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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2003

Commission File Number 001-14135

OMI CORPORATION
(Exact name of Registrant as specified in its charter)

     
Marshall Islands
    
52-2098714
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

Registrant’s Address:
One Station Place
Stamford, Connecticut 06902
www.omicorp.com

Registrant’s telephone number including area code: (203) 602-6700
Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $.50 per share
    
       New York Stock Exchange
Title of Class 
 Name of Exchange on which Registered

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the Registrant (1) Has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     YES  X             NO              

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

     YES  X             NO              

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

     YES  X             NO              

Aggregate market value of Registrant’s voting stock, held by non-affiliates, based on the closing price on the New York Stock Exchange as of the close of business on June 30, 2003:

$457,207,187

Number of shares of the Registrant’s Common Stock outstanding as of March 10, 2004:

81,025,214

The following document is hereby incorporated by reference into Part III of this Form 10-K:

(1)   Portions of the OMI Corporation 2004 Proxy Statement to be filed with the Securities and Exchange Commission.

INDEX

PART I

Items     Page(s)   
1. and 2.   Business and Properties       1  
3.   Legal Proceedings       15  
4.   Submission of Matters to a Vote of Security Holders       15  
4A.   Management and Directors       15
 

PART II

5.       Market for OMI Corporation’s Common Stock and Related
  Stockholder Matters
           17  
6.     Selected Financial Data           18  
7.     Management’s Discussion and Analysis of Results of Operations and
  Financial Condition
           21  
        Overview           21  
        2003 Financial Summary           21  
        Market Overview           23  
        Critical Accounting Estimates           27  
        Results of Operations           29  
        Financial Condition and Capital Resources           40  
7A.     Quantitative and Qualitative Disclosures about Market Risks           47  
8.     Financial Statements and Supplementary Data           48  
9.     Changes in and Disagreements with Accountants on Accounting and
  Financial Disclosure
           76  
9A.     Controls and Procedures           76
 

PART III

10.    Directors and Executive Officers of OMI Corporation       77  
11.   Executive Compensation       77  
12.   Security Ownership of Certain Beneficial Owners and Management       77  
13.   Certain Relationships and Related Transactions       77  
14.   Principal Accountant Fees and Services       77
           
 

PART IV

15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K       78  
    SIGNATURES     

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PART I

Items 1 and 2. BUSINESS AND PROPERTIES

General

OMI Corporation was incorporated under the laws of the Republic of the Marshall Islands on January 9, 1998. We have our principal place of business at One Station Place, Stamford, Connecticut and are listed on the New York Stock Exchange under the symbol “OMM”. The telephone number is (203) 602-6700.

We separated from our former parent entity in 1998 in a transaction designed to create a shipping company with only internationally flagged vessels. Our predecessor entities, however, date back to 1960.

Unless the context otherwise requires, in this Form 10-K the “Company,” “OMI,” “we,” “us,” and “our” refer to OMI Corporation and its subsidiaries.

For terms specific to the shipping industry please see “Glossary” beginning on page 12.

Website Information

It is the Company’s policy to make all of its filings with the Securities and Exchange Commission (“SEC”) , which include this Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all related amendments, available, free of charge, on our website at www.omicorp.com, Investor Relations. These reports are available soon after they are filed electronically with the SEC. You may read and copy any document we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public at the SEC’s web site at http://www.sec.gov.

Interested parties may find the Board Guidelines on Corporate Governance Issues, the charters of its Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee and the Company’s Corporate Code of Ethics also available on our website.

Development of OMI’s Business

We are a leading seaborne transporter of crude oil and refined petroleum products operating in the international shipping markets. We believe our modern fleet of 37 vessels is one of the youngest in the world, with an average age as of December 31, 2003 of approximately 5.8 years,1 compared to an industry average of approximately 9.8 years. Our customers include many of the world’s largest commercial and government owned oil companies and oil trading companies.

To serve our customers with high-quality, modern vessels, we embarked on a fleet renewal program beginning in 1998 that has substantially reduced the age of our fleet, while at the same time expanding the fleet and concentrating our vessels into two core categories: Suezmax tankers and petroleum product carriers. As a result of our renewal program, our fleet now comprises 21 product carriers, which primarily transport refined petroleum products from refinery locations to consuming locations, and 16 crude oil tankers, including 10 Suezmax tankers (approximately 160,000 dwt each), which transport oil from production and storage locations to refinery locations. Our product carriers are smaller to mid-size tankers, namely, handysizes (25,000-40,000 dwt), handymaxes (40,000-50,000 dwt) and Panamaxes (50,000-80,000 dwt). The remaining six vessels include one ULCC, three Panamax tankers and two handysize tankers.

1   All averages referring to vessel age in this Form 10-K are based on deadweight tons (“dwt”) and are calculated as of December 31, 2003. Dwt, expressed in metric tons each of which is equivalent to 1000 kilograms, refers to the total weight a vessel can carry when loaded to a particular load line. Unless otherwise indicated, when we refer to our fleet of 37 vessels, we include two Suezmax tankers that we sold and subsequently “chartered-in” to our fleet under long-term time charters.  

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The following sets forth a summary of our current fleet:

Crude Oil Fleet:       Number of Vessels
Aggregate dwt
1998-2002 built Suezmaxes       10 (a) 1,585,871  
1986 built ULCC       1   322,466  
1981-1984 built Panamaxes       3   198,244  
1993 built handysizes       2   72,707  
Total       16   2,179,288  
Product Carrier Fleet:
 
1999-2004 built handysizes       11   400,300  
2000-2003 built handymaxes       6   282,216  
2003 built Panamaxes       2   140,659  
1988-1991 built handysizes       2   59,995  
Total       21   883,170  
Total Fleet       37   3,062,458  
 

(a)   Two Suezmax tankers are chartered-in. One charter expires December 2006 and the other expires June 2010. 

We expect to take delivery of three new, double hulled, handysize ice class 1A product carriers in 2004, two more in 2005 and one in 2006.

We have grown since our fleet renewal program commenced, both in dwt and number of vessels, while substantially reducing the age of our fleet. At June 30, 1998, our fleet consisted of 26 vessels (including three jointly owned and four time chartered) aggregating 2.5 million dwt and the average age of the owned and jointly owned vessels was approximately 15.1 years. In comparison, our fleet at December 31, 2003 had an average age of approximately 5.8 years.

We have been successful in implementing a chartering strategy that has allowed us to generate stable cash flow while retaining significant profit generating capabilities in a strong charter rate environment. In 2003, we generated approximately $116 million of time charter (“TC”) revenue from time charters on 19 product carriers and two crude carriers. Revenue from time charters in 2004 is expected to be approximately $111 million, assuming the six time charters that expire are not renewed. In 2003, TC revenue from time charters covered in excess of 100% of the following fixed expenses: company-wide general and administrative expense, total interest expense and operating expenses for vessels under time charter. While the majority of vessels are on time charter, in excess of two-thirds of our vessels on a tonnage basis operate in the spot market, which allows us to generate increased cash flow in a strong charter rate environment.

Our Strategy

Our strategy includes the following initiatives:

Balanced chartering in spot and time charter markets

We actively manage the balance between our spot and time charters to maintain cash flow stability without losing our ability to participate in strong spot markets. Our general objective is for revenue from our time chartered vessels to cover the following fixed expenses: company-wide general and administrative expense, total interest expense and operating expenses of the time chartered vessels. Our balanced chartering strategy helped us to be profitable even in the weak market conditions which prevailed from the second quarter of 2001 into the fourth quarter of 2002. We were recently able to extend the charter periods for four of our vessels, two by one year and two by two years. Additionally, of the seven product carriers on order, four will begin five-year charters upon delivery from the shipyard, all of which charters provide for profit sharing. However, in excess of two-thirds of our dwt, including all of our Suezmax tankers, operate in the spot market, which allows us to capitalize on a strong charter rate environment, as was the case during most of 2003 when market conditions were strong.

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The following reflects our contracted TC revenue through 2007:

   
Actual
   
Actual
   
Actual
   
Actual
   
   
(In Millions)
 
2000
2001
2002
2003
2004
2005
 
2006
    
2007
TC Revenue       $16.3   $43.5   $90.4   $115.6   $111.2      $68.6   $49.6   $33.5
Number of Vessels (a)       5   14   17   21(b)   18(c)   13(d)   7(e)   7(f)
 

(a)   Number of vessels at the end of each year.  
(b)      During 2003, four newbuildings began time charters.  
(c)   24 vessels will operate on time charters during 2004 (including three vessels that will begin time charters upon delivery); assuming no extensions, 6 vessels complete time charter contracts during the year.  
(d)   20 vessels will operate on time charters during 2005; (including two vessels that will begin time charters upon delivery); assuming no extensions, 7 vessels complete time charters.  
(e)   13 vessels will operate on time charters during 2006; assuming no extensions, 6 vessels complete time charters.  
(f)   Two of the vessels will complete their time charters in 2008, three in 2009 and two in 2010.  
Note:   TC revenue is the amount contracted to date in the table above and does not include projections other than for expected delivery dates of newbuildings and offhire relating to drydock. We intend to time charter vessels which have time charters expiring 2004-2007 at opportunistic times. 

Concentration in two vessel categories

We have chosen to concentrate our fleet in two categories: Suezmax tankers, because they offer size advantages over aframax tankers and geographic flexibility relative to VLCCs, and product carriers because new refineries are not generally being built near the areas of greatest demand for petroleum products. The large scale of our product carrier and Suezmax fleets relative to many of our competitors enables us to realize economies of scale and increase vessel utilization, and concentrated fleets allows us to more efficiently spread overhead costs, including costs associated with our customers inspecting and approving, or “vetting”, our vessels and complying with environmental and other regulations. By gaining expertise in operating, supplying and maintaining selected vessel classes, our crews and management are more efficient and effective. Large and concentrated fleets also improve utilization by affording greater opportunities for backhauls, which are voyages from areas near discharge locations to areas of normal load location. Backhauls reduce the amount of ballast time, i.e. voyages without cargo.

Continued acquisition of modern vessels while improving our balance sheet

Our strategy is to continue building our fleets of Suezmax tankers and product carriers as market conditions and opportunities warrant, while maintaining a prudent debt-to-total capitalization ratio. From December 31, 1999 to December 31, 2003, we invested $778 million in acquiring modern vessels, while at the same time we decreased our net debt (total debt less cash and cash equivalents) to total net capitalization (total capitalization less cash and

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cash equivalents) from 60.3% as of December 31, 1999 to 49% as of December 31, 2003. This was aided by the issuance of approximately $148 million in equity during that period. We will continue to monitor opportunities to acquire modern vessels at attractive returns on capital and to dispose of old vessels.

Enter into strategic alliances

Working with other business enterprises in our industry provides us with superior market information, scheduling efficiencies and access to expertise. It provides opportunities to reduce ballast time which may result in higher earnings for our vessels. All 10 of our Suezmax tankers are marketed through a marketing alliance with another large Suezmax tanker owner, and commencing in December 2003, our Suezmax tankers are pooled with a European shipowner. Our three Panamax tankers are also in a pool with other Panamax shipowners.

Our Fleet

The following tables set forth additional detail about our fleet. Our current fleet consists of crude oil tankers and product carriers.

EXISTING FLEET

 Name of Vessel      Year
Built		 Dwt            Charter
Expiration 		    Hull
Type (a)
CRUDE OIL TANKERS:
Suezmax
SOMJIN       2001   160,183         SPOT       D  
POTOMAC       2000   159,999         SPOT       D  
HUDSON       2000   159,999         SPOT       D  
DELAWARE       2002   159,452         SPOT       D  
DAKOTA       2002   159,435         SPOT       D  
SACRAMENTO       1998   157,411         SPOT       D  
PECOS       1998   157,406         SPOT       D  
SABINE       1998   157,332         SPOT       D  
OLIVER JACOB(b)       1999   157,327         SPOT       D  
MAX JACOB(c)       2000   157,327         SPOT       D  
                                 
Panamax                                
ELBE       1984   66,800         SPOT       S  
NILE(d)       1981   65,755         SPOT       S  
VOLGA(d)       1981   65,689         SPOT       S  
                                 
Handysize                                
TANDJUNG AYU       1993   36,362         5/2005       DS  
BANDAR AYU       1993   36,345         7/2005       DS  
 
ULCC
SETTEBELLO(e)       1986   322,466         SPOT       S  
         
                   
                                2,179,288                    
         
                   

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 Name of Vessel  Year
Built		 Dwt Charter
Expiration 		      Hull
Type (a)
PRODUCT CARRIERS:
Panamax
TAMAR
 
2003
        
70,362
           
7/2008
D
  
OTTAWA
 
2003
70,297
4/2008
D
  
 
Handymax
NECHES
 
2000
47,052
9/2004
D
  
SAN JACINTO
 
2002
47,038
3/2005
D
  
GUADALUPE
 
2000
47,037
11/2004
D
AMAZON
 
2002
47,037
1/2005
D
  
MOSELLE
 
2003
47,037
2/2006
D
  
ROSETTA
 
2003
47,015
3/2006
D
  
                   
Handysize
 
ORONTES
 
2002
37,383
3/2005
D
  
OHIO
 
2001
37,278
12/2004
D
ASHLEY
 
2001
37,270
11/2004
D
MARNE
 
2001
37,230
9/2004
D
  
LOIRE
 
2004
37,106
2/2009
D
  
TRINITY
 
2000
35,834
10/2006
D
MADISON
 
 2000
35,828
9/2006
D
  
RHONE
 
2000
35,775
4/2005
D
  
CHARENTE
 
2001
35,751
9/2006
D
  
ISERE
 
1999
35,438
9/2006
D
  
SEINE
 
1999
35,407
7/2005
D
  
SHANNON
 
1991
29,999
SPOT
S
  
ALMA
 
1988
29,996
6/2004
S
  
       
         
       
883,170
          
       
         
      Total Current Fleet                     
3,062,458
          
       
         
VESSELS ON ORDER
                 
 Name of Vessel  Year
Built		 Dwt Charter
Expiration 		  Hull
Type (a)
GARONNE   4/2004   37,000   4/2009   D  
SAONE   8/2004   37,000   8/2009   D  
GANGES   11/2004   37,000   SPOT   D  
FOX   6/2005   37,000   6/2010   D  
TO BE NAMED   8/2005   47,000   SPOT   D  
TO BE NAMED   8/2005   37,000   8/2010   D  
TO BE NAMED   4/2006   37,000   SPOT   D  
     
         
      Total Vessels on Order      
269,000
          
     
         

(a)   “D” is double hulled, “S” is single hulled and “DS” is double sided.  
(b)   In June 2002, we acquired the COLUMBIA (which we had sold and chartered back in 1999) and simultaneously resold the vessel to an unrelated third party. We then chartered the vessel back (which had been renamed the OLIVER JACOB) for a period of eight years. The owners of the OLIVER JACOB provide crewing and all other technical operations for the vessel.  
(c)   In December 2001, we sold the SOYANG to a third party. We then chartered the vessel back (which had been renamed the MAX JACOB) for a period of five years. The owners of the MAX JACOB provide crewing and all other technical operations for the vessel.  
(d)   In March 2004, the vessel was reclassified to Vessels Held for Sale.  
(e)   The vessel is held for sale. 

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Operations

There are two central aspects to the operation of our fleet:
•   Commercial Operations, which involves chartering a vessel; and  
•   Technical Operations, which involves maintaining, crewing and insuring a vessel. 

Our office staff, either directly or through a subsidiary, provides the following services:
•   commercial operations and technical supervision;  
•   safety monitoring;  
•   vessel acquisition, construction management and oversight; and  
•   financial, accounting and information technology services. 

Commercial operations

We arrange voyage charters for vessels that we operate in the spot market and time charters for vessels for which we seek longer term commitments. Under a voyage charter, the owner of a vessel provides the vessel for the transport of goods between specific ports in return for the payment of an agreed-upon freight per ton of cargo or, alternatively, a specified total amount. All operating costs are borne by the owner of the vessel. A single voyage charter is often referred to as a “spot market” charter, which generally lasts from two to ten weeks. Our vessels in the spot market may spend time idle waiting for business, or may have to be “laid up” if the markets are especially weak for protracted periods.

Under a time charter, the owner of the vessel provides the vessel to the charterer to use for a fixed period of time in return for the payment of a specified daily or monthly hire rate. Operating costs, such as for crews, maintenance and insurance are typically paid by the vessel owner, while voyage costs, such as fuel and port charges, are paid by the charterer. Once we have time chartered a vessel, trading of the vessel and the commercial risk shift to our customers.

We charter our vessels for varying periods, ranging from a single voyage, as in the case of our spot market charters, to multiple years, as in the case of our long-term time charters. In general, our time charters afford us greater assurance that we will be able to cover a fixed portion of our costs. In addition, there is also a profit sharing element in six of our existing time charters that allows us to further capitalize on the upside of the spot market without undue risk. Operating vessels in the spot market affords us greater speculative opportunity to capitalize on fluctuations in the spot market: when vessel demand is high we earn higher rates, but when demand is low our rates are lower and potentially insufficient to cover costs. Spot market rates are volatile and are affected by world economics, international events, weather conditions, strikes, governmental policies, supply and demand, and other factors beyond our control.

Crude oil tankers

Our Suezmax tankers are commercially managed by Alliance Chartering LLC, a marketing alliance we operate in conjunction with Frontline Ltd., another large Suezmax tanker owner and operator. Alliance currently manages approximately 35 Suezmax tankers, including the Suezmax fleets of Frontline Ltd. and several smaller owners. The overall size and quality of the fleet give us access to market information and improve our vessel utilization.

Alliance operates through Frontline’s offices in Oslo, Norway and through our offices in Stamford, Connecticut. The Oslo office commences trading at the time of its opening and transfers trading to our Stamford office later in the day. Typical voyages chartered through Alliance for our Suezmax tankers are for loading crude oil in North Sea or West African ports and discharging it at refineries in the East or Gulf Coasts of the United States. Alliance employs objective criteria when it selects a vessel for a particular charter. Each vessel owner receives the revenues from voyages it performs.

Under an arrangement that commenced in December 2003, we have agreed to pool our ten Suezmax tankers with two Suezmax tankers owned by a European shipowner in a pool called “Gemini Tankers”. Alliance will commercially manage the vessels in the pool and revenues will be paid into the pool for the vessel performing the charter. Revenues received by the pool will be shared by the Company and the European shipowner according to an agreed formula.

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Our three Panamax crude oil tankers are time chartered into the Star Tankers Pool. Star Tankers Inc. is a tanker pool that operated, as of December 31, 2003, 42 Panamax vessels, the largest pool in this class of vessel. The pool is operated by Heidenreich Marine Inc., an unaffiliated third party that charters the vessels to customers as it deems appropriate. This pool distributes revenues to participants according to an agreed formula. This pool enables us to place our vessels with an operator with greater knowledge of the Panamax market segment. We believe that our vessels receive a better rate than we would be able to achieve by chartering the vessels in the spot market on our own. Two of our three vessels will leave the pool during 2004, and have been reclassified to Vessels Held for Sale in March 2004.

Product carriers

Our product carriers are available for spot market voyages or time charters and are commercially managed by us from our Stamford office. All but one of our 21 product carriers currently are on time charter. The charterers of time chartered vessels decide where to send the vessels to load and discharge. We trade one product carrier in the spot market.

Technical operations

All of our owned vessels are operated and managed on a technical basis by our wholly owned subsidiary, OMI Marine Services LLC, which has offices in Houston, Texas and Stamford, Connecticut. Technical management involves crewing, maintaining and insuring the vessels and arranging for vetting by customers, potential customers and others. OMI Marine Services LLC currently obtains crews through Orinoco Maritime Consultancy India Pvt. Ltd. (“OMCI”), an unaffiliated crewing agent in Mumbai, India. OMCI provides crews primarily to us, most of who are from India. In addition to operating the vessels during voyages, the crews perform general maintenance, sometimes with the help of additional personnel. A portion of our technical management is subcontracted to the crewing agent as well, as the crewing agent has access to many seamen who have previously served on our vessels and therefore have knowledge of our ships and experience with our operations.

Contractual arrangements between us and our Indian agent provide us with the ability to ensure that the standards of recruiting and training that we require are followed and that the training of crew members includes continuous updating and emphasizes awareness of, and adherence to, applicable environmental and safety regulations. As part of this relationship, we jointly sponsor and hold monthly training seminars for crew members in India to discuss and promote environmental and safety compliance. Many of our crew members frequently crew on our vessels and have attended our jointly sponsored seminars to improve their shipboard skills and heighten their environmental awareness.

Our vessels are inspected often by customers, potential customers, regulatory authorities and by us. We also drydock our vessels periodically as required by applicable regulations or earlier, as appropriate. Our employees prepare specifications for and observe the performance of the drydockings to ensure proper performance. Insurance is arranged and administered by personnel in our Stamford, Connecticut office. The two vessels we charter-in, the OLIVER JACOB and the MAX JACOB, are managed by their respective owners, who provide crews and all technical services for these vessels and also obtain required vettings from major oil companies.

Competition

The international shipping industry is highly competitive with many market participants. There are approximately 3,000 tankers aggregating approximately 290 million dwt, and the largest tanker owner has less than 5.0% of the total market dwt. The refined petroleum products transport segment is even more fragmented than the crude oil transport segment.

In the spot market, our vessels compete with all other vessels that satisfy the size and availability requirements specified by a customer. Competition in the spot market is based primarily on price, although many charterers are becoming more selective with respect to the quality of vessel they charter, focusing on a number of factors, including age, ship specifications, such as double hulls, reliability and quality of operations. Our competitors in the crude oil and products transport market are mainly privately owned fleets and some government owned fleets.

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We also compete with oil companies and traders who own or charter-in vessels. Competition for voyage charters may also include vessels that are in other classes. For example, our Suezmax tankers compete with VLCC tankers in certain markets and aframax tankers in other markets.

As in the spot market, the time charter market is price sensitive and also depends on our ability to demonstrate the high quality of our vessels and operations to chartering customers. However, because of the longer term commitment, customers entering time charters are more concerned about their exposure and image from chartering vessels that do not comply with environmental regulations or that will be forced out of service for extensive maintenance and repairs.

Employees and Labor Relations

As of December 31, 2003, we had approximately 50 office employees. Additionally, there are in aggregate approximately 900 seagoing personnel on board our vessels at any one time.

Our agent signs labor contracts in India with labor organizations that represent seagoing personnel. We are not a party to these contracts. One of these contracts is with a union representing the ratings, or non officer, seagoing personnel. Our agent also has entered into a contract for officers for our vessels. Our labor relations historically have been very good with our crews and we expect these positive relations to continue.

Customers

Our customers include major oil companies, petroleum products traders, government agencies and various other entities that utilize the crude oil tanker market and the product carrier market. For 2003, our largest customers by revenues were Chartering and Shipping S.A., a subsidiary of Total S.A. ($33,851,000 or 11% of our consolidated revenue) and El Paso Marine Company ($42,720,000 or 13% of our consolidated revenue). For 2002, our largest customers by revenues were also Chartering and Shipping S.A. ($34,045,000 or 17% of our consolidated revenue) and El Paso Marine Company ($28,082,000 or 14% of our consolidated revenue). During 2001, the Company did not receive 10% of its revenue from any one entity.

Regulations

Environmental regulations

Our operations are affected by U.S. federal, state and foreign environmental protection laws and regulations, particularly OPA 90, CERCLA, the U.S. Port and Tanker Safety Act, the Act to Prevent Pollution from Ships, regulations adopted by the IMO and the European Union, various volatile organic compound emission requirements, the IMO/U.S. Coast Guard pollution regulations and various Safety of Life at Sea (“SOLAS”) amendments, as well as the regulations described below. Compliance with these laws and regulations entails additional expense, including vessel modifications and implementation of certain operating procedures.

United States requirements

OPA 90 affects all vessel owners and operators shipping oil or hazardous material to, from, or within U.S. waters. The law phases out the use of tankers having single hulls and effectively imposes on vessel owners and operators unlimited liability in the event of a catastrophic oil spill. OPA 90 requires that tankers over 5,000 gross tons calling at U.S. ports have double hulls if contracted after June 30, 1990 or delivered after January 1, 1994. Furthermore, OPA 90 calls for the phase out of all single hulled tankers by the year 2015 according to a schedule that is based on size and age of the vessel, unless the tankers are retrofitted with double hulls. OPA 90 permits single hulled tankers to operate until the year 2015 if they discharge at the Louisiana Offshore Oil Port (“LOOP”) or off-load, or lighter, at approved lightering areas more than 60 miles offshore.

Under OPA 90, a vessel owner or operator is liable, without regard to fault, for removal costs and damages, including economic loss without physical damage to property for oil pollution in U.S. waters. Liability is limited to $1,200 per gross ton of the vessel unless the spill is caused by gross negligence, willful misconduct or a violation of certain regulations, in which case liability is unlimited. In addition, OPA 90 does not preempt state law; therefore states may and have enacted laws imposing additional liability. Coastal states have enacted pollution prevention, liability and response laws, many providing for unlimited liability.

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OPA 90 also requires owners and operators of vessels to adopt contingency plans for reporting and responding to oil spill scenarios up to a “worst case” scenario and to identify and ensure, through contracts or other approved means, the availability of necessary private response resources to respond to a “worst case discharge.” In addition, periodic training programs for shore and response personnel and for vessels and their crews are required. Our vessel response plans have been approved by the U.S. Coast Guard.

CERCLA applies to the discharge of hazardous substances whether on land or at sea. CERCLA contains liability aspects similar to those of OPA 90 and also imposes liability for cleanup, removal and natural resource damages. Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million unless the spill is caused by gross negligence, willful misconduct, or a violation of certain regulations, in which case liability is unlimited.

Under the financial responsibility regulations issued under OPA 90, all vessels entering U.S. waters are required to obtain Certificates of Financial Responsibility or COFRs in the amount of $1,500 per gross ton for tankers, combining the OPA 90 limitation of liability of $1,200 per gross ton with the CERCLA liability of $300 per gross ton as discussed above. Under the regulations, owners or operators of fleets of vessels are required to demonstrate evidence of financial responsibility of the tanker having the maximum aggregate liability under OPA 90 and CERCLA. All of our vessels that need COFRs have them.

We believe that we are in substantial compliance with OPA 90, CERCLA and all applicable state regulations in U.S. ports where our vessels call.

International requirements

As described in the table below, similar laws and regulations have been adopted by the EU and by the IMO, which phase out non-double hulled tankers at different periods from OPA 90. As a result, some vessels that are eligible to trade internationally will be unable to carry cargo to or from the United States, and some vessels that may trade in the U.S. will be unable to trade elsewhere.

The European Parliament’s new Regulation No. 1726/2003, effective October 21, 2003, provides for an accelerated phase out of non-double hulled tankers. Specific phase-out dates depend upon the year of construction and whether the tanker has segregated ballast tanks, among other factors. In addition, non-double hulled tankers cannot carry heavy grades of oil to or from member ports, and commencing in 2005 all single hulled tankers above 15 years of age must comply with a condition assessment program to enter or leave member states’ ports. In December 2003, IMO announced the adoption of a revised accelerated phase out schedule for single hulled tankers along with other measures, including an extended application of the condition assessment program for single hulled tankers 15 years old or older and a ban on the carriage of certain heavy grades of oil in single hulled tankers, all of which are expected to enter into force April 5, 2005.

Our six single hulled vessels (one ULCC, three Panamax tankers and two handysize product carriers) and two double sided handysize crude oil tankers will be phased out under OPA 90, IMO and EU regulations in accordance with the following table. However, commercial considerations arising from customer preference for double hulled vessels will likely cause all of them to be non-competitive before the required phase-out dates. For that reason, we sell non-double hulled vessels whenever a good opportunity presents itself.

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Phase Out Dates (Month/Year)
           
Name of Vessel   Year Built  
Dwt
   
OPA 90
  
IMO
  
EU
ULCC
SETTEBELLO(a)   1986   322,466   7/09   7/10 (c) 7/05
 
Panamax
ELBE   1984   66,800   6/07   6/10 (d) 6/10
NILE(b)   1981   65,755   10/04   10/10 (d) 10/07
VOLGA(b)   1981   65,689   6/04   6/10 (d) 6/07
 
Handysize
TANDJUNG AYU   1993   36,362   1/15   10/18 (e) 10/15
BANDAR AYU   1993   36,345   1/15   5/18 (e) 5/15
SHANNON   1991   29,999   1/10   8/15 (e) 8/10
ALMA   1988   29,996   1/10   9/13 (d)(e) 9/10

(a)   The vessel is held for sale.  
(b)   In March 2004, these vessels were reclassified to Vessels Held for Sale.  
(c)   The date would be July 2005 if we decided not to make certain alterations to create segregated ballast tanks on the vessel.  
(d)   Each date would be the respective anniversary of delivery day in 2007 unless the country of vessel registry is satisfied that results of the vessel under a condition assessment scheme and finds the vessel is fit to continue to operate.  
(e)   Each date would be the respective anniversary of delivery day in 2010 unless the country of vessel registry is satisfied that results of the vessel under a condition assessment scheme and finds the vessel is fit to continue to operate. 

Other regulations

We are also required by various other governmental and quasi-governmental agencies to obtain permits, licenses and certificates for our vessels, depending upon such factors as the country of registry, the commodity transported, the waters in which the vessel operates, the nationality of the vessel’s crew, the age of the vessel and our status as owner or charterer. We believe that we have, or can readily obtain, all permits, licenses, approvals and certificates necessary to permit our vessels to operate.

Industry regulations require that a vessel be “in class” as a condition to its initial and continued registration under a country flag. Being certified as “in class” means that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the country of registry of the vessel and the international conventions to which that country is a member. Each vessel is inspected by a surveyor of the classification society in three types of surveys: annual surveys, intermediate surveys every two to three years and special surveys every five years. A vessel may be required to be drydocked as part of an intermediate survey for inspection of the underwater parts. A vessel is required to be drydocked for special surveys. Should any defects be found during any survey, the classification surveyor will issue a recommendation for appropriate repairs to be made by the shipowner, which have to be made within required time periods. Our vessels have all been certified as being in class by their respective classification societies.

The requirements contained in the International Safety Management Code, or ISM Code, promulgated by the IMO also affects our operations. The ISM Code requires the party with operational control of a vessel to develop an extensive safety management system that includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for operating its vessels safely and describing procedures for responding to emergencies. OMI Marine Services LLC, our wholly owned subsidiary that is the technical operator of all of our owned vessels, is certified as an approved ship manager under the ISM Code.

The ISM Code requires that vessel operators obtain a safety management certificate for each vessel they operate. This certificate evidences compliance by a vessel’s management with code requirements for a safety management system. No vessel can obtain a certificate unless its manager has been awarded a Document of Compliance, issued by the vessel’s flag state, or by an appointed classification society, under the ISM Code. All of our vessels and OMI Marine Services LLC have received ISM Certification.

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Non-compliance with the ISM Code and other IMO regulations may subject the shipowner to increased liability, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports. Both the U.S. Coast Guard and EU authorities have indicated that vessels not in compliance with the ISM Code will be prohibited from trading in U.S. and EU ports, as the case may be. All of our vessels comply with the IMO regulations which pertain to them.

Inspections

Our vessels are subject to both scheduled and unscheduled inspections by a variety of governmental and private entities, each of which may have unique requirements. These entities include the local port authorities such as the U.S. Coast Guard, harbor master or equivalent, classification societies, flag state administration or country of registry, charterers, and particularly terminal operators and major oil companies which conduct frequent vessel inspections.

Insurance

We believe that our current insurance coverage is adequate to protect us against the accident-related risks involved in the conduct of our business and that we maintain appropriate levels of environmental damage and pollution insurance coverage, consistent with currently prevailing industry practice at commercially acceptable rates. We often do not purchase other available insurances, such as loss of hire, when in our view they are not commercially attractive. Not all risks can be insured against and we cannot assure that any specific claim will be paid or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future.

We have arranged for insurance covering our vessels in line with currently prevailing industry practice for fleets comparable to ours. Our insurance policies include:

Hull and Machinery. We maintain marine hull and machinery and war risks insurance, and increased value coverage, which includes the risk of actual or constructive total loss for all of our vessels. Each of our vessels is insured for at least its fair market value, with deductibles generally ranging from $100,000 to $150,000 per vessel per incident.

Protection and Indemnity Insurance. We maintain P&I insurance for pollution and spillage of up to $1 billion, and for war and terrorist-related acts of $200 million, in each case per occurrence per vessel. P&I insurance is provided by mutual marine indemnity associations, or “P&I Clubs”, formed by shipowners to provide protection from large financial loss to one member by contribution towards that loss by all members. Each P&I Club has capped its exposure to each of its members at $4.25 billion; each member’s potential exposure to the P&I Club is not otherwise limited. Deductibles vary up to $25,000 per claim, depending on the nature of the claim. As with other forms of mutual insurance, the members of each P&I Club share in the benefits if the overall results of the P&I Club are favorable and are liable for additional payments when and if required.

Value of Assets and Cash Requirements

Although the replacement costs of comparable new vessels may be above the book value of OMI’s fleet, the market value of OMI’s fleet may be below book value when market conditions are weak and exceed book value when markets are strong. In common with other shipowners, OMI continually considers asset redeployment which at times includes the sale of vessels at less than their book value.

OMI’s results of operations and cash flow may be significantly affected by future charter markets.

Taxation of Operating Income

We believe that we currently qualify under Section 883 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) for an exemption from U.S. federal income tax on substantially all of our shipping income. This exemption may be lost if 50% or more of our stock is owned, for more than half the number of days during the taxable year, by persons who actually or constructively own 5% or more of our stock and we cannot qualify for an exemption from such rule. We can give no assurance that changes in the ownership of our stock will permit us to qualify for the Section 883 exemption in the future. If we do not qualify for an exemption pursuant to Section 883 of the Code, we will be subject to U.S. federal income tax, likely imposed on a gross basis at 4%, on our U.S. source shipping income, which constitutes not more than 50 % of our gross shipping income. In such a case, our net income and cash flow will be reduced by the amount of such tax.

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Under current law, we will not be subject to income taxation under the laws of the Republic of the Marshall Islands, and distributions to us by our subsidiaries also will not be subject to any Republic of the Marshall Islands tax.

GLOSSARY OF SHIPPING TERMS

Aframax   means a tanker of 80,000 to 120,000 dwt.  
         
Backhaul   when a vessel loads a cargo near the vessel’s prior discharge port and transports the cargo near the next load port.  
       
Ballast   a vessel is in ballast when it is steaming without cargo and is usually loaded down with seawater for stability.  
       
Bunker   fuel oil used to operate a vessel’s engines and generators.  
       
b/d   means barrels per day.  
       
Charter   is a contract entered into with a customer for the use of a vessel for a specific voyage at a specific rate per unit of cargo, or for a specific period of time at a specific rate per unit (day or month) of time.  
       
Charterer   means the customer who hires a vessel to perform charter.  
       
Chartered-in   means a Charter from another owner of a vessel for use by the Company.  
       
Classification    societies   are organizations that establish and administer standards for the design, construction and operational maintenance of vessels. As a practical matter, vessels cannot trade unless they meet these standards.  
       
Combined
    carriers		   vessel capable of carrying either liquid or dry cargos in bulk.  
       
Commercial    operations   refers to the process of employment, or chartering, of a vessel and associated functions, including seeking and negotiating employment, billing and collecting revenues, issuing voyage instructions, purchasing fuel and appointing port agents.  
       
Crude oil
    tanker		   means a tanker vessel designed to carry crude oil or low grade oil products.  
       
Double
    bottomed		   refers to a vessel with an inner and outer bottom separated by void space.  
       
Double hulled   refers to a vessel with an inner and outer side and bottom separated by void space.  
       
Double sided   refers to a vessel with an inner and outer side separated by void space.  
   
Drydocking   is the performance of repairs and maintenance while a vessel has been taken out of the water. During drydockings, which are required to be carried out periodically, certain mandatory Classification society inspections are carried out and relevant certifications issued. Normally, as the age of a vessel increases, the cost of drydocking increases.

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dwt     means deadweight ton, which is a unit of a vessel’s capacity for cargo, fuel oil, stores and crew. A vessel’s dwt or total deadweight is the total weight the vessel can carry when loaded to a particular load line.  
       
Gross ton   means the volume of the interior of a vessel including all spaces except the void areas related to a double hulled, double sided or double bottomed vessel, expressed in a ton equal to 100 cubic feet.  
       
Handymax   is a vessel of 40,000 to 50,000 dwt.  
       
Handysize   is a vessel of 25,000 to 40,000 dwt.  
       
Hull and
   machinery
   insurance		   is the basic asset coverage insurance for repair or replacement of a damaged or lost vessel.  
       
Ice Class 1A   refers to a vessel designed and built to be able to trade in areas in which ice is not greater than 80cm thick. This is the highest standard for vessels able to trade in ice bound waters.  
       
IMO   the abbreviation for International Maritime Organization, an agency of the United Nations, which is the body that is responsible for the administration of internationally developed maritime safety and pollution treaties, including MARPOL 73/78.  
       
Lay-up   means taking a vessel out of service, generally for an extended period.  
       
Lightering   is the process of discharging a vessel’s cargo into smaller vessels.  
       
Lightweight   means the weight of the hull and superstructure in long tons.  
       
MARPOL 73/78   is the International Convention for the Prevention of Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto, which includes regulations aimed at preventing and minimizing pollution from ships by accident and by routine operations.  
       
Newbuilding   means a newly constructed vessel.  
       
OPA 90   is the abbreviation for the U.S. Oil Pollution Act of 1990.  
       
Off-hire   is any period in which a vessel under charter is not earning revenue.  
       
Orderbook   refers to vessels under contract to be constructed, usually expressed by number of vessels or dwt.  
       
Panamax   means a vessel of 50,000 to 80,000 dwt.  
       
Pool   is a grouping of vessels in which the financial results are aggregated, then distributed among pool members according to an agreement.  
       
Product carrier   means a tanker that is used to transport refined oil products, such as gasoline, jet fuel or heating oil.