-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O2l6YG+eMRDGFNd71jiWiL1q78tqjrxQAblB8ynijnl/TOnBHQsNmuOEPx12LJOX 49dL1UnWvkP7YY9dck7Suw== 0000950123-98-009666.txt : 19981111 0000950123-98-009666.hdr.sgml : 19981111 ACCESSION NUMBER: 0000950123-98-009666 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARINE TRANSPORT CORP CENTRAL INDEX KEY: 0000732780 STANDARD INDUSTRIAL CLASSIFICATION: DEEP SEA FOREIGN TRANSPORTATION OF FREIGHT [4412] IRS NUMBER: 132625280 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11573 FILM NUMBER: 98741395 BUSINESS ADDRESS: STREET 1: 1200 HARBOR BOULEVARD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 BUSINESS PHONE: 2013300200 MAIL ADDRESS: STREET 1: 1200 HARBOR BOULEVARD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 FORMER COMPANY: FORMER CONFORMED NAME: OMI CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: OGDEN MARINE INC DATE OF NAME CHANGE: 19831212 10-Q 1 MARINE TRANSPORT CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (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, 1998 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 000-11573 MARINE TRANSPORT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-2625280 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 1200 HARBOR BOULEVARD, C-901, WEEHAWKEN, NJ 07082-0901 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code 201-330-0200 Former Name: OMI Corp. Former Address: 90 Park Avenue New York, NY 10016 Former Fiscal Year: Not applicable 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 9, 1998: Common Stock, par value $0.50 per share, 5,892,605 shares 2 MARINE TRANSPORT CORPORATION AND SUBSIDIARIES INDEX
PAGE ---- PART I: FINANCIAL INFORMATION 3 ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Statements of 4 Operations for the three months and nine months ended September 30, 1998 and 1997 Condensed Consolidated Balance Sheets- 5 September 30, 1998 and December 31, 1997 Condensed Consolidated Statements of Changes in 6 Stockholders' Equity for the year ended December 31, 1997 and the nine months ended September 30, 1998 Condensed Consolidated Statements of Cash Flows for the nine 7 months ended September 30, 1998 and 1997 Notes to Condensed Consolidated Financial 8 Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 PART II: OTHER INFORMATION 18 SIGNATURES 19
2 3 PART I: ITEM 1: FINANCIAL INFORMATION SUMMARY OF CERTAIN TRANSACTIONS AFFECTING THE COMPANY Marine Transport Corporation ("MTC" or "the Company"), formerly OMI Corp., was established in its present form through a series of transactions, culminating June 17, 1998, through which OMI Corp. split up and distributed to its shareholders a subsidiary containing its international businesses (the "Distribution") and then acquired Marine Transport Lines, Inc. in a stock-for-stock exchange (the "Acquisition"). OMI Corp. then changed its name to Marine Transport Corporation. Upon completion of the Distribution, the assets, liabilities and equity related to OMI Corp.'s international businesses were removed from the Company's balance sheet at their recorded values. For periods prior to the Distribution, the historical financial statements of the Company reflect the financial position and results of operations of OMI Corp. as reported for such periods. For periods subsequent to the Distribution and Acquisition, the Company's financial statements include the assets, liabilities, equity and operations of OMI Corp.'s domestic business and reflect the acquisition of Marine Transport Lines, Inc. under the purchase method of accounting. The comparisons of financial position and results of operations should be read with consideration of the above transactions and presentations. Users of these financial statements should be aware that future results of operations will significantly differ from the historical results of operations because of the changes in the Company which occurred as a result of the transactions described. Notes 1 and 2 to the Condensed Consolidated Financial Statements of Marine Transport Corporation and Subsidiaries more fully describe the Distribution and Acquisition transactions and the impact of these transactions on the consolidated financial statements. 3 4 MARINE TRANSPORT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
FOR THE THREE FOR THE NINE MONTHS MONTHS ENDED SEPT 30, ENDED SEPT 30, 1998 1997 1998 1997 ---- ---- ---- ---- Revenues: Voyage $ 25,381 $ 52,112 $ 138,143 $ 163,499 Other 5,047 2,506 9,202 5,885 -------- -------- --------- --------- Total revenues 30,428 54,618 147,345 169,384 -------- -------- --------- --------- Operating expenses: Vessel and voyage 27,859 41,857 123,509 128,445 Depreciation and amortization 3,746 7,149 18,080 21,584 General and administrative 2,922 4,734 12,669 12,301 -------- -------- --------- --------- Total operating expenses 34,527 53,740 154,258 162,330 -------- -------- --------- --------- Operating income (loss) (4,099) 878 (6,913) 7,054 Other income (expense): Gain (loss) on disposal of assets 2 537 908 Interest expense (370) (1,994) (3,590) (7,600) Equity in income (loss) of affiliates 262 (3,796) 2,136 (216) -------- -------- --------- --------- Net other income (expense) (108) (5,788) (917) (6,908) -------- -------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle (4,207) (4,910) (7,830) 146 Provision (benefit) for income taxes, including reversal of deferred income taxes of $38.9 million in the nine months ended September 30, 1998 resulting from the Distribution (see Note 5) (1,420) 21 (40,304) 1,127 -------- -------- --------- --------- Income (loss) before cumulative effect of change in accounting principle (2,787) (4,931) 32,474 (981) Cumulative effect of change in accounting principle, net of income taxes of $7,429 13,797 -------- -------- --------- --------- Net income (loss) $ (2,787) $ (4,931) $ 32,474 $ 12,816 ======== ======== ========= ========= Basic earnings per common share: Income (loss) before cumulative effect of change in accounting principle $ (0.46) $ (1.15) $ 6.51 $ (0.23) Cumulative effect of change in accounting principal, net of income taxes $ 3.22 Net income (loss) $ (0.46) $ (1.15) $ 6.51 $ 2.99 Diluted earnings per common share: Income (loss) before cumulative effect of change in accounting principle $ (0.46) $ (1.15) $ 6.51 $ (0.22) Cumulative effect of change in accounting principal, net of income taxes $ 3.15 Net income (loss) $ (0.46) $ (1.15) $ 6.51 $ 2.93
See notes to condensed consolidated financial statements. 4 5 MARINE TRANSPORT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPT 30, DECEMBER 31, 1998 1997(1) ---- ------- (UNAUDITED) ASSETS Current assets: Cash, including cash equivalents in 1997-$25,900 $ 5,110 $ 32,489 Receivables, less allowances of $520 in 1998 and $528 in 1997 18,148 20,181 Prepaid expenses and other current assets 4,140 18,732 --------- --------- Total current assets 27,398 71,402 Capital construction fund 4,029 10,969 Vessels and other property, at cost 105,402 518,709 Construction in progress 56,032 Less accumulated depreciation (65,839) (204,516) --------- --------- Vessels, construction in progress and other property-net 39,563 370,225 Vessel dry-docking costs 7,065 1,818 Investments in and advances to/from affiliates 3,012 28,155 Note receivable 9,000 9,000 Other assets and deferred charges 20,678 27,018 --------- --------- TOTAL ASSETS $ 110,745 $518,587 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,019 $ 6,314 Accrued liabilities 10,060 22,931 Current portion of long-term debt 2,750 16,575 --------- --------- Total current liabilities 22,829 45,820 Advance time charter revenues and other liabilities 2,903 3,114 Deferred gain on sale and leaseback of vessel 20,298 36,108 Deferred income taxes payable 24,004 64,264 Long-term debt 25,991 146,341 Minority interest in subsidiary 1,917 Stockholders' equity 14,720 221,023 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 110,745 $ 518,587 ========= =========
(1) The condensed balance sheet as of December 31, 1997 has been derived from the audited financial statements as of that date. See notes to condensed consolidated financial statements. 5 6 MARINE TRANSPORT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE NINE MONTHS ENDED SEPT 30, 1998 (UNAUDITED)
Unearned Accum. Common Compensation Retained Compre- Stock Capital Restricted (Deficit) hensive Shares(1) Amount(1) Surplus(1) Stock Earnings Income --------- --------- ---------- ----- -------- ------ Balance as of January 1, 1997 4,269 $2,135 $ 203,462 $ (1,039) $ (1,848) $ 4,868 Comprehensive income: Net income 10,827 Net change in valuation account 22 Comprehensive income Retirement of partner's equity interest in joint venture 777 Retirement of minority stockholders' equity interest in subsidiary (549) Exercise of stock options 33 17 1,979 Issuance of restricted stock awards 5 2 436 (438) -- Amortization of unearned compensation 372 ----------------------------------------------------------------------------------- Balance at December 31, 1997 4,307 2,154 206,105 (1,105) 8,979 4,890 Comprehensive income: Net income 32,474 Net change in valuation account (4,943) Comprehensive income Exercise of stock options 5 2 210 Retirement of minority stockholders' equity interest in subsidiary (681) Amortization of unearned compensation 1,105 Issuance of common stock 1,931 965 10,287 Spin-off of foreign subsidiaries (190,952) (54,048) Purchase of treasury stock ----------------------------------------------------------------------------------- Balance at Sept 30, 1998 6,243 $3,121 $ 24,969 $ -- $(12,595) $ (53) ===================================================================================
Other Total Compre- Share- hensive Treasury holders' Income Stock Equity ------ ----- ------ Balance as of January 1, 1997 $ 207,578 Comprehensive income: Net income $ 10,827 10,827 Net change in valuation account 22 22 -------- Comprehensive income $ 10,849 ========= Retirement of partner's equity interest in joint venture 777 Retirement of minority stockholders' equity interest in subsidiary (549) Exercise of stock options 1,996 Issuance of restricted stock awards -- Amortization of unearned compensation 372 ----------------------------------------- Balance at December 31, 1997 221,023 Comprehensive income: Net income $ 32,474 32,474 Net change in valuation account (4,943) (4,943) -------- Comprehensive income $ 27,531 ========= Exercise of stock options 212 Retirement of minority stockholders' equity interest in subsidiary (681) Amortization of unearned compensation 1,105 Issuance of common stock 11,250 Spin-off of foreign subsidiaries (245,000) Purchase of treasury stock (722) (722) ----------------------------------------- Balance at Sept 30, 1998 $(722) $ 14,720 =========================================
(1) Restated to give retroactive effect to 1 for 10 reverse stock split. See notes to condensed consolidated financial statements 6 7 MARINE TRANSPORT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPT 30, 1998 1997 ---- ---- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (700) $ 568 CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES: Additions to vessels and other property (61,418) (44,886) Cash distributed as part of spin off of UBC's net assets (12,600) Proceeds from Capital Construction Fund 7,090 Net proceeds from sale of vessels 708 78,972 Payments for the retirement of minority stockholders' interest (1,917) (2,456) Purchase of MTL net of cash acquired (4,519) Proceeds and interest received and reinvested in the Capital Construction Fund (203) (552) --------- --------- Net cash provided (used) by investing activities (72,859) 31,078 --------- --------- CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 72,637 114,090 Payments on long-term debt (36,774) (171,374) Issuance of common stock 11,250 1,706 Payments for debt issue costs (211) (636) Purchase of treasury shares (722) --------- --------- Net cash provided (used) by financing activities 46,180 (56,214) --------- --------- Net decrease in cash and cash equivalents (27,379) (24,568) Cash and cash equivalents at beginning of period 32,489 47,877 --------- --------- Cash and cash equivalents at end of period $ 5,110 $ 23,309 ========= =========
See notes to condensed consolidated financial statements. 7 8 MARINE TRANSPORT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Marine Transport Corporation ("MTC" or the "Company") (formerly OMI Corp.) is a U.S.-based company that owns and charters a fleet of ocean-going vessels which it operates in domestic and international markets. The Company also manages vessels for other shipowners. On June 17, 1998 the Company distributed to its shareholders, in a tax-free distribution (the "Distribution"), all of the shares of its wholly owned subsidiary Universal Bulk Carriers, Inc. ("UBC"). UBC operated what were the Company's foreign shipping businesses, and continues to operate those businesses as OMI Corporation ("New OMI") under the Company's former management. Concurrent with the Distribution, the Company acquired all of the outstanding common stock of Marine Transport Lines, Inc. ("MTL"), a U.S.-based company that owns, operates and manages U.S. and foreign flag vessels, in exchange for newly issued shares of the Company's common stock (the "Acquisition"). The Company is managed by certain officers formerly of MTL and certain former directors of MTL and additional new directors. The Company trades under the symbol "MTLX" and is listed on the NASDAQ National Market. Unless otherwise indicated, amounts reflected in the accompanying financial statements include the results of UBC through June 17, 1998, and the results of MTL subsequent to June 17, 1998. Immediately following the Distribution and Acquisition, the Company consummated a one-for-ten reverse stock split. All share and per share amounts have been retroactively restated to reflect the reverse stock split. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. However, in the opinion of the management of the Company, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of operating results have been included in the statements. Certain accounts have been reclassified in the 1997 financial statements to conform to their 1998 presentation. Reference is made to OMI Corp.'s Form 10-K for the year ended December 31, 1997 and the Form S-1 filed on May 15, 1998 for additional information. NOTE 2 - ACQUISITION AND DISTRIBUTION As consideration for the Acquisition of MTL described above, the Company issued approximately 1,931,000 shares, including 127,453 to be held in escrow pending resolution of certain post-closing adjustments, (as adjusted for a one-for-ten reverse stock split) in exchange for all of the outstanding shares of MTL. The acquisition was valued at approximately $11,250,000 representing the Company's estimate of the fair value of MTL at the date the transaction was announced, and has been accounted for as a purchase. The pro forma unaudited results of operations for the nine months ended September 30, 1998 and September 30, 1997, assuming consummation of the Acquisition and Distribution as of January 1, 1997 are as follows: 8 9
Nine Months Ended Sept 30 1998 1997 ---- ---- Revenues $ 93,924 $ 91,375 Vessel, voyage and lease expense 88,063 91,963 General and administrative expense 17,257 11,074 (Loss) before other income (expense), income taxes, and cumulative effect of change in accounting principle (11,396) (11,662) Loss before cumulative effect of change in accounting principle (9,220) (8,600) Net loss $ (9,220) $ (4,866) Basic and diluted earnings per common share: Loss before cumulative effect of change in accounting principle $ (1.85) $ (1.13) Net loss $ (1.85) $ (1.13)
As part of the Distribution, MTC is party to certain agreements with New OMI, including the following: Distribution Agreement-The Distribution Agreement provides for, with certain exceptions, assumptions of liabilities and cross-indemnities designed principally to place financial responsibility for the domestic-related assets and liabilities with MTC and the foreign-related assets and liabilities with New OMI. New OMI, however, assumed the obligations of the Company with respect to the Company's 10.25 percent Senior Notes due November 1, 2003 in exchange for a note in the amount of $6.8 million, which is equivalent in value to the principal amount of the Senior Notes outstanding. The Distribution Agreement also provides that each of MTC and New OMI will indemnify the other in the event of certain liabilities arising under the Federal securities laws. Each of MTC and New OMI will have sole responsibility for claims arising out of respective activities after the Distribution. The Distribution Agreement also provides that, except as otherwise set forth therein or in any other agreement, all costs or expenses incurred on or prior to the date of the Distribution in connection with the Distribution will be charged to and paid by the party incurring such costs or expenses. Except as set forth in the Distribution Agreement or any related agreement, each party shall bear its own costs and expenses incurred after the date of the Distribution. As part of the Distribution Agreement, New OMI has, subject to certain exceptions, provided indemnity to MTC for all taxes attributable to the Distribution and to certain corporate restructuring transactions preceding the Distribution. Tax Cooperation Agreement-Prior to the Distribution, MTC and New OMI entered into a Tax Cooperation Agreement which sets forth each party's rights and obligations with respect to federal, state, local and foreign taxes for periods prior to and after the Distribution and related matters such as filing of tax returns and conducting audits and other proceedings. In general, the Tax Cooperation Agreement provides that New OMI will be liable for taxes and be entitled to refunds for each period covered by any such return which are attributable to New OMI and its subsidiaries. Though valid as between the parties thereto, the Tax Cooperation Agreement is not binding on the IRS and does not alter either party's tax liability to the IRS. 9 10 Acquisition Agreement-The Acquisition Agreement provides for an adjustment in the purchase price of Marine Transport Lines, Inc. based on Working Capital amounts as of the date of the Closing compared to certain pre-established levels. The purchase price adjustment will be made by increasing or decreasing the number of shares of the Company which were exchanged for MTL's shares. NOTE 3 - ACCOUNTING CHANGE FOR VESSEL DRYDOCKING COSTS Effective January 1, 1997, the Company changed its method of accounting for vessel drydocking costs from the accrual method to the deferral method. Vessel drydocking costs had been accrued and charged to operating expenses over the period between drydockings, which is generally a two to three year period. Under the deferral method, vessel drydocking expenses are capitalized and amortized over the period until the next scheduled drydocking. Management believes the deferral method better matches costs with revenues, and minimizes any significant changes in estimates associated with the accrual method. The cumulative effect of this accounting change is shown separately in the consolidated statement of operations and resulted in income of $13,797,000 (net of income taxes of $7,429,000), or $3.22 and $3.15 per basic and diluted share for the nine months ended September 30, 1997. The three months and nine months ended September 30, 1997 was previously presented using the accrual method of accounting and has been restated to reflect this change. NOTE 4 - EARNINGS PER COMMON SHARE The computation of basic earnings per share is based on weighted average number of common shares outstanding of 6,050,000 and 4,296,000 for the three months ended September 30, 1998 and 1997, respectively, and 4,988,000 and 4,287,000 for the nine months ended September 30, 1998 and 1997, respectively. The computation of diluted earnings per share, which assumes the exercise of all dilutive stock options using the treasury method, is based on the weighted average number of common shares outstanding of 6,050,000 and 4,384,000 for the three months ended September 30, 1998 and 1997, respectively, and 4,988,000 and 4,375,000 for the nine months ended September 30, 1998 and 1997, respectively. NOTE 5 - INCOME TAXES As a result of the Distribution, the subsidiary holding the Company's foreign shipping businesses became a decontrolled corporation for income tax purposes. Accordingly, the Company will not be subject to income taxes applicable to the future operations of these foreign businesses and the balance of deferred income taxes of approximately $38,900,000 at the date of the Distribution related to such operations was credited to income. This income tax credit accounts for all of the Company's net income for the nine month period ended September 30, 1998 and will not recur in subsequent periods. NOTE 6 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS At September 30, 1998 Long-Term Debt consisted of the following (in thousands):
MTL Term Loan $11,531 MTC Term Loan 8,393 MTL Revolving Credit 1,000 MTC Revolving Credit 1,000 Subordinated Debt due to OMI 6,444 Promissory Note due to OMI 373 ------- Total Debt 28,741 Less Current Portion 2,750 ------- Long-term Portion $25,991 =======
10 11 All debt at September 30, 1998 was created concurrently with the Acquisition. Both the term loans and revolving credit facilities of the Company and its wholly-owned subsidiary MTL accrue interest at a floating rate that is fixed for brief periods (30-,60-,90, or 180-day periods) at the Company's discretion. The interest rate is comprised of LIBOR (which, depending on the borrowing period chosen, was approximately 5.25% at September 30, 1998) plus an incremental margin determined by the Company's ratio of Total Debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). That incremental margin can range from a maximum of 2.25% (3.0x Total Debt to EBITDA) to a minimum of 1.25% (1.0x Total Debt to EBITDA). The Company pays commitment fees quarterly on the unused and available portion of the revolving credit facilities at an annual rate equal to the aggregate of forty percent of the applicable incremental margin and one-quarter of one percent. At September 30, 1998 there was $1 million unused and available of the revolving credit facilities. The subordinated debt is payable in semi-annual installments of principal and interest through November 1, 2003. The promissory note is payable in semi-annual installments of principal and interest through May 1, 2003. On October 20, 1998, the Company effected an interest rate swap that fixed the base LIBOR rate on the $19,923,659 then outstanding on the Term Loan portions of Total Debt at 4.75% for a three-year period. The total interest rate on the Term Loans, which previously had a rate base that floated at LIBOR, also includes an incremental margin that is reset quarterly based on the Company's EBITDA results. That incremental margin can range from a maximum of 2.25% (3.0x Total Debt to EBITDA) to a minimum of 1.25% (1.0x Total Debt to EBITDA). There were no transaction fees or other costs incurred in effecting this swap. The term loans are payable in twenty quarterly installments that began in September 1998; the first four installments total $500,000 each; the next fifteen installments total $906,250 each; and the final installment of $5,406,250 is due June 18, 2003. The revolving credit facility of the Company's wholly-owned subsidiary, MTL, reduces to $1,000,000 on June 18, 2001; the remaining revolving credit facilities expire on June 18, 2003. Among other things, the Company's debt obligations restrict the Company's ability to pay or declare dividends and require the Company to maintain certain financial ratios, minimum cash balances, minimum asset values, and to use proceeds of vessel sales to reduce debt. In addition, the Company's vessels are pledged as collateral to secure the borrowings under the term loan and revolving credit facility agreements. As of September 30, 1998, the Company was not in compliance with certain of the financials convenants in the term loan and revolving credit facility agreements for which waivers have been obtained. The Company was in compliance with all other convenants included in the various agreements and expects to be in full compliance with all convenants by December 31, 1998. In addition to the above, as of September 30, 1998 MTL had borrowed $3,250,000 from its 50%-owned affiliate, Marine Car Carriers, Inc. under two unsecured promissory notes that bear interest at 8%, payable quarterly in arrears. The notes are due on June 5, 1999. The notes are shown on the balance sheet in Investments in and advances to/from affiliates. NOTE 7 - OTHER MATTERS Pursuant to a prior charter agreement between a subsidiary of MTL and a subsidiary of a bank (the "Bank"), MTL has indemnified the Bank for certain investment tax credits previously utilized by the Bank to the extent such credits may be disallowed by the Internal Revenue Service. These investment tax credits are the basis for a claim by the Internal Revenue Service ("IRS") against the Bank amounting to approximately 11 12 $5,000,000 as of September 30, 1998, including interest and penalties. MTL and the Bank are contesting the IRS claim. In May 1998, the IRS issued a Notice of Deficiency to the Bank. The tax deficiency and interest, in a total amount of approximately $1.1 million, must be paid to the IRS in order to contest this matter in a venue other than the Tax Court. In accordance with the terms of the original charter agreement, the Company plans to advance the $1.1 million to the Bank. The Bank and the Company intend to continue to contest the IRS claim and to seek a refund for any amounts paid, upon which the Bank will repay to the Company any amounts previously advanced. Management believes it is probable that the Bank and the Company will prevail in this matter. However, in the event that the Company and the Bank do not prevail, the charter agreement requires that the Bank credit the Company for any amounts advanced against any ultimate indemnification obligation. PART I: ITEM 2: MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Marine Transport Corporation ("MTC" or "the Company"), formerly OMI Corp., was established in its present form through a series of transactions, culminating June 18, 1998, through which OMI Corp. distributed to its shareholders a subsidiary containing its international businesses (the "Distribution") and then acquired Marine Transport Lines, Inc. in a stock-for-stock exchange (the "Acquisition"). OMI Corp. then changed its name to Marine Transport Corporation. Upon completion of the Distribution, the assets, liabilities and equity related to OMI Corp.'s international businesses were removed from the Company's balance sheet at their recorded values. For periods prior to the Distribution, the historical financial statements of the Company reflect the financial position and results of operations of OMI Corp. as reported for such periods. For periods subsequent to the Distribution and Acquisition, the Company's financial statements include the assets, liabilities, equity and operations of OMI Corp.'s domestic business and reflect the acquisition of Marine Transport Lines, Inc. under the purchase method of accounting. The comparisons of financial position and results of operations should be read with consideration of the above transactions and presentations. Users of these financial statements should be aware that future results of operations will significantly differ from the historical results of operations because of the changes in the Company which occurred as a result of the transactions described. Certain pro forma financial information has been presented to give effect to the Acquisition and Distribution as if such events had occurred on January 1, 1998. The pro forma information does not purport to represent what the operations actually would have been or to project operating results for any projected period. The pro forma financial information is based on certain assumptions the Company believes are reasonable. See Note 2 to the Condensed Consolidated Financial Statements. The information below and elsewhere in this document contains certain forward- looking statements which reflect the current view of the Company with respect to future events and financial performance, as well as potential impacts of the Year 2000 issue on the Company. Wherever used, the words "expect", "plan", "anticipate" and similar expressions identify forward-looking statements. Such statements are based on management's current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. The Company does not normally 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. 12 13 The following presentation of management's discussion and analysis of Marine Transport Corporation's financial condition and results of operations should be read in connection with the Condensed Consolidated Financial Statements, accompanying notes thereto and other financial information appearing elsewhere in this document, as well as the Form S-1 filed on May 15, 1998 which fully describes the Acquisition and Distribution, and the documents incorporated by reference thereto. General Marine Transport Corporation, formerly OMI Corp., is a U.S.-based supplier of marine transportation services. Prior to the Acquisition and Distribution, its major businesses were providing seaborne transportation services for crude oil and refined petroleum products in two distinct international market segments: Suezmax tankers and Handymax product tankers. These businesses were separated from the Company and were distributed to the shareholders of the Company in the Distribution. In addition, the Company provided lightering services in the Gulf of Mexico, operated four tank vessels in the U.S. Jones Act trade and provided ship management services to the U.S. government for its Ready Reserve Fleet. Following the Distribution and Acquisition, the major businesses of the Company are: marine transportation of chemicals, petroleum products and crude oil for U.S.-based industrial customers, including lightering services for crude oil customers in the Gulf of Mexico; and ship management services for third-party ship owners and the U.S. government. The Company's results of operations for the periods prior to the Acquisition and Distribution, which were effective on June 17, 1998, include the operations of the major businesses conducted by the Company prior to that date. The following discussion of financial condition and results of operations is organized accordingly. Market Overview Following the Acquisition and Distribution, the market for the Company's major businesses can be described as follows: Energy and Chemical Transportation: MTC provides an industrial shipping philosophy, serving the chemical and petroleum liquid bulk market for large commercial customers. In a number of cases, the Company has entered into long-term contracts of affreightment providing for base amounts of cargo to be shipped on an annual schedule of voyages on its vessels. Three vessels operate under long-term contracts to third party customers who pay all direct costs of operating the vessels. Spot market movements are used to fill out cargo capacity on vessels not used for contract tonnage. Contracts are renewed periodically (contract terms range from one to five years) and rate fluctuations due to a changing market environment are generally not as large as experienced in the spot market for chemical and petroleum tankers. Most of the Company's commercial vessels operate in the protected U.S. Jones Act market. MTC also provides lightering services in the Gulf of Mexico through its subsidiary MTL Petrolink. The Company timecharters-in four international flag Aframax tankers, and frequently charters in on a spot basis other vessels to augment its services. MTL Petrolink provides assist vessels, equipment and personnel to discharge large crude oil vessels offshore and deliver cargo to ports in the U.S. Gulf. MTL Petrolink also provides vessel repair services. Ship Management: MTC provides ship management services to industrial ship owners who use vessels in parts of their own businesses, and to the U.S. government for its Ready Reserve Fleet. Ship management includes technical operation and maintenance, crewing, regulatory compliance and other ship operating activities. MTC manages one of the largest U.S. based fleets. Management contracts range in length from one to five years in remaining term. 13 14 Results of Operations The Company's vessels operate, or have operated in prior years, on time, bareboat or voyage ("spot") charters. Each type of charter denotes a method by which revenues are recorded and expenses are allocated. Under a time charter, revenue is measured based on a daily or monthly rate and the charterer assumes certain voyage expenses, such as fuel and port charges. Under a bareboat charter, the charterer assumes all voyage and operating expenses; therefore, the revenue rate is likely to be lower than a time charter. Under a voyage charter, revenue is calculated based on the amount of cargo carried, most expenses are for the shipowner's account and the length of the charter is one voyage. Revenue may be higher in the spot market, as the owner is responsible for most of the costs of the voyage. Other factors affecting net voyage revenues for voyage charters are waiting time between cargoes, port costs, and bunker prices. Vessel expenses included in net voyage revenue discussed above include operating expenses such as crew payroll/benefits/travel, stores, maintenance and repairs, insurance and miscellaneous. These expenses are a function of the fleet size, utilization levels for certain expenses and requirements under laws, by charterers and Company standards. Insurance expense varies with the overall insurance market conditions as well as the insured's loss record, level of insurance and desired coverage. Significant Adjustments Related to Distribution and Change in Accounting Principle: Net income for the nine months ended September 30, 1998 was $32.5 million compared to $12.8 million for the nine months ended September 30, 1997. Included in the 1998 income is a benefit of $38.9 million for federal income taxes. In connection with the Distribution, the subsidiary holding OMI Corp.'s international business became a decontrolled corporation for income tax purposes and deferred income taxes, which had previously been recorded, were reversed. Similar adjustments are not expected to occur in the future. Included in the 1997 income of $12.8 million is $13.8 million, net of income taxes, from the cumulative effect of a change in accounting principle. THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997 Voyage revenues decreased by $26.7 million for the three months and by $25.4 million for the nine months ended September 30, 1998 compared to same periods in 1997. The primary reason for the substantial decreases in revenues is the exclusion of the revenues and the results of operations of the Company's international businesses for periods after the Distribution. Other revenues for all periods presented primarily represents revenues from ship management services, with the increases in ship management revenues for the 1998 periods attributable to the Acquisition of Marine Transport Lines, Inc.. Vessel and voyage operating expenses decreased by approximately $17.6 million for the nine months ended September 30, 1998 as compared to the same period in 1997 primarily as a result of the impact of the Distribution (international businesses that were separated from the Company in June, 1998). This decrease was partially offset by the impact of the addition of vessels from Marine Transport Lines, Inc., and the costs associated with the start up expenses of activating three vessels that had been in extended lay-up periods. Operating lease expenses included in vessel and voyage operating expenses increased by $12.7 million and $500,000 for the nine month and three month periods ended September 30, 1998, respectively, compared to the same periods in 1997 because of the Company's decision to charter in four Suezmax tankers during the 1998 periods. The consolidated operating losses for the three month and nine month periods ended September 30, 1998 reflect planned out of service time for two commercial vessels for scheduled repairs during the quarter. The lost revenue related to these outages, cumulatively 57 days, was approximately $2.7 million. In addition, costs related to activating three ships, which had been in lay-up since 1997 amounted to almost $1 million for the quarter ended September 30, 1998. Two of these vessels went into operation in August 1998 on spot charters, while the other vessel went on time charter to a major oil company for a two-year period starting in October, 1998. 14 15 The Company's lightering operations had improved results due to increased oil imports to the US Gulf on larger tankers which use the Company's lightering services. General and administrative expense increased by $400,000 for the nine month period ended September 30, 1998 as compared to the comparable period in 1997, but decreased by $1.8 million for the three months ended September 30, 1998 compared to the same period in 1997. The decrease in general and administrative expenses for the three month period reflect the substantial changes in organizational structure and cost controls made by Company management after the Acquisition and Distribution. Interest expense was approximately $400,000 for the three months and $3.6 million for the nine months ended September 30, 1998. The significant decreases in interest expense results from lower borrowings by the Company (mostly impacted by the Distribution) as well as lower interest rates for current periods. In October, 1998 the Company fixed interest rates on $19.9 million of floating rate long term debt for three years through an interest rate swap (see Note 6 to the Condensed Consolidated Financial Statements). Losses from equity in operations of affiliates in 1997 relate to the sale of dry bulk vessels in which the Company had minority interest; income from joint ventures in 1998 result from strong markets for the Suezmax and ULCC vessels owned by the applicable joint ventures in the 1998 periods. The income tax benefit for the nine month period ended September 30, 1998 represents principally the reversal of deferred taxes at the distribution date for the Company's foreign subsidiaries which became decontrolled corporations though the Distribution; income taxes are no longer payable on the deferred taxable income of those companies and the deferred taxes were reversed. For the three-month period ended September 30, 1998, the income tax provision is similar to the statutory rate. The income tax provision for the three month period ended September 30, 1997 differed from statutory rates because taxes were not accrued on some of the earnings results of the Company's investments in joint ventures as management considered those earnings to be invested for an indefinite period. BALANCE SHEET MTC's balance sheet as of September 30, 1998 reflects both the Distribution and Acquisition transactions whereas the balance sheet as of December 31, 1997 reflects the historical balance sheet of OMI Corp. prior to such transactions. LIQUIDITY AND CAPITAL RESOURCES As a result of planned out of service time of certain Company vessels as described above, the Company posted operating losses for the three months and nine months ended September 30, 1998. After adding back charges for depreciation and amortization, net cash used in operations was significantly less than operating losses for the quarter and nine month periods. Cash balances of $5.1 million as of September 30, 1998 include cash drawn from the Company's revolving credit line of $2 million, as well as $3.25 million borrowed from a joint venture company at market rates and terms. Concurrent with the Acquisition and Distribution, the Company restructured various loan agreements, including those of Marine Transport Lines, Inc. At September 30, 1998, the Company had total borrowings under these agreements of $28.7 million, which was one million dollars less than its total borrowing capacity under the loan agreements at that date. Other forms of cash available for operations and investment by the Company include additional cash balances of approximately $4.5 million in the joint venture company as well as $4 million included in the Capital Construction Fund. Both of these amounts are before applicable income taxes payable on amounts withdrawn from their current use. 15 16 During the three months ended September 30,1998 the Company used: $2.8 million to reduce long-term debt balances; $3.7 million for planned repair and activation of the Company's vessels as previously described; and $720,000 to purchase 350,000 shares of the Company's Common Stock. Cash balances and available credit lines are expected to be sufficient to meet the Company's normal operating requirements, including scheduled payments of long-term debt. OTHER OPERATING MATTERS The Company sold its vessel Savonetta in July 1998, and used the after tax proceeds of $576,000 to reduce long term debt. In July, 1998 MTC was awarded ship management contracts for four container vessels operated for First Ocean Bulk Carriers and Lykes Lines. In August, 1998 the Company completed negotiations with the owner of two chemical/petroleum products vessels for the purchase of the vessels by the Company by assumption of the outstanding mortgage debt on the vessels in the aggregate amount of approximately $22.8 million. In June, 1998 the Company was awarded contracts to manage ten vessels to replace seventeen vessels currently managed under contracts with the U.S. Maritime Administration which were due to expire in June, 1998. The Maritime Administration subsequently rescinded awards to all awardees, and is resoliciting proposals for management of its fleet. Expiring contracts have been extended until November 30, 1998. Management expects further extensions of the existing contract through at least December 31, 1998. The Company will resubmit proposals to the Maritime Administration for new awards, but cannot anticipate the outcome. PRO FORMA FINANCIAL INFORMATION Pro forma financial information included in the notes to the unaudited condensed financial statements for the nine month periods ended September 30, 1997 and 1998 present certain historical financial information as if the Acquisition and Distribution occurred on January 1, 1997. Although this pro forma financial information is based on reasonable assumptions applied to past financial events, management has taken certain actions subsequent to the Acquisition, which it expects will improve the future operating results. These actions include: reduction of salary and employment expenses, decrease in office rental commitments and decreases in other administrative expenses which will reduce total general and administrative expenses by approximately $8 million on an annualized basis as compared to that amount allocated to OMI's Domestic Business on a historical basis; employment of the laid up vessel Courier on a two year charter at profitable rates, and implementation of plans for other laid up vessels to profitably employ these vessels; and, expansion of the Company's ship management business. AGREEMENTS As part of the Distribution, the Company is party to certain agreements with OMI Corporation (New OMI), its former subsidiary. Certain provisions of these agreements are summarized in Note 2 of the Condensed Consolidated Financial Statements included herein. These agreements are included in the Company's Form S-1 dated May 15, 1998. EFFECTS OF INFLATION The Company does not consider inflation to be a significant risk to the cost of doing business in the foreseeable future. Inflation has a moderate impact on operating expenses, drydocking expenditures and corporate overhead. 16 17 YEAR 2000 MTC management has identified the following areas of concern relating to the Year 2000 issue, and has determined appropriate courses of action as described below. Internally generated funds will be used to fund testing, improvements or replacements where necessary. Navigation of vessels: the potential impact of failure of embedded microprocessor chips on navigational equipment. All critical equipment on each of the Company's vessels has been identified and vendors have been contacted for certification for Year 2000 compliance. Where manufacturers cannot provide certification for critical equipment, non-compliant equipment will be replaced. Management does not anticipate material expenditures for certification or replacement. Communications: the potential failure of computer equipment used for communications ship-to-shore and with other third parties ashore. All equipment used for ship-to-shore communication will be tested for compliance by the Company or an independent third party and will be replaced where necessary; most of this equipment consists of personal computers, off the shelf software and small servers. The cost of testing and replacement is not expected to be significant. Operations: the potential failure of embedded microprocessor chips on power, steering and cargo systems aboard vessels. Critical machinery has been identified and will be surveyed and tested by Company personnel or independent third parties. Most systems have manual backup procedures or systems in the event of failure. Management expects to complete this testing prior to projected impact dates of Year 2000, but at this time is not certain of the costs of remediation of any identified problems. Administration: the impact of Year 2000 problems on the Company's computer systems and those systems of third parties, such as vendors, customers and banks. The Company plans to replace existing administrative (including accounting) software and hardware used in related applications prior to the projected impact dates of Year 2000. The cost of replacement of these systems is expected to exceed $750,000. This expenditure was planned because of the recent changes in the Company's operation, but implementation has been accelerated as a result of identified Year 2000 problems. Management is not certain of the preparedness of all of its third party relations, and the potential impact of failure of their systems on the Company's results of operations, liquidity and financial condition. Interruption of services provided by the Company's vessels could result from many factors for which the Company relies on third parties, such as delivery of equipment, fuel and personnel, availability of assist vessels to enter and leave ports, availability of cargo to haul and capacity to discharge ashore and availability of repair facilities. Management is aware that most of its important customers (mostly large, multi-national companies), and the Company's banks, are studying Year 2000 issues and implementing changes where appropriate. 17 18 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. Exhibits and Reports of Form 8-K (a) Exhibits 27.0 Financial Data Schedule, dated September 30, 1998 (b) Reports on Form 8-K. None 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 10, 1998 MARINE TRANSPORT CORPORATION By:/s/ Richard T. du Moulin ------------------------------------- Richard T. du Moulin President and Chief Executive Officer Date: November 10, 1998 By:/s/ Mark L. Filanowski ------------------------------------- Mark L. Filanowski Senior Vice President and Chief Financial Officer 19 20 EXHIBIT INDEX ------------- Exhibit No. Description - ----------- ----------- 27.0 Financial data schedule.1 EX-27 2 FINANCIAL DATA SCHEDULE
5 EXHIBIT 27 CONTAINS SUMMARY INFORMATION EXTRACTED FROM MARINE TRANSPORT CORPORATION SUBSIDIARIES CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 9-MOS DEC-31-1998 SEP-30-1998 1 5,110 0 18,148 0 0 27,398 105,402 65,839 110,745 22,829 25,991 0 0 3,121 11,599 110,745 0 147,345 0 123,509 30,749 0 3,540 (7,830) (40,304) 0 0 0 0 32,474 6.51 6.51
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