Being Filed Pursuant to Rule 901 (d) of Regulation S-T
================================================================================
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 SEPTEMBER 30, 2002
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 NOVEMBER 14, 2002:
-----------------------------
Common Stock, par value $0.50 per share 70,279,164 shares
================================================================================
OMI CORPORATION AND SUBSIDIARIES
INDEX
PART I: FINANCIAL INFORMATION PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of
Operations (unaudited) for the three and nine months ended
September 30, 2002 and 2001 ................................. 3
Condensed Consolidated Balance Sheets-
September 30, 2002 (unaudited) and December 31, 2001 ........ 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity (unaudited) for the nine months
ended September 30, 2002 .................................... 5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2002 and 2001 ....... 6
Notes to Condensed Consolidated Financial
Statements (unaudited) ...................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................. 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS .................................................. 39
ITEM 4. CONTROLS AND PROCEDURES ....................................... 40
PART II: OTHER INFORMATION ............................................. 41
SIGNATURES ............................................................. 42
CERTIFICATIONS ......................................................... 43
2
OMI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues ................................. $ 46,708 $ 45,203 $ 139,243 $ 161,083
--------- --------- --------- ---------
Operating Expenses:
Voyage ................................ 8,698 8,219 24,810 21,892
Vessel ................................ 11,104 11,226 38,335 29,804
Charter hire .......................... 4,288 1,641 12,210 6,192
Depreciation and amortization ......... 11,074 8,311 31,714 23,132
General and administrative ............ 3,701 3,057 10,280 8,902
(Gain) loss on disposal/write down
of assets-net ....................... -- (41) 289 (19,550)
--------- --------- --------- ---------
Total operating expenses ............ 38,865 32,413 117,638 70,372
--------- --------- --------- ---------
Operating Income ......................... 7,843 12,790 21,605 90,711
--------- --------- --------- ---------
Other (Expense) Income:
Loss on disposal/write down of
investments ......................... -- (1,117) (547) (1,617)
Interest expense ...................... (6,417) (4,455) (18,150) (15,678)
Interest income ....................... 129 413 549 1,696
Other-net ............................. -- (67) -- 255
--------- --------- --------- ---------
Net Other Expense ..................... (6,288) (5,226) (18,148) (15,344)
--------- --------- --------- ---------
Income before income taxes
and equity in operations of
joint ventures ........................ 1,555 7,564 3,457 75,367
Benefit for income taxes ................. 1,099 -- 1,406 --
--------- --------- --------- ---------
Income before equity in
operations of joint ventures .......... 2,654 7,564 4,863 75,367
Equity in operations of joint ventures ... -- -- -- 220
--------- --------- --------- ---------
Net Income ............................... $ 2,654 $ 7,564 $ 4,863 $ 75,587
========= ========= ========= =========
Basic Earnings Per Share ................. $ 0.04 $ 0.11 $ 0.07 $ 1.13
Diluted Earnings Per Share ............... $ 0.04 $ 0.11 $ 0.07 $ 1.13
Weighted Average Shares Outstanding:
Basic ............................... 70,279 70,244 70,269 66,597
Diluted ............................. 70,475 70,504 70,475 67,055
See notes to condensed consolidated financial statements.
3
OMI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash, including cash equivalents:
2002-$30,507; 2001-$15,168 ..................... $ 31,350 $ 17,730
Marketable securities ............................ -- 6,218
Receivables:
Traffic receivables, net of allowance for
doubtful accounts of $1,743 in 2002 and
$1,622 in 2001 ............................... 9,811 14,052
Other .......................................... 1,803 1,549
Current notes receivable ......................... 75 6,775
Current restricted cash .......................... 1,000 13,120
Prepaid expenses and other current assets ........ 6,726 5,316
-------- --------
Total Current Assets ........................... 50,765 64,760
-------- --------
Vessels and other property, at cost ................. 915,441 781,895
Construction in progress ............................ 52,881 84,736
-------- --------
Total vessels and other property ................. 968,322 866,631
Less accumulated depreciation ....................... 99,086 76,865
-------- --------
Vessels and other property-net ............. 869,236 789,766
-------- --------
Drydock costs-net of amortization ................... 6,862 5,743
Non-current restricted cash ......................... 3,250 4,000
Other assets and deferred charges ................... 8,905 11,358
-------- --------
Total Assets ............................... $939,018 $875,627
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................. $ 7,864 $ 8,842
Accrued liabilities:
Deferred charter hire revenue .................. 4,068 5,981
Voyage and vessel .............................. 4,490 4,590
Interest ....................................... 2,465 3,731
Other .......................................... 4,696 5,859
Deferred gain on sale of vessels ................. 1,557 971
Current portion of long-term debt ................ 47,352 40,238
-------- --------
Total Current Liabilities .................. 72,492 70,212
-------- --------
Long-term debt ................................... 447,459 392,316
Other liabilities ................................ 6,409 7,441
Deferred gain on sale of vessels ................. 7,033 3,842
Stockholders' equity ............................. 405,625 401,816
-------- --------
Total Liabilities & Stockholders' Equity ... $939,018 $875,627
======== ========
See notes to condensed consolidated financial statements
4
OMI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
(UNAUDITED)
Unearned Accumulated
Common Stock Compensation Other Total Comprehensive
--------------- Capital Retained Restricted Comprehensive Stockholders' Income
Shares Amount Surplus Earnings Stock Income Equity (Loss)
------ ------- -------- -------- ------------ ------------- ------------- -------------
Balance at January 1, 2002 ........... 70,248 $35,124 $303,117 $72,463 $(4,611) $(4,277) $401,816
Comprehensive income:
Net income ........................ 4,863 4,863 $ 4,863
Unrealized loss on securities-net.. (57) (57) (57)
Reclassification adjustment for
gains realized in net income ..... (43) (43) (43)
Other comprehensive income ........ (1,761) (1,761) (1,761)
-------
Comprehensive income ................. $ 3,002
=======
Issuance of common stock ............. 11 6 27 33
Issuance of restricted stock ......... 20 10 70 (80) --
Amortization of restricted stock ..... 774 774
------- ------- -------- ------- ------- ------- --------
Balance at September 30, 2002 ........70,279 $35,140 $303,214 $77,326 $(3,917) $(6,138) $405,625
====== ======= ======== ======= ======= ======= ========
See notes to condensed consolidated financial statements
5
OMI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
2002 2001
--------- ---------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income .................................................. $ 4,863 $ 75,587
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................... 31,714 23,132
Amortization of deferred financing fees ............... 1,839 1,122
Amortization of lease reserve ......................... -- (231)
Amortization of deferred gain on sale of vessels ...... (914) (788)
Amortization of restricted stock ...................... 774 255
Loss (gain) on disposal/write down of assets-net ...... 289 (19,550)
Loss on disposal/write down of investments-net ........ 547 1,617
Decrease in deferred income taxes ..................... (1,406) --
Equity in operations of joint ventures-
net of dividends received ........................... -- 2,274
Changes in assets and liabilities:
Decrease in receivables and other current assets .... 3,698 5,554
Decrease (increase) in other assets and
deferred charges .................................. 862 (1,006)
(Decrease) increase in accounts payable and
accrued liabilities ............................... (4,829) 6,315
(Decrease) increase in other liabilities ............ (853) 210
Other ............................................... 102 (879)
--------- ---------
Net cash provided by operating activities ................... 36,686 93,612
--------- ---------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Additions to vessels and other property ................... (162,534) (277,072)
Proceeds from disposition of vessels and other property ... 58,009 77,282
Payments for drydocking ................................... (3,985) (5,244)
Investment in joint ventures-net .......................... -- 1,076
Proceeds from notes receivable ............................ 6,737 1,187
Proceeds from (payments for) investments-net .............. 6,129 (6,357)
Escrow of funds ........................................... 11,750 (1,000)
--------- ---------
Net cash used by investing activities ....................... (83,894) (210,128)
--------- ---------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from issuance of debt ............................ 167,929 213,391
Payments on debt .......................................... (105,672) (97,304)
Payments for debt issue costs ............................. (1,429) (3,901)
Proceeds from issuance of common stock-net ................ -- (1,410)
--------- ---------
Net cash provided by financing activities ................... 60,828 110,776
--------- ---------
Net increase (decrease) in cash and cash equivalents ........ 13,620 (5,740)
Cash and cash equivalents at beginning of year .............. 17,730 35,327
--------- ---------
Cash and cash equivalents at end of period .................. $ 31,350 $ 29,587
========= =========
See notes to condensed consolidated financial statements.
6
OMI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1
The condensed consolidated interim financial statements of OMI Corporation
("OMI" or the "Company") are unaudited and reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim periods. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001. The results of operations for the nine
months ended September 30, 2002, are not necessarily indicative of the results
for the entire fiscal year ending December 31, 2002.
OMI, a bulk shipping company incorporated January 9, 1998 in the Republic
of the Marshall Islands, provides seaborne transportation services primarily of
crude oil and refined petroleum products. The Company is the successor to
Universal Bulk Carriers, Inc., 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)
through a tax-free distribution to Old OMI shareholders of one share of the
Company's common stock for each share of Old OMI common stock. The Company
trades under the symbol "OMM" on the New York Stock Exchange.
RECLASSIFICATIONS--Certain reclassifications have been made to the prior
year financial statements to conform to the 2002 presentation. These
reclassifications had no effect on previously reported net income.
NEWLY ISSUED ACCOUNTING STANDARDS--The Financial Accounting Standards Board
"FASB" recently issued five Statements of Financial Accounting Standards
("SFAS"), which are summarized as follows:
SFAS 142, "Goodwill and Other Intangible Assets" addresses financial
accounting and reporting for goodwill and other intangible assets. SFAS 142
discontinues the practice of amortizing goodwill and indefinite lived intangible
assets and initiates an annual review for impairment. Impairment would be
examined more frequently if certain indicators were encountered. Intangible
assets with a determinable useful life will continue to be amortized over that
period. The amortization provisions shall be applied to fiscal years beginning
after December 15, 2001 to all goodwill and intangible assets except that, these
provisions presently apply to goodwill and intangible assets acquired after June
30, 2001. The Company did not have goodwill or intangible assets as of September
30, 2002 and therefore there was no impact on the financial statements.
SFAS 143, "Accounting for Asset Retirement Obligations" was issued in June
2001. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
currently does not anticipate that the provisions of the new statement will have
a material impact on the Company's results of operations or financial position.
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
was issued in October 2001. SFAS 144 replaces FASB Statement 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
7
Assets to Be Disposed Of." SFAS 144 requires that those long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred.
SFAS 144 also broadens the reporting of discontinued operations to include
all components of an entity with operations that can be distinguished from the
rest of the entity and that will be eliminated from the ongoing operations of
the entity in a disposal transaction. The provisions of SFAS 144 are effective
for financial statements issued for interim periods and fiscal years beginning
after December 15, 2001 and are to be applied prospectively. The Company did not
have discontinued operations as of September 30, 2002 and the adoption of this
statement had no material impact on the financial statements.
SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" was issued in April 2002. The
Statement updates, clarifies and simplifies existing accounting pronouncements.
SFAS 145 rescinds Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. Statement 64
amended Statement 4, and is no longer necessary because Statement 4 has been
rescinded. Statement 44 was issued to establish accounting requirements for the
effects of transition to the provisions of the Motor Carrier Act of 1980.
Because the transition has been completed, Statement 44 is no longer necessary.
SFAS 145 amends Statement 13 to require that certain lease modifications that
have economic effects similar to sale-leaseback transactions be accounted for in
the same manner as sale-leaseback transactions. This Statement also makes
technical corrections to existing pronouncements. While those corrections are
not substantive in nature, in some instances, they may change accounting
practices. This Statement is effective for fiscal years beginning after May 15,
2002. Since this new Statement was issued to clarify and simplify existing
pronouncements there is no effect on the Company's financial statements.
SFAS 146, "Accounting for Costs Associated with Exit or Disposal
Activities" was issued in June 2002. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS 146 requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability is incurred, as
opposed to when the entity commits to an exit plan under EITF Issue No. 94-3.
The Company is required to adopt SFAS 146 for exit or disposal activities that
are initiated after December 31, 2002. The Company currently does not anticipate
that the provisions of the new statement will have a material impact on its
financial statements in the year of adoption.
DERIVATIVES AND HEDGING ACTIVITIES--The FASB issued SFAS 133 as amended,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective for fiscal years beginning after June 15, 2000. The Company adopted
SFAS 133 effective January 1, 2001.
All derivatives are recognized on the Company's balance sheet at their fair
value. On the date the derivative contract is entered into, the
8
Company designates the derivative as (1) a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment ("fair
value" hedge) or (2) a hedge of a forecasted transaction ("cash flow" hedge).
The Company does not have foreign-currency cash-flow or fair-value hedges
("foreign currency" hedge) or a hedge of a net investment in a foreign
operation.
The Company is exposed to market risk, such as changes in interest rates.
To manage the volatility relating to this exposure, the Company selectively
enters into derivative transactions pursuant to the Company's policies for
hedging practices. Designation is performed on a specific exposure basis to
support hedge accounting. The changes in fair value of these hedging instruments
are offset in part or in whole by corresponding changes in the fair value or
cash flows of the underlying exposures being hedged. The Company does not hold
or issue derivative financial instruments for trading purposes.
As of September 30, 2002, the Company has interest rate swaps and Future
Rate Agreements ("FRA's") to effectively convert a portion of its debt from a
floating to a fixed-rate basis. The swaps and FRA's are designated as cash flow
hedges. These swap contracts and FRA's were effective hedges and therefore no
ineffectiveness was recorded in the Consolidated Statements of Operations.
NOTE 2 - CREDIT FACILITIES AND LOAN AGREEMENTS
As of September 30, 2002 the Company's debt and credit arrangements
consisted of the following:
(in thousands)
Loans under bank credit agreements at a margin plus
variable rates of the London Interbank Offering
Rate ("LIBOR")(1) (2)............................................. $493,800
7.00% Convertible Note due 2004...................................... 1,011
--------
Total...................................................... 494,811
Less current portion of long-term debt..................... 47,352
--------
Long-term debt....................................................... $447,459
========
- ----------
(1) Rates at September 30, 2002 ranged from 2.9375 percent to 5.50 percent
(including margins).
(2) At September 30, 2002 OMI had interest rate swaps that fix notional amounts
of $85,000,000 of variable rate debt at 4.86% and $60,000,000 at 4.77%
(excluding margins) with maturity dates of October 2004 and October 2005,
respectively. The FRA's with notional amounts of $95,289,000 have interest
rates within a range of 2.355% to 2.50% (excluding margins) and expire in
December 2002.
2002 Financing Transactions
The Company has a term loan agreement, secured by 16 vessels, in the
original amount of $310,000,000 (the "$310 Facility"), which has a balance of
$170,341,000 at September 30, 2002. In March 2002, this Facility was amended to
reduce the then three remaining 2002 quarterly payments from $10,000,000 to
$6,250,000 and increase the balloon payment by $11,250,000. In April 2002, the
15 remaining quarterly payments (including the three in 2002) were reduced to
$6,051,000 as a result of the sale of a vessel. The balloon payment due at
maturity in October 2005 is $91,683,000. As a result of the amendment, the
Company's margin on this Facility was increased by 25 basis points until
September 30, 2002. For the period ending September 30, 2002, the Company's
interest rate margin was 2.25% over LIBOR.
9
On March 27, 2002, the Company entered into a $78,000,000 reducing
revolving credit facility secured by first mortgages on two vessels and second
mortgages on 17 vessels, one of which was sold in April 2002. The loan, which
matures on March 27, 2007, bears interest at LIBOR plus a margin of 2.75
percent, and requires semi-annual payments of $3,000,000, with the balance being
payable with the tenth payment. As of September 30, 2002, the line had been
reduced to $70,678,000 and the Company had $14,588,000 available under the line.
During October 2002, OMI paid down $8,000,000 on this facility (which increased
the amount available under the line to $22,588,000).
In November 2001, the Company obtained a seven-year $44,000,000 term loan
to partially finance the purchase of two product carrier newbuildings, one of
which was delivered on December 17, 2001 and the other of which was delivered on
March 26, 2002. The loan is split into two $22,000,000 tranches. At September
30, 2002, the balance of the loan was $40,750,000. Each tranche is being repaid
in 28 quarterly installments (the first 12 at $650,000 and next 16 at $375,000)
plus a balloon of $8,200,000 due with the last installment. The outstanding
balance of the loan bears interest at LIBOR plus an applicable margin. During
the first three years of this loan the margin is 1.00 percent as long as the
secured vessels remain on time charter. During the remaining four years, the
margin will be based on OMI's ratio of consolidated funded debt to consolidated
EBITDA on a trailing four quarter basis.
Reducing Revolving Facility
On July 27, 2001, OMI entered into a six year $348,000,000 reducing
revolving credit facility (the "$348 Facility"). The $348 Facility has been and
will be used to provide up to 65 percent financing of pre-delivery installments
and final payments at delivery on eleven newbuilding vessels, with deliveries
scheduled through 2003, acquisition financing and refinancing of four secondhand
vessels purchased in the first half of 2001 and for general corporate purposes
up to the available amount. This loan includes interest rate margins based on a
pricing ratio grid (currently 2.125% over LIBOR). The Company paid an additional
margin of 25 basis points until September 30, 2002, which was reduced to 12.5
basis points for the period from October 1, 2002 to March 31, 2003. The
availability of the facility reduces quarterly based on a 17-year amortization
schedule from delivery of the vessels until September 2003, and thereafter
$6,539,000 per quarter until July 27, 2007 at which time the outstanding balance
is due. At September 30, 2002, the Company had drawn $189,320,000. The remainder
of the Facility becomes available when construction and delivery payments are
made. In October 2002, OMI drew an additional $32,000,000 for the delivery of a
newbuilding (see Note 5).
Restrictive Covenants
All loan agreements contain restrictive covenants as to working capital,
net worth, maintenance of specified financial ratios and collateral values. They
restrict the Company's ability to make certain payments, such as dividends and
repurchase of its stock. Pursuant to the loan agreements liens against specific
assets were granted and other liens against those assets were prohibited. As of
September 30, 2002, the Company was in compliance with its covenants.
Interest Rate Swaps
As of September 30, 2002, the Company had two interest rate swaps, which
are cash flow hedges, aggregating $145,000,000, and has recorded a liability of
$6,042,000 and a charge correspondingly to Accumulated other comprehensive
income related to the fair market value of these swaps.
10
During October 2002, OMI committed to six new interest rate swaps, which also
have been designated as cash flow hedges. The following table lists all swap
contracts and terms (in thousands):
FIXED
NOTIONAL START MATURITY INTEREST
AMOUNT DATE DATE RATE
-------- --------- --------- --------
$60,000 Oct. 2001 Oct. 2004 4.77%
85,000 Oct. 2001 Oct. 2005 4.86%
20,000 Dec. 2002 Jun. 2004 2.12%
37,000 Feb. 2003 Jun. 2004 2.16%
24,000 Mar. 2003 Jun. 2004 2.17%
20,000 Mar. 2003 Jun. 2004 2.07%
17,000 Jun. 2003 Jun. 2004 2.16%
34,600 Apr. 2003 Jun. 2004 2.08%
The Company will pay fixed-rate interest payments and will receive
floating-rate interest amounts based on three month LIBOR settings (for a term
equal to the swaps' reset periods).
Future Rate Agreements
In February 2002, OMI entered into five FRAs, which match five loan
tranches of the $348 Facility, for an aggregate notional value of $95,289,000.
The FRAs fixed the interest rate before margins on these tranches within a range
of 2.355% to 2.50% and expire in December 2002. In October 2002, OMI entered
into four more FRAs, which match four loan tranches of the $348 Facility, for an
aggregate notional value of $91,000,000. The FRAs fixed the interest rate before
margins on these tranches within a range of 1.72% to 1.86% beginning May 2003
and expire in December 2003.
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
stock options using the treasury stock method and the conversion of the 7%
convertible note due 2004, to the extent dilutive.
The components of the denominator for the calculation of basic and diluted
earnings per share are as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
------ ------ ------ ------
(in thousands, except per share
amounts)
BASIC EARNINGS PER SHARE:
Weighted average common shares
outstanding .................... 70,279 70,244 70,269 66,597
====== ====== ====== ======
DILUTED EARNINGS PER SHARE:
Weighted average common shares
outstanding .................... 70,279 70,244 70,269 66,597
Options .......................... 196 260 206 458
7% Convertible notes ............. -- -- -- --
------ ------ ------ ------
Weighted average common shares
Outstanding-diluted ............ 70,475 70,504 70,475 67,055
====== ====== ====== ======
BASIC EARNINGS PER SHARE:
Net income ..................... $ 0.04 $ 0.11 $ 0.07 $ 1.13
====== ====== ====== ======
DILUTED EARNINGS PER SHARE:
Net income ....................... $ 0.04 $ 0.11 $ 0.07 $ 1.13
====== ====== ====== ======
11
The effect of the assumed conversion of the 7% convertible notes due 2004
was not included in the computation of diluted earnings per share for the three
and nine months ended September 30, 2002 and 2001 because the average price of
OMI's stock was less than the stock conversion price of $7.375.
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended September 30, 2002 and 2001 interest paid
totaled approximately $19,063,000 and $17,058,000, respectively.
During March 2002, OMI issued 11,073 shares at $2.89 to one director in
lieu of his annual fee of $33,000.
NOTE 5 - ACQUISITIONS
During September 2002, the Company took delivery of a 159,435 deadweight
metric tons ("dwt") Suezmax tanker newbuilding, the DAKOTA. The DAKOTA's total
capitalized cost (including capitalized interest) at September 30, 2002 was
$58,105,000. The vessel was partially financed under the $348 Facility (see Note
2). The vessel began operating in the spot market upon delivery. During October
2002, OMI took delivery of the DAKOTA's sister-ship the DELAWARE with a contract
price of $55,600,000. OMI paid $32,313,000 upon delivery of the vessel, which
was partially financed under the $348 million Facility (see Note 2).
During January and March 2002, OMI took delivery of two handymax product
carriers contracted from the same shipyard. Total capitalized costs for both
vessels aggregated approximately $59,757,000. These vessels also were partially
financed under the $348 Facility (see Note 2) and began three-year time charters
upon delivery.
During March 2002, the Company acquired one handysize product carrier.
Total capitalized costs for the vessel aggregated approximately $30,393,000 of
which $22,000,000 was financed (see Note 2). The vessel began a three-year time
charter upon delivery.
NOTE 6 - DISPOSAL OF VESSELS
In June 2002, the Company exercised its option to reacquire the COLUMBIA
(using approximately $29,000,000 in cash, $12,000,000 of cash in an escrow
account and $3,700,000 from an associated note receivable) and simultaneously
sold the vessel to an unrelated party for $50,000,000. The vessel, renamed
OLIVER JACOB, has been time chartered back for a period of eight years (plus two
years at the owners option) and has been accounted for as an operating lease.
The gain on the sale of approximately $4,700,000 will be amortized over the
charter period.
In February 2002, OMI contracted to sell a 1988 built product carrier for
$9,100,000 and recognized a loss on sale of $302,000. The vessel was delivered
to its new owners on April 4, 2002.
NOTE 7 - DISPOSAL AND WRITE DOWN OF INVESTMENTS
During the nine months ended September 30, 2002, OMI recorded a net loss on
the disposal/write down of investments aggregating $850,000.
12
During the nine months ended September 30, 2002, OMI sold marketable
securities and received net proceeds of approximately $6,129,000. The sale
resulted in a net gain of $303,000.
NOTE 8 - 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. The current fleet includes four sizes of vessels; Suezmax,
ULCC, Panamax and handysize.
Product Carrier Fleet - includes vessels that normally carry refined
petroleum products such as gasoline, naphtha and kerosene. This fleet includes
two sizes of vessels, handymax and handysize vessels.
The following is a summary of the operations by major operating segments
for the three and nine months ended September 30, 2002 and September 30, 2001:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------
(in thousands) 2002 2001 2002 2001
--------- --------- --------- ---------
TOTAL REVENUES:
Crude Oil Tanker Fleet ...................... $ 19,164 $ 24,694 $ 60,756 $ 102,709
Product Carrier Fleet ....................... 27,499 20,440 78,393 58,079
Other ....................................... 45 69 94 295
--------- --------- --------- ---------
Total ..................................... $ 46,708 $ 45,203 $ 139,243 $ 161,083
========= ========= ========= =========
TIME CHARTER EQUIVALENT REVENUES:(1)
Crude Oil Tanker Fleet ...................... $ 12,432 $ 19,342 $ 41,810 $ 87,288
Product Carrier Fleet ....................... 25,533 17,601 72,529 51,635
Other ....................................... -- (28) -- (27)
--------- --------- --------- ---------
Total ..................................... $ 37,965 $ 36,915 $ 114,339 $ 138,896
========= ========= ========= =========
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY
IN OPERATIONS OF JOINT VENTURES:
Crude Oil Tanker Fleet(2) ................... $ (3,485) $ 4,989 $ (6,111) $ 62,121
Product Carrier Fleet(2) .................... 8,528 6,414 19,443 21,012
General and administrative expense
not allocated to vessels .................. (2,755) (2,209) (7,356) (5,923)
Other ....................................... (733) (1,630) (2,519) (1,843)
--------- --------- --------- ---------
Total ..................................... $ 1,555 $ 7,564 $ 3,457 $ 75,367
========= ========= ========= =========
- ----------
(1) The Company uses time charter equivalent revenue, which is voyage revenue
less voyage expenses, as a measure of analyzing fluctuations in voyage
revenue between financial periods and as a method of equating revenue
generated from a voyage charter to time charter.
(2) Operating income includes (Gain) loss on disposal/write down of assets-net
see below:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- ------------------------
(in thousands) 2002 2001 2002 2001
--------- -------- -------- --------
Crude Oil Tanker Fleet ............................. $ -- $ -- $ -- $(18,913)
Product Carrier Fleet .............................. -- (41) 289 (637)
--------- -------- -------- --------
(Gain) loss on disposal/write down of assets-net ... $ -- $ (41) $ 289 $(19,550)
========= ======== ======== ========
During the three and nine months ended September 30, 2002 and 2001,
mortgage debt of OMI and its related interest expense have been allocated to
13
the above segments based upon the relative value of the vessels collateralizing
the debt.
NOTE 9 - TAX MATTERS
The income tax benefit of $1,099,000 for the three months and $1,406,000
for the nine months ended September 30, 2002 represented the reversal of tax
accruals (previously reserved for in Deferred income taxes) after the settlement
payment of $535,000 pertaining to certain tax years prior to the spin off date
of June 17, 1998.
OMI is a Marshall Islands Corporation (see Note 1). Pursuant to various tax
treaties and the current United States Internal Revenue Code, the Company's
international shipping income prospectively is not subject to federal income
taxes in the United States (other than adjustments to previously reported
amounts).
NOTE 10 - OTHER COMMITMENTS AND CONTINGENCIES
Contracts to Purchase Vessels
During June 2001, OMI agreed to have constructed two 70,100 dwt product
carriers for $36,718,000 each, which are expected to be delivered in April and
July of 2003. At September 30, 2002, approximately $62,421,000 is scheduled to
be paid to the shipyard over the next year ($7,344,000 in 2002 and $55,077,000
in 2003). During 2002, OMI committed to time charter the two Panamax vessels for
a period of five years from their delivery dates.
During 2000 and 2001, OMI contracted to build four 47,000 dwt product
carriers for approximately $116,960,000. Two of the vessels were delivered in
the first quarter of 2002 and the other two are scheduled for delivery in the
first quarter of 2003. All four vessels have three-year time charters upon
delivery and are financed at 65 percent. At September 30, 2002, approximately
$44,060,000 was scheduled to be paid to the shipyard over the next year
($2,949,000 in 2002 and $41,111,000 in 2003).
Other
The Company is continuing to cooperate with an investigation by the U.S.
Attorney's office in Newark, New Jersey of an allegation that crew members of
one or more of the Company's vessels had by-passed systems designed to prevent
impermissible discharge of certain wastes into the water and had presented false
statements to the government, and otherwise had obstructed the government's
investigation. As well as being violations of the MARPOL (Maritime Pollution)
Convention and U.S. law, the activities under investigation violate Company
policies and directives. The Company is continuing its review of those policies
and has been implementing additional safeguards. The Company received a subpoena
requesting information with respect to other vessels in its fleet and the
Company has been providing the information requested. On May 10, 2002 a former
master and former chief engineer of one of the Company's vessels entered guilty
pleas in U.S. District Court in Newark, New Jersey, to violations of U.S. law
involving false statements to the U.S. Coast Guard during a vessel's port call
in New Jersey on September 10, 2001. At this time, the Company cannot predict
the scope or duration or estimate the cost of this investigation or its outcome.
Accordingly, the Company cannot predict whether any penalties or fines will be
imposed or their materiality. The Company expects that a substantial portion of
the costs relating to this incident will be covered by insurers, who have been
duly notified.
14
OMI and certain subsidiaries are defendants in various actions arising from
shipping operations. Such actions are covered by insurance or, in the opinion of
management, are of such nature that the ultimate liability, if any, would not
have a material adverse effect on the consolidated financial statements.
During October 2002, OMI chartered-in a handymax product carrier, the JAG
PRATAP, for a one year period.
NOTE 11-STOCKHOLDERS' EQUITY
Stock Based Compensation
Options--There was no adjustment necessary to compensation expense related
to variable plan stock options for the nine months ended September 30, 2002 and
September 30, 2001.
Restricted Stock
In April 2002, OMI awarded and issued 20,000 shares of restricted stock to
a new director for a total value at the date of grant of approximately $80,000.
Restrictions lapse for 25 percent of the shares at the end of year three, the
next 25 percent at the end of year five, and the remaining 50 percent of the
shares at varying years in accordance with years of service at the individual's
retirement date (if the director remains with the Company for at least five
years from the date of grant).
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The following presentation of management's discussion and analysis of OMI
Corporation's ("OMI" or the "Company") financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and accompanying notes appearing elsewhere in this Form
10-Q.
The information in this Management Discussion and Analysis 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.
GENERAL
Overview
OMI, which is incorporated in the Republic of the Marshall Islands, is one
of the largest publicly-traded providers of energy transportation services in
the world. Our ships carry crude oil and refined petroleum products in
international markets for major oil companies and commodity traders. The Company
is the successor to Universal Bulk Carriers, Inc, 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)
through a tax-free distribution to Old OMI shareholders of one share of the
Company's common stock for each share of Old OMI common stock. The Company
trades under the symbol "OMM" on the New York Stock Exchange.
OMI has focused on two classes of ships that we believe have strong
long-term fundamentals, product carriers and Suezmaxes. In the past few years we
have expanded and modernized our product carrier and Suezmax fleets by taking
delivery of newly constructed vessels and acquiring new vessels from others. We
have also made a concentrated effort to increase the number of handysize and
handymax type vessels on long-term time charters when we could enter into such
charters at attractive rates of return. As of September 30, 2002, 17 of the
Company's then 34 vessels were on time charters but only 27 percent of the
Company's deadweight tons ("dwt") were committed to time charters. During the
third quarter 2002, time charter revenue accounted for 64 percent of
consolidated Time Charter Equivalent ("TCE") revenue. The balance of our fleet,
73 percent of our dwt, consisting primarily of Suezmaxes and other crude oil
vessels, are operating in the spot market enabling us to capitalize on present
opportunities and capture upside earnings as tanker markets improve.
Consolidated TCE revenue of $114.3 million for the nine months ended
September 30, 2002 comprises time charter revenue ("TC revenue") and voyage
revenue less voyage expenses from vessels operating in the spot market. For the
nine months ended September 30, 2002, TCE revenue comprised $68.0 million
generated by time charters ($59.2 million by the Clean Fleet; $8.8
16
million by the Crude Oil Fleet) and $46.3 million generated by voyage charters
($33.0 million by the Crude Oil Fleet; $13.3 million by the Clean Fleet).
OMI secured long-term contracts in prior years (2000 and 2001) when the
markets were stronger, in anticipation of weaker and more difficult tanker
markets such as we are currently experiencing. This year we will have
approximately $90.0 million of revenue from long-term contracts, more than
double the amount we had in 2001 (see Outlook section).
OMI's net income was $2.7 million or $0.04 basic and diluted earnings per
share ("EPS") for the third quarter 2002 compared to net income of $7.6 million
or $0.11 basic and diluted EPS for the third quarter 2001. For the nine months
ended September 30, 2002, net income was $4.9 million or $0.07 basic and diluted
EPS compared to net income of $75.6 million or $1.13 basic and diluted EPS for
the nine months ended September 30, 2001.
Business Strategy
OMI's strategy is to operate a major international crude oil and petroleum
products transportation company with a quality management team to achieve the
following Company goals:
Focus on Two Classes of Ships--By being focused on operating a Suezmax and
Product carrier fleet OMI can serve two markets, which enables us to capture
economies of scale.
Improved Financial Strength-OMI has positioned itself so that its financial
strength and financial flexibility are at their strongest in the Company's
history.
Upside Earnings Potential--Through our crude oil fleet, we have the ability
to capture upside earnings in strong tanker markets with vessels operating in
the spot market balanced with steady cash flow from our product carrier fleet
operating on time charters.
Predictable Revenue and Earnings Stream--OMI's product carrier fleet is
mostly operating under 3-5 year time charter contracts, providing for
predictable revenue with the goal that time charter revenue cover the Company's
debt amortization, interest and general and administrative expenses and enable
us to provide positive earnings through industry cycles. Five vessels on time
charter have profit sharing arrangements which provide potential for upside
earnings during strong markets.
Expansion and Modernization of Tanker FleetOMI has one of the youngest
tanker fleets in the world with a current average age of approximately 7 years
compared to the industry average age of 12 years. The acquisition of modern
tonnage is a continuing program based on current commitments and opportunities
that arise in the market place.
OUTLOOK
The Company anticipated earnings in 2002 to be lower than comparable 2001
periods. At the start of the fourth quarter, rates remained weak but have
recently improved significantly. Improvement in the short-term appears to be the
result of tightness in the market due to higher demand in anticipation of the
winter and low inventory levels.
The fleet renewal program continues, as we took delivery of our second
Suezmax newbuilding in October 2002 (the first was delivered in September). Four
newbuildings, two handymax and two Panamax vessels are scheduled for
17
delivery from shipyards in 2003. The two handymax vessels will begin three-year
time charters and the two Panamax vessels will begin five year time charters
upon delivery. When appropriate, we may also look to make other strategic vessel
acquisitions. The delivery of vessels on order and potential acquisitions of
vessels may be funded by operating cash, issuance of stock, debt financing, and
proceeds from the disposal of vessels.
Time Charter Revenue
As a hedge against weaker rates, OMI's strategy has been to fix its product
carriers on attractive long-term contracts. Our long-term contracts range from
three to five years and provide:
>> Revenue stream that is predictable and visible for several years
>> Lower risk
>> Consistent earnings growth
Currently 17 vessels of OMI's 36 vessels operate on time charters. The
majority of the Company's tonnage operates in the spot market, giving the
Company the ability to take advantage of increases in rates while protecting its
downside. Five of our seventeen long-term contracts have profit sharing
(long-term contracts that have a floor rate and profit sharing without a cap
when tanker rates exceed a certain price). These profit sharing arrangements
enable us to take advantage of upturns in the markets. OMI's business strategy
blends long-term contract revenue at attractive rates with the ability to
capture earnings upswings in rising spot markets with its Suezmax tanker fleet,
certain of its product carriers, Panamaxes, ULCC and from profit sharing
arrangements for five of the product carriers on time charter. The contracted
time charter revenue scheduled below does not include any profit sharing in the
future periods for the five vessels eligible for profit sharing; however, profit
sharing of $4.4 million earned by the five vessels in the first three quarters
of 2002 is included. Projected requirements for offhire relating to drydock are
included. The following reflects OMI's contracted TC revenue through 2004.
CONTRACTED TIME CHARTER REVENUE
[GRAPHICAL REPRESENTATION OF DATA CHART]
(In millions) 2000 2001 2002 2003 2004
---- ---- ---- ---- ----
TC Revenue ................. $16.3 $43.5 $89.9 $98.7 $92.6
Number of Vessels (a) ...... 5 14 17 20(b) 11(c)
- ----------
(a) Number of vessels at the end of each year.
18
(b) During 2003, one time charter terminates and four newbuildings to be
delivered begin time charters.
(c) 20 vessels operate on time charters during 2004; assuming no extensions, 9
vessels complete time charter contracts during the year.
TC revenue is the amount contracted to date and does not include
projections other than for expected delivery dates of newbuildings and offhire
relating to drydock.
2002 Drydocks
We do not foresee any unusual increase in costs for the fleet during the
remainder of 2002. The vessel costs in future years may be higher than in past
years because some of the newer vessels are approaching their first drydocks
and/or special surveys and will incur costs associated with periodic routine
maintenance. OMI currently estimates approximately 24 offhire days and $0.65
million in capital expenditures for a drydock in the fourth quarter of 2002 for
one product carrier. Other vessels previously projected for 2002 drydock have
been rescheduled to 2003.
OMI'S FLEET
OMI's fleet currently comprises 36 vessels aggregating approximately 2.5
million dwt, consisting of eight Suezmaxes (including two chartered-in and one
vessel delivered in October 2002), three Panamax tankers carrying crude oil, 22
handysize and handymax product carriers (including one chartered-in), two
handysize crude oil tankers and one ultra large crude carrier ("ULCC").
During September and October 2002, the Company took delivery of two Suezmax
tanker newbuildings, the DAKOTA and the DELAWARE. Suezmaxes are normally crude
oil carriers, but these vessels have coated tanks which enable the vessels to
carry clean products as well. Both vessels began operating in the spot market
upon delivery. The DAKOTA began its first voyage carrying a clean products cargo
in September.
During October 2002, OMI chartered-in a handymax product carrier, the JAG
PRATAP, for a one year period.
NUMBER
OF VESSELS DWT
---------- -----------------
CRUDE OIL FLEET:
- ----------------
1998-2002 built Suezmax vessels ................. 6 157,000 - 160,000
1999-2000 Suezmax vessels chartered-in .......... 2 157,000
1993 built crude tankers ........................ 2 36,000
1980's built Panamax vessels .................... 3 66,000
1986 built ULCC ................................. 1 322,000
--
Total ..................................... 14
--
PRODUCT CARRIER ("CLEAN") FLEET:
- --------------------------------
2000-2002 built handymax product ................ 4 47,000
1995 built handymax product chartered-in ........ 1 45,000
1999-2002 built handysize product ............... 10 35,000 - 37,000
1984-1991 built handysize product ............... 7 29,000 - 35,000
--
Total ..................................... 22
--
Our objective is to operate a high quality, well-maintained, modern fleet
of vessels concentrated in the crude oil and product carrier markets. Large
fleets of uniform-sized and younger vessels offer many advantages to
19
customers, and enable the Company to maintain lower operating costs. In recent
years we have sought to modernize and increase the size of our fleet. While some
vessels were ordered directly from the shipyard, we also purchased rights from
other shipowners to obtain vessels upon delivery from shipyards. By doing so, we
obtained earlier access to the vessels than we would have if we ordered them
from the shipyards, and increased the size of our fleet without increasing the
supply of tonnage.
The following tables reflect the changes in the composition of OMI's fleet
from January 1, 2001 to November 2002 that are reflected in operating results
for the periods reported. There were 20 acquisitions (including vessels
chartered-in), which make up more than 50 percent of the current fleet, and
seven dispositions.
For the nine months ended September 30, 2002 the net increase in operating
days was 2,464, of which 2,319 was an increase in operating days for the Clean
Fleet and 145 for the Crude Fleet compared to the same period in 2001 (see
Breakdown by Fleet). In the third quarter 2002, there was 708 more operating
days (net) due to acquisitions/disposals, 688 of which was attributable to the
Clean Fleet and 20 in the Crude Fleet.
DATE CHARTER
ACQUIRED DELIVERED TYPE TYPE
-------- ------------- ---------- ---------
SOMJIN ................. JAN. 2001 Suezmax SPOT
RACER .................. FEB. 2001 Handysize SPOT
RAIN ................... MAR. 2001 Handysize SPOT
RADIANCE ............... MAR. 2001 Handysize SPOT
RHONE .................. APR. 2001 Handysize T/C
BANDAR AYU (1) ........ JUN. 2001 Handysize T/C
TANDJUNG AYU (1) ....... JUN. 2001 Handysize T/C
MARNE .................. SEPT. 2001 Handysize T/C
MADISON ................ SEPT. 2001 Handysize T/C
CHARENTE ............... SEPT. 2001 Handysize T/C
TRINITY ................ OCT. 2001 Handysize T/C
ASHLEY ................. NOV. 2001 Handysize T/C
OHIO ................... DEC. 2001 Handysize T/C
AMAZON ................. JAN. 2002 Handymax T/C
SAN JACINTO ............ MAR. 2002 Handymax T/C
ORONTES ................ MAR. 2002 Handysize T/C
COLUMBIA (2) ........... JUN. 2002 Suezmax SPOT
DAKOTA ................. SEPT. 2002 Suezmax SPOT
DELAWARE ............... OCT. 2002 Suezmax SPOT
JAG PRATAP (3) ......... OCT. 2002 Handymax SPOT
DISPOSALS DATE TYPE
--------- ------------- ---------
HARRIET (4) ............ JAN. 2001 Suezmax
ALTA (4) ............... MAR. 2001 Suezmax
RADIANCE ............... MAY 2001 Handysize
LOIRE .................. JUN. 2001 Suezmax
SOYANG (5) ............. DEC. 2001 Suezmax
LIMAR .................. APR. 2002 Handysize
COLUMBIA (2) ........... JUN. 2002 Suezmax
- ----------
(1) Handysize vessel carrying crude oil.
(2) The COLUMBIA, a previously chartered-in vessel, was acquired and
simultaneously sold during June 2002. The vessel, renamed OLIVER JACOB, has
been time chartered back by the Company for eight years and has been
accounted for as an operating lease.
(3) Vessel was chartered-in October 2002.
(4) Vessel was chartered-in, redelivered to owners.
(5) Vessel was chartered back in a sale leaseback transaction and was renamed
the MAX JACOB.
20
OMI has the following vessels under construction:
DELIVERY APPROX. CHARTER
TO BE NAMED TYPE OF VESSEL DATE DWT EXPIRATION
----------- -------------- ---------------- -------- ----------
MOSELLE ............. Handymax FEB. 2003 47,000 2/2006
ROSETTA ............. Handymax MAR. 2003 47,000 3/2006
OTTAWA .............. Panamax APR. 2003 70,100 4/2008
TAMAR ............... Panamax JULY 2003 70,100 7/2008
-------
Total .......... 234,200
=======
RECENT ACTIVITIES
During 2002, the Company entered into the following transactions to improve
its financial position and strengthen its balance sheet:
(1) During September and October 2002, OMI took delivery of two Suezmax
newbuildings.
(2) During October 2002, OMI chartered-in a handymax product carrier for a
one year period.
(3) In June 2002, the Company exercised its option to reacquire the
COLUMBIA and simultaneously sold the vessel to an unrelated party for
$50.0 million. The vessel, renamed OLIVER JACOB, has been time
chartered back for a period of eight years and has been accounted for
as an operating lease. The gain on the sale of approximately $4.7
million is being amortized over the charter period.
(4) In June 2002, OMI agreed to time charter two Panamax vessels to a
major oil company for a period of five years from their delivery
dates. The vessels are scheduled to be delivered in April and July
2003.
(5) In April 2002, OMI sold a 1988 built product carrier for $9.1 million
and paid down related debt of $6.0 million.
(6) In March 2002, the Company entered into a $78.0 million reducing
revolving credit facility (the line was reduced to $73.3 million in
June 2002) secured by first mortgages on two vessels and second
mortgages of vessels under another facility.
(7) In March 2002, OMI's term loan agreement (in the original amount of
$310.0 million) was amended to reduce the then three remaining 2002
quarterly payments from $10.0 million to $6.25 million and increase
the balloon payment by $11.25 million. In April 2002, the 15 remaining
quarterly payments (including the three in 2002) were reduced to $6.1
million as a result of the sale of a vessel. The balloon payment due
at maturity in October 2005 is $91.7 million.
(8) In January and March 2002, OMI took delivery of three 2002 built
product carriers (two 47,000 dwt and one 37,000 dwt). Each vessel
began a three year time charter upon delivery.
MARKET OVERVIEW
Suezmax Tanker Overview
The crude tanker market weakness, which began more than a year ago
continued in the third quarter 2002 and average Suezmax tanker TCEs, were lower
than those in the previous quarter, and well below the TCEs in the same period a
year ago. This was the result of slow global economic growth, the continuation
of OPEC's oil production cuts and gains of short-haul non-OPEC oil production,
notwithstanding a marginal increase in the tanker supply thus far this year.
Tanker TCEs showed improvement early in the fourth quarter as more oil was
transported as a result of increased Iraqi oil production and exports
21
and the increase in OPEC oil production due to higher non-compliance by its
members in their oil production quotas. Tanker TCEs are expected to benefit from
uncertainty in the oil markets which may result from increased political
instability in the Middle East.
[GRAPHICAL REPRESENTATION OF DATA CHART]
OPEC Crude Oil Production and Tanker Earnings
OPEC Crude Oil Production (Million barrels per day)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
IQ ........ 23.84 23.16 23.97 25.08 24.95 24.44 25.33 26.96 28.23 27.78 26.68 28.56 25.30
IIQ ....... 23.69 22.41 23.58 24.22 24.87 24.40 25.34 26.86 28.11 26.30 28.10 27.42 24.89
IIIQ ...... 22.21 23.63 24.51 24.85 24.74 24.94 25.54 27.34 27.27 26.70 28.86 27.94 25.63
IVQ ....... 23.19 24.13 25.38 24.90 25.07 24.96 26.25 27.82 27.33 26.14 29.20 26.88
Daily Tanker Earnings (1) (In thousands)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
IQ ........ 12.28 18.69 13.10 16.46 14.56 18.05 20.72 22.51 24.77 19.35 23.59 45.81 15.78
IIQ ....... 12.70 17.16 7.88 14.42 15.65 16.35 21.23 22.33 20.93 13.56 31.57 31.81 14.83
IIIQ ...... 8.99 14.03 7.05 13.45 15.63 19.77 19.77 22.73 18.81 11.02 44.96 27.28 14.49
IVQ ....... 10.55 10.20 11.13 15.02 18.91 19.40 20.89 25.16 18.32 15.61 55.30 20.27
- ----------
(1) Bonny-Philadelphia voyage for 1990/1991 built vessels in 1990-1996 period,
and modern vessels beginning 1997
Note: As at 9/30/2002
Source: Clarkson Research Studies, London. PIRA Energy Group
World oil demand in the third quarter 2002 was higher than the preceding
quarter as well as above the low level prevailing in the same period of last
year, the first year-on-year growth in a year. World oil demand is expected to
increase further in the foreseeable future due to usual seasonal oil demand
gains in the winter months and improvement in world economic activity and
industrial production. The average OPEC oil production in the third quarter 2002
totaled about 25.6 million barrels per day ("b/d"), down by 2.3 million b/d
compared to the same period last year, despite the substantial non-compliance by
OPEC producers toward the end of the quarter. More importantly, the average oil
output by the long-haul Middle East OPEC producers in the third quarter this
year totaled 17.3 million b/d, down by 1.9 million b/d or about 10%, compared to
the same period a year ago.
OPEC oil production cuts have left onshore commercial oil stocks in the
three major OECD markets (U.S., Europe and Japan) at the end of September 2002,
at low levels, the lowest they have been in the last ten years except in 1996
and 2000. Oil inventories are expected to fall further in the fourth quarter as
a result of increasing oil demand, notwithstanding the increase in non-OPEC oil
production and the higher OPEC countries non-compliance with their oil
production quotas.
22
TANKER ORDERBOOK AND 20+ YEAR OLD
AS PERCENTAGE OF FLEET DWT
[GRAPHICAL REPRESENTATION OF DATA CHART]
Vessels on order ............... 21.6%
Vessels 20+ years old .......... 21.8%
Note: As at 9/30/02
Source: Fearnley's, Oslo
The world tanker fleet totaled about 277.8 million deadweight ("dwt") at
the end of the third quarter 2002, up by 0.5 million dwt from the end of 2001
level, and down by 4.0 million dwt or 1.4% below the level prevailing a year
ago. The tanker orderbook for delivery over the next few years stood at 60.0
million dwt, or 21.6% of the existing fleet at the end of September 2002.
Approximately 8.6 million dwt are for delivery later this year, 30.5 million dwt
in 2003, 18.6 million dwt in 2004 and the balance in 2005. The tanker orderbook
includes 54 Suezmaxes of about 8.5 million dwt or 24.5% of the existing
internationally trading Suezmax tanker fleet.
Approximately 60.5 million dwt or 21.8% of the total tanker fleet was 20 or
more years old, including 30.4 million dwt or about 11.0% of the tanker fleet
which was 25 or more years old. In addition, 26 and 18 Suezmaxes were 20 or more
and 25 or more years old, respectively.
As a result of the low tanker freight rate environment, tanker sales for
scrap and for Floating Production Storage Offloading conversion continued at a
relatively high rate and through the end of September totaled about 16.6 million
dwt, about 40% more than the same period last year, representing an annual rate
of 22.1 million dwt.
Product Tanker Overview
After a modest recovery during the second quarter 2002, the market for
handysize product tankers in the Caribbean weakened throughout the third quarter
and the TCE rate fell compared to the preceding quarter and was well below the
rate prevailing in the same period a year ago. The handysize market in the
Caribbean continues to be weak in the early part of the current quarter.
The world product tanker fleet totaled about 48.8 million dwt at the end of
September 2002, up about 1.0% from the year-end 2001 level, and the product
tanker orderbook for delivery over the next few years totaled about 16.2 million
dwt, or about one-third of the existing product tanker fleet. Approximately 1.7
million dwt are for delivery in 2002, 6.7 million dwt in 2003, 6.6 million dwt
in 2004 and the balance in 2005. At the same time 12.0 million dwt or 24.5% of
the existing fleet was 20 or more years old, including 4.5 million dwt or 9.2%
of the existing fleet that was 25 or more years old. It seems that the product
tanker fleet will grow substantially, given the high orderbook for delivery in
the next two years, unless scrappings accelerate.
23
HANDYSIZE & HANDYMAX ORDERBOOK AND 20+
YEAR OLD AS PERCENTAGE OF FLEET DWT
[GRAPHICAL REPRESENTATION OF DATA CHART]
Vessels on order ............... 30.6%
Vessels 20+ years old .......... 25.2%
Note: As at 9/30/02
Source: SSY Consultancy and Research Ltd., London
The outlook for the tanker market is expected to improve in the near-term
as a result of the need for additional oil production by OPEC to accommodate the
expected increase in world oil demand due to the usual seasonal gains in oil
consumption and improvement of world economic activity at a time when world oil
inventories are expected to be at low levels. However, given the high tanker
orderbook for delivery in the balance of 2002 and next year, tanker rates will
depend on world economic activity and oil demand growth as well as tanker
scrappings.
RESULTS OF OPERATIONS
Results of operations include operating activities of the Company's
vessels. The following discussion explains our operating results in terms of
both Operating income (excluding (Gain) loss on disposal/write down of
assets-net and General and administrative expenses) and TCE revenues. Operating
expenses included in operating income include charter hire expense. Consistent
with industry practice, we use TCE revenue (voyage revenue less voyage expenses)
or TCE rate calculations as a measure of analyzing fluctuations in voyage
revenue between financial periods and as a method of equating revenue generated
from a voyage charter to time charter revenue.
Under a voyage charter, the owner of a vessel agrees to provide the vessel
for the transport of specific goods between specific ports in return for the
payment of an agreed upon freight per ton of cargo or, alternatively, for a
specified total amount. All operating costs are for the owner's account. A
single voyage charter is often referred to as a "spot market" charter. Vessels
in the spot market may also spend time idle or laid up as they await business.
A time charter involves the placing of a vessel at the charterer's disposal
for a set period of time during which the charterer may use the vessel in return
for the payment by the charterer of a specified daily or monthly hire rate. In
time charters, operating costs such as for crews, maintenance and insurance are
typically paid by the owner of the vessel and voyage costs such as fuel and port
charges are paid by the charterer.
24
Under a bareboat charter, the charterer takes possession of the vessel in
return for a specified amount payable daily or monthly to the owner of the
vessel. The bareboat charterer must provide its own crew, pay all operating and
voyage expenses and is responsible for the operation and management of the
vessel.
Voyage, time and bareboat charters are available for varying periods,
ranging from a single trip to a long-term arrangement approximating the useful
life of the ship to commercial firms (such as oil companies) and governmental
agencies (both foreign and domestic) on a worldwide basis. In general, a
long-term charter assures the vessel owner of a consistent stream of revenue.
Operating the vessel in the spot market affords the owner greater speculative
opportunity, which may result in high rates when ships are in high demand or low
rates (possibly insufficient to cover costs) when ship availability exceeds
demand. Ship charter rates are affected by world economics, international
events, weather conditions, strikes, governmental policies, supply and demand,
and many other factors beyond the control of OMI (see Market Overview section).
OMI has been securing vessels on long-term time charter contracts (see
Outlook section). Currently, 17 of OMI's 36 vessels are performing on time
charters greater than one year. This represents 54 percent of the operating days
of the fleet during the third quarter 2002. The crude oil fleet, however,
operates primarily in the spot market, with the exception of two crude oil
carriers acquired in June 2001 with time charters. In the discussion that
follows, total operating days are net of offhire days, which are any days that
the vessel is not generating revenue due to drydock, special surveys, repairs or
initial positioning of the vessel. Vessel expenses included in operating income
discussed above include operating expenses such as crew wages and other related
costs, stores, routine maintenance and repairs, insurance and miscellaneous.
These expenses are a function of the fleet size, utilization levels for certain
expenses, requirements under laws, and by charterer and Company standards.
Insurance expense varies with overall insurance market conditions as well
as the insured's loss record, level of insurance and desired coverage. OMI
locked in rates for most of its hull and machinery coverage (i.e. asset
insurance), and protection and indemnity coverage (liability insurance provided
by "P&I Clubs") with multi-year contracts in 2001, which also cover the new
vessels that OMI has on order. In addition, some P&I Clubs, which are mutual
indemnity providers, assessed their members additional amounts for several past
years due to their current financial needs resulting from the current poor
investment markets and an increased level of claims. Certain other insurances,
such as war risk, also increased rates. As a result insurance expense increased
in the 2002 periods compared to 2001.
OPERATING INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 VERSUS
SEPTEMBER 30, 2001
Operating income of $11.5 million for the three months ended September 30,
2002 decreased by a net $4.3 million from $15.8 million for the three months
ended September 30, 2001. Operating income of $32.2 million for the nine months
ended September 30, 2002 decreased by a net $47.9 million from $80.1 million for
the nine months ended September 30, 2001.
Operating income for the three and nine months ended September 30, 2002 and
2001 were as follows by market segments in which OMI primarily operates.
25
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
(in millions) 2002 2001 2002 2001
-------- -------- -------- --------
VOYAGE AND OTHER REVENUES:
Crude Oil Fleet .......................... $ 19.1 $ 24.7 $ 60.7 $ 102.7
Product Carrier Fleet .................... 27.5 20.4 78.4 58.1
Other Revenue ............................ -- 0.1 0.1 0.2
-------- -------- -------- -------
Total .................................... $ 46.6 $ 45.2 $ 139.2 $ 161.0
======== ======== ======== =======
VOYAGE EXPENSES:
Crude Oil Fleet .......................... $ 6.7 $ 5.4 $ 18.9 $ 15.5
Product Carrier Fleet .................... 2.0 2.8 5.9 6.4
-------- -------- -------- -------
Total .................................... $ 8.7 $ 8.2 $ 24.8 $ 21.9
======== ======== ======== =======
TCE REVENUES:
Crude Oil Fleet .......................... $ 12.4 $ 19.3 $ 41.8 $ 87.2
Product Carrier Fleet .................... 25.5 17.6 72.5 51.7
-------- -------- -------- -------
Total .................................... $ 37.9 $ 36.9 $ 114.3 $ 138.9
======== ======== ======== =======
VESSEL EXPENSES (INCLUDING CHARTER HIRE):
Crude Oil Fleet .......................... $ 8.5 $ 7.3 $ 27.0 $ 21.8
Product Carrier Fleet .................... 6.8 5.7 23.7 14.6
All Other ................................ -- (0.1) (0.2) (0.5)
-------- -------- -------- -------
Total .................................... $ 15.3 $ 12.9 $ 50.5 $ 35.9
======== ======== ======== =======
DEPRECIATION AND AMORTIZATION:
Crude Oil Fleet .......................... $ 5.1 $ 4.6 $ 14.2 $ 12.9
Product Carrier Fleet .................... 6.0 3.6 17.3 10.0
All Other ................................ -- 0.1 0.2 0.2
-------- -------- -------- -------
Total .................................... $ 11.1 $ 8.3 $ 31.7 $ 23.1
======== ======== ======== =======
OPERATING INCOME: (1)
Crude Oil Fleet .......................... $ (1.2) $ 7.4 $ 0.6 $ 52.5
Product Carrier Fleet .................... 12.7 8.3 31.5 27.1
All Other ................................ -- 0.1 0.1 0.5
-------- -------- -------- -------
Total .................................... $ 11.5 $ 15.8 $ 32.2 $ 80.1
======== ======== ======== =======
- ----------
(1) Operating Income excludes (Gain) loss on disposal/write down of assets-net
and General and administrative expenses.
Net changes are discussed as follows according to the two market segments (crude
oil fleet and product carrier or "Clean" fleet) in which OMI primarily operates.
CRUDE OIL TANKER FLEET
Operating income decreased $8.6 million for the three months and $51.9
million for the nine months ended September 30, 2002 compared to the same
periods in 2001.
26
CRUDE OIL FLEET:
BREAKDOWN BY FLEET
FOR THE THREE FOR THE NINE
IN THOUSANDS, EXCEPT DAILY RATES MONTHS ENDED MONTHS ENDED
& EXPENSES, NUMBER OF VESSELS AND SEPTEMBER 30, SEPTEMBER 30,
OPERATING DAYS ------------------------- -------------------------
(UNAUDITED) 2002 2001 2002 2001
- ----------------------------------- -------- -------- -------- --------
SUEZMAXES:
TCE Revenue .................................. $ 6,972 $ 11,167 $ 24,642 $ 58,750
-------- -------- -------- --------
Operating Expenses ........................... 1,849 2,559 6,365 7,953
Charter Hire Expense ......................... 4,288 1,641 12,210 6,192
Depreciation and Amortization................. 2,341 2,608 6,604 8,523
-------- -------- -------- --------
Operating (Loss) Income ...................... $ (1,506) $ 4,359 $ (537) $ 36,082
======== ======== ======== ========
Average Daily TCE (Spot) ..................... $ 12,539 $ 20,340 $ 15,043 $ 32,414
Average Daily TCE (Time Charter Out) ......... -- $ 17,700 -- $ 17,232
Average daily operating expense .............. $ 4,559 $ 4,636 $ 4,868 $ 4,506
Number of vessels owned-end of
period (1),(2) ............................ 5 5 5 5
Number of vessels chartered-in end of
period (2),(3) ............................ 2 1 2 1
Number of operating days (Spot) .............. 556 507 1,638 1,619
Number of operating days (Time Charter Out) .. -- 45 -- 234
- ---------------------------------------------------------------------------------------------------------------
ULCC:
TCE Revenue .................................. $ (129) $ 2,249 $ (582) $ 7,784
-------- -------- -------- --------
Operating Expenses ........................... 434 732 1,617 2,322
Depreciation and Amortization ................ 507 453 1,506 1,084
-------- -------- -------- --------
Operating (Loss)Income ....................... $ (1,070) $ 1,064 $ (3,705) $ 4,378
======== ======== ======== ========
Average Daily TCE ............................ $ (1,397) $ 24,991 $ (2,131) $ 34,908
Average daily operating expense .............. $ 4,717 $ 7,957 $ 5,923 $ 8,505
Number of vessels owned-end of period ........ 1 1 1 1
Number of operating days ..................... 92 90 273 223
- ---------------------------------------------------------------------------------------------------------------
PANAMAXES:
TCE Revenue .................................. $ 2,612 $ 2,920 $ 8,933 $ 17,356
-------- -------- -------- --------
Operating Expenses ........................... 1,395 1,858 5,017 4,773
Depreciation and Amortization ................ 1,505 808 3,934 2,427
-------- -------- -------- --------
Operating (Loss) Income ...................... $ (288) $ 254 $ (18) $ 10,156
======== ======== ======== ========
Average Daily TCE ............................ $ 9,855 $ 15,095 $ 11,438 $ 23,566
Average daily operating expense .............. 5,054 6,732 6,126 5,828
Number of vessels owned-end of period ........ 3 3 3 3
Number of operating days ..................... 265 194 781 737
- ---------------------------------------------------------------------------------------------------------------
HANDYSIZE PRODUCT CARRIERS-ON TIME CHARTER:
TCE Revenue .................................. $ 2,987 $ 3,006 $ 8,817 $ 3,379
-------- -------- -------- --------
Operating Expenses ........................... 559 492 1,754 577
Depreciation ................................. 714 714 2,141 821
-------- -------- -------- --------
Operating Income ............................. $ 1,714 $ 1,800 $ 4,922 $ 1,981
======== ======== ======== ========
Average daily TCE ............................ $ 16,231 $ 16,339 $ 16,148 $ 16,364
Average daily operating expense .............. $ 3,038 $ 2,674 $ 3,212 $ 2,801
Number of vessels owned-end of period (4) .... 2 2 2 2
Number of operating days ..................... 184 184 546 206
TOTAL CRUDE FLEET OPERATING
(LOSS)INCOME ................................. $ (1,150) $ 7,477 $ 662 $ 52,597
======== ======== ======== ========
27
Note: Average daily operating expenses are computed using the number of days in
the period which OMI owned or chartered the vessel. Number of operating days
used to compute Average daily TCE includes waiting days and is reduced only for
the days the vessels are in drydock.
(1) In September 2002, a Suezmax newbuilding was delivered. In June 2001, a
Suezmax vessel was sold. During January 2001, a Suezmax newbuilding was
delivered.
(2) In December 2001, a vessel was sold and leased back.
(3) In January and March 2001, OMI redelivered two chartered-in vessels.
(4) In June 2001, two handysize crude oil tankers were acquired with time
charters.
Fluctuations in each of the crude oil fleet vessel types were as follows:
Suezmaxes: Operating income decreased by $5.9 million for the three months
and $36.6 million for the nine months ended September 30, 2002 compared to the
three and nine months ended September 30, 2001. TCE revenue decreased by $4.2
million during the three months and $34.1 million during the nine months ended
September 30, 2002 primarily from:
(1) a decline in charter rates (see Market Overview) for the Suezmax
tanker fleet coupled with waiting/slow steaming days,
(2) a decrease in TCE revenue due to the sale of a Suezmax vessel in June
2001 (resulting in 151 fewer days during the nine month period in
2002) and
(3) a decline in earnings in 2002 due to the early termination of two
chartered-in vessels that were redelivered during the first quarter
2001 (resulting in 86 fewer operating days during the nine months in
2002).
Decreases in operating income in the 2002 periods were offset in part by
income earned in the spot market (for 20 days) by the vessel acquired in
September 2002.
Charter hire expense increased for two vessels, $2.6 million for the three
months and $6.0 million for the nine months ended September 30, 2002.
Depreciation expense decreased for one vessel, the MAX JACOB (formerly SOYANG),
which was sold and chartered back in December 2001 and OLIVER JACOB (formerly
COLUMBIA), which was also sold and then time chartered back in June 2002.
Operating expenses decreased $0.7 million for the three months and $1.6
million for the nine months ended September 30, 2002 as a result of lower
expenses for the vessel sold in 2001 and the two vessels sold and chartered
back. The average daily operating expense increased during the nine month period
in 2002 primarily for increases in insurance expense, primarily war risk
premiums and P & I supplemental calls and for other vessel expenses which we
attribute to the timing of when the expenses were incurred in 2002 versus 2001.
ULCC: Operating income decreased by $2.1 million for the three months and
$8.1 million for the nine months ended September 30, 2002 compared to the three
and nine months ended September 30, 2001. TCE revenue decreased by $2.4 million
during the three months and $8.4 million during the nine months ended September
30, 2002 primarily due to waiting days and unemployment of the vessel for a
significant part of the three and nine month periods in 2002. Net operating
expenses decreased in both periods during 2002 compared to 2001, primarily for
decreased maintenance and repair and stores expense also as a result of the
vessel's unemployment. Repairs made during the vessel's drydock in 2001
increased expense during the 2001 periods. Depreciation and amortization expense
increased primarily for amortization of drydock expense (drydock performed July
2001).
28
Panamaxes: Operating income decreased by $0.5 million for the three months
and $10.2 million for the nine months ended September 30, 2002 compared to the
three and nine months ended September 30, 2001. TCE revenue decreased by $0.3
million during the three months and $8.4 million during the nine months ended
September 30, 2002 primarily from a decline in charter rates (see Market
Overview) for the fleet coupled with waiting/slow steaming days in 2002.
Operating expense increased for the nine months ended September 30, 2002 by $0.2
million primarily for increases in crew expenses and insurance expense
(primarily war risk premiums and P & I supplemental calls) compared to 2001.
Operating expense decreased for the three months ended September 30, 2002 by
$0.5 million primarily for timing of when the expenses were incurred in 2002
versus 2001. Depreciation and amortization expense increased primarily for
amortization of drydock expense for three vessels drydocked in October, December
2001 and July 2002.
Handysize Product Carriers-on time charter: Operating income decreased by
$0.1 million for the three months and increased $2.9 million for the nine months
ended September 30, 2002 compared to the three and nine months ended September
30, 2001. TCE revenue remained relatively unchanged during the three months and
increased $5.4 million during the nine months ended September 30, 2002 primarily
from the two 1993 built crude oil carriers that were delivered in June 2001
(aggregating 340 more operating days in 2002) that are continuing on long-term
time charters. Operating expenses increased $0.1 million during the three months
ended September 30, 2002 primarily from additional crew and miscellaneous
expenses. Operating expenses increased $1.2 million during the nine months ended
September 30, 2002 primarily from more operating days in 2002.
PRODUCT CARRIER FLEET
Operating income earned by the product carrier fleet increased a net of
$4.4 million for the three months and $4.4 million for the nine months ended
September 30, 2002 compared to the same periods in 2001.
CLEAN FLEET:
BREAKDOWN BY FLEET
FOR THE THREE FOR THE NINE
IN THOUSANDS, EXCEPT DAILY RATES MONTHS ENDED MONTHS ENDED
& EXPENSES, NUMBER OF VESSELS AND SEPTEMBER 30, SEPTEMBER 30,
OPERATING DAYS ---------------------- ----------------------
(UNAUDITED) 2002 2001 2002 2001
- ---------------------------------- ------- ------- ------- -------
PRODUCTS-ON-SPOT:
TCE Revenue ....................... $ 4,063 $ 8,764 $13,366 $32,159
------- ------- ------- -------
Operating Expenses ................ 2,206 3,080 7,941 9,178
Depreciation and Amortization ..... 1,603 1,642 4,726 5,496
------- ------- ------- -------
Operating Income .................. $ 254 $ 4,042 $ 699 $17,485
======= ======= ======= =======
Average Daily TCE ................. $ 8,101 $14,132 $ 8,218 $16,486
Average daily operating expense ... $ 3,996 $ 4,775 $ 4,641 $ 4,495
Number of vessels owned-end of
period (1), (2) ................. 6 7 6 7
Number of operating days .......... 501 618 1,625 1,951
- ----------------------------------------------------------------------------------------------
PRODUCTS-ON-TIME CHARTER:
TCE Revenue ....................... $21,470 $ 8,837 $59,163 $19,476
------- ------- ------- -------
Operating Expenses ................ 4,681 2,601 15,778 5,276
Depreciation and Amortization ..... 4,309 2,003 12,532 4,539
------- ------- ------- -------
Operating Income .................. $12,480 4,233 $30,853 $ 9,661
======= ======= ======= =======
29
BREAKDOWN BY FLEET
FOR THE THREE FOR THE NINE
IN THOUSANDS, EXCEPT DAILY RATES MONTHS ENDED MONTHS ENDED
& EXPENSES, NUMBER OF VESSELS AND SEPTEMBER 30, SEPTEMBER 30,
OPERATING DAYS ---------------------- ----------------------
(UNAUDITED) 2002 2001 2002 2001
- ----------------------------------- ------- ------- ------- -------
PRODUCTS-ON-TIME CHARTER:
Average Daily TCE (3) ............ $15,558 $14,726 $15,016 $14,051
Average daily operating expense ... $ 3,392 $ 4,342 $ 4,004 $ 3,798
Number of vessels owned-end of
period (2), (4) ................. 15 9 15 9
Number of operating days .......... 1,380 599 3,941 1,389
- ----------------------------------------------------------------------------------------------
TOTAL CLEAN FLEET OPERATING INCOME ... $12,734 $ 8,275 $31,552 $27,146
======= ======= ======= =======
Note: Average daily operating expenses are computed using the number of days in
the period which OMI owned or chartered the vessel. Number of operating days
used to compute Average daily TCE includes waiting days and is reduced only for
the days the vessels are in drydock.
(1) A vessel was sold in April 2002. A vessel acquired in March 2001 was sold
in May 2001.
(2) A vessel operating on spot during the first half of 2001 began a time
charter in July 2001.
(3) During 2002, OMI recognized profit sharing of approximately $2.2 million in
the third quarter 2002 and $4.4 million for the nine months ended September
30, 2002.
(4) From July to December 2001, six handysize product carriers were acquired.
In January and March 2002, two handymax product carriers and one handysize
product carrier were acquired.
Fluctuations in each of the product carrier groups were as follows:
Product Carriers-on spot: Operating income decreased by $3.8 million for
the three months and by $16.8 million for the nine months ended September 30,
2002 compared to the three and nine months ended September 30, 2001. TCE revenue
decreased by $4.7 million during the three months and $18.8 million during the
nine months ended September 30, 2002 primarily from the decline in spot rates
during the 2002 periods compared to the same periods in 2001 (see Market
Overview). Additionally, TCE revenue and operating expenses declined because of
a vessel that began a two-year time charter in July 2001, and another vessel
that was sold in April 2002. Average daily operating expenses also decreased
during the third quarter 2002 as a result of timing of when certain expenses
were incurred in 2002 versus 2001.
Product Carriers-on time charter: Operating income increased by $8.2
million for the three months and by $21.2 million for the nine months ended
September 30, 2002 compared to the three and nine months ended September 30,
2001. TCE revenue increased by $12.6 million for the three months and $39.7
million for the nine months ended September 30, 2002 compared to the same
periods in 2001. The increases were attributable primarily to the purchase of
seven vessels in 2001 and three vessels in 2002 coupled with increased profit
sharing earned in 2002 by five vessels, three of which were acquired in 2001.
Four of the vessels have anniversary dates in the third quarter; however, profit
sharing for one of the vessels that has an anniversary date in July was recorded
in the second quarter 2002.
The five vessels that are time chartered with profit sharing agreements
receive 50 percent profit sharing above the agreed rate. In accordance with SEC
Staff Accounting Bulletin No. 101 Revenue Recognition in Financial Statements,
OMI recognizes the profit sharing or contingent
30
revenue only after meeting a threshold, which is the minimum yearly charter
hire. In the third quarter of 2002, OMI recognized $2.2 million in profit
sharing primarily from three vessels that have anniversary dates in September.
For the nine month period in 2002 an aggregate of $4.4 million in profit sharing
was recognized. The Company receives preliminary profit sharing after six
months. This distribution is recorded in deferred revenue until the threshold is
reached.
Operating expenses and depreciation and amortization expense also increased
in the 2002 periods corresponding to the increased number of vessels.
Additionally, operating expenses increased by legal expenses relating to an
investigation with which the company is cooperating and is explained in the
Other Matters section of this report.
OTHER OPERATING EXPENSES
The Company's operating expenses, other than vessel, voyage and charter
hire expenses, consist of depreciation and amortization, general and
administrative ("G&A") expenses and (gain) loss on disposal/write down of
assets-net. These expenses increased by $3.4 million to $14.8 million for the
three months ended September 30, 2002 and by $29.8 million to $42.3 million for
the nine months ended September 30, 2002 compared to the same period in 2001.
The increases were primarily attributable to: depreciation and amortization and
gain on disposal of vessels-net in 2001 compared to the nine months ended
September 30, 2002.
Depreciation and amortization-Depreciation and amortization increased by
$2.8 million during the three months and by $8.6 million during the nine months
ended September 30, 2002 compared to the three and nine months ended September
30, 2001. The increase was primarily due to the acquisition of seventeen new
vessels (seven of which were acquired during the first half of 2001, six during
the latter part of 2001 and four in 2002, see OMI's Fleet section), net of the
decrease from the disposal of two Suezmax vessels and one product carrier, in
addition to the increase in expense due to amortization of drydock.
General and administrative--G & A increased $0.6 million for the three
months and $1.4 million for the nine months ended September 30, 2002 compared to
the same periods in 2001. The increases were due to additional expenses as a
result of a larger fleet in 2002.
(Gain) loss on disposal/write down of assets-net-The (Gain)loss on
disposal/write down of assets -net changed by $19.8 million for the nine months
ending September 30, 2002 compared to the same period in 2001. The 2002 loss on
disposal of $0.3 million resulted primarily from the loss on disposal of a 1988
built product carrier, which was sold in April 2002.
The 2001 gain on disposal of $19.5 million resulted from the sale of two
vessels, a 2000 built Suezmax vessel with a gain of $17.5 million and gain on
the sale of a product carrier (acquired in March 2001) of $0.6 million.
Additionally, the 2001 gains of $1.4 million included in the nine months ended
September 30, 2001 results of operations resulted from the early termination of
two time charters. The gain from the early termination of one charter was from
the accelerated amortization of the provision for loss on the lease obligation.
The gain on early termination of the second charter resulted from accelerated
amortization on the deferred gain on sale of the vessel.
OTHER (EXPENSE) INCOME
Other (expense) income consists of loss/ write down on investments--net,
interest expense, interest income and other-net. Net other expense
31
increased by $1.1 million from $5.2 million during the three months ended
September 30, 2001 to $6.3 million for the three months ended September 30,
2002. Net other expense increased by $2.8 million from $15.3 million during the
nine months ended September 30, 2001 to $18.1 million for the nine months ended
September 30, 2002.
During the nine months ended September 30, 2002, OMI recorded a net loss on
the disposal/write down of investments aggregating $0.9 million. The loss was
offset in part by a net gain on the disposal of marketable securities of $0.3
million for the nine months ended September 30, 2002. The 2001 loss on
disposal/write down of investments of $1.1 million and $1.6 million for the
three and nine months, respectively, related to the winding down of the
International Product Carriers Limited joint venture.
Interest expense during the three and nine months ended September 30, 2002
increased $2.0 million and $2.5 million, respectively, compared to the three and
nine months ended September 30, 2001. The average outstanding debt for both
periods in 2002 was higher than the comparable periods in 2001 due to additional
borrowings for acquisitions above that of the repayments from the disposal of
vessels. The net increase was primarily due to interest expense on the financing
for vessel acquisitions.
Interest income during the three and nine months ended September 30, 2002
decreased by $0.3 million and $1.1 million, respectively, compared to the three
and nine months ended September 30, 2001. The decrease was primarily due to
average lower rates on cash equivalents and lower Notes receivable balances in
2002.
INCOME TAX BENEFIT
The income tax benefit of $1.1 million for the three months and $1.4
million for the nine months ended September 30, 2002 represented the reversal of
tax accruals (previously reserved for in Deferred income taxes) after the
settlement payment of $0.5 million pertaining to certain tax years prior to the
spin off date of June 17, 1998.
OMI is a Marshall Islands Corporation. Pursuant to various tax treaties and
the current United States Internal Revenue Code, the Company's international
shipping income prospectively is not subject to federal income taxes in the
United States (other than adjustments to previously reported amounts).
EQUITY IN OPERATIONS OF JOINT VENTURES
Equity in operations of joint ventures decreased by $0.2 million for the
nine months ended September 30, 2002 compared to the nine months ended September
30, 2001. The 2001 balance was from the winding down of the joint ventures
disposed of in prior years.
BALANCE SHEET
During the nine months ended September 30, 2002, OMI sold marketable
securities and received net proceeds of approximately $6.1 million. The sales
resulted in a net gain of $0.3 million for the nine months ended September 30,
2002.
At September 30, 2002, Accumulated other comprehensive income was reduced
by $1.9 million to reflect the fair value of the swaps to $6.0 million (see
Financing Activities) and the fair value of an investment to $0.1 million at
that date.
32
During the nine months ended September 30, 2002, changes in Vessels and
other property-net were as follows:
>> Vessels and other property increased $133.5 million,
>> Construction in progress decreased a net of $31.9 million and
>> Accumulated depreciation increased a net of $22.2 million from the
balances at December 31, 2001. Depreciation and amortization for the
nine months ended September 30, 2002 was $29.1 million (excluding $2.6
million for amortization of drydock expense, which is included with
Prepaid drydock).
During January, March and September 2002, OMI took delivery of four
vessels, two new handymax product carriers, one handysize product carrier and
one Suezmax vessel. Vessels increased an aggregate of $148.3 million for the
capitalized costs of the four vessels, $50.4 million of which was reclassified
from Construction in progress and $97.7 million cash was paid to the shipyard
and related to capitalized costs. The Company financed an aggregate of $91.9
million of these payments during the nine months ended September 30, 2002 (see
Cash Flow section and Financing Activities).
Increases to Vessels and other property were partially offset by the sale
of the product carrier in April 2002, decreasing Vessels by $15.9 million and
Accumulated depreciation decreased by $6.9 million. Additionally, a charge was
recorded to reflect the loss on disposal of the vessel of $0.3 million.
In June 2002, the Company exercised its option to reacquire the COLUMBIA
(using approximately $29.0 million in cash, $12.0 million of cash in an escrow
account and $3.7 million of proceeds from an associated note receivable) and
simultaneously sold the vessel to an unrelated party for $50.0 million. The
vessel, renamed OLIVER JACOB, has been time chartered back for a period of eight
years (plus two years at the owners option) and has been accounted for as an
operating lease. The gain on the sale of approximately $4.7 million will be
amortized over the charter period of eight years. The Company used $20.0 million
of the sales proceeds to pay down a line of credit.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash and cash equivalents of $31.4 million at September 30, 2002 increased
$13.7 million from cash and cash equivalents of $17.7 million at December 31,
2001. The Company's working capital decreased by $16.2 million between September
30, 2002 and December 31, 2001, and is a deficit of $21.7 million at September
30, 2002. The deficit will be met by the time charter revenue from the new
vessels, income earned from vessels in the spot market which is expected to
increase in the next year, the $78.0 million credit facility entered into on
March 27, 2002 and other activities. Current assets decreased $14.0 million and
current liabilities increased $2.3 million. Cash increased primarily because of
proceeds from the issuance of debt and the sale of two vessels and marketable
securities, which exceeded the payments to acquire vessels. Decreases in other
current assets were primarily from the return of escrow ($12.0 million) as a
result of the purchase of the COLUMBIA in June 2002. Current liabilities
increased primarily from the increase in the current portion of long-term debt,
which related to the acquisition of vessels. Net cash provided by operating
activities decreased $56.9 million to $36.7 million for the nine months ended
September 30, 2002 compared to net cash provided by operating activities of
$93.6 million for the nine months ended September 30, 2001 (see Results of
Operations).
33
During the nine months ended September 30, 2002 the Company took various
steps to improve its liquidity, and as a result ended the quarter with a cash
balance of $31.4 million. The Company had $14.6 million available under lines of
credit (currently $22.6 million) and our net debt to net capitalization ratio is
53.6 percent. The Company's management believes that cash flow from operations,
along with available borrowing capacity under its credit facilities, will be
sufficient to meet capital requirements.
Cash used by investing activities was $83.9 million for the nine months
ended September 30, 2002, compared to cash used by investing activities of
$210.1 million for the nine months ended September 30, 2001. During 2002, $162.5
million was used for the additions to vessels:
>> $97.9 million was used for the purchase of three product carriers and
one Suezmax vessel,
>> $44.9 million for the purchase of the COLUMBIA,
>> $15.8 million was paid for vessels under construction, and
>> $3.9 million was used for capital expenditures for improvements to
existing vessels and capitalized interest
Cash was used during the nine months ended September 30, 2001 primarily for
additions to vessels of $277.1 million:
>> $218.2 million in cash used to purchase one 2001 built Suezmax vessel,
three 1989-1990 built, two 1993 built, two 2000 built and two 2001
built product carriers,
>> $19.2 million for two new Suezmax newbuilding contracts,
>> $3.0 million deposit for a product carrier delivered in October,
>> $33.8 million installment payments for nine vessels under
construction, and
>> $2.9 million for capital expenditures for improvements to existing
vessels and capitalized interest
During the nine months ended September 30, 2002, we sold and leased back a
Suezmax vessel, sold a product carrier (proceeds from dispositions aggregated
$58.0 million), secured additional lines of credit, and reduced amortization on
existing lines giving us flexibility to withstand weak tanker markets and
improve liquidity. Proceeds of $77.3 million received for the disposal of
vessels during the nine months ended September 30, 2001, were for the Suezmax
vessel sold in June 2001 and a product carrier sold in May 2001.
Financing Activities
Cash provided by financing activities was $60.8 million for the nine months
ended September 30, 2002, compared to cash provided by financing activities of
$110.8 million for the nine months ended September 30, 2001. During the nine
months ended September 30, 2002, there was $105.7 million in principal payments
($30.4 million were scheduled payments, $49.3 million for two vessels that were
refinanced under a new credit facility in March 2002, $6.0 million for a vessel
sold in April 2002, and $20.0 million paid down on a credit facility upon the
sale of the COLUMBIA), and there was $167.9 million in proceeds from the
issuance of debt ($111.9 million for the purchase of four vessels and
construction in progress payments and $56.0 million was drawn down on the $78.0
million credit facility).
During the nine months ended September 30, 2001 we paid debt of $97.3
million; $32.2 million in scheduled principal payments and $65.1 million in
unscheduled payments ($37.7 million was paid upon the sale of a vessel in June
2001, $23.0 million was refinanced in July 2001 and $4.4 million of OMI's senior
unsecured Notes were repurchased in August 2001).
34
At September 30, 2002, OMI had $494.8 million in debt outstanding. The
following paragraphs describe changes to the Company's debt facilities during
the nine months ended September 30, 2002:
The Company has a term loan agreement, secured by 16 vessels, in the
original amount of $310 million, which had a balance of $170.3 million at
September 30, 2002. In March 2002, this facility was amended to reduce the then
three remaining 2002 quarterly payments from $10.0 million to $6.25 million and
increase the balloon payment by $11.25 million. In April 2002, the 15 remaining
quarterly payments (including the three in 2002) were reduced to $6.1 million as
a result of the sale of a vessel. The balloon payment due at maturity in October
2005 is $91.7 million. As a result of the amendment, the Company's margin on
this Facility was increased by 25 basis points. For the period ending September
30, 2002, the Company's interest rate margin was 2.25% over LIBOR.
On March 27, 2002, the Company entered into a $78.0 million reducing
revolving credit facility secured by first mortgages on two vessels and second
mortgages on 17 vessels. The loan, which matures on March 27, 2007, bears
interest at LIBOR plus a margin of 2.75 percent, and requires semi-annual
payments of $3.0 million, with the balance being payable with the tenth payment.
As of September 30, 2002, the line had been reduced to $70.7 million, and the
Company had $14.6 million available under the line. During October 2002, OMI
paid down $8.0 million on this facility (which increased the amount available
under the line to $22.6 million).
In November 2001, the Company obtained a seven-year $44.0 million term loan
to partially finance the purchase of two product carrier newbuildings, one of
which was delivered on December 17, 2001 and the other of which was delivered on
March 26, 2002. The loan is split into two $22.0 million tranches. At September
30, 2002, the balance of the loan was $40.8 million. Each tranche is being
repaid in 28 quarterly installments (the first 12 at $0.65 million and next 16
at $0.38 million) plus a balloon of $8.2 million due with the last installment.
The outstanding balance of the loan bears interest at LIBOR plus an applicable
margin. During the first three years of this loan the margin is 1.00 percent as
long as the secured vessels remain on time charter. During the remaining four
years, the margin will be based on OMI's ratio of consolidated funded debt to
consolidated EBITDA on a trailing four quarter basis.
Reducing Revolving Facility
On July 27, 2001, OMI entered into a six year $348.0 million reducing
revolving credit facility (the "$348 Facility"). The $348 Facility has been and
will be used to provide up to 65 percent financing of pre-delivery installments
and final payments at delivery on eleven newbuilding vessels, with deliveries
scheduled through 2003, acquisition financing and refinancing of four secondhand
vessels purchased in the first half of 2001 and for general corporate purposes
up to the available amount. This loan includes interest rate margins based on a
pricing ratio grid (currently 2.125% over LIBOR). The Company paid an additional
margin of 25 basis points until September 30, 2002, which was reduced to 12.5
basis points for the period from October 1, 2002 to March 31, 2003. The
availability of the facility reduces quarterly based on a 17-year amortization
schedule from delivery of the vessels until September 2003, and thereafter $6.5
million per quarter until July 27, 2007 at which time the outstanding balance is
due. At September 30, 2002, the Company had drawn $189.3 million. The remainder
of the Facility becomes available when construction and delivery payments are
made.
35
Restrictive Covenants
All loan agreements contain restrictive covenants as to working capital,
net worth, maintenance of specified financial ratios and collateral values. They
restrict the Company's ability to make certain payments, such as dividends and
repurchase of its stock. Pursuant to the loan agreements liens against specific
assets were granted and other liens against those assets were prohibited. As of
September 30, 2002, the Company was in compliance with its covenants.
Interest Rate Swaps
As of September 30, 2002, the Company had two interest rate swaps, which
are cash flow hedges, aggregating $145.0 million and has recorded a liability of
$6.0 million and a charge correspondingly to Accumulated other comprehensive
income related to the fair market value of these swaps. During October 2002, OMI
committed to six new interest rate swaps, which also have been designated as
cash flow hedges. The following table lists all swap contracts and terms (in
thousands):
FIXED
NOTIONAL START MATURITY INTEREST
AMOUNT DATE DATE RATE
-------- --------- --------- --------
$60,000 Oct. 2001 Oct. 2004 4.77%
85,000 Oct. 2001 Oct. 2005 4.86%
20,000 Dec. 2002 Jun. 2004 2.12%
37,000 Feb. 2003 Jun. 2004 2.16%
24,000 Mar. 2003 Jun. 2004 2.17%
20,000 Mar. 2003 Jun. 2004 2.07%
17,000 Jun. 2003 Jun. 2004 2.16%
34,600 Apr. 2003 Jun. 2004 2.08%
The Company will pay fixed-rate interest payments and will receive
floating-rate interest amounts based on three month LIBOR settings (for a term
equal to the swaps' reset periods).
Future Rate Agreements
In February 2002, OMI entered into five FRAs, which match five loan
tranches of the $348 Facility, for an aggregate notional value of $95.3 million.
The FRAs fixed the interest rate before margins on these tranches within a range
of 2.355% to 2.50% and expire in December 2002. In October 2002, OMI entered
into four more FRAs, which match four loan tranches of the $348 Facility, for an
aggregate notional value of $91.0 million. The FRAs fixed the interest rate
before margins on these tranches within a range of 1.72% to 1.86% beginning May
2003 and expire in December 2003.
ADJUSTED EBITDA
The Company, its lenders and investors generally consider adjusted EBITDA
to be an appropriate measure of performance. Adjusted EBITDA represents
operating income from operations before depreciation and amortization expense
and (gain)loss on disposal/write down of assets-net. OMI's computation of
adjusted EBITDA may not be comparable to the adjusted EBITDA reported by other
companies. Adjusted EBITDA should not be considered an alternative to net income
or other measurements under generally accepted accounting principles. Adjusted
EBITDA of $18.9 million for the three months and $53.6 million for the nine
months ended September 30, 2002 was $2.1 million less than the three months and
$40.7 million less than the nine months ended September 30, 2001 adjusted
EBITDA. The decreases in both periods were due to the decline in tanker rates,
but primarily due to the decreased rates earned by the Suezmax fleet in 2002
compared to the same periods in 2001.
36
OTHER COMMITMENTS
The following are other commitments that have not been previously detailed
in the Recent Activities section.
Contracts to Purchase Vessels
The following are commitments to purchase vessels currently under
construction, related construction payments and the financing arranged (in
millions):
CONSTRUCTION PAYMENTS
DELIVERY CONTRACT ---------------------
VESSEL DATE PRICE 2002 2003
- ------ -------- -------- ----- -----
MOSELLE (1) .......... 2/2003 $ 29.2 $ -- $20.5
ROSETTA (1) .......... 3/2003 29.5 2.9 20.6
OTTAWA (2) .......... 4/2003 36.7 3.7 25.7
TAMAR (2) .......... 7/2003 36.7 3.7 29.4
------ ----- -----
Total ..... $132.1 $10.3 $96.2
====== ===== =====
Construction Financing Arranged ...................... $ 6.7 $62.5
===== =====
- ----------
(1) This vessel will commence a three-year time charter upon delivery.
(2) This vessel will commence a five-year time charter upon delivery.
Restricted Stock
In April 2002, OMI awarded and issued 20,000 shares of restricted stock to
a new director for a total value at the date of grant of approximately $0.1
million. Restrictions lapse for 25 percent of the shares at the end of year
three, the next 25 percent at the end of year five, and the remaining 50 percent
of the shares at varying years in accordance with years of service at the
individuals' retirement date (if the director remains with the Company for at
least five years from the date of grant).
Other Matters
The Company is continuing to cooperate with an investigation by the U.S.
Attorney's office in Newark, New Jersey of an allegation that crew members of
one or more of the Company's vessels had by-passed systems designed to prevent
impermissible discharge of certain wastes into the water and had presented false
statements to the government, and otherwise had obstructed the government's
investigation. As well as being violations of the MARPOL (Maritime Pollution)
Convention and U.S. law, the activities under investigation violate Company
policies and directives. The Company is continuing its review of those policies
and has been implementing additional safeguards. The Company received a subpoena
requesting information with respect to other vessels in its fleet and the
Company has been providing the information requested. On May 10, 2002 a former
master and former chief engineer of one of the Company's vessels entered guilty
pleas in U.S. District Court in Newark, New Jersey, to violations of U.S. law
involving false statements to the U.S. Coast Guard during a vessel's port call
in New Jersey on September 10, 2001. At this time, the Company cannot predict
the scope or duration or estimate the cost of this investigation or its outcome.
Accordingly, the Company cannot predict whether any penalties or fines will be
imposed or their materiality. The Company expects that a substantial portion of
the costs relating to this incident will be covered by insurers, who have been
duly notified.
37
OMI and certain subsidiaries are defendants in various actions arising from
shipping operations. Such actions are covered by insurance or, in the opinion of
management, are of such nature that the ultimate liability, if any, would not
have a material adverse effect on the consolidated financial statements.
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.
Newly Issued Accounting Standards
SFAS 146, "Accounting for Costs Associated with Exit or Disposal
Activities" was issued in June 2002. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS 146 requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability is incurred, as
opposed to when the entity commits to an exit plan under EITF Issue No. 94-3.
The Company is required to adopt SFAS 146 for exit or disposal activities that
are initiated after December 31, 2002. The Company currently does not anticipate
that the provisions of the new statement will have a material impact on its
financial statements in the year of adoption.
During 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 145 ("SFAS 145"), Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections. The Statement
updates, clarifies and simplifies existing accounting pronouncements. SFAS 145
rescinds Statement 4, which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in Opinion 30 will now
be used to classify those gains and losses. Statement 64 amended Statement 4,
and is no longer necessary because Statement 4 has been rescinded. Statement 44
was issued to establish accounting requirements for the effects of transition to
the provisions of the Motor Carrier Act of 1980. Because the transition has been
completed, Statement 44 is no longer necessary. SFAS 145 amends Statement 13 to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This Statement also makes technical corrections to
existing pronouncements. While those corrections are not substantive in nature,
in some instances, they may change accounting practice. This Statement is
effective for fiscal years beginning after May 15, 2002. Since this new
Statement was issued to clarify and simplify existing pronouncements there is no
effect on the Company's financial statements.
SFAS 143, "Accounting for Asset Retirement Obligations" was issued in June
2001. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
currently does not anticipate that the provisions of the new statement will have
a material impact on the Company's financial statements.
38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's major market risk exposure is changing interest rates. The
majority of OMI's debt was floating rate debt at September 30, 2002 and December
31, 2001. At September 30, 2002, the floating rate debt was $493.8 million
($145.0 million of which was fixed with interest-rate swaps and $95.3 million
with FRAs) of the $494.8 million total debt, and at December 31, 2001, the
floating rate debt was $431.0 million ($175.0 million of which was fixed with
interest-rate swaps) of the $432.6 million total debt. Based on the floating
rate debt at September 30, 2002, a one-percentage point increase in the floating
interest rate would increase interest expense by $3.5 million per year.
The fixed rate debt on the balance sheet and the fair market value were
$1.0 million as of September 30, 2002, and $1.6 million as of December 31, 2001.
Based on the fixed rate debt at September 30, 2002, if interest rates were to
increase (decrease) by one percent with all other variables remaining constant,
the market value of the fixed rate debt would have an immaterial change.
The Company's policy is to manage interest rate risk through the use of
interest rate derivatives based upon market conditions. OMI uses interest rate
swaps and FRAs to manage the impact of interest rate changes on borrowings under
the Company's variable rate credit facilities. The interest rate swaps and FRAs
are entered into with a group of financial institutions with investment grade
credit ratings, thereby minimizing the risk of credit loss. The Company has
entered into certain interest rate derivative transactions with certain
financial institutions to manage the impact of interest rate changes on variable
rate debt.
As of September 30, 2002, the Company had two interest rate swap
transactions with notional amounts of $60.0 million and $85.0 million in which
the Company will pay fixed-rate interest payments, at 4.77% and 4.86%,
respectively, and will receive floating-rate interest amounts based on three
month LIBOR settings (for a term equal to the swaps' reset periods). These
agreements have maturity dates of October 2004 and October 2005, respectively.
These transactions have been designated as cash flow hedges, and as of September
30, 2002, the Company has recorded a liability of $6.0 million and a charge
correspondingly to Accumulated other comprehensive income related to the fair
market value of these swaps.
In February 2002, we entered into five FRAs, which match five loan
tranches, respectively, for an aggregate notional value of $95.3 million. The
FRAs fixed the interest rate before margins on these tranches within a range of
2.355% to 2.50 and expire in December 2002.
In October and November 2002, we agreed to six interest rate swaps for an
aggregate notional amount of $152.6 million. In each of these swaps, we will pay
a fixed rate interest and receive floating rate interest. The swaps are
designated as cash flow hedges. The following table summarizes the swaps:
FIXED
NOTIONAL START MATURITY INTEREST
AMOUNT DATE DATE RATE
-------- --------- --------- --------
$20,000 Dec. 2002 Jun. 2004 2.12%
37,000 Feb. 2003 Jun. 2004 2.16%
24,000 Mar. 2003 Jun. 2004 2.17%
20,000 Mar. 2003 Jun. 2004 2.07%
17,000 Jun. 2003 Jun. 2004 2.16%
34,600 Apr. 2003 Jun. 2004 2.08%
39
In October 2002, we agreed to four FRAs for an aggregate notional amount of
$91.0 million. In each of these FRAs, we will pay a fixed rate interest and
receive floating rate interest. The FRAs are designated as cash flow hedges. The
following table summarizes the FRAs:
FIXED
START MATURITY INTEREST
AMOUNT DATE DATE RATE
------- --------- --------- --------
$13,000 May 2003 Dec. 2003 1.72%
15,000 July 2003 Dec. 2003 1.79%
31,000 July 2003 Dec. 2003 1.79%
32,000 July 2003 Dec. 2003 1.86%
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
within 90 days prior to the filing date of this quarterly report. There were no
significant changes in internal controls or in other factors that could
significantly affect these controls subsequent to management's evaluation.
40
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
99.1 OMI Corporation's certification by the Chief Executive Officer on Form
10-Q for the period ending September 30, 2002 pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of THE SARBANES-OXLEY ACT OF 2002.
99.2 OMI Corporation's certification by the Chief Financial Officer on Form
10-Q for the period ending September 30, 2002 pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of THE SARBANES-OXLEY ACT OF 2002.
b. REPORTS ON FORM 8-K
None.
41
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: NOVEMBER 14, 2002 BY: /s/ CRAIG H. STEVENSON, JR.
- ----------------------- ---------------------------
CRAIG H. STEVENSON, JR.
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
DATE: NOVEMBER 14, 2002 BY: /s/ KATHLEEN C. HAINES
- ----------------------- ------------------------
KATHLEEN C. HAINES
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
AND TREASURER
42
CERTIFICATIONS
I, Craig H. Stevenson, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of OMI Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DATE: NOVEMBER 14, 2002 BY: /s/ CRAIG H. STEVENSON, JR.
----------------- ----------------------------------------
Craig H. Stevenson, Jr.
Chairman of the Board and
Chief Executive Officer
43
CERTIFICATIONS
I, Kathleen C. Haines, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OMI Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DATE: NOVEMBER 14, 2002 BY: /s/ KATHLEEN C. HAINES
----------------- -------------------------------------
Kathleen C. Haines
Senior Vice President,
Chief Financial Officer and Treasurer
44