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<SEC-DOCUMENT>0001169232-04-001401.txt : 20040226
<SEC-HEADER>0001169232-04-001401.hdr.sgml : 20040226
<ACCEPTANCE-DATETIME>20040226170711
ACCESSION NUMBER: 0001169232-04-001401
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 13
CONFORMED PERIOD OF REPORT: 20031231
FILED AS OF DATE: 20040226
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-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-06479
FILM NUMBER: 04631478
BUSINESS ADDRESS:
STREET 1: 511 FIFTH AVENUE
CITY: NEW YORK
STATE: NY
ZIP: 10017
BUSINESS PHONE: 2122511153
MAIL ADDRESS:
STREET 1: 511 FIFTH AVENUE
CITY: NEW YORK
STATE: NY
ZIP: 10017
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>d58534_10-k.txt
<DESCRIPTION>ANNUAL REPORT
<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, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ________________ to ________________.
Commission File Number 1-6479-1
OVERSEAS SHIPHOLDING GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2637623
(State or other jurisdiction of (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:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
- ---------------------------------------- -----------------------------------------
<S> <C>
Common Stock (par value $1.00 per share) New York Stock Exchange
Pacific Exchange, Inc.
</TABLE>
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|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
The aggregate market value of the Common Stock held by non-affiliates of
the registrant on June 30, 2003, the last business day of the registrant's most
recently completed second quarter, was $637,382,000, based on the closing price
of $22.01 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 February 23, 2004, 39,254,097 shares of Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for 2003 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 2004 Annual
Meeting of Shareholders are incorporated by reference in Part III.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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............................................. 8
Competition............................................................... 9
Environmental and Security Matters Relating to Bulk Shipping.............. 10
Domestic Requirements.................................................. 10
International Requirements............................................. 10
Insurance.............................................................. 12
Security Matters....................................................... 13
Global Bulk Shipping Markets.............................................. 13
Faster Economic Recovery and Higher Oil Production..................... 13
VLCC Newbuilding Orders Climb; Fleet Modernizes........................ 14
Aframax Contracting Accelerates; Rapid Fleet Expansion................. 14
Panamax Product Carrier Fleet Stable; Rapid Modernization Imminent..... 14
Handysize Product Carrier Newbuilding Orderbook Continues to Grow...... 15
Glossary.................................................................. 15
Available Information..................................................... 18
Item 2. Properties................................................................ 18
Item 3. Legal Proceedings......................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders....................... 19
Executive Officers of the Registrant...................................... 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 20
Item 6. Selected Consolidated Financial Data...................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 22
General............................................................. 22
Operations.......................................................... 22
Critical Accounting Policies........................................ 25
Income from Vessel Operations....................................... 28
Equity in Income of Joint Ventures ................................. 33
Interest Expense.................................................... 34
Provision/(Credit) for Federal Income Taxes......................... 35
Effects of Inflation................................................ 35
Newly Issued Accounting Standard.................................... 35
Liquidity and Sources of Capital.................................... 36
Risk Management..................................................... 39
Interest Rate Sensitivity........................................... 40
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................ 40
Item 8. Financial Statements and Supplementary Data............................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 73
Item 9A. Controls and Procedures................................................... 73
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 73
Item 11. Executive Compensation.................................................... 73
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters............................................. 73
Item 13. Certain Relationships and Related Transactions............................ 74
Item 14. Principal Accounting Fees and Services.................................... 74
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 74
Signatures................................................................................. 79
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
Overseas Shipholding Group, Inc. ("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. As of December 31,
2003, the Company's modern fleet consisted of 52 oceangoing vessels that
aggregate 9.0 million deadweight tons, of which 43 vessels operated in the
international market and nine vessels operated in the U.S. Flag market, making
it the sixth largest independent tanker company in the world as measured by
deadweight tons. OSG is the only major U.S. shipping company with significant
operations in both the international and U.S. Flag markets.
Of the 52 vessels in OSG's fleet, 47 are tankers engaged in the oil
transportation business, of which 41 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 five other vessels are engaged in
the transportation of dry bulk cargo: two are Foreign Flag Dry Bulk Carriers
that operate in the international market, two are U.S. Flag Dry Bulk Carriers
that operate in the U.S. foreign aid trade, and one is a U.S. Flag Pure Car
Carrier. Of the Company's 41 Foreign Flag tankers, 21 are VLCCs (including seven
vessels owned by joint ventures in which the Company has interests ranging from
30% to 49.9%), one is a Suezmax, 13 are Aframaxes (including one vessel owned by
a joint venture in which the Company has a 50% interest) and six are Product
Carriers. The Marshall Islands is the principal flag of registry of the
Company's Foreign Flag vessels. The Company's U.S. Flag tankers consist of four
tankers engaged in the transportation of Alaskan crude oil ("U.S. Flag Crude
Tankers") and two Product Carriers.
The Company charters its vessels either for specific voyages ("voyage
charters") at spot rates or for specific periods of time ("time charters") at
fixed monthly amounts. From time to time, the Company also charters out its
vessels on bareboat charters. Under such bareboat charters, the ships are
chartered out for specific periods of time (generally medium or long-term)
during which they are manned and operated by our customers.
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 have been derived from the transportation of dry bulk
cargoes, primarily grain, coal, and iron ore. The transportation of crude oil
accounted for all of the operating income of the Company's joint ventures in
each of 2003, 2002 and 2001. The Company's customers include many of the world's
largest oil companies.
Voyage charters constituted 79% of the Company's Time Charter Equivalent
revenues in 2003, 70% in 2002 and 73% in 2001. 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. Spot market
rates are highly volatile. Rates are determined by market forces such as local
and worldwide demand for the commodities carried (such as crude oil or petroleum
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 the period of projected use. Seasonal trends greatly affect world oil
consumption and consequently tanker demand. While trends in consumption vary
with season, peaks in tanker demand quite often precede seasonal consumption
peaks as refiners and suppliers try to anticipate consumer demand. Seasonal
peaks in oil demand are principally driven by increased demand prior to Northern
Hemisphere winters, as heating oil consumption increases, and increased demand
for gasoline prior to the summer driving season in the U.S. 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, by the level of scrap prices and by international and U.S.
governmental regulations that require the maintenance of vessels within certain
standards and mandate the retirement of tankers lacking double hulls.
1
<PAGE>
A major portion of the Company's U.S. Flag fleet is on time or bareboat
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 remaining terms ranging from slightly more than one month to
more than two years. The Company's two U.S. Flag Product Carriers are operating
on time charters extending through late 2004. During 2002, the time charter on
the Company's U.S. Flag Pure Car Carrier was extended through late 2007. In the
Company's international fleet, one VLCC and the Suezmax are on charters that
extend to December 2004 and June 2005, respectively, and one of the Bostonmax
Product Carriers and one of the Panamax Product Carriers are on time charters
that extend to June 2004 and September 2004, respectively. With the commencement
of a 21-month charter in January 2004, three Product Carriers are now operating
on time charter. OSG's two Foreign Flag Dry Bulk Carriers will commence
three-year time charters in early 2004. At that time these vessels will be
withdrawn from a pool of Capesize vessels in which they have participated since
2000. In the aggregate, time charter and bareboat charter revenues constituted
21% of the Company's TCE revenues in 2003, 30% in 2002 and 27% in 2001.
In the international market, the Company offers its customers one of the
industry's most modern and efficient fleets. As of December 31, 2003, the
average age of the Company's 21 VLCCs was 5.4 years and the average age for its
13 Aframaxes was 6.5 years. In contrast as of the end of 2003, the average age
of the world fleets of VLCCs and Aframaxes was 8.2 years and 10.3 years,
respectively. The young age of the Company's VLCC and Aframax fleets and the
Company's technical management expertise has resulted in minimal service
disruptions for these vessels.
The Company's fleet-renewal program has enabled OSG to offer one of the
industry's most modern fleets at the same time that major customers are
demonstrating a clear preference for modern tonnage based on concerns about the
environmental risks associated with older vessels. As of December 31, 2003, more
than 92% (based on deadweight tons, weighted to reflect the Company's interest
in vessels owned jointly with others) of OSG's Foreign Flag tanker fleet was
double hull or double sided. Under this fleet-renewal program, two newbuildings
were delivered in 2000, seven in 2001, four in 2002 and two in 2003. In
addition, five modern second-hand vessels were acquired in the last four years,
one of which was transferred to a joint venture partner in July 2003. The one
remaining newbuilding on order as of December 31, 2003, which is a wide-bodied,
shallow-draft Aframax, was delivered in January 2004. All of these modern
vessels are built and maintained to operate safely and reliably in accordance
with the Company's commitment to environmental protection.
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 for vessel owners.
In December 1999, the Company and other leading tanker companies formed Tankers
International LLC to pool the commercial operation of their modern VLCCs. As of
December 31, 2003, Tankers managed 38 VLCCs. The Company also has an Aframax
pooling arrangement that consisted of 29 Aframaxes as of December 31, 2003,
which generally trade in the Atlantic Basin and the Mediterranean (see
"Operations - International Fleet Operations - Aframax Pool" on page 7). Both of
these pools negotiate charters with customers on behalf of the Company,
primarily in the spot market. The size and scope of these pools enable them to
enhance utilization rates for pool vessels and generate higher effective TCE
revenues than are otherwise obtainable in the spot market.
In recent years, the Company has materially reduced vessel operating costs
and overhead. The Company has reduced organizational layers to streamline
decision making, transferred functions 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 shoreside 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 to benchmark its operations with those of other
parties.
2
<PAGE>
OSG has sought to distinguish itself through its emphasis on service,
safety and reliability. Through its customer-focused business strategy, the
Company is committed to providing comprehensive transportation solutions for its
customers' bulk shipping challenges. As a result, the Company has successfully
maintained a number of long-term, close customer relationships.
The Company also believes that the strength of its balance sheet, and the
financial flexibility that it affords, distinguishes it from many of its
competitors. At December 31, 2003, the Company's liquidity adjusted debt to
capital ratio stood at 37.6% compared with 45.5% at December 31, 2000. For this
purpose, the Company's liquidity adjusted debt is defined as the Company's
long-term debt reduced by the Company's cash, marketable securities and tax
adjusted balance in the Capital Construction Fund. The Company's liquidity
adjusted debt to capital ratio has decreased by 7.9% even as OSG has made
investments in joint ventures and vessels of more than $487 million in the last
three years. Completion of the Company's fleet expansion in January 2004 only
required further capital expenditures of approximately $8 million.
On January 29, 2004, the Company sold 3,200,000 shares of common stock in
an underwritten public offering. The sale was made pursuant to an existing shelf
registration statement filed on January 13, 2004. The net proceeds (after
deducting expenses) to OSG from such sale were approximately $115.2 million.
On February 19, 2004, the Company issued $150,000,000 principal amount of
senior unsecured notes pursuant to the existing shelf registration statement.
The notes, which are due in February 2024 and may not be redeemed prior to
maturity, have a coupon of 7.5%. The Company received net proceeds (after
deducing expenses) of approximately $146.7 million.
As of December 31, 2003, the Company had 1,752 employees: 1,609 seagoing
personnel and 143 shoreside staff. The Company has collective bargaining
agreements with two different maritime unions covering 130 seagoing personnel
employed on the Company's U.S. Flag vessels. These agreements are in effect
through June 15, 2005 with one of the unions and June 15, 2006 with the other
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.
Since tankers tend to specialize on specific trade routes based on their
size, design configuration and flag of registry, the Company has established
four reportable business segments: Foreign Flag VLCCs, Aframaxes and Product
Carriers, and U.S. Flag Crude Tankers.
For information about the world tanker fleet in 2003, see "Global Bulk
Shipping Markets" on pages 13 to 15.
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 15.
Capitalized terms that are used in this Annual Report are either defined when
they are first used or in the Glossary.
Forward-Looking Statements
This Form 10-K contains forward-looking statements regarding the outlook
for tanker and dry cargo markets, and the Company's prospects, including
prospects for certain strategic alliances. 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 globally or in
particular regions; greater than anticipated levels of newbuilding orders or
less than anticipated rates of scrapping of older vessels; 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 discharge of
pollutants; unanticipated changes in laws and regulations; increases in costs of
operation; 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; and changes affecting the
vessel owning joint ventures in which the Company is a party. The Company
assumes no obligation to update or revise any forward-looking statements.
Forward-looking statements in this Form 10-K and written and oral
forward-looking statements attributable to the Company or its
3
<PAGE>
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.
Operations
The bulk shipping industry has many distinct market segments based, in
large part, on the size and design configuration of vessels required and, in
some cases, on the flag of registry. Freight rates in each market segment are
determined by a variety of factors affecting the supply and demand for suitable
vessels. Tankers and Dry Bulk Carriers 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 four reportable segments for each year in the three-year period
ended December 31, 2003 and excludes the Company's proportionate share of TCE
revenues of joint ventures:
Percentage of TCE Revenues
-------------------------------------------
2003 2002 2001
-------------------------------------------
Foreign Flag
VLCCs 43.9% 29.9% 29.6%
Aframaxes 24.5% 26.7% 29.2%
Product Carriers 8.2% 13.1% 15.2%
-------------------------------------------
Total Foreign Flag Segments 76.6% 69.7% 74.0%
U.S. Flag Crude Tankers 6.5% 10.5% 7.4%
All Other 16.9% 19.8% 18.6%
-------------------------------------------
Total 100.0% 100.0% 100.0%
===========================================
U.S. Flag Dry Bulk Carriers, which was a reportable segment through 2002,
no longer meet the materiality thresholds for disclosure as a reportable segment
as established by Statement of Financial Accounting Standards No. 131 ("FAS
131"), "Disclosures about Segments of an Enterprise and Related Information."
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, 2003. The percentages for 2002 and 2001
have been adjusted to conform to the 2003 presentation of certain items. Income
from vessel operations is before general and administrative expenses, the
restructuring charge taken in 2001, and the Company's share of income from joint
ventures:
Percentage of Income from Vessel Operations
-------------------------------------------
2003 2002 2001
-------------------------------------------
Foreign Flag
VLCCs 49.2% 24.5% 35.5%
Aframaxes 26.7% 35.9% 36.8%
Product Carriers 6.2% 13.8% 16.7%
-------------------------------------------
Total Foreign Flag Segments 82.1% 74.2% 89.0%
U.S. Flag Crude Tankers 7.2% 18.0% 7.8%
All Other 10.7% 7.8% 3.2%
-------------------------------------------
Total 100.0% 100.0% 100.0%
===========================================
4
<PAGE>
Revenues from Foreign Flag vessels are derived principally from voyage
charters and are, therefore, significantly affected by prevailing spot rates.
During 2002, spot rates, particularly for VLCCs and Aframaxes, were
significantly lower than their levels for 2003 and 2001. In contrast to the
Foreign Flag fleet, revenues from U.S. Flag Crude Tankers are derived from
long-term fixed rate charters generating a fixed level of TCE 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 freight rates then existing in the international
market, increasing when rates in the international market decrease and
decreasing when such rates increase.
The following chart reflects the percentage of equity in income of joint
ventures by each reportable segment:
Percentage of Equity in Income of Joint
Ventures
-------------------------------------------
2003 2002 2001
-------------------------------------------
Foreign Flag
VLCCs 69.2% 29.8% 35.0%
Aframaxes 8.5% 1.2% 24.0%
Product Carriers -- -- --
-------------------------------------------
Total Foreign Flag Segments 77.7% 31.0% 59.0%
U.S. Flag Crude Tankers 22.3% 68.2% 40.8%
All Other -- 0.8% 0.2%
-------------------------------------------
Total 100.0% 100.0% 100.0%
===========================================
The relative contribution to equity in income of joint ventures of our
joint-venture VLCCs and one Aframax grew in 2003 compared with 2002 because of
the increase in spot market rates earned by such vessels.
The Company and its joint venture partner in six VLCCs (three pairs of
sisterships), in which the Company's interest approximates 49.9%, have entered
into an agreement in principle under which three (one from each pair of
sisterships) of such vessels will become wholly owned by OSG and the remaining
three VLCCs will become wholly owned by the joint venture partner. This
transaction is expected to close in the first quarter of 2004. In 2004, as a
result of this agreement, equity in income of joint ventures will decrease.
Shipping revenues and ship operating expenses, however, will increase because we
will cease using the equity method of accounting for these six VLCCs and instead
consolidate the results of the three 100% owned VLCCs.
For additional information regarding the Company's four reportable
segments for the three years ended December 31, 2003, 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 2003 set forth in Item 8.
Fleet
As of December 31, 2003, OSG's Foreign Flag and U.S. Flag fleets consisted
of 52 vessels, including eight vessels owned by joint ventures (seven VLCCs and
one Aframax) in which the Company has an average interest of 47% and six vessels
that are chartered in under operating leases. One of the six chartered-in
vessels is a VLCC that participates in the Tankers International pool and in
which the Company has a 40% participation interest.
5
<PAGE>
<TABLE>
<CAPTION>
December 31, 2003 December 31, 2002 December 31, 2001
-------------------- -------------------- --------------------
Vessel Type Vessels Dwt Vessels Dwt Vessels Dwt
- ----------- ------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Foreign Flag
VLCC 21 6,335,600 21 6,316,217 17 5,080,218
Suezmax 1 147,501 1 147,501 1 147,501
Aframax 13 1,339,961 12 1,227,918 12 1,200,394
Panamax Product Carrier 2 128,379 4 260,765 4 260,765
Bostonmax Product Carrier 4 159,555 4 159,555 4 159,555
Capesize Bulk Carrier 2 319,843 2 319,843 2 319,843
----------------------------------------------------------------------
Foreign Flag Vessels 43 8,430,839 44 8,431,799 40 7,168,276
U.S. Flag
Crude Tanker 4 398,664 4 398,664 4 398,664
Handysize Product Carrier 2 87,030 2 87,030 2 87,030
Bulk Carrier 2 51,902 2 51,902 3 174,312
Pure Car Carrier 1 16,141 1 16,141 1 16,141
----------------------------------------------------------------------
U.S. Flag Vessels 9 553,737 9 553,737 10 676,147
----------------------------------------------------------------------
Foreign and U.S. Flag Vessels 52 8,984,576 53 8,985,536 50 7,844,423
Foreign Flag Newbuildings on Order
VLCC -- -- 1 318,518 4 1,232,574
Aframax 1 112,700 2 225,401 3 337,541
----------------------------------------------------------------------
Total Vessels, including Newbuildings 53 9,097,276 56 9,529,455 57 9,414,538
======================================================================
</TABLE>
The fleet list for 2002 has been restated to include vessels that were
chartered in under operating leases, which prior to 2003 had been excluded from
such fleet lists. In addition, the deadweight tons for 2002 and 2001 have been
remeasured in metric tons to conform to the 2003 presentation. Prior to 2003,
deadweight tons were measured in long tons.
The following chart summarizes the fleet and its tonnage, weighted to
reflect the Company's ownership and participation interests in vessels.
<TABLE>
<CAPTION>
December 31, 2003 December 31, 2002 December 31, 2001
-------------------- -------------------- --------------------
Vessels Dwt Vessels Dwt Vessels Dwt
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Foreign and U.S. Flag Vessels 47.2 7,669,441 45.9 6,973,157 44.8 6,413,192
Total Vessels, including Newbuildings 48.2 7,782,141 48.9 7,517,076 50.5 7,502,527
</TABLE>
The one Aframax newbuilding (Overseas Cathy) on order as of December 31,
2003 was delivered in January 2004. The Overseas Boston, a U.S. Flag Crude
Tanker was sold in February 2004, upon its redelivery from a long-term charter.
For additional information regarding the Company's fleet, see the fleet
list tables in the Company's Annual Report to Shareholders for 2003, which
tables are incorporated herein by reference.
International Fleet Operations
The Company's VLCC and Aframax fleets constitute two of its reportable
business segments. In order to enhance vessel utilization and TCE revenues, the
Company has placed its VLCCs and Aframaxes in pools that are responsible for the
Commercial Management of these vessels.
6
<PAGE>
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, 2003, Tankers managed a fleet of 38 modern VLCCs (of which the
Company has contributed 17 vessels, including four ships owned by joint ventures
in which the Company has ownership interests ranging from 30% to 49.9%).
Tankers has recently been advised that one of the members intends to
withdraw its eight vessels from the pool over the course of the next 12 months.
These deletions will be more than offset by additions to the pool over this
period arising from existing charter, newbuilding and other commitments.
Tankers performs the Commercial Management of its participants' vessels.
It collects revenues from customers, pays voyage-related expenses, 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 vessel.
The large number of vessels managed by Tankers, and the COAs into which
Tankers has entered, give it the ability to enhance vessel utilization. In
recent years, crude oil shipments from West Africa to Asia have expanded,
increasing opportunities for vessels otherwise returning in ballast (i.e.,
without cargo) from Europe and North America to load cargoes in West Africa for
delivery in Asia. Such combination voyages are used to maximize vessel
utilization by minimizing the distance vessels travel in ballast.
By consolidating the Commercial Management of its substantial VLCC fleet,
Tankers is able to offer its customers "one-stop shopping" for high-quality
VLCCs. 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.
Aframax Pool ("Aframax International")
Since 1996, the Company and PDV Marina S.A., the marine transportation
subsidiary of the Venezuelan state-owned oil company, have pooled the Commercial
Management of their Aframax fleets. In the past two years, three well
established European owners have joined the pool, adding eight vessels. With 29
vessels that generally trade in the Atlantic Basin and the Mediterranean, the
Aframax International pool has been able to enhance vessel utilization with
backhaul cargoes and COAs, thereby generating higher TCE revenues than would
otherwise be attainable in the spot market.
From December 2002, until production started to increase again in February
2003, a general strike restricted the production and export of oil from
Venezuela by the state-owned oil company, Petroleos de Venezuela S.A. Although
the Venezuelan government succeeded in restoring a significant portion of
pre-strike production, the eight vessels of PDV Marina normally employed in the
Aframax International pool have been carrying proprietary Venezuelan cargoes
outside of the pool since the strike began.
Commercially Flexible Fleet of Product Carriers
OSG's fleet of six Foreign Flag Product Carriers constitutes one of the
Company's reportable business segments. 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
two Panamax Product Carriers, which for many years traded from the Arabian Gulf
to the Far East, have adapted to changing trade patterns and are now also
carrying products from Korea to the U.S. West Coast as well as in the
intra-Asian trades.
7
<PAGE>
U.S. Flag Fleet Operations
The Company's four U.S. Flag Crude Tankers constitute one of the Company's
reportable business segments.
Under the Jones Act, shipping between United States ports, including the
movement of Alaskan crude oil, is reserved for U.S. Flag vessels that are built
in the U.S. and owned by U.S. companies, more than 75% owned and controlled by
U.S. citizens. The four U.S. Flag Crude Tankers and two U.S. Flag Product
Carriers operate in trades protected by the Jones Act.
The Merchant Marine Act of 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. The Company's two U.S. Flag Dry Bulk Carriers generate most of their
revenue from these preference trades.
Since late 1996, the Company's U.S. Flag Pure Car Carrier 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 from U.S. Flag vessels
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 U.S. Flag vessels to be constructed or
acquired. 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 $247 million in its Capital Construction
Fund as of December 31, 2003. The Company's balance sheet at December 31, 2003
includes a liability of approximately $77 million for deferred taxes on the fund
deposits and earnings thereon.
Alaska Tanker Company, LLC ("ATC")
Building on a more than 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. The Company's U.S. Flag Crude Tankers are bareboat chartered
to ATC, with BP guaranties. Each bareboat charter expires shortly before the
date that OPA 90 precludes such single hull tanker from calling on U.S. ports.
The first charter expires in February 2004 and the last charter expires in 2006.
The bareboat charters will generate TCE revenues of approximately $19.5 million
in 2004, $15.1 million in 2005 and $1.1 million in 2006. The Company's
participation in ATC provides the Company with the ability to earn additional
income (incentive hire) based upon ATC's meeting certain predetermined
performance standards. Such income, which is included in equity in income of
joint ventures, amounted to $7.6 million in 2003, $7.8 million in 2002 and $8.4
million in 2001.
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. On July 1, 2003, the Company
consolidated this entity in accordance with Financial Accounting Standards Board
Interpretation No. 46. For additional information, see Note B to the
consolidated financial statements
8
<PAGE>
set forth in Item 8. As of December 31, 2003, the balance of bank debt on the
books of the entity to which such vessels were sold aggregated $27.4 million.
Such debt, which is due in monthly installments through August 2005, is
repayable in full from bareboat charter revenues received 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 more than 5.3% 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 more charterers have recently
become 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 users of oil transportation
services 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 than in the voyage charter market.
In both the VLCC and Aframax market segments, the Company competes against
a large number of companies. Competitors include other independent shipowners,
oil companies and state owned entities with fleets ranging from one to more than
50 vessels in a particular segment. While some of our competitors operate
worldwide, others focus on one or more geographical areas such as the Pacific,
the Mediterranean, or the Caribbean.
As of December 31, 2003, OSG's VLCC fleet consisted of 21 vessels (6.3
million dwt) of which 17 (5.1 million dwt) are Commercially Managed through
Tankers. Of the Company's four remaining VLCCs, one is operating on a long-term
charter expiring in 2004 and three are joint-venture vessels that are
Commercially Managed by our joint-venture partner. Four of the VLCCs entered in
Tankers by the Company are owned jointly with others. As of December 31, 2003,
Tankers had a fleet of 38 VLCCs (11.5 million dwt), which represented 9.1% of
the total world VLCC fleet on a deadweight ton basis.
In the VLCC market segment, Tankers competes with more than 90 owners, the
largest being Frontline Ltd. (38 vessels, 11.2 million dwt), World-Wide Shipping
Agency (S) Pte. Ltd. (30 vessels, 8.8 million dwt), Nippon Yusen Kabushiki
Kaisha (23 vessels, 6.4 million dwt), Mitsui OSK Lines Ltd. (23 vessels, 6.6
million dwt) and VELA International Marine Ltd., the shipping arm of the Saudi
Arabian oil company (21 vessels, 6.4 million dwt).
As of December 31, 2003, Aframax International had a fleet of 29 Aframaxes
(3.0 million dwt). Aframax International's vessels generally trade in the
Atlantic Basin and the Mediterranean. More than 160 owners operate in the
Aframax market segment. Aframax International's main competitors include Teekay
Shipping Corporation (59 vessels, 6.0 million dwt), Malaysian International
Shipping Corporation Berhad (32 vessels, 3.3 million dwt), General Maritime
Corp. (23 vessels, 2.2 million dwt) and Tsakos Energy Navigation (14 vessels,
1.4 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 compete with
pipelines and oceangoing barges, and are affected by the level of imports on
Foreign Flag Product Carriers.
9
<PAGE>
Environmental and Security 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 vessel quality and to the strengthening of the inspection
programs of Classification Societies, governmental authorities and charterers.
OPA 90 affects all vessel owners shipping oil 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
(i.e., offload cargo) more than 60 miles offshore.
OSG's two single hull VLCCs (including one in which OSG has a 30%
interest) and its single hull Suezmax will not be 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 Company's 50% owned double sided Aframax is
required to stop trading to U.S. ports in 2015. The two U.S. Flag 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 six 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 its commercial life.
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 certified under the standards reflected in International
Standards Organization's 9002 quality assurance program and IMO's International
Safety Management safety and pollution prevention protocols. In 2002, our New
York office obtained 14001 Certification for Environmental Management Systems.
Under the International Safety Management Code for the Safe Operation of Ships
and for Pollution Prevention promulgated by the IMO, vessel operators are
required to develop an extensive safety management system for each of the
vessels over which they have operational control. The system includes, among
other things, the adoption of a safety and environmental protection policy
setting forth instructions and procedures for safe operation and describing
procedures for dealing with emergencies. The International Safety Management
Code requires a certificate of compliance to be obtained both for the vessel
manager and for each vessel that it operates. We have obtained such certificates
for our shoreside offices and for all of the vessels that we manage.
10
<PAGE>
MARPOL 73/78 regulations of the IMO require double hulls or equivalent
tanker designs for newbuildings ordered after 1993. In addition, the
regulations, which were amended in 2001, provided a timetable for the phase out
of single hull tankers. This timetable was amended again in December 2003 in
response to European Union ("EU") proposals, further accelerating the final
phase-out dates for single hull tankers. The new phase-out regime will become
effective on April 5, 2005. For Category 1 tankers (pre-MARPOL tankers without
segregated ballast tanks, generally built before 1982), the final phase-out date
has been brought forward to 2005 from 2007. For Category 2 tankers (MARPOL
tankers, generally built after 1982) the final phase out date was brought
forward to 2010 from 2015. In addition, a Condition Assessment Scheme ("CAS")
will apply to all single hull tankers 15 years or older. Flag states, however,
may permit the continued operation of Category 2 tankers beyond 2010, subject to
satisfactory CAS results, but only to 2015 or 25 years of age, whichever comes
earlier. Category 2 tankers fitted with double bottoms or double sides not used
for the carriage of oil will be permitted to trade beyond 2010 to 25 years of
age, subject to the approval of the flag state. The latest amendments to MARPOL
73/78 will ban the oldest single hull tankers, representing approximately 12% of
the current world tanker fleet, from worldwide trading by the end of 2005. A
further 26% of the existing world tanker fleet will be excluded from many oil
tanker trades by 2010.
Although flag states may grant life extensions to Category 2 tankers, port
states are permitted to deny entry to their ports and offshore terminals to
single hull tankers operating under such life extensions after 2010, and to
double sided or double bottomed tankers after 2015.
A new MARPOL Regulation 13H was also introduced, banning the carriage of
heavy grade oils in single hull tankers of more than 5,000 dwt after April 5,
2005. This regulation will predominantly affect heavy crude oil from Latin
America as well as heavy fuel oil, bitumen, tar and related products. Flag
states, however, may permit Category 2 tankers to continue to carry heavy grade
oil beyond 2005, subject to satisfactory CAS results.
EU regulation (EC) No. 417/2002, which was introduced in the wake of the
sinking of the Erika off the coast of France in December 1999, provided a
timetable for the phase out of the single hull tankers from EU waters. The
subsequent sinking of the Prestige off the coast of Spain in November 2002
prompted the EU to implement an immediate ban on the transport of heavy crude
oil and heavy fuel oil in single hull tankers loading or discharging at EU
ports. In addition, the previous timetable was amended with the introduction of
regulation (EC) No. 1726/2003 to further accelerate the phase out of single hull
tankers. The new regulation came into force during October 2003 and banned all
Category 1 single hull tankers over the age of 23 years immediately, with all
Category 1 single hull tankers being phased out by 2005. For Category 2 single
hull tankers, the final phase-out date was set at 2010, with double sided or
double bottomed tankers permitted to trade until 2015 or until reaching 25 years
of age, whichever comes earlier.
Because OSG's Foreign Flag tanker fleet comprises mainly modern double
hull vessels, the impact of the revised EU regulations and the revised and
accelerated IMO phase out schedule will be limited. The following table
summarizes the impact of such regulations on the Company's single hull and
double sided Foreign Flag tankers:
<TABLE>
<CAPTION>
Banned from EU
Ports IMO Phase Out (1)
--------------------- -------------------
Age at Year of Age at
Vessel Vessel Year Year of Date Phase Date of
Vessel Name Type Category Built Ban of Ban Out Phase Out
- ----------- ---- -------- ----- --- ------ --- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Crude Oil Tankers
Olympia (2) VLCC Single Hull 1990 2010 20 2015 25
Dundee (3) VLCC Double Sided 1993 2015 22 2018 25
Edinburgh (3) VLCC Double Sided 1993 2015 22 2018 25
Front Tobago (4) VLCC Single Hull 1993 2010 17 2015 22
Eclipse (2) Suezmax Single Hull 1989 2010 21 2014 25
Compass 1 (5) Aframax Double Sided 1992 2015 23 2017 25
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Banned from EU Ports IMO Phase Out (1)
--------------------- -------------------
Age at Year of Age at
Vessel Vessel Year Year of Date Phase Date of
Vessel Name Type Category Built Ban of Ban Out Phase Out
- ----------- ---- -------- ----- --- ------ --- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Product Carriers
Mary Ann (2) Panamax Double Sided 1986 2011 25 2011 25
Diane (2) Panamax Double Sided 1987 2012 25 2012 25
Uranus (2) Bostonmax Double Sided 1988 2013 25 2013 25
Vega (2) Bostonmax Double Sided 1989 2014 25 2014 25
Delphina (2) Bostonmax Double Sided 1989 2014 25 2014 25
Neptune (2) Bostonmax Double Sided 1989 2014 25 2014 25
</TABLE>
(1) Assumes that flag state permits continued trading.
(2) 100% owned.
(3) 49.9% owned. These vessels are subject to an agreement that is expected to
close in the first quarter of 2004 whereby the Dundee will become wholly
owned by OSG and the Edinburgh will become wholly owned by the Company's
joint-venture partner. See Note E to the consolidated financial statements
set forth in Item 8.
(4) 30% owned.
(5) 50% owned.
The Company's four U.S. Flag Crude Tankers and two U.S. Flag Product
Carriers participate in the U.S. Jones Act trades and are therefore not affected
by the IMO phase-out schedule. The U.S. has not adopted the 2001 amendments to
the MARPOL regulations, which were viewed as less restrictive than OPA 90
regulations that were already in place.
Many users of oil transportation services operating around Europe are
showing a willingness to pay a higher Worldscale rate for double hull tankers
than for single hull tankers. It is becoming increasingly more difficult to
obtain clearance for single hull tankers from many countries and oil terminals.
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 record as well as the claim records of all
other members of the individual Association of which it is a member, and the
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.
The Company carries marine hull and machinery and war risk insurance,
which includes the risk of actual or constructive total loss, for all of our
vessels. The vessels are each covered up to at least their fair market value,
with deductibles ranging from $100,000 to $185,000 per vessel per incident. In
addition, in order to reduce premiums the Company maintains certain co-insurance
provisions that it believes are prudent. The Company is self insured for hull
and machinery claims in amounts in excess of the individual vessel deductibles
up to a maximum aggregate loss of $2,000,000 per policy year.
12
<PAGE>
The Company currently maintains loss of hire insurance to cover loss of
charter income resulting from accidents or breakdowns of our owned vessels that
are covered under the vessels' marine hull and machinery insurance. Although
loss of hire insurance covers up to 120 days lost charter income per vessel per
incident, the Company bears the first 27 days lost for each covered incident.
Security Matters. As of July 1, 2004, all ships involved in international
commerce and the port facilities that interface with those ships must comply
with the new International Code for the Security of Ships and of Port Facilities
("ISPS Code"). This includes passenger ships, cargo ships over 500 gross tons,
and mobile offshore drilling rigs. The ISPS Code, which was adopted by the IMO
in December 2002, provides a set of measures and procedures to prevent acts of
terrorism, which threaten the security of passengers and crew and the safety of
ships and port facilities.
In December 2003, OSG submitted its Ship Security Plans for review and
certification to the regulatory authorities. On December 20, 2003, the first OSG
vessel received and implemented its approved Ship Security Plan, with
verification by the flag state scheduled for the end of February 2004. OSG
anticipates that the new security measures will be in place fleet-wide well
ahead of the obligatory deadline.
Global Bulk Shipping Markets
Faster Economic Recovery and Higher Oil Production
World economic growth, as measured by Gross Domestic Product, accelerated
to an estimated 2.5% in 2003, up from 2.0% in 2002. World oil demand, as
estimated by the International Energy Agency ("IEA"), rose to 78.4 million
barrels per day ("b/d") in 2003 from 77.0 million b/d in 2002, and world oil
production increased to 79.3 million b/d from 76.6 million b/d. The Organisation
of Petroleum Exporting Countries ("OPEC") increased production during 2003 by
1.9 million b/d. Oil production from countries outside of OPEC increased by 0.9
million b/d, with a production decline of 0.3 million b/d in the North Sea
offset by gains of 0.9 million b/d in the Former Soviet Union ("FSU") and 0.2
million b/d in North America. Overall tanker employment grew by 3.0% in 2003,
benefiting from a 7.0% increase in long haul movements from Middle East members
of OPEC, a market upon which VLCC owners are heavily reliant.
The increase in production by Middle East members of OPEC compensated for
production shortfalls elsewhere, with Iraqi production sharply reduced by the
Second Gulf War, and both Venezuelan and Nigerian production curtailed due to
labor unrest. Venezuela's production failed to recover to pre-strike levels
during 2003. In addition, Indonesian production also declined during 2003.
Although Iraqi production fell from 2.5 million b/d before the war to just 0.2
million b/d in the immediate aftermath, production has since recovered to almost
2.0 million b/d by the end of 2003. Iraq's northern export route via Ceyhan in
the Mediterranean has remained dormant since the end of the war, with attempts
to restore pipeline operations disrupted by guerrilla attacks. These factors
raised the volume of oil being shipped from long-haul Middle East sources.
On the demand side, world economic growth slowed during the first quarter
of 2003 in the build up to the Second Gulf War, but recovered strongly following
its swift resolution. The outbreak of Severe Acute Respiratory Syndrome ("SARS")
briefly reduced Asian oil demand during the second quarter of 2003, but was
quickly contained and demand rebounded. China's oil consumption in 2003
increased to 5.5 million b/d from 5.0 million b/d in 2002. In Japan, the
shutdown of a significant number of nuclear power plants due to security
concerns led to a 33% increase in consumption of residual fuel oil and crude for
direct burning in the first ten months of 2003.
This series of events contributed to increased volatility in tanker rates
during 2003. For example, for fixtures from the Middle East, average VLCC rates
were $68,000 per day in the first quarter, falling to $39,800 per day in the
second quarter and then to $28,600 per day in the third quarter, before rising
to $56,800 per day in the final quarter. Aframax rates followed a similar
pattern with average rates on voyages from the Caribbean to the U.S. of $41,200
per day in the first quarter falling to $18,800 per day by the third quarter,
before recovering in the final quarter of 2003 to $34,700 per day.
13
<PAGE>
VLCC Newbuilding Orders Climb; Fleet Modernizes
The world VLCC fleet grew marginally to 433 (126.1 million dwt) at
December 31, 2003 from 427 vessels (124.8 million dwt) at the start of 2003, as
VLCC deliveries from shipyards exceeded deletions for the first time in three
years. VLCC newbuilding deliveries amounted to 37 vessels (11.4 million dwt) in
2003, a slight decrease from 38 vessels (12.0 million dwt) in 2002. Newbuilding
orders in 2003, which totaled 51 vessels (15.5 million dwt), were concentrated
in the first half of the year, as high ordering in other bulk shipping sectors
led to a scarcity of newbuilding berths at shipyards during the second half of
the year. As of December 31, 2003, the VLCC orderbook had risen to 74 vessels
(22.5 million dwt), equivalent to 17.8%, based on deadweight tons, of the
existing VLCC fleet. This compares with 64 vessels (19.6 million dwt),
equivalent to 15.7% of the VLCC fleet, at the start of 2003.
Strong demand for VLCC tonnage during 2003 often made it difficult for
charterers to secure modern vessels. Consequently, sales for scrap of older
vessels declined from the levels reached in 2002. During the second and third
quarters of 2003, however, scrap sales accelerated as freight rates fell. Total
VLCC sales for scrap and conversions amounted to 33 vessels (10.9 million dwt)
in 2003 compared with 41 VLCCs (13.4 million dwt) being removed from service in
2002.
Aframax Contracting Accelerates; Rapid Fleet Expansion
The Aframax fleet grew significantly in 2003. As of December 31, 2003, the
world Aframax fleet amounted to 601 vessels (59.2 million dwt), an increase of
8.4% (in terms of deadweight tons) from 565 vessels (54.6 million dwt) at
January 1, 2003. Removals from service in the Aframax fleet increased to 41
vessels (3.7 million dwt) during 2003 compared with 20 vessels (1.8 million dwt)
in 2002.
Strong freight rates during the first and last quarters of 2003
contributed to a sharp increase in the number of Aframax newbuilding orders. In
2003, 99 vessels (10.6 million dwt) were ordered, up from 43 vessels (4.7
million dwt) in 2002. As a result of the heavy ordering activity during the
period from 2000 to 2002, Aframax newbuilding deliveries during 2003 rose to 76
vessels (8.2 million dwt) compared with 36 vessels (3.8 million dwt) in 2002.
Newbuilding orders exceeded deliveries during 2003 lifting the number of vessels
on order to 154 vessels (16.6 million dwt) at December 31, 2003, equivalent to
28.0% of the existing Aframax fleet, based on deadweight tons. This compares
with 132 vessels (14.2 million dwt), equivalent to 26% of the Aframax fleet, at
the start of 2003. The size of the orderbook suggests growth in the Aframax
fleet over the next couple of years.
Aframax tankers have benefited from the increase in non-OPEC production in
recent years. In 2003, non-OPEC oil production increased by 0.9 million b/d,
primarily from the FSU. Seaborne crude oil exports from the FSU in 2003 rose to
3.7 million b/d, a 19% increase compared with 2002. Because half of these
exports were carried in Aframax tankers, Aframaxes employed in Mediterranean
trades particularly benefited.
The general strike in Venezuela that started in December 2002 has
negatively impacted Venezuelan oil production, which fell to average 2.0 million
b/d in 2003, or 76% of pre-strike levels. As a result, Venezuelan crude exports
to the U.S. were 6.1% lower in the first ten months of 2003 compared with the
same period in 2002. This shortfall has been offset, however, by increased
shipments from longer haul sources such as North and West Africa and the Middle
East, resulting in an overall increase in ton miles.
Panamax Product Carrier Fleet Stable; Rapid Modernization Imminent
The world Panamax Product Carrier fleet at December 31, 2003 amounted to
273 vessels (17.7 million dwt), a small reduction from the 283 vessels (18.1
million dwt) at the beginning of 2003. During 2003, 32 Panamax Product Carriers
(2.0 million dwt) were removed from service compared with 18 vessels (1.1
million dwt) in 2002. In 2003, Panamax deliveries totaled 22 vessels (1.6
million dwt), a significant increase from the nine vessels (0.6 million dwt)
delivered in 2002. At December 31,
14
<PAGE>
2003, the orderbook was 137 vessels (9.5 million dwt), equivalent to 53.7%,
based on deadweight tons, of the existing Panamax fleet. This compares with 75
vessels (5.3 million dwt), equivalent to 29.3% of the Panamax fleet, one year
earlier. At December 31, 2003, 40.7% of the world Panamax fleet was 20 or more
years old, making it the oldest overall tanker sector with an average age of
15.4 years.
The increase in production by Middle East members of OPEC in 2003 led to
an increase in long haul refined products exports from that region, positively
impacting rates for Panamax Product Carriers. Organization of Economic
Cooperation and Development ("OECD") imports of refined products from Middle
East members of OPEC during the first nine months of 2003 rose by 9.7% compared
with the corresponding period in 2002. U.S. long-haul imports of refined
products from the Middle East increased by 10.5% during the first ten months of
2003, compared with the corresponding period in 2002. Despite higher deliveries,
however, OECD inventory levels of refined products at November 30, 2003, were
0.8% lower (10.8 million barrels) than in November 2002, as strong demand for
gasoline and middle distillates resulted in a drawdown in stocks.
OECD Pacific imports of refined products during the first nine months of
2003 were 6.9% higher than during the corresponding period in 2002, reflecting
increased deliveries of residual fuel oil to Japan. For much of 2003, a
significant number of nuclear power plants in Japan were idled due to concerns
over safety, resulting in higher consumption of residual fuel oil by electric
utilities.
Handysize Product Carrier Newbuilding Orderbook Continues to Grow
The world Handysize Product Carrier fleet (which includes Bostonmax
Product Carriers) declined to 491 vessels at December 31, 2003 from 501 vessels
at the start of 2003, but remained constant in deadweight terms at 19.9 million
dwt as smaller vessels were replaced by larger vessels. Deliveries in 2003
totaled 34 vessels (1.6 million dwt) compared with scrappings and conversions of
33 vessels (1.1 million dwt) and the reclassification of 11 vessels. At December
31 2003, the newbuilding orderbook for Handysize Product Carriers reached 178
vessels (8.2 million dwt), equivalent to 41.2%, based on deadweight tons, of the
existing Handysize fleet. This compares with 131 vessels (6.0 million dwt),
equivalent to 30.3% of the Handysize fleet, one year earlier.
Glossary
Vessel Types Owned by OSG
VLCC VLCC is the abbreviation for Very Large Crude
Carrier, a large crude oil tanker 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 of approximately
120,000 to 200,000 deadweight tons. Modern
Suezmaxes can generally transport about one
million barrels of crude oil.
Aframax A medium size crude oil tanker 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).
Modern Aframaxes can generally transport from
500,000 to 800,000 barrels of crude oil.
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.
15
<PAGE>
Panamax Product Carrier A large size Product Carrier of approximately
50,000 to 80,000 deadweight tons that generally
operates on longer routes.
Handysize Product Carrier A small size Product Carrier 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 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 Company pays all voyage expenses,
and all vessel expenses, unless the vessel to
which the Charter relates has been time
chartered in. The customer is liable for
Demurrage, if incurred.
Demurrage Additional revenue paid to the Company 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.
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.
16
<PAGE>
Contract of Affreightment or COA is the abbreviation for Contract of
COA 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 is the abbreviation for Time Charter
TCE 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 or The management of the employment, or
Commercially Managed 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. and 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 administration 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.
Miscellaneous
Deadweight tons or Dwt Dwt is the abbreviation for deadweight tons,
representing principally the cargo carrying
capacity of a vessel, but including the weight
of consumables such as fuel, lube oil, drinking
water and stores.
17
<PAGE>
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.
Condition Assessment Scheme An inspection program designed to check and
report on the vessel's physical condition and
on its past performance based on survey and
IMO's International Safety Management audit
reports and port state performance records.
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.
Available Information
The Company makes available free of charge through its internet website,
www.osg.com, its Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after the Company electronically
files such material with, or furnishes it to, the Securities and Exchange
Commission.
ITEM 2. PROPERTIES
See Item 1.
ITEM 3. LEGAL PROCEEDINGS
On October 1, 2003, the U.S. Department of Justice served a grand jury
subpoena directed at the Company's Foreign Flag Product Carrier, the Uranus, and
the Company's handling of waste oils. Several witnesses have appeared before the
grand jury. The Company is cooperating with the U.S. investigation.
Previously, on September 11, 2003, the Department of Transport of the
Government of Canada commenced an action against the Uranus charging the vessel
with violations of regulations under the Canada Shipping Act with respect to
alleged discrepancies in the vessel's oil record book during the period between
December 2002 and March 2003. On January 22, 2004, the Department of Transport
withdrew all pending charges related to the alleged discrepancies.
The Company has in place extensive systems and procedures aboard its
vessels and has for some years provided additional training to its crews to
ensure the proper handling of waste oil aboard its vessels. The Company is
committed to safeguarding the environment in the operation of its vessels, and
it is the Company's policy to comply fully with all applicable oil pollution
regulations.
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 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, 2003, set forth in Item 8.
18
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of the Registrant
Name Age Position Held Has Served as Such Since
- ----- ---- ------------------------ ------------------------
Morten Arntzen 48 President and Chief January 2004
Executive Officer
Robert N. Cowen 55 Senior Vice President, February 1993
Chief Operating Officer June 1999
and Secretary June 1982
Myles R. Itkin 56 Senior Vice President, June 1995
Chief Financial Officer
and Treasurer
Robert E. Johnston 56 Senior Vice President October 1998
and Chief Commercial June 1999
Officer
Peter J. Swift 60 Senior Vice President June 1999
and Head of Shipping
Operations
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 on June 1, 2004, and until the
election and qualification of his successor. There is no family relationship
between the executive officers.
During the five years prior to joining the Company in January 2004 as an
officer and director, Mr. Morten Arntzen was employed by American Marine
Advisors, Inc. as Chief Executive Officer. Mr. Robert N. Cowen has served as a
director of the Company since 1993. Mr. Robert E. Johnston has served as an
officer and director of certain of the Company's subsidiaries during the past
five years. 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 during the past five years.
19
<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 closing 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.
2003 High Low
---- ---- ---
First Quarter 20.13 15.15
Second Quarter 22.75 17.21
Third Quarter 26.54 21.31
Fourth Quarter 35.89 25.00
2002 High Low
---- ---- ---
First Quarter 24.30 18.55
Second Quarter 24.75 19.60
Third Quarter 20.59 15.28
Fourth Quarter 18.65 15.15
(b) On February 23, 2004, there were 466 shareholders of record of the
Company's common stock.
On March 7, 2003, the Company completed a private issuance of $200 million
principal amount of 8.25% Senior Notes due March 15, 2013 (the "Notes") to
Goldman, Sachs & Co. (the "Initial Purchaser"). The offer and sale of the
Notes to the Initial Purchaser was exempt from registration with the
Securities and Exchange Commission pursuant to Section 4(2) of the
Securities Act of 1933 because of the nature of the purchaser and the
circumstances of the offering. The net proceeds from the sale of the Notes
were approximately $195 million, after deducting the Initial Purchaser's
discount and offering expenses of approximately $5 million. The Notes were
resold by the Initial Purchaser to certain qualified institutional buyers
("QIBs") upon reliance on Rule 144A under the Securities Act of 1933.
Subsequently, the QIBs exchanged the Notes for identical notes issued by
the Company that were registered with the Securities and Exchange
Commission.
(c) In June 2003, OSG announced a 16.7% increase in its annual dividend to
70(cent) per share from 60(cent) per share of common stock. Subsequent
thereto, the Company paid two regular dividends each of 17.5(cent) per
share of common stock. For each of the quarters during the past two years
prior to the above change, the Company paid a dividend of 15(cent) per
share of common stock. 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, 2003, 2002 and 2001, and at December 31, 2003 and 2002, 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, 2000 and 1999, and at December 31, 2001, 2000 and 1999, 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.
20
<PAGE>
<TABLE>
<CAPTION>
In thousands, except per share amounts 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shipping revenues $ 454,120 $ 297,283 $ 469,333 $ 467,618 $ 350,545
Time charter equivalent revenues (a) 431,136 266,725 381,018 370,081 253,217
Income from vessel operations 191,107 44,888 130,686(b) 134,066 23,366
Income/(loss) before federal income taxes and
cumulative effect of change in accounting principle 168,153 (20,864) 154,445 132,989 21,764
Net income/(loss) (c) 121,309 (17,620) 101,441 90,391 14,764
Depreciation and amortization (d) 90,010 80,379 71,671 71,465 77,209
EBITDA (e) 320,287 112,208 271,151 251,121 129,577
Net cash provided by operating activities 223,200 13,173 193,025 102,042 37,033
Vessels and capital leases, at net book amount 1,364,773 1,416,774 1,345,719 1,293,958 1,237,513
Total assets 2,000,686 2,034,842 1,964,275 1,823,913 1,720,945
Debt - long-term debt and capital lease obligations
(exclusive of short-term debt and current portions) (f) 787,588 985,035 854,929 836,497 827,372
Reserve for deferred federal income taxes -
noncurrent 151,304 134,204 132,170 117,749 77,877
Shareholders' equity $ 917,075 $ 784,149 $ 813,426 $ 750,167 $ 661,058
Debt/total capitalization 46.2% 55.7% 51.2% 52.7% 55.6%
Per share amounts:
Basic net income/(loss) $ 3.49 $ (0.51) $ 2.97 $ 2.67 $ 0.41
Diluted net income/(loss) $ 3.47 $ (0.51) $ 2.92 $ 2.63 $ 0.41
Shareholders' equity $ 25.54 $ 22.76 $ 23.73 $ 22.07 $ 19.63
Cash dividends paid $ 0.65 $ 0.60 $ 0.60 $ 0.60 $ 0.60
Average shares outstanding for basic earnings per share 34,725 34,395 34,169 33,870 35,712
Average shares outstanding for diluted earnings per share 34,977 34,395 34,697 34,315 35,725
</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 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 recognition of net voyage revenues of vessels
operating on voyage charters ratably over the estimated length of each
voyage. 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 method of recognizing net voyage revenues ratably over the
estimated length of each voyage had been applied retroactively, the pro
forma income before cumulative effect of change in accounting principle
for 1999 would have been $13,450, or $0.37 per share.
(d) Amounts for years prior to 2003 have been restated to conform with the
2003 presentation.
(e) EBITDA represents operating earnings, which is before interest expense,
income taxes and cumulative effect of change in accounting principle, plus
other income/(expense) 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. The following
table reconciles net income/(loss), as reflected in the consolidated
statements of operations, to EBITDA:
<TABLE>
<CAPTION>
2003 2002 2001 2000 1999
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income/(loss) $ 121,309 $ (17,620) $ 101,441 $ 90,391 $ 14,764
Cumulative effect of change in accounting principle -- -- -- (4,152) --
Provision/(credit) for federal income taxes 46,844 (3,244) 53,004 46,750 7,000
Interest expense 62,124 52,693 45,035 46,667 43,008
Gain on planned vessel dispositions -- -- -- -- (12,404)
Depreciation and amortization 90,010 80,379 71,671 71,465 77,209
-----------------------------------------------------------
EBITDA $ 320,287 $ 112,208 $ 271,151 $ 251,121 $ 129,577
===========================================================
</TABLE>
(f) Amounts do not include debt of joint ventures in which the Company
participates.
21
<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 52 vessels aggregating 9.0
million deadweight tons, including eight vessels that are owned by joint
ventures in which the Company has an average interest of 47%, and six vessels
that have been chartered in under operating leases.
Operations
The Company's revenues are highly sensitive to patterns of supply and
demand for vessels of the size and design configurations owned and operated by
the Company and the trades in which those vessels operate. Rates for the
transportation of crude oil and refined petroleum products from which the
Company earns a substantial majority of its revenue are determined by market
forces such as the supply and demand for oil, the distance that cargoes must be
transported, and the number of vessels expected to be available at the time such
cargoes need to be transported. The demand for oil shipments is significantly
affected by the state of the global economy and level of OPEC's exports. The
number of vessels is affected by newbuilding deliveries and by the removal of
existing vessels from service, principally because of scrapping. The Company's
revenues are also affected by the mix of charters between spot (voyage charter)
and long-term (time charter). Because shipping revenues and voyage expenses are
significantly affected by the mix between voyage charters and time charters, the
Company manages its vessels based on 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
markets in which the Company's vessels operated for the periods indicated. In
each case, the rates may differ from the actual TCE rates achieved by the
Company in the period indicated because of the timing and length of voyages and
the portion of revenue generated from long-term charters. It is important to
note that the spot market is quoted in Worldscale rates. The conversion of
Worldscale rates to the following TCE rates requires the Company to make certain
assumptions as to brokerage commissions, port time, port costs, speed and fuel
consumption, all of which will vary in actual usage.
Foreign Flag VLCC Segment
- --------------------------------------------------------------------------------
Spot Market TCE Rates
VLCCs in the Arabian Gulf
Q1-2003 Q2-2003 Q3-2003 Q4-2003 2003 2002 2001
--------------------------------------------------------------------
Average $68,000 $39,800 $28,600 $56,800 $47,900 $19,000 $32,700
High $96,100 $78,300 $72,800 $95,100 $96,100 $81,500 $69,800
Low $31,100 $14,900 $ 9,200 $13,800 $ 9,200 $ 3,500 $11,700
- --------------------------------------------------------------------------------
During 2003, rates for VLCCs trading out of the Arabian Gulf averaged
$47,900 per day, 152% higher than the average for 2002 and 46% higher than the
average for 2001. Although the development of VLCC rates over 2003 was positive,
the market was extremely volatile during the year, with a number of
extraordinary factors influencing the market.
22
<PAGE>
Freight rates, which rose rapidly in the final quarter of 2002, continued
their ascent in the first quarter of 2003, reaching a first quarter high of
$96,100 per day. A general strike disrupted crude oil production in Venezuela,
increasing U.S. dependence on longer-haul imports from such areas as the Middle
East. In addition a significant number of Japanese nuclear power plants remained
shutdown during 2003 as they underwent operational safety checks, increasing
Japanese dependence on oil for power generation. As refiners sought to secure
crude supplies ahead of an impending war in Iraq, reported VLCC fixtures from
the Arabian Gulf to the U.S. increased by 38% in the first quarter of 2003
compared with the first quarter of 2002. Similarly, VLCC fixtures from the
Arabian Gulf to Japan were 30% higher for the same period.
VLCC rates declined during the second and third quarters of 2003 from
first quarter levels because the rapid conclusion of the war in Iraq eased
concerns over the security of oil supplies from the Middle East, and Venezuelan
and Nigerian oil exports were restored following disruptions caused by civil
unrest. In addition, the outbreak of SARS dampened Chinese oil demand during the
second quarter of 2003 and Japanese oil usage in the third quarter declined
slightly relative to the same period in 2002, reflecting the gradual return to
operation of some nuclear power plants previously idled. As a result, key load
areas experienced a buildup of available VLCC tonnage and weaker earnings in the
Suezmax sector increased the competitive pressure for VLCCs, contributing to
lower rates, which averaged $39,800 per day during the second quarter of 2003
before falling to $28,600 per day in the third quarter.
In the fourth quarter, VLCC rates rebounded to average $56,800 per day, as
OPEC far exceeded its production quotas, taking advantage of high crude prices.
OPEC's quota cut effective November 1 was intended to accommodate the
restoration of Iraqi production and prevent inventory buildups in consuming
regions. This quota cut was largely ignored as demand exceeded expectations due
in large part to exceptionally strong Chinese demand. This coincided with a
scarcity of modern tonnage in the Arabian Gulf. As a result, VLCC rates surged
to a fourth quarter high of $95,100 per day. At the same time, the global
economic recovery continued to gather pace, coinciding with the onset of the
winter heating season. It is estimated that global oil demand during the fourth
quarter of 2003 was 80.6 million barrels per day ("b/d"), an increase of 3.3%
relative to the previous quarter and 1.9% higher than the comparable quarter in
2002. China's fourth quarter oil demand showed the strongest growth, rising
11.3% over the corresponding quarter in 2002.
Foreign Flag Aframax Segment
- --------------------------------------------------------------------------------
Spot Market TCE Rates
Aframaxes in the Caribbean
Q1-2003 Q2-2003 Q3-2003 Q4-2003 2003 2002 2001
-------------------------------------------------------------------
Average $41,200 $30,600 $18,800 $34,700 $31,100 $16,100 $24,800
High $67,000 $44,000 $31,000 $70,000 $70,000 $34,000 $51,000
Low $11,000 $11,500 $13,500 $19,500 $11,000 $ 8,500 $12,000
- --------------------------------------------------------------------------------
During 2003, rates for Aframaxes operating in the Caribbean trades
averaged $31,100 per day, 93% higher than the average for 2002 and 25% higher
than the average for 2001. Aframax freight rates have been supported by the
general increase in worldwide economic activity as well as rapid growth in crude
oil exports from the Former Soviet Union ("FSU"). Total seaborne oil exports
from Baltic and Black Sea ports have increased by 16.7% in 2003. In addition,
transit delays in the Bosporus tightened availability of Aframaxes with a
further positive effect on rates. The Aframax fleet carries a significant share
of FSU exports from the Baltic Sea and the Black Sea. The share of reported spot
crude oil liftings carried on Aframaxes from the Baltic Sea rose to 71% in 2003
from 65% in 2002, while the Aframax share of Black Sea exports increased to 44%
in 2003 from 41% in 2002.
23
<PAGE>
In the Caribbean market, the negative impact of oil export disruptions in
Venezuela during the first quarter of 2003 was partly offset by the positive
impact of increased long-haul crude oil imports to the U.S., which increased
Aframax employment for lightering operations in the U.S. Gulf. The Caribbean
market also benefited from vessels repositioning to stronger markets in the
North Sea and the Mediterranean. Mexico's subsequent increase in exports and the
resumption of Venezuelan exports late in the first quarter helped boost Aframax
rates to a first quarter high of $67,000 per day.
During the second quarter of 2003, the gradual restoration of Venezuelan
exports coincided with the disappearance of Iraqi crude oil shipments from
Ceyhan in the Mediterranean and the steady decline in Indonesian production due
to that country's aging oil fields, as well as a sizable number of Aframax
newbuilding deliveries. Planned and unplanned maintenance in the Black Sea port
of Novorossiysk and the North Sea during the early part of the summer further
contributed to reduced demand for Aframax vessels. These factors caused Aframax
rates to decline to average $30,600 per day in the second quarter before falling
further to $18,800 per day by the third quarter.
By the fourth quarter, Aframax rates recovered to average $34,700 per day,
with the onset of the winter heating season in the Northern Hemisphere boosting
oil demand. Rates soared as high as $70,000 per day as weather-related loading
delays in the Black Sea and congestion in the Bosporus tightened availability of
Aframaxes.
Foreign Flag Product Carrier Segment
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Spot Market TCE Rates
Panamaxes in the Pacific and Bostonmaxes in the Caribbean
Q1-2003 Q2-2003 Q3-2003 Q4-2003 2003 2002 2001
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Panamax Average $22,800 $21,400 $20,800 $14,100 $19,900 $13,100 $27,100
Panamax High $27,000 $27,000 $25,000 $17,500 $27,000 $23,500 $58,000
Panamax Low $20,000 $15,500 $15,000 $10,500 $10,500 $ 9,000 $10,500
Bostonmax Average $17,400 $14,800 $14,000 $18,200 $16,000 $10,100 $18,200
Bostonmax High $24,900 $24,900 $16,900 $23,800 $24,900 $15,000 $32,000
Bostonmax Low $13,800 $10,000 $10,000 $13,500 $10,000 $ 7,200 $ 7,300
- ----------------------------------------------------------------------------------------
</TABLE>
Rates for Panamax Product Carriers operating in the Pacific Region
averaged $19,900 per day in 2003, 52% higher than the average for 2002, but 27%
lower than the average for 2001. Since the Japanese nuclear power plant
shutdowns began in the third quarter of 2002, net Japanese imports of residual
fuel oil for power generation have increased significantly, growing by 25%
during the first ten months of 2003 compared with the corresponding period in
2002. In China, power stations ran at full capacity during the summer to meet
record cooling demand. However, net imports of fuel oil were so strong that by
mid September, storage tanks were full, and China, as the region's largest
buyer, disappeared from the market. As a result, the market weakened during the
fourth quarter of 2003.
Rates for Bostonmax Product Carriers operating in the Caribbean trades
averaged $16,000 per day in 2003, 58% higher than the average for 2002, but 12%
lower than the average for 2001. U.S. imports of refined oil products were 10%
higher in 2003, boosted by a series of unplanned outages at several domestic
refineries. Escalated imports from the Middle East and Northwest Europe
increased ton-mile demand. Imports of transportation-related products grew the
most in volume terms, with gasoline imports up by 5% in 2003, and jet fuel
imports up by 6%. Imports of residual fuel oil increased by 42% in 2003, a rise
stimulated by high natural gas prices and much colder winter weather than the
previous year.
24
<PAGE>
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.
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
charter revenue and expenses: (1) ratably over the estimated length of each
voyage and (2) completed voyage. The recognition of voyage revenues and expenses
ratably over the estimated length of each voyage is the most prevalent method of
accounting for voyage revenues and expenses and the method currently being used
by OSG. Under 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 port, and the Company's
revenues fluctuated from period to period because of the timing of voyage
completions. The change in method to recognize voyage revenues and expenses
ratably over the estimated length of each voyage, with voyages calculated on a
discharge-to-discharge basis, eliminated these fluctuations because specific
voyage results are allocated on a pro-rata basis to the periods over which they
are performed.
In applying its revenue recognition 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 Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements," OSG does not begin recognizing voyage revenue until a
Charter has been agreed to 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 that become effective April 5, 2005 and the new EU regulations
that went into force on October 21, 2003 on the economic lives assigned to the
tankers in the Company's Foreign Flag fleet. Because the OSG Foreign Flag tanker
fleet comprises mainly modern, double hull vessels, the revised regulations only
affect two wholly-owned vessels and four vessels currently held in joint
ventures. Current regulations will not require any of these single hull or
double sided Foreign Flag tankers, except the Front Tobago, to be removed from
service prior to attaining 25 years of age, although the trading of such vessels
after 2010 could be affected. The revised IMO Regulation G allows the flag state
to permit the continued operation of our single hull and double sided tankers
beyond 2010. Because such regulations do not explicitly permit single hull and
double sided tankers to continue trading beyond 2010, their operation beyond
2010 is not assured. Two single hull VLCCs will be banned from EU ports
beginning in 2010 at the ages of 17 (for one VLCC which is 30% owned by OSG) and
20 years (for one VLCC which is wholly owned by OSG),
25
<PAGE>
respectively. Two double sided VLCCs (both 49.9% owned by OSG) will be banned
from EU ports in 2015 at the age of 22 years. The Company's single hull Suezmax
tanker will be banned from EU ports in 2010 at the age of 21 years. A 50% owned
double sided Aframax tanker will be banned from EU ports in 2015 at the age of
23 years. OSG considered the need to reduce the estimated remaining useful lives
of its single hull and double sided Foreign Flag tankers because of the EU
regulations and the revised and accelerated phase-out schedule agreed to by IMO
in December 2003. These new regulations will not prevent any of these vessels,
with the exception of the Front Tobago, in which the Company has a 30% interest,
from trading prior to reaching 25 years of age. The economic life of the Front
Tobago has been reduced to 2015. Accordingly, it was not deemed necessary at
this time to reduce the estimated remaining useful lives of any of our other
single hull or double sided Foreign Flag tankers. If the economic lives assigned
to the tankers prove to be too long because of new regulations or other future
events, higher depreciation expense and impairment losses could result in future
periods related to a reduction in the useful lives of any affected vessels.
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 second-hand vessels
tend to fluctuate with changes in charter rates and the cost of newbuildings.
Historically, both charter rates and vessel values tend to be cyclical. The
Company records impairment losses only when events occur that cause the Company
to believe that future cash flows for any individual vessel will be less than
its carrying value. The carrying amounts of vessels 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 vessel 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 vessel and its eventual disposition is less than the
vessel's carrying amount. This assessment is made at the individual vessel level
since separately identifiable cash flow information for each vessel is
available.
In developing estimates of future cash flows, the Company must make
assumptions about future charter rates, ship operating expenses, and the
estimated remaining useful lives of the vessels. These assumptions are based on
historical trends as well as future expectations. Although management believes
that the assumptions used to evaluate potential impairment are reasonable and
appropriate, such assumptions are highly subjective.
We performed an impairment test for our single hull and double sided
Foreign Flag tankers, including vessels held in joint ventures, in December
2003, because of the new EU regulations that became effective in October 2003
and the revised and accelerated phase-out schedule agreed to by the IMO in
December 2003. For purposes of this analysis, we assumed that the single hull
tankers would stop trading in 2015 and the double sided tankers would continue
trading until age 25, in accordance with the revised and accelerated phase-out
schedule adopted by the IMO. We also assumed that these vessels would achieve
lower TCE rates than comparable double hull tankers over their remaining useful
lives. Because voyage charter rates are volatile and vessel values vary over
time, a probability-weighted approach based on historically-observed TCE rates
was used to estimate future cash flows. In all cases, the carrying values of the
Company's single hull and double sided Foreign Flag tankers as of December 31,
2003 were less than the sum of the undiscounted cash flows for the respective
vessels. Accordingly, no impairment loss was recorded.
We performed an impairment test for our vessels in December 2002 because
of a decrease in the sales price of second-hand vessels, as reported in trade
publications, and the downward trend in spot rates that had persisted during
2001 and the first nine months of 2002. A probability-weighted approach based on
historically-observed TCE rates was used to estimate future cash flows. In all
cases, the carrying values of the Company's vessels were less than the sum of
the undiscounted cash flows for the respective vessels. Accordingly, no
impairment loss was recorded.
Market Value of Marketable Securities
In accordance with Statement of Financial Accounting Standards No. 115
("FAS 115"), the Company's holdings in marketable securities are classified as
available for sale and, therefore, are carried on the balance sheet at fair
value (as determined by using period-end sales prices on U.S. or
26
<PAGE>
foreign stock exchanges) with changes in carrying value being recorded in
accumulated other comprehensive income/(loss) until the investments are sold.
Accordingly, these changes in value are not reflected in the Company's
statements of operations. If, however, pursuant to the provisions of FAS 115 and
Staff Accounting Bulletin No. 59, the Company determines that a material decline
in the fair value below the Company's cost basis is other than temporary, the
Company records a noncash impairment loss as a charge in the statement of
operations in the period in which that determination is made. As a matter of
policy, the Company evaluates all material declines in fair value for impairment
whenever the fair value of a stock has been below its cost basis for six
consecutive months. In the period in which a decline in fair value is determined
to be other than temporary, the carrying value of that security is written down
to its fair value at the end of such period, thereby establishing a new cost
basis. Based on a number of factors, including the magnitude of the drop in
market values below the Company's cost bases and the length of time that the
declines had been sustained, management concluded that the declines in fair
value of securities with aggregate cost bases of $16,187,000 in 2003 and
$72,521,000 in 2002 were other than temporary. Accordingly, the Company recorded
pre-tax impairment losses of $4,756,000 in 2003 and $42,055,000 in 2002 related
to such securities. These impairment losses are reflected in the accompanying
consolidated statements of operations.
As of December 31, 2003, the Capital Construction Fund held a diversified
portfolio of marketable equity securities with an aggregate cost basis of
$38,436,000 and an aggregate fair value of $47,135,000. The gross unrealized
losses on equity securities held in the Capital Construction Fund as of December
31, 2003 were $474,000. See Note F to the consolidated financial statements set
forth in Item 8 for additional information on pre-tax unrealized losses as of
December 31, 2003.
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 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.
Deferred Tax Assets and Valuation Allowance
The carrying value of the Company's deferred tax assets is based on the
assumption that the Company will generate sufficient taxable income in the
future to permit the Company to take deductions and use tax-credit
carryforwards. The deferred tax assets are net of a valuation allowance. During
2002, the Company recorded a valuation allowance of $3,640,000 related to
capital losses arising from the write-down of certain marketable securities. The
valuation allowance was established because the Company believed that a portion
of the capital losses might expire unused because the generation of future
taxable capital gains was not certain. During 2003, the Company reduced the
valuation allowance by $2,706,000 to $934,000 based primarily on increases in
the fair value of securities previously written down. If assumptions and
estimates change in the future, the Company could be required to increase the
valuation allowance against its deferred tax assets, which will result in
additional income tax expense in the Company's statement of operations. Each
quarter, management evaluates the realizability of the deferred tax assets and
assesses the need to change the valuation allowance.
Pension and Other Postretirement Benefits
The Company has recorded pension and other postretirement benefit costs
based on complex valuations developed by its actuarial consultants. These
valuations are based on key estimates and assumptions related to the discount
rates used and the rates expected to be earned on investments of
27
<PAGE>
plan assets. OSG is required to consider market conditions in selecting a
discount rate that is representative of the rates of return currently available
on high-quality fixed income investments. A higher discount rate would result in
a lower benefit obligation and a lower rate would result in a higher benefit
obligation. The expected rate of return on plan assets is management's best
estimate of expected returns. A decrease in the expected rate of return will
increase future net periodic benefit costs and an increase in the expected rate
of return will decrease future benefit costs. With respect to the Company's
domestic plans, as of December 31, 2003, management reduced the discount rate to
6.7% from 7.4% and maintained unchanged the expected rate of return on plan
assets at 8.75%. Changes in pension and other postretirement benefit costs may
occur in the future as a result of changes in these rates.
Special Purpose Entity ("SPE")
In 1999, the Company facilitated the creation of an SPE that purchased
from and bareboat chartered back to the Company five U.S. Flag Crude Tankers
that the Company in turn bareboat chartered to Alaska Tanker Company for the
transportation of Alaskan crude oil for BP. The purchase price of $170 million
was financed by a term loan from a commercial lender and a substantive equity
capital investment by the owner of the SPE. The Company did not guarantee the
vessels' residual values or guarantee the SPE's debt. ATC time chartered the
vessels to BP under a "hell or highwater" lease through the dates on which they
must be removed from service in accordance with OPA 90. The portion of the
charter hire payments from BP to ATC representing bareboat charter hire to the
Company is sufficient to fully amortize the debt of the SPE. Such payments have
been assigned to the SPE. On July 1, 2003, the Company consolidated this SPE in
accordance with Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities," ("FIN 46"). Under the provisions
of FIN 46, the Company is considered to be the primary beneficiary of the SPE.
For additional information, see Note B to the consolidated financial statements
set forth in Item 8.
Income from Vessel Operations
During 2003, TCE revenues increased by $164,411,000, or 62%, to
$431,136,000 from $266,725,000 in 2002, principally resulting from an increase
in average daily TCE rates for vessels operating in the spot market. During
2003, approximately 79% of the Company's TCE revenues were derived in the spot
market, including vessels in pools that predominantly perform voyage charters,
compared with 70% in 2002 and 73% in 2001. In 2003, approximately 21% of TCE
revenues were generated from long-term charters compared with 30% in 2002 and
27% in 2001. During 2002, TCE revenues decreased by $114,293,000 to $266,725,000
from $381,018,000 in 2001, as a result of a sharp decline in average daily TCE
rates for vessels operating in the spot market partially offset by an increase
in revenue days. The reduction in percentage contribution from long-term
charters during 2003 compared with 2002 was principally attributable to
significant increases in average TCE rates in 2003 for vessels operating in the
spot market and the expiry, in early 2002, of a long-term charter on a VLCC.
The reliance on the spot market contributes to fluctuations in the
Company's revenue, cash flow, and net income/(loss), 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 2003, income from vessel operations increased by $146,219,000, or
326%, to $191,107,000 from $44,888,000 in 2002. The improvement resulted from an
increase in average daily TCE rates for all of the Company's Foreign Flag
segments. During 2002, income from vessel operations decreased by $85,798,000 to
$44,888,000 from $130,686,000 in 2001. Excluding the impact of the restructuring
charge of $10,439,000 recorded in 2001, income from vessel operations decreased
by $96,237,000 in 2002 compared with 2001. This reduction resulted from a
decrease in average daily TCE rates and revenues for all of the Company's
Foreign Flag segments (see Note C to the consolidated financial statements set
forth in Item 8 for additional information on the Company's segments). On a
consolidated basis, the average daily vessel expenses for 2003 was approximately
$362 per day higher than 2002 but unchanged from 2001.
28
<PAGE>
<TABLE>
<CAPTION>
VLCC Segment: 2003 2002 2001
--------- --------- ---------
<S> <C> <C> <C>
TCE revenues (in thousands) $ 189,410 $ 79,714 $ 112,820
Vessel expenses (in thousands) (28,093) (21,481) (16,763)
Time and bareboat charter hire expenses (in thousands) (11,386) (9,512) (7,889)
Depreciation and amortization (in thousands) (36,475) (30,033) (23,815)
--------- --------- ---------
Income from vessel operations (in thousands)(a) $ 113,456 $ 18,688 $ 64,353
========= ========= =========
Average daily TCE rate $ 40,725 $ 20,545 $ 37,432
Average number of vessels (b) 11.8 9.8 7.4
Average number of vessels chartered in under operating
leases 1.2 1.1 1.0
Number of revenue days(c) 4,651 3,880 3,014
Number of ship-operating days(d) 4,736 3,972 3,077
</TABLE>
(a) Income from vessel operations by segment is before general and
administrative expenses and the restructuring charge.
(b) The average is calculated to reflect the addition and disposal of vessels
during the year.
(c) Revenue days represent ship-operating days less days that vessels were not
available for employment due to repairs, drydock or lay-up.
(d) Ship-operating days represent calendar days.
During 2003, TCE revenues for the VLCC segment increased by $109,696,000,
or 138% to $189,410,000 from $79,714,000 in 2002. This improvement in TCE
revenues resulted from an increase of $20,180 per day in the average daily TCE
rate earned and an increase in the number of revenue days. All but one of the
vessels in the VLCC segment participate in the Tankers pool as of December 31,
2003. The increase in revenue days resulted principally from the delivery of two
newbuilding VLCCs (one in April 2002 and another in mid-February 2003) and the
April 2003 purchase of a 1997-built double hull VLCC, Meridian Lion, previously
held by a 50% owned joint venture (see Note E to the consolidated financial
statements set forth in Item 8). The redemption of the other partner's joint
venture interest in the Equatorial Lion and Meridian Lion (as described in Note
E to the consolidated financial statements set forth in Item 8) and the
simultaneous acquisition of the Meridian Lion from the other partner resulted in
the inclusion of both vessels in the VLCC segment from the mid-April effective
date of the transaction. The Equatorial Lion, which had, prior to the completion
of this transaction, been time chartered in from the joint venture is now owned
by a subsidiary of the Company. Vessel expenses increased by $6,612,000 to
$28,093,000 in 2003 from $21,481,000 in the prior year principally as a result
of the Equatorial Lion becoming wholly owned in April 2003 and an increase in
ship-operating days. Average daily vessel expenses increased by $524 per day in
2003 compared with 2002, principally attributable to increases in damage repair
expenses and insurance premiums partially offset by decreases attributable to
the timing of delivery of stores and supplies. Time and bareboat charter hire
expenses increased by $1,874,000 to $11,386,000 in 2003 from $9,512,000 in 2002
as a result of the sale-leaseback agreement discussed below and the inclusion of
a 40% participation interest in a chartered-in VLCC (Charles Eddie) partially
offset by the termination of the charter in of the Equatorial Lion from a joint
venture. The charter in of the Charles Eddie, which commenced in the third
quarter of 2002, provides for profit sharing with the vessel's owner when the
TCE rates exceed the base rate in the charter ($23,000 to $23,700 per day during
2003). Depreciation and amortization increased by $6,442,000 to $36,475,000 from
$30,033,000 in 2002 as a result of the vessel additions discussed above. In
late-June 2003, the Company entered into a sale-leaseback agreement for one of
its VLCCs, the Meridian Lion, which lease is classified as an operating lease.
The gain on the sale was deferred and is being amortized over the eight-year
term of the lease as a reduction of time and bareboat charter hire expenses. The
sale-leaseback transaction increased time charter hire expenses by approximately
$2,250,000 per quarter, commencing in the third quarter of 2003.
29
<PAGE>
During 2002, TCE revenues for the VLCC segment decreased by $33,106,000,
or 29%, to $79,714,000 from $112,820,000 in 2001. This reduction in TCE revenues
resulted from a decrease of $16,887 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 three newbuilding VLCCs
(two in the second half of 2001 and one in early-April 2002). Vessel expenses
increased by $4,718,000 to $21,481,000 in 2002 from $16,763,000 in 2001 as a
result of an increase in ship-operating days. Average daily vessel expenses,
however, were relatively unchanged. Time and bareboat charter hire expenses
increased by $1,623,000 to $9,512,000 in 2002 from $7,889,000 in 2001,
principally because of the inclusion of the 40% interest in the charter in of
the Charles Eddie, which commenced during the third quarter of 2002.
Depreciation and amortization increased by $6,218,000 to $30,033,000 in 2002
from $23,815,000 in 2001 principally as a result of the vessel additions
discussed above.
<TABLE>
<CAPTION>
Aframax Segment: 2003 2002 2001
--------- --------- ---------
<S> <C> <C> <C>
TCE revenues (in thousands) $ 105,739 $ 71,121 $ 111,293
Vessel expenses (in thousands) (21,927) (21,131) (18,658)
Time and bareboat charter hire expenses (in thousands) -- -- (5,821)
Depreciation and amortization (in thousands) (22,261) (22,554) (20,096)
--------- --------- ---------
Income from vessel operations (in thousands) $ 61,551 $ 27,436 $ 66,718
========= ========= =========
Average daily TCE rate $ 26,389 $ 17,389 $ 29,505
Average number of vessels 11.2 11.5 9.9
Average number of vessels chartered in under operating
leases -- -- 0.5
Number of revenue days 4,007 4,090 3,772
Number of ship-operating days 4,083 4,187 3,810
</TABLE>
During 2003, TCE revenues for the Aframax segment increased by
$34,618,000, or 49%, to $105,739,000 from $71,121,000 in 2002. This improvement
in TCE revenues resulted from an increase of $9,000 per day in the average daily
TCE rate earned partially offset by a decrease in revenue days. The decrease in
revenue days resulted from the sale of two single hull Aframaxes in the third
quarter of 2002 partially offset by the delivery of two newbuilding Aframaxes
(one in February 2002 and one in October 2003) and the purchase, in the third
quarter of 2002, of a 1994-built double hull Aframax. TCE revenues for 2003
reflect a loss of $3,229,000 generated by forward freight agreements. Although
the Company entered into these forward freight agreements to convert a portion
of its variable revenue stream from Aframax International to a fixed rate, such
forward freight agreements do not qualify as effective cash flow hedges under
FAS 133. Vessel expenses increased marginally by $796,000 to $21,927,000 in 2003
from $21,131,000 in the prior year. Average daily vessel expenses increased by
$324 per day in 2003 compared with 2002, principally due to increases in
insurance premiums and repair costs.
During 2002, TCE revenues for the Aframax segment decreased by
$40,172,000, or 36%, to $71,121,000 from $111,293,000 in 2001. This reduction in
TCE revenues resulted from a decrease of $12,116 per day in the average daily
TCE rate earned partially offset by an increase in revenue days. The increase in
revenue days primarily resulted from the delivery of four new vessels since
January 1, 2001. TCE revenues for 2002 reflect a loss of $697,000 generated by
forward freight agreements compared with income of $3,197,000 in 2001. Vessel
expenses increased by $2,473,000 to $21,131,000 from $18,658,000 in 2001 as a
result of an increase in ship-operating days. Average daily vessel expenses,
however, decreased by $113 per day, principally due to reductions in crew costs.
The reductions in time and bareboat charter hire expenses reflects the operating
lease costs on two chartered-in vessels, both of which were redelivered during
2001. Depreciation and amortization increased by $2,458,000 to $22,554,000 in
2002 from $20,096,000 in 2001, principally as a result of the vessel additions
discussed above.
30
<PAGE>
<TABLE>
<CAPTION>
Product Carrier Segment: 2003 2002 2001
-------- -------- --------
<S> <C> <C> <C>
TCE revenues (in thousands) $ 35,124 $ 35,053 $ 58,078
Vessel expenses (in thousands) (13,143) (14,686) (17,262)
Time and bareboat charter hire expenses (in thousands) -- -- (1,070)
Depreciation and amortization (in thousands) (7,671) (9,807) (9,486)
-------- -------- --------
Income from vessel operations (in thousands) $ 14,310 $ 10,560 $ 30,260
======== ======== ========
Average daily TCE rate $ 15,653 $ 12,226 $ 21,212
Average number of vessels 6.4 8.0 8.0
Average number of vessels chartered in under operating
leases -- -- 0.2
Number of revenue days 2,244 2,867 2,738
Number of ship-operating days 2,350 2,920 3,007
</TABLE>
During 2003, TCE revenues for the Product Carrier segment increased
marginally by $71,000, or less than 1%, to $35,124,000 from $35,053,000 in 2002.
TCE revenues were stable despite a decrease in revenue days attributable to the
sale of two (Lucy and Suzanne) of the segment's four Panamaxes late in the first
quarter of 2003 because of an increase of $3,427 per day in the average daily
TCE rate earned. Vessel expenses decreased by $1,543,000 to $13,143,000 in 2003
from $14,686,000 in 2002 as a result of the vessel sales. Average daily vessel
expenses, however, increased by $563 per day in 2003 compared with 2002,
principally attributable to increases in crew and repair costs. Depreciation and
amortization decreased by $2,136,000 to $7,671,000 from $9,807,000 in 2002 as a
result of the vessel sales.
One of the Bostonmax Product Carriers is on a time charter that extends to
June 2004, and one of the Panamax Product Carriers is on a time charter that
extends to September 2004.
During 2002, TCE revenues for the Product Carrier segment decreased by
$23,025,000, or 40%, to $35,053,000 from $58,078,000 in 2001. This reduction in
TCE revenues resulted from a decrease of $8,986 per day in the average daily TCE
rate earned and the redelivery of a chartered-in vessel to its owner in
late-March 2001, partially offset by an increase in revenue days caused by a
216-day reduction in repair and drydocking days. Vessel expenses decreased by
$2,576,000 to $14,686,000 from $17,262,000 in 2001, principally as a result of
decreases in insurance costs related to hull and machinery claims. Average daily
vessel expenses, excluding the impact of insurance costs related to hull and
machinery claims, decreased by $113 per day, principally due to reductions in
crew costs. Time and bareboat charter hire expenses in 2001 reflects the
operating lease costs on a chartered-in vessel that was redelivered in March
2001. Depreciation and amortization increased marginally by $321,000 to
$9,807,000 in 2002 from $9,486,000 in 2001.
<TABLE>
<CAPTION>
U.S. Flag Crude Tanker Segment: 2003 2002 2001
-------- -------- --------
<S> <C> <C> <C>
TCE revenues (in thousands) $ 28,052 $ 28,052 $ 28,052
Vessel expenses (in thousands) 110 (50) 459
Time and bareboat charter hire expenses (in thousands) (7,139) (14,278) (14,278)
Depreciation and amortization (in thousands) (4,359) -- --
-------- -------- --------
Income from vessel operations (in thousands) $ 16,664 $ 13,724 $ 14,233
======== ======== ========
Average daily TCE rate $ 19,214 $ 19,214 $ 19,214
Average number of vessels 2.0 -- --
Average number of vessels chartered in under operating
leases 2.0 4.0 4.0
Number of revenue days 1,460 1,460 1,460
Number of ship-operating days 1,460 1,460 1,460
</TABLE>
31
<PAGE>
TCE revenues in 2003 for the U.S. Flag Crude Tanker segment were unchanged
from 2002 and 2001 because the segment's vessels are bareboat chartered at fixed
rates to Alaska Tanker Company ("ATC"). On July 1, 2003, in accordance with the
provisions of FIN 46, the Company consolidated the special purpose entity that
owns the four U.S. Flag Crude Tankers. The consolidation of the special purpose
entity reduced time and bareboat charter hire expenses, which was net of
amortization of the deferred gain on the 1999 sale-leaseback transaction, by
$7,139,000, and increased depreciation and amortization expense by $4,359,000 in
2003 compared with 2002 and 2001 because the four vessels are now included in
the consolidated balance sheet. See Interest Expense below for a discussion of
the increase in interest expense attributable to the consolidation of Alaskan
Equity Trust.
One of the segment's vessels, the Overseas Boston, was sold in February
2004 upon its redelivery from a long-term charter.
<TABLE>
<CAPTION>
All Other: 2003 2002 2001
-------- -------- --------
<S> <C> <C> <C>
TCE revenues (in thousands) $ 72,811 $ 52,785 $ 70,775
Vessel expenses (in thousands) (26,824) (27,269) (31,835)
Time and bareboat charter hire expenses (in thousands) (1,949) (1,569) (14,897)
Depreciation and amortization (in thousands) (19,244) (17,985) (18,274)
-------- -------- --------
Income from vessel operations (in thousands) $ 24,794 $ 5,962 $ 5,769
======== ======== ========
Average daily TCE rate $ 24,923 $ 18,188 $ 17,814
Average number of vessels 3.9 4.4 5.4
Average number of vessels chartered in under operating
leases 4.3 4.3 6.2
Number of revenue days 2,922 2,902 3,973
Number of ship-operating days 2,998 3,171 4,234
</TABLE>
As of December 31, 2003, the Company also owns and operates one U.S. Flag
Pure Car Carrier, two U.S. Flag Handysize Product Carriers operating in the
Jones Act trade, and one Foreign Flag Suezmax, all four on long-term charter, as
well as two U.S. Flag Dry Bulk Carriers that transport U.S. foreign aid grain
cargoes and two Foreign Flag Dry Bulk Carriers that operate in a pool of
Capesize Dry Bulk Carriers. The U.S. Flag Dry Bulk Carriers no longer meet the
materiality threshold established by FAS 131 for disclosure as a reportable
segment. This was due to the reduction in shipping revenues attributable to the
sale of two of that segment's vessels during 2002 and 2001.
TCE revenues increased by $20,026,000, or 38%, to $72,811,000 in 2003 from
$52,785,000 in 2002 principally because of an increase of $6,735 per day in the
average daily TCE rate earned. Vessel expenses decreased by $445,000 to
$26,824,000 in 2003 from $27,269,000 in 2002 because of the sale of one of the
U.S. Flag Dry Bulk Carriers in June 2002. Depreciation and amortization
increased by $1,259,000 to $19,244,000 in 2003 from $17,985,000 in 2002 because
of increased amortization of drydock costs on the two remaining U.S. Flag Dry
Bulk Carriers.
The two Foreign Flag Dry Bulk Carriers commenced three-year time charters
in early 2004, at which time they were withdrawn from the pool of Capesize
vessels in which they had participated since 2000.
TCE revenues decreased by $17,990,000, or 25%, to $52,785,000 in 2002 from
$70,775,000 in 2001 principally because of a reduction of 692 days ($12,094,000)
in the Company's participation in the charter-in of vessels that were
commercially managed by a pool of Capesize Dry Bulk Carriers and the impact of
the sale of two U.S. Flag Dry Bulk Carriers (one in June 2002 and one in June
2001). These decreases were offset by an increase of $374 per day in the average
daily TCE rate earned. Vessel expenses decreased by $4,566,000 to $27,269,000 in
2002 from $31,835,000 in 2001 because of the sale of the two U.S. Flag Dry Bulk
Carriers. The decrease in time and bareboat charter hire expenses of $13,328,000
in 2002 compared with 2001 was attributable to the reduced participation in
32
<PAGE>
the charter-in of vessels that were commercially managed by the pool of Capesize
Bulk Carriers. The average daily rates paid during 2002 and 2001 with respect to
these chartered-in vessels were higher than the TCE rates earned by such
vessels. Accordingly, the reduced participation in the charter-in of vessels
positively affected consolidated income from vessel operations by $1,254,000 in
2002 compared with 2001.
Since December 1996, the U.S. Flag Pure Car Carrier has received payments
of $2,100,000 per year under the U.S. Maritime Security Program, which continues
through late 2005, subject to annual congressional appropriations.
General and Administrative Expenses
During 2003, general and administrative expenses increased by $8,186,000
to $39,668,000 from $31,482,000 in 2002 principally because of the following
reasons:
o severance payments and additional compensation aggregating $1,615,000
recognized in connection with the January 2003 resignation of a senior
vice president and the retirement of the Company's former CEO (see Note R
to the consolidated financial statements set forth in Item 8);
o 2003 bonus payments aggregating $1,940,000 in recognition of the
substantial completion of the Company's five year cost reduction program;
o increases in the cost of certain benefit plans for domestic shore-based
employees aggregating $2,431,000. Such increase reflects a gain of
$1,090,000 recognized in 2002 as a reduction of the 2002 net periodic
benefit cost;
o costs of $862,000 incurred through December 31 in connection with certain
investigations by the Department of Transport of the Government of Canada
and the U.S. Department of Justice (see Note S to the consolidated
financial statements set forth in Item 8); and
o a reserve for an expected loss of $529,000 on the sublease of overseas
office space.
During 2002, general and administrative expenses decreased by $8,726,000
to $31,482,000 from $40,208,000 in 2001 principally due to a decrease in cash
compensation and related benefits. Such reductions were principally attributable
to the New York headquarters staff reductions discussed in Note O to the
consolidated financial statements set forth in Item 8.
Equity in Income of Joint Ventures
During 2003, equity in income of joint ventures increased by $22,558,000
to $33,965,000 from $11,407,000 in 2002, principally due to a significant
increase in average daily TCE rates earned by the joint-venture vessels
operating in the spot market, which more than offset the impact of a reduction
in revenue days. The reduction in revenue days was attributable to the
termination in April 2003 of the joint venture agreement with a major oil
company and our effective acquisition of their 50% interest in two VLCCs (see
Note E to the consolidated financial statements set forth in Item 8). These two
vessels have been included in the VLCC segment from April 2003. Equity in income
of joint ventures for 2003 reflects the Company's share ($2,566,000) of a loss
on disposal recognized in connection with the redemption of the other partner's
interest in a joint venture in exchange for 100% of the stock of one of two
vessel owning joint venture companies.
During 2002, equity in income of joint ventures decreased by $9,067,000 to
$11,407,000 from $20,474,000 in 2001, principally due to a decrease in average
daily rates earned by the joint-venture vessels. The impact of this decrease in
rates was partially offset by an increase in revenue days of joint venture VLCCs
participating in the Tankers pool to 997 in 2002 from 555 in 2001, resulting
from the delivery in 2002 and 2001 of seven vessels. In addition, the Company's
share of incentive hire earned by ATC in 2002 decreased by $580,000 from 2001.
33
<PAGE>
The following is a summary of the Company's interest in its joint
ventures, excluding ATC (see discussion below), and OSG's proportionate share of
the revenue days for the respective vessels. Revenue days are adjusted for OSG's
percentage ownership in order to state the revenue days on a basis comparable to
that of a wholly-owned vessel. The ownership percentages reflected below are
averages as of December 31 of each year. The Company's actual ownership
percentages for these joint ventures ranged from 30% to 50%:
<TABLE>
<CAPTION>
2003 2002 2001
-------------------------------------------------------------
Revenue % of Revenue % of Revenue % of
Days Ownership Days Ownership Days Ownership
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VLCCs operating in the spot market* 1,137 47.1% 997 37.1% 555 38.3%
Two VLCCs owned jointly with a major oil company operating
on long-term charters 104 0.0% 365 50.0% 365 50.0%
One Aframax participating in Aframax International pool 181 50.0% 165 50.0% 183 50.0%
-------------------------------------------------------------
Total 1,422 47.4% 1,527 40.6% 1,103 42.2%
=============================================================
</TABLE>
* The increase in revenue days in 2003 compared with 2002 reflects the
delivery of two VLCC newbuildings in February and July 2002 to joint
ventures in which the Company had a 33.3% interest and the restructuring
of the relative ownership interests in five jointly owned VLCCs. The
effect of such restructuring was to increase the Company's overall joint
venture interest by the equivalent of one third of a vessel effective July
1, 2003.
The Company has entered into an agreement in principle with a
joint-venture partner, covering six joint venture companies that each own a
VLCC. This agreement provides for an exchange of joint venture interests such
that the Company will own 100% of the Dundee, Sakura I and Tanabe, and the
joint-venture partner will own 100% of the Edinburgh, Ariake and Hakata. This
transaction is expected to close in the first quarter of 2004. The results of
the Dundee, Sakura I and Tanabe will be included in the VLCC segment from the
2004 effective date of transaction.
Additionally, the Company has a 37.5% interest in ATC, a company that
operates nine (ten during 2002 and 2001) U.S. Flag tankers transporting Alaskan
crude oil for BP. The number of tankers operated by ATC will decrease to eight
in 2004. The Company's participation in ATC provides us with the opportunity to
earn additional income (in the form of our share of incentive hire paid by BP to
ATC) based on ATC's meeting certain predetermined performance standards. Such
income is included in the U.S. Flag Crude Tanker segment.
Interest Expense
The components of interest expense are as follows (in thousands):
<TABLE>
<CAPTION>
In thousands for the year ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest before impact of swaps and capitalized
interest $ 51,791 $ 43,798 $ 53,386
Impact of swaps 14,320 13,844 4,800
Capitalized interest (3,987) (4,949) (13,151)
--------------------------------
Interest expense $ 62,124 $ 52,693 $ 45,035
================================
</TABLE>
Interest expense increased by $9,431,000 to $62,124,000 in 2003 from
$52,693,000 in 2002 because of the impact of the issuance of 10-year senior
unsecured notes with a coupon of 8.25% and the application of the resulting
proceeds to repay amounts outstanding under long-term credit facilities (which
bear interest at a margin above LIBOR) and a decrease of $962,000 ($3,987,000 in
2003 compared with $4,949,000 in 2002) in interest capitalized in connection
with vessel construction. Such increases were partially offset by decreases in
the average amount of debt outstanding of $23,959,000
34
<PAGE>
and in the average rate paid on floating rate debt of 40 basis points to 2.6% in
2003 from 3.0% in 2002. The impact of this decline in rates was substantially
offset by the impact of floating-to-fixed interest rate swaps that increased
interest expense by $14,320,000 in 2003 compared with an increase of $13,844,000
in 2002. The issuance of the 8.25% senior unsecured notes increased the weighted
average effective interest rate for debt (excluding capital lease obligations)
outstanding at December 31, 2003 by approximately 150 basis points to 7.1%.
Interest expense for 2003 includes $1,336,000 attributable to the special
purpose entity that owns the U.S. Flag Crude Tankers, which was consolidated
effective July 1, 2003 (see Note B to the consolidated financial statements set
forth in Item 8).
During 2002, interest expense increased by $7,658,000 to $52,693,000 from
$45,035,000 in 2001 as a result of an increase in the average amount of debt
outstanding of $89,930,000 and a reduction of $8,202,000 ($4,949,000 in 2002
compared with $13,151,000 in 2001) in interest capitalized in connection with
vessel construction. Such increases were partially offset by a decrease of 210
basis points in the average rate paid on floating rate debt to 3.0% in 2002 from
5.1% in 2001. The impact of this decline in rates was substantially offset by
the impact of floating-to-fixed interest rate swaps that increased interest
expense by $13,844,000 in 2002 compared with an increase of $4,800,000 in 2001.
Provision/(Credit) for Federal Income Taxes
The income tax provisions in 2003 and 2001 and the credit for income taxes
in 2002 are based on pre-tax income/(loss), adjusted to reflect items that are
not subject to tax and the dividends received deduction.
The provision for income taxes for 2003 also reflects a reduction of
$2,706,000 to $934,000 from $3,640,000 in the valuation allowance offset that
was established in 2002 against the deferred tax asset resulting from the 2002
write-down of certain marketable securities. The reduction in the valuation
allowance primarily reflects increases subsequent to December 31, 2002 in fair
values of securities previously written down and the effect of securities sold
in 2003.
The credit for income taxes for 2002 also reflects the recording of the
valuation allowance offset of $3,640,000 against the deferred tax asset
resulting from the write-down of certain marketable securities. The valuation
allowance was established because the Company could not be certain that the full
amount of the deferred tax asset would be realized through the generation of
capital gains in the future.
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.
Newly Issued Accounting Standard
On December 8, 2003, the President of the U.S. signed into law the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
"Act"). The Act introduces a prescription drug benefit under Medicare Part D as
well as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D. In
accordance with Financial Accounting Standards Board Staff Position 106-1, the
accrued benefit obligation at December 31, 2003 and the net periodic
postretirement benefit cost for 2003 that are included in the consolidated
financial statements and accompanying footnotes do not reflect the effects of
the Act on the Company's postretirement health care plan. Specific authoritative
guidance on the accounting for the federal subsidy is pending and such guidance
when issued, could require the Company to change previously reported
information. The Company has not completed its evaluation of the impact of the
Act on such plan.
35
<PAGE>
Liquidity and Sources of Capital
Working capital at December 31, 2003 was approximately $43,000,000
compared with $77,000,000 at December 31, 2002 and $61,000,000 at December 31,
2001. Current assets are highly liquid, consisting principally of cash,
interest-bearing deposits, investments in marketable securities (at December 31,
2002 and 2001) and receivables. In addition, the Company maintains a Capital
Construction Fund with a market value of approximately $247,000,000 at December
31, 2003. Net cash provided by operating activities approximated $223,000,000 in
2003 compared with $13,000,000 in 2002 and $193,000,000 in 2001. Net cash
provided by operating activities in 2002 reflects $24,500,000 of payments with
respect to estimated 2001 federal income taxes. 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. The Company's
reliance on the spot market contributes to fluctuations in cash flows from
operating activities. Any decrease in the average TCE rates earned by the
Company's vessels in periods subsequent to December 31, 2003, compared with the
actual TCE rates achieved during 2003, will have a negative comparative impact
on the amount of cash provided by operating activities. Current financial
resources, together with cash anticipated to be generated from operations, are
expected to be adequate to meet requirements in the next year.
In March 2003, the Company issued $200,000,000 principal amount of senior
unsecured notes. The notes, which are due in March 2013, have a coupon of 8.25%.
Proceeds from the offering of approximately $194,849,000 were used to repay a
portion of the balances then outstanding under long-term revolving credit
facilities. The indenture pursuant to which the notes were issued requires the
Company to secure the notes equally and comparably with any indebtedness under
existing revolving credit facilities in the event OSG is required to secure the
debt outstanding under such credit facilities as a result of a downgrade in the
credit rating of the Company's senior unsecured debt.
In August and October 2003, the Company concluded two new five-year
unsecured revolving credit facilities aggregating $330,000,000, which together
with its existing $350,000,000 long-term credit facility that matures in
December 2006, results in aggregate long-term revolving credit availability of
$680,000,000. The maturities of the two newly executed facilities may, subject
to lender approval, be extended for two, one-year periods on the first and
second anniversary dates of each of the two facilities. The terms, conditions
and financial covenants contained in both agreements are more favorable than
those contained in the existing long-term revolving credit facility that matures
in December 2006. Borrowings under both of the new facilities bear interest at a
rate based on LIBOR plus a margin. In October 2003, in consideration of entering
into these two new revolving credit facilities, the Company terminated the
revolving credit facility that would otherwise have matured in April 2005.
OSG has $680,000,000 of long-term unsecured credit availability, of which
$468,000,000 was unused at December 31, 2003. The Company's three long-term
revolving credit facilities mature in 2006 ($350,000,000) and 2008
($330,000,000). In February 2002, the Company increased its unsecured short-term
credit facility from $15,000,000 to $45,000,000, of which approximately
$19,500,000 was unused at December 31, 2003.
On January 29, 2004, pursuant to a Form S-3 shelf registration filed on
January 13, 2004, the Company sold 3,200,000 shares of its common stock at a
price of $36.13 per share, after underwriting discounts and commissions of $0.47
per share, thereby generating proceeds of $115,166,000, after deducting
estimated expenses. On February 19, 2004, pursuant to the existing shelf
registration, the Company issued $150,000,000 principal amount of senior
unsecured notes. The notes, which are due in February 2024 and may not be
redeemed prior to maturity, have a coupon of 7.5%. The Company received proceeds
of approximately $146,650,000, after deducting estimated expenses. The proceeds
from these offerings will be used for general corporate purposes.
The Company was in compliance with all of the financial covenants
contained in the Company's debt agreements as of December 31, 2003. Existing
financing agreements impose operating restrictions and establish minimum
financial covenants. Failure to comply with any of the covenants in existing
financing agreements could result in a default under those agreements and under
other
36
<PAGE>
agreements containing cross-default provisions. A default would permit lenders
to accelerate the maturity of the debt under these agreements and to foreclose
upon any collateral securing that debt. Under those circumstances, the Company
might not have sufficient funds or other resources to satisfy its obligations.
In addition, the secured nature of a portion of OSG's debt, together with
the limitations imposed by financing agreements on the ability to secure
additional debt and to take other actions, might impair the Company's ability to
obtain other financing.
Off-Balance Sheet Arrangements
As of December 31, 2003, the joint ventures in which OSG participates had
total bank debt of $101,792,000. The Company's percentage interests in these
joint ventures ranged from 30% to 50%. OSG has guaranteed a total of $11,005,000
of the joint venture debt at December 31, 2003. The balance of the joint venture
debt is nonrecourse to the Company. The amounts of the Company's guaranties are
reduced as the principal amounts of the joint venture debt are paid down. See
Note E to the consolidated financial statements set forth in Item 8 for
disclosures concerning long-term debt of the joint ventures.
The Company has entered into an agreement in principle with a
joint-venture partner covering six joint venture companies that each own a VLCC.
This agreement provides for an exchange of joint venture interests such that the
Company will own 100% of the Dundee, Sakura I and Tanabe, and the joint-venture
partner will own 100% of the Edinburgh, Ariake and Hakata. This transaction is
expected to close in the first quarter of 2004. The effect of this agreement
will be to reduce the joint venture bank debt by $79,958,000 and the amount
guaranteed by OSG by $9,205,000.
Aggregate Contractual Obligations
A summary of the Company's long-term contractual obligations as of
December 31, 2003 follows:
<TABLE>
<CAPTION>
Beyond
In thousands 2004 2005 2006 2007 2008 2008 Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt (1) $ 80,295 $ 70,146 $ 241,373 $ 49,791 $ 85,834 $ 611,171 $1,138,610
Obligations under capital leases (1) 9,313 9,692 9,692 9,692 9,692 26,677 74,758
Operating lease obligations
(chartered-in vessels) (2) 26,268 24,813 22,502 22,521 22,619 51,244 169,967
Newbuilding installments (3) 8,300 -- -- -- -- -- 8,300
Acquisition of joint venture
interest (4) 39,900 -- -- -- -- -- 39,900
----------------------------------------------------------------------------------------
Total $ 164,076 $ 104,651 $ 273,567 $ 82,004 $ 118,145 $ 689,092 $1,431,535
========== ========== ========== ========== ========== ========== ==========
</TABLE>
(1) Amounts shown include contractual interest obligations. The interest
obligations for floating rate debt ($439,242,000 as of December 31, 2003)
have been estimated based on the fixed rates stated in related
floating-to-fixed interest rate swaps, where applicable, or the LIBOR rate
at December 31, 2003 of 1.2%. The Company is a party to floating-to-fixed
interest rate swaps covering notional amounts aggregating approximately
$431,000,000 at December 31, 2003 that effectively convert the Company's
interest rate exposure from a floating rate based on LIBOR to an average
fixed rate of 6.56%.
(2) As of December 31, 2003, the Company had chartered in six vessels (the
Company has a 40% participation in one of such chartered-in vessels) on
leases that are accounted for as operating leases. Certain of these leases
provide the Company with various renewal and purchase options.
(3) As of December 31, 2003, OSG had a non-cancelable commitment for the
construction of one Foreign Flag tanker for delivery in January 2004, with
an aggregate unpaid cost of approximately $8,300,000. This amount was paid
in the first quarter of 2004.
(4) Principally attributable to the retirement of debt of certain of the joint
ventures. See "Off-Balance Sheet Arrangements" above.
37
<PAGE>
In addition to the above long-term contractual obligations the Company has
certain obligations as of December 31, 2003 related to an unfunded supplemental
pension plan and an unfunded postretirement health care plan as follows:
<TABLE>
<CAPTION>
In thousands 2004 2005 2006 2007 2008
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Supplemental pension plan
obligations (1) $14,620 $ 76 $ 76 $ 76 $ 76
Postretirement health care plan
obligations (2) $ 304 $ 320 $ 337 $ 350 $ 362
</TABLE>
(1) Obligations are included herein only if the retirement of a covered
individual is known as of December 31, 2003. The amount for 2004 includes
$14,544,000 that has been classified in sundry liabilities and accrued
expenses (see Note H to the consolidated financial statements set forth in
Item 8). Amounts shown herein exclude obligations payable by the Company's
defined benefit plan for domestic shore-based employees, which was
overfunded as of December 31, 2003.
(2) Amounts are estimated based on the 2003 cost taking the assumed health
care cost trend rate for 2004 to 2008 into consideration. See Note N to
the consolidated financial statements set forth in Item 8. Because of the
subjective nature of the assumptions made, actual premiums paid in future
years may differ significantly from the estimated amounts.
OSG has used interest rate swaps to effectively convert a portion of its
debt from a floating to fixed-rate basis reflecting management's interest-rate
outlook at various times. These agreements contain no leverage features and have
various maturity dates from July 2005 to August 2014.
OSG finances vessel additions primarily with cash provided by operating
activities and long-term borrowings. In 2003, 2002 and 2001, cash used for
vessel additions approximated $87,000,000, $153,000,000 and $112,000,000,
respectively. In July 2002, the Company prepaid approximately $47,600,000 of
progress payments for two newbuildings realizing the benefit of a
contractually-provided discount. OSG expects to finance 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 charter rates are volatile.
EBITDA
EBITDA represents operating earnings, which is before interest expense and
income taxes, plus other income/(expense) and depreciation and amortization
expense. Amounts for 2002 and 2001 have been restated to conform with the 2003
presentation of depreciation and amortization. EBITDA should not be considered a
substitute for net income, cash flow from operating activities and other
operations or cash flow statement data prepared in accordance with accounting
principles generally accepted in the United States or as a measure of
profitability or liquidity. EBITDA is presented to provide additional
information with respect to the Company's ability to satisfy debt service,
capital expenditure and working capital requirements. While EBITDA is frequently
used as a measure of operating results and the ability to meet debt service
requirements, it is not necessarily comparable to other similarly titled
captions of other companies due to differences in methods of calculation. The
following table is a reconciliation of net income/(loss), as reflected in the
consolidated statements of operations set forth in Item 8, to EBITDA:
In thousands for the year ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------
Net income/(loss) $ 121,309 $ (17,620) $ 101,441
Provision/(credit) for federal income taxes 46,844 (3,244) 53,004
Interest expense 62,124 52,693 45,035
Depreciation and amortization 90,010 80,379 71,671
----------------------------------
EBITDA $ 320,287 $ 112,208 $ 271,151
==================================
38
<PAGE>
Ratios of Earnings to Fixed Charges
The ratio of earnings to fixed charges for each of 2003 and 2001 was 2.9X.
The deficiency of earnings necessary to cover fixed charges for 2002 was
$34,220,000. The ratio of earnings to fixed charges has been computed by
dividing the sum of (a) pretax income for continuing operations, (b) fixed
charges (reduced by the amount of interest capitalized during the period) and
(c) amortization expense related to capitalized interest, by fixed charges.
Fixed charges consist of all interest (both expensed and capitalized),
amortization of debt issuance costs, and the interest portion of time and
bareboat charter hire expenses.
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 such 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.
39
<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, 2003 2004 2005 2006 2007 2008 2008 Total Dec. 31, 2003
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Fixed income securities $ 32.0 $ 1.4 $ 5.4 $ 1.4 $ 1.4 $ 59.7 $ 101.3 $ 101.3
Average interest rate 1.0% 3.1% 4.0% 4.5% 5.4% 6.5%
Liabilities
Long-term debt and capital lease
obligations, including current
portion:
Fixed rate $ 6.9 $ 8.2 $ 8.7 $ 9.3 $ 10.0 $ 340.5 $ 383.6 $ 409.0
Average interest rate 7.9% 8.3% 8.4% 8.5% 8.6% 8.4%
Variable rate $ 28.3 $ 21.6 $ 191.3 $ 11.2 $ 48.3 $ 138.5 $ 439.2 $ 439.3
Average spread over LIBOR 1.3% 1.3% 1.3% 1.1% 1.4% 1.1%
Interest Rate Swaps Related to Debt
Pay fixed/receive variable* $ 35.0 $ 33.1 $ 218.1 $ 14.0 $ 52.0 $ 79.2 $ 431.4 $ (25.0)
Average pay rate 6.1% 6.1% 5.4% 5.1% 5.3% 4.6%
<CAPTION>
=============================================================================================================================
Beyond Fair Value at
At December 31, 2002 2003 2004 2005 2006 2007 2007 Total Dec. 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Fixed income securities $ 0.8 $ 0.2 $ 1.0 $ 1.3 $ 1.6 $ 64.4 $ 69.3 $ 69.3
Average interest rate 6.3% 8.0% 2.6% 5.9% 4.6% 7.3%
Liabilities
Long-term debt and capital lease
obligations, including current
portion:
Fixed rate $ 77.2 $ 7.3 $ 8.2 $ 8.7 $ 9.3 $ 150.4 $ 261.1 $ 249.6
Average interest rate 8.2% 7.7% 8.0% 8.1% 8.2% 8.0%
Variable rate $ 14.3 $ 11.3 $ 361.3 $ 197.2 $ 11.2 $ 149.7 $ 745.0 $ 745.0
Average spread over LIBOR 1.0% 1.1% 1.1% 1.7% 1.1% 1.1%
Interest Rate Swaps Related to Debt
Pay fixed/receive variable* $ 19.5 $ 17.9 $ 22.8 $ 213.0 $ 14.0 $ 131.2 $ 418.4 $ (33.9)
Average pay rate 6.3% 5.4% 5.7% 5.4% 5.1% 4.9%
</TABLE>
* LIBOR
The Company has one long-term revolving credit facility under which
borrowings bear interest at LIBOR plus a margin, where the margin is dependent
on the Company's leverage. As of December 31, 2003, there was $175,000,000
outstanding under such facility.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7.
40
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Years ended December 31, 2003, 2002 and 2001 Page
Consolidated Balance Sheets at December 31, 2003 and 2002................. 42
Consolidated Statements of Operations for the Years Ended December 31,
2003, 2002 and 2001.................................................... 43
Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002 and 2001.................................................... 44
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 2003, 2002 and 2001................................. 45
Notes to Consolidated Financial Statements................................ 46
Report of Independent Auditors............................................ 72
41
<PAGE>
Consolidated Balance Sheets
Overseas Shipholding Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Dollars in thousands at December 31, 2003 2002
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 74,003 $ 36,944
Investments in marketable securities-- Note F -- 28,796
Voyage receivables, including unbilled
of $45,877 and $35,637 51,990 38,755
Other receivables, including federal income taxes recoverable
of $6,098 in 2002 7,634 12,777
Inventories 495 1,155
Prepaid expenses 7,301 4,960
- ---------------------------------------------------------------------------------------------------
Total Current Assets 141,423 123,387
Capital Construction Fund-- Notes F and J 247,433 231,072
Vessels, at cost, less accumulated depreciation--
Notes A5 and I 1,336,824 1,383,744
Vessels under Capital Leases, less accumulated
amortization-- Note A6 27,949 33,030
Investments in Joint Ventures-- Note E 183,831 168,315
Other Assets-- Note A5 63,226 95,294
- ---------------------------------------------------------------------------------------------------
Total Assets $ 2,000,686 $ 2,034,842
===================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 1,681 $ 2,201
Sundry liabilities and accrued expenses-- Note H 48,120 22,971
Federal income taxes 13,172 --
Short-term debt and current installments of long-term debt-- Note I 31,318 14,284
Current obligations under capital leases-- Note M1 3,917 6,791
- ---------------------------------------------------------------------------------------------------
Total Current Liabilities 98,208 46,247
Long-term Debt-- Note I 739,733 932,933
Obligations under Capital Leases-- Note M1 47,855 52,102
Deferred Federal Income Taxes ($151,304 and $134,204),
Deferred Credits and Other Liabilities-- Notes E, G and J 197,815 219,411
Commitments-- Note T
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 108,549 106,154
Retained earnings 829,824 731,201
- ---------------------------------------------------------------------------------------------------
977,964 876,946
Cost of treasury stock (3,685,326 and 5,139,684 shares) 48,454 70,270
- ---------------------------------------------------------------------------------------------------
929,510 806,676
Accumulated other comprehensive income/(loss) (12,435) (22,527)
- ---------------------------------------------------------------------------------------------------
Total Shareholders' Equity 917,075 784,149
- ---------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 2,000,686 $ 2,034,842
===================================================================================================
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
Consolidated Statements of Operations
Overseas Shipholding Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Dollars in thousands, except per share amounts,
for the year ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shipping Revenues -- Note C:
Time and bareboat charter revenues, including vessels operating
in certain pools and $28,052 in each year received from a
37.5% owned joint venture $ 396,254 $ 227,402 $ 183,627
Voyage charter revenues 57,866 69,881 285,706
- -----------------------------------------------------------------------------------------------------------------
454,120 297,283 469,333
Voyage Expenses (22,984) (30,558) (88,315)
- -----------------------------------------------------------------------------------------------------------------
Time Charter Equivalent Revenues 431,136 266,725 381,018
- -----------------------------------------------------------------------------------------------------------------
Ship Operating Expenses:
Vessel expenses 89,877 84,617 84,058
Time and bareboat charter hire expenses, including $1,757,
$8,399 and $7,889 paid to a 50% owned joint venture --
Notes E and M1 20,474 25,359 43,956
Depreciation and amortization 90,010 80,379 71,671
General and administrative-- Notes R and S 39,668 31,482 40,208
Restructuring charge-- Note O -- -- 10,439
- -----------------------------------------------------------------------------------------------------------------
Total Ship Operating Expenses 240,029 221,837 250,332
- -----------------------------------------------------------------------------------------------------------------
Income from Vessel Operations 191,107 44,888 130,686
Equity in Income of Joint Ventures-- Note E 33,965 11,407 20,474
- -----------------------------------------------------------------------------------------------------------------
Operating Income 225,072 56,295 151,160
Other Income/(Expense)-- Note P 5,205 (24,466) 48,320
- -----------------------------------------------------------------------------------------------------------------
230,277 31,829 199,480
Interest Expense 62,124 52,693 45,035
- -----------------------------------------------------------------------------------------------------------------
Income/(Loss) before Federal Income Taxes 168,153 (20,864) 154,445
Provision/(Credit) for Federal Income Taxes-- Note J 46,844 (3,244) 53,004
- -----------------------------------------------------------------------------------------------------------------
Net Income/(Loss) $ 121,309 $ (17,620) $ 101,441
=================================================================================================================
Weighted Average Number of Common Shares
Outstanding -- Note K:
Basic 34,725,247 34,394,977 34,168,944
Diluted 34,976,793 34,394,977 34,696,823
Per Share Amounts:
Basic net income/(loss) $ 3.49 $ (0.51) $ 2.97
Diluted net income/(loss) $ 3.47 $ (0.51) $ 2.92
Cash dividends declared and paid $ 0.65 $ 0.60 $ 0.60
</TABLE>
See notes to consolidated financial statements.
43
<PAGE>
Consolidated Statements of Cash Flows
Overseas Shipholding Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
In thousands for the year ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income/(loss) $ 121,309 $ (17,620) $ 101,441
Items included in net income/(loss) not affecting cash flows:
Depreciation and amortization 90,010 80,379 71,671
Amortization of deferred gain on sale and leaseback (6,888) (13,774) (13,775)
Restructuring charge -- -- 10,439
Deferred compensation relating to stock option grants 226 2,262 2,659
Unrealized loss on write-down of marketable securities 4,756 42,055 --
Provision for deferred federal income taxes 11,351 2,759 25,862
Undistributed earnings of joint ventures (17,999) (4,026) (7,937)
Other-- net (9,432) (14,954) (8,241)
Items included in net income/(loss) related to investing and financing
activities:
Gain on sale of securities-- net (10,439) (3,643) (27,227)
(Gain)/loss on disposal of vessels 6,809 861 (436)
Changes in operating assets and liabilities:
Decrease/(increase) in receivables (4,534) (12,611) 22,281
Increase/(decrease) in Federal income taxes payable 13,172 (24,500) 18,851
Net change in prepaid items, accounts payable and sundry liabilities
and accrued expenses 24,859 (24,015) (2,563)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 223,200 13,173 193,025
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchases of marketable securities -- -- (116,969)
Proceeds from sales of marketable securities 34,674 40,326 96,402
Expenditures for vessels, including $29,167, $116,830 and $109,960
related to vessels under construction (87,007) (152,640) (112,012)
Proceeds from disposal of vessels 151,143 12,729 1,142
Acquisition of interests in joint ventures that own four VLCCs (10,362) -- --
Investments in and advances to joint ventures (60,090) (19,756) (59,845)
Distributions from joint ventures 6,612 5,661 2,749
Purchases of other investments (919) (1,339) (890)
Proceeds from dispositions of other investments 27,581 2,150 1,147
Other-- net (1,744) (1,442) 1,241
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) investing activities 59,888 (114,311) (187,035)
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Issuance of debt, net of issuance costs 194,849 256,000 41,000
Payments on debt and obligations under capital leases (435,164) (127,864) (14,565)
Cash dividends paid (22,686) (20,636) (20,512)
Issuance of common stock upon exercise of stock options 20,259 2,627 4,547
Other-- net (3,287) (2,301) (1,985)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) financing activities (246,029) 107,826 8,485
- ---------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 37,059 6,688 14,475
Cash and cash equivalents at beginning of year 36,944 30,256 15,781
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 74,003 $ 36,944 $ 30,256
===============================================================================================================
</TABLE>
See notes to consolidated financial statements.
44
<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, 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 Income/(Loss),
net of tax:
Net unrealized holding losses on
available-for-sale securities* (16,341) (16,341)
Effect of derivative instruments (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
Net Loss (17,620) (17,620)
Other Comprehensive Income/(Loss),
net of tax:
Net unrealized holding gains on
available-for-sale securities* 16,777 16,777
Effect of derivative instruments (13,880) (13,880)
Minimum pension liability 859 859
---------
Comprehensive (Loss) (13,864)
---------
Cash Dividends Declared and Paid (20,636) (20,636)
Deferred Compensation Related to Options
Granted 2,262 2,262
Options Exercised and Employee
Stock Purchase Plan 29 (173,183) 2,598 2,627
Tax Benefit Related to Options
Exercised 334 334
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 39,591 106,154 731,201 5,139,684 (70,270) (22,527) 784,149
Net Income 121,309 121,309
Cumulative Effect of Change in Accounting
Principle, net of tax benefit of $902--
Note B (1,674) (1,674)
Other Comprehensive Income/(Loss),
net of tax:
Net unrealized holding gains on
available-for-sale securities* 6,242 6,242
Effect of derivative instruments--
Note L 5,334 5,334
Minimum pension liability 190 190
---------
Comprehensive Income 131,401
---------
Cash Dividends Declared and Paid (22,686) (22,686)
Deferred Compensation Related to Options
Granted 226 226
Options Exercised and Employee
Stock Purchase Plan (1,557) (1,454,358) 21,816 20,259
Tax Benefit Related to Options
Exercised 3,726 3,726
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 39,591 $ 108,549 $ 829,824 3,685,326 $ (48,454) $ (12,435) $ 917,075
===================================================================================================================================
</TABLE>
* For 2001, net of realized gains included in net income of $18,230; for
2002, net of write-down of marketable securities of $30,976 and realized
gains of $2,173 that were included in net loss; and for 2003, net of
write-down of marketable securities of $385 and realized gains of $6,624
that were included in net income.
See notes to consolidated financial statements.
45
<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, 2003, 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 operations and cash flows for 2002 and 2001
have been reclassified to conform with the 2003 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 fair value. Net
unrealized gains or losses are reported as a component of accumulated
other comprehensive income/(loss) within shareholders' equity.
The Company accounts for investments in marketable securities in
accordance with the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" and Staff Accounting Bulletin No. 59, "Noncurrent Marketable
Equity Securities." Accordingly, if a material decline in the fair value
below the Company's cost basis is determined to be other than temporary, a
noncash impairment loss is recorded as a charge in the statement of
operations in the period in which that determination is made. As a matter
of policy, the Company evaluates all material declines in fair value for
impairment whenever the fair value of a stock has been below its cost
basis for more than six consecutive months. In the period in which a
decline in fair value is determined to be other than temporary, the
carrying value of that security is written down to its fair value at the
end of such period, thereby establishing a new cost basis.
The classification of investments in marketable securities in the
consolidated balance sheets as a current asset 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 cost
determined on a first-in, first-out basis.
5. Vessels, deferred drydocking expenditures and other property - Vessels
include vessels under construction aggregating $36,202,000 and
$126,093,000 at December 31, 2003 and 2002, respectively (see Note Q).
Vessels are recorded at cost and are depreciated to their estimated
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
$439,495,000 and $423,344,000 at December 31, 2003 and 2002, respectively.
Other property, including leasehold improvements, are recorded at cost and
amortized substantially on the straight-line basis over the shorter of the
terms of the leases or the estimated useful lives of the assets, which
range from three to seven years.
46
<PAGE>
Interest costs are capitalized to vessels during the period that vessels
are under construction. Interest capitalized aggregated $3,987,000 in
2003, $4,949,000 in 2002 and $13,151,000 in 2001.
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 operations, amounted to
$10,810,000 in 2003, $10,369,000 in 2002 and $10,268,000 in 2001. The
unamortized portion of deferred drydocking expenditures, which is included
in other assets in the consolidated balance sheets, was $12,907,000 and
$18,647,000 at December 31, 2003 and 2002, respectively.
6. Vessels under capital leases - The Company charters in two U.S. Flag
vessels (four at December 31, 2002) that it accounts for as capital
leases. Amortization of capital leases is computed by the straight-line
method over 22 years (25 years with respect to the charters-in of two U.S.
Flag vessels that terminated in 2003), representing the terms of the
leases (see Note M1). Accumulated amortization was $50,372,000 and
$89,060,000 at December 31, 2003 and 2002, 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
$10,678,000 and $6,826,000 are included in other assets at December 31,
2003 and 2002, respectively. Amortization amounted to $2,865,000 in 2003,
$1,711,000 in 2002 and $1,282,000 in 2001.
9. Revenue and expense recognition - Revenues from time charters and bareboat
charters are accounted for as operating leases and are thus recognized
ratably over the rental periods of such charters, as service is performed.
Voyage revenues and expenses are recognized ratably over the estimated
length of each voyage and, therefore, are allocated between reporting
periods based on the relative transit time in each period. In accordance
with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," OSG does not begin recognizing voyage revenue until a Charter
has been agreed to 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.
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.
47
<PAGE>
Beginning in 2002, operation of the Aframax International pool changed to
be substantially similar to the operations of the Tankers and Dry Bulk
Carrier pools. Accordingly, in the first quarter of 2002, Aframax
International began reporting results on a time charter equivalent basis
in accordance with an agreed-upon formula. For the Company's vessels
operating in Aframax International prior to 2002, the Company billed and
collected its own revenues and paid its own voyage expenses. Accordingly,
prior to 2002, revenues and voyage expenses were reported on a gross basis
in the consolidated statements of operations. Prior to 2002, settlements
between the pool participants were recorded as adjustments of shipping
revenues on a one-quarter lag, in accordance with an agreed-upon formula.
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 - Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133")
requires the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not effective hedges must be adjusted to
fair value through income. If the derivative is an effective 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 an effective hedge and the full amount of an ineffective hedge
will be immediately recognized in earnings.
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 the Company's debt either from a fixed to a floating rate
basis, which swaps are designated and qualify as fair value hedges, or
from a floating to a fixed rate, which swaps are designated and qualify as
cash flow hedges. The Company uses foreign currency swaps from
time-to-time, which swaps are designated and qualify as cash flow hedges,
to minimize the effect of foreign exchange rate fluctuations on reported
revenues and protect against the reduction in value of forecasted foreign
currency cash flows from future charter revenues receivable in currencies
other than U.S. dollars. 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 to date have not met the 80%
effectiveness threshold required by FAS 133; therefore, they have not been
accounted for as effective cash flow hedges. For interest rate swaps, the
Company assumes no ineffectiveness since each interest rate swap either
meets the conditions required under FAS 133 to apply the short-cut method
or the critical terms method in the case of prepayable debt such as
borrowings under the Company's long-term revolving credit facilities.
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.
48
<PAGE>
11. Stock-based compensation - As of December 31, 2003, the Company had one
stock-based employee compensation plan and one non-employee director plan,
which are more fully described in Note K. The Company accounts for those
plans in accordance with the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"). Compensation cost for stock options is
recognized as an expense based on the excess, if any, of the quoted market
price of the stock at the grant date of the award or other measurement
date, over the amount an employee or non-employee director must pay to
acquire the stock. The following table presents the effects on net
income/(loss) and earnings per share if the Company had applied the fair
value recognition provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"),
to stock-based compensation.
<TABLE>
<CAPTION>
In thousands, except per share amounts, for the
year ended December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income/(loss), as reported $ 121,309 $ (17,620) $ 101,441
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax (158) (561) (1,527)
------------------------------------------------------------------------------------------------------------
Pro forma net income/(loss) $ 121,151 $ (18,181) $ 99,914
============================================================================================================
Per share amounts:
Basic - as reported $ 3.49 $ (0.51) $ 2.97
Basic - pro forma $ 3.49 $ (0.53) $ 2.93
Diluted - as reported $ 3.47 $ (0.51) $ 2.92
Diluted - pro forma $ 3.46 $ (0.53) $ 2.88
</TABLE>
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.
13. Newly issued accounting standards - On December 8, 2003, the President of
the U.S. signed into law the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act"). The Act introduces a prescription
drug benefit under Medicare Part D as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that
is at least actuarially equivalent to Medicare Part D. In accordance with
Financial Accounting Standards Board Staff Position 106-1, the accrued
benefit obligation at December 31, 2003 and the net periodic
postretirement benefit cost for 2003 that are included in the consolidated
financial statements and accompanying footnotes do not reflect the effects
of the Act on the Company's postretirement health care plan. Specific
authoritative guidance on the accounting for the federal subsidy is
pending and such guidance could require the Company to change previously
reported information. The Company has not completed its evaluation of the
impact of the Act on such plan.
49
<PAGE>
Note B -- Change in Accounting Principle:
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). This
interpretation requires the consolidation of special purpose entities by the
company that is deemed to be the primary beneficiary of such entities. This
represents a significant change from the then existing rules, which required
consolidation by the entity with voting control; and, according to which OSG
accounted for its 1999 sale-leaseback transaction of U.S. Flag Crude Tankers as
an off-balance-sheet financing. On July 1, 2003, the Company consolidated the
special purpose entity ("Alaskan Equity Trust") that now owns these vessels and
holds the associated bank debt used to purchase them because, under the
provisions of FIN 46, the Company is considered to be the primary beneficiary of
Alaskan Equity Trust. The vessels were recorded in the consolidated balance
sheet based on their carryover bases, that is, as if FIN 46 had been effective
at the time of the 1999 sale-leaseback. The special purpose entity's debt of
$32,496,000 as of December 31, 2003 is secured by the vessels but is otherwise
nonrecourse to OSG. In addition, OSG did not issue any repayment or
residual-value guaranties. Therefore, OSG is not exposed to any loss as a result
of its involvement with Alaskan Equity Trust. The cumulative effect of this
change in accounting principle on the Company's consolidated balance sheet as of
July 1, 2003 was to increase total assets by $25,079,000 (principally to reflect
the reconsolidation of the vessels), to increase liabilities by $26,753,000
(principally to reflect debt of Alaskan Equity Trust of $45,034,000 partially
offset by the elimination of the unamortized balance of the deferred gain on the
1999 sale-leaseback of $21,141,000) and to reduce shareholders' equity by
$1,674,000 (to reflect the fair value of Alaskan Equity Trust's
floating-to-fixed interest rate swaps included in accumulated other
comprehensive income/(loss)). The cumulative effect of such accounting change on
net income/(loss) was insignificant.
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 size and design configuration of vessels required and, in
some cases, on 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 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 four reportable segments: Foreign Flag VLCCs, Aframaxes and
Product Carriers, which participate in the international market, and U.S. Flag
Crude Tankers, which participate in the U.S. Flag trades. U.S. Flag Dry Bulk
Carriers no longer meet the materiality thresholds for disclosure as a
reportable segment as established by Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
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.
50
<PAGE>
Information about the Company's reportable segments for the three years ended
December 31, 2003 follows:
<TABLE>
<CAPTION>
Foreign Flag
------------------------------------------ U.S. Flag
Product Crude
In thousands VLCCs Aframaxes Carriers Tankers All other Totals
- ------------------------------------------------------------------------------------------------------------------------------
2003
<S> <C> <C> <C> <C> <C> <C>
Shipping revenues** $ 191,671 $ 105,793 $ 44,924 $ 28,052 $ 83,680 $ 454,120
Time charter equivalent revenues 189,410 105,739 35,124 28,052 72,811 431,136
Depreciation and amortization 36,475 22,261 7,671 4,359 19,244 90,010
Income from vessel operations 113,456 61,551 14,310 16,664 24,794 230,775*
Equity in income of joint
ventures 23,444 2,874 -- 7,584 63 33,965
Loss on disposal of vessels -- 8 (862) -- (5,955) (6,809)
Investments in joint ventures at
December 31, 2003 172,658 3,255 -- 7,437 481 183,831
Total assets at December 31, 2003 972,994 477,435 64,487 27,270 79,521 1,621,707
Expenditures for vessels 71,806 14,486 606 -- 109 87,007
2002
Shipping revenues** 81,039 71,162 52,020 28,052 65,010 297,283
Time charter equivalent revenues 79,714 71,121 35,053 28,052 52,785 266,725
Depreciation and amortization 30,033 22,554 9,807 -- 17,985 80,379
Income from vessel operations 18,688 27,436 10,560 13,724 5,962 76,370*
Equity in income of joint
ventures 3,404 132 -- 7,776 95 11,407
Loss on disposal of vessels -- (1,549) -- -- 688 (861)
Investments in joint ventures at
December 31, 2002 149,869 10,590 -- 7,813 43 168,315
Total assets at December 31, 2002 892,068 488,895 91,287 10,462 168,829 1,651,541
Expenditures for vessels 59,269 88,724 113 -- 4,534 152,640
2001
Shipping revenues** 113,614 160,221 73,992 28,052 93,454 469,333
Time charter equivalent revenues 112,820 111,293 58,078 28,052 70,775 381,018
Depreciation and amortization 23,815 20,096 9,486 -- 18,274 71,671
Income from vessel operations 64,353 66,718 30,260 14,233 5,769 181,333*
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 12,630 171,352 1,539,468
Expenditures for vessels 40,225 70,878 909 -- -- 112,012
==============================================================================================================================
</TABLE>
* Segment totals for income from vessel operations are before general and
administrative expenses and the restructuring charge.
** Revenues of VLCCs operating in the Tankers pool amounted to $174,965
(2003), $66,757 (2002) and $89,971 (2001). Beginning in 2002, operation of
the Aframax International pool changed to be substantially similar to the
operations of the Tankers and Dry Bulk Carrier pools. Accordingly, in the
first quarter of 2002, Aframax International began reporting results on a
time charter equivalent basis (after reduction for voyage expenses). Prior
to 2002, revenues of the Aframaxes were reported on a voyage charter
basis, that is, before reduction for voyage expenses, which aggregated
$48,928 in 2001. Revenues of $21,985 (2003), $7,243 (2002) and $22,436
(2001) from vessels operating in the Dry Bulk Carrier pool are reported in
All other.
For vessels operating in pools or on time or bareboat charters, shipping
revenues are substantially the same as time charter equivalent revenues.
Reconciliations of total assets of the segments to amounts included in the
consolidated balance sheets follow:
<TABLE>
<CAPTION>
In thousands at December 31, 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets of all segments $ 1,621,707 $ 1,651,541 $ 1,539,468
Corporate cash and securities,
including Capital Construction Fund 321,436 296,812 333,185
Other unallocated amounts 57,543 86,489 91,622
- ------------------------------------------------------------------------------------------------------------------
Consolidated total assets $ 2,000,686 $ 2,034,842 $ 1,964,275
==================================================================================================================
</TABLE>
51
<PAGE>
Certain additional information about the Company's operations for the three
years ended December 31, 2003 follows:
<TABLE>
<CAPTION>
In thousands Consolidated Foreign Flag* U.S. Flag
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2003
Shipping revenues $ 454,120 $ 369,604 $ 84,516
Vessels and vessels under capital leases
at December 31, 2003 1,364,773 1,295,921** 68,852
2002
Shipping revenues 297,283 215,626 81,657
Vessels and vessels under capital leases
at December 31, 2002 1,416,774 1,360,027** 56,747
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
==================================================================================================================
</TABLE>
* Principally Marshall Islands as of December 31, 2003.
** Includes vessels under construction of $36,202 (2003), $126,093 (2002) and
$120,521 (2001).
See Note J for information relating to taxation of income and undistributed
earnings of foreign subsidiaries and unconsolidated affiliates.
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, 2003 2002
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 108,641 $ 54,186
Vessels, net 1,274,370 1,337,260
Other assets 154,744 165,324
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,537,755 $ 1,556,770
=================================================================================================================
Current installments of long-term debt $ 14,284 $ 14,284
Other current liabilities 13,555 10,461
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 27,839 24,745
Long-term debt, deferred credits and other liabilities, including
intercompany debt of $4,000 in 2003 247,546 451,881
Equity 1,262,370 1,080,144
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,537,755 $ 1,556,770
=================================================================================================================
</TABLE>
Note E -- Joint Ventures and Certain Pooling Arrangements:
As of December 31, 2003, the Company is a partner in joint ventures that own
eight foreign flag vessels (seven VLCCs and one Aframax).
Alaska Tanker Company
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
52
<PAGE>
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 (one of which was subsequently sold by the
owner in 2000), which were previously time chartered to BP, were converted to
bareboat charters to ATC, with guaranties from BP, to employ the vessels through
their OPA 90 retirement dates, ranging from February 2004 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 cost of leasing back these vessels from Alaskan
Equity Trust was included in time and bareboat charter hire expense. The gain on
the sale-leaseback transaction was deferred and, until June 30, 2003, was being
amortized over the leaseback period as a reduction in time and bareboat charter
hire expense in the consolidated statements of operations. As of December 31,
2002, the unamortized balance of the deferred gain on the sale-leaseback
transaction was $28,029,000 and was included in other noncurrent liabilities.
The unamortized balance of such deferred gain as of June 30, 2003 was eliminated
in connection with the consolidation of Alaskan Equity Trust (see Note B).
Revenue from the bareboat charters of these vessels to ATC is included in time
and bareboat charter revenue. The Company accounts for its 37.5% interest in ATC
according to the equity method.
Tankers International Pool
In December 1999, the Company and other leading tanker companies established
Tankers to pool their VLCC fleets. Tankers, which commenced operations in
February 2000, commercially manages a fleet of 38 modern VLCCs as of December
31, 2003. Tankers was formed to meet the global transportation requirements of
international oil companies and other major customers. As of December 31, 2003,
13 of the Company's VLCCs (including one chartered-in VLCC in which the Company
has a 40% participation interest) plus four other VLCCs that are owned by joint
ventures, as discussed below, participate in the Tankers pool.
Capesize Bulk Carrier Pool
During the first quarter of 2000, the Company and other major vessel owners
agreed to pool their Capesize Dry Bulk Carriers. The Company's two Foreign Flag
Dry Bulk Carriers were withdrawn from such pool in early 2004 upon commencement
of three-year time charters.
VLCC Joint Ventures
In 2000, the Company acquired a 30% interest in a joint venture that purchased
the Front Tobago, 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, 2003, the outstanding balance of
such subordinated partner loans advanced by the Company was $4,590,000. In
connection with the bank financing, the partners have severally issued
guaranties aggregating $6,000,000 at December 31, 2003, of which the Company's
share was $1,800,000.
In early 2001, the Company formed joint ventures that entered into an agreement
whereby companies in which OSG holds a 49.9% interest acquired two 1993-built
VLCCs (Dundee and Edinburgh) for approximately $103 million. Such acquisitions
were financed by the joint ventures through long-term bank financing and
subordinated partner loans. The outstanding balance of the long-term bank
financing was repaid in December 2003 using funds received from the partners. As
of December 31, 2003, the outstanding balance of such subordinated partner loans
advanced by the Company was $54,779,000.
In June 2001, the Company agreed to acquire a 33.33% interest in joint ventures
formed to purchase six new VLCCs. The number of vessels to be purchased was
reduced to five in August 2001. Three vessels were delivered to the joint
ventures in the third quarter of 2001. The remaining two were delivered to the
joint ventures upon completion of their construction in February and July 2002.
The total purchase price for the vessels of $399 million and the joint ventures'
then remaining commitments under the construction contracts for two of those
vessels were financed by the joint ventures through
53
<PAGE>
long-term bank financing and subordinated partner loans. The Company completed
transactions with its partners to restructure the relative ownership interests
in the five joint-venture companies. These transactions, which increased OSG's
overall joint-venture interest by the equivalent of one third of a vessel, were
effective as of July 1, 2003. In one transaction, the Company, jointly with one
partner, acquired the remaining partner's 33.33% interest in the joint venture
companies owning the Ariake and Sakura I for cash of approximately $20,000,000,
thereby increasing the Company's share in such joint ventures to 49.889%. In a
second transaction, the Company exchanged its 33.33% interest in the Ichiban
with one partner for a portion of that partner's interest in the Tanabe and
Hakata, thereby increasing the Company's interest in these joint ventures to
49.889%. As of December 31, 2003, the outstanding balance of subordinated
partner loans advanced by the Company with respect to these four vessels was
$170,469,000. The outstanding balance of the long-term bank financing for the
Tanabe and Hakata was repaid in December 2003 using funds received from the
partners. In connection with the bank financings for the Ariake and Sakura I,
the partners have severally issued guaranties aggregating approximately
$18,451,000 at December 31, 2003, of which the Company's share was 49.889%.
Through April 2003, the Company had a 50% interest in a joint venture with a
major oil company that owned two VLCCs that were 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. In April 2003, OSG effectively
acquired its partner's 50% interest in the joint venture, resulting in such
vessels becoming 100% owned. Accordingly, the results of these two vessels are
included in the consolidated statements of operations from the effective date of
the transaction. The acquisition was accomplished through the joint venture's
redemption of our partner's shares in exchange for one of the venture's two
vessel owning subsidiaries, followed by our purchase from the partner of such
vessel for $56,500,000. In accordance with the provisions of Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the joint venture recognized a loss on disposal
of $5,132,000 based on the excess of the carrying amount of the vessel
transferred to our former partner over its fair value. The Company's share of
such charge of $2,566,000 is reflected in equity in income of joint ventures in
the consolidated statements of operations.
Aframax Joint Venture
In May 2000, the Company invested $1,500,000 for a 50% interest in a joint
venture that bareboat chartered in the Compass I, a 1992-built Aframax tanker,
which was accounted for as a capital lease by the joint venture. In May 2002,
such joint venture exercised a purchase option and acquired the vessel. The
purchase price of approximately $13,000,000 was financed through capital
contributions from the partners. The Company provided certain charter guaranties
to its joint venture partner through the May 2002 exercise of the purchase
option; daily TCE revenues in excess of an agreed amount were for the Company's
benefit through the May 2002 exercise of the purchase option. In January 2003,
the joint venture borrowed $15,375,000. The proceeds from such borrowing were
used to repay the capital contributions received from the shareholders. This
Aframax tanker participates in the Aframax International pool.
54
<PAGE>
A condensed summary of the combined assets and liabilities of the joint ventures
follows:
<TABLE>
<CAPTION>
In thousands at December 31, 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 83,152 $ 102,307
Vessels, net 431,798 666,214
Other assets 5,450 11,034
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 520,400 $ 779,555
======================================================================================================================
Current installments of long-term debt $ 9,616 $ 42,046
Other current liabilities 48,788 53,388
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 58,404 95,434
Long-term debt 92,176 291,086
Other liabilities, including subordinated loans of $229,780 and $224,652
due to the joint venture partners 229,780 225,177
Equity 140,040 167,858
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 520,400 $ 779,555
======================================================================================================================
</TABLE>
As of December 31, 2003, the joint ventures in which the Company had interests
ranging from 30% to 50% had bank debt of $101,792,000 and subordinated loans
payable to all joint-venture partners of $229,780,000. The Company's guaranties
in connection with the joint ventures' bank financings, which are otherwise
nonrecourse to the joint venture partners, aggregated $11,005,000 at December
31, 2003.
The Company has entered into an agreement in principle with its partner covering
six joint venture companies that each own a VLCC. This agreement provides for an
exchange of joint venture interests such that the Company will own 100% of the
Dundee, Sakura I and Tanabe, and the joint venture partner will own 100% of the
Edinburgh, Ariake and Hakata. This transaction is expected to close in the first
quarter of 2004. The results of the Dundee, Sakura I and Tanabe will be included
in the VLCC segment from the 2004 effective date of transaction.
The effect of the above agreement will be to reduce the combined bank debt of
the joint ventures by $79,958,000 to $21,834,000 and the OSG guaranties by
$9,205,000 to $1,800,000, which will remain outstanding until the related debt
matures in March 2005. The Company's share of the amounts required to repay such
bank debt will be funded from cash.
A condensed summary of the results of operations of the joint ventures follows:
<TABLE>
<CAPTION>
In thousands for the year ended December 31, 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Time charter equivalent revenues $ 294,130 $ 261,217 $ 243,288
Ship operating expenses (196,275) (217,936) (194,125)
Loss on vessel disposal (5,132) -- --
- ----------------------------------------------------------------------------------------------------------------------
Income from vessel operations 92,723 43,281 49,163
Other income 250 639 1,020
Interest expense* (18,111) (26,516) (17,062)
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 74,862 $ 17,404 $ 33,121
======================================================================================================================
</TABLE>
* Includes interest on subordinated loans payable to the joint venture
partners of $9,840 (2003), $14,488 (2002) and $6,063 (2001). The Company's
share of such interest is eliminated in recording the results of the joint
ventures by the equity method.
55
<PAGE>
Note F -- Investments in Marketable Securities and Capital Construction Fund:
Based on a number of factors, including the magnitude of the drop in market
values below the Company's cost bases and length of time that the declines had
been sustained, management concluded that declines in fair value of certain
securities with aggregate cost bases of $16,187,000 in 2003 and $72,521,000 in
2002, were other than temporary. Accordingly, during 2003 and 2002, the Company
recorded impairment losses aggregating $4,756,000 and $42,055,000, respectively,
in the accompanying consolidated statements of operations.
The Company has sold certain of the securities for which write-downs aggregating
$42,253,000 had previously been recorded. These sales resulted in the
recognition of gains of $12,104,000 in 2003 and $3,821,000 in 2002 (see Note P).
Certain information, which gives effect to the above write-downs, concerning the
Company's marketable securities, 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>
2003
Capital Construction Fund:
U.S. Treasury securities and
obligations of U.S. government
agencies $ 22,304 $ 314 $ 22 $ 22,596
Mortgage-backed securities 61,445 397 38 61,804
Other debt securities 16,163 854 89 16,928
- -------------------------------------------------------------------------------------------------------------------
Total debt securities 99,912 1,565 149 101,328
Equity securities 38,436 9,173 474 47,135
Cash and cash equivalents 98,970 -- -- 98,970
- -------------------------------------------------------------------------------------------------------------------
Total Capital Construction Fund $ 237,318 $ 10,738 $ 623 $ 247,433
===================================================================================================================
</TABLE>
At February 11, 2004, the aggregate market value of the above marketable
securities was approximately $150,500,000 compared with a market value of
$148,463,000 as of December 31, 2003.
<TABLE>
<CAPTION>
Approximate
Gross unrealized market value and
------------------- carrying
In thousands at December 31, Cost Gains Losses amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2002
Capital Construction Fund:
U.S. Treasury securities and
obligations of U.S. government
agencies $ 8,662 $ 567 $ -- $ 9,229
Mortgage-backed securities 44,373 885 4 45,254
Other debt securities 14,173 779 165 14,787
- -------------------------------------------------------------------------------------------------------------------
Total debt securities 67,208 2,231 169 69,270
Equity securities 41,359 5,869 12,974 34,254
Cash and cash equivalents 127,548 -- -- 127,548
- -------------------------------------------------------------------------------------------------------------------
Total Capital Construction Fund $ 236,115 $ 8,100 $ 13,143 $ 231,072
===================================================================================================================
Equity securities included in investments
in marketable securities $ 23,244 $ 5,884 $ 332 $ 28,796
===================================================================================================================
</TABLE>
56
<PAGE>
The cost and approximate market value of debt securities held by the Company as
of December 31, 2003, 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 $ 7,984 $ 7,989
Due after one year through five years 9,205 9,318
Due after five years through ten years 9,485 9,887
Due after ten years 11,793 12,330
- -----------------------------------------------------------------------------------------------------------------
38,467 39,524
Mortgage-backed securities 61,445 61,804
- -----------------------------------------------------------------------------------------------------------------
$ 99,912 $ 101,328
=================================================================================================================
</TABLE>
The following table shows our Capital Construction Fund's gross unrealized
losses and fair value, aggregated by investment category and length of time that
individual securities have been in a continuous loss position, as of December
31, 2003.
<TABLE>
<CAPTION>
Less than 12 months More than 12 months Total
------------------- ------------------- -----
Market Unrealized Market Unrealized Market Unrealized
In thousands value losses value losses value losses
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities and
obligations of U.S.
government
agencies $ 4,545 $ 22 $ -- $ -- $ 4,545 $ 22
Mortgage-backed
securities 2,868 38 -- -- 2,868 38
Other debt securities 2,764 89 -- -- 2,764 89
- -------------------------------------------------------------------------------------------------------------------
Total debt securities 10,177 149 -- -- 10,177 149
Equity securities 4,343 356 1,507 118 5,850 474
- -------------------------------------------------------------------------------------------------------------------
Total temporarily
impaired securities $ 14,520 $ 505 $ 1,507 $ 118 $ 16,027 $ 623
===================================================================================================================
</TABLE>
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 instrument:
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.
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.
57
<PAGE>
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, 2003 2003 2002 2002
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets (liabilities)
Cash and cash equivalents $ 74,003 $ 74,003 $ 36,944 $ 36,944
Capital Construction Fund-- See Note F 247,433 247,433 231,072 231,072
Investments in marketable securities -- -- 28,796 28,796
Debt, including capital lease obligations (822,823) (848,287) (1,006,110) (994,645)
</TABLE>
As of December 31, 2003, the Company is a party to floating-to-fixed interest
rate swaps with various major financial institutions covering notional amounts
aggregating approximately $431,000,000, pursuant to which it pays fixed rates
ranging from 4.6% to 8.3% and receives floating rates based on the London
interbank offered rate ("LIBOR") (approximately 1.2% at December 31, 2003).
These agreements contain no leverage features and have various maturity dates
ranging from July 2005 to August 2014. As of December 31, 2003, the Company has
recorded a liability of $24,975,000 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 was recognized ratably over the period through
December 2003, as an adjustment of interest expense.
Shipping revenues for 2003 have been reduced by $384,000, because of forward
freight agreements with a notional value of $1,632,000 that extend to December
2004. The fair value of these agreements, which do not qualify as effective
hedges, was recorded as a liability in other liabilities as of December 31,
2003.
Shipping revenues for 2002 were reduced by $534,000, because of forward freight
agreements with a notional value of $8,370,000 that extended to December 2003.
The fair value of these agreements, which did not qualify as effective hedges,
was recorded as a liability in other liabilities as of December 31, 2002.
Note H -- Sundry Liabilities and Accrued Expenses:
Sundry liabilities and accrued expenses follows:
<TABLE>
<CAPTION>
In thousands at December 31, 2003 2002
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Payroll and benefits $ 7,657 $ 3,851
Settlement of supplemental pension plan obligation -- Notes N and R 14,544 --
Restructuring reserve -- 214
Interest 12,511 7,659
Insurance 1,356 1,582
Other 12,052 9,665
- -----------------------------------------------------------------------------------------------------------------
$ 48,120 $ 22,971
=================================================================================================================
</TABLE>
58
<PAGE>
Note I -- Debt:
Debt consists of the following:
<TABLE>
<CAPTION>
In thousands at December 31, 2003 2002
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unsecured revolving credit facilities $ 212,000 $ 536,000
8.75% debentures due 2013, net of unamortized discount of $136
and $149 84,839 84,826
8.25% notes due 2013 200,000 --
8% notes due 2003, net of unamortized discount of $15 -- 70,391
Floating rate secured term loans, due through 2014 222,143 256,000
5.29% secured term loan, due through 2014 46,970 --
Other 5,099 --
- -----------------------------------------------------------------------------------------------------------------
771,051 947,217
Less current portion 31,318 14,284
- -----------------------------------------------------------------------------------------------------------------
Long-term portion $ 739,733 $ 932,933
=================================================================================================================
</TABLE>
The weighted average effective interest rates for debt outstanding at December
31, 2003 and 2002 are 7.1% and 5.1%, respectively. Such rates take into
consideration related interest rate swaps.
In March 2003, the Company issued $200,000,000 principal amount of senior
unsecured notes in an unregistered offering pursuant to Rule 144A and Regulation
S under the Securities Act of 1933. In August 2003, the Company exchanged all of
the notes issued in the private offering for an equal amount of notes registered
under the Securities Act of 1933. The terms of the registered notes are
identical in all material respects to the notes issued in the private offering.
The notes, which are due in March 2013, have a coupon of 8.25% and are
non-callable before March 2008. Proceeds from the offering of approximately
$194,849,000 were used to repay a portion of the balances then outstanding under
long-term revolving credit facilities.
In August and October 2003, the Company concluded two new five-year unsecured
revolving credit facilities aggregating $330,000,000, which together with its
existing $350,000,000 long-term credit facility that matures in December 2006
(the "2006 Facility"), results in aggregate long-term revolving credit
availability of $680,000,000. The maturities of the two newly executed
facilities may, subject to lender approval, be extended for two, one-year
periods on the first and second anniversary dates of each of the two facilities.
The terms, conditions, and financial covenants contained in both agreements are
more favorable than those contained in the 2006 Facility. Borrowings under both
of the new facilities bear interest at a rate based on LIBOR plus a margin. In
October 2003, in consideration of entering into these two new revolving credit
facilities, the Company terminated the $350,000,000 revolving credit facility
that was scheduled to mature in April 2005 (the "2005 Facility").
The Company has a $45,000,000 unsecured short-term credit facility expiring in
August 2005. As of December 31, 2003, letters of credit aggregating $25,500,000
had been issued under such facility, reducing credit availability to
$19,500,000.
In late July and early August 2002, the Company entered into four secured loan
agreements aggregating $256,000,000. Seven vessels (three VLCCs and four
Aframaxes) were pledged as collateral in connection with such loans. The loans
have terms ranging from 10 to 12 years (with an average life of approximately
eight years) and interest rates based on LIBOR plus a margin. The interest rate
basis applicable to $50,000,000 of such loans converted to a fixed rate in
August 2003. The Company used the proceeds received from these borrowings to pay
down existing secured term loans and an unsecured promissory note with an
aggregate outstanding balance of $117,100,000, which loans had significantly
shorter remaining terms, and to reduce amounts then outstanding under the
Company's revolving credit facilities. The full $256,000,000 had been
effectively converted into fixed rate debt for periods up to 12 years by the end
of the third quarter of 2002.
In December 2001, the Company concluded a new $300 million, five-year unsecured
revolving credit facility (the 2006 Facility), which was increased to $350
million in January 2002 during syndication.
59
<PAGE>
Borrowings under 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 was due to expire in
August 2002, were repaid in early 2002 with borrowings from the 2006 Facility,
and the $425 million revolving credit facility was terminated in February 2002.
Agreements related to long-term debt provide for prepayment privileges (in
certain instances with penalties), limitations on the amount of total borrowings
and secured debt (as defined), and acceleration of payment under certain
circumstances, including failure to satisfy the financial covenants contained in
certain of such agreements. The most restrictive of these covenants requires the
Company to maintain net worth as of December 31, 2003 of approximately
$735,000,000 (increasing quarterly by an amount related to net income).
As of December 31, 2003, approximately 26.4% of the net book amount of the
Company's vessels, representing seven foreign flag tankers and four U.S. Flag
Crude Tankers, is pledged as collateral under certain debt agreements.
The aggregate annual principal payments required to be made on debt are as
follows:
In thousands at December 31, 2003
- --------------------------------------------------------------------------------
2004 $ 31,318
2005 24,648
2006 194,383
2007 14,284
2008 51,284
Thereafter 455,134
- --------------------------------------------------------------------------------
$ 771,051
================================================================================
Interest paid, excluding capitalized interest, amounted to $57,271,000 in 2003,
$52,147,000 in 2002 and $41,874,000 in 2001. Capitalized interest (see Note A5)
decreased in 2003 compared with 2002, and in 2002 compared with 2001 principally
due to vessel deliveries.
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
undistributed income of the foreign shipping companies accumulated through
December 31, 1986 was required at December 31, 2003 since undistributed earnings
of foreign shipping companies have been reinvested or are intended to be
reinvested in foreign shipping operations. As of December 31, 2003, such
undistributed earnings aggregated approximately $493,000,000, including
$119,000,000 earned prior to 1976; the unrecognized deferred U.S. income tax
attributable to such undistributed earnings approximated $172,000,000. No
provision for U.S. income taxes on the Company's share of the undistributed
60
<PAGE>
earnings of the less than 50%-owned foreign shipping joint ventures was required
as of December 31, 2003, since it is intended that such undistributed earnings
($27,100,000 at December 31, 2003) will be indefinitely reinvested; the
unrecognized deferred U.S. income taxes attributable thereto approximated
$9,500,000.
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 its agreement, the Company is expected to
use the fund to acquire or construct U.S. Flag vessels. 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, 2003 2002
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Excess of tax over book depreciation -- net $ 87,352 $ 84,491
Tax benefits related to the Capital Construction Fund 76,515 70,871
Costs capitalized and amortized for book, expensed for tax 5,612 8,358
Other -- net 3,019 16,966
- -----------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 172,498 180,686
- -----------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Capital leases -- 802
Write-down of marketable securities* 1,246 7,975
Other comprehensive income -- Note L 10,236 10,680
Alternative minimum tax credit carryforwards, which can be carried
forward indefinitely 10,546 30,565
- -----------------------------------------------------------------------------------------------------------------
Total deferred tax assets 22,028 50,022
Valuation allowance 934 3,640
- -----------------------------------------------------------------------------------------------------------------
Net deferred tax assets 21,094 46,382
- -----------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities 151,404 134,304
Current portion of net deferred tax liabilities 100 100
- -----------------------------------------------------------------------------------------------------------------
Long-term portion of net deferred tax liabilities $ 151,304 $ 134,204
=================================================================================================================
</TABLE>
* In 2003, represents a capital loss carryforward expiring in 2008,
resulting from the 2003 sale of securities previously written down.
During 2002, the Company established a valuation allowance of $3,640,000 against
the deferred tax asset resulting from the write-down of certain marketable
securities (see Note F). The valuation allowance was established because the
Company could not be certain that the full amount of the deferred tax asset
would be realized through the generation of capital gains in the future. The
valuation allowance was recorded as a reduction in the federal income tax credit
in the accompanying consolidated statement of operations for the year ended
December 31, 2002. During 2003, the Company reduced the valuation allowance by
$2,706,000 based primarily on subsequent increases in the fair value of
securities previously written down. The reduction in the valuation allowance was
recorded as a reduction in the provision for federal income taxes in the
accompanying consolidated statement of operations for the year ended December
31, 2003.
61
<PAGE>
The components of income/(loss) before federal income taxes follow:
<TABLE>
<CAPTION>
In thousands for the year ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign $ 202,760 $ 17,321 $ 136,395
Domestic (34,607) (38,185) 18,050
- -----------------------------------------------------------------------------------------------------------------
$ 168,153 $ (20,864) $ 154,445
=================================================================================================================
</TABLE>
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.
The components of the provision/(credit) for federal income taxes follow:
<TABLE>
<CAPTION>
In thousands for the year ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 35,493 $ (6,003) $ 27,142
Deferred 11,351 2,759 25,862
- -----------------------------------------------------------------------------------------------------------------
$ 46,844 $ (3,244) $ 53,004
=================================================================================================================
</TABLE>
Actual income taxes paid amounted to $18,377,000 in 2003 (all of which related
to 2003), $24,500,000 in 2002 (all of which related to 2001) and $6,100,000 in
2001 ($3,100,000 of which related to 2000). An income tax refund of $5,765,000,
related to the carryback of capital losses arising in 2002, was received in
2003.
Reconciliations of the actual federal income tax rate attributable to pretax
income/(loss) and the U.S. statutory income tax rate follow:
<TABLE>
<CAPTION>
For the year ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actual federal income tax provision/(credit) rate 28.1% (15.6%) 34.3%
Adjustments due to:
Dividends received deduction 0.1% 1.0% 0.1%
Income/(loss) not subject to U.S. income taxes 4.9% (4.4%) 0.7%
Other 0.3% 1.4% (0.1%)
Valuation allowance 1.6% (17.4%) --
- -----------------------------------------------------------------------------------------------------------------
U.S. statutory income tax provision/(credit) rate 35.0% (35.0%) 35.0%
=================================================================================================================
</TABLE>
Note K -- Capital Stock and Stock Compensation:
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 220,630
shares are outstanding with exercise prices ranging from $13.81 to $18.16 per
share (the market prices at dates of grant). Options covering 852,360 shares are
available for grant under the 1998 stock option plan as of December 31, 2003.
The 1999 non-employee director (as defined) stock option plan, makes 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 95,500 shares are outstanding with exercise prices ranging from
$13.31 to $29.67 per share (the market prices at dates of grant). Options
covering
62
<PAGE>
31,500 shares are available for grant under the 1999 non-employee director stock
option plan as of December 31, 2003.
Stock option activity under all plans is summarized as follows:
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
Granted 8,000
Forfeited (2,297)
Exercised ($13.31 to $16.00 per share) (159,516)
- -------------------------------------------------------------------------------
Options Outstanding at December 31, 2002 1,739,676
Granted 21,169
Forfeited (4,569)
Exercised ($12.50 to $19.50 per share) (1,440,146)
- -------------------------------------------------------------------------------
Options Outstanding at December 31, 2003 316,130
===============================================================================
Options Exercisable at December 31, 2003 294,961
===============================================================================
The weighted average remaining contractual life of the outstanding stock options
at December 31, 2003 was 5.6 years. The range of exercise prices of the stock
options outstanding at December 31, 2003 was $13.31 to $29.67 per share. The
weighted average exercise price of the stock options outstanding at December 31,
2003 was $15.96.
The Company follows APB 25 and related interpretations in accounting for its
stock options. For purposes of determining compensation cost for the Company's
stock option plans using the fair value method of FAS 123, for grants made
subsequent to 1994, 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 2003, 2002 and 2001: risk free interest rates
of 3.1%, 5.1% and 4.2%, dividend yields of 3.4%, 2.9% and 2.0%, expected stock
price volatility factors of .39, .36 and .45, and expected lives of 6.0, 6.0 and
7.7 years. The weighted average grant-date fair values of options granted in
2003, 2002 and 2001were $5.59, $6.50 and $12.71, 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.
Diluted net income/(loss) per share gives effect to the aforementioned stock
options. Such options have not been included in the computation of diluted net
(loss) per share for 2002 since their effect thereon would be antidilutive.
In October 1998, the Board of Directors adopted a Stockholder Rights Plan and
declared a rights distribution under the plan of one common stock purchase right
on each outstanding share of common stock of the Company. The rights plan is
designed to guard against attempts to take over the Company for a price that
does not reflect the Company's full value or that are conducted in a manner or
on terms not approved by the Board of Directors 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.
63
<PAGE>
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, 2003 2002
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized gains on available-for-sale securities $ 6,574 $ 332
Unrealized losses on derivative instruments (16,234) (19,894)
Minimum pension liability (2,775) (2,965)
- -----------------------------------------------------------------------------------------------------------------
$ (12,435) $ (22,527)
=================================================================================================================
</TABLE>
At December 31, 2003, the Company expects to reclassify $10,431,000 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.
The components of the change in the accumulated unrealized loss on derivative
instruments, net of related taxes follow:
<TABLE>
<CAPTION>
In thousands for the year ended December 31, 2003 2002
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cumulative effect of change in accounting principle -- Note B $ (1,674) $ --
Reclassification adjustments for (gains)/losses included in net
income/(loss), net:
Interest expense 9,563 8,765
Shipping revenues -- (595)
Change in unrealized loss on derivative instruments (4,229) (22,050)
- -----------------------------------------------------------------------------------------------------------------
$ 3,660 $ (13,880)
=================================================================================================================
</TABLE>
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, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains/(losses) on available-for-sale securities $ 2,559 $ (2,711) $ 2,871
Unrealized losses on derivative instruments (3,179) (11,873) (2,461)
Minimum pension liability 414 150 (2,059)
Reclassification adjustments included in net income/(loss):
Write-down of marketable securities 4,371 11,079 --
Gains on sale of securities (3,566) (1,170) (9,816)
(Gains)/losses on derivative instruments 5,149 4,399 (777)
- -----------------------------------------------------------------------------------------------------------------
$ 5,748 $ (126) $(12,242)
=================================================================================================================
</TABLE>
64
<PAGE>
Note M -- Leases:
1. Charters-in:
The future minimum commitments under charters-in are as follows:
<TABLE>
<CAPTION>
In thousands at December 31, 2003 Capital Operating
--------------------------------------------------------------------------------------------
<S> <C> <C>
2004 $ 9,313 $ 26,268
2005 9,692 24,813
2006 9,692 22,502
2007 9,692 22,521
2008 9,692 22,619
Thereafter 26,677 51,244
--------------------------------------------------------------------------------------------
Net minimum lease payments 74,758 169,967
Less amount representing interest (22,986) --
--------------------------------------------------------------------------------------------
Present value of net minimum lease payments $ 51,772 $ 169,967
============================================================================================
</TABLE>
In June 2003, the Company entered into a sale-leaseback agreement for one
VLCC (Meridian Lion), which lease is classified as an operating lease. The
gain on the sale was deferred and is being amortized over the eight-year
term of the lease. The lease agreement contains no renewal or purchase
options.
In December 2003, the Company entered into sale-leaseback agreements for
its two Foreign Flag Dry Bulk Carriers (Chrismir and Matilde), which
leases are classified as operating leases. The aggregate loss on the sales
of $5,965,000 has been included in other income/(expense). The lease
agreements have seven-year terms and contain certain renewal and purchase
options.
The 25-year bareboat charter ins, which were classified as capital leases,
on the Company's two U.S. Flag Dry Bulk Carriers (Overseas Marilyn and
Overseas Harriette) expired in November 2003. Such charters were extended
for three years in the case of the Overseas Harriette and one year in the
case of the Overseas Marilyn. These charter extensions, which are
classified as operating leases, provide for additional renewal options.
As of December 31, 2003, the Company participates with other pool members
in the charter-in of two vessels (one Capesize Dry Bulk Carrier at a rate
of $11,700 per day and one VLCC at an average minimum rate of $24,300 per
day for the remaining term), which are commercially managed by pools in
which the Company participates. As of December 31, 2003, these charter ins
have remaining minimum terms of approximately four months for the Dry Bulk
Carrier and 19 months for the VLCC. The Company's share of such charter-in
obligations as of December 31, 2003, which amounts are included in the
above table, are $3,712,000 (2004) and $1,995,000 (2005).
The total rental expense for charters accounted for as operating leases
amounted to $21,550,000 in 2003, $25,391,000 in 2002 and $51,904,000 in
2001.
65
<PAGE>
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, 2003
--------------------------------------------------------------------------
2004 $ 72,657
2005 23,328
2006 7,526
2007 5,173
--------------------------------------------------------------------------
Net minimum lease payments $ 108,684
==========================================================================
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.
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 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, that provides for additional benefits, primarily those
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 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, and 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 of the Company's foreign subsidiaries have pension plans that, in the
aggregate, are not significant to the Company's consolidated financial position.
66
<PAGE>
Certain information with respect to the domestic plans, for which the Company
uses a December 31 measurement date, follow:
<TABLE>
<CAPTION>
Pension benefits Other benefits
------------------------- -------------------------
In thousands 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 37,989 $ 43,152 $ 3,830 $ 3,872
Cost of benefits earned (service cost) 1,338 1,803 48 55
Interest cost on benefit obligation 3,029 2,715 237 276
Plan participants' contributions -- -- 92 74
Amendments 2,112 2,454 -- 152
Actuarial (gains) and losses 1,651 (1,879) 685 (229)
Benefits paid (2,440) (8,842) (399) (370)
Terminations, curtailments, settlements and other
similar events -- (1,414) -- --
- -------------------------------------------------------------------------------------------------------------
Benefit obligation at year end 43,679 37,989 4,493 3,830
- -------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 22,918 38,777 -- --
Actual return on plan assets 5,969 (4,110) -- --
Benefits paid (1,989) (8,299) -- --
Terminations, curtailments, settlements and other
similar events -- (3,450) -- --
- -------------------------------------------------------------------------------------------------------------
Fair value of plan assets at year end 26,898 22,918 -- --
- -------------------------------------------------------------------------------------------------------------
Funded status at December 31 (unfunded) (16,781) (15,071) (4,493) (3,830)
Unrecognized prior-service costs (benefit) 1,671 687 (1,105) (1,259)
Unrecognized net actuarial loss 8,827 11,786 1,007 320
Unrecognized transition obligation -- -- 187 208
Additional minimum liability (5,560) (5,162) -- --
- -------------------------------------------------------------------------------------------------------------
Net liability recognized at year end $(11,843) $ (7,760) $ (4,404) $ (4,561)
=============================================================================================================
</TABLE>
The net liability recognized in the balance sheet consists of the following:
<TABLE>
<CAPTION>
Pension benefits Other benefits
------------------------- -------------------------
In thousands at December 31, 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid benefit costs $ 7,604 $ 8,483 $ -- $ --
Accrued benefit costs (15,178) (11,369) (4,404) (4,561)
Intangible assets 1,291 288 -- --
Accumulated other comprehensive income/(loss) (5,560) (5,162) -- --
- -------------------------------------------------------------------------------------------------------------
Net liability recognized $(11,843) $ (7,760) $ (4,404) $ (4,561)
=============================================================================================================
</TABLE>
The accumulated benefit obligation for the Company's defined benefit pension
plans covering domestic shore-based employees was $40,962,000 and $35,734,000 at
December 31, 2003 and 2002, respectively.
Information for pension plans with accumulated benefit obligations in excess of
plan assets, which, for the Company, is its nonqualified supplemental pension
plan follows:
<TABLE>
<CAPTION>
In thousands at December 31, 2003 2002
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation $ 20,914 $ 17,188
Accumulated benefit obligation 19,447 16,243
Fair value of plan assets -- --
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Pension benefits Other benefits
In thousands for the year ended ------------------------------------ -----------------------------------
December 31, 2003 2002 2001 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of expense:
Cost of benefits earned $ 1,338 $ 1,803 $ 1,053 $ 48 $ 55 $ 69
Interest cost on benefit obligation 3,029 2,715 2,993 237 276 318
Expected return on plan assets (1,972) (2,477) (3,466) -- -- --
Amortization of prior-service costs 1,127 456 656 (154) (154) (128)
Amortization of transition obligation -- -- -- 20 20 48
Recognized net actuarial loss 613 297 447 (1) 2 36
- --------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost 4,135 2,794 1,683 150 199 343
(Gain)/loss on terminations,
curtailments, settlements and other
similar events -- (1,090) 1,815 -- -- 1,535
- --------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost after
terminations, curtailments,
settlements and other similar events $ 4,135 $ 1,704 $ 3,498 $ 150 $ 199 $1,878
====================================================================================================================
</TABLE>
The 2001 loss on terminations, curtailments and settlements and other similar
events has been included in the restructuring charge.
The change in the minimum pension liability included in other comprehensive
income/(loss) amounted to a decrease of $190,000 in 2003, a decrease of $859,000
in 2002 and an increase of $3,824,000 in 2001.
The weighted-average assumptions used to determine benefit obligations follow:
<TABLE>
<CAPTION>
Pension benefits Other benefits
------------------------ ------------------------
At December 31, 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 6.7% 7.4% 6.7% 7.4%
Rate of future compensation increases 3.9% 3.9% -- --
</TABLE>
The weighted-average assumptions used to determine net periodic benefit cost
follow:
<TABLE>
<CAPTION>
Pension benefits Other benefits
----------------------------------- ----------------------------------
For the year ended December 31, 2003 2002 2001 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.4% 7.8% 7.0% 7.4% 7.8% 7.0%
Expected long-term return on plan assets 8.75% 9.00% 9.00% -- -- --
Rate of future compensation increases 3.9% 4.4% 4.4% -- -- --
</TABLE>
The assumed health care cost trend rate for measuring the benefit obligation
included in Other Benefits above is an increase of 13% for 2004, with the rate
of increase declining steadily thereafter by 1% per annum to an ultimate trend
rate of 4% per annum in 2013. 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 2003 $ 20 $ (17)
Effect on postretirement benefit obligation as of
December 31, 2003 $ 271 $ (237)
</TABLE>
The expected long-term rate of return on plan assets is the weighted average of
the returns, determined by category of plan assets, using the current and
expected future allocation of plan assets, and assuming active asset management
as opposed to investment in passive investment funds. The rate of return
assumption for each category of plan assets was based on historical average
returns achieved.
68
<PAGE>
The Company's pension plan weighted-average asset allocations at December 31,
2003 and 2002, by asset category, follow:
2003 2002
- --------------------------------------------------------------------------------
Asset category:
Equity securities 78% 76%
Debt securities 17% 23%
Cash and cash equivalents 5% 1%
- --------------------------------------------------------------------------------
100% 100%
- --------------------------------------------------------------------------------
The Company's investment strategy is to balance capital preservation and return
through investment in a diversified portfolio of high-quality debt and equity
securities. The Company has hired professional investment advisors to manage the
portfolio in accordance with this strategy and our investment policy of
maintaining a mix of between 75% and 80% equity securities and between 20% and
25% debt securities. The allocation is rebalanced quarterly after considering
anticipated benefit payments.
The Company expects to contribute between $250,000 and $2,000,000 to its
qualified defined benefit pension plan in 2004, or prior to the filing of the
Company's federal income tax return for 2004.
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 U.S.
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, 2003. 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, 2003.
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 included $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. The restructuring
has been completed.
69
<PAGE>
Note P -- Other Income/(Expense):
Other income/(expense) consists of:
<TABLE>
<CAPTION>
In thousands for the year ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest $ 5,134 $ 6,613 $ 9,789
Dividends 824 2,402 6,004
Realized gain on sale of securities (based on first-in,
first-out method), net of unrealized loss on other
investments 10,439 3,643 27,227
Write-down of marketable securities -- See Note F (4,756) (42,055) --
Foreign currency exchange gain/(loss) -- 5,324 (49)
- -----------------------------------------------------------------------------------------------------------------
11,641 (24,073) 42,971
Gain/(loss) on disposal of vessels -- net (6,809) (861) 436
Gain on derivative transactions -- 325 4,465
Miscellaneous -- net 373 143 448
- -----------------------------------------------------------------------------------------------------------------
$ 5,205 $ (24,466) $ 48,320
=================================================================================================================
</TABLE>
Gains on sale of securities are net of losses of $1,895,000 (2003), $14,869,000
(2002) and $5,665,000 (2001).
Note Q -- Commitments:
As of December 31, 2003, the Company had a remaining commitment of $8,300,000 on
a non-cancelable contract for the construction of one Foreign Flag Aframax
tanker that was delivered in January 2004. Unpaid costs, which are net of
$31,900,000 of progress payments and prepayments, was funded in the first
quarter of 2004.
Note R -- Agreements with Executive Officers:
The Company entered into an agreement dated June 23, 2003 in connection with the
retirement, effective December 31, 2003, of the Company's chief executive
officer. The agreement provides, among other matters, for a payment of
$1,200,000 to be made to the former chief executive officer in January 2004.
Accordingly, the Company recognized this $1,200,000 expense in 2003. The
agreement also provides for the payment of the former chief executive officer's
unfunded, nonqualified pension plan obligation in January 2004, at which time
the Company will recognize, as a charge to earnings, a settlement loss of
approximately $4,100,000 in accordance with the provisions of Statement of
Financial Accounting Standards No. 88, "Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits."
OSG has agreements with four executive officers, which provide that if the named
executive is terminated (other than for "cause," as defined, or becoming
"disabled") in or prior to July 2005, such executive will continue to receive
base salary and other benefits for a period of two years after the date of such
termination.
Note S -- Legal Matters:
On October 1, 2003, the U.S. Department of Justice served a grand jury subpoena
directed at the Company's Foreign Flag Product Carrier, the Uranus, and the
Company's handling of waste oils. Several witnesses have appeared before the
grand jury. The Company is cooperating with the U.S. investigation.
In accordance with Statement of Financial Accounting Standards No. 5,
"Contingent Liabilities," the Company assessed the likelihood of incurring any
liability as a result of the U.S. investigation. The U.S. investigation is
preliminary and no charges against the Company have been filed. Accordingly, no
loss accrual has been recorded.
70
<PAGE>
Previously, on September 11, 2003, the Department of Transport of the Government
of Canada commenced an action against the Uranus charging the vessel with
violations of regulations under the Canada Shipping Act with respect to alleged
discrepancies in the vessel's oil record book during the period between December
2002 and March 2003. On January 22, 2004, the Department of Transport withdrew
all pending charges related to the alleged discrepancies.
The Company has incurred costs of approximately $862,000 through December 31,
2003 in connection with the above U.S. investigation and Canadian proceeding.
Such costs have been included in general and administrative expenses in the 2003
consolidated statement of operations.
Note T -- Subsequent Events:
In January 2004, the Company awarded 50,000 shares of common stock at no cost to
its new chief executive officer. Restrictions limit the sale or transfer of
these shares until they vest, which occurs ratably over a four-year period.
During the restriction period, the shares will have voting rights and cash
dividends applicable thereto, if declared, will be paid. At the date of the
award, the fair market value of the Company's common stock was $35.70 per share.
Accordingly, $1,785,000 will be recorded as unearned compensation in
shareholders' equity as of the award date and subsequently amortized to
compensation expense over four years using the straight-line method. In
addition, the Company granted the new chief executive officer stock options to
purchase 100,000 shares of common stock at an exercise price of $35.70 per share
(the market price at the date of the grant). Options granted vest and become
exercisable over a three-year period and expire ten years from the date of the
grant.
On January 29, 2004, pursuant to a Form S-3 shelf registration filed on January
13, 2004, the Company sold 3,200,000 shares of its common stock at a price of
$36.13 per share, after underwriting discounts and commissions of $0.47 per
share, thereby generating proceeds of $115,166,000, after deducting estimated
expenses.
On February 19, 2004, pursuant to the existing Form S-3 shelf registration, the
Company issued $150,000,000 principal amount of senior unsecured notes. The
notes, which are due in February 2024 and may not be redeemed prior to maturity,
have a coupon of 7.5%. The Company received proceeds of approximately
$146,650,000, after deducting estimated expenses.
Note U -- 2003 and 2002 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>
2003
Shipping revenues $ 126,885 $ 126,249 $ 90,079 $ 110,907
Income from vessel operations 62,067 62,614 26,012 40,414
Gain/(loss) on disposal of
vessels -- net (902) 44 14 (5,965)
Net income $ 44,235 $ 41,840 $ 14,036 $ 21,198
- ----------------------------------------------------------------------------------------------------------
Basic net income per share $ 1.28 $ 1.21 $ 0.40 $ 0.61
Diluted net income per share $ 1.28 $ 1.20 $ 0.40 $ 0.60
==========================================================================================================
2002
Shipping revenues $ 73,495 $ 70,745 $ 68,955 $ 84,088
Income from vessel operations 9,535 8,134 8,088 19,131
Gain/(loss) on disposal of
vessels -- net -- 688 (1,549) --
Net income/(loss) $ 744 $ 3,670 $ (29,661) $ 7,627
- ----------------------------------------------------------------------------------------------------------
Basic and diluted net
income/(loss) per share $ 0.02 $ 0.11 $ (0.86) $ 0.22
==========================================================================================================
</TABLE>
71
<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, 2003 and 2002, and
the related consolidated statements of operations, cash flows, and changes in
shareholders' equity for each of the three years in the period ended December
31, 2003. 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, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note B to the consolidated financial statements, on July 1,
2003, the Company adopted Financial Accounting Standards Board Interpretation
No. 46, "Consolidation of Variable Interest Entities."
/s/ Ernst & Young LLP
New York, New York
February 11, 2004, except for the
third paragraph of Note T, as to
which the date is February 19, 2004
72
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2003, an evaluation was performed under the supervision
and with the participation of the Company's management, including the Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
current disclosure controls and procedures were effective as of December 31,
2003 in timely providing them with material information relating to the Company
required to be included in the reports the Company files or submits under the
Exchange Act. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to December 31, 2003.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 14 below. Information with respect to executive officers of the
Company is included at the end of Part I. The Company has adopted a code of
ethics that applies to all of its directors, officers (including its principal
executive officer, principal financial officer, principal accounting officer,
controller and any person performing similar functions) and employees. The
Company makes its code of ethics available free of charge through its internet
website, www.osg.com.
ITEM 11. EXECUTIVE COMPENSATION
See Item 14 below.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table provides information as of December 31, 2003 with
respect to the Company's equity (stock) compensation plans, all of which have
been approved by the Company's shareholders:
<TABLE>
<CAPTION>
Number of securities
remaining available for
Number of securities to Weighted-average exercise future issuance under
be issued upon exercise price of outstanding equity compensation plans
of outstanding options, options, warrants and (excluding securities
Plan Category warrants and rights rights reflected in column (a))
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity compensation plans
approved by security holders 316,130 $15.96 883,860
===================================================================================================================
</TABLE>
See also Item 14 below.
73
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 14 below.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Except for the table in Item 12 above, the information called for under
Items 10, 11, 12, 13 and 14 is incorporated by reference from the definitive
Proxy Statement to be filed by the Company in connection with its 2004 Annual
Meeting of Shareholders.
PART IV
ITEM 15. 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, 2003 and 2002.
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001.
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2003, 2002 and 2001.
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
15(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).
74
<PAGE>
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 8-3/4% 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 December 12, 2001 among the
registrant, two subsidiaries of the registrant and certain
banks (filed as Exhibit 4(d) to the registrant's Annual
Report on Form 10-K for 2001 and incorporated herein by
reference).
4(d) Amendment dated January 22, 2002 to the Credit Agreement
listed at Exhibit 4(c) (filed as Exhibit 4(e) to the
registrant's Annual Report on Form 10-K for 2001 and
incorporated herein by reference).
4(e)(1) Indenture dated as of March 7, 2003 between the registrant
and Wilmington Trust Company, as trustee, providing for
the issuance of debt securities of the registrant from
time to time (filed as Exhibit 4(e)(1) to the registrant's
Registration Statement on Form S-4 filed May 5, 2003 and
incorporated herein by reference).
4(e)(2) Resolutions dated as of February 27, 2003 fixing the terms
of a series of debt securities issued by the registrant
under the Indenture (filed as Exhibit 4(e)(2) to the
registrant's Registration Statement on Form S-4 filed May
5, 2003 and incorporated herein by reference).
4(e)(3) Form of 8.250% Senior Notes due March 15, 2013 of the
registrant (filed as Exhibit 4(e)(3) to the registrant's
Registration Statement on Form S-4 filed May 5, 2003 and
incorporated herein by reference).
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).
75
<PAGE>
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) Basic Supplemental Executive Retirement Plan of the
registrant, as amended and restated effective as of
January 1, 2002 (filed as Exhibit 10(iii)(a) to the
registrant's Annual Report on Form 10-K for 2002 and
incorporated herein by reference).
*10(iii)(b) Supplemental Executive Retirement Plan Plus of the
registrant, as amended and restated effective as of
January 1, 2002 (filed as Exhibit 10(iii)(b) to the
registrant's Annual Report on Form 10-K for 2002 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 dated June 23, 2003 between the registrant and
an executive officer (filed as Exhibit 10(iii) to
Amendment No. 1 to the Registration Statement on Form S-4
filed July 18, 2003 and incorporated herein by reference).
*10(iii)(j) 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)(k) 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)(l) 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).
76
<PAGE>
*10(iii)(m) 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)(n) Form of Amendment to the agreements listed as Exhibits
10(iii)(e), 10(iii)(f) and 10(iii)(h) 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).
*10(iii)(o) Form of Amendment to the agreements listed as Exhibits
10(iii)(c), 10(iii)(d), 10(iii)(e), 10(iii)(f) and
10(iii)(h) (filed as Exhibit 10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 2002 and incorporated herein by reference).
*10(iii)(p) Amendment Number One effective as of January 1, 2003 to
the Basic Supplemental Executive Retirement Plan of the
registrant, as amended and restated effective as of
January 1, 2002 (filed as Exhibit 10(iii)(r) to the
registrant's Annual Report on Form 10-K for 2002 and
incorporated herein by reference).
*10(iii)(q) Amendment Number One effective as of January 1, 2003 to
the Supplemental Executive Retirement Plan Plus of the
registrant, as amended and restated effective as of
January 1, 2002 (filed as Exhibit 10(iii)(s) to the
registrant's Annual Report on Form 10-K for 2002 and
incorporated herein by reference).
* 10(iii)(r)** Agreement dated December 12, 2003 with an executive
officer.
* 10(iii)(s)** Agreement dated December 12, 2003 with an executive
officer.
* 10(iii)(t)** Agreement dated December 12, 2003 with an executive
officer.
* 10(iii)(u)** Agreement dated December 12, 2003 with an executive
officer.
* 10(iii)(v)** Agreement dated January 19, 2004 with an executive
officer.
**12 Computation of Ratio of Earnings to Fixed Charges.
**13 Such portions of the Annual Report to shareholders for
2003 as are expressly incorporated herein by reference.
**21 List of subsidiaries of the registrant.
**23 Consent of Independent Auditors of the registrant.
**31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a), as amended.
**31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and 15d-14(a), as amended.
**32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
77
<PAGE>
(b) Reports on Form 8-K.
During the quarter ended December 31, 2003, the registrant filed one
Current Report on Form 8-K. The registrant disclosed under Item 12
of the Current Report, which was dated October 28, 2003, that it has
issued a press release on October 28, 2003 with respect to the
registrant's results for the quarter ended September 30, 2003.
- ----------
(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 (**).
78
<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: February 23, 2004
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 Morten Arntzen 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/ Morten Arntzen February 23, 2004
- ------------------------------------
Morten Arntzen, Principal
Executive Officer and Director
/s/ Myles R. Itkin February 23, 2004
- ------------------------------------
Myles R. Itkin, Principal
Financial Officer and
Principal Accounting Officer
/s/ Alan R. Batkin February 23, 2004
- ------------------------------------
Alan R. Batkin, Director
/s/ Thomas B. Coleman February 23, 2004
- ------------------------------------
Thomas B. Coleman, Director
/s/ Robert N. Cowen February 23, 2004
- ------------------------------------
Robert N. Cowen, Director
/s/ Charles Fribourg February 23, 2004
- ------------------------------------
Charles Fribourg, Director
/s/ William L. Frost February 23, 2004
- ------------------------------------
William L. Frost, Director
/s/ Stanley Komaroff February 23, 2004
- ------------------------------------
Stanley Komaroff, Director
/s/ Solomon N. Merkin February 23, 2004
- ------------------------------------
Solomon N. Merkin, Director
79
<PAGE>
Name Date
/s/ Joel I. Picket February 23, 2004
- ------------------------------------
Joel I. Picket, Director
/s/ Ariel Recanati February 23, 2004
- ------------------------------------
Ariel Recanati, Director
/s/ Oudi Recanati February 23, 2004
- ------------------------------------
Oudi Recanati, Director
/s/ Michael J. Zimmerman February 23, 2004
- ------------------------------------
Michael J. Zimmerman, Director
80
<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, 2003 and 2002.
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000.
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2003, 2002 and 2001.
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
15(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 8-3/4% Debentures due December 1, 2013 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).
81
<PAGE>
4(c) Credit Agreement dated December 12, 2001 among the
registrant, two subsidiaries of the registrant and certain
banks (filed as Exhibit 4(c) to the registrant's Annual
Report on Form 10-K for 2001 and incorporated herein by
reference).
4(d) Amendment dated January 22, 2002 to the Credit Agreement
listed at Exhibit 4(c) (filed as Exhibit 4(d) to the
registrant's Annual Report on Form 10-K for 2001 and
incorporated herein by reference).
4(e)(1) Indenture dated as of March 7, 2003 between the registrant
and Wilmington Trust Company, as trustee, providing for
the issuance of debt securities of the registrant from
time to time (filed as Exhibit 4(e)(1) to the registrant's
Registration Statement on Form S-4 filed May 5, 2003 and
incorporated herein by reference).
4(e)(2) Resolutions dated as of February 27, 2003 fixing the terms
of a series of debt securities issued by the registrant
under the Indenture (filed as Exhibit 4(e)(2) to the
registrant's Registration Statement on Form S-4 filed May
5, 2003 and incorporated herein by reference).
4(e)(3) Form of 8.250% Senior Notes due March 15, 2013 of the
registrant (filed as Exhibit 4(e)(3) to the registrant's
Registration Statement on Form S-4 filed May 5, 2003 and
incorporated herein by reference).
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) Basic Supplemental Executive Retirement Plan of the
registrant, as amended and restated effective as of
January 1, 2002 (filed as Exhibit 10(iii)(a) to the
registrant's Annual Report on Form 10-K for 2002 and
incorporated herein by reference).
82
<PAGE>
*10(iii)(b) Supplemental Executive Retirement Plan Plus of the
registrant, as amended and restated effective January 1,
2002 (filed as Exhibit 10(iii)(b) to the registrant's
Annual Report on Form 10-K for 2002 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 dated June 23, 2003 between the registrant and
an executive officer (filed as Exhibit 10(iii) to the
registrant's Amendment No. 1 to the Registration Statement
on Form S-4 filed July 18, 2003 and incorporated herein by
reference).
*10(iii)(j) 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)(k) 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)(l) 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)(m) 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)(n) Form of Amendment to the agreements listed as Exhibits
10(iii)(e), 10(iii)(f) and 10(iii)(h) 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).
*10(iii)(o) Form of Amendment to the agreements listed as Exhibits
10(iii)(c), 10(iii)(d), 10(iii)(e), 10(iii)(f) and
10(iii)(h) hereto (filed as exhibit 10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 2002 and incorporated herein by reference).
*10(iii)(p) Amendment Number One effective as of January 1, 2003 to
the Basic Supplemental Executive Retirement Plan of the
registrant, as amended and restated effective as of
January 1, 2002 (filed as Exhibit 10(iii)(r) to the
registrant's Annual Report on Form 10-K for 2002 and
incorporated herein by reference).
83
<PAGE>
*10(iii)(q) Amendment Number One effective as of January 1, 2003 to
the Supplemental Executive Retirement Plan Plus of the
registrant, as amended and restated effective as of
January 1, 2002 (filed as Exhibit 10(iii)(s) to the
registrant's Annual Report on Form 10-K for 2002 and
incorporated herein by reference).
* 10(iii)(r)** Agreement dated December 12, 2003 with an executive
officer.
* 10(iii)(s)** Agreement dated December 12, 2003 with an executive
officer.
* 10(iii)(t)** Agreement dated December 12, 2003 with an executive
officer.
* 10(iii)(u)** Agreement dated December 12, 2003 with an executive
officer.
* 10(iii)(v)** Agreement dated January 19, 2004 with an executive
officer.
**12 Computation of Ratio of Earnings to Fixed Charges.
**13 Such portions of the Annual Report to shareholders for
2003 as are expressly incorporated herein by reference.
**21 List of subsidiaries of the registrant.
**23 Consent of Independent Auditors of the registrant.
**31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a), as amended.
**31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and 15d-14(a), as amended.
**32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
- ----------
(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 (**).
84
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(III)(R)
<SEQUENCE>3
<FILENAME>d58534_ex10iii-r.txt
<DESCRIPTION>SEVERANCE PROTECTION AGREEMENT
<TEXT>
EXHIBIT 10 (iii)(r)
SEVERANCE PROTECTION AGREEMENT
This Severance Protection Agreement (the "Agreement") is made as of the
12th day of December, 2003, by and between Overseas Shipholding Group, Inc., a
corporation incorporated under the laws of Delaware with its principal office at
511 Fifth Avenue, New York, New York 10017 (the "Company") and Robert N. Cowen
(the "Executive").
W I T N E S S E T H:
WHEREAS, the Company believes that the continuation and maintenance of a
sound and vital management of the Company and its affiliates is essential to the
protection and enhancement of the interests of the Company and its stockholders;
WHEREAS, the Company also recognizes that the search for, and hiring of, a
new chief executive officer ("CEO") of the Company may result in the departure
or distraction of key employees of the Company to the detriment of the Company;
and
WHEREAS, the Company has determined that it is appropriate to take steps
to induce key employees to remain with the Company, and to reinforce and
encourage their continued focus and dedication.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. Term. The Protection Period under this Agreement shall commence on the
Commencement Date, which shall be the earlier of (a) the date a written
employment agreement is executed by the Company and an individual who shall
serve as the new CEO of the Company or (b) the date a new CEO (other than an
interim CEO) commences employment with
<PAGE>
the Company, and shall expire on the earlier of (a) eighteen (18) months
following the Commencement Date or (b) the date of the Executive's termination
of employment due to death, Disability (as defined in Section 2 below),
retirement, resignation by the Executive with or without Good Reason (as defined
in Section 2 below) or termination by the Company with or without Cause (as
defined in Section 2 below).
2. Termination. (a) If, during the Protection Period as provided in
Section 1 hereof, the Executive's employment with the Company is terminated by
the Company without Cause (as defined below) or by the Executive for Good Reason
(as defined below) the Executive shall be entitled to the amounts provided in
Section 3 as of the date of such termination (the "Termination Date").
(b) For purposes of this Agreement, the following definitions shall apply:
(i) Resignation for Good Reason. For purposes of this Agreement,
Resignation for Good Reason shall mean a resignation by the Executive effected
by a written notice of termination to the Company following the Executive's
thirty (30) day written notice to the Company of the occurrence of a Good Reason
event which is not materially cured by the Company within such thirty (30) day
period. "Good Reason" shall mean the occurrence of any of the following events
without the Executive's express written consent: (A) any material diminution in
the Executive's role, duties, responsibilities or authority, or the assignment
to the Executive of duties and responsibilities materially inconsistent with his
position, except in connection with the Executive's termination of employment
for Cause or as a result of the Executive's death, or temporarily as a result of
the Executive's incapacity or other absence; (B) a reduction in the Executive's
annual base salary; or (C) a relocation of the Executive's principal
<PAGE>
business location to an area outside of a fifty (50) mile radius of the
Executive's current principal business location and the Executive's home.
(ii) Termination Without Cause. A termination without Cause shall be
a termination by the Company other than for Cause or Disability (each as defined
below).
(A) As used herein, the term "Cause" shall mean: (I) the engaging by the
Executive in willful misconduct either (x) involving the Company or its assets,
business or employees, or (y) which is materially injurious to the Company
economically or to the Company's reputation; (II) the Executive's conviction or
indictment for (or pleading guilty or nolo contendere to) (x) a felony, or (y)
any other crime involving any financial or moral impropriety, or (z) any other
crime which, in the determination of the Board of Directors of the Company (the
"Board") would materially interfere with the Executive's ability to perform his
services to the Company or otherwise be materially injurious to the Company
economically or otherwise; (III) the continued and substantial failure by the
Executive to perform his duties with the Company (other than a failure resulting
from Executive's incapacity due to physical or mental illness or injury), which
failure has continued for a period of at least ten (10) days after written
notice thereof from the Company; (IV) the breach by the Executive of any
material provisions of any agreement with the Company, which breach is not cured
within ten (10) days after written notice thereof from the Company; or (V)
refusal to follow the legal written direction of the Board or a more senior
officer within five (5) business days of it being given, provided that the
foregoing refusal shall not be "Cause" if the Executive, in good faith, believes
that such direction is illegal and Executive promptly so notifies the Board.
<PAGE>
(B) As used herein, the term "Disability" shall mean the Executive's
failure to perform his material duties and responsibilities as a result of
physical or mental illness or injury for one hundred eighty (180) days during a
three hundred sixty-five (365) day period.
3. Severance Compensation. If, pursuant to Section 2, the Executive is
entitled to amounts and benefits under this Section 3, the Company shall,
subject to the provisions hereof, (a) pay to the Executive at the same time as
such amounts would be paid to the Executive if he had remained an employee (i)
for twenty-four (24) months an amount based on the Executive's highest annual
base salary rate in effect during the six (6) month period immediately prior to
his termination, less legally required taxes and any sums owed by the Executive
to the Company, (ii) subject to submission of documentation, any incurred but
unreimbursed business expenses for the period prior to termination payable in
accordance with the Company's policies and practices, and (iii) any base salary,
bonus, vacation pay or other compensation accrued or earned under law or in
accordance with the Company's policies applicable to the Executive but not yet
paid; (b) pay to the Executive any other amounts or vested benefits due under
applicable employee benefit (including, without limitation any Supplemental
Executive Retirement Plan), equity or incentive plans of the Company then in
effect, applicable to the Executive as shall be determined and paid in
accordance with such plans; and (c) provide for the benefit of the Executive and
the Executive's eligible dependents for a period ending at the earliest of (i)
the Executive and the Executive's eligible dependents ceasing to be eligible
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), (ii)
eighteen (18) months following the Executive's Termination Date and (iii) the
Executive's commencement of other substantially full-time employment (such
period to be counted against the COBRA continuation coverage period), at the
Company's expense (subject to the Executive
<PAGE>
paying the same portion of premiums he paid as an active employee), continued
coverage under the Company health plans in which the Executive and the
Executive's eligible dependents participated immediately prior to the
Termination Date (or replacement plans therefor) .
4. Acceptance and Release. Any and all amounts payable and benefits or
additional rights provided pursuant to Sections 3(a) and 3(c) of this Agreement
shall only be payable if the Executive delivers to the Company the attached
Acceptance Form and Release (Exhibit A) discharging all claims of the Executive
which may have occurred up to the Termination Date (with such changes therein as
may be necessary to make it valid and encompassing under applicable law) within
twenty-one (21) days of presentation thereof by the Company to the Executive.
Notwithstanding anything herein to the contrary, if the Executive materially
breaches any of the provisions of Section 6 of this Agreement, the Company may
cease all payments and benefits due to the Executive under Sections 3(a) and
3(c) hereof (other than as required by law).
5. No Duty to Mitigate/Set-off. The Company agrees that if the Executive's
employment with the Company is terminated pursuant to this Agreement during the
term of this Agreement, the Executive shall not be required to seek other
employment or to attempt in any way to reduce any amounts payable to the
Executive by the Company pursuant to this Agreement. The amounts due under
Section 3 are inclusive, and in lieu of, any amounts payable under any other
salary continuation or cash severance arrangement of the Company and to the
extent paid or provided under any other such arrangement shall be offset against
the amount due hereunder.
6. (a) Confidentiality and Cooperation. The Executive shall not at any
time during the term of this Agreement, or thereafter, directly or indirectly,
for any reason
<PAGE>
whatsoever, communicate or disclose to any unauthorized person, firm or
corporation, or use for the Executive's own account, without the prior written
consent of the Board, any proprietary processes, trade secrets or other
confidential data or information of the Company and its related and affiliated
companies concerning their businesses or affairs, accounts, products, services
or customers, it being understood, however, that the obligations of this Section
shall not apply to the extent that the aforesaid matters (i) are disclosed in
circumstances in which the Executive is legally required to do so, provided that
the Executive gives the Company prompt written notice of receipt of notice of
any legal proceedings so as the Company has the opportunity to obtain a
protective order, or (ii) become known to and available for use by the public
other than by the Executive's wrongful act or omission. During and after his
employment, the Executive shall cooperate with the Company or its counsel in
connection with any matter, investigation, proceeding or litigation regarding
any matter in which the Executive was involved during his employment with the
Company or to which the Executive has knowledge based on his employment with the
Company.
(b) Nonsolicitation. During the Executive's employment with the
Company and for the one (1) year period thereafter, the Executive agrees that he
will not, directly or indirectly, individually or on behalf of any other person,
firm, corporation or other entity, solicit, induce, hire or retain any employee
of the Company to leave the employ of the Company or to accept employment or
retention as an independent contractor with, or render services to or with any
other person, firm, corporation or other entity unaffiliated with the Company or
take any action to assist or aid any other person, firm, corporation or other
entity in identifying, soliciting, hiring or retaining any such employee
(provided the Executive may serve as a reference after he is no longer employed
by the Company but not with regard to any entity
<PAGE>
with which he is affiliated or from which he is receiving compensation).
Furthermore, during the Executive's employment with the Company and for the one
(1) year period thereafter, the Executive will not solicit or induce any
customer of the Company to purchase goods or services offered by the Company
from another person, firm, corporation or other entity or assist or aid any
other persons or entity in identifying or soliciting any such customer.
(c) Agreement to Not Disparage. The Executive agrees that while
employed by the Company and thereafter, he will not make any statements that
disparage the Company or its employees, officers, directors, products or
services. Notwithstanding the foregoing, truthful statements made in the course
of sworn testimony in administrative, judicial or arbitral proceedings
(including, without limitation, depositions in connection with such proceedings)
by the Executive shall not be subject to this Section 6(c). Traditional
competitive statements made by the Executive but not based on his employment
with the Company, also shall not be deemed a violation of the foregoing if the
Executive is in a competitive position.
(d) Equitable Relief and Other Remedies. Because the Company's
remedies at law for a breach or threatened breach of any of the provisions of
this Section would be inadequate, the Executive acknowledges and agrees that, in
the event of such a breach or threatened breach, in addition to any remedies at
law, the Company shall be entitled to obtain equitable relief in the form of
specific performance, a temporary restraining order, a temporary or permanent
injunction or any other equitable remedy which may then be available.
(e) Reformation. If it is determined by a court of competent
jurisdiction that any restriction in this Section 6 is excessive in duration or
scope or is unreasonable or unenforceable, it is the intention of the parties
that such restriction may be modified or amended by the court to render it
enforceable to the maximum extent permitted.
<PAGE>
(f) Survival of Provisions. The obligations contained in this
Section 6 shall survive the termination, separation, or expiration of the
Executive's employment with the Company and shall be fully enforceable
thereafter.
7. Employee Benefit Plans. The amounts and benefits specified in Section 3
hereof shall not be paid to the Executive as an employee and the Executive shall
not be eligible to participate in employee benefit plans maintained by the
Company during such period except as specifically provided herein. Amounts paid
pursuant to Section 3 shall not be taken into account for purposes of
determining contributions to or calculating accrued benefits under the employee
benefit plans maintained by the Company.
8. Non-Resignation. In consideration of this Agreement, the Executive
agrees that he shall not resign from the Company without Good Reason for at
least one hundred eighty (180) days from the date of this Agreement.
9. Successors; Binding Agreement. In addition to any obligations imposed
by law upon any successor to the Company, the Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to
expressly assume and agree in writing to perform this Agreement in the same
manner and to the same extent that the Company would have been required to
perform the Agreement if no such succession had taken place. This Agreement
shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive shall die while any amount
would still be payable to the Executive, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate, as if the Executive
<PAGE>
had continued to live. This Agreement is personal to the Executive and neither
this Agreement nor any rights or obligations hereunder may be assigned by the
Executive.
10. Miscellaneous. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and the CEO or other such officer as may be
specifically designated by the Board. No waiver of a breach under this Agreement
shall be deemed a waiver of similar or dissimilar provisions or conditions at
any time. This Agreement constitutes the entire Agreement between the Executive
and the Company with respect to the severance protection offered by the Company
to the Executive, except as may be provided in any other written agreement. This
Agreement is being executed for a limited purpose and for a specified Protection
Period (as set forth in Section 1 hereof). This Agreement does not confer or
impose any severance protection for the Executive following the termination of
the Protection Period. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either the Executive or the Company which are not expressly set forth in this
Agreement. All references to any law shall be deemed also to refer to any
successor provisions to such laws.
11. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
12. Notices. Any notice or other communication required or permitted under
this Agreement shall be in writing and shall be delivered personally, or sent by
registered mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, or, if
<PAGE>
mailed, five (5) days after the date of deposit in the United States mails.
Notices and communications shall be delivered or sent to the following
addresses:
(i) If to the Company, to:
Overseas Shipholding Group, Inc.
511 Fifth Avenue
New York, New York 10017
Attention: Chairman or CEO
(ii) If to the Executive, to his or her last shown
address on the books of the Company.
Any party may designate another address or person for receipt of notices
hereunder by providing notice as specified in this Section 12.
13. Service with Any Subsidiary. For purposes of this Agreement,
employment with any subsidiary shall be deemed to be employment by the Company
and references to the Company shall include all such entities, except that the
payment obligation hereunder shall be solely that of the Company.
14. Separability. If any provisions of this Agreement (including Exhibit
A) shall be declared to be invalid or unenforceable, in whole or in part, by a
court of competent jurisdiction, such invalidity or unenforceability shall not
affect the validity of the remaining provisions of this Agreement, including
Exhibit A.
15. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive, equity or other plan or program provided by the Company for which the
Executive may qualify, nor shall anything herein (except Section 6) limit or
otherwise prejudice such rights as the Executive may have under any other
currently existing plan, agreement as to employment or termination from
<PAGE>
employment with the Company or statutory entitlements. Amounts that are vested
benefits or those which the Executive is otherwise entitled to receive under any
plan or program of the Company, at or subsequent to the Termination Date, shall
be payable in accordance with such plan or program, except as otherwise
specifically provided herein. Notwithstanding the foregoing, the Executive shall
not be entitled to received duplicative severance payments and benefits and, to
the extent that the Executive is entitled to severance payments and benefits
under any other plan or agreement (for example, the Change of Control Agreement,
dated October 21, 1996, as amended on March 24, 1999, February 14, 2001 and June
21, 2002 between the Company and the Executive), the Executive shall be entitled
to the greater of the payments and benefits thereunder or hereunder but not
under both plans or agreements.
16. At Will Employment. This Agreement does not constitute a contract of
employment and, subject to any other agreement between the Executive and the
Company, the Company reserves the right to terminate the Executive's employment
at any time with or without reason or notice (unless otherwise prohibited by
law), subject to the payment provisions hereof.
17. Governing Law. This Agreement shall be construed, interpreted, and
governed in accordance with the laws of the State of Delaware without reference
to rules relating to conflicts of law.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand as of the date first set
forth above.
OVERSEAS SHIPHOLDING GROUP, INC.
By: /s/ Morton P. Hyman
----------------------------------
Name: Morton P. Hyman
Title: Chairman, President and Chief
Executive Officer
ROBERT N. COWEN
/s/ Robert N. Cowen
--------------------------------------
<PAGE>
EXHIBIT A
ACCEPTANCE FORM AND RELEASE
Release
1. I agree and acknowledge that the payments and other benefits provided
pursuant to the Severance Protection Agreement ("Agreement"), dated _________:
(i) are in full discharge of any and all liabilities and obligations of the
Company to me, monetarily or with respect to employee benefits or otherwise,
including but not limited to any and all obligations arising under any alleged
written or oral employment agreement, policy, plan or procedure of the Company
and/or any alleged understanding or arrangement between me and the Company; and
(ii) exceed any payment, benefit, or other thing of value to which I might
otherwise be entitled under any policy, plan or procedure of the Company and/or
any agreement between me and the Company.
2. (a) In consideration for the payments and benefits to be provided to
me pursuant to the Agreement, I forever release and discharge the Company from
any and all claims. This includes claims that are not specified in this
Agreement, claims of which I am not currently aware, claims under: (i) the Age
Discrimination in Employment Act, as amended; (ii) Title VII of the Civil Rights
Act of 1964, as amended; (iii) the Americans with Disabilities Act, as amended;
(iv) the Employee Retirement Income Security Act of 1974, as amended (excluding
claims for accrued, vested benefits under any employee benefit pension plan of
the Company in accordance with the terms and conditions of such plan and
applicable law); (v) the Workers' Adjustment and Retraining Notification Act;
(vi) the Family and Medical Leave Act; (vii) any claim under the New York State
Human Rights Law and the New York City Administrative Code; (viii) any other
claim (whether based on federal, state, or local law, statutory or decisional)
<PAGE>
relating to or arising out of my employment, the terms and conditions of such
employment, the separation of such employment, and/or any of the events relating
directly or indirectly to or surrounding the separation of that employment,
including, but not limited to, breach of contract (express or implied), wrongful
discharge, detrimental reliance, defamation, emotional distress or compensatory
or punitive damages; and (ix) any claim for attorneys' fees, costs,
disbursements and/or the like. Notwithstanding anything herein to the contrary,
the sole matters to which this Release does not apply are (i) the rights of
indemnification and directors and officers liability insurance coverage to which
I was entitled immediately prior to my termination; and (ii) my rights under any
tax-qualified pension plan or claims for accrued vested benefits under any other
employee benefit plan, policy or arrangement maintained by the Company or under
COBRA.
(b) This release applies to me and to anyone who succeeds to my
rights, such as my heirs, executors, administrators of my estate, trustees, and
assigns. This release is for the benefit of (i) the Company, (ii) any related
corporation or entity, (iii) any director, officer, employee, or agent of the
Company or of any such related corporation or entity, or (iv) any person,
corporation or entity who or that succeeds to the rights of the Company or of
any such person, corporation or entity.
3. I acknowledge that I: (a) have carefully read in their entirety the
Agreement, the Acceptance Form and Release [and the information attached as
Appendix I provided pursuant to the Older Workers Benefit Protection Act]; (b)
have had an opportunity to consider fully for at least twenty-one (21) days the
terms of the Agreement, the Acceptance Form and Release [and information
attached as Appendix I]; (c) have been advised by the Company in writing to
consult with an attorney of my choosing in connection with the Agreement,
Acceptance Form and
<PAGE>
Release [and the information attached as Appendix I]; (d) fully understand the
significance of all of the terms and conditions of the Agreement, Acceptance
Form and Release [and the information attached as Appendix I], and have
discussed them with my independent legal counsel, or have had a reasonable
opportunity to do so; (e) have had answered to my satisfaction any questions I
have asked with regard to the meaning and significance of any of the provisions
of the Agreement, the Acceptance Form and Release [and the information attached
as Appendix I]; and (f) am signing this Acceptance Form and Release voluntarily
and of my own free will and assent to all the terms and conditions contained
herein and contained in the Agreement, Acceptance Form and Release.
4. I understand that I will have twenty-one (21) days from the date of
receipt of the Agreement, Acceptance Form and Release [and information attached
as Appendix I] to consider the terms and conditions of those documents. I may
accept the Agreement by signing the Acceptance Form and Release and returning
them to ___________________. After executing the Acceptance Form and Release and
returning them to ___________________, I shall have seven (7) days (the"
Revocation Period") to revoke this Agreement by indicating my desire to do so in
writing delivered by no later than 5:00 p.m. on the seventh (7th) day following
the date I sign and return the Acceptance Form and Release. The effective date
of the Agreement shall be the eighth (8th) day following my signing and return
of the Acceptance Form and Release. If the last day of the Revocation Period
falls on a Saturday, Sunday or holiday, the last day of the Revocation Period
will be deemed to be the next business day. In the event I do not accept the
Agreement, or in the event I revoke the Acceptance Form and Release during the
Revocation Period, the Agreement, including but not limited to the obligation of
the Company to provide the payments and other benefits, shall be deemed
automatically null and void.
<PAGE>
Print Name:___________________________ Date: _________________
Employee
Signature:____________________________
Employee
STATE OF NEW YORK )
) ss:
COUNTY OF ___________ )
On this __ day of ________ _____, before me personally came
_______________ to be known and known to me to be the person described and who
executed the foregoing Release, and (s)he duly acknowledged to me that (s)he
executed the same.
_____________________________
Notary Public
<PAGE>
ACCEPTANCE FORM AND RELEASE
Acceptance Form:
I have read the Severance Protection Agreement, dated ______ ("Agreement") and
the accompanying Release [and the information attached as Appendix I] and hereby
accept the benefits provided under the Agreement, subject to the terms and
conditions set forth in the Agreement and Release.
Print Name:________________________ Date: _______________
Employee
Signature:_________________________
Employee
STATE OF NEW YORK )
) ss:
COUNTY OF ___________ )
On this __ day of ________ _____, before me personally came
_______________ to be known and known to me to be the person described and who
executed the foregoing Acceptance Form, and (s)he duly acknowledged to me that
(s)he executed the same.
____________________________
Notary Public
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(III)(S)
<SEQUENCE>4
<FILENAME>d58534_ex10iii-s.txt
<DESCRIPTION>SEVERANCE PROTECTION AGREEMENT
<TEXT>
EXHIBIT 10 (iii)(s)
SEVERANCE PROTECTION AGREEMENT
This Severance Protection Agreement (the "Agreement") is made as of the
12th day of December, 2003, by and between Overseas Shipholding Group, Inc., a
corporation incorporated under the laws of Delaware with its principal office at
511 Fifth Avenue, New York, New York 10017 (the "Company") and Myles R. Itkin
(the "Executive").
W I T N E S S E T H:
WHEREAS, the Company believes that the continuation and maintenance of a
sound and vital management of the Company and its affiliates is essential to the
protection and enhancement of the interests of the Company and its stockholders;
WHEREAS, the Company also recognizes that the search for, and hiring of, a
new chief executive officer ("CEO") of the Company may result in the departure
or distraction of key employees of the Company to the detriment of the Company;
and
WHEREAS, the Company has determined that it is appropriate to take steps
to induce key employees to remain with the Company, and to reinforce and
encourage their continued focus and dedication.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. Term. The Protection Period under this Agreement shall commence on the
Commencement Date, which shall be the earlier of (a) the date a written
employment agreement is executed by the Company and an individual who shall
serve as the new CEO of the
<PAGE>
Company or (b) the date a new CEO (other than an interim CEO) commences
employment with the Company, and shall expire on the earlier of (a) eighteen
(18) months following the Commencement Date or (b) the date of the Executive's
termination of employment due to death, Disability (as defined in Section 2
below), retirement, resignation by the Executive with or without Good Reason (as
defined in Section 2 below) or termination by the Company with or without Cause
(as defined in Section 2 below).
2. Termination. (a) If, during the Protection Period as provided in
Section 1 hereof, the Executive's employment with the Company is terminated by
the Company without Cause (as defined below) or by the Executive for Good Reason
(as defined below) the Executive shall be entitled to the amounts provided in
Section 3 as of the date of such termination (the "Termination Date").
(b) For purposes of this Agreement, the following definitions shall apply:
(i) Resignation for Good Reason. For purposes of this Agreement,
Resignation for Good Reason shall mean a resignation by the Executive effected
by a written notice of termination to the Company following the Executive's
thirty (30) day written notice to the Company of the occurrence of a Good Reason
event which is not materially cured by the Company within such thirty (30) day
period. "Good Reason" shall mean the occurrence of any of the following events
without the Executive's express written consent: (A) any material diminution in
the Executive's role, duties, responsibilities or authority, or the assignment
to the Executive of duties and responsibilities materially inconsistent with his
position, except in connection with the Executive's termination of employment
for Cause or as a result of the Executive's death, or temporarily as a result of
the Executive's incapacity or other absence; (B) a reduction in the Executive's
annual base salary; or (C) a relocation of the Executive's principal
<PAGE>
business location to an area outside of a fifty (50) mile radius of the
Executive's current principal business location and the Executive's home.
(ii) Termination Without Cause. A termination without Cause shall be
a termination by the Company other than for Cause or Disability (each as defined
below).
(A) As used herein, the term "Cause" shall mean: (I) the engaging by the
Executive in willful misconduct either (x) involving the Company or its assets,
business or employees, or (y) which is materially injurious to the Company
economically or to the Company's reputation; (II) the Executive's conviction or
indictment for (or pleading guilty or nolo contendere to) (x) a felony, or (y)
any other crime involving any financial or moral impropriety, or (z) any other
crime which, in the determination of the Board of Directors of the Company (the
"Board") would materially interfere with the Executive's ability to perform his
services to the Company or otherwise be materially injurious to the Company
economically or otherwise; (III) the continued and substantial failure by the
Executive to perform his duties with the Company (other than a failure resulting
from Executive's incapacity due to physical or mental illness or injury), which
failure has continued for a period of at least ten (10) days after written
notice thereof from the Company; (IV) the breach by the Executive of any
material provisions of any agreement with the Company, which breach is not cured
within ten (10) days after written notice thereof from the Company; or (V)
refusal to follow the legal written direction of the Board or a more senior
officer within five (5) business days of it being given, provided that the
foregoing refusal shall not be "Cause" if the Executive, in good faith, believes
that such direction is illegal and Executive promptly so notifies the Board.
<PAGE>
(B) As used herein, the term "Disability" shall mean the Executive's
failure to perform his material duties and responsibilities as a result of
physical or mental illness or injury for one hundred eighty (180) days during a
three hundred sixty-five (365) day period.
3. Severance Compensation. If, pursuant to Section 2, the Executive is
entitled to amounts and benefits under this Section 3, the Company shall,
subject to the provisions hereof, (a) pay to the Executive at the same time as
such amounts would be paid to the Executive if he had remained an employee (i)
for twenty-four (24) months an amount based on the Executive's highest annual
base salary rate in effect during the six (6) month period immediately prior to
his termination, less legally required taxes and any sums owed by the Executive
to the Company, (ii) subject to submission of documentation, any incurred but
unreimbursed business expenses for the period prior to termination payable in
accordance with the Company's policies and practices, and (iii) any base salary,
bonus, vacation pay or other compensation accrued or earned under law or in
accordance with the Company's policies applicable to the Executive but not yet
paid; (b) pay to the Executive any other amounts or vested benefits due under
applicable employee benefit (including, without limitation any Supplemental
Executive Retirement Plan), equity or incentive plans of the Company then in
effect, applicable to the Executive as shall be determined and paid in
accordance with such plans; and (c) provide for the benefit of the Executive and
the Executive's eligible dependents for a period ending at the earliest of (i)
the Executive and the Executive's eligible dependents ceasing to be eligible
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), (ii)
eighteen (18) months following the Executive's Termination Date and (iii) the
Executive's commencement of other substantially full-time employment (such
period to be counted against the COBRA continuation coverage period), at the
Company's expense (subject to the Executive
<PAGE>
paying the same portion of premiums he paid as an active employee), continued
coverage under the Company health plans in which the Executive and the
Executive's eligible dependents participated immediately prior to the
Termination Date (or replacement plans therefor) .
4. Acceptance and Release. Any and all amounts payable and benefits or
additional rights provided pursuant to Sections 3(a) and 3(c) of this Agreement
shall only be payable if the Executive delivers to the Company the attached
Acceptance Form and Release (Exhibit A) discharging all claims of the Executive
which may have occurred up to the Termination Date (with such changes therein as
may be necessary to make it valid and encompassing under applicable law) within
twenty-one (21) days of presentation thereof by the Company to the Executive.
Notwithstanding anything herein to the contrary, if the Executive materially
breaches any of the provisions of Section 6 of this Agreement, the Company may
cease all payments and benefits due to the Executive under Sections 3(a) and
3(c) hereof (other than as required by law).
5. No Duty to Mitigate/Set-off. The Company agrees that if the Executive's
employment with the Company is terminated pursuant to this Agreement during the
term of this Agreement, the Executive shall not be required to seek other
employment or to attempt in any way to reduce any amounts payable to the
Executive by the Company pursuant to this Agreement. The amounts due under
Section 3 are inclusive, and in lieu of, any amounts payable under any other
salary continuation or cash severance arrangement of the Company and to the
extent paid or provided under any other such arrangement shall be offset against
the amount due hereunder.
6. (a) Confidentiality and Cooperation. The Executive shall not at any
time during the term of this Agreement, or thereafter, directly or indirectly,
for any reason
<PAGE>
whatsoever, communicate or disclose to any unauthorized person, firm or
corporation, or use for the Executive's own account, without the prior written
consent of the Board, any proprietary processes, trade secrets or other
confidential data or information of the Company and its related and affiliated
companies concerning their businesses or affairs, accounts, products, services
or customers, it being understood, however, that the obligations of this Section
shall not apply to the extent that the aforesaid matters (i) are disclosed in
circumstances in which the Executive is legally required to do so, provided that
the Executive gives the Company prompt written notice of receipt of notice of
any legal proceedings so as the Company has the opportunity to obtain a
protective order, or (ii) become known to and available for use by the public
other than by the Executive's wrongful act or omission. During and after his
employment, the Executive shall cooperate with the Company or its counsel in
connection with any matter, investigation, proceeding or litigation regarding
any matter in which the Executive was involved during his employment with the
Company or to which the Executive has knowledge based on his employment with the
Company.
(b) Nonsolicitation. During the Executive's employment with the
Company and for the one (1) year period thereafter, the Executive agrees that he
will not, directly or indirectly, individually or on behalf of any other person,
firm, corporation or other entity, solicit, induce, hire or retain any employee
of the Company to leave the employ of the Company or to accept employment or
retention as an independent contractor with, or render services to or with any
other person, firm, corporation or other entity unaffiliated with the Company or
take any action to assist or aid any other person, firm, corporation or other
entity in identifying, soliciting, hiring or retaining any such employee
(provided the Executive may serve as a reference after he is no longer employed
by the Company but not with regard to any entity
<PAGE>
with which he is affiliated or from which he is receiving compensation).
Furthermore, during the Executive's employment with the Company and for the one
(1) year period thereafter, the Executive will not solicit or induce any
customer of the Company to purchase goods or services offered by the Company
from another person, firm, corporation or other entity or assist or aid any
other persons or entity in identifying or soliciting any such customer.
(c) Agreement to Not Disparage. The Executive agrees that while
employed by the Company and thereafter, he will not make any statements that
disparage the Company or its employees, officers, directors, products or
services. Notwithstanding the foregoing, truthful statements made in the course
of sworn testimony in administrative, judicial or arbitral proceedings
(including, without limitation, depositions in connection with such proceedings)
by the Executive shall not be subject to this Section 6(c). Traditional
competitive statements made by the Executive but not based on his employment
with the Company, also shall not be deemed a violation of the foregoing if the
Executive is in a competitive position.
(d) Equitable Relief and Other Remedies. Because the Company's
remedies at law for a breach or threatened breach of any of the provisions of
this Section would be inadequate, the Executive acknowledges and agrees that, in
the event of such a breach or threatened breach, in addition to any remedies at
law, the Company shall be entitled to obtain equitable relief in the form of
specific performance, a temporary restraining order, a temporary or permanent
injunction or any other equitable remedy which may then be available.
(e) Reformation. If it is determined by a court of competent
jurisdiction that any restriction in this Section 6 is excessive in duration or
scope or is unreasonable or unenforceable, it is the intention of the parties
that such restriction may be modified or amended by the court to render it
enforceable to the maximum extent permitted.
<PAGE>
(f) Survival of Provisions. The obligations contained in this
Section 6 shall survive the termination, separation, or expiration of the
Executive's employment with the Company and shall be fully enforceable
thereafter.
7. Employee Benefit Plans. The amounts and benefits specified in Section 3
hereof shall not be paid to the Executive as an employee and the Executive shall
not be eligible to participate in employee benefit plans maintained by the
Company during such period except as specifically provided herein. Amounts paid
pursuant to Section 3 shall not be taken into account for purposes of
determining contributions to or calculating accrued benefits under the employee
benefit plans maintained by the Company.
8. Non-Resignation. In consideration of this Agreement, the Executive
agrees that he shall not resign from the Company without Good Reason for at
least one hundred eighty (180) days from the date of this Agreement.
9. Successors; Binding Agreement. In addition to any obligations imposed
by law upon any successor to the Company, the Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to
expressly assume and agree in writing to perform this Agreement in the same
manner and to the same extent that the Company would have been required to
perform the Agreement if no such succession had taken place. This Agreement
shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive shall die while any amount
would still be payable to the Executive, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate, as if the Executive
<PAGE>
had continued to live. This Agreement is personal to the Executive and neither
this Agreement nor any rights or obligations hereunder may be assigned by the
Executive.
10. Miscellaneous. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and the CEO or other such officer as may be
specifically designated by the Board. No waiver of a breach under this Agreement
shall be deemed a waiver of similar or dissimilar provisions or conditions at
any time. This Agreement constitutes the entire Agreement between the Executive
and the Company with respect to the severance protection offered by the Company
to the Executive, except as may be provided in any other written agreement. This
Agreement is being executed for a limited purpose and for a specified Protection
Period (as set forth in Section 1 hereof). This Agreement does not confer or
impose any severance protection for the Executive following the termination of
the Protection Period. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either the Executive or the Company which are not expressly set forth in this
Agreement. All references to any law shall be deemed also to refer to any
successor provisions to such laws.
11. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
12. Notices. Any notice or other communication required or permitted under
this Agreement shall be in writing and shall be delivered personally, or sent by
registered mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, or, if
<PAGE>
mailed, five (5) days after the date of deposit in the United States mails.
Notices and communications shall be delivered or sent to the following
addresses:
(i) If to the Company, to:
Overseas Shipholding Group, Inc.
511 Fifth Avenue
New York, New York 10017
Attention: Chairman or CEO
(ii) If to the Executive, to his or her last shown
address on the books of the Company.
Any party may designate another address or person for receipt of notices
hereunder by providing notice as specified in this Section 12.
13. Service with Any Subsidiary. For purposes of this Agreement,
employment with any subsidiary shall be deemed to be employment by the Company
and references to the Company shall include all such entities, except that the
payment obligation hereunder shall be solely that of the Company.
14. Separability. If any provisions of this Agreement (including Exhibit
A) shall be declared to be invalid or unenforceable, in whole or in part, by a
court of competent jurisdiction, such invalidity or unenforceability shall not
affect the validity of the remaining provisions of this Agreement, including
Exhibit A.
15. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive, equity or other plan or program provided by the Company for which the
Executive may qualify, nor shall anything herein (except Section 6) limit or
otherwise prejudice such rights as the Executive may have under any other
currently existing plan, agreement as to employment or termination from
<PAGE>
employment with the Company or statutory entitlements. Amounts that are vested
benefits or those which the Executive is otherwise entitled to receive under any
plan or program of the Company, at or subsequent to the Termination Date, shall
be payable in accordance with such plan or program, except as otherwise
specifically provided herein. Notwithstanding the foregoing, the Executive shall
not be entitled to received duplicative severance payments and benefits and, to
the extent that the Executive is entitled to severance payments and benefits
under any other plan or agreement (for example, the Change of Control Agreement,
dated September 14, 1998, as amended on March 24, 1999, February 14, 2001 and
June 21, 2002 between the Company and the Executive), the Executive shall be
entitled to the greater of the payments and benefits thereunder or hereunder but
not under both plans or agreements.
16. At Will Employment. This Agreement does not constitute a contract of
employment and, subject to any other agreement between the Executive and the
Company, the Company reserves the right to terminate the Executive's employment
at any time with or without reason or notice (unless otherwise prohibited by
law), subject to the payment provisions hereof.
17. Governing Law. This Agreement shall be construed, interpreted, and
governed in accordance with the laws of the State of Delaware without reference
to rules relating to conflicts of law.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand as of the date first set
forth above.
OVERSEAS SHIPHOLDING GROUP, INC.
By: /s/ Morton P. Hyman
--------------------------------
Name: Morton P. Hyman
Title: Chairman, President and Chief
Executive Officer
MYLES R. ITKIN
/S/ Myles R. Itkin
------------------------------------
<PAGE>
EXHIBIT A
ACCEPTANCE FORM AND RELEASE
Release
1. I agree and acknowledge that the payments and other benefits provided
pursuant to the Severance Protection Agreement ("Agreement"), dated _________:
(i) are in full discharge of any and all liabilities and obligations of the
Company to me, monetarily or with respect to employee benefits or otherwise,
including but not limited to any and all obligations arising under any alleged
written or oral employment agreement, policy, plan or procedure of the Company
and/or any alleged understanding or arrangement between me and the Company; and
(ii) exceed any payment, benefit, or other thing of value to which I might
otherwise be entitled under any policy, plan or procedure of the Company and/or
any agreement between me and the Company.
2. (a) In consideration for the payments and benefits to be provided to
me pursuant to the Agreement, I forever release and discharge the Company from
any and all claims. This includes claims that are not specified in this
Agreement, claims of which I am not currently aware, claims under: (i) the Age
Discrimination in Employment Act, as amended; (ii) Title VII of the Civil Rights
Act of 1964, as amended; (iii) the Americans with Disabilities Act, as amended;
(iv) the Employee Retirement Income Security Act of 1974, as amended (excluding
claims for accrued, vested benefits under any employee benefit pension plan of
the Company in accordance with the terms and conditions of such plan and
applicable law); (v) the Workers' Adjustment and Retraining Notification Act;
(vi) the Family and Medical Leave Act; (vii) any claim under the New York State
Human Rights Law and the New York City Administrative Code; (viii) any other
claim (whether based on federal, state, or local law, statutory or decisional)
<PAGE>
relating to or arising out of my employment, the terms and conditions of such
employment, the separation of such employment, and/or any of the events relating
directly or indirectly to or surrounding the separation of that employment,
including, but not limited to, breach of contract (express or implied), wrongful
discharge, detrimental reliance, defamation, emotional distress or compensatory
or punitive damages; and (ix) any claim for attorneys' fees, costs,
disbursements and/or the like. Notwithstanding anything herein to the contrary,
the sole matters to which this Release does not apply are (i) the rights of
indemnification and directors and officers liability insurance coverage to which
I was entitled immediately prior to my termination; and (ii) my rights under any
tax-qualified pension plan or claims for accrued vested benefits under any other
employee benefit plan, policy or arrangement maintained by the Company or under
COBRA.
(b) This release applies to me and to anyone who succeeds to my
rights, such as my heirs, executors, administrators of my estate, trustees, and
assigns. This release is for the benefit of (i) the Company, (ii) any related
corporation or entity, (iii) any director, officer, employee, or agent of the
Company or of any such related corporation or entity, or (iv) any person,
corporation or entity who or that succeeds to the rights of the Company or of
any such person, corporation or entity.
3. I acknowledge that I: (a) have carefully read in their entirety the
Agreement, the Acceptance Form and Release [and the information attached as
Appendix I provided pursuant to the Older Workers Benefit Protection Act]; (b)
have had an opportunity to consider fully for at least twenty-one (21) days the
terms of the Agreement, the Acceptance Form and Release [and information
attached as Appendix I]; (c) have been advised by the Company in writing to
consult with an attorney of my choosing in connection with the Agreement,
Acceptance Form and
<PAGE>
Release [and the information attached as Appendix I]; (d) fully understand the
significance of all of the terms and conditions of the Agreement, Acceptance
Form and Release [and the information attached as Appendix I], and have
discussed them with my independent legal counsel, or have had a reasonable
opportunity to do so; (e) have had answered to my satisfaction any questions I
have asked with regard to the meaning and significance of any of the provisions
of the Agreement, the Acceptance Form and Release [and the information attached
as Appendix I]; and (f) am signing this Acceptance Form and Release voluntarily
and of my own free will and assent to all the terms and conditions contained
herein and contained in the Agreement, Acceptance Form and Release.
4. I understand that I will have twenty-one (21) days from the date of
receipt of the Agreement, Acceptance Form and Release [and information attached
as Appendix I] to consider the terms and conditions of those documents. I may
accept the Agreement by signing the Acceptance Form and Release and returning
them to ___________________. After executing the Acceptance Form and Release and
returning them to ___________________, I shall have seven (7) days (the"
Revocation Period") to revoke this Agreement by indicating my desire to do so in
writing delivered by no later than 5:00 p.m. on the seventh (7th) day following
the date I sign and return the Acceptance Form and Release. The effective date
of the Agreement shall be the eighth (8th) day following my signing and return
of the Acceptance Form and Release. If the last day of the Revocation Period
falls on a Saturday, Sunday or holiday, the last day of the Revocation Period
will be deemed to be the next business day. In the event I do not accept the
Agreement, or in the event I revoke the Acceptance Form and Release during the
Revocation Period, the Agreement, including but not limited to the obligation of
the Company to provide the payments and other benefits, shall be deemed
automatically null and void.
<PAGE>
Print Name:____________________________ Date: ________________
Employee
Signature:_____________________________
Employee
STATE OF NEW YORK )
) ss:
COUNTY OF ___________ )
On this __ day of ________ _____, before me personally came
_______________ to be known and known to me to be the person described and who
executed the foregoing Release, and (s)he duly acknowledged to me that (s)he
executed the same.
________________________________
Notary Public
<PAGE>
ACCEPTANCE FORM AND RELEASE
Acceptance Form:
I have read the Severance Protection Agreement, dated ______ ("Agreement") and
the accompanying Release [and the information attached as Appendix I] and hereby
accept the benefits provided under the Agreement, subject to the terms and
conditions set forth in the Agreement and Release.
Print Name:___________________________ Date: ________________
Employee
Signature:____________________________
Employee
STATE OF NEW YORK )
) ss:
COUNTY OF ___________ )
On this __ day of ________ _____, before me personally came
_______________ to be known and known to me to be the person described and who
executed the foregoing Acceptance Form, and (s)he duly acknowledged to me that
(s)he executed the same.
_______________________________
Notary Public
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(III)(T)
<SEQUENCE>5
<FILENAME>d58534_ex10iii-t.txt
<DESCRIPTION>SEVERANCE PROTECTION AGREEMENT
<TEXT>
EXHIBIT 10 (iii)(t)
SEVERANCE PROTECTION AGREEMENT
This Severance Protection Agreement (the "Agreement") is made as of the
12th day of December, 2003, by and between Overseas Shipholding Group, Inc., a
corporation incorporated under the laws of Delaware with its principal office at
511 Fifth Avenue, New York, New York 10017 (the "Company") and Robert E.
Johnston (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company believes that the continuation and maintenance of a
sound and vital management of the Company and its affiliates is essential to the
protection and enhancement of the interests of the Company and its stockholders;
WHEREAS, the Company also recognizes that the search for, and hiring of, a
new chief executive officer ("CEO") of the Company may result in the departure
or distraction of key employees of the Company to the detriment of the Company;
and
WHEREAS, the Company has determined that it is appropriate to take steps
to induce key employees to remain with the Company, and to reinforce and
encourage their continued focus and dedication.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. Term. The Protection Period under this Agreement shall commence on the
Commencement Date, which shall be the earlier of (a) the date a written
employment agreement is executed by the Company and an individual who shall
serve as the new CEO of the
<PAGE>
Company or (b) the date a new CEO (other than an interim CEO) commences
employment with the Company, and shall expire on the earlier of (a) eighteen
(18) months following the Commencement Date or (b) the date of the Executive's
termination of employment due to death, Disability (as defined in Section 2
below), retirement, resignation by the Executive with or without Good Reason (as
defined in Section 2 below) or termination by the Company with or without Cause
(as defined in Section 2 below).
2. Termination. (a) If, during the Protection Period as provided in
Section 1 hereof, the Executive's employment with the Company is terminated by
the Company without Cause (as defined below) or by the Executive for Good Reason
(as defined below) the Executive shall be entitled to the amounts provided in
Section 3 as of the date of such termination (the "Termination Date").
(b) For purposes of this Agreement, the following definitions shall apply:
(i) Resignation for Good Reason. For purposes of this Agreement,
Resignation for Good Reason shall mean a resignation by the Executive effected
by a written notice of termination to the Company following the Executive's
thirty (30) day written notice to the Company of the occurrence of a Good Reason
event which is not materially cured by the Company within such thirty (30) day
period. "Good Reason" shall mean the occurrence of any of the following events
without the Executive's express written consent: (A) any material diminution in
the Executive's role, duties, responsibilities or authority, or the assignment
to the Executive of duties and responsibilities materially inconsistent with his
position, except in connection with the Executive's termination of employment
for Cause or as a result of the Executive's death, or temporarily as a result of
the Executive's incapacity or other absence; (B) a reduction in the Executive's
annual base salary; or (C) a relocation of the Executive's principal
<PAGE>
business location to an area outside of a fifty (50) mile radius of the
Executive's current principal business location and the Executive's home.
(ii) Termination Without Cause. A termination without Cause shall be
a termination by the Company other than for Cause or Disability (each as defined
below).
(A) As used herein, the term "Cause" shall mean: (I) the engaging by the
Executive in willful misconduct either (x) involving the Company or its assets,
business or employees, or (y) which is materially injurious to the Company
economically or to the Company's reputation; (II) the Executive's conviction or
indictment for (or pleading guilty or nolo contendere to) (x) a felony, or (y)
any other crime involving any financial or moral impropriety, or (z) any other
crime which, in the determination of the Board of Directors of the Company (the
"Board") would materially interfere with the Executive's ability to perform his
services to the Company or otherwise be materially injurious to the Company
economically or otherwise; (III) the continued and substantial failure by the
Executive to perform his duties with the Company (other than a failure resulting
from Executive's incapacity due to physical or mental illness or injury), which
failure has continued for a period of at least ten (10) days after written
notice thereof from the Company; (IV) the breach by the Executive of any
material provisions of any agreement with the Company, which breach is not cured
within ten (10) days after written notice thereof from the Company; or (V)
refusal to follow the legal written direction of the Board or a more senior
officer within five (5) business days of it being given, provided that the
foregoing refusal shall not be "Cause" if the Executive, in good faith, believes
that such direction is illegal and Executive promptly so notifies the Board.
<PAGE>
(B) As used herein, the term "Disability" shall mean the Executive's
failure to perform his material duties and responsibilities as a result of
physical or mental illness or injury for one hundred eighty (180) days during a
three hundred sixty-five (365) day period.
3. Severance Compensation. If, pursuant to Section 2, the Executive is
entitled to amounts and benefits under this Section 3, the Company shall,
subject to the provisions hereof, (a) pay to the Executive at the same time as
such amounts would be paid to the Executive if he had remained an employee (i)
for twenty-four (24) months an amount based on the Executive's highest annual
base salary rate in effect during the six (6) month period immediately prior to
his termination, less legally required taxes and any sums owed by the Executive
to the Company, (ii) subject to submission of documentation, any incurred but
unreimbursed business expenses for the period prior to termination payable in
accordance with the Company's policies and practices, and (iii) any base salary,
bonus, vacation pay or other compensation accrued or earned under law or in
accordance with the Company's policies applicable to the Executive but not yet
paid; (b) pay to the Executive any other amounts or vested benefits due under
applicable employee benefit (including, without limitation any Supplemental
Executive Retirement Plan), equity or incentive plans of the Company then in
effect, applicable to the Executive as shall be determined and paid in
accordance with such plans; and (c) provide for the benefit of the Executive and
the Executive's eligible dependents for a period ending at the earliest of (i)
the Executive and the Executive's eligible dependents ceasing to be eligible
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), (ii)
eighteen (18) months following the Executive's Termination Date and (iii) the
Executive's commencement of other substantially full-time employment (such
period to be counted against the COBRA continuation coverage period), at the
Company's expense (subject to the Executive
<PAGE>
paying the same portion of premiums he paid as an active employee), continued
coverage under the Company health plans in which the Executive and the
Executive's eligible dependents participated immediately prior to the
Termination Date (or replacement plans therefor) .
4. Acceptance and Release. Any and all amounts payable and benefits or
additional rights provided pursuant to Sections 3(a) and 3(c) of this Agreement
shall only be payable if the Executive delivers to the Company the attached
Acceptance Form and Release (Exhibit A) discharging all claims of the Executive
which may have occurred up to the Termination Date (with such changes therein as
may be necessary to make it valid and encompassing under applicable law) within
twenty-one (21) days of presentation thereof by the Company to the Executive.
Notwithstanding anything herein to the contrary, if the Executive materially
breaches any of the provisions of Section 6 of this Agreement, the Company may
cease all payments and benefits due to the Executive under Sections 3(a) and
3(c) hereof (other than as required by law).
5. No Duty to Mitigate/Set-off. The Company agrees that if the Executive's
employment with the Company is terminated pursuant to this Agreement during the
term of this Agreement, the Executive shall not be required to seek other
employment or to attempt in any way to reduce any amounts payable to the
Executive by the Company pursuant to this Agreement. The amounts due under
Section 3 are inclusive, and in lieu of, any amounts payable under any other
salary continuation or cash severance arrangement of the Company and to the
extent paid or provided under any other such arrangement shall be offset against
the amount due hereunder.
6. (a) Confidentiality and Cooperation. The Executive shall not at any
time during the term of this Agreement, or thereafter, directly or indirectly,
for any reason
<PAGE>
whatsoever, communicate or disclose to any unauthorized person, firm or
corporation, or use for the Executive's own account, without the prior written
consent of the Board, any proprietary processes, trade secrets or other
confidential data or information of the Company and its related and affiliated
companies concerning their businesses or affairs, accounts, products, services
or customers, it being understood, however, that the obligations of this Section
shall not apply to the extent that the aforesaid matters (i) are disclosed in
circumstances in which the Executive is legally required to do so, provided that
the Executive gives the Company prompt written notice of receipt of notice of
any legal proceedings so as the Company has the opportunity to obtain a
protective order, or (ii) become known to and available for use by the public
other than by the Executive's wrongful act or omission. During and after his
employment, the Executive shall cooperate with the Company or its counsel in
connection with any matter, investigation, proceeding or litigation regarding
any matter in which the Executive was involved during his employment with the
Company or to which the Executive has knowledge based on his employment with the
Company.
(b) Nonsolicitation. During the Executive's employment with the
Company and for the one (1) year period thereafter, the Executive agrees that he
will not, directly or indirectly, individually or on behalf of any other person,
firm, corporation or other entity, solicit, induce, hire or retain any employee
of the Company to leave the employ of the Company or to accept employment or
retention as an independent contractor with, or render services to or with any
other person, firm, corporation or other entity unaffiliated with the Company or
take any action to assist or aid any other person, firm, corporation or other
entity in identifying, soliciting, hiring or retaining any such employee
(provided the Executive may serve as a reference after he is no longer employed
by the Company but not with regard to any entity
<PAGE>
with which he is affiliated or from which he is receiving compensation).
Furthermore, during the Executive's employment with the Company and for the one
(1) year period thereafter, the Executive will not solicit or induce any
customer of the Company to purchase goods or services offered by the Company
from another person, firm, corporation or other entity or assist or aid any
other persons or entity in identifying or soliciting any such customer.
(c) Agreement to Not Disparage. The Executive agrees that while
employed by the Company and thereafter, he will not make any statements that
disparage the Company or its employees, officers, directors, products or
services. Notwithstanding the foregoing, truthful statements made in the course
of sworn testimony in administrative, judicial or arbitral proceedings
(including, without limitation, depositions in connection with such proceedings)
by the Executive shall not be subject to this Section 6(c). Traditional
competitive statements made by the Executive but not based on his employment
with the Company, also shall not be deemed a violation of the foregoing if the
Executive is in a competitive position.
(d) Equitable Relief and Other Remedies. Because the Company's
remedies at law for a breach or threatened breach of any of the provisions of
this Section would be inadequate, the Executive acknowledges and agrees that, in
the event of such a breach or threatened breach, in addition to any remedies at
law, the Company shall be entitled to obtain equitable relief in the form of
specific performance, a temporary restraining order, a temporary or permanent
injunction or any other equitable remedy which may then be available.
(e) Reformation. If it is determined by a court of competent
jurisdiction that any restriction in this Section 6 is excessive in duration or
scope or is unreasonable or unenforceable, it is the intention of the parties
that such restriction may be modified or amended by the court to render it
enforceable to the maximum extent permitted.
<PAGE>
(f) Survival of Provisions. The obligations contained in this
Section 6 shall survive the termination, separation, or expiration of the
Executive's employment with the Company and shall be fully enforceable
thereafter.
7. Employee Benefit Plans. The amounts and benefits specified in Section 3
hereof shall not be paid to the Executive as an employee and the Executive shall
not be eligible to participate in employee benefit plans maintained by the
Company during such period except as specifically provided herein. Amounts paid
pursuant to Section 3 shall not be taken into account for purposes of
determining contributions to or calculating accrued benefits under the employee
benefit plans maintained by the Company.
8. Non-Resignation. In consideration of this Agreement, the Executive
agrees that he shall not resign from the Company without Good Reason for at
least one hundred eighty (180) days from the date of this Agreement.
9. Successors; Binding Agreement. In addition to any obligations imposed
by law upon any successor to the Company, the Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to
expressly assume and agree in writing to perform this Agreement in the same
manner and to the same extent that the Company would have been required to
perform the Agreement if no such succession had taken place. This Agreement
shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive shall die while any amount
would still be payable to the Executive, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate, as if the Executive
<PAGE>
had continued to live. This Agreement is personal to the Executive and neither
this Agreement nor any rights or obligations hereunder may be assigned by the
Executive.
10. Miscellaneous. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and the CEO or other such officer as may be
specifically designated by the Board. No waiver of a breach under this Agreement
shall be deemed a waiver of similar or dissimilar provisions or conditions at
any time. This Agreement constitutes the entire Agreement between the Executive
and the Company with respect to the severance protection offered by the Company
to the Executive, except as may be provided in any other written agreement. This
Agreement is being executed for a limited purpose and for a specified Protection
Period (as set forth in Section 1 hereof). This Agreement does not confer or
impose any severance protection for the Executive following the termination of
the Protection Period. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either the Executive or the Company which are not expressly set forth in this
Agreement. All references to any law shall be deemed also to refer to any
successor provisions to such laws.
11. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
12. Notices. Any notice or other communication required or permitted under
this Agreement shall be in writing and shall be delivered personally, or sent by
registered mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, or, if
<PAGE>
mailed, five (5) days after the date of deposit in the United States mails.
Notices and communications shall be delivered or sent to the following
addresses:
(i) If to the Company, to:
Overseas Shipholding Group, Inc.
511 Fifth Avenue
New York, New York 10017
Attention: Chairman or CEO
(ii) If to the Executive, to his or her last shown
address on the books of the Company.
Any party may designate another address or person for receipt of notices
hereunder by providing notice as specified in this Section 12.
13. Service with Any Subsidiary. For purposes of this Agreement,
employment with any subsidiary shall be deemed to be employment by the Company
and references to the Company shall include all such entities, except that the
payment obligation hereunder shall be solely that of the Company.
14. Separability. If any provisions of this Agreement (including Exhibit
A) shall be declared to be invalid or unenforceable, in whole or in part, by a
court of competent jurisdiction, such invalidity or unenforceability shall not
affect the validity of the remaining provisions of this Agreement, including
Exhibit A.
15. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive, equity or other plan or program provided by the Company for which the
Executive may qualify, nor shall anything herein (except Section 6) limit or
otherwise prejudice such rights as the Executive may have under any other
currently existing plan, agreement as to employment or termination from
<PAGE>
employment with the Company or statutory entitlements. Amounts that are vested
benefits or those which the Executive is otherwise entitled to receive under any
plan or program of the Company, at or subsequent to the Termination Date, shall
be payable in accordance with such plan or program, except as otherwise
specifically provided herein. Notwithstanding the foregoing, the Executive shall
not be entitled to received duplicative severance payments and benefits and, to
the extent that the Executive is entitled to severance payments and benefits
under any other plan or agreement (for example, the Change of Control Agreement,
dated October 30, 1998, as amended on March 24, 1999, February 14, 2001 and June
21, 2002 between the Company and the Executive), the Executive shall be entitled
to the greater of the payments and benefits thereunder or hereunder but not
under both plans or agreements.
16. At Will Employment. This Agreement does not constitute a contract of
employment and, subject to any other agreement between the Executive and the
Company, the Company reserves the right to terminate the Executive's employment
at any time with or without reason or notice (unless otherwise prohibited by
law), subject to the payment provisions hereof.
17. Governing Law. This Agreement shall be construed, interpreted, and
governed in accordance with the laws of the State of Delaware without reference
to rules relating to conflicts of law.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand as of the date first set
forth above.
OVERSEAS SHIPHOLDING GROUP, INC.
By: /s/ Morton P. Hyman
---------------------------------
Name: Morton P. Hyman
Title: Chairman, President and Chief
Executive Officer
ROBERT E. JOHNSTON
/s/ Robert E. Johnston
-------------------------------------
<PAGE>
EXHIBIT A
ACCEPTANCE FORM AND RELEASE
Release
1. I agree and acknowledge that the payments and other benefits provided
pursuant to the Severance Protection Agreement ("Agreement"), dated _________:
(i) are in full discharge of any and all liabilities and obligations of the
Company to me, monetarily or with respect to employee benefits or otherwise,
including but not limited to any and all obligations arising under any alleged
written or oral employment agreement, policy, plan or procedure of the Company
and/or any alleged understanding or arrangement between me and the Company; and
(ii) exceed any payment, benefit, or other thing of value to which I might
otherwise be entitled under any policy, plan or procedure of the Company and/or
any agreement between me and the Company.
2. (a) In consideration for the payments and benefits to be provided to me
pursuant to the Agreement, I forever release and discharge the Company from any
and all claims. This includes claims that are not specified in this Agreement,
claims of which I am not currently aware, claims under: (i) the Age
Discrimination in Employment Act, as amended; (ii) Title VII of the Civil Rights
Act of 1964, as amended; (iii) the Americans with Disabilities Act, as amended;
(iv) the Employee Retirement Income Security Act of 1974, as amended (excluding
claims for accrued, vested benefits under any employee benefit pension plan of
the Company in accordance with the terms and conditions of such plan and
applicable law); (v) the Workers' Adjustment and Retraining Notification Act;
(vi) the Family and Medical Leave Act; (vii) any claim under the New York State
Human Rights Law and the New York City Administrative Code; (viii) any other
claim (whether based on federal, state, or local law, statutory or decisional)
<PAGE>
relating to or arising out of my employment, the terms and conditions of such
employment, the separation of such employment, and/or any of the events relating
directly or indirectly to or surrounding the separation of that employment,
including, but not limited to, breach of contract (express or implied), wrongful
discharge, detrimental reliance, defamation, emotional distress or compensatory
or punitive damages; and (ix) any claim for attorneys' fees, costs,
disbursements and/or the like. Notwithstanding anything herein to the contrary,
the sole matters to which this Release does not apply are (i) the rights of
indemnification and directors and officers liability insurance coverage to which
I was entitled immediately prior to my termination; and (ii) my rights under any
tax-qualified pension plan or claims for accrued vested benefits under any other
employee benefit plan, policy or arrangement maintained by the Company or under
COBRA.
(b) This release applies to me and to anyone who succeeds to my
rights, such as my heirs, executors, administrators of my estate, trustees, and
assigns. This release is for the benefit of (i) the Company, (ii) any related
corporation or entity, (iii) any director, officer, employee, or agent of the
Company or of any such related corporation or entity, or (iv) any person,
corporation or entity who or that succeeds to the rights of the Company or of
any such person, corporation or entity.
3. I acknowledge that I: (a) have carefully read in their entirety the
Agreement, the Acceptance Form and Release [and the information attached as
Appendix I provided pursuant to the Older Workers Benefit Protection Act]; (b)
have had an opportunity to consider fully for at least twenty-one (21) days the
terms of the Agreement, the Acceptance Form and Release [and information
attached as Appendix I]; (c) have been advised by the Company in writing to
consult with an attorney of my choosing in connection with the Agreement,
Acceptance Form and
<PAGE>
Release [and the information attached as Appendix I]; (d) fully understand the
significance of all of the terms and conditions of the Agreement, Acceptance
Form and Release [and the information attached as Appendix I], and have
discussed them with my independent legal counsel, or have had a reasonable
opportunity to do so; (e) have had answered to my satisfaction any questions I
have asked with regard to the meaning and significance of any of the provisions
of the Agreement, the Acceptance Form and Release [and the information attached
as Appendix I]; and (f) am signing this Acceptance Form and Release voluntarily
and of my own free will and assent to all the terms and conditions contained
herein and contained in the Agreement, Acceptance Form and Release.
4. I understand that I will have twenty-one (21) days from the date of
receipt of the Agreement, Acceptance Form and Release [and information attached
as Appendix I] to consider the terms and conditions of those documents. I may
accept the Agreement by signing the Acceptance Form and Release and returning
them to ___________________. After executing the Acceptance Form and Release and
returning them to ___________________, I shall have seven (7) days (the"
Revocation Period") to revoke this Agreement by indicating my desire to do so in
writing delivered by no later than 5:00 p.m. on the seventh (7th) day following
the date I sign and return the Acceptance Form and Release. The effective date
of the Agreement shall be the eighth (8th) day following my signing and return
of the Acceptance Form and Release. If the last day of the Revocation Period
falls on a Saturday, Sunday or holiday, the last day of the Revocation Period
will be deemed to be the next business day. In the event I do not accept the
Agreement, or in the event I revoke the Acceptance Form and Release during the
Revocation Period, the Agreement, including but not limited to the obligation of
the Company to provide the payments and other benefits, shall be deemed
automatically null and void.
<PAGE>
Print Name:___________________________ Date: _________________
Employee
Signature:____________________________
Employee
STATE OF NEW YORK )
) ss:
COUNTY OF ___________ )
On this __ day of ________ _____, before me personally came
_______________ to be known and known to me to be the person described and who
executed the foregoing Release, and (s)he duly acknowledged to me that (s)he
executed the same.
__________________________
Notary Public
<PAGE>
ACCEPTANCE FORM AND RELEASE
Acceptance Form:
I have read the Severance Protection Agreement, dated ______ ("Agreement") and
the accompanying Release [and the information attached as Appendix I] and hereby
accept the benefits provided under the Agreement, subject to the terms and
conditions set forth in the Agreement and Release.
Print Name:______________________ Date: _________________
Employee
Signature:_______________________
Employee
STATE OF NEW YORK )
) ss:
COUNTY OF ___________ )
On this __ day of ________ _____, before me personally came
_______________ to be known and known to me to be the person described and who
executed the foregoing Acceptance Form, and (s)he duly acknowledged to me that
(s)he executed the same.
___________________________
Notary Public
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(III)(U)
<SEQUENCE>6
<FILENAME>d58534_ex10iii-u.txt
<DESCRIPTION>SEVERANCE PROTECTION AGREEMENT
<TEXT>
EXHIBIT 10(iii)(u)
SEVERANCE PROTECTION AGREEMENT
This Severance Protection Agreement (the "Agreement") is made as of the
12th day of December, 2003, by and between Overseas Shipholding Group, Inc., a
corporation incorporated under the laws of Delaware with its principal office at
511 Fifth Avenue, New York, New York 10017 (the "Company") and Peter J. Swift
(the "Executive").
W I T N E S S E T H:
WHEREAS, the Company believes that the continuation and maintenance of a
sound and vital management of the Company and its affiliates is essential to the
protection and enhancement of the interests of the Company and its stockholders;
WHEREAS, the Company also recognizes that the search for, and hiring of, a
new chief executive officer ("CEO") of the Company may result in the departure
or distraction of key employees of the Company to the detriment of the Company;
and
WHEREAS, the Company has determined that it is appropriate to take steps
to induce key employees to remain with the Company, and to reinforce and
encourage their continued focus and dedication.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. Term. The Protection Period under this Agreement shall commence on the
Commencement Date, which shall be the earlier of (a) the date a written
employment agreement is executed by the Company and an individual who shall
serve as the new CEO of the
<PAGE>
Company or (b) the date a new CEO (other than an interim CEO) commences
employment with the Company, and shall expire on the earlier of (a) eighteen
(18) months following the Commencement Date or (b) the date of the Executive's
termination of employment due to death, Disability (as defined in Section 2
below), retirement, resignation by the Executive with or without Good Reason (as
defined in Section 2 below) or termination by the Company with or without Cause
(as defined in Section 2 below).
2. Termination. (a) If, during the Protection Period as provided in
Section 1 hereof, the Executive's employment with the Company is terminated by
the Company without Cause (as defined below) or by the Executive for Good Reason
(as defined below) the Executive shall be entitled to the amounts provided in
Section 3 as of the date of such termination (the "Termination Date").
(b) For purposes of this Agreement, the following definitions shall apply:
(i) Resignation for Good Reason. For purposes of this Agreement,
Resignation for Good Reason shall mean a resignation by the Executive effected
by a written notice of termination to the Company following the Executive's
thirty (30) day written notice to the Company of the occurrence of a Good Reason
event which is not materially cured by the Company within such thirty (30) day
period. "Good Reason" shall mean the occurrence of any of the following events
without the Executive's express written consent: (A) any material diminution in
the Executive's role, duties, responsibilities or authority, or the assignment
to the Executive of duties and responsibilities materially inconsistent with his
position, except in connection with the Executive's termination of employment
for Cause or as a result of the Executive's death, or temporarily as a result of
the Executive's incapacity or other absence; (B) a reduction in the Executive's
annual base salary; or (C) a relocation of the Executive's principal
<PAGE>
business location to an area outside of a fifty (50) mile radius of the
Executive's current principal business location and the Executive's home.
(ii) Termination Without Cause. A termination without Cause shall be
a termination by the Company other than for Cause or Disability (each as defined
below).
(A) As used herein, the term "Cause" shall mean: (I) the engaging by the
Executive in willful misconduct either (x) involving the Company or its assets,
business or employees, or (y) which is materially injurious to the Company
economically or to the Company's reputation; (II) the Executive's conviction or
indictment for (or pleading guilty or nolo contendere to) (x) a felony, or (y)
any other crime involving any financial or moral impropriety, or (z) any other
crime which, in the determination of the Board of Directors of the Company (the
"Board") would materially interfere with the Executive's ability to perform his
services to the Company or otherwise be materially injurious to the Company
economically or otherwise; (III) the continued and substantial failure by the
Executive to perform his duties with the Company (other than a failure resulting
from Executive's incapacity due to physical or mental illness or injury), which
failure has continued for a period of at least ten (10) days after written
notice thereof from the Company; (IV) the breach by the Executive of any
material provisions of any agreement with the Company, which breach is not cured
within ten (10) days after written notice thereof from the Company; or (V)
refusal to follow the legal written direction of the Board or a more senior
officer within five (5) business days of it being given, provided that the
foregoing refusal shall not be "Cause" if the Executive, in good faith, believes
that such direction is illegal and Executive promptly so notifies the Board.
<PAGE>
(B) As used herein, the term "Disability" shall mean the Executive's
failure to perform his material duties and responsibilities as a result of
physical or mental illness or injury for one hundred eighty (180) days during a
three hundred sixty-five (365) day period.
3. Severance Compensation. If, pursuant to Section 2, the Executive is
entitled to amounts and benefits under this Section 3, the Company shall,
subject to the provisions hereof, (a) pay to the Executive at the same time as
such amounts would be paid to the Executive if he had remained an employee (i)
for twenty-four (24) months an amount based on the Executive's highest annual
base salary rate in effect during the six (6) month period immediately prior to
his termination, less legally required taxes and any sums owed by the Executive
to the Company, (ii) subject to submission of documentation, any incurred but
unreimbursed business expenses for the period prior to termination payable in
accordance with the Company's policies and practices, and (iii) any base salary,
bonus, vacation pay or other compensation accrued or earned under law or in
accordance with the Company's policies applicable to the Executive but not yet
paid; (b) pay to the Executive any other amounts or vested benefits due under
applicable employee benefit (including, without limitation any Supplemental
Executive Retirement Plan), equity or incentive plans of the Company then in
effect, applicable to the Executive as shall be determined and paid in
accordance with such plans; and (c) provide for the benefit of the Executive and
the Executive's eligible dependents for a period ending at the earliest of (i)
the Executive and the Executive's eligible dependents ceasing to be eligible
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), (ii)
eighteen (18) months following the Executive's Termination Date and (iii) the
Executive's commencement of other substantially full-time employment (such
period to be counted against the COBRA continuation coverage period), at the
Company's expense (subject to the Executive
<PAGE>
paying the same portion of premiums he paid as an active employee), continued
coverage under the Company health plans in which the Executive and the
Executive's eligible dependents participated immediately prior to the
Termination Date (or replacement plans therefor) .
4. Acceptance and Release. Any and all amounts payable and benefits or
additional rights provided pursuant to Sections 3(a) and 3(c) of this Agreement
shall only be payable if the Executive delivers to the Company the attached
Acceptance Form and Release (Exhibit A) discharging all claims of the Executive
which may have occurred up to the Termination Date (with such changes therein as
may be necessary to make it valid and encompassing under applicable law) within
twenty-one (21) days of presentation thereof by the Company to the Executive.
Notwithstanding anything herein to the contrary, if the Executive materially
breaches any of the provisions of Section 6 of this Agreement, the Company may
cease all payments and benefits due to the Executive under Sections 3(a) and
3(c) hereof (other than as required by law).
5. No Duty to Mitigate/Set-off. The Company agrees that if the Executive's
employment with the Company is terminated pursuant to this Agreement during the
term of this Agreement, the Executive shall not be required to seek other
employment or to attempt in any way to reduce any amounts payable to the
Executive by the Company pursuant to this Agreement. The amounts due under
Section 3 are inclusive, and in lieu of, any amounts payable under any other
salary continuation or cash severance arrangement of the Company and to the
extent paid or provided under any other such arrangement shall be offset against
the amount due hereunder.
6. (a) Confidentiality and Cooperation. The Executive shall not at any
time during the term of this Agreement, or thereafter, directly or indirectly,
for any reason
<PAGE>
whatsoever, communicate or disclose to any unauthorized person, firm or
corporation, or use for the Executive's own account, without the prior written
consent of the Board, any proprietary processes, trade secrets or other
confidential data or information of the Company and its related and affiliated
companies concerning their businesses or affairs, accounts, products, services
or customers, it being understood, however, that the obligations of this Section
shall not apply to the extent that the aforesaid matters (i) are disclosed in
circumstances in which the Executive is legally required to do so, provided that
the Executive gives the Company prompt written notice of receipt of notice of
any legal proceedings so as the Company has the opportunity to obtain a
protective order, or (ii) become known to and available for use by the public
other than by the Executive's wrongful act or omission. During and after his
employment, the Executive shall cooperate with the Company or its counsel in
connection with any matter, investigation, proceeding or litigation regarding
any matter in which the Executive was involved during his employment with the
Company or to which the Executive has knowledge based on his employment with the
Company.
(b) Nonsolicitation. During the Executive's employment with the
Company and for the one (1) year period thereafter, the Executive agrees that he
will not, directly or indirectly, individually or on behalf of any other person,
firm, corporation or other entity, solicit, induce, hire or retain any employee
of the Company to leave the employ of the Company or to accept employment or
retention as an independent contractor with, or render services to or with any
other person, firm, corporation or other entity unaffiliated with the Company or
take any action to assist or aid any other person, firm, corporation or other
entity in identifying, soliciting, hiring or retaining any such employee
(provided the Executive may serve as a reference after he is no longer employed
by the Company but not with regard to any entity
<PAGE>
with which he is affiliated or from which he is receiving compensation).
Furthermore, during the Executive's employment with the Company and for the one
(1) year period thereafter, the Executive will not solicit or induce any
customer of the Company to purchase goods or services offered by the Company
from another person, firm, corporation or other entity or assist or aid any
other persons or entity in identifying or soliciting any such customer.
(c) Agreement to Not Disparage. The Executive agrees that while
employed by the Company and thereafter, he will not make any statements that
disparage the Company or its employees, officers, directors, products or
services. Notwithstanding the foregoing, truthful statements made in the course
of sworn testimony in administrative, judicial or arbitral proceedings
(including, without limitation, depositions in connection with such proceedings)
by the Executive shall not be subject to this Section 6(c). Traditional
competitive statements made by the Executive but not based on his employment
with the Company, also shall not be deemed a violation of the foregoing if the
Executive is in a competitive position.
(d) Equitable Relief and Other Remedies. Because the Company's
remedies at law for a breach or threatened breach of any of the provisions of
this Section would be inadequate, the Executive acknowledges and agrees that, in
the event of such a breach or threatened breach, in addition to any remedies at
law, the Company shall be entitled to obtain equitable relief in the form of
specific performance, a temporary restraining order, a temporary or permanent
injunction or any other equitable remedy which may then be available.
(e) Reformation. If it is determined by a court of competent
jurisdiction that any restriction in this Section 6 is excessive in duration or
scope or is unreasonable or unenforceable, it is the intention of the parties
that such restriction may be modified or amended by the court to render it
enforceable to the maximum extent permitted.
<PAGE>
(f) Survival of Provisions. The obligations contained in this
Section 6 shall survive the termination, separation, or expiration of the
Executive's employment with the Company and shall be fully enforceable
thereafter.
7. Employee Benefit Plans. The amounts and benefits specified in Section 3
hereof shall not be paid to the Executive as an employee and the Executive shall
not be eligible to participate in employee benefit plans maintained by the
Company during such period except as specifically provided herein. Amounts paid
pursuant to Section 3 shall not be taken into account for purposes of
determining contributions to or calculating accrued benefits under the employee
benefit plans maintained by the Company.
8. Non-Resignation. In consideration of this Agreement, the Executive
agrees that he shall not resign from the Company without Good Reason for at
least one hundred eighty (180) days from the date of this Agreement.
9. Successors; Binding Agreement. In addition to any obligations imposed
by law upon any successor to the Company, the Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to
expressly assume and agree in writing to perform this Agreement in the same
manner and to the same extent that the Company would have been required to
perform the Agreement if no such succession had taken place. This Agreement
shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive shall die while any amount
would still be payable to the Executive, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate, as if the Executive
<PAGE>
had continued to live. This Agreement is personal to the Executive and neither
this Agreement nor any rights or obligations hereunder may be assigned by the
Executive.
10. Miscellaneous. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and the CEO or other such officer as may be
specifically designated by the Board. No waiver of a breach under this Agreement
shall be deemed a waiver of similar or dissimilar provisions or conditions at
any time. This Agreement constitutes the entire Agreement between the Executive
and the Company with respect to the severance protection offered by the Company
to the Executive, except as may be provided in any other written agreement. This
Agreement is being executed for a limited purpose and for a specified Protection
Period (as set forth in Section 1 hereof). This Agreement does not confer or
impose any severance protection for the Executive following the termination of
the Protection Period. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either the Executive or the Company which are not expressly set forth in this
Agreement. All references to any law shall be deemed also to refer to any
successor provisions to such laws.
11. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
12. Notices. Any notice or other communication required or permitted under
this Agreement shall be in writing and shall be delivered personally, or sent by
registered mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, or, if
<PAGE>
mailed, five (5) days after the date of deposit in the United States mails.
Notices and communications shall be delivered or sent to the following
addresses:
(i) If to the Company, to:
Overseas Shipholding Group, Inc.
511 Fifth Avenue
New York, New York 10017
Attention: Chairman or CEO
(ii) If to the Executive, to his or her last shown
address on the books of the Company.
Any party may designate another address or person for receipt of notices
hereunder by providing notice as specified in this Section 12.
13. Service with Any Subsidiary. For purposes of this Agreement,
employment with any subsidiary shall be deemed to be employment by the Company
and references to the Company shall include all such entities, except that the
payment obligation hereunder shall be solely that of the Company.
14. Separability. If any provisions of this Agreement (including Exhibit
A) shall be declared to be invalid or unenforceable, in whole or in part, by a
court of competent jurisdiction, such invalidity or unenforceability shall not
affect the validity of the remaining provisions of this Agreement, including
Exhibit A.
15. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive, equity or other plan or program provided by the Company for which the
Executive may qualify, nor shall anything herein (except Section 6) limit or
otherwise prejudice such rights as the Executive may have under any other
currently existing plan, agreement as to employment or termination from
<PAGE>
employment with the Company or statutory entitlements. Amounts that are vested
benefits or those which the Executive is otherwise entitled to receive under any
plan or program of the Company, at or subsequent to the Termination Date, shall
be payable in accordance with such plan or program, except as otherwise
specifically provided herein. Notwithstanding the foregoing, the Executive shall
not be entitled to received duplicative severance payments and benefits and, to
the extent that the Executive is entitled to severance payments and benefits
under any other plan or agreement (for example, the Change of Control Agreement,
dated March 24, 1999, as amended on February 14, 2001 and June 21, 2002 between
the Company and the Executive), the Executive shall be entitled to the greater
of the payments and benefits thereunder or hereunder but not under both plans or
agreements.
16. At Will Employment. This Agreement does not constitute a contract of
employment and, subject to any other agreement between the Executive and the
Company, the Company reserves the right to terminate the Executive's employment
at any time with or without reason or notice (unless otherwise prohibited by
law), subject to the payment provisions hereof.
17. Governing Law. This Agreement shall be construed, interpreted, and
governed in accordance with the laws of the State of Delaware without reference
to rules relating to conflicts of law.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand as of the date first set
forth above.
OVERSEAS SHIPHOLDING GROUP, INC.
By: /s/ Morton P. Hyman
-----------------------------------
Name: Morton P. Hyman
Title: Chairman, President and Chief
Executive Officer
PETER J. SWIFT
/s/ Peter J. Swift
---------------------------------------
<PAGE>
EXHIBIT A
ACCEPTANCE FORM AND RELEASE
Release
1. I agree and acknowledge that the payments and other benefits provided
pursuant to the Severance Protection Agreement ("Agreement"), dated _________:
(i) are in full discharge of any and all liabilities and obligations of the
Company to me, monetarily or with respect to employee benefits or otherwise,
including but not limited to any and all obligations arising under any alleged
written or oral employment agreement, policy, plan or procedure of the Company
and/or any alleged understanding or arrangement between me and the Company; and
(ii) exceed any payment, benefit, or other thing of value to which I might
otherwise be entitled under any policy, plan or procedure of the Company and/or
any agreement between me and the Company.
2. (a) In consideration for the payments and benefits to be provided to me
pursuant to the Agreement, I forever release and discharge the Company from any
and all claims. This includes claims that are not specified in this Agreement,
claims of which I am not currently aware, claims under: (i) the Age
Discrimination in Employment Act, as amended; (ii) Title VII of the Civil Rights
Act of 1964, as amended; (iii) the Americans with Disabilities Act, as amended;
(iv) the Employee Retirement Income Security Act of 1974, as amended (excluding
claims for accrued, vested benefits under any employee benefit pension plan of
the Company in accordance with the terms and conditions of such plan and
applicable law); (v) the Workers' Adjustment and Retraining Notification Act;
(vi) the Family and Medical Leave Act; (vii) any claim under the New York State
Human Rights Law and the New York City Administrative Code; (viii) any other
claim (whether based on federal, state, or local law, statutory or decisional)
<PAGE>
relating to or arising out of my employment, the terms and conditions of such
employment, the separation of such employment, and/or any of the events relating
directly or indirectly to or surrounding the separation of that employment,
including, but not limited to, breach of contract (express or implied), wrongful
discharge, detrimental reliance, defamation, emotional distress or compensatory
or punitive damages; and (ix) any claim for attorneys' fees, costs,
disbursements and/or the like. Notwithstanding anything herein to the contrary,
the sole matters to which this Release does not apply are (i) the rights of
indemnification and directors and officers liability insurance coverage to which
I was entitled immediately prior to my termination; and (ii) my rights under any
tax-qualified pension plan or claims for accrued vested benefits under any other
employee benefit plan, policy or arrangement maintained by the Company or under
COBRA.
(b) This release applies to me and to anyone who succeeds to my
rights, such as my heirs, executors, administrators of my estate, trustees, and
assigns. This release is for the benefit of (i) the Company, (ii) any related
corporation or entity, (iii) any director, officer, employee, or agent of the
Company or of any such related corporation or entity, or (iv) any person,
corporation or entity who or that succeeds to the rights of the Company or of
any such person, corporation or entity.
3. I acknowledge that I: (a) have carefully read in their entirety the
Agreement, the Acceptance Form and Release [and the information attached as
Appendix I provided pursuant to the Older Workers Benefit Protection Act]; (b)
have had an opportunity to consider fully for at least twenty-one (21) days the
terms of the Agreement, the Acceptance Form and Release [and information
attached as Appendix I]; (c) have been advised by the Company in writing to
consult with an attorney of my choosing in connection with the Agreement,
Acceptance Form and
<PAGE>
Release [and the information attached as Appendix I]; (d) fully understand the
significance of all of the terms and conditions of the Agreement, Acceptance
Form and Release [and the information attached as Appendix I], and have
discussed them with my independent legal counsel, or have had a reasonable
opportunity to do so; (e) have had answered to my satisfaction any questions I
have asked with regard to the meaning and significance of any of the provisions
of the Agreement, the Acceptance Form and Release [and the information attached
as Appendix I]; and (f) am signing this Acceptance Form and Release voluntarily
and of my own free will and assent to all the terms and conditions contained
herein and contained in the Agreement, Acceptance Form and Release.
4. I understand that I will have twenty-one (21) days from the date of
receipt of the Agreement, Acceptance Form and Release [and information attached
as Appendix I] to consider the terms and conditions of those documents. I may
accept the Agreement by signing the Acceptance Form and Release and returning
them to ___________________. After executing the Acceptance Form and Release and
returning them to ___________________, I shall have seven (7) days (the"
Revocation Period") to revoke this Agreement by indicating my desire to do so in
writing delivered by no later than 5:00 p.m. on the seventh (7th) day following
the date I sign and return the Acceptance Form and Release. The effective date
of the Agreement shall be the eighth (8th) day following my signing and return
of the Acceptance Form and Release. If the last day of the Revocation Period
falls on a Saturday, Sunday or holiday, the last day of the Revocation Period
will be deemed to be the next business day. In the event I do not accept the
Agreement, or in the event I revoke the Acceptance Form and Release during the
Revocation Period, the Agreement, including but not limited to the obligation of
the Company to provide the payments and other benefits, shall be deemed
automatically null and void.
<PAGE>
Print Name:___________________________ Date: ________________
Employee
Signature:____________________________
Employee
STATE OF NEW YORK )
) ss:
COUNTY OF ___________ )
On this __ day of ________ _____, before me personally came
_______________ to be known and known to me to be the person described and who
executed the foregoing Release, and (s)he duly acknowledged to me that (s)he
executed the same.
______________________________
Notary Public
<PAGE>
ACCEPTANCE FORM AND RELEASE
Acceptance Form:
I have read the Severance Protection Agreement, dated ______ ("Agreement") and
the accompanying Release [and the information attached as Appendix I] and hereby
accept the benefits provided under the Agreement, subject to the terms and
conditions set forth in the Agreement and Release.
Print Name:___________________________ Date: _____________________
Employee
Signature:____________________________
Employee
STATE OF NEW YORK )
) ss:
COUNTY OF ___________ )
On this __ day of ________ _____, before me personally came
_______________ to be known and known to me to be the person described and who
executed the foregoing Acceptance Form, and (s)he duly acknowledged to me that
(s)he executed the same.
___________________________
Notary Public
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(III)(V)
<SEQUENCE>7
<FILENAME>d58534_ex10iii-v.txt
<DESCRIPTION>TERMS OF EMPLOYMENT
<TEXT>
EXHIBIT 10 (iii)(v)
January 19, 2004
Mr. Morten Arntzen
1018 Weed Street
New Canaan, Connecticut 06840
Re: Terms of Employment
Dear Mr. Arntzen:
This letter, when countersigned by you, will confirm our agreement as to
your becoming President and Chief Executive Officer ("CEO") of Overseas
Shipholding Group, Inc. (together with its Successors and Assigns as defined in
Section 7(d) hereof, the "Company") on January 19, 2004 (the "Effective Date")
in accordance with the terms and conditions of this letter (the "Letter
Agreement" or "Agreement"). This Letter Agreement shall be effective upon it
being executed by the parties.
1. Title and Position. You will serve as President and CEO of the Company
and, as such, have the duties and responsibilities commensurate with the
position at public companies of similar size and ownership. In addition,
you will be appointed to the Company's Board of Directors (the "Board")
at, or prior to, the next meeting of the Board. You will report to the
Board. While you are employed by the Company, you will (a) devote
substantially all of your business time and reasonable best efforts to the
performance of your duties and (b) discharge your duties diligently,
faithfully and in what you believe in your good faith judgment is the best
interests of the Company. Notwithstanding the obligation to devote
substantially all of your business time to the performance of our duties,
you may manage your personal and family passive investments, be involved
in charitable activities (including serving on their boards) and, with the
prior consent of the Board, serve on other for profit boards, provided
that such activities in the aggregate do not materially interfere with the
performance of your duties or breach your fiduciary duty to the Company.
The Board has agreed that you may continue to serve on the board of
directors of Chiquita Brands International, Inc., subject to the
limitations set forth in the prior sentence.
<PAGE>
2. Employment. Your employment is at will employment and as such may be
terminated by you or the Company at any time for any reason or no reason,
provided that, in the event of your voluntary termination of employment
without Good Reason (as defined in Exhibit A) prior to January 19, 2007,
you shall give the Company thirty (30) days' prior written notice.
3. Compensation.
(a) Base Salary. As compensation for your services, the Company
will pay you a base salary at the rate of $750,000 per year,
in accordance with the usual payroll practices of the Company
(as increased from time to time, the "Base Salary"). Your Base
Salary will be subject to annual review for increase (but may
not be decreased) and is subject to merit increases as
determined by the Board.
(b) Bonus Payments. Bonuses will be paid to you in accordance with
the Company's applicable bonus plans, policies and procedures
as in effect from time to time. For fiscal year 2004, you will
receive a minimum guaranteed cash bonus of 50% of your Base
Salary (i.e. $375,000), to be paid in accordance with the
Company's usual practices, provided that you are employed by
the Company on December 31, 2004. Notwithstanding the
foregoing, in the event of your death or Disability
termination (as defined in Section 5(b) herein) prior to
December 31, 2004, you or your beneficiary will receive the
applicable pro rata portion of the minimum guaranteed bonus
described in the foregoing sentence, based on the product of
(x) a fraction the numerator of which is the number of days in
2004 you are employed by the Company prior to your death or
Disability termination and the denominator of which is 365 and
(y) the minimum guaranteed bonus (the "Pro Rata Guaranteed
Bonus").
4. Benefits and Business Expenses.
(a) Benefits. While you are employed by the Company, you will be
entitled to participate, to the extent eligible under the
standard eligibility provisions of such plans, in all benefit
plans and programs (including, without limitation, the
Company's vacation policy and the Basic Supplemental Executive
Retirement Plan (the "Basic SERP")), in accordance with the
terms thereof in effect from time to time as generally
applicable to senior executives. There is no guarantee that
any plan or program (including the Basic SERP) shall continue
indefinitely. For clarity, you recognize that you will not
necessarily be eligible to participate in the Supplemental
Executive Retirement Plan Plus or any other benefit plan
specifically designed for special situations or arrangements.
(b) Initial Stock Option Grant. On the Effective Date, you will be
granted options to acquire 100,000 shares of common stock of
the Company (the "Options"). The Options will be non-qualified
stock options
<PAGE>
granted under, and governed by, the Company's 1998 Stock
Option Plan (the "Option Plan") and the associated Option
Agreement (in the form attached hereto as Exhibit B). The
Options will have an exercise price equal to the Fair Market
Value (as defined in the Option Plan) of the Company's Stock
on the Effective Date. The Options will vest and become
exercisable in three (3) equal tranches on the day prior to
each of the first, second and third anniversaries of the
Effective Date provided that you are employed by the Company
on each such vesting date, subject to earlier vesting in
certain situations, as provided herein, in the Option
Agreement or in the Option Plan. The Options will have a ten
(10) year term, subject to earlier termination in accordance
with this Letter Agreement, the Option Plan and the Option
Agreement. The Options will vest upon a Change of Control (as
defined in the Change of Control Agreement attached hereto as
Exhibit D) unless Section 8.1(b) of the Option Plan as in
effect as of the Effective Date (utilizing the definition of
Change of Control set forth in the Change of Control
Agreement) applies. In the event Section 8.1(b) applies,
"Options" shall also include any "Alternative Option" as
defined in the Option Plan.
(c) Initial Restricted Stock Grant. As a material inducement to
you to agree to the terms of this Letter Agreement and become
the Company's CEO, you will be granted on the Effective Date
50,000 shares of restricted stock of the Company (the
"Restricted Stock"). The Restricted Stock will be governed by
the Restricted Stock Agreement (in the form attached hereto as
Exhibit C). Except as otherwise provided herein or in the
Restricted Stock Agreement, restrictions on the Restricted
Stock will lapse with respect to one fourth of the shares on
the day before each of the next four (4) anniversaries of the
Effective Date provided you are employed by the Company on
each such date. When Restricted Stock vests, the certification
for such vested stock will be delivered to you with only such
legends as may be required by law or in the Company's good
faith implementation of legal requirements. In the event you
vest in any Restricted Stock prior to January 18, 2005, the
Company shall use reasonable business efforts to register the
vested Restricted Stock for resale by you by promptly filing a
Form S-8 with a resale prospectus with regard to the vested
Restricted Stock, provided that (i) at any time after January
19, 2005 the Company shall have the right to amend such Form
S-8 to remove the resale prospectus, and (ii) that you shall
not sell any securities relying on such resale prospectus if
the Company has notified you in writing that because of
non-public developments such resale prospectus may not be
utilized (but the Company shall promptly notify you in writing
when such limitation no longer applies), and (iii) the
foregoing shall not relieve you of any obligations you may
have under the securities laws with regard to insider trading.
(d) Future Grants. You will be entitled to future equity grants as
determined by the Board, or the applicable Committee thereof,
and they shall be subject to such terms as provided in the
applicable grant.
<PAGE>
(e) Perquisites. You will be entitled to perquisites consistent
with Company practices as in effect from time to time.
(f) Business Expenses. Upon presentation of appropriate
documentation, you will be reimbursed by the Company for
reasonable business expenses, in accordance with Company
policies, in connection with the performance of your duties
hereunder.
(g) Disability Policy. Upon presentation of appropriate
documentation, the Company will pay the premiums for the Mass
Mutual disability insurance policy number 8370383 and the
Boston Mutual disability insurance policy number 5070-0012
maintained by you, in an amount up to $11,000 per annum. The
foregoing shall not limit your participation in the Company's
disability programs, except to the extent required by the
underwriters thereof.
(h) Legal Fees. Upon presentation of appropriate documentation
(including time sheets), the Company shall pay reasonable
legal fees (at your counsel's lowest standard rate for each
lawyer involved), and expenses incurred in connection with the
negotiation and execution of this Letter Agreement, but not in
excess of $25,000.
(i) Indemnification and Directors and Officers Liability
Insurance. You shall be indemnified and be covered by
officers' and directors' liability insurance to the same
extent that the Company covers the directors of the Company
(subject to any legal or indemnity limitations). Such
indemnification and coverage shall continue after the
Employment Term with regard to actions or inactions during the
Employment Term while liability exists to the same extent that
directors are covered.
5. Consequences of Termination.
(a) Death. If your employment with the Company terminates as a
result of your death, the Company will pay or provide to your
spouse or estate, as applicable, (i) any Base Salary earned
but not yet paid as of the date of termination, (ii) any
accrued vacation pay payable pursuant to the Company's
policies, (iii) any documented unreimbursed business expenses,
(iv) any earned bonus for any prior completed fiscal year
earned in accordance with, and to the extent provided under,
the terms of the applicable plan or program but not yet paid,
and (v) any amounts, benefits or rights you are due or
entitled to pursuant to the terms of any plan, policy, program
or arrangement of the Company applicable to you or any other
written agreement with the Company, including any equity grant
in accordance therewith (collectively the "Accrued Amounts").
You will also, if applicable, receive the Pro Rata Guaranteed
Bonus. You will not be entitled to any other amounts, except
rights with regard to indemnification and directors' and
officers' liability insurance.
<PAGE>
(b) Disability. If your employment with the Company terminates as
a result of your Disability, the Company will pay you the
Accrued Amounts and the Pro Rata Guaranteed Bonus, if
applicable. You will not be entitled to any other amounts,
except rights with regard to indemnification and directors'
and officers' liability insurance and as provided in the last
sentence hereof. For purposes of this Letter Agreement,
Disability means your failure (on an actual basis) or
inability (on a projected basis (including any prior actual
absence period) as determined by a physician selected by the
Board in good faith and reasonably acceptable to you) to
respectively, have performed or be able to perform your
material duties and responsibilities as a result of physical
or mental illness or injury for more than one hundred eighty
(180) days during a three hundred sixty-five (365) day period.
In the event such termination is on a projected basis, your
actual termination date shall be at the earliest of your
actually satisfying the above actual absence requirement, your
qualifying to commence receiving disability benefits under any
Company paid for or sponsored long-term disability program,
your death or six (6) months after such termination
determination, but in such interim you shall be entitled to
your compensation hereunder, but shall not have any offices,
any responsibilities, duties or authority or any right to
terminate for Good Reason.
(c) Without Cause or For Good Reason. If the Company terminates
your employment without Cause (as defined in Exhibit A) or you
terminate your employment for Good Reason, you will receive
your Accrued Amounts and, provided such termination is prior
to January 19, 2007, subject to your execution of a waiver and
general release in the form attached hereto as Exhibit E (with
such changes as may be required to make the waiver and release
voluntary and binding on you in accordance with applicable
law) within the later of ninety (90) days after such
termination or twenty-one (21) days after the waiver and
general release is provided to you, the Company agrees (i) to
pay you at the same time as such amounts would be paid to you
had you remained employed by the Company an amount equal to
your proper monthly Base Salary (as defined herein) in effect
on the date immediately prior to your termination for a period
of twenty-four (24) months, subject to Section 6(m) below,
(ii) to accelerate the vesting on the next vesting tranche of
the Options described in Section 4(b) above so that they
become immediately vested (with all other unvested Options
forfeited) and to permit your vested Options to remain
exercisable for a period of one (1) year (but not beyond the
original ten (10) year term) following your termination of
employment without Cause or for Good Reason, subject to
earlier termination in accordance with the terms of the Option
Plan unrelated to termination of employment, provided that no
portion of the Option that vests upon such termination may be
exercised by you prior to delivery of the aforesaid waiver and
general release and expiration of the revocation period with
regard thereto, (iii) to accelerate the lapse of restrictions
on the next vesting tranche of the Restricted Stock described
in Section
<PAGE>
4(c) above so that they immediately vest (with all other
unvested Restricted Stock forfeited), and (iv) to provide for
the benefit of you and your eligible dependents for a period
ending at the earliest of (A) you or your eligible dependents
(as applicable) ceasing to be eligible under the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA"), (B)
eighteen (18) months following your termination of employment
with the Company, and (C) the date of your permitted entry to
any future employer's health coverage plan upon or following
your commencement of other substantially full-time employment
or the equivalent (such period to be counted against the COBRA
continuation coverage period), at the Company's expense
(subject to you paying the same portion of premiums you paid
as an active employee), continued coverage under the Company
health plans in which you and your eligible dependents
participate immediately prior to the date your employment
terminates. Notwithstanding the foregoing, if the Company
terminates your employment without Cause or you terminate your
employment for Good Reason at any time during the two (2) year
period following a Change of Control (as defined in the Change
of Control Agreement attached hereto as Exhibit D) or in the
event of your Anticipatory Termination (as defined in the
Change of Control Agreement) within one hundred and twenty
(120) days prior to a Change of Control, (i) the Company shall
pay you such amounts and provide you with such benefits as
provided in the Change of Control Agreement attached hereto as
Exhibit D if it is then in effect (or, if not, any replacement
change of control agreement then in effect) in lieu of
Sections 5(c)(i) and 5(c)(iv), (ii) in lieu of Section
5(c)(ii), to the extent not vested upon a Change of Control,
the vesting of all of the Options described in Section 4(b)
above will accelerate and your vested Options will remain
exercisable for a period ending on the later of ninety (90)
days following your termination of employment or the Change of
Control (but not beyond the original ten (10) year term),
subject to earlier termination in accordance with the terms of
the Option Plan unrelated to termination of employment, (iii)
in lieu of Section 5(c)(iii), the lapsing of restrictions on
all of the Restricted Stock described in Section 4(c) above
will accelerate to the date of such termination, and (iv) any
release requirement shall only be as required pursuant to the
change of control agreement then in effect and shall not apply
to the treatment of the Options and Restricted Stock. You
will not be entitled to any other amounts, except with regard
to indemnification and directors' and officers' liability
insurance.
(d) For Cause. If the Company terminates your employment for
Cause, the Company will pay you the Accrued Amounts other than
any unpaid bonus and you shall not be entitled to any other
amount, except with regard to indemnification and directors'
and officers' liability insurance.
(e) Voluntary Resignation Without Good Reason. If your employment
terminates as a result of your voluntary resignation without
Good
<PAGE>
Reason, the Company will pay you the Accrued Amounts
(including the minimum guaranteed bonus under Section 3(b), to
the extent unpaid, if your termination of employment is on or
after January 1, 2005). You shall not be entitled to any other
amounts, except with regard to indemnification and directors'
and officers' liability insurance.
(f) No Mitigation. Following your termination of employment, you
shall be under no obligation to seek other employment and,
except as provided under Section 6(m), there shall be no
setoff against any amounts due you hereunder on account of
remuneration attributable to any subsequent employment that
you may obtain or, on other than a Cause termination, on
account of any claim the Company or any affiliate may have
against you.
(g) Resignation as a Director. Upon any termination of your
employment, you agree to promptly resign in a writing
delivered to the Company as an officer and director of the
Company and any affiliate and from any other fiduciary
position with the foregoing.
6. Confidential Information, Non-Competition and Non-Solicitation.
(a) You acknowledge that as a result of your employment by the
Company, you will obtain confidential information as to the
Company and its affiliates and create relationships with
customers, suppliers and other persons dealing with the
Company and its affiliates and the Company and its affiliates
will suffer substantial damage, which would be difficult to
ascertain, if you should use such confidential information or
take advantage of such relationship (other than in the good
faith performance of your duties during the Employment Term)
and that because of the nature of the information that will be
known to you and the relationships created it is necessary for
the Company and its affiliates to be protected by the
prohibition against Competition as set forth herein, as well
as the Confidentiality restrictions set forth herein. For
purposes of this Letter Agreement, an affiliate of any entity
means an entity that directly or indirectly controls, is
controlled by, or is under common control with, such other
entity.
(b) You acknowledge that the retention of the customers of the
Company and its affiliates is important to the businesses of
the Company and its affiliates and that you will create
relationships with such customers as a result of being an
executive of the Company, and, therefore, it is necessary for
the Company and its affiliates to be protected from your
Solicitation of such customers as set forth below.
(c) You acknowledge that the retention of nonclerical employees
employed by the Company and its affiliates in which the
Company and its affiliates have invested training and depends
on for the operation of their businesses is important to the
businesses of the Company and its affiliates, that you will
obtain unique information as to such employees
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as an executive of the Company and will develop a unique
relationship with such persons as a result of being an
executive of the Company and, therefore, it is necessary for
the Company and its affiliates to be protected from your
Solicitation of such employees as set forth below.
(d) You acknowledge that the provisions of this Agreement are
reasonable and necessary for the protection of the businesses
of the Company and its affiliates and that part of the
compensation paid under this Agreement and the agreement to
pay severance in certain instances is in consideration for the
agreements in this Section.
(e) While you are employed by the Company and for one (1) year
after your termination of employment, you will not engage in
Solicitation (other than in the good faith performance of your
duties during the Employment Ter