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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001005477-02-001365.txt : 20020415
<SEC-HEADER>0001005477-02-001365.hdr.sgml : 20020415
ACCESSION NUMBER: 0001005477-02-001365
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020326
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: OVERSEAS SHIPHOLDING GROUP INC
CENTRAL INDEX KEY: 0000075208
STANDARD INDUSTRIAL CLASSIFICATION: DEEP SEA FOREIGN TRANSPORTATION OF FREIGHT [4412]
IRS NUMBER: 132637623
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-06479
FILM NUMBER: 02586977
BUSINESS ADDRESS:
STREET 1: 511 FIFTH AVENUE
CITY: NEW YORK
STATE: NY
ZIP: 10017
BUSINESS PHONE: 2125781636
MAIL ADDRESS:
STREET 1: 511 FIFTH AVENUE
CITY: NEW YORK
STATE: NY
ZIP: 10017
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d02-36547.txt
<DESCRIPTION>FORM 10-K
<TEXT>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ________________ to ________________.
Commission File Number 1-6479-1
OVERSEAS SHIPHOLDING GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2637623
- -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
511 Fifth Avenue, New York, New York 10017
- --------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-953-4100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
--------------------------------------- ---------------------------------
Common Stock (par value $1.00 per share) New York Stock Exchange
Pacific Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the Common Stock held by non-affiliates of
the registrant on March 21, 2002 was $671,865,000, based on the closing price of
$23.84 per share on the New York Stock Exchange on that date. (For this purpose,
all outstanding shares of Common Stock have been considered held by
non-affiliates, other than the shares beneficially owned by directors, officers
and certain 5% shareholders of the registrant; certain of such persons disclaim
that they are affiliates of the registrant.)
As of March 21, 2002, 34,341,115 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for 2001 are
incorporated by reference in Part I and portions of the registrant's definitive
proxy statement to be filed by the registrant in connection with its 2002 Annual
Meeting of Shareholders are incorporated by reference in Part III.
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business...................................................... 1
Overview...................................................... 1
Forward-Looking Statements.................................... 3
Operations.................................................... 4
Fleet...................................................... 5
International Fleet Operations............................. 6
U.S. Flag Fleet Operations................................. 7
Competition................................................... 8
Environmental Matters Relating to Bulk Shipping............... 9
Domestic Requirements...................................... 9
International Requirements................................. 10
Insurance.................................................. 11
Global Bulk Shipping Markets.................................. 11
Economic Slowdown and Falling Oil Production............... 11
VLCC Scrapping Increases; Fleet Decreases.................. 11
Aframax Scrapping Subdued; Orderbook Increases............. 11
Panamax Product Carrier Fleet Little Changed............... 12
Handysize Product Carrier Orderbook Grows.................. 12
Glossary...................................................... 12
Item 2. Properties.................................................... 15
Item 3. Legal Proceedings............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders........... 15
Executive Officers of the Registrant.......................... 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................... 17
Item 6. Selected Consolidated Financial Data.......................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 19
General.................................................. 19
Operations............................................... 19
Critical Accounting Policies............................. 21
Income from Vessel Operations............................ 23
Equity in Income of Joint Ventures ...................... 27
Interest Expense......................................... 28
Provision for Federal Income Taxes....................... 29
Effects of Inflation..................................... 29
Cumulative Effect of Accounting Change................... 29
New Accounting Standard.................................. 29
Liquidity and Sources of Capital......................... 29
Risk Management.......................................... 30
Interest Rate Sensitivity................................ 31
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 31
Item 8. Financial Statements and Supplementary Data................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 60
PART III
Item 10. Directors and Executive Officers of the Registrant............ 60
Item 11. Executive Compensation........................................ 60
Item 12. Security Ownership of Certain Beneficial Owners and Management 60
Item 13. Certain Relationships and Related Transactions................ 60
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................... 60
Signatures.................................................................. 64
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
Overseas Shipholding Group, Inc. (together with its subsidiaries, "OSG" or
the "Company"), is one of the world's leading independent bulk shipping
companies engaged primarily in the ocean transportation of crude oil and
petroleum products. The Company owns and operates a modern fleet of 50
oceangoing vessels that aggregate 7.7 million deadweight tons, of which 40
vessels operate in the international market and ten vessels operate in the U.S.
Flag trades. The Company believes that it is the sixth largest independent
tanker company in the world as measured by the carrying capacity of its tanker
fleet. OSG is the only major U.S. shipping company with significant
international and U.S. Flag operations.
A glossary of shipping terms (the "Glossary") that should be used as a
reference when reading this Annual Report on Form 10-K begins on page 12.
Capitalized terms that are used in this Annual Report which are not defined when
they are first used are defined in the Glossary.
In recent years, over 85% of the Company's shipping revenues have been
generated by the transportation of crude oil and petroleum products. The balance
of the Company's revenues are derived from the transportation of dry bulk
cargoes, primarily grain, coal and iron ore. The transportation of crude oil
accounted for 100% of the operating earnings of the Company's joint ventures in
each of 2001, 2000 and 1999. The Company's customers include many of the world's
largest oil companies and oil trading companies as well as governments and
governmental agencies.
Of the Company's 50 vessels, 44 are engaged in the oil transportation
business, of which 38 are Foreign Flag tankers that operate in the international
market, and six are U.S. Flag tankers that operate in the U.S. Alaskan and
coastwise trades. The Company's six other vessels are engaged in the
transportation of dry bulk cargo, of which two are Foreign Flag Dry Bulk
Carriers that operate in the international market, three are U.S. Flag Dry Bulk
Carriers primarily chartered to foreign and U.S. governmental agencies for the
transportation of U.S. foreign aid grain cargoes and one is a U.S. Flag Pure Car
Carrier that has been operating for a number of years under a long term charter.
As of December 31, 2001, the Foreign Flag tanker fleet included 17 VLCCs
(including eight in which the Company has joint venture interests ranging from
30% to 50%), one Suezmax vessel, twelve Aframax vessels (including one joint
venture vessel in which the Company has a 50% interest) and eight Product
Carriers. The U.S. Flag Jones Act tanker fleet consists of four tankers engaged
in the Alaskan crude oil trade on long term charters for the balance of their
economic lives ("U.S. Flag Crude Tankers") and two Product Carriers that have
recently begun three-year charters.
Since tankers tend to specialize on specific trade routes based on type,
size and flag of registry, the Company reports its tankers in four business
segments: Foreign Flag VLCCs, Aframaxes and Product Carriers, and U.S. Flag
Crude Tankers. The Company's three U.S. Flag Dry Bulk Carriers constitute the
Company's fifth business segment.
The Company charters its vessels either for specific voyages ("voyage
charters") or for specific periods of time ("time charters"). Under the terms of
voyage and time charters, the Company's vessels are manned and operated by the
Company. The Company from time to time also charters out its vessels on bareboat
charters. Under bareboat charters, the ships are chartered out for fixed periods
of time (generally medium or long-term) during which they are operated and
manned by the customers.
Voyage charters constituted 73% of the Company's Time Charter Equivalent
revenues in 2001, 76% in 2000 and 62% in 1999. Accordingly, the Company's
shipping revenues are significantly affected by prevailing spot rates for voyage
charters in the markets in which the Company's vessels operate. Charter rates,
particularly in the spot market for voyage charters, are highly volatile and
typically reflect intense competition among vessel owners. Spot market rates are
determined by market forces such as local and worldwide demand for commodities
carried (such as crude oil and petroleum
<PAGE>
products), volumes of trade, distances that the commodities must be transported
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 volume of newbuilding deliveries, the removal (principally through
scrapping) of existing vessels from service, and by the greater efficiency of
modern tonnage. Scrapping is affected by the level of freight rates and by
international and U.S. governmental regulations that require the maintenance of
vessels within certain standards and mandate the phase-out of tankers lacking
double hulls.
A major portion of the Company's U.S. Flag fleet is on long term charter,
providing a significant and predictable level of earnings, which is not subject
to fluctuations in spot market rates. The Company's U.S. Flag Crude Tankers are
on bareboat charters extending for the remaining useful lives of such vessels
with terms ranging up to four years. During 2001, the Company's two U.S. Flag
Jones Act Product Carriers both entered into three year time charters. The
Company's U.S. Flag Pure Car Carrier has also been operating for a number of
years under a time charter. In the Company's international fleet, two VLCCs and
the Suezmax are on long-term charters. The charters for one of the VLCCs and the
Suezmax expire in December 2004 or beyond, and the charter for the other VLCC
expires in early 2002. In the aggregate, time charter and bareboat charter
revenues constituted 27% of the Company's TCE revenues in 2001, 24% in 2000 and
38% in 1999.
OSG has sought to distinguish itself through its emphasis on service,
innovation, safety and reliability, its customer-focused business strategy, and
its commitment to providing comprehensive transportation solutions for its
customers' bulk shipping challenges. The Company has succeeded in establishing
and maintaining a number of long-term, close customer relationships.
In the international market, the Company offers its customers one of the
industry's most modern and efficient fleets. The average age of the Company's 17
vessel VLCC fleet is 4.4 years and the average age for its Aframax fleet (after
taking into account the planned disposal of two older vessels) is 5.4 years. In
contrast, the average age of the world fleet of VLCCs and Aframaxes each exceeds
11 years. The relative young age of the Company's VLCC and Aframax fleets and
the Company's Technical Management expertise has resulted in reduced operating
costs and minimal delays for these vessels.
To increase vessel utilization and thereby revenues, the Company
participates in commercial pools with other owners of modern vessels. By
operating a large number of vessels as an integrated transportation system, such
pools offer customers greater flexibility and a higher level of service while at
the same time achieving improved scheduling efficiencies. In December 1999, the
Company and five other leading tanker companies formed Tankers International LLC
to pool the commercial operation of their modern VLCC fleets. As of January 1,
2002, Tankers managed approximately 55 VLCCs. The Company also has an Aframax
pooling arrangement with PDV Marina, the marine transportation subsidiary of the
Venezuelan state oil company. This pool managed 20 Aframaxes in the Atlantic
Basin as of January 1, 2002. In addition, in 2000, the Company entered its two
Foreign Flag Dry Bulk Carriers into a large pool of Capesize vessels. All of
these pools negotiate charters with customers on behalf of the pool
participants, primarily in the spot market. The size and scope of these pools
enables them to enhance utilization rates for pool vessels and generate higher
effective TCE revenues than are otherwise obtainable in the spot market.
In addition to revenue-enhancement initiatives realized through pool
participation, in recent years, the Company has materially reduced overhead and
operating costs. The Company has reduced organizational layers to streamline
decision making, transferred functions from high cost areas to lower cost areas,
outsourced functions where appropriate and renegotiated service and supply
contracts. Through fully integrated shoreside and shipboard automation, the
Company has been able to improve the speed and quality of information provided
to its customers, while reducing the number of shore-side staff by more than 50%
since January 1999. All aspects of vessel operations are continuously reviewed
to ensure that the Company's vessels conform with best industry practices. Third
parties provide Technical Management for some of the Company's vessels held in
joint ventures, providing OSG the opportunity for continuous comparison of its
operations with those of other parties. The Company's cost reduction initiatives
have generated annualized savings of $60 million, including $20 million in
annual cost savings that are expected to be realized in 2002 as a result of
initiatives implemented in 2001.
2
<PAGE>
The Company is nearing completion of an $800 million, 21-vessel fleet
renewal and expansion program. The program enables OSG to offer one of the
industry's most modern fleets, at the same time as major customers are
demonstrating a preference for modern tonnage based on concerns about the
environmental risks associated with older vessels. Upon completion of the
program, more than 93% of OSG's Foreign Flag tanker fleet will be double-hulled
or double-sided. The program consists of 16 newbuildings, of which nine have
been delivered as of the end of 2001 (two in 2000 and seven in 2001), and the
acquisition of five modern second-hand vessels (two in 2000 and three in 2001).
The seven remaining newbuildings on order as of December 31, 2001 consist of
four double-hulled VLCCs and three wide-bodied, shallow-draft, double-hulled
Aframaxes. One VLCC and one Aframax were delivered in late February 2002 and the
remaining newbuildings are scheduled for delivery over the next 24 months. All
of these vessels are being built to exacting specifications that are designed to
ensure that the vessels operate safely and reliably, consistent with the
Company's commitment to the protection of the environment.
For information about the world tanker fleet in 2001, see "Global Bulk
Shipping Markets" on pages 11 and 12.
The Company believes that the strength of its balance sheet, and the
financial flexibility that it affords, distinguishes it from most of its
competitors. At December 31, 2001, the Company's liquidity adjusted debt to
capital ratio stood at 42.6% compared with 48.4% at December 31, 1999. For this
purpose, the Company's liquidity adjusted debt is defined as the Company's debt
reduced by the Company's cash, marketable securities and the tax adjusted
balance in its capital construction fund. The Company's liquidity adjusted debt
to capital ratio has declined even as OSG has made investments in newbuildings
and joint ventures of more than $292 million in the last two years. Completion
of the Company's fleet expansion will require capital expenditures of $80
million in 2002 and $69 million in 2003.
As of December 31, 2001, the Company had approximately 1,510 employees:
1,380 seagoing personnel and 130 shore staff. The Company has collective
bargaining agreements with three different maritime unions, covering seagoing
personnel employed on the Company's U.S. Flag Vessels. These agreements are in
effect through June 15, 2002 with one of the unions, June 15, 2005 with another
union, and June 15, 2006 with a third union. Under the collective bargaining
agreements, the Company is obligated to make contributions to pension and other
welfare programs. OSG believes that it has a satisfactory relationship with its
employees.
Forward-Looking Statements
This Form 10-K, including portions of the Company's Annual Report to
Shareholders for 2001, incorporated herein by reference, contains
forward-looking statements regarding the outlook for tanker and dry cargo
markets, and the Company's prospects, including its anticipated acquisition of
newbuildings, its planned vessel dispositions, prospects for certain strategic
alliances and the implementation of certain overhead and operating cost
reductions. There are a number of factors, risks and uncertainties that could
cause actual results to differ from the expectations reflected in these
forward-looking statements, including changes in production of or demand for oil
and petroleum products, either generally or in particular regions; greater than
anticipated levels of newbuilding orders or less than anticipated rates of
scrapping of older vessels; the availability to the Company of suitable vessels
for acquisition or chartering in on terms it deems favorable; changes in the
pooling arrangements in which the Company participates, including withdrawal of
participants or termination of such arrangements; changes affecting the vessel
owning joint ventures in which the Company is a party; changes in trading
patterns for particular commodities significantly impacting overall tonnage
requirements; changes in the rates of growth of the world and various regional
economies; risks incident to vessel operation, including pollution; increases in
costs of operation and unanticipated delays in implementing various cost
reduction measures; and unanticipated changes in laws and regulations.
Forward-looking statements in this Form 10-K and written and oral
forward-looking statements attributable to the Company or its representatives
after the date of this Form 10-K are qualified in their entirety by the
cautionary statement contained in this paragraph and in other reports hereafter
filed by the Company with the Securities and Exchange Commission.
3
<PAGE>
Operations
The bulk shipping industry has many distinct market segments based, in
large part, on the type and size of vessels required and, in some cases, on the
flag of registration. Rates in each market segment are determined by a variety
of factors affecting the supply and demand for vessels to move cargoes in trades
for which they are suited. Bulk vessels, unlike container and liner vessels,
which the Company does not own, are not bound to specific ports or schedules and
therefore can respond to market opportunities by moving between trades and
geographical areas.
The following chart reflects the percentage of TCE revenues generated by
the Company's five reportable segments for each year in the three-year period
ended December 31, 2001:
<TABLE>
<CAPTION>
Percentage of TCE Revenues
----------------------------------
2001 2000 1999
----------------------------------
<S> <C> <C> <C>
Foreign Flag
VLCCs 29.6% 31.9% 21.3%
Aframaxes 29.2% 23.3% 16.4%
Product Carriers 15.2% 14.7% 13.6%
----------------------------------
Total Foreign Flag Segments 74.0% 69.9% 51.3%
----------------------------------
U.S. Flag
Crude Tankers 7.4% 10.0% 20.0%
Dry Bulk Carriers 3.9% 6.7% 8.8%
----------------------------------
Total U.S. Flag Segments 11.3% 16.7% 28.8%
Other 14.7% 13.4% 19.9%
----------------------------------
Total 100.0% 100.0% 100.0%
==================================
</TABLE>
The following chart reflects the percentage of income from vessel
operations accounted for by each reportable segment for each year in the
three-year period ended December 31, 2001. Income from vessel operations is
before general and administrative expenses, the 2001 restructuring charge, and
the Company's share of income from joint ventures.
<TABLE>
<CAPTION>
Percentage of Income/(Loss) from
Vessel Operations
----------------------------------
2001 2000 1999
----------------------------------
<S> <C> <C> <C>
Foreign Flag
VLCCs 35.1% 42.0% 24.4%
Aframaxes 36.4% 27.9% 4.8%
Product Carriers 16.5% 14.1% 8.0%
----------------------------------
Total Foreign Flag Segments 88.0% 84.0% 37.2%
----------------------------------
U.S. Flag
Crude Tankers 7.8% 7.3% 35.2%
Dry Bulk Carriers (2.9)% 1.7% 9.6%
----------------------------------
Total U.S. Flag Segments 4.9% 9.0% 44.8%
Other 7.1% 7.0% 18.0%
----------------------------------
Total 100.0% 100.0% 100.0%
==================================
</TABLE>
4
<PAGE>
The Foreign Flag segments provide an increasing share of the Company's
consolidated TCE revenues and income from vessel operations. This increase
reflects a decrease in the relative size of the U.S. Flag fleet as well as
higher rates in the international market. In 2000, the Company added two VLCCs
while disposing of one U.S. Flag Vessel. In 2001, it added two VLCCs and three
Aframaxes while disposing of one U.S. Flag Vessel. In addition, during 2000 and
2001, average freight rates were substantially higher than in 1999.
Revenues from U.S. Flag Crude Tankers are derived from long-term fixed
rate charters and therefore generate a fixed level of earnings. Accordingly, the
relative contribution of the U.S. Flag Crude Tankers to consolidated TCE
revenues and to consolidated income from vessel operations is dependent on the
level of rates then existing in the international market, increasing when market
rates in the international market decrease and decreasing when such market rates
increase. The decrease in the relative contribution of the U.S. Flag Crude
Tankers to consolidated TCE revenues and to consolidated income from vessel
operations reflects the 1999 conversion of time charters on such vessels to
bareboat charters (under a bareboat charter, revenues are reduced, as are vessel
expenses because vessel expenses become the responsibility of the charterer).
The August 1999 off-balance sheet financing also reduced the relative
contribution of the U.S. Flag Crude Tankers to consolidated income from vessel
operations since the cost of leasing back these vessels is included in time and
bareboat charter hire expense.
For additional information regarding the Company's five reportable
segments for the three years ended December 31, 2001, please see Management's
Discussion and Analysis of Financial Condition and Results of Operations set
forth in item 7, and Note C to the Company's consolidated financial statements
for 2001 set forth in Item 8.
Fleet
As of December 31, 2001, OSG's international and U.S. Flag fleets
consisted of 50 vessels, including nine vessels owned by joint ventures (eight
VLCCs and one Aframax) in which the Company has an average interest of 42%. In
addition, at December 31, 2001, the Company had seven newbuildings on order, of
which four were VLCCs, including two in which the Company has a 33.3% interest,
and three were Aframax tankers.
<TABLE>
<CAPTION>
December 31, 2001 December 31, 2000 December 31, 1999
---------------------- ------------------- --------------------
Vessel Type Vessels Dwt Vessels Dwt Vessels Dwt
------- --------- ------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Foreign Flag
VLCC 17 4,999,950 10 2,933,300 7 2,047,050
Suezmax 1 145,150 1 145,150 1 145,150
Aframax 12 1,181,400 9 850,450 9 850,450
Panamax Product Carrier 4 256,650 4 256,650 4 256,650
Bostonmax Product Carrier 4 157,050 4 157,050 4 157,050
Capesize Bulk Carrier 2 314,800 2 314,800 2 314,800
---------------------------------------------------------------------
Foreign Flag Vessels 40 7,055,000 30 4,657,400 27 3,771,150
U.S. Flag
Crude Tanker 4 392,350 4 392,350 5 482,950
Handysize Product Carrier 2 85,650 2 85,650 2 85,650
Bulk Carrier 3 171,550 4 209,350 4 209,350
Pure Car Carrier 1 15,900 1 15,900 1 15,900
---------------------------------------------------------------------
U.S. Flag Vessels 10 665,450 11 703,250 12 793,850
---------------------------------------------------------------------
Foreign and U.S. Flag Vessels 50 7,720,450 41 5,360,650 39 4,565,000
Foreign Flag Newbuildings on Order
VLCC 4 1,213,100 4 1,235,550 4 1,234,800
Aframax 3 332,200 6 554,600 4 452,000
--------------------------------------------------------------------
Total Vessels, including Newbuildings 57 9,265,750 51 7,150,800 47 6,251,800
=====================================================================
</TABLE>
5
<PAGE>
The following chart summarizes the fleet and its carrying capacity,
weighted to reflect the Company's interest in vessels owned jointly with others.
<TABLE>
<CAPTION>
December 31, 2001 December 31, 2000 December 31, 1999
---------------------- ------------------- --------------------
Vessels Dwt Vessels Dwt Vessels Dwt
------- --------- ------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Foreign and U.S. Flag Vessels 44.8 6,311,850 38.8 4,835,200 38 4,269,300
Total Vessels, Including Newbuildings 50.5 7,467,050 46.8 6,625,350 52 5,956,100
</TABLE>
In accordance with the Company's fleet renewal program, six Dry Bulk
Carriers and nine older and less efficient tankers were disposed of during 1999
and 2000. The reduction was more than offset by the delivery of VLCC and Aframax
newbuildings and the acquisition of modern, second-hand VLCC and Aframax
vessels. Of seven newbuildings to be delivered in the next 24 months, two, a
jointly owned VLCC and an Aframax, were delivered at the end of February 2002.
The fleet renewal program will ensure that the Company continues to have one of
the most modern VLCC and Aframax fleets in the world.
For additional information regarding the Company's fleet, see the tables
on page 5 of the Company's Annual Report to Shareholders for 2001, which tables
are incorporated herein by reference.
International Fleet Operations
During the past several years, the Company has increased its focus on
VLCCs and Aframaxes through expansion of its fleet of such vessels. The
Company's VLCC and Aframax fleets constitute two of its reportable business
segments. The Company participates in pools for the Commercial Management of its
VLCCs and Aframaxes in order to enhance vessel utilization and TCE revenues.
Tankers International LLC ("Tankers")
In December 1999, the Company and five other leading tanker companies
formed Tankers to pool the commercial operation of their modern VLCC fleets. As
of December 31, 2001, Tankers managed a fleet of approximately 55 modern VLCCs
(of which the Company has contributed 14 vessels, including six ships owned by
joint ventures in which the Company has ownership interests ranging from 30% to
49.9%). The Company's four VLCC newbuildings, including two vessels in which the
Company has a 33.3% interest, are scheduled to enter the pool upon their
delivery from the shipyard.
Tankers Commercially Manages its participants' vessels. It collects the
revenues from customers and distributes TCE revenues to the participants, after
deducting administrative fees, according to a formula based upon the relative
carrying capacity, speed, and fuel consumption of each of the vessels.
The large number of vessels managed by Tankers and the COAs into which it
has entered give it the opportunity to enhance vessel utilization. With higher
requirements for imported crude oil by China, India and other Asian countries,
the crude oil shipments from West Africa to the Far East expanded in 2000,
increasing triangulation opportunities for vessels returning in ballast (moving
without cargo to the next load port) from Europe and North America.
Triangulation is a strategy to maximize vessel utilization by minimizing the
distance vessels travel in ballast.
By consolidating the Commercial Management of this substantial VLCC fleet,
Tankers is able to offer its customers "one-stop shopping" for high quality
modern VLCC tonnage. The size of the fleet enables Tankers to become the
logistics partner of major customers, providing new and improved tools to help
them better manage their shipping programs, inventories and risk. Tankers also
seeks to reduce vessel operating costs by facilitating the joint purchasing of
goods and services by pool participants.
6
<PAGE>
Aframax Pool (the "PDVM/OSG pool")
Since 1996, the Company and PDV Marina, the marine transportation
subsidiary of the Venezuelan state oil company, have pooled the Commercial
Management of their Aframax fleets. With 20 vessels in the Atlantic Basin, the
PDVM/OSG pool has been able to supplement baseload cargoes with backhauls and
COAs. As a result, the pool has enhanced vessel utilization, thereby generating
higher TCE revenues than would otherwise be attainable in the spot market. The
Company's three Aframax newbuildings are scheduled to enter the pool upon
delivery, further increasing the pool's size and presence in the Atlantic Basin.
Commercially Flexible Fleet of Product Carriers
OSG's fleet of eight Foreign Flag Product Carriers constitutes one of the
Company's reportable business segments. The Company believes that the diversity
in the size of its Foreign Flag Product Carriers enables it to respond to the
frequently changing patterns of the petroleum products trade. OSG's four
Bostonmax Product Carriers operate in the Atlantic Basin and provide the
Company's customers full access to all Boston-area terminals, allowing maximum
discharge flexibility. The Company's four Panamax Product Carriers, which for
many years operated in the trade from the Arabian Gulf to the Far East, have
adapted to changing trade patterns and are now carrying product from Korea to
the U.S. West Coast as well as in the intra-Asian trades.
U.S. Flag Fleet Operations
The Company's four U. S. Flag Crude Tankers and three U.S. Flag Dry Bulk
Carriers constitute two of the Company's reportable business segments.
Under the Jones Act, shipping between United States ports, including the
movement of Alaskan oil, is reserved for U.S. Flag Vessels that are built in the
U.S. and owned by a U.S. company, more than 75% owned and controlled by U.S.
citizens. In addition, the Merchant Marine Act, 1936, as amended, requires that
preference be given to U.S. Flag Vessels, if available at reasonable rates, in
the shipment of at least half of all U.S. government-generated cargoes and 75%
all of food-aid cargoes.
Vessels in the Company's U.S. Flag fleet have been chartered from time to
time to the Military Sealift Command of the United States Navy ("MSC"). Charters
to MSC reflect, in large part, the requirements of the United States military
for waterborne transportation of cargoes and, accordingly, depend, in part, on
world conditions and United States foreign policy. Revenues from charters to MSC
were not significant during the three years ended December 31, 2001.
Since late 1996, the Company's U.S. Flag Pure Car Carrier, which is under
long-term charter, has participated in the U.S. Maritime Security Program, which
ensures that militarily-useful U.S. Flag Vessels are available to the Department
of Defense in the event of war or national emergency. Under the program, the
Company receives approximately $2.1 million per year through 2005, subject to
annual Congressional appropriations.
To encourage private investment in U.S. Flag Vessels, the Merchant Marine
Act of 1970 permits deferral of taxes on earnings deposited into a capital
construction fund and amounts earned thereon, which can be used for the
construction or acquisition of, or retirement of debt on, qualified U.S. Flag
Vessels (primarily those limited to United States foreign, Great Lakes and
noncontiguous domestic trades). The Company is a party to an agreement under the
act. Under the agreement, the general objective is (by use of assets accumulated
in the fund) for three U.S. Flag Vessels to be constructed or acquired by the
end of 2004. If the agreement is terminated or amounts are withdrawn from the
capital construction fund for non-qualified purposes, such amounts will then be
subject to federal income taxes. Monies can remain tax-deferred in the fund for
a maximum period of 25 years (commencing January 1, 1987 for deposits prior
thereto). The Company had approximately $233 million in its capital construction
fund as of December 31, 2001. The Company has provided deferred taxes on the
fund deposits and earnings thereon.
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Alaska Tanker Company, LLC ("ATC")
Building on a 30-year relationship between the Company and BP p.l.c.
("BP"), ATC was formed in early 1999 by the Company, BP, and Keystone Shipping
Company ("Keystone"), to create the leading provider of marine transportation
services in the environmentally sensitive Alaskan crude oil trade. ATC, which is
owned 37.5% by the Company, 37.5% by Keystone and 25% by BP, manages the vessels
carrying BP's Alaskan crude oil, including four of the Company's vessels. At the
time ATC was established, charters for five of the Company's U.S. Flag Crude
Tankers that had been on long-term time charter to BP were converted into
bareboat charters of such vessels to ATC, with BP guarantees. Each bareboat
charter expires shortly before the date that OPA 90 precludes such single-hulled
tanker from calling on U.S. ports; the last charter expires in 2006. The four
bareboat charters (the fifth vessel having been disposed of) will generate U.S.
Flag operating earnings averaging approximately $12 million per year for the
Company through 2005. In addition, the Company's participation in ATC provides
the Company with the ability to earn additional incentive hire income based upon
ATC's meeting certain predetermined performance standards.
In August 1999, the Company sold the foregoing four vessels (and a fifth
that was subsequently disposed of by the owner in 2000) and leased them back as
part of an off-balance sheet financing that generated approximately $170
million, which was used to reduce long-term debt. As of December 31, 2001, the
balance of debt on the books of the entity to which such vessels were sold
aggregated $75.1 million. Such debt, which is due in monthly installments
through August 2005, is repayable in full from bareboat charter revenues from
ATC, which are guaranteed by BP.
Competition
The bulk shipping industry is highly competitive and fragmented, with no
one shipping group owning or controlling as much as 6% of the world tanker
fleet. OSG competes with other owners of U.S. and Foreign Flag tankers and dry
cargo ships operating on an unscheduled basis similar to the Company.
OSG's vessels compete with all other vessels of a size and type required
by a customer that can be available at the date specified. In the spot market,
competition is based primarily on price, although certain charterers have become
more selective with respect to the quality of vessels they hire, with particular
emphasis on such factors as age, double hulls, and the reliability and quality
of operations. Increasingly, major customers are demonstrating a preference for
modern vessels based on concerns about the environmental risks associated with
older vessels. Consequently, owners of large modern fleets have gained a
competitive advantage over owners of older fleets. In the time charter market,
factors such as the age and quality of a vessel and the reputation of the owner
and operator tend to be more significant in competing for business.
In both the VLCC and Aframax market segments, the Company competes against
a large number of companies that own or operate vessels in these segments.
Competitors include other independent shipowners, oil companies and state owned
entities with fleets ranging from one to as many as 60 vessels in a particular
segment. While some companies operate worldwide, others focus on one or more
geographical areas such as the Pacific, the Mediterranean or the Caribbean.
OSG owns 17 VLCCs (5.0 million dwt) of which 14 (4.2 million dwt) are
Commercially Managed through Tankers. The Company's three remaining VLCCs are
operating on long-term charters. The Company's four newbuildings (1.2 million
dwt) are scheduled for delivery in 2002 and 2003 and, upon their delivery, will
be entered in the Tankers pool. Six of the foregoing VLCCs entered in Tankers
and two of the newbuildings on order are owned jointly with others. As of
January 1, 2002, Tankers had a fleet of approximately 55 VLCCs (16.3 million
dwt) with 14 newbuildings (4.3 million dwt) scheduled to join Tankers upon
delivery. Tankers' existing fleet represents 13.0% of the total world VLCC
fleet. By the end of 2003, as participants take delivery of newbuildings and
vessels are redelivered from time charters, Tankers' fleet is expected to exceed
70 VLCCs.
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In the VLCC market segment, Tankers competes with more than 100 owners,
the largest being Mitsui OSK Lines Ltd. (28 vessels, 7.6 million dwt), Nippon
Yusen Kabushiki Kaisha (24 vessels, 6.4 million dwt), World-Wide Shipping Agency
(S) Pte. Ltd. (22 vessels, 6.3 million dwt), VELA International Marine Ltd., the
shipping arm of the Saudi Arabian oil company (18 vessels, 5.5 million dwt) and
Bergesen d.y. AS (15 vessels, 4.8 million dwt).
As of December 31, 2001, the PDVM/OSG pool operated 20 Aframaxes (2.0
million dwt), including one 50% owned vessel, in the Atlantic Basin. OSG's three
Aframax newbuildings are scheduled to enter this pool upon delivery, further
increasing the pool's size and presence in the Atlantic Basin. More than 160
owners operate in the Aframax market segment. The Company's main competitors
include Teekay Shipping Corporation (60 vessels, 6.0 million dwt), Neptune
Orient Lines and its subsidiaries (21 vessels, 2.1 million dwt), General
Maritime Corp. (15 vessels, 1.4 million dwt) and Tsakos Energy Navigation
Limited (14 vessels, 1.3 million dwt).
In the U.S. Flag trades, the Company competes with other owners of U.S.
Flag Vessels. Demand for U.S. Flag Product Carriers is closely linked to changes
in regional energy demands and in refinery activity. These vessels also compete
with pipelines and oceangoing barges, and are affected by the level of imports
on Foreign Flag Product Carriers.
Environmental Matters Relating to Bulk Shipping
Domestic Requirements. Since 1990, the tanker industry has experienced a more
rigorous regulatory environment. Safety and pollution concerns have led to a
greater emphasis on quality and to the strengthening of the inspection programs
of Classification Societies, governmental authorities and charterers.
OPA 90 affects all vessel owners shipping oil or hazardous material to,
from, or within the United States. Under OPA 90, a vessel owner or operator is
liable without fault for removal costs and damages, including economic loss
without physical damage to property, of up to $1,200 per gross ton of the
vessel. When a spill is proximately caused by gross negligence, willful
misconduct or a violation of a federal safety, construction or operating
regulation, liability is unlimited. OPA 90 did not preempt state law and,
therefore, states remain free to enact legislation imposing additional
liability. Virtually all coastal states have enacted pollution prevention,
liability and response laws, many with some form of unlimited liability.
OPA 90 phases out the use of tankers having single hulls. OPA 90 requires
that tankers over 5,000 gross tons calling at U.S. ports have double hulls if
contracted after June 30, 1990, or delivered after January 1, 1994. Furthermore,
OPA 90 calls for the elimination of all single hull vessels by the year 2010 on
a phase-out schedule that is based on size and age, unless the tankers are
retrofitted with double hulls. The law permits then existing single hull tankers
to operate until the year 2015 if they discharge at deep water ports, or lighter
(offload cargo) more than 60 miles offshore.
OSG's two single-hulled VLCCs (including one in which OSG has a 30%
interest) and its Suezmax are not permitted to trade to U.S. ports after 2009.
Two 49.9% owned double-sided VLCCs are not permitted to trade to U.S. ports
after 2014. The two single-hulled Aframaxes are required to stop trading to the
U.S. after 2003 and the Company's 50% owned double-sided Aframax is required to
stop trading to the U.S. in 2015. The two U.S. Flag Jones Act Product Carriers,
which are operated under capital leases expiring in 2011, are not affected by
the OPA 90 phase-out schedule. The OPA 90 phase-out dates for the Company's
eight Foreign Flag Product Carriers are subsequent to their respective IMO
phase-out dates (see the discussion of International Requirements below). One of
OSG's four U.S. Flag Crude Tankers is required to be phased out in 2004, two in
2005 and one in 2006, at which time each of these tankers will be at the end of
their commercial lives.
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OPA 90 also requires owners and operators of vessels calling at U.S. ports
to adopt contingency plans for reporting and responding to various oil spill
scenarios up to a worst case oil spill under adverse weather conditions. The
plans must include contractual commitments with clean-up response contractors in
order to ensure an immediate response to an oil spill. Furthermore, training
programs and drills for vessel, shore and response personnel are required. The
Company has developed and filed its vessel response plans with the U.S. Coast
Guard, and has received approval of such plans.
Under U.S. Coast Guard financial responsibility regulations issued
pursuant to OPA 90, all vessels entering U.S. waters are required to obtain
Certificates of Financial Responsibility ("COFRs") from the U.S. Coast Guard
demonstrating financial capability to meet potential oil spill liabilities. All
the vessels in the Company's U.S. and Foreign Flag fleets have requisite COFRs.
International Requirements. The Company's vessels undergo regular and rigorous
in-house safety reviews. They are also routinely inspected by port authorities,
Classification Societies and major oil companies. All of the Company's vessels
are now certified under the standards reflected in International Standards
Organization's 9002 quality assurance program, and IMO's International Safety
Management's safety and pollution prevention protocols.
MARPOL 73/78 regulations of the IMO require double hulls or equivalent
tanker designs for newbuildings ordered after 1993 and mandate the scrapping of
single hull tankers at 30 years of age. Under Regulation 13G of Annex 1 to
MARPOL 73/78, single hull tankers, upon reaching 25 years of age, are required
to either have protectively located segregated ballast tanks or double bottom
spaces not used for cargo covering at least 30% of the cargo tank area, or they
must utilize hydrostatically balanced loading. These modifications reduce the
carrying capacity of the affected vessel.
In April 2001, the IMO, in collaboration with the European Commission,
approved an amendment to the regulations, accelerating the mandatory retirement
of older, single hull tankers. The main impetus behind this amendment was the
breakup and sinking of the 1975-built, 37,000 dwt single hull oil tanker Erika
off the coast of France in late 1999, which caused a significant amount of
environmental and commercial damage. These new regulations, which supersede the
prior MARPOL Regulation 13G, become effective in 2003. Under the new
regulations, the maximum age for continued trading begins at 30 (vessels
delivered in 1973 and earlier) and declines to 26 (vessels delivered in 1981 and
later) by the end of 2007. For owners of older, single hull tankers, scrapping
decisions will be increasingly influenced by the need to comply with these new
regulations. In view of the age profile of the world VLCC fleet and the IMO
timetable, the new regulations will likely concentrate scrapping of older VLCCs
in 2004 and 2005; however, commercial considerations may cause the scrapping
schedule to advance. Since the percentage of the world Aframax fleet that was
built in the 1970s is smaller than for the world VLCC fleet, scrapping of older,
single hull Aframaxes will be less pronounced in the short term.
The MARPOL regulations have been adopted by over 100 nations covering more
than 90% of the world's tanker fleet. The U.S. has not adopted the 2001
amendments; therefore, U.S. Flag Vessels operating exclusively in Jones Act
shipping are only subject to OPA 90 regulations.
Since OSG's Foreign Flag tanker fleet is mostly modern and double hulled,
the impact of the IMO phase-out schedule will be limited. Out of the 17 VLCCs in
the Company's operating fleet, one of the two single-hulled VLCCs is required to
be phased out in 2015 and the other single-hulled VLCC (in which OSG has a 30%
interest) has to be phased out in 2017, contingent upon receiving flag state
approval to operate beyond 2015, and the two 49.9% owned double-sided VLCCs are
required to be phased out in 2018. The Company's Suezmax is required to be
phased out in 2015. Of the Company's 12 existing Foreign Flag Aframaxes, two are
required to be phased out in 2007 and a 50% owned double-sided vessel in 2017.
Of the Company's eight Foreign Flag Product Carriers, three are to be phased out
in 2012, one in 2013, one in 2014 and three in 2015. None of the vessels in
OSG's international fleet are affected by the accelerated IMO timetable prior to
reaching 25 years of age. Further, the Company's U.S. Flag Crude Tankers and
Product Carriers participate in the U.S. Jones Act trades and are therefore not
affected by the IMO phase-out schedule.
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Insurance. Consistent with the currently prevailing practice in the industry,
the Company presently carries protection and indemnity ("P&I") insurance
coverage for pollution of $1.0 billion per occurrence on every vessel in its
fleet. P&I insurance is provided by mutual protection and indemnity associations
("P&I Associations"). The 13 P&I Associations that comprise the International
Group insure approximately 90% of the world's commercial tonnage and have
entered into a pooling agreement to reinsure each association's liabilities.
Each P&I Association has capped its exposure to each of its members at
approximately $4.25 billion. As a member of a P&I Association, which is a member
of the International Group, the Company is subject to calls payable to the
associations based on its claim records as well as the claim records of all
other members of the individual associations, and members of the pool of P&I
Associations comprising the International Group. While the Company has
historically been able to obtain pollution coverage at commercially reasonable
rates, no assurances can be given that such insurance will continue to be
available in the future.
Global Bulk Shipping Markets
Economic Slowdown and Falling Oil Production
World economic growth as measured by real Gross Domestic Product fell
sharply during 2001, averaging just 1.4% compared with 3.9% in 2000. World oil
demand as estimated by the International Energy Agency increased just
fractionally from 75.9 million barrels in 2000 to 76.0 million barrels per day
in 2001. During the year, growth in oil production from countries not in the
Organization of Petroleum Exporting Countries ("OPEC") of 0.7 million barrels
per day, mostly from the former Soviet Union (the "FSU"), coupled with OPEC's
decision to cut its own oil production, reduced the share of cargo shipments
from the Middle East, a market on which VLCC owners depend heavily. While OPEC
cut its oil supply by 2.5% in 2001, production from OPEC Middle East fell 3.4%.
The terrorist attacks in the U.S. on September 11 had a further negative impact
on economic growth and oil demand, particularly for jet fuel. Although the
effect on consumer spending was short-lived, world industrial activity, which
had already been dropping quite markedly, fell more steeply. In December, some
key economic indicators in the U.S. showed signs of bottoming out. On January 1,
2002, OPEC, with the support of some major non-OPEC producers, Angola, Mexico,
Norway, Oman and Russia, implemented a combined cut of almost two million
barrels per day of oil production, further reducing tanker demand.
VLCC Scrapping Increases; Fleet Decreases
As of January 1, 2002, 78 VLCCs were 25 years or older, constituting 14.7%
of the world VLCC fleet of 428 vessels. Older, single-hulled VLCCs fared poorly
for most of 2001 as lower demand provided charterers with adequate choice among
modern vessels. Less fuel efficient, older vessels suffered greater earnings
declines because of the high fuel oil prices that prevailed throughout much of
the year. As a result, scrap sales of VLCCs rose, especially from May, when
freight rates began to fall more sharply. A total of 40 VLCCs (11.4 million dwt)
was removed from service in 2001, of which 29 were sold for scrap, ten were sold
for conversion to floating production storage and off-loading vessels, and one
was lost at sea.
VLCC newbuilding deliveries amounted to 26 vessels (7.8 million dwt) in
2001. Newbuilding orders totaled 25 vessels, with approximately two-thirds of
contracting activity occurring in the first six months of the year. Deletions of
vessels exceeded deliveries from the shipyards, which resulted in the VLCC fleet
decreasing during 2001 from 128.7 million dwt to 125.5 million dwt. At the
beginning of 2002, the VLCC orderbook totaled 87 vessels (26.9 million dwt)
compared with 89 vessels (27.2 million dwt) at the start of 2001, and
represented 21.4% of the existing VLCC fleet. As of January 1, 2002, the VLCCs
on order as a proportion, based on deadweight tons, of those over 20 years of
age stood at 87.6%.
Aframax Scrapping Subdued; Orderbook Increases
As of January 1, 2002, the world Aframax fleet amounted to 546 vessels
(52.2 million dwt) and was little changed from the previous year. As of such
date, approximately 23.8% of Aframaxes were over 20 years of age. Although
freight rates declined during 2001, scrap sales were actually less than in 2000,
amounting to 17 vessels (1.5 million dwt) compared with 18 vessels (1.7 million
dwt) the year
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before. The Aframax orderbook represented 24.6% of the existing Aframax fleet as
of January 1, 2002, or 103.4% stated as a proportion, based on deadweight tons,
of those over 20 years. The relatively high freight rates for Aframaxes during
the second half of 2000, which continued into 2001, resulted in 70 orders being
placed in 2001. Aframax newbuilding deliveries amounted to 14 vessels (1.4
million dwt) during the year. The orderbook rose from 68 vessels (7.2 million
dwt) at the beginning of 2001 to 120 vessels (12.8 million dwt) at January 1,
2002.
Panamax Product Carrier Fleet Little Changed
The world Panamax Product Carrier fleet at January 1, 2002 comprised 293
vessels of 18.7 million dwt, which was little changed from the 294 vessels (18.7
million dwt) existing one year earlier. During 2001, seven Panamax Product
Carriers totaling 0.5 million dwt were sold for scrap compared to seven vessels
totaling 0.4 million dwt in 2000. Meanwhile, deliveries amounted to four vessels
of 0.3 million dwt. As of January 1, 2002, the orderbook was 39 vessels of 2.8
million dwt, representing 14.8% of the current Panamax fleet compared with 13
vessels of 0.9 million dwt one year earlier. As of January 1, 2002, 39.8% of the
existing Panamax fleet was 20 years old or older and 9.2% was 25 or more years
old. The Panamax fleet's average age of 16.8 years makes this the oldest overall
fleet sector. As of January 1, 2002, the Panamax Product Carriers on order as a
proportion, based on deadweight tons, of those over 20 years of age stood at
37.1%.
The increase in long haul products trade during 2001, particularly from
the Middle East, benefited Panamax Product Carriers. U.S. imports of refined
products rose by 3.4% to 2.5 million barrels per day during 2001. This increase
was in response to severe winter weather at the start of the year, combined with
shortages and high natural gas prices, prompting increased use of oil for power
generation. Long haul refined products trades into the U.S. increased by 30.1%
for the first 11 months of 2001, originating primarily from the FSU, through the
Baltic, and also from the Middle East.
Handysize Product Carrier Orderbook Grows
The world Handysize Product Carrier fleet (which includes Bostonmax
Product Carriers) decreased from 20.6 million dwt at the end of 2000 to 20.2
million dwt at the end of 2001, with scrap sales of 16 vessels (0.6 million dwt)
exceeding newbuilding deliveries of eight vessels (0.3 million dwt). The
orderbook for Handysize Product Carriers was 87 vessels (3.9 million dwt) at
January 1, 2002, which equated to 19.6% of the existing fleet compared with 35
vessels (1.5 million dwt) at January 1, 2001. At the end of 2001, 36.8% of the
medium range Product Carrier fleet was 20 years old or older. In comparison, the
current orderbook represents 53.2%, based on deadweight tons, of this fleet
sector that was 20 years old or older.
Glossary
Vessel Types Owned by OSG
VLCC VLCC is the abbreviation for Very Large
Crude Carrier, a large crude oil tanker with
a carrying capacity of more than 200,000
deadweight tons. Modern VLCCs can generally
transport two million barrels or more of
crude oil. These vessels are mainly used on
the longest (long haul) routes from the
Arabian Gulf to North America, Europe, and
Asia, and from West Africa to the U.S. and
Far Eastern destinations.
Suezmax A large crude oil tanker with a carrying
capacity of approximately 120,000 to 200,000
deadweight tons. Modern Suezmaxes can
generally transport about one million
barrels of crude oil.
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Aframax A medium size crude oil tanker with a
carrying capacity of approximately 80,000 to
120,000 deadweight tons. Because of their
size, Aframaxes are able to operate on many
different routes, including from Latin
America and the North Sea to the U.S. They
are also used in lightering (transferring
cargo from larger tankers, typically VLCCs,
to smaller tankers for discharge in ports
from which the larger tankers are
restricted).
Product Carrier General term that applies to any
tanker that is used to transport refined oil
products, such as gasoline, jet fuel or
heating oil.
Panamax Product Carrier A large size Product Carrier with a carrying
capacity of approximately 50,000 to 80,000
deadweight tons that generally operates on
longer routes.
Handysize Product Carrier A small size Product Carrier with a carrying
capacity of approximately 30,000 to 50,000
deadweight tons. This type of vessel
generally operates on shorter routes (short
haul).
Bostonmax Product Carrier A small size Product Carrier with a carrying
capacity of approximately 39,000 deadweight
tons and the largest size capable of
accessing all Boston-area terminals.
Capesize Bulk Carrier A large Dry Bulk Carrier (any vessel used to
carry non-liquid bulk commodities) with a
carrying capacity of more than 80,000
deadweight tons that mainly transports iron
ore and coal.
Pure Car Carrier A single-purpose vessel, with many decks,
designed to carry automobiles, which are
driven on and off using ramps.
Operations
Worldscale Industry name for the Worldwide Tanker
Nominal Freight Scale published annually by
the Worldscale Association as a rate
reference for shipping companies, brokers,
and their customers engaged in the bulk
shipping of oil in the international
markets. Worldscale is a list of calculated
rates for specific voyage itineraries for a
standard vessel, as defined, using defined
voyage cost assumptions such as vessel
speed, fuel consumption, and port costs.
Actual market rates for voyage charters are
usually quoted in terms of a percentage of
Worldscale.
Charter Contract entered into with a customer for
the use of the vessel for a specific voyage
at a specific rate per unit of cargo, or for
a specific period of time at a specific rate
per unit (day or month) of time.
Voyage Charter A Charter under which a customer pays a
transportation charge for the movement of a
specific cargo between two or more specified
ports. The shipowner pays all vessel and
voyage expenses. The customer is liable for
Demurrage, if incurred.
Demurrage Additional revenue paid to the shipowner on
its voyage charters for delays experienced
in loading and/or unloading cargo, which are
not deemed to be the responsibility of the
shipowner, calculated in accordance with
specific Charter terms.
Time Charter A Charter under which a customer pays a
fixed daily or monthly rate for a fixed
period of time for use of the vessel.
Subject to any restrictions in the Charter,
the customer decides the type and quantity
of cargo to be carried and the ports of
loading and unloading. The customer pays all
voyage expenses such as fuel, canal tolls,
and port charges. The shipowner pays all
vessel expenses such as the Technical
Management expenses.
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Bareboat Charter A Charter under which a customer pays a
fixed daily or monthly rate for a fixed
period of time for use of the vessel
plus all voyage and vessel expenses.
Bareboat charters are usually long term.
Contract of Affreightment or COA COA is the abbreviation for Contract of
Affreightment, which is an agreement
providing for the transportation of a
specific quantity of cargo over a
specific time period but without
designating specific vessels or voyage
schedules, thereby allowing flexibility
in scheduling. COAs can either have a
fixed rate or a market-related rate. An
example would be two shipments of 70,000
tons per month for the next two years at
the prevailing spot rate at the time of
each loading.
Time Charter Equivalent or TCE TCE is the abbreviation for Time Charter
Equivalent. TCE revenues, which is voyage
revenues less voyage expenses, serves as
an industry standard for measuring and
managing fleet revenue and comparing
results between geographical regions and
among competitors.
Commercial Management The management of the employment, or
chartering, of a vessel and associated
functions, including seeking and
negotiating employment for vessels,
billing and collecting revenues, issuing
voyage instructions, purchasing fuel, and
appointing port agents.
Technical Management The management of the operation of a
vessel, including physically maintaining
the vessels, maintaining necessary
certifications, and supplying necessary
stores, spares, and lubricating oils.
Responsibilities also generally include
selecting, engaging and training crew,
and arranging necessary insurance
coverage.
Regulations
Jones Act U.S. law that applies to port-to-port
shipments within the continental U.S. and
between the continental U.S., Hawaii,
Alaska, Puerto Rico, and Guam, and
restricts such shipments to U.S. Flag
Vessels that are built in the U.S. and
that are owned by a U.S. company that is
more than 75% owned and controlled by
U.S. citizens.
U.S. Flag Vessel A U.S. Flag Vessel must be crewed by U.S.
sailors, and owned and operated by a U.S.
company.
Foreign Flag Vessel A vessel that is registered under a flag
other than that of the U.S.
OPA 90 OPA 90 is the abbreviation for the U.S.
Oil Pollution Act of 1990.
IMO IMO is the abbreviation for International
Maritime Organization, an agency of the
United Nations, which is the body that is
responsible for the maintenance of
internationally developed maritime safety
and pollution treaties, including MARPOL
73/78.
MARPOL 73/78 International Convention for the
Prevention of Pollution from Ships, 1973,
as modified by the Protocol of 1978
relating thereto, includes regulations
aimed at preventing and minimizing
pollution from ships by accident and by
routine operations.
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Miscellaneous
Deadweight tons or Dwt Dwt is the abbreviation for deadweight
tons, representing the cargo carrying
capacity of a vessel.
Classification Societies Organizations that establish and
administer standards for the design,
construction and operational maintenance
of vessels. As a practical matter,
vessels cannot trade unless they meet
these standards. The Company's vessels,
excluding certain of those owned jointly
with others, are inspected for compliance
by the American Bureau of Shipping and
Lloyd's Register of Shipping.
Drydocking An out-of-service period during which
planned repairs and maintenance are
carried out, including all underwater
maintenance such as external hull
painting. During the drydocking, certain
mandatory Classification Society
inspections are carried out and relevant
certifications issued. Normally, as the
age of a vessel increases, the cost of
drydocking increases.
ITEM 2. PROPERTIES
See Item 1.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party, as plaintiff or defendant, to various suits in the
ordinary course of business for monetary relief arising principally from
personal injuries, collision or other casualty and to claims arising under
charter parties. All such personal injury, collision and casualty claims against
the Company are fully covered by insurance (subject to deductibles not material
in amount). Each of the other claims involves an amount which, in the opinion of
management, is not material in relation to the consolidated current assets of
the Company as shown in the Company's Consolidated Balance Sheet as at December
31, 2001, set forth in Item 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
Executive Officers of the Registrant
<TABLE>
<CAPTION>
Name Age Position Held Has Served as Such Since
- ----- ---- ------------------------ ----------------------
<S> <C> <C> <C>
Morton P. Hyman 66 Chairman of the Board, September 2000
President and October 1971
Chief Executive Officer
Robert N. Cowen 53 Senior Vice President, February 1993
Chief Operating Officer June 1999
and Secretary June 1982
Myles R. Itkin 54 Senior Vice President, June 1995
Chief Financial Officer
and Treasurer
Robert E. Johnston 54 Senior Vice President October 1998
and Chief Commercial June 1999
Officer
Ariel Recanati 38 Senior Vice President October 1998
and Chief Strategic and June 1999
Planning Officer
Peter J. Swift 58 Senior Vice President June 1999
and Head of Shipping
Operations
</TABLE>
The term of office of each executive officer continues until the first
meeting of the Board of Directors of the Company immediately following the next
annual meeting of its shareholders, to be held in June 2002, and until the
election and qualification of his successor. There is no family relationship
between the executive officers.
Messrs. Morton P. Hyman and Robert N. Cowen have served as directors of
the Company since 1969 and 1993, respectively. Mr. Robert E. Johnston has served
as an officer and director of certain of the Company's subsidiaries during the
past five years; he also served for more than the five years ended in 1998 as a
senior officer of Maritime Overseas Corporation ("MOC"), the corporation that
managed the fleet from the Company's inception in 1969 to 1998. Mr. Ariel
Recanati has served as a director of the Company since October 1999 and as an
officer and director of certain of the Company's subsidiaries during the past
five years; he served as a senior officer of MOC for more than the five years
ended in 1998. Mr. Ariel Recanati is a first cousin of Mr. Oudi Recanati, a
director of the Company. Mr. Peter J. Swift was Vice President of the Company
from October 1998 until June 1999. He has served as an officer and director of
certain of the Company's subsidiaries since October 1998; he also served as an
officer of MOC and one of its subsidiaries for more than the five years ended in
1998.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's common stock is listed for trading on the New York Stock
Exchange and the Pacific Exchange, Inc. under the trading symbol OSG. The
range of high and low sales prices of the Company's common stock as
reported on the New York Stock Exchange for each of the quarters during
the last two years are set forth below.
2001 High Low
---- ---- ---
First Quarter 28.00 21.38
Second Quarter 37.09 27.28
Third Quarter 30.62 19.90
Fourth Quarter 24.93 21.51
2000 High Low
---- ---- ---
First Quarter 24.44 13.88
Second Quarter 26.19 21.50
Third Quarter 30.25 22.63
Fourth Quarter 27.56 20.25
(b) On March 21, 2002, there were 556 shareholders of record of the Company's
common stock.
(c) The Company has paid a dividend of 15 cents per share of common stock for
each of the quarters during the last two years. The payment of cash
dividends in the future will depend upon the Company's operating results,
cash flow, working capital requirements and other factors deemed pertinent
by the Company's Board of Directors.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following unaudited selected consolidated financial data for the years
ended December 31, 2001, 2000 and 1999, and at December 31, 2001 and 2000, are
derived from the audited consolidated financial statements of the Company set
forth in Item 8, which have been audited by Ernst & Young LLP, independent
auditors. The unaudited selected consolidated financial data for the years ended
December 31, 1998 and 1997, and at December 31, 1999, 1998 and 1997, are derived
from audited consolidated financial statements of the Company not appearing in
this Annual Report, which have also been audited by Ernst & Young LLP.
17
<PAGE>
<TABLE>
<CAPTION>
In thousands, except per share amounts 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shipping revenues $ 469,333 $ 467,618 $ 350,545 $ 412,384 $ 477,950
Time charter equivalent revenues (a) 381,018 370,081 253,217 326,519 380,370
Income from vessel operations 130,686(b) 134,066 23,366 41,050 62,502
Income/(loss) before federal income taxes,
extraordinary gain/(loss) and
cumulative effect of
change in accounting principle 154,445 132,186 19,515 (35,222) 31,167
Net income/(loss) (c)(d) 101,441 90,391 14,764 (37,920) 19,017
Depreciation and amortization (e) 69,912 70,138 75,860 90,331 99,344
EBITDA (e)(g) 269,392 249,794 128,228 160,093 210,612
Net cash provided by operating activities 181,716 100,292 37,033 56,296 59,854
Vessels and capital leases, at net book amount 1,345,719 1,293,958 1,237,513 1,229,110(f) 1,308,125(f)
Total assets 1,964,275 1,823,913 1,720,945 1,695,515 2,023,224
Debt - long-term debt and capital
lease obligations (exclusive of short-term
debt and current portions)(h) 854,929 836,497 827,372 833,893 1,056,306
Reserve for deferred federal income taxes -
noncurrent 132,170 117,749 77,877 69,384 108,814
Shareholders' equity $ 813,426 $ 750,167 $ 661,058 $ 707,622 $ 779,797
Debt/total capitalization 51.2% 52.7% 55.6% 54.1% 57.5%
Per share amounts:
Basic net income/(loss)(c) $ 2.97 $ 2.67 $ 0.41 $ (1.03) $ 0.52
Diluted net income/(loss)(c) $ 2.92 $ 2.63 $ 0.41 $ (1.03) $ 0.52
Shareholders' equity $ 23.73 $ 22.07 $ 19.63 $ 19.24 $ 21.19
Cash dividends paid $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.60
Average shares outstanding for basic
earnings per share 34,169 33,870 35,712 36,794 36,468
Average shares outstanding for diluted
earnings per share 34,697 34,315 35,725 36,794 36,569
</TABLE>
(a) Represents shipping revenues less voyage expenses.
(b) Reflects restructuring charge of $10,439 to cover costs associated with
the reduction of staff at the New York headquarters and the transfer of
ship management and administrative functions to the Company's subsidiary
in Newcastle, U.K.
(c) Results for 2000, 1999 and 1998 reflect extraordinary income/(loss) on
early extinguishment of debt of $573 ($.02 per share), $1,462 ($.04 per
share) and ($13,648) ($.37 per share), respectively.
(d) Results for 2000 also include income of $4,152 ($.12 per share) from the
cumulative effect of a change in accounting principle from the completed
voyage method to the percentage of completion method of recognizing net
voyage revenues of vessels operating on voyage charters. Income before
cumulative effect of change in accounting principle in 2000 was $86,239,
or $2.55 per basic share ($2.51 per diluted share). Assuming the
percentage of completion method had been applied retroactively, the pro
forma income/(loss) before cumulative effect of change in accounting
principle would have been income of $13,450, or $0.37 per share in 1999; a
loss of $40,780, or $1.11 per share in 1998; and income of $21,655, or
$0.59 per share in 1997.
(e) Amounts for years prior to 2001 have been restated to conform with the
2001 presentation.
(f) Includes vessels held for disposal, at estimated fair value.
(g) EBITDA represents operating earnings, which is before net interest
expense, income taxes and extraordinary items and cumulative effect of
change in accounting principle, plus equity in results of cruise business,
other income and depreciation and amortization expense. EBITDA should not
be considered a substitute for net income, cash flows from operating
activities and other operations or cash flow statement data prepared in
accordance with accounting principles generally accepted in the United
States or as a measure of profitability or liquidity. EBITDA is presented
to provide additional information with respect to the Company's ability to
satisfy debt service, capital expenditure and working capital
requirements. While EBITDA is frequently used as a measure of operating
results and the ability to meet debt service requirements, it is not
necessarily comparable to other similarly titled captions of other
companies due to differences in methods of calculations.
(h) Amounts do not include debt of joint ventures in which the Company
participates.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company is one of the largest independent bulk shipping companies in
the world. The Company's operating fleet consists of 50 vessels aggregating 7.7
million deadweight tons, including nine vessels that are owned by joint ventures
in which the Company has an average interest of 42%. An additional seven
newbuildings are scheduled to be delivered in the next 24 months, including two
VLCCs which will be owned by joint ventures in which the Company has a 33.3%
interest.
Operations
The Company's revenues are highly sensitive to patterns of supply and
demand for vessels of the types and sizes owned and operated by the Company and
the trades in which those vessels operate. Rates for the transportation of crude
oil and refined petroleum products from which the Company earns a substantial
majority of its revenue are determined by market forces such as the supply and
demand for oil, the distance that cargoes must be transported, and the number of
vessels expected to be available at the time such cargoes need to be
transported. The demand for oil shipments is significantly affected by the state
of the global economy and level of OPEC's exports. The number of vessels is
affected by newbuilding deliveries and by the removal of existing vessels from
service, principally because of scrapping. The Company's revenues are also
affected by the mix of charters between spot and long-term.
Shipping revenues and voyage expenses are significantly affected by the
mix between voyage charters and time charters. Therefore, the Company manages
its vessels based on TCE revenues. Management makes economic decisions based on
anticipated TCE rates and evaluates financial performance based on TCE rates
achieved.
Set forth in the tables below are daily TCE rates that prevailed in
various markets in which the Company's vessels operated for the periods
indicated. In each case, the rates may differ from the actual TCE rates achieved
by the Company in the period indicated because of the timing and length of
voyages and the portion of revenue generated from long-term charters. It is
important to note that the spot market is quoted in Worldscale rates. The
conversion of Worldscale rates to the following TCE rates necessarily required
the Company to make certain assumptions as to brokerage commissions, port time,
port costs, speed and fuel consumption, all of which will vary in actual usage.
Foreign Flag VLCC Segment
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Spot Market TCE Rates
VLCCs in the Arabian Gulf
Q1-2001 Q2-2001 Q3-2001 Q4-2001 2001 2000 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Average $53,000 $31,000 $26,400 $20,300 $32,700 $46,100 $17,500
High $69,800 $53,400 $42,100 $43,000 $69,800 $79,700 $35,000
Low $43,700 $15,200 $14,800 $11,700 $11,700 $11,000 $ 9,000
- --------------------------------------------------------------------------------------------------------
</TABLE>
For 2001, freight rates for modern VLCCs trading East and West out of the
Arabian Gulf averaged $32,700 per day, which is significantly less than the
average for 2000, but significantly higher than the average for 1999.
19
<PAGE>
Freight rates which peaked in the fourth quarter of 2000, continued to
show strength during the first quarter of 2001 as OPEC cut oil exports but
trended downward throughout the rest of the year, with only a few brief periods
of recovery. From a high of $69,800 per day in the first quarter of 2001, rates
fell steadily to a second quarter low of $15,200 per day in response to OPEC's
cut in oil exports that started in April. Iraq's return to the export market in
July caused freight rates to recover briefly. In September, VLCC rates rose
sharply to a high of $42,100 per day, partly in reaction to uncertainties
following the terrorist attacks in the U.S., an excess of early September cargo
loadings and a temporary shortage of VLCCs available for loading at Arabian Gulf
ports. OPEC's decision to implement a third export cut in September and fears of
recession, however, quickly reduced the demand for VLCCs, causing freight rates
to fall steeply by late October to an average of $20,300 per day for the fourth
quarter.
The global economic slowdown significantly reduced Asian oil demand in
2001, causing freight rates on the Arabian Gulf-East route to fall steadily from
January through June. The amount of oil shipped from West Africa to Far East
destinations also fell. In contrast, during 2000, TCE revenues were boosted by
the increased triangulation opportunities for vessels returning east from
western discharge ports in Europe and North America to transport cargo from West
Africa to Asia.
Foreign Flag Aframax Segment
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Spot Market TCE Rates
Aframaxes in the Caribbean
Q1-2001 Q2-2001 Q3-2001 Q4-2001 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Average $36,300 $25,400 $18,000 $19,200 $24,800 $30,600 $13,300
High $51,000 $36,000 $26,000 $26,000 $44,000 $56,000 $22,100
Low $24,700 $16,000 $12,000 $14,500 $12,000 $11,200 $ 8,600
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Aframaxes are not as reliant on the Arabian Gulf trades and are,
therefore, less affected by cutbacks in OPEC exports. In the Caribbean trade,
rates for 2001 averaged $24,800 per day, down 19% from the previous year's
average of $30,600 per day. Freight rates for Aframax tankers on the
Caribbean-U.S. Gulf route, increased sharply from mid January lows of $24,700
per day to a high of $51,000 per day in mid March. In April, freight rates
plunged, reaching a low of $16,000 per day in late June as the U.S. entered a
recession. Rates then remained relatively stable, but low, for the remainder of
the year.
During 2001, Aframax-based crude oil imports into the U.S. from the
Caribbean (Colombia, Venezuela, Trinidad and Mexico) rose by 3.8% over the
average for 2000, offsetting a drop of crude oil imports from the North Sea.
Crude oil imports from the North Sea fell by 18%, but imports from the Arabian
Gulf on VLCCs increased, providing lightering opportunities for Aframax tankers
that typically operate in the U.S. Gulf. Offsetting the reduction in OPEC oil
exports, non-OPEC exports increased by 700,000 barrels per day during 2001. Only
a small proportion of this incremental crude oil is transported in VLCCs. The
largest single increase in exports was recorded by the FSU, exports from which
primarily utilize Aframax and Suezmax vessels.
20
<PAGE>
Foreign Flag Product Carriers Segment
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Spot Market TCE Rates
Panamaxes in the Pacific and Bostonmaxes in the Caribbean
Q1-2001 Q2-2001 Q3-2001 Q4-2001 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Panamax Average $45,600 $26,200 $20,200 $16,300 $27,100 $22,100 $11,100
Panamax High $58,000 $29,000 $24,000 $23,500 $58,000 $50,000 $15,300
Panamax Low $26,000 $23,000 $16,000 $10,500 $10,500 $11,500 $ 7,400
Bostonmax Average $24,000 $20,400 $16,200 $11,800 $18,200 $15,900 $10,300
Bostonmax High $32,000 $23,000 $19,000 $16,300 $32,000 $28,700 $14,000
Bostonmax Low $16,000 $15,300 $13,000 $ 7,300 $ 7,300 $ 7,000 $ 6,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Panamax Product Carriers began 2001 on a strong note with freight rates in
the Pacific averaging $45,600 per day in the first quarter. Although refineries
in China operated at close to their capacity during the earlier part of 2001,
they were unable to satisfy domestic demand. As a result, imports rose during
the first six months of 2001. While this trade activity provided some support
for Panamax Product Carriers, freight rates eventually succumbed to downward
pressure as a result of worsening economic conditions in other parts of Asia and
on the U.S. West Coast. In addition, Asian petrochemical manufacturers cut back
on ethylene production, reducing the need for naphtha imports. Beginning in the
second quarter and continuing through the end of 2001, freight rates in the
Pacific fell in every month except October, when concerns about the security of
supply in the aftermath of the terrorist events of September 11 provided a short
market boost.
Bostonmax Product Carriers also began 2001 in a strong position because
colder than normal temperatures in North America in January and February
resulted in increased demand for fuel oil. Imports of fuel oil and middle
distillates rose strongly due to tightness in local supply caused by low
inventories, high refinery utilization, and implementation of stricter fuel
standards. In the meantime, the supply of Product Carriers was constrained by
strong demand in the Far East. Towards the end of the first quarter of 2001,
demand for middle distillates and fuel oil in the U.S. diminished, due to
seasonality and the effects of a slowing economy. From a 2001 high reached in
early January of $32,000 per day, freight rates in the Caribbean fell steadily
to $16,000 per day by mid March. Nonetheless, the average rate of $24,000 per
day in the first quarter of 2001 was still comparatively strong compared with
the first quarter of 2000 when rates averaged $9,200 per day. Freight rates for
the Caribbean trade averaged $20,400 per day during the second quarter of 2001,
as deteriorating economic conditions were already beginning to have an effect.
Average rates fell further in the third quarter to $16,200 per day, as jet fuel
demand dropped along with gasoline prices in response to the sharp slowdown in
the U.S. economy. Freight rates for the Caribbean trade in September 2001
averaged less than half the level achieved nine months earlier, and became
successively weaker in the final three months of 2001.
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States, which
require the Company to make estimates in the application of its accounting
policies based on the best assumptions, judgments, and opinions of management.
Following is a discussion of the accounting policies that involve a higher
degree of judgment and the methods of their application. For a description of
all of the Company's material accounting policies, see Note A to the Company's
consolidated financial statements set forth in Item 8.
21
<PAGE>
Revenue Recognition
The Company generates a majority of its revenue from voyage charters.
Within the shipping industry, there are two methods used to account for voyage
revenue and expenses: percentage of completion and completed voyage. The
percentage of completion method is the most prevalent method of accounting for
voyage revenues and expenses, and the method currently being used by OSG. For
each method, voyages may be calculated on either a load-to-load or
discharge-to-discharge basis.
Prior to 2000, OSG accounted for voyage revenues and expenses using the
completed voyage method, with voyages calculated on a load-to-load basis.
Accordingly, OSG did not recognize the revenues and expenses of voyages until
vessels had completed their trips to the next load ports. Under this method, the
Company's revenues fluctuated from period to period because of the timing of
voyage completions. The change to the percentage of completion method, with
voyages calculated on a discharge-to-discharge basis, eliminates these
fluctuations since specific voyage results are allocated on a pro rata basis to
the periods over which they are performed.
In applying the percentage completion method, management believes that the
discharge-to-discharge basis of calculating voyages more accurately estimates
voyage results than the load-to-load basis. Since, at the time of discharge,
management generally knows the next load port and expected discharge port, the
discharge-to-discharge calculation of voyage revenues and expenses can be
estimated with a greater degree of accuracy.
In accordance with the Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," OSG does not begin recognizing voyage
revenue until a Charter has been approved by both the Company and the customer,
even if the vessel has discharged its cargo and is sailing to the anticipated
load port on its next voyage.
Vessel Lives and Impairment
The carrying value of each of the Company's vessels represents its
original cost at the time it was delivered or purchased less depreciation
calculated using an estimated useful life of 25 years from the date such vessel
was originally delivered from the shipyard. In the shipping industry, use of a
25-year life has become the standard. The actual life of a vessel may be
different. The Company has evaluated the impact of the revisions to MARPOL
Regulation 13G on the economic lives assigned to the tankers in the Company's
Foreign Flag fleet. Such regulations will not require that any of the
single-hulled or double-sided Foreign Flag tankers be removed from service prior
to attaining 25 years of age.
The carrying values of the Company's vessels may not represent their fair
market value at any point in time since the market prices of secondhand vessels
tend to fluctuate with changes in charter rates and the cost of newbuildings.
Both charter rates and newbuilding costs tend to be cyclical. The Company only
records impairment losses when events occur that cause the Company to believe
that future cash flows for any individual vessel will be less than its carrying
value.
Market Value of Marketable Securities
The Company's investments in marketable securities are classified as
available for sale and, therefore, are carried on the balance sheet at fair
market value with changes in carrying value being recorded in Accumulated Other
Comprehensive Income/(Loss) until the investments are sold. Fair market value is
determined using period-end sales prices on U.S. or foreign stock exchanges. The
Company believes that the decline in the market value of these securities
reflects the general decline in the U.S. equity markets that occurred in the
second half of 2001 and is not necessarily indicative of any developments in the
business of these companies that would constitute a permanent impairment. The
22
<PAGE>
Company anticipates that the market values of these securities will increase
with an improvement in the global economy. Therefore, the Company views the
value at December 31, 2001 to be the result of a temporary decline and,
accordingly, continues to record the unrealized loss in Accumulated Other
Comprehensive Income/(Loss).
Drydocking
Within the shipping industry, there are three methods that are used to
account for drydockings: (1) capitalize drydocking costs as incurred (deferral
method) and amortize such costs over the period to the next scheduled
drydocking, (2) accrue the estimated cost of the next scheduled drydocking over
the period preceding such drydocking, and (3) expense drydocking costs as
incurred. Since drydocking cycles typically extend over two and a half years or
longer, management believes that the deferral method provides a better matching
of revenues and expenses than the expense-as-incurred method. The Company
further believes that the deferral method is preferable to the accrual method
because, under the accrual method estimates of drydocking costs can differ
greatly from actual costs and, in fact, anticipated drydockings may not be
performed if management decides to dispose of the vessels before their scheduled
drydock dates.
Special Purpose Entity ("SPE")
In 1999, the Company facilitated the creation of a special purpose entity
that purchased from and leased back to the Company five U.S. Flag Crude Tankers
that were being time chartered to BP for the transportation of Alaskan crude
oil. The purchase price of $170 million was financed by a term loan from a
commercial lender and a substantive equity capital investment by the SPE's
owner. The Company did not make any guarantee of the vessels' residual values or
guarantee the SPE's debt. The Company has bareboat chartered the vessels to a
joint venture in which it has a 37.5% interest. The joint venture has time
chartered the vessels to BP under a "hell or highwater" lease through the date
on which they must be removed from service in accordance with OPA 90. The
portion of the lease payments from BP to the joint venture representing bareboat
charter hire to the Company, which is sufficient to fully amortize the debt of
the SPE, has been assigned to the SPE. The Company has not consolidated the SPE.
As of December 31, 2001, total assets and total liabilities on the books of the
SPE were $81.4 million and $75.7 million, respectively.
Income from Vessel Operations
During 2001, TCE revenues increased by $10,937,000 to $381,018,000 from
$370,081,000 in 2000 because of an increase in average daily TCE rates and
revenue days. Approximately 73% of the Company's TCE revenues were derived in
the spot market, including vessels in pools, which predominantly operate on
voyage charters, compared with 76% in 2000 and 62% in 1999. In 2001,
approximately 27% of TCE revenues were generated from time charters and
long-term bareboat charters compared with 24% in 2000 and 38% in 1999. This
reliance on the spot market contributes to fluctuations in the Company's
revenue, cash flow, and net income, but affords the Company greater opportunity
to increase income from vessel operations when rates rise. On the other hand,
time and bareboat charters provide the Company with a predictable level of
revenues.
During 2001, income from vessel operations increased by approximately
$7,059,000 from $134,066,000 in 2000, before taking into account a $10,439,000
restructuring charge in 2001. The improvement resulted from an increase in
average daily TCE rates and revenues for the Aframax and Product Carriers
segments, partially offset by a decrease in TCE rates and revenues for the VLCC
segment (see Note C to the financial statements for additional information on
the Company's segments).
23
<PAGE>
<TABLE>
<CAPTION>
VLCC Segment: 2001 2000 1999
-------- -------- -------
<S> <C> <C> <C>
TCE revenues (in thousands) $112,820 $118,156 $53,899
Running expenses (in thousands)(a) 48,467 43,927 38,632
-------- -------- -------
Income from vessel operations (in thousands)(b) $ 64,353 $ 74,229 $15,267
======== ======== =======
Average daily TCE rate $ 37,432 $ 44,137 $26,382
Average number of vessels (c) 7.4 6.4 5.0
Average number of vessels chartered in under
operating leases 1.0 1.0 1.0
Number of revenue days(d) 3,014 2,677 2,043
Number of ship-operating days(e) 3,077 2,701 2,121
</TABLE>
(a) Running expenses represent vessel expenses, time and bareboat charter hire
expenses, and depreciation and amortization.
(b) Income from vessel operations by segment is before general and
administrative expenses and the restructuring charge.
(c) The average is calculated to reflect the addition and disposal of vessels
during the year.
(d) Revenue days represent ship-operating days less days that vessels were not
available for employment due to repairs, drydock or lay-up.
(e) Ship-operating days represent calendar days.
The VLCC segment includes two vessels that were time chartered out during
the three years ended December 31, 2001. The following table presents a
breakdown of the VLCC segment between the two VLCCs generating revenue on time
charters and those generating revenue in the spot market.
<TABLE>
<CAPTION>
2001 2000 1999
------- ------- -------
<S> <C> <C> <C>
Spot Market:
TCE revenues (in thousands) $89,631 $91,419 $30,755
Running expenses (in thousands) 35,990 31,729 24,324
------- ------- -------
Income from vessel operations (in thousands) $53,641 $59,690 $ 6,431
======= ======= =======
Average daily TCE rate $38,987 $47,002 $22,126
Number of revenue days 2,299 1,945 1,390
Time Charters:
TCE revenues (in thousands) $23,189 $26,737 $23,144
Running expenses (in thousands) 12,477 12,198 14,308
------- ------- -------
Income from vessel operations (in thousands) $10,712 $14,539 $ 8,836
======= ======= =======
Average daily TCE rate $32,432 $36,526 $35,443
Number of revenue days 715 732 653
</TABLE>
During 2001, TCE revenues for the VLCC segment decreased by $5,336,000 to
$112,820,000 from $118,156,000 in 2000 because of a decrease of $6,705 per day
in the average daily TCE rate earned, partially offset by an increase in the
number of revenue days. The increase in revenue days resulted from the delivery
of two VLCC newbuildings in the second half of 2001 and the operation for all of
2001 of two VLCC newbuildings delivered in the first half of 2000, partially
offset by an increase in days spent repairing and drydocking the segment's
vessels. Running expenses increased by $4,540,000 to $48,467,000 in 2001 from
$43,927,000 in 2000 as a result of an increase in ship-operating days, but
average daily running expenses were relatively unchanged.
24
<PAGE>
During 2000, TCE revenues for the VLCC segment increased by $64,257,000 to
$118,156,000 from $53,899,000 in 1999 because of an increase of $17,755 per day
in the average daily TCE rate earned and an increase in the number of revenue
days resulting from the delivery of two VLCC newbuildings in the first half of
2000 and a reduction in days spent repairing and drydocking the segment's
vessels. Running expenses increased by $5,295,000 to $43,927,000 in 2000 from
$38,632,000 in 1999 as a result of an increase in ship-operating days, partially
offset by a decrease in charter-in expense. The decrease in charter-in expense
was offset in equity in income of joint ventures and, therefore, had no impact
on the Company's net income (see Equity in Income of Joint Ventures for further
discussion). The average daily running expenses, exclusive of charter-in
expense, were relatively unchanged.
The Company's VLCCs operating in the Tankers pool are generally able to
generate higher TCE rates than those reflected in the table on page 19, because
the scale of the pool provides opportunities for scheduling efficiencies that
result in enhanced vessel utilization.
Aframax Segment: 2001 2000 1999
-------- ------- -------
TCE revenues (in thousands) $111,293 $86,101 $41,522
Running expenses (in thousands) 44,575 36,868 38,506
-------- ------- -------
Income from vessel operations (in thousands) $ 66,718 $49,233 $ 3,016
======== ======= =======
Average daily TCE rate $ 29,505 $26,957 $12,867
Average number of vessels 9.9 9.0 9.0
Average number of vessels chartered in under
operating leases 0.5 0.1 0.4
Number of revenue days 3,772 3,194 3,227
Number of ship-operating days 3,810 3,295 3,355
During 2001, TCE revenues for the Aframax segment increased by $25,192,000
to $111,293,000 from $86,101,000 in 2000 because of an increase of $2,548 per
day in the average daily TCE rate earned and an increase in revenue days
resulting from the delivery of three Aframaxes in 2001 and a decrease in days
spent repairing and drydocking the segment's vessels. TCE revenues for 2001
include $3,197,000 resulting from forward freight agreements. Running expenses
increased in 2001 as a result of an increase in ship-operating days, but average
daily running expenses were relatively unchanged.
During 2000, TCE revenues for the Aframax segment increased by $44,579,000
to $86,101,000 from $41,522,000 in 1999 because of an increase of $14,090 per
day in the average daily TCE rate earned, partially offset by a slight decrease
in the number of revenue days.
Product Carrier Segment: 2001 2000 1999
------- ------- -------
TCE revenues (in thousands) $58,078 $54,354 $34,456
Running expenses (in thousands) 27,818 29,416 29,424
------- ------- -------
Income from vessel operations (in thousands) $30,260 $24,938 $ 5,032
======= ======= =======
Average daily TCE rate $21,212 $16,541 $11,964
Average number of vessels 8.0 8.0 8.0
Average number of vessels chartered in under
operating leases 0.2 1.0 0.3
Number of revenue days 2,738 3,286 2,880
Number of ship-operating days 3,007 3,293 3,054
25
<PAGE>
During 2001, TCE revenues for the Product Carrier segment increased by
$3,724,000 to $58,078,000 from $54,354,000 in 2000 because of an increase of
$4,671 per day in the average daily TCE rate earned, partially offset by a
decrease in revenue days resulting from the expiration in early 2001 of an
operating lease on a chartered-in vessel and an increase in days spent repairing
and drydocking the segment's vessels. Running expenses decreased by $1,598,000
to $27,818,000 in 2001 from $29,416,000 in 2000 because of a decrease in
ship-operating days, partially offset by an increase of $2,000,000 in damage
repair expenses involving two vessels.
During 2000, TCE revenues for the Product Carrier segment increased by
$19,898,000 to $54,354,000 from $34,456,000 in 1999 because of an increase of
$4,577 per day in the average daily TCE rate earned and an increase in revenue
days resulting from the charter in of one vessel and a decrease in days spent
repairing and drydocking the segment's vessels. Average daily running expenses
remained relatively unchanged between 1999 and 2000.
U.S. Flag Crude Tanker Segment
During 2001, TCE revenues for the U.S. Flag Crude Tanker segment decreased
by $9,247,000 to $28,052,000 from $37,299,000 in 2000 principally because of a
reduction of the number of segment vessels from five to four. This reduction
resulted from the cancellation of both the bareboat charter-in and bareboat
charter-out for one vessel that was sold by the owner in October 2000 in
connection with BP's merger with ARCO.
During 2000, TCE revenues for the U.S. Flag Crude Tanker segment decreased
by $13,258,000 to $37,299,000 from $50,557,000 in 1999 because of the lease
cancellation referred to above and the full-year effects in 2000 of the
sale-leaseback transaction of the five vessels that was completed in the second
quarter of 1999, thereby converting the long-term time charters to BP to
bareboat charters to ATC. Under a bareboat charter, revenues are reduced, as are
running expenses, because such expenses become the responsibility of the
customer. Since such reductions offset each other, the conversion from time
charters to bareboat charters had no material effect on income from vessel
operations.
The increased time charter hire expense in 2000 principally reflects the
sale-leaseback transaction referred to in the preceding paragraph and is net of
amortization of the related deferred gain. Such increase in ship operating
expenses is partially offset by a reduction in depreciation in 2000 of
$6,500,000, resulting from the removal of these five vessels from the
consolidated balance sheet. The net reduction in income from vessel operations
for 2000 of approximately $6,700,000 is offset by a decrease in interest expense
resulting from the application of the net proceeds received to reduce
outstanding debt.
U.S. Flag Dry Bulk Carrier Segment
During 2001, TCE revenues for the U.S. Flag Dry Bulk Carriers segment
decreased by $9,862,000 to $14,872,000 from $24,734,000 in 2000 because of lower
charter rates, an increase of 100 days in time waiting for cargoes, and a
reduction in revenue days caused by the sale in 2001 of an older U.S. Flag
Product Carrier that had participated in the U.S. grain trade program since the
beginning of 2000. Running expenses decreased by $1,472,000 because of the
vessel sale discussed above.
During 2000, TCE revenues for U.S. Flag Dry Bulk Carriers increased by
$2,255,000 to $24,734,000 from $22,479,000 in 1999. This increase was
attributable to the reclassification of an older U.S. Flag Product Carrier that
participated exclusively in the U.S. grain trade program commencing in 2000. TCE
revenues for this vessel aggregated $4,387,000 in 2000. In 1999, results for
this vessel are included in the All Other category in the Company's segment
reporting. Results for the other three vessels in this segment were weaker in
2000 compared with 1999 because the average TCE rate earned declined by more
than $4,000 per day and time spent waiting for cargoes increased by 50 days.
26
<PAGE>
All Other
The Company also owns and operates a U.S. Flag Pure Car Carrier, two U.S.
Flag Handysize Product Carriers operating in the Jones Act trade, and a Foreign
Flag Suezmax, all on long-term charter, as well as two Foreign Flag Dry Bulk
Carriers that operate in a pool of Capesize Dry Bulk Carriers. During 2001, TCE
revenues increased by $6,466,000 to $55,903,000 from $49,437,000 in 2000
principally because of the Company's participation in the charter in of vessels
that were commercially managed by the Capesize pool. Running expenses similarly
increased because of the charter in expense attributable to such vessel
interests. The increase in TCE revenues earned in 2001 by the two U.S. Flag
Product Carriers, which commenced long-term charters in that year, was offset by
significantly weaker results from the two Foreign Flag Dry Bulk Carriers.
Since December 1996, the Pure Car Carrier has received payments of
$2,100,000 per year under the U.S. Maritime Security Program, which continues
through 2005, subject to annual congressional appropriations.
The Company's sale of three older Suezmaxes in late 1999 resulted in a
reduction in TCE revenues and running expenses for 2000 compared with 1999 of
$9,790,000 and $6,508,000, respectively.
General and Administrative Expenses
During 2001, general and administrative expenses decreased by $655,000 to
$41,967,000 from $42,622,000 in 2000 because of a decrease of $3,364,000 in cash
compensation and related benefits, partially offset by increases of $1,377,000
in non-cash stock compensation and $962,000 in net periodic pension and other
postretirement plan costs.
During 2000, general and administrative expenses increased by $3,314,000
to $42,622,000 from $39,308,000 because of an increase in bonuses payable under
the Company's incentive compensation plan for 2000 and an increase of $1,282,000
in non-cash stock compensation incurred in 2000.
Equity in Income of Joint Ventures
As of December 31, 2001, the Company is a partner in joint ventures that
own nine foreign flag vessels (eight VLCCs and one Aframax) and two VLCC
newbuildings that are scheduled to be delivered during the first half of 2002.
As of December 31, 2001, six of these VLCCs participate in the Tankers pool and
two operate on long-term charters, one to OSG and one to the other joint venture
partner, a major oil company, and do not participate in the Tankers pool. The
Aframax participates in the PDVM/OSG pool. The two newbuildings will participate
in the Tankers pool upon delivery.
During 2001, 2000 and 1999, the Company's various joint ventures made the
following acquisitions and dispositions:
Acquisitions
o In March 2000, one VLCC in which the Company has a 30% interest.
o In June 2000, one Aframax in which the Company has a 50% interest.
o In March 2001, two VLCCs in which the Company has a 49.9% interest.
o In the third quarter of 2001, three VLCCs in which the Company has a
33.3% interest.
Dispositions
o In 1999, three older VLCCs in which the Company had a 50% interest.
27
<PAGE>
The following is a summary of the Company's interest in all of its joint
ventures, excluding ATC (see discussion below), and the revenue days for the
respective vessels since their acquisition date, adjusted for OSG's percentage
ownership in order to state the revenue days on a basis comparable to that of a
wholly-owned vessel. For the VLCCs operating in the Tankers pool, the ownership
percentage reflected below is an average as of December 31, 2001. The Company's
actual ownership percentages for these joint ventures ranged from 30% to 49.9%:
<TABLE>
<CAPTION>
Number of Revenue Days
-----------------------------------------------
Average %
Ownership 2001 2000 1999
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
VLCCs participating in Tankers pool 38.3% 555 89 --
VLCCs owned jointly with a major oil company 50.0% 365 366 627
Aframax in PDVM/OSG pool 50.0% 183 91 --
--------------- --------------- ---------------
Total 1,103 546 627
--------------- --------------- ---------------
</TABLE>
Additionally, the Company is a partner in ATC, a joint venture that
operates ten U.S. Flag tankers transporting Alaskan crude oil for BP. The
participation in ATC provides the Company with the opportunity to earn
additional income (in the form of its share of incentive hire paid by BP to ATC)
based on ATC's meeting certain predetermined performance standards.
During 2001, equity in income of joint ventures increased by $9,025,000 to
$20,474,000 from $11,449,000 in 2000, principally because of the inclusion of
the earnings of vessels acquired by joint ventures (as discussed above) and an
increase in incentive hire earned by ATC. Of the total increase, $3,193,000
resulted from the acquisition of six VLCCs since March 2000, all of which have
joined the Tankers pool, as reflected by the increase in revenue days to 555
days in 2001 from 89 days in 2000. The increase in the Company's share of
incentive hire earned by ATC amounted to $3,108,000. An increase of $908,000
resulted from the operation of the Aframax for the full year in 2001, as
reflected by the increase in revenue days to 183 days from 91 days in 2000.
During 2000, equity in income of joint ventures increased by $4,317,000 to
$11,449,000 from $7,132,000 in 1999, as a result of the inclusion of the
earnings of one VLCC and one Aframax acquired in 2000, and an increase in the
Company's share of incentive hire earned by ATC. These increases were partially
offset by a gain of $3,200,000 recognized in 1999 upon the sale of three older
VLCCs (see Note Q to the financial statements) and a decrease in revenues earned
during 2000 by the two remaining VLCCs owned jointly with a major oil company.
Interest Expense
During 2001, interest expense decreased by $2,435,000 to $45,035,000 from
$47,470,000 in 2000 because of a decrease of 210 basis points in the average
rate paid on floating rate debt to 5.1% in 2001 from 7.2% in 2000. The impact of
this decline in rates was partially offset by an increase in the average amount
of debt outstanding of $26,500,000. Interest expense reflects the impact of
interest rate swaps that increased interest expense by $4,800,000 in 2001 and
reduced interest expense by $1,286,000 in 2000. Interest expense is net of
amounts capitalized in connection with vessel construction of $13,151,000 in
2001 and $15,411,000 in 2000.
During 2000, interest expense increased by $2,213,000 to $47,470,000 from
$45,257,000 in 1999 because of an increase of 130 basis points in the average
rate paid on floating rate debt to 7.2% in 2000 from 5.9% in 1999. The impact of
such rate increase, however, was substantially offset by increased amounts
capitalized in connection with vessel construction, $15,411,000 in 2000 compared
with $10,614,000 in 1999. The average amount of debt outstanding in 2000 was
relatively unchanged from 1999 despite payments in connection with the
construction of vessels exceeding $116,100,000 during 2000.
28
<PAGE>
Provision for Federal Income Taxes
The income tax provisions are based on pre-tax income, adjusted to reflect
items that are not subject to tax and the dividends received deduction. The tax
provision in 1999 reflects the release of approximately $300,000 of reserves in
connection with the settlement of federal tax audits covering open years through
1996.
Effects of Inflation
The Company does not believe that inflation has had or is likely, in the
foreseeable future, to have a significant impact on vessel operating expenses,
drydocking expenses and general and administrative expenses.
Cumulative Effect of Accounting Change
On January 1, 2000, the Company changed its accounting policy for revenue
recognition of vessels operating on voyage charters from the completed-voyage
method to the percentage-of-completion method. Prior years' financial statements
have not been restated. Net income for 2000 includes $4,152,000, net of related
income taxes, from the cumulative effect of this change in accounting principle.
Assuming the above percentage of completion method had been applied
retroactively, the pro forma income before cumulative effect of change in
accounting principle for 1999 would have been reduced by $1,314,000 to
$13,450,000, or $.37 per basic and diluted share.
New Accounting Standard
In August 2001, the Financial Accounting Standards Board issued Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"), which is effective for financial statements issued for years beginning
after December 15, 2001, and interim periods within such years. The provisions
of FAS 144 are generally to be applied prospectively. The Company believes that
the adoption of FAS 144 will not have a material effect on its earnings and
financial position.
Liquidity and Sources of Capital
Working capital at December 31, 2001 was approximately $61,000,000
compared with $88,000,000 at December 31, 2000 and $76,000,000 at December 31,
1999. Current assets are highly liquid, consisting principally of cash,
interest-bearing deposits, investments in marketable securities and receivables.
In addition, the Company maintains a capital construction fund with a market
value of approximately $233,000,000 at December 31, 2001. Net cash provided by
operating activities increased to approximately $182,000,000 in 2001 compared
with $100,000,000 in 2000 and $37,000,000 in 1999. Current financial resources,
together with cash anticipated to be generated from operations, are expected to
be adequate to meet financial requirements in the next year.
As of December 31, 2001, the Company's total debt, including capital lease
obligations, was $878,693,000 compared with $850,791,000 at December 31, 2000.
The aggregate principal payments required to be made during the five years
subsequent to December 31, 2001 are $23,764,000 (2002), $90,815,000 (2003),
$16,848,000 (2004), $372,587,000 (2005) and $193,375,000 (2006). In December
2001, OSG concluded a new five-year unsecured revolving credit agreement that
provides for borrowings of up to $300,000,000, which was increased to
$350,000,000 in January 2002 during syndication. Borrowings against the
Company's $425,000,000 long-term credit facility, which expires in August 2002
and was canceled February 1, 2002, will be converted to borrowings against the
new facility. OSG has $700,000,000 of long-term unsecured credit availability,
of which $171,000,000 was unused at December 31, 2001. The Company also has an
unsecured short-term credit facility of $15,000,000, of which $10,000,000 was
unused at December 31, 2001.
29
<PAGE>
As of December 31, 2001, the joint ventures in which OSG participates had
total debt of $277,560,000. The Company's percentage interests in these joint
ventures range from 30% to 50%. OSG has guaranteed a total of $25,952,000 of the
joint venture debt at December 31, 2001. The balance of the joint venture debt
is nonrecourse to the Company. The amount of the Company's guaranties reduces
proportionately as the principal amounts of the joint venture debt are paid
down. See Note E to the financial statements for disclosures concerning
long-term debt of the joint ventures.
OSG finances vessel additions primarily with cash provided by operating
activities and long-term borrowings. In 2001, 2000 and 1999, cash used for
vessel additions approximated $112,000,000, $107,000,000 and $177,000,000,
respectively, excluding additions financed by secured debt. As of December 31,
2001, OSG had non-cancelable contracts for the construction of five
double-hulled Foreign Flag tankers for delivery between late-February 2002 and
early-January 2004, with an aggregate unpaid cost of approximately $143,100,000.
Unpaid costs are net of progress payments and prepayments, which are covered by
refundment guaranties. Scheduled payments are $74,400,000 in 2002 and
$68,700,000 in 2003. In addition, the Company expects to advance approximately
$5,000,000 in 2002 in connection with vessels that are to be delivered in 2002
to joint ventures in which the Company has a 33.3% interest. OSG expects to
finance such vessel commitments from working capital, cash anticipated to be
generated from operations, existing long-term credit facilities and additional
long-term debt, as required. The amounts of working capital and cash generated
from operations that may, in the future, be utilized to finance vessel
commitments are dependent on the rates at which the Company can charter its
vessels. Such rates are volatile. Cancellation of these contracts by OSG, except
as provided in the contracts, could require the Company to reimburse the
respective shipyard for any losses that the shipyard may incur as a result of
such cancellation.
OSG 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. These agreements
contain no leverage features and have various maturity dates from mid 2002 to
2008. As of December 31, 2001, the interest rate swaps effectively convert the
Company's interest rate exposure on $459,000,000 from a floating rate based on
LIBOR to an average fixed rate of 6.58%.
Risk Management
The Company is exposed to market risk from changes in interest rates,
which could impact its results of operations and financial condition. The
Company manages this exposure to market risk through its regular operating and
financing activities and, when deemed appropriate, through the use of derivative
financial instruments. The Company manages its ratio of fixed to floating rate
debt with the objective of achieving a mix that reflects management's interest
rate outlook at various times. To manage this mix in a cost-effective manner,
the Company, from time to time, enters into interest rate swap agreements, in
which it agrees to exchange various combinations of fixed and variable interest
rates based on agreed upon notional amounts. The Company uses derivative
financial instruments as risk management tools and not for speculative or
trading purposes. In addition, derivative financial instruments are entered into
with a diversified group of major financial institutions in order to manage
exposure to nonperformance on such instruments by the counterparties.
The following tables provide information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. For investment securities and debt obligations, the
tables present principal cash flows and related weighted average interest rates
by expected maturity dates. Additionally, the Company has assumed that its fixed
income securities are similar enough to aggregate those securities for
presentation purposes. For interest rate swaps, the tables present notional
amounts and weighted average interest rates by contractual maturity dates.
Notional amounts are used to calculate the contractual cash flows to be
exchanged under the contracts.
30
<PAGE>
Interest Rate Sensitivity
Principal (Notional) Amount (dollars in millions) by Expected Maturity and
Average Interest (Swap) Rate
<TABLE>
<CAPTION>
=====================================================================================================================
Beyond Fair Value at
At December 31, 2001 2002 2003 2004 2005 2006 2006 Total Dec. 31, 2001
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Fixed income securities $ 1.9 $ 0.8 $ 1.5 $ 8.8 $ 1.0 $ 50.5 $ 64.5 $ 64.5
Average interest rate 7.0% 6.3% 6.8% 6.8% 6.1% 6.8%
Liabilities
Long-term debt and capital lease
obligations, including current
portion:
Fixed rate $ 6.2 $ 78.2 $ 4.3 $ 5.1 $ 5.7 $121.8 $221.3 $ 215.7
Average interest rate 9.8% 8.2% 10.0% 10.0% 10.0% 9.1%
Variable rate $ 17.6 $ 12.6 $ 12.6 $367.5 $187.7 $ 59.4 $657.4 $ 657.4
Average spread over LIBOR 1.15% 0.90% 0.90% 1.11% 1.29% 1.00%
Interest Rate Swaps Related to
Debt
Pay fixed/receive variable* $150.8 $ 19.5 $ 11.8 $ 16.6 $206.9 $ 53.8 $459.4 $ (13.7)
Average pay rate 5.2% 6.3% 5.9% 6.1% 5.4% 5.4%
<CAPTION>
======================================================================================================================
Beyond Fair Value at
At December 31, 2000 2001 2002 2003 2004 2005 2005 Total Dec. 31, 2000
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Fixed income securities $ 30.2 $ 2.4 $ 2.5 $ 8.2 $ 5.1 $ 43.1 $ 91.5 $ 91.5
Average interest rate 6.2% 7.0% 6.3% 6.6% 6.9% 6.5%
Liabilities
Long-term debt and capital lease
obligations, including current
portion:
Fixed rate $ 5.6 $ 6.4 $ 76.8 $ 4.3 $ 5.1 $127.5 $225.7 $ 222.0
Average interest rate 9.8% 9.8% 8.2% 10.0% 10.0% 9.2%
Variable rate $ 8.7 $431.6 $ 12.6 $ 12.6 $ 91.5 $ 68.1 $625.1 $ 625.1
Average spread over LIBOR 1.00% 0.71% 0.90% 0.90% 1.07% 1.00%
Interest Rate Swaps Related to
Debt
Pay variable*/receive fixed $ 60.0 $ 60.0 $ 0.2
Average receive rate 6.1%
Pay fixed/receive variable* $ 17.8 $150.8 $ 19.5 $ 11.8 $ 16.6 $ 61.7 $278.2 $ 3.2
Average pay rate 6.3% 5.2% 6.3% 5.9% 6.1% 5.4%
</TABLE>
* LIBOR
In July 2001, the Company terminated all $60 million of its fixed to
floating interest rate swaps that were to mature in December 2003. The gain of
$1.76 million realized on such termination will be recognized ratably over the
period through December 2003, as an adjustment of interest expense. In addition,
in July, the Company entered into five-year floating to fixed interest rate
swaps with several major financial institutions covering notional amounts of
$199 million (bringing the total notional amount of such swaps to $463 million
at that time), pursuant to which it will pay fixed rates of approximately 5.4%
and receive LIBOR. These swaps are designated and qualify as cash flow hedges.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Years ended December 31, 2001, 2000 and 1999 Page
Consolidated Balance Sheets at December 31, 2001 and 2000.................. 33
Consolidated Statements of Income for the Years Ended December 31,
2001, 2000 and 1999..................................................... 34
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999..................................................... 35
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999.................................. 36
Notes to Consolidated Financial Statements................................. 37
Report of Independent Auditors............................................. 59
32
<PAGE>
Consolidated Balance Sheets
Overseas Shipholding Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Dollars in thousands at December 31, 2001 2000
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 30,256 $ 15,781
Investments in marketable securities -- Note F 69,958 54,985
Voyage receivables, including unbilled
of $18,221 and $37,378 29,593 51,805
Other receivables 8,461 5,149
Inventories 3,046 4,403
Prepaid expenses 5,308 4,912
- --------------------------------------------------------------------------------------------------------
Total Current Assets 146,622 137,035
Capital Construction Fund -- Notes F and J 232,971 213,440
Vessels, at cost, less accumulated depreciation --
Notes A5 and I 1,307,311 1,250,171
Vessels under Capital Leases, less accumulated
amortization -- Note A6 38,408 43,787
Investments in Joint Ventures -- Note E 149,775 84,742
Other Assets -- Note A5 89,188 94,738
- --------------------------------------------------------------------------------------------------------
Total Assets $ 1,964,275 $ 1,823,913
========================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 3,132 $ 3,451
Sundry liabilities and accrued expenses -- Notes H and O 34,880 26,178
Federal income taxes 23,756 4,905
Short-term debt and current installments of long-term debt -- Note I 17,600 8,700
Current obligations under capital leases -- Note M1 6,164 5,594
- --------------------------------------------------------------------------------------------------------
Total Current Liabilities 85,532 48,828
Long-term Debt -- Note I 795,736 770,869
Obligations under Capital Leases -- Note M1 59,193 65,628
Deferred Federal Income Taxes ($132,170 and $117,749),
Deferred Credits and Other Liabilities -- Notes E and J 210,388 188,421
Commitments -- Note R
Shareholders' Equity -- Notes G, I, J, K and L:
Common stock ($1 par value; 60,000,000 shares authorized; 39,590,759 shares
issued) 39,591 39,591
Paid-in additional capital 103,529 99,009
Retained earnings 769,457 688,528
- --------------------------------------------------------------------------------------------------------
912,577 827,128
Cost of treasury stock (5,312,867 and 5,604,275 shares) 72,868 76,857
- --------------------------------------------------------------------------------------------------------
839,709 750,271
Accumulated other comprehensive income/(loss) (26,283) (104)
- --------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 813,426 750,167
- --------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 1,964,275 $ 1,823,913
========================================================================================================
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
Consolidated Statements of Income
Overseas Shipholding Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
In thousands, except per share amounts,
for the year ended December 31, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shipping Revenues -- Note C:
Voyage charter revenues $ 285,706 $ 268,010 $ 252,696
Time and bareboat charter revenues, including vessels operating
in certain pools 183,627 199,608 97,849
- -----------------------------------------------------------------------------------------------------
469,333 467,618 350,545
Voyage Expenses (88,315) (97,537) (97,328)
- -----------------------------------------------------------------------------------------------------
Time Charter Equivalent Revenues 381,018 370,081 253,217
- -----------------------------------------------------------------------------------------------------
Ship Operating Expenses:
Vessel expenses 84,058 81,929 92,395
Time and bareboat charter hire expenses -- Notes E and M1 43,956 41,326 22,288
Depreciation and amortization 69,912 70,138 75,860
General and administrative 41,967 42,622 39,308
Restructuring charge -- Note O 10,439 -- --
- -----------------------------------------------------------------------------------------------------
Total Ship Operating Expenses 250,332 236,015 229,851
- -----------------------------------------------------------------------------------------------------
Income from Vessel Operations 130,686 134,066 23,366
Equity in Income of Joint Ventures -- Notes E and Q 20,474 11,449 7,132
- -----------------------------------------------------------------------------------------------------
Operating Income 151,160 145,515 30,498
Other Income (Net) -- Note P 48,320 34,141 21,870
- -----------------------------------------------------------------------------------------------------
199,480 179,656 52,368
Interest Expense 45,035 47,470 45,257
- -----------------------------------------------------------------------------------------------------
154,445 132,186 7,111
Gain on Planned Vessel Dispositions -- Note Q -- -- 12,404
- -----------------------------------------------------------------------------------------------------
Income before Federal Income Taxes, Extraordinary
Gain and Cumulative Effect of Change in Accounting
Principle 154,445 132,186 19,515
Provision for Federal Income Taxes -- Note J 53,004 46,520 6,213
- -----------------------------------------------------------------------------------------------------
Income before Extraordinary Gain and
Cumulative Effect of Change in Accounting Principle 101,441 85,666 13,302
Extraordinary Gain on Early Extinguishment of Debt,
net of income taxes of $230 and $787 -- Note I -- 573 1,462
Cumulative Effect of Change in Accounting Principle,
net of income taxes of $1,800 -- Note B -- 4,152 --
- -----------------------------------------------------------------------------------------------------
Net Income $ 101,441 $ 90,391 $ 14,764
=====================================================================================================
Per Share Amounts -- Note K:
Basic net income before extraordinary gain and cumulative
effect of change in accounting principle $ 2.97 $ 2.53 $ 0.37
Diluted net income before extraordinary gain and cumulative
effect of change in accounting principle $ 2.92 $ 2.49 $ 0.37
Extraordinary gain -- $ 0.02 $ 0.04
Cumulative effect of change in accounting principle -- $ 0.12 --
Basic net income $ 2.97 $ 2.67 $ 0.41
Diluted net income $ 2.92 $ 2.63 $ 0.41
Cash dividends declared and paid $ 0.60 $ 0.60 $ 0.60
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
Consolidated Statements of Cash Flows
Overseas Shipholding Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
In thousands for the year ended December 31, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 101,441 $ 90,391 $ 14,764
Items included in net income not affecting cash flows:
Cumulative effect of change in accounting principle -- (5,952) --
Depreciation and amortization 69,912 70,138 75,860
Amortization of deferred gain on sale and leaseback (13,775) (17,353) (6,674)
Restructuring charge 10,439 -- --
Deferred compensation relating to stock option grants 2,659 1,282 --
Gain on planned vessel dispositions -- -- (12,404)
Provision for deferred federal income taxes 25,862 35,040 7,668
Equity in results of joint ventures (19,246) (10,807) (7,132)
Other -- net (6,482) (10,851) (13,421)
Items included in net income related to investing and financing activities:
Gain on sale of securities -- net (27,227) (3,513) (1,884)
Gain on disposal of other vessels (436) (21,064) (1,824)
Extraordinary gain on early extinguishment of debt -- (803) (2,249)
Changes in operating assets and liabilities:
Decrease/(increase) in receivables 22,281 (23,695) 18,344
Net change in prepaid items, accounts payable, sundry liabilities
and accrued expenses and Federal income taxes 16,288 (2,521) (34,015)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 181,716 100,292 37,033
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchases of marketable securities (116,969) (38,968) (23,309)
Proceeds from sales of marketable securities 96,402 15,148 3,847
Expenditures for vessels, including $109,960, $105,037 and $173,056
related to vessels under construction* (112,012) (106,858) (177,334)
Proceeds from sale and leaseback -- -- 169,949
Proceeds from sale of vessels held for disposal -- -- 53,043
Proceeds from disposal of other vessels 1,142 8,148 --
Investments in and advances to joint ventures (59,845) (6,845) --
Distributions from joint ventures 14,058 8,824 23,222
Purchases of other investments (890) (3,912) (1,849)
Proceeds from dispositions of other investments 1,147 6,475 3,072
Other -- net 1,241 (3,096) (7,517)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) investing activities (175,726) (121,084) 43,124
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Purchases of treasury stock -- -- (39,229)
Issuance of long-term debt* 41,000 74,000 64,000
Payments on long-term debt and obligations under capital leases (14,565) (75,885) (77,800)
Cash dividends paid (20,512) (20,316) (21,443)
Issuance of common stock upon exercise of stock options 4,547 4,795 --
Other -- net (1,985) (2,748) 37
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) financing activities 8,485 (20,154) (74,435)
- -----------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 14,475 (40,946) 5,722
Cash and cash equivalents at beginning of year 15,781 56,727 51,005
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 30,256 $ 15,781 $ 56,727
=================================================================================================================
</TABLE>
* Net of $11,116 (2000) of secured debt in connection with the construction
of vessels.
See notes to consolidated financial statements.
35
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
Overseas Shipholding Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
Paid-In Treasury Stock Other
Common Additional Retained ---------------------- Comprehensive
Dollars in thousands Stock Capital Earnings Shares Amount Income/(Loss) Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 39,591 $ 96,156 $ 625,132 2,809,062 $ (41,869) $ (11,388) $ 707,622
Net Income 14,764 14,764
Other Comprehensive (Loss),
net of tax:
Net unrealized holding losses on
available- for-sale securities* (656) (656)
---------
Comprehensive Income 14,108
---------
Cash Dividends Declared and Paid (21,443) (21,443)
Common Stock Acquired 3,109,400 (39,229) (39,229)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 39,591 96,156 618,453 5,918,462 (81,098) (12,044) 661,058
Net Income 90,391 90,391
Other Comprehensive Income,
net of tax:
Net unrealized holding gains on
available- for-sale securities* 11,940 11,940
---------
Comprehensive Income 102,331
---------
Cash Dividends Declared and Paid (20,316) (20,316)
Deferred Compensation Related to
Options Granted 1,282 1,282
Options Exercised and Employee
Stock Purchase Plan 554 (314,187) 4,241 4,795
Tax Benefit Related to Options
Exercised 1,017 1,017
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 39,591 99,009 688,528 5,604,275 (76,857) (104) 750,167
Net Income 101,441 101,441
Cumulative Effect of Change in
Accounting Principle, net of taxes
of $1,861 -- Note A10 3,455 3,455
Other Comprehensive (Loss),
net of tax:
Net unrealized holding losses on
available-for-sale securities* (16,341) (16,341)
Effect of derivative instruments --
Note L (9,469) (9,469)
Minimum pension liability (3,824) (3,824)
---------
Comprehensive Income 75,262
---------
Cash Dividends Declared and Paid (20,512) (20,512)
Deferred Compensation Related to
Options Granted 2,659 2,659
Options Exercised and Employee
Stock Purchase Plan 558 (291,408) 3,989 4,547
Tax Benefit Related to Options
Exercised 1,303 1,303
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 39,591 $ 103,529 $ 769,457 5,312,867 $ (72,868) $ (26,283) $ 813,426
===========================================================================================================================
</TABLE>
* Net of realized gains included in net income of $18,230 (2001), $3,056
(2000) and $1,996 (1999).
See notes to consolidated financial statements.
36
<PAGE>
Notes to Consolidated Financial Statements
Overseas Shipholding Group, Inc. and Subsidiaries
Note A -- Summary of Significant Accounting Policies:
1. Basis of presentation and description of business - The consolidated
financial statements include the accounts of Overseas Shipholding Group,
Inc., a U.S. corporation, and its majority-owned subsidiaries (the
"Company" or "OSG"). For the three years ended December 31, 2001, all
subsidiaries were wholly owned. All significant intercompany balances and
transactions have been eliminated in consolidation. Investments in 50% or
less owned joint ventures, in which the Company exercises significant
influence, are accounted for by the equity method.
The Company owns and operates a fleet of oceangoing vessels engaged in the
transportation of liquid and dry bulk cargoes in the international market
and the U.S. Flag trades.
The consolidated statements of income and cash flows for 2000 and 1999
have been reclassified to conform with the 2001 presentation of certain
items.
2. Cash and cash equivalents - Interest-bearing deposits that are highly
liquid investments and have a maturity of three months or less when
purchased are included in cash and cash equivalents.
3. Marketable securities - The Company's investments in marketable securities
are classified as available-for-sale and are carried at market value. Net
unrealized gains or losses are reported as a component of accumulated
other comprehensive income/(loss). The classification of investments in
marketable securities in the consolidated balance sheets reflects
management's view with respect to the portfolio's availability for use in
current operations.
4. Inventories - Inventories, which consist of fuel, are stated at the lower
of cost or market. Cost is determined on a first-in, first-out basis.
5. Vessels and deferred drydocking expenditures - Vessels include vessels
under construction aggregating $120,521,000 and $260,937,000 at December
31, 2001 and 2000, respectively (see Note R).
Vessels are recorded at cost and are depreciated to their salvage value on
the straight-line basis, using a vessel life of 25 years. Each vessel's
salvage value is equal to the product of its lightweight tonnage and an
estimated scrap rate. Accumulated depreciation was $434,442,000 and
$397,373,000 at December 31, 2001 and 2000, respectively.
Interest costs are capitalized to vessels during the period that vessels
are under construction. Interest capitalized aggregated $13,151,000 in
2001, $15,411,000 in 2000 and $10,614,000 in 1999.
Expenditures incurred during a drydocking are deferred and amortized on
the straight-line basis over the period until the next scheduled
drydocking, generally two and a half to five years. Expenditures for
maintenance and repairs are expensed when incurred. Amortization of
capitalized drydock expenditures, which is included in depreciation and
amortization in the consolidated statements of income, amounted to
$10,268,000 in 2001, $14,912,000 in 2000 and $18,005,000 in 1999. The
unamortized portion of deferred drydocking expenditures, which is included
in other assets in the consolidated balance sheets, was $12,202,000 and
$13,706,000 at December 31, 2001 and 2000, respectively.
6. Vessels under capital leases - The Company charters in four U.S. Flag
Vessels that it accounts for as capital leases. Amortization of capital
leases is computed by the straight-line method over 22 or
37
<PAGE>
25 years, representing the terms of the leases (see Note M1). Accumulated
amortization was $83,681,000 and $78,303,000 at December 31, 2001 and
2000, respectively.
7. Impairment of long-lived assets - The carrying amounts of long-lived
assets held and used by the Company are reviewed for potential impairment
whenever events or changes in circumstances indicate that the carrying
amount of a particular asset may not be fully recoverable. In such
instances, an impairment charge would be recognized if the estimate of the
undiscounted future cash flows expected to result from the use of the
asset and its eventual disposition is less than the asset's carrying
amount. This assessment is made at the individual vessel level since
separately identifiable cash flow information for each vessel is
available. The amount of an impairment charge, if any, would be determined
using discounted cash flows.
8. Deferred finance charges - Finance charges incurred in the arrangement of
debt are deferred and amortized to interest expense on the straight-line
basis over the life of the related debt. Deferred finance charges of
$7,116,000 and $5,458,000 are included in other assets at December 31,
2001 and 2000, respectively. Amortization amounted to $1,282,000 in 2001,
$1,149,000 in 2000 and $494,000 in 1999.
9. Revenue and expense recognition - Time charters and bareboat charters that
are operating leases are reported on the accrual basis. Effective January
1, 2000, voyage revenues and expenses are reported using the percentage of
completion method (see Note B). For 1999 and earlier periods, voyage
revenues and expenses were reported on the completed voyage basis. Under
voyage charters, expenses such as fuel, port charges, canal tolls, cargo
handling operations and brokerage commissions are paid by the Company
whereas, under time and bareboat charters, such voyage costs are paid by
the Company's customers. For voyage charters, time charter equivalent
revenues represent shipping revenues less voyage expenses. For time and
bareboat charters, time charter equivalent revenues represent shipping
revenues less brokerage commissions, if applicable, which are included in
voyage expenses.
For the Company's vessels operating in the Tankers International LLC
("Tankers") pool and the Dry Bulk Carrier pool, revenues and voyage
expenses are pooled and allocated to each pool's participants on a time
charter equivalent basis in accordance with an agreed-upon formula.
For the Company's vessels operating in the PDVM/OSG pool, the Company
bills and collects its own revenues and pays its own voyage expenses.
Accordingly, revenues and voyage expenses are recorded on a gross basis in
the consolidated statements of income. Settlements between the pool
participants are recorded as adjustments of shipping revenues on a
one-quarter lag, in accordance with an agreed-upon formula. Beginning in
2002, operation of the PDVM/OSG pool will change to be substantially
similar to the operations of the Tankers and dry bulk carrier pools.
Ship operating expenses exclude voyage expenses. Vessel expenses include
crew costs, vessel stores and supplies, lubricating oils, maintenance and
repairs, insurance and communication costs.
10. Derivatives - In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"). FAS 133 requires 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. If the
derivative is a hedge, depending on the nature of the hedge, a change in
the fair value of the derivative is either offset against the change in
fair value of the hedged item (fair value hedge), or recognized in other
comprehensive income/(loss) until the hedged item is reflected in earnings
(cash flow hedge). The ineffective portion (that is, the change in fair
value of the derivative that does not offset the change in fair value of
the hedged item) of a derivative's change in fair value will be
immediately recognized in earnings. The adoption of FAS 133 on January 1,
2001 resulted in the cumulative effect of an accounting change, net of
taxes, of $3,455,000 being recognized as a gain in other comprehensive
income/(loss). The cumulative effect of such accounting change on net
income was insignificant.
38
<PAGE>
The Company uses derivatives to reduce market risks associated with its
operations. The Company uses interest rate swaps for the management of
interest rate risk exposure. The interest rate swaps effectively convert a
portion of its debt either from a fixed to floating rate basis, which
swaps are designated and qualify as fair value hedges, or from floating to
fixed rate, which swaps are designated and qualify as cash flow hedges.
The Company uses foreign currency swaps, which are designated and qualify
as cash flow hedges to minimize the effect of foreign exchange rate
fluctuations on reported income and protect against the reduction in value
of forecasted foreign currency cash flows from future charter revenues
receivable in Japanese yen. The Company also uses forward freight
agreements and fuel swaps from time to time in order to reduce its
exposure to the spot charter market for specified trade routes by creating
synthetic time charters for the terms of the agreements. The forward
freight agreements involve contracts to provide a fixed number of
theoretical voyages at fixed rates. The forward freight agreements did not
meet the 80% effectiveness threshold required by FAS 133; therefore, they
have not been accounted for as cash flow hedges. For interest rate swaps,
the Company assumes no ineffectiveness since each interest rate swap meets
the conditions required under FAS 133 to apply the short-cut method.
Accordingly, no gains or losses have been recorded in income relative to
the Company's interest rate swaps. Any gain or loss realized upon the
early termination of an interest rate swap is recognized as an adjustment
of interest expense over the shorter of the remaining term of the swap or
the hedged debt. For foreign currency swaps, effectiveness is assessed
based on changes in forward rates and, accordingly, there is no hedge
ineffectiveness. Any gain or loss realized upon the termination of foreign
currency swaps would be recognized as an adjustment of shipping revenues
over the remaining term of the related charter.
For 2000 and earlier periods, amounts receivable or payable under interest
rate swaps (designated as hedges against certain existing debt) were
accrued and reflected as adjustments of interest expense. Such receivables
or payables were included in other receivables or sundry liabilities and
accrued expenses, respectively. Changes in the value of currency swaps
(designated as hedges against contracted future charter revenues
receivable in a foreign currency) were deferred and offset against
corresponding changes in the value of the charter hire, over the related
charter periods.
11. Stock-based compensation - In accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
compensation cost for stock options is recognized as an expense based on
the excess, if any, of the quoted market price of the stock at the grant
date of the award or other measurement date, over the amount an employee
or non-employee director must pay to acquire the stock.
12. Use of estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Note B -- Change in Accounting for Voyage Revenue:
Prior to 2000, revenues and voyage expenses for vessels operating on voyage
charters were accounted for using the completed voyage method, with voyages
being calculated on a load-to-load basis. Under that method, revenue of a voyage
was included in operating results in the period in which that voyage was deemed
completed, that is, upon the vessel's arrival at the subsequent voyage's initial
load port.
Effective January 1, 2000, the Company changed its accounting policy for the
recognition of net voyage revenues of vessels operating on voyage charters to
the percentage of completion method, with voyages being calculated on a
discharge-to-discharge basis. Under this method, voyage revenues and expenses
are recognized evenly over the period from a vessel's departure from its last
discharge port to the projected departure from its next discharge port. The
change in revenue recognition policy
39
<PAGE>
eliminates fluctuations in income from vessel operations attributable solely to
the timing of completion of voyages. Further, the discharge-to-discharge basis
is deemed by management to be a more reliable method of recognizing net voyage
revenues under the percentage of completion method, because it eliminates
uncertainty associated with predicting the actual location of the next load
port. The cumulative effect of this change is shown separately in the
consolidated statement of income for 2000, and resulted in income, net of taxes,
of $4,152,000 in the first quarter. The cumulative effect of this change in
accounting principle as of January 1, 2000 on the Company's consolidated balance
sheet was to increase total assets by $3,749,000, to reduce total liabilities by
$403,000 and to increase shareholders' equity by $4,152,000.
Assuming the above percentage of completion method had been applied
retroactively, the pro forma income before cumulative effect of change in
accounting principle for 1999 would have been reduced by $1,314,000 to
$13,450,000, or $.37 per basic and diluted share.
Note C -- Business and Segment Reporting:
The Company is engaged primarily in the ocean transportation of crude oil and
petroleum products in both the international market and the U.S. Flag trades
through the ownership and operation of a diversified fleet of bulk cargo
vessels. The bulk shipping industry has many distinct market segments based, in
large part, on the type and size of vessels required and, in some cases, by the
flag of registry. Rates in each market segment are determined by a variety of
factors affecting the supply and demand for vessels to move cargoes in the
trades for which they are suited. Bulk vessels, unlike container and liner
vessels, which the Company does not own, are not bound to specific ports or
schedules and therefore can respond to market opportunities by moving between
trades and geographical areas. The Company charters its vessels to commercial
shippers and U.S. and foreign governments and governmental agencies primarily on
voyage charters and also on time and bareboat charters, which are longer term
(see Note M2).
The Company has five reportable segments: Foreign Flag VLCCs, Aframaxes, and
Product Carriers, which participate in the international market and U.S. Flag
Crude Tankers and Dry Bulk Carriers, which participate in the U.S. Flag trades.
Segment results are evaluated based on income from vessel operations before
general and administrative expenses. The Company uses time charter equivalent
revenues to analyze fluctuations in revenues between periods and to make
decisions regarding the deployment and use of its vessels. The accounting
policies followed by the reportable segments are the same as those followed in
the preparation of the Company's consolidated financial statements.
40
<PAGE>
Information about the Company's reportable segments for the three years ended
December 31, 2001 follows:
<TABLE>
<CAPTION>
In thousands Foreign Flag U.S. Flag
------------------------------- ------------------
Product Crude Dry Bulk
2001 VLCCs Aframaxes Carriers Tankers Carriers All other Totals
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shipping revenues $113,614+ $160,221 $ 73,992 $ 28,052 $ 37,051 $ 56,403+ $ 469,333
Time charter equivalent revenues 112,820 111,293 58,078 28,052 14,872 55,903 381,018
Depreciation and amortization 23,815 20,096 9,486 -- 3,439 13,076 69,912
Income/(loss) from vessel
operations 64,353 66,718 30,260 14,233 (5,375) 12,903 183,092*
Equity in income of joint
ventures 7,161 4,924 -- 8,356 -- 33 20,474
Gain on disposal of vessels -- -- -- -- 436 -- 436
Investments in joint ventures at
December 31, 2001 138,420 4,100 -- 7,165 -- 90 149,775
Total assets at December 31, 2001 839,001 417,074 99,411 12,630 13,470 157,882 1,539,468
Expenditures for vessels 40,225 70,878 909 -- -- -- 112,012
2000
- ------------------------------------------------------------------------------------------------------------------------
Shipping revenues 120,549+ 132,006 76,655 37,486 47,490** 53,432+ 467,618
Time charter equivalent revenues 118,156 86,101 54,354 37,299 24,734 49,437 370,081
Depreciation and amortization 20,857 18,553 9,402 4,600 3,791 12,935 70,138
Income from vessel operations 74,229 49,233 24,938 12,843 3,015 12,430 176,688*
Equity in income/(loss) of joint
ventures 2,736 4,016 -- 5,248 -- (551) 11,449
Gain on disposal of vessels -- 1,353 -- 19,711 -- -- 21,064
Investments in joint ventures at
December 31, 2000 72,703 5,879 -- 4,644 -- 1,516 84,742
Total assets at December 31, 2000 764,118 374,288 110,666 6,628 28,577 174,163 1,458,440
Expenditures for vessels 86,126 31,317 174 -- 145 212 117,974
1999
- ------------------------------------------------------------------------------------------------------------------------
Shipping revenues 66,772 77,977 47,506 51,078 37,475 69,737 350,545
Time charter equivalent revenues 53,899 41,522 34,456 50,557 22,479 50,304 253,217
Depreciation and amortization 16,599 19,643 9,288 13,256 3,711 13,363 75,860
Income from vessel operations 15,267 3,016 5,032 22,080 5,986 11,293 62,674*
Equity in income of joint
ventures 4,336 -- -- 1,750 -- 1,046 7,132
Gain on planned vessel
dispositions -- -- -- -- -- 12,404 12,404
Gain on disposal of vessels -- -- 239 -- -- 1,585 1,824
Investments in joint ventures at
December 31, 1999 72,329 -- -- 1,787 -- 1,798 75,914
Total assets at December 31, 1999 685,386 355,565 117,255 10,013 17,705 198,584 1,384,508
Expenditures for vessels 121,170 53,043 2,339 -- 262 520 177,334
========================================================================================================================
</TABLE>
* Segment totals for income/(loss) from vessel operations are before general
and administrative expenses and the restructuring charge.
** Reflects the reclassification of an older Product Carrier that
participated in the U.S. grain trade program for all of 2001 and 2000.
+ Revenues of VLCCs operating in the Tankers pool, which commenced in 2000,
amounted to $89,971 (2001) and $88,943 (2000). In 1999, revenues of the
VLCCs are reported on a voyage charter basis, that is, before reduction
for voyage expenses of $15,547. Revenues of $22,436 (2001) and $19,630
(2000) from vessels operating in the Foreign Flag Dry Bulk Carrier pool
are reported in All other.
41
<PAGE>
Reconciliations of total assets of the segments to amounts included in the
consolidated balance sheets follow:
In thousands at December 31 2001 2000 1999
- ----------------------------------------------------------------------------
Total assets of all segments $1,539,468 $1,458,440 $1,384,508
Corporate cash and securities,
including capital construction fund 333,185 284,206 270,926
Other unallocated amounts 91,622 81,267 65,511
- ----------------------------------------------------------------------------
Consolidated total assets $1,964,275 $1,823,913 $1,720,945
============================================================================
Certain additional information about the Company's operations for the three
years ended December 31, 2001 follows:
<TABLE>
<CAPTION>
In thousands Consolidated Foreign Flag* U.S. Flag
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
2001
Shipping revenues $ 469,333 $ 374,414 $ 94,919
- ---------------------------------------------------------------------------------------
Vessels and vessels under capital leases
at December 31, 2001 1,345,719 1,283,833** 61,886
- ---------------------------------------------------------------------------------------
2000
Shipping revenues 467,618 355,397 112,221
- ---------------------------------------------------------------------------------------
Vessels and vessels under capital leases
at December 31, 2000 1,293,958 1,224,004** 69,954
- ---------------------------------------------------------------------------------------
1999
Shipping revenues 350,545 223,468 127,077
- ---------------------------------------------------------------------------------------
Vessels and vessels under capital leases
at December 31, 1999 1,237,513 1,160,495** 77,018
- ---------------------------------------------------------------------------------------
</TABLE>
* Principally Marshall Islands as of December 31, 2001.
** Includes vessels under construction of $120,521 (2001), $260,937 (2000)
and $281,751 (1999).
The Company had one charterer (BP) during 1999 from which revenues exceeded 10%
of shipping revenues. Revenues from such charterer amounted to $35,193,000.
See Note J for information relating to taxation of income and undistributed
earnings of foreign subsidiaries and unconsolidated affiliates.
42
<PAGE>
Note D -- Assets and Liabilities of Foreign Subsidiaries:
A condensed summary of the combined assets and liabilities of the
Company's foreign subsidiaries, whose operations are principally conducted in
U.S. dollars, is as follows:
<TABLE>
<CAPTION>
In thousands at December 31, 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 35,182 $ 44,451
Vessels, net 1,259,383 1,198,027
Other assets 166,238 108,499
- --------------------------------------------------------------------------------
Total Assets $1,460,803 $1,350,977
- --------------------------------------------------------------------------------
Current installments of long-term debt, including
intercompany of $66,800 in 2001 and 2000 $ 79,400 $ 75,500
Other current liabilities 16,135 11,108
- --------------------------------------------------------------------------------
Total current liabilities 95,535 86,608
Long-term debt (including intercompany of
$66,800 in 2000), deferred credits and other
liabilities 304,861 397,075
Equity 1,060,407 867,294
- --------------------------------------------------------------------------------
Total Liabilities and Equity $1,460,803 $1,350,977
================================================================================
</TABLE>
Note E -- Bulk Shipping Joint Ventures and Certain Pooling Arrangements:
In the first quarter of 1999, OSG, BP, and Keystone Shipping Company formed
Alaska Tanker Company ("ATC") to manage the vessels carrying Alaskan crude oil
for BP. ATC, which is owned 37.5% by OSG, 37.5% by Keystone and 25% by BP,
provides marine transportation services in the environmentally sensitive Alaskan
crude oil trade. Each member in ATC is entitled to receive its respective share
of any incentive charter hire payable, if certain conditions are met, by BP to
ATC. In the second quarter of 1999, the charters for five of the Company's U.S.
Flag Crude Tankers, which were previously time chartered to BP, were converted
to bareboat charters to ATC, with guarantees from BP, to employ the vessels
through their OPA 90 retirement dates, ranging from 2003 through 2006. In August
1999, the Company sold these five vessels and leased them back as part of an
off-balance sheet financing that generated $170 million, which was used to
reduce long-term debt. The gain on the sale-leaseback transaction was deferred
and is being amortized over the leaseback period as a reduction in time and
bareboat charter hire expense in the consolidated statements of income.
In October 2000, one of the vessels referred to above was sold by the owner in
connection with BP's merger with ARCO and OSG was released from its leaseback
commitment. As a result of the sale, OSG recorded a gain of $19.7 million in
other income, equal to the unamortized balance of the deferred gain on the
sale-leaseback transaction, net of the vessel's unamortized deferred drydocking
expenditures.
As of December 31, 2001 and 2000, the unamortized balance of deferred gain on
the sale-leaseback transaction was $41,803,000 and $55,578,000, respectively,
and was included in other liabilities.
Revenue from the bareboat charters of these vessels to ATC is included in time
and bareboat charter revenue. The cost of leasing back these vessels is included
in time and bareboat charter hire expense. The Company accounts for its 37.5%
interest in ATC according to the equity method.
In December 1999, the Company and five other leading tanker companies
established Tankers to pool their VLCC fleets. Tankers, which commenced
operations in February 2000, commercially manages a fleet of exclusively modern
VLCCs. Tankers was formed to meet the global transportation requirements of
international oil companies and other major customers. As of December 31, 2001,
eight of the Company's VLCCs participate in the Tankers pool. In addition, six
other VLCCs that are owned by joint ventures participate in the Tankers pool.
The Company's four VLCC newbuildings,
43
<PAGE>
including two that are to be delivered to joint ventures in which the Company
has an interest of 33.3%, are scheduled to enter the pool upon their delivery.
In March 2000, the Company acquired a 30% interest in a joint venture that
purchased a 1993-built VLCC for approximately $37 million, which immediately
began participating in the Tankers pool. The vessel's acquisition was financed
by the joint venture through long-term bank financing and subordinated partner
loans. As of December 31, 2001, the outstanding balance of such subordinated
partner loans advanced by the Company was $1,874,000. In connection with the
bank financing, the partners have severally issued guaranties aggregating
$6,000,000 at December 31, 2001, of which the Company's share was 30%.
In early 2001, the Company formed a joint venture that entered into an agreement
whereby companies in which OSG holds a 49.9% interest acquired two 1993-built
VLCCs for approximately $103 million. Such acquisitions were financed by the
joint ventures through long-term bank financing and subordinated partner loans.
As of December 31, 2001, the outstanding balance of such subordinated partner
loans advanced by the Company was $18,632,000. In connection with the bank
financing, the partners have severally issued guaranties that aggregated
$18,383,000 at December 31, 2001, of which the Company's share was 49.9%. The
amount of these guaranties reduces proportionately as the principal amount of
the bank loan is paid down.
In June 2001, the Company agreed to acquire a 33.3% interest in joint ventures
formed to purchase six new VLCCs. The number of vessels to be purchased was
reduced to five in August. Three vessels were delivered to the joint ventures in
the third quarter of 2001. The remaining two are expected to be delivered to the
joint ventures upon completion of their construction in February and June 2002.
The total purchase price for the vessels of $399 million is being financed by
the joint ventures through long-term bank financing and subordinated partner
loans. Amounts advanced by the Company as of December 31, 2001, in the form of
subordinated partner loans, aggregated $43,424,000. The Company expects to make
additional advances of $5,000,000. In connection with the bank financing for the
three vessels delivered to the joint venture in 2001, the partners have
severally issued guaranties that aggregated approximately $44,935,000 at
December 31, 2001, of which the Company's share was 33.3%. The amount of these
guaranties reduces proportionately, to a stated minimum amount, as the bank loan
is paid down.
During the first quarter of 2000, the Company and other major vessel owners
agreed to pool their Capesize Dry Bulk Carriers. The pool currently commercially
manages a fleet of more than 60 vessels, including the Company's two Foreign
Flag Dry Bulk Carriers. The Company and certain of the other pool members have
interests in a number of short-term charters-in that participate in the pool.
OSG's share of the cost of such charters-in for 2001 and 2000 was $14,612,000
and $8,868,000, respectively.
In May 2000, the Company invested $1,500,000 for a 50% interest in a newly
formed joint venture that bareboat chartered in a 1992-built Aframax tanker,
which is being accounted for as a capital lease by the joint venture. The
Company has provided certain charter guaranties to their joint venture partner;
daily TCE revenues in excess of an agreed amount are for the Company's benefit.
This Aframax tanker participates in the PDVM/OSG pool.
The Company has a 50% interest in two other joint ventures with a major oil
company that own two VLCCs, which are operating on long term charters, one to
OSG (which vessel has been time chartered to the major oil company) and one to
such major oil company, and do not participate in the Tankers pool.
44
<PAGE>
A condensed summary of the combined assets and liabilities and results of
operations of the joint ventures, follows:
In thousands at December 31, 2001 2000
- --------------------------------------------------------------------------------
Current assets $ 78,338 $ 57,884
Vessels, net 571,159* 208,321
Other assets 4,510 1,661
- --------------------------------------------------------------------------------
Total Assets $654,007 $267,866
================================================================================
Current installments of long-term debt $ 33,211 $ 12,687
Other current liabilities 46,828 38,649
- --------------------------------------------------------------------------------
Total current liabilities 80,039 51,336
Long-term debt 244,349 61,856
Other liabilities, including subordinated loans
of $166,082 and $9,384 due to the joint
venture partners 171,422 9,915
Equity (principally undistributed net earnings) 158,197 144,759
- --------------------------------------------------------------------------------
Total Liabilities and Equity $654,007 $267,866
================================================================================
* Includes vessels under construction of $38,898.
<TABLE>
<CAPTION>
In thousands for the year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Shipping revenues $ 244,357 $ 241,759 $ 145,509
Voyage expenses 1,069 1,705 7,481
- --------------------------------------------------------------------------------
Time charter equivalent revenues 243,288 240,054 138,028
Ship operating expenses 194,125 210,981 122,625
- --------------------------------------------------------------------------------
Income from vessel operations 49,163 29,073 15,403
Other income 1,020 1,057 5,362
Interest expense (17,062) (6,368) (3,581)
- --------------------------------------------------------------------------------
Net income $ 33,121 $ 23,762 $ 17,184
================================================================================
</TABLE>
OSG's guaranties in connection with the joint ventures' bank financings, which
are otherwise nonrecourse to the joint venture partners, aggregated $25,952,000
at December 31, 2001.
45
<PAGE>
Note F -- Investments in Marketable Securities:
Certain information concerning the Company's marketable securities (including
securities in the capital construction fund), all of which are accounted for as
available-for-sale securities, follows:
<TABLE>
<CAPTION>
Approximate
Gross unrealized market value and
------------------------------ carrying
In thousands at December 31, Cost Gains Losses amount
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2001
U.S. Treasury securities and
obligations of U.S. government
agencies $ 9,822 $ 21 $ 36 $ 9,807
Mortgage-backed securities 34,962 372 183 35,151
Other debt securities 19,667 287 397 19,557
- -------------------------------------------------------------------------------------------
Total debt securities 64,451 680 616 64,515
Equity securities included in capital
construction fund 64,203 2,323 4,046 62,480
- -------------------------------------------------------------------------------------------
Total securities included in capital 128,654 3,003 4,662 126,995
construction fund
Equity securities included in investments
in marketable securities 91,764 -- 21,806 69,958
- -------------------------------------------------------------------------------------------
$220,418 $ 3,003 $ 26,468 $196,953
===========================================================================================
2000
U.S. Treasury securities and
obligations of U.S. government
agencies $ 14,772 $ 640 $ 13 $ 15,399
Mortgage-backed securities 55,808 252 179 55,881
Other debt securities 20,731 165 659 20,237
- --------------------------------------------------------------------------------------------
Total debt securities 91,311 1,057 851 91,517
Equity securities included in capital
construction fund 28,983 4,214 3,037 30,160
- --------------------------------------------------------------------------------------------
Total securities included in capital 120,294 5,271 3,888 121,677
construction fund
Equity securities included in investments
in marketable securities 56,548 2,138 3,701 54,985
- --------------------------------------------------------------------------------------------
$176,842 $ 7,409 $ 7,589 $176,662
============================================================================================
</TABLE>
At February 21, 2002, the aggregate market quotation of the above marketable
securities was approximately $195,800,000.
The cost and approximate market value of debt securities held by the Company as
of December 31, 2001, by contractual maturity (except for mortgage-backed
securities, which do not have a single maturity date), follow:
<TABLE>
<CAPTION>
Approximate
In thousands Cost market value
- -----------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 1,802 $ 1,784
Due after one year through five years 10,685 10,823
Due after five years through ten years 7,270 7,229
Due after ten years 9,732 9,528
- -----------------------------------------------------------------------------------
29,489 29,364
Mortgage-backed securities 34,962 35,151
- -----------------------------------------------------------------------------------
$64,451 $64,515
===================================================================================
</TABLE>
46
<PAGE>
Note G -- Derivatives and Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents -- The carrying amounts reported in the consolidated
balance sheet for interest-bearing deposits approximate their fair value.
Investment securities -- The fair value for marketable securities is based on
quoted market prices or dealer quotes.
Debt, including capital lease obligations -- The carrying amounts of the
borrowings under the revolving credit agreements and the other floating rate
loans approximate their fair value. The fair values of the Company's fixed rate
debt are estimated using discounted cash flow analyses, based on the rates
currently available for debt with similar terms and remaining maturities.
Interest rate swaps -- The fair value of interest rate swaps (used for hedging
purposes) is the estimated amount that the Company would receive or pay to
terminate the swaps at the reporting date.
Foreign currency swaps -- The fair value of foreign currency swaps (used for
hedging purposes) is the estimated amount that the Company would receive or pay
to terminate the swaps at the reporting date.
Forward freight agreements -- The fair value of forward freight agreements is
the estimated amount that the Company would receive or pay to terminate the
agreements at the reporting date.
The estimated fair values of the Company's financial instruments, other than
derivatives, follow:
<TABLE>
<CAPTION>
Carrying Fair Carrying Fair
amount value amount value
In thousands at December 31, 2001 2001 2000 2000
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets (liabilities)
Cash and cash equivalents $ 30,256 $ 30,256 $ 15,781 $ 15,781
Cash and cash equivalents included in capital
construction fund 105,976 105,976 91,763 91,763
Investments in marketable securities, including
securities in the capital construction fund 196,953 196,953 176,662 176,662
Debt, including capital lease obligations (878,693) (873,126) (850,791) (847,074)
</TABLE>
As of December 31, 2001, the Company is a party to floating to fixed interest
rate swaps with various major financial institutions covering notional amounts
aggregating approximately $459,000,000 pursuant to which it pays fixed rates
ranging from 5.1% to 7.1% and receives floating rates based on the London
interbank offered rate ("LIBOR") (approximately 2.0% as of December 31, 2001).
These agreements contain no leverage features and have various maturity dates
from mid 2002 to 2008. As of December 31, 2001, the Company has recorded a
liability of $10,167,000 related to the fair values of these swaps in other
liabilities.
In July 2001, the Company terminated all $60,000,000 of its fixed to floating
interest rate swaps that were to mature in December 2003. The gain of $1,760,000
realized on such termination is being recognized ratably over the period through
December 2003, as an adjustment of interest expense.
As of December 31, 2001, the Company recorded an asset, included in other
assets, of $915,000 related to the fair value of Japanese yen foreign currency
swaps entered into with a major financial institution that will result in the
Company receiving approximately $3,700,000 for such foreign currency from
January 1, 2002 through March 31, 2002.
47
<PAGE>
Shipping revenues for 2001 have been increased by $3,197,000, resulting from the
impact of forward freight agreements referred to in Note A10.
Note H -- Sundry Liabilities and Accrued Expenses:
Sundry liabilities and accrued expenses follows:
<TABLE>
<CAPTION>
In thousands at December 31, 2001 2000
- -----------------------------------------------------------------------------------
<S> <C> <C>
Payroll and benefits $ 8,147 $ 7,266
Restructuring reserve 2,345 --
Interest 8,132 4,291
Insurance 2,448 2,999
Other 13,808 11,622
- -----------------------------------------------------------------------------------
$34,880 $26,178
===================================================================================
</TABLE>
Note I -- Debt:
Debt consists of the following:
<TABLE>
<CAPTION>
In thousands at December 31, 2001 2000
- -----------------------------------------------------------------------------------
<S> <C> <C>
Unsecured revolving credit facilities $534,000 $493,000
8.75% Debentures due 2013, net of unamortized
discount of $163 and $177 84,812 84,798
8% Notes due 2003, net of unamortized discount of $32 and $49 71,124 69,671
Floating rate secured Term Loans, due through 2008 102,950 111,650
Floating rate unsecured Promissory Note, due through 2005 20,450 20,450
- -----------------------------------------------------------------------------------
813,336 779,569
Less current portion 17,600 8,700
- -----------------------------------------------------------------------------------
Long-term portion $795,736 $770,869
===================================================================================
</TABLE>
The weighted average effective interest rates for debt outstanding at December
31, 2001 and 2000 are 6.1% and 7.3%, respectively. Such rates take into
consideration related interest rate swaps.
In December 2001, the Company concluded a new $300 million, five-year unsecured
revolving credit facility (the "2006 Facility") of which $228 million was unused
as of December 31, 2001. The 2006 Facility was increased to $350 million in
January 2002 during syndication. The terms, conditions, and financial convenants
are substantially similar to those contained in the existing $350 million
revolving credit facility (the "2005 Facility") that runs through April 2005.
Both the 2006 Facility and the 2005 Facility bear interest at a rate based on
LIBOR plus a margin that, with respect to the 2006 Facility, depends in part on
the financial leverage of the Company. Borrowings against the Company's $425
million revolving credit facility, which expires in August 2002, will be
converted to borrowings against the 2006 Facility and the $425 million revolving
credit facility was terminated on February 1, 2002. Accordingly, $107 million
outstanding as of December 31, 2001 under the $425 million facility has been
classified as long-term.
The Company also has a $15,000,000 committed short-term line of credit facility
with a bank, of which $10,000,000 was unused as of December 31, 2001. The
$5,000,000 outstanding under this facility at December 31, 2001 (there was no
balance outstanding under the short-term line of credit facility at December 31,
2000) has been reflected as short-term debt in the accompanying consolidated
balance sheet.
48
<PAGE>
Agreements related 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
failure to satisfy the financial covenants contained in certain of such
agreements. The most restrictive of these covenants requires the Company to
maintain net worth as of December 31, 2001 of approximately $731,000,000
(increasing quarterly by an amount related to net income).
In June 2000, the Company repurchased 8% Notes with an aggregate principal
amount of $15,180,000, at a discount of $803,000. During 1999, the Company
repurchased 8.75% Debentures and 8% Notes with an aggregate principal amount of
$23,875,000, at a $2,249,000 discount. Such discounts have been reported in the
Company's consolidated statements of income as extraordinary gains.
Approximately 9.8% of the net book amount of the Company's vessels, representing
two foreign flag vessels, is pledged as collateral for certain long-term debt.
The aggregate annual principal payments required to be made on debt are as
follows:
In thousands at December 31, 2001
- ------------------------------------------------------------------------------
2002 $ 17,600
2003 83,724
2004 12,600
2005 367,450
2006 187,700
Thereafter 144,262
- ------------------------------------------------------------------------------
$ 813,336
==============================================================================
Interest paid amounted to $41,874,000 in 2001, $47,387,000 in 2000 and
$45,858,000 in 1999, excluding capitalized interest.
Note J -- Taxes:
Since January 1, 1987, earnings of the foreign shipping companies (exclusive of
foreign joint ventures in which the Company has a less than 50% interest) are
subject to U.S. income taxation in the year earned and may be distributed to the
U.S. parent without further tax. Income of foreign shipping companies earned
from January 1, 1976 through December 31, 1986 ("Deferred Income") is excluded
from U.S. income taxation to the extent that such income is reinvested in
foreign shipping operations. Foreign shipping income earned before 1976 is not
subject to tax unless distributed to the U.S. parent. A determination of the
amount of qualified investments in foreign shipping operations, as defined, is
made at the end of each year and such amount is compared with the corresponding
amount at December 31, 1986. If, during any determination period, there is a
reduction of qualified investments in foreign shipping operations, Deferred
Income, limited to the amount of such reduction, would become subject to tax.
The Company believes that it will be reinvesting sufficient amounts in foreign
shipping operations so that U.S. income taxes on the undistributed income of its
foreign companies accumulated through December 31, 1986 will be postponed
indefinitely. U.S. income taxes on the income of its foreign companies
accumulated through December 31, 1986 will be provided at such time as it
becomes probable that a liability for such taxes will be incurred and the amount
thereof can reasonably be estimated. No provision for U.S. income taxes on the
income of the foreign shipping companies accumulated through December 31, 1986
was required at December 31, 2001 since undistributed earnings of foreign
shipping companies have been reinvested or are intended to be reinvested in
foreign shipping operations. As of December 31, 2001, such undistributed
earnings aggregated approximately $475,000,000, including $114,000,000 earned
prior to 1976; the unrecognized deferred U.S. income tax attributable to such
undistributed earnings approximated $165,000,000. Further, no provision for U.S.
income taxes on the Company's share of the
49
<PAGE>
undistributed earnings of the less than 50%-owned foreign shipping joint
ventures was required as of December 31, 2001, since it is intended that such
undistributed earnings ($6,100,000 at December 31, 2001) will be indefinitely
reinvested; the unrecognized deferred U.S. income taxes attributable thereto
approximated $2,100,000.
Pursuant to the Merchant Marine Act of 1936, as amended, the Company is a party
to an agreement that permits annual deposits, related to taxable income of
certain of its domestic subsidiaries, into a capital construction fund. Payments
of federal income taxes on such deposits and earnings thereon are deferred
until, and if, such funds are withdrawn for nonqualified purposes or termination
of the agreement; however, if withdrawn for qualified purposes (acquisition of
U.S. Flag Vessels or retirement of debt on U.S. Flag Vessels), such funds remain
tax-deferred and the federal income tax basis of any such vessel is reduced by
the amount of such withdrawals. Under the agreement, the Company is expected to
use the fund to acquire or construct three U.S. Flag Vessels by the end of 2004.
Monies can remain tax-deferred in the fund for a maximum of 25 years (commencing
January 1, 1987 for deposits prior thereto).
The significant components of the Company's deferred tax liabilities and assets
follow:
<TABLE>
<CAPTION>
In thousands at December 31, 2001 2000
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Excess of tax over statement depreciation -- net $ 83,859 $ 69,739
Tax benefits related to the capital construction fund 71,738 64,493
Costs capitalized and amortized for statement, expensed for tax 7,869 6,457
Other -- net 8,070 17,710
- --------------------------------------------------------------------------------------------------
Total deferred tax liabilities 171,536 158,399
- --------------------------------------------------------------------------------------------------
Deferred tax assets:
Capital leases 1,148 1,494
Other comprehensive income -- Note L 11,737 --
Alternative minimum tax credit carryforwards, which can be carried forward
indefinitely 26,981 38,856
- --------------------------------------------------------------------------------------------------
Total deferred tax assets 39,866 40,350
- --------------------------------------------------------------------------------------------------
Net deferred tax liabilities 131,670 118,049
Current portion of net deferred tax (assets)/liabilities (500) 300
- --------------------------------------------------------------------------------------------------
Long-term portion of net deferred tax liabilities $ 132,170 $117,749
==================================================================================================
</TABLE>
The components of income before federal income taxes, extraordinary gain and
cumulative effect of change in accounting principle follow:
In thousands for the year ended December 31, 2001 2000 1999
- ----------------------------------------------------------------------------
Foreign $136,395 $117,105 $ 9,528
Domestic 18,050 15,081 9,987
- ----------------------------------------------------------------------------
$154,445 $132,186 $19,515
============================================================================
Substantially all of the above foreign income resulted from the operations of
companies that were not subject to income taxes in their countries of
incorporation.
50
<PAGE>
The components of the provision for federal income taxes follow:
In thousands for the year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
Current $ 27,142 $ 14,299 $ (1,455)
Deferred 25,862 32,221 7,668
- --------------------------------------------------------------------------------
$ 53,004 $ 46,520 $ 6,213
================================================================================
Actual federal income taxes paid amounted to $6,100,000 in 2001 ($3,100,000 of
which related to 2000) and $9,850,000 in 2000 ($950,000 of which related to
1999). A federal income tax refund of approximately $7,900,000, all of which
related to prior years, was received in 1999.
Reconciliations of the actual federal income tax rate attributable to pretax
income before extraordinary gain and cumulative effect of change in accounting
principle and the U.S. statutory income tax rate follow:
In thousands for the year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
Actual federal income tax provision rate 34.3% 35.2% 31.8%
Adjustments due to:
Dividends received deduction 0.1% 0.1% 2.1%
Income not subject to U.S. income taxes 0.7% 0.7% --
Other (0.1%) (1.0%) 1.1%
- --------------------------------------------------------------------------------
U.S. statutory income tax provision rate 35.0% 35.0% 35.0%
================================================================================
Note K -- Capital Stock and Per Share Amounts:
The Company's Board of Directors ("Board"), has authorized the repurchase of up
to 6,000,000 shares of the Company's common stock from time to time in the open
market. Such purchases will be made at the Company's discretion and take into
account such factors as price and prevailing market conditions. As of December
31, 2001, a total of 3,123,100 shares have been repurchased.
The Company's 1989 nonqualified stock option plan, as amended, covered 570,000
treasury shares. Options were granted to certain officers of the Company for the
purchase of all the shares covered by the amended plan, at $14.00 per share (the
market price at date of grant). Options covering 100,000 shares are outstanding
and remain exercisable until October 2003.
The Company has granted options under its 1990 nonqualified stock option plan,
as amended at exercise prices ranging from $14.00 to $19.50 per share (the
market prices at the dates of grant). Options covering 133,839 shares are
outstanding and remain exercisable over various periods that end between 2003
and 2005.
The Company's 1998 stock option plan, as amended, provides for options for up to
2,800,000 shares to be granted at exercise prices of at least market value at
the date of grant. Options granted vest and become exercisable over a three-year
period and expire ten years from the date of grant. Options covering 1,571,150
shares are outstanding with exercise prices ranging from $12.50 to $16.00 per
share (the market prices at dates of grant). Options covering 852,457 shares are
available for grant under the 1998 stock option plan as of December 31, 2001.
In February 1999, the Board adopted the 1999 non-employee director (as defined)
stock option plan, making available up to 150,000 shares of the Company's stock.
The plan provides for the grant of an initial option for 7,500 shares and an
annual option for 1,000 shares thereafter to each non-employee director at an
exercise price equal to market value at the date of the grant. Initial options
vest and become exercisable over a three-year period, annual options vest and
become exercisable one year from the date of the grant. All options expire ten
years from the date of grant. Options covering 88,500
51
<PAGE>
shares are outstanding with exercise prices ranging from $13.30 to $29.67 per
share (the market prices at dates of grant). Options covering 54,000 shares are
available for grant under the 1999 non-employee director stock option plan as of
December 31, 2001.
Stock option activity under all plans is summarized as follows:
Options Outstanding at December 31, 1998 1,128,961
Granted 881,292
Forfeited (214,167)
Exercised --
- --------------------------------------------------------------------------------
Options Outstanding at December 31, 1999 1,796,086
Granted 722,000
Forfeited (25,236)
Exercised ($13.30 to $16.00 per share) (308,821)
- --------------------------------------------------------------------------------
Options Outstanding at December 31, 2000 2,184,029
Granted 9,000
Forfeited (22,814)
Exercised ($13.81 to $16.00 per share) (276,726)
- --------------------------------------------------------------------------------
Options Outstanding at December 31, 2001 1,893,489
- --------------------------------------------------------------------------------
Options Exercisable at December 31, 2001 1,133,490
================================================================================
The weighted average remaining contractual life of the outstanding stock options
at December 31, 2001 was 7.2 years. The weighted average exercise price of the
stock options outstanding at December 31, 2001 was $14.28.
The Company follows APB 25 and related interpretations in accounting for its
stock options. Compensation cost for the Company's stock option plans determined
using the fair value method of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123"), for grants made
subsequent to 1994, would have reduced net income for 2001, 2000 and 1999 by
$1,527,000 ($.04 per share), $1,382,000 ($.04 per share) and $1,437,000 ($.04
per share), respectively. For purposes of applying FAS 123, the fair values of
the options granted were estimated on the dates of grant using the Black-Scholes
option pricing model with the following weighted average assumptions for 2001,
2000 and 1999: risk free interest rates of 4.2%, 5.0% and 6.8%, dividend yields
of 2.0%, 4.1% and 4.7%, expected stock price volatility factors of .45, .37 and
.42, and expected lives of 7.7, 7.7 and 7.8 years. The weighted average
grant-date fair values of options granted in 2001, 2000 and 1999 were $12.71,
$4.41 and $4.17, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Since the
Company's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.
Basic net income per share is based on the following weighted average number of
common shares outstanding during each year: 34,168,944 shares (2001), 33,870,154
shares (2000) and 35,711,705 shares (1999). Diluted net income per share, which
gives effect to the aforementioned stock options, is based on the following
weighted average number of shares during each year: 34,696,823 shares (2001),
34,315,257 shares (2000) and 35,724,725 shares (1999).
52
<PAGE>
In October 1998, the Board 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 that does not
reflect the Company's full value, or that 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 were not distributed in
response to any known attempt to acquire control of the Company.
Note L -- Accumulated Other Comprehensive Income/(Loss):
The components of accumulated other comprehensive income/(loss), net of related
taxes, follow:
<TABLE>
<CAPTION>
In thousands at December 31, 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Unrealized losses on available-for-sale securities $(16,445) $ (104)
Unrealized losses on derivative instruments (6,014) --
Minimum pension liability (3,824) --
- --------------------------------------------------------------------------------
$(26,283) $ (104)
================================================================================
</TABLE>
At December 31, 2001, the Company expects to reclassify $7,209,000 of net losses
on derivative instruments from accumulated other comprehensive income/(loss) to
earnings during the next twelve months due to the payment of variable rate
interest associated with floating rate debt, and the receipt of charter revenues
denominated in Japanese yen.
The components of the change in the accumulated unrealized gain/(loss) on
derivative instruments, net of related taxes follow:
<TABLE>
<CAPTION>
In thousands for the year ended December 31, 2001
- --------------------------------------------------------------------------------------
<S> <C>
Cumulative effect of change in accounting principle -- Note A10 $ 3,455
Reclassification adjustments for (gains)/losses included in net income, net:
Interest expense 3,129
Shipping revenues (1,670)
Other income* (2,902)
Change in unrealized loss on derivative instruments (8,026)
- --------------------------------------------------------------------------------------
$(6,014)
======================================================================================
</TABLE>
* This amount was included in other income in the first quarter of 2001 and
relates to a foreign currency swap reclassified upon receipt of notice
that the charter extension to which such swap applied would not be
exercised.
The income tax expense/(benefit) allocated to each component of other
comprehensive income/(loss) follows:
<TABLE>
<CAPTION>
In thousands for the year ended December 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains on available-for-sale securities $ 2,871 $ 7,945 $ 800
Unrealized losses on derivative instruments (2,461) -- --
Minimum pension liability (2,059) -- --
Reclassification adjustments included in net income:
Gains on sale of securities (9,816) (1,645) (1,075)
Gains on derivative instruments (777) -- --
- ----------------------------------------------------------------------------------------
$(12,242) $ 6,300 $ (275)
========================================================================================
</TABLE>
53
<PAGE>
Note M -- Leases:
1. Charters-in:
The future minimum commitments under charters-in are as follows:
<TABLE>
<CAPTION>
In thousands at December 31, 2001 Capital Operating
-----------------------------------------------------------------------------
<S> <C> <C>
2002 $ 11,986 $ 36,491
2003 12,751 35,402
2004 9,270 25,779
2005 9,691 15,059
2006 9,692 1,065
Thereafter 46,062 --
-----------------------------------------------------------------------------
Net minimum lease payments 99,452 113,796
Less amount representing interest 34,095 --
-----------------------------------------------------------------------------
Present value of net minimum lease payments $ 65,357 $ 113,796
=============================================================================
</TABLE>
The total rental expense for charters accounted for as operating leases
amounted to $51,904,000 in 2001 (including the $14,612,000 referred to in
Note E), $51,053,000 in 2000 (including the $8,868,000 referred to in Note
E) and $25,908,000 in 1999.
Included in rental expense during 2001, 2000 and 1999 is $7,889,000,
$7,366,000, and $9,159,000, respectively, for the charter in of a VLCC
from a 50% owned joint venture.
2. Charters-out:
The future minimum revenue expected to be received on noncancelable time
charters and bareboat charters are as follows:
In thousands at December 31, 2001
-------------------------------------------------------------------------
2002 $ 77,602
2003 70,565
2004 58,234
2005 17,069
2006 1,313
-------------------------------------------------------------------------
Net minimum lease payments $ 224,783
-------------------------------------------------------------------------
Revenues from a time charter are not generally received when a vessel is
off-hire, including time required for normal periodic maintenance of the
vessel. In arriving at the minimum future charter revenues, an estimated
time off-hire to perform periodic maintenance on each vessel has been
deducted, although there is no assurance that such estimate will be
reflective of the actual off-hire in the future.
Included in shipping revenue during 2001, 2000, and 1999 is $28,052,000,
$37,486,000 and $26,259,000 received from the bareboat charter out of four
(five prior to October 2000) U.S. Flag Crude Tankers to ATC, a 37.5% owned
joint venture.
Note N -- Pension and Other Postretirement Benefit Plans:
The Company is the sponsor of a noncontributory defined benefit pension plan
covering substantially all of its domestic shore-based employees. Retirement
benefits are based primarily on years of service and compensation earned during
the last years of employment. The Company's policy is to fund
54
<PAGE>
pension costs as accrued, but not in excess of amounts allowable under income
tax regulations. The Company has an unfunded, nonqualified supplemental pension
plan covering certain employees, which provides for additional benefits that
would otherwise have been payable to such employees under the Company's pension
plan in the absence of limitations imposed by income tax regulations. The
accrued benefit liabilities for this supplemental plan were $15,513,000 and
$7,983,000 at December 31, 2001 and 2000, respectively, and have been reflected
in the accrued benefit costs shown in the table below.
Certain of the Company's foreign subsidiaries have pension plans that, in the
aggregate, are not significant to the Company's consolidated financial position.
The Company also provides certain postretirement health care and life insurance
benefits to qualifying domestic retirees and their eligible dependents. The
health care plan is contributory; the life insurance plan is noncontributory. In
general, postretirement medical coverage is provided to employees who retire and
have met minimum age and service requirements, under a formula related to total
years of service. The Company does not currently fund these benefit arrangements
and has the right to amend or terminate the health care benefits at any time.
Certain information as of December 31, 2001 and 2000 and for the three years
ended December 31, 2001 with respect to the above domestic plans follows:
<TABLE>
<CAPTION>
Pension benefits Other benefits
--------------------- --------------------
In thousands at December 31, 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 39,486 $ 33,234 $ 6,504 $ 4,636
Cost of benefits earned (service cost) 1,053 908 69 135
Interest cost on benefit obligation 2,993 2,361 318 324
Plan participants' contributions -- -- 75 58
Amendments and changes in prescribed interest
rates 1,012 356 (2,920) --
Benefits paid (3,882) (3,586) (459) (360)
Terminations, curtailments and settlements 2,490 -- 285 --
- ------------------------------------------------------------------------------------------------
Benefit obligation at December 31 43,152 33,273 3,872 4,793
================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year 36,976 37,274 -- --
Actual return on plan assets 5,617 2,668 -- --
Benefits paid (3,816) (2,966) -- --
Curtailments and settlements -- -- -- --
- ------------------------------------------------------------------------------------------------
Fair value of plan assets at December 31 38,777 36,976 -- --
- ------------------------------------------------------------------------------------------------
Funded status at December 31 (unfunded) (4,375) 3,703 (3,872) (4,793)
Unrecognized prior-service costs 405 1,080 (1,414) --
Unrecognized net actuarial (gain)/loss 3,645 (1,676) 399 (935)
Unrecognized transition obligation -- -- 228 2,562
Additional minimum liability (6,352) (1,171) -- --
- ------------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit cost
at December 31 $ (6,677) $ 1,936 $ (4,659) $ (3,166)
===============================================================================================
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
In thousands for the year ended Pension benefits Other benefits
December 31, ------------------------------ ---------------------------
2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of expense:
Cost of benefits earned $ 1,053 $ 908 $ 1,150 $ 69 $ 135 $ 164
Interest cost on benefit obligation 2,993 2,361 2,552 318 324 374
Expected return on plan assets (3,466) (3,314) (3,540) -- -- --
Amortization of prior-service costs 656 757 224 (128) 7 --
Amortization of transition obligation -- (261) (261) 48 176 197
Recognized net actuarial loss/(gain) 447 23 190 36 (52) (6)
- --------------------------------------------------------------------------------------------------------
Net periodic benefit cost 1,683 474 315 343 590 729
(Gain)/loss on terminations,
curtailments and settlements 1,815 -- (527) 1,535 -- 247
- --------------------------------------------------------------------------------------------------------
Net periodic benefit cost after
terminations, curtailments and
settlements $ 3,498 $ 474 $ (212) $ 1,878 $ 590 $ 976
========================================================================================================
</TABLE>
The 2001 loss on terminations, curtailments and settlements has been included in
the restructuring charge.
The weighted average discount rate and assumed rate of future compensation
increases used in determining the benefit obligation at December 31, 2001 were
7.8% and 4%, respectively. The expected long-term return on plan assets was 9%.
The assumed health care cost trend rate for measuring the benefit obligation
included in Other Benefits above is 4%.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
In thousands 1% increase 1% decrease
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components in 2001 $ 33 $ (27)
Effect on postretirement benefit obligation as of
December 31, 2001 $205 $ (182)
</TABLE>
The Company also has a 401(k) employee savings plan covering all eligible
employees. Contributions are limited to amounts allowable for income tax
purposes. Employer matching contributions to the plan are at the discretion of
the Company. Certain subsidiaries make contributions to union-sponsored
multi-employer pension plans covering seagoing personnel. The Employee
Retirement Income Security Act of 1974 requires employers who are contributors
to domestic multi-employer plans to continue funding their allocable share of
each plan's unfunded vested benefits in the event of withdrawal from or
termination of such plans. The Company has been advised by the trustees of such
plans that it has no withdrawal liability as of December 31, 2001. Certain other
seagoing personnel of U.S. Flag vessels are covered under a defined contribution
plan, the cost of which is funded as accrued. The costs of these plans were not
material during the three years ended December 31, 2001.
56
<PAGE>
Note O -- Restructuring Charge:
In the first quarter of 2001, the Company completed a review of its ship
management and administrative functions and adopted a plan to transfer a major
portion of such functions to its subsidiary in Newcastle, United Kingdom,
resulting in New York headquarters staff reductions numbering approximately 100
persons. In connection with such staff reductions, the Company recorded a
restructuring charge of $10,439,000. The charge includes $8,869,000 related to
employee termination and severance costs associated with the reduction in
workforce and $1,570,000 for the disposal of certain assets. A liability of
$2,345,000 is included in sundry liabilities and accrued expenses in the
consolidated balance sheet as of December 31, 2001.
Note P -- Other Income (Net):
Other income (net) consists of:
<TABLE>
<CAPTION>
In thousands for the year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest $ 9,789 $ 9,766 $12,239
Dividends 6,004 1,280 1,343
Gain on sale of securities -- net (based on first-in,
first-out method) 27,227 3,513 1,884
Foreign currency exchange loss on available-for-sale
securities (49) -- --
- --------------------------------------------------------------------------------------------
42,971 14,559 15,466
Gain on disposal of vessels -- net 436 21,064 1,824
Gain on derivative transactions 4,465 -- 2,804
Miscellaneous -- net 448 (1,482) 1,776
- --------------------------------------------------------------------------------------------
$ 48,320 $ 34,141 $21,870
============================================================================================
</TABLE>
Gains on sale of securities are net of realized losses of $5,665,000 (2001),
$18,805,000 (2000) and $7,713,000 (1999).
Note Q -- Planned Vessel Dispositions:
In 1997, the Company recorded an impairment loss of $26,536,000 to reduce the
carrying amount of ten older and less efficient Dry Bulk Carriers to their
estimated disposal value (net of disposal costs). As a result of continued
weakness in world dry bulk markets, the Company decided during 1998 to extend
the period over which it expected to dispose of such vessels and recorded an
additional impairment charge of $65,400,000. During 1999, the Company completed
its dry bulk disposal program and recognized a gain of $12,404,000.
In 1998, the Company recorded an impairment loss of $19,700,000 to reduce the
carrying amount of seven older and less efficient tankers to their estimated
disposal value. During 1999, the Company sold five of these tankers. The two
remaining tankers began participating in the U.S. grain trade program and,
accordingly, were reclassified from vessels held for disposal to vessels as of
December 31, 1999. In 2001, one of these tankers was sold and a gain of $436,000
was recorded in other income.
In 1998, the Company recorded an impairment charge of $5,900,000 to reduce the
carrying value of its investment in joint ventures to reflect the Company's
share of the expected loss on disposal of three older and less efficient
tankers. The vessels were sold in 1999 for a gain, the Company's share of which
was $1,600,000. The charge and subsequent gain were included in equity in income
of joint ventures in 1998 and 1999, respectively.
57
<PAGE>
Note R -- Commitments:
As of December 31, 2001, the Company had non-cancelable contracts for the
construction of five double-hulled foreign flag tankers (excluding two VLCCs in
which the Company has a 33.3% interest), scheduled for delivery between
late-February 2002 and early-January 2004, with an aggregate unpaid cost of
approximately $143,100,000. Unpaid costs, which are net of $112,500,000 of
progress payments and prepayments, will be funded as follows: $74,400,000 in
2002 and $68,700,000 in 2003. The progress payments and prepayments are covered
by refundment guaranties.
As of December 31, 2001, joint ventures in which the Company has a 33.3%
interest had non-cancelable contracts for the construction of two double-hulled
VLCCs, scheduled for delivery in late February and June 2002, with an aggregate
unpaid cost of approximately $120,200,000. Unpaid costs are net of $36,800,000
of progress payments. Long-term bank financing exists for $105,000,000 of the
unpaid cost of these vessels. In connection with the bank financing, the
partners will severally issue guaranties covering a portion of the loan balance.
Note S -- 2001 and 2000 Quarterly Results of Operations (Unaudited):
<TABLE>
<CAPTION>
Results of Operations for Quarter
Ended (in thousands, except per
share amounts) March 31, June 30, Sept. 30, Dec. 31,
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2001
Shipping revenues $ 149,739 $ 129,127 $ 97,435 $ 93,032
Income from vessel operations 57,497 47,348 16,900 8,941
Gain on disposal of vessels -- net -- 436 -- --
Net income $ 40,363 $ 42,711 $ 11,162 $ 7,205
- ------------------------------------------------------------------------------------------
Basic net income per share $ 1.19 $ 1.25 $ 0.33 $ 0.21
Diluted net income per share $ 1.17 $ 1.23 $ 0.32 $ 0.21
==========================================================================================
2000
Shipping revenues $ 84,041 $ 103,203 $ 129,535 $ 150,839
Income from vessel operations 5,275 25,749 46,402 56,640
Gain on disposal of vessels -- net -- -- -- 21,064
Income before extraordinary gain 5,013* 10,406 26,765 47,634
Net income $ 5,013 $ 10,979 $ 26,765 $ 47,634
- ------------------------------------------------------------------------------------------
Basic net income per share $ 0.15 $ 0.32 $ 0.79 $ 1.40
Diluted net income per share $ 0.15 $ 0.32 $ 0.78 $ 1.38
==========================================================================================
</TABLE>
* Reflects the cumulative effect of change in accounting principle (net of
income taxes of $1,800) of $4,152, or $.12 per share.
58
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Overseas Shipholding Group, Inc.
We have audited the accompanying consolidated balance sheets of Overseas
Shipholding Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of income, cash flows, and changes in
shareholders' equity for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Overseas
Shipholding Group, Inc. and subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note B to the consolidated financial statements, in 2000 the
Company changed its method of accounting for net voyage revenues for vessels
operating on voyage charters.
Ernst & Young LLP
New York, New York
February 20, 2002
59
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 13 below. Information with respect to executive officers of the
Company is included at the end of Part I.
ITEM 11. EXECUTIVE COMPENSATION
See Item 13 below.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 13 below.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for under Items 10, 11, 12 and 13 is incorporated
by reference from the definitive Proxy Statement to be filed by the Company in
connection with its 2002 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the
Company are filed in response to Item 8.
Consolidated Balance Sheets at December 31, 2001 and 2000.
Consolidated Statements of Income for the Years Ended
December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
(a)(2) Schedules of the Company have been omitted since they are not
applicable or are not required.
60
<PAGE>
(a)(3) The following exhibits are included in response to Item
14(c):
3(i) Certificate of Incorporation of the registrant, as amended
to date (filed as Exhibit 3(i) to the registrant's Annual
Report on Form 10-K for 1998 and incorporated herein by
reference).
3(ii) By-Laws of the registrant, as amended to date (filed as
Exhibit 3(ii) to the registrant's Annual Report on Form 10-K
for 1993 and incorporated herein by reference).
4(a) Rights Agreement dated as of October 20, 1998 between the
registrant and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent, with the form of Right Certificate attached as
Exhibit A thereto and the Summary of Rights to Purchase
Shares attached as Exhibit B thereto (filed as Exhibit 4.1
to the registrant's Registration Statement on Form 8-A filed
November 9, 1998 and incorporated herein by reference).
4(b)(1) Form of Indenture dated as of December 1, 1993 between the
registrant and The Chase Manhattan Bank (National
Association) providing for the issuance of debt securities
by the registrant from time to time (filed as Exhibit
4(d)(1) to the registrant's Annual Report on Form 10-K for
1993 and incorporated herein by reference).
4(b)(2) Resolutions dated December 2, 1993 fixing the terms of two
series of debt securities issued by the registrant under the
Indenture (filed as Exhibit 4(d)(2) to the registrant's
Annual Report on Form 10-K for 1993 and incorporated herein
by reference).
4(b)(3) Form of 8% Notes due December 1, 2003 of the registrant
(filed as Exhibit 4(d)(3) to the registrant's Annual Report
on Form 10-K for 1993 and incorporated herein by reference).
4(b)(4) Form of 8-3/4% Debentures due December 1, 2013 of the
registrant (filed as Exhibit 4(d)(4) to the registrant's
Annual Report on Form 10-K for 1993 and incorporated herein
by reference).
4(c) Credit Agreement dated April 18, 2000 among the registrant,
two subsidiaries of the registrant and certain banks (filed
as Exhibit 4 to the registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000 and incorporated
herein by reference).
**4(d) Credit Agreement dated December 12, 2001 among the
registrant, two subsidiaries of the registrant and
certain banks.
**4(e) Amendment dated January 22, 2002 to the Credit Agreement
listed at Exhibit 4(d).
NOTE: The Exhibits filed herewith do not include other
instruments authorizing long-term debt of the registrant and
its subsidiaries, where the amounts authorized thereunder do
not exceed 10% of total assets of the registrant and its
subsidiaries on a consolidated basis. The registrant agrees
to furnish a copy of each such instrument to the Commission
upon request.
61
<PAGE>
10(i)(a) Exchange Agreement dated December 9, 1969 (including
exhibits thereto) between the registrant and various parties
relating to the formation of the registrant (the form of
which was filed as Exhibit 2(3) to Registration Statement
No. 2-34124 and incorporated herein by reference).
10(i)(b) Form of Additional Exchange Agreement referred to in Section
2.02 of Exhibit 10(i)(a) hereto (filed as Exhibit 2(4) to
Registration Statement No. 2-34124 and incorporated herein
by reference).
10(i)(c) Limited Liability Company Agreement of Alaska Tanker
Company, LLC dated as of March 30, 1999 (filed as Exhibit 10
to the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and incorporated herein by
reference).
10(i)(d) Participation Agreement dated as of August 20, 1999 by and
among 398 Equity Corporation, 399 Equity Corporation, 400
Equity Corporation, 401 Equity Corporation, and Cambridge
Tankers, Inc., as owners; Alaska Tanker Company, LLC, as
bareboat charterer; Alaskan Equity Trust, as owner trust and
borrower; Wilmington Trust Company, as owner trustee;
National Australia Bank Limited, as arranger, lender, agent
for the Lenders, collateral trustee and swap counterparty;
Alaskan Equity Investors LLC, as investor participant;
American Marine Advisors, Inc., as arranger; and Overseas
Shipholding Group, Inc., as parent of the owners (filed as
Exhibit 10 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999 and incorporated
herein by reference).
*10(iii)(a) Supplemental Executive Retirement Plans of the registrant,
as amended and restated as of January 1, 1999 (filed as
Exhibit 10 (iii)(a) to the registrant's Annual Report on
Form 10-K for 1999 and incorporated herein by reference).
*10(iii)(b) Supplemental Executive Retirement Plans of OSG Ship
Management, Inc., effective as of October 30, 1998 (filed as
Exhibit 10 (iii)(b) to the registrant's Annual Report on
Form 10-K for 1999 and incorporated herein by reference).
*10(iii)(c) Agreement with an executive officer (filed as Exhibit
10(k)(4) to the registrant's Annual Report on Form 10-K for
1996 and incorporated herein by reference).
*10(iii)(d) Agreement with an executive officer (filed as Exhibit
10(k)(5) to the registrant's Annual Report on Form 10-K for
1996 and incorporated herein by reference).
*10(iii)(e) Agreement with an executive officer (filed as Exhibit 10 to
the registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 and incorporated herein by
reference).
*10(iii)(f) Agreement with an executive officer (filed as Exhibit
10(d)(4) to the registrant's Annual Report on Form 10-K for
1998 and incorporated herein by reference).
*10(iii)(g) Form of Amendment to the agreements listed as Exhibits
10(iii)(c), 10(iii)(d), 10(iii)(e) and 10(iii)(f) hereto
(filed as Exhibit 10(d)(5) to the registrant's Annual Report
on Form 10-K for 1998 and incorporated herein by reference).
*10(iii)(h) Agreement with an executive officer (filed as Exhibit
10(d)(6) to the registrant's Annual Report on Form 10-K for
1998 and incorporated herein by reference).
*10(iii)(i) Agreement with an executive officer (filed as Exhibit
10(d)(7) to the registrant's Annual Report on Form 10-K for
1998 and incorporated herein by reference).
62
<PAGE>
*10(iii)(j) 1989 Stock Option Plan, as amended on October 9, 1990,
adopted for officers and key employees of the registrant or
its subsidiaries (filed as Exhibit 10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March
31, 2000 and incorporated herein by reference).
*10(iii)(k) 1998 Stock Option Plan adopted for employees of the
registrant and its affiliates (filed as Exhibit 10 to the
registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 and incorporated herein by reference).
*10(iii)(l) Amendment to the 1998 Stock Option Plan adopted for
employees of the registrant and its affiliates (filed as
Exhibit 10 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 and incorporated herein
by reference).
*10(iii)(m) 1999 Non-Employee Director Stock Option Plan of the
registrant (filed as Exhibit 10(e)(4) to the registrant's
Annual Report on Form 10-K for 1998 and incorporated herein
by reference).
*10(iii)(n) Maritime Overseas Corporation 1990 Stock Option Plan, as
amended, assumed by the registrant (filed as Exhibit
10(e)(5) to the registrant's Annual Report on Form 10-K for
1998 and incorporated herein by reference).
10(iii)(o) Form of Amendment to the agreements listed as Exhibits
10(iii)(c) and 10(iii)(d) hereto (filed as Exhibit 10.1 to
the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001 and incorporated herein by
reference).
10(iii)(p) Form of Amendment to the agreements listed as Exhibits
10(iii)(e), 10(iii)(f), 10(iii)(h) and 10(iii)(i) hereto
(filed as Exhibit 10.2 to the registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference).
**13 Such portions of the Annual Report to shareholders for 2001
as are expressly incorporated herein by reference.
**21 List of subsidiaries of the registrant.
**23 Consent of Independent Auditors of the registrant.
- ------------------------------
(1) The Exhibits marked with one asterisk (*) are a management contract or a
compensatory plan or arrangement required to be filed as an exhibit.
(2) The Exhibits which have not previously been filed or listed or are being
refiled are marked with two asterisks (**).
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 22, 2002
OVERSEAS SHIPHOLDING GROUP, INC.
By /s/ Myles R. Itkin
----------------------------------------
Myles R. Itkin
Senior Vice President,
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Each of such
persons appoints Morton P. Hyman and Myles R. Itkin, and each of them, as his
agents and attorneys-in-fact, in his name, place and stead in all capacities, to
sign and file with the SEC any amendments to this report and any exhibits and
other documents in connection therewith, hereby ratifying and confirming all
that such attorneys-in-fact or either of them may lawfully do or cause to be
done by virtue of this power of attorney.
Name Date
/s/ Morton P. Hyman March 22, 2002
- ------------------------------------------
Morton P. Hyman, Principal
Executive Officer and Director
/s/ Myles R. Itkin March 22, 2002
- ------------------------------------------
Myles R. Itkin, Principal
Financial Officer and
Principal Accounting Officer
/s/ Alan R. Batkin March 22, 2002
- ------------------------------------------
Alan R. Batkin, Director
/s/ Robert N. Cowen March 22, 2002
- ------------------------------------------
Robert N. Cowen, Director
/s/ Charles Fribourg March 22, 2002
- ------------------------------------------
Charles Fribourg, Director
/s/ William L. Frost March 22, 2002
- ------------------------------------------
William L. Frost, Director
/s/ Stanley Komaroff March 22, 2002
- ------------------------------------------
Stanley Komaroff, Director
64
<PAGE>
Name Date
/s/ Solomon N. Merkin March 22, 2002
- ------------------------------------------
Solomon N. Merkin, Director
/s/ Joel I. Picket March 22, 2002
- ------------------------------------------
Joel I. Picket, Director
/s/ Ariel Recanati March 22, 2002
- ------------------------------------------
Ariel Recanati, Director
/s/ Oudi Recanati March 22, 2002
- ------------------------------------------
Oudi Recanati, Director
/s/ Michael J. Zimmerman March 22, 2002
- ------------------------------------------
Michael J. Zimmerman, Director
65
<PAGE>
Exhibit Index
(a)(1) The following consolidated financial statements of the Company
are filed in response to Item 8.
Consolidated Balance Sheets at December 31, 2001 and 2000.
Consolidated Statements of Income for the Years Ended December
31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
(a)(2) Schedules of the Company have been omitted since they are not
applicable or are not required.
(a)(3) The following exhibits are included in response to Item 14(c):
3(i) Certificate of Incorporation of the registrant, as amended to
date (filed as Exhibit 3(i) to the registrant's Annual Report on
Form 10-K for 1998 and incorporated herein by reference).
3(ii) By-Laws of the registrant, as amended to date (filed as Exhibit
3(ii) to the registrant's Annual Report on Form 10-K for 1993 and
incorporated herein by reference).
4(a) Rights Agreement dated as of October 20, 1998 between the
registrant and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent, with the form of Right Certificate attached as
Exhibit A thereto and the Summary of Rights to Purchase Shares
attached as Exhibit B thereto (filed as Exhibit 4.1 to the
registrant's Registration Statement on Form 8-A filed November 9,
1998 and incorporated herein by reference).
4(b)(1) Form of Indenture dated as of December 1, 1993 between the
registrant and The Chase Manhattan Bank (National Association)
providing for the issuance of debt securities by the registrant
from time to time (filed as Exhibit 4(d)(1) to the registrant's
Annual Report on Form 10-K for 1993 and incorporated herein by
reference).
4(b)(2) Resolutions dated December 2, 1993 fixing the terms of two series
of debt securities issued by the registrant under the Indenture
(filed as Exhibit 4(d)(2) to the registrant's Annual Report on
Form 10-K for 1993 and incorporated herein by reference).
66
<PAGE>
4(b)(3) Form of 8% Notes due December 1, 2003 of the registrant (filed as
Exhibit 4(d)(3) to the registrant's Annual Report on Form 10-K
for 1993 and incorporated herein by reference).
4(b)(4) Form of 8-3/4% Debentures due December 1, 2013 of the registrant
(filed as Exhibit 4(d)(4) to the registrant's Annual Report on
Form 10-K for 1993 and incorporated herein by reference).
4(c) Credit Agreement dated April 18, 2000 among the registrant, two
subsidiaries of the registrant and certain banks (filed as
Exhibit 4 to the registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000 and incorporated herein by
reference).
**4(d) Credit Agreement dated December 12, 2001 among the registrant,
two subsidiaries of the registrant and certain banks.
**4(e) Amendment dated January 22, 2002 to the Credit Agreement listed
at Exhibit 4(d).
NOTE: The Exhibits filed herewith do not include other
instruments authorizing long-term debt of the registrant and its
subsidiaries, where the amounts authorized thereunder do not
exceed 10% of total assets of the registrant and its subsidiaries
on a consolidated basis. The registrant agrees to furnish a copy
of each such instrument to the Commission upon request.
10(i)(a) Exchange Agreement dated December 9, 1969 (including exhibits
thereto) between the registrant and various parties relating to
the formation of the registrant (the form of which was filed as
Exhibit 2(3) to Registration Statement No. 2-34124 and
incorporated herein by reference).
10(i)(b) Form of Additional Exchange Agreement referred to in Section 2.02
of Exhibit 10(i)(a) hereto (filed as Exhibit 2(4) to Registration
Statement No. 2-34124 and incorporated herein by reference).
10(i)(c) Limited Liability Company Agreement of Alaska Tanker Company, LLC
dated as of March 30, 1999 (filed as Exhibit 10 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 and incorporated herein by reference).
10(i)(d) Participation Agreement dated as of August 20, 1999 by and among
398 Equity Corporation, 399 Equity Corporation, 400 Equity
Corporation, 401 Equity Corporation, and Cambridge Tankers, Inc.,
as owners; Alaska Tanker Company, LLC, as bareboat charterer;
Alaskan Equity Trust, as owner trust and borrower; Wilmington
Trust Company, as owner trustee; National Australia Bank Limited,
as arranger, lender, agent for the Lenders, collateral trustee
and swap counterparty; Alaskan Equity Investors LLC, as investor
participant; American Marine Advisors, Inc., as arranger; and
Overseas Shipholding Group, Inc., as parent of the owners (filed
as Exhibit 10 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999 and incorporated herein
by reference).
*10(iii)(a) Supplemental Executive Retirement Plans of the registrant, as
amended and restated as of January 1, 1999 (filed as Exhibit 10
(iii)(a) to the registrant's Annual Report on Form 10-K for 1999
and incorporated herein by reference).
67
<PAGE>
*10(iii)(b) Supplemental Executive Retirement Plans of OSG Ship Management,
Inc., effective as of October 30, 1998 (filed as Exhibit 10
(iii)(b) to the registrant's Annual Report on Form 10-K for 1999
and incorporated herein by reference).
*10(iii)(c) Agreement with an executive officer (filed as Exhibit 10(k)(4) to
the registrant's Annual Report on Form 10-K for 1996 and
incorporated herein by reference).
*10(iii)(d) Agreement with an executive officer (filed as Exhibit 10(k)(5) to
the registrant's Annual Report on Form 10-K for 1996 and
incorporated herein by reference).
*10(iii)(e) Agreement with an executive officer (filed as Exhibit 10 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 and incorporated herein by reference).
*10(iii)(f) Agreement with an executive officer (filed as Exhibit 10(d)(4) to
the registrant's Annual Report on Form 10-K for 1998 and
incorporated herein by reference).
*10(iii)(g) Form of Amendment to the agreements listed as Exhibits
10(iii)(c), 10(iii)(d), 10(iii)(e) and 10(iii)(f) hereto (filed
as Exhibit 10(d)(5) to the registrant's Annual Report on Form
10-K for 1998 and incorporated herein by reference).
*10(iii)(h) Agreement with an executive officer (filed as Exhibit 10(d)(6) to
the registrant's Annual Report on Form 10-K for 1998 and
incorporated herein by reference).
*10(iii)(i) Agreement with an executive officer (filed as Exhibit 10(d)(7) to
the registrant's Annual Report on Form 10-K for 1998 and
incorporated herein by reference).
*10(iii)(j) 1989 Stock Option Plan, as amended on October 9, 1990, adopted
for officers and key employees of the registrant or its
subsidiaries (filed as Exhibit 10 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000 and
incorporated herein by reference).
*10(iii)(k) 1998 Stock Option Plan adopted for employees of the registrant
and its affiliates (filed as Exhibit 10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998 and incorporated herein by reference).
*10(iii)(l) Amendment to the 1998 Stock Option Plan adopted for employees of
the registrant and its affiliates (filed as Exhibit 10 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000 and incorporated herein by reference).
*10(iii)(m) 1999 Non-Employee Director Stock Option Plan of the registrant
(filed as Exhibit 10(e)(4) to the registrant's Annual Report on
Form 10-K for 1998 and incorporated herein by reference).
*10(iii)(n) Maritime Overseas Corporation 1990 Stock Option Plan, as amended,
assumed by the registrant (filed as Exhibit 10(e)(5) to the
registrant's Annual Report on Form 10-K for 1998 and incorporated
herein by reference).
10(iii)(o) Form of Amendment to the agreements listed as Exhibits 10(iii)(c)
and 10(iii)(d) hereto (filed as Exhibit 10.1 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001
and incorporated herein by reference).
68
<PAGE>
10(iii)(p) Form of Amendment to the agreements listed as Exhibits
10(iii)(e), 10(iii)(f), 10(iii)(h) and 10(iii)(i) hereto (filed
as Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 and incorporated herein by
reference).
**13 Such portions of the Annual Report to shareholders for 2001 as
are expressly incorporated herein by reference.
**21 List of subsidiaries of the registrant.
**23 Consent of Independent Auditors of the registrant.
- -----------------------------------
(1) The Exhibits marked with one asterisk (*) are a management contract or a
compensatory plan or arrangement required to be filed as an exhibit.
(2) The Exhibits which have not previously been filed or listed or are being
refiled are marked with two asterisks (**).
69
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.(D)
<SEQUENCE>3
<FILENAME>ex-4d.txt
<DESCRIPTION>CREDIT AGREEMENT
<TEXT>
Exhibit 4(d)
$240,000,000
CREDIT AGREEMENT
AMONG
OVERSEAS SHIPHOLDING GROUP, INC.,
OSG BULK SHIPS, INC.,
OSG INTERNATIONAL, INC.,
as joint and several Borrowers,
JPMORGAN CHASE BANK,
as Administrative Agent and Lender,
DEN NORSKE BANK ASA,
as Syndication Agent, Lead Arranger and Lender,
NORDEA,
as Syndication Agent, Lead Arranger and Lender,
LANDESBANK SCHLESWIG-HOLSTEIN GIROZENTRALE,
as Documentation Agent, Lead Arranger and Lender,
HAMBURGISCHE LANDESBANK - GIROZENTRALE-,
as Lead Arranger and Lender,
NIB CAPITAL BANK N.V.,
as Lead Arranger and Lender,
J.P. MORGAN SECURITIES INC.,
as Lead Arranger,
AND
The Banks and Financial Institutions listed on Schedule 1 hereto,
as Banks
Dated as of December 12, 2001
<PAGE>
TABLE OF CONTENTS
Page
----
1. DEFINITIONS..............................................................1
1.1. Defined Terms.......................................................1
1.2. Computation of Time Periods; Other Definitional Provisions.........23
1.3. Accounting Terms...................................................23
2. THE ADVANCES............................................................23
2.1. Advances...........................................................23
2.2. Drawdown Notice....................................................24
2.3. Effect of Drawdown Notice..........................................24
2.4. Funding of Advances................................................24
2.5. Notation of Advances...............................................25
2.6. Reduction of the Commitments.......................................25
2.7. Mandatory Prepayments..............................................26
2.8. Several Obligations................................................26
2.9. Pro Rata Treatment.................................................26
3. CONDITIONS..............................................................26
3.1. Conditions Precedent to Availability of the Facility...............26
3.2. Further Conditions Precedent.......................................28
3.3. Satisfaction after Drawdown........................................28
4. REPAYMENT AND PREPAYMENT................................................28
4.1. Repayment..........................................................28
4.2. Prepayment.........................................................29
4.3. Borrowers' Obligations Absolute....................................29
5. INTEREST AND RATE.......................................................29
5.1. Payment of Interest; Interest Rate.................................29
5.2. Calculation of Interest............................................30
5.3. Maximum Interest...................................................30
6. PAYMENTS................................................................30
6.1. Place of Payments; No Set Off......................................30
6.2. Federal Income Tax Credits.........................................30
6.3. Sharing of Setoffs.................................................31
7. REPRESENTATIONS AND WARRANTIES..........................................31
8. COVENANTS...............................................................36
8.1. Affirmative Covenants..............................................36
8.2. Negative Covenants.................................................44
9. EVENTS OF DEFAULT.......................................................48
9.1. Events of Default..................................................48
<PAGE>
9.2. Application of Moneys..............................................50
10. ASSIGNMENTS; PARTICIPATIONS; PLEDGES....................................50
10.1. Assignments.......................................................50
10.2. Participations....................................................51
10.3. Promissory Notes..................................................51
10.4. Security Interest.................................................51
11. ILLEGALITY, INCREASED COST, NON-AVAILABILITY, ETC.......................52
11.1. Illegality........................................................52
11.2. Increased Cost....................................................52
11.3. Nonavailability of Funds..........................................53
11.4. Determination of Losses...........................................53
11.5. Compensation for Losses...........................................53
11.6. Compensation for Breakage Costs...................................54
11.7. Currency Indemnity................................................54
11.8. Replacement of Bank or Participant................................55
12. FEES, EXPENSES AND INDEMNIFICATION......................................55
12.1. Fees..............................................................55
12.2. Expenses; Indemnity; Damage Waiver................................56
13. APPLICABLE LAW, JURISDICTION AND WAIVER.................................57
13.1. Applicable Law....................................................57
13.2. Jurisdiction......................................................57
13.3. Waiver of Jurisdiction , Forum Non Conveniens.....................57
13.4. Waiver Of Jury Trial..............................................58
14. THE AGENTS..............................................................58
14.1. Appointment and Authorization....................................58
14.2. Agents and Affiliates............................................58
14.3. Action by Agents.................................................58
14.4. Consultation with Experts........................................58
14.5. Liability of the Agents..........................................58
14.6. Indemnification..................................................59
14.7. Credit Decision..................................................59
14.8. Successor Administrative Agent...................................59
14.9. Administrative Fee...............................................60
14.10. Distribution of Payments.........................................60
14.11. Holder of Interest in Notes......................................60
14.12. Assumption re Event of Default...................................60
14.13. Notification of Event of Default.................................61
14.14. Limitations of Liability of Creditors............................61
15. NOTICES AND DEMANDS.....................................................61
ii
<PAGE>
16. LIMITATION OF LIABILITY/SURVIVAL OF LIABILITY/CONTINUING INDEMNITIES....62
16.1. Limitation of Liability..........................................62
17. MISCELLANEOUS...........................................................63
17.1. Time of Essence..................................................63
17.2. Severability.....................................................63
17.3. References.......................................................63
17.4. Further Assurances...............................................64
17.5. Prior Agreements, Merger.........................................64
17.6. Entire Agreement, Amendments.....................................64
17.7. Headings.........................................................64
17.8. Survival.........................................................64
17.9. Confidentiality..................................................64
17.10. Counterparts.....................................................65
17.11. Waiver Of Immunity...............................................65
SCHEDULE I - BANKS
SCHEDULE II - APPLICABLE MARGIN
SCHEDULE III - FUNDED DEBT AT DECEMBER 31. 1999
SCHEDULE IV - ACCEPTABLE BROKERS
EXHIBIT A - FORM OF ADMINISTRATIVE QUESTIONAIRE
EXHIBIT B - FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
EXHIBIT C - PROMISSORY NOTE
EXHIBIT D - FORM OF DRAWDOWN NOTICE1
EXHIBIT E - FORM OF COMPLIANCE CERTIFICATE
EXHIBIT F - FORM OF INTEREST NOTICE
EXHIBIT G - FORM OF OPINION OF PROSKAUER ROSE LLP, SPECIAL COUNSEL TO THE
BORROWERS
EXHIBIT H - FORM OF OPINION OF ROBERT N. COWEN, ESQ. COUNSEL TO OSG AND OSG BULK
EXHIBIT I - FORM OF OPINION OF MARK LOWE, ESQ., COUNSEL TO OSG INTERNATIONAL
EXHIBIT J - FORM OF OPINION OF SEWARD & KISSEL LLP, SPECIAL COUNSEL TO THE
AGENTS
iii
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (the "Agreement") is made as of the 12th day
of December, 2001, by and among (1) OVERSEAS SHIPHOLDING GROUP, INC., a
corporation incorporated under the laws of the State of Delaware ("OSG"), with
offices at 511 Fifth Avenue, New York, New York 10017, (2) OSG BULK SHIPS, INC.,
a corporation incorporated under the laws of the State of New York ("OSG Bulk"),
with offices at 511 Fifth Avenue, New York, New York 10017, (3) OSG
INTERNATIONAL, INC., a corporation incorporated under the laws of the Republic
of the Marshall Islands with offices at 511 Fifth Avenue, New York, New York
10017 ("OSG International," jointly and severally with OSG and OSG Bulk, the
"Borrowers," each a "Borrower"), (4) the banks and financial institutions whose
names and addresses are set out in Schedule 1 hereto (together with any assignee
pursuant to Section 10, the "Banks," each a "Bank"), (5) JPMORGAN CHASE BANK
(successor by merger to The Chase Manhattan Bank), in its capacity as
administrative agent for the Banks (the "Administrative Agent") and lender, (6)
DEN NORSKE BANK ASA ("DnB"), as syndication agent for the Banks and lender, (7)
NORDEA, acting through Nordea Bank Finland Plc, New York Branch, as syndication
agent for the Banks and lender (together with DnB, the "Syndication Agents"),
(8) LANDESBANK SCHLESWIG-HOLSTEIN GIROZENTRALE, as documentation agent for the
Banks and lender (the "Documentation Agent" and together with the Administrative
Agent and the Syndication Agents, the "Agents"), (9) HAMBURGISCHE
LANDESBANK-GIROZENTRALE-, lender and (10) NIB CAPITAL BANK N.V., as lender.
WITNESSETH THAT:
WHEREAS, at the request of the Borrowers, each of the Agents has
agreed to act in its respective capacity as set forth herein and the Banks have
agreed to provide to the Borrowers a revolving credit facility in the initial
amount of $240,000,000 on the terms and conditions set forth herein which
facility may be increased, to the extent Commitments from additional Banks are
obtained after the date hereof and prior to January 31, 2002, up to $300,000,000
on the terms and subject to the conditions set forth herein and in the
Commitment Letter (as hereinafter defined);
NOW, THEREFORE, in consideration of the premises set forth above,
the covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as set forth below:
1. DEFINITIONS
1.1. Defined Terms. In this Agreement the words and expressions specified below
shall, except where the context otherwise requires, have the meanings attributed
to them below:
"Adjusted Fixed Charges" shall mean for each period of four
consecutive fiscal quarters (taken as a
single accounting period) for which a
determination is being made, the sum of
(i) Fixed Charges plus (ii) the average
of the amount of Current Debt of OSG and
the Recourse
<PAGE>
Subsidiaries outstanding as of the end of
each fiscal quarter within such period;
"Administrative Agent" shall have the meaning ascribed thereto
in the preamble;
"Administrative Questionnaire" shall mean, with respect to each Bank, an
administrative questionnaire
substantially in the form of Exhibit A
hereto, submitted to the Administrative
Agent (with a copy to the Borrowers) duly
completed by such Bank;
"Advance" shall mean any amount advanced or
requested to be advanced to the Borrowers
pursuant to Section 2.1; provided that
each such Advance shall be in a minimum
amount of $10,000,000 or any larger
multiple of $1,000,000;
"Advance Time Charter shall mean, as of the date of any
Revenues" determination thereof, the amount of
advance time charter revenues of OSG and
its Recourse Subsidiaries that are
properly included on the liability side
of OSG's most recent consolidated balance
sheet, determined in accordance with
GAAP, and if not listed as separate line
items on such balance sheet, such amounts
as are described separately in the
applicable Compliance Certificate
required pursuant to Section 8.1(d)(iii);
"Affiliate" shall mean, with respect to any Person,
(i) any Person that directly, or
indirectly through one or more
intermediaries, Controls such Person (a
"Controlling Person") or (ii) any Person
(other than such Person or a Subsidiary
of such Person) which is Controlled by or
is under common Control with a
Controlling Person;
"Agent(s)" shall have the meaning ascribed thereto
in the preamble;
"Applicable Law" shall mean any Law of any Authority,
including, without limitation, all
Federal, state and foreign banking or
securities laws, to which the Person in
question is subject or by which it or any
of its material property is bound;
"Applicable Margin" shall mean a margin which will vary as
set forth on Schedule II attached hereto
based upon the rating levels assigned to
OSG's senior long-term unsecured debt
(without third-party credit enhancement)
by S&P and Moody's and in certain cases,
Fitch;
"Applicable Rate" shall mean, in respect of any Advance,
the rate of interest on such Advance from
time to time applicable pursuant to
Section 5.1;
"Assignment and shall mean the Assignment and Assumption
Agreement(s)
2
<PAGE>
Assumption Agreement(s)" executed pursuant to Section 10.1 or 11.8
substantially in the form of Exhibit B;
"Attributable Debt" shall mean, as of the date of any
determination thereof, in connection with
any Sale and Leaseback Transaction which
is not permitted pursuant to Section
8.2(d)(ii), the lesser of (i) the sum of
the Fair Market Value of any vessels
subject to such transaction and the fair
market value of any non-vessel assets
subject to such transaction or (ii) the
present value (computed in accordance
with GAAP at the imputed rate of interest
used in such transaction) of the
obligation of a lessee in such
transaction for Rentals during the
remaining term of any lease (including
any period for which such lease has been
extended or may, at the option of the
lessor, be extended);
"Authority" shall mean any governmental or
quasi-governmental authority, whether
executive, legislative, judicial,
administrative, monetary or other, or any
combination thereof, including, without
limitation, any Federal, state,
territorial, county, municipal or other
government or governmental or
quasi-governmental agency, arbitrator,
board, body, branch, bureau, commission,
corporation, court, department,
instrumentality, master, mediator, panel,
referee, system or other political unit
or subdivision or other entity of any of
the foregoing, whether domestic or
foreign;
"Bank(s)" shall have the meaning ascribed thereto
in the preamble;
"Banking Day(s)" shall mean any day that is not a
Saturday, Sunday or other day on which
(a) commercial banks in New York, New
York are authorized or required by law to
remain closed, or (b) banks are not
generally open for dealing in dollar
deposits in the London interbank market;
"Book Value" shall mean, as of the date of any
determination thereof, for any asset of
OSG and the Recourse Subsidiaries, the
value at which the asset of OSG and the
Recourse Subsidiaries is recorded and
reported by OSG in its consolidated
financial statements in accordance with
GAAP, consistently applied;
"Borrower(s)" shall have the meaning ascribed thereto
in the preamble;
"Capital Construction Funds" shall mean as of the date of any
determination thereof, the aggregate
amount on deposit in capital construction
funds established and maintained pursuant
to agreement with the Secretary of
Transportation in accordance with Section
1177 of the Merchant Marine Act, 1936, as
amended, 46 U.S.C. Appx. Section 1177,
for the account of OSG and the Recourse
3
<PAGE>
Subsidiaries;
"Capitalized Lease" of any Person shall mean any lease or
other arrangement conveying the right to
use real or personal property where the
obligations for Rentals are required to
be capitalized on a balance sheet of the
lessee in accordance with GAAP;
"Capitalized Rentals" of any Person shall mean, as of the date
of any determination thereof, the
capitalized amount of all Rentals due and
to become due under all Capitalized
Leases of such Person, as lessee,
reflected as a liability on the balance
sheet of such Person;
"Cash" shall mean as of the date of any
determination thereof, the total amount
of all cash and Cash Equivalents as
determined in accordance with GAAP of OSG
and the Recourse Subsidiaries including,
without limitation, cash of OSG and the
Recourse Subsidiaries included in Capital
Construction Funds (net of any taxes
calculated at the applicable rate for
non-qualified withdrawals pursuant to
Section 1177 of the Merchant Marine Act,
1936, as amended, 46 U.S.C. Appx. Section
1177, and penalties thereon, if any),
interest-bearing deposits in banks or
trust companies described in clause (c)
of the definition of "Permitted
Investments" with maturities of less than
one year held by OSG and the Recourse
Subsidiaries as the same are reflected in
a consolidated balance sheet of OSG and
the Subsidiaries delivered in accordance
with Section 8.1(d), and "Cash" shall
also include, for the purposes of the
calculations of Cash Adjusted
Consolidated Net Tangible Assets and Cash
Adjusted Funded Debt required by Section
8.1(s) only, Cash of OSG and the Recourse
Subsidiaries included in Restricted
Funds;
"Cash Adjusted shall mean, as of the date of any
Consolidated determination thereof, Consolidated Net
Net Tangible Assets" Tangible Assets less Cash;
"Cash Adjusted Debt shall mean, for each four consecutive
Service Coverage Ratio" fiscal quarter periods (taken as a single
accounting period) for which a
determination is being made, the ratio of
Cash Adjusted Income Available for Fixed
Charges to Adjusted Fixed Charges;
"Cash Adjusted Funded Debt" shall mean, as of the date of any
determination thereof, Consolidated
Funded Debt less Cash;
"Cash Adjusted Income shall mean, for any period, with respect
Available for Fixed Charges" to OSG and the Recourse Subsidiaries, the
sum of (without duplication) (i) Net
Income Available for Fixed Charges, (ii)
depreciation and amortization of OSG and
the Recourse Subsidiaries determined on a
consolidated basis in accordance with
GAAP for such period, and (iii) 75% of
4
<PAGE>
the average of the amounts of Cash
outstanding as of the end of each of the
four consecutive quarterly fiscal periods
included in the determination;
"Cash Collateral" shall have the meaning ascribed thereto
in Section 8.1(t);
"Cash Equivalents" shall mean (i) securities directly issued
or fully and unconditionally guaranteed
or insured, as to principal and interest,
by the United States of America or any
agency or instrumentality thereof
(provided that the full faith and credit
of the United States of America is
pledged in support thereof), and (ii)
time deposits, certificates of deposit or
deposits in the interbank market of any
commercial bank of recognized standing
organized under the laws of the United
States of America, any state thereof or
any foreign jurisdiction having capital
and surplus in excess of $500,000,000,
and rated at least A or the equivalent
thereof by S&P, with respect to both (i)
and (ii) above, and in each case having
maturities of not more than ninety (90)
days from the date of acquisition;
"Closing Date" shall mean the date on which each of the
conditions precedent to the availability
of the Facility set forth in Section 3.1
shall have been met or waived;
"Code" shall mean the Internal Revenue Code of
1986, as amended, and any successor
statute and regulations promulgated
thereunder;
"Collateral Date" shall have the meaning ascribed thereto
in Section 8.1(t);
"Collateralized Assets" shall mean as of the date of
determination any assets of OSG that are
pledged or mortgaged as security for any
type of financing (including Capitalized
Leases);
"Commitment" shall mean, with respect to each Bank,
the commitment of such Bank to make
Advances, and to acquire Participations
in Advances, pursuant to this Agreement,
expressed as an amount representing the
maximum aggregate amount of its
obligations to fund hereunder, as such
commitment may be (a) reduced from time
to time pursuant to this Agreement and
(b) reduced or increased from time to
time by assignment by or to such Bank
pursuant to Section 6.3. The initial
amount of each Bank's commitment is set
forth opposite its name in Schedule I
hereto or, as the case may be, in the
Assignment and Assumption Agreement
pursuant to which it assumes its
commitment.
"Commitment Fee" shall have the meaning ascribed thereto
in Section 12.1;
5
<PAGE>
"Commitment Letter" shall mean that certain commitment letter
dated October 26, 2001 by and between
JPMorgan Chase Bank (successor by merger
to The Chase Manhattan Bank), DnB,
Nordea, Landesbank Schleswig-Holstein
Girozentrale, Hamburgische Landesbank
-Girozentrale-, NIB Capital Bank N.V. and
J.P. Morgan Securities Inc. and as
accepted and agreed by the Borrowers;
"Compliance Certificate" shall mean a certificate in the form set
out in Exhibit E, or in such other form
as the Administrative Agent may agree,
certifying the compliance by each of the
Borrowers with all of its covenants
contained herein and showing the
calculations thereof, which certificate
shall be executed and delivered by the
chief executive officer, the chief
operating officer or the chief financial
officer of OSG or the designee thereof to
the Administrative Agent with sufficient
copies for the other Creditors to be
distributed to the other Creditors by the
Administrative Agent promptly upon
receipt thereof pursuant to Section
8.1(d)(iii);
"Consolidated EBITDA" shall mean, for any period, with respect
to OSG and the Recourse Subsidiaries, the
sum of (without duplication) (i)
Consolidated Net Income; (ii) all
Interest Charges of OSG and the Recourse
Subsidiaries; (iii) income taxes (other
than income taxes (either positive or
negative) attributable to extraordinary
and non-recurring gains or losses) of OSG
and the Recourse Subsidiaries; and (iv)
depreciation and amortization of OSG and
the Recourse Subsidiaries determined on a
consolidated basis in accordance with
GAAP for such period; provided that if
any Recourse Subsidiary is not
wholly-owned by OSG, Consolidated EBITDA
shall be reduced (to the extent not
otherwise reduced in accordance with
GAAP) by an amount equal to (A) the
amount of the Consolidated Net Income
attributable to such Recourse Subsidiary
multiplied by (B) the percentage
ownership interest in the income of such
Recourse Subsidiary not owned on the last
day of such period by OSG;
"Consolidated Funded Debt" shall mean, as of the date of
determination, all Funded Debt of OSG and
the Recourse Subsidiaries, determined on
a consolidated basis eliminating
intercompany items;
"Consolidated Net Income" for any period shall mean consolidated
net income of OSG and the Recourse
Subsidiaries for such period, as shown on
the consolidated financial statements of
OSG and the Recourse Subsidiaries
delivered in accordance with Section
8.1(d);
"Consolidated Net Tangible shall mean as of the date of any
Assets" determination thereof the total amount of
all Tangible Assets after excluding
therefrom (i) all Restricted Investments
(valued in accordance with GAAP) and (ii)
any write-up of fixed assets of OSG and
the Recourse
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<PAGE>
Subsidiaries other than write-ups in
accordance with GAAP of assets of a
business made upon the acquisition of
such business after December 31, 2000 and
after deducting all liabilities except
deferred income taxes, deferred credits,
Advance Time Charter Revenues, Minority
Interests, Unterminated Voyage Revenues
and Consolidated Funded Debt;
"Consolidated Tangible Net Worth" shall mean, as of the date of any
determination thereof, the total of
stockholders' equity (as shown on the
most recent consolidated balance sheet of
OSG and the Recourse Subsidiaries) less
Intangible Assets of OSG and the Recourse
Subsidiaries;
"Control" shall mean, for purposes of the
definition of "Affiliate," with respect
to any Person, possession, directly or
indirectly, of the power to direct or
cause the direction of the management or
policies of such Person, whether through
the ownership of voting securities, by
contract or otherwise (for purposes of
the aforesaid definition, the term
"Control" used as a verb has a
corresponding meaning);
"Conversion Date" shall have the meaning ascribed thereto
in Section 11.7(a);
"Creditors" shall mean, together, the Agents and the
Banks, each, a "Creditor";
"Current Debt" of any Person shall mean as of the date
of any determination thereof (i) the
Current Portion, (ii) all other Debt of
such Person other than Funded Debt and
(iii) (without duplication) Guarantees by
such Person of Debt of the type described
in clauses (i) and (ii);
"Current Portion" with respect to any Person or
consolidated group of Persons shall mean
the portion (determined in accordance
with GAAP) of long-term Debt of such
Person(s) shown as a current liability on
the consolidated balance sheet of such
Person(s);
"Debt" of any Person shall mean (i) all
liabilities for money borrowed
(excluding, in the case of OSG or any
Recourse Subsidiary, Debt defined herein
as Non-Recourse Debt) as determined in
accordance with GAAP eliminating
intercompany items, (ii) (without
duplication) all Capitalized Rentals of
such Person (other than rentals owing
from OSG or any Recourse Subsidiary to
OSG or another Recourse Subsidiary), and
(iii) (without duplication) all
Guarantees by such Person of Debt of
Persons (other than, in the case of OSG
or any Recourse Subsidiary, Debt of OSG
or any Recourse Subsidiary);
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<PAGE>
"Default" shall mean any event that would, with the
giving of notice or passage of time, or
both, be an Event of Default;
"Default Rate" shall have the meaning ascribed thereto
in Section 5.1(b);
"Derivatives Obligations" of any Person shall mean all obligations
of such Person in respect of any rate
swap transaction, basis swap, forward
rate transaction, commodity swap,
commodity option, equity or equity index
swap, equity or equity index option, bond
option, interest rate option, foreign
exchange transaction, cap transaction,
floor transaction, collar transaction,
currency swap transaction, cross-currency
rate swap transaction, currency option or
any other similar transaction (including
any option with respect to any of the
foregoing transactions) or any
combination of the foregoing
transactions;
"DOC" shall mean a document of compliance
issued to an Operator in accordance with
rule 13 of the ISM Code;
"Documentation Agent" shall have the meaning ascribed thereto
in the preamble;
"Dollars" or "$" shall mean the legal currency, at any
relevant time hereunder, of the United
States of America and, in relation to all
payments hereunder, in same day funds
settled through the New York Clearing
House Interbank Payments System (or such
other Dollar funds as may be determined
by the Administrative Agent to be
customary for the settlement in New York
City of banking transactions of the type
herein involved);
"Drawdown Date" shall mean any date, being a Banking Day,
not later than the date falling one day
prior to the Final Payment Date, upon
which the Borrowers have requested that
an Advance be made as provided in Section
2.2;
"Drawdown Notice" shall have the meaning ascribed thereto
in Section 2.2;
"Environmental Approvals" shall have the meaning ascribed thereto
in Section 7.1(h);
"Environmental Claim" shall have the meaning ascribed thereto
in Section 7.1(h);
"Environmental Laws" shall have the meaning ascribed thereto
in Section 7.1(h);
"ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended;
"ERISA Affiliate" shall mean a trade or business (whether
or not incorporated) which is under
common control with any Borrower within
the meaning of Sections 414(b),(c),(m) or
(o) of the Code;
8
<PAGE>
"ERISA Group" shall mean OSG and the Subsidiaries;
"Event(s) of Default" shall mean any of the events set out in
Section 9.1;
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended;
"Existing Credit Facility" shall mean the credit facility
established pursuant to that certain
Second Amended and Restated Credit
Agreement in its entirety, dated as of
August 19, 1997, among the Borrowers, the
banks listed therein, Citibank, N.A., as
Administrative Agent, The Chase Manhattan
Bank, as Syndication Agent, and Morgan
Guaranty Trust Company of New York, as
Documentation Agent;
"Facility" the line of credit, in an initial amount
of Two Hundred Forty Million Dollars
($240,000,000) and not to exceed Three
Hundred Million Dollars ($300,000,000) in
aggregate principal amount, to be made
available to Borrowers pursuant to
Section 2 hereof, as the same may be
reduced from time to time pursuant to
Section 2.6 hereof;
"Facility Balance" shall mean, as of the date of
determination, the Dollar amount of the
Facility outstanding at such time;
"Facility Period" shall mean the period from the date
hereof to the date which is five (5)
years from the date hereof;
"Fair Market Value" shall mean, in respect of any vessel, the
average of two sets of appraised values
of such vessel as determined by two (2)
independent brokers chosen from the
brokers listed on Schedule IV, such
vessel to be valued on a stand alone
basis, free and clear of any liens,
charters or other encumbrances and with
no value given to any pooling
arrangements. One broker shall be
selected by the Borrowers and one broker
shall be selected by the Administrative
Agent. No appraisal shall be dated more
than thirty (30) days prior to the date
on which such appraisal is required
pursuant to this Agreement;
"Federal Funds Rate" shall mean, for each day during any
period, the weighted average (rounded if
necessary to the next 1/100 of 1%) of the
rates on overnight Federal funds
transactions with members of the Federal
Reserve System arranged by Federal funds
brokers, as published for such day (on
the next succeeding Banking Day or, if
such day is not a Banking Day, on the
next succeeding Banking Day) by the
Federal Reserve Bank of New York, or, if
such rate is not so published for any day
which is a Banking Day, the average of
the quotations for such day on such
transactions received by the
Administrative Agent from three (3)
Federal funds brokers of
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<PAGE>
recognized standing selected by the
Administrative Agent;
"Fee Letter" shall mean that certain fee letter dated
October 26, 2001 by and between JPMorgan
Chase Bank (successor by merger to The
Chase Manhattan Bank), DnB, Nordea,
Landesbank Schleswig-Holstein
Girozentrale, Hamburgische Landesbank
-Girozentrale-, NIB Capital Bank N.V. and
J.P. Morgan Securities Inc. and as
accepted and agreed by the Borrowers;
"Final Payment Date" shall mean the date which falls on the
fifth anniversary of the date of this
Agreement or, if such day is not a
Banking Day, the Final Payment Date shall
be the immediately preceding Banking Day
or such earlier date on which all sums
become due and payable under this
Agreement whether by prepayment,
acceleration or otherwise;
"Fitch" shall mean Fitch IBCA, Inc. and any
successor or successors thereto;
"Fixed Charges" for any period shall mean on a
consolidated basis the sum of (i) all
Rentals (other than Capitalized Rentals)
payable in respect of such period by OSG
and the Recourse Subsidiaries, and (ii)
all Interest Charges on all Indebtedness
(including the interest component of
Capitalized Rentals) of OSG and the
Recourse Subsidiaries;
"Funded Debt" of any Person shall mean all Debt of such
Person having a final maturity of more
than one year from the date of origin
thereof (or which is renewable or
extendible at the option of the obligor
for a period or periods more than one
year from the date of origin), excluding
the Current Portion of such Debt solely
to the extent that such Person has
sufficient availability under (i)
existing credit facilities (including
this Agreement) or (ii) underwritten
commitments on terms reasonably
satisfactory to the Administrative Agent
to refinance such Current Portion for a
period of at least 12 months;
"GAAP" shall mean generally accepted accounting
principles at the time in the United
States, except that (so long as the
Statement of Financial Accounting
Standards No. 94 (or any substantially
similar successor statement) is in
effect), with respect to financial
statements of OSG and the Recourse
Subsidiaries, the failure to consolidate
Non-Recourse Subsidiaries shall be deemed
to be in accordance with such principles;
"Guarantee" by any Person shall mean, without
duplication, any obligation (other than
endorsements in the ordinary course of
business of negotiable instruments for
deposit or collection), contingent or
10
<PAGE>
otherwise, of such Person (the
"Guarantor") directly or indirectly
guaranteeing or having the economic
effect of a guarantee of any Debt or
other obligation of any other Person and,
without limiting the generality of the
foregoing, any obligation, direct or
indirect, contingent or otherwise, of the
Guarantor (i) to purchase or pay (or
advance or supply funds for the purchase
or payment of) such Debt or other
obligation or any security therefor
(whether arising by virtue of partnership
arrangements, by agreement to keep-well,
to take-or-pay (or similar arrangements
involving the purchase of goods,
securities or services), or to maintain
working capital, equity capital or any
other financial statement condition or
liquidity of such other Person or
otherwise); or (ii) entered into for the
purpose of assuring in any other manner
the obligee of such Debt or other
obligation of the payment thereof or to
protect such obligee against loss in
respect thereof (in whole or in part);
provided that the term "Guarantee" used
as a verb has a corresponding meaning;
"Indebtedness" of any Person shall mean and include all
obligations of such Person which in
accordance with GAAP shall be classified
upon a balance sheet of such Person as
liabilities of such Person, and in any
event shall include all Debt of such
Person;
"Intangible Assets" shall mean, as of the date of any
determination thereof, goodwill, patents,
trade names, trademarks, copyrights,
franchises, experimental expenses,
organization expenses, unamortized debt
discount and expenses, deferred charges
(other than unamortized deferred drydock
costs, unterminated voyage expenses,
prepaid insurance, prepaid taxes, prepaid
charterhire and other prepaid items
properly excludable from intangible
assets under GAAP), the excess of cost of
shares acquired over fair value of
underlying tangible assets and such other
assets as are properly classified as
"intangible assets" in accordance with
GAAP;
"Interest Charges" for any period shall mean all interest
and all amortization of debt discount and
expense on any particular Indebtedness
for which such calculations are being
made;
"Interest Notice" means a notice from the Borrowers to the
Administrative Agent to be delivered to
the Administrative Agent at least three
(3) Banking Days prior to the end of any
then existing Interest Period and
specifying the duration of any relevant
Interest Period and certifying OSG's
current rating level and the
corresponding Applicable Margin, each
substantially in the form of Exhibit F;
"Interest Period" shall mean with respect to any Advance,
(a) each seven (7) day period (a "Seven
Day Interest Period") or each one (1),
three (3), six (6) or twelve (12) month
period commencing on the date such
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<PAGE>
Advance is made or the last day of the
next preceding Interest Period with
respect to such Advance and ending on the
seventh (7th) day thereafter or on the
same day in the first, third, sixth or
twelfth calendar month thereafter, in
each case, as selected by the Borrowers
in the Interest Notice or, (b) in the
Administrative Agent's discretion, such
other period(s) not to exceed twelve (12)
months as may be agreed by the Majority
Banks, or, (c) in the Banks' discretion,
such other period(s) in excess of twelve
(12) months as may be agreed; provided,
however, (x) in each case, that each such
Interest Period (if such Interest Period
is a whole number of months) which
commences on the last Banking Day of a
calendar month (or on any day for which
there is no numerically corresponding day
in the appropriate subsequent calendar
month) shall end on the last Banking Day
of the appropriate subsequent calendar
month, (y) that if no LIBOR Rate is
quoted or available for a 12 month
Interest Period or a Seven Day Interest
Period, the Borrowers shall not request,
and the Lenders need not fund, a 12 month
Interest Period or a Seven Day Interest
Period, as the case may be, and (z) there
shall be no more than two Seven Day
Interest Periods outstanding at any time.
If at the end of any then existing
Interest Period the Borrowers fail to
deliver an Interest Notice or an Event of
Default shall have occurred and be
continuing, the relevant Interest Period
shall be one month.
Notwithstanding the foregoing, (i) no
Interest Period may extend beyond the
Final Payment Date; (ii) each Interest
Period which would otherwise end on a day
which is not a Banking Day shall end on
the next succeeding Banking Day (or, if
such next succeeding Banking Day falls in
the next succeeding calendar month, on
the next preceding Banking Day); and
(iii) each Interest Period which would
otherwise commence before and end after
the Final Payment Date shall end on the
Final Payment Date;
"Investments" shall mean all investments, regardless of
the form of consideration paid therefor,
directly or indirectly in any Person,
whether by acquisition of shares of
capital stock, indebtedness or other
obligations or Securities or by loan,
advance, capital contribution or
otherwise; provided, however, that
"Investments" shall not mean or include
routine investments in property to be
used or consumed in the ordinary course
of business;
"ISM Code" shall mean the International Safety
Management Code for the Safe Operating of
Ships and for Pollution Prevention
constituted pursuant to Resolution
A.741(18) of the International Maritime
Organization and incorporated into the
Safety of Life at Sea
12
<PAGE>
Convention and shall include any
amendments or extensions thereto and any
regulation issued pursuant thereto;
"Joint Venture" shall mean at any date any Person (other
than a Subsidiary) in which OSG or any
Subsidiary has an ownership interest or
profits or loss which would be accounted
for in the consolidated financial
statements of OSG and its consolidated
Subsidiaries by the equity method if such
statements were prepared as of such date;
"judgment currency" shall have the meaning ascribed thereto
in Section 11.7(a);
"Law" shall mean any law, rule, regulation or
official code, consent decree,
constitution, decree, directive,
enactment, guideline, injunction,
interpretation, judgment, order,
ordinance, policy statement,
proclamation, promulgation, requirement,
rule of law, rule of public policy,
settlement agreement, statute, or writ,
of any Authority;
"LIBOR Rate" shall mean, with respect to any Interest
Period for any Advance, the rate per
annum determined by the Administrative
Agent to be equal to the quotient
(rounded upwards, if necessary, to the
next higher 1/16 of 1%) of (y) (i) the
rate of interest for deposits in Dollars
for a period equal to the number of days
in such Interest Period (or, in the case
of a Seven Day Interest Period, if
greater, the rate of interest for
deposits in Dollars for a one month
period) which appears on the Telerate
Page 3750 as of 11:00 A.M., London time,
on the day that is two (2) Banking Days
prior to the first day of such Interest
Period, or (ii) if such rate does not
appear on the Telerate Page 3750 at such
time, the rate per annum at which
deposits in Dollars are offered to the
Administrative Agent in immediately
available funds at its LIBOR lending
office in an amount comparable to the
principal amount of such Advance for a
period equal to such Interest Period (or,
in the case of a Seven Day Interest
Period, if greater, the rate of interest
for deposits in Dollars for a one month
period) at approximately 10:00 A.M., New
York City time, on the date two (2)
Banking Days before the first day of such
Interest Period, divided by (z) a number
equal to 1.00 minus the LIBOR Rate
Reserve Percentage;
"LIBOR Rate Reserve Percentage" shall mean, for any day, the maximum
percentage (expressed as a decimal)
specified from time to time by the Board
of Governors of the Federal Reserve
System (or any successor) for determining
the maximum reserve requirements
(including, but not limited to,
supplemental, marginal and emergency
reserves) with respect to eurocurrency
funding (currently referred to as
"Eurocurrency Liabilities") of a member
bank in such System. The LIBOR Rate
13
<PAGE>
shall be adjusted automatically with
respect to any Advance outstanding on the
effective date of any change in the LIBOR
Rate Reserve Percentage, as of such
effective date;
"Lien" shall mean, with respect to any asset,
any interest in such asset securing an
obligation owed to, or a claim by, a
Person other than the owner of the asset,
whether such interest is based on the
common law, statute or contract, and
including but not limited to the security
interest or lien arising from a mortgage,
encumbrance, pledge, conditional sale,
title retention agreement or trust
receipt or a lease, consignment or
bailment for security purposes or any
arrangement having substantially the same
economic effect as any of the foregoing.
The term "Lien" shall include
reservations, exceptions, encroachments,
easements, rights-of-way, covenants,
conditions, restrictions, leases and
other title exceptions and encumbrances
(including, with respect to stock, any
purchase options or calls, stockholder
agreements, voting trust agreements,
buy-back agreements and all similar
arrangements) affecting property. For the
purposes of this Agreement, OSG or a
Recourse Subsidiary shall be deemed to be
the owner of any property which it has
acquired or holds subject to a
conditional sale agreement, Capitalized
Lease or other arrangement pursuant to
which title to the property has been
retained by or vested in some other
Person for security purposes and such
retention or vesting shall constitute a
Lien;
"List of Vessels" shall mean a list of vessels more than
fifty percent (50%) owned directly or
indirectly by the Borrowers or any
Subsidiary, which list shall describe
each Lien on any such vessel;
"Majority Banks" shall mean Banks, the dollar amount of
whose aggregate Commitments exceed
one-half of the total Commitments or if
the Commitments have terminated, Banks
holding in the aggregate a dollar amount
in excess of one-half of the Facility
Balance;
"Material Adverse Change" shall mean the occurrence of an event or
condition which (a) materially impairs
the ability of OSG and the Subsidiaries
to meet or perform any of their
obligations with regard to (i) the
Facility and the financing arrangements
established in connection therewith or
(ii) any of their respective other
obligations that are material to OSG and
the Subsidiaries considered as a whole;
or (b) materially impairs the rights of
or benefits or remedies available to the
Banks under this Agreement;
"Material Financial Obligations" means a principal or face amount of Debt
(in the case of Derivative Obligations,
determined in respect of any counterparty
on a net basis), in each case of OSG
and/or one or more of the Subsidiaries
and arising in one or more related or
unrelated
14
<PAGE>
transactions, exceeding in the aggregate
$10,000,000 (or its equivalent in any
other currency);
"Material Subsidiary" shall mean, at any date, each of the
following: (i) any Subsidiary (other than
OSG Bulk or OSG International) which
owns, leases or charters any vessel on
such date and/or (ii) any Subsidiary or
Subsidiaries the assets of which,
individually or in the aggregate, had an
aggregate book value (net of
depreciation) as of the date of the
consolidated balance sheet of OSG and the
Subsidiaries most recently delivered or
required to be delivered to the
Administrative Agent pursuant to Section
8.1(d) prior to such date, in excess of
the lesser of (x) $50,000,000 and (y) 2%
of the aggregate book value (net of
depreciation) of all assets of OSG and
the Subsidiaries as of the date of such
balance sheet;
"Materials of Environmental shall have the meaning ascribed thereto
Concern" in Section 7.1(h);
"Minority Interests" shall mean any shares of stock of any
class of a Subsidiary (other than
directors' qualifying shares as required
by law) that are not owned by OSG and/or
one or more of the Recourse Subsidiaries.
Minority Interests shall be valued by
valuing Minority Interests constituting
preferred stock at the voluntary or
involuntary liquidation value of such
preferred stock, whichever is greater,
and by valuing Minority Interests
constituting common stock at the book
value of capital and surplus applicable
thereto adjusted, if necessary, to
reflect any changes from the book value
of such common stock required by the
foregoing method of valuing Minority
Interests in preferred stock;
"Moody's" shall mean Moody's Investors Service,
Inc.;
"Multiemployer Plan" shall mean a "multiemployer plan" (as
defined in Section 4001(a)(3) of ERISA)
to which any Borrower or any ERISA
Affiliate is making or accruing an
obligation to make contributions or has
within any of the preceding five plan
years made or accrued an obligation to
make contributions;
"Multiple Employer Plan" shall mean an employee benefit plan,
other than a Multiemployer Plan, subject
to Title IV of ERISA to which any
Borrower or ERISA Affiliate, and one or
more employers other than a Borrower or
ERISA Affiliate, is making or accruing an
obligation to make contributions or, in
the event that any such plan has been
terminated, to which a Borrower or ERISA
Affiliate made or accrued an obligation
to make contributions during any of the
five plan years preceding the date of
termination of such plan;
"Net Income Available for for any period shall mean Consolidated
Net Income excluding
15
<PAGE>
Fixed Charges" extraordinary gains or losses (adjusted
for taxes, if any) during such period
plus (to the extent used in the
determination of Consolidated Net
Income), (i) all provisions for any
Federal, state or other taxes based on
income made by OSG and the Recourse
Subsidiaries during such period and (ii)
Fixed Charges during such period;
"Non-Recourse Debt" shall mean Debt of any Subsidiary (i)
that is not Guaranteed by OSG or any
Recourse Subsidiary, (ii) that is not
secured by a Lien on any asset of OSG or
any Recourse Subsidiary and (iii) with
respect to which Debt or Subsidiary
neither OSG nor any of the Recourse
Subsidiaries has any express obligation
or has written any instrument or letter
indicating its support for such Debt or
Subsidiary; provided that Debt of such
Subsidiary shall constitute Non-Recourse
Debt only if (x) OSG shall have given the
Banks, through the Administrative Agent,
written notice at least twenty (20) days
prior to the incurrence, issuance,
assumption or Guarantee thereof (or, in
the case of Debt of a Person to be
acquired by such Subsidiary, prior to the
time of such acquisition) and (y) the
terms and conditions of the related
documentation insofar as they relate to
the non-recourse nature of such Debt, and
the final form of such documentation with
respect thereto, shall be reasonably
satisfactory to the Majority Banks;
"Non-Recourse Subsidiary" shall mean, at any time, a Subsidiary of
OSG (i) having no Debt at such time
(other than Non-Recourse Debt) and (ii)
as to which an officer of OSG has, prior
to the issuance, incurrence, assumption
or Guarantee of any Non-Recourse Debt by
such Subsidiary, delivered a certificate
to the Administrative Agent certifying
that such Subsidiary is a Non-Recourse
Subsidiary in accordance with the terms
of this Agreement;
"Note" shall mean a promissory note, to be
executed by the Borrowers in favor of a
Bank pursuant to Section 3.1(b) to
evidence the Advances made by such Bank
and substantially in the form set out in
Exhibit C or in such other form as the
Administrative Agent may agree and shall
include any promissory note issued by the
Borrowers pursuant to Section 10.3,
collectively, the "Notes";
"Operating Assets" of OSG and the Recourse Subsidiaries
shall mean, as of the date of any
determination thereof, all assets of such
Person as determined in accordance with
GAAP other than Cash and marketable
securities of OSG and the Recourse
Subsidiaries;
"Operator" shall mean, in respect of any of the
Borrowers' vessels, the Person who is
concerned with the operation of such
vessel and falls within the definition of
"Company" set out in rule 1.1.2 of the
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<PAGE>
ISM Code;
"OSG" shall have the meaning ascribed thereto
in the preamble;
"OSG Bulk" shall have the meaning ascribed thereto
in the preamble;
"OSG International" shall have the meaning ascribed thereto
in the preamble;
"Participant" shall have the meaning ascribed thereto
in Section 10.2;
"PBGC" shall mean the Pension Benefit Guaranty
Corporation;
"Permitted Country(ies)" shall mean any or all of the following:
United States of America, United Kingdom,
Ireland, France, Belgium, the
Netherlands, Germany, Sweden, Denmark,
Norway, Switzerland, Finland, Austria,
Spain, Portugal, Italy, Luxembourg,
Canada and Japan;
"Permitted Investments" shall mean any of the following:
(a) Investments in commercial paper
maturing in 270 days or less from
the date of issuance which, at the
time of acquisition by OSG or any
Subsidiary, is rated one of the two
highest ratings by S&P or by
Moody's or any substantially
similar commercial paper or
short-term ratings by any other
nationally recognized credit rating
agency domiciled in the United
States of America or the United
Kingdom which in the reasonable
opinion of the Majority Banks is of
similar standing and with
comparable rating categories and
methodologies (a "Substitute Rating
Agency");
(b) Investments in obligations directly
issued by or fully and
unconditionally guaranteed as to
principal and interest by the
United States of America or any
agency or instrumentality of the
United States of America, in either
case, maturing in three (3) years
or less from the date of
acquisition thereof;
(c) Investments in certificates of
deposit, time deposits or bankers'
acceptances issued by a Bank or any
other bank or trust company
organized under the laws of any
Permitted Country or any state
thereof, having capital, surplus
and undivided profits aggregating
at least $500,000,000 maturing in
270 days or less from the date of
acquisition thereof;
(d) Investments in indebtedness of any
governmental body of the United
States of America or any State or
political
17
<PAGE>
subdivision thereof, which
indebtedness is at all times
accorded one of the two highest
ratings by S&P, Moody's, or a
Substitute Rating Agency maturing
not later than three (3) years from
the date of acquisition thereof
(or, if maturing more than three
(3) years after the date of
acquisition, which is subject to a
put at par by the holder thereof on
a weekly or more frequent basis);
(e) Investments in money market
investment programs which are
classified as a current asset in
accordance with GAAP and which are
administered by reputable financial
institutions having capital,
surplus and undivided profits of at
least $500,000,000 and which are
registered under the Investment
Company Act of 1940, as amended;
and
(f) investments in money market and
auction rate preferred stocks rated
"A" or better by S&P or Moody's or
a similar category by a Substitute
Rating Agency;
"Person" shall mean an individual, partnership,
corporation, limited liability company,
business trust, bank, trust company,
joint venture, association, joint stock
company, trust or other unincorporated
organization, whether or not a legal
entity, or any government or agency or
political subdivision thereof;
"Plan" shall mean any employee pension benefit
plan (other than a Multiemployer Plan or
a Multiple Employer Plan) covered by
Title IV of ERISA or Section 302 of ERISA
or Section 412 of the Code;
"rate of exchange" shall have the meaning ascribed thereto
in Section 11.7(d);
"Recourse Subsidiaries" shall mean all Subsidiaries of OSG other
than the Non-Recourse Subsidiaries;
"Regulation T" shall mean Regulation T of the Board of
Governors of the Federal Reserve System,
as in effect from time to time;
"Regulation U" shall mean Regulation U of the Board of
Governors of the Federal Reserve System,
as in effect from time to time;
"Regulation X" shall mean Regulation X of the Board of
Governors of the Federal Reserve System,
as in effect from time to time;
"Rentals" shall mean and include as of the date of
any determination thereof all fixed
payments (including as such all payments
which the lessee is obligated to make to
the lessor on termination of the lease or
surrender of the property) payable by a
Person, as lessee
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or sublessee under a lease of real or
personal property (excluding fixed
payments on any item of personal property
involving rentals of less than $1,000 per
month each and $10,000 per month in the
aggregate), but shall be exclusive of any
amounts required to be paid by such
Person, directly or indirectly (whether
or not designated as rents or additional
rents), on account of maintenance,
repairs, insurance, taxes and similar
charges incurred by such lessee or
sublessee. Fixed rents under any
so-called "percentage leases" shall be
computed solely on the basis of the
minimum rents, if any, required to be
paid by the lessee regardless of sales
volume or gross revenues;
"Replacement Bank" shall have the meaning ascribed thereto
in Section 11.8 of this Agreement;
"Restricted Funds" shall mean restricted funds established
and maintained pursuant to Title XI
reserve fund and financial agreements
between OSG or any of the Subsidiaries
and the Secretary of Transportation in
accordance with Title XI of the Merchant
Marine Act, 1936, as amended, and the
regulations promulgated thereunder;
provided that "Restricted Funds" shall
mean, for any period, the aggregate
amount on deposit in Restricted Funds as
so defined as of the last day of such
period, as the same is reflected in a
consolidated balance sheet of OSG and the
Subsidiaries as of such date;
"Restricted Investments" shall mean all Investments by OSG or any
Recourse Subsidiary in any Person or
property except the following:
(a) Permitted Investments;
(b) Cash;
(c) Investments in Shipping and Related
Businesses ;
(d) Investments by OSG and the Recourse
Subsidiaries in and to Recourse
Subsidiaries, including any
Investment in a corporation which,
after giving effect to such
Investment, will become a Recourse
Subsidiary;
(e) Investments in property to be used
in the ordinary course of business;
(f) Investments in marketable
securities (as defined in
accordance with GAAP); and
(g) Investments (in addition to those
listed in (a) through (f) above) in
Persons not engaged in Shipping and
Related Businesses and which are
not Recourse Subsidiaries in an
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amount (excluding Investments
existing as of the date of this
Agreement) not to exceed the sum of
(i) $10,000,000 plus (ii) 10% of
Consolidated Tangible Net Worth;
"Sale and Leaseback shall mean any arrangement with any
Transaction" Person to which such Person is a party,
(not including, in either case, OSG or
any Recourse Subsidiary) providing for
the leasing by OSG or a Recourse
Subsidiary for a period, including
renewals, in excess of three years of any
asset which has been or is to be sold or
transferred more than 180 days after the
acquisition or occupancy thereof or the
completion of construction and
commencement of full operation thereof,
whichever is later, by OSG or any
Recourse Subsidiary to such Person;
"Secured Debt" shall mean all Debt of OSG or any of the
Recourse Subsidiaries which is secured by
a Lien on any of the property or assets
of OSG or any of the Recourse
Subsidiaries;
"Securities and Exchange shall mean the United States Securities
Commission" and Exchange Commission or any other
governmental authority of the United
States of America at the time
administrating the Securities Act of
1933, as amended, the Investment Company
Act of 1940, as amended, or the Exchange
Act;
"Security" shall have the same meaning as in Section
2(1) of the Securities Act of 1933, as
amended;
"Security Documents" shall have the meaning ascribed thereto
in Section 8.1(t);
"Seven Day Interest Period" "Seven Day Interest Period" shall have
the meaning ascribed thereto in the
definition of "Interest Period";
"Shipping and Related shall mean any one or all of the
Businesses" following: owning, chartering, leasing,
crewing, navigating, managing, supplying
or operating or repairing commercial
vessels of all kinds, including but not
limited to cargo ships, liners, container
ships, passenger vessels, tugs, barges
and ferries; owning, operating or
managing transportation assets ancillary
to or in furtherance of the
transportation of freight and passengers
by water; owning, operating or managing
terminals and other facilities of any
kind incidental or ancillary to or in
furtherance of the transportation of
freight and passengers by water; and
owning, managing or operating terminals,
docks, piers, quays, wharves, dry docks,
storage facilities and port facilities
incidental or ancillary to or in
furtherance of the transportation of
freight and passengers by water;
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"Shipping Manager" shall mean (a) the principal companies
that, as of the date of this Agreement,
are acting as agent for OSG and the
Subsidiaries in respect of ships owned,
leased or chartered by, and is providing
substantially all of the general and
administrative services to, OSG and the
Subsidiaries, or (b) any Person, if, for
the period of two consecutive years after
the date of formation of such Person, all
or substantially all of the executive
officers and directors of such Person
were executive officers or directors, as
the case may be, of the Shipping Manager
immediately prior to the formation of
such Person, (except for any executive
officer or director who shall have been
appointed or elected to such position as
a result of any death, disability,
retirement or incapacity of any such
executive officer or director);
"S&P" shall mean Standard & Poor's Ratings
Services, a division of McGraw-Hill Inc.;
"SMC" means the safety management certificate
issued in respect of any of the
Borrowers' vessels in accordance with
rule 13 of the ISM Code;
"Subordinated Funded Debt" shall mean all unsecured Funded Debt of
the Borrowers which shall contain or have
applicable thereto subordination
provisions (reasonably satisfactory to
the holders of not less than 66 2/3% in
aggregate principal amount of the
Commitments or, if the Commitments have
been terminated, of the Facility Balance)
providing for the subordination of such
unsecured Funded Debt to other Debt of
the Borrowers, including, without
limitation, to the Notes;
"subsidiary" shall mean as to any particular Person,
at any date, any corporation, limited
liability company, partnership or other
entity of which more than 50% (by number
of votes of the Voting Stock or other
ownership interests having ordinary
voting power) are beneficially owned or
controlled, directly or indirectly, by
such Person and/or one or more other
subsidiaries of such Person;
"Subsidiary(ies)" shall mean a/the subsidiary(ies) of OSG;
"Subsidiary Structurally shall mean, as of the date of any
Subordinated Assets" determination thereof, for any Recourse
Subsidiary (other than OSG Bulk and OSG
International), an amount equal to the
Debt which is not Secured Debt plus
one-third (1/3) of an amount equal to (i)
the total Book Value of assets minus (ii)
the total amount of Debt which is not
Secured Debt;
"Syndication Agent" shall have the meaning ascribed thereto
in the preamble;
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"Tangible Assets" shall mean, as of the date of
determination thereof, the Book Value of
assets of OSG and the Recourse
Subsidiaries (less depreciation,
depletion and other properly deductible
valuation reserves) after deducting
Intangible Assets therefrom;
"Taxes" shall mean any present or future income
or other taxes, levies, duties, charges,
fees, deductions or withholdings of any
nature now or hereafter imposed, levied,
collected, withheld or assessed by any
taxing authority whatsoever, except for
taxes on or measured by the overall net
income of any Bank imposed by the United
States of America, the State or The City
of New York or any governmental
subdivision or taxing authority of any
thereof or by any other taxing authority
having jurisdiction over such Bank
(unless such jurisdiction is asserted
solely by reason of the activities of the
Borrower or any of the Subsidiaries);
"Termination Event" shall mean (i) a "reportable event," as
such term is defined in Section 4043 of
ERISA, (ii) the withdrawal of any
Borrower or any ERISA Affiliate from a
Multiple Employer Plan during a plan year
in which it was a "substantial employer,"
as such term is defined in Section
4001(a)(2) of ERISA, or the incurrence of
liability by any Borrower or any ERISA
Affiliate under Section 4064 of ERISA
upon the termination of a Multiple
Employer Plan, (iii) the filing of a
notice of intent to terminate a Plan
under Section 4041 of ERISA or the
termination or the treatment of a
Multiemployer Plan amendment as a
termination under Section 4041A of ERISA,
(iv) the institution of proceedings to
terminate a Plan or a Multiemployer Plan
or (v) any other event or condition which
might constitute grounds under Section
4042 of ERISA for the termination of, or
the appointment of a trustee to
administer, any Plan or Multiemployer
Plan;
"Unencumbered Assets" shall mean, as of the date of any
determination thereof, Tangible Assets
(excluding the Book Value of any assets
of any Subsidiaries, the shares of stock
or any evidence of Indebtedness of which
have been pledged to secure any
obligations) less the sum of (without
duplication) (i) Attributable Debt and
(ii) the Book Value of any assets of OSG
and any Recourse Subsidiary which have
become or have been agreed to become
subject to a Lien securing any Secured
Debt and (iii) Subsidiary Structurally
Subordinated Assets;
"Unsecured Debt" shall mean, as of the date of any
determination thereof, all Debt of OSG
and the Subsidiaries other than Secured
Debt;
"Unterminated Voyage shall mean, as of the date of any
Revenues" determination thereof, accrued but unpaid
revenues for uncompleted voyages the
amounts thereof determined in accordance
with GAAP as reflected in the
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consolidated financial statements of OSG
and the Recourse Subsidiaries;
"Vessel Collateral" shall have the meaning ascribed thereto
in Section 8.1(t);
"Voting Stock" shall mean, with respect to any Person,
Securities of any class or classes, the
holders of which are ordinarily, in the
absence of contingencies, entitled to
elect a majority of the corporate
directors (or Persons performing similar
functions) of such Person; and
"Withdrawal Liability" shall have the meaning given to such term
under Part 1 of Subtitle E of Title IV of
ERISA.
1.2. Computation of Time Periods; Other Definitional Provisions. In this
Agreement and the Notes, in the computation of periods of time from a specified
date to a later specified date, the word "from" means "from and including" and
the words "to" and "until" each mean "to but excluding"; words importing either
gender include the other gender; references to "writing" include printing,
typing, lithography, electronic and other means of reproducing or capable of
reproducing words in a tangible visible form; the words "including," "includes"
and "include" shall be deemed to be followed by the words "without limitation";
references to agreements and other contractual instruments (including this
Agreement and the Notes) shall be deemed to include all subsequent amendments,
amendments and restatements, supplements, extensions, replacements and other
modifications to such instruments (without, however, limiting any prohibition on
any such amendments, extensions and other modifications by the terms of this
Agreement or the Notes); references to any matter that is "approved" or requires
"approval" of a party shall mean approval given in the sole and absolute
discretion of such party unless otherwise specified; words importing the
singular number only shall include the plural and vice versa (except as
indicated), as may be appropriate; references to any Person shall include such
Person, its successors and permitted assigns and transferees.
1.3. Accounting Terms. Unless otherwise specified herein, all accounting terms
used in this Agreement and in the Notes shall be interpreted, and all financial
statements and certificates and reports as to financial matters required to be
delivered to the Administrative Agent or to the Banks under this Agreement shall
be prepared, in accordance with GAAP as in effect from time to time.
2. THE ADVANCES
2.1. Advances. Each of the Banks, relying upon each of the representations and
warranties set out in Section 7, hereby severally, and not jointly, agrees with
the Borrowers that, subject to and upon the terms of this Agreement, it will on
the Drawdown Dates from time to time during the Facility Period make its portion
of the Advances available through the Administrative Agent, to the Borrowers,
ratably with the other Banks according to their respective Commitments;
provided, however, that at no time shall the outstanding aggregate principal
amount of the Advances made by any Bank exceed the Bank's Commitment or the
outstanding aggregate principal amount of all Advances of all Banks hereunder
exceed the total Commitments of all the Banks. The proceeds of the Advances
shall be utilized for lawful corporate purposes; provided,
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<PAGE>
however, that such proceeds may not be used for hostile acquisitions of
substantially all the assets or securities of another company without the prior
consent of the Majority Banks. Multiple Advances may be outstanding at any one
time during the Facility Period; provided, however, that there shall be no more
than ten (10) different Interest Periods relating to the Advances outstanding at
any one time. Within the foregoing limits of this Section 2.1 and upon the
conditions herein provided, the Borrowers may from time to time borrow pursuant
to this Section 2.1, repay Advances pursuant to Section 4 and reborrow pursuant
to this Section 2.1.
2.2. Drawdown Notice. The Borrowers shall, in respect of all Advances, serve a
written notice (a "Drawdown Notice") on the Administrative Agent (which shall
promptly furnish a copy to each Bank) not later than 11:00 A.M., New York City
time, at least three (3) Banking Days prior to the date of the proposed Advance.
Each Drawdown Notice shall specify (a) the date of the proposed borrowing which
shall be a Banking Day, (a "Drawdown Date"), (b) the aggregate principal amount
of the Advance to be made by the Banks on that date, (c) the Interest Period
requested by the Borrowers, which Period may end no later than the Maturity
Date, (d) the locations and account(s) to which the proceeds of such Advance
shall be disbursed, and (e) the name of the Borrower(s) which will draw down
such Advance. Each Drawdown Notice shall be effective upon receipt by the
Administrative Agent, shall be irrevocable and shall be in the form set out in
Exhibit D.
2.3. Effect of Drawdown Notice. Each Drawdown Notice shall be deemed to
constitute a warranty by the Borrowers: (a) that the representations and
warranties stated in Section 7 are true and correct on the date of such Drawdown
Notice and will be true and correct on the applicable Drawdown Date as if made
on such date to the extent provided in Section 3.2(b), and (b) that no Default
or Event of Default has occurred and is continuing on the date of such Notice or
will occur and be continuing on such Drawdown Date or would result from the
making of such Advance.
2.4. Funding of Advances. Upon receipt of a Drawdown Notice, the Administrative
Agent shall promptly notify each Bank of the contents thereof and of such Bank's
share of the proposed Advance.
(a) Not later than 11:00 A.M. (New York City time) on the Drawdown
Date of each Advance, each Bank shall (except as provided in subsection (b) of
this Section) make available its share of such Advance, in Federal or other
funds immediately available in New York City, to the Administrative Agent at its
address set forth on Schedule I or to such account of the Administrative Agent
most recently designated by it for such purpose by notice to the Banks. Unless
the Administrative Agent determines that any applicable condition specified in
Section 3.1 or 3.2 has not been satisfied, the Administrative Agent will make
the funds so received from the Banks available to the Borrowers at the aforesaid
address, subject to the receipt of funds by the Administrative Agent as provided
in the immediately preceding sentence, not later than 2:30 P.M. (New York City
time) on the date of such Advance, and in any event as soon as practicable after
receipt.
(b) If any Bank makes a new Advance hereunder to any Borrower on a
day on which such Borrower is to repay all or any part of an outstanding Advance
from such Bank, such Bank shall apply the proceeds of its new Advance to make
such repayment and only an amount equal to the difference (if any) between the
amount being borrowed from such Bank by such
24
<PAGE>
Borrower and the amount being repaid to such Bank shall be made available by
such Bank to the Administrative Agent as provided in subsection (b) of this
Section, or remitted by such Borrower to the Administrative Agent for repayment
to such Bank, as the case may be.
(c) Unless the Administrative Agent shall have received notice from
a Bank prior to the Drawdown Date of any Advance that such Bank will not make
available to the Administrative Agent such Bank's share of such Advance, the
Administrative Agent may assume that such Bank has made such share available to
the Administrative Agent on the date of such Advance in accordance with
subsections (a) and (b) of this Section 2.4 and the Administrative Agent may, in
reliance upon such assumption, make available to the Borrowers on such date a
corresponding amount. If and to the extent that such Bank shall not have so made
such share available to the Administrative Agent, such Bank and the Borrowers
(but without duplication) severally agree to repay to the Administrative Agent
forthwith on demand such corresponding amount together with interest thereon,
for each day from the date such amount is made available to the Borrowers until
the date such amount is repaid to the Administrative Agent, at (i) in the case
of the Borrowers, a rate per annum equal to the higher of (y) the Federal Funds
Rate and (z) the interest rate applicable thereto pursuant to Section 5.1(a) and
(ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay
to the Administrative Agent such corresponding amount, such amount so repaid
shall constitute such Bank's Advance included in such Advance for purposes of
this Agreement as of the date such Advance was made. Nothing in this subsection
(d) shall be deemed to relieve any Bank of its obligation to make Advances to
the extent provided in this Agreement. In the event that the Borrowers are
required to repay an Advance to the Administrative Agent pursuant to this
Section 2.4(c), as between the Borrowers and the defaulting Bank, the liability
for any breakage costs as described in Section 11.6 shall be borne by the
defaulting Bank. If the defaulting Bank has not paid any such breakage costs
upon demand by the Administrative Agent therefor, the Borrowers shall pay such
breakage costs upon demand by the Administrative Agent and the Borrowers shall
be entitled to recover any such payment for breakage costs made by the Borrowers
from the defaulting Bank.
2.5. Notation of Advances. Each Advance made by a Bank to the Borrowers may be
evidenced by a notation of the same made by such Bank on the applicable grid
attached to such Bank's Note, which notation, absent manifest error, shall be
prima facie evidence of the amount of the relevant Advance.
2.6. Reduction of the Commitments.
(a) Subject to Section 2.9, the Borrowers may from time to time
reduce the Commitments of the Banks by $10,000,000 or any larger multiple of
$1,000,000 upon five (5) Banking Days' written notice to the Administrative
Agent (which shall promptly notify each Bank). Any such reduction shall be
permanent and irrevocable and pro rata among the Banks ratably in accordance
with their respective Commitments; provided that no reduction in Commitments
shall be made if, after giving effect to such reduction of the Commitments and
any concurrent prepayment of Advances, the aggregate Commitments shall be less
than the aggregate principal amount of all outstanding Advances.
(b) On the Final Payment Date, the Commitments shall be reduced to
zero and any Advances then outstanding (together with accrued interest thereon)
shall be due and payable on such date.
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<PAGE>
(c) Upon the effectiveness of any reduction pursuant to Section
2.6(a) hereof, the term "Commitment" shall mean the Commitments of each Bank in
effect immediately prior to such reduction less the amount of such reduction of
the Commitment.
2.7. Mandatory Prepayments. If at any time the aggregate principal amount of
outstanding Advances shall exceed the aggregate Commitments, then the Borrowers
shall immediately prepay the Advances in an amount equal to such excess together
with any compensation due pursuant to the provisions of Section 11.6.
2.8. Several Obligations. The failure of any Bank to make any Advance to be made
by it on the date specified therefor shall not relieve any other Bank of its
obligation to make its Advance on such date, and none of the Agents nor any Bank
shall be responsible for the failure of any other Bank to make an Advance to be
made by such other Bank.
2.9. Pro Rata Treatment. Each borrowing from the Banks hereunder shall be made
from the Banks, each payment of the Commitment Fee or other fees and expenses
under Section 12 shall be made for account of the Banks, and each termination or
reduction of the amount of the Commitments shall be applied to the Commitments
of the Banks, pro rata according to the amounts of their respective Commitments;
each payment or prepayment of principal of Advances by the Borrowers shall be
made for account of the Banks pro rata in accordance with the respective unpaid
principal amounts of the Advances made by the Banks; and each payment of
interest on Advances by the Borrowers shall be made for the account of the Banks
pro rata in accordance with the amounts of interest due and payable to the
respective Banks.
3. CONDITIONS
3.1. Conditions Precedent to Availability of the Facility. The obligation of the
Banks to make the Facility available to the Borrowers under this Agreement shall
be expressly subject to the following conditions precedent:
(a) Corporate Authority. The Administrative Agent shall have
received the following documents in form and substance satisfactory to the
Administrative Agent and its legal advisers:
(i) copies of the resolutions adopted by the board of directors of
each Borrower, certified as true and complete by an officer of such
Borrower, evidencing approval of this Agreement and the Notes and
authorizing an appropriate officer or officers or attorney-in-fact or
attorneys-in-fact of each such Borrower to execute the same on its behalf;
(ii) copies from each Borrower, certified as true and complete by an
officer of such Borrower, of all documents evidencing any other necessary
action, approvals or consents with respect to this Agreement and the Notes
and the transactions contemplated hereby and thereby;
(iii) copies from each Borrower, certified as true and complete by
an officer of such Borrower, of the certificate or articles of
incorporation and by-laws or similar constituent document thereof;
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<PAGE>
(iv) a good standing certificate (or, in the case of OSG
International, the equivalent thereof) issued by the jurisdiction of
incorporation or formation of each of the Borrowers; and
(v) a certificate signed by the President, Treasurer, Comptroller,
Controller or chief financial officer of each of the Borrowers to the
effect that (A) no Default or Event of Default shall have occurred and be
continuing and (B) the representations and warranties of the Borrowers
contained in this Agreement are true and correct as of the date of such
certificate.
(b) The Agreement and the Notes. The Borrowers shall have duly
executed and delivered this Agreement and the Notes to the Administrative Agent.
(c) The Creditors. The Administrative Agent shall have received
executed counterparts of this Agreement from each of the Banks and the Agents
(or, in the case of any Bank as to which an executed counterpart shall not have
been received, the Administrative Agent shall have received in form satisfactory
to it a telex, facsimile or other written confirmation from such Bank of the
execution of a counterpart of this Agreement by such Bank).
(d) Fees. The Creditors shall have received payment in full of all
other fees and expenses due to each thereof pursuant to the terms hereof on the
date when due including, without limitation, all fees and expenses due under
Section 12 and all fees and expenses due pursuant to the Fee Letter shall have
been received in full by the parties thereto.
(e) Environmental Claims. None of the Borrowers nor any Subsidiary
is subject to any Environmental Claim which could reasonably be expected to
result in a Material Adverse Change.
(f) Legal Opinions. The Administrative Agent shall have received
opinions addressed to the Agents from (i) Proskauer Rose LLP, special counsel to
the Borrowers, (ii) Robert N. Cowen, Esq., Senior Vice President and Chief
Operating Officer of OSG and counsel to OSG and OSG Bulk, (iii) Mark A. Lowe,
Esq., counsel to OSG International, and (iv) Seward & Kissel LLP, special
counsel to the Agents, in the forms attached hereto as Exhibits G through J and
including such other legal opinions as the Banks shall have required as to all
or any matters under the laws of the State of Delaware, the United States of
America, the State of New York and the Republic of the Marshall Islands covering
the conditions and representations and warranties which are the subjects of
Sections 3 and 7, respectively.
(g) Appointment of Process Agent. The Administrative Agent shall
have received a duly executed copy of the acceptance by OSG Ship Management,
Inc. of its appointment as agent for service of process for OSG International,
which acceptance shall be in such form and substance as may be reasonably
satisfactory to the Administrative Agent.
(h) Officer's Certificate. The Administrative Agent shall have
received a certificate signed by the President or chief financial officer of OSG
certifying that under Applicable Law existing on the date hereof, no Borrower
shall be compelled by law to withhold or deduct any Taxes from any amounts to
become payable to the Administrative Agent for the account of the Administrative
Agent or the Creditors hereunder.
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(i) Insurance. Receipt by the Administrative Agent of certificates
of insurance or other evidence satisfactory to it indicating the existence and
effectiveness of the insurance required to be maintained by or on behalf of OSG,
the Subsidiaries and the Joint Ventures pursuant to Section 8.1(m).
(j) Reduction of Existing Credit Facility. The Administrative Agent
shall have received evidence that the commitments of the banks and other lenders
under the Existing Credit Facility have been reduced to $126,000,000.
(h) List of Vessels. The Administrative Agent shall have received a
List of Vessels.
3.2. Further Conditions Precedent. The obligation of the Banks to make an
Advance available to the Borrowers shall be expressly and separately from the
foregoing conditional upon, on each Drawdown Date:
(a) Drawdown Notice. The Administrative Agent having received a
Drawdown Notice in accordance with the terms of Section 2.2.
(b) Representations and Warranties True. The representations stated
in Section 7 being true and correct as if made on such Drawdown Date; provided,
however, that (i) the representations and warranties set forth in Section 7.1(e)
and (o) shall be deemed inapplicable on such date if such Advance would not
result in an incremental increase in the aggregate principal amount of Advances
outstanding under the Facility and (ii) any representation and warranty which,
by its express terms, relates solely to an earlier date shall be true and
accurate on and as of such earlier date.
(c) No Default. No Default or Event of Default having occurred and
continuing or resulting from the making of such Advance.
(d) No Material Adverse Change. There having been no Material
Adverse Change since September 30, 2001; provided however, that this condition
shall not apply to any Advance which would not increase the aggregate principal
amount of Advances outstanding under the Facility.
3.3. Satisfaction after Drawdown. Without prejudice to any of the other terms
and conditions of this Agreement, in the event all of the Banks elect, in their
sole discretion, to make an Advance prior to the satisfaction of all or any of
the conditions referred to in Sections 3.1 and 3.2, the Borrowers hereby
covenant and undertake to satisfy or procure the satisfaction of such condition
or conditions within seven (7) days after the Drawdown Date (or such longer
period as the Majority Banks, in their sole discretion, may agree).
4. REPAYMENT AND PREPAYMENT
4.1. Repayment. Each Borrower jointly and severally agrees to repay to the Banks
the principal of each Advance made to the Borrowers on the last day of the
Interest Period therefor
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and to pay the then outstanding aggregate principal amount of all of the
Advances on the Final Payment Date.
4.2. Prepayment. Subject to delivery of the notices required by this Section
4.2, the Borrowers may, at their option, on any Banking Day, prepay all or any
portion of the principal of any Advance. The Borrowers shall compensate the
Banks and Participants or any thereof for any loss, cost or expense incurred by
them as a result of a prepayment made on any day other than the last day of an
Interest Period in accordance with the provisions of Section 11.6. Prepayments
made on the last day of any Interest Period shall be without penalty or premium.
Any prepayment shall be in an integral multiple of $1,000,000 with a minimum
amount of $10,000,000. In addition, on the date of any prepayment hereunder, all
accrued interest to the date of such prepayment must be paid in full with
respect to the Advances or portions thereof being prepaid. The Borrowers shall
deliver to the Administrative Agent (which shall promptly furnish a copy to each
Bank) notice of such prepayment on not less than three (3) Banking Days (which
notice shall be irrevocable and shall specify the date and amount of
prepayment).
4.3. Borrowers' Obligations Absolute. The Borrowers' obligations to pay each
Creditor hereunder and under the Notes shall be absolute, unconditional and
irrevocable, and shall be paid strictly in accordance with the terms hereof and
thereof, under any and all circumstances and irrespective of any setoff,
counterclaim or defense to payment which the Borrowers or any of them may have
or have had against the Creditors.
5. INTEREST AND RATE
5.1. Payment of Interest; Interest Rate.
(a) The Borrowers hereby jointly and severally promise to pay to the
Banks interest on the unpaid principal amount of each outstanding Advance made
to the Borrowers for the period commencing on the date of such Advance until but
not including the maturity thereof (whether at stated maturity, by acceleration
or otherwise) or the date of prepayment thereof at the Applicable Rate which
shall be the rate per annum which is equal to the aggregate of (i) the LIBOR
Rate for the relevant Interest Period plus (ii) the Applicable Margin. The
Applicable Rate with respect to each Advance shall be determined by the
Administrative Agent two (2) Banking Days prior to the first day of the relevant
Interest Period. The Administrative Agent shall promptly notify the Borrowers
and the Banks in writing of the Applicable Rate and the duration of each
Interest Period as and when determined. Each such determination, absent manifest
error, shall be conclusive and binding upon the Borrowers.
(b) Notwithstanding the foregoing, each Borrower jointly and
severally agrees that upon the occurrence and during the continuance of an Event
of Default, each outstanding Advance shall bear interest at a rate per annum
equal to the greater of (A) two percent (2%) plus the Applicable Rate in effect
with respect to such Advance or (B) two percent (2%) plus the sum of (x) the
Applicable Margin plus (y) the LIBOR Rate for overnight or weekend deposits (the
"Default Rate"). In addition, each Borrower hereby jointly and severally
promises to pay interest on any Advance made to the Borrowers or any installment
thereof and (to the extent that the payment of such interest shall be legally
enforceable) on any overdue installment of interest, and on any other amount
payable by the Borrowers hereunder which shall not be paid in full when
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due (whether at stated maturity, by acceleration or otherwise), for the period
commencing on the due date thereof until but not including the date the same is
paid in full at the Default Rate.
(c) Except as provided in the next sentence, accrued interest on
each Advance shall be payable (i) on the last day of each Interest Period,
except that if the Borrowers shall select an Interest Period in excess of three
(3) months, accrued interest shall be payable during such Interest Period on
each three (3) month anniversary of the commencement of such Interest Period and
upon the last day of such Interest Period, and (ii) with each repayment of
principal thereof. Interest payable at the Default Rate shall be payable from
time to time on demand of the Administrative Agent.
5.2. Calculation of Interest. All interest shall accrue from day-to-day and be
calculated on the actual number of days elapsed and on the basis of a three
hundred sixty (360) day year.
5.3. Maximum Interest. Anything in this Agreement or the Notes to the contrary
notwithstanding, the interest rate on any Advance shall in no event be in excess
of the maximum rate permitted by Applicable Law.
6. PAYMENTS
6.1. Place of Payments; No Set Off. All payments to be made hereunder by the
Borrowers shall be made in Dollars on the due dates or dates of demand of such
payments to the Administrative Agent at its office located at One Chase
Manhattan Plaza, 8th Floor, New York, NY 10005-1401 or to such other branch of
the Administrative Agent as the Administrative Agent may direct, without set-off
or counterclaim and free from, clear of and without deduction for, any Taxes;
provided, however, that if the Borrowers shall at any time be compelled by law
or regulatory authority to withhold or deduct any Taxes or any other amounts
from any amounts payable to the Administrative Agent for the account of the
Banks or the other Creditors hereunder, then, the Borrowers shall pay such
additional amounts as may be necessary in order that the net amounts received
after withholding or deduction shall equal the amounts which would have been
received if such withholding or deduction were not required and, in the event
any withholding or deduction is made, whether for Taxes or otherwise, the
Borrowers shall promptly send to the Administrative Agent any documentary
evidence they have with respect to such withholding or deduction. No Bank shall
change its lending office if such change would result in the Borrowers being
compelled by law to withhold or deduct any Taxes (or increase the amount to be
withheld or deducted) from any amounts payable to the Administrative Agent for
the account of the Banks or the other Creditors hereunder. If a Bank becomes
subject to withholding, such Bank shall use its best efforts to change its
lending office to one without withholding, and should such change in lending
office not be possible, (i) the Borrowers may replace such Bank pursuant to
Section 11.8 or (ii) such Bank may waive its rights to any additional amounts
such Bank would be entitled to receive under this Section 6.1.
6.2. Federal Income Tax Credits. If any Bank obtains the benefit of a credit
against its liability for federal income taxes imposed by the United States of
America for all or part of the Taxes as to which the Borrowers have paid
additional amounts as aforesaid then such Bank shall reimburse the Borrowers for
the amount of the credit so obtained; (b) each of the Banks that is not a United
States Person (as such term is defined in Section 7701(a)(30) of the Code)
shall, on or prior to the first Drawdown Date (and in the case of an assignee,
on or prior to the effective
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date of the relevant assignment) and from time to time thereafter when required
by applicable provisions of the Code, provide the Borrowers with two duly
completed copies of Internal Revenue Service Form W-8 BEN or W-8ECI, as
appropriate, or any successor form prescribed by the Internal Revenue Service,
certifying that such Bank is entitled to benefits under an income tax treaty to
which the United States is a party that exempts withholding tax on payments
under this Agreement or the Notes or certifying that the income receivable by it
pursuant to this Agreement or the Notes is effectively connected with the
conduct of a trade or business in the United States; (c) for any period with
respect to which a Bank that is not a United States Person has failed to provide
the Borrowers with the appropriate forms described in clause (b) above (other
than if such failure is due to a change in law occurring after the date on which
such person was originally required to provide such forms, or if such forms are
otherwise not required under clause (b) above), such Bank shall not be entitled
to payment of additional amounts under Section 6.1 with respect to Federal Taxes
imposed by the United States; provided, however, that should a Bank become
subject to Taxes because of its failure to deliver a form required hereunder,
the Borrowers shall take such steps as such Bank shall reasonably request to
assist such Bank to recover such Taxes if, in the judgment of the Borrowers such
steps would avoid the need for, or reduce the amount of, any Taxes required to
be deducted from or in respect of any sum payable hereunder to such Bank and
would not, in the judgment of the Borrowers, be disadvantageous to the
Borrowers.6.3. Sharing of Setoffs. Each Bank agrees that if it shall, through
the exercise of a right of banker's lien, setoff or counterclaim or pursuant to
a secured claim under the Federal Bankruptcy Code or other security or interest
arising from, or in lieu of, such secured claim, exercised or received by such
Bank under any applicable bankruptcy, insolvency or other similar law or
otherwise, or by any other means (except in the event of such Bank's replacement
pursuant to Section 11.8), obtain payment (voluntary or involuntary) in respect
of any Advance or Advances as a result of which the unpaid principal portion of
its Advances (and accrued and unpaid interest thereon) shall be proportionately
less than the unpaid principal portion of the Advances (and accrued and unpaid
interest thereon) of any other Bank, it shall be deemed simultaneously to have
purchased from such other Bank at face value, and shall promptly pay to such
other Bank the purchase price for, a participation in the Advances of such other
Bank so that the aggregate unpaid principal amount of the Advances (and accrued
and unpaid interest thereon) and participations in the Advances held by each
Bank shall be in the same proportion to the aggregate unpaid principal amount of
all Advances then outstanding as the principal amount of its Advances (and
accrued and unpaid interest thereon) prior to such exercise of banker's lien,
setoff or counterclaim or other event was to the principal amount of all
Advances outstanding (and accrued and unpaid interest thereon) prior to such
exercise of banker's lien, setoff or counterclaim or other event; provided,
however, that, if any such purchase or purchases or adjustments shall be made
pursuant to this Section 6.3 and the payment giving rise thereto shall
thereafter be recovered, such purchase or purchases or adjustments shall be
rescinded to the extent of such recovery and the purchase price or prices or
adjustment restored without interest. Any Bank holding a participation in an
Advance deemed to have been so purchased may exercise any and all rights of
banker's lien, setoff or counterclaim with respect to any and all moneys owing
to such Bank by reason thereof as fully as if such Bank had made an Advance in
the amount of such participation. The Borrowers expressly consent to the
foregoing arrangement.
7. REPRESENTATIONS AND WARRANTIES
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7.1. In order to induce the Creditors to enter into this Agreement and to make
the Facility and each Advance thereunder available, the Borrowers hereby,
jointly and severally, represent and warrant to the Banks (which representations
and warranties shall survive the execution and delivery of this Agreement and
the Notes and each drawdown of the Facility) that:
(a) Due Organization and Power. Each of the Borrowers is a
corporation duly formed and validly existing in good standing under the laws of
its jurisdiction of incorporation and is duly qualified and is authorized to do
business as a foreign corporation in each jurisdiction wherein the nature of the
business transacted thereby makes such qualification necessary, except where
failure to so qualify would not result in a Material Adverse Change, has full
power and authority and, to the best of its knowledge after due investigation,
all material governmental licenses, authorizations, consents and approvals
required to carry on its business as now being conducted and to own its
properties and has full power and authority to enter into and perform its
obligations under this Agreement and the Notes, and has complied with all
statutory, regulatory and other requirements relative to such business, property
and with all agreements and instruments to which it is party, or to which its
property is subject, other than those agreements for which non-compliance,
either singularly or in the aggregate, could not reasonably be expected to
result in a Material Adverse Change.
(b) Authorization and Consents. All necessary corporate action has
been taken to duly authorize, and all necessary consents and authorities have
been obtained and remain in full force and effect to permit, each of the
Borrowers to enter into and perform its obligations under this Agreement and the
Notes and to borrow, service and repay the Advances and, as of the date of this
Agreement, no further consents or authorities are necessary for the service and
repayment of the Advances or any part thereof.
(c) Binding Obligations. Each of this Agreement and the Notes
constitutes a legal, valid and binding obligation of each Borrower enforceable
against such Borrower in accordance with its terms.
(d) No Violation. Neither the execution and delivery by the
Borrowers of this Agreement or the Notes, or any instrument or agreement
referred to herein or therein, or contemplated hereby or thereby, nor the
consummation of the transactions herein or therein contemplated, nor compliance
with the terms, conditions and provisions hereof or thereof by each of them,
will (i) conflict with, or result in a breach or violation of, or constitute a
default under the organizational documents of the Borrowers; (ii) conflict with
or contravene any Applicable Law or any contractual restriction binding on or
affecting the Borrowers or any of their respective assets or properties; (iii)
result in a breach or violation of, or constitute a default under, or permit the
acceleration of any material obligation or liability in, or but for any
requirement of the giving of notice or the passage of time (or both) would
constitute such a conflict with, breach or violation of, or default under, or
permit any such acceleration in, any material contractual obligation or any
material agreement or document to which any of the Borrowers is a party or by
which any of the Borrowers or any of their respective assets or properties is
bound (or to which any such obligation, agreement or document relates); or (iv)
result in any Lien upon any of the Borrowers' respective material assets or
properties.
(e) Litigation. No action, suit or proceeding is pending or
threatened against OSG or any Subsidiary before any court, board of arbitration
or administrative agency which
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could be reasonably expected to result in any Material Adverse Change or which
in any manner draws into question the validity or enforceability of this
Agreement or the Notes.
(f) No Default. Neither OSG nor any of the Subsidiaries is in
default under any material agreement by which it is bound and no circumstances,
conditions, acts or events have occurred and are continuing or will result from
the transactions contemplated hereby which constitute or would give rise to or
would with the passage of time or the giving of notice or both constitute a
default under any such agreement.
(g) ERISA. The execution and delivery of this Agreement and the
consummation of the transactions hereunder will not involve any prohibited
transaction within the meaning of ERISA or Section 4975 of the Code and no
condition exists or event or transaction has occurred in connection with any
Plan maintained or contributed to by any member of the ERISA Group or any ERISA
Affiliate resulting from the failure of any thereof to comply with ERISA which
is reasonably likely to result in any member of the ERISA Group or any ERISA
Affiliate incurring any liability, fine or penalty which individually or in the
aggregate could result in a Material Adverse Change. No member of the ERISA
Group nor any ERISA Affiliate, individually or collectively, has incurred, or
reasonably expects to incur, Withdrawal Liabilities or liabilities upon the
happening of a Termination Event the aggregate of which for all such Withdrawal
Liabilities and other liabilities exceeds or would exceed $30,000,000. With
respect to any Multiemployer Plan, Multiple Employer Plan or Plan, no member of
the ERISA Group nor any ERISA Affiliate is aware of or has been notified that
any "variance" from the "minimum funding standard" has been requested (each such
term as defined in Part 3, Subtitle B, of Title 1 of ERISA). No member of the
ERISA Group nor any ERISA Affiliate has received any notice that any
Multiemployer Plan is in reorganization, within the meaning of Title IV of
ERISA, which reorganization could result in a Material Adverse Change.
(h) Environmental Matters and Claims. (A) OSG and each Subsidiary
and the Affiliates of each thereof will, when required, be in compliance with
all applicable United States federal and state, local, foreign and international
laws, regulations, conventions and agreements relating to pollution, pollution
prevention or protection of human health or the environment (including, without
limitation, ambient air, surface water, ground water, navigable waters, waters
of the contiguous zone, ocean waters and international waters), including,
without limitation, laws, regulations, conventions and agreements relating to
(1) emissions, discharges, releases or threatened releases of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous materials, oil,
hazardous substances, petroleum and petroleum products and by-products
("Materials of Environmental Concern"), or (2) the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern ("Environmental Laws") (except as to all of
the above, where the failure to do so would not be reasonably likely to result
in a Material Adverse Change); (B) OSG, each Subsidiary and the Affiliates of
each will, when required, have all permits, licenses, approvals, rulings,
variances, exemptions, clearances, consents or other authorizations required
under applicable Environmental Laws ("Environmental Approvals") and will, when
required, be in compliance with all Environmental Approvals required to operate
their respective businesses as then being conducted (except where the failure to
comply with, obtain or renew such permits, licenses, rulings, variances,
exemptions, clearances, consents or other authorizations would not be reasonably
likely to result in a Material Adverse Change); (C) neither OSG, nor any
Subsidiary
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nor any Affiliates of any thereof has received any notice of any claim, action,
cause of action, investigation or demand by any Person, entity, enterprise or
government, or any political subdivision, intergovernmental body or agency,
department or instrumentality thereof, alleging potential liability which would
be reasonably likely to result in a Material Adverse Change or a requirement to
incur investigatory costs, cleanup costs, response and/or remedial costs
(whether incurred by a governmental entity or otherwise), natural resources
damages, property damages, personal injuries, attorneys' fees and expenses, or
fines or penalties which would be reasonably likely to result in a Material
Adverse Change, in each case arising out of, based on or resulting from (1) the
presence, or release, or threat of release, of any Materials of Environmental
Concern at any location, whether or not owned by such person, or (2)
circumstances forming the basis of any violation, or alleged violation, of any
Environmental Law or Environmental Approval ("Environmental Claim") (other than
Environmental Claims that have been fully and finally adjudicated or otherwise
determined and all fines, penalties and other costs (including permitted
deductibles), if any, payable by OSG or any of the Subsidiaries in respect
thereof have been paid in full or which are fully covered by insurance); (D) to
the best of the Borrowers' knowledge, after due investigation, there are no
circumstances that would be reasonably likely to prevent or interfere with such
full compliance in the future; and (E) there is no Environmental Claim pending
or, to the best of the Borrowers' knowledge, threatened against OSG, any
Subsidiary or any Affiliate of any thereof and to the best of the Borrowers'
knowledge, there are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the release,
emission, discharge or disposal of any Materials of Environmental Concern, that
could reasonably be expected to form the basis of any Environmental Claim
against such persons the adverse disposition of which could reasonably be
expected to result in a Material Adverse Change.
(i) Subsidiaries. (A) Each Material Subsidiary is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all corporate powers and authority and
all material governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted and to own its properties and
(B) there are no Non-Recourse Subsidiaries as of the date hereof.
(j) Financial Statements. Each of the audited consolidated balance
sheet of OSG and the Subsidiaries as at December 31, 2000 and the related
audited consolidated statements of operations and retained earnings and cash
flows for the fiscal year then ended reported on by Ernst & Young LLP and
included in OSG's 2000 Form 10-K, as well as the unaudited consolidated balance
sheet of OSG and the Subsidiaries for the nine month period ended on September
30, 2001 and the related unaudited consolidated statements of income and
retained earnings and cash flows for such period as reported on OSG's September
30, 2001 Form 10-Q, copies of all of which have been furnished to each Bank,
fairly present, in all material respects, the consolidated financial condition
of OSG and the Subsidiaries as at such dates and the consolidated results of the
operations of OSG and the Subsidiaries for the periods ended on such dates, all
in accordance with GAAP consistently applied.
(k) Tax Returns and Payments. United States Federal income tax
returns of OSG and the Subsidiaries have been examined and closed through the
fiscal year ended December 31, 1996. OSG and the Subsidiaries have filed all
United States Federal, state, local and foreign income tax returns and all other
material tax or information returns which are
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required to be filed by them (collectively, the "Tax Returns"). All of the Tax
Returns (and any tax or information return becoming due after the date hereof
and on or before the Closing Date) are true and complete in all material
respects. OSG and the Subsidiaries have paid all material federal, state, local
and foreign taxes (collectively, the "OSG Taxes") due pursuant to the Tax
Returns or pursuant to any assessment received by OSG or any Subsidiary, other
than OSG Taxes which are being contested in good faith by appropriate
proceedings and for which adequate reserves (in conformity with GAAP
consistently applied) shall have been set aside on their books. The charges,
accruals and reserves on the books of OSG and the Subsidiaries in respect of OSG
Taxes are adequate in all material respects and in conformity with GAAP
consistently applied. There is no material action, suit, proceeding, audit,
investigation or claim pending or, to the knowledge of OSG or its Subsidiaries,
threatened in respect of any OSG Taxes for which OSG or any of the Subsidiaries
is or may become liable nor has any deficiency or claim for any such OSG Taxes
been proposed, asserted or, to the knowledge of OSG or its Subsidiaries
threatened. Neither OSG nor its Subsidiaries, has consented to any waivers or
extensions of any statute of limitations with respect to the collection or
assessment of any OSG Taxes against it.
(l) Insurance. Each of OSG and the Subsidiaries has insured its
properties and assets against such risks and in such amounts as are customary
for companies engaged in similar businesses. The properties and assets of each
Joint Venture have been insured against such risks and in such amounts as are
customary for companies engaged in similar businesses.
(m) Foreign Trade Control Regulations. None of the transactions (i)
contemplated herein or (ii) otherwise engaged in by the Borrowers will violate
any of the provisions of the Foreign Assets Control Regulations of the United
States of America (Title 31, Code of Federal Regulations, Chapter V, Part 500,
as amended), any of the provisions of the Cuban Assets Control Regulations of
the United States of America (Title 31, Code of Federal Regulations, Chapter V,
Part 515, as amended), any of the provisions of the Libyan Assets Control
Regulations of the United States of America (Title 31, Code of Federal
Regulations, Chapter V, Part 550, as amended), any of the provisions of the
Iranian Transaction Regulations of the United States of America (Title 31, Code
of Federal Regulations, Chapter V, Part 560, as amended), any of the provisions
of the Iraqi Sanctions Regulations (Title 31, Code of Federal Regulations,
Chapter V, Part 575, as amended), any of the provisions of the Federal Republic
of Yugoslavia (Serbia and Montenegro) and Bosnian Serb-Controlled Areas of the
Republic of Bosnia and Herzegovina Sanctions Regulations (Title 31, Code of
Federal Regulations, Chapter V, Part 585, as amended), any of the provisions of
the Regulations of the United States of America Governing Transactions in
Foreign Shipping of Merchandise (Title 31, Code of Federal Regulations, Chapter
V, Part 505, as amended) or any other applicable foreign trade control
regulation; except, with respect to matters covered by clause (ii) above, where
any failure to comply with any such laws could not reasonably be expected to,
alone or in the aggregate, result in a Material Adverse Change.
(n) Investment Company Act. Neither OSG nor any of the Subsidiaries
is an "investment company" or an "affiliated person" of, or a "promoter" or
"principal underwriter" for or a company "controlled" by an "investment company"
as such terms are defined in the Investment Company Act of 1940, as amended;
neither the making of the Advances nor the application of the proceeds or
repayment thereof by the Borrowers, nor the consummation of the
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other transactions contemplated hereby, will violate any provision of such act
or any rule, regulation or order of the Securities and Exchange Commission
thereunder.
(o) No Material Adverse Change. Since December 31, 2000, there has
been no Material Adverse Change.
(p) Compliance with ISM Code. Each of the Borrowers' and
Subsidiaries' vessels and each Operator thereof complies with the requirements
of the ISM Code in all material respects including (but not limited to)
obtaining all necessary ISM Code documentation and the maintenance and renewal
of valid certificates pursuant thereto.
(q) No Threatened Withdrawal of DOC or SMC. There is no actual or,
to the best of the Borrowers' knowledge, threatened withdrawal of any Operator's
DOC, SMC or other certification or documentation related to the ISM Code or
otherwise required for the operation of such vessels in respect of any of the
Borrowers' or Subsidiaries' vessels.
(r) No Proceedings to Dissolve. There are no proceedings or actions
pending or contemplated by any of the Borrowers or, to the best of the
Borrowers' knowledge, contemplated by any third party, to dissolve or terminate
such Borrowers.
(s) Compliance with Laws. Each of the Borrowers is in compliance
with all Applicable Laws, except where any failure to comply with any such
Applicable Laws would not, alone or in the aggregate, result or reasonably be
expected to result in a Material Adverse Change.
(t) OSG International Not Immune. OSG International is generally
subject to suit, and neither OSG International nor any of its properties or
assets has any immunity from the jurisdiction of any court or from legal process
(whether through service of process or notice of attachment prior to judgment,
attachment in aid of execution or otherwise) under the laws of the Marshall
Islands or any political subdivision thereof.
(u) No Marshall Islands Filing Necessary. To ensure the
enforceability or admissibility in evidence of this Agreement and/or the Notes,
it is not necessary that this Agreement or any of the Notes be filed or recorded
with any court or other authority in the Marshall Islands or any political
subdivision thereof or that any stamp or similar tax be paid hereon or thereon
or in respect hereof or thereof.
8. COVENANTS
8.1. Affirmative Covenants. Each of the Borrowers hereby jointly and severally
covenants and undertakes with each of the Banks that, from the date hereof and
so long as the Commitments are in effect or any principal, interest or other
moneys are owing in respect of the Facility or otherwise owing under this
Agreement or the Notes or any of them, such Borrower will:
(a) Performance of Agreements. Duly perform and observe the terms of
this Agreement and the Notes.
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(b) Notice of Default. Provide written notice to the Administrative
Agent (which shall promptly, and in any event within three (3) Banking Days of
receipt of such notice, notify the Banks) of the occurrence of (i) any Default
or Event of Default, (ii) any litigation or governmental proceeding pending or
threatened against OSG or any Subsidiary which in any manner draws into question
the validity or enforceability of this Agreement or any Note or which will
result or could reasonably be expected to result in a Material Adverse Change or
Default, and (iii) any other event or condition of which it becomes aware which
is reasonably likely to result in a Material Adverse Change or Default, in each
case, promptly, and in any event within three (3) Banking Days after becoming
aware of the occurrence thereof.
(c) Consents. Without prejudice to Section 7.1 and this Section 8.1,
obtain every consent and do all other acts and things which may from time to
time be necessary for the continued due performance of all its obligations under
this Agreement and the Notes.
(d) Financial Statements and Other Information. Deliver to the
Administrative Agent with sufficient copies for the other Creditors to be
distributed to the other Creditors by the Administrative Agent promptly upon
receipt thereof:
(i) as soon as available and in any event within 105 days after the
end of each fiscal year of OSG, (A) a consolidated balance sheet of OSG
and the Subsidiaries as of the end of such fiscal year and the related
consolidated statements of income and retained earnings and cash flows for
such fiscal year, setting forth in each case in comparative form the
figures as of the end of and for the previous fiscal year, complying in
all material respects with all applicable rules and regulations
promulgated by the Securities and Exchange Commission, in each case
accompanied by an unqualified opinion of Ernst & Young LLP or other
independent public accountants of nationally recognized standing and (B)
if there are any Non-Recourse Subsidiaries, an unaudited consolidated
balance sheet of OSG and the Recourse Subsidiaries as of the end of such
fiscal year and the related unaudited consolidated statements of income
and retained earnings and cash flows for such fiscal year, setting forth
in each case in comparative form the figures as of the end of and for the
previous fiscal year, together with a letter from the independent public
accountants referred to in the foregoing clause (A) confirming the
mathematical accuracy of such financial statements and the derivation
thereof on a reasonable basis from the audited financial statements
referred to in clause (A);
(ii) as soon as available and in any event within 60 days after the
end of each of the first three fiscal quarters of each fiscal year of OSG,
(A) an unaudited consolidated balance sheet of OSG and the Subsidiaries as
of the end of such fiscal quarter and the related unaudited consolidated
statements of income and retained earnings and cash flows for such fiscal
quarter and for the portion of OSG's fiscal year ended at the end of such
fiscal quarter, setting forth in each case in comparative form the figures
as of the end of and for the corresponding fiscal quarter and the
corresponding portion of OSG's previous fiscal year, all certified
(subject to normal year-end adjustments) as to fairness of presentation
and compliance in all material respects with all applicable rules and
regulations of the Securities and Exchange Commission with respect to
interim financial statements and consistency by the chief financial
officer or the chief accounting officer of OSG and (B) if there are any
Non-Recourse Subsidiaries, an unaudited consolidated balance sheet of OSG
and the Recourse Subsidiaries as of the end of such fiscal quarter
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and the related unaudited consolidated statements of income and retained
earnings and cash flows for such fiscal quarter and for the portion of
OSG's fiscal year ended at the end of such fiscal quarter, setting forth
in each case in comparative form the figures as of the end of and for the
corresponding fiscal quarter and the corresponding portion of OSG's
previous fiscal year, together with a certificate of the chief financial
officer or chief accounting officer of OSG as to the derivation of such
financial statements from the financial statements referred to in clause
(A) of this subsection (ii);
(iii) simultaneously with the delivery of each set of financial
statements referred to in clauses (i)(A) and (ii)(A) above, a Compliance
Certificate of OSG executed by OSG's chief financial officer or chief
accounting officer (A) setting forth in reasonable detail the calculations
required to establish whether the covenants set forth in Sections 8.1(p)
through (s) and 8.2(a), (c), (e) and (h) were complied with as of the last
day of the fiscal period covered by such financial statements, and (B)
stating whether any Default or Event of Default exists on the date of such
Certificate and, if any Default or Event of Default then exists, setting
forth the details thereof and the action which the Borrowers are taking or
propose to take with respect thereto;
(iv) simultaneously with the delivery of each set of financial
statements referred to in clause (i)(A) above, a statement of the firm of
independent public accountants which reported on such statements (A)
stating whether anything has come to their attention to cause them to
believe that OSG and the Subsidiaries were not in compliance with any of
the covenants set forth in Sections 8.1(p) through (s) and 8.1(w) and
8.2(a)through (e) and 8.2 (h) on the date of such statements and (B)
confirming the calculations set forth in the officer's certificates
delivered simultaneously therewith pursuant to subsection (iii) above or,
with respect to the calculations required to derive the amount referred to
in the covenants set forth in Section 8.1(p) through (s), 8.1(w), and 8.2
(a) through (e) and 8.2 (h), verifying the mathematical accuracy of such
calculations and comparing Consolidated Net Income for each of the
relevant fiscal quarters with the consolidated income statement of OSG and
the Recourse Subsidiaries for such fiscal quarter;
(v) within three (3) Banking Days after the date on which any
executive officer of any of the Borrowers obtains knowledge of (A) any
Default or Event of Default, if such Default or Event of Default is then
continuing, or (B) a Material Adverse Change or any action, suit or
proceeding of the type referred to in Section 7.1(e), a certificate of the
chief financial officer or the chief accounting officer of each of the
Borrowers setting forth the details thereof and the action which the
Borrowers are taking or propose to take with respect thereto;
(vi) promptly upon the mailing thereof to the shareholders of OSG
generally, copies of all financial statements, reports and proxy
statements so mailed;
(vii) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration
statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q
and 8-K (or their equivalents) which OSG shall have filed with the
Securities and Exchange Commission;
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(viii) as soon as possible, (A) copies of all reports and notices
which any member of the ERISA Group or ERISA Affiliate files under ERISA
with the Internal Revenue Service or the PBGC or the U.S. Department of
Labor or the sponsor of a Multiemployer Plan or which any member of the
ERISA Group or ERISA Affiliate receives from the PBGC or the sponsor of a
Multiemployer Plan relating to (1) any Termination Event and (2) with
respect to a Multiemployer Plan, any Withdrawal Liability, or any actual
or expected reorganization (within the meaning of Title IV of ERISA) or
termination of a Multiemployer Plan (within the meaning of Title IV of
ERISA) and (B) a certificate of the chief financial officer or chief
accounting officer of OSG setting forth in reasonable detail the
calculation of the amount (to the extent then reasonably determinable) of
any liability in connection with the foregoing;
(ix) within 72 hours after any officer of any of the Borrowers
becomes aware of any change in the rating by Moody's or S&P of OSG's
publicly-traded senior unsecured long-term debt securities, notice of such
change;
(x) in the event of any change in OSG's fiscal year, OSG shall as
soon as possible, restate such of its consolidated financial statements
required to be delivered under this Section 8.1(d) for such twelve month
period as shall be necessary in order to permit the calculation of the
financial covenants set forth in this Agreement;
(xi) as soon as available and in any event within 45 days after the
end of each fiscal quarter of OSG, a List of Vessels, current as of the
date provided; provided, however, that the Borrowers shall update such
list as soon as practicable (and in any event within 15 Banking Days) in
the event that there is a change of ten percent (10%) or more (by number
of vessels) in the Borrowers' fleet of vessels; and
(xii) from time to time such additional information regarding the
financial position, results of operations, business or prospects of OSG
and the Subsidiaries as the Administrative Agent, at the request of any
Bank, may reasonably request.
(e) Corporate Existence. Do or cause to be done all things necessary
to preserve and keep in full force and effect the Borrowers' and each Material
Subsidiary's legal existence, and all licenses, franchises, permits and assets
necessary or material to the conduct of the business of OSG and the
Subsidiaries.
(f) Books and Records. Keep proper books and records of all
transactions relating to the business activities of the Borrowers are made until
all obligations under this Agreement have been satisfied in full.
(g) Inspection. Allow any representative or representatives
designated by any Bank, at the risk and expense of such Bank and during normal
business hours, subject to applicable laws and regulations, to visit and inspect
any of the property of Borrowers or Subsidiaries, and, on reasonable prior
notice, to examine the Borrowers' and Subsidiaries' books of account, records,
reports and other papers (and to make copies thereof and to take extracts
therefrom) and to discuss their affairs, finances and accounts with the
Borrowers' and Subsidiaries' officers and executive employees all at such
reasonable times and as often as such Bank reasonably requests.
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(h) Inspection and Survey Reports. If the Majority Banks shall so
request, and the Borrowers have become obligated to provide Vessel Collateral as
provided in Section 8.1(t) hereof, the Borrowers shall provide the Banks with
copies of all internally generated inspection or survey reports on any Vessel
Collateral.
(i) Payment of Obligations. Pay and discharge, or cause to be paid
and discharged, and will cause each Subsidiary to pay and discharge, at or
before maturity, all their respective obligations and liabilities, including,
without limitation, all taxes, assessments and governmental charges or levies
imposed upon them, the Subsidiaries or their respective income or property prior
to the date upon which penalties attach thereto which, if not paid, could
reasonably be expected to result, either singularly or in the aggregate, in a
Material Adverse Change; provided, however, that the Borrowers shall not be
required to pay and discharge, or cause to be paid and discharged, any such
obligation, liability, tax, assessment, charge or levy so long as the legality
thereof shall be contested in good faith and by appropriate proceedings and they
or the relevant Subsidiary or Subsidiaries shall maintain in accordance with
GAAP appropriate reserves with respect thereto.
(j) Compliance with Agreements, Statutes, etc. Do or cause to be
done all things necessary to comply with all material contracts or agreements to
which any of the Borrowers or Material Subsidiaries is a party, and all laws and
the rules and regulations thereunder, applicable to the Borrowers or any of the
Subsidiaries or the conduct of their business including, without limitation,
those laws, rules and regulations relating to employee benefit plans and
environmental matters except where the failure to do so would not be reasonably
likely to result in a Material Adverse Change.
(k) Environmental Matters. Promptly upon the occurrence of any of
the following conditions, provide to the Administrative Agent (which shall
promptly furnish a copy thereof to each Bank) a certificate of an executive
officer of each of the Borrowers, specifying in detail the nature of such
condition and their proposed response or the response of their Environmental
Affiliates (as hereinafter defined): (i) its receipt or the receipt by any of
the Subsidiaries or any of their Environmental Affiliates of any communication
whatsoever that alleges that such Person is not in compliance with any
applicable Environmental Law or Environmental Approval, if such noncompliance
could reasonably be expected to result in a Material Adverse Change, (ii)
knowledge by it, any of the Subsidiaries or any of their Environmental
Affiliates that there exists any Environmental Claim pending or threatened
against any such Person, which could reasonably be expected to result in a
Material Adverse Change, or (iii) any release, emission, discharge or disposal
of any material that could form the basis of any Environmental Claim against it,
any of the Subsidiaries or any of their Environmental Affiliates if such
Environmental Claim could reasonably be expected to result in a Material Adverse
Change. Upon the written request by the Administrative Agent, each Borrower will
submit to the Banks at reasonable intervals, a report providing an update of the
status of any issue or claim identified in any notice or certificate required
pursuant to this subsection. For the purposes of this subsection, "Environmental
Affiliate" shall mean any Person or entity whose liability for Environmental
Claims may have been assumed by contract or operation of law by OSG or any of
the Subsidiaries.
(l) Maintenance of Assets. Maintain and keep, and procure that each
of the Subsidiaries shall maintain and keep, all properties used or useful in
the conduct of their
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respective business in good condition, repair and working order (ordinary wear
and tear excepted) and will be supplied with all necessary equipment and will
make, or cause to be made, all necessary repairs, renewals and replacements
thereof so that the business carried on in connection therewith and every
material portion thereof may be properly conducted at all times except where the
failure to maintain such properties would not either singularly, or in the
aggregate, be reasonably likely to result in a Material Adverse Change.
(m) Insurance. Maintain, cause each Subsidiary to maintain and use
its best efforts to cause each Joint Venture to maintain, with financially sound
and reputable insurance companies (which may include protection and indemnity
clubs) (i) in the case of OSG or any Subsidiary or Joint Venture which engages
in any shipping or shipping related business or in any business in products
related to oil, including without limitation, owning, leasing or chartering any
ship engaged in the transport of oil or related products, oil pollution
insurance covering risks in the maximum amount available in accordance with
standard industry practice or, if such insurance is not available at a
reasonable cost after taking into account the level of exposure to which OSG,
the Subsidiaries and the Joint Ventures may be subject, such other amount as is
usually insured against by companies of established repute engaged in the same
or similar business from time to time and (ii) such other insurance on all their
respective properties and against all such risks in at least such amounts as are
usually insured against by companies of established repute engaged in the same
or similar business from time to time.
(n) Shipping Management. At all times cause not less than 66 2/3% of
the Consolidated Net Tangible Assets to be managed by OSG, any Subsidiary, the
Shipping Manager, any subsidiary of the Shipping Manager, one or more other
shipping management companies reasonably acceptable to the Majority Banks or any
combination of the foregoing.
(o) Agent for Service of Process. OSG shall cause OSG International
to maintain at all times OSG Ship Management, Inc., or another agent acceptable
to the Majority Banks, as its agent for service of process in the State of New
York and shall cause any other such agent to execute and deliver to OSG and the
Administrative Agent a letter in form and substance reasonably satisfactory to
the Administrative Agent, accepting such agency, prior to or concurrently with
such other agent's acceptance of its appointment as agent for service of process
for OSG International.
(p) Consolidated Tangible Net Worth. At all times maintain
Consolidated Tangible Net Worth at an amount not less than $659,226,000, plus
50% of cumulative Consolidated Net Income (to the extent positive) for each
fiscal quarter after June 30, 2001.
(q) Cash Adjusted Debt Service Coverage Ratio. At all times maintain
a Cash Adjusted Debt Service Coverage Ratio measured as of the end of each
fiscal quarter for the period of four consecutive fiscal quarters ended on that
date (taken as a single accounting period) of not less than 1.75 to 1.
(r) Unencumbered Assets to Unsecured Debt Ratio. At all times
maintain a ratio of Unencumbered Assets to Unsecured Debt of not less than 1.50
to 1.
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(s) Cash Adjusted Funded Debt to Cash Adjusted Consolidated Net
Tangible Assets. At all times maintain a ratio of Cash Adjusted Funded Debt to
Cash Adjusted Consolidated Net Tangible Assets of not more than 0.60 to 1.
(t) Security Interest on Ratings Downgrade. (i) Unless the Banks
unanimously consent to continue the Facility on an unsecured basis, (x) upon the
event of a downgrading of Moody's and S&P's ratings of OSG's senior long-term
unsecured debt (without third-party credit enhancement) to a combined rating of
(I) BB- or lower by S&P or BB by S&P on Credit Watch with negative outlook, and
(II) Ba3 or lower by Moody's or (y) if no longer rated by S&P and Moody's, then
OSG shall, or shall cause one or more of the Subsidiaries to:
(A) not later than the fifteenth (15th) day after the
occurrence of such ratings downgrade submit to the Administrative
Agent for approval by the Agents a list of collateral for the
Advances made or to be made hereunder which it proposes to grant a
security interest in, pledge, assign or mortgage to or in favor of
the Administrative Agent for the benefit of the Creditors, as
collateral for the Advances, pursuant to one or more agreements or
other instruments to which OSG (and any relevant Subsidiary) is a
party (collectively, "Security Documents"). The list of collateral
shall contain a description and valuation of any proposed
collateral. Such proposed collateral shall consist of (1) vessels of
OSG or any Subsidiary reasonably satisfactory to the Agents (the
"Vessel Collateral"), such Vessel Collateral to be subject to no
other Liens (other than Liens arising in the ordinary course of
business which (x) do not secure Debt and (y) do not, individually
or in the aggregate, materially detract from the value of the Vessel
Collateral as collateral hereunder) and to have an aggregate Fair
Market Value (taking into account such Liens) at least equal to 125%
of the sum of the aggregate principal amount of all Advances
outstanding on such fifteenth (15th) Banking Day; or (2) a cash
collateral account of OSG or any Subsidiary maintained with the
Administrative Agent into which OSG or any Subsidiary shall propose
to deposit cash in an amount equal to 100% of the sum of the
aggregate principal amount of all Advances outstanding on the date
such list is provided (the "Cash Collateral") or (3) any combination
of Vessel Collateral and Cash Collateral so long as the sum of (x)
80% of the Fair Market Value of any Vessel Collateral plus (y) any
Cash Collateral, equals or exceeds the sum of the aggregate
principal amount of all Advances outstanding on the date such list
is provided. The Administrative Agent shall notify OSG in writing as
to whether the proposed collateral is acceptable to the Majority
Banks on or prior to the fifteenth (15th) day following its receipt
of the list of proposed collateral from OSG. On or prior to the
fifteenth (15th) Banking Day following its receipt of such notice
from the Administrative Agent, OSG shall grant and perfect a
security interest in, pledge, assign or mortgage to or in favor of
the Administrative Agent for the benefit of the Creditors any such
collateral as the Agents shall have approved pursuant to one or more
Security Documents (such day, the "Collateral Date"). In the event
the Agents do not find the proposed collateral to be reasonably
acceptable (it being understood that collateral in which another
Person has a first priority security interest shall not be deemed
reasonably acceptable for this purpose), OSG shall propose
alternative collateral on or prior to the fifteenth
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(15th) Banking Day following its receipt of the notice from the
Administrative Agent. It shall constitute an Event of Default if the
Borrowers shall fail to provide substitute collateral reasonably
acceptable to the Administrative Agent with the approval of the
Majority Banks;
(B) on the Collateral Date, provide to the Administrative
Agent one or more opinions of counsel, the form and substance of
each such opinion and such counsel to be reasonably satisfactory in
the opinion of counsel to the Administrative Agent, as to the
creation, validity, effectiveness, perfection and priority of such
security interests, pledges, assignments and mortgages, compliance
with Regulation U, the absence of any fraudulent conveyance or
transfer and such other matters as the Administrative Agent may
reasonably request; and
(C) amend or modify this Agreement, pursuant to one or more
amendments or modifications in form and substance satisfactory to
the Administrative Agent, to the extent necessary or desirable, in
the reasonable judgment of the Administrative Agent, to take into
account the Security Documents entered into in accordance with this
Section 8.1(t) and such security interests, pledges, assignments and
mortgages and such other matters related thereto as the
Administrative Agent may reasonably request, such amendments and
modifications to include, without limitation, one or more
representations and warranties, covenants, events of default and
indemnities relating to the subject matter addressed in clauses (A)
and (B) above, or the Security Documents, opinions or other writings
referred to therein. In order for OSG to satisfy its obligations
under this Section 8.1(t) and without limiting the provisions set
forth above, the assets constituting Vessel Collateral hereunder,
the determination of the Fair Market Value thereof and the form and
substance of the Security Documents, the opinions referred to in
clause (B) above and the amendments and modifications referred to in
clause (C) above must each be satisfactory in form and substance to
the Administrative Agent and its counsel, and OSG must have received
a certificate signed by the Administrative Agent stating that OSG
has complied with its obligations under this Section 8.1(t);
provided that, in the event the entity which is the Administrative
Agent is no longer a Bank at the time the Borrowers become obligated
to grant a security interest in, pledge, assign or mortgage
collateral for the Advances under this Section 8.1(t), the Majority
Banks may appoint one of the Banks as Administrative Agent to
replace the then existing Administrative Agent. The provisions of
Article 14 shall continue to inure to such replaced Administrative
Agent's benefit as to any actions taken or omitted to be taken while
it was Administrative Agent.
(ii) At all times after the Collateral Date, the sum of (x) 80% of
the Fair Market Value of any Vessel Collateral plus (y) any Cash
Collateral, shall be at least equal to the aggregate principal amount of
all Advances outstanding hereunder from time to time. In the event the sum
of the Fair Market Value of any Vessel Collateral and any Cash Collateral
exceeds 140% of the aggregate principal amount of all Advances then
outstanding hereunder, the Borrowers may withdraw Vessel Collateral, (with
the consent
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of the Majority Banks (such consent not to be unreasonably withheld))
and/or Cash Collateral so long as the Fair Market Value of any remaining
Vessel Collateral and any remaining Cash Collateral equals or exceeds 140%
of the aggregate principal amount of all Advances outstanding hereunder
immediately following any such release of collateral. Should the Borrowers
wish to withdraw Vessel Collateral a current List of Vessels must be
provided to the Administrative Agent. If any collateral is released
pursuant to this clause (ii), the Administrative Agent shall, within 15
Banking Days release or deliver a signed termination statement or other
document releasing any Lien relating to such Vessel Collateral or Cash
Collateral.
(iii) In the event OSG is no longer required under the indentures
relating to its senior unsecured long-term indebtedness to continue to
have such indebtedness rated, the Borrowers shall (A) on or prior to the
120th day after the expiration of OSG's credit ratings and (B) annually
thereafter until the later of the Final Payment Date or payment in full of
all amounts due under this Agreement, deliver to the Administrative Agent,
with sufficient copies for the Banks, a letter from either S&P or Moody's
providing a rating of the Facility as BB or better, in the case of S&P, or
as Ba2 or better, in the case of Moody's, and upon any failure to deliver
a letter rating in accordance with (A) above, provide collateral in
accordance with the provisions of subsections (i) and (ii) above.
(u) Ownership of OSG Bulk and OSG International. In respect of OSG
only, cause OSG Bulk and OSG International to be direct or indirect wholly-owned
Subsidiaries (excluding only directors' qualifying shares).
(v) Exchange Listing. In respect of OSG only, remain listed on the
New York Stock Exchange, NASDAQ or such other exchange as is satisfactory to the
Banks.
(w) Book Value. At all times use valuation procedures to determine
Book Value which are consistent with GAAP consistently applied.
(x) Termination of Existing Credit Facility. Reduce the commitments
and repay any outstandings of the banks and other lenders under the Existing
Credit Facility to less than $126,000,000 on or prior to December 12, 2001 and
terminate, cancel and prepay all amounts outstanding thereunder on or before
February 1, 2002.
8.2. Negative Covenants. Each of the Borrowers hereby jointly and severally
covenants and undertakes with each of the Banks that, from the date hereof and
so long as the Commitments are in effect or any principal, interest or other
moneys are owing in respect of the Facility or otherwise owing under this
Agreement or the Notes or any of them, the Borrowers, without the prior written
consent of the Majority Banks (or the Administrative Agent acting with the
written consent of the Majority Banks):
(a) Limitation on Secured Debt. Will not, and will not permit any
Recourse Subsidiary to, create, assume, incur or in any manner become liable in
respect of any Secured Debt unless immediately after giving effect thereto and
to the application of the proceeds thereof, the ratio of Unencumbered Assets to
Unsecured Debt shall not be less than 1.50 to 1.
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(b) Limitations on Funded Debt. Will not, and will not permit any
Recourse Subsidiary to, create, assume or incur or in any manner be or become
liable in respect of any Funded Debt, except:
(i) Funded Debt of OSG and the Recourse Subsidiaries outstanding as
of September 30, 2001 as the same is set forth on Schedule III attached
hereto;
(ii) Funded Debt of OSG and the Recourse Subsidiaries; provided,
however, that at the time of issuance thereof and immediately after giving
effect thereto the Borrowers shall be in compliance with Section 8.1(s);
(iii) Renewals, extensions or refundings of Funded Debt referred to
in Section 8.2(b)(i) or incurred pursuant to the provisions of Section
8.2(b)(ii), without increase in the ranking or priority thereof or
principal amount thereof; provided, that in the case of any refunding of
any such Funded Debt, the newly issued Funded Debt shall have a weighted
average life to maturity at least equal to the remaining weighted average
life to maturity of the Funded Debt being refunded; and
(iv) Funded Debt under the Facility.
(c) Conduct of Business. Will not, and will not permit any Recourse
Subsidiary to, acquire any Operating Assets or make any Investment in Operating
Assets unless, after giving effect to such acquisition or Investment at least
70% (based on the most recent consolidated balance sheet of OSG and the Recourse
Subsidiaries required to be provided pursuant to Section 8.1(d)) of the
Operating Assets of OSG and the Recourse Subsidiaries are (on a consolidated
basis) in Shipping and Related Businesses; provided, however, that the foregoing
shall not limit or restrict the acquisition of assets to be used in the Shipping
and Related Businesses of OSG and the Recourse Subsidiaries or of any equity
interest in any Person engaged primarily in Shipping and Related Businesses.
(d) Limitation on Sale and Leasebacks. Will not, and will not permit
any Recourse Subsidiary to, enter into any Sale and Leaseback Transaction unless
either:
(i) after giving effect to such Sale and Leaseback Transaction, the
ratio of Unencumbered Assets to Unsecured Debt shall be not less than 1.50
to 1; or
(ii) the proceeds of the sale of the assets to be leased are at
least equal to their fair market value and such proceeds are applied (or
committed pursuant to a binding written contract to be applied within 24
months of receipt thereof to (A) the purchase, acquisition or construction
of assets to be used in the business of OSG and the Subsidiaries or (B)
retire Funded Debt ; provided, that, the percentage of proceeds, if any,
applied to pay Subordinated Funded Debt shall not exceed the percentage
which Subordinated Funded Debt represents of Consolidated Funded Debt.
Pending the actual application of such proceeds for the purposes described
in clauses (A) or (B) above, such proceeds shall be held by OSG or the
relevant Subsidiary in Permitted Investments only.
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(e) Mergers, Consolidations and Sales of Assets.
(i) (A) Will not, and will not permit any Material Subsidiary to,
consolidate with or be a party to a merger with any other Person or (B)
sell, lease (other than chartering in the ordinary course of business,
which shall not include bareboat chartering for periods in excess of ten
(10) years) or otherwise dispose of all or substantially all of the assets
of OSG and the Subsidiaries, taken as a whole; provided, however, that OSG
or any Subsidiary may consolidate or merge with any other Person if (A) at
the time of such transaction and after giving effect thereto, no Default
or Event of Default shall have occurred and be continuing, and (B) the
surviving entity in such consolidation or merger shall be OSG (unless the
Majority Banks otherwise consent, such consent not to be unreasonably
withheld) and shall have assumed all liabilities and obligations of the
parties thereto and the Borrowers shall have provided the Administrative
Agent, not less than ten (10) Business Days in advance of such
consolidation or merger, (i) a certificate declaring that no Default or
Event of Default exists or would result from the intended consolidation or
merger, and (ii) pro forma financial statements of the surviving entity
together with a Compliance Certificate demonstrating the compliance of the
Borrowers with all the covenants under this Agreement; and provided
further, that OSG or any Recourse Subsidiary may consolidate or merge with
any Recourse Subsidiary, in the case of OSG, or OSG or any other Recourse
Subsidiary, in the case of a Recourse Subsidiary.
(ii) In addition to the restrictions contained in Section 8.2(e)(i)
OSG will not, and will not permit any Recourse Subsidiary to, sell, lease
or otherwise dispose of (other than in the ordinary course of business)
any Substantial Part (as defined in Section 8.2(e)(iii)) of the assets of
OSG and the Subsidiaries, taken as a whole (including the creation of
Minority Interests); provided that any Subsidiary may sell, lease or
otherwise dispose of all or substantially all of its assets to OSG or a
wholly-owned Subsidiary. For the purposes of any determination under this
Section 8.2(e)(ii), a sale or other disposition of assets of OSG and the
Subsidiaries shall include, but not be limited to, the creation of any
Minority Interests and any other sale, transfer or other disposition of
the capital stock or assets of any Subsidiary (other than to OSG or a
wholly-owned Subsidiary) including any merger, consolidation or sale of
all or substantially all of the assets of any Subsidiary if the surviving
or continuing or acquiring corporation is not a Subsidiary.
(iii) As used in this Section 8.2(e), a sale, lease or other
disposition of assets shall be deemed to be a "Substantial Part" of the
assets of OSG and the Recourse Subsidiaries, taken as a whole, if the Book
Value of such assets, when added to the Book Value of all other assets
sold, leased or otherwise disposed of by OSG and the Subsidiaries (other
than in the ordinary course of business) during the 365 day period ending
with the date of such sale, lease or other disposition, exceeds 15% of
Consolidated Net Tangible Assets, determined as of the end of the
immediately preceding fiscal quarter. For the purposes of any
determination of "Substantial Part" under this Section 8.2(e), a Qualified
Joint Venture Transaction shall not be deemed a sale, lease or other
disposition of assets by OSG and the Subsidiaries. A "Qualified Joint
Venture Transaction" shall mean a contribution of property by OSG or a
Subsidiary to a Joint Venture which property, in the good faith judgment
of the Board of Directors of OSG, is substantially equivalent in value to
the property contributed by the other co-venturers in
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such Joint Venture; provided (A) there are one or more co-venturers other
than OSG or a Subsidiary and (B) OSG or a Subsidiary maintains at least a
50% equity interest or exercises (and is entitled to exercise) at least
equivalent control of the management and administration of such Joint
Venture as the co-venturers, either singularly or in the aggregate,
exercise (and are entitled to exercise).
For the purpose of making any determination of "Substantial Part,"
sales, leases and other dispositions of assets of OSG and its Subsidiaries
shall not be included if, within twenty-four (24) months after such sale,
lease or disposition, the net proceeds thereof are either (1) committed,
pursuant to a binding written contract, to the purchase or construction of
other assets of Shipping or Related Businesses that are to be used in the
business of OSG and its Subsidiaries or (2) used to retire Funded Debt;
provided, that, the percentage of proceeds, if any, applied to pay
Subordinated Funded Debt shall not exceed the percentage which
Subordinated Funded Debt represents of Consolidated Funded Debt; provided
further that pending the actual application of such proceeds for the
purposes described in clause (1) or (2) above, such net proceeds shall be
invested only in Permitted Investments.
(f) Transactions with Affiliates. Will not, and will not permit any
Recourse Subsidiary to, enter into or become a party to any material transaction
or arrangement with any Affiliate (including, without limitation, the purchase
from, sale to, or exchange of property with, or the rendering of any service by
or for, any Affiliate), except pursuant to the reasonable requirements of OSG's
or such Subsidiary's business and upon terms which are fair and reasonable and
in the best interests of OSG or such Subsidiary.
(g) Use of Proceeds. Will not use the proceeds of the Advances in
violation of Regulation T, U or X or the Foreign Assets Control Regulations of
the United States of America (Title 31, Code of Federal Regulations, Chapter V,
Part 500, as amended) or for any hostile acquisition.
(h) Maximum Investments in Joint Ventures. Will not, and will not
permit any Recourse Subsidiary to, make any Investment in any Joint Venture on
any date if, immediately after giving effect to such Investment, the aggregate
amount of all such Investments made by OSG and the Recourse Subsidiaries after
December 31, 2000 would exceed 30% of Consolidated Net Tangible Assets based on
the most recent consolidated balance sheet of OSG required to be provided
pursuant to Section 8.1(d).
(i) No Money Laundering. Will not, and will not permit any
Subsidiary to, contravene any law, official requirement or other regulatory
measure or procedure implemented to combat "money laundering" (as defined in
Article 1 of the Directive (91/308/EEC) of the Council of European Communities)
and comparable United States Federal and state laws.
(j) No Violation. Will not, and will not permit any Subsidiary to,
enter into any instrument or agreement with terms, conditions and provisions
therein which will conflict with or result in a breach or violation of Section
8.1(p) through (s) or any other provision of this Agreement.
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9. EVENTS OF DEFAULT
9.1. Events of Default. In the event that any of the following events shall
occur and be continuing:
(a) Principal Payments Any principal of the Advances is not paid on
the date due (whether at stated maturity or by prepayment, acceleration or
otherwise); or
(b) Interest and other Payments. Any interest on the Advances or any
other amount becoming payable under this Agreement and under the Notes or under
any of them, is not paid within three (3) Banking Days from the date when due;
or
(c) Representations, etc. Any representation, warranty or other
statement made or deemed made by or on behalf of the Borrowers or any Subsidiary
thereof in this Agreement or in any other instrument, document or other
agreement delivered in connection herewith (including, without limitation, any
amendment, or modification or waiver) proves to have been untrue or misleading
in any material respect as at the date as of which it was made or deemed to be
made; or
(d) Impossibility, Illegality. It becomes impossible or unlawful for
the Borrowers to fulfill any of the covenants and obligations contained herein
or in the Notes, or (in the event of any illegality which arises solely as a
result of the domicile of any Bank and the Borrower fails to obtain a
Replacement Bank in accordance with Section 11.8 within thirty (30) days
thereof) for any of the Banks to exercise any of the rights vested in any of
them hereunder or under the Notes and such impossibility or illegality, in the
reasonable opinion of such Bank, will have a material adverse effect on any of
its rights hereunder or under the Notes or on any of its rights to enforce any
thereof; or
(e) Certain Covenants. One or more of the Borrowers default in the
performance or observance of any covenant contained in Sections 8.1(b),
8.1(d)(v), 8.1(l), 8.1(p) through (u), 8.1(x), 8.2(a) through 8.2(e), and 8.2(h)
; or
(f) Covenants. One or more of the Borrowers default in the
performance of any term, covenant or agreement contained in this Agreement or in
the Notes, or in any other instrument, document or other agreement delivered in
connection herewith or therewith, in each case other than an Event of Default
referred to elsewhere in this Section 9.1, and such default continues unremedied
for a period of fifteen (15) days after written notice thereof has been given to
the Borrowers by the Administrative Agent at the request of any Bank; or
(g) Indebtedness and Other Obligations. OSG or any Recourse
Subsidiary defaults under (i) any Material Financial Obligation or (ii) any
other material contract or agreement to which it is a party or by which it is
bound and, in the case of this (ii), such default could reasonably be expected
to result in a Material Adverse Change or any event or condition occurs that
enables or permits (with or without the giving or notice of the lapse of time,
or both) the holder or holders of Material Financial Obligations of OSG or any
Subsidiary or any agent or trustee on their behalf to accelerate Indebtedness;
or
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(h) Bankruptcy. Any of the Borrowers or Material Subsidiaries
commences any proceedings relating to any substantial portion of its property
under any reorganization, arrangement or readjustment of debt, dissolution,
winding up, adjustment, composition, bankruptcy or liquidation law or statute of
any jurisdiction, whether now or hereafter in effect (a "Proceeding"), or there
is commenced against any thereof any Proceeding and such Proceeding remains
undismissed or unstayed for a period of sixty (60) days; or any receiver,
trustee, liquidator or sequestrator of, or for, any thereof or any substantial
portion of the property of any thereof is appointed and is not discharged within
a period of sixty (60) days; or any thereof by any act indicates consent to or
approval of or acquiescence in any Proceeding or to the appointment of any
receiver, trustee, liquidator or sequestrator of, or for, itself or any
substantial portion of its property; or
(i) Judgments. Any judgment or order is made the effect whereof
would be to render invalid this Agreement or the Notes or any material provision
thereof or any Borrower asserts that any such agreement or provision thereof is
invalid; or one or more judgments or orders for the payment of money aggregating
in excess of $10,000,000 for OSG and all Subsidiaries (or its equivalent in any
other currency) shall be rendered against OSG and/or any Subsidiary and such
judgments or orders shall continue unsatisfied and unstayed for a period of 30
consecutive days or any action shall be legally taken by the judgment creditor
to attach or levy upon assets of OSG or its Subsidiary to enforce such judgment;
or
(j) Inability to Pay Debts. Any Borrower or Material Subsidiary is
unable to pay or admits its inability to pay its debts as they fall due or a
moratorium shall be declared in respect of any Indebtedness of any thereof; or
(k) ERISA Debt. Any member of the ERISA Group or any ERISA Affiliate
shall (i) fail to pay when due an amount or amounts aggregating in excess of
$5,000,000 which it or they shall have become liable to pay under Title IV of
ERISA or (ii) any member of the ERISA Group or any ERISA Affiliate, individually
or collectively, shall incur, or shall reasonably expect to incur, any
Withdrawal Liability or liability upon the happening of a Termination Event and
the aggregate of all such Withdrawal Liabilities and such other liabilities
shall be in excess of $30,000,000;
then, and in every such event, the Banks' obligation to make the
Facility available shall cease and the Administrative Agent on behalf of the
Banks may, with the Majority Banks' consent and shall, upon the Majority Banks'
instruction, by notice to the Borrowers, declare the entire Commitments
terminated and the Facility Balance, accrued interest and any other sums payable
by the Borrowers hereunder and under the Notes due and payable whereupon the
same shall forthwith be due and payable immediately without presentment, demand,
protest or notice of any kind, all of which are hereby expressly waived;
provided that upon the happening of an event specified in subclauses (h) or (j)
of this Section 9.1, the Commitments shall automatically terminate without
further action of any kind and the Facility Balance, accrued interest and any
other sums payable by the Borrowers hereunder and under the Notes shall
automatically be immediately due and payable without declaration, presentment,
demand, protest or other notice to the Borrowers, all of which are expressly
waived by the Borrowers. In such event, the Creditors may proceed to protect and
enforce their rights by action at law, suit in equity or in admiralty or other
appropriate proceeding, whether for specific performance of any covenant
contained in this Agreement or in the Notes or in aid of the exercise of any
power granted herein
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or therein, or the Banks or the Administrative Agent may proceed to enforce the
payment of the Notes when due or to enforce any other legal or equitable right
of the Banks, or proceed to take any action authorized or permitted by
Applicable Law for the collection of all sums due, or so declared due,
including, without limitation, the right to appropriate and hold or apply
(directly, by way of set-off or otherwise) to the payment of the obligations of
the Borrowers to any of the Creditors hereunder and/or under the Notes (whether
or not then due) all moneys and other amounts of the Borrowers then or
thereafter in possession of any Creditor, the balance of any deposit account
(demand or time, matured or unmatured, provisional or final) of the Borrowers
then or thereafter with any Creditor and every other claim of the Borrowers then
or thereafter against any of the Creditors.
9.2. Application of Moneys. All moneys received by any of the Creditors under or
pursuant to this Agreement or the Notes after the happening of any Event of
Default shall be turned over to the Administrative Agent and applied by the
Administrative Agent in the following manner:
(a) firstly, in or towards the payment or reimbursement of any
expenses or liabilities incurred by any of the Creditors in connection with the
ascertainment, protection or enforcement of its rights and remedies hereunder
and under the Notes;
(b) secondly, in or towards payment of any interest owing in respect
of the Advances;
(c) thirdly, in or towards repayment of the Advances;
(d) fourthly, in or towards payment of all other sums which may be
owing to any of the Creditors under this Agreement or under the Notes; and
(e) fifthly, the surplus (if any) shall be paid to the Borrowers or
to whomsoever else may be entitled thereto.
10. ASSIGNMENTS; PARTICIPATIONS; PLEDGES
10.1. Assignments.
(a) This Agreement shall be binding upon, and inure to the benefit
of, the Borrowers and each of the Creditors and their respective successors and
assigns, except that the Borrowers may not assign any of their rights or
obligations hereunder without the prior written consent of all the Banks. Any
Bank may assign all or part of its rights and obligations under this Agreement
to any one or more financial institutions or collateralized loan obligation
funds or trusts ("CLO") approved by the Administrative Agent and the Borrowers,
which approval shall not be unreasonably withheld; provided, however, (i) that
no consent of the Borrowers shall be required if a Default has occurred and is
continuing at the time of such assignment (ii) that no such consent shall be
required if the assignee is immediately prior to such assignment another Bank,
an Affiliate of the assigning Bank or a CLO advised by a Bank (the expenses of
any Bank in connection with any such assignment shall be for its own or the
assignee's account); (iii) that no Borrower shall be required to pay any amount
under Sections 6.1 or 11 that is greater than the amount which it would have
been required to pay had no such assignment (including assignments to CLOs) been
made; (iv) that any assignment shall be made pursuant to an
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Assignment and Assumption Agreement substantially in the form of Exhibit B
hereto; and (v) that, in the case of a partial assignment by any Bank of its
rights and obligations hereunder, unless such assignment is to another Bank, an
Affiliate of a Bank, or, upon the consent of the Borrowers such consent not to
be unreasonably withheld, a CLO the minimum amount which may be assigned shall
be $5,000,000 and, after giving effect to any such assignment, each such
assigning Bank's pro rata portion of the Commitments and Advances shall
aggregate not less than $10,000,000; unless, in each case, otherwise agreed by
the Borrowers and the Administrative Agent. The Borrowers will take all
reasonable actions requested by the Banks to effect any such assignment,
including, without limitation, the execution of a written consent to any
Assignment and Assumption Agreement for which such consent is required by this
Section 10.1.
(b) Notwithstanding the foregoing, any Bank may at any time assign
all or any portion of its rights under this Agreement and the Notes to a Federal
Reserve Bank to secure extensions of credit by such Federal Reserve Bank to such
Bank; provided that no such assignment shall release a Bank from any of its
obligations hereunder or substitute any such Federal Reserve Bank for such Bank
as a party hereto.
10.2. Participations. Any Bank may at any time sell to one or more commercial
banks or other financial institutions (each of such commercial banks and other
financial institutions being herein called a "Participant") participating
interests in any of the Advances, its Commitment or other interests of such Bank
hereunder; provided, however, that
(a) no participation contemplated in this Section 10.2 shall relieve
such Bank from its Commitment or its other obligations hereunder;
(b) such Bank shall remain solely responsible for the performance of
its Commitment and such other obligations;
(c) no Participant, unless such Participant is an Affiliate of such
Bank, shall be entitled to require such Bank to take or refrain from taking any
action hereunder, except that such Bank may agree with any Participant that such
Bank will not, without such Participant's consent, approve any amendment or
waiver of any provision of this Agreement or any Note, or consent to any
departure by the Borrowers therefrom, if any such amendment, waiver or consent
would require the affirmative consent of such Bank pursuant to the terms hereof;
and
(d) no Borrower shall be required to pay any amount under Sections
6.1 or 11 that is greater than the amount which it would have been required to
pay had no participating interest been sold.
10.3. Promissory Notes. In order to facilitate assignments and participations
hereunder, the Borrowers shall, at the request of any Bank assigning or selling
participating interests in all or any portion of its rights under this Agreement
and its Note pursuant to Section 10.1 or 10.2, duly execute and deliver to such
Bank a promissory note or notes evidencing the portion of the Facility Balance
owing by the Borrowers to such Bank hereunder for delivery to the assignee.
10.4. Security Interest. Notwithstanding any other provision set forth in this
Agreement, any Bank or Participant may at any time create a security interest in
all or any portion of its rights
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under this Agreement, including, without limitation, in the Advances owing to
such Bank or Participant and the Note held by it.
11. ILLEGALITY, INCREASED COST, NON-AVAILABILITY, ETC.
11.1. Illegality. In the event that by reason of any change in any applicable
law, regulation or regulatory requirement or in the interpretation or
application thereof by any authority, a Bank or Participant has a reasonable
basis to conclude that it has become unlawful for such Bank or Participant to
maintain or give effect to its obligations as contemplated by this Agreement,
such Bank or Participant shall inform the Borrowers and the Administrative Agent
to that effect, whereupon the Commitment of such Bank or obligation of such
Participant shall forthwith terminate and the Borrowers shall be required to
repay to such Bank or Participant that portion of the Facility Balance advanced
by such Bank or Participant immediately. In any such event, but without
prejudice to the aforesaid obligations of the Borrowers to prepay the relevant
portion of the Facility Balance, the Borrowers and such Bank or Participant
shall negotiate in good faith with a view to agreeing on terms for making the
Commitment available from another jurisdiction or otherwise restructuring the
Commitment on a basis which is not unlawful.
11.2. Increased Cost. If any change in applicable law, regulation or regulatory
requirement or in the interpretation or application thereof by any Authority
shall:
(a) subject any Bank or Participant or the parent holding company
thereof to any Taxes; or
(b) change the basis of taxation to any Bank or Participant or the
parent holding company thereof payments of principal or interest or any other
payment due or to become due pursuant to this Agreement (other than a change in
the basis effected by the United States of America, the State or The City of New
York or any governmental subdivision or other taxing authority having
jurisdiction over such Bank, Participant, or parent holding company (unless such
jurisdiction is asserted solely by reason of the activities of OSG or any
Subsidiary) or such other jurisdiction where the Advances may be payable); or
(c) impose, modify or deem applicable any reserve or capital
adequacy requirements to or require the making of any special deposits against
or in respect of any assets or liabilities of, deposits with or for the account
of, or loans by, any Bank or Participant or the parent holding company thereof;
or
(d) impose on any Bank or Participant or the parent holding company
thereof any other condition affecting the Facility or any part thereof;
and the result of the foregoing is either to increase the cost of
making available or maintaining the Facility or any part thereof to such Bank or
Participant or its parent holding company, to reduce the rate of return on
assets or equity of such Bank or Participant or its parent holding company or
the amount of any payment received by such Bank or Participant or its parent
holding company, then and in any such case if such increase or reduction in the
opinion of such Bank or Participant materially affects the interests of such
Bank or Participant or its parent holding company under or in connection with
this Agreement:
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(i) such Bank or Participant shall notify the Borrowers and
the Administrative Agent in writing of the happening of such event;
(ii) the Borrowers agree forthwith upon receipt of notice from
such Bank or Participant as aforesaid to pay to such Bank or Participant such
amount as such Bank or Participant certifies to be necessary to compensate such
Bank or Participant or its parent holding company for such additional cost or
such reduction.
Any such notice referred to in subsections (i) and (ii) of this
Section 11.2 may be made by a Bank or Participant at any time before or within
one (1) year after any repayment of the Facility Balance; provided, however,
that before making any such demand, such Bank or Participant agree to use its
best efforts (consistent with its internal policy and legal and regulatory
restrictions) to designate a different lending office if the making of such
designation would avoid the need for, or reduce the amount of, such increased
cost or such reduction and would not, in the judgment of such Bank or
Participant, be otherwise disadvantageous to such Bank or Participant.
11.3. Nonavailability of Funds. If the Administrative Agent shall determine
that, by reason of circumstances affecting the London Interbank Market
generally, adequate and reasonable means do not or will not exist for
ascertaining the Applicable Rate for any Advance for any Interest Period, the
Administrative Agent shall give notice of such determination to the Borrowers
and the Banks. The Borrowers and the Administrative Agent, acting in accordance
with the instruction of the Banks, shall then negotiate in good faith in order
to agree upon a mutually satisfactory interest rate and/or Interest Period to be
substituted for those which would otherwise have applied under this Agreement.
If the Borrowers and the Administrative Agent are unable to agree upon such a
substituted interest rate and/or Interest Period within thirty (30) days of the
giving of such determination notice, the Administrative Agent shall set an
interest rate and Interest Period to take effect from the expiration of the
Interest Period in effect at the date of determination, which rate shall be
equal to the Applicable Margin plus the cost to the Banks and Participants (as
certified by each Bank and Participant) of funding such Advance. In the event
the state of affairs referred to in this Section 11.3 shall extend beyond the
end of any Interest Period, the foregoing procedure shall continue to apply
until circumstances are such that the Applicable Rate may be determined pursuant
to Section 5.
11.4. Determination of Losses. A certificate or determination notice of the
Administrative Agent or any affected Bank or Participant, as the case may be, as
to any of the matters referred to in this Section 11 shall, absent manifest
error, be conclusive and binding on the Borrowers.
11.5. Compensation for Losses. Where any portion of the Facility Balance is to
be prepaid by the Borrowers pursuant to Section 11.1 or otherwise, the Borrowers
agree simultaneously with such prepayment to pay to the affected Bank or
Participant all accrued interest to the date of actual payment and all other
sums payable by the Borrowers to such Bank or Participant pursuant to this
Agreement together with such amounts as may be certified by such Bank or
Participant to be necessary to compensate such Bank or Participant for any
actual loss, premium or penalties incurred or to be incurred by it on account of
funds borrowed to make, fund or maintain its portion of the Facility Balance for
the remainder (if any) of the then current Interest Period or Periods, but
otherwise without penalty or premium.
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11.6. Compensation for Breakage Costs. The Borrowers shall pay to the Banks,
Participants or any thereof, upon the request of any thereof, such amount or
amounts as shall be sufficient (in the reasonable opinion of the relevant Banks
and/or Participants) to compensate them for any loss, cost or expense incurred
by them as a result of:
(a) any payment or prepayment (including any such prepayment made
pursuant to Sections 2.7, 4.2 and 9.1) of an Advance on a date other than the
last day of an Interest Period for such Advance; or
(b) any failure by the Borrowers to borrow (including without
limitation any such failure resulting from a condition precedent set forth in
Section 3) or prepay an Advance held by any Banks and/or Participants on the
date for such borrowing or prepayment specified in the relevant request for such
Advance or notice of prepayment delivered under Sections 2.2 or 4.2,
respectively;
such compensation to include, without limitation, an amount equal to
the excess, if any, of (i) the amount of interest which would have accrued on
the principal amount so paid, prepaid or not borrowed for the period from the
date of such payment, prepayment or failure to borrow to the last day of the
then current Interest Period for such Advance or, in the case of a failure to
borrow, the Interest Period for such Advance which would have commenced on the
date of such failure to borrow, in each case at the applicable rate of interest
for such Advance provided for herein over (ii) the amount of interest which
otherwise would have accrued on such principal amount at a rate per annum equal
to the interest component (as reasonably determined by the relevant Banks and/or
Participants) of the amount (as reasonably determined by such Banks and/or
Participants) the Banks and/or Participants would have bid in the Eurocurrency
market for Dollar deposits of amounts comparable to such principal amount and
maturities comparable to such Interest Period. Any certification of a relevant
Bank or Participant shall, absent manifes