BEING FILED PURSUANT TO RULE 901(d) OF REGULATION S-T
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934.
For the period from __________ to __________
COMMISSION FILE NUMBER
001-14135
---------
OMI CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARSHALL ISLANDS 52-2098714
- ------------------------------ -------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
ONE STATION PLACE
STAMFORD, CT 06902
--------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code 203-602-6700
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 and 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 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF May 14, 1999:
Common Stock, par value .50 per share 41,647,387 shares
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<PAGE>
OMI CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
PART I: FINANCIAL INFORMATION PAGE
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of
Operations for the three months
ended March 31, 1999 and 1998 3
Condensed Consolidated Balance Sheets-
March 31, 1999 and December 31, 1998 4
Condensed Statements of Changes in Stockholders' Equity for the year
ended December 31, 1998 and the (unaudited) three months
ended March 31, 1999 5
Condensed Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial
Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 12
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 22
MARKET RISK
PART II: OTHER INFORMATION 24
SIGNATURES 25
</TABLE>
2
<PAGE>
OMI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE
MONTHS ENDED MARCH 31,
----------------------
1999 1998
-------- --------
Revenues $ 35,037 $ 40,032
-------- --------
Operating Expenses:
Vessel and voyage 18,642 19,768
Charter hire expense 3,226 7,155
Depreciation and amortization 6,187 5,749
General and administrative 2,686 2,071
-------- --------
Total operating expenses 30,741 34,743
-------- --------
Operating income 4,296 5,289
-------- --------
Other Income (Expense):
Interest expense-net (3,737) (1,623)
-------- --------
Net other expense (3,737) (1,623)
-------- --------
Income before income taxes and
equity in operations of joint
ventures 559 3,666
Provision for income taxes -- 1,619
-------- --------
Income before equity in
operations of joint ventures 559 2,047
(Loss) equity in operations of joint
ventures (319) 1,042
-------- --------
Net income 240 3,089
Other comprehensive income:
Net change in valuation account -- --
-------- --------
Comprehensive income $ 240 $ 3,089
======== ========
Basic earnings per common share $ 0.01 $ 0.07
Diluted earnings per common share $ 0.01 $ 0.07
See notes to condensed consolidated financial statements
3
<PAGE>
OMI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash, including cash equivalents:
1999-$20,229 1998-$10,166 $ 23,443 $ 22,698
Receivables:
Traffic 12,590 12,842
Other 3,699 2,733
Prepaid expenses and current assets 8,797 8,822
Vessel held for sale 55,674 --
-------- --------
Total current assets 104,203 47,095
-------- --------
Vessels, construction in progress
and other property:
Vessels and other property 545,251 544,447
Construction in progress 19,964 34,733
Less accumulated depreciation 156,602 150,585
-------- --------
Vessels, construction in progress
and other property-net 408,613 428,595
-------- --------
Investments in, and advances to joint ventures 22,674 25,507
Other assets and deferred charges 30,067 28,930
-------- --------
Total $565,557 $530,127
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,461 $ 2,520
Accrued liabilities:
Voyage and vessel 12,720 11,438
Interest 2,632 4,007
Other 1,404 2,571
Deferred gain on sale of vessels 3,151 3,151
Current portion of long-term debt 61,761 21,494
-------- --------
Total current liabilities 84,129 45,181
-------- --------
Advance time charter revenues and other
liabilities 4,014 3,496
Deferred gain on sale of vessels 6,726 7,514
Deferred income taxes payable 3,100 3,100
Long-term debt 222,085 225,653
Stockholders' equity 245,503 245,183
-------- --------
Total $565,557 $530,127
======== ========
See notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
OMI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
Accumulated
Net Retained Other Total
Common Stock Capital Intercompany Treasury (Deficit) Comprehensive Comprehensive Stockholders'
Shares Amount Surplus Transaction Stock Earnings Income Income Equity
------ ------ ------- ----------- ----- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1998 43,066 $ 21,533 $ 243,062 $ 39,503 $ (25,452) $ 4,912 $ 283,558
Comprehensive income:
Net income 42,917 $ 42,917 42,917
Reversal of deferred
income taxes on
cumulative transaction
adjustment 2,530 2,530 2,530
----------
Comprehensive income $ 45,447
==========
Capital distribution of
net intercompany account
balance with parent (76,119) (76,119)
Net intercompany transactions 1,337 1,337
Capital distribution of
net intercompany
transactions with parent 40,840 (40,840) --
Exercise of stock options 50 25 (25) --
Issuance of common stock 560 280 (280) --
Purchase of treasury stock $ (9,040) (9,040)
------ -------- --------- ------- -------- --------- ----------- ----------
Balance at December 31, 1998 43,676 21,838 207,478 -- (9,040) 17,465 7,442 245,183
Comprehensive income:
Net income 240 $ 240 240
Net change in valuation --
account ----------
Comprehensive income $ 240
==========
Issuance of common stock 48 24 56 80
------ -------- --------- ------- -------- --------- ----------- ----------
Balance at March 31, 1999 43,724 $ 21,862 $ 207,534 -- $ (9,040) $ 17,705 $ 7,442 $ 245,503
====== ========= ========= ======= ======== ========= =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
OMI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
-------- --------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income $ 240 $ 3,089
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Net intercompany transactions -- 2,347
Depreciation and amortization 6,187 5,749
Amortization of deferred gain on sale of vessel (788) (788)
Equity (loss) in operations of joint ventures
over dividends received 2,769 (1,042)
Changes in assets and liabilities:
Increase in receivables and other current assets (2,552) (52)
Advances to (from) joint ventures - net 64 (170)
(Increase) decrease in other assets and
deferred charges (1,117) 1,783
Increase (decrease) in accounts payable and
accrued liabilities 424 (2,907)
Payable to Parent-net -- (13,382)
Increase (decrease) in advance time charter
revenues and other liabilities 518 (1,413)
-------- --------
Net cash provided (used) by operating activities 5,745 (6,786)
-------- --------
CASH FLOWS USED BY INVESTING ACTIVITIES:
Additions to vessels and other property (41,588) (12,249)
-------- --------
Net cash used by investing activity (41,588) (12,249)
-------- --------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from issuance of debt 49,499 --
Payments on debt (12,800) (772)
Payments for debt issue costs (191) (175)
Net proceeds from issuance of common stock 80 --
-------- --------
Net cash provided (used) by financing activities 36,588 (947)
-------- --------
Net increase (decrease) in cash and cash equivalents 745 (19,982)
Cash and cash equivalents at beginning of year 22,698 30,608
-------- --------
Cash and cash equivalents at end of period $ 23,443 $ 10,626
======== ========
See notes to condensed consolidated financial statements
6
<PAGE>
OMI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. However, in the opinion of the
management of OMI Corporation and subsidiaries ("OMI" or the "Company"), all
adjustments (comprising only normal recurring accruals) necessary for a fair
presentation of operating results have been included in the statements.
Reference is made to the OMI Corporation's Form 10-K for additional information.
The Company is the successor to Universal Bulk Carriers, Inc. ("UBC"), a
Liberian corporation, which was a wholly-owned subsidiary of OMI Corp. ("Old
OMI") until June 17, 1998 at which date the Company was separated from Old OMI
(renamed Marine Transport Corporation, "MTC") through a tax-free distribution
("Distribution") of one share of the Company's common stock for each share of
Old OMI common stock. The distribution separated Old OMI into two publicly-owned
companies. OMI Corporation operates what was Old OMI's foreign shipping
businesses under the management of certain of the officers formerly of Old OMI
who moved to the new company and certain former directors of Old OMI and
additional new directors. The Company continues to trade under the symbol OMM on
the New York Stock Exchange.
The financial statements and computations of basic and diluted earnings per
share (see Note 3) have been presented giving effect to the Distribution as
though it occurred at the beginning of the earliest period presented. Except as
indicated, amounts reflected in the financial statements or disclosed in the
notes to financial statements relate to the Company's continuing operations and
prior year amounts have been reclassified to conform with the current
presentation.
NOTE 2 - CREDIT FACILITIES AND LOAN AGREEMENTS
As of March 31, 1999, the Company's debt and credit arrangements consisted of
the following:
<TABLE>
<CAPTION>
Outstanding Available
(in thousands) Commitment Balance Balance
---------------------------------
Fixed rate unsecured notes:
<S> <C> <C> <C> <C>
7% Convertible Note due February 2004 (A) $ 3,000 $ 3,000 --
10.25% Senior Notes due November 2003 4,357 4,357 --
Floating rate credit facilities:
Due April 2002 (B) 116,500 116,090 $ 410
Due June 2003 50,600 13,600 37,000
Due August 2008 71,500 71,500 --
Due July 2006 (C) 37,800 37,800 --
Floating rate revolving lines of credit:
Due December 1999 (D) 60,000 37,499 22,501
Due February 2000 (E) 25,000 -- 25,000
-------- -------- --------
Total $368,757 283,846 $ 84,911
======== ========
Less current portion of long-term debt 61,761
--------
Long-term debt $222,085
========
</TABLE>
(A) The 7% Convertible Note is convertible into 411,800 shares at $7.285 per
share.
(B) As of March 31, 1999, there were six semi-annual reductions in the
available commitment remaining (two at $5,500,000 and four at $8,875,000).
As long as the available balance exceeds the outstanding balance and the
collateral tests are met, current amortization is not required. In April
1999, $12,000,000 of the outstanding balance was repaid, and in addition,
the available line was reduced by $11,000,000.
7
<PAGE>
(C) In April 1999, this facility was increased by $33,500,000 for the financing
of a Suezmax under construction (see Note 9).
(D) The $60,000,000 revolving Line of Credit was drawndown to finance the
COLUMBIA, which was delivered in January 1999 and is being held for sale
(see Note 9). The outstanding balance will be repaid when the sale is
completed. The line of credit may be renewed annually subject to bank
approval.
(E) The $25,000,000 revolving Line of Credit was obtained in February 1999. It
will be used for working capital and other general corporate purposes. The
line of credit may be renewed annually subject to bank approval. On May 3,
1999, $20,000,000 was drawndown.
Restrictive Covenants
Certain of the loan agreements contain restrictive covenants requiring minimum
levels of cash or cash equivalents, working capital and net worth, maintenance
of specified financial ratios and collateral values, and restricting the
Company's ability to pay dividends. These loan agreements also contain various
provisions restricting the right of OMI and/or its subsidiaries to make certain
investments, to place additional liens on the property of certain of OMI's
subsidiaries to make certain investments, to place additional liens on the
property of certain of OMI's subsidiaries, to incur additional long-term debt,
to make certain payments, to merger or to undergo a similar corporate
reorganization, and to enter into transactions with affiliated companies. In the
event of a sale of a secured asset, each of the loan agreements requires the
Company to reduce the applicable loan by net proceeds of the sale up to the
outstanding loan balance, except for the Credit Facility maturing April 2002
which permits the Company to substitute another vessel. As of March 31, 1999,
the Company was in compliance with all of its financial covenants.
Interest Rates
The interest rates on the 10.25% unsecured Senior Notes and 7.00% Convertible
Note are fixed. The interest rates range from 0.60% to 1.00% above London
Interbank Offering Rate ("LIBOR") on the credit facilities and from 0.55% to
1.75% above LIBOR for the lines of credit.
Security
At March 31, 1999, vessels with an aggregate net book value of $450,224,000 and
shares in a joint venture have been pledged as collateral for debt agreements.
NOTE 3 - EARNINGS PER COMMON SHARE
The computation of basic earnings per share is based on the weighted average
number of common shares outstanding during the period. The computation of
diluted earnings per share assumes the foregoing and the exercise of all
dilutive stock options using the treasury stock method and the conversion of the
7% convertible note due 2004.
The components of the denominator for the calculation of basic earnings per
share and diluted earnings per share are as follows:
8
<PAGE>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
------ ------
(in thousands, except per share
amounts)
BASIC EARNINGS PER SHARE:
Weighted average common shares
outstanding ................... 41,611 43,072
====== ======
DILUTED EARNINGS PER SHARE:
Weighted average common shares
outstanding .................... 41,611 43,072
Options ......................... -- 361
------ ------
Weighted average common shares
Outstanding .................... 41,611 43,433
====== ======
BASIC EARNINGS PER COMMON SHARE:
Net income ...................... $ 0.01 $ 0.07
====== ======
DILUTED EARNINGS PER COMMON SHARE:
Net income ...................... $ 0.01 $ 0.07
====== ======
The effect of the assumed conversion of the 7% convertible note due 2004 was not
included in the the computation of diluted earnings per share for the three
months ended March 31, 1999 and 1998 because the effect was antidilutive.
NOTE 4 - INCOME TAXES
As of the Distribution date of June 17, 1998, OMI Corporation is no longer
subject to U.S. taxes.
The provision for income taxes on income varies from the statutory rates as
follows:
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
------ ------
(in thousands)
Provision calculated at
statutory rates $ -- $ 1,648
Adjustment for equity in operations
of certain joint ventures -- (29)
------- -------
Provision for income taxes $ -- $ 1,619
======= =======
For the quarter ended March 31, 1998, the Company did not provide deferred
income taxes on its equity in the undistributed earnings of foreign corporate
joint ventures accounted for under the equity method other than Amazon
Transport, Inc. ("Amazon") and White Sea Holdings Ltd. ("White Sea"). These
earnings are considered by management to be invested in the business for an
indefinite period.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments include interest of approximately $5,640,000 and $1,198,000 for
the three months ended March 31, 1999 and 1998, respectively.
9
<PAGE>
NOTE 6 - JOINT VENTURE INFORMATION
Amazon and White Sea are both 49.0 percent owned by the Company and are
accounted for using the equity method. Summarized income statement information
for the three months ended March 31, 1999 and 1998 is as follows:
FOR THE THREE
MONTHS ENDED MARCH 31,
--------------------------------------
AMAZON WHITE SEA
--------------------------------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands)
Revenues $ 1,873 $ 3,574 $ 1,611 $ 2,532
Expenses 2,000 2,369 1,254 1,863
------- ------- ------- -------
Operating (loss) income $ (127) $ 1,205 $ 357 $ 669
======= ======= ======= =======
Net (loss) income $ (26) $ 1,244 $ 375 $ 682
======= ======= ======= =======
NOTE 7 - FINANCIAL INFORMATION RELATING TO SEGMENTS
The Company organizes its business principally into two operating segments.
These segments and their respective operations are as follows:
Crude Oil Tanker Fleet - Includes vessels that normally carry crude oil and
"dirty" products. This fleet includes three sizes of vessels, Suezmax, aframax
and Panamax vessels.
Product Carrier Fleet - Includes vessels that normally carry refined petroleum
products such as gasoline, naphtha and kerosene. This fleet includes two sizes
of vessels, Panamax and handysize vessels.
The following is a summary of the operations by major operating
segments:
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
(in thousands) 1999 1998
-------- --------
TOTAL REVENUES:
Crude Oil Tanker Fleet ............ $ 24,078 $ 26,759
Product Carrier Fleet ............. 10,908 13,259
Other ............................. 51 14
-------- --------
Total ............................ $ 35,037 $ 40,032
======== ========
INCOME BEFORE INCOME TAXES AND EQUITY
IN OPERATIONS OF JOINT VENTURES:
Crude Oil Tanker Fleet ............ $ 2,331 $ 4,068
Product Carrier Fleet ............. 425 1,267
General and administrative expense
not allocated to vessels .......... (1,584) (877)
Other ............................. (613) (792)
-------- --------
Total ............................ $ 559 $ 3,666
======== ========
During the three months ended March 31, 1999 and 1998, mortgage debt of OMI
Corporation and its related interest expense have been allocated to the above
segments based upon the value of the vessel collateralizing the debt. For the
three months ended March 31, 1998, general and administrative expense included
in determining income before income tax and equity in
10
<PAGE>
operations of joint ventures includes an allocation of costs of corporate
administrative services provided by the Company's parent prior to the spin-off.
The foreign segments were charged a fixed amount per month per vessel for vessel
management and accounting activities and was charged 1.25 percent of revenues
earned by each vessel for commercial management. General corporate activities,
such as salaries (other than those included in the aforementioned fees), legal,
accounting, communications and other administrative expenses were allocated
based on the services provided to the segment. Rent expense was allocated based
on the number of employees included in the corporate allocation. Management
believes the methods for allocating were reasonable.
NOTE 8 - GUARANTEES AND OTHER COMMITMENTS
The Company has three remaining construction contracts with a shipyard for two
product carriers with expected capitalized costs at delivery in 1999 of
$30,000,000 each and one Suezmax carrier with an expected capitalized cost of
$51,000,000 scheduled to be delivered in 2000 (see Note 9). As of March 31,
1999, the total capitalized cost for the three vessels aggregated $20.0 million.
OMI acts as a guarantor for a portion of the debt incurred by a joint venture
with affiliates of its joint venture partner. Such debt was approximately
$14,252,000 at March 31, 1999 with OMI's guaranty of such debt being
approximately $7,126,000.
The Company and its joint venture partners have committed to fund any working
capital deficiencies which may be incurred by their joint venture investments.
As of March 31, 1999, OMI has advanced an aggregate of $0.8 million in the form
of non-interest bearing loans to cover operating expenses for a joint venture
formed in 1997. At March 31, 1999, no other such deficiencies have been funded.
NOTE 9 - ACQUISITION AND DISPOSAL OF VESSELS
On January 19, 1999, the COLUMBIA, a new double-hulled Suezmax tanker was
delivered. The vessel with a book value of $55,674,000 at March 31, 1999, is
classified as vessel held for sale on the balance sheet since the Company is in
the process of arranging a sale/ leaseback transaction. The transaction is
expected to be completed in the second quarter of 1999. OMI has contracted for
one additional 156,000 deadweight ton ("dwt") double-hulled Suezmax tanker to be
delivered in 2000 and two 35,000 dwt product carriers to be delivered in June
1999 and September 1999. The product carriers will be time chartered for two
years.
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The following presentation of management's discussion and analysis of
the OMI Corporation ("OMI" or the "Company") financial condition and results of
operations should be read in conjunction with the consolidated financial
statements, accompanying notes thereto and other financial information appearing
elsewhere in this Form 10-Q.
The information below and elsewhere in this document contains certain
forward-looking statements which reflect the current view of the Company with
respect to future events and financial performance. Wherever used, the words
"believes," "estimates," "expects," "plan" "anticipates" and similar expressions
identify forward-looking statements. Any such forward-looking statements are
subject to risks and uncertainties that could cause the actual results of the
Company's results of operations to differ materially from historical results or
current expectations. The Company does not publicly update its forward-looking
statements even if experience or future changes make it clear that any projected
results expressed or implied therein will not be realized. The information
contained in the discussion of the Year 2000 Issue ("Y2K") constitutes
forward-looking information. The identification and remediation of Y2K issues is
a technological effort that has never been undertaken before and estimates of
the outcome, time and expense of this project are, for that reason, particularly
hard to make with any certainty. Factors that may cause these differences
include, but are not limited to, those outlined in the Risk Assessment category
of the Year 2000 Issue.
GENERAL
Overview
OMI provides seaborne transportation services for crude oil, refined
petroleum products, and dry bulk cargoes (primarily iron ore, coal and grain).
The Company is the successor to Universal Bulk Carriers, Inc. ("UBC"), a
Liberian corporation, which was a wholly-owned subsidiary of OMI Corp. ("Old
OMI") until June 17, 1998 at which date the Company was separated from Old OMI
(renamed Marine Transport Corporation, "MTC") through a tax-free distribution
("Distribution") of one share of the Company's common stock for each share of
Old OMI common stock. The distribution separated Old OMI into two publicly-owned
companies. OMI Corporation operates what was Old OMI's foreign shipping
businesses under the management of certain of the officers formerly of Old OMI
who moved to the new company and certain former directors of Old OMI and
additional new directors. The Company continues to trade under the symbol "OMM"
on the New York Stock Exchange.
OMI is concentrating its fleet in two classes of vessels, Suezmax and
product tankers. Focusing on those two fleets, OMI has been renewing its Suezmax
fleet with new vessels and attempting to thereby, increase vessel utilization
and profitability by consolidations of fleets to increase market share in these
two markets.
Currently, OMI's fleet comprises 27 vessels (including two chartered-in
and three jointly owned vessels). In June, July and August of 1998 and January
1999, OMI took delivery of four Suezmax newbuildings and will take delivery of a
fifth Suezmax in May 2000. Its fleet comprises eight wholly-owned and one
jointly owned Suezmax tankers, two chartered-in Suezmaxes, one jointly owned
Ultra Large Crude Carrier ("ULCC"), one aframax, three Panamax product tankers
(currently carrying crude oil), ten handysize product carriers transporting
clean products and one jointly owned drybulk carrier. Two 35,000 deadweight ton
("dwt") product carrier newbuildings are scheduled to be delivered in July and
September of 1999.
12
<PAGE>
Net income for the three months ended March 31, 1999 was $0.2 million
compared to $3.1 million for the three months ended March 31, 1998. Included in
1998 net income of $3.1 million is a provision of $1.6 million for federal
income taxes. In connection with the Distribution described above, OMI became a
decontrolled corporation and its income is no longer subject to United States
federal income tax.
MARKET OVERVIEW
The charter rates that the Company is able to obtain for its vessels
are determined in a highly competitive market. The industry is cyclical,
experiencing significant swings in profitability and asset values resulting from
changes in the supply of and demand for vessels. The following is an overview
for the two market segments OMI primarily operates in.
Product Carriers
The product carrier market is the segment of the tanker market which
transports refined petroleum products such as gasoline, jet fuel, kerosene,
naphtha and gas oil. Historically, earnings in the product tanker market have
been less volatile than earnings in the other tanker sectors. This is the result
of stable long-term fleet growth that has matched steady tonne-mile demand gains
over the years.
Product tanker freight rates showed some seasonal improvement towards
the end of 1998, but weakened again early in 1999 as the product tanker fleet
expansion continues to surpass demand. This adverse freight rate environment in
the product tanker market is expected to persist in the short- term due to the
high newbuilding deliveries for the balance of 1999, notwithstanding the signs
of stability of economic activity in the Pacific region. However, the current
orderbook indicates that the product tanker newbuilding deliveries will return
to a moderate level next year. Furthermore, oil product import requirements are
expected to increase in the three major world oil consuming areas (North
America, Western Europe and the Pacific region) in the next few years as oil
product demand growth is projected to exceed refinery capacity in these areas.
After product tanker rates reached a very high level in early 1997 they
began receding gradually. Both supply and demand of product tankers has grown by
the annual compounded rate of about 4.8% in the 1990-1997 period. This was the
result of reduced oil product imports in the Pacific region due to refinery
capacity additions in the area and lower oil consumption because of the
financial crisis in Southeast Asia and Korea, higher throughput in
industrialized countries, at the same time that the supply of product tankers
grew substantially. Product tanker tonne-mile demand fell by about 4.0% in 1998
from the preceding year level though the fleet grew by about 4.5%. As a result,
average freight rates for product tankers in 1998 were substantially lower than
rates prevailing in the previous year, and the lowest since 1992.
The Company's handysize product tankers are currently employed in the
spot market. However, effective May 1, 1999, the majority have been time
chartered to a newly formed joint venture, International Product Carriers
Limited ("IPC") described below. Currently, three vessels are chartered to
another joint venture also described below. The two product carriers to be
delivered in 1999 have been time chartered to a major oil company for two years.
OMI's strategy for its handysize fleet is to increase market share by
consolidating commercial operations of vessels through marketing joint ventures
and through concentrating trading in selected areas.
13
<PAGE>
In March 1999, the Company agreed with Osprey Maritime Limited, a major
international shipping company based in Singapore, to consolidate their product
tanker operations, establishing IPC to commercially operate their vessels. The
combined operating product tanker fleet totals 26 vessels of about 0.9 million
dwt. IPC intends to expand the pool to other product carrier owners to enhance
its marketing.
OMI and Heidenreich Marine Inc. ("Heidmar"), an operator of a modern
fleet of 50,000 to 90,000 dwt. tankers, have formed a jointly owned company
named OMI-Heidmar Shipping LLC to market tankers in the Far East. Currently,
this company operates seven handysize and handymax product tankers, including
three OMI handysize vessels. In addition, OMI has put its three Panamax product
tankers into Star Tankers, Inc. a pool of Panamax and aframax crude/product
tankers operated by Heidmar which comprises 28 vessels and operates worldwide.
Suezmax Tankers
Freight rates in the Suezmax market recovered somewhat in the first
quarter in 1999 relative to the preceding quarter, but were substantially below
the rates prevailing a year ago. Rates for crude tankers, especially VLCCs, fell
to very low levels in April 1999. The crude tanker market is expected to remain
weak in the near term due to high newbuilding deliveries for the balance of
1999, high world oil inventories, low oil demand growth due to the economic
weakness in Southeast Asia and the Far East and the additional crude oil cuts,
agreed by OPEC and some non-OPEC crude oil producers last March, which would
reduce oil liftings.
The world tanker fleet totaled approximately 276.5 million dwt at the
end of the first quarter in 1999, up by 3.7 million dwt or 1.4% from the
year-end 1998 level. At the same time, the tanker orderbook stood at 41.8
million dwt, or 15.1% of the existing fleet, down by 4.9 million dwt in the
first three months of 1999. Approximately, 14.2 million dwt is scheduled for
delivery in the balance of 1999, 20.1 million dwt in the year 2000 and the
balance in the year 2001. The tanker orderbook includes 35 Suezmaxes of 5.3
million dwt or 15.7% of the existing Suezmax fleet, and 5.9 million dwt of
product tankers or about 12.8% of the existing product tanker fleet.
However, 93 Suezmax tankers of 12.8 million dwt or 37.7% of the
existing Suezmax fleet, and 9.3 million dwt or 20.0% of the total product tanker
fleet were 20 or more years old at the end of the first quarter in 1999. In
addition, 104.0 million dwt or 37.6% of the total tanker fleet was 20 or more
years old. The current tanker market weakness, the relatively high tanker
orderbook, an expensive fifth special survey and stricter environmental
regulations should accelerate deletions of old tanker tonnage. World oil demand
increased marginally in 1998 and is expected to increase by about 1.0 million
b/d in 1999. World oil inventories increased substantially in 1998, especially
in the first half of the year, but are expected to fall in 1999 to levels
prevailing in the mid-1990s due to increasing oil demand and the additional oil
production cuts by OPEC and non-OPEC oil producers.
The Company has identified the advantages of owning a large Suezmax
fleet and has been implementing strategies to maximize the advantages. First,
the fleet will be more attractive to large customers by providing better
scheduling opportunities. A large fleet also provides opportunities to obtain
contracts for large volume movements and creates the potential to increase
vessel utilization. Second, large and concentrated fleets create economies of
scale to spread efficiently the overhead costs associated with environmental
regulations and inspections. Third, operating expertise and efficiency are
enhanced by concentration in certain vessel classes. Fourth, OMI believes that
large customers will prefer to deal with a limited number of large shipping
companies with fleets that they have pre-vetted for quality, rather than smaller
shipping companies characteristic of the fragmented international
14
<PAGE>
tanker market. In 1998, in order to increase the Company's market share in the
Suezmax trades in the Atlantic Basin, OMI and Frontline Ltd, a Norwegian owner
of one of the world's largest and modern Suezmax fleets, combined Suezmax tanker
fleets for commercial purposes and created Alliance Chartering LLC ("Alliance").
Alliance currently markets 27 Suezmax tankers, of which 24 tankers are employed
in the Atlantic market, comprising approximately 20 percent of the total
Suezmaxes trading in the Atlantic basin. Alliance's control of the largest
modern fleet of Suezmaxes has enabled it to strengthen relationships and obtain
contracts with customers. These contracts may allow Alliance the opportunity to
increase its Suezmax fleet utilization through backhauls, when cargo is
available, which will improve vessel earnings.
Any improvement in freight rates in the crude oil market, as well as
the product carrier market, will be largely dependent upon improvement in the
Far East and Latin American economic conditions as well as an increase in the
rate of tanker scrappings in view of the relatively high tanker orderbook for
delivery in the foreseeable future.
RESULTS OF OPERATIONS
Results of operations of OMI Corporation include operating activities
of the Company's vessels. The discussion that follows explains the Company's
operating results in terms of net voyage revenues, which equals voyage revenues
minus vessel and voyage expenses (including charter hire expense), because
fluctuations in voyage revenues and expenses occur based on the nature of a
charter. The Company's vessels currently operate, or have operated in prior
years, on time, bareboat or voyage ("spot") charters. Each type of charter
denotes a method by which revenues are recorded and expenses are allocated.
Under a time charter, revenue is measured based on a daily or monthly rate and
the charterer assumes certain voyage expenses, such as fuel and port charges.
Under a bareboat charter, the charterer assumes all voyage and operating
expenses; therefore, the revenue rate is likely to be lower than a time charter.
Under a voyage charter, revenue is calculated based on the amount of cargo
carried, most expenses are for the shipowner's account and the length of the
charter is one voyage. Revenue may be higher in the spot market, as the owner is
responsible for most of the costs of the voyage. Other factors affecting net
voyage revenues for voyage charters are waiting time between cargoes, port
costs, and bunker prices.
Vessel expenses included in net voyage revenue discussed above include
operating expenses such as crew payroll/benefits/travel, stores, maintenance and
repairs, drydock, insurance and miscellaneous. These expenses are a function of
the fleet size, utilization levels for certain expenses, requirements under
laws, by charterers and Company standards. Insurance expense varies with the
overall insurance market conditions as well as the insured's loss record, level
of insurance and desired coverage.
15
<PAGE>
VOYAGE REVENUES LESS VESSEL AND VOYAGE EXPENSES.
Net voyage revenues of $13.2 million for the three months ended March
31, 1999 increased by a net of $0.1 million from $13.1 million for the three
months ended March 31, 1998. Net voyage revenues for the three months ended 1999
and 1998 are as follows by the market segments in which OMI primarily operates.
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1999 1998
--------- ---------
(IN THOUSANDS)
VOYAGE REVENUES:
Crude Oil Fleet ............................. $ 24.1 $ 26.8
Product Carrier Fleet ....................... 10.9 13.3
All Other ................................... -- (0.1)
--------- ---------
Total ................................. $ 35.0 $ 40.0
========= =========
VESSEL AND VOYAGE EXPENSES:
Crude Oil Fleet ............................. $ 14.9 $ 19.2
Product Carrier Fleet ....................... 6.4 7.9
All Other ................................... 0.5 (0.2)
--------- ---------
Total ................................. $ 21.8 $ 26.9
========= =========
NET VOYAGE REVENUES:
Crude Oil Fleet ............................. $ 9.2 $ 7.6
Product Carrier Fleet ....................... 4.5 5.4
All Other ................................... (0.5) 0.1
--------- ---------
Total ................................. $ 13.2 $ 13.1
========= =========
Net voyage revenues for the Company increased $0.1 million for the
three months ended March 31, 1999. The Crude oil fleet net voyage revenues
increased by $1.6 million, Product carrier fleet decreased by $0.9 million and
other net voyage revenue decreased by $0.6 million. Net changes are discussed as
follows according to the two market segments (product carrier and crude oil) in
which OMI primarily operates.
Product Carrier Fleet
The product carrier fleet consisted of thirteen vessels (ten handysize
and three Panamaxes) at March 31, 1999 and 1998. Rates in the product market
began to decline in the second half of 1997. To minimize decreases due to rate
declines in the short-term, OMI placed three Panamaxes which previously carried
clean products, into a marketing pool in November 1997, May 1998 and July 1998.
Decreases in the product carrier fleet in the first quarter of 1999 pertain in
part to two of the Panamaxes which were carrying clean products in the first
quarter 1998 and are carrying crude oil (included in the crude oil fleet's
operating results).
Net voyage revenues of $4.5 million decreased by a net of $0.9 million
for the three months ended March 31, 1999 compared to $5.4 million in the same
period in 1998. Decreases of approximately $2.5 million primarily relate to two
factors, one, decreases of $1.5 million related to two Panamaxes which are not
included with product carriers results in 1999 and approximately $1.0 million in
decreases related to three vessels which were operating in a marketing pool
which has experienced declines in pool earnings in the first quarter 1999 in
comparison to its 1998 quarter. Increases of approximately $1.6 million,
offsetting the decreases included in this fleet, related primarily to five
vessels (half of OMI's handysize fleet) whose rates were higher in the 1999
first quarter in comparison to the 1998 first quarter (although rates had
declined toward the later part of 1998 leading into the
16
<PAGE>
1999 quarter rates) and one vessels net voyage revenues increased in 1999
resulting from offhire related to a 1998 first quarter drydock.
Crude Oil Tanker Fleet
At March 31, 1999, the crude fleet consisted of nine wholly-owned
vessels (eight Suezmaxes and one aframax) and two chartered-in Suezmaxes; all
but one of the vessels are currently operating in the spot market. At March
31,1998, OMI owned five Suezmaxes, one aframax and chartered-in four vessels.
Subsequent to the first quarter 1998, four new Suezmax vessels were delivered, a
vessel was sold in August 1998 and two chartered-in vessels were redelivered to
their owners in July and December 1998.
Net voyage revenues of $9.2 million generated by the crude tanker fleet
increased a net of $1.6 million for the three months ended March 31, 1999 from
$7.6 million for the three months ended March 31, 1998. The net increase in net
voyage revenues can be attributed to increases of approximately $6.5 million
primarily from two reasons: two Panamaxes with net voyage revenue that had been
carrying clean products in the first quarter 1998 were carrying crude in the
first quarter 1999 and net voyage revenues earned from four Suezmax vessels
three delivered in the summer of 1998 and one delivered January 1999. Net voyage
revenues were reduced by decreases in revenues of approximately $4.9 million
relating primarily to: lower rates in the spot market earned on four 1970's
built vessels and OMI's 1980's built aframax vessel in comparison to the first
quarter 1998 rates earned, resulting from various factors explained in the
market overview and decreases in net voyage revenues earned from the four
vessels chartered-in during 1998 as compared to earnings on two charter-in
vessels in the first quarter 1999.
OTHER OPERATING EXPENSES.
The Company's operating expenses, other than vessel, voyage and
operating lease expenses consist of depreciation and amortization and general
and administrative ("G & A") expenses. For the three months ended March 31,
1999, these expenses increased $1.1 million to $8.9 million, from $7.8 million
for the three months ended March 31, 1998. The net increase was due to a net
increase of $0.6 million in depreciation expense from the delivery of three
Suezmax tankers in 1998 and one in 1999 offset by the sale of a Suezmax tanker
in August 1998, in addition to an increase in G & A expenses of $0.5 million
primarily because the G & A expenses during the 1999 first quarter were actual
expenses incurred as compared to an allocation for the first quarter 1998 of Old
OMI's G & A expenses to its foreign subsidiaries.
OTHER INCOME (EXPENSE).
Other income (expense) consists of interest expense-net for the periods
presented. Net other expense increased by $2.1 million from $1.6 million to $3.7
million for the three months ended March 31, 1999 compared to the three months
ended March 31, 1998. Interest expense increased in the first quarter 1999 in
comparison to the first quarter 1998 primarily because of additional interest
expense on borrowings of $146.8 million upon delivery of the four new buildings
(June, July, August 1998 and January 1999) and decreases in the capitalization
of interest on construction in progress.
PROVISION FOR INCOME TAXES.
The income tax provision of $ 1.6 million from January 1, 1998 through
March 31, 1998 relates to the allocation of income taxes by Old OMI before the
Company became a decontrolled corporation and was no longer a taxable entity
after the spin-off date.
17
<PAGE>
EQUITY IN OPERATIONS OF JOINT VENTURES.
Equity in operations of joint ventures decreased by $1.4 million to
$(0.3) million for the three months ended March 31, 1999 compared to $1.1
million for the three months ended 1998. The decrease was primarily attributed
to lower earnings for a 49.0 percent owned joint venture which operates one ULCC
vessel that was in drydock durng the first quarter of 1999 and decreased
earnings from three other joint ventures related to declines in spot rates
during the first quarter 1999 compared to the first quarter 1998, resulting from
current market conditions.
During 1999, the Company received an aggregate of $2.4 million in
dividends from joint ventures, $1.9 million from Amazon Transport, Inc. and
$0.5 million from White Sea Holdings Ltd.
BALANCE SHEET
In January 1999, the Company took delivery of a newly constructed
double hulled Suezmax tanker, the COLUMBIA increasing Vessel held for sale by
$55.7 million, decreasing Construction in Progress by $17.7 million, increasing
Current portion of long-term debt by $37.8 million and decreasing Cash and cash
equivalents by $0.2 million. The Company is in the process of arranging a sale
and leaseback transaction for the COLUMBIA, expected to close during the second
quarter of 1999.
Long-term debt decreases of approximately $3.6 million are related
primarily to reclasses to Current portion of long-term debt in accordance with
debt agreements for existing debt at March 31, 1999.
Decreases in Investment and advances in joint ventures primarily relate
to decreases in Investments in two joint ventures which paid dividends, as a
return on investment in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash and cash equivalents of $23.4 million at March 31, 1999 increased
$0.7 million from cash and cash equivalents of $22.7 million at December 31,
1998. The Company's working capital of $20.1 million at March 31, 1999,
increased $18.2 million from working capital of $1.9 million at December 31,
1998. Current assets increased $57.1 million primarily due to the vessel held
for sale of $55.7 million. Current liabilities increased $38.9 million due to
the increase in current portion of long-term debt, primarily for the debt to be
repaid on the vessel held for sale of $37.8 million (see Financing Facilities).
Net cash provided by operating activities increased $12.5 million to $5.7
million for the three months ended March 31, 1999 compared to net cash used by
operating activities of $6.8 million for the three months ended March 31, 1998.
This decrease is primarily related to the decrease in Payable to parent-net of
$13.4 million during the first quarter 1998, prior to the spin-off of the
Company, in addition to fluctuations in operating activities of vessels (see
Results of Operations).
The Company operates in a capital-intensive industry and augments cash
generated by operating activities with debt and sales of vessels that no longer
fit the Company's strategy. Cash used by investing activities was $41.5 million
for the first quarter ending March 31, 1999, an increase of $29.3 million from
cash used by investing activities of $12.2 million for the first quarter ending
March 31, 1998. Cash used by investing activities increased in 1999 primarily
due to the delivery of the new Suezmax vessel of $37.8 million, $3.0 million for
additions to vessels under construction and capitalized interest and $0.7 for
other capital expenditures. During the first quarter of 1998, $10.9 million was
used to pay for additions to vessels under construction.
18
<PAGE>
FINANCING ACTIVITIES
Cash provided by financing activities was $36.6 million for the three
months ended March 31, 1999 compared to cash used of $0.9 million for the three
months ended 1998. Payments on long-term debt of $12.8 million were made in
1999. Included in the payments of $12.8 million were unscheduled payments of
$12.0 million for payments on short-term borrowings from a credit facility.
Proceeds from the issuance of long-term debt of $49.5 million include proceeds
of $37.5 million for the financing of the newly constructed vessel delivered
January 1999 and $12.0 million drawn on a credit facility. For the three months
ended March 31, 1998, $0.8 million was paid in accordance with scheduled debt
repayments.
Currently, OMI has four credit facilities and two lines of credit
("LOC") aggregating $383.9 million, $124.4 million of which is unused. At March
31, 1999, these facilities/LOCs aggregated $361.4 million, $276.5 million was
outstanding and $84.9 million was unused at that date. One facility for $116.5
million was assumed from Old OMI and the remaining facilities/LOC s aggregating
$244.9 million at March 31, 1999, were secured subsequent to the spin-off.
In February 1999, OMI entered into a $25.0 million revolving line of
credit to be used for working capital and other general corporate purposes. The
line of credit bears interest at LIBOR plus a margin that varies with facility
use not greater than 1.75%. On May 3, 1999, OMI drew down $20.0 million under
this line of credit.
The Company has a credit facility, which was assumed from Old OMI. At
March 31, 1999, the commitment was $116.5 and the outstanding loan was $116.1
million. On April 1, 1999, the outstanding balance was paid down by $12.0
million and, in addition, the available line was reduced by $11.0 million. The
facility bears interest at LIBOR plus a margin ranging from 60- 95 basis points
which is computed based on OMI s funded debt to equity ratio and interest
coverage ratio. The agreement, which expires in April 2002, provides for nine
semiannual reductions (six currently remaining at March 31, 1999). As long as
the available balance of the credit facility exceeds the outstanding loan
balance and the collateral tests are met, current amortization is not required.
During June and July 1998, the Company entered into three new secured
revolving credit agreements to refinance two Panamax tankers, three Suezmax
tankers and two product carriers when delivered. As of March 31, 1999, the total
available commitment was $159.9 million and the outstanding balance was $122.8
million. On April 30, 1999, the amount available under the facilities increased
by $33.5 million for the fifth Suezmax tanker to be delivered in May 2000. The
facilities bear interest at LIBOR plus a margin ranging from 0.65%-1.00%.
During December 1998, the Company entered into an agreement for a $60.0
million revolving LOC to finance, on an interim basis, the acquisition of
vessels and will be secured by such vessels. The facility bears interest at
LIBOR plus a margin ranging from 55-80 basis points based on the Company s
funded debt to capitalization ratio and interest coverage ratio. On January 14,
1999, the Company drew down $37.5 million to finance the Suezmax vessel
delivered. The vessel is held for sale and the Company intends to repay this
debt with the proceeds to be received from the sale in the second quarter of
1999.
Certain of the loan agreements contain restrictive covenants requiring
minimum levels of cash or cash equivalents, working capital and net worth,
maintenance of specified financial ratios and collateral values, and restricting
the Company's ability to pay dividends. These loan agreements also contain
various provisions restricting the right of OMI and/or its subsidiaries to make
certain investments, to place additional liens on the property of certain of
OMI's subsidiaries, to incur additional long- term debt, to make certain
payments, to merge or to undergo a similar corporate reorganization, and to
enter into transactions with affiliated companies. At March 31, 1999, the
Company was in compliance with all its financial covenants.
19
<PAGE>
The Company believes that the actions it has taken in the last year and
continues to do currently to improve its liquidity and financial position will
give the Company greater financial flexibility to fund its vessel acquisition
program and finance its other cash needs.
OTHER COMMITMENTS
The Company has three remaining construction contracts with the same
yard for two product carriers with expected capitalized costs at delivery in
1999 of $30.0 million each and one Suezmax carrier with an expected capitalized
cost of $51.0 million scheduled to be delivered in 2000. As of March 31, 1999,
total capitalized costs for the three vessels aggregated $20.0 million.
OMI acts a guarantor for a portion of the debt incurred by a joint
venture with affiliates of its joint venture partner. Such debt was
approximately $14.3 million at March 31, 1999 with OMI's guaranty of such debt
being approximately $7.1 million.
The Company and its joint venture partners have committed to fund any
working capital deficiencies that may be incurred by their joint venture
investments. As of March 31, 1999, OMI has advanced an aggregate of $0.8 million
in the form of non-interest bearing loans to cover operating expenses for a
joint venture formed in 1997. At March 31, 1999, no other such deficiencies have
been funded.
AGREEMENTS
As part of the Distribution, OMI is party to certain agreements with
MTC, including the following:
Distribution Agreement-The Distribution Agreement provides for, with
certain exceptions, assumptions of liabilities and cross-indemnities designed
principally to place financial responsibility for the liabilities with the
appropriate company. OMI, however, assumed the obligations of Old OMI with
respect to Old OMI's 10.25 percent Senior Notes due November 1, 2003 in exchange
for a note from MTC in the amount of $6.4 million, which is equivalent in value
to the principal amount of the Senior Notes then outstanding. The Distribution
Agreement also provides that each of MTC and OMI will indemnify the other in the
event of certain liabilities arising under the Federal securities laws. Each of
MTC and OMI will have sole responsibility for claims arising out of its
respective activities after the Distribution.
The Distribution Agreement also provides that, except as otherwise set
forth therein or in any other agreement, all costs or expenses incurred on or
prior to the Distribution Date in connection with the Distribution will be
charged to and paid by the party incurring such costs or expenses. Except as set
forth in the Distribution Agreement or any related agreement, each party shall
bear its own costs and expenses incurred after the Distribution Date.
As part of the Distribution Agreement, OMI has, subject to certain
exceptions, provided indemnity to MTC for all taxes attributable to the
Distribution and to certain corporate restructuring transactions preceding the
Distribution.
Tax Cooperation Agreement-Prior to the Distribution, OMI and MTC
entered into a Tax Cooperation Agreement which sets forth each party's rights
and obligations with respect to federal, state, local and foreign taxes for
periods prior and after the Distribution and related matters such as the filing
of tax returns and the conduct of audits and other proceedings. In general, the
Tax Cooperation Agreement provides that OMI will be liable for taxes and be
entitled to refunds for each period covered by any such return which are
attributable to OMI and its subsidiaries and that MTC will be liable for and be
entitled to
20
<PAGE>
refunds for each period covered by such return which are not attributable to OMI
or OMI subsidiaries. Though valid as between the parties thereto, the Tax
Cooperation Agreement is not binding on the IRS and does not alter either
party's tax liability to the IRS.
Dividends-Any determination to pay dividends in the future by OMI will
be at the discretion of the board of directors and will be dependent upon its
results of operations, financial condition, capital restrictions, covenants and
other factors deemed relevant by the board of directors. Currently, the payment
of dividends by OMI is limited by its credit agreements.
EFFECTS OF INFLATION
The Company does not consider inflation to be a significant risk to the
cost of doing business in the current or foreseeable future. Inflation has a
moderate impact on operating expenses, drydocking expenses and corporate
overhead.
YEAR 2000 ISSUE
GENERAL
The Year 2000 issue arises from the fact that many computer hardware
and software systems use only two digits rather than four digits to define the
applicable year. As a result, these systems may not calculate dates beyond 1999,
which may result in system failure or miscalculations by computer programs which
could cause disruption of the Company's operations.
STATE OF READINESS
The Company has taken steps to ensure that its systems will be year
2000 compliant including systems on board vessels. The Company has been in the
process over the last year of upgrading its internal hardware and software
systems for business reasons other than Year 2000 compliance. Therefore, the
Company believes, after conversion to the new systems, the Year 2000 issue will
not pose significant operational problems for its computer systems. However, the
Year 2000 readiness of the Company's customers, suppliers and business partners
may vary.
The Company developed a plan that outlines the Company s procedures to
become Y2K compliant which was approved in November 1998 by senior management of
OMI, as well as the Board of Directors. An oversight committee was formed which
includes members of senior and technical management who meet on a monthly basis
with the Company's Information Services team. The procedures in the plan or the
Project, address the following: identification of inventory and assessment as
to its Y2K readiness, remediation strategies and remediation costs. The Company
has initiated formal communications with vendors and other customers which the
Company does business with, to determine the extent to which the Company is
vulnerable to those third parties failure to remedy their own Y2K issue. The
Company cannot predict the outcome of other companies remediation efforts. The
Project includes procedures for fixing critical systems using a combination of
replacements and upgrades.
The Company has identified and scheduled a sufficient number of
qualified personnel to accomplish the Project objectives and has established a
process for monitoring its progress against the Y2K plan in accordance with a
timetable of expected completion dates for the various phases of the Project.
21
<PAGE>
The Company expects all critical systems and products to be Y2K
compliant as of July 1999. Currently, 50 percent of the accounting systems and
75 percent of the ship hardware is year 2000 compliant.
COSTS
The Y2K Project includes estimated costs of $0.2 million related to
financial systems. The cost that relates to fixture of ships software and
hardware is expected to be minimal. Additionally, the Company has already paid
$0.3 million, not included in the estimated budget for financial systems,
towards new financial applications implementation which included the hardware,
software and support fees.
Based on responses received from vendors, to date, the Company is not
aware of any significant investments in assets that are not Y2K compliant.
There can be no guarantee that these estimates will be achieved and
actual results could differ from what has been anticipated. Based on its current
estimates and information currently available, the Company does not anticipate
that costs associated with this Project will have a material adverse effect on
the Company s consolidated financial position, results of operations or cash
flows in future periods.
RISK ASSESSMENT
At this time, until the process is tested, the Company cannot fully
estimate the risks of its Y2K issue. To date, OMI has not identified any
material risks of not being year 2000 ready. However, if a risk should
subsequently arise, OMI would identify its effects and remedy by the contingency
plan, see below. Additionally, there is exposure to third parties because
guarantees which the Company relies on as to Y2K compliance are not specifically
verified, which can also cause disruption if not remedied in a timely manner.
CONTINGENCY PLAN
The Company relies on vendor guarantees that critical systems are Y2K
compliant. Therefore, the Company anticipates that those critical systems will
function properly. OMI has full maintenance contracts with all its vendors in
the case of any system problem, they are required to resolve such problems
within a reasonable amount of time.
The Company does not anticipate that any of their critical and
non-critical systems will not be Y2K compliant by the required completion dates.
There are no critical and unique high volume systems for which a contingency
plan may not be possible. Further, if the computer system would go down, the
Company plans to revert to manual procedures, which will be reviewed and tested
during 1999.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market Risk
The company is exposed to various market risks, including interest
rates. The exposure to interest rate risk relates primarily to its debt and
related interest rate swaps. The majority of this exposure is the floating rate
debt, which totaled $276.4 (excludes Senior Notes plus 7% Convertible Note which
are fixed rates) million at March 31, 1999. A one percent increase in the
floating rate would increase interest expense by $2.8 million per year.
22
<PAGE>
The fixed rate debt on the balance sheet and the fair market value were
$7.4 million as of March 31, 1999. If the interest rate was to increase
(decrease) by one percent with all other variables remaining constant, the
market value of the fixed rate debt would decrease (increase) by approximately
$0.3 million.
The Company has entered into interest rate swap agreements to manage
its exposure with interest rates by locking in fixed interest rates from
floating rates. At March 31, 1999, there were two swaps with a total notional
principal of $15.2 million and to terminate the agreements the Company would
have to pay $0.3 million.
23
<PAGE>
PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBIT AND REPORTS ON FORM 8-K
a. EXHIBITS
27 OMI Corporation - Financial Data Schedule, dated March 31,
1999.
b. REPORTS ON FORM 8-K
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMI CORPORATION
- --------------------------------------------------------------------------------
(REGISTRANT)
DATE: MAY 14, 1999 BY: /s/ CRAIG H. STEVENSON, JR.
----------------------------------
Craig H. Stevenson, Jr.
PRESIDENT, CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
DATE: MAY 14, 1999 BY: /s/ VINCENT DE SOSTOA
----------------------------------
Vincent de Sostoa
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27 contains summary information extracted from OMI Corporation and
subsidiaries Consolidated financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
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0
0
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</TABLE>
