UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20052006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
______________________________
For the transition period from
_________________________________________________
Commission file number 0-22704
Ship Finance International Limited
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(Exact name of Registrant as specified in its charter)
Ship Finance International Limited
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(Translation of Registrant's name into English)
Bermuda
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(Jurisdiction of incorporation or organisation)organization)
Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda
(Address of principal executive offices)
Securities registered or to be registered pursuant to section 12(b) of the Act
Title of each class Name of each exchange
Common Shares, $1.00 Par Value New York Stock Exchange
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Securities registered or to be registered pursuant to section 12(g) of the Act.
None
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
Common Shares, $1.00 Par ValueNone
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
73,143,73772,743,737 Common Shares, $1.00 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
[X] Yes [ ] No
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
[ ]Yes] Yes [X] No
Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those Sections.
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.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [X][ ] Accelerated filer [ ][X] Non-accelerated filer [ ]
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.
[ ] Item 17 [X] Item 18
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
[ ] Yes [X] No
INDEX TO REPORT ON FORM 20-F
PART I PAGE
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS............1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE......................... 1
ITEM 3. KEY INFORMATION................................................. 1
ITEM 4. INFORMATION ON THE COMPANY......................................10
ITEM 4A. UNRESOLVED STAFF COMMENTS.......................................26
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS....................26
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES......................44
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS....................................................46
ITEM 8. FINANCIAL INFORMATION...........................................47
ITEM 9. THE OFFER AND LISTING...........................................48
ITEM 10. ADDITIONAL INFORMATION..........................................49
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...............................................60
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES...............................................60
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.................60
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS.............................................60
ITEM 15. CONTROLS AND PROCEDURES.........................................60
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT................................61
ITEM 16B. CODE OF ETHICS..................................................61
ITEM 16C. PRINCIPAL ACCOUNTANT FEES.......................................61
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR
AUDIT COMMITTEES................................................62
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY ISSUER
AND AFFILIATED PURCHASERS.......................................62
PART III
ITEM 17. FINANCIAL STATEMENTS............................................63
ITEM 18. FINANCIAL STATEMENTS............................................63
ITEM 19. EXHIBITS........................................................64
PAGE
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS ........... 1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE ......................... 1
ITEM 3. KEY INFORMATION ................................................. 1
ITEM 4. INFORMATION ON THE COMPANY ...................................... 16
ITEM 4A. UNRESOLVED STAFF COMMENTS ....................................... 34
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS .................... 34
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES ...................... 55
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS ............... 58
ITEM 8. FINANCIAL INFORMATION ........................................... 60
ITEM 9. THE OFFER AND LISTING ........................................... 61
ITEM 10. ADDITIONAL INFORMATION .......................................... 62
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...... 76
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES .......... 76
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES ................. 77
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS ............................................. 77
ITEM 15. CONTROLS AND PROCEDURES ......................................... 77
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT ................................ 78
ITEM 16B. CODE OF ETHICS .................................................. 78
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES .......................... 78
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES ...... 79
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY ISSUER AND AFFILIATED
PURCHASERS ...................................................... 79
PART III
ITEM 17. FINANCIAL STATEMENTS ............................................ 81
ITEM 18. FINANCIAL STATEMENTS ............................................ 81
ITEM 19. EXHIBITS ........................................................ 81
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Matters discussed in this document may constitute forward-looking statements.
The Private Securities Litigation Reform Act of 1995 provides safe harbor
protections for forward-looking statements in order to encourage companies to
provide prospective information about their business. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements, which
are other than statements of historical facts.
Ship Finance International Limited, or the Company, desires to take advantage of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and is including this cautionary statement in connection with this safe
harbor legislation. This document and any other written or oral statements made
by us or on our behalf may include forward-looking statements, which reflect our
current views with respect to future events and financial performance. The words
"believe," "anticipate," "intends," "estimate," "forecast," "project," "plan,"
"potential," "will," "may," "should," "expect" and similar expressions identify
forward-looking statements.
The forward-looking statements in this document are based upon various
assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, management's examination of historical operating
trends, data contained in our records and other data available from third
parties. Although we believe that these assumptions were reasonable when made,
because these assumptions are inherently subject to significant uncertainties
and contingencies which are difficult or impossible to predict and are beyond
our control, we cannot assure you that we will achieve or accomplish these
expectations, beliefs or projections.
In addition to these important factors and matters discussed elsewhere herein,
important factors that, in our view, could cause actual results to differ
materially from those discussed in the forward-looking statements include the
strength of world economies, fluctuations in currencies and interest rates,
general market conditions including fluctuations in charterhire rates and vessel
values, changes in demand in the tanker market, includingmarkets in which we operate, changes in demand
resulting from changes in OPEC's petroleum production levels and world wide oil
consumption and storage, changes in market demand in countries which import
commodities and finished goods and changes in the Company'samount and location of the
production of those commodities and finished goods, changes in our operating
expenses, including bunker prices, drydocking and insurance costs, performance
of our charterers and other counterparties with whom we deal, timely delivery of
vessels under construction within the contracted price, changes in governmental
rules and regulations or actions taken by regulatory authorities, potential
liability from pending or future litigation, general domestic and international
political conditions, potential disruption of shipping routes due to accidents
or political events, and other important factors described from time to time in
the reports filed by the Company with the Securities and Exchange Commission.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
Throughout this report, the "Company," "we," "us" and "our" all refer to Ship
Finance International Limited and its subsidiaries. We use the term deadweight
ton, or dwt, in describing the size of the vessels. Dwt, expressed in metric
tons, each of which is equivalent to 1,000 kilograms, refers to the maximum
weight of cargo and supplies that a vessel can carry. Unless otherwise
indicated, all references to "USD," "US$" and "$" in this report are to, and
amounts are presented in, U.S. dollars.
A. SELECTED FINANCIAL DATA
The selected income statement data forof the Company with respect to the fiscal
years ended December 31, 2006, 2005 and 2004 and the period from October 10, 2003 (date of incorporation) to December
31, 2003 and the selected balance sheet data
as of December 31, 2005 and
December 31, 2004 is derived from our audited financial statements included
herein. The selected combined income statement data forthe Company with respect to the fiscal yearyears ended December 31, 2003 has2006 and 2005
have been derived from our audited predecessor combined
carve-out financial statementsthe Company's Consolidated Financial Statements included
herein.in Item 18 of this annual report, prepared in accordance with United States
generally accepted accounting principles.
The selected combined income statement data for the fiscal years ended December
31, 20022003 and 2001 and
selected combined balance sheet data with respect to the fiscal years ended
December 31, 2003, 2002 and 2001 has been derived from our audited predecessor combined
carve-out financial statements not included herein. The selected balance sheet
data as of December 31, 2004, 2003 and 2002 have been derived from consolidated
financial statements of the Company, and predecessor combined carve-out
statements not included herein. The following table should also be read in
conjunction with Item 5. "Operating and Financial Review and Prospects" and our historical financial statementsthe
Company's Consolidated Financial Statements and the notesNotes thereto included elsewhere herein.
Period
From
Year Year October
Ended Ended 10 to
December December December
Predecessor combined
carve-out
31, 31,Year Ended December 31, Year Ended December 31,
--- --- --- -----------------------2006 2005 2004 2003 2003 2002
2001
---- ---- ---- ---- ---- --------------- ----------- ----------- ----------- ----------
(in thousands of dollars except common shares,share and per share fleet and average
daily time charter equivalent earnings data)
Income Statement Data:
Income Statement Data:
Total operating revenues (1) ...................................... 424,658 437,510 492,069 - 695,068 365,174 486,655
Net operating income (loss)................... .................. 293,697 300,662 347,157 (14) 348,816 86,091 230,718
Net income (loss)............................. ............................ 180,798 209,546 262,659 (1,937) 334,812 18,024 212,010
Earnings per share, basic and diluted (2) $2.84 $3.52 - $4.53 $0.24 $2.87........ $ 2.48 $ 2.84 $ 3.52 $ 4.53 $ 0.24
Cash dividends paid .......................... 149,123 148,863 78,905 - n/a n/a
Cash dividend paid per share ................. $ 2.05 $ 2.00 $ 1.05 n/a n/a
Balance Sheet Data (at end of period):
Cash and cash equivalents.....................equivalents .................... 64,569 32,857 29,193 - 26,519 20,634 26,041
Vessels and equipment, net....................net ................... 246,549 315,220 236,305 - 1,863,504 1,904,146 1,696,528
Investment in finance leases (including
current portion) ..................................................... 2,109,183 1,925,354 1,718,642 - - - --- --
Total assets..................................assets ................................. 2,553,677 2,393,913 2,152,937 582,192 2,156,348 2,123,607 1,951,353
Long term debt (including current portion) ... 1,915,200 1,793,657 1,478,894 580,000 991,610 1,106,847
1,000,537
Share capital (2)capital................................. 72,744 73,144 74,901 12 n/a n/a n/a
Stockholders' equity (deficit)................ ............... 600,530 561,522 660,982 (1,925) 822,026 485,605 466,742
Common shares outstanding .................... 72,743,737 73,143,737 74,900,837 12,000 n/a n/a n/a
Weighted average common shares
outstanding (2) 74,560,108outstanding(1) ............................ 72,764,287 73,904,465 74,610,946 12,000 n/a n/a n/a
Cash Flow Data:
Cash provided by operating activities.........activities ........ 193,497 280,834 178,528 - 415,523 115,658 307,167
Cash provided by (used in) investing
activities....................................activities ................................ (110,706) (269,573) 76,948 (565,500) (51,632) (261,779) (271,850)
Cash provided by (used in) financing
activities..................................activities ................................ (51,079) (7,597) (226,283) 565,500 (358,006) 140,714 (24,549)
Fleet Data:
Number of wholly owned vessels (end of period) 52 46 - 43 42 38
Number of vessels owned in joint ventures
(end of period)............................. - - - 6 9 7
Average Daily Time Charter Equivalent
Earnings: (3)
VLCCs......................................... $32,718 $35,482 n/a n/a n/a n/a
Suezmaxes..................................... $24,674 $26,313 n/a n/a n/a n/a
Suezmax OBOs.................................. $23,539 $26,313 n/a n/a n/a n/a
Containerships................................ $26,128 n/a n/a n/a n/a n/a
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n/a: Not applicable
(1) Operating revenues from January 1, 2004 include finance lease interest
income, finance lease service revenues, profit sharing revenues from
our profit sharing arrangement with Frontline Ltd., or Frontline, and
charter revenues for the period prior to our vessels commencing
trading under their charters to Frontline. They also include charter
revenues for vessels trading under long term charters to third parties
during the period. All of the vessels that we have acquired from
Frontline are chartered to subsidiaries of Frontline under long term
charters which are generally accounted for as finance leases. We
allocate $6,500 per day from each time charter payment as finance
lease service revenue. The balance of each charter payment is
allocated between finance lease interest income and finance lease
repayment in order to produce a constant periodic return on the
balance of our net investments in finance leases. Our arrangement with
Frontline is that while our vessels are completing performance of
third party charters, we pay Frontline all revenues we earn under
third party charters in exchange for Frontline paying us the Frontline
charter rates. We account for the revenues received from these third
party charters as time charter, bareboat or voyage revenues as
applicable, and the subsequent payment of these amounts to Frontline
as deemed dividends paid. We account for the charter revenues received
from Frontline prior to the charters becoming effective for accounting
purposes as deemed equity contributions received.
The following table analyzes our total operating revenues in 2005 and
2004:
(in thousands of dollars) Year Ended Year Ended
December 31, December 31,
2005 2004
Time charter revenues ...................... 62,605 86,741
Bareboat charter revenues................... 7,325 27,453
Voyage charter revenues .................... 9,745 49,707
Finance lease interest income .............. 177,474 140,691
Finance lease service revenues.............. 92,265 72,551
Profit sharing revenues..................... 88,096 114,926
Total operating revenues ................... 437,510 492,069
The following table analyzes our cash inflows for the year ended
December 31, 2005 from the charters to Frontline and how they are
accounted for in the balance sheet and statement of operations:
Statement
(in thousands of dollars) Balance of
Total Sheet Operations
Frontline charterhire payments
accounted for as:
Finance lease interest income...........177,474 177,474
Finance lease service revenues.......... 92,265 92,265
Finance lease repayments................ 94,777 94,777
Deemed equity contributions received.... 50,560 50,560
Total charterhire paid...................415,076 145,337 269,739
(2) For all periods presented prior to June 16, 2004, per share amounts are
based on a denominator of 73,925,837 common shares outstanding, which is the number
of issued common shares outstanding on June 16, 2004, the date that the
Company's shares were partially spun off. The Company's shares were listed on
the New York Stock Exchange on June 17, 2004.
(3) Average Daily Time Charter Equivalent Earnings for our tankers
represent time charter equivalent, or TCE, earnings of the basic
charterhire payments and profit sharing payments that our tankers
earned under our time charters with Frontline for the period presented.
Subsequent to January 1, 2004, our tankers operate under time and
bareboat charters to subsidiaries of Frontline. Prior to January 1,
2004 our tankers operated under time charters, bareboat charters,
voyage or spot charters, pool arrangements and contracts of
affreightment to third parties. Average Daily Time Charter Equivalent
Earnings for our containerships represent time charter earnings from
our time charters with third parties.
In order to compare vessels trading under different types of charters,
it is standard industry practice to measure the revenue performance of
a vessel in terms of average daily time charter equivalent earnings, or
TCEs. For voyage charters, which are charters obtained in the spot
market, this is calculated by dividing net voyage revenues by the
number of days on charter. Days spent off hire are excluded from this
calculation. We believe that net voyage revenues, provide more
meaningful information to us than voyage revenues. Net voyage revenues
are also widely used by investors and analysts in the tanker shipping
industry for comparing financial performance between companies and to
industry averages. Under a time charter, the charterer pays
substantially all of the vessel voyage costs and the vessel owner
generally pays the operating costs. Under a bareboat charter the
charterer pays substantially all of the vessel voyage and operating
costs. Under a voyage charter, the vessel owner pays the vessel voyage
and operating costs. Vessel voyage costs are primarily fuel and port
charges. Accordingly, charter income from a voyage charter would be
greater than that from an equally profitable time charter to provide
for the owner's payment of vessel voyage costs. A contract of
affreightment is a form of voyage charter under which the vessel owner
agrees to carry a specific type and quantity of cargo in two or more
shipments over an agreed period of time. For comparability, TCEs for
bareboat charters include an allowance for estimated operating costs
that would be paid by us under an equivalently profitable time charter.
In 2004 and 2005 we included an allowance of $6,500 per day for
estimated operating costs.
B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable
D. RISK FACTORS
WeOur assets are primarily engaged primarily in transporting crude oil and oil products.products,
drybulk and containerized cargos, and in offshore drilling and related
activities. The following summarisessummarizes some of the risks that may materially
affect our business, financial condition or results of operations. Please note,Unless
otherwise indicated in this section,
"we", "us"Annual Report on Form 20-F, all information
concerning our business and "our" all referour assets is as of June 15, 2007.
Risks Relating to Our Industry
The seaborne transportation industry is cyclical and volatile, and this may lead
to reductions in our charter rates, vessel values and results of operations.
The international seaborne transportation industry is both cyclical and volatile
in terms of charter rates and profitability. The degree of charter rate
volatility for vessels has varied widely. Fluctuations in charter rates result
from changes in the supply and demand for vessel capacity and changes in the
supply and demand for energy resources, commodities, semi-finished and finished
consumer and industrial products internationally carried at sea. The factors
affecting the supply and demand for vessels are outside of our control, and the
nature, timing and degree of changes in industry conditions are unpredictable.
Factors that influence demand for vessel capacity include:
o supply and demand for energy resources, commodities, semi-finished
and finished consumer and industrial products;
o changes in the production of energy resources, commodities,
semi-finished and finished consumer and industrial products;
o the location of regional and global production and manufacturing
facilities;
o the location of consuming regions for energy resources, commodities,
semi-finished and finished consumer and industrial products;
o the globalization of production and manufacturing;
o global and regional economic and political conditions;
o developments in international trade;
o changes in seaborne and other transportation patterns, including the
distance cargo is transported by sea;
o environmental and other regulatory developments;
o currency exchange rates;
o weather;
o the number of newbuilding deliveries;
o the scrapping rate of older vessels;
o the price of steel;
o changes in environmental and other regulations that may limit the
useful lives of vessels;
o the number of vessels that are out of service; and
o port or canal congestion.
We anticipate that the future demand for our vessels and charter rates will be
dependent upon continued economic growth in China, India and the rest of the
world, seasonal and regional changes in demand and changes to the Companycapacity of
the world fleet. We believe the capacity of the world fleet is likely to
increase and there can be no assurance that economic growth will continue at a
rate sufficient to utilize this new capacity. Adverse economic, political,
social or other developments could negatively impact charter rates and therefore
have a material adverse effect on our business, results of operations and
ability to pay dividends.
An acceleration of the current prohibition to trade deadlines for our non-double
hull tankers could adversely affect our operations.
Our fleet includes eleven non-double hull tankers.
The United States, the European Union and the International Maritime
Organization, or IMO, have all imposed limits or prohibitions on the use of
these types of tankers in specified markets after certain target dates,
depending on certain factors such as the size of the vessel and the type of
cargo. In the case of our non-double hull tankers, these phase out dates range
from 2010 to 2015. As of April 15, 2005, the Marine Environmental Protection
Committee of the IMO has amended the International Convention for the Prevention
of Pollution from Ships to accelerate the phase out of certain categories of
single hull tankers, including the types of vessels in our fleet, from 2015 to
2010 unless the relevant flag states extend the date.
This change could result in some or all of our non-double hull tankers being
unable to trade in many markets after 2010. In addition, single hull tankers are
likely to be chartered less frequently and at lower rates. Additional
regulations may be adopted in the future that could further adversely affect the
useful lives of our non-double hull tankers, as well as our ability to generate
income from them.
Safety, environmental and other governmental and other requirements expose us to
liability, and compliance with current and future regulations could require
significant additional expenditures, which could have a material adverse affect
on our business and financial results.
Our operations are affected by extensive and changing international, national,
state and local laws, regulations, treaties, conventions and standards in force
in international waters, the jurisdictions in which our tankers and other
vessels operate and the country or countries in which such vessels are
registered, including those governing the management and disposal of hazardous
substances and wastes, the cleanup of oil spills and other contamination, air
emissions, and water discharges and ballast water management. These regulations
include the U.S. Oil Pollution Act of 1990, or OPA, the International Convention
on Civil Liability for Oil Pollution Damage of 1969, International Convention
for the Prevention of Pollution from Ships, the IMO International Convention for
the Safety of Life at Sea of 1974, or SOLAS, the International Convention on
Load Lines of 1966 and the U.S. Marine Transportation Security Act of 2002.
In addition, vessel classification societies also impose significant safety and
other requirements on our vessels. In complying with current and future
environmental requirements, vessel owners and operators may also incur
significant additional costs in meeting new maintenance and inspection
requirements, in developing contingency arrangements for potential spills and in
obtaining insurance coverage. Government regulation of vessels, particularly in
the areas of safety and environmental requirements, can be expected to become
stricter in the future and require us to incur significant capital expenditures
on our vessels to keep them in compliance, or even to scrap or sell certain
vessels altogether.
Many of these requirements are designed to reduce the risk of oil spills and
other pollution, and our compliance with these requirements can be costly. These
requirements also can affect the resale value or useful lives of our vessels,
require a reduction in cargo-capacity, ship modifications or operational changes
or restrictions, lead to decreased availability of insurance coverage for
environmental matters or result in the denial of access to certain
jurisdictional waters or ports, or detention in, certain ports.
Under local, national and foreign laws, as well as international treaties and
conventions, we could incur material liabilities, including cleanup obligations,
natural resource damages and third-party claims for personal injury or property
damages, in the event that there is a release of petroleum or other hazardous
substances from our vessels or otherwise in connection with our current or
historic operations. We could also incur substantial penalties, fines and other
civil or criminal sanctions, including in certain instances seizure or detention
of our vessels, as a result of violations of or liabilities under environmental
laws, regulations and other requirements. For example, OPA affects all vessel
owners shipping oil to, from or within the United States. OPA allows for
potentially unlimited liability without regard to fault for owners, operators
and bareboat charterers of vessels for oil pollution in United States waters.
Similarly, the International Convention on Civil Liability for Oil Pollution
Damage, 1969, as amended, which has been adopted by most countries outside of
the United States, imposes liability for oil pollution in international waters.
OPA expressly permits individual states to impose their own liability regimes
with regard to hazardous materials and oil pollution incidents occurring within
their boundaries. Coastal states in the United States have enacted pollution
prevention liability and response laws, many providing for unlimited liability.
An over-supply of container vessel capacity may lead to reductions in charter
hire rates and profitability.
The market supply of container vessels has been increasing, and the number of
container vessels on order have recently reached historic highs. An over-supply
of container vessel capacity may result in a reduction of charter hire rates. If
such a reduction occurs, the value of our container vessels may decrease and,
under certain circumstances, affect the ability of our customers who charter our
container vessels to make charterhire payments to us. This and other factors
affecting the supply and demand for container vessels and the supply and demand
for products shipped in containers are outside our control and the nature,
timing and degree of changes in the industry may affect the ability of our
charterers to make charterhire payments to us.
Our drill rig business depends on the level of activity in the offshore oil and
gas industry, which is significantly affected by volatile oil and gas prices and
other factors.
Our drill rig business depends on the level of activity in oil and gas
exploration, development and production in market sectors worldwide, with the
U.S. and international offshore areas being our primary market sectors. Oil and
gas prices and market expectations of potential changes in these prices
significantly affect this level of activity. However, higher commodity prices do
not necessarily translate into increased drilling activity since our customers'
expectations of future commodity prices typically drive demand for our rigs.
Also, increased competition for our customers' drilling budgets could come from,
among other areas, land-based energy markets in Africa, Russia, other former
Soviet Union states, the Middle East and Alaska. The availability of quality
drilling prospects, exploration success, relative production costs, the stage of
reservoir development and political and regulatory environments also affect our
customers' drilling campaigns. Worldwide military, political and economic events
have contributed to oil and gas price volatility and are likely to do so in the
future. Oil and gas prices are extremely volatile and are affected by numerous
factors, including the following:
o worldwide demand for oil and gas;
o the ability of OPEC to set and maintain production levels and
pricing;
o the level of production in non-OPEC countries;
o the policies of various governments regarding exploration and
development of their oil and gas reserves;
o advances in exploration and development technology; and
o the worldwide military and political environment, including
uncertainty or instability resulting from an escalation or
additional outbreak of armed hostilities or other crises in oil
producing areas or further acts of terrorism in the United States,
or elsewhere.
The drill rig business involves numerous operating hazards.
Our drilling operations are subject to the usual hazards inherent in the
drilling of oil and gas wells, such as blowouts, reservoir damage, loss of
production, loss of well control, punch-throughs, craterings, fires and natural
disasters such as hurricanes and tropical storms could damage or destroy our
drilling rigs. The occurrence of one or more of these events could result in the
suspension of drilling operations, damage to or destruction of the equipment
involved and injury or death to rig personnel. Operations also may be suspended
because of machinery breakdowns, abnormal drilling conditions, and failure of
subcontractors to perform or supply goods or services or personnel shortages. In
addition, offshore drilling operations are subject to perils peculiar to marine
operations, including capsizing, grounding, collision and loss or damage from
severe weather. Damage to the environment could also result from our operations,
particularly through oil spillage or extensive uncontrolled fires. We may also
be subject to property, environmental and other damage claims by oil and gas
companies. Similar to our vessel operating business our insurance policies and
contractual rights to indemnity may not adequately cover losses, and we do not
have insurance coverage or rights to indemnity for all risks.
Increased inspection procedures, tighter import and export controls and new
security regulations could increase costs and cause disruption of our container
shipping business.
International container shipping is subject to security and customs inspection
and related procedures in countries of origin, destination and trans-shipment
points. These security procedures can result in cargo seizure, delays in the
loading, offloading, trans-shipment, or delivery of containers and the levying
of customs duties, fines or other penalties against exporters or importers and,
in some cases, carriers.
Since the events of September 11, 2001, U.S. authorities have more than doubled
container inspection rates to approximately 5% of all imported containers.
Government investment in non-intrusive container scanning technology has grown,
and there is interest in electronic monitoring technology, including so-called
"e-seals" and "smart" containers that would enable remote, centralized
monitoring of containers during shipment to identify tampering with or opening
of the containers, along with potentially measuring other characteristics such
as temperature, air pressure, motion, chemicals, biological agents and
radiation.
It is unclear what changes, if any, to the existing security procedures will
ultimately be proposed or implemented, or how any such changes will affect the
container shipping industry. These changes have the potential to impose
additional financial and legal obligations on carriers and, in certain cases, to
render the shipment of certain types of goods by container uneconomical or
impractical. These additional costs could reduce the volume of goods shipped in
containers, resulting in a decreased demand for container vessels. In addition,
it is unclear what financial costs any new security procedures might create for
container vessel owners and operators. Any additional costs or a decrease in
container volumes could have an adverse impact on our customers that charter
container vessels from us and, under certain circumstances, may affect their
ability to make charterhire payments to us under the terms of our charters.
Our business has inherent operational risks, which may not be adequately covered
by insurance.
Our vessels and their cargoes are at risk of being damaged or lost because of
events such as marine disasters, bad weather, mechanical failures, human error,
environmental accidents, war, terrorism, piracy and other circumstances or
events. In addition, transporting cargoes across a wide variety of international
jurisdictions creates a risk of business interruptions due to political
circumstances in foreign countries, hostilities, labor strikes and boycotts, the
potential for changes in tax rates or policies, and the potential for government
expropriation of our vessels. Any of these events may result in loss of
revenues, increased costs and decreased cash flows to our customers, which could
impair their ability to make payments to us under our charters.
In the event of a casualty to a vessel or other catastrophic event, we will rely
on our insurance to pay the insured value of the vessel or the damages incurred.
Through our management agreements with our vessel managers, we procure insurance
for the vessels in our fleet employed under time charters against those risks
that we believe the shipping industry commonly insures against. These insurances
include marine hull and machinery insurance, protection and indemnity insurance,
which include pollution risks and crew insurances, and war risk insurance.
Currently, the amount of coverage for liability for pollution, spillage and
leakage available to us on commercially reasonable terms through protection and
indemnity associations and providers of excess coverage is $1 billion per tanker
per occurrence.
We cannot assure you that we will be adequately insured against all risks. Our
vessel managers may not be able to obtain adequate insurance coverage at
reasonable rates for our vessels in the future. For example, in the past more
stringent environmental regulations have led to increased costs for, and in the
future may result in the lack of availability of, insurance against risks of
environmental damage or pollution. Additionally, our insurers may refuse to pay
particular claims. For example, the circumstances of a spill, including
non-compliance with environmental laws, could result in denial of coverage,
protracted litigation and delayed or diminished insurance recoveries or
settlements. Any significant loss or liability for which we are not insured
could have a material adverse effect on our financial condition. Under the terms
of our bareboat charters, the charterer is responsible for procuring all
insurances for the vessel.
Maritime claimants could arrest our vessels, which could interrupt our customers
or our cash flows.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and
other parties may be entitled to a maritime lien against that vessel for
unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien
holder may enforce its subsidiaries.lien by arresting a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our vessels could
interrupt the relevant charterer's or our cash flow and require us to pay a
significant amount of money to have the arrest lifted. In addition, in some
jurisdictions, such as South Africa, under the "sister ship" theory of
liability, a claimant may arrest both the vessel which is subject to the
claimant's maritime lien and any "associated" vessel, which is any vessel owned
or controlled by the same owner. Claimants could try to assert "sister ship"
liability against vessels in our fleet managed by our vessel managers for claims
relating to another vessel managed by that manager.
Governments could requisition our vessels during a period of war or emergency
without adequate compensation, resulting in a loss of earnings.
A government could requisition for title or seize our vessels. Requisition for
title occurs when a government takes control of a vessel and becomes her owner.
Also, a government could requisition our vessels for hire. Requisition for hire
occurs when a government takes control of a vessel and effectively becomes her
charterer at dictated charter rates. This amount could be materially less than
the charterhire that would have been payable otherwise. In addition, we would
bear all risk of loss or damage to a vessel under requisition for hire.
As our fleet ages, the risks associated with older vessels could adversely
affect our operations.
In general, the costs to maintain a vessel in good operating condition increase
as the vessel ages. Due to improvements in engine technology, older vessels
typically are less fuel-efficient than more recently constructed vessels. Cargo
insurance rates increase with the age of a vessel, making older vessels less
desirable to charterers.
Governmental regulations, safety, environmental or other equipment standards
related to the age of tankers and other types of vessels may require
expenditures for alterations or the addition of new equipment to our vessels to
comply with safety or environmental laws or regulations that may be enacted in
the future. These laws or regulations may also restrict the type of activities
in which our vessels may engage or the geographic regions in which they may
operate. We cannot predict what alterations or modifications our vessels may be
required to undergo in the future or that as our vessels age, market conditions
will justify any required expenditures or enable us to operate our vessels
profitably during the remainder of their useful lives.
There may be risks associated with the purchase and operation of second-hand
vessels.
Our current business strategy includes additional growth through the acquisition
of both newbuildings and second-hand vessels. Although we generally inspect
second-hand vessels prior to purchase, this does not normally provide us with
the same knowledge about the vessels' condition that we would have had if such
vessels had been built for and operated exclusively by us.
Therefore, our future operating results could be negatively affected if some of
the vessels do not perform as we expect. Also, we do not receive the benefit of
warranties from the builders if the vessels we buy are older than one year.
Risks relating to our Company
We depend on subsidiaries ofour charterers and principally the Frontline Ltd.Charterers for the majorityall of
our operating cash flowflows and for our ability to pay dividends to our
shareholders.
AllMost of the tanker vessels and oil bulk ore carriers or OBOs in our vessels, except two,fleet are
chartered to either Frontline Shipping Limited which we refer to as Frontline Shipping, orand Frontline Shipping II Limited which we refer to asor the
Frontline Shipping II, and together the
Charterers, under long term time charters, and the Charterers' payments to us
are currently our principal source of operating cash flow. The Charterers are
both wholly owned subsidiaries of Frontline Ltd. (NYSE:FRO),Ltd, or Frontline, while our
other vessels that have charters attached to them are chartered to our other
customers under medium to long-term time and bareboat charters, except one which
is oneon a short-term time charter through October 2007. The charter hire payments
that we receive from our customers constitute substantially all of the largest owners and operators of large crude oil tankers in the
world. Neither of theour operating
cash flows. The Frontline Charterers has anyhave no business or sources of funds other
than those related to the chartering of our tanker fleet to third parties.
The Frontline Shipping was initially capitalized by Frontline with $250 million (currently
$218.2 million), and Frontline Shipping II has beenCharterers are, at June 15, 2007 capitalized with $56.2
million. This capital$197.0 and $35.0
million, respectively, which serves to support the Frontline Charterers'
obligations to make charterhire payments to us. Neither Frontline nor any of its
affiliates guarantees the payment of charterhire or is obligated to contribute
additional capital to either of the Frontline Charterers at any time. Although there are
restrictions on the Frontline Charterers' rights to use their cash to pay
dividends or make other distributions, at any given time in the future,
their available cash
may be diminished or exhausted, and the Frontline Charterers may be unable to
make charterhire payments to us. If the Frontline Charterers or any of our other
charterers are unable to make charterhire payments to us, our results of
operations and financial condition will be materially adversely affected and we
may not have cash available to pay debt service or for distributions to our
shareholders.
The amount of the profit sharing payment we receive under our charters with the
Frontline Charterers, if any, and our ability to pay our ordinary quarterly
dividend, may depend on prevailing spot market rates, which are volatile.
Most of our tanker vessels and our OBOs, operate under time charters to the
Frontline Charterers. These charter contracts provide for base charterhire and
profit sharing payments when the Frontline Charterers' earnings from deploying
our vessels exceed certain levels. The majority of our vessels chartered to the
Frontline Charterers are sub-chartered by the Frontline Charterers in the spot
market, which is subject to greater volatility than the long-term time charter
market. Accordingly, the amount of profit sharing payments that we receive, if
any, is primarily dependant on the strength of the spot market and we cannot
assure you that we will receive any profit sharing payments for any periods in
the future. Furthermore, our quarterly dividend may depend on the Company
receiving profit sharing payments or that we continue to expand our fleet so
that, in either case, we receive cash flows in addition to the cash flows we
receive from our base charterhire from the Frontline Charterers and charter
payments from other customers. As a result, we cannot assure you that we will
continue to pay quarterly dividends.
Volatility in the tanker charterinternational shipping and offshore markets may cause the Charterersour
customers to be unable to pay charterhire to us.
The Charterers subcharterOur customers are subject to volatility in the shipping market that affects
their ability to operate the vessels they charter from us at a profit. Our
customers' successful operation of our vessels to end users under long term time
charters, onand rigs in the spot charter market
or under contracts of affreightment under
whichwill depend on, among other things, their ability to obtain profitable charters.
We cannot assure you that future charters will be available to our vessels carry an agreed upon quantity of cargo over a specified route
and time period.customers at
rates sufficient to enable them to meet their obligations to make charterhire
payments to us. As a result, the Charterers are directly exposed to the riskour revenues and results of volatility in tanker charter rates. Tanker charter rates have historically
fluctuated significantly based upon manyoperations may be
adversely affected. These factors including:include:
o global and regional economic and political conditions;
o changes in productionsupply and demand for oil and refined petroleum products, which is
affected by, among other things, competition from alternative
sources of crude oil, particularly by OPECenergy;
o supply and other key
producers;demand for energy resources, commodities, semi-finished
and finished consumer and industrial products;
o developments in international trade;
o changes in seaborne and other transportation patterns, including
changes in the distances that cargoes are transported and construction
of new pipelines;transported;
o environmental concerns and regulations;
o weather;
o the number of newbuilding deliveries;
o the phase-out of single hull tankers from certain markets pursuant
to national and international laws and regulations;
o the scrapping rate of older vessels; and
o competition from alternative sourceschanges in production of energy.crude oil, particularly by OPEC and other
key producers.
Tanker charter rates also tend to be subject to seasonal variations, with demand
(and therefore charter rates) normally higher in winter months.
The Charterers' successful operation of our vesselsmonths in the tanker charter market
willnorthern
hemisphere.
We depend on among other things, its ability to obtain profitable tanker
charters. We cannot assure you that future tanker charters will be available to
the Charterers at rates sufficient to enable the Charterers to meet their
obligations to pay charterhire to us.
A significant portion of our common sharesdirectors who are owned by Frontline and related
parties and we depend on officers and directors of Frontline for our management,associated with affiliated companies which may
create conflicts of interest.
Frontline currently owns 11.1%Currently, the chairman of our common shares,Board of Directors, Tor Olav Troim, and Hemen Holding Ltd.Kate
Blankenship, a member of our Board of Directors, are also directors of
Frontline, Golden Ocean Group Limited ("Golden Ocean"), and Farahead Investment Inc.,Seadrill Limited
("Seadrill"). All of these companies are indirectly controlled by John
Fredriksen Frontline's Chairmanwho also controls our principal shareholders, Hemen Holding Limited
and CEO currently own collectively 37.6%Farahead Investment Inc. (collectively "Hemen"). Svein Aaser, a member of
our common
shares. Exceptboard of directors, acts as Executive Director for the CEO in our subsidiary Ship FinanceSeatankers Management AS, Lars
Solbakken, we do not have any employees or officers who are not employees or
officers of Frontline. All of our directors and officers, except for one, are
directors or officers of Frontline.Ltd
("Seatankers"), a company affiliated with Hemen. These three directors owe
fiduciary duties to the shareholders of each company and may have conflicts of
interest in matters involving or affecting us and Frontline, including matters arising under our agreements with Frontline and its affiliates.customers. In addition,
due to their ownership of Frontline, Golden Ocean or Seadrill common shares,
some of these individualsthey may have conflicts of interest when faced with decisions that could have
different implications for Frontline, Golden Ocean, Seadrill or Seatankers than
they do for us. We cannot assure you that any of these conflicts of interest
will be resolved in our favor.
The agreements between us and Frontline and Frontline's affiliates of Hemen may be less favorable to us
than agreements that we could obtain from unaffiliated third parties.
The charters, the management agreements, the charter ancillary agreements and the
other contractual agreements we have with Frontline and its affiliatescompanies affiliated with Hemen were
made in the context of an affiliated relationship and were not necessarily
negotiated in arms lengtharms-length transactions. The negotiation of these agreements may
have resulted in prices and other terms that are less favorable to us than terms
we might have obtained in arm's lengtharm's-length negotiations with unaffiliated third
parties for similar services.
Frontline's otherHemen and its associated companies business activities may create conflicts of interestconflict with Frontline.ours.
While Frontline has agreed to cause the Frontline Charterers to use their
commercial best efforts to employ our vessels on market terms and not to give
preferential treatment in the marketing of any other vessels owned or managed by
Frontline or its other affiliates, it is possible that conflicts of interests in
this regard will adversely affect us. Under our charter ancillary agreements
with the Frontline Charterers and Frontline, we are entitled to receive annual
profit sharing payments to the extent that the average time daily charter
equivalent, or TCE, rates realized by the Frontline Charterers exceed specified
levels. Because Frontline also owns or manages other vessels in addition to our
fleet, which are not included in the profit sharing calculation, conflicts of
interest may arise between us and Frontline in the allocation of chartering
opportunities that could limit our fleet's earnings and reduce the profit
sharing payments or charterhire due under our charters.
IfOur shareholders must rely on us to enforce our charters or management agreements terminate, we could be exposed to
increased volatility inrights against our business and financial results.
If anycontract
counterparties.
Holders of our charters terminate, we may not be ablecommon shares and other securities have no direct right to
re-charter these vessels
on a long term basis with terms similar toenforce the terms of our charters with the
Charterers. While the terms of our current charters end between 2014 and 2025,
the Charterers have the option to terminate the charters of our non-double hull
vessels on the vessel's anniversary date in 2010. One or moreobligations of the charters
with respect to our vessels may also terminate in the event of a requisition for
title or a loss of a vessel. In addition, under our vessel management agreements
withFrontline Charterers, Frontline Management
(Bermuda) Limited,Ltd., or Frontline Management, Frontline, Management is responsible for allGolden Ocean and Seadrill or
any of our other customers under the charters, or any of the technical and operational management of
our vessels for a fixed management fee, and will indemnify us against certain
losses of hire and various other liabilities relatingagreements to
the operation of the
vessels. We may terminatewhich we are party, including our management agreementsagreement with Frontline
Management
forManagement. Accordingly, if any reason at any time on 90 days' notice. In addition, our current
management agreements with Frontline Management may be terminated if the
relevant charter is terminated. If our management agreements with Frontline
Managementof those counterparties were to terminate or we werebreach their
obligations to acquire additional vessels in the
future, we may not be ableus under any of these agreements, our shareholders would have to
obtain similar fixed rate terms from an
independent third party. We may acquire additional vessels in the future and we
cannot assure yourely on us to pursue our remedies against those counterparties.
There is a risk that we will be able to enter into similar charters with the
Charterers or a third party charterer, or that we will be able to enter into
similar management agreements with Frontline Management or a third party
manager.
With respect to any vessels we acquire that are not subject to the charter and
management agreements with the Charterers and Frontline Management, we will be
directly exposed to all of the operational and other risks associated with
operating our vessels as described in these risk factors. As a result, our
future cash flow could be more volatile and we could be exposed to increases in
our vessel operating expenses, each of which could materially and adversely
affect our results of operations and business.
U.S.United States tax authorities could treat us as a "passive
foreign investment company," which couldwould have adverse U.S.United States federal
income tax consequences to U.S.United States holders.
A foreign corporation will be treated as a "passive foreign investment company,"
or PFIC, for U.S.United States federal income tax purposes if either (1) at least
75% of its gross income for any taxable year consists of certain types of
"passive income" or (2) at least 50% of the average value of the corporation's
assets produce or are held for the production of those types of "passive
income." For purposes of these tests, "passive income" includes dividends,
interest and gains from the sale or exchange of investment property and rents
and royalties other than rents and royalties which are received from unrelated
parties in connection with the active conduct of a trade or business. For
purposes of these tests, income derived from the performance of services does
not constitute "passive income."
Based on our methodUnited States shareholders of operation, we do not believe that we will be a PFIC with
respect to any taxable year. In this regard, we intend to treat the gross income
we derive or are deemed to derive from our time chartering activities as
services income, rather than rental income. Accordingly, we believe that our
income from our time chartering activities will not constitute "passive income,"
and the assets that we own and operate in connection with the production of that
income do not constitute passive assets.
There is, however, no direct legal authority under the PFIC rules addressing our
proposed method of operation. Accordingly, no assurance can be given that the
U.S. Internal Revenue Service, or IRS, or a court of law will accept our
position, and there is a risk that the IRS or a court of law could determine
that we are a PFIC. Moreover, no assurance can be given that we would not
constitute a PFIC for any future taxable year if there were to be changes in the
nature and extent of our operations.
If the IRS were to find that we are or have been a PFIC for any taxable year,
our U.S. shareholders would be subject to a disadvantageous U.S.United
States federal income tax regime with respect to the income derived by the PFIC,
the distributions they receive from the PFIC and the gain, if any, they derive
from the sale or other disposition of their shares in the PFIC.
See "United States
Taxation--TaxationUnder these rules, we should not be considered to be a PFIC if our income from
our time charters is considered to be income for the performance of U.S. Holders"services,
but we will be considered to be a PFIC if such income is considered to be rental
income. We have received an opinion from our counsel, Seward & Kissel LLP, that
it is more likely than not that our income from time charters will not be
treated as passive income for purposes of determining whether we are a PFIC.
Based on this opinion and our current method of operations, we do not believe we
are, nor do we expect to become, a PFIC with respect to any taxable year. Our
belief and the opinion are based principally upon the positions that (1) time
and voyage charter income constitutes services income, rather than rental income
and (2) Frontline Management which provides services to our vessels that are
chartered under time charters, will be respected as a separate entity from the
Frontline Charterers, with which it is affiliated.
There is no direct legal authority under the PFIC rules addressing our proposed
method of operation. In particular, there is no legal authority addressing the
situation where the charterer of a majority of the vessels in a company's fleet
is affiliated with the technical management provider for a more comprehensive discussionmajority of the
U.S.company's vessels. Accordingly, no assurance can be given that the Internal
Revenue Service, or IRS, or a court of law will accept our position, and there
is a significant risk that the IRS or a court of law could determine that we are
a PFIC. Moreover, no assurance can be given that we would not constitute a PFIC
for any future taxable year if the nature and extent of our operations were to
change.
If the IRS were to find that we are or have been a PFIC for any taxable year,
our United States shareholders will face adverse United States tax consequences.
Individual shareholders will not be eligible for the 15% maximum tax rate on
dividends that we pay, and other adverse tax consequences will arise.
We may have to pay tax on United States source income, which would reduce our
earnings.
Under the United States Internal Revenue Code of 1986, or the Code, 50% of the
gross shipping income of a vessel owning or chartering corporation, such as
ourselves and our subsidiaries, that is attributable to transportation that
begins or ends, but that does not both begin and end, in the United States may
be subject to a 4% United States federal income tax consequenceswithout allowance for
deduction, unless that corporation qualifies for exemption from tax under
Section 883 of the Code and the applicable Treasury Regulations recently
promulgated thereunder.
We expect that we and each of our subsidiaries qualify for this statutory tax
exemption and we will take this position for United States federal income tax
return reporting purposes. However, there are factual circumstances beyond our
control that could cause us to U.S.lose the benefit of this tax exemption and
thereby become subject to United States federal income tax on our United States
source income. For example, Hemen owned 41.4% of our outstanding stock at June
15, 2007. There is therefore a risk that we could no longer qualify for
exemption under Code Section 883 for a particular taxable year if other
shareholders ifwith a five percent or greater interest in our stock were, in
combination with Hemen, to own 50% or more of our outstanding shares of our
stock on more than half the days during the taxable year. Due to the factual
nature of the issues involved, we can give no assurances on our tax-exempt
status or that of any of our subsidiaries.
If we, or our subsidiaries, are treated asnot entitled to exemption under Section 883 of
the Code for any taxable year, we, or our subsidiaries, could be subject for
those years to an effective 4% United States federal income tax on the gross
shipping income these companies derive during the year that are attributable to
the transport or cargoes to or from the United States. The imposition of this
tax would have a PFIC.negative effect on our business and would result in decreased
earnings available for distribution to our shareholders.
Our Liberian subsidiaries may not be exempt from Liberian taxation, which would
materially reduce our Liberian subsidiaries', and consequently our, net income
and cash flow by the amount of the applicable tax.
The Republic of Liberia enacted a newan income tax actlaw generally effective as of
January 1, 2001, (the "New("the New Act"). In contrast to the income tax law previously in effect
since 1977 (the "Prior Law"), which the New Act repealed, in its entirety, the New Act does not distinguish between the taxation of a non-resident Liberian
corporation, such asprior
income tax law in effect since 1977, pursuant to which our Liberian
subsidiaries, which conduct no business in
Liberia andas non-resident domestic corporations, were wholly exemptedexempt from
tax under the Prior Law, and the taxation
of ordinary resident Liberian corporations.tax.
In 2004, the Liberian Ministry of Finance issued regulations, ("the New
Regulations"), pursuant to which a non-resident domestic corporation engaged in
international shipping, such as our Liberian subsidiaries, will not be subject
to tax under the New Act retroactive to January 1, 2001 (the "New Regulations").2001. In addition, the
Liberian Ministry of Justice issued an opinion that the New Regulations were a
valid exercise of the regulatory authority of the Ministry of Finance.
Therefore, assuming that the New Regulations are valid, our Liberian
subsidiaries will be wholly exempt from Liberian income tax as under the Prior Law.prior law.
If our Liberian subsidiaries were subject to Liberian income tax under the New
Act, our Liberian subsidiaries would be subject to tax at a rate of 35% on their
worldwide income. As a result, their, and subsequently our, net income and cash
flow would be materially reduced by the amount of the applicable tax. In
addition, we, as a shareholder of the Liberian subsidiaries, would be subject to
Liberian withholding tax on dividends paid by the Liberian subsidiaries at rates
ranging from 15% to 20%.
If our long-term time or bareboat charters or management agreements with respect
to our vessels employed on long-term time charters terminate, we could be
exposed to increased volatility in our business and financial results, our
revenues could significantly decrease and our operating expenses could
significantly increase.
If any of our charters terminate, we may not be able to re-charter those vessels
on a long-term basis with terms similar to the terms of our existing charters,
or at all. While the terms of our current charters for our tanker vessels to the
Frontline Charterers end between 2013 and 2027, the Frontline Charterers have
the option to terminate the charters of our non double hull tanker vessels from
2010.
The charters for the other vessels in our current fleet, other than the Front
Vanadis which is subject to a three and a half year hire-purchase contract, and
our 1,700 twenty foot equivalent units, or TEUs, container vessels, one of which
is on a time charter scheduled to terminate in May 2009 and the other of which
is on a time charter scheduled to terminate in October 2007, are generally
contracted to expire between six and 20 years, although we have granted some of
these charterers purchase options that, if exercised, may effectively terminate
our charters with these customers earlier. One or more of the charters with
respect to our vessels may also terminate in the event of a requisition for
title or a loss of a vessel.
In addition, under our vessel management agreements with Frontline Management,
for a fixed management fee Frontline Management is responsible for all of the
technical and operational management of the vessels chartered by the Frontline
Charterers, and will indemnify us against certain loss of hire and various other
liabilities relating to the operation of these vessels. We may terminate our
management agreements with Frontline Management for any reason at any time on 90
days' notice or that agreement may be terminated if the relevant charter is
terminated. We expect to acquire additional vessels in the future and we cannot
assure you that we will be able to enter into similar fixed price management
agreements with Frontline Management or another third party manager for those
vessels.
Therefore, to the extent that we acquire additional vessels, our cash flow could
be more volatile and we could be exposed to increases in our vessel operating
expenses, each of which could materially and adversely affect our results of
operations and business.
If the delivery of any of the vessels that we have agreed to acquire is delayed
or are delivered with significant defects, our earnings and financial condition
could suffer.
As at June 15, 2007, we have entered into agreements to acquire two additional
Suezmax tankers, two Capesize drybulk carriers, five additional container
vessels, one additional jack-up drilling rig and three seismic vessels. A delay
in the delivery of any of these vessels or the failure of the contract
counterparty to deliver any of these vessels could cause us to breach our
obligations under related charter agreements that we have entered into and could
adversely affect our revenues and results of operations. In addition, an
acceptance of any of these vessels with substantial defects could have similar
consequences.
Certain of our vessels are subject to purchase options held by the charterer of
the vessel, which, if exercised, could reduce the size of our fleet and reduce
our future revenues.
The market values of our vessels, which are currently at near historically high
levels, is expected to change from time to time depending on a number of
factors, including general economic and market conditions affecting the shipping
industry, competition, cost of vessel construction, governmental or other
regulations, prevailing levels of charter rates, and technological changes. We
have granted fixed price purchase options to certain of our customers with
respect to the vessels they have chartered from us, and these prices may be less
than the respective vessel's market value at the time the option is exercised.
In addition, we may not be able to obtain a replacement vessel for the price at
which we sell the vessel. In such a case, we could incur a loss and a reduction
in earnings.
We may incur losses when we sell vessels, which may adversely affect our
earnings.
During the period a vessel is subject to a charter, we will not be permitted to
sell it to take advantage of increases in vessel values without the charterers'
agreement. On the other hand, if the charterers were to default under the
charters due to adverse market conditions, causing a termination of the
charters, it is likely that the fair market value of our vessels would also be
depressed. If we were to sell a vessel at a time when vessel prices have fallen,
we could incur a loss and a reduction in earnings.
An increase in interest rates could materially and adversely affect our
financial performance.
As of December 31, 2006, we had approximately $1.5 billion in floating rate debt
outstanding under our credit facilities. Although we use interest rate swaps to
manage our interest rate exposure and have interest rate adjustment clauses in
some of our chartering agreements, we are exposed to fluctuations in the
interest rates. For a portion of our floating rate debt, if interest rates rise,
interest payments on our floating rate debt that we have not swapped into
effectively fixed rates would increase.
As of December 31, 2006, we have entered into interest rate swaps to fix the
interest on $738.7 million of our outstanding and committed indebtedness. As of
December 31, 2006, $166.4 million of these interest rate swaps relate to
committed but not outstanding debt. In addition we had entered into total return
bond swaps in respect of $52.0 million of our 8.5% senior notes as of December
31, 2006. The total return bond swaps effectively translate the underlying
principal amount into floating rate debt.
An increase in interest rates could cause us to incur additional costs
associated with our debt service, which may materially and adversely affect our
results of operations. For example, our net income for the year ended December
31, 2006 was reduced by a $2.8 million unrealized loss, representing the net
change in the fair value of these interest rate swaps. Our maximum exposure to
interest rate fluctuations on our outstanding debt and our outstanding total
return bond swaps at December 31, 2006 was $945.8 million. A one per cent change
in interest rates would at most increase or decrease interest expense by $9.5
million per year as of December 31, 2006. The maximum figure does not take into
account that certain of our charter contracts include interest adjustment
clauses, whereby the charter rate is adjusted to reflect the actual interest
paid on the outstanding debt related to the assets on charter. At December 31,
2006, $155.1 million of our floating rate debt was subject to such interest
adjustment clauses.
We may have difficulty managing our planned growth properly.
Since our original acquisitions from Frontline we have expanded and diversified
our fleet, and we have recently begun performing certain administrative services
through a wholly owned subsidiary company that were previously contracted to
Frontline.
The growth in the size and diversity of our fleet will continue to impose
additional responsibilities on our management, and may require us to increase
the number of our personnel. We may need to increase our customer base in the
future as we continue to grow our fleet. We cannot assure that we will be
successful in executing our growth plans or that we will not incur significant
expenses and losses in connection with our future growth.
We are highly leveraged and subject to restrictions in our financing agreements
that impose constraints on our operating and financing flexibility.
We have significant indebtedness outstanding under our senior notes. We have
also entered into secured loan facilities.facilities that we have used to refinance existing
indebtedness and to acquire additional vessels. We may need to refinance some or
all of our indebtedness on maturity of our senior notes but weand to acquire
additional vessels in the future. We cannot assure you we will be able to do so
on terms that are acceptable to us or at all. If we cannot refinance our
indebtedness, we will have to dedicate some or all of our cash flow,flows, and we may
be required to sell some of our assets, to pay the principal and interest on thisour
indebtedness. In such a case, we may not be able to pay dividends to our
shareholders and may not be able to grow our fleet as may
otherwise be planned. We may also incur
additional debt in the future.
Our loan facilities and the indenture for our senior notes subject us to
limitations on our business and future financing activities, including:
o limitations on ourthe incurrence of additional indebtedness, including
our
issuance of additional guarantees;
o limitations on our incurrence of liens;
o limitations on our ability to pay dividends and make other
distributions under certain circumstances;distributions; and
o limitations on our ability to renegotiate or amend our charters,
management agreements and other material agreements.
Further, our loan facilities contain financial covenants that require us to,
among other things:
o provide additional security under the loan facilitiesfacility or prepay an
amount of the loan facilitiesfacility as necessary to maintain the fair market
value of our vessels securing the loan facilitiesfacility at not less than
125% orspecified percentages (ranging from 120% to 140%) of the principal
amount outstanding under the different loan facilities;facility;
o maintain available cash on a consolidated basis of not less than $25
million;
o maintain positive working capital on a consolidated basis; and
o maintain a ratio of shareholders'shareholder equity to total assets of not less
than 20%.
Under the terms of our loan facility,facilities, we may not make distributions to our
shareholders if we do not satisfy these covenants.covenants or receive waivers from the
lenders. We cannot assure you that we will be able to satisfy these covenants in
the future.
Due to these restrictions, we may need to seek permission from our lenders in
order to engage in some corporate actions. Our lenders' interests may be
different from ours and we cannot guarantee that we will be able to obtain our
lenders' permission when needed. This may prevent us from taking actions that
are in our best interest.
Our debt service obligations require us to dedicate a substantial portion of our
cash flowflows from operations to required payments on indebtedness and could limit
our ability to obtain additional financing, make capital expenditures and
acquisitions, and carry out other general corporate activities in the future.
These obligations may also limit our flexibility in planning for or reacting to,
changes in our business and the shipping industry or detract from our ability to
successfully withstand a downturn in our business or the economy generally. This
may place us at a competitive disadvantage to other less leveraged competitors.
Risks Relating to Our Common Shares
We are a holding company, and we depend on the ability of our subsidiaries to
distribute funds to us in order to satisfy our financial and other obligations.
We are a holding company, and have no significant assets other than the equity
interests in our subsidiaries. Our subsidiaries own all of our vessels, and
payments under our charter agreements are made to our subsidiaries. As a result,
our ability to make distributions to our shareholders must relydepends on the performance
of our subsidiaries and their ability to distribute funds to us. The ability of
a subsidiary to make these distributions could be affected by a claim or other
action by a third party or by the law of their respective jurisdiction of
incorporation which regulates the payment of dividends by companies. If we are
unable to obtain funds from our subsidiaries, we will not be able to pay
dividends to our shareholders.
Because we are a foreign corporation, you may not have the same rights that a
shareholder in a United States corporation has.
We are a Bermuda exempted company. Bermuda law may not as clearly establish your
rights and the fiduciary responsibilities of our directors as do statutes and
judicial precedent in some United States jurisdictions. In addition, most of our
directors and officers are not resident in the United States and the majority of
our assets are located outside of the United States. As a result, investors may
have more difficulty in protecting their interests and enforcing judgments in
the face of actions by our management, directors or controlling shareholders
than would shareholders of a corporation incorporated in a jurisdiction in the
United States.
Our major shareholder, Hemen, may be able to influence us, to enforceincluding the outcome
of shareholder votes with interests may be different from yours.
As of June 15, 2007, Hemen owned approximately 41.4% of our rights against our contract
counterparties.
Holdersoutstanding common
shares. As a result of its ownership of our common shares, and other securities will have no direct right to
enforceHemen may influence
our business, including the obligationsoutcome of the Charterers, Frontline Management or Frontline
under the charters and related agreements, the Frontline performance guarantee
or the management agreements with Frontline Management. Accordingly, if any of
those counterparties were to breach their obligations to us under any of these
agreements, our shareholders would have to rely on us to pursue our remedies
against those counterparties. Because we depend on officers and directors of
Frontline for our management, if such a breach were to occur, our common
officers and directors would face a direct conflict of interest and we cannot
assure you that our rights would be protected to the same extent that they would
be if we had independent managers.
An increase in interest rates could materially and adversely affect our
financial performance.
We have outstanding approximately $1,336.6 million in floating rate debt under
our two senior secured credit facilities as of December 31, 2005. Although we
use interest rate swaps to manage our interest rate exposure from a portionvote of our floating rate debt, if interest rates rise, interest payments on our
floating rate debt that we have not swapped into effectively fixed rates would
increase. Asshareholders. Hemen also
currently beneficially owns substantial stakes in Frontline, Golden Ocean and
Seadrill. The interests of December 31, 2005 we have entered into interest rate swaps to
fix the interest on $568.3 million of our outstanding indebtedness. An increase
in interest rates could cause us to incur additional costs associated with our
debt service which may materially and adversely affect our results of
operations. Our maximum exposure to interest rate fluctuations is $768.3 million
at December 31, 2005. A one per cent change in interest rates would increase or
decrease interest expense by $7.7 million per year as of December 31, 2005.
Because we are a relatively new company with limited separate operating history,
our historical financial and operating data for periods prior to January 1,
2004, will not be representative of our future results.
We were formed in October 2003 and commenced operations in January 2004. Prior
to commencing operations we did not have any operating history separate from
Frontline's. The predecessor combined carve-out financial statements included as
comparatives in this annual report have been prepared on a carve-out basis and
reflect the historical business activities of Frontline relating to our vessel
owning subsidiaries. These predecessor financial statements do not reflect the
results we would have obtained under our current fixed rate long term charters
and management agreements and therefore are not a meaningful representation of
our future results of operations.
An acceleration of the current prohibition to trade deadlines for our non-double
hull tankers could adversely affect our operations.
Our fleet includes 18 non-double hull tankers. The United States, the European
Union and the International Maritime Organization, or the IMO, have all imposed
limits or prohibitions on the use of these types of tankers in specified markets
after certain target dates, depending on certain factors such as the size of the
vessel and the type of cargo. In the case of our non-double hull tankers, these
phase out dates range from 2010 to 2015. In 2005, the Marine Environmental
Protection Committee of the IMO has amended the International Convention for the
Prevention of Pollution from Ships to accelerate the phase out of certain
categories of single hull tankers, including the types of vessels in our fleet,
from 2015 to 2010 unless the relevant flag states extend the date. This change
could result in a number of our vessels being unable to trade in many markets
after 2010. The phase out of single hull tankers may therefore reduce the demand
for single hull tankers, and force the remaining single hull tankers into
employment on less desirable trading routes and increase the number of tankers
trading on those routes. As a result, single hull tankersHemen may be chartered less
frequently and at lower rates. Moreover, additional regulations may be adopted
in the future that could further adversely affect the useful lives of our
non-double hull tankers, as well as our ability to generate incomedifferent from them.
Compliance with safety, environmental and other governmental and other
requirements may adversely affect our business.
The shipping industry is affected by numerous regulations in the form of
international conventions, national, state and local laws and national and
international regulations in force in the jurisdictions in which such tankers
operate, as well as in the country or countries in which such tankers are
registered. These regulations include the U.S. Oil Pollution Act of 1990, or
OPA, the International Convention on Civil Liability for Oil Pollution Damage of
1969, International Convention for the Prevention of Pollution from Ships, the
IMO International Convention for the Safety of Life at Sea of 1974, or SOLAS,
the International Convention on Load Lines of 1966 and the U.S. Marine
Transportation Security Act of 2002. In addition, vessel classification
societies also impose significant safety and other requirements on our vessels.
We believe our tankers are maintained in good condition in compliance with
present regulatory and class requirements relevant to areas in which they
operate, and are operated in compliance with applicable safety/environmental
laws and regulations.
However, regulation of tankers, particularly in the areas of safety and
environmental impact may change in the future and require significant capital
expenditures be incurred on our vessels to keep them in compliance.
We may incur losses when we sell vessels, which may adversely affect our
earnings.
The market value of our vessels, which are at historically high levels, will
change depending on a number of factors, including general economic and market
conditions affecting the shipping industry, competition, cost of vessel
construction, governmental or other regulations, prevailing levels of charter
rates, and technological changes. During the period a vessel is subject to a
charter with the Charterers, we will not be permitted to sell it to take
advantage of increases in vessel values without the Charterers' agreement. On
the other hand, if the Charterers were to default under the charters due to
adverse conditions in the tanker market, causing a termination of the charters,
it is likely that the fair market value of vessels would be depressed in such
market conditions. If we were to sell a vessel at a time when vessel prices have
fallen, we could incur a loss and a reduction in earnings.
Our business has inherent operational risks, which may not be adequately covered
by insurance.
Our tankers and their cargoes are at risk of being damaged or lost because of
events such as marine disasters, bad weather, mechanical failures, human error,
war, terrorism, piracy and other circumstances or events. In addition,
transporting crude oil across a wide variety of international jurisdictions
creates a risk of business interruptions due to political circumstances in
foreign countries, hostilities, labor strikes and boycotts, the potential for
changes in tax rates or policies, and the potential for government expropriation
of our vessels. Any of these events may result in loss of revenues, increased
costs and decreased cash flows to the Charterers, which could impair their
ability to make payments to us under our charters.
In the event of a casualty to a vessel or other catastrophic event, we will rely
on our insurance to pay the insured value of the vessel or the damages incurred.
Under the management agreements, Frontline Management is responsible for
procuring insurance for our fleet against those risks that we believe the
shipping industry commonly insures against. These insurances include marine hull
and machinery insurance, protection and indemnity insurance, which include
pollution risks and crew insurances and war risk insurance. Currently, the
amount of coverage for liability for pollution, spillage and leakage available
to us on commercially reasonable terms through protection and indemnity
associations and providers of excess coverage is $1 billion per vessel per
occurrence. We cannot assure you that we will be adequately insured against all
risks. Frontline Management may not be able to obtain adequate insurance
coverage at reasonable rates for our fleet in the future. Additionally, our
insurers may refuse to pay particular claims. Any significant loss or liability
for which we are not insured could have a material adverse effect on our
financial condition.
Maritime claimants could arrest our tankers, which could interrupt the
Charterers' or our cash flow.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and
other parties may be entitled to a maritime lien against that vessel for
unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien
holder may enforce its lien by arresting a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our vessels could
interrupt the Charterers' or our cash flow and require us to pay a significant
amount of money to have the arrest lifted. In addition, in some jurisdictions,
such as South Africa, under the "sister ship" theory of liability, a claimant
may arrest both the vessel which is subject to the claimant's maritime lien and
any "associated" vessel, which is any vessel owned or controlled by the same
owner. Claimants could try to assert "sister ship" liability against one vessel
in our fleet for claims relating to another vessel in our fleet.
As our fleet ages, the risks associated with older tankers could adversely
affect our operations.
In general, the costs to maintain a tanker in good operating condition increase
as the tanker ages. Due to improvements in engine technology, older tankers
typically are less fuel-efficient than more recently constructed tankers. Cargo
insurance rates increase with the age of a tanker, making older tankers less
desirable to charterers.
Governmental regulations, safety or other equipment standards related to the age
of tankers may require expenditures for alterations or the addition of new
equipment to our tankers to comply with safety or environmental laws or
regulations that may be enacted in the future. These laws or regulations may
also restrict the type of activities in which our tankers may engage or the
geographic regions in which they may operate. We cannot predict what alterations
or modifications our vessels may be required to undergo in the future or that as
our tankers age, market conditions will justify any required expenditures or
enable us to operate our tankers profitably during the remainder of their useful
lives.
There may be risks associated with the purchase and operation of secondhand
vessels.
Our current business strategy includes additional growth through the acquisition
of secondhand vessels. Although we will inspect secondhand vessels prior to
purchase, this does not normally provide us with the same knowledge about their
condition that we would have had if such vessels had been built for and operated
exclusively by us. Therefore, our future operating results could be negatively
affected if some of the vessels do not perform as we expect. Also, we do not
receive the benefit of warranties from the builders if the vessels we buy are
older than one year.your interests.
If Frontline were to become insolvent, there is a risk that a bankruptcy court
could pool our or the Frontline Charterers' assets and liabilities with those of
Frontline under the equitable doctrine of substantive consolidation.consolidation which may
adversely affect our future results.
Under United States bankruptcy law, the equitable doctrine of substantive
consolidation can permit a bankruptcy court to disregard the separateness of
related entities and to consolidate and pool the entities' assets and
liabilities and treat them as though held and incurred by one entity where the
interrelationship among the entities warrants such consolidation. Substantive
consolidation is an equitable remedy in bankruptcy that results in the pooling
of assets and liabilities of a debtor with one or more of its debtor affiliates
or, in rare circumstances, non-debtor affiliates, for the purposes of
administering claims and assets of creditors as part of the bankruptcy case,
including treatment under a reorganization plan.
Not all jurisdictions that could potentially have jurisdiction over an
insolvency or bankruptcy case involving Frontline, us, and/or any of our
respective affiliates recognize the substantive consolidation doctrine. For
example, we have been advised by our Bermuda counsel that Bermuda does not
recognize this doctrine. However, if Frontline or its creditors were to assert
claims of substantive consolidation or related theories in a Frontline
bankruptcy proceeding in a jurisdiction that recognizes the doctrine of
substantive consolidation, such as the United States, the bankruptcy court could
make our assets or the Frontline Charterers' assets available to satisfy
Frontline obligations to its creditors. This could have a material adverse
effect on us.
We are a holding company, and we depend on the ability of our subsidiaries to
distribute funds to us in order to satisfy our financial and other obligations.
We are a holding company, and have no significant assets other than the equity
interests in our subsidiaries. Our subsidiaries own all of our vessels, and
payments under our charter agreements with the Charterers will be made to our
subsidiaries. As a result, our ability to make distributions to our shareholders
depends on the performance of our subsidiaries and their ability to distribute
funds to us. If we are unable to obtain funds from our subsidiaries, we will not
be able to pay dividends to our shareholders.
Investor confidence and the market price of our common stock may be adversely
impacted if we are unable to comply with Section 404 of the Sarbanes-Oxley Act
of 2002.
We will becomeare subject to Section 404 of the Sarbanes-Oxley Act of 2002, which will requirerequires
us to include in our annual report on Form 20-F our management's report on, and
assessment of the effectiveness of, our internal controls over financial
reporting. In addition, first effective in our annual report for the fiscal year
ended December 31, 2007, our independent registered public accounting firm will
be required to attest to and report on management's assessment of the
effectiveness of our internal controls over financial reporting. These
requirements will first apply to our annual report for the fiscal year ending
December 31, 2006. If we fail to achieve and
maintain the adequacy of our internal controls over financial reporting, we will
not be in compliance with all of the requirements imposed by Section 404. Any
failure to comply with Section 404 could result in an adverse reaction in the
financial marketplace due to a loss of investor confidence in the reliability of
our financial statements, which ultimately could harm our business and could
negatively impact the market price of our common stock. We believe the total
cost of our initial compliance and the future ongoing costs of complying with
these requirements may be substantial.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The Company
We are Ship Finance International Limited, a Bermuda based shipping company that
is engaged primarily in the ownership and operation of oil tankers.vessels and offshore
related assets. We are also involved in the charter, purchase and sale of
assets. We were incorporated in Bermuda on October 10, 2003 (Company No.
EC-34296). Our registered and principal executive offices are located at
Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda, and our
telephone number is +1 (441) 295-9500.
We are engaged primarily in the ownership and operation of oil tankers,
including oil/bulk/ore, or OBO carriers. We operate tankers of two sizes: very
large crude carriers, or VLCCs, which are between 200,000 and 320,000 deadweight
tons, or dwt, and Suezmaxes, which are vessels between 120,000 and 170,000 dwt.
In addition, we own two containerships. We operate through subsidiaries and partnerships located in Bermuda, Cyprus,
Isle of Man, Liberia, Norway, Delaware and Singapore.
We are also involved in the charter, purchase and sale of vessels.
Our tanker fleet isan international ship owning company with one of the largest tanker fleets inasset bases
across the world, with a
combined deadweight tonnagemaritime and offshore industries. Our assets currently consist of 11.7 million dwt, and has an average age of 8.6
years for VLCCs and 13.6 years for Suezmaxes as of June 2, 2006. Eighteen of our
VLCCs and fourteen of our Suezmax35
oil tankers, are of double hull construction, with
the remainder being modern single hull or double side vessels built since 1989.
Eight of our Suezmax tankers are oil/bulk/ore carriers, or OBO carriers, which
can beeight OBOs currently configured to carry eitherdrybulk cargo, and one
drybulk carrier aggregating 10.7 million dwt, seven container vessels
aggregating 17,520 TEUs, and one jack-up drilling rig.
Additionally we have contracted to purchase the following newbuild vessels:
o a second jack-up drilling rig scheduled for delivery in 2007;
o three seismic vessels, scheduled for delivery in 2008;
o two Capesize drybulk carriers, scheduled for delivery in 2008-09;
o two Suezmax oil tankers, scheduled for delivery in 2009; and
o five container vessels, scheduled for delivery in 2010.
We have secured charter arrangements for each of our new acquisitions apart from
the two Suezmax tankers and the five container vessels, which we are currently
marketing for medium to long-term employment.
Our principal strategy is to generate stable and increasing cash flows by
chartering our assets under medium to long-term time or dry cargo as market conditions warrant.bareboat charters to
customers across a diverse group of maritime and offshore segments.
Currently, these customers include Frontline, Horizon Lines Inc. ("Horizon
Lines"), Golden Ocean, Seadrill, SCAN Geophyiscal ASA ("SCAN"), Great Elephant
Corporation ("Great Elephant"), Gold Star Line Ltd, and Heung-A. For most of our
vessels, our charters range from six to 20 years, providing us with significant,
stable base cash flows and high asset utilization. Some of our charters include
purchase options on behalf of the charterer, which if exercised would reduce our
remaining charter coverage and contracted cash flow.
Our primary objective is to continue to grow our business through accretive
acquisitions in diverse marine and offshore asset classes in order to increase
our dividend per share.
History of the Company
We were formed as a wholly owned subsidiary of Frontline, which is one of the
largest owners and operators of large crude oil tankers in the world. On May 28,
2004, Frontline announced the distribution of 25% of our common shares to its
ordinary shareholders in a partial spin off. On June 16, 2004, each Frontline
shareholder of record on June 7, 2004, received one of our common shares for
every four Frontline shares held. Our common shares commenced trading
on the New York Stock Exchange under the ticker symbol "SFL" on June 17, 2004.
Frontline has subsequently made twoseveral further dividends of our shares to its
shareholders, including two distributions in 2004: On
September 24, 2004, every Frontline shareholder receivedtwo in 2005, one of our common shares
for every ten Frontline shares that they heldin 2006 and
on December 15, 2004 every
Frontline shareholder received two of our common shares for every 15 Frontline
shares that they held. At December 31, 2004, Frontline's remaining shareholding
in us was approximately 50.8%.
On January 28, 2005 and February 23, 2005 Frontline approved further
distributions of its holdings of our shares. On February 18, 2005, each
shareholder of Frontline received one of our shares for every four shares of
Frontline held and on March 24, 2005 each shareholder of Frontline received one
of our shares for every ten shares of Frontline held. Finally, on February 17,
2006, Frontline approved a furtherfinal distribution in which each shareholder of
Frontline received one of2007. Following the latest distribution in March 2007,
Frontline's ownership in our shares for every twenty shares of Frontline held.
Following these transactions Frontline's shareholding in usCompany is 11.1% at June 2,
2006.less than 1%.
Pursuant to a fleet purchasean agreement entered into in December 2003, we purchased from
Frontline a fleet of 47 crude oil tankers, comprising 23 Very Large Crude
Carriers, or VLCCs, including an option to acquire aone VLCC, each having a
capacity of 275,000 to 308,000 dwt, and 24 Suezmax tankers, including eight
OBOs, each having a capacity of 142,000 to 169,000 dwt. We paid an aggregate
purchase price of $950.0 million excluding working capital to acquire this
initial fleet. We also assumed senior secured indebtedness with respect to ourthis
fleet in the amount of approximately $1.158 billion, which we subsequently
refinanced with the proceeds of oura senior notes ourissuance, a $1.058 billion credit
facility and a deemed equity contribution of $525$525.0 million from Frontline.
Since January 1, 2005, we have diversified our asset base from two asset types,
crude oil tankers and OBO carriers, to six asset types including container
vessels, drybulk carriers, jack-up drilling rigs and seismic vessels.
All of our tankers and OBOs, with the exception of the two vessels except twocontracted
for delivery in 2009, and the VLCC Front Vanadis, are chartered to the Frontline
Shipping Limited or to Frontline Shipping II Limited, which we refer
collectively to as the
Charterers under longer term time charters that have remaining terms that range
from fivesix to 2320 years. The Frontline Charterers, in turn, charter our vessels to
third parties. The daily base charter rates payable to us under the charters
have been fixed in advance and will decrease as our vessels age, and the
Frontline Charterers have the right to terminate the charter for non double hull
vessels afterfrom 2010.
The daily charter rate that the Frontline Charterers pay to us is not dependant
on the revenue that they receive from chartering our vessels to third parties.
Frontline Shipping was initially capitalized with $250 million in cash provided
by Frontline to support its obligation to make payments to us under the
charters. Frontline Shipping II was capitalisedcapitalized with approximately $21.0 million
in cash. Due to sales and acquisitions, the current capitalisation
incapitalization of the
Frontline Charterers is $218.2$197 million and $56.2$35 million, respectively.
We have entered into charter ancillary agreements with the Frontline Charterers,
our vessel owning subsidiaries that own our vessels and Frontline, which remainsremain
in effect until the last long term charter with the relevant Frontline Charterer
terminates in accordance with its terms. Frontline has guaranteed the Frontline
Charterers' obligations under the charter ancillary agreements. Under the terms
of the charter ancillary agreements, beginning with the final 11-month period in
2004 and for each calendar year after that, the Frontline Charterers have agreed
to pay us a profit sharing payment equal to 20% of the charter revenues for the
applicable period, calculated annually on a TCE basis, realized by that
Frontline Charterer for our fleet in excess of the daily base charterhire. After
2010, all of our non-double hull vessels will be excluded from the annual profit
sharing payment calculation. For purposes of calculating bareboat revenues on a
TCE basis, expenses are assumed to equal $6,500 per day.
We have also entered into a fixed rate management agreement and an
administrative services agreementsagreement with Frontline Management to provide for the
operation and maintenance of our initial fleet of vessels and administrative
support services.
These arrangements are intended to provide us with stable cash flow and reduce
our exposure to volatility in the markets for seaborne oil transportation
services.
We refer you to Item 10 C. - Material Contracts for further discussion of the
agreements discussed above.
In 2005,During the fourth quarter of 2006 and first quarter of 2007 we have boughtreduced our
non-double hull fleet from 18 vessels to 11 vessels. The 11 non-double hull
vessels include the VLCC Front Vanadis which we have re-chartered on
hire-purchase terms, where the charterer has a furtherpurchase obligation at the end of
the charter. Five of the single hull vessels were sold to Frontline in
connection with Frontline's spin-off of Sealift Ltd., a dedicated heavy-lift
company, and the other vessels have been sold to unrelated third parties.
In addition, we also have a profit sharing arrangement for the vessels on
charter to the Frontline Charterers where we receive profit sharing payments in
times of relative market strength where the spot market rate exceeds our base
charter rate. This profit sharing agreement is calculated on an annual basis,
and in 2006 we received base charter payments of $437.2 million from the
Frontline Charterers and accrued profit sharing revenues of $78.9 million.
There are also profit sharing agreements relating to the charters of the jack-up
drilling rigs West Ceres and West Prospero, where we will receive profit shares
calculated as a percentage of the annual earnings above specified thresholds
relating to milestones set under the relevant charters.
The predictability and stability of our cash flows is enhanced by having
substantially all of the vessel operating expenses of our tankers and OBO
carriers fixed through our management services agreements with Frontline
Management. Under these agreements, we make fixed payments to Frontline
Management during the charter period to provide for the operation and
maintenance of our vessels.
The charters for our two jack-up drilling rigs to Seadrill, our three drybulk
carriers to Golden Ocean, our five container vessels to Horizon Lines and our
three seismic vessels to SCAN are all on bareboat terms, under which the
respective charterer will bear all operating and maintenance expenses.
Acquisitions and Disposals
We purchased our initial 46 vessel owning subsidiaries from Frontline on January
1, 2004 for a total purchase price of $1,061.8 million. The purchase price was
calculated as the book value of vessels owned by the subsidiaries of $2,048.4
million less related debt balances and chartered
them back under long term chartersother liabilities of $986.6 million which
we assumed. The purchase was partly funded by an equity contribution of $525.0
million from Frontline. Additionally we purchased Frontline's option to Frontline Shipping II.acquire
an additional VLCC for $8.4 million. This price represents the book value of the
option as recorded previously in Frontline's accounts.
Acquisitions
In the year ended December 31, 2005 the following vessels and vessel owning
entities were acquired or delivered to us as discussed below:
o In January 2005, we bought the Front Century and Front Champion, for a total of $196.0 million. The
vessels have been chartered back to Frontline Shipping II for 199 and 204 months
respectively atexercised an initial rate of $31,501 per day declining to $28,625 per day
in 2019 for Front Century and at an initial rate of $31,340 per day declining to
$28,464 per day in 2019 for Front Champion. This arrangement also includes a 20%
profit split element. In March 2005, we bought the VLCC Golden Victory from
Frontline for $98 million. The vessel has been chartered back to Frontline for
204 months at a rate of $33,793 per day.
On January 17, 2005 the Company exercised its option to acquire the VLCC Oscilla
and the vessel was delivered to the Companyus on April 4, 2005. The purchase
price paid to acquire the vessel was approximately $21.6 million which was equal to the outstanding
mortgage debt under the four loan agreements between lenders and the
vessel's owning company. In addition, the Companywe made a payment of $14.6
million to Frontline to reflect the fact that the original purchase
price was set assuming delivery to Ship Financeus on January 1, 2004, whereas
delivery did not occur until April 4, 2005.
On the same date the vessel commenced a fixed
rate time charter to Frontline Shipping with an initial rate of $25,575 per day
for a fixed period of 210 months. The Company also entered into a fixed rate
management contract with Frontline Management for $6,500 per day with the same
term as the related time charter.
Ino Between January and March 2005, we sold the Suezmax Front Fighteracquired three additional double
hull VLCCs from Frontline for $68.3 million and the
vessel was delivered to its new owners in March 2005. The charteran aggregate purchase price of the Front
Fighter to Frontline Shipping has been cancelled as a result of this sale.
We$294
million.
o In May 2005, we entered into an agreement in May 2005 with parties affiliated
with Hemen
Holding Ltd., or Hemen to acquire two vessel owning companies, each owning one
2005 built containership, for a total consideration of $98.6
million.
The firsto In May 2005, we agreed to acquire three Suezmax tankers from
Frontline, the Front Traveller, Front Transporter, and Front Target,
for an aggregate amount of $92.0 million.
o In June 2005, we entered into an agreement with parties affiliated
with Hemen to acquire two vessel owning companies, each owning one
2004 built VLCC, for total consideration of $184 million.
In the Sea Alfa,year ended December 31, 2006, the following vessels and vessel owning
entities were acquired or delivered to us:
o In January 2006, we acquired the VLCC Front Tobago from Frontline
for consideration of $40.0 million.
o In April 2006, we entered into an arrangement with Horizon Lines
under which we acquired five 2,824 TEU container vessels built at
Hyundai Mipo yard in Korea for consideration of approximately $280.0
million. Under this agreement the Horizon Hunter was delivered in
May 2005,November 2006, the Horizon Hawk in March 2007, Horizon Eagle and
Horizon Falcon in April 2007 and the second, Sea Beta,final vessel, Horizon Tiger in
May 2007.
o In June 2006, we acquired, through our wholly owned subsidiary Rig
Finance Ltd., or Rig Finance, the jack-up drilling rig West Ceres
from SeaDrill Invest I Ltd., or SeaDrill Invest I, a wholly owned
subsidiary of Seadrill, for total consideration of $210.0 million.
o In July 2006, we entered into an agreement to acquire, through our
wholly owned subsidiary Front Shadow Inc., or Front Shadow, the
Panamax drybulk carrier Golden Shadow from Golden Ocean for a total
consideration of $28.4 million. The vessel was delivered to us in
September 2006.
o In November 2006, we acquired two newbuilding Suezmax contracts from
Frontline with delivery expected in the first quarter of 2009 and
third quarter of 2009.
During 2007, we have so far agreed to acquire the following vessels or
newbuildings:
o In January 2007, we entered into an agreement, via our wholly owned
subsidiary Rig Finance II Ltd, or Rig Finance II, to acquire a
newbuilding jack-up drilling rig currently under construction from
SeaDrill Invest II Ltd., or SeaDrill Invest II, a wholly owned
subsidiary of Seadrill. The purchase price will be $210.0 million
and delivery is expected to take place at the end of June 2007.
o In February 2007, we agreed to acquire two newbuilding Capesize
vessels contracts from Golden Ocean for a total delivered cost of
$160.0 million. Delivery from the shipyard is scheduled in September 2005. Boththe
fourth quarter of 2008 and first quarter of 2009.
o In March 2007, we entered into an agreement to acquire three
newbuilding seismic vessels, including complete seismic equipment,
from SCAN for an aggregate amount of $210.0 million. The vessels are
currently
trading on medium termscheduled to be delivered in 2008.
o In June 2007, we agreed to acquire five newbuilding container
vessels with scheduled delivery in 2010 for an aggregate
construction cost of approximately $190 million.
o In June 2007 we acquired 10% of the equity of Seachange Maritime
LLC, a Miami based company that owns and charters containerships.
Disposals
In the year ended December 31, 2005, we sold vessels and vessel owning entities
as discussed below:
o In January 2005, we sold a Suezmax tanker, the Front Fighter, to an
unrelated third parties. Sea Alfa is trading
on a medium term time charter while Sea Beta is trading on a medium term
bareboat charter.party for $68.3 million. The vessel was delivered to
its new owner in March 2005.
o In May 2005, we sold the three Suezmaxes,Suezmax tankers, Front Lillo, Front
Emperor and Front Spirit, for a total consideration of $92.0
million. These vessels were delivered to their new owners in June
2005.
In May 2005, we also agreed to buy a further
three vessels from Frontline, namely Front Traveller, Front Transporter, and
Front Target, for an aggregate amount of $92.0 million. The time charter and
management arrangements between Ship Finance and Frontline Shipping have been
cancelled for the three sold vessels and replaced with new agreements on similar
terms for the vessels acquired.
We entered into an agreement in June 2005 with parties affiliated with Hemen to
acquire two vessel owning companies, each owning one 2004 built VLCC, for a
total consideration of $184 million. The ships were bought from the Indonesian
state oil enterprise's shipping division, Pertamina in 2004 by parties
affiliated with Hemen. The vessels were delivered to us and entered on long term
charters to Frontline Shipping II starting in the third quarter of 2005.o In August 2005, the Companywe sold a Suezmax tanker, the Front Hunter to an
unrelated third party for net proceeds of $71.0 million.
A $3.8 million termination payment was paid as a result of the
termination of the charter.o In November 2005, the bareboat charterer of the VLCC Navix Astral
exercised an option to purchase the vessel for approximately $40.5
million. The vessel was delivered to its new owner in January of2006.
In the year ended December 31, 2006 at the same time we acquiredsold vessels as discussed below:
o In December 2006, we sold the VLCC Front Tobago fromto an unrelated
third party for $45.0 million.
During 2007, we have so far sold the following vessels:
o In January 2007, we sold the single-hull Suezmax tanker Front
Transporter for $38.0 million. The vessel was delivered to its new
owner in March 2007.
o In January 2007, we sold a total of five single-hull Suezmax tankers
to Frontline for considerationan aggregate amount of $40.0$183.7 million. Effective
January 2006 thisThe vessels
were delivered to Frontline in March 2007.
o In May 2007, we re-chartered the single-hull VLCC Front Vanadis to
an unrelated third party. The new charter is in the form of a
hire-purchase agreement, where the vessel has replacedis chartered to the Navix Astral and will fulfillbuyer
for a 3.5 year period, with a purchase obligation at the remainderend of the
Navix Astral time charter with Frontline until the charter
termination date in January 2014.
In April 2006, we entered into an agreement with Horizon Lines Inc. to acquire
five newbuilding containerships, each with a carrying capacity of 2,824 twenty
foot equivalent units, or TEUs being built at Hyundai Mipo yard in Korea. The
vessels will be delivered over the course of five months commencing in early
2007, and will be chartered back to Horizon Lines under 12 year bareboat
charters with a three year renewal option on the part of Horizon Lines. The
latter will also have the options to buy the vessels after five, eight, 12 and
15 years.charter.
B. BUSINESS OVERVIEW
Strategy
Our core strategy isBusiness Strategies
Our primary objectives are to create shareholder value by deployingprofitably grow our fleetbusiness and growing our fleet, in each case in a manner designed to increase
operating cash
flows and permit attractive dividend yields. To accomplish this objective, we
plan to:
o Enter into contracts with base charterhire and significant upside
potential. We charter our tankers under long term time charters. Under
those time charters, we receive base charterhire plus profit sharing
payments equal to 20% of revenues earned by each of the Charterers
above such base charterhire. Subject to market conditions, we expect
to enter into charters with profit sharing arrangements for other new
vessels that we acquire.
o Grow our fleet. Since we agreed to purchase our original fleet from
Frontline in December 2003, we have exercised an option to purchase
one VLCC, purchased six additional VLCCs, three Suezmaxes and two
containerships. We have also agreed to purchase another five container
vessels. Our growth strategy is supported by our policy of retaining a
portion of ourdistributable cash flow to support growth while paying attractive
dividends to our shareholders. Our financial flexibility should also
allow us to renew our fleet over time and replace our single hull
vessels with modern double hull vessels as they are retired.per share by pursuing the following strategies:
o Diversify our customer base. As our existing charters expire or we
acquire new vessels, which may include types of vessels other than oil
tankers, we intend to enter into charters with other parties in order
to diversify our customer base within the tanker and other shipping
sectors.
o DiversityExpand our asset base. We are aware that most shipping markets
today have historic high new buildingincreased, and second hand prices thatintend to further
increase, the risk in most transactions.size of our asset base through timely and selective
acquisitions of additional assets that we believe will be accretive
to long-term distributable cash flow per share. We are looking for
transactions which on a stand alone basis can provide a reasonably
high financial leveragewill seek to
optimize the return on equity. The Offshore
market which is likelyexpand our asset base through placing newbuilding orders, acquiring
modern second-hand vessels and entering into medium or long-term
charter arrangements. From time to have a better risk/reward situation than
most shipping marketstime we may be an attractive alternative. Particularly
since this market also provides good opportunities for charterers to
cover the risk by chartering out for long term periods to major oil
companies.
Competitive Strengthsacquire vessels
with no or limited initial charter coverage. We believe that our fleet, togetherby
entering into newbuilding contracts or acquiring modern second-hand
vessels or rigs and leveraging the relationships with our contractual arrangements with
Frontlineexisting
customers, we can provide for long-term growth of our assets and
its affiliates, give us a numbercontinue to decrease the average age of competitive strengths,
including:
o one of the largest VLCC and Suezmax fleets in the world;
o fixed rate, long term charters intended to reduce our exposure to
volatility in tanker rates;
o profit sharing potential when the Charterers' earnings from deploying
our vessels exceed certain levels;
o substantially fixed operating costs under our management agreements;
o a charter counterparty with Frontline Shipping and Frontline Shipping
II, currently capitalized with $218.2 million and $56.2 million,
respectively to support their obligation to make charter payments to
us; and
o vessels managed by Frontline Management, one of the industry's most
experienced operators of tankers.
Charter Arrangements with the Frontline Group
The Charterers
Each of the Charterers is a Bermuda company and a wholly owned subsidiary of
Frontline. Frontline Shipping was incorporated to charter our initial fleet of
47 tankers we agreed to acquire from Frontline in December 2003 including the
vessel under the option that was exercised in January 2005. Frontline Shipping
II charters the nine other tankers that we acquired since December 2003. Under
its constituent documents, Frontline Shipping is not permitted to engage in
other businesses or activities and is required to have at least one independent
director on its board of directors whose consent is required to approve
bankruptcy actions and other extraordinary transactions, including dividend
payouts. Each Charterer's obligations to us under the applicable charters are
secured by a lien over all the assets of that Charterer and a pledge of the
equity interests of that Charterer.fleet. In addition, Frontline Shipping is
capitalized by Frontlinewe
will seek to enter into sale and lease back transactions with $218.2 million in cash,new
customers, as we believe we can provide attractive alternatives for
outsourcing of vessel ownership for these customers.
o Diversify our asset base. Since January 1, 2005, we have diversified
our asset base from two asset types, crude oil tankers and Frontline Shipping II
is capitalized with $56.2 million in cash. These amounts serveOBO
carriers, to supportsix asset types including container vessels, drybulk
carriers, jack-up drilling rigs and seismic vessels. We believe that
there are several attractive markets that could provide us the
Charterers' obligationsopportunity to make charterhire payments to us, and are subject to
adjustment based on the number of charters with us that each Charterer is a
party to. The Charterers are entitled to use these funds only (1) to make
charterhire payments (including profit sharing payments) to us and (2) for
reasonable working capital purposes to meet short term voyage expenses.
Time Charters
We have chartered the tankers we acquired from Frontline to the Charterers under
long term time charters, which will extend for various periods depending on the
age of the vessels, ranging from approximately seven to 23 years. We refer you
to "Our Fleet" below for the relevant charter termination dates for each of our
vessels. Five of the vessels that we acquired are on current long term time
charters and one vessel was on current long term bareboat charter at December
31, 2005. The latter vessel, Navix Astral, has since been sold. We have agreed
with the Charterers that it will treat all of these vessels as being under time
charters with us, on the same terms and effective on the same dates as with the
other 44 vessels for all economic purposes. If the current underlying charterer
defaults, the relevant Charterer will continue to performdiversify our asset base. These markets
include vessels and assets that service the economic terms of
the charters with us. On redelivery of a vessel from its underlying charter,
that vessel will be deemed delivered under the Charterer's charter with us for
the rest of its term. The daily base charter rates payable to us under the
charters have been fixed in advanceoffshore oil exploration
industry and will decrease as our vessels age, and
the Charterers have the right to terminate a charter for a non double hull
vessel on each vessel's anniversary date 2010. The Charterer is not obligated to
pay us charterhire for off hire days in excess of five off hire days per year
per vessel, calculated on a fleet-wide basis. However, under the vessel
management agreements, Frontline Management will reimburse us for any loss of
charter revenue in excess of five off hire days per vessel, calculated on a
fleet-wide basis.
With the exceptions described below, the daily base charterhire for vessels
chartered to Frontline Shipping, which are payable to us monthly in advance for
a maximum of 360 days per year (361 days per leap year), are as follows:
Year VLCC Suezmax
- ---- ---- -------
2003 to 2006..............................................$25,575 $21,100
2007 to 2010..............................................$25,175 $20,700
2011 and beyond...........................................$24,175 $19,700
The daily base charter rates for vessels that reach their 18th delivery date
anniversary, in the case of non-double hull vessels, or their 20th delivery date
anniversary, in the case of double hull vessels, will decline to $18,262 per day
for VLCCs and $15,348 for Suezmax tankers after such dates, respectively.
In addition, the base charter rate for our non-double hull vessels will decline
to $7,500 per day on each vessel's anniversary date in 2010, at which time the
Charterer will have the option to terminate the charters for those vessels. Each
charter also provides that the base charter rate will be reduced if the vessel
does not achieve the performance specifications set forth in the charter. The
related management agreement provides that Frontline Management will reimburse
us for any such reduced charter payments. The Charterer has the right under a
charter to direct us to bareboat charter the related vessel to a third party.
During the term of the bareboat charter, the Charterer will continue to pay us
the daily base charter rate for the vessel, less $6,500 per day. The related
management agreement provides that our obligation to pay the $6,500 fixed fee to
Frontline Management will be suspended for so long as the vessel is bareboat
chartered.
The daily base charterhire for our vessels that are charteredof long-term strategic importance to
Frontline
Shipping II, which is also payable to us monthly in advance for a maximum of 360
days per year (361 days per leap year), is as follows:
Vessel 2005 to 2006 2007 to 2010 2011 to 2018 2019 and beyond
- ------ ------------ ------------ ------------ ---------------
Front Champion........ $31,340 $31,140 $30,640 $28,464
Front Century......... $31,501 $31,301 $30,801 $28,625
Golden Victory........ $33,793 $33,793 $33,793 $33,793
Front Energy.......... $30,014 $30,014 $30,014 $30,014
Front Force........... $29,853 $29,853 $29,853 $29,853
For the VLCC Front Tobago, and the three Suezmaxes, Front Target, Front
Traveller, and Front Transporter, the terms are similar to those listed above
under Frontline Shipping as these vessels represent replacement leases for
vessels includedcertain operators in the original fleet purchase which have since been sold.
Under the charters we are required to keep the vessels seaworthy, and to crew
and maintain them. Frontline Management performs those duties for us under the
management agreements described below. If a structural change or new equipment
is required due to changes in classification society or regulatory requirements,
the Charterer may make them, at its expense, without our consent, but those
changes or improvements will become our property. The Charterer is not obligated
to pay us charter hire for off hire days in excess of five off hire days per
year per vessel calculated on a fleet-wide basis, which include days a vessel is
unable to be in service due to, among other things, repairs or drydockings.
However, under the management agreements described below, Frontline Management
will reimburse us for any loss of charter revenue in excess of five off hire
days per vessel, calculated on a fleet-wide basis.
The terms of the charters do not provide the Charterer with an option to
terminate the charter before the end of its term, other than with respect to our
non-double hull vessels on each vessel's anniversary date in 2010. We may
terminate any or all of the charters in the event of an event of default under
the charter ancillary agreement that we describe below. The charters may also
terminate in the event of (1) a requisition for title of a vessel or (2) the
total loss or constructive total loss of a vessel. In addition, each charter
provides that we may not sell the related vessel without the Charterer's
consent.
Frontline Performance Guarantee
Frontline has issued a performance guarantee with respect to the charters, the
charter ancillary agreements, the management agreements and the administrative
services agreement. Pursuant to the performance guarantee, Frontline has
guaranteed the following obligations of the Charterers and Frontline Management:
o the performance of the obligations of the Charterers under the
charters with the exception of payment of charter hire, which is not
guaranteed,
o the performance of the obligations of the Charterers under the charter
ancillary agreement,
o the performance of the obligations of Frontline Management under the
management agreements, provided, however, that Frontline's obligations
with respect to indemnification for environmental matters shall not
extend beyond the protection and indemnity insurance coverage with
respect to any vessel required by us under the management agreements,
and
o the performance of the obligations of Frontline Management under the
administrative services agreement.
Frontline's performance guarantee shall remain in effect until all obligations
of the Charterers or Frontline Management, as the case may be, that have been
guaranteed by Frontline under the performance guarantee have been performed and
paid in full.
Frontline Ltd., Frontline Shipping Limited and Frontline Shipping II Limited -
Charter Ancillary Agreements.
We and our vessel owning subsidiaries have entered into charter ancillary
agreements with Frontline, Frontline Shipping, and Frontline Shipping II which
provides, among other things, for:
o the maintenance of the charter service reserve by the Charterers,
o profit sharing payments by the Charterers to us when charter revenues
for our fleet exceed the daily base charterhire,
o the deferral of certain charter payments to us by the Charterers
during any period when cash and cash equivalents held by the
Charterers fall below a predetermined amount. The charter ancillary
agreement also imposes certain restrictive covenants on the
Charterers, including, among others, a covenant not to pay dividends
or make other distributions to its shareholders, incur additional
indebtedness, loan, repay or make any other payment in respect of its
indebtedness, undertake some corporate transactions, or amend its
charter, unless, in each case, certain conditions are met.
The Charterers' obligations to us under the charters and the charter ancillary
agreements are secured by a lien over its assets and a pledge of the equity
interests in the Charterers. In addition, Frontline has guaranteed the
Charterers' obligations under the charter ancillary agreement pursuant to the
performance guarantee. Subject to a 30-day cure period, and in addition to any
other available rights or remedies we may have, upon the occurrence of any event
of default under the charter ancillary agreement we may terminate any or all of
the charters and foreclose on any or all of our security interests provided by
the agreement.
Frontline Management-Vessel Management Agreements.
Each of our vessel owning subsidiaries has entered into fixed rate vessel
management agreements with Frontline Management, pursuant to which Frontline
Management is responsible for the technical management of their respective
vessels. We expect that Frontline Management will outsource many of these
services to third party providers. The management agreements also require
Frontline Management to maintain insurance for each of the vessels. Under the
management agreements, each vessel owning subsidiary pays Frontline Management a
fixed fee of $6,500 per day per vessel for as long as the relevant charter is in
place.
Frontline Management-Administrative Services Agreement.
We and each of our vessel owning subsidiaries have entered into an
administrative services agreement with Frontline Management. Under the terms of
the agreement, Frontline Management provides us and our vessel owning
subsidiaries with all of our non-vessel related administrative support services
and with office space in Bermuda. We and our vessel owning subsidiaries each pay
Frontline Management a fixed fee of $20,000 per year for its services under the
agreement, and will reimburse Frontline Management for reasonable additional
third party costs that it incurs on our behalf.
Frontline Ltd.-Performance Guarantee.
Frontline has issued a performance guarantee with respect to the charters, the
management agreements, the administrative services agreement, and the charter
ancillary agreement. Under the terms of this guarantee, Frontline has
guaranteed:
o the Charterers' performance of its obligations under the charters
other than the payment of charter hire,
o the Charterers' performance of its obligations under the charter
ancillary agreement,
o Frontline Management's performance of its obligations under the
management agreements (however, Frontline's indemnification obligation
for environmental matters will not exceed the coverage of the
applicable protection and indemnity insurance), and
o Frontline Management's obligations under the administrative services
agreement.
The performance guarantee will remain in effect until all of the obligations of
the Charterers and Frontline Management that are guaranteed under the
performance guarantee have been performed.
Charter Arrangements for Containerships
During 2005, we took delivery of two newbuilding containerships, each with a
carrying capacity of 1,700 TEUs. The Sea Alfa is on a timecharter until May 2009
to Heung-A, a Korean container line at $28,350 per day on a timecharter basis.
The Sea Beta is bareboat chartered out until March 2009 to Pan Logistics, an
Australian container line at $15,000 per day.
In April 2006, we entered into an agreement with Horizon Lines Inc. to acquire
five newbuilding containerships each with a carrying capacity of 2,824 TEUs. The
vessels will be delivered over a course of five months commencing in early 2007,
and will be chartered back to Horizon Lines under 12 year bareboat charters with
a three year renewal option on the part of Horizon Lines. The latter will also
have options to buy the vessels after five, eight, 12 and 15 years.
Our Fleet
We operate a substantially modern fleet of vessels and the following table sets
forth the fleet that we operate as of June 2, 2006:
Approximate Charter Termination
----------- -------------------
Vessel Built Dwt. Construction Flag Date
- ------ ----- ---- ------------ ---- ----
VLCCs
- -----
Front Sabang 1990 286,000 Single-hull SG 2014 (1)
Front Vanadis 1990 286,000 Single-hull SG 2014 (1)
Front Highness 1991 284,000 Single-hull SG 2015 (1)
Front Lady 1991 284,000 Single-hull SG 2015 (1)
Front Lord 1991 284,000 Single-hull SG 2015 (1)
Front Duke 1992 284,000 Single-hull SG 2014 (1)
Front Duchess 1993 284,000 Single-hull SG 2014 (1)
Front Tobago 1993 261,000 Single-hull LIB 2014 (1)
Front Edinburgh 1993 302,000 Double-side LIB 2013 (1)
Front Ace 1993 276,000 Single-hull LIB 2014 (1)
Front Century 1998 311,000 Double-hull MI 2021
Front Champion 1998 311,000 Double-hull BA 2022
Front Vanguard 1998 300,000 Double-hull MI 2021
Front Vista 1998 300,000 Double-hull MI 2021
Front Circassia 1999 306,000 Double-hull MI 2021
Front Opalia 1999 302,000 Double-hull MI 2022
Front Comanche 1999 300,000 Double-hull FRA 2022
Golden Victory 1999 300,000 Double-hull MI 2022
Ocana (ex Front Commerce) 1999 300,000 Double-hull IoM 2022
Front Scilla (ex Oscilla) 2000 303,000 Double-hull MI 2023
Ariake (tbn Oliva) 2001 299,000 Double-hull BA 2023
Front Serenade 2002 299,000 Double-hull LIB 2024
Otina (ex Hakata) 2002 298,465 Double-hull IoM 2025
Front Stratus (tbn Ondina) 2002 299,000 Double-hull LIB 2025
Front Falcon 2002 309,000 Double-hull BA 2025
Front Page 2002 299,000 Double-hull LIB 2025
Front Energy 2004 305,000 Double-hull CYP 2027
Front Force 2004 305,000 Double-hull CYP 2027
Suezmax OBO Carriers
- --------------------
Front Breaker 1991 169,000 Double-hull MI 2015
Front Climber 1991 169,000 Double-hull SG 2015
Front Driver 1991 169,000 Double-hull MI 2015
Front Guider 1991 169,000 Double-hull SG 2015
Front Leader 1991 169,000 Double-hull SG 2015
Front Rider 1992 170,000 Double-hull SG 2015
Front Striver 1992 169,000 Double-hull SG 2015
Front Viewer 1992 169,000 Double-hull SG 2015
Suezmaxes
- ---------
Front Transporter 1989 150,000 Single-hull MI 2014 (1)
Front Target 1990 150,000 Single-hull MI 2014 (1)
Front Traveller 1990 150,000 Single-hull MI 2014 (1)
Front Birch 1991 150,000 Double-side MI 2014 (1)
Front Maple 1991 150,000 Double-side MI 2014 (1)
Front Granite 1991 150,000 Single-hull MI 2014 (1)
Front Sunda 1992 150,000 Single-hull MI 2014 (1)
Front Comor 1993 150,000 Single-hull MI 2014 (1)
Front Pride 1993 150,000 Double-hull NIS 2017
Front Glory 1995 150,000 Double-hull NIS 2018
Front Splendour 1995 150,000 Double-hull NIS 2018
Front Ardenne 1997 153,000 Double-hull NIS 2019
Front Brabant 1998 153,000 Double-hull NIS 2021
Mindanao 1998 159,000 Double-hull SG 2021
Containerships
- --------------
Sea Alfa 2005 1,700 Teu n/a CYP 2007
Sea Beta 2005 1,700 Teu n/a CYP 2007
Key to Flags:
BA - Bahamas, IoM - Isle of Man, LIB - Liberia, NIS - Norwegian International
Ship Register, SG - Singapore, FRA - France, MI - Marshall Islands, CYP -
Cyprus.
(1) Charter subject to termination at the Charterer's option during 2010.
Other than our interests in the vessels described above, we do not own any
material physical properties.
Importance of Fleet Sizeshipping industry. We believe that fleet size in the
industrialexpertise and relationships of our management and our relationship
and affiliation with Mr. John Fredriksen could provide us with
incremental opportunities to expand our asset base.
o Expand and diversify our customer relationships. Since January 1,
2005, we have increased our customer base from one to eight
customers and have expanded our relationship with our original
customer, Frontline, through the purchase of additional vessels. Of
these eight customers, Frontline, Golden Ocean and Seadrill are
directly or indirectly controlled by Mr. John Fredriksen. We intend
to continue to expand our relationships with our existing customers,
as well as add new customers, as companies that service the
international shipping sector is important in
negotiating termsand offshore oil exploration markets continue
to expand their use of chartered-in assets to add capacity.
o Pursue medium to long-term, fixed-rate charters. We intend to
continue to pursue medium to long-term, fixed rate charters, which
provide us with major clients and charterers.stable future cash flows. Our customers typically
employ long-term charters for strategic expansion as most of their
assets are typically of strategic importance to certain operating
pools, established trade routes or dedicated oil-field
installations. We believe that a large,
high-quality VLCC and Suezmax fleetwe will enhance our abilitybe well positioned to
obtain
competitive terms from suppliers and shipbuilders and to produce cost savingsparticipate in chartering and operations.
Seasonality
Historically, oil trade and thereforetheir growth. In addition, in markets where lower
relative long-term charter rates increasedare available, we will also seek to
enter into charter agreements that provide for profit sharing so
that we can generate incremental revenue and share in the winter
monthsupside
during strong markets.
Customers
During 2006 and eased in the summer months as demand for oil in the Northern
Hemisphere rose in colder weather and fell in warmer weather. The tanker
industry in general is less dependent on the seasonal transport of heating oil
than a decade ago as new uses for oil and oil products have developed, spreading
consumption more evenly over the year. Most apparent is a higher seasonal demand
during the summer months due to energy requirements for air conditioning and
motor vehicles.
Customers2005, Frontline, through its subsidiaries, iswas our principal
customer andwith more than 80% of our operating revenues arefor the years ended
December 31, 2006 and December 31, 2005, being derived from them.the Frontline
Charterers. We anticipate the percentage of our business attributable to the
Frontline Charterers to diminish as we continue to expand our business and our
customer base.
Competition
We currently operate or will operate in several segments of the shipping and
offshore industry, including crude oil transportation, drybulk shipments,
container transportation, drilling rigs and seismic exploration.
The marketmarkets for international seaborne crude oil transportation services,
isdrybulk transportation services and container transportation services are highly
fragmented and competitive. Seaborne crude oil transportation services generally
are provided by two main types of operators: major oil companycompanies or captive
fleets (both private and state-owned) and independent shipowner fleets. In
addition, several owners and operators pool their vessels together on an ongoing
basis, and such pools are available to customers to the same extent as
independently owned and operated fleets. Many major oil companies and other oil
trading companies also operate their own vessels and use such vessels not only
to transport their own crude oil but also to transport crude oil for third party
charterers in direct competition with independent owners and operators in the
tanker charter market. Similarly, drybulk commodity owners or traders use such
vessels not only to transport their own commodities but also to transport
commodities for third party charterers in direct competition with independent
owners and operators in the drybulk charter market.
Container vessels are generally operated by container logistics companies, where
the vessels are used as an integral part of their services. Therefore, container
vessels are typically chartered more on a period basis while single voyage
chartering is less common. As the market has grown significantly over the last
decades, we expect over time to see more vessels chartered by container
logistics companies on shorter term basis, particularly in the smaller segments.
Our jack-up drilling rigs and our seismic exploration vessels are chartered out
on long-term year charters to contractors, and we are therefore not directly
exposed to the short term fluctuation in these markets. Normally, jack-up
drilling rigs and seismic exploration vessels are charted by oil companies on a
shorter term basis linked to area-specific well drilling or oil exploration
activities, but there have also been longer period charters available when oil
companies want to cover their longer term requirements for drilling rigs and/or
seismic vessels. Seismic exploration vessels are self-propelled, and can
therefore easily move between geographic areas. Jack-up drilling rigs are not
self-propelled, but it is common to move these assets over long distances on
heavy-lift vessels. Therefore, the markets and competition for these rigs are
effectively world-wide.
Competition for charters in all the above segments is intense and is based upon
price, location, size, age, condition and acceptability of the vesselvessel/rig and
its manager. Competition is also affected by the availability of other size
vesselsvessels/rigs to compete in the trades in which we engage.
Risk of Loss and Insurance
Our business is affected by a number of risks, including mechanical failure,
of
the vessels, collisions, property loss to the vessels, cargo loss or damage and business
interruption due to political circumstances in foreign countries, hostilities
and labourlabor strikes. In addition, the operation of any ocean-going vessel is
subject to the inherent possibility of catastrophic marine disaster, including
oil spills and other environmental mishaps, and the liabilities arising from
owning and operating vessels in international trade.
Except for vessels whose charter specifies otherwise, Frontline Management isand
our third-party managers are responsible for arranging for the insurance of our
vessels in line with standard industry practice. In accordance with that
practice, we maintain marine hull and machinery and war risks insurance, which
include the risk of actual or constructive total loss, and protection and
indemnity insurance with mutual assurance associations. From time to time we
carry insurance covering the loss of hire resulting from marine casualties in
respect of some of our vessels. Currently, the amount of coverage for liability
for pollution, spillage and leakage available to us on commercially reasonable
terms through protection and indemnity associations and providers of excess
coverage is $1 billion per vessel per occurrence. Protection and indemnity
associations are mutual marine indemnity associations formed by shipowners to
provide protection from large financial loss to one member by contribution
towards that loss by all members.
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 standard industry practice. However, there is no
assurance that all risks are adequately insured against, that any particular
claims will be paid or that we will be able to procure adequate insurance
coverage at commercially reasonable rates in the future.
Inspection by a Classification Society
Every commercial vessel's hull and machinery is "classed" by a classification
society authorised by its country of registry. The classification society
certifies that the vessel has been built and maintained in accordance with the
rules of such 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. Our vessels have all been
certified as "in class."
Each vessel is inspected by a surveyor of the classification society every year,
every two and a half years and every four to five years. Should any defects be
found, the classification surveyor will issue a "recommendation" for appropriate
repairs which have to be made by the shipowner within the time limit prescribed.
Environmental and Other Regulations
Government regulation significantly affects the ownershipregulations and operations of our
vessels. The various types of governmental regulation that affects our vessels
include international conventions and national, state and local laws and
regulations of the jurisdictions where our tankers operate or are registered significantly affect the ownership and operation
of our tankers.tankers, OBOs, drybulk carriers, rigs, containerships and seismic
vessels. We are subject to various international conventions, laws and
regulations in force in the countries in which our vessels may operate or are
registered.
A variety of government, quasi-governmental and private organizations subject
our assets to both scheduled and unscheduled inspections. These organizations
include the local port authorities, national authorities, harbor masters or
equivalent, classification societies, flag state and charterers, particularly
terminal operators, oil companies and drybulk and commodity owners. Some of
these entities require us to obtain permits, licenses and certificates for the
operation of our assets. Our failure to maintain necessary permits or approvals
could require us to incur substantial costs or temporarily suspend operation of
one or more of the assets in our fleet.
We believe wethat the heightened levels of environmental and quality concerns
among insurance underwriters, regulators and charterers have led to greater
inspection and safety requirements on all tankers and may accelerate the
scrapping of older vessels throughout the industry. Increasing environmental
concerns have created a demand for tankers that conform to the stricter
environmental standards. We are currentlyrequired to maintain operating standards for all
of our vessels emphasizing operational safety, quality maintenance, continuous
training of our officers and crews and compliance with applicable local,
national and international environmental laws and regulations. We believe that
the operation of our vessels will be in substantial compliance with applicable
environmental laws and regulatory laws regardingregulations and that our vessels have all material
permits, licenses, certificates or other authorizations necessary for the
ownership and operationconduct of our tankers. However,operations; however, because existingsuch laws and regulations are
frequently changed and may change or new laws may be implemented,impose increasingly stricter requirements, we cannot
predict the ultimate cost of complying with all applicablethese requirements, or the impact they will haveof
these requirements on the resale value or useful lives of our tankers. Future, non-complianceIn
addition, a future serious marine incident that results in significant oil
pollution or otherwise causes significant adverse environmental impact could
require us to incur substantial costsresult in additional legislation or to
temporarily suspend operation ofregulation that could negatively affect our
tankers.
We believe that the heightened environmental and quality concerns of insurance
underwriters, regulators and charterers are leading to greater inspection and
safety requirements on all vessels and creating an increasing demand for modern
vessels that are able to conform to the stricter environmental standards. We
maintain high operating standards for our vessels that emphasize operational
safety, quality maintenance, continuous training of our crews and officers and
compliance with United States and international and other national regulations.
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, harbour master or equivalent, classification societies, flag state
administration or country of registry, and charterers, particularly terminal
operators and major oil companies which conduct frequent vessel inspections.
Each of these entities may have unique requirements that we must comply with.profitability.
International Maritime OrganisationOrganization
The International Maritime Organisation,Organization, or the IMO (the United Nations agency for
maritime safety and the prevention of marine pollution by ships), has adopted the
International Convention for the Prevention of Marine Pollution from Ships,
1973, as modified by the Protocol of 1978 relating thereto, which has been
updated through various amendments, or the "MARPOL"MARPOL Convention. The MARPOL
Convention relates toimplements environmental standards including oil leakage or spilling,
garbage management, as well as the handling and disposal of noxious liquids,
harmful substances in packaged forms, sewage and air emissions. In March 1992,
the IMO adopted regulations that set forth pollution prevention requirements
applicable to tankers which became effective in July 1993. These
regulations, which have been adopted by more than 150 nations, includingimplemented in many of the jurisdictions in which our
tankersvessels operate, provide, in part, that:
o 25-year old tankers between 25 and 30 years old must be of double-hulldouble hull construction or of a
mid-deck design with double-sided construction, unless:
(1) they have wing tanks or double-bottom spaces not used
for the carriage of oil which cover at least 30% of the
length of the cargo tank section of the hull or bottom;
or
(2) they are capable of hydrostatically balanced loading
(loading less cargo into a tanker in such a wayso that in the event
of a breach of the hull, water flows into the tanker,
displacing oil upwards instead of into the sea);
o tankers 30 years30-year old or oldertankers must be of double-hulldouble hull construction or mid-deck
design with double-sided construction; and
o all tankers arewill be subject to enhanced inspections.
Also, under IMO regulations, a tanker must be of double-hulldouble hull construction or a
mid-deck design with double-sided construction or be of another approved design
ensuring the same level of protection against oil pollution if the tanker:
o is the subject of a contract for a major conversion or original
construction on or after July 6, 1993;
o commences a major conversion or has its keel laid on or after
January 6, 1994; or
o completes a major conversion or is a newbuilding delivered on or
after July 6, 1996.
These regulations were amended in 2001 and provided a timetable forOur vessels are also subject to regulatory requirements, including the phase
out of single hull tankers. This timetable was amended again in December 2003 in
response to European Union ("EU") proposals, further accelerating the final
phase-out dates for single hull tankers.
The baseline phase-out dates apply to tankers according to their certified
arrangement (protectively located segregated ballast tanks or PL/SBT) and the
type of oil carried as cargo. These regulations identify 3 categories
of single hull tankers, including double side and double bottom tankers:
a) Category 1 (Pre- PL/SBT)imposed by the IMO. Effective September 2002, the IMO
accelerated its existing timetable for the phase-out of single hull oil tankers.
At that time, these regulations required the phase-out of most single hull oil
tankers - anyby 2015 or earlier, depending on the age of the tanker and whether it
has segregated ballast tanks.
Under the regulations, the flag state may allow for some newer single hull ships
registered in its country that conform to certain technical specifications to
continue operating until the 25th anniversary of 20,000 dwttheir delivery. Any port state,
however, may deny entry of those single hull tankers that are allowed to operate
until their 25th anniversary to ports or above
carrying crudeoffshore terminals. These regulations
have been adopted by over 150 nations, including many of the jurisdictions in
which our tankers operate.
As a result of the oil fuel oil, heavy diesel oilspill in November 2002 relating to the loss of the MT
Prestige, which was owned by a company not affiliated with us, in December 2003,
the Marine Environmental Protection Committee of the IMO, or lubricating oil as cargo
orMEPC, adopted an
amendment to the MARPOL Convention, which became effective in April 2005. The
amendment revised an existing regulation 13G accelerating the phase-out of
30,000 dwt or above carrying other types of oil.
b) Category 2 (PL/SBT)single hull oil tankers - any tankerand adopted a new regulation 13H on the prevention of
20,000 dwt or above
carrying crude oil fuel oil, heavy diesel oil or lubricating oil as cargo
or of 30,000 dwt or above carrying other types of oil.
c) Category 3pollution from oil tankers - any tanker of between 5,000 dwt and 20,000 dwtwhen carrying crudeheavy grade oil. Under the revised
regulation, single hull oil fuel oil, heavy diesel oil or lubricating oil as cargo
or of less than 30,000 dwt carrying other types of oil.
All of the single-hull tankers we operate are Category 2 oil tankers. The table
below provides the specific phase out dates according to each category of oil
tanker. Oil tankers that meet MARPOL Regulation 13F or have double bottoms and
double sides with dimensions in compliance with MARPOL Regulation 13G1(c)
continuewere required to be exempt from the accelerated phase out.
Baseline Phase-Out Scheme
Phase Out Date Year of Delivery
Category 1 Category 2 Category 3phased out no later than
April 5, 2005 before April 5, 1982 before April 5, 1977
+ 2005 after April 5, 1982 After April 5, 1977 but
before January 1, 1978
+ 2006 1978*or the anniversary of the date of delivery of the ship on the date
or in the year specified in the following table:
Category of Oil Tankers Date or Year for Phase Out
- ----------------------- --------------------------
Category 1 oil tankers of 20,000 dwt and above
carrying crude oil, fuel oil, heavy diesel oil or April 5, 2005 for ships delivered on April 5, 1982
lubricating oil as cargo, and of 30,000 dwt and above or earlier; or
carrying other oils, which do not comply with the 2005 for ships delivered after April 5, 1982
requirements for protectively located segregated
ballast tanks
Category 2 - oil tankers of 20,000 dwt and above
carrying crude oil, fuel oil, heavy diesel oil or April 5, 2005 for ships delivered on April 5, 1977
lubricating oil as cargo, and of 30,000 dwt and above or earlier
carrying other oils, which do comply with the 2005 for ships delivered after April 5, 1977 but
protectively located segregated ballast tank before January 1, 1978
requirements 2006 for ships delivered in 1978 and 1979
2007 for ships delivered in 1980 and 1981
and 2008 for ships delivered in 1982
2009 for ships delivered in 1983
Category 3 - oil tankers of 5,000 dwt and above but 2010 for ships delivered in 1984 or later
less than the tonnage specified for Category 1 and 2
tankers.
Under the revised regulations, the a flag state may permit continued operation
of certain Category 2 or 3 tankers beyond their phase out date in accordance
with the above schedule. Under regulation 13G, the flag state may allow for some
newer single hull oil tankers registered in its country that conform to certain
technical specifications to continue operating until the earlier of the
anniversary of the date of delivery of the vessel in 2015 or the 25th
anniversary of their delivery. Under regulation 13G and 1979*
+ 2007 1980* and 1981*
+ 2008 1982*
+ 2009 1983*
+ 2010 1984* or later
+ by Anniversary of Delivery Date In Year
* subject to CAS
For13H, as described below,
certain Category 2 and 3 tankers a successful completion of the Condition
Assessment Scheme (CAS) is required by 15 years of agefitted only with double bottoms or double sides
may be allowed by the first
intermediate or renewal survey due after April 5, 2005, which ever occurs later.
The new phase-out regime became effective on April 5, 2005. For Category 1
tankers (pre-MARPOL tankers without segregated ballast tanks, generally built
before 1982), the final phase-out date has been brought forwardflag state to 2005 from
2007. For Category 2 tankers (MARPOL tankers, generally built after 1982) the
final phase out date has brought forward to 2010 from 2015.
To soften the significant impact that would occur if the approximately 700
tankers (approximately 67 million tons dwt) were to be phased out globally in
2010 as per above, two exceptions to the baseline phase out dates were adopted
which allow Category 2 and 3continue operations until their 25th
anniversary of delivery. Any port state, however, may deny entry of those single
hull oil tankers that have passed the CASare allowed to operate beyonduntil the 2010 cut-offearlier of their
anniversary date as summarized below:
Exception One - a flag state may permit oil tankers to operate toof delivery in 2015 or the year in which the ship reaches 25
years of age provided that, not later than July 1, 2001,after the entire cargo tank lengthdate of its delivery, whichever is protected with oneearlierunder any of
the following arrangements which cannot be used for the
carriage of oil:
|X| Double bottoms having a height at centerline which does not meet that
required by the MARPOL Regulation 13E; or
|X| Wing tanks having a width which does not meet that required by
International Bulk Chemical Code for type 2 cargo tank location.
Exception Two - a flag state may permit oil tankers, that do not have double
bottoms nor double sides, to operate to 25 years of age or the anniversary date
of the tanker's delivery in 2015, whichever occurs earlier.
Although flag states are permitted to grant extensions in both of the above
cases provided CAS is satisfactorily completed and IMO has been so informed of
the extension, coast States have the right to deny oil tankers that have been
granted such extensions into their ports and offshore terminals.
Oil tankers granted life extension under Exception One may be denied entry after
2015 for vessels which are 25 years of age and older. Oil tankers with neither
double bottoms nor double sides which have been granted an extension under
Exception Two may be denied entry after the relevant phase out date.
Based on the present oil consumption, expected future oil consumption, the
present tanker fleet, the order book for tankers forward and the yard capacities
we believe that in order to meet the world demand for transport of oil, the
industry will need to use single hulls after 2010 and hence we believe
exemptions will be granted for trading well maintained single hull tankers after
2010.exemptions.
The following table summarizes the impact of such regulations on the Company's
single hull and double sided tankers:
OPA 90
Vessel Year IMO phase out Flag state
Vessel Name Vessel type Category(s) Built No exemption exemption
Front Birch Suezmax DS 1991 2010 2015
Front Comor Suezmax SH 1993 2010 2015
Front Granite Suezmax SH 1991 2010 2015
Front Maple Suezmax DS 1991 2010 2015
Front Sunda Suezmax SH 1992 2010 2015
Front Target Suezmax SH 1990 2010 2015
Front Transporter Suezmax SH 1989 2010 2014
Front Traveller Suezmax SH 1990 2010 2015
Edinburgh VLCC DS 1993 2010 2015
Vessel Flag state
Vessel Name Vessel type Category(s) Year Built IMO phase out exemption
- --------------- ----------- ----------- ---------- ------------- ----------
Front Birch Suezmax DS 1991 2010 2016
Front Maple Suezmax DS 1991 2010 2016
Edinburgh VLCC DS 1993 2010 2018
Front Ace VLCC SH 1993 2010 2015
Front Duchess VLCC SH 1993 2010 2015
Front Duke VLCC SH 1992 2010 2015
Front Highness VLCC SH 1991 2010 2015
Front Lady VLCC SH 1991 2010 2015
Front Lord VLCC SH 1991 2010 2015
Front Sabang VLCC SH 1990 2010 2015
Front Vanadis VLCC SH 1990 2010 2015
Front Tobago VLCC SH 1993 2010 2015
Under regulation 13G and as described below, regulation 13H, category 2 and 3
tankers fitted only with double bottoms or double sides may be allowed to
continue operations until their 25th anniversary.
In December 2003, the IMO adopted MARPOL Regulation 13H on the prevention of oil
pollution from oil tankers when carrying heavy grade oil, or HGO. The new
regulation bans the carriage of HGO in single hull oil tankers of 5,000 dwt and
above after April 5, 2005, and in single hull oil tankers of 600 dwt and above
but less than 5,000 dwt, no later than the anniversary of their delivery in
2008.
Under MARPOL Regulation 13H, HGO means any of the following:
1. crude oils having a density at 15(0)15(degree)C higher than 900
kg/m3;m(3);
2. fuel oils having either a density at 15(0)15(degree)C higher than
900 kg/ m3m(3) or a kinematic viscosity at 50(0)50(degree)C higher
than 180 mm2/mm(2)/s;
3. bitumen, tar and their emulsions.
Under MARPOL Regulation 13H, the flag state may allow continued operation of oil
tankers of 5,000 dwt and above, carrying crude oil with a density at 15(0)15(degree)C
higher than 900 kg/m3m(3) but lower than 945 kg/m3,m(3), that conform to certain
technical specifications and, in the opinion of the such state, the ship is fit
to continue such operation, having regard to the size, age, operational area and
structural conditions of the ship and provided that the continued operation
shall not go beyond the date on which the ship reaches 25 years after the date
of its delivery. The flag state may also allow continued operation of a single
hull oil tanker of 600 dwt and above but less than 5,000 dwt, carrying HGO as
cargo, if, in the opinion of the such state, the ship is fit to continue such
operation, having regard to the size, age, operational area and structural
conditions of the ship, provided that the operation shall not go beyond the date
on which the ship reaches 25 years after the date of its delivery.
The IMO has also negotiated international conventions that impose liability for
oil pollution in international waters and a signatory's territorial waters. In
September 1997, the IMO adopted Annex VI to the International Convention for the
Prevention of Pollution from Ships to address air pollution from ships. Annex VI
was ratified in May 2004, and became effective in May 2005. Annex VI sets limits
on sulfur oxide and nitrogen oxide emissions from ship exhausts and prohibit
deliberate emissions of ozone depleting substances, such as halons,
chlorofluorocarbons, emissions of volatile compounds from cargo tanks and
prohibition of shipboard incineration of specific substances. Annex VI also
includes a global cap on the sulfur content of fuel oil and allows for special
areas to be established with more stringent controls on sulfur emissions. We
believe that we are in substantial compliance with the Annex VI regulations.
Compliance with these regulations could require the installation of expensive
emission control systems and could have a financial impact on the operation of
our vessels. Additional or new conventions, laws and regulations may be adopted
that could adversely affect our ability to manage our vessels.
The operation of our vessels is also affected by the requirements set forth in
the IMO's Management Code for the Safe Operation of Ships and Pollution
Prevention, or the ISM Code. The ISM Code requires ship owners and bareboat
charterers to maintain an extensive "Safety Management System" that includes the
adoption of a safety and environmental protection policy setting forth
instructions and procedures for safe operation and describing procedures for
emergencies. The failure of a ship owner or a bareboat charterer to comply with
the ISM Code may subject such party to increased liability, may decrease
available insurance coverage for the affected vessels and may result in a denial
of access to, or detention in certain ports. We rely on the safety management
system that we and our third party technical managers have developed.
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 the ISM 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 each flag state, under the ISM Code. All of
our vessels and their operators have received ISM certification. The Manager is
required to renew these documents of compliance and safety management
certificates annually.
Non-compliance with the ISM Code and other IMO regulations may subject the
vessel owner or a bareboat charterer to increased liability, may lead to
decreases in available insurance coverage for affected vessels and may result in
a tanker's denial of access to, or detention in, some ports. Both the United
States 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.
The IMO continues to review and introduce new regulations. It is impossible to
predict what additional regulations, if any, may be passed by the IMO and what
effect, if any, such regulations might have on the operation of oil tankers.our operations.
United States Oil Pollution Act ofRequirements
In 1990, and Comprehensive Environmental
Response, Compensation and Liability Act of 1980
Thethe United States regulates the tanker industry withCongress enacted OPA to establish an extensive
regulatory and liability regime for environmental protection and cleanup of oil
spills,
consisting primarily of the United States Oil Pollution Act of 1990, or OPA, and
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, or CERCLA.spills. OPA affects all owners and operators whose vessels trade with the United
States or its territories or possessions, or whose vessels operate in the waters
of the United States, which include the United StatesU.S. territorial sea and the 200
nautical mile exclusive economic zone around the United States. The
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
applies toimposes liability for cleanup and natural resource damage from the dischargerelease of
hazardous substances (other than oil) whether on land or at sea. Both OPA and
CERCLA impact our operations.
Under OPA, vessel owners, operators and bareboat charterers are "responsible
parties"responsible
parties who are jointly, severally and strictly liable (unless the spill results
solely from the act or omission of a third party, an act of God or an act of
war) for all containment and clean-up costs and other damages arising from oil
spills from their vessels. These other damages are defined broadly to include:
o natural resourcesresource damages and related assessment costs;
o real and personal property damages;
o net loss of taxes, rents, royalties, rents, feesprofits or earnings capacity;
and other lost
revenues;
o net cost of public services necessitated by a spill response, such
as protection from fire, safety or health hazards; and o loss of
subsistence use of natural resources.
OPA limitspreviously limited the liability of responsible parties to the greater of
$1,200 per gross ton or $10.0 million per tanker that is over 3,000 gross tons
(subject to possible adjustment for inflation). Under a recently proposed legislation,Amendments to OPA signed into
law in July 2006 increased these limits on the liability limits will be increased, when such legislation is enacted,of responsible parties
to the greater of $1,900 per gross ton or $16.0 million per double hull tanker
that is over 3,000 gross tons per discharge (subject to possible adjustment for inflation).tons. The act specifically permits individual states to
impose their own liability regimes with regard to oil pollution incidents
occurring within their boundaries, and some states have enacted legislation
providing for unlimited liability for discharge of pollutants within their
waters. In some cases, states thatwhich have enacted this type of legislation have
not yet issued implementing regulations defining tanker owners' responsibilities
under these laws. CERCLA, which applies to owners and operators of tankers,vessels,
contains a similar liability regime and provides for cleanup, and removal of hazardous substances
and for
natural resource damages. Liability under CERCLA is limited to the greater of
$300 per gross ton or $5$5.0 million.
These limits of liability do not apply, however, where the incident is caused by
violation of applicable United
StatesU.S. federal safety, construction or operating
regulations, or by the responsible party's gross negligence or wilfulwillful
misconduct. These limits do not apply if the responsible party fails or refuses
to report the incident or to co-operatecooperate and assist in connection with the
substance removal activities. OPA and CERCLA each preserve the right to recover
damages under existing law, including maritime tort law. We believe that we are
in substantial compliance with OPA, alsoCERCLA and all applicable state regulations
in the ports where our vessels call.
OPA requires owners and operators of vessels to establish and maintain with the
United StatesU.S. Coast Guard evidence of financial responsibility sufficient to meet the
limit of their potential strict liability under the act. The United
StatesU.S. Coast Guard
has enacted regulations requiring evidence of financial responsibility in the
amount of $1,500 per gross ton for tankers, coupling the former OPA limitation
on liability of $1,200 per gross ton with the CERCLA liability limit of $300 per
gross ton. We expect that if the recently proposed legislation
increasing liability limitations under OPA is enacted, the United StatesThe U.S. Coast Guard will accordingly increasehas indicated that it expects to adopt
regulations requiring evidence of financial responsibility in amounts that
reflect the amountshigher limits of liability imposed by the July 2006 amendments to
OPA, as described above. Under the regulations, evidence of financial
responsibility.responsibility may be demonstrated by insurance, surety bond, self-insurance or
guaranty. Under theseOPA regulations, an owner or operator of more than one tanker is
required to obtain a certificatedemonstrate evidence of financial responsibility for the entire
fleet in an amount equal only to the financial responsibility requirement of the
tanker having the greatest maximum strict liability under OPA and CERCLA.
We have provided requisite guarantees and received certificates of financial
responsibility from the United States Coast Guard forinsure each of our tankers that
calls in United States waters.
Frontline Management insures each of our tankersvessels with pollution liability insurance in the maximum
commercially available amount of $1.0 billion per
incident per vessel.billion. A catastrophic spill could exceed
the insurance coverage available, in which event there could behave a material adverse effect on
our business.
Under OPA, oil tankers withoutwith certain limited exceptions, all newly-built or converted vessels
operating in U.S. waters must be built with double hulls, and existing vessels
that do not comply with the double hull requirement will not be permittedprohibited from
trading in U.S. waters over a 20-year period (1995-2015) based on size, age and
place of discharge, unless retrofitted with double hulls. Notwithstanding the
prohibition to come to
United States ports or trade inschedule, the United States waters by 2015. Based on the
current phase-out requirement, our 18act currently permits existing single hull
and double-sided tankers will not be eligible
to carry oil as cargo withinoperate until the 200-mile United States exclusive economic zone
starting in 2010, except that these tankers and our three double sided tankers
may trade in United States waters untilyear 2015 if their operations
within U.S. waters are limited to discharging their cargoes at the Louisiana Offshore Oil
Port, ("LOOP") or unloading with the aid of another vessel, a process referred to as "lightering,"LOOP, or off-loading by lightering within authorized lightering zones
more than 60 miles off-shore. OPA also amendedLightering is the Federal Water Pollution Control Actprocess by which vessels at sea
off-load their cargo to require ownerssmaller vessels for ultimate delivery to the discharge
port.
Owners or operators of tankers operating in the waters of the United States tomust
file vessel response plans with the United StatesU.S. Coast Guard, and their tankers are
required to operate in compliance with their United StatesU.S. Coast Guard approved plans.
These response plans must, among other things:
o address a "worst case"worst case scenario and identify and ensure, through
contract or other approved means, the availability of necessary
private response resources to respond to a "worstworst case discharge";discharge;
o describe crew training and drills; and
o identify a qualified individual with full authority to implement
removal actions.
VesselWe have obtained vessel response plans approved by Coast Guard for our tankersvessels
operating in the waters of the United States have been approved by the United States Coast Guard.States. In addition, the United StatesU.S. Coast Guard
has announced it intends to propose similar regulations requiring certain
vessels to prepare response plans for the release of hazardous substances.
WeIn addition, the United States Clean Water Act prohibits the discharge of oil or
hazardous substances in United States navigable waters and imposes strict
liability in the form of penalties for unauthorized discharges. The Clean Water
Act also imposes substantial liability for the costs of removal, remediation and
damages and complements the remedies available under OPA and CERCLA, discussed
above. The United States Environmental Protection Agency, or EPA, has exempted
the discharge of ballast water and other substances incidental to the normal
operation of vessels in U.S. ports from Clean Water Act permitting requirements.
However, on March 31, 2005, a U.S. District Court ruled that the EPA exceeded
its authority in creating an exemption for ballast water. On September 18, 2006,
the court issued an order invalidating the exemption in EPA's regulations for
all discharges incidental to the normal operation of a vessel as of September
30, 2008, and directing the EPA to develop a system for regulating all
discharges from vessels by that date. The EPA filed a notice of appeal of this
decision and, if the EPA's appeals are responsible for ensuringsuccessful and exemption is repealed, our
vessels complymay be subject to Clean Water Act permit requirements that could include
ballast water treatment obligations that could increase the cost of operating in
the United States. For example, this could require the installation of equipment
on our vessels to treat ballast water before it is discharged or the
implementation of other port facility disposal arrangements or procedures at
potentially substantial cost, and/or otherwise restrict our vessels from
entering U.S. waters.
Other Regulations
In July 2003, in response to the MT Prestige oil spill in November 2002, the
European Union adopted legislation that prohibits all single hull tankers from
entering into its ports or offshore terminals by 2010. The European Union has
also banned all single hull tankers carrying heavy grades of oil from entering
or leaving its ports or offshore terminals or anchoring in areas under its
jurisdiction. Commencing in 2005, certain single hull tankers above 15 years of
age will also be restricted from entering or leaving European Union ports or
offshore terminals and anchoring in areas under European Union jurisdiction. The
European Union has also adopted legislation that would: (1) ban manifestly
sub-standard vessels (defined as those over 15 years old that have been detained
by port authorities at least twice in a six month period) from European waters
and create an obligation of port states to inspect vessels posing a high risk to
maritime safety or the marine environment; and (2) provide the European Union
with greater authority and control over classification societies, including the
ability to seek to suspend or revoke the authority of negligent societies. The
sinking of the MT Prestige has also led to the adoption of other environmental
regulations by certain European Union nations, which could adversely affect the
remaining useful lives of all of our vessels and our ability to generate income
from them. It is impossible to predict what legislation or additional
regulations, if any, additional regulations.
OPA does not prevent individual states from imposing their own liability regimes
with respect to oil pollution incidents occurring within their boundaries.may be promulgated by the European Union or any other
country or authority.
In fact,addition, most U.S. states that border a navigable waterway have enacted
environmental pollution laws that impose strict liability on a person for
removal costs and damages resulting from a discharge of oil or a release of a
hazardous substance. These laws may be more stringent than United StatesU.S. federal law.
Other U.S. Environmental Requirements
The U.S. Clean Air Act of 1970, as amended by the Clean Air Act Amendments of
1977 and 1990, or the CAA, requires the U.S. Environmental Protection Agency, or
EPA, to promulgate standards applicable to emissions of volatile organic
compounds and other air contaminants. Our vessels are subject to vapor control
and recovery requirements for certain cargoes when loading, unloading,
ballasting, cleaning and conducting other operations in regulated port areas.
Our vessels that operate in such port areas with restricted cargoes are equipped
with vapor controlrecovery systems that satisfy these requirements. The CAA also
requires states to draft State Implementation Plans, or SIPs, designed to attain
national health-based air quality standards in primarily major metropolitan
and/or industrial areas. Several SIPs regulate emissions resulting from vessel
loading and unloading operations by requiring the installation of vapor control
equipment. As indicated above, our vessels operating in covered port areas are
already equipped with vapor controlrecovery systems that satisfy these requirements.
Although a risk exists that new regulations could require significant capital
expenditures and otherwise increase our costs, we believe, based on the regulations that
have been proposed to date, we believe that no material capital expenditures
beyond those currently contemplated and no material increase in costs are likely
to be required.
The Clean Water Act, or the CWA, prohibits the discharge of oil or hazardous
substances into navigable waters and imposes strict liability in the form of
penalties for any unauthorized discharges. The CWA also imposes substantial
liability for the costs of removal, remediation and damages. State laws for the
control of water pollution also provide varying civil, criminal and
administrative penalties in the case of a discharge of petroleum or hazardous
materials into state waters. The CWA complements the remedies available under
the more recent OPA and CERCLA, discussed above. Under current regulations of
the EPA, vessels are not required to obtain CWA permits for the discharge of
ballast water in U.S. ports. However, as a result of a recent U.S. federal court
decision, vessel owners and operators may be required to obtain CWA permits for
the discharge of ballast water, or they will face penalties for failing to do
so. Although the EPA is likely to appeal this decision, we do not know how this
matter is likely to be resolved and we cannot assure you that any costs
associated with compliance with the CWA's permitting requirements will not be
material to our results of operations.
The National Invasive Species Act, or NISA, was enacted in 1996 in response
to growing reports of harmful organisms being released into U.S. ports through
ballast water taken on by ships in foreign ports. The United States Coast Guard
adopted regulations under NISA established ain July 2004 that impose mandatory ballast water
management programpractices for shipsall vessels equipped with ballast water tanks entering
U.S. waters. Under NISA,These requirements can be met by performing mid-ocean ballast
water exchange, is voluntary, except for ships heading to the Great
Lakes, Hudson Bay, or vessels engaged in the foreign export of Alaskan North
Slope crude oil. However, NISA's exporting and record-keeping requirements are
mandatory for vessels bound for any port in the United States. Althoughby retaining ballast water exchange is the primary means of compliance with the act's guidelines,
compliance can also be achieved through the retention of ballast water onboardon board the ship, or the use ofby using
environmentally sound alternative ballast water management methods approved by
the U.S.United States Coast Guard. IfMid-ocean ballast exchange is the primary method
for compliance with the United States Coast Guard regulations, since holding
ballast water can prevent ships from performing cargo operations upon arrival in
the United States, and alternative methods are still under development. Vessels
that are unable to conduct mid-ocean ballast exchange is made mandatory throughoutdue to voyage or safety
concerns may discharge minimum amounts of ballast water (in areas other than the
Great Lakes and the Hudson River), provided that they comply with recordkeeping
requirements and document the reasons they could not follow the required ballast
water management requirements. The United States Coast Guard is developing a
proposal to establish ballast water discharge standards, which could set maximum
acceptable discharge limits for various invasive species, and/or if waterlead to
requirements for active treatment requirements or options are instituted, the costs of compliance could increase
for ocean carriers.ballast water.
Our operations occasionally generate and require the transportation, treatment
and disposal of both hazardous and non-hazardous solid wastes that are subject
to the requirements of the U.S. Resource Conservation and Recovery Act, or RCRA,
or comparable state, local or foreign requirements. In addition, from time to
time we arrange for the disposal of hazardous waste or hazardous substances at
offsite disposal facilities. If such materials are improperly disposed of by
third parties, we might stillmay be held liable for clean up costs under applicable laws.
Several of our vessels currently carry cargoes to U.S. waters regularly and we
believe that all of our vessels are suitable to meet OPA and other U.S.
environmental requirements and that they would also qualify for trade if
chartered to serve U.S. ports.
European Union Tanker Restrictions
In July 2003, the EU adopted legislation, which was amended in October 2003,
that prohibits all single hull tankers from entering into its ports or offshore
terminals by 2010 or earlier, depending on their age. The EU has also already
banned all single hull tankers carrying heavy grades of oil from entering or
leaving its ports or offshore terminals or anchoring in areas under its
jurisdiction. Commencing in 2005, certain single hull tankers above 15 years of
age are also restricted from entering or leaving EU ports or offshore terminals
and anchoring in areas under EU jurisdiction. The EU is also considering
legislation that would: (1) ban manifestly sub-standard vessels (defined as
those more than 15 years old that have been detained by port authorities at
least twice in a six month period) from European waters and create an obligation
of port states to inspect vessels posing a high risk to maritime safety or the
marine environment; and (2) provide the EU with greater authority and control
over classification societies, including the ability to seek to suspend or
revoke the authority of negligent societies. The sinking of the m.t. Prestige
and resulting oil spill in November 2002 has led to the adoption of other
environmental regulations by certain EU nations, which could adversely affect
the remaining useful lives of all of our tankers and our ability to generate
income from them. It is impossible to predict what legislation or additional
regulations, if any, may be promulgated by the European Union or any other
country or authority.
International Conventions on Civil Liability for Oil Pollution Damage
Although the United States is not a party to these Conventions, many countries
ratified and followed the liability system adopted by the IMO and originally set
out in the International Convention on Civil Liability for Oil Pollution Damage
of 1969 and the Convention for the Establishment of an International Fund for
Oil Pollution of 1971. This international oil pollution regime was modified in
1992 by two Protocols. The amended Conventions are known as the 1992 Civil
Liability Convention and the 1992 Fund Convention. The 1992 Conventions entered
into force on May 30, 1996. Due to a number of denunciations of the 1971
Convention this Convention ceased to be in force on May 24, 2004. A large number
of States have also denounced the 1969 Civil Liability Convention and as more
States do so its importance is increasingly diminishing. Under the 1992 Civil
Liability Convention, a vessel's registered owner is strictly liable for oil
pollution damage caused in the territory, territorial seas or exclusive economic
zone of a contracting state by discharge of persistent oil from a tanker,
subject to certain complete defences. The 1992 Fund established by the 1992 Fund
Convention pays compensation to those suffering oil pollution damage in a State
party to the 1992 Fund Convention who did not obtain full compensation under the
1992 Civil Liability Convention. This would normally apply where the shipowner
has a defence under the 1992 Civil Liability Convention or the damage exceeds
the shipowner's liability under that Convention. Under an amendment that became
effective on November 1, 2003, liability limits under the 1992 Civil Liability
Convention were increased by over 50%. For vessels of 5,000 to 140,000 gross
tons (a unit of measurement for the total enclosed spaces within a vessel)
liability will be limited to SDR 4,510,000 (approximately $6.7 million) plus SDR
631 (approximately $932) for each additional gross ton over 5,000. For vessels
of over 140,000 gross tons, liability will be limited to SDR 89,770,000
(approximately $132.7 million). Also with effect from the same date the maximum
amount payable by the 1992 Fund increased from SDR 135 million (approximately
$199.5 million) to SDR 203million (approximately $300.0 million). The right to
limit liability is forfeited under the 1992 Civil Liability Convention if it is
proved that the pollution damage resulted from the shipowner's personal act or
omission, committed with the intent to cause such damage, or recklessly and with
knowledge that such damage would probably result. Vessels trading to States that
are parties to the 1992 Civil Liability Convention must provide evidence of
insurance covering the liability of the owner. On March 2005 a third tier of
compensation was established by means of a Supplementary Fund. This Fund
provides additional compensation to that available under the 1992 Fund
Convention for pollution damage in States that are members of the Supplementary
Fund. The amount available is SDR 750 million (approximately $1.1 billion)
including the costs payable under the 1992 Civil Liability Convention and the
1992 Fund Convention, SDR 203 million (approximately $300.0 million). In
jurisdictions where the 1992 Civil Liability Convention has not been adopted,
various legislative schemes govern or common law applies, and liability is
imposed either on the basis of fault or in a manner similar to the 1992
Convention. We believe that our P&I insurance covers liabilities either under
the international oil pollution schemes or under local regimes like for example
the US Oil Pollution Act 1990.
The unit of account in the 1992 Conventions is the Special Drawing Right (SDR)
as defined by the International Monetary Fund. In this document the SDR has been
converted into US dollars at the rate of exchange applicable on May 2, 2006 of
SDR 1 = USD 1.477760.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a variety of
initiatives intended to enhance vessel security. On November 25, 2002, the U.S.
Maritime Transportation Security Act of 2002, ("MTSA")or MTSA, came into effect. To
implement certain portions of the MTSA, in July 2003, the United StatesU.S. Coast Guard
issued regulations requiring the implementation of certain security requirements
aboard vessels operating in waters subject to the jurisdiction of the United
States. Similarly, in December 2002, amendments to the International
Convention for the Safety of Life at Sea ("SOLAS")SOLAS created a new chapter
of the convention dealing specifically with maritime security. The new chapter
came
into effectbecame effective in July 2004 and imposes various detailed security obligations
on vessels and port authorities, most of which are contained in the
newly created
International Ship and Port Facilities Security Code, ("ISPS").or the ISPS Code. The ISPS
Code is designed to protect ports and international shipping against terrorism.
After July 1, 2004, to trade internationally, a vessel must attain an
International Ship Security Certificate from a recognized security organization
approved by the vessel's flag state. Among the various requirements are:
o on-board installation of automatic identification systems to provide
a means for the automatic transmission of safety-related information
systems, or AIS, to
enhance vessel-to-vesselfrom among similarly equipped ships and vessel-to-shore communications;shore stations, including
information on a ship's identity, position, course, speed and
navigational status;
o on-board installation of ship security alert systems;systems, which do not
sound on the vessel but only alerts the authorities on shore;
o the development of vessel security plans;
o ship identification number to be permanently marked on a vessel's
hull;
o a continuous synopsis record kept onboard showing a vessel's history
including, name of the ship and of the state whose flag the ship is
entitled to fly, the date on which the ship was registered with that
state, the ship's identification number, the port at which the ship
is registered and the name of the registered owner(s) and their
registered address; and
o compliance with flag state security certification requirements.
The United StatesU.S. Coast Guard regulations, intended to align with international maritime
security standards, exempt non-U.S. vessels from MTSA vessel security measures provided suchnon-U.S. vessels
that have on board, as of July 1, 2004, a valid International Ship Security
Certificate that attestsISSC attesting to the vessel's
compliance with SOLAS security requirements and the ISPS Code. All of our vessels comply withWe have
implemented the various security measures addressed by the MTSA, SOLAS and the ISPS
Code.Code, and our fleet is in compliance with applicable security requirements.
C. ORGANIZATIONAL STRUCTURE
See Exhibit 8.1 for a list of our significant subsidiaries.
D. PROPERTY, PLANT AND EQUIPMENT
We own a substantially modern fleet of vessels. The following table sets forth
the fleet that we own or have contracted for delivery as of June 15, 2007.
Approximate Charter
----------------- Termination
Vessel Built Dwt. Construction Flag Date
- -------------------------- ----- --------- ------------ ---- -----------
VLCCs
Front Sabang 1990 286,000 Single-hull SG 2014 (1)
Front Vanadis 1990 286,000 Single-hull SG 2010 (2)
Front Highness 1991 284,000 Single-hull SG 2015 (1)
Front Lady 1991 284,000 Single-hull SG 2015 (1)
Front Lord 1991 284,000 Single-hull SG 2015 (1)
Front Duke 1992 284,000 Single-hull SG 2014 (1)
Front Duchess 1993 284,000 Single-hull SG 2014 (1)
Front Edinburgh 1993 302,000 Double-side LIB 2013 (1)
Front Ace 1993 276,000 Single-hull LIB 2014 (1)
Front Century 1998 311,000 Double-hull MI 2021
Front Champion 1998 311,000 Double-hull BA 2022
Front Vanguard 1998 300,000 Double-hull MI 2021
Front Vista 1998 300,000 Double-hull MI 2021
Front Circassia 1999 306,000 Double-hull MI 2021
Front Opalia 1999 302,000 Double-hull MI 2022
Front Comanche 1999 300,000 Double-hull FRA 2022
Golden Victory 1999 300,000 Double-hull MI 2022
Ocana (ex Front Commerce) 1999 300,000 Double-hull IoM 2022
Front Scilla (ex Oscilla) 2000 303,000 Double-hull MI 2023
Ariake (tbn Oliva) 2001 299,000 Double-hull BA 2023
Front Serenade 2002 299,000 Double-hull LIB 2024
Otina (ex Hakata) 2002 298,465 Double-hull IoM 2025
Front Stratus (tbn Ondina) 2002 299,000 Double-hull LIB 2025
Front Falcon 2002 309,000 Double-hull BA 2025
Front Page 2002 299,000 Double-hull LIB 2025
Front Energy 2004 305,000 Double-hull CYP 2027
Front Force 2004 305,000 Double-hull CYP 2027
Suezmax OBO Carriers
Front Breaker 1991 169,000 Double-hull MI 2015
Front Climber 1991 169,000 Double-hull SG 2015
Front Driver 1991 169,000 Double-hull MI 2015
Front Guider 1991 169,000 Double-hull SG 2015
Front Leader 1991 169,000 Double-hull SG 2015
Front Rider 1992 170,000 Double-hull SG 2015
Front Striver 1992 169,000 Double-hull SG 2015
Front Viewer 1992 169,000 Double-hull SG 2015
Suezmaxes
Front Birch 1991 150,000 Double-side MI 2014 (1)
Front Maple 1991 150,000 Double-side MI 2014 (1)
Front Pride 1993 150,000 Double-hull NIS 2017
Front Glory 1995 150,000 Double-hull NIS 2018
Front Splendour 1995 150,000 Double-hull NIS 2019
Front Ardenne 1997 153,000 Double-hull NIS 2020
Front Brabant 1998 153,000 Double-hull NIS 2021
Mindanao 1998 159,000 Double-hull SG 2021
SFL Heimdall (NB) 2009 156,000 Double-hull n/a n/a
SFL Baldur (NB) 2009 156,000 Double-hull n/a n/a
Panamax Drybulk Carrier
Golden Shadow 1997 73,732 n/a HK 2016 (2)
Containerships
Sea Alfa 2005 1,700 TEU n/a CYP 2009
Sea Beta 2005 1,700 TEU n/a CYP 2007
Horizon Hunter 2006 2,824 TEU n/a U.S. 2021 (2)
Horizon Hawk 2007 2,824 TEU n/a U.S. 2022 (2)
Horizon Falcon 2007 2,824 TEU n/a U.S. 2022 (2)
Horizon Eagle 2007 2,824 TEU n/a U.S. 2022 (2)
Horizon Tiger 2006 2,824 TEU n/a U.S. 2022 (2)
SFL Avon (NB) 2010 1,700 TEU n/a MI n/a
SFL Clyde (NB) 2010 1,700 TEU n/a MI n/a
SFL Dee (NB) 2010 1,700 TEU n/a MI n/a
SFL Humber (NB) 2010 2,500 TEU n/a MI n/a
SFL Tamar (NB) 2010 2,500 TEU n/a MI n/a
Capesize Drybulk Carrier
Golden Straits (NB) 2008 170,000 n/a n/a 2023 (2)
Golden Island (NB) 2009 170,000 n/a n/a 2024 (2)
Jack-Up Drilling Rigs
West Ceres 2006 300 ft n/a PAN 2021 (2)
West Prospero (NB) 2007 300 ft n/a PAN 2022 (2)
Seismic
To be named (NB) 2008 n/a n/a 2020 (2)
To be named (NB) 2008 n/a n/a 2020 (2)
To be named (NB) 2008 n/a n/a 2020 (2)
NB - Newbuilding
Key to Flags:
BA - Bahamas, CYP - Cyprus, FRA - France, IoM - Isle of Man, HK - Hong Kong, LIB
- - Liberia, MI - Marshall Islands, NIS - Norwegian International Ship Register,
PAN - Panama, SG - Singapore, U.S - United States of America.
(1) Charter subject to termination at the Frontline Charterer's option
from 2010.
(2) Charterer has purchase options during the term of the charter.
Other than itsour interests in the vessels and jack-up drilling rigs described
above, we do not own any material physical properties.
ITEM 4A.4A UNRESOLVED STAFF COMMENTS
Not Applicable.None
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion should be read in conjunction with Item 3 "Selected
Financial Data", Item 4 "Information on the Company" and our audited
consolidated financial statementsConsolidated Financial Statements and notesNotes thereto and predecessor combined
carve-out financial statements included herein.
This discussion includes
forward-looking statements based on assumptions aboutOverview
Following our future business. Our
actual results could differ materially from those contained in the
forward-looking statements.
Overview
We were incorporated in Bermuda on October 10, 2003, for the purpose of
acquiring certain of the shipping assets of Frontline. Frontline is a publicly
listed Bermuda based shipping company engaged primarily in the ownership and
operation of oil tankers, including OBO carriers.
On December 11, 2003, we entered into a purchase agreement with Frontline to
purchase certain of Frontline's wholly owned VLCC and Suezmax owning
subsidiaries, plus a purchase option to acquire a further VLCC, which we refer
to collectively as the Vessel Interests. On December 18, 2003 we issued $580
million aggregate principal amount of 8.5% senior notes due 2013 in a private
offering to qualified institutional buyers. The proceeds from the offering of
our senior notes, together with a deemed equity contribution of approximately
$525 millionspin-off from Frontline, were used to complete the acquisition of the Vessel
Interests. We also assumed senior secured indebtedness with respect to our fleet
in the amount of approximately $1,158.0 million, which we subsequently
refinanced with the proceeds of our notes and our $1,058.0 million credit
facility. On January 1, 2004 we completed the purchase of the Vessel Interests
we agreed to purchase from Frontline on December 11, 2003. As a result of these
transactions we acquired a fleet of 24 Suezmax tankers, 22 VLCCs, and an option
to acquire an additional VLCC with a combined carrying capacity of approximately
10.5 million dwt and a combined book value at January 1, 2004 of approximately
$2,048.4 million.
On January 1, 2004, we entered into time charter agreements with Frontline
Shipping to charter the 46 vessels for substantially the remainder of their
useful lives at fixed rates. Frontline Shipping was initially capitalized by
Frontline with $250 million to support its obligation to make charterhire
payments to us. In addition, on January 1, 2004, we entered into management
agreements with Frontline Management to manage the 46 vessels for substantially
the remainder of their useful lives at fixed rates.
On January 17, 2005 we exercised our option to acquire the VLCC Oscilla. The
vessel was delivered to us on April 4, 2005, renamed Front Scilla and chartered
to Frontline Shipping under substantially the same terms as our other VLCCs.
Between January and March 2005 we purchased three further double hulled VLCCs
from Frontline, which were chartered to Frontline Shipping II under
substantially the same terms as our other VLCCs, except with respect to the base
charter rates. In March 2005, we sold the Suezmax tanker Front Fighter and the
time charter of Front Fighter to Frontline Shipping and management agreement for
the vessel were both concurrently cancelled.
In 2005 we acquired a total of 11 vessels, of which two were containerships, and
sold five vessels as discussed in detail in Item 4. Following these purchases
and disposals we have a fleet of 52 vessels as of June 2, 2006.
As a result of the purchase of our original fleet and our time charter and management
agreements with Frontline, our consolidated financial statements significantly
differ as of and for the year ended December 31,in
2004, compared with our
predecessor combined carve-out financial statements as of and for the year ended
December 31, 2003. These differences primarily relate to the way we account for
vessels and revenueshave established ourselves as a resultleading international maritime asset
owning company with one of the time charter arrangements, but also
includelargest asset bases across the way we account for operating expensesmaritime and
administrative expenses.
The following discussion identifies the principal factors that affect our
predecessor combined carve-out financial statements and our 2004 and future
results.
Overview - Predecessor
For the year ended December 31, 2003, the predecessor combined carve-out
financial statements presented herein have been carved out of the consolidated
financial statements of Frontline. Our financial position, results of operations
and cash flows reflectedoffshore industries. A full fleet list is provided in our combined financial statements are not indicative
of those that would have been achieved had we operated autonomously for all
periods presented.
Our predecessor combined carve-out financial statements assume that our business
was operated as a separate corporate entity prior to its inception. Prior to the
date of our incorporation, our business was operated as part of the shipping
business of Frontline. Our predecessor combined carve-out financial statements
have been prepared to reflect the combination of the Vessel Interests.
As at December 31, 2003, the Vessel Interests were comprised of 19 wholly owned
VLCCs, 24 wholly owned Suezmax tankers, one option to acquire a VLCC and
interests in six associated companies that each owned a VLCC.
Where Frontline's assets, liabilities, revenues and expenses relate to specific
Vessel Interests, these have been identified and carved out for inclusion in our
predecessor combined carve-out financial statements. Frontline's shipping
interests and other assets, liabilities, revenues and expenses that do not
relate to the Vessel Interests have been identified and not included in our
combined financial statements. The preparation of our combined financial
statements requires allocation of certain assets and liabilities and expenses
where these items are not identifiable as related to one specific activity.
Administrative overheads of Frontline that cannot be related to a specific
vessel have been allocated pro rata basedItem 4.D "Information on
the number of vessels inCompany" showing the Company compared with the number in Frontline's total fleet. We have deemedassets that the related allocations are reasonable to present our financial position,
results of operations,we currently own and cash flows. We also believe the various allocated
amounts would not materially differ from those that would have been achieved had
we operated on a stand-alone basis for all periods presented. However, our
financial position, results of operations and cash flows are not indicative of
those that would have been achieved had we operated autonomously for all periods
presented in our predecessor combined carve-out financial statements as we may
have made different operational and investment decisions as an independent
Company. Furthermore, the predecessor combined carve-out financial statements do
not reflect the results we would have achieved under our current fixed rate long
term charters and management agreements and therefore are not indicative of our
current or future results of operations.
The majority of our assets, liabilities, revenues and expenses are vessel
specific and are included in the vessel owning subsidiaries' financial
statements. However, in addition, the following significant allocations have
been made:
Long term debt: An allocation of corporate debt of Frontline has been made. This
debt has been allocated as it relates specifically to a vessel over which the
Company had a purchase option (which was subsequently exercised). The associated
interest expense has also been allocatedcharter to our
predecessor combined carve-out
financial statements.
Interest rate swaps: For the purposes of our combined financial statements,
interest rate swaps specific to carved out debt have been included. In addition,
non-debt specific interest rate swaps have been included on the basis that such
swaps were intended to cover the floating rate debt that has been included in
our predecessor carve-out combined statements. The associated mark to market
adjustments arising on the swaps has also been allocated to our predecessor
combined carve-out financial statements and is included in other financial
items, net.
Administrative expenses: Frontline's overheads relate primarily to management
organizations in Bermuda and Oslo that manage the business. These overhead costs
include salaries and other employee related costs, office rents, legal and
professional fees and other general administrative expenses. Other employee
related costs includes costs recognized in relation to Frontline's employee
share option plan. We have allocated overhead pro rata based on the number of
vessels in the Company compared with the number in Frontline's total fleet.
No allocation of interest income has been made and interest income reported in
our combined financial statements represents interest income earned by the
vessel owning subsidiaries and interest earned on loans to joint ventures.customers.
Factors Affecting Our Current and Future Results
Principal factors that have affected our results since 2004 and are expected to
affect our future results of operations and financial position include:
o the earnings of our vessels under time charters and bareboat
charters to the Frontline Charterers;
o the amount we receive under the profit sharing arrangements with the
Charterers;Frontline Charters;
o the earnings and expenses related to any additional vessels that we
acquire;
o vessel management fees;fees and expenses;
o administrative expenses; and
o interest expense.
Vessel Earningsexpenses.
Revenues
Our revenues since January 1, 2004 derive primarily from our long term, fixed
rate time charters with the Charterers. Allcharters. Most of the vessels that we have acquired from Frontline,
including the vessels we have acquired since December 2003, are chartered to the
Frontline Charterers under long term charters that are generally accounted for
as finance leases.
We allocate $6,500 per day from each time charter payment from the Frontline
Charters as finance lease service revenue.revenue relating to these vessels. The balance
of each charter payment is allocated between finance lease interest income and
finance lease repayment in order to produce a constant periodic return on the
balance of our net investments in finance leases. As the balance of our net
investments in finance leases decreases, we will allocate less of each charter
payment as finance lease interest income and more as finance lease repayments.
CertainUntil April 2007, certain of our vessels wereacquired from Frontline remained on
charter to third parties, as atunder charters which commenced before January 1, 2004,
when(the date upon which our charter arrangements withto the Frontline Charterers became
economically effective.effective). Our arrangement with Frontline is that while our
vessels are completing performance of third party charters, we pay the Frontline
Charterers all revenues we earn under third party charters in exchange for the
Frontline Charterers paying us the agreed upon Frontline charterhire. We account for the
revenues received from these third party charters as time charter, bareboat or
voyage revenues, as applicable, and the subsequent payment of these amounts to
the Frontline Charterers as deemed dividends paid. We account for the charter
revenues received from the Frontline Shipping and Frontline
Shipping IICharterers prior to the charters becoming
effective for accounting purposes, as deemed equity contributionsdividends received.
In addition,March 2007, we announced the agreement to cancel the previous charter for the
final 11-month period in 2004single hull VLCC Front Vanadis. We have agreed to pay a $13.2 million
compensation to Frontline for the cancellation of the charter. The new
charterer, Great Elephant, a subsidiary of Taiwan Maritime Transportation, paid
a gross upfront payment of $12.5 million, and for each calendar year
thereafter, the Charterers will pay usa daily gross bareboat
charter hire of $25,000 per day for 42 months, starting May 2007. Great Elephant
has quarterly purchase options, and also has a purchase obligation of $3 million
at the end of the charter.
We have a profit sharing payment if our vessels'
earnings exceed certain amounts. Operating revenues from January 1, 2004,
therefore include finance lease interest income, finance lease service revenues,
profit sharing revenues and includeagreement for all vessels on charter revenues forto the period prior to our
vessels commencing trading under their charters to Frontline.Frontline
Charterers. We recognize profit sharing revenue for a particular vesselVLCC's and Suezmaxes/Suezmax
OBO's, respectively when itsthe aggregate earnings on a TCE basis exceed the
maximum amount of base charterhire that the vessel isthese vessels are scheduled to earn for
the entire year. In 2004,2006, this occurred in the second quarter of the year. We
therefore generally do not expect to recognize any profit sharing revenue in the
first quarter of any year. In addition, we expect stronger demand for vesselscrude oil
tankers and increased oil trading activity in the winter months in the Northernnorthern
hemisphere to affect the amount and timing of our profit sharing revenue. We
also have profit sharing agreements relating to the jack-up drilling rigs West
Ceres and West Prospero, where we will receive 5% and 4%, respectively, of
the earning above certain thresholds. These profit sharing agreements will not,
however, become effective until 2009.
We own seven container vessels, of which three were in operation at December 31,
2006. Five of the seven vessels are vessels on long-term bareboat charters to
Horizon Lines, of which one vessel was delivered in 2006, and the remaining four
vessels have been delivered to us in 2007. Each vessel chartered to Horizon
Lines has an initial charter period of 12 years, plus three year extension
options for Horizon Lines. Horizon Lines also has purchase options for the
vessels, exercisable for the first time after five years from commencement of
the relevant charter.
Our two smaller container vessels are employed on short to medium time charters.
One of the vessels, Sea Alfa, is on a time charter to the Korean operator Heung
A until May 2009. The other vessel, Sea Beta, was on a bareboat charter to the
Australian operator Pan Logistics, but this company went into administration in
October 2006, and the charter was cancelled. Later in the year we secured a new
six month time charter for the vessel, commencing in January 2007 with two
three-month extension options for the charterer. The first of these extension
options has been exercised by the charterer. Our charter to Pan Logistics was
secured by a $2.7 million bank guarantee, and we have collected the full
guarantee amount in 2007. This amount, net of an amount of approximately
$800,000 to compensate the technical manager of the vessel, will be recognized
in the year 2007.
In June 2007, we announced an agreement to acquire five newbuilding container
vessels with scheduled delivery in 2010 for an aggregate construction cost of
approximately $190 million. Consistent with our strategy, it is our intention to
market these vessels for medium to long term contracts.
In September 2006, we took delivery of Golden Shadow, a Panamax drybulk carrier
built in 1997. This vessel has been bareboat chartered to Golden Ocean for a
period of 10 years. At the end of the charter we have a fixed price put option
to Golden Ocean, and Golden Ocean also has purchase options, exercisable for the
first time after three years. We have determined under FIN 46 (R) that we are
not the primary beneficiary of the vessel owning subsidiary and have accounted
for it using the equity method.
In February 2007, we announced an agreement to acquire two newbuilding Capesize
drybulk carriers from Golden Ocean. The vessels are scheduled to be delivered in
the fourth quarter of 2008 and first quarter of 2009, respectively, and will be
chartered for 15 years to Golden Ocean. Golden Ocean will have a purchase
option, starting after five years.
At the end of June 2006, we took delivery of the newbuilding jack-up drilling
rig, West Ceres, acquired from SeaDrill Invest I, a wholly owned subsidiary of
Seadrill. The rig has been bareboat chartered back to SeaDrill Invest I for a
period of 15 years, and SeaDrill Invest I has purchase options, exercisable for
the first time after three years. The charter is classified as a finance lease,
similar to the charters to the Frontline Charterers.
In January 2007, we also announced the agreement to acquire a second jack-up
drilling rig, the West Prospero, from SeaDrill Invest II, a wholly owned
subsidiary of Seadrill. This rig is scheduled to be delivered from the shipyard
at the end of June 2007, and will then commence a 15 year charter to SeaDrill
Invest II. SeaDrill Invest II will have purchase options for the rig,
exercisable for the first time after three years.
In March 2007, we announced the acquisition of three newbuilding seismic
vessels, including complete seismic equipment, from SCAN. The vessels are
scheduled to be delivered in 2008. Upon delivery the vessels will commence 12
year bareboat charters to SCAN. SCAN has been granted fixed purchase options for
each of the vessels after six, 10 and 12 years from commencement of the relevant
charters.
Expenses
Our expenses consist primarily of vessel management fees and expenses,
administrative expenses and interest expense. With respect to vessel management
fees and expenses, our vessel owning subsidiaries with vessels on charter to the
Frontline Charterers have entered into fixed rate management agreements with
Frontline Management under which Frontline Management is responsible for all
technical management of the vessels. Each of these subsidiaries pays Frontline
Management a fixed fee of $6,500 per day per vessel for all of the above
services.
We reported voyage expenses in 2004, derived from voyages that
were in progressIn addition to the vessels on January 1, 2004. As of January 1, 2005, all of ourcharter to the Frontline Charterers, we also have
two 1,700 TEU container vessels were employed underon time or bareboat charters. We do not expecthave outsourced
the technical management for these vessels, and we pay operating expenses for
these vessels as they are incurred. The remaining vessels we own that have
charters attached to report
further significant voyage expenses.them are employed on bareboat charters, where the charterer
pays all operating expenses, including maintenance, dry-docking and insurance.
We have entered into an administrative services agreement with Frontline
Management under which Frontline Management provides us with certain
administrative support services. WeFor the year 2006, we and each of our vessel
owning subsidiaries paypaid Frontline Management a fixed fee of $20,000 per year for its
services under the agreement, and agreeagreed to reimburse Frontline Management for
reasonable third party costs, if any, advanced on our behalf by Frontline. For
the year 2007, some of the compensation to Frontline Management will be based on
cost sharing for the services rendered based on actual incurred costs plus a
margin.
Other than the interest expense associated with our 8.5% senior notes, the
amount of our interest expense will be dependent on our overall borrowing levels
and may significantly increase when we acquire vessels or on the delivery of
newbuildings. Interest incurred during the construction of a newbuilding is
capitalized in the cost of the newbuilding. Interest expense may also change
with prevailing interest rates, although the effect of these changes may be
reduced by interest rate swaps or other derivative instruments that we enter
into. At December 31, 2004 we had a $1,058.0 million secured six-year credit
facility with a syndicate of financial institutions. This credit facility
provided us with a portion of the capital required to complete the acquisition
of the Vessel Interests and to refinance related secured indebtedness. This
credit facility bore interest at LIBOR plus 1.25%. We were also party to
interest rate swaps which fixed the interest on $581.4 million of our floating
rate borrowings at an average rate of 3.8% (exclusive of margin). In February
2005, we refinanced our existing secured credit facility with a new $1,131.0
million secured credit facility. The new facility bears interest at LIBOR plus a
margin of 0.7% and is repayable over a term of six years. The related interest
rate swaps remain unchanged.
Factors Affecting Our Predecessor Results
The principal factors that have affected our predecessor historical results of
operations and financial position include:
o the earnings of our vessels in the charter market;
o vessel expenses;
o administrative expenses;
o depreciation;
o interest expense; and
o foreign exchange.
Vessel Earnings
Prior to January 1, 2004, we derived our earnings from bareboat charters, time
charters, voyage charters and contracts of affreightment. A bareboat charter is
a contract for the use of a vessel for a specified period of time where the
charterer pays substantially all of the vessel voyage costs and operating costs.
A time charter is a contract for the use of a vessel for a specific period of
time during which the charterer pays substantially all of the vessel voyage
costs but the vessel owner pays the operating costs. A voyage charter is a
contract for the use of a vessel for a specific voyage in which the vessel owner
pays substantially all of the vessel voyage costs and operating costs. A
contract of affreightment is a form of voyage charter in which the owner agrees
to carry a specific type and quantity of cargo in two or more shipments over an
agreed period of time. Accordingly, for equivalent profitability, charter income
under a voyage charter would be greater than that under a time charter to take
account of the owner's payment of the vessel voyage costs. In order to compare
vessels trading under different types of charters, it is standard industry
practice to measure the revenue performance of a vessel in terms of average
daily TCEs. For voyage charters, this is calculated by dividing net voyage
revenues by the number of days on charter. Days spent off hire are excluded from
this calculation. Off hire days are days a vessel is unable to perform its
service for which it is immediately required under a time charter. Off hire days
include days spent on repairs, dry docking and surveys, whether scheduled or
unscheduled.
As at December 31, 2003, 29 of our vessels operated in the voyage charter
market. The tanker industry has historically been highly cyclical, experiencing
volatility in profitability, vessel values and freight rates. In particular,
freight and charter rates are strongly influenced by the supply of tanker
vessels and the demand for oil transportation services. The following table sets
forth the average daily TCEs earned by our tanker fleet in 2003 :
--------------------------------
2003
--------------------------------
(dollars per day)
VLCC.......................... 40,400
Suezmax....................... 33,500
Suezmax OBO................... 32,000
Expenses
Operating costs are the direct costs associated with running a vessel and
include crew costs, vessel supplies, repairs and maintenance, drydockings,
lubricating oils and insurance.
Administrative expenses are composed of general corporate overhead expenses,
including personnel costs, property costs, legal and professional fees and other
general administrative expenses. Personnel costs include, among other things,
salaries, pension costs, fringe benefits, travel costs and health insurance.
Depreciation, or the periodic cost charged to our income for the reduction in
usefulness and long term value of our vessels, is also related to the number of
vessels we own. We depreciate the cost of our vessels, less their estimated
residual value, over their estimated useful life on a straight-line basis. No
charge is made for depreciation of vessels under construction until they are
delivered.
Interest expense in our combined financial statements relates to vessel specific
debt facilities of our subsidiaries and to corporate debt that has been
allocated to us. Interest expense depends on the same factors set forth above as
to our interest expense. At December 31, 2003, all of our debt was floating rate
debt.
Foreign Exchange
As at December 31, 2003, certain of our subsidiaries had Yen denominated debt
and charters denominated in Yen, which exposed us to exchange rate risk. As at
December 31, 2003, we had Yen denominated debt in subsidiaries of (Y)9.6 billion
($89.8 million).
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements and combined financial
statements in accordance with accounting principles generally accepted in the
United States requires management to make estimates and assumptions affecting
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of our financial statements and the reported
amounts of revenues and expenses during the reporting period. The following is a
discussion of the accounting policies we apply that are considered to involve a
higher degree of judgment in their application. See Note 2 to our consolidated
financial statements and predecessor combined carve-out financial statements for details of all of our material accounting policies.
In preparing our consolidated financial statements, we follow critical
accounting policies that are different in some respect from those followed in
the preparation of our predecessor financial statements. Each set of critical
accounting policies is discussed separately below.
We use the following critical accounting policies in preparing our consolidated
financial statements.
Revenue Recognition
Revenues are generated from time charter and bareboat charterhires and are
recorded over the term of the charter as service is provided. Voyage charter
revenues have been included for the period prior to our vessels commencing
trading under their charters to Frontline. Under a voyage charter, the revenues
and associated voyage costs are recognized ratably over the estimated duration
of the voyage.
Profit sharing revenues are recorded when earned and realizable. We consider
profit sharing revenues to be earned and realizable to the extent that a
vessel's underlying earnings on a time charter equivalent basis exceed the
maximum amount of base charterhire the vessel could earn during the period. This
threshold is calculated as the number of days in the profit sharing period
multiplied by the daily profit sharing threshold rates. These threshold rates
represent the base charterhire rates specified in the individual time charter
agreements.
Vessels and Depreciation
The cost of vessels and rigs less estimated residual value isare depreciated on a
straight line basis over the vessels'their estimated remaining economic useful lives. The
estimated economic useful life of our double-hull vessels is 25 years andexcept for single hull
vesselstankers for which the useful life is either 25 years or the vessels' anniversary
date in 2015,
whichever comes first. This is a2015. We depreciate our rigs over 30 years. These are common life
expectancyexpectancies applied in the shipping industry.
If the estimated economic useful life is incorrect, or circumstances change and
the estimated economic useful life has to be revised, an impairment loss could
result in future periods. We will continue to monitor the situation and revise
the estimated useful lives of those vessels as appropriate when new regulations
are implemented.
Leases
Leases of our vessels where we are the lessor are classified as either finance
leases or operating leases based on an assessment of the terms of the lease. For
the leases which have been classified as finance leases, the minimum lease
payments (net of amounts representing estimated executory costs including profit
thereon) plus the unguaranteed residual value are recorded as the gross
investment in the lease. The difference between the gross investment in the
lease and the sum of the present values of the two components of the gross
investment is recorded as unearned income which is amortized to income over the
lease term as finance lease interest income to produce a constant periodic rate
of return on the net investment in the lease.
Classification of a lease involves the use of estimates or assumptions about
fair values of leased vessels and expected future values of vessels. We
generally base our estimates of fair value on the average of three independent
broker valuations of a vessel. Our estimates of expected future values of
vessels are based on current fair values amortized in accordance with our
standard depreciation policy for owned vessels.
Deemed Dividends
Our charter arrangements with Frontline became effective on January 1, 2004.
Certain of our vessels were on fixed term charters to third parties as at
January 1, 2004 and the remainder were on spot voyages. As each of our vessels
completes its original charter in place on January 1, 2004, the finance leases
with Frontline become effective for accounting purposes. We account for the
revenues received from these third party charters as time charter, bareboat or
voyage revenues as applicable and the subsequent payment of these amounts to the
Frontline Charterers as deemed dividends paid. We account for the charter
revenues received from the Frontline Shipping LimitedCharterers prior to the charters becoming
effective for accounting purposes, as deemed equity contributions received. This
treatment has been applied due to the related party nature of the charter
arrangements.
The Company has accounted for the acquisition of assets from entities under
common control at the historical carrying value of the seller. The difference
between the purchase price and historical carrying value has been recorded as a
deemed dividend paid.
Deemed Equity Contributions
We have accounted for the difference between the historical cost of the vessels,
originally transferred to us by Frontline at Frontline's historical carrying
value, and the net investment in the lease as a deferred deemed equity
contribution. This deferred deemed equity contribution is presented as a
reduction in the net investment in finance leases in the balance sheet. This
results from the related party nature of both the original transfer of the
vessel and the subsequent finance lease. The deferred deemed equity contribution
is amortized as a credit to contributed surplus over the life of the new lease
arrangement as lease payments are applied to the principal balance of the lease
receivable.
Impairment of Long-lived Assets
OurThe vessels and rigs held and used by us are reviewed for impairment whenever
events or changes in circumstances indicate that theirthe carrying amount of an asset
may not be recoverable. In assessing the recoverability of the vessels' carrying amounts, we
must make assumptions regarding estimated future cash flows. These assumptions
include assumptions about the spot market rates, for vessels, the revenues the vessel
could earn under time charter, voyage charter or bareboat charter, the operating costs of our vessels,and the estimated
economic useful life of our vessels and
their scrap value.these assets. In making these assumptions we refer to
historical trends and performance as well as any known future factors. Factors
we consider important thatwhich could affect recoverability and trigger impairment
include significant underperformance relative to expected operating results, new
regulations that change the estimated useful economic lives of our vessels and
rigs and significant negative industry or economic trends. If our review indicates
impairment, an impairment charge is recognized based on the difference between
carrying value and fair value. Fair value is typically established using an
average of three independent valuations. Although management believes that the
assumptions and estimates used to evaluate impairment are reasonable and
appropriate, such assumptions and estimates are highly subjective.
Variable Interest Entities
A variable interest entity is a legal entity that lacks either (a) equity
interest holders as a group that lack the characteristics of a controlling
financial interest, including: decision making ability and an interest in the
entity's residual risks and rewards or (b) the equity holders have not provided
sufficient equity investment to permit the entity to finance its activities
without additional subordinated financial support. FASB Interpretation 46 (R)
requires a variable interest entity to be consolidated if any of its interest
holders are entitled to a majority of the entity's residual return or are
exposed to a majority of its expected losses.
In applying the provisions of Interpretation 46 (R), we must make assumptions in
respect of, but not limited to, the sufficiency of the equity investment in the
underlying entity. These assumptions include assumptions about the future
revenues, operating costs and estimated economic useful lives of assets of the
underlying entity.
We initially appliedIn June 2006 we incorporated a wholly owned subsidiary, Rig Finance Ltd., for
the purpose of holding the jack-up drilling rig West Ceres. In applying the
provisions of Interpretation 46(R) to all special
purpose entities and other entities created after January 31, 2003 on December
31, 2003. In accordance with the requirements of InterpretationFIN 46(R), we initially applied its provisions to entitieshave determined that are not considered to be
special purpose entities that were created before January 31, 2003 as of March
31, 2004.
The effect of implementation of FIN 46(R) was to require consolidation of one
entity in which we held an interest but which had not previously been
consolidated. We had an option to purchaseRig Finance Ltd. meets the
VLCC Oscilla on expirydefinition of a five-year time charter, which commenced in March 2000. Oscilla was owned and
operated by an unrelated special purpose entity. Prior to the adoption of FIN
46(R) we did not consolidate this special purposevariable interest entity. We have determined
that the entity that owns Oscilla is a variable interest entity andconcluded that we are the
primary beneficiary. AtAccordingly we have consolidated the assets and liabilities
of Rig Finance effective December 31, 2004 through2006.
In August 2006 we incorporated a wholly owned subsidiary, Front Shadow Inc. for
the purpose of holding a Panamax drybulk carrier. In applying the provisions of
FIN 46(R), we have determined that Front Shadow Inc. meets the definition of a
variable interest entity. The vessel has been bareboat chartered to January 2005, whenGolden Ocean
and the terms of the agreement are such that Ship Finance is not the primary
beneficiary. Accordingly we exercisedhave equity accounted for our optioninvestment in Front
Shadow effective December 31, 2006
Recent accounting pronouncements
In March 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 156 Accounting for Servicing of
Financial Assets - an amendment to acquireFAS 140 ("FAS 156"). FAS 156 requires that
all separately recognized servicing rights be initially measured at fair value
if practicable. The statement also permits an entity to choose between two
measurement methods for each class of separately recognized servicing assets and
liabilities. FAS 156 is effective for fiscal years beginning after September 15,
2006. The Company does not expect the vessel, after exhaustive efforts, we were
unableadoption of FAS 156 to obtainhave an impact on
its financial statements.
In July 2006, the accounting information necessaryFASB issued Interpretation No. 48 Accounting for Uncertainty
in Income Taxes - an interpretation of FAS 109 ("FIN 48"). FIN 48 clarifies the
application of FAS 109 by defining the criterion that an individual tax position
must meet for any part of the benefit of that position to be ablerecognized in an
entity's financial statements and also provides guidance on measurement,
de-recognition, classification, interest and penalties and disclosure. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company does
not expect the adoption of FIN 48 to consolidatehave an impact on its financial statements.
In September 2006, the entityFASB issued Statement of Financial Accounting Standards
No. 157 Fair Value Measurements ("FAS 157"). FAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. FAS
157 applies under most other accounting pronouncements that owned Oscilla. If we had exercisedrequire or permit
fair value measurements and does not require any new fair value measurements.
FAS 157 is effective for fiscal years beginning after November 15, 2007. The
Company has not yet determined the option ateffect of adoption of FAS 157 on its
financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 158 Employers' Accounting for Defined Benefit Pension and Other Post
Retirement Plans - an amendment of FAS 87, 88, 106, and 132R ("FAS 158"). FAS
158 requires that the funded status of defined benefit post retirement plans be
recognized in the statement of financial position and changes in the funded
status be reflected in comprehensive income. FAS 158 also requires the benefit
obligations to be measured as of the same date of the financial statements and
requires additional disclosures related to the effects of delayed recognition of
gains or losses, prior service costs or credits and transition assets or
obligation on net periodic benefit cost. FAS 158 is effective for fiscal years
ending after December 15, 2006 for employers without publicly traded securities.
The Company does not expect the adoption of FAS 158 to have an impact on its
financial statements.
In September 2006, the United States Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 108 Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements ("SAB 108"), which provides interpretative guidance on how
registrants should quantify financial statement misstatements. Under SAB 108
registrants are required to consider both a "rollover" method, which focuses
primarily on the income statement impact of misstatements, and the "iron
curtain" method, which focuses primarily on the balance sheet impact of
misstatements. The effects of prior year uncorrected errors include the
potential accumulation of improper amounts that may result in material
misstatement on the balance sheet or the reversal of prior period errors in the
current period that result in a material misstatement of the current period
income statement amounts. Adjustments to current or prior period financial
statements would be required in the event that after application of various
approaches for assessing materiality of a misstatement in a current period
financial statements and consideration of all relevant quantitative and
qualitative factors, a misstatement is determined to be material. We adopted the
provisions of SAB 108 as of December 31, 2004, the cost of the Oscilla would2006 and this did not have been approximately $28.5 million and
our maximum exposure to loss was $8.4 million. The application of FIN 46(R) has
not had a material
impacteffect on ourthe Company's results of operations or financial position.
We
have taken delivery ofMarket Overview
The Oil Tanker Market
The tanker market strengthened in 2006 with demand having the vessel in April 2005.greatest influence
on rates. The following critical accounting policiesseasonal patterns for the Suezmax and VLCC sectors were used in the preparation of the
predecessor combined carve-out financial statements.
Carve out of the Financial Statements of Frontline
For thequite
similar, though Suezmaxes witnessed more volatility. The year ended December 31, 2003, our predecessor combined carve-out
financial statements presented herein have been carved out of the financial
statements of Frontline.
Where Frontline's assets, liabilities, revenues and expenses relate to the
specific Vessel Interests, these have been identified and carved out for
inclusion in our combined financial statements. Frontline's shipping interests
and other assets, liabilities, revenues and expenses that do not relate to the
Vessel Interests have been identified and not included in our combined financial
statements. The preparation of our combined financial statements requires the
allocation of certain assets and liabilities and expenses where these items are
not identifiable as related to one specific activity. Administrative overheads
of Frontline that cannot be related to a specific vessel have been allocated
based on the number of vessels in the Company compared with the number in
Frontline's total fleet. Management has deemed the related allocations are
reasonable to present our financial position, results of operations, and cash
flows. Management believes the various allocated amounts would not materially
differ from those that would have been achieved had we operated on a stand-alone
basis for all periods presented in our predecessor combined carve-out financial
statements. Our financial position, results of operations and cash flows are not
indicative of those that would have been achieved had we operated autonomously
for all years presented as we may have made different operational and investment
decisions as a company independent of Frontline.
Revenue Recognition
Revenues are generated from voyage charters, contracts of affreightment, time
charter and bareboat charterhires. Time charter and bareboat charter revenues
are recorded over the term of the charter as service is provided. Under a voyage
charter the revenues and associated voyage costs are recognized ratably over the
estimated duration of the voyage. The operating results of voyages in progressstarted at a reporting date are estimatedTCE
of approximately $81,000 for VLCCs and recognized pro-rata on a per day basis.
Probable losses on voyages are providedapproximately $70,000 for in full at the time such losses can
be estimated.
Amounts receivable or payable arising from profit sharing arrangements are
accrued based on the estimated results of the voyage recorded as at the
reporting date.
The operating revenues and voyage expenses of the vessels operating in the
Tankers pool, and certain other pool arrangements, are pooled and net operating
revenues, calculated on a TCE basis, are allocated to the pool participants
according to an agreed formula. The same revenue and expenses principles stated
above are applied in determining the pool's net operating revenues.
Vessels and Depreciation
The cost of vessels less estimated residual value is depreciated on a straight
line basis over the vessels' estimated remaining economic useful lives. The
estimated economic useful life of our double-hull vessels is 25 years and for
single hull vessels is either 25 years or the vessels' anniversary date in 2015,
whichever comes first. This is a common life expectancy applied in the shipping
industry. Effective in April 2001, the IMO implemented new regulations that
result in the accelerated phase out of certain non-double hull vessels.
If the estimated economic useful life is incorrect, or circumstances change and
the estimated economic useful life has to be revised, an impairment loss could
result in future periods. We will continue to monitor the situation and revise
the estimated useful lives of its non-double hull vessels as appropriate when
new regulations are implemented.
Impairment of Long-lived Assets
Our vessels are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. In
assessing the recoverability of the vessels' carrying amounts, we must make
assumptions regarding estimated future cash flows. These assumptions include
assumptions about the spot market rates for vessels, the revenues the vessel
could earn under time charter, voyage charter or bareboat charter, the operating
costs of our vessels, the estimated economic useful life of our vessels and
their scrap value. In making these assumptions, we refer to historical trends
and performance as well as any known future factors. Factors we consider
important that could effect recoverability and trigger impairment include
significant underperformance relative to expected operating results, new
regulations that change the estimated useful economic lives of our vessels and
significant negative industry or economic trends. If our review indicates
impairment, an impairment charge is recognized based on the difference between
carrying value and fair value. Fair value is typically established using an
average of three independent valuations. Although management believes that the
assumptions and estimates used to evaluate impairment are reasonable and
appropriate, such assumptions and estimates are highly subjective.
Leases
Leases of vessels where we are the lessee are classified as either capital
leases or operating leases based on an assessment of the terms of the lease.
Classification of leases involves the use of estimates or assumptions about fair
values of leased vessels, expected future values of vessels and, if lessor's
rates of return are not known, lessee's cost of capital. We generally base our
estimates of fair value on the average of three independent broker valuations of
a vessel. Our estimates of expected future values of vessels are based on
current fair values amortized in accordance with our standard depreciation
policy for owned vessels. Lessee's cost of capital is estimated using an average
that includes estimated return on equity and estimated incremental borrowing
cost. The classification of leases in our accounts as either capital leases or
operating leases is sensitive to changes in these underlying estimates and
assumptions.
Variable Interest Entities
The application of this accounting policy is discussed in the above critical
accounting policies for our consolidated financial statements.
Accounting Changes
The accounting changes as set forth below relate to the predecessor combined
carve-out financial statements included herein. The changes are not applicable
to our consolidated financial statements for the years ended December 31, 2004
and 2005 of the Company.
In December 2003 we implemented the provisions of FIN 46R. The effect of
implementation of FIN 46R was to require consolidation of one entity in which we
held an interest but which had not previously been consolidated. We had an
option to purchase the VLCC Oscilla on expiry of a five-year time charter, which
commenced in March 2000. Oscilla was owned and operated by an unrelated special
purpose entity. Prior to the adoption of FIN 46 we did not consolidate this
special purpose entity. We have determined that the entity that owned Oscilla
was a variable interest entity and that we were the primary beneficiary. At
December 31, 2004 through to January 2005, when we exercised our option to
acquire the vessel, after exhaustive efforts, we were unable to obtain the
accounting information necessary to be able to consolidate the entity that owned
Oscilla. If we had exercised the option at December 31, 2004, the cost of the
Oscilla would have been approximately $28.5 million. Our maximum exposure to
loss, measured by the purchase price we paid for the option, was $8.4 million.
With effect from December 2003, the IMO implemented new regulations that result
in the accelerated phase-out of single hull vessels. As a result of this, we
have re-evaluated the estimated useful life of our single hull vessels and
determined this to be either 25 years or the vessel's anniversary date in 2015
whichever comes first. As a result, the estimated useful lives of 13 of our
wholly owned vessels were reduced in the fourth quarter of 2003. A change in
accounting estimate was recognized to reflect this decision, resulting in an
increase in depreciation expense and consequently decreasing net income by $1.1
million and basic and diluted earnings per share by $0.01, for 2003.
Market Overview
For the third year in a row the tanker market was very profitable, even if 2005
could not compete with 2004. The extreme volatility witnessed in rates over 2004
was to a smaller extent the case for 2005, though still were testing at times.
The TCE for a modern VLCC differed between lows of $24,000 per day and highs of
$130,000 per day in 2005Suezmaxes
according to industry sources. Rates then followed the traditional seasonal
pattern by softening to approximately $33,000 for the VLCCs and approximately
$25,000 for Suezmaxes around the middle of April 2006. From this point, rates
began to firm against market predictions at the time and rose to approximately
$89,000 for VLCCs and approximately $75,000 for Suezmaxes by the end of August.
The International Energy Agency (IEA) reportedfear of another active hurricane season in their May issue,the US Gulf, geopolitical
uncertainty and increased risk of supply disruptions provided strong incentives
for building oil reserves throughout the summer. On-land storage capacity was in
some regions filled to capacity, driven by extraordinarily strong future rates,
as compared to market rates, resulting in the wide use of tankers for storage
purposes.
The build up in reserves triggered a sharp drop in crude prices, from $76 per
barrel in early August to $56 per barrel in early October. This led to the
market weakening with rates falling to approximately $45,000 for VLCCs and
approximately $30,000 for Suezmaxes by the middle of December 2006. Depending on
the source of information, the average TCE for the year was approximately
$63,000 for a double hull VLCC and approximately $50,000 for a double hull
Suezmax.
The increasing trend is for oil majors to discriminate against single hull
tonnage. Oil traders with crude or fuel oil cargoes often require double hull
tonnage in order to have full flexibility with regard to cargo delivery.
Therefore, single hull ships appear no longer able to trade efficiently compared
to double hull vessels, which implies a further gap in the already existing 'two
tier market' between the double hull and single hull vessels.
We believe it is likely that more single hull tankers will be either converted
or scrapped compared to recent years. We expect approximately 30 VLCCs and
approximately 25 Suezmaxes to be delivered from shipyards during 2007.
The Drybulk Shipping Market
The drybulk shipping market continued its strong performance in 2006, mainly
driven by Chinese imports and exports. Chinese iron ore, steam coal and grain
imports were all running at record high levels during the second half of 2006.
In addition to these trades, steel exports from China increased substantially
during 2006, and China is now a major exporter of steel.
In line with the continued strong market, contracting for new drybulk vessels
has increased in 2007. The increase in the orderbook is likely to put pressure
on the current strong rates as vessels start getting delivered. Further, the
development of the drybulk market is expected to be dependent on the development
of the Chinese industrial economy. A slow-down in the Chinese industrial economy
could result in a softening of the market.
The Containership Market
The strong demand growth for containerships since 2003 has been supported by the
improving world oileconomy and expanding world trade. Historically, demand in 2005 of 83.59 million barrels per day (mbd), an increase of 1.05 mbd
from 2004. The Middle East, Chinafor
containerships has been highly sensitive to global economic growth.
Demand growth for containerships has been mainly driven by surging exports by
Asian countries and increasing imports by Europe and North America, contributed with 55% of this
increase which indicate their strongas well as
more intra-Asian trade. With an expected healthy outlook for global economic
growth.
Lack of spare oil production capacity drove crude oil pricesgrowth, it is expected that demand for containerships will continue to about $70 per
barrel towardsgrow
steadily until 2010.
One concern, however, arises from the endlarge orderbook for new ships entering the
market over the next three to four years. Because of the year and dampenedmany orders for new
vessels, the extremely strong growth in
oil consumption oforderbook currently stands at close to 4.0% in 2004 to 1.3% in 2005 according to the IEA.
China continued its rapid economic growth with full force in 2005 with GDP
increasing 9.9% however their growth in oil demand was down from 15.4% in 2004
to 2.4% in 2005. The hurricanes Katrina and Rita which hit the US Gulf Coast in
August and September were each among the top five most powerful storms of all
time and lead to damages to production platforms which caused additional ton
miles for the last quarter of 2005. It is estimated that hurricanes cut down
approximately 0.4 mbd in US production as an average over the year. Geopolitical
tension in Nigeria, Venezuela, Iraq, Iran and other parts of the Middle East,
which was given a lot of press attention, seems to have had limited effect on
their production as the OPEC members in total increased production by 3.2% in
2005 compared to total world supply which increased 1.3%.
The world VLCC fleet increased 4.7% in 2005 from 444 vessels to 465 vessels.
Only one VLCC was scrapped during the year while eight were converted. A total
of 30 were delivered during the year. The total order book for VLCCs was at 92
vessels at the end of 2005, of which 35 were ordered during the year. The size
of the world Suezmax fleet increased seven per cent in 2005 from 315 vessels to
337. Two Suezmaxes were scrapped while 24 were delivered. The total orderbook
for Suezmaxes was at 63 at the end of the year, of which seven were ordered
during the year. The total orderbooks for VLCCs and Suezmaxes equate to 19.8%
and 18.7%, respectively,half of the existing fleet.
Even though spotMost of the new capacity is expected in the post-Panamax vessel segment.
Industry sources expect that this will lead to an annual fleet growth of
approximately 10% per annum until 2010, similar to the historic average growth
rate for demand.
The Offshore Drilling Rig Market
The substantial oil price crash in 1998, caused by the Asian crisis, has for
many years deterred global oil majors from making significant expansion of
exploration and production budgets. However, with the strong upturn in oil
prices since 2003, exploration and production budgets have been increased to
meet growing oil demand and depletion of existing oil reserves in regions such
as the North Sea and the U.S. Gulf of Mexico.
The increase in the average oil price from $30 per barrel in 2003 to $60 per
barrel in 2006 is partly a result of the increased oil demand by Asian
developing countries. Oil producers have encountered difficulties coping with
growth in the increase in production required to meet this increase in demand.
Depletion of North Sea and U.S. Gulf of Mexico oil reserves, rising costs and
barriers to entry for foreign oil companies tapping into Russian oil reserves
and geopolitical issues that constantly disrupt steady oil supplies in West
Africa have led to increasing pressure on the limited spare capacity held by the
Middle East OPEC producers. As a consequence, oil majors have taken serious
efforts to increase their budgets for oil exploration and production.
According to industry experts, it is estimated that offshore oil production will
continue to grow through 2010, with production from deepwater sources taking the
lead. The focus of offshore services is on the North Sea, U.S. Gulf of Mexico,
Brazil, West Africa and South East Asia.
Strong growth in offshore production volume has also significantly improved the
demand outlook for offshore drilling rigs and supply vessels. The offshore
services markets have experienced tight conditions with fleet utilization
staying at over 90% for offshore drilling rigs in main areas. As a result, there
has been an increase in the newbuilding market rates have declinedfor offshore drilling units and
supply vessels during the first four monthspast two years. In particular, demand has increased
for drilling rigs capable of 2006,operating in harsh environments such as the Company believesNorth
Sea, boosting capacity utilization and consequently day rates.
With the outlook for the remainder of 2006 is positive.
The continuedestimated growth in oil consumption combined with relatively few deliveries,
combined with an increasing amountdemand and current orderbook, the offshore services
market is expected to continue to enjoy the high levels of conversions for other purposes, should
leadutilization seen to
date in 2007. The market balance is expected to soften gradually as more
newbuildings are delivered in 2008 and afterwards. Nevertheless according to
industry sources, it is expected that the offshore market will continue to enjoy
a positive demand environment for tankers.healthy outlook over the next four to five years.
However, market developments cannot always be predicted and may well differ from
our expectations.
Seasonality
WeOur tankers operate our tankers in markets that have historically exhibited seasonal
variations in demand and, therefore, charter rates. Tanker markets are typically
stronger in the winter months in the northern hemisphere due to increased oil
consumption. In addition, unpredictable weather patterns in the winter months
tend to disrupt vessel scheduling. The oil price volatility resulting from these
factors has historically led to increased oil trading activities and demand for
vessels.tankers. The change in demand for vessels may affect the charter rates that the
Charterer receivesFrontline Charterers receive for our vessels. Seasonality may also affect the
amount and timing of our profit sharing revenues.
Inflation
Although inflation has had a moderate impact on our corporate overheads and our
ship operating expenses, we do not consider inflation to be a significant risk
to direct costs in the current and foreseeable economic environment. In
addition, in a shipping downturn, costs subject to inflation can usually be
controlled because shipping companies typically monitor costs to preserve
liquidity and encourage suppliers and service providers to lower rates and
prices in the event of a downturn.
Results of Operations
Year ended December 31, 20052006 compared with the year ended December 31, 20042005
Operating revenues
- --------------------------------------------------------------------------------
(in thousands of $) 2006 2005
2004- --------------------------------------------------------------------------------
Time charter revenues ..........................53,087 62,605 86,741
Bareboat charter revenues.......................revenues 3,986 7,325 27,453
Voyage charter revenues ........................(709) 9,745 49,707
Finance lease interest income ..................182,580 177,474 140,691
Finance lease service revenues..................revenues 106,791 92,265 72,551
Profit sharing revenues.........................revenues 78,923 88,096
114,926
----------------------------------------------
Total operating revenues .......................424,658 437,510
492,069
----------------------------------------------
Total operating revenues decreased 11%3% in the year ended December 31, 20052006
compared with 2004. The decrease in operating2005.
Time charter revenues in 2005 primarily
reflects the change in employmentconsist mainly of our vessels in addition to reduced profit
share incomerevenues received from Frontline. In the first six monthsas a result of
2004, the
majority of our vessels were completingincomplete third party charters prior to commencingon vessels acquired from Frontline. As at
December 31, 2006 only two of the vessels originally acquired from Frontline
remained on such third party charters. During 2006, four third party charters
expired and the vessels commenced employment with the Frontline whereas in 2005, all but six of our tankers have
commenced full employment with Frontline and are nowCharterers
operating under the fixed rate charter arrangements and are accounted for as
finance leases. During the period of third party employment, we recorded time
charter, bareboat charter, and voyage charter revenue for the vessels.
Subsequent to the completion of third party charters, vessels under finance
leases provide earnings in the form of lease interest income, lease service
revenue and profit share.
In 2005, two vessels accounted for a significant portion of voyage charter
revenues due to lucrative spot market rates prior to their employment with
Frontline.
Voyage charter revenues included demurrage, despatch, pool earnings and other
operating income which are subject to various adjustments, e.g. loss of hire,
vendor rebates and underperformance claims. These adjustments have resulted in a
negative figure in 2006.
The increase in finance lease interest income from 2005 to 2006 results from the
new leasing contracts with SeaDrill Invest I for the West Ceres jack-up drilling
rig, which commenced June 30, 2006. In addition, during 2006, four vessels were
redelivered following the completion of charters to third parties. On
redelivery, each commenced time charter contracts with the Frontline Charterers.
Finance lease service revenues, which are based on a fixed daily rate, increased
in 2006 because of the change in employment of the four above mentioned
vessels.
At December 31, 2006 all but two of our tankers had completed their
pre-acquisition charters to third parties. The remaining vessels on charter to
third parties completed their charters during the first half of 2007. After
these two charters completed in the second quarter of 2007, most revenues from
the tankers in our current fleet is derived from finance leases and our profit
sharing arrangement with the Frontline Charterers.
Each of the Frontline Charterers has agreed to pay us a profit sharing payment
equal to 20% of the charter revenues for the applicable period, calculated
annually on a TCE basis for the VLCCs Suezmaxes and OBOs, realized by that
Frontline Charterer for our vessels in excess of the base charterhire for those
vessels. For the year ended December 31, 2006 we earned total profit share
revenues from the Frontline Charterers in the amount of $78.9 million (2005:
$88.1 million). The decrease in profit sharing revenue is directly related to
decrease in average TCE earned by these vessels while employed by Frontline in
2006.
Cash flows arising from finance leases
The following table analyzes our cash flows from the charters to the Frontline
Charterers and SeaDrill Invest I during 2006 and 2005 and how they are accounted
for:
(in thousands of $)
2006 2005
Charterhire payments accounted for as:
Finance lease interest income 182,580 177,474
Finance lease service revenues 106,791 92,265
Finance lease repayments 136,701 94,777
Deemed equity contributions received 31,741 50,560
--------------------
Total charterhire paid 457,813 415,076
--------------------
We allocate $6,500 per day from each time charter payment from the Frontline
Charterers as finance lease service revenue.
Certain of our vessels acquired as part of the original spin-off were on charter
to third parties as at January 1, 2004 when our charter arrangements with the
first of the Frontline Charterers became economically effective. Our charter
arrangements with the Frontline Charterers become economically effective on the
date of delivery of the vessel to Frontline Charterers. Our arrangement with the
Frontline Charterers is that while our vessels are completing performance of
third party charters, we pay the Frontline Charterers all revenues we earn under
third party charters in exchange for the Frontline Charterers paying us the
agreed upon charterhire rates. We account for the revenues received from these
third party charters as time charter, bareboat or voyage revenues as applicable
and the subsequent payment of these amounts to the Frontline Charterers as
deemed dividends paid. We account for the charter revenues received from the
Frontline Charterers prior to the charters becoming effective for accounting
purposes, as deemed dividends received. For the year ended December 31, 2006 we
paid deemed dividends in the amount of $7.2 million (2005: $16.5 million) to the
Frontline Charterers. The decrease in deemed dividends paid is due to the fact
that that all but two of our tankers had completed their respective third party
charters as of December 31, 2006.
Voyage expenses
Voyage expenses are derived from vessels which were on charter to third parties
on their delivery date to us. Voyage expenses have decreased in 2006 as fewer
vessels are on voyage charter to third parties. We do not expect to report
further significant voyage expenses.
Ship operating expenses
Ship operating expenses increased 7% from $110.2 million for the year ended
December 31, 2005 to $118.0 million for the year ended December 31, 2006
primarily due to the change in employment of our tankers. In 2006 four of our
tankers were redelivered from bareboat charters and resumed vessel management
with Frontline Management.
Ship operating expenses in 2006 are primarily comprised of our payments to
Frontline Management of $6,500 per day under the management contracts for our
tankers and OBOs chartered to the Frontline Charterers. They also include ship
operating expenses for two of our containerships that are managed by unrelated
third parties.
Administrative expenses
Administrative expenses increased from $2.5 million in 2005 to $6.6 million in
2006. This increase is primarily due to the establishment of our own management
organization in 2006 and consequent staff costs. Prior to 2006, all
administrative activities were outsourced to Frontline Management in conjunction
with our administrative services agreement and comprised a fee of $20,000 per
vessel owning subsidiary plus $20,000 paid by us. Fees payable under this
agreement amounted to $1.0 million in the year ended December 31, 2006 (December
31, 2005: $1.0 million). Frontline Management provides administrative services
under this agreement, which include accounting, corporate secretarial and other
services.
Additionally, we pay expenses that are not covered by this agreement which
include audit and legal fees, listing fees and other professional charges.
Commencing in 2007, some of the compensation to Frontline Management will be
based on cost sharing for the services rendered based on actual incurred costs
plus a margin.
Depreciation expense
Depreciation expenses for the year ended December 31, 2006 was $14.5 million
compared to $19.9 million for the year ended December 31, 2005. Depreciation
expenses relate to the vessels on charters accounted for as operating leases. In
2006, four such Frontline vessels were redelivered from third party charters and
are now being accounted for as finance leases, thus contributing to the decrease
in depreciation from 2005. We expect that our depreciation charge relating to
our tankers on charter to the Frontline Charterers will continue to decrease as
the remaining vessels have now completed their charters to third parties.
However, those decreases are likely to be offset as we expand our fleet.
Interest income
Interest income has increased by $0.6 million for the year ended December 31,
2006. The increase is a result of the increase in funds on deposit during the
year.
Interest expense
(in thousands of $) 2006 2005 Change (%)
Interest on floating rate loans 80,453 50,951 58%
Interest on 8.5% Senior Notes 38,881 41,614 (7%)
Swap interest (income) (8,815) 2,846 n/a
Amortization of deferred charges 3,069 16,524 (81%)
---------------------------------
113,588 111,935 1%
---------------------------------
At December 31, 2006, we had total debt outstanding of $1,915.2 million
comprised of $449.1 million aggregate principal amount of 8.5% senior notes and
$1,466.1 million under floating rate secured credit facilities. At December 31,
2005 we had total debt outstanding of $1,793.7 million, $457.1 million related
to the 8.5% senior notes and $1,336.6 million of which was floating rate debt.
Overall, interest expense has increased due to increased underlying interest
rates. This has been partially offset by swap interest income, and by the
decrease in senior notes interest, as the Company repurchased and cancelled $8.0
million of the notes during 2006.
At December 31, 2006, we were party to interest rate swap contracts which
effectively fix our interest rate on $738.7 million of floating rate debt at a
weighted average rate of 4.15% per annum. At December 31, 2005 we were party to
interest rate swap contracts with a notional principal amount of $568.3 million.
Swap interest has decreased due to the increase in the three month LIBOR
throughout 2006.
Amortization of deferred charges decreased 81% in 2006 to $3.1 million because
2005 included the write off of deferred charges associated with a refinancing of
a $1,058.0 million credit facility
Other financial items
Other financial items consist of mark to market valuation changes on our
interest rate swap contracts and our bond swap. In 2006 we recorded an expense
of $2.8 million in relation to the mark to market as compared to income of $14.7
million in 2005. The significant change is primarily a result of five new swap
contracts entered into in association with the Horizon Lines arrangement. The
new swaps have a notional principal, at December 31, 2006, of $207.9 million and
fix our LIBOR debt at 5.65% per annum, which is significantly higher than the
weighted average of 3.56% per annum for the remaining swaps which bear a
combined notional principal of $530.8 million.
Equity in earnings of unconsolidated subsidiaries
As of December 31, 2006, we have accounted for one investment under the equity
method as discussed in Note 12 of the financial statements included herein.
Year ended December 31, 2005 compared with the year ended December 31, 2004
Operating revenues
(in thousands of $) 2005 2004
Time charter revenues 62,605 86,741
Bareboat charter revenues 7,325 27,453
Voyage charter revenues 9,745 49,707
Finance lease interest income 177,474 140,691
Finance lease service revenues 92,265 72,551
Profit sharing revenues 88,096 114,926
-----------------------
Total operating revenues 437,510 492,069
-----------------------
Total operating revenues decreased 11% in the year ended December 31, 2005
compared with 2004. The decrease in operating revenues in 2005 primarily
reflects the change in employment of our vessels in addition to reduced profit
share income received from the Frontline Charterers. In the first six months of
2004, the majority of our vessels were completing third party charters prior to
commencing employment with the Frontline Charterers, whereas in 2005, all but
six of our tankers had commenced full employment with the Frontline Charterers
and are now operating under the fixed rate charter arrangements and are
accounted for as finance leases.
As of December 31, 2005 18 of our 22 Suezmax tankers and 26 of our 28 VLCC
tankers havehad commenced employment with the Frontline Charterers under long term
charters that are accounted for as finance leases. Finance lease interest income
and finance lease services revenues increased by 26% and 27% respectively in the
year ended December 31, 2005. This increase is explained by the increase in the
number of vessels accounted for as finance leases, 44 in 2005 compared with 40
at December 31, 2004.
At December 31, 2005 all but six of our tankers had completed their charters to
third parties. We expect theThe remaining vessels on charter to third parties to
complete these arrangements between January 1, 2006 and December 31,completed their
charters during the first half of 2007. After these charters are completed we expect that all
revenues from our current fleet of tankers will beare derived from finance leases and
our profit sharing arrangement with Frontline.the Frontline Charterers.
In addition to operating revenues from our tankers we have also recorded time charter
revenues in connection with our two containerships which arewere on time charter to
unrelated third parties.
The following table analyzes our cash flows from the charters to the Frontline
Charterers during 2005 and 2004 and how they arewere accounted for:
(in thousands of $)
2005 2004
Frontline charterhire payments accounted for as:
Finance lease interest income .............. 177,474 140,691
Finance lease service revenues...............revenues 92,265 72,551
Finance lease repayments.....................repayments 94,777 61,990
Deemed equity contributions received.........received 50,560 97,118
-------------------------------------------------
Total charterhire paid............................paid 415,076 372,350
-------------------------
We allocate $6,500 per day from each time charter payment as finance lease
service revenue. The balance of each charter payment is allocated between
finance lease interest income and finance lease repayment in order to produce a
constant periodic return on the balance of our net investments in finance
leases. Accordingly as the balance of our net investments in finance leases
decreases, we will allocate less of each charter payment as finance lease
interest income and more as finance lease repayments. At December 31, 2005 the
average implicit interest rate for our finance leases was 8.3% (December 31,
2004: 8.9%).
Certain of our vessels acquired in 2005 were on charter to third parties at the
delivery date to the Company and certain of our vessels acquired as part of the
original purchase of the Vessel Interests were on charter to third parties as at
January 1, 2004 when our charter arrangements with Frontline Shipping Limited
became economically effective. Our charter arrangements with the Charterers
become economically effective on the date of delivery of the vessel to such
Charterers. Our arrangement with the Charterers is that while our vessels are
completing performance of third party charters, we pay the Charterers all
revenues we earn under third party charters in exchange for the Charterers
paying us the agreed upon charterhire rates. We account for the revenues
received from these third party charters as time charter, bareboat or voyage
revenues as applicable and the subsequent payment of these amounts to Frontline
as deemed dividends paid. We account for the charter revenues received from the
Charterers prior to the charters becoming effective for accounting purposes, as
deemed dividends received.-----------------------
For the year ended December 31, 2005 we paid deemed dividends in the amount of
$16.5 million (2004: $59.0)$59.0 million) to Frontline.the Frontline Charterers. The significant
decrease in deemed dividends paid iswas due to the fact that the majority of our
fleet of tankers completed their respective third party charters in 2004.
Each of the Frontline Charterers has agreed to pay us a profit sharing payment
equal to 20% of the charter revenues for the applicable period, calculated
annually on a TCE basis, realized by that Frontline Charterer for our fleet in
excess of the weighted
average rate of the base charterhire. For the year ended December 31, 2005 we earned
total profit share revenues from the Frontline Charterers in the amount of $88.1
million (2004: $114.9 million). The decrease in profit sharing revenue iswas
directly related to decrease in average TCE earned by the fleet while employed
by Frontline in 2005.
Voyage expenses
Voyage expenses of $3.6 million in 2005 arewere derived from vessels which were on
charter to third parties on the delivery date to the Company. Voyage expenses
have decreased 64% from $10.0 million for the year ended December 31, 2004, as
fewer vessels were on charter to third parties during the period. We do not
expect to report further significant voyage expenses.
Ship operating expenses
Ship operating expenses have increased 14% from $96.5 million for the year ended
December 31, 2004 to $110.2 million for the year ended December 31, 2005
primarily due to the increase in our fleet of tankers and the addition of two
containerships. Ship operating expenses in 2005 arewere primarily comprised of our
payments to Frontline Management of $6,500 per day under the management
contracts for our tankers. They also includeincluded ship operating expenses for our
two containerships that are managed by unrelated third parties. The management
fees are payable on each of our vessels, except those that Frontline has electedCharterers
elect to bareboat charter from us. At December 31, 2005, five of our vessels
were bareboat chartered.
Administrative expenses
Administrative expenses in 2005 comprisecomprised a fee of $20,000 per vessel owning
subsidiary plus $20,000 paid by us to Frontline Management under the terms of
our administrative service agreement. Fees payable under this agreement amounted
to $1.0 million in the year ended December 31, 2005 (December 31, 2004: $0.9
million).
Frontline provides administrative services under this agreement, which
include accounting, corporate secretarial and investor support. Additionally, we
pay expenses that are not covered by this agreement which include audit and
legal fees, listing fees and other professional charges.
Depreciation expense
Depreciation expensesexpense for the year ended December 31, 2005 was $19.9 million
compared to $34.6 million for the year ended December 31, 2004. Depreciation
expenses relate to the vessels on charters to third parties that are accounted
for as operating leases. The reduction in 2005 iswas due to the fact that in 2004
we recorded depreciation on vessels during the period before they commenced
employment with the Frontline Charterers under long term charters. In 2005 we
recorded the majority of depreciation on the six vessels trading on third party
timecharters.
With the exception of our containerships, we expect that our total depreciation
charge will continue to decrease as vessels complete their charters to third
parties.time charters.
Interest income
Interest income has increased by $0.8 million for the year ended December 31, 2005. The increase is2005
as a result of the increase in funds on deposit during the year.
Interest expense
(in thousands of $) 2005 2004 Change
Interest on floating rate loans 50,951 26,723 91%
Interest on 8.5% Senior Notes 41,614 47,180 (12%)
Swap interest 2,846 12,545 (77%)
Amortization of deferred charges 16,524 9,485 74%
-------- ------------ --------------------------------------------
111,935 95,933 17%
-------- ------------ --------------------------------------------
At December 31, 2005, we had total debt outstanding of $1,793.7 million
comprised of $457.1 million aggregate principal amount of 8.5% Senior Notessenior notes and
$1,336.6 million under floating rate secured credit facilities. At December 31,
2004 we had total debt outstanding of $1,478.9 million, $530.3 million related
to the 8.5% Senior Notessenior notes and $948.6 million of which was floating rate debt.
Interest costs related to floating rate debt increased in 2005 due to the rising
LIBOR and also due to an increase in debt outstanding as the Company financed
the purchase of five VLCC's during the period. The increase in floating rate
interest costs was offset by the decrease in Senior Notessenior notes interest, as the
Company bought back and cancelled $73.2 million of the notes during 2005.
At December 31, 2005, we were party to interest rate swap contracts which
effectively fixfixed our interest rate on $568.3 million of floating rate debt at ana
weighted average rate of 3.7%. At December 31, 2004 we were party to interest
rate swap contracts with a notional principal amount of $581.4 million. Swap
interest has decreased due to the increase in the three month LIBOR throughout 2005.
Amortization of deferred charges increased by $7.0 million in 2005 compared with
2004 due to the write off of deferred charges associated with the refinancing of
the $1,058.0 million credit facility. In addition, deferred charges related to
the repurchase of $73.2 million in Senior Notessenior notes were written off during the
year.
Other financial items
In 2005 and 2004, other financial items primarily consisted of mark to market
valuation changes on our interest rate swap contracts of $14.7 million and $9.3
million, respectively.
Year ended December 31, 2004 compared with predecessor combined carve-out for
year ended December 31, 2003
Operating revenues
(in thousands of $) 2004 2003
Time charter revenues .......................... 86,741 40,759
Bareboat charter revenues....................... 27,453 25,986
Voyage charter revenues ........................ 49,707 628,323
Finance lease interest income .................. 140,691 -
Finance lease service revenues.................. 72,551 -
Profit sharing revenues......................... 114,926 -
----------- ----------
Total operating revenues ....................... 492,069 695,068
----------- ----------
Total operating revenues decreased 29% in the year ended December 31, 2004 as
compared to 2003. Operating revenues in 2004 include finance lease interest
income, finance lease service revenues, profit sharing revenues from our profit
sharing arrangement with Frontline and charter revenues for the period prior to
our vessels commencing trading under their charters to Frontline after January
1, 2004. They also include charter revenues for vessels trading under long term
charters to third parties during the period. The decrease in operating revenues
in 2004 primarily reflects the change in employment of our vessels. During 2004,
20 of our 24 Suezmax tankers and 20 of our 22 VLCC tankers had commenced
employment with Frontline under long term charters that were accounted for as
finance leases in 2004. At December 31, 2004 all but six of our vessels had
completed their charters to third parties. We expect the remaining vessels on
charter to third parties to complete these arrangements between January 1, 2006
and December 31, 2007. After these charters are completed we expect that all of
our revenues from our current fleet will be derived from finance leases and our
profit sharing arrangement with Frontline. In 2003, the combined predecessor
carve-out financial statements reflect that the majority of vessels were trading
in the spot market.
At December 31, 2004 the average implicit interest rate for our finance leases
was 8.9%.
For the year ended December 31, 2004 we paid deemed dividends in the amount of
$59.0 million to Frontline Shipping Limited in connection with vessels on
charter to third parties as described above.
For the final 11-month period in 2004 and for each calendar year after that,
each of the Charterers has agreed to pay us a profit sharing payment equal to
20% of the charter revenues for the applicable period, calculated annually on a
TCE basis, realized by that Charterer for our fleet in excess of the weighted
average rate of the base charterhire, which for the year ended December 31, 2004
were $25,575 per day for each VLCC and $21,100 per day for each Suezmax tanker.
For the year ended December 31, 2004 we earned total profit share revenues from
Frontline Shipping Limited in the amount of $114.9 million.
Voyage expenses
Voyage expenses of $10.0 million in 2004 are derived from voyages which were in
progress at January 1, 2004. Voyage expenses have decreased 93% from $148.5
million for the year ended December 31, 2003, as all of our vessels are now
employed under time or bareboat charters. We do not expect to report further
significant voyage expenses.
Ship operating expenses
Ship operating expenses have increased 18% from $82.0 million for the year ended
December 31, 2003 to $96.5 million for the year ended December 31, 2004
primarily due to the change in vessel management contracts. Ship operating
expenses in 2004 are primarily comprised of our payments to Frontline of $6,500
per day under the management contracts for our vessels. They also include ship
operating expenses for those vessels that were on voyages at January 1, 2004.
The management fees are payable on each of our vessels except those that
Frontline has elected to bareboat charter from us. At December 31, 2004, five of
our vessels were bareboat chartered. For the year ended December 31, 2003
operating expenses were based on actual costs incurred.
Administrative expenses
Administrative expenses in 2004 comprise a fee of $20,000 per vessel owning
subsidiary plus $20,000 paid by us to Frontline under the terms of our
administrative service agreement. Fees payable under this agreement amounted to
$960,000 in the year ended December 31, 2004. Administrative expenses reported
in our predecessor combined carve-out financial statements consist of an
allocation of total administrative expenses reported by Frontline.
Depreciation expense
Depreciation expenses for the year ended December 31, 2004 was $34.6 million
compared to $106.0 million for the year ended December 31, 2003. Depreciation
expenses relate to the vessels on charters to third parties that are accounted
for as operating leases. The reduction in 2004 is due to the fact that most of
our fleet is now employed under long term charters to Frontline that are
accounted for as capital leases. In 2003 we recorded depreciation on our entire
wholly-owned fleet of 42 vessels whereas in 2004 we recorded depreciation on
only six vessels throughout the period. Additionally we recorded depreciation on
vessels during the period before they commenced employment with Frontline under
long term charter. We expect that our total depreciation charge will continue to
decrease as vessels complete their charters to third parties.
Interest income
Interest income has decreased by $3.2 million for the year ended December 31,
2004. The decrease is a result of the decrease in interest income from loans to
associated companies. Our investment in these associated companies was
terminated in the first quarter of 2004.
Interest expense
2004 2003 Change
Interest on floating rate loans 26,723 30,258 (12%)
Interest on 8.5% Senior Notes 47,180 - -
Swap interest 12,545 3,831 227%
Amortization of deferred charges 9,485 1,088 772%
-------- -------- ---------
95,933 35,177 173%
------- -------- ---------
At December 31, 2004, we had total debt outstanding of $1,478.9 million
comprised of $530.3 million aggregate principal amount of 8.5% Senior Notes and
$948.6 million under a floating rate secured credit facility. At December 31,
2003 we had total debt outstanding of $991.6 million, all of which was floating
rate. Interest costs increased in 2004 principally due to the issuance of the
senior notes. At December 31, 2004, we were party to interest rate swap
contracts which effectively fix our interest rate on $581.4 million of floating
rate debt at an average rate of 3.8%. At December 31, 2003 we were party to
interest rate swap contracts with a notional principal amount of $152.7 million.
Swap interest has increased due to the increase in contracts and notional
principal amounts outstanding at December 31, 2004.
Amortization of deferred charges increased by $8.3 million in 2004 compared with
2003 due to additions that were incurred in relation to the issuance of the
senior notes, the draw down of the $1,058.0 million credit facility and the
write-off of $4.3 million of deferred charges related to refinanced facilities.
Other financial items and foreign exchange gains and losses
In 2004 and 2003, other financial items primarily consisted of mark to market
valuation changes on our interest rate swap contracts of $9.3 million and $5.6
million, respectively.
Foreign exchange losses have decreased from 2003 due to the repayment of our Yen
denominated debt. At December 31, 2004 we have no Yen denominated debt as
compared to Yen denominated debt of (Y)9.6 billion ($89.8 million) at December
31, 2003.
Liquidity and Capital Resources
We operate in a capital intensive industry and have historically financed ourindustry. Our purchase of the tankers in the
initial transaction with Frontline was financed through a combination of debt
issuances, an equity contribution from Frontline and borrowings from commercial
banks. Our subsequent transactions have been financed through a combination of
our own equity and borrowings from commercial banks. Our liquidity requirements
relate to servicing our debt, funding the equity portion of investments in
vessels, funding working capital requirements and maintaining cash reserves
against fluctuations in operating cash flows. Revenues from our time charters
and bareboat charters are received monthly in advance.advance, quarterly in advance or
monthly in arrears. Management fees are also payable monthly in advance.
Our funding and treasury activities are conducted within corporate policies to
maximize investment returns while maintaining appropriate liquidity for our
requirements. Cash and cash equivalents are held primarily in U.S. dollars, with
minimal amounts held in Norwegian Kroner.
Our short-term liquidity requirements relate to servicing our debt and funding
working capital requirements (including required payments under our management
agreements and administrative services agreements). Sources of short-term
liquidity include cash balances, restricted cash balances, short-term
investments, available amounts under a revolving credit facility and receipts
from our charters. We believe that our cash flow from the charters will be
sufficient to fund our anticipated debt service and working capital requirements
for the short and medium term.
Our long term liquidity requirements include funding the equity portion of
investments in new or replacement vessels, and repayment of long term debt balances including
those relating to our 8.5% Senior Notessenior notes due 2013, our $1,131.4 million secured
credit facility due 2011, and our $350.0 million secured creditterm loan facility due
2012.2012, our $165.0 million secured term loan facility due 2012, our $170.0 million
secured term loan facility due 2013, our $120 million secured term loan facility
due 2014, our $22.7 million secured term loan facility due 2016 and our $210.0
million secured term loan facility due 2019. To the extent we decide to acquire
additional vessels, we may consider additional borrowings and equity and debt
issuances.
At December 31, 2006, the Company had contractual commitments relating to
newbuilding contracts and vessel acquisitions totaling $362.5 million.
We expect that we will require additional borrowings or issuances of equity in
the long term to meet theseour capital requirements.
As of December 31, 20052006 and December 31, 2004,2005, we had cash and cash equivalents
(including restricted cash) of $34.4$77.5 million and $34.6$34.4 million, respectively. In
the year ended December 31, 2005,2006, we generated cash from operations of $280.8$193.5
million, used $269.6$110.7 million in investing activities and used $7.6$51.1 million in
financing activities.
On January 1, 2004, our charter agreements with Frontline Shipping and the
management agreements and administrative services agreements with Frontline
Management took economic effect. Under these agreements, we are contracted to
make payments and receive amounts that will impact our future liquidity
requirements.
During the year ended December 31, 2005 we paid cash dividends of $2.00 per
common share (December 31, 2004: $1.05), or a total of $148.9 million. In the
first quarter of 2006 we paid cash dividends of $0.50$2.05 per
common share (December 31, 2005: $2.00), or a total of $149.1 million. In the
first half of 2007 we paid cash dividends of $0.54 and $0.55 per share for a
total of $36.4 million.
Acquisitions and Disposals
We purchased our initial 46 vessel owning subsidiaries from Frontline on January
1, 2004 for a total purchase price of $1,061.8 million. The purchase price was
calculated as the book value of vessels owned by the subsidiaries of $2,048.4
million less related debt balances and other liabilities of $986.6 million which
we assumed. The purchase was partly funded by an equity contribution of $525.0
million from Frontline. Additionally we purchased Frontline's option to acquire
an additional VLCC for $8.4 million. This price represents the book value of the
option as recorded previously in Frontline's accounts.
In the year ended December 31, 2005 we acquired vessels and vessel owning
entities for a total cost of $598.0$39.3 million, and sold vessels for total proceeds
of $229.8$40.0 million as discussed below:
On January 17, 2005 the Company exercised its option to acquire the VLCC Oscilla
and the vessel was delivered to the Company on April 4, 2005. The purchase price
paid to acquire the vessel was equal to the outstanding mortgage debt under the
four loan agreements between lenders and the vessel's owning company. In
addition, the Company made a payment of $14.6 million to Frontline to reflect
the fact that the original purchase price was set assuming delivery to Ship
Finance on January 1, 2004 whereas delivery did not occur until April 4, 2005.
On the delivery date the vessel, which has been renamed Front Scilla, commenced
a fixed rate time charter to Frontline following the structure in place for
other vessels chartered to Frontline. The Company also entered into a fixed rate
management contract with Frontline Management for $6,500 per day with the same
term as the related time charter.
In March 2005, we sold a Suezmax tanker, the Front Fighter to an unrelated third
party for $68.3 million.
Between January and March 2005, we purchased three additional double hull VLCCs
from Frontline for an aggregate purchase price of $294 million. The acquisitions
of these vessels have been funded partly by the proceeds from the sale of the
Front Fighter in March 2005, partly from profit sharing payments that we
received from Frontline in respect of the 11-month period ended December 31,
2004, and partly from use of proceeds from our new secured credit facility.
We entered into an agreement in May 2005 with parties affiliated with Hemen to
acquire two vessel owning companies, each owning one 2005 built containership
for a total consideration of $98.6 million.
In May 2005, we sold the three Suzemaxes, Front Lillo, Front Emperor and Front
Spirit, for a total consideration of $92.0 million. These vessels were delivered
to their new owners in June 2005. In May 2005, we also agreed to buy a further
three vessels from Frontline, namely Front Traveller, Front Transporter, and
Front Target, for an aggregate amount of $92.0 million.
We entered into an agreement in June 2005 with parties affiliated to Hemen to
acquire two vessel owning companies, each owning one 2004 built VLCC, for total
consideration of $184 million.
In August 2005, we sold a Suezmax tanker, the Front Hunter to an unrelated third
party for net proceeds of $71.0 million.
In November of 2005 the bareboat charterer of the VLCC Navix Astral exercised an
option to purchase the vessel for approximately $40.5 million.
In January 2006 the Company acquired the VLCC Front Tobago from Frontline for
consideration of $40.0 million. Effective January 2006 this vessel has replaced
the Navix Astral and will fulfil the remainder of the Navix Astral time charter
with Frontline Shipping.
In April 2006, we entered into an agreement with Horizon Lines Inc. in which we
will acquire five 2,824 TEU container vessels being built at Hyundai Mipo yard
in Korea for consideration of approximately $280.0 million. The vessels will be
delivered over the course of five months commencing in early 2007, and will be
chartered back to Horizon Lines under 12 years bareboat charters with a three
year renewal option on the part of Horizon Lines. The latter will also have
options to buy the vessels after five, eight, 12 and 15 years.respectively.
Borrowings
As of December 31, 20052006 and December 31, 2004,2005, we had total long term debt
outstanding of $1,915.2 million and $1,793.7 million, respectively. In addition,
our wholly owned subsidiary Front Shadow had long term debt of $22.7 million
outstanding as of December 31, 2006. Front Shadow is accounted for using the
equity method, and $1,478.9 million, respectively.the outstanding long term debt does not appear in our
consolidated balance sheet.
As at December 31, 2005, this amount consisted of the2006, we had $449.1 million outstanding amount of $457.1
million from our issue in
2003 of $580.0 million 8.5% senior notes due 2013. In February
2004, we refinanced the existing debt on the vessels we acquired from Frontline
and entered into a new $1,058.0 million syndicated senior secured credit
facility. This facility bore interest at LIBOR plus 1.25% and was repayable
between 2004 and 2010 with a final bullet of $499.7 million payable on maturity.
In February 2005, we refinanced our existing $1,058.0 million secured credit
facility with a new $1,131.4 million secured credit facility. The newThis facility
bears interest at LIBOR plus a margin of 0.7%,0.70% per annum, is repayable over a
term of six years and has similar security terms to the repaid facility. In
September 2006, we signed an agreement whereby the existing debt facility which
had been partially repaid, was increased by $219.7 million to the original
outstanding amount of $1,131.4 million. The increase is available on a revolving
basis. At December 31, 2005,2006, the outstanding amount on this facility was $997.9$953.3
million. This facility contains a minimum value covenant, which requires that
the aggregate value of our vessels secured as collateral exceed 140% of the
outstanding amount of the facility. The new facility also contains covenants
that require us to maintain certain minimum levels of free cash, working capital
and equity ratios.
In June 2005, we entered into a combined $350.0 million senior and junior
secured term loan facility with a syndicate of banks. At December 31, 2005,2006, the
outstanding amount on this facility was $338.7$316.1 million. The proceeds of the
facility were used to partly fund the acquisition of five new VLCCs. The facility
bears interest at LIBOR plus a margin of 0.65% per annum for the senior loan and
LIBOR plus a margin of 1.00% per annum for the junior loan,loan. The facility is
repayable over a term of seven years
and has similar security terms as the $1,131.4
million facility. This new facility contains a minimum value covenant, which
requires that the aggregate value of our vessels exceed 140% of the outstanding
amount of the senior loan and, for as long as any amount is outstanding under
the junior loan, 125% of the total outstanding loan. The facility also contains
covenants that require us to maintain certain minimum levels of free cash,
working capital and equity ratios.
In April 2006, five vessel owning subsidiaries entered into a $210 million
secured term loan facility with a syndicate of banks. The facility is non
recourse to Ship Finance International Limited, as the holding company does not
guarantee this debt. The proceeds of the facility were used to partly fund the
acquisition of five newbuilding container vessels in connection with our
long-term bareboat charters to Horizon Lines. At December 31, 2006, the
outstanding amount under this facility was $41.6 million relating to the first
vessel, which was delivered during the fourth quarter 2006. The second vessel
was delivered during the first quarter of 2007, and the remaining three vessels
were delivered during the second quarter of 2007.
The facility bears interest at LIBOR plus a margin of 1.40% per annum, is
repayable over a term of 12 years and is secured by the vessel owning
subsidiaries' assets. The facility contains a minimum value covenant, which
requires that the aggregate value of our vessels exceed 120% of the outstanding
loan if there is a default under any of the charters. The vessel owning
subsidiaries have entered into 12 year interest rate swaps with a combined
notional principal amount of $207.9 million at rates of approximately 5.65% per
annum.
In June 2006, our subsidiary Rig Finance, entered into a $165 million secured
term loan facility with a syndicate of banks. The proceeds of the facility were
used to partly fund the acquisition of a newbuilding jack-up drilling rig. At
December 31, 2006, the outstanding amount under this facility was $155.1
million.
The facility bears interest of LIBOR plus a margin of 1.15% per annum as long as
the rig is employed under an initial sub-charter to a third party, but in no
event longer than the first 36 months, and LIBOR plus a margin of 1.20% per
annum thereafter. The facility contains a minimum value covenant, which requires
that the value of the rig exceed 120% of the outstanding loan during the period
up to six months prior to expiry of the initial sub-charter to the third party,
and 140% thereafter. The facility is repayable over six years and is secured by
the rig owning subsidiary's assets. The lenders have limited recourse to Ship
Finance International Limited as the holding company only guarantees $10 million
of this debt. The facility contains covenants that require us to maintain
certain minimum levels of free cash, working capital and equity ratios.
In June 2006, we entered into a $25 million secured revolving credit facility.
The proceeds of the facility were used to partly fund a VLCC acquired in January
2006. The facility was repaid in full in December 2006, when the vessel was sold
to an unrelated third party.
In September 2006, our subsidiary Front Shadow entered into a $22.7 million
secured term loan facility. The proceeds of the facility were used to partly
fund the acquisition of a 1997 built Panamax drybulk carrier. At December 31,
2006, the outstanding amount under this facility was $22.7 million. The facility
bears interest of LIBOR plus a margin of 0.59% per annum. The facility contains
a minimum value covenant, which requires that the value of the vessel exceed
110% of the outstanding loan during the first four years, and 125% thereafter.
The facility is repayable over ten years and is secured by the vessel owning
subsidiary's assets. The lenders have limited recourse to Ship Finance
International Limited as the holding company guarantees $2.1 million of this
debt.
In February 2007, our subsidiary, Rig Finance II, entered into a $170 million
pre- and post-delivery secured term loan facility with a syndicate of banks. The
proceeds of the facility will be used to partly fund the acquisition of a
newbuilding jack-up drilling rig. $85.6 million of the facility is available for
drawdown during the period before delivery of the rig from the yard, with the
remaining $84.4 million being available for drawdown upon delivery of the rig.
The facility bears interest of LIBOR plus a margin of 1.20% per annum up to and
including the delivery date of the rig. Following delivery, the facility bears
interest of LIBOR plus a margin based upon a grid between 0.90% per annum and
1.20% per annum depending on the ratio of the value of the rig to the
outstanding loan under the facility. The facility contains a minimum value
covenant, which requires that the value of the rig exceeds 120% of the
outstanding loan during the period up to six months prior to expiry of an
initial sub-charter to a third party, and 130% thereafter. The facility is
repayable over six years and is secured by the rig owning subsidiary's assets.
The lenders have limited recourse to Ship Finance International Limited as the
holding company only guarantees $30 million of this debt until the delivery from
the shipyard and $20 million thereafter. The facility contains covenants that
require us to maintain certain minimum levels of free cash, working capital and
equity ratios.
In March 2007, three vessel owning subsidiaries entered into a $120.0 million
secured term loan and guarantee facility with a syndicate of banks. The facility
is divided into a $48.5 million pre-delivery guarantee facility and a $120
million term loan facility, and will be used to partly fund the acquisition of
three newbuilding seismic vessels. The guarantee facility is for the purpose of
guaranteeing obligations under the construction contracts with the yard. The
proceeds from the term loan facility will be used to partly fund the acquisition
of the vessels upon delivery from the yard. The facility bears interest of LIBOR
plus a margin of 1.50% per annum for the first two years from delivery of the
first vessel, and thereafter bears interest of LIBOR plus a margin based upon a
grid between 1.25% per annum and 1.50% per annum depending on the ratio of the
aggregate value of the vessels to the outstanding loan under the facility. The
facility contains a minimum value covenant, which requires that the aggregate
value of our vessels, including seismic equipment, exceeds 130% of the
outstanding loan. The facility is repayable over six years and is secured by the
vessel owning subsidiaries' assets. The lenders have limited recourse to Ship
Finance International Limited as the holding company has provided a guarantee of
$48.5 million prior to delivery from the shipyard and $30 million of the debt
thereafter. The facility contains covenants that require us to maintain certain
minimum levels of free cash, working capital and equity ratios.
We were in compliance with all loan covenants at December 31, 2005.2006. At December
31, 2005,2006, three month LIBOR was 4.54%5.36%.
In AprilAt December 31, 2006, we had entered into a non recourse $210 million secured term loan
facility with a syndicate of banks. The proceeds of the facility will be used to
partly fund the acquisition of five new container vessels to be delivered over a
five-month period commencing in January 2007. The vessels will be chartered back
to Horizon Lines under a 12-year bareboat charter with a 3-year renewal option
on the part of Horizon Lines. The latter will also have options to buy the
vessels after five, eight, 12 and 15 years. The facility bears interest at LIBOR
plus a margin of 1.4%, is repayable over a term of 12 years and is secured by
the vessel owning subsidiaries' assets. This new facility contains a minimum
value covenant, which requires that the aggregate value of our vessels exceed
120% of the outstanding loan. The vessel owning subsidiaries have entered into
12 year interest rate swaps with a combined notional principal amount of $210
million at rates of approximately 5.65%.
In connection with the $1,058.0 million syndicated senior secured credit
facility, in the first quarter of 2004 we entered into new five year interest
rate swaps with a combined notional principal amount of $500.0 million at rates
between 3.3% and 3.5%. We also have existing interest rate swap contracts with a
combined notional principal amount of $68.3$738.7 million at rates between 6.0%3.32% per
annum and 6.5%.6.24% per annum. The overall effect of these swaps is to fix the
interest rate on $568.3$738.7 million of floating rate debt at 4.4% (exclusivea weighted average
interest of margin). Our4.15% per annum. At December 31, 2006, $166.4 million of the
interest rate swaps relate to committed but not outstanding debt on vessels not
yet delivered to us. Several of our charter contracts also contain interest
adjustment clauses, whereby the charter rate is adjusted to reflect the actual
interest paid on the outstanding loan, effectively transferring the interest
rate exposure to the counterparty under the charter contract. At December 31,
2006, $155.1 million of our outstanding debt was subject to such interest
adjustment clauses. At December 31, 2006, we had also entered into total return
bond swaps in respect of $52 million of our 8.5% debentures, which effectively
translates the underlying principle amount into floating rate debt
At December 31, 2006, our net exposure to interest rate fluctuations on our
outstanding debt was $790.6 million, compared with $768.3 million at December
31, 2005, compared
with $367.2 million at December 31, 2004. The refinancing of our credit facility
in February 2005 had no effect on these swap arrangements.2005. Our net exposure to interest fluctuations is based on our total
floating rate debt outstanding at December 31, 2006, plus the outstanding under
the bond swap line at December 31, 2006, less the outstanding floating rate debt
subject to interest adjustment clauses and the notional principal of our
floating to fixed interest rate swaps.swaps outstanding at December 31, 2006.
In addition, the outstanding debt of $22.7 million at December 31, 2006 in our
subsidiary Front Shadow, which is accounted for using the equity method, is
subject to an interest adjustment clause under the charter contract.
We use financial instruments to reduce the risk associated with fluctuations in
interest rates. We do not currently hold or issue instruments for speculative or
trading purposes.
In 20052006 we bought backrepurchased and cancelled 8.5% senior notes with a total principal
amount of $73.2$8.0 million. In AprilFebruary 2006 we entered into a Bond Swap Linetotal return bond
swap line with a bank in which the bank buys our senior notes, and we compensate
the bank for theirits funding cost plus a margin,margin. Through this arrangement, we keep the upside andare
able to realize profits, but guarantee against losses for the downside in the transaction.bank. During April and May 2006
the bank acquired senior notes with a total principal amount of $51.5 million.
Equity
We were initially capitalized with 12,000 shares of $1.00 each and an equity
contribution of $525.0$52.0 million
by Frontline. On May 18, 2004under this bond swap line. In February 2007, we issuedentered into an additional 73,913,837 sharesbond
swap line with a second bank and we hold bonds with a principal amount of $1.00 each to Frontline. This transaction was
recorded$5.0
million under this arrangement as an increase in share capital and a corresponding reduction in
contributed surplus at par value of the shares issued.
In July 2004, we issued 1,600,000 common shares to an institutional investor at
a price of $15.75 per share for total proceeds of $25.2 million.
In November and December 2004,June 15, 2007.
Equity
During 2006 we repurchased and cancelled 625,000 common
shares at an average price of $23.54 per share for a total amount of $14.8
million.
During 2005 we repurchased and cancelled a further 1,757,100400,000 common shares. The shares were
repurchased at an average price of $18.83$18.03 for a total amount of $33.1$7.2 million.
As each of ourthe vessels acquired from Frontline during the initial spin-off
completes the third party charters that were in place on January 1, 2004, the
finance leases with the relevant Frontline Charterer, entered into on January 1,
2004, become effective for accounting purposes. We have accounted for the
difference between the historical cost of the vessel originally transferred to
us by Frontline on January 1, 2004 at Frontline's historical carrying value, and the net investment in
the lease as a deferred deemed equity contribution. The difference is presented
as a reduction in the net investment in finance leases in the balance sheet.
This results from the related party nature of both the original transfer of the
vessel and the subsequent sales type lease. The deferred deemed equity
contribution is amortized as a credit to contributed surplus over the life of
the new lease arrangement as lease payments are applied to the principal balance
of the lease receivable. In the year ended December 31, 20052006 we accounted for
$9.2$30.0 million as amortization of such deemed equity contributions.contributions (2005: $9.2
million). The increase over 2005 is partially because the unamortized portion of
the deferred equity contribution for Front Tobago ($7.5 million) was credited to
contributed surplus because the Company sold the vessel to an unrelated third
party in December 2006. Also in June 2006 Frontline decided not to exercise the
right to sell a newbuilding VLCC to the Company to replace Front Hunter which
was sold to an unrelated third party in 2005. As a result, we credited the
remaining deferred equity contribution for this vessel ($6.1 million) to
contributed surplus in 2006.
Following these transactions, as of December 31, 2005,2006, our issued and fully paid
share capital balance was $73.1$72.7 million and our contributed surplus balance was
$441.1 million.
During the first five months of 2006, a further 400,000 common shares have been
repurchased and cancelled. The shares were repurchased at an average price of
$18.03 for a total amount of $7.2$464.5 million.
Contractual Commitments
At December 31, 2005,2006, we had the following contractual obligations and
commitments:
Payment due by period
Less than After
1 year 1 - 31-3 years 3 - 53-5 years After 5 years Total
-------------------- --------------- --------------- ---------------- --------------------------------------------------------------------
(in thousands of $)
$580 million 8.5% notes - - - 457,080 457,080
$1,131.4 million and $350
million credit facilities 122,519 245,038 245,038 723,982 1,336,577
-------------------- --------------- --------------- ---------------- -------------Senior Notes due 2013 -- -- -- 449,080 449,080
Floating rate debt 144,451 278,524 732,384 310,761 1,466,120
-------------------------------------------------------
Total contractual cash
obligations 122,519 245,038 245,038 1,181,062 1,793,657
-------------------- --------------- --------------- ---------------- -------------under existing loans 144,451 278,524 732,384 759,841 1,915,200
-------------------------------------------------------
Obligations under newbuilding
contracts and vessel
acquisitions 234,700 127,800 -- -- 362,500
-------------------------------------------------------
Total contractual cash
obligations 379,151 406,324 732,384 759,841 2,277,700
-------------------------------------------------------
Trend information
Our charters with the Frontline Charterers provide that daily rates decline over
the terms of the charters as discussed in Item 4.B "Our Fleet".
We pay daily management fees, which are payable by us monthly in advance, for
365 days per year (366 days in a leap year) for each of our vessels on charter
to the Frontline Charterers in the amount of $6,500.
Since December 31, 20052006, we have acquired one VLCCentered into several new agreements for both
the acquisition and agreedsale of assets. In January 2007, we entered in to an
agreement to acquire five
containershipsa newbuilding jack-up drilling rig currently under
construction, with expected delivery at the end of June 2007. In February 2007,
we entered into an agreement to be delivered over a five month period commencing January 2007.acquire two newbuilding Capesize drybulk
carriers, with expected delivery in 2008 and 2009. In March 2007, we entered
into an agreement to acquire three newbuilding seismic vessels, including
complete seismic equipment, with expected delivery in 2008. We have also
rechartered one single hull VLCC tanker in a hire-purchase agreement and sold
one VLCC tanker. We expectsix single hull Suezmax tankers in 2007.
The trend is that prices for both second-hand vessels and newbuilding contracts
are increasing. The same is the net increasecase for drilling rigs. This is in our fleet will
increase our total revenues.
To partly financeline with the
increasecurrent strong markets in our fleet sizemost sectors in 2007which we plan to increase our
level of indebtedness through a new non recourse credit facility inoperate, and also reflects
market expectations going forward. Available yard capacity for additional
newbuildings over the amount
of approximately $210.0 million; thisnext years is also limited. New contracts generally
provide for delivery from the builder from 2010 and after.
Interest rates have increased indebtednesssince December 31, 2006, which will increase our
interest expense. Our new non recourse secured credit facility which will be
drawnexpenses on our floating rate debt. We have effectively locked in 2007 bears a higherpart
of our interest margin (1.4%) thanexposure on our existing facilities
(0.65%-1.00%) and we have entered intofloating rate debt through swap agreements with
banks. Several of our charter contracts also include interest adjustment
clauses, whereby the charter rate is adjusted to reflect the actual interest
paid on the outstanding loan relating to the asset, effectively transferring the
interest rate swaps forexposure to our counterparty under the full amount
at an effective fixed rate of approximately 5.65%. Accordingly, we expect our
new facility will increase our average interest rate on our debt.
Since December 31, 2005charter contract.
So far in 2007, market rates for spot charteringchartered tankers have decreased.
All of ouron average
generally decreased compared to the same period in 2006. Our tanker vessels on
charter to the Frontline Charterers are subject to long term charters that
provide for both a fixed base charterhire and a profit sharing payment that
applies once the applicable Frontline Charterer earns daily rates from our
vessels that exceed certain levels. If market rates for spot market chartered
vessels decrease, our profit sharing revenues will decrease.likewise decrease for the
vessels operated by the Frontline Charterers in the spot market. The charter
contracts for the two jack-up drilling rigs on charter to Seadrill also include
profit sharing payments above certain base levels from certain dates. The
current market for jack-up rigs is strong, but should the market decrease, we
may not receive any revenues from the profit sharing agreements once they
commence.
Off balance sheet arrangements
At December 31, 20052006 we were not party to any arrangements which are considered
to be off balance sheet arrangements.
Liquidity and Capital Resources - Predecessor
As of December 31, 2003 and 2002, we had cash and cash equivalents of $26.5
million, and $20.6 million, respectively. We generated cash from operations of
$415.5 million in 2003. Net cash used in investing activities in 2003 was $51.6
million and related primarily to $70 million in funding payments to the various
investments in associated companies, in addition to $17 million received as
proceeds from the sale of investments in associated companies.
Cash used in financing activities was $358.0 million in 2003. In 2003 there were
$178.2 million in principal repayments on long term debt and a net reduction of
$178.8 million in the amount due to Frontline.
In July 2003 we disposed of our interests in Golden Lagoon Corporation and
Ichiban Transport Corporation for proceeds of $17 million.
In June 2003, we acquired the remaining 50% of the shares in Golden Tide
Corporation for $9.5 million.
We had total long term debt outstanding of $991.6 million at December 31, 2003..
As of December 31, 2003, all of our debt was floating rate debt. As of December
31, 2003, our interest rate swap arrangements effectively fixed our interest
rate exposure on $152.6 million of floating rate debt.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth information regarding our executive officers and
directors and certain key officers of Frontline Management AS, which is aour wholly owned subsidiary of Frontline,Ship Finance
Management AS, ("SFMAS"), who are responsible for overseeing the management
of our vessels. With the exception of Paul Leand , all of our current executive
officers and directors are officers and/or directors of Frontline, Frontline
Management and the Charterers.management.
Name Age Position
- ---- --- --------
Tor Olav Tr0im.................... 43Troim ............ 44 Director and Chairman of the Board
Paul Leand........................ 39Leand ................ 40 Director of the Company
Svein Aaser ............... 60 Director of the Company
Kate Blankenship.................. 41Blankenship .......... 42 Director of the Company and Chairperson of
the Audit Committee
Lars Solbakken.................... 49Solbakken ............ 50 Chief Executive Officer of Ship Finance
Management AS
Inger M. Klemp.................... 43Ole B. Hjertaker .......... 40 Chief Financial Officer of Frontline
Management AS
Oscar Spieler..................... 45 Chief Executive Officer of FrontlineShip Finance
Management AS
Under our constituent documents, we are required to have at least one
independent director on our boardBoard of directorsDirectors whose consent will be required to
file for bankruptcy, liquidate or dissolve, merge or sell all or substantially
all of our assets.
Certain biographical information about each of our directors and executive
officers is set forth below.
Tor Olav Tr0imTroim has been the Chairman of the Board since October 2003. He has
been Vice-President and a director of Frontline since November 3, 1997. He
previously served as Deputy Chairman of Frontline from July 4, 1997. Since MayUntil April
2000, Mr. Tr0imTroim was the Chief Executive Officer of Frontline Management AS, a
company which supports the Company in the implementation of decisions made by
the Board of Directors. Mr. Troim graduated as M.Sc Naval Architect from the
University of Trondheim, Norway in 1985. His experience includes Portfolio
Manager Equity in Storebrand ASA (1987-1990) and Chief Executive Officer for the
Norwegian Oil Company DNO AS (1992-1995). Since 1995, Mr. Troim has been a
director and Vice-Chairman of SeaTankers Management in Cyprus. In this capacity, he has acted as
Chief Executive Officer for the public companies Knightsbridge Tankers Ltd, a Bermuda company listed onLimited
and Golar LNG Limited (NASDAQ). Mr. Troim was also Chief Executive Officer of
Seadrill until the NASDAQ National Market. Hetakeover and integration of Smedvig ASA. Mr. Troim is
currently Vice Chairman of these three companies and in addition is a directormember of
Aktiv Inkasso ASA, a Norwegian Oslo Stock Exchange listed company andthe Boards in the public companies Golden Ocean Group Limited a Bermuda company listed on the Oslo Stock Exchange. Prior
to his service with Frontline, from January 1992, Mr. Tr0im served as Managing
Director(OSE), Aktiv
Kapital ASA (OSE) and a member of the Board of Directors of DNO AS, a Norwegian oil
company. Since May 2001, Mr. Tr0im has served as a director of Golar LNG
Limited, a Bermuda company listed on the Oslo Stock Exchange and the NASDAQ
National Market. Mr. Tr0im has served as a director of SeaDrill Limited, a
Bermuda company listed on the Oslo Stock Exchange, since May 2005.Marine Harvest ASA (OSE).
Paul Leand Jr., who is not affiliated with Frontline, serves as a Director of the Company. Mr. Leand is the Chief
Executive Officer and Director of AMA Capital Partners LLC, or AMA, an
investment bank specializing in the maritime industry. From 1989 to 1998 Mr.
Leand served at the First National Bank of Maryland where he managed the Bank's
Railroad Division and its International Maritime Division. He has worked
extensively in the U.S. capital markets in connection with AMA's restructuring
and mergers and acquisitions practices. Mr. Leand serves as a member of American
Marine Credit LLC's Credit Committee and served as a member of the Investment
Committee of AMA Shipping Fund I, a private equity fund formed and managed by
AMA.
Svein Aaser, serves as a Director of the Company. Mr. Aaser is the former
President and Chief Executive Officer of DnB NOR ASA. Prior to his position in
DnB NOR, Mr Aaser had a long career as a top executive in several companies,
including Nycomed Amersham plc., Storebrand Skade AS and Stabburet AS. Mr. Aaser
currently serves as a director on several boards, including Marine Harvest ASA,
Deep Sea Supply Plc and Laerdal Medical AS. Mr. Aaser acts as Executive Director
for Seatankers, a company indirectly controlled by Mr. Fredriksen.
Kate Blankenship has been a director of the Company since October 2003. Mrs.Ms.
Blankenship served as the Company's Chief Accounting Officer and Company
Secretary from October 2003 to October 2005. Mrs.Ms. Blankenship has been a director
of Frontline Ltd since August 2003, a director of Golar LNG Limited since 2003 and a
director of Golden Ocean Group Limited since October 2004. Mrs.Ms. Blankenship has served as a
director of SeaDrill LimitedSeadrill since May 2005.
Lars Solbakken has been employed as Chief Executive Officer of Ship Finance
Management AS since May 1, 2006. In the period from June 1997 until April 2006,
Mr. Solbakken was employed as General Manager of Fortis Bank in Norway and was
also responsible for the bank's shipping and oil service activities in
Scandinavia. From 1987 to 1997 Mr. Solbakken served in several positions in
Nordea Bank Norge ASA (previously Christiania Bank). He was Senior Vice
President and Deputy for the shipping, offshore and aviation group, head of
equity issues and merger & acquisition activities and General Manager for the
Seattle Branch. Prior to joining Nordea Bank Norge ASA, Mr. Solbakken worked
five years in Wilh. Wilhelmsen ASA as Finance Manager.
Inger M. KlempOle B. Hjertaker has served as Chief Financial Officer of FrontlineShip Finance
Management AS since June 1,September 2006. Mrs. Klemp has served as Vice PresidentPrior to joining Ship Finance, from August
2001 until sheMr. Hjertaker
was promoted. From 1992 to 2001 Mrs. Klemp serveda director in various
positions in Color Group ASA, a Norwegian cruise ferry operator. From 1989 to
1992 Mrs. Klemp served as Assistant Vice President in Nordea Bank Norge ASA
(previously Christiania Bank).
Oscar Spieler has served as Chief Executive Officerthe Corporate Finance division of Frontline Management AS
since October 2003, and prior to that time as Technical DirectorDnB NOR Markets, one of Frontline
Management AS since November 1999. From 1995 until 1999, Mr. Spieler served as
Fleet Manager for Bergesen, a major Norwegian gas tanker and VLCC owner. From
1986 to 1995, Mr. Spieler worked with the
Norwegian classification society DNV,
working both withworld's leading shipping and offshore assets.banks. Mr. Hjertaker has 12 years
corporate and investment banking experience, mainly within the
Maritime/Transportation industries.
B. COMPENSATION
During the year ended December 31, 2005,2006, we paid to our directors and executive
officers (three persons) aggregate cash compensation of $52,500$3.1 million and an aggregate amount of
$nil$0.2 million for pension and retirement benefits. We reimburse directors for
reasonable out of pocket expenses incurred by them in connection with their
service to us.
In addition to cash compensation, during 2006 we also recognized an expense of
$0.1 million related to the issue of 150,000 stock options to one of our
executive officers. The options vest over a three year period, with the first of
these options vesting in November 2007, and expire in November 2011. The
exercise price of the options is $22.85 per share.
The employment contract for one of our executive officers contains a share-based
bonus provision. Under the terms of the contract, the share based bonus is
calculated based on the annual increase in the share price of the Company, plus
any dividend per share paid, multiplied by a notional share holding of 200,000
shares. Any bonus related to the increase in share price is payable at the end
of each calendar year, while any bonus linked to dividend payments is payable on
the relevant dividend payment date. The share-based bonus fair value of $1.7
million at December 31, 2006 was recorded as a liability.
C. BOARD PRACTICES
In accordance with our Bye-laws the number of Directors shall be such number not
less than two as the Company by Ordinary Resolution may from time to time
determine and each Director shall hold office until the next annual general
meeting following his election or until his successor is elected. We have threefour
Directors.
We currently have an audit committee, which is responsible for overseeing the
quality and integrity of the Company's financial statements and its accounting,
auditing and financial reporting practices, the Company's compliance with legal
and regulatory requirements, the independent auditor's qualifications,
independence and performance and the Company's internal audit function.
In lieuAs a foreign private issuer we are exempt from certain requirements of the New
York Stock Exchange that are applicable to U.S. listed companies. For a compensation committee comprisedlisting
and further discussion of independent directors,how our Boardcorporate governance practices differ from
those required of Directors is responsible for establishingU.S. companies listed on the executive officers'
compensation and benefits. In lieuNew York Stock Exchange, please
visit the corporate governance section of a nomination committee comprised of
independent directors, our Board of Directors is responsible for identifying and
recommending potential candidates to become board members and recommending
directors for appointment to board committees.website at www.shipfinance.bm.
Our officers are elected by the Board of Directors as soon as possible following
each Annual General Meeting and shall hold office for such period and on such
terms as the Board may determine.
There are no service contracts between us and any of our Directors providing for
benefits upon termination of their employment or service.
D. EMPLOYEES
We currently employ one person, Mr Lars Solbakken. This is becausefour persons. We have contracted with Frontline Management
has assumed fulland other third parties for certain managerial responsibility for our fleet and
ourwith Frontline Management for some administrative services, including accounting
and corporate services.
E. SHARE OWNERSHIP
The beneficial interests of our Directors and officers in our common shares as
of June 2, 2006,15, 2007, were as follows:
Percentage of Common
Shares Common Shares
Director or Officer Common Shares of $1.00 each Shares Outstanding
- ------------------- ------------- -------------------------------------- --------------------
Tor Olav Tr0im 204,700Troim 203,132 *
Paul Leand - --- --
Kate Blankenship 3,7663,980 *
Svein Aaser 3,000 *
Lars Solbakken - -
Inger M. Klemp 14,13310,000 *
Oscar Spieler 14,083Ole B Hjertaker 4,000 *
* Less than one per cent
We do not have a share option plan and nonepercent.
As of our Directors and officers hold
anyJune 15, 2007, Ole B. Hjertaker holds 150,000 options to acquire our common
shares.shares in the Company. The options were granted under the Ship Finance
International Limited Share Option Scheme, which was approved by the board on
November 27, 2006. The options begin to vest in November 2007 and expire in
November 2011. The exercise price of the options is $22.85.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table presents certain information regarding the current ownership
of our Common Shares with respect to (i) each person who we know to own more
than five percent of our outstanding Common Shares; and (ii) all directors and
officers as a group as of June 2, 2006.15, 2007.
Owner Amount of Common Shares Owner Amount Percent Farahead Investment. Inc. 14,000,000 19.24%of Common Shares
----- ----------------------- ------------------------
Hemen Holding Ltd. 13,333,994 18.33%
Frontline Ltd. 8,084,686 11.11%
Fidelity Management & Research Company 3,977,763 5.33%18,128,176 24.92%
Farahead Investments Inc. 12,000,000 16.5%
All Directors and Officers
as a group (six(eight persons) 236,682 0.32%*
* Less than one per cent224,112 0.31%
Hemen Holding Ltd. is a Cyprus holding company, and Farahead Investments Inc. is
a Liberian company, both indirectly controlled by MrMr. John Fredriksen, who is Frontline's Chairman and
Chief Executive Officer.Fredriksen.
The Company's major shareholders have the same voting rights as other
shareholders of the Company.
As at June 2, 2006, 62,909,002 of our Common Shares were held by 23115, 2007, the Company had 291 holders of record in the United States.
We had a total of 72,743,737 of Commmon Shares and outstanding as of June 15,
2007.
We are not aware of any arrangements, the operation of which may at a subsequent
date result in a change in control.
B. RELATED PARTY TRANSACTIONS
We have acquired the majority of our assets which at May 11, 2006 consist
primarilyfrom Frontline. As of June 15, 2007
our fleet consists of 5265 vessels, from Frontline.13 of which are under construction. The
majority of our operations are conducted through contractual relationships
between us and other
affiliates of Frontline.parties indirectly controlled by Hemen. In addition, the majority
of our directors are also directors of Frontline.companies related to Hemen. We refer you
to Item 10.C "Material Contracts" for discussion of the material contractual
arrangements that we have with Frontline
and its affiliates.
We acquired our initial fleetaffiliates of 46 vessel owning subsidiaries and one
subsidiary with an option to acquire an additional vessel from Frontline
pursuant to a fleet purchase agreement between us and Frontline thatHemen.
As of June 15, 2006, we entered
into in December 2003. We paid a total of $1,061.8 million to Frontline being
the book value of assets transferred by Frontline less amounts of debt assumed.
As part of this spin-off transaction we also received an equity contribution of
$525.0 million from Frontline. We assumed senior secured indebtedness with
respect to our fleet in the amount of approximately $1,158 million.
We charter 5042 of our vessels to the Frontline Charterers
under long-term leases, most of which were given economic effect from January 1,
2004. In connection with these charters to the Frontline Charterers, we have
recognized the inception of net investments in finance leases of $1,876.5
million, additions during 20052006 of $137.0 million (2005: $647.8 millionmillion) and
disposals during 20052006 of $34.4 million (2005: $160.8 million.million). At December 31,
20052006 the balance of net investments in finance leases withto Frontline was $1,925.4$1,910.4
million (2004:
$1,718.6(2005: $1,925.4 million) of which $107.0$126.9 million (2004: $77.0(2005: $107.0 million)
represents short-term maturities.
We pay Frontline Management a management fee of $6,500 per day per vessel for
all of its
vessels withchartered to the exception of five which are bareboat chartered,Frontline Charterers resulting in expenses of
$105.2$116.1 million for the year ended December 31, 2005 (2004: 96.42006 (2005: $105.2 million). The
management fees have been classified as ship operating expenses.
We pay Frontlinehave an administrative managementservices agreement with Frontline Management under
which Frontline Management provides us with certain administrative support
services. For the year 2006, we and each of our vessel owning subsidiaries paid
Frontline Management a fixed fee of $20,000 per year for its services under the
agreement, and agree to reimburse Frontline Management for reasonable third
party costs, if any, advanced on our behalf by Frontline. For the year 2007,
some of the compensation to Frontline Management will be based on cost sharing
for the services rendered based on actual incurred costs plus $20,000 per vessel per year. Based on the current fleet we paida margin.
The Frontline $1.0
million in 2005 (2004: $960,000) under this arrangement. These fees have been
classified as administrative expenses.
FrontlineCharterers pay us profit sharing paymentson 20% of 20% earnings above average
base charter rates as presented in Item 5 "Trend Information" for the 11 month period beginning February 1, 2004, and each
year thereafter. During the year ended December 31, 2005,2006, we earned and
recognized revenue of $88.1$78.9 million (2004:
$114.9(2005: $88.1 million) under this
arrangement.
In 2005, we bought a further six vessels from Frontline, all of which have been
chartered back to Frontline Shipping II under long term charters. In January
2005, we bought the Front Century and Front Champion, for a total of $196
million. In March 2005, we bought the VLCC Golden Victory from Frontline for $98
million. In June 2005, we boughtsold the Suezmax Front Traveller, Front TransporterHunter to an unrelated third party for a
net gain of $25.3 million which was deferred. The charter and Front
Target for an aggregate of $92 million. Alsomanagement
agreements with Frontline relating to this vessel were terminated, and we paid
Frontline a $3.8 million termination fee, in June 2005, we purchased the Sea
Energy, Sea Force, Sea Alfa and Sea Beta from parties affiliated with Hemen for
total consideration of $282.6 million. The Sea Energy and Sea Force are
chartered backaddition to Frontline Shipping II, whilehaving the
Sea Alfaright to sell to Ship Finance a newbuilding VLCC and Sea Betacharter it back at reduced
charter rates. In June 2006, the parties agreed to cancel the agreement, and to
split the profit in accordance with the profit share agreement (80% to Frontline
and 20% to us), but adjusted for the residual value belonging to us. The
cancellation of this agreement resulted in net payment of $16.3 million to
Frontline, in addition to the earlier termination payment of $3.8 million. We
have been charteredbooked a net gain of $9 million relating to unrelated third parties, both until 2009.the sale of Front Hunter and
the cancellation of the option agreement in 2006.
In January 2006 we acquired the VLCC Front Tobago from Frontline for
consideration of $40.0 million. Effective JanuaryThe vessel was subsequently sold in December
2006 this vessel has replacedto an unrelated third party for $45.0 million. At the Navix Astral and will fulfil the remaindertime of the Navix Astral timesale the
vessel was on lease with one of the Frontline Charterers, and we paid a
termination fee of $9.6 million to Frontline to terminate the lease.
In April 2006, we entered into an agreement with Horizon Lines under which we
acquired five 2,824 TEU container vessels under construction at Hyundai Mipo
yard in Korea for consideration of approximately $280.0 million. The vessels
have been chartered back to Horizon Lines under 12-year bareboat charters with
three-year renewal options on the part of Horizon Lines. Horizon Lines has
options to buy the vessels after five, eight, 12 and 15 years. As part of this
transaction, Horizon Lines paid a commission to AMA for brokerage and financial
advice. One of our board members is associated with AMA.
In June 2006, Rig Finance, our wholly owned subsidiary, purchased the
newbuilding jack-up drilling rig West Ceres from SeaDrill Invest I, for a total
consideration of $210 million. Upon delivery to Rig Finance the rig was
immediately bareboat chartered back to SeaDrill Invest I for a period of 15
years. The charter party is fully guaranteed by Seadrill, the ultimate parent
company of SeaDrill Invest I. SeaDrill Invest I has been granted fixed price
purchase options after three, five, seven, 10, 12 and 15 years. The first
purchase option after three years is at $135.5 million and the last purchase
option after 15 years is at $60 million.
In July 2006, we entered into an agreement to acquire the 1997 built Panamax
drybulk carrier Golden Shadow for $28.4 million from Golden Ocean. The vessel
was chartered back to the seller for a period of 10 years upon delivery to us in
September 2006. As part of the agreement, Golden Ocean has provided an interest
free and non-amortizing seller's credit of $2.6 million. Golden Ocean has been
granted fixed purchase options after three, five, seven and 10 years. At the end
of the charter, we also have an option to sell the vessel back to Golden Ocean
at an agreed fixed price of $10.4 million, including the $2.6 million seller's
credit. We have secured a $22.7 million debt facility in connection with Frontlinethe
acquisition, of which $2.1 million is guaranteed by Ship Finance.
In November 2006, we announced that we had assumed two newbuilding Suezmax
tanker contracts from Frontline. The Suezmax vessels, of 156,000 dwt each, will
be built at Jiangsu Rongsheng Heavy Industries Group Co. Ltd. in China with
scheduled delivery in the first quarter of 2009 and third quarter of 2009. We
expect to market these vessels for medium to long-term employment.
In January 2007, we announced that Rig Finance II, a wholly owned subsidiary of
the Company had entered into an agreement to acquire the newbuilding jack-up
drilling rig West Prospero, from SeaDrill Invest II Ltd., or SeaDrill Invest II.
The purchase price for the drilling rig is $210.0 million and expected delivery
from Keppel Fels in Singapore is at the end of June 2007. Upon delivery, the rig
will be bareboat chartered back to SeaDrill Invest II for a period of 15 years.
The charter party is fully guaranteed by Seadrill, the ultimate parent company
of SeaDrill Invest II. SeaDrill Invest II has been granted fixed price purchase
options after three, five, seven, 10, 12 and 15 years. The first purchase option
after three years is at $142 million and the last purchase option after 15 years
is at $60 million.
In February 2007, we entered into an agreement to acquire two newbuilding
Capesize drybulk carriers from Golden Ocean. Delivery from the shipyard is
scheduled in the fourth quarter of 2008 and first quarter of 2009. Upon delivery
the vessels will commence fifteen year bareboat charter contracts to Golden
Ocean. Golden Ocean has been granted fixed price purchase options after five, 10
and 15 years at $61 million, $44 million and $24 million respectively.
In January 2007, we sold five single hull Suezmax tankers to Frontline. The
gross sales price for the vessels was $183.7 million, and the Company receiving
approximately $119.2 million in cash after paying compensation of approximately
$64.5 million to Frontline for the termination of the charters. The vessels were
delivered to Frontline in March of 2007.
In January 2007, we sold the single-hull Suezmax tanker Front Transporter to an
unrelated third party for a gross sales price of $38.0 million. The vessel was
delivered to its new owner untilin March 2007, and we have agreed to pay a
termination fee of $14.9 million to Frontline for the termination of the related
charter.
In May 2007, we re-chartered the single-hull VLCC Front Vanadis to an unrelated
third party. The new charter is in the form of a hire-purchase agreement, where
the vessel is chartered to the buyer for a 3.5 year period, with a purchase
obligation at the end of the charter. We have agreed to pay a compensation
payment of approximately $13.2 million to Frontline for the termination date in January 2014.of the
charter.
C. INTERESTS OF EXPERTS AND COUNSEL
Not ApplicableApplicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18.
Legal Proceedings
Our shipowning subsidiaries are routinely party, as plaintiff or defendant, to
claims and lawsuits in various jurisdictions for demurrage, damages, off hire
and other claims and commercial disputes arising from the operation of their
vessels, in the ordinary course of business or in connection with its
acquisition activities. We believe that resolution of such claims will not have
a material adverse effect on our operations or financial conditions.
Dividend Policy
TheOur Board initiallyof Directors adopted a policy in May, 2004, followingin connection with our
public listing, whereby we would seek to have a normalregular quarterly dividend, targetthe
amount of $0.25 per share per
quarter. In August, 2004,which is based on our contracted revenues and growth prospects. Our
goal is to increase our quarterly dividend as we grow the targeted normal dividend was increased to $0.35
per sharebusiness, but the
timing and amount of dividends, if any, is at the discretion of our Board of
Directors and will depend upon our results of operations, financial condition,
cash requirements, restrictions in November 2004, the targeted normal dividend was increased to
$0.45 per share.financing arrangements and other relevant
factors.
We have paid the following cash dividends since our public listing in June 2004.2004:
Payment Date Amount per Share
- ------------ ----------------
2004
July 9, 2004 $0.25
September 13, 2004 $0.35
December 7, 2004 $0.45
2005
March 18, 2005 $0.50
June 24, 2005 $0.50
September 20, 2005 $0.50
December 13, 2005 $0.50
2006
March 20, 2006 $0.50
The timing and amountJune 26, 2006 $0.50
September 18, 2006 $0.52
December 21, 2006 $0.53
On February 27, 2007 the Board declared a dividend of dividends, if any, is at$0.54 per share that was
paid on March 22, 2007. On May 29, 2007, the discretionBoard declared a dividend of our Board of
Directors and will depend upon our results of operations, financial condition,
cash requirements, restrictions in financing arrangements and other relevant
factors.$0.55
per share that was paid on June 21, 2007.
B. SIGNIFICANT CHANGES
We were incorporated in Bermuda in October 2003 as a wholly owned subsidiary of
Frontline for the purpose of acquiring certain of our shipping assets. During
2004, Frontline distributed approximately 48.3% of its shares in us to its
shareholders and at December 31, 2004 held 50.8% in the Company. See Item 4.
Information"Information on the Company."
In February and March 2005, Frontline spun off a further 35% of its shares in
the CompanyShip Finance to its shareholders.shareholders and at December 31 2005 Frontline held 16.2% of
Ship Finance. In February 2006, a further 5% of Frontline's interest in Ship
Finance was spun off andafter which Frontline holdsheld approximately 11.1% of our
shares as at June 2December 31, 2006. These shares were distributed by Frontline to
its shareholders on March 22, 2007 following which Frontline holds a minimal
number of shares in Ship Finance.
ITEM 9. THE OFFER AND LISTING
Not applicable except for Item 9.A. 4. and Item 9. C.
The Company's Common Sharescommon shares were listed on the New York Stock Exchange, ("NYSE")or NYSE,
on June 17,15, 2004 and commenced trading on that date under the symbol "SFL".
The following table sets forth the fiscal years high and low prices for the
Common Sharescommon shares on the NYSE since the date of listing.
High Low
------ ------
Fiscal year ended December 31
2006 $23.80 $16.33
2005 $24.00 $16.70
2004 $26.16 $11.55
The following table sets forth, for each full financial quarter for the two most
recent fiscal years, the high and low prices of the Common Sharescommon shares on the NYSE
since the date of listing.
High Low
------ ------
Fiscal year ended December 31, 2006
First quarter $18.75 $16.70
Second quarter $17.64 $16.33
Third quarter $21.00 $17.91
Fourth quarter $23.80 $19.31
High Low
------ ------
Fiscal year ended December 31, 2005
First quarter $24.00 $18.41
Second quarter $20.79 $18.05
Third quarter $20.83 $17.67
Fourth quarter $20.25 $16.70
Fiscal year ended December 31, 2004
Second quarter $16.00 $11.55
Third quarter $22.75 $14.30
Fourth quarter $26.16 $18.64
The following table sets forth, for the most recent six months, the high and low
prices for the Common Sharescommon shares on the NYSE.
High Low
------ ------
May 2007 $31.07 $29.29
April 2007 $29.94 $27.44
March 2007 $27.90 $25.15
February 2007 $26.10 $23.86
January 2007 $23.86 $22.24
December 2006 $19.78 $18.21
April 2006 $17.72 $16.52
March 2006 $18.46 $16.57
February 2006 $18.70 $17.92
January 2006 $19.15 $16.30
December 2005 $18.70 $16.70$23.80 $22.22
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not Applicable
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The Memorandum of Association of the Company has previously been filed as
Exhibit 3.1 to the Company's Registration Statement on Form F-4/A, (Registration
No. 333-115705) filed with the Securities and Exchange Commission on May 25,
2004, and is hereby incorporated by reference into this Annual Report.
At the 2006 Annual General Meeting of the Company the shareholders voted to
amend the Company's Bye-Law 104. The purpose of this amendment was to provide
for a change to the requirements for the form and signatories to the seal of the
Company. These amended Bye-Laws of the Company as adopted by shareholders on
December 1, 2006 are filed as Exhibit 1.4 to this Annual Report.
The purposes and powers of the Company are set forth in Items 6(1) and 7(a)
through (h) of our Memorandum of Association and in the Second Schedule of the
Bermuda Companies Act of 1981 which is attached as an exhibit to our Memorandum
of Association. These purposes include exploring, drilling, moving, transporting
and refining petroleum and hydro-carbon products, including oil and oil
products; the acquisition, ownership, chartering, selling, management and
operation of ships and aircraft; the entering into of any guarantee, contract,
indemnity or suretyship and to assure, support, secure, with or without the
consideration or benefit, the performance of any obligations of any person or
persons; and the borrowing and raising of money in any currency or currencies to
secure or discharge any debt or obligation in any manner.
Bermuda law permits the Bye-laws of a Bermuda company to contain a provision
eliminating personal liability of a director or officer to the company for any
loss arising or liability attaching to him by virtue of any rule of law in
respect of any negligence default, breach of duty or breach of trust of which
the officer or person may be guilty. Bermuda law also grants companies the power
generally to indemnify directors and officers of the company if any such person
was or is a party or threatened to be made a party to a threatened, pending or
completed action, suit or proceeding by reason of the fact that he or she is or
was a director and officer of the company or was serving in a similar capacity
for another entity at the company's request.
Our shareholders have no pre-emptive, subscription, redemption, conversion or
sinking fund rights. Shareholders are entitled to one vote for each share held
of record on all matters submitted to a vote of our shareholders. Shareholders
have no cumulative voting rights. Shareholders are entitled to dividends if and
when they are declared by our Board of Directors, subject to any preferred
dividend right of holders of any preference shares. Directors to be elected by
shareholder require a plurality of votes cast at a meeting at which a quorum is
present. For all other matters, unless a different majority is required by law
or our bye-laws, resolutions to be approved by shareholders require approval by
a majority of votes cast at a meeting at which a quorum is present.
Upon our liquidation, dissolution or winding up, shareholders will be entitled
to receive, rateably, our net assets available after the payment of all our
debts and liabilities and any preference amount owed to any preference
shareholders. The rights of shareholders, including the right to elect
directors, are subject to the rights of any series of preference shares we may
issue in the future.
Under our bye-laws annual meetings of shareholders will be held at a time and
place selected by our boardBoard of directorsDirectors each calendar year. Special meetings of
shareholders may be called by our boardBoard of directorsDirectors at any time and must be
called at the request of shareholders holding at least 10% of our paid-up share
capital carrying the right to vote at general meetings. Under our bye-laws five
days' notice of an annual meeting or any special meeting must be given to each
shareholder entitled to vote at that meeting. Under Bermuda law accidental
failure to give notice will not invalidate proceedings at a meeting. Our boardBoard
of directorsDirectors may set a record date at any time before or after any date on which
such notice is dispatched.
Special rights attaching to any class of our shares may be altered or abrogated
with the consent in writing of not less than 75% of the issued and shares of
that class or with the sanction of a resolution passed at a separate general
meeting of the holders of such shares voting in person or by proxy.
Our Bye-laws do not prohibit a director from being a party to, or otherwise
having an interest in, any transaction or arrangement with the Company or in
which the Company is otherwise interested. Our Bye-laws provide our boardBoard of
directorsDirectors the authority to exercise all of the powers of the Company to borrow
money and to mortgage or charge all or any part of our property and assets as
collateral security for any debt, liability or obligation. Our directors are not
required to retire because of their age, and our directors are not required to
be holders of our common shares. Directors serve for one year terms, and shall
serve until re-elected or until their successors are appointed at the next
annual general meeting.
Our Bye-laws provide that no director, alternate director, officer, person or
member of a committee, if any, resident representative, or his heirs, executors
or administrators, which we refer to collectively as an indemnitee, is liable
for the acts, receipts, neglects, or defaults of any other such person or any
person involved in our formation, or for any loss or expense incurred by us
through the insufficiency or deficiency of title to any property acquired by us,
or for the insufficiency of deficiency of any security in or upon which any of
our monies shall be invested, or for any loss or damage arising from the
bankruptcy, insolvency, or tortuous act of any person with whom any monies,
securities, or effects shall be deposited, or for any loss occasioned by any
error of judgment, omission, default, or oversight on his part, or for any other
loss, damage or misfortune whatever which shall happen in relation to the
execution of his duties, or supposed duties, to us or otherwise in relation
thereto. Each indemnitee will be indemnified and held harmless out of our funds
to the fullest extent permitted by Bermuda law against all liabilities, loss,
damage or expense (including but not limited to liabilities under contract, tort
and statute or any applicable foreign law or regulation and all reasonable legal
and other costs and expenses properly payable) incurred or suffered by him as
such director, alternate director, officer, person or committee member or
resident representative (or in his reasonable belief that he is acting as any of
the above). In addition, each indemnitee shall be indemnified against all
liabilities incurred in defending any proceedings, whether civil or criminal, in
which judgment is given in such indemnitee's favor, or in which he is acquitted.
We are authorized to purchase insurance to cover any liability it may incur
under the indemnification provisions of its Bye-laws.
C. MATERIAL CONTRACTS
Fleet Purchase Agreement
On December 11, 2003 we entered into a fleet purchase agreement with Frontline
pursuant to which we acquired our initial fleet of 46 vessel owning subsidiaries
and one subsidiary with an option to acquire an additional vessel. We paid an
aggregate purchase price of $950.0 million, excluding working capital and other
intercompany balances retained by us. We also assumed senior secured
indebtedness with respect to its fleet in the amount of approximately $1.158
billion. The purchase price and the refinancing of the existing senior secured
indebtedness on those vessels, which was completed in January of 2004, were
financed through a combination of the net proceeds from our issuance of $580
million of 8 1/2% Senior Notes,8.5% senior notes, due 2013, funds from a $1.058 billion senior
secured credit facility and a deemed equity contribution of $525.0 million from
Frontline.
Frontline Time Charters
We have chartered the vesselstankers we acquired from Frontline to the Frontline
Charterers under long term time charters, which will extend for various periods
depending on the age of the vessels, ranging from approximately eightsix to twenty two20 years.
We refer you to Item 4.B., "Our Fleet", for the relevant charter termination
dates for each of our vessels. The daily base charter rates payable to us under
the charters have been fixed in advance and will decrease as our vessels age,
and the Frontline Charterers have the right to terminate a charter for a non
double hull vessel beginning on each vessel's anniversary date in 2010.
With the exceptions described below, the daily base charter rates for our
charters with the Frontline Shipping,Charterers, which are payable to us monthly in
advance for a maximum of 360 days per year (361 days per leap year), are as
follows:
Year VLCC Suezmax
- ---- ----------- -------
2003 to 2006..............................................$25,5752006 .............................................. $25,575 $21,100
2007 to 2010..............................................$25,1752010 .............................................. $25,175 $20,700
2011 and beyond...........................................$24,175beyond ........................................... $24,175 $19,700
The daily base charterhire for our vessels that are chartered to Frontline
Shipping II, which is also payable to us monthly in advance for a maximum of 360
days per year (361 days per leap year), is as follows:
The daily base charter rates for vessels that reach their 18th delivery date
anniversary, in the case of non-double hull vessels, or their 20th delivery date
anniversary, in the case of double hull vessels, will decline to $18,262 per day
for VLCCs and $15,348 for Suezmax tankers after such dates, respectivelyrespectively.
The daily base charterhire for our vessels that are chartered to Frontline
Shipping II, which is also payable to us monthly in advance for a maximum of 360
days per year (361 days per leap year), is as follows:
2019 and
Vessel 2005 to 2006 2007 to 2010 2011 to 2018 2019 and beyond
- ------------- ------------ ------------ ------------ -----------------------
Front Champion........$31,340Champion $31,340 $31,140 $30,640 $28,464
Front Century.........$31,501Century $31,501 $31,301 $30,801 $28,625
Golden Victory........$33,793Victory $33,793 $33,793 $33,793 $33,793
Front Energy..........$30,014Energy $30,014 $30,014 $30,014 $30,014
Front Force...........$29,853Force $29,853 $29,853 $29,853 For the VLCC Front Tobago and the three Suezmaxes, Front Target, Front
Transporter and Front Traveller the terms are similar to the listed above under
Frontline Shipping as these vessels represent replacement leases for vessels
included in the original fleet purchase which have been sold.$29,853
In addition, the base charter rate for our non-double hull vessels will decline
to $7,500 per day after theon each vessels anniversary datesdate in 2010, at which time the
relevant Frontline ShippingCharterer will have the option to terminate the charters for
those vessels. Each charter also provides that the base charter rate will be
reduced if the vessel does not achieve the performance specifications set forth
in the charter. The related management agreement provides that Frontline
Management will reimburse us for any such reduced charter payments. The
Frontline Charterers have the right under a charter to direct us to bareboat
charter the related vessel to a third party. During the term of the bareboat
charter, the CharterersFrontline Charterer will continue to pay us the daily base charter
rate for the vessel, less $6,500 per day. The related management agreement
provides that our obligation to pay the $6,500 fixed fee to Frontline Management
will be suspended for so long as the vessel is bareboat chartered.
Under the charters we are required to keep the vessels seaworthy, and to crew
and maintain them. Frontline Management performs those duties for us under the
management agreements described below. If a structural change or new equipment
is required due to changes in classification society or regulatory requirements,
the Frontline Charterers may make them, at its expense, without our consent, but
those changes or improvements will become our property. The Frontline Charterers
are not obligated to pay us charterhire for off hire days in excess of five off
hire days per year per vessel calculated on a fleet-wide basis, which include
days a vessel is unable to be in service due to, among other things, repairs or
drydockings. However, under the management agreements described below, Frontline
Management will reimburse us for any loss of charter revenue in excess of five
off hire days per vessel, calculated on a fleet-wide basis.
The terms of the charters do not provide the Frontline Charterers with an option
to terminate the charter before the end of its term, other than with respect to
our non-double hull vessels after the vessels anniversary dates in 2010. We may
terminate any or all of the charters in the event of an event of default under
the charter ancillary agreement that we describe below. The charters may also
terminate in the event of (1) a requisition for title of a vessel or (2) the
total loss or constructive total loss of a vessel. In addition, each charter
provides that we may not sell the related vessel without relevant Frontline
Charterers consent.
Charter Ancillary Agreement
We have entered into charter ancillary agreements with each of the Frontline
Charterers, our relevant vessel owning subsidiaries and Frontline. The charter
ancillary agreements remain in effect until the last long term charter with the
Frontline Charterers terminates in accordance with its terms. Frontline has
guaranteed the Frontline Charterers' obligations under the charter ancillary
agreements, except for the Frontline Charterers' obligations to pay charterhire.
Charter Service Reserve. Frontline Shipping was initially capitalized with $250
million in cash provided by Frontline to support its obligation to make payments
to us under the charters. Frontline Shipping II has been capitalisedwas initially capitalized with
approximately $21.0 million in cash. Due to sales and acquisitions, the current
capitalisationcapitalization in the CharterersFrontline Shipping and Frontline Shipping II are $218.2$197.0
million and $56.2$35.0 million respectively. These funds are being held as a charter
service reserve to support each Charterer's obligation to make charter payments
to us under the charters. The Frontline Charterer's are entitled to use the
charter service reserve only (1) to make charter payments to us and (2) for
reasonable working capital to meet short term voyage expenses. The Frontline
Charterers are required to provide us with monthly certifications of the
balances of and activity in the charter service reserve.
Material Covenants. Pursuant to the terms of the charter ancillary agreement,
each Frontline Charterer has agreed not to pay dividends or other distributions
to its shareholders or loan, repay or make any other payment in respect of its
indebtedness or any of its affiliates (other than us or our wholly owned
subsidiaries), unless (1) the relevant Frontline Charterer is then in compliance
with its obligations under the charter ancillary agreement, (2) after giving
effect to the dividend or other distribution, (A) the Frontline Charterer
remains in compliance with such obligations, (B) the balance of the charter
service reserve equals at least $218.2$197.0 million, in the case of Frontline
Shipping, or $56.2$35.0 million in the case of Frontline Shipping II (which threshold
will be reduced by $5.3 million and $7.0 million alternatively $5.3 million in the case of Frontline
Shipping and Frontline Shipping II, respectively, in each event that a charter
to which the Frontline Charterer is a party is terminated other than by reason
of a default by the Frontline Charterer), which we refer to as the "Minimum
Reserve", and (C) it certifies to us that it reasonably believes that the
charter service reserve will be equal to or greater than the Minimum Reserve
level for at least 30 days after the date of that dividend or distribution,
taking into consideration it's reasonably expected payment obligations during
such 30-day period, (3) any charterhire payments deferred pursuant to the
deferral provisions described below have been fully paid to us and (4) any
profit sharing payments deferred pursuant to the profit sharing payment
provisions described below have been fully paid to us. In addition, each
Frontline Charterer has agreed to certain other restrictive covenants, including
restrictions on its ability to, without our consent:
o amend its organizational documents in a manner that would adversely
affect us;
o violate its organizational documents;
o engage in businesses other than the operation and chartering of our
vessels;vessels (not applicable for Frontline Shipping II);
o incur debt, other than in the ordinary course of business;
o sell all or substantially all of its assets or the assets of the
relevant Frontline Charterer and its subsidiaries taken as a whole,
or enter into any merger, consolidation or business combination
transaction;
o enter into transactions with affiliates, other than on an
arm's-length basis;
o permit the incurrence of any liens on any of its assets, other than
liens incurred in the ordinary course of business;
o issue any capital stock to any person or entity other than
Frontline; and
o make any investments in, provide loans or advances to, or grant
guarantees for the benefit of any person or entity other than in the
ordinary course of business.
In addition, Frontline has agreed that it will cause the Frontline Charterers at
all times to remain its wholly owned subsidiary.subsidiaries.
Deferral of Charter Payments. For any period during which the cash and cash
equivalents held by Frontline Shipping are less than $75 million, Frontline
Shipping is entitled to defer from the payments payable to us under each charter
up to $4,600 per day for each of our vessels that is a VLCC and up to $3,400 per
day for each of our vessels that is a Suezmax, in each case without interest.
However, no such deferral with respect to a particular charter may be
outstanding for more than one year at any given time. Frontline Shipping will be
required to immediately use all revenues that Frontline Shipping receives that
are in excess of the daily charter rates payable to us to pay any deferred
amounts at such time as the cash and cash equivalents held by Frontline Shipping
are greater than $75 million, unless Frontline Shipping reasonably believes that
the cash and cash equivalents held by Frontline Shipping will not exceed $75
million for at least 30 days after the date of the payment.
In addition, Frontline Shipping will not be
required to make any payment of deferred charter amounts until the payment
would be at least $2 million. For Frontline Shipping II, with respect to
the vessels that represent replacement leases for vessels included in the
original fleet purchase which have been sold, the terms are similar to the
ones listed under Frontline Shipping above.
Profit Sharing Payments. Under the terms of the charter ancillary agreements,
beginning with the final 11-month period in 2004 and for each calendar year
after that, the Frontline Charterers have agreed to pay us a profit sharing
payment equal to 20% of the charter revenues for the applicable period,
calculated annually on a TCE basis, realized by that Charterthe relevant Frontline Charterer
for our fleet in excess of the daily base charterhire. After 2010, all of our
non-double hull vessels will be excluded from the annual profit sharing payment
calculation. For purposes of calculating bareboat revenues on a TCE basis,
expenses are assumed to equal $6,500 per day. Each of the Frontline Charterers
has agreed to use its commercial best efforts to charter our vessels on market
terms and not to give preferential treatment to the marketing of any other
vessels owned or managed by Frontline or its affiliates.
The Frontline Shipping and Frontline Shipping IICharterers are entitled to defer, without interest, any profit
sharing payment to the extent that, after giving effect to the payment, the
charter service reserve would be less than the Minimum Reserve. The Frontline
Shipping and Frontline Shipping IICharterers are required to immediately use all revenues that the Frontline
Shipping and Frontline
Shipping IICharterers receive that are in excess of the daily charter rates payable to us
to pay any deferred profit sharing amounts at such time as the charter service
reserve exceeds the minimum reserve, unless the relevant Frontline ShippingCharterer
reasonably believes that the charter service reserve will not exceed the minimum
reserve level for at least 30 days after the date of the payment. In addition,
the Frontline Shipping and Frontline Shipping IICharterers will not be required to make any payment of deferred
profit sharing amounts until the payment would be at least $2 million.
Collateral Arrangements. The charter ancillary agreements provides that the
obligations of the Frontline Charterers to us under the charters and the charter
ancillary agreements are secured by a lien over all of the assets of the
Frontline Charterers and a pledge of the equity interests in the Frontline
Charterers.
Default. An event of default shall be deemed to occur under the charter
ancillary agreement if:
o the relevant Frontline Charterer materially breaches any of its
obligations under any of the charters, including the failure to make
charterhire payments when due, subject to Frontline Shipping's
deferral rights explained above;
o the relevant Frontline Charterer or Frontline materially breaches
any of its obligations under the applicable charter ancillary
agreement or the Frontline performance guarantee;
o Frontline Management materially breaches any of its obligations
under any of the management agreements; or
o Frontline Shipping and Frontline Shipping II fails at any time to
hold at least $55 million or $12.4$7.5 million in cash and cash
equivalents, respectively.
Upon the occurrence of any event of default under a charter ancillary agreement
that continues for 30 days after we give the relevant Frontline Charterer notice
of such default, we may elect to:
o terminate any or all of the relevant charters with the relevant
Frontline Charterer; and
o foreclose on any or all of our security interests described above
with respect to the relevant Frontline Charterer; and/or
o pursue any other available rights or remedies.
Frontline Performance Guarantee
Frontline has issued a performance guarantee with respect to the charters, the
charter ancillary agreements, the management agreements and the administrative
services agreement. Pursuant to the performance guarantee, Frontline has
guaranteed the following obligations of the Frontline Charterers and Frontline
Management:
o the performance of the obligations of the Frontline Charterers under
the charters with the exception of payment of charter hire, which is
not guaranteed;
o the performance of the obligations of the Frontline Charterers under
the charter ancillary agreement;
o the performance of the obligations of Frontline Management under the
management agreements, provided, however, that Frontline's
obligations with respect to indemnification for environmental
matters shall not extend beyond the protection and indemnity
insurance coverage with respect to any vessel required by us under
the management agreements; and
o the performance of the obligations of Frontline Management under the
administrative services agreement.
Frontline's performance guarantee shall remain in effect until all obligations
of the Frontline Charterers or Frontline Management, as the case may be, that
have been guaranteed by Frontline under the performance guarantee have been
performed and paid in full.
Vessel Management Agreements
Our vesseltanker owning subsidiaries that we acquired from Frontline entered into
fixed rate management agreements with Frontline Management effective January 1,
2004. Under the management agreements, Frontline Management is responsible for
all technical management of the vessels, including crewing, maintenance, repair,
certain capital expenditures, drydocking, vessel taxes and other vessel
operating expenses. In addition, if a structural change or new equipment is
required due to changes in classification society or regulatory requirements,
Frontline Management will be responsible for making them, unless Frontline
Shipping does so under the charters. Frontline Management outsources many of
these services to third party providers.
Frontline Management is also obligated under the management agreements to
maintain insurance for each of our vessels, including marine hull and machinery
insurance, protection and indemnity insurance (including pollution risks and
crew insurances) and war risk insurance. Frontline Management will also
reimburse us for all lost charter revenue caused by our vessels being off hire
for more than five days per year on a fleet-wide basis or failing to achieve the
performance standards set forth in the charters. Under the management
agreements, we will pay Frontline Management a fixed fee of $6,500 per day per
vessel for all of the above services, for as long as the relevant charter is in
place. If Frontline Shipping exercises its right under a charter to direct us to
bareboat charter the related vessel to a third party, the related management
agreement provides that our obligation to pay the $6,500 fixed fee to Frontline
Management will be suspended for so long as the vessel is bareboat chartered.
Both we and Frontline Management have the right to terminate any of the
management agreements if the relevant charter has been terminated and in
addition we have the right to terminate any of the management agreements upon 90
days prior written notice to Frontline Management.
Frontline has guaranteed to us Frontline Management's performance under these
management agreements.
Administrative Services Agreement
We have entered into an administrative services agreement with Frontline Management under
which Frontline Management provides us with certain administrative support
services. For the year 2006, we and each of our vessel owning subsidiaries effective January 1, 2004 and
subsequent administrative services agreements for the vessel owning subsidiaries
purchased at a later time. Under these administrative services agreements
Frontline Management provides us and our vessel owning subsidiaries with
administrative support services such as the maintenance of our corporate books
and records, payroll services, the preparation of tax returns and financial
statements, assistance with corporate and regulatory compliance matters not
related to our vessels, legal and accounting services, assistance in complying
with United States and other relevant securities laws, obtaining non-vessel
related insurance, if any, cash management and bookkeeping services, development
and monitoring of internal audit controls, disclosure controls and information
technology, furnishing any reports or financial information that might be
requested by us and other non-vessel related administrative services. Under this
agreement Frontline Management also provides us and our vessel owning
subsidiaries with office space in Bermuda. We and our vessel owning subsidiaries
paypaid
Frontline Management a fixed fee of $20,000 each per year for its services under the
agreement, and agree to reimburse Frontline Management for reasonable third
party costs, including directors fees and expenses, shareholder communications
and public relations, registrars, audit, legal fees and listing costs, if any, advanced on our behalf by Frontline. For the year 2007,
some of the compensation to Frontline Management advances themwill be based on our behalf.cost sharing
for the services rendered based on actual incurred costs plus a margin.
Frontline guarantees to us Frontline Management's performance under this
administrative services agreement.
D. EXCHANGE CONTROLS
We are classified by the Bermuda Monetary Authority as a non-resident of Bermuda
for exchange control purposes.
The transfer of Common Shares between persons regarded as resident outside
Bermuda for exchange control purposes may be effected without specific consent
under the Exchange Control Act of 1972 and regulations there under and the
issuance of Common Shares to persons regarded as resident outside Bermuda for
exchange control purposes may be effected without specific consent under the
Exchange Control Act of 1972 and regulations there under. Issues and transfers
of Common Shares involving any person regarded as resident in Bermuda for
exchange control purposes require specific prior approval under the Exchange
Control Act of 1972.
The owners of Common Shares who are ordinarily resident outside Bermuda are not
subject to any restrictions on their rights to hold or vote their shares.
Because we have been designated as a non-resident for Bermuda exchange control
purposes, there are no restrictions on our ability to transfer funds in and out
of Bermuda or to pay dividends to U.S. residents who are holders of Common
Shares, other than in respect of local Bermuda currency.
E. TAXATION
United States Taxation
The following discussion is based upon the provisions of the U.S. Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed U.S.
Treasury Department regulations, administrative rulings, pronouncements and
judicial decisions, all as of the date of this Annual Report. Unless otherwise
noted, references to the "Company" include the Company's Subsidiaries. This
discussion assumes that we do not have an office or other fixed place of
business in the United States.
Taxation of the Company's Shipping Income: In General
The Company anticipates that it will derive substantially all of its gross
income from the use and operation of vessels in international commerce and that
this income will principally consist of freights from the transportation of
cargoes, hire or lease from time or voyage charters and the performance of
services directly related thereto, which the Company refers to as "shipping
income."
Shipping income that is attributable to transportation that begins or ends, but
that does not both begin and end, in the United States will be considered to be
50% derived from sources within the United States. Shipping income attributable
to transportation that both begins and ends in the United States will be
considered to be 100% derived from sources within the United States. The Company
does not engage in transportation that gives rise to 100% U.S. source income.
Shipping income attributable to transportation exclusively between non-U.S.
ports will be considered to be 100% derived from sources outside the United
States. Shipping income derived from sources outside the United States will not
be subject to U.S. federal income tax.
Based upon the Company's anticipated shipping operations, the Company's vessels
will operate in various parts of the world, including to or from U.S. ports.
Unless exempt from U.S. taxation under Section 883 of the Code, the Company will
be subject to U.S. federal income taxation, in the manner discussed below, to
the extent its shipping income is considered derived from sources within the
United States.
Application of Code Section 883
Under the relevant provisions of Section 883 of the Code ("Section 883"), the
Company will be exempt from U.S. taxation on its U.S. source shipping income if:
(i) It is organized in a qualified foreign country which is one that
grants an equivalent exemption from tax to corporations organized in
the United States in respect of the shipping income for which
exemption is being claimed under Section 883 (a "qualified foreign
country") and which the Company refers to as the "country of
organization requirement"; and
(ii) It can satisfy any one of the following two (2) stock ownership
requirements for more than half the days during the taxable year:
o the Company's stock is "primarily and regularly" traded on an
established securities market located in the United States or
a qualified foreign country, which the Company refers to as
the "Publicly-Traded Test"; or
o more than 50% of the Company's stock, in terms of value, is
beneficially owned by any combination of one or more
individuals who are residents of a qualified foreign country
or foreign corporations that satisfy the country of
organization requirement and the Publicly-Traded Test, which
the Company refers to as the "50% Ownership Test."
The U.S. Treasury Department has recognized Bermuda, the country of
incorporation of the Company and certain of its subsidiaries, as a qualified
foreign country. In addition, the U.S. Treasury Department has recognized
Liberia, Panama, the Isle of Man, Singapore and Cyprus, the countries of
incorporation of certain of the Company's subsidiaries, as qualified foreign
countries. Accordingly, the Company and its vessel owning subsidiaries satisfy
the country of organization requirement.
Therefore, the Company's eligibility to qualify for exemption under Section 883
is wholly dependent upon being able to satisfy one of the stock ownership
requirements.
For the 20052006 tax year, the Company satisfied the Publicly-Traded Test since, on
more than half the days of the taxable year, the Company's stock was primarily
and regularly traded on the New York Stock Exchange.
Final regulations interpreting Section 883 became effective for calendar year
taxpayers such as the Company and its subsidiaries beginning with the calendar
year 2005.
Taxation in Absence of Internal Revenue Code Section 883 Exemption
To the extent the benefits of Section 883 are unavailable with respect to any
item of U.S. source income, the Company's U.S. source shipping income, would be
subject to a 4% tax imposed by Section 887 of the Code on a gross basis, without
the benefit of deductions. Since under the sourcing rules described above, no
more than 50% of the Company's shipping income would be treated as being derived
from U.S. sources, the maximum effective rate of U.S. federal income tax on the
Company's shipping income would never exceed 2% under the 4% gross basis tax
regime.
Gain on Sale of Vessels.Vessels
Regardless of whether we qualify for exemption under Section 883, we will not be
subject to United States federal income taxation with respect to gain realized
on a sale of a vessel, provided the sale is considered to occur outside of the
United States under United States federal income tax principles. In general, a
sale of a vessel will be considered to occur outside of the United States for
this purpose if title to the vessel, and risk of loss with respect to the
vessel, pass to the buyer outside of the United States. It is expected that any
sale of a vessel by us will be considered to occur outside of the United States.
Taxation of U.S. Holders
The following is a discussion of the material United States federal income tax
considerations relevant to an investment decision by a U.S. Holder, as defined
below, with respect to the common stock. This discussion does not purport to
deal with the tax consequences of owning common stock to all categories of
investors, some of which may be subject to special rules. You are encouraged to
consult your own tax advisors concerning the overall tax consequences arising in
your own particular situation under United States federal, state, local or
foreign law of the ownership of common stock.
As used herein, the term "U.S. Holder" means a beneficial owner of our common
stock that (i) is a U.S. citizen or resident, a U.S. corporation or other U.S.
entity taxable as a corporation, an estate, the income of which is subject to
U.S. federal income taxation regardless of its source, or a trust if a court
within the United States is able to exercise primary jurisdiction over the
administration of the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust and (ii) owns our common stock as
a capital asset, generally, for investment purposes.
If a partnership holds our common stock, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner in a partnership holding our common stock, you
are encouraged to consult your own tax advisor on this issue.
Distributions
Subject to the discussion of passive foreign investment companies below, any
distributions made by us with respect to our common stock to a U.S. Holder will
generally constitute dividends, which may be taxable as ordinary income or
"qualified dividend income" as described in more detail below, to the extent of
our current or accumulated earnings and profits, as determined under United
States federal income tax principles. Distributions in excess of our earnings
and profits will be treated first as a nontaxable return of capital to the
extent of the U.S. Holder's tax basis in his common stock on a dollar-for-dollar
basis and thereafter as capital gain. Because we are not a United States
corporation, U.S. Holders that are corporations will not be entitled to claim a
dividends received deduction with respect to any distributions they receive from
us.
Dividends paid on our common stock to a U.S. Holder who is an individual, trust
or estate (a "U.S. Individual Holder") will generally be treated as "qualified
dividend income" that is taxable to such U.S. Individual Holders at preferential
tax rates (through 2010) provided that (1) the common stock is readily tradable
on an established securities market in the United States (such as the New York
Stock Exchange); (2) we are not a passive foreign investment company for the
taxable year during which the dividend is paid or the immediately preceding
taxable year (which we do not believe we are, have been or will be); and (3) the
U.S. Individual Holder has owned the common stock for more than 60 days in the
121-day period beginning 60 days before the date on which the common stock
becomes ex-dividend.
There is no assurance that any dividends paid on our common stock will be
eligible for these preferential rates in the hands of a U.S. Individual Holder.
Legislation has been recently introduced in the U.S. Congress which, if enacted
in its present form, would preclude our dividends from qualifying for such
preferential rates prospectively from the date of the enactment. Any dividends
paid by the Company which are not eligible for these preferential rates will be
taxed as ordinary income to a U.S. Individual Holder.
Sale, Exchange or other Disposition of Common Stock
Assuming we do not constitute a passive foreign investment company for any
taxable year, a U.S. Holder generally will recognize taxable gain or loss upon a
sale, exchange or other disposition of our common stock in an amount equal to
the difference between the amount realized by the U.S. Holder from such sale,
exchange or other disposition and the U.S. Holder's tax basis in such stock.
Such gain or loss will be treated as long-term capital gain or loss if the U.S.
Holder's holding period is greater than one year at the time of the sale,
exchange or other disposition. A U.S. Holder's ability to deduct capital losses
is subject to certain limitations.
Passive Foreign Investment Company Status and Significant Tax Consequences
Special United States federal income tax rules apply to a U.S. Holder that holds
stock in a foreign corporation classified as a passive foreign investment
company, or a PFIC, for United States federal income tax purposes. In general,
we will be treated as a PFIC with respect to a U.S. Holder if, for any taxable
year in which such holder held our common stock, either at least 75% of our
gross income for such taxable year consists of passive income (e.g., dividends,
interest, capital gains and rents derived other than in the active conduct of a
rental business), or at least 50% of the average value of the assets held by the
corporation during such taxable year produce, or are held for the production of,
passive income.
For purposes of determining whether we are a PFIC, we will be treated as earning
and owning our proportionate share of the income and assets, respectively, of
any of our subsidiary corporations in which we own at least 25 percent of the
value of the subsidiary's stock. Income earned, or deemed earned, by us in
connection with the performance of services would not constitute passive income.
By contrast, rental income would generally constitute "passive income" unless we
were treated under specific rules as deriving our rental income in the active
conduct of a trade or business.
Based on our current operations and future projections, we do not believe that
we are, nor do we expect to become, a PFIC with respect to any taxable year.
Although there is no legal authority directly on point, our belief is based
principally on the position that, for purposes of determining whether we are a
PFIC, the gross income we derive or are deemed to derive from the time
chartering and voyage chartering activities of our wholly-owned subsidiaries
should constitute services income, rather than rental income. Correspondingly,
we believe that such income does not constitute passive income, and the assets
that we or our wholly-owned subsidiaries own and operate in connection with the
production of such income, in particular, the vessels, do not constitute passive
assets for purposes of determining whether we are a PFIC. We believe there is
substantial legal authority supporting our position consisting of case law and
Internal Revenue Service pronouncements concerning the characterization of
income derived from time charters and voyage charters as services income for
other tax purposes. However, in the absence of any legal authority specifically
relating to the statutory provisions governing passive foreign investment
companies, the Internal Revenue Service or a court could disagree with our
position. In addition, although we intend to conduct our affairs in a manner to
avoid being classified as a PFIC with respect to any taxable year, we cannot
assure you that the nature of our operations will not change in the future.
As discussed more fully below, if we were to be treated as a PFIC for any
taxable year, a U.S. Holder would be subject to different taxation rules
depending on whether the U.S. Holder makes an election to treat us as a
"Qualified Electing Fund," which election we refer to as a "QEF election." As an
alternative to making a QEF election, a U.S. Holder should be able to make a
"mark-to-market" election with respect to our common stock, as discussed below.
Taxation of U.S. Holders Making a Timely QEF Election
If a U.S. Holder makes a timely QEF election, which U.S. Holder we refer to as
an "Electing Holder," the Electing Holder must report each year for United
States federal income tax purposes his pro rata share of our ordinary earnings
and our net capital gain, if any, for our taxable year that ends with or within
the taxable year of the Electing Holder, regardless of whether or not
distributions were received from us by the Electing Holder. The Electing
Holder's adjusted tax basis in the common stock will be increased to reflect
taxed but undistributed earnings and profits. Distributions of earnings and
profits that had been previously taxed will result in a corresponding reduction
in the adjusted tax basis in the common stock and will not be taxed again once
distributed. An Electing Holder would generally recognize capital gain or loss
on the sale, exchange or other disposition of our common stock.
Taxation of U.S. Holders Making a "Mark-to-Market" Election
Alternatively, if we were to be treated as a PFIC for any taxable year and, as
we anticipate, our stock is treated as "marketable stock," a U.S. Holder would
be allowed to make a "mark-to-market" election with respect to our common stock.
If that election is made, the U.S. Holder generally would include as ordinary
income in each taxable year the excess, if any, of the fair market value of the
common stock at the end of the taxable year over such holder's adjusted tax
basis in the common stock. The U.S. Holder would also be permitted an ordinary
loss in respect of the excess, if any, of the U.S. Holder's adjusted tax basis
in the common stock over its fair market value at the end of the taxable year,
but only to the extent of the net amount previously included in income as a
result of the mark-to-market election. A U.S. Holder's tax basis in his common
stock would be adjusted to reflect any such income or loss amount. Gain realized
on the sale, exchange or other disposition of our common stock would be treated
as ordinary income, and any loss realized on the sale, exchange or other
disposition of the common stock would be treated as ordinary loss to the extent
that such loss does not exceed the net mark-to-market gains previously included
by the U.S. Holder.
Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election
Finally, if we were to be treated as a PFIC for any taxable year, a U.S. Holder
who does not make either a QEF election or a "mark-to-market" election for that
year, whom we refer to as a "Non-Electing Holder," would be subject to special
rules with respect to (1) any excess distribution (i.e., the portion of any
distributions received by the Non-Electing Holder on our common stock in a
taxable year in excess of 125 percent of the average annual distributions
received by the Non-Electing Holder in the three preceding taxable years, or, if
shorter, the Non-Electing Holder's holding period for the common stock), and (2)
any gain realized on the sale, exchange or other disposition of our common
stock. Under these special rules:
o the excess distribution or gain would be allocated ratably over the
Non-Electing Holders' aggregate holding period for the common stock;
o the amount allocated to the current taxable year and any taxable
years before the Company became a PFIC would be taxed as ordinary
income; and
o the amount allocated to each of the other taxable years would be
subject to tax at the highest rate of tax in effect for the
applicable class of taxpayer for that year, and an interest charge
for the deemed deferral benefit would be imposed with respect to the
resulting tax attributable to each such other taxable year.
These penalties would not apply to a pension or profit sharing trust or other
tax-exempt organization that did not borrow funds or otherwise utilize leverage
in connection with its acquisition of our common stock. If a Non-Electing Holder
who is an individual dies while owning our common stock, such holder's successor
generally would not receive a step-up in tax basis with respect to such stock.
Backup Withholding and Information Reporting
In general, dividend payments, or other taxable distributions, made within the
United States to you will be subject to information reporting requirements. Such
payments will also be subject to "backup withholding" if you are a non-corporate
U.S. Holder and you:
o fail to provide an accurate taxpayer identification number;
o are notified by the Internal Revenue Service that you have failed to
report all interest or dividends required to be shown on your
federal income tax returns; or
o in certain circumstances, fail to comply with applicable
certification requirements.
If you sell your common shares to or through a U.S. office or broker, the
payment of the proceeds is subject to both U.S. backup withholding and
information reporting unless you establish an exemption. If you sell your common
shares through a non-U.S. office of a non-U.S. broker and the sales proceeds are
paid to you outside the United States then information reporting and backup
withholding generally will not apply to that payment. However, U.S. information
reporting requirements, but not backup withholding, will apply to a payment of
sales proceeds, including a payment made to you outside the United States, if
you sell your common stock through a non-U.S. office of a broker that is a U.S.
person or has some other contacts with the United States. Backup withholding is
not an additional tax. Rather, you generally may obtain a refund of any amounts
withheld under backup withholding rules that exceed your income tax liability by
filing a refund claim with the U.S. Internal Revenue Service.
Bermuda Taxation
Bermuda currently imposes no tax (including a tax in the nature of an income,
estate duty, inheritance, capital transfer or withholding tax) on profits,
income, capital gains or appreciations derived by, or dividends or other
distributions paid to U.S. Shareholders of Common Shares. Bermuda has undertaken
not to impose any such Bermuda taxes on U.S. Shareholders of Common Shares prior
to the year 2016 except in so far as such tax applies to persons ordinarily
resident in Bermuda.
Liberian Taxation
The Republic of Liberia enacted a new income tax act effective as of January 1,
2001 (the "New Act"). In contrast to the income tax law previously in effect
since 1977 (the "Prior Law"), which the New Act repealed in its entirety, the
New Act does not distinguish between the taxation of a non-resident Liberian
corporation, such as our Liberian subsidiaries, which conduct no business in
Liberia and were wholly exempted from tax under the Prior Law, and the taxation
of ordinary resident Liberian corporations.
In 2004, the Liberian Ministry of Finance issued regulations pursuant to which a
non-resident domestic corporation engaged in international shipping, such as our
Liberian subsidiaries, will not be subject to tax under the New Act retroactive
to January 1, 2001 (the "New Regulations"). In addition, the Liberian Ministry
of Justice issued an opinion that the New Regulations were a valid exercise of
the regulatory authority of the Ministry of Finance. Therefore, assuming that
the New Regulations are valid, our Liberian subsidiaries will be wholly exempt
from Liberian income tax as under the Prior Law.
If our Liberian subsidiaries were subject to Liberian income tax under the New
Act, our Liberian subsidiaries would be subject to tax at a rate of 35% on their
worldwide income. As a result, their, and subsequently our, net income and cash
flow would be materially reduced by the amount of the applicable tax. In
addition, we, as shareholder of the Liberian subsidiaries, would be subject to
Liberian withholding tax on dividends paid by the Liberian subsidiaries at rates
ranging from 15% to 20%.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable
G. STATEMENT BY EXPERTS
Not Applicable
H. DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange Act
of 1934, as amended. In accordance with these requirements, we file reports and
other information with the Securities and Exchange Commission. These materials,
including this annual report and the accompanying exhibits, may be inspected and
copied at the public reference facilities maintained by the Commission 100 Fifth
Street, N.E., Room 1580 Washington, D.C. 20549. You may obtain information on
the operation of the public reference room by calling 1 (800) SEC-0330, and you
may obtain copies at prescribed rates from the public reference facilities
maintained by the Commission at its principal office in Washington, D.C. 20549.
The SEC maintains a website (http://www.sec.gov.) that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC. In addition, documents referred to in this annual
report may be inspected at our principal executive offices at Par-la-Ville
Place, 14 Par-la-Ville Road, Hamilton, Bermuda HM 08.
I. SUBSIDIARY INFORMATION
Not Applicable
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including interest rates and foreign
currency fluctuations. We use interest rate swaps to manage interest rate risk.
Several of our charter contracts also contain interest adjustment clauses,
whereby the charter rate is adjusted to reflect the actual interest paid on the
outstanding debt, effectively transferring the interest rate exposure on the
counterparty under the charter contract. We may enter into derivative
instruments from time to time for speculative purposes.
Our exposure to interest rate risk relates primarily to our debt and related
interest rate swaps. The majority of this exposure derives from our floating
rate debt, which totalled $1,336.6$1,466.1 million at December 31, 2005 (2004: $948.62006 (2005: $1,336.6
million). We have entered into interest rate swap agreements to manage this
exposure to interest rate changes by swapping floating interest rates with fixed
interest rates. At December 31, 2005,2006, we had fourteen swaps with a total
notional principal of $738.7 million (2005: $568.3 million). At December 31,
2006, $166.4 million (2004: $581.4 million)(2005: $nil) of the interest rate swaps relate to
committed, but not outstanding, debt on vessels not yet delivered to us. The
swap agreements mature between March 2006February 2009 and February 2009,May 2019, and we estimate that
we would receive $18.4$9.1 million to terminate these agreements as of December 31,
2005
(2004: $3.62006 (2005: $18.4 million). At December 31, 2006, $155.1 million (2005: $nil) of
our outstanding debt was also subject to interest adjustment clauses under
charter contracts with the relevant charterers. At December 31, 2006, we had
also entered into total return bond swaps in respect of $52 million (2005: $nil)
of our 8.5% debentures, which effectively translates the underlying principal
amount into floating rate debt.
At December 31, 2006, our net exposure to interest rate fluctuations on our
outstanding debt was $790.6 million (2005: $768.3 million). Our net exposure to
interest rate fluctuations is $768.3
million at December 31, 2005 (2004: $367.2 million). Our net exposure is based on our total floating rate debt outstanding at
December 31, 2006, plus the outstanding under the bond swap line at December 31,
2006, less the outstanding floating rate debt subject to interest adjustment
clauses and the notional principal of our floating to fixed interest rate swaps.swaps
outstanding at December 31, 2006. A one per cent change in interest rates would
increase or decrease interest expense by $7.7$7.9 million per year as of December
31, 2005 (2004: $3.62006 (2005: $7.7 million). This net figure takes into account that we would
be compensated for the increase or decrease in interest expenses under the
related charter contracts that include interest adjustment clauses.
The fair market value of our fixed rate debt was $427.3$448.8 million as of December
31, 2005 (2004: $546.2 million). If interest rates were to increase or decrease
by one per cent with all other variables remaining constant, we estimate that
the market value of our fixed rate debt would decrease or increase by
approximately $22.7 million and $24.5 million respectively (2004: decrease by
$31.2 and increase by $33.82006 (2005: $427.3 million). The majority of our transactions, assets and
liabilities are denominated in U.S. dollars, our functional currency. One of our
subsidiaries had charter contracts denominated in Yen. At December 31, 2005 we had (Y)35.7 million (2004: (Y)929
million) receivable in relation to long term Yen denominated charter contracts;
a movement of one Yen in the exchange rate would not have a significant effect
on net income. The charterer also had an
option to buy the vessel for (Y)4,666 million in January 2006, this option was
exercised. The option was settled on January 17, 2006. Since this date, we do
not have any direct Yen exposure in the Company.
ITEM 12. DESCRIPTION OF SECURITIES
Not Applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Neither we nor any of our subsidiaries have been subject to a material default
in the payment of principal, interest, a sinking fund or purchase fund
instalmentinstallment or any other material default that was not cured within 30 days. In
addition, the payment of our dividends are not, and have not been in arrears or
have notenot been subject to material delinquency that was not cured within 30
days.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None
ITEM 15. CONTROLS AND PROCEDURES
(a)a) Disclosure of Controls and Procedures
As of December 31, 2005, we carried out an evaluation ofManagement assessed the effectiveness of the design and operation of the
ourCompany's disclosure controls and procedures pursuant to Rule 13a-15(e) of the
Securities Exchange Act Rule 13a-14.of 1934, as of the end of the period covered by this
annual report as of December 31, 2006. Based upon that evaluation, the principal executive
officerPrincipal
Executive Officer and principal financial officerPrincipal Financial Officer concluded that the ourCompany's
disclosure controls and procedures are effective in alerting them timely to material
information relating to the Company required to be included in our periodic SEC
filings.
(b) Management's Annual Report on Internal Control over Financial Reporting
Not Applicable
(c) Attestation reportas of the registered public accounting firm
Not Applicable
(d) Changes in Internal Controls over Financial Reporting
There have been no changes inevaluation date.
b) Management's annual report on internal controls over financial reporting
(identifiedOur management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in connectionRules 13a-15(f) promulgated under
the Securities Exchange Act of 1934.
Internal control over financial reporting is defined in Rule 13a-15(f) or
15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the Company's principal executive and
principal financial officers and effected by the Company's Board of Directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with management'sgenerally accepted accounting
principles and includes those policies and procedures that:
o Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with
authorizations of Company's management and directors; and
o Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
sucheffectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree or compliance
with the policies or procedures may deteriorate.
Management conducted the evaluation of the effectiveness of the internal
controls over financial reporting)reporting using the control criteria framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
published in its report entitled Internal Control-Integrated Framework.
Our management with the participation of our Principal Executive Officer and
Principal Financial Officer assessed the effectiveness of the design and
operation of the Company's internal controls over financial reporting pursuant
to Rule 13a-15 of the Securities Exchange Act of 1934, as of December 31, 2006.
Based upon that evaluation, the Principal Executive Officer and Principal
Financial Officer concluded that the Company's internal controls over financial
reporting are effective as of December 31, 2006.
This annual report does not include an attestation report of the Company's
current registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's current registered public accounting firm pursuant to temporary rules
of the Securities and Exchange Commission that permit the Company to provide
only management's report in this annual report.
c) Changes in internal control over financial reporting
There were no changes in our internal controls over financial reporting that
occurred during the yearperiod covered by this annual report that hashave materially
affected,effected or isare reasonably likely to materially affect, ourthe Company's internal
controlscontrol over financial reporting.
ITEM 16 A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that our Audit Committee has one Audit
Committee Financial Expert. Kate Blankenship is an independent Director and is
the Audit Committee Financial Expert.
ITEM 16 B. CODE OF ETHICS.ETHICS
We have adopted a Code of Ethics that applies to all entities controlled by us
and our employees, directors, officers and agents of the Company. The Code of
Ethics has previously been filed as Exhibit 11.1 to the our Annual Report on
Form 20-F for the fiscal year ended December 31 2004, filed with the Securities
and Exchange Commission on June 30, 2005, and is hereby incorporated by
reference into this Annual Report.
We have posted a copy of our Code of Ethics on itsour website at www.shipfinance.bm
We will provide any person, free of charge, a copy of itsour Code of Ethics upon
written request to our registered office.
ITEM 16 C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our principal accountant for 20052006 and 20042005 was Moore Stephens, P.C. The
following table sets forth the fees related to audit and other services provided
by Moore Stephens, P.C.
(in thousands of $)2006 2005
2004--------- --------
Audit Fees (a) 330 250$300,000 $300,000
Audit-Related Fees (b) 9 -$ 43,771 $ 38,000
Tax Fees (c) - --- --
All Other Fees (d) - --- --
Total 339 250$343,771 $338,000
(a) Audit Fees
Audit fees represent professional services rendered for the audit of our annual
financial statements and services provided by the principal accountant in
connection with statutory and regulatory filings or engagements.
(b) Audit -RelatedAudit-Related Fees
Audit-related fees consisted of assurance and related services rendered by the
principal accountant related to the performance of the audit or review of our
financial statements which have not been reported under Audit Fees above.
(c) Tax Fees
Tax fees represent fees for professional services rendered by the principal
accountant for tax compliance, tax advice and tax planning.
(d) All Other Fees
All other fees include services other than audit fees, audit-related fees and
tax fees set forth above.
Our Board of Directors has adopted pre-approval policies and procedures in
compliance with paragraph (c) (7)(i) of Rule 2-01 of Regulation S-X that require
the Board to approve the appointment of our independent auditor before such
auditor is engaged and approve each of the audit and non-audit related services
to be provided by such auditor under such engagement by the Company. All
services provided by the principal auditor in 2006 and 2005 were approved by the
Board pursuant to the pre-approval policy.
ITEM 16 D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable
ITEM 16 E. PURCHASE OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS
Average Price Total Number Maximum Number of Shares (or Maximum Number (or Approximate
Total Number of Paid per Units) Purchased as Part of Dollar Value) of Shares (or Units)
Shares (or Units) Share (or Approximate
(or Units) Dollar Value)
Purchased as of Shares
Total Part of (or Units)
Number Average Publicly Announced Plans or that May Yet
of Shares Price Paid Announced Be Purchased
(or Units) per Share Plans or Under the Plans
Period Purchased (or Units) Programs Plans or Programs
- ------ --------- ---------- -------- -----------
05.06.01 to 05.06.30 300,000 (1) $19.58 - -
05.10.01 to 05.10.31 336,400 (1) $19.43 - -
05.11.01 to 05.11.30 520,700 (1) $18.95 - -
05.12.01 to 05.12.31 600,000 (1) $18.01 - -
Total 1,757,100 (1) $18.81 -
- -------------------------------------------------------------------------------------------------------------------
06/01/05 to
06/30/05 300,000 (1) $19.58 -- --
10/01/05 to
10/31/05 336,400 (1) $19.43 -- --
11/01/05 to
11/30/05 520,700 (1) $18.95 -- --
12/01/05 to
12/31/05 600,000 (1) $18.01 -- --
01/10/06 to
01/20/06 400,000 (1) $18.03 -- --
Total 2,157,100 (1) $18.68 -- --
(1) The shares repurchased in the period were not part of a publicly announced
plan or program. The repurchases were made in open-market transactions.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
The following financial statements listed below and set forth on pages F-1
through F-30F-27 are filed as part of this annual report:
Financial Statements for Ship Finance International Limited.
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-3
Report of Independent Registered Public Accounting Firm F-4
Consolidated Statements of Operations for the years ended December 31,
2006, 2005 and 2004 and the period from October 10,
2003 (inception) to December 31, 2003 and Predecessor Combined
Carve-out Statement of Operations for the year ended December 31,
2003 F-5F-3
Consolidated Balance Sheets as of December 31, 2006 and 2005 and 2004 F-6F-4
Consolidated Statements of Cash Flows for the years ended December 31,
2006, 2005 and 2004 and the period from October 10,
2003 (inception) to December 31, 2003 and Predecessor Combined
Carve-out Statement of Cash Flows for the year ended December 31,
2003 F-7F-5
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income for the years ended December 31, 2006, 2005
and 2004 and the period from
October 10, 2003 (inception) to December 31, 2003 and Predecessor
Combined Carve-out Statement of Changes in Stockholders' Equity
for the year ended December 31 2003 F-9F-6
Notes to Consolidated and Predecessor Combined Carve-out
Financial Statements F-10
F-7
ITEM 19. EXHIBITS
Number Description of Exhibit
1.1* Memorandum of Association of Ship Finance International Limited (the
"Company") incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement, SEC File No. 333-115705, filed on May 21,
2004 (the "Original Registration Statement").
1.4*1.4 Amended and Restated Bye-laws of the Company incorporated by
reference to Exhibit 3.2 of the Company's Original Registration
Statement.as adopted on
December 1, 2006.
2.1* Form of Common Stock Certificate of the Company incorporated by
reference to Exhibit 4.1 of the Company's Original Registration
Statement.
2.2 Share Option Scheme.
4.1* Indenture relating to 8.5% Senior Notes due 2013, dated December 18,
2003 incorporated by reference to Exhibit 4.4 of the Company's
Original Registration Statement.
4.2* Form of $1.058 billion Credit Facility incorporated by reference to
Exhibit 10.1 of the Company's Original Registration Statement.
4.3* Fleet Purchase Agreement dated December 11, 2003 incorporated by
reference to Exhibit 10.2 of the Company's Original Registration
Statement.
4.4* Form of Performance Guarantee issued by Frontline Ltd. incorporated
by reference to Exhibit 10.3 of the Company's Original Registration
Statement.
4.5* Form of Time Charter incorporated by reference to Exhibit 10.4 of
the Company's Original Registration Statement.
4.6* Form of Vessel Management Agreements incorporated by reference to
Exhibit 10.5 of the Company's Original Registration Statement.
4.7* Form of Charter Ancillary Agreement incorporated by reference to
Exhibit 10.6 of the Company's Original Registration Statement.
4.8* Form of Administrative Services Agreement incorporated by reference
to Exhibit 10.7 of the Company's Original Registration Statement.
4.9 $1.131 billion Term Loan Facility, dated February 5, 2005.
4.10 Amendment to $1.131 billion Term Loan Facility, dated September 18,
2006.
8.1 Subsidiaries of the CompanyCompany.
11.1* Code of EthicsEthics.
12.1 Certification of the Principal Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended.
12.2 Certification of the Principal Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended.
13.1 Certification of the Principal Executive Officer 12.3pursuant to 18 USC
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
13.2 Certification of the Principal Financial Officer 13.1 Certifications underpursuant to 18 USC
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley actAct of 2002 of
the Principal Executive Officer
13.2 Certifications under Section 906 of the Sarbanes-Oxley act of 2002 of
the Principal Executive Officer
13.3 Certifications under Section 906 of the Sarbanes-Oxley act of 2002 of
the Principal Financial Officer2002.
* Incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorised.authorized.
Ship Finance International Limited.Limited
----------------------------------
(Registrant)
Date June 27, 2006 By:July 2, 2007 By /s/ Inger M. Klemp
--------------------------------
Inger M. KlempOle B. Hjertaker
---------------------------
Ole B. Hjertaker
Principal Financial Officer
Ship Finance International Limited
Report of Independent Registered Public Accounting Firm F-2
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004 F-3
Consolidated Balance Sheets as of December 31, 2006 and 2005 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 F-5
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income for the
years ended December 31, 2006, 2005 and 2004 F-6
Notes to Consolidated Financial Statements F-7
Index to Consolidated and Predecessor Combined Carve-out Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-3
Report of Independent Registered Public Accounting Firm F-4
Consolidated Statements of Operations for the years ended F-5
December 31, 2005 and 2004 and the period from October 10, 2003
(inception) to December 31, 2003 and Predecessor Combined
Carve-out Statement of Operations for the year ended
December 31, 2003
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-6
Consolidated Statements of Cash Flows for the years ended F-7
December 31, 2005 and 2004 and the period from October 10, 2003
(inception) to December 31, 2003 and Predecessor Combined
Carve-out Statement of Cash Flows for the year ended
December 31, 2003
Consolidated Statement of Changes in Stockholders' Equity for F-9
the years ended December 31, 2005 and 2004 and the period from
October 10, 2003 (inception) to December 31, 2003 and
Predecessor Combined Carve-out Statement of Changes in
Stockholders' Equity for the year ended December 31 2003
Notes to Consolidated and Predecessor Combined Carve-out F-10
Financial Statements
Ship Finance International Limited
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Ship Finance International Limited
We have audited the accompanying consolidated balance sheets of Ship Finance International
Limited and subsidiaries (the "Company"), as of December 31, 20052006 and 2004,2005, and the related
consolidated statements of operations, cash flows and
changes in stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2005 and 20042006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require thatThe Company is not required to have,
nor were we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. We were not engaged to perform, an audit of the Company'sits internal control over financial
reporting. Our auditaudits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2005 and 2004, and the consolidated results of their
operations, and their cash flows for the years ended December 31, 2005 and 2004,
in conformity with U.S. generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
February 15, 2006
Ship Finance International Limited
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Ship Finance International
Limited.
In our opinion, the accompanying statements of operations, cash flows and
changes in stockholders' equity present fairly, in all material respects, the
results of operations of Ship Finance International Limited (the Company) and
its cash flows for the period from October 10, 2003 (Inception) to December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit providesaudits provide a reasonable basis for our opinion.
PricewaterhouseCoopers DA
Oslo, Norway
February 6, 2004
Ship Finance International Limited
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Ship Finance International
Limited.
In our opinion, the accompanying predecessor combined statement of operations,
cash flows and changes in stockholders' equityconsolidated financial statements referred to above present
fairly, in all material respects, the resultsfinancial position of operations of the predecessor to Ship Finance
International Limited and its subsidiaries (the Company) atas of December 31, 20032006 and 2005, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with accounting principlesU.S. generally accepted
in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers DA
Oslo, Norway
Marchprinciples.
Moore Stephens, P.C.
New York, New York
June 22, 20042007
Ship Finance International Limited
Consolidated Statements of OperationsCONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2006, 2005 December 31,and 2004
and the period from October 10, 2003 (inception) to
December 31, 2003 and Predecessor Combined Carve-out Statement(in thousands of Operations
for the year ended December 31, 2003$, except per share amounts)
(in thousands of $, except per share data)
Predecessor
Period from Predecessor
October 10, Combined
2003 Carve-out
Year ended Year ended (inception) to Year ended
December 31, December 31, December 31, December 31,
2006 2005 2004
2003 2003
Operating revenues
Time charter revenues 53,087 62,605 86,741 - 40,759
Bareboat charter revenues 3,986 7,325 27,453 - 25,986
Voyage charter revenues (709) 9,745 49,707 - 628,323
Finance lease interest income from related parties 177,840 176,030 140,691
Finance lease interest income from non-related parties 4,740 1,444 --
-------------------------------
Total finance lease interest income 182,580 177,474 140,691
- --------------------------------
Finance lease service revenues from related parties 106,791 92,265 72,551 - -
Profit sharing revenues from related parties 78,923 88,096 114,926
- -
- ----------------------------------------------------------------- --------------- -------------- -----------------------------------------------------------------------------------------------------------------
Total operating revenues 424,658 437,510 492,069
- 695,068
LossProfit / (loss) on sale of assets 9,806 (654) - - ---
Operating expenses
Voyage expenses and commission 1,736 3,600 9,978 - 148,533
Ship operating expenses to related parties 116,362 108,957 96,392
Ship operating expenses to non-related parties 1,595 1,283 113
Total ship operating expenses 117,957 110,240 96,505
- 81,989
Administrative expenses 2,447 3,812 14 9,715
Depreciation and amortization 14,490 19,907 34,617
Selling, general and administrative expenses
To related parties 1,184 1,013 2,852
To non-related parties 5,400 1,434 960
- 106,015
- ----------------------------------------------------------------- --------------- -------------- ---------------
Total operating expenses 136,194 144,912 14 346,252--------------------------------------------------------------------------------------------------
Net operating income/(loss)income 293,697 300,662 347,157
(14) 348,816
Other income/(expenses)Non-operating income / (expense)
Interest income 3,978 3,343 2,567
199 5,866
Interest expense (113,588) (111,935) (95,933) (2,122) (35,117)
Share of results of associated companies - - - 22,098
Foreign currency exchange gain (loss) (52) 88 - (10,442)
Other financial items, net 17,528 8,780(3,556) 17,476 8,868
- 3,591
- ----------------------------------------------------------------- --------------- -------------- -----------------------------------------------------------------------------------------------------------------
Net other expenses (91,116) (84,498) (1,923) (14,004)
- ----------------------------------------------------------------- --------------- -------------- ---------------
Net income/(loss)income before equity in earnings of associated companies 180,531 209,546 262,659
(1,937) 334,812
================================================================= =============== ============== ===============Equity in earnings of unconsolidated subsidiaries 267 -- --
- --------------------------------------------------------------------------------------------------
Net income 180,798 209,546 262,659
==================================================================================================
Per share information:
Basic and diluted earnings per share $2.84 $3.52 - $4.53$ 2.48 $ 2.84 $ 3.52
Cash dividends paid and declared $2.00 $1.05 - -$ 2.05 $ 2.00 $ 1.05
The accompanying notes are an integral part of these consolidated and combined
carve-out financial
statements.
Ship Finance International Limited
Consolidated Balance Sheets asCONSOLIDATED BALANCE SHEETS
As of December 31, 20052006 and 2004December 31, 2005
(in thousands of $)
December 31, December 31,
2006 2005 2004
ASSETS
Current assets
Cash and cash equivalents 64,569 32,857 29,193
Restricted cash 12,937 1,575
5,379Accounts receivable
Trade accounts receivable491 382
256
Amount dueDue from parent companyrelated parties 63,024 79,416 119,790
Other receivables 3,906 1,409
241
Inventories 331 185 -
Prepaid expenses and accrued income 180 106 -
Investment in finance leases to related parties, current portion 150,492 107,010
76,998Other current assets 11,223 --
- ---------------------------------------------------------- ---------------------------- -------------------------------------------------------------------------------------------------------------------
Total current assets 307,153 222,940
231,857
Vessel purchase optionProperty plant and equipment - 8,370at cost
Newbuilding contracts 7,658 --
Vessels and equipment net308,313 481,732
Accumulated depreciation and amortization (69,422) (166,512)
--------- ---------
246,549 315,220 236,305
Investment in finance leases with related parties, long-term portion 1,958,691 1,818,344
1,641,644Investment in associated companies 3,698 -
Mark to market valuation of derivatives 20,738 19,563 7,737
Deferred charges 16,848 17,846
27,024
- ---------------------------------------------------------- ---------------------------- -------------------------------------------------------------------------------------------------------------------
Total assets 2,553,677 2,393,913
2,152,937
========================================================== ============================ ===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of long-term debt 144,451 122,519 91,308
Trade accounts payable 533 978
180Due to related parties 14,411 -
Accrued expenses 11,262 9,908 8,396
Other current liabilities 2,998 1,315
382
- ---------------------------------------------------------- ---------------------------- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 173,655 134,720 100,266
Long-term liabilities
Long-term debt 1,770,749 1,671,138 1,387,586
Mark to market valuation of derivatives 8,743 1,196 4,103
Other long-term liabilities -- 25,337
- - ---------------------------------------------------------- ---------------------------- -------------------------------------------------------------------------------------------------------------------
Total liabilities 1,953,147 1,832,391 1,491,955
Commitments and contingent liabilities
Stockholders' equity
Share capital 72,744 73,144 74,901
Contributed surplus 464,478 441,105
463,261Accumulated other comprehensive loss (71) --
Retained earnings 63,379 47,273
122,820
- ---------------------------------------------------------- ---------------------------- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 600,530 561,522
660,982
- ---------------------------------------------------------- ---------------------------- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 2,553,677 2,393,913
2,152,937
========================================================== ============================ ===================================================================================================================
The accompanying notes are an integral part of these consolidated and combined
carve-out financial
statements.
Ship Finance International Limited
Consolidated Statements of Cash FlowsCONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2006, 2005 and 2004 and the period from October 10, 2003 (inception) to December 31,
2003 and Predecessor Combined Carve-out Statement of Cash Flows for the
year ended December 31, 2003
(in thousands of $)
Period from Predecessor
October 10, Combined
2003 Carve-out
Year ended Year ended (inception) to Year ended
December 31, December 31, December 31, December 31,
2006 2005 2004
2003 2003
Operating activities
Net income (loss)180,798 209,546 262,659 (1,937) 334,812
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 14,490 19,907 34,617
- 106,015
AmortisationAmortization of deferred charges 3,069 16,524 9,485 69 1,019
Share of results of associated companies - - - (22,098)
Interest income, capitalised - - - (4,489)
Unrealised(4,205) -- --
Unrealized foreign exchange (gain) loss --- -- (164)
- 10,716
Loss(Gain)/ loss on sale of assets (26,469) 654 - - ---
Adjustment of derivatives to market value 6,375 (14,732) (9,289)
- (6,850)
Other (5,091) (4,708) (1,146) - -
Release of accumulated other comprehensive income to - - - 1,609
net income
Changes in operating assets and liabilities, net of effect of acquisitions
Trade accounts receivable 3,455 6,241 (256)
- (343)
Other receivables 525 940 - (199) (129)--
Inventories 352 3,191 - - 4,540--
Other current assets (12,245) 5,266 Voyages in progress - - - (3,061)--
Prepaid expenses and accrued income (74) 129 199 - (285)
Trade accounts payable (445) (1,291) 180
- (539)
Accrued expenses 476 (2,139) 1,750 2,063 (9,092)
Amount due from parent company 30,803 40,374 (119,892) 4 -
Other current liabilities 1,683 932 385
- 3,698
- ---------------------------------------------------------- ---------------- --------------- ---------------- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 193,497 280,834 178,528
- 415,523
Investing activities
Repayments from investments in finance leases 136,760 94,777 61,990
Acquisition of subsidiaries, net of cash acquired (34,810) (518,182) (536,793) - -
Additions to new buildings and vessel purchase options -(7,658) -- (8,370) - -
Purchase of vessels (266,750) (79,772) --
Proceeds from sales of vessels 75,606 229,800 Repayments from investments in finance leases 94,777 61,990 - ---
Investments in associated companies - - - (70,045)
Proceeds from sales508 -- --
Purchase of other investments in associated - - - 17,245
companies(3,000) -- --
Net (placement)/maturity (placement) of restricted cash (11,362) 3,804 560,121 (565,500) -
Short-term loan advances to parent company --- -- (55,254) - -
Short-term loan repayments from parent company --- -- 55,254
- -
Net maturity of other loans receivable - - - 1,168
- ---------------------------------------------------------- ---------------- --------------- ---------------- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) /provided by investing activities (110,706) (269,573) 76,948 (565,500) (51,632)
Financing activities
Proceeds from issuance of shares --- -- 24,696 - -
Repurchases of shares (7,212) (33,083) (14,713) - -
Proceeds from issuance of long-term debt 312,588 1,571,429 1,017,100 580,000 -
Repayments of long-term debt (190,716) (1,253,503) (1,099,707) - (178,236)
Debt fees paid (1,047) (7,347) (15,760) (14,500) (985)
Net repayments to parent company - - - (178,785)
Cash dividends paid (149,123) (148,863) (78,905) - -
Deemed dividends paid (15,569) (136,230) (58,994)
- -
- ---------------------------------------------------------- ---------------- --------------- ---------------- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (51,079) (7,597) (226,283)
565,500 (358,006)
- ---------------------------------------------------------- ---------------- --------------- ---------------- --------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 31,712 3,664 29,193 - 5,885
Cash and cash equivalents at start of the periodyear 32,857 29,193 --
- - 20,634
- ---------------------------------------------------------- ---------------- --------------- ---------------- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the periodyear 64,569 32,857 29,193
- 26,519
========================================================== ================ =============== ================ ================================================================================================================================
Supplemental disclosure of cash flow information:
Interest paid, net of capitalisedcapitalized interest 111,823 92,315 81,992
- 31,543
========================================================== ================ =============== ================ ================================================================================================================================
The accompanying notes are an integral part of these consolidated and combined
carve-out financial
statements.
Ship Finance International Limited
Consolidated Statement of Changes in Stockholders' EquityCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
for the years ended December 31, 2006, 2005 and 2004 and the period from October 10, 2003 (inception)
to December 31, 2003 and Predecessor Combined Carve-out Statement of Changes
in Stockholders' Equity for the
year ended December 31 2003
(in thousands of $, except number of shares)
Period from Predecessor
October 10, Combined
2003 Carve-out
Year ended Year ended (inception) to Year ended
December 31, December 31, December 31, December 31,
2006 2005 2004
2003 2003
Number of shares outstanding
At beginning of periodyear 73,143,737 74,900,837 12,000 - -
Shares issued from contributed surplus --- -- 73,913,837 12,000 -
Shares issued for cash --- -- 1,600,000
- -
ShareShares repurchased and cancelled (400,000) (1,757,100) (625,000)
- -
- ---------------------------------------------------------- ---------------- --------------- ---------------- -----------------------------------------------------------------------------------------------------------------
At end of periodyear 72,743,737 73,143,737 74,900,837
12,000 - - ---------------------------------------------------------- ---------------- --------------- ---------------- -----------------------------------------------------------------------------------------------------------------
Share capital
At beginning of periodyear 73,144 74,901 12 - -
Shares issued from contributed surplus --- -- 73,914 12 -
Shares issued for cash --- -- 1,600
- -
ShareShares repurchased and cancelled (400) (1,757) (625)
- -
- ---------------------------------------------------------- ---------------- --------------- ---------------- -----------------------------------------------------------------------------------------------------------------
At end of periodyear 72,744 73,144 74,901
12 - - ---------------------------------------------------------- ---------------- --------------- ---------------- -----------------------------------------------------------------------------------------------------------------
Contributed surplus
At beginning of periodyear 441,105 463,261 - - ---
Equity contribution from parent company --- -- 525,000 - -
Shares issued from contributed surplus --- -- (73,914) - -
Shares issued for cash --- -- 23,096
- -
ShareShares repurchased and cancelled (6,811) (31,327) (14,088)
- -
AmortisationEmployee stock options issued 49 -- --
Amortization of deferred equity contributions 30,135 9,171 3,167
- -
- ---------------------------------------------------------- ---------------- --------------- ---------------- -----------------------------------------------------------------------------------------------------------------
At end of periodyear 464,478 441,105 463,261
- --------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
At beginning of year -- -- --
Other comprehensive income (loss) (71) -- --
- --------------------------------------------------------------------------------------------------
At end of year (71) -- --
- ---------------------------------------------------------- ---------------- --------------- ---------------- -----------------------------------------------------------------------------------------------------------------
Retained earnings (deficit)
At beginning of periodyear 47,273 122,820 (1,937)
- -
Net income (loss)180,798 209,546 262,659 (1,937) -
Cash dividends paid (149,123) (148,863) (78,905) - -
Deemed dividends paid (15,569) (136,230) (58,997)
- -
- ---------------------------------------------------------- ---------------- --------------- ---------------- -----------------------------------------------------------------------------------------------------------------
At end of periodyear 63,379 47,273 122,820
(1,937) - - ---------------------------------------------------------- ---------------- --------------- ---------------- -----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 600,530 561,522 660,982
(1,925)
- ---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
Invested equity
At beginning of period - - - 485,605
Net income - - - 334,812
Release of accumulated other comprehensive income to net - - - 1,609
income
- ---------------------------------------------------------- ---------------- --------------- ---------------- ---------------
At end of period - - - 822,026
- ---------------------------------------------------------- ---------------- --------------- ---------------- -----------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income (loss)180,798 209,546 262,659
(1,937) 334,812
Release of accumulated other comprehensive income to net - - - 1,609
income
- ---------------------------------------------------------- ---------------- --------------- ---------------- -----------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (71) -- --
- - - 1,609
- ---------------------------------------------------------- ---------------- --------------- ---------------- -----------------------------------------------------------------------------------------------------------------
Comprehensive income 180,727 209,546 262,659
(1,937) 336,421
- ---------------------------------------------------------- ---------------- --------------- ---------------- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated and combined
carve-out financial
statements.
SHIP FINANCE INTERNATIONAL LIMITED
Notes to the Consolidated and Predecessor Combined Carve-out
Financial Statements
1. GENERAL INFORMATION
Ship Finance International Limited ("Ship Finance" or the "Company"), a
publicly listed company on the New York Stock Exchange (ticker SFL), was
incorporated in Bermuda in October 2003 as a subsidiary of Frontline Ltd.
("Frontline") for the purpose of acquiring certain of the shipping assets
of Frontline. In December 2003, Ship Finance issued $580 million of 8.5%
senior notes. Innotes and in the first quarter of 2004, Ship Financethe Company used the
proceeds of the notes issue, together with a refinancing of existing debt,
to fund the acquisition of a fleet of 47 crude oil tankers (including one
purchase option for a VLCC) from Frontline and has chartered each of the
ships back to two Frontline subsidiaries, Frontline Shipping Limited and
Frontline Shipping II Limited (the "Frontline Charterers") for most of
their estimated remaining lives. The Company operates tankers of two sizes: very
large crude carriers ("VLCCs") which are between 200,000 and 320,000
deadweight tons ("dwt"), and Suezmaxes, which are vessels between 120,000
and 170,000 dwt. In addition, the Company operates two containerships with
a carrying capacity of approximately 1,800 twenty-foot equivalent units
("teu"). Ship Finance also entered into fixed rate
management and administrative services agreements with Frontline to
provide for the operation and maintenance of the Company's tankers and
administrative support services. The charters and the management
agreements were each given economic effect as of January 1, 2004 (See Note
17). TheSubsequently, the Company was incorporatedhas acquired other assets.
As of December 31, 2006, the Company owned 27 very large crude oil
carriers ("VLCCs"), 14 Suezmax crude oil carriers, eight oil/bulk/ore
carriers ("OBOs"), one Panamax drybulk carrier, three container vessels
and one jack-up drilling rig. In addition, as a wholly owned subsidiary of Frontline. On
June 16, 2004, Frontline distributed 25% of Ship Finance's common sharesDecember 31, 2006, the
Company had contracted to Frontline's ordinary shareholders with each Frontline shareholder receiving
one share inacquire two Suezmax tankers and four container
vessels. Subsequently, Ship Finance has contracted to acquire an
additional jack-up drilling rig, two Capesize drybulk carriers, three
seismic vessels and five container vessels. Further, the Company has sold
six single-hull Suezmax tankers and entered into a hire purchase agreement
for every four Frontline shares held. On June 17,a single-hull VLCC.
Since its incorporation in 2003 and listing in 2004, Ship Finance common shares commenced trading on the New York Stock
Exchangehas
established itself as a leading international shipowning company,
expanding both its asset and customer base. The Company's principal
strategy is to generate stable and increasing cash flows by chartering its
assets under the ticker symbol "SFL". In 2004 and 2005 Frontline made
four further distributionsmedium to long-term time or bareboat charters to customers
across a diverse group of its shares in Ship Finance and at December
31, 2005 held 15.8% of the Company.maritime segments.
2. ACCOUNTING POLICIES
Basis of Accounting
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States.States ("US GAAP").
The consolidated financial statements include the assets and liabilities
of the Company and its subsidiaries. All intercompanyinter-company balances and
transactions have been eliminated on consolidation.
As at December 31, 2003Consolidation of variable interest entities.
A variable interest entity is defined by Financial Accounting Standards
Board Interpretation ("FIN") 46(R) as a legal entity where either (a)
equity interest holders as a group lack the company
didcharacteristics of a
controlling financial interest, including: decision making ability and an
interest in the entity's residual risks and rewards or (b) the equity
holders have not haveprovided sufficient equity investment to permit the
entity to finance its activities without additional subordinated financial
support, or where (c) the voting rights of some investors are not
proportional to their obligations to absorb the expected losses of the
entity, their rights to receive the expected residual returns of the
entity, or both and substantially all of the entity's activities either
involve or are conducted on behalf of an investor that has
disproportionately few voting rights.
FIN 46(R) requires a variable interest entity to be consolidated if any subsidiaries.of
its interest holders are entitled to a majority of the entity's residual
return or are exposed to a majority of its expected losses.
We evaluate our subsidiaries, and any other entity in which we hold a
variable interest in order to determine whether we are the primary
beneficiary of the entity, and where it is determined that we are the
primary beneficiary we fully consolidate the entity.
Investments in associated companies
Investments in companies over which the Company exercises significant
influence but does not consolidate, are accounted for using the equity
method. The Company records its investments in equity-method investees on
the consolidated balance sheets as "Investments in associated companies"
and its share of the investees' earnings or losses in the consolidated
statements of operations as "Share"Equity in results from associated companies"earnings of unconsolidated
subsidiaries". The excess, if any, of purchase price over book value of
the Company's investments in equity method investees is included in the
accompanying consolidated balance sheets in "Investment in associated
companies".
The Company accounts for certainUse of the long-term charters to Frontline as
sales type leases while the remaining charters are currently being
accounted for as operating leases. For those vessels on existing long-term
charters to third parties, the difference between amounts earned under
those charters and the amounts due to the Company by Frontline is remitted
to Frontline and accounted for as a deemed dividend which reduces
stockholders' equity.accounting estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires that management make estimates and
assumptions affecting the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current period. Effective December 31, 2004 we
have reclassified accrued income relating to profit share due from
Frontline to amounts due from parent company.
Predecessor combined carve-out financial information
The predecessor combined carve-out financial statements are prepared in
accordance with accounting principles generally accepted in the United
States. For the year ended December 31, 2003, the predecessor combined
carve-out financial statements have been carved out of the consolidated
financial statements of Frontline and assume that the Company was operated
as a separate corporate entity prior to its inception. The predecessor
combined carve-out financial statements were prepared in contemplation of
the fleet purchase transaction that occurred effective January 1, 2004 and
reflect the Company's acquisition from Frontline of certain wholly owned
VLCC and Suezmax owning subsidiaries, including certain subsidiaries
acquired through a reorganization of Frontline's interests in certain joint
ventures plus a purchase option to acquire a further VLCC (together the
"Vessel Interests").
Frontline is a shipping company with activities that include the ownership
and operation of oil tankers and dry bulk carriers as well as leasing of
vessels and participation in tanker owning joint venture arrangements.
Frontline is also involved in the purchase and sale of vessels. Where
Frontline's assets, liabilities, revenues and expenses relate to the
specific Vessel Interests, these have been identified and carved out for
inclusion in these financial statements. Frontline's shipping interests and
other assets, liabilities, revenues and expenses that do not relate to the
Vessel Interests have been identified and not included in these financial
statements. The preparation of the carved out financial statements requires
allocation of certain assets and liabilities and expenses where these items
are not identifiable as related to one specific activity. Administrative
overheads of Frontline that cannot be related to a specific vessel type of
operations have been allocated pro-rata based on the number of vessels in
the Company compared with the number in Frontline's total fleet. Management
has deemed that the related allocations are reasonable to present the
financial position, results of operations, and cash flows of the Company.
Management believes the various allocated amounts would not materially
differ from those that would have been achieved had Ship Finance operated
on a stand-alone basis for all periods presented. However, the financial
position, results of operations and cash flows of the Company are not
necessarily indicative of those that would have been achieved had the
Company operated autonomously for all periods presented as the Company may
have made different operational and investment decisions as a Company
independent of Frontline.
The majority of the Company's assets, liabilities, revenues and expenses
are vessel specific and are included in the vessel owning subsidiaries
financial statements. However, in addition, the following significant
allocations have been made:
Long term debt: An allocation of corporate debt of Frontline has been made
which totals $8,608,000 as of December 31, 2003. This debt has been
allocated as it relates specifically to an entity of which the Company has
a purchase option. The associated interest expense has also been allocated
to these predecessor combined carve-out financial statements.
Interest rate swaps: For the purposes of the predecessor combined carve-out
financial statements, interest rate swaps specific to carved out debt have
been included. In addition, non-debt specific interest rate swaps with
notional principal amounts of $50,000,000 have been included on the basis
that such swaps were intended to cover the floating rate debt that has been
included in these predecessor combined carve-out statements. The associated
mark to market adjustments arising on the swaps has also been allocated to
these predecessor combined carve-out financial statements and is included
in other financial items, net.
Administrative expenses: Frontline's overheads relate primarily to
management organizations in Bermuda and Oslo that manage the business.
These overhead costs include salaries and other employee related costs,
office rents, legal and professional fees and other general administrative
expenses. Other employee related costs include costs recognized in relation
to Frontline's employee share option plan. We have allocated overhead pro
rata based on the number of vessels in the Company compared with the number
in Frontline's total fleet. The amount of such costs, presented as part of
administrative expenses, which was allocated from these organizations was
$8,995,000 for the year ended December 31, 2003.
No allocation of interest income has been made and interest income reported
in the predecessor combined carve-out financial statements represents
interest income earned by the vessel owning subsidiaries and interest
earned on loans to joint ventures.
Accounting policies used in preparing the consolidated financial statements
Foreign currencies
The Company's functional currency is the U.S. dollar as the majority of
revenues are received in U.S. dollars and a majority of the Company's
expenditures are made in U.S. dollars. The Company's reporting currency is
U.S. dollars. AllMost of the Company's subsidiaries report in U.S. dollars.
Transactions in foreign currencies during the year are translated into
U.S. dollars at the rates of exchange in effect at the date of the
transaction. Foreign currency monetary assets and liabilities are
translated using rates of exchange at the balance sheet date. Foreign
currency non-monetary assets and liabilities are translated using
historical rates of exchange. Foreign currency transaction gains or losses
are included in the consolidated statements of operations.
Revenue and expense recognition
Revenues and expenses are recognized on the accrual basis. Revenues are
generated from freight billings, time charter hire, bareboat charter hires,hire,
finance lease interest income, finance lease service revenues and profit
sharing revenues. The operating results of voyages in progress are
estimated and recorded pro-rata on a per day basis in the consolidated
statements of operations. Probable losses on voyages are provided for in
full at the time such losses can be estimated. Time charter and bareboat
charter revenues are recorded over the term of the charter as service is
provided.
Finance lease service revenues represent services provided to the lessee
to operate vessels and are recognized on a daily accrual basis.
Profit sharing revenues are recorded when earned and realizable. The
Company considers profit sharing revenues to be earned and realizable to
the extent that a vessel'sthe underlying earnings on a time charter equivalent basis
exceed the profit sharing threshold for the profit sharing period. This
threshold is calculated as the number of days in the profit sharing period
multiplied by the daily profit sharing threshold rates. Ourrates for the applicable
vessels. The Frontline Charterers have agreed to pay us a profit sharing
revenues arepayment equal to 20% of a vessel's underlying earningsthe charter revenues for the applicable period,
calculated annually on an average daily time charter equivalent ("TCE")
basis, realized by the relevant Frontline Charterer for our fleet, in
excess of the threshold.
Revenues and voyage expenses of the vessels operating in pool arrangements
are pooled and the resulting net pool revenues, calculated on a time
charter equivalent basis, are allocated to the pool participants according
to an agreed formula. Formulae used to allocate net pool revenues vary
among different pools but generally allocate revenues to pool participants
on the basis of the number of days a vessel operates in the pool with
weighting adjustments made to reflect vessels' differing capacities and
performance capabilities. The same revenue and expenses principles stated
above are applied in determining the pool's net pool revenues. Certain
pools are responsible for paying voyage expenses and distribute net pool
revenues to the participants. Certain pools require the participants to pay
and account for voyage expenses, and distribute gross pool revenues to the
participants such that the participants' resulting net pool revenues are
equal to net pool revenues calculated according to the agreed formula. The
Company accounts for gross pool revenues allocated by these pools as "pool
revenues" which are included in voyage revenues in its statements of
operations. Refer to Note 5 for further analysis of pool revenues.daily base charterhire.
Cash and cash equivalents
For the purposes of the statement of cash flows, all demand and time
deposits and highly liquid, low risk investments with original maturities
of three months or less are considered equivalent to cash.
Vessels and equipment
The cost of the vesselsfixed assets less estimated residual value is depreciated on a
straight-line basis over the vessels' estimated remaining economic useful lives.life of
the asset. The estimated economic useful life of the Company's double hull
vessels is
25 years, andbut for single hull vessels it is either 25 years or the
vessel's anniversary date in 2015, whichever comes first.
In December 2003,2015. For the International Maritime Organization adopted new
regulations that will result in a more accelerated phase-out of single hull
vessels. As a result of this, the Company re-evaluated the estimated useful
life of its single hull vessels and determined this to be either 25 years
or the vessel's anniversary date in 2015 whichever came first. As a result,
the estimated useful life of thirteen of the Company's vessels was reduced
in the fourth quarter of 2003. A change in accounting estimate was
recognized in the predecessor combined carve-out financial statements to
reflect this decision, resulting in an increase in depreciation expense and
consequently decreasing net income by $1.1 million in 2003.
Vessel purchase options
Vessel purchase options are capitalized at the time option contracts are
acquired or entered into.rigs it is 30 years.
Newbuildings
The Company reviews expected future cash flows,
which would result from the exercise of each option contract on a contract
by contract basis to determine whether the carrying value of the option is
recoverable. Ifvessels under construction ("newbuildings")
represents the expected future cash flows are less than the carrying
value of the option plus furtheraccumulated costs to delivery, provisionthe balance sheet date which the
Company has had to pay by way of purchase installments and other capital
expenditures together with capitalized loan interest and associated
finance costs. During the year ended December 31, 2006, we capitalized
$0.3 million of interest. No charge for depreciation is made to
write down the carrying value of the option to the recoverable amount. The
carrying value of each option payment is written off as and when the
Company adopts a formal plan not to exercise the option. Purchase price
payments are capitalized and the total of the option payment, if any, and
purchase price payment is transferred to cost of vessels, upon exercise of
the option and delivery ofuntil the
vessel to the Company.is put into operation.
Leases
Leases of our vessels where we are the lessor are classified as either
finance leases or operating leases based on an assessment of the terms of
the lease. For the long term charters classified as finance type leases
the minimum lease payments (net of amounts representing estimate executory
costs including profit thereon) plus the unguaranteed residual value are
recorded as the gross investment in the lease. The difference between the
gross investment in the lease and the sum of the present values of the two
components of the gross investment is recorded as unearned income which is
amortisedamortized to income over the lease term as finance lease interest income
to produce a constant periodic rate of return on the net investment in the
lease.
Deemed Dividends
Certain of the Company's vessels acquired in 2005 were on charter to third
parties at the delivery date to the Company and certain of its vessels
acquired as part of the original purchase of the Vessel Interestsvessels from Frontline were
on charter to third parties as at January 1, 2004 when the charter
arrangements with the Frontline Charterers became economically effective.
The Company's arrangement with the Frontline Charterers is that while the
vessels are completing performance of third party charters, the Company
pays the Frontline Charterers all revenues earned under third party
charters in exchange for the Frontline Charterers paying the Company the
charter rates under the charter agreements with the Frontline charter rates.Charterers.
The revenues received from these third party charters are accounted for as
time charter, bareboat or voyage revenues as applicable and the subsequent
payment of these amounts to the Frontline Charterers as deemed dividends
paid. The Company accounts for the charter revenues received from the
Frontline ShippingCharterers prior to the charters becoming effective for
accounting purposes, as deemed equity contributions received. This
treatment has been applied due to the related party nature of the charter
arrangements.
The Company has accounted for the acquisition of assetsvessels from entities under
common controlFrontline at
the historical carrying value of the seller.Frontline. The difference between the
purchase price and historical carrying value has been recorded as a deemed
dividend paid.
Deemed Equity Contributions
The Company has accounted for the difference between the historical cost
of the vessels transferred to the Company from Frontline at Frontline's
historical carrying value, and the net investment in the lease as a
deferred deemed equity contribution. This deferred deemed equity
contribution is presented as a reduction in the net investment in finance
leases in the balance sheet. This results from the related party nature of
both the transfer of the vessel and the subsequent finance lease. The
deferred deemed equity contribution is amortized as a credit to
contributed surplus over the life of the new lease arrangement, as lease
payments are applied to the principal balance of the lease receivable.
Impairment of long-lived assets
The carrying value of long-lived assets that are held and used by the
Company are reviewed whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
assesses recoverability of the carrying value of the asset by estimating
the future net cash flows expected to result from the asset, including
eventual disposition. If the future net cash flows are less than the
carrying value of the asset, an impairment loss is recorded equal to the
difference between the asset's carrying value and fair value. In addition,
long-lived assets to be disposed of are reported at the lower of carrying
amount and fair value less estimated costs to sell.
Deferred charges
Loan costs, including debt arrangement fees, are capitalized and amortized
on a straight line basis over the term of the relevant loan. The straight
line basis of amortization approximates the effective interest method in
the Company's statement of operations. Amortization of loan costs is
included in interest expense. Financial Instruments
In determining fair value of its financial instruments, the Company usesIf a variety of methods and assumptions that are based on market conditions and
risks existing at each balance sheet date. For the majority of financial
instruments including most derivatives and long term debt, standard market
conventions and techniques such as options pricing models are used to
determine fair value. All methods of assessing fair value result in a
general approximation of value, and such value may never actually be
realized.
The Company has no independent assets or operations from those if its
subsidiaries who have provided guarantees to its indebtedness. These
guarantees are full and unconditional and joint and several. Allloan is repaid early, any unamortized
portion of the Company's subsidiaries are guarantors.
Derivatives
The Company enters into interest rate swap transactions from time to time
to hedge a portion of its exposure to floating interest rates. These
transactions involve the conversion of floating rates into fixed rates over
the life of the transactions without an exchange of underlying principal.
SFAS 133, as amended by SFAS 137 "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No.133"
and SFAS 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities an amendment of FASB Statement No. 133", requires an
entity to recognize all derivatives as either assets or liabilities on the
balance sheet and measure these instruments at fair value. Changesrelated deferred charges is charged against income in the
fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivativewhich the loan is designated
as part of a hedge transaction and, if it is, the type of hedge
transaction. In order to qualify for hedge accounting under SFAS 133,
certain criteria and detailed documentation requirements must be met.
Drydocking provisions
Normal vessel repair and maintenance costs are charged to expense when
incurred. The Company recognises the cost of a drydocking at the time the
drydocking takes place, that is, it applies the "expense as incurred"
method.
Accounting policies used in preparing the predecessor combined-carve out
financial statements
Foreign currencies
The Company's functional currency is the U.S. dollar as the majority of
revenues are received in U.S. dollars and a majority of the Company's
expenditures are made in U.S. dollars. The Company's reporting currency is
U.S. dollars. Most of the Company's subsidiaries report in U.S. dollars.
Transactions in foreign currencies during the year are translated into U.S.
dollars at the rates of exchange in effect at the date of the transaction.
Foreign currency monetary assets and liabilities are translated using rates
of exchange at the balance sheet date. Foreign currency non-monetary assets
and liabilities are translated using historical rates of exchange. Foreign
currency transaction gains or losses are included in the consolidated
statements of operations.
Revenue and expense recognition
Revenues and expenses are recognized on the accrual basis. Revenues are
generated from freight billings, contracts of affreightment, time charter,
and bareboat charter hires. The operating results of voyages in progress
are estimated and recorded pro-rata on a per day basis. Probable losses on
voyages are provided for in full at the time such losses can be estimated.
Time charter and bareboat charter revenues are recorded over the term of
the charter as service is provided. Amounts receivable or payable arising
from profit sharing arrangements are accrued based on the estimated results
of the voyage recorded as at the reporting date.
Revenues and voyage expenses of the vessels operating in pool arrangements
are pooled and the resulting net pool revenues, calculated on a time
charter equivalent basis, are allocated to the pool participants according
to an agreed formula. Formulae used to allocate net pool revenues vary
among different pools but generally allocate revenues to pool participants
on the basis of the number of days a vessel operates in the pool with
weighting adjustments made to reflect vessels' differing capacities and
performance capabilities. The same revenue and expenses principles stated
above are applied in determining the pool's net pool revenues. Certain
pools are responsible for paying voyage expenses and distribute net pool
revenues to the participants. The Company accounts for the net pool
revenues allocated by these pools as "pool revenues" which are included in
voyage revenues in its statements of operations. Certain pools require the
participants to pay and account for voyage expenses, and distribute gross
pool revenues to the participants such that the participants' resulting net
pool revenues are equal to net pool revenues calculated according to the
agreed formula. The Company accounts for gross pool revenues allocated by
these pools as "pool revenues" which are included in voyage revenues in its
statements of operations. Refer to Note 5 for further analysis of pool
revenues.
Cash and cash equivalents
For the purposes of the statement of cash flows, all demand and time
deposits and highly liquid, low risk investments with original maturities
of three months or less are considered equivalent to cash.
Inventories
Inventories, which is comprised of principally fuel and lubricating oils,
are stated at the lower of cost and market value. Cost is determined on a
first-in, first-out basis.
Vessels and equipment
The cost of the vessels less estimated residual value is depreciated on a
straight-line basis over the vessels' estimated remaining economic useful
lives. The estimated economic useful life of the Company's double hull
vessels is 25 years and for single hull vessels is either 25 years or the
vessel's anniversary date in 2015, whichever comes first.
In December 2003, the International Maritime Organization adopted new
regulations that will result in a more accelerated phase-out of single hull
vessels. As a result of this, the Company re-evaluated the estimated useful
life of its single hull vessels and determined this to be either 25 years
or the vessel's anniversary date in 2015 whichever came first. As a result,
the estimated useful life of thirteen of the Company's vessels was reduced
in the fourth quarter of 2003. A change in accounting estimate was
recognized in the predecessor combined carve-out financial statements to
reflect this decision, resulting in an increase in depreciation expense and
consequently decreasing net income by $1.1 million in 2003.
Vessel purchase options
Vessel purchase options are capitalized at the time option contracts are
acquired or entered into. The Company reviews expected future cash flows,
which would result from exercise of each option contract on a contract by
contract basis to determine whether the carrying value of the option is
recoverable. If the expected future cash flows are less than the carrying
value of the option plus further costs to delivery, provision is made to
write down the carrying value of the option to the recoverable amount. The
carrying value of each option payment is written off as and when the
Company adopts a formal plan not to exercise the option. Purchase price
payments are capitalized and the total of the option payment, if any, and
purchase price payment is transferred to cost of vessels, upon exercise of
the option and delivery of the vessel to the Company.
Impairment of long-lived assets
The carrying value of long-lived assets that are held and used by the
Company are reviewed whenever events or changes in circumstances indicate
that the carrying amount of an asset may not recoverable. The Company
assesses recoverability of the carrying value of the asset by estimating
the future net cash flows expected to result from the asset, including
eventual disposition. If the future net cash flows are less than the
carrying value of the asset, an impairment loss is recorded equal to the
difference between the asset's carrying value and fair value. In addition,
long-lived assets to be disposed of are reported at the lower of carrying
amount and fair value less estimated costs to sell.
Deferred charges
Loan costs, including debt arrangement fees, are capitalized and amortized
on a straight-line basis over the term of the relevant loan. The straight
line basis of amortization approximates the effective interest method in
the Company's statement of operations. Amortization of loan costs is
included in interest expense.repaid.
Financial Instruments
In determining fair value of its financial instruments, the Company uses a
variety of methods and assumptions that are based on market conditions and
risks existing at each balance sheet date. For the majority of financial
instruments including most derivatives and long term debt, standard market
conventions and techniques such as options pricing models are used to
determine fair value. All methods of assessing fair value result in a
general approximation of value, and such value may never actually be
realized.
Derivatives
The Company enters into interest rate swap transactions from time to time
to hedge a portion of its exposure to floating interest rates. These
transactions involve the conversion of floating rates into fixed rates
over the life of the transactions without an exchange of underlying
principal. Hedge accounting
may be used to account for these swaps provided certain hedging criteria
are met. On January 1, 2002,The fair values of the Company discontinued hedge accounting for
two interest rate swaps previously accounted forswap contracts are
recognized as cash flow hedges. This
resulted in a balance of $4.9 million being frozen in accumulated other
comprehensive income as at that date and this amount was reclassified into
the consolidated statement of operations over the remaining lives of the
underlying debt instruments. The underlying loans were repaid in 2004 and
the then remaining balance in accumulated other comprehensive income of
$2.5 million was reclassified into earnings.
SFAS 133, as amended by SFAS 137 "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No.133"
and SFAS 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities an amendment of FASB Statement No. 133", requires an
entity to recognize all derivatives as either assets or liabilities onwith changes in fair values recognized
in the balance sheetconsolidated statements of operations.
When the interest rate swap qualifies for hedge accounting under Statement
of Financial Accounting Standards ("FAS") 133, and measure these instruments at fair value. Changesthe Company has
formally designated the swap instrument to the underlying loan, and when
the hedge is effective, the changes in the fair value of derivatives are recorded each periodthe swap will be
recognized in current earnings or other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and, if it is, the type of hedge
transaction. In order to qualify for hedge accounting under SFAS 133,
certain criteria and detailed documentation requirements must be met.income.
Drydocking provisions
Normal vessel repair and maintenance costs are charged to expense when
incurred. The Company recognisesrecognizes the cost of a drydocking at the time the
drydocking takes place, that is, it applies the "expense as incurred"
method. The expense as incurred method is considered an appropriate method
of recognizing drydocking costs as it eliminates the uncertainty
associated with estimating the cost and timing of future drydockings.
Earnings per share
Basic earnings per share ("EPS") is computed based on the income available
to common stockholders and the weighted average number of shares
outstanding for basic EPS. Diluted EPS includes the effect of the assumed
conversion of potentially dilutive instruments.
Stock-based compensation
Effective January 1, 2006 the Company adopted FAS 123(R) Share-Based
Payment. Under FAS 123(R) we are required to expense the fair value of
stock options issued to employees over the period the options vest.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003,March 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 156 Accounting for Servicing of Financial Assets - an amendment
to FAS 140 ("SFAS 156"). SFAS 156 requires that all separately recognized
servicing rights be initially measured at fair value if practicable. The
statement also permits an entity to choose between two measurement methods
for each class of separately recognized servicing assets and liabilities.
SFAS 156 is effective for fiscal years beginning after September 15, 2006.
The Company does not expect the adoption of SFAS 156 to have an impact on
its financial statements.
In July 2006, the FASB issued Interpretation 46, ConsolidationNo. 48 Accounting for
Uncertainty in Income Taxes - an interpretation of Variable Interest Entities. In December 2003,FAS 109 ("FIN 48"). FIN
48 clarifies the FASB issued
Interpretation 46 Revised, Consolidationapplication of Variable Interest Entities. In
general, a variable interest entity is a corporation, partnership, trust,
orSFAS 109 by defining the criterion that an
individual tax position must meet for any other legal structure used for business purposespart of the benefit of that
either (a)
does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity
to support its activities. Interpretation 46 requires a variable interest
entityposition to be combined by a company if that company is subject to a majority
of the risk of loss from the variable interestrecognized in an entity's activities or
entitled to receive a majority of the entity's residual returns or both.
The consolidation requirements of Interpretation 46 apply in the first
fiscal year or interim period ending after December 15, 2003 to variable
interest entities created after January 31, 2003. The consolidation
requirements apply in the first fiscal year or interim period ending after
December 15, 2003 for "Special Purpose Entities" created before January 31,
2003. The consolidation requirements apply in the first fiscal year or
interim period ending after March 15, 2004 for other entities created
before January 31, 2003. Certain of the disclosure requirements apply in
all financial statements issued after January 31, 2003, regardless of when
the variableand also
provides guidance on measurement, de-recognition, classification, interest
entity was established. The adoption of
Interpretation 46 did not result in the consolidation of any entities.
The Company had an option to purchase the VLCC Oscilla on or before the
expiry of a five-year time charter, which commenced in March 2000. Oscilla
was owned and operated by an unrelated entity, Seacrest Shipping Ltd.
("Seacrest"). If the Company had exercised its option at December 31, 2003,
the cost to the Company of the Oscilla would have been approximately $42.3
millionpenalties and the maximum exposure to loss is $17.4 million, representing
amounts outstanding from Seacrest of $9.0 million and the carrying value of
the option of $8.4 million. At December 31, 2003, Seacrest had total
indebtedness of $36.0 million (including $9.0 million due to the Company)
and JPY674.6 million (equivalent to $6.3 million) and the fair value of the
vessel Oscilla was $78.5 million. Prior to the adoption ofdisclosure. FIN 46R, this
special purpose entity was not consolidated in the predecessor combined
carve out financial statements. We have determined that the entity that
owns Oscilla is a variable interest entity and that we are the primary
beneficiary. At December 31, 2004 through to January 2005 when we exercised
our option to acquire the vessel, after exhaustive efforts, we were unable
to obtain the accounting information necessary to be able to consolidate
the entity that owned Oscilla. If we had exercised the option at December
31, 2004, the cost of the Oscilla would have been approximately $28.5
million and our maximum exposure to loss was $8.4 million. We have taken
delivery of the vessel in April 2005.
In December 2004, the FASB issued Statement of Financial Accounting
Standards 153 Exchanges of Nonmonetary Assets, an amendment of APB Opinion
No. 29 ("SFAS 153"). APB Opinion No. 29 Accounting for Nonmonetary
Transactions ("APB 29") provides that accounting for nonmonetary
transactions should be measured based on the fair value of the assets
exchanged but allows certain exceptions to this principle. SFAS 153 amends
APB 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that don't have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. SFAS 15348 is effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005 and shall be applied prospectively. Adoption
of SFAS 153 has not affected the Company's results to date.
In May 2005, the FAS issued Statement of Financial Accounting Standards 154
Accounting Changes and Error Corrections, a replacement of APB Opinion No.
20 and FAS 3 ("SFAS 154"). SFAS 154 replaces APB Opinion No. 20 Accounting
Changes and FAS 3 Reporting Accounting Changes in Interim Financial
Statements. Previously, most changes in accounting principle were
recognised by including the cumulative effect of changing to the new
accounting principle in net income for the period of the change. SFAS 154
requires retrospective application of a change in accounting principle to
prior periods unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change to any
period. When it is impracticable to determine the period-specific effects
of an accounting change, SFAS 154 requires that the new accounting
principle be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the opening
balance of retained earnings ( or other appropriate components of equity or
net assets) for that period rather than being reported in an income
statement. SFAS 154 is applicable for all accounting changes and
corrections of errors occurring in fiscal years
beginning after December 15, 2005.2006. The Company does not expect the
adoption of SFAS 154 on January 1,
2006FIN 48 to have a significantan impact on its financial statements.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. SFAS 157 applies under
most other accounting pronouncements that require or permit fair value
measurements and does not require any new fair value measurements. SFAS
157 is effective for fiscal years beginning after November 15, 2007. The
Company has not yet determined the effect of adoption of SFAS 157 on its
financial statements.
In September 2006, the FASB issued SFAS No. 158 Employers' Accounting for
Defined Benefit Pension and Other Post Retirement Plans - an amendment of
SFAS 87, 88, 106, and 132R ("SFAS 158"). SFAS 158 requires that the funded
status of defined benefit post retirement plans be recognized in the
statement of financial position and changes in the funded status be
reflected in comprehensive income. SFAS 158 also requires the benefit
obligations to be measured as of the same date of the financial statements
and requires additional disclosures related to the effects of delayed
recognition of gains or losses, prior service costs or credits and
transition assets or obligation on net periodic benefit cost. SFAS 158 is
effective for fiscal years ending after December 15, 2006 for employers
without publicly traded securities. The Company does not expect the
adoption of SFAS 158 to have an impact on its financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements ("SAB 108"), which
provides interpretative guidance on how registrants should quantify
financial statement misstatements. Under SAB 108 registrants are required
to consider both a "rollover" method, which focuses primarily on the
income statement impact of misstatements, and the "iron curtain" method,
which focuses primarily on the balance sheet impact of misstatements. The
effects of prior year uncorrected errors include the potential
accumulation of improper amounts that may result in material misstatement
on the balance sheet or the reversal of prior period errors in the current
period that result in a material misstatement of the current period income
statement amounts. Adjustments to current or prior period financial
statements would be required in the event that after application of
various approaches for assessing materiality of a misstatement in a
current period financial statements and consideration of all relevant
quantitative and qualitative factors, a misstatement is determined to be
material. The Company adopted the provisions of SAB 108 as of December 31,
2006. The adoption of SAB 108 did not have an effect on the Company's
results of operations or financial position.
4. SEGMENTALSEGMENT INFORMATION
The Company has only one reportable segment, leasing. Segment results are
evaluated based on income from vessel operations before general and
administrative expenses. The accounting policies used in the reportable
segment are the same as those followed in the preparation of the Company's
consolidated financial statements.
The Company's management does not evaluate performance by geographical
region as this information is not meaningful.
Information about the Company's reportable segment as of and for the each
of the years ended December 31, 2005 and December 31, 2004 are as follows:
(in thousands of $) Leasing 2005 Leasing 2004
Total operating revenues 437,510 492,069
Voyage expenses 3,600 9,978
Ship operating expenses 110,240 96,505
Depreciation and amortisation 19,907 34,617
Interest income 173 663
Interest expense 111,935 95,933
Net income 205,984 264,317
Vessels and equipment, net 315,220 236,305
Investment in finance leases 1,925,354 1,718,642
Total assets 2,366,288 2,111,257
Expenditure for vessels 79,772 -
Reconciliations of reportable segments information to the Company's
consolidated totals follows:
(in thousands of $) 2005 2004
Total operating revenues
Total operating revenues for
reportable segments 437,510 492,069
Other operating revenues - -
Total consolidated operating revenues 437,510 492,069
Interest income
Total interest income for
reportable segments 173 663
Interest income attributable to corporate 3,170 1,904
holding and management companies
-------------------------------------------------------------------------
Total consolidated interest income 3,343 2,567
-------------------------------------------------------------------------
Interest expense
Total interest expense for
reportable segments 111,935 95,933
Interest expense attributable to corporate - -
holding and management companies
-------------------------------------------------------------------------
Total consolidated interest expense 111,935 95,933
-------------------------------------------------------------------------
Depreciation
Total depreciation for reportable segments 19,907 34,617
Depreciation not attributed to segments - -
-------------------------------------------------------------------------
Total consolidated depreciation 19,907 34,617
-------------------------------------------------------------------------
Net income
Net income for reportable segments 205,984 264,317
Net income attributable to corporate 3,562 (1,658)
holding and management companies
-------------------------------------------------------------------------
Total net income 209,546 262,659
-------------------------------------------------------------------------
Vessels and equipment, net
Vessels and equipment, net for
reportable segments 315,220 236,305
Vessels and equipment not attributed
to segments - -
-------------------------------------------------------------------------
Total consolidated vessels and equipment, net 315,220 236,305
Investment in finance leases
Investment in finance leases for
reportable segments 1,925,354 1,718,642
Investment in finance leases not
attributed to segments - -
-------------------------------------------------------------------------
Total consolidated investment in finance leases 1,925,354 1,718,642
-------------------------------------------------------------------------
Assets
Total assets for reportable segments 2,366,288 2,111,257
Cash and cash equivalents attributable to
holding company 26,751 28,447
Other assets attributable to corporate 874 13,233
holding and management companies
-------------------------------------------------------------------------
Total consolidated assets 2,393,913 2,152,937
-------------------------------------------------------------------------
During the year ended December 31, 2005, the Company reported total income
from one customer of $358 million. These revenues are reported under the
leasing segment.
During the years ended December 31, 2005 and 2004 one
customer accounted for 10% or more of consolidated operating revenues.
5. POOL REVENUES
Voyage charter revenues included in these financial statements include pool
revenues. Certain pools are responsible for paying voyage expenses and
distribute net pool revenues to the participants while other pools require
the participants to pay and account for voyage expenses, and distribute
gross pool revenues to the participants such that the participants'
resulting net pool revenues are equal to net pool revenues calculated
according to the agreed formula. An analysis of the Company's pool revenues
included within voyage revenues is as follows:
------------------------------------------------------ -------------- -------------- ---------------
(in thousands of $) Year ended Year ended Period from Predecessor
December 31, December 31, October 10, Combined
2005 2004 2003 Carve-Out
(inception) Year ended
to December December 31,
31, 2003 2003
------------------------------------------------------ -------------- -------------- ---------------
Pool earnings allocated on gross basis - 4,040 - 45,749
Pool earnings allocated on net basis (4) 4,464 - 37,775
Total pool earnings (4) 8,504 - 83,524
------------------------------------------------------ -------------- -------------- ---------------
6. TAXATION
Bermuda
Under current Bermuda law, the Company is not required to pay taxes in
Bermuda on either income or capital gains. The Company has received
written assurance from the Minister of Finance in Bermuda that, in the
event of any such taxes being imposed, the Company will be exempted from
taxation until the year 2016.
United States
The Company does not accrue U.S. income taxes as, in the opinion of U.S.
counsel, the Company is not engaged in a U.S. trade or business and is
exempted from a gross basis tax under Section 883 of the U.S. Internal
Revenue Code.
A reconciliation between the income tax expense resulting from applying
the U.S. Federal statutory income tax rate and the reported income tax
expense has not been presented herein as it would not provide additional
useful information to users of the financial statements as the Company's
net income is subject to neither Bermuda nor U.S. tax.
Other Jurisdictions
Certain of the Company's subsidiaries in Singapore are subject to
taxation. The tax paid by subsidiaries of the Company that are subject to
taxation is not material.
7.6. EARNINGS PER SHARE
Basic earnings per share ("EPS") for all periods prior to June 16, 2004 has
been computedThe computation of basic EPS is based on the net income (loss) available to common
stockholders and theweighted average number of
common shares outstanding on June 16, 2004,during the date on whichyear. Diluted EPS includes the Company was partially spun off from Frontline. Basic
EPS for all periods subsequent to June 16, 2004 is computed based oneffect of the
net income (loss) available to common stockholders and the numberassumed conversion of common
shares outstanding. For all periods presented there are no potentially dilutive securities.instruments.
The components of the numerator for the calculation of basic and diluted
EPS are as follows:
(in thousands of $) Year ended Year ended Period from Predecessor
December 31, December 31, October 10, Combined
2005 2004 2003 Carve-Out
(inception) Year ended
to December December 31,
31, 2003 2003
---------------------------------------------- -------------- -------------- -------------- --------------
Net income (loss) available to stockholders 209,546 262,659 (1,937) 334,812
---------------------------------------------- -------------- -------------- -------------- --------------
--------------------------------------------------------------------------
(in thousands of $) Year ended December 31,
--------------------------------------------------------------------------
2006 2005 2004
Net income available to stockholders 180,798 209,546 262,659
--------------------------------------------------------------------------
The components of the denominator for the calculation of basic diluted EPS
are as follows:
(in thousands ) Year ended Year ended Period from Predecessor
December 31, December 31, October 10, Combined
2005 2004 2003 Carve-Out
(inception) Year ended
to December December 31,
31, 2003 2003
----------------------------------------- -------------- -------------- -------------- --------------
Weighted average number of common shares
outstanding 74,560 74,611 73,925 73,925
----------------------------------------- -------------- -------------- -------------- --------------
8.--------------------------------------------------------------------------
(in thousands) Year ended December 31
--------------------------------------------------------------------------
2006 2005 2004
Weighted average number of common shares
outstanding 72,764 73,904 74,611
7. OPERATING LEASES
Rental income
The minimum future revenues to be received under the Company's
non-cancellablenon-cancelable operating leases as of December 31, 20052006 are as follows:
--------------------------------------------------------------------------
Year ending December 31,
Yen revenues Revenues Total
(in thousands) (in (Y)) (in $ (inthousands of $)
(in $)
equivalent)
2006 35,700 303 45,610 45,913--------------------------------------------------------------------------
2007 17,363 17,36341,186
2008 15,823 15,82342,383
2009 4,422 4,42236,004
2010 32,035
2011 29,878
Thereafter - - - -
---------------------------------------------------------------------------7,532
--------------------------------------------------------------------------
Total minimum lease revenues 35,700 303 83,218 83,521
---------------------------------------------------------------------------189,018
--------------------------------------------------------------------------
The cost and accumulated depreciation of vessels leased to third parties
on operating leases at December 31, 20052006 and 20042005 were as follows:
--------------------------------------------------------------------------
(in thousands of $) 2006 2005
--------------------------------------------------------------------------
Cost 308,313 481,732
Accumulated depreciation 69,422 166,512
8. RESTRICTED CASH
--------------------------------------------------------------------------
(in thousands of $) 2006 2005
--------------------------------------------------------------------------
Restricted cash 12,937 1,575
Restricted cash is mainly comprised of deposits held as collateral by the
relevant banks in connection to interest rate swap and bond swap
arrangements. At December 31, 2005 December 31, 2004
Cost 481,732 384,198
Accumulated depreciation 166,512 147,8932006 restricted cash balance also contained
a deposit held by courts in Australia in connection with settlement of a
claim made by the technical manager of the Sea Beta, resulting from the
bankruptcy of the charterer of the vessel.
9. TRADE ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
Trade accounts receivable
Trade accounts receivable are presented net of allowances for doubtful
accounts amounting to $nilaccounts. There is no provision made for doubtful debt as of each of December 31,
20052006 and 2004.2005.
Other receivables
Other receivables are presented net of allowances for doubtful accounts
amounting to $nil as of eachaccounts.
As of December 31, 2006 and 2005 and 2004.there was no allowance.
10. VESSEL PURCHASE OPTION
The Company had an option from a third party to purchase the VLCC Oscilla
on expiry of a five-year time charter, which commenced in March 2000. The
Company acquired the option from Frontline in 2004 for $8.4 million as part
of the Vessel Interests. In January 2005, the Company exercised its option
to acquire the vessel with the purchase price paid being equal to the
outstanding mortgage debt under four loan agreements between lenders and
the vessel's owning company. In addition, the Company made a payment of
$14.6 million to Frontline to reflect the fact that the original purchase
price was set assuming delivery to Ship Finance on January 1, 2004 whereas
delivery did not occur until April 4, 2005. On the delivery date, the
vessel, which has been renamed Front Scilla, commenced a fixed rate time
charter to Frontline following the structure in place for other vessels
chartered to Frontline. The additional payment to Frontline has been
accounted for as a deemed dividend paid.
11. VESSELS AND EQUIPMENT, NET
--------------------------------------------------------------------------
(in thousands of $) December 31,2006 2005 December 31, 2004
--------------------------------------------------------------------------
Cost 308,313 481,732 385,436
Accumulated depreciation 69,422 166,512 149,131
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net book value 238,891 315,220 236,305
--------------------------------------------------------------------------
Depreciation expense was $14.5 million, $19.9 $34.6, $nil,million and $106.1$34.6 million
for the years ended December 31, 2006, 2005 and 2004, the period from October 10, 2003 to
December 31, 2003 and for the predecessor combined carve out for the year
ended December 31, 2003.
In November 2005, the bareboat charterer of the vessel "Navix Astral"
declared their intent to exercise their purchase option and the vessel was
delivered to her new owner in January 2006. As a consequence, an impairment
loss of $1.9 million has been included in the statement of operations for
the year ended December 31, 2005.
12.respectively.
11. INVESTMENTS IN FINANCE LEASES
TheMost of the Company's tankersVLCCs, Suezmaxes and OBOs are chartered on long
term, fixed rate charters to the Frontline Charterers which extend for
various periods depending on the age of the vessels, ranging from
approximately sevensix to 2320 years. The terms of the charters do not provide
the Frontline Charterers with an option to terminate the charter before
the end of its term, other than with respect to the Company's non-double
hull vessels for which there are termination options commencing in 2010.
Of these charters, 44 areThe Company's jack-up drilling rig West Ceres is chartered on a long term
bareboat charter to SeaDrill Invest I Ltd ("SeaDrill Invest I"). The terms
of the charter provide the charterer with various call options throughout
the charter period which expires in 2021.
As of December 31, 2006, 48 of the Company's assets were accounted for as
sales type leases. The following lists the components of the investments
in finance leases as of December 31, 2005:
(in thousands of $)
Total minimum lease payments to be received 4,060,056
Less: amounts representing estimated executory costs including (1,019,259)
profit thereon, included in total minimum lease payments
---------------------------------------------------------------------------------------
Net minimum lease payments receivable 3,040,797
Estimated residual values of leased property (unguaranteed) 596,697
Less: unearned income (1,429,445)
---------------------------------------------------------------------------------------
2,208,049
Less: deferred deemed equity contribution (249,601)
Add: accumulated amortization of deferred deemed equity contribution 9,171
---------------------------------------------------------------------------------------
Less: unamortised gains (42,265)
---------------------------------------------------------------------------------------
1,925,354
Current portion 107,010
Long-term portion 1,818,344
---------------------------------------------------------------------------------------
1,925,354
---------------------------------------------------------------------------------------
13.2006:
--------------------------------------------------------------------------
(in thousands of $) 2006 2005
--------------------------------------------------------------------------
Total minimum lease payments to be received 4,330,607 4,060,056
Less: amounts representing estimated (1,165,139) (1,019,259)
executory costs including profit thereon,
included in total minimum lease payments
--------------------------------------------------------------------------
Net minimum lease payments receivable 3,165,468 3,040,797
Estimated residual values of leased property 644,188 596,697
(unguaranteed)
Less: unearned income (1,425,740) (1,429,445)
--------------------------------------------------------------------------
2,383,916 2,208,049
Less: deferred deemed equity contribution (237,208) (240,430)
--------------------------------------------------------------------------
Less: unamortized gains (37,525) (42,265)
--------------------------------------------------------------------------
2,109,183 1,925,354
--------------------------------------------------------------------------
Current portion 150,492 107,010
Long-term portion 1,958,691 1,818,344
--------------------------------------------------------------------------
2,109,183 1,925,354
--------------------------------------------------------------------------
12. INVESTMENT IN ASSOCIATED COMPANIES
At December 31, 2003, Frontline had2006, the Company has the following participation in investmentsan
investment that wereis recorded in the Company's predecessor combined
carve-out financial statements using the equity method:
Vessel/ Country--------------------------------------------------------------------------
2006 2005
--------------------------------------------------------------------------
Front Shadow Inc. 100.00% --
Summarized balance sheet information of Ownership
Name Activity Incorporation Percentage
---- -------- ------------- ----------
Ariake Transport Corporation.... Ariake Liberia 50.1%
Dundee Navigation SA............ Dundee Liberia 50.1%
Edinburgh Navigation SA......... Edinburgh Liberia 50.1%
Hitachi Hull #4983 Corporation.. Hakata Liberia 50.1%
Sakura Transport Corporation.... Sakura I Liberia 50.1%
Tokyo Transport Corporation..... Tanabe Liberia 50.1%the Company's equity method
investee is as follows:
--------------------------------------------------------------------------
(in thousands of $) 2006 2005
--------------------------------------------------------------------------
Current assets 978 --
Non current assets 28,099 --
Current liabilities 8,170 --
Non current liabilities 20,640 --
Summarized statement of operations information of thesethe Company's equity
method investeesinvestee is as follows:
--------------------------------------------------------------------------
(in thousands of $) 2003
------------------- ------2006 2005
--------------------------------------------------------------------------
Net operating revenues. 93,872revenues 694 --
Net operating income... 79,434income 684 --
Net income............. 45,039
In December 2003, Frontline agreed with its partner, Overseas Shipholding,
Group, Incincome 267 --
Front Shadow Inc. ("OSG"Front Shadow"), to swap interests in six joint venture companies, each is a 100% owned subsidiary of which owns a VLCC. These agreements resulted in Frontline exchanging its
interest in three vessels in exchange for OSG's interest in three other
vessels, thereby increasing its interest in those vessels to 100% each. The
exchanges of interests were completed on February 24, 2004. These
transactions have beenShip
Finance. This entity is being accounted for using the equity method as it
has been determined that Ship Finance is not the primary beneficiary under
FIN 46 (R).
Front Shadow was incorporated during 2006 for the purpose of holding a
non-monetary exchange of
productive assets. The Company receivedPanamax drybulk carrier, and leasing that vessel to Golden Ocean Group
Limited ("Golden Ocean"), a net cash settlement of $2.3
million in the exchange transaction to reflect the difference in values of
the assets exchanged and recognized a gain of $0.2 million.
14.related party.
13. ACCRUED EXPENSES
--------------------------------------------------------------------------
(in thousands of $) December 31,2006 2005
December 31, 2004--------------------------------------------------------------------------
Ship operating expenses 262 102 70
Voyage expenses 51 252 -
Administrative expenses 3,389 769 1,143
Interest expense 7,560 8,785
7,183
------------------------------- -------------------- ------------------------------------------------------------------------------------------
11,262 9,908
8,396
------------------------------- -------------------- ----------------
15.--------------------------------------------------------------------------
14. LONG-TERM DEBT
--------------------------------------------------------------------------
(in thousands of $) December 31, December 31,2006 2005 2004
--------------------------------------------------------------------------
8.5% Senior Notes due 2013 449,080 457,080
530,270
USU.S. dollar denominated floating rate debt
1,336,577 948,624
(LIBOR plus 0.65% - 1.00%1.40%) due through 20112018 1,466,120 1,336,577
--------------------------------------------------------------------------
1,915,200 1,793,657 1,478,894
Less: short-term portion (144,451) (122,519)
(91,308)
--------------------------------------------------------------------------
1,770,749 1,671,138 1,387,586
--------------------------------------------------------------------------
The outstanding debt as of December 31, 20052006 is repayable as follows:
--------------------------------------------------------------------------
Year ending December 31,
(in thousands of $)
2006 122,519--------------------------------------------------------------------------
2007 122,519144,451
2008 122,519143,327
2009 122,519135,196
2010 122,519128,899
2011 and later 1,181,062
--------------------------------------------------------------------603,485
Thereafter 759,842
--------------------------------------------------------------------------
Total debt 1,793,657
--------------------------------------------------------------------1,915,200
--------------------------------------------------------------------------
The weighted average interest rate for floating rate debt denominated in
USU.S. dollars was 5.34% per annum and 4.41% and 3.97% as ofper annum for the years ended
December 31, 20052006 and December 31, 2004,2005, respectively. These rates take
into consideration the effect of related interest rate swaps.
$1,058.0 million senior secured credit facility
In February 2005, Ship Finance refinanced its existing $1,058.0 million
senior secured credit facility with a new $1,131.4 million secured credit
facility discussed in more detail below.
8.5% Senior Notes due 2013
On December 15, 2003 the Company issued $580 million of senior notes.
The
notes are governed by an Indenture dated December 15, 2003 among the
Company and Wilmington Trust Company, as trustee. The Indenture contains
covenants that restrict the ability of the Company, among other things, to
incur additional indebtedness, to pay dividends or make distributions of
capital, to enter into certain sale and leaseback transactions, to sell
assets or capital stock of its subsidiaries or to enter into transactions
with affiliates.
The notes are general unsecured, senior obligations of the Company and rank
equally in right of payment to any future senior indebtedness of the
Company but are effectively subordinated to all future secured indebtedness
of the Company, to the extent of the value of the collateral securing such
indebtedness. The notes are unconditionally guaranteed on a senior
unsecured basis by each subsidiary of the Company, but the guarantees are
effectively subordinated to all present and future secured indebtedness of
the subsidiaries, to the extent of the value of the collateral securing
such Indebtedness. Interest on the notes is payable in cash semi-annually in arrears on June
15 and December 15, commencing on June 15, 2004 and is
computed on the basis of a 360-day year comprised of twelve 30-day months.15. The notes are not redeemable prior to December 15,
2008 except in certain circumstances. After that date the Company may
redeem notes at redemption prices which reduce from 104.25% in 2008 to
100% in 2011 and thereafter.
Prior to December 15,In February 2006, the Company may redeementered into a total return bond swap line
with a bank for a term of 12 months. The bond swap line has been extended
for a period up to 35%August 2009. As of December 31, 2006, the originalCompany held
bonds with a principal amount usingof $52 million under this agreement. In
February 2007, the cash proceedsCompany entered into an additional bond swap line with
a second bank for a term of an initial public equity
offering at12 months. As of June 15, 2007, the Company
holds bonds with a redemption priceprincipal amount of 108.5%.$52.0 million and $5.0 million
respectively under the two bond swap agreements.
In 2006 and 2005, the Company bought back and cancelled notes with
a principal amountamounts of $8.0 million and $73.2 million.
$1,058.0 million, syndicated senior secured credit facility
In February 2005, the Company refinanced its existing $1,058.0respectively. $449.1
million syndicated senior secured credit facility with a newwas outstanding at December 31, 2006 (December 31, 2005: $457.1
million).
$1,131.4 million secured credit facility, with similar security terms.
$1,131.4 million term loan facility
In February 2005, the Company entered into a $1,131.4 million term loan
facility with a syndicate of banks. The proceeds from the facility were
used to repay the $1,058.0 million syndicated senior secured credit
facility and for general corporate purposes. Obligations under the facility
are secured by the Company's assets and equity interests of vessel owning
subsidiaries. In addition, each of the new vessel owning subsidiaries has
guaranteed its performance under the facility. The facility bears interest
at LIBOR plus a margin of 0.7% and the0.70% per annum. The facility is repayable over
a term of six years.
The loan facility subjectsIn September 2006, the Company signed an agreement whereby the existing
debt facility, which had been partially repaid, was increased by $219.7
million to the original amount of $1,131.4 million. The increase is
available on a number of restrictions on its
business and financial maintenance covenants, including restrictions on
creating liens on the vessels, limitations on the Company's ability to
amend its charters, management, and administrative agreements, minimum
liquidity and working capital requirements, and collateral maintenance
limitations.
Further, the loan facility restricts the Company's ability to make
distributions unless the (i) charter service reserve and Free Cash as
defined exceed $100 million and (ii) the Company satisfies financial
covenants contained in the loan facility at the distribution date.revolving basis.
$350.0 million syndicated combined senior and junior secured creditterm loan facility
In June 2005, the Company entered into a combined $350 million senior and
junior secured term loan facility with a syndicate of banks. The proceeds
from the facility were used to fund the acquisition of five new VLCCs.
Obligations under the facility are secured by the Company's assets and
equity interests of the five new vessel owning subsidiaries. In addition,
each of the new vessel owning subsidiaries has guaranteed its performance
under the facility. The
facility bears interest at LIBOR plus a margin of 0.65% per annum for the
senior loan and LIBOR plus a margin of 1.00% per annum for the junior
loan and may be prepaid on a pro-rata basis without penalty.loan. The facility is repayable over a term of seven years.
The$210 million secured term loan facility
subjectsIn April 2006, five vessel owning subsidiaries entered into a $210 million
secured term loan facility with a syndicate of banks to partly fund the
acquisition of five new container vessels. The facility bears interest at
LIBOR plus a margin of 1.40% per annum and is repayable over a term of 12
years.
$165 million secured term loan facility
In June 2006, the Company's subsidiary Rig Finance Limited ("Rig Finance")
entered into a $165 million secured term loan facility with a syndicate of
banks. The proceeds of the facility were used to partly fund the
acquisition of the jack up drilling rig West Ceres. The facility currently
bears interest at LIBOR plus a margin of 1.15% per annum and is repayable
over a term of six years.
Agreements related to long-term debt provide limitations on the amount of
total borrowings and secured debt, and acceleration of payment under
certain circumstances, including failure to satisfy certain financial
covenants.
As of December 31, 2006, the Company to a numberis in compliance with all of restrictions onthe
covenants under its business and financial maintenance covenants, including restrictions on
creating liens on the vessels, limitations on its ability to amend its
charters, management, and administrative agreements, minimum liquidity and
working capital requirements, and collateral maintenance limitations.
Further, the loan facility restricts the Company's ability to make
distributions unless the (i) charter service reserve and its Free Cash as
defined exceed $35 million and (ii) the Company satisfies financial
covenants contained in the loan facility on the distribution date.
16.long-term debt facilities.
15. SHARE CAPITAL AND CONTRIBUTED SURPLUS
AuthorisedAuthorized share capital is as follows:
-----------------------------------------------------------------------
(in thousands of $)$, except share data) 2006 2005
-----------------------------------------------------------------------
125,000,000 common shares of $1.00 par
value each 125,000 ---------------------------------------------------------------------------125,000
-----------------------------------------------------------------------
Issued and fully paid share capital is as follows:
-----------------------------------------------------------------------
(in thousands of $, except per share data) 73,143,7372006 2005
-----------------------------------------------------------------------
72,743,737 common shares of $1.00 par
value each 72,744 73,144
--------------------------------------------------------------------------------------------------------------------------------------------------
The Company's common shares are listed on the New York Stock Exchange.
The Company was formed in October 2003 with an authorized share capital of
$12,000, divided into 12,000 common shares of $1.00 par value each. In
connection with the partial spin-off from Frontline in May 2004, the
authorized share capital was increased to 125,000,000 common shares, of
which 73,925,837 were issued and outstanding immediately after the partial
spin-off. In July 2004, the Company issued 1,600,000 common shares in a
private placement for the price of $15.75 per share. In 2004 the Company
repurchased and cancelled 625,000 shares at an average cost of $23.54 per
share. In 2005 the Company repurchased and cancelled a further 1,757,100 shares at
andan average cost of $18.81 per share. In 2006, the Company repurchased and
cancelled 400,000 shares at an average cost of $18.03 per share.
In connection with the purchase of the Company's original fleet from
Frontline in January 2004, Ship Finance received an equity contribution of
$525.0 million.
As at December 31, 2005, none of the unissued share capital of the Company
is under option or is conditionally or unconditionally to be put under
option.
As each of the Company's vessels acquired from Frontline completes its
original charter put in place prior to the acquisition date from
Frontline, the sales typefinance leases with Frontline become effective for
accounting purposes. The Company has accounted for the difference between
the historical cost of the vessel transferred to the Company by Frontline
at Frontline's historical carrying value, and the net investment in the
lease as a deferred deemed equity contribution. The difference is
presented as a reduction in the net investment in finance leases in the
balance sheet. This results from the related party nature of both the
transfer of the vessel and the subsequent sales typefinance lease. The deferred
deemed equity contribution is amortized as a credit to equity over the
life of the new lease arrangement as lease payments are applied to the
principal balance of the lease receivable. In the year ended December 31,
20052006 the Company has accounted for $9.2$30.1 million of such deemed equity
contributions (December 31, 2004: $3.22005: $9.2 million).
16. SHARE OPTION PLAN
In November 2006, the board of directors approved the Ship Finance
International Limited Share Option Scheme (the "Option Scheme"). The
Option Scheme permits the board of directors, at its discretion, to grant
options to employees and directors of the Company or its subsidiaries. The
Option Scheme will expire in November 2016. The subscription price for all
options granted under the scheme will be reduced by the amount of all
dividends declared by the Company per share in the period from the date of
grant until the date the option is exercised, provided the subscription
price never shall be reduced below the par value of the share. Options
granted under the scheme will vest at a date determined by the board at
the date of the grant. The options granted under the plan to date vest
over a period of one to three years. There is no maximum number of shares
authorized for awards of equity share options, and authorized, unissued
shares of Ship Finance International Limited will be used to satisfy
exercised options.
The fair value of each option awarded in 2006 is estimated on the date of
the grant using a Black Scholes option valuation model with the following
assumptions: risk-free interest rate of 4.74%, volatility of 31%, a
dividend yield of 0% and a weighted average expected option term of 3.5
years. The risk-free interest rate was estimated using the interest rate
on three year US treasury zero coupon issues. The volatility was estimated
using historical share price data. The dividend yield has been estimated
at 0% as the exercise price is reduced by all dividends declared by the
Company from the date of grant to the exercise date. It is assumed that
all options granted under the plan will vest.
The following summarizes share option transactions related to the Option
Scheme:
--------------------------------------------------------------------------
(in thousands, except per share data) Shares Exercise Price
--------------------------------------------------------------------------
Options outstanding at December 31, 2005 -- --
Granted 150 $22.85
Exercised -- --
Cancelled -- --
Vested -- --
--------------------------------------------------------------------------
Options outstanding at December 31, 2006 150 $22.85
--------------------------------------------------------------------------
The weighted average grant-date fair value of options granted during 2006
is $6.67 per share.
As of December 31, 2006, there was $0.95 million in unrecognized
compensation cost related to non-vested options granted under the Options
Scheme. This cost will be recognized over a weighted average period of 1.5
years.
In 2007, an additional 10,000 options has been awarded to an employee in
accordance with the Option Scheme.
Share-based bonus
The employment contract for one employee contains a share-based bonus
provision. Under the terms of the contract, the share based bonus is
calculated based on the annual increase in the share price of the Company,
plus any dividend per share paid, multiplied by a notional share holding
of 200,000 shares. Any bonus related to the increase in share price is
payable at the end of each calendar year, while any bonus linked to
dividend payments is payable on the relevant dividend payment date. The
share-based bonus fair value of $1.7 million at December 31, 2006 was
recorded as a liability.
17. RELATED PARTY TRANSACTIONS
Leasing and service contracts
As at December 31, 2006, 49 of the Company's vessels were leased to the
Frontline Charterers. The jack-up drilling rig, West Ceres is leased to
SeaDrill Invest I. These companies are related parties due to common
significant shareholdings, held by Hemen Holding Limited and Farahead
Investments Inc. (collectively "Hemen").
The Company acquired its initial fleethas recognized the inception of 47net investments in finance
leases of $1,876.5 million, additions during 2005 of $647.8 million and
disposals during 2005 of $106.8 million, and additions during 2006 of
$137.0 million and disposals during 2006 of $34 million.
At December 31, 2006 the balance of net investments in finance leases with
the Frontline Charterers was $1,910.4 million (2005: $1,925.4 million) of
which $126.9 million (2005: $107.0 million) represents short-term
maturities.
A summary of leasing revenues earned from the Frontline Charterers and
SeaDrill Invest I is as follows:
--------------------------------------------------------------------------
Payments (in millions of $) 2006 2005
--------------------------------------------------------------------------
Finance lease interest income 182.6 177.5
Finance lease service revenue 106.8 92.3
Finance lease repayments 136.8 94.8
Deemed dividends (net) (see Note 2) (15.6) (16.5)
For each of the vessels from its parent
company,leased to the Frontline Charterers, the Company
pays a management fee to Frontline Management (Bermuda) Ltd, ("Frontline
Management") of $6,500 per day, resulting in expenses of $116.1 million
for the year ended December 31, 2006 (2005: $105.2 million, 2004: $94.6
million). The management fees have been classified as ship operating
expenses in the consolidated statements of operations. As at December 31,
2006 the Company owes Frontline Management $3.9 million (2005: $0.03
million)
For the years 2004, 2005 and 2006, the Company paid a spin-off transaction.fee of $20,000 per
year plus $20,000 per vessel per year to Frontline Management for the
provision of management and administrative services. The Company paid $1.0
million in 2006 (2005: $1.0 million, 2004: $1.0 million) under this
arrangement. These fees have been classified as administrative expenses in
the consolidated statements of operations. As at December 31, 2006 the
Company owes Frontline Management $3.9 million (2005: $0.03 million)
The Frontline Charterers pay the Company profit sharing of 20% of their
earnings from their use of the Company's fleet above the average daily
charter rates each fiscal year. During the year ended December 31, 2006,
the Company earned and recognized revenue of $78.9 million (2005: $88.1
million, 2004: $114.9 million) under this arrangement.
During 2006, and 2007 to date, leases to the Frontline Charterers were
cancelled on the following vessels that were agreed sold. Termination fees
in respect of each of the sold vessels were agreed paid to Frontline as
compensation for the cancellation of these leases to the Frontline
Charterers as follows:
Termination Fee
Vessel Year Sold (in millions of $)
--------------------------------------------------------------------------
Front Tobago 2006 9.6
Front Transporter 2007 14.9
Front Target 2007 14.6
Front Traveller 2007 13.6
Front Granite 2007 15.8
Front Comor 2007 13.3
Front Sunda 2007 7.2
In addition, the VLCC Front Vanadis was re-chartered to an unrelated third
party in 2007, whereby the Company agreed to pay a compensation of $13.2
million to Frontline for the cancellation of the lease to the relevant
Frontline Charterer.
As at December 31, 2006 the Company was owed a total of $1,061.8$56.9 million
(2005: $80.0 million) by the Frontline Charterers in respect of leasing
contracts.
Purchase and sale of vessels - 2006
In January 2006, the Company acquired the VLCC Front Tobago from Frontline
for consideration of $40.0 million. The vessel was chartered back to
Frontline beingfollowing the book valuestructure in place for the other vessels chartered
to Frontline. The vessel was subsequently sold to an unrelated third party
in December 2006 for approximately $45.0 million.
In June 2006, the Company purchased the jack up rig West Ceres from
SeaDrill Invest I, a wholly owned subsidiary of assets transferredSeadrill Limited
("Seadrill"), for a total consideration of $210.0 million. Both Seadrill
and the Company have common principal shareholders. Upon delivery to the
Company the rig was immediately chartered back to SeaDrill Invest I under
a 15-year bareboat charter agreement, fully guaranteed by Frontline less amountsSeadrill.
SeaDrill Invest I will have options to buy back the rig after three, five,
seven, 10, 12 and 15 years.
In September 2006, Front Shadow, a wholly owned subsidiary of debt assumed.the Company,
acquired the 1997 built Panamax Golden Shadow for $28.4 million from
Golden Ocean, a related party. The vessel has been chartered back to
Golden Ocean for a period of 10 years. As part of this spin-off
transactionthe agreement, Golden
Ocean has provided an interest free and non-amortizing seller's credit of
$2.6 million. Golden Ocean has been granted fixed purchase options after
three, five, seven and 10 years. At the end of the charter, we have an
option to sell the vessel back to Golden Ocean at an agreed fixed price of
$10.4 million, including the $2.6 million seller's credit.
In November 2006 the Company also received an equity contribution of $525.0
millionannounced that it had assumed two newbuilding
Suezmax tanker contracts from Frontline. [See Note 1]
In February 2001, Frontline acquired newbuilding contracts for the
construction and purchase of three VLCCsThe Suezmax tankers, each 156,000
dwt, will be built at the Hitachi shipyardJiangsu Rongsheng Heavy Industries Group Co.
Ltd. in JapanChina for delivery in 2002 from Seatankers Management Co. Ltd.,the first quarter of 2009 and the third
quarter of 2009.
As at December 31, 2006, the Company was owed a company
affiliated with Hemen Holding Ltd ("Hemen"). Hemen is indirectly controlledtotal of $6.1 million
(2005: $nil) by Mr. John Fredriksen,Frontline as a directorresult of Frontline. These contracts were
acquired forvessel purchases and profit
share.
Also at December 31, 2006 the original contract priceCompany owed a total of $72$10.4 million each plus $0.5
million per contract. These three newbuildings were deliveredto a
subsidiary of Frontline in 2002respect of costs incurred on behalf of
Frontline in respect of the vessel Front Sunda.
Purchase and are included in the predecessor combined carve-out financial statements.sale of vessels - 2005
In the first quarter of 2005, the Company acquired three VLCCs from
Frontline for total consideration of $294.0 million. The vessels were
chartered back to Frontline following the structure in place for the other
vessels chartered to Frontline. Frontline received discounted time charter
rates for two of the new vessels, as compensation for the early
termination of one Suezmax charter, when the vessel was sold to an
unrelated third party.
In May 2005, the Company entered into an agreement with parties affiliated
with Hemen to acquire two vessel owning companies, each owning a 2005
built containership, for a total consideration of $98.6 million. The
vessels were delivered in 2005 and are currently chartered to unrelated
third parties.
In June 2005, the Company acquired three SuezmaxesSuezmax tankers from Frontline
for total consideration of $92.0 million. The vessels were immediately
chartered back to Frontline to replace time charters for three similar
vessels whose charters were terminated upon their sale to an unrelated
third party.
In June 2005, the Company entered into an agreement to acquire two 2004
built VLCCs from parties affiliated with Hemen for total consideration of
$184.0 million. This transaction has been recorded at the fair value of
$270.0 million, resulting in an additional equity contribution from Hemen
of $85.0 million. The vessels were delivered in June 2005 and have been
chartered to Frontline under long-term leases. The ensuing finance leases
have been recorded based on the economic substance of the transaction,
with the fair value of minimum lease payments approximating the purchase
consideration. The resulting loss of $85.0 million on transfer of the
vessels to finance leases has been recorded as a negative equity
contribution. The overall effect of this transaction on the Company's
stockholders' equity was nil.
TheIn June 2005, the Company charters 51 of its vesselssold the Suezmax tanker Front Hunter to Frontline under long-term leases,
47an
unrelated third party as a result of which were given economic effect from January 1, 2004,the charter and the
remainder with effect in the first half of 2005. In connection with these
charters, the Company has recognized the inception of net investments in
finance leases of $1,876.5 million, additions during 2005 of $647.8 million
and disposals during 2005 of $160.8 million. At December 31, 2005 the
balance of net investments in finance leasesmanagement
agreements with Frontline was $1,925.4
million (2004: $1,718.6 million) of which $107.0 million (2004: $77.0
million) represents short-term maturities.
A summary of earned amounts from Frontline is as follows:
Frontline payments (in millions of $) 2005 2004
------------------------------------- ---- ----
Finance lease interest income 177.5 140.7
Finance lease service revenue 92.3 72.6
Finance lease repayments 94.8 62.0
Deemed dividends (net) (16.5) (59.0)
The Company pays Frontline a management fee of $6,500 per day perrelating to this vessel for all of its vessels, with the exception of five which are bareboat
chartered, resulting in expenses of $105.2 million for the year ended
December 31, 2005 (2004: $96.4 million). The management fees have been
classified as ship operating expenses in the consolidated statements of
operations.
The Company pays Frontline an administrative management fee of $20,000 per
year plus $20,000 per vessel per year. Based on the current fleetwere terminated, and the
Company paid Frontline $1,011,830 in 2005 (2004: $960,000) under this
arrangement. These fees have been classified as administrative expenses in
the consolidated statements of operations.a $3.8 million termination fee. In addition
Frontline paysheld a put option to sell a newbuilding VLCC to the Company and
charter back at reduced charter rates. In June 2006, the parties agreed to
cancel this agreement, and to split the profit sharingin accordance with the
profit share agreement (80% to Frontline and 20% to the Company), adjusted
for the residual value belonging to the Company. The cancellation of 20%this
agreement resulted in a net payment of their earnings from
their use$16.3 million to Frontline, in
addition to the earlier termination payment of $3.8 million. The Company
recorded a net gain of $9.0 million in 2006 relating to the sale of the
Company's fleet aboveFront Hunter and the average daily charter rates each
fiscal year. Duringcancellation of the year ended December 31, 2005, the Company earned
and recognized revenue of $88.1 million (2004: $114.9 million) under this
arrangement.option agreement.
18. FINANCIAL INSTRUMENTS
Interest rate risk management
In certain situations, the Company may enter into financial instruments to
reduce the risk associated with fluctuations in interest rates. The
Company has a portfolio of swaps that swap floating rate interest to fixed
rate, which from a financial perspective hedge interest rate exposure. The
Company does not currently hold or issue instruments for speculative or
trading purposes. The counterparties to such contracts are J.P. Morgan Chase,
Nordea, Bank Norge, Credit Agricole Indosuez,Calyon,
Deutsche Schiffsbank, HSH Nordbank, Fortis Bank, HBOS, NIBC, Citibank,
Scotiabank, Den Norske BankDnB NOR and Skandinaviska Enskilda Banken. Credit risk exists
to the extent that the counterparties are unable to perform under the
contracts, but this risk is considered remote.
The Company manages its debt portfolio with interest rate swap agreements
in U.S. dollars to achieve an overall desired position of fixed and
floating interest rates. For the purposes of the financial statements,
interest rate swaps specific to debt have been included. In addition, non
debt specific interest rate swaps with notional principal amountsAt December 31,
2006, the Company, or subsidiaries of $50,000,000 have been included. Thethe Company, hashad entered into the
following interest rate swap transactions involving the payment of fixed
rates in exchange for LIBOR:
(in thousands of $) Inception Maturity Fixed
date date interest rate
---------- -------- -------------
$50,000 Feb 2004 Feb 2009 3.49%
$100,000 Feb 2004 Feb 2009 3.49%
$50,000 Feb 2004 Feb 2009 3.35%
$50,000 Feb 2004 Feb 2009 3.49%
$50,000 Feb 2004 Feb 2009 3.35%
$50,000 Feb 2004 Feb 2009 3.35%
$50,000 Feb 2004 Feb 2009 3.37%
$25,000 Feb 2004 Feb 2009 3.32%
$25,000 Feb 2004 Feb 2009 3.32%
$25,000 Feb 2004 Feb 2009 3.33%
$25,000 Feb 2004 Feb 2009 3.32%
$30,958 (reducing monthly to $29,793) Mar 1998 Mar 2006 6.04%
$19,146 (reducing monthly to $10,294) Sept 1998 Aug 2008 6.49%
$18,153 (reducint monthly to $8,763) Feb 2004 Aug 2008 6.49%
----------------------------------------------------------------------------------------------
(in thousands of $) Inception date Maturity date Fixed interest rate
----------------------------------------------------------------------------------------------
$50,000 Feb 2004 Feb 2009 3.49%
$100,000 Feb 2004 Feb 2009 3.49%
$50,000 Feb 2004 Feb 2009 3.35%
$50,000 Feb 2004 Feb 2009 3.49%
$50,000 Feb 2004 Feb 2009 3.35%
$50,000 Feb 2004 Feb 2009 3.35%
$50,000 Feb 2004 Feb 2009 3.37%
$25,000 Feb 2004 Feb 2009 3.32%
$25,000 Feb 2004 Feb 2009 3.32%
$25,000 Feb 2004 Feb 2009 3.33%
$25,000 Feb 2004 Feb 2009 3.32%
$15,919 (reducing monthly to $10,294) Feb 2004 Aug 2008 6.24%
$14,849 (reducing monthly to $8,763) Feb 2004 Aug 2008 6.24%
$41,588 (reducing quarterly to $19,647) Apr 2006 Nov 2018 5.64%
$41,588 (reducing quarterly to $19,654) Apr 2006 Mar 2019 5.65%
$41,588 (reducing quarterly to $19,654) Apr 2006 Apr 2019 5.65%
$41,588 (reducing quarterly to $19,657) Apr 2006 Apr 2019 5.65%
$41,588 (reducing quarterly to $19,657) Apr 2006 May 2019 5.65%
As at December 31, 2005,2006, the notional principal amounts subject to such
swap agreements was $568.3$738.7 million (2004 - $581.4(2005: $568.3 million).
Forward freight contracts
The Company may enter into forward freight contracts and futures contracts
in order to manage its exposure to the risk of movements in the spot
market for certain trade routes and for speculative or trading purposes.
Market risk exists to the extent that spot market fluctuations have a
negative effect on the Company's cash flows and consolidated statements of
operations.
At December 31, 2005,2006, the Company was not party to any forward freight
contracts or futures contracts.
Foreign currency risk
The majority of the Company's transactions, assets and liabilities are
denominated in U.S. dollars, the functional currency of the Company. One of
the Company's subsidiaries has a charter contract denominated in Yen with
contracted payments as set forth in Note 8. There
is a risk that currency fluctuations will have a negative effect on the
value of the Company's cash flows. The Company has not entered into
forward contracts for either transaction or translation risk, which may
have an adverse effect on the Company's financial condition and results of
operations.
Fair Values
The carrying value and estimated fair value of the Company's financial
instruments at December 31, 20052006 and 20042005 are as follows:
--------------------------------------------------------------------------------------------
2006 2006 2005 2005
(in thousands of $) 2005 2005 2004 2004 Carrying value Fair value Carrying value Fair value
--------------------------------------------------------------------------------------------
Non-derivatives:
Cash and cash equivalents 64,569 64,569 32,857 32,857
29,193 29,193
Restricted cash 12,937 12,937 1,575 1,575 5,379 5,379
Floating rate debt 1,466,120 1,466,120 1,336,577 1,336,577 948,624 948,624
8.5% Senior Notes due 2013 449,080 448,799 457,080 427,370 530,270 546,178
Derivatives:
Interest rate swap contracts -
amounts receivable 17,807 17,807 19,563 19,563 7,737 7,737
amounts receivable
Interest rate swap contracts -
amounts payable 8,743 8,743 1,196 1,196
4,103 4,103Bond swap contract - amounts
payablereceivable 2,931 2,931 -- --
The carrying value of cash and cash equivalents, which are highly liquid,
is a reasonable estimate of fair value.
The estimated fair value for floating rate long-term debt is considered to
be equal to the carrying value since it bears variable interest rates,
which are reset on a quarterly basis. The estimated fair value for fixed
rate long-term senior notes is based on the quoted market price.
The fair value of interest rate swaps is estimated by taking into account
the cost of entering into interest rate swaps to offset the Company's
outstanding swaps.
The fair value of the bond swap is estimated by taking into account the
cost of entering into the bond swap to offset the Company's outstanding
bond swap.
Concentrations of risk
There is a concentration of credit risk with respect to cash and cash
equivalents to the extent that substantially allmost of the amounts are carried with
Skandinaviska Enskilda Banken, BNP Paribas, Den norske Bank,DnB NOR, Fortis Bank and Nordea Bank Norge.Nordea. However,
the Company believes this risk is remote as these banks are high credit
quality financial institutions.
During the yearyears ended December 31, 2005,2006, and 20042005 one customer,
Frontline, accounted for more than 80% of our consolidated operating
revenues.
19. COMMITMENTS AND CONTINGENT LIABILITIES
Assets Pledged
-------------------------------------------------------------
(in thousands of $) ----------------------------------------------------------------------2006
-------------------------------------------------------------
Ship mortgages 1,2642,427,060
Guarantees
In June 2006, the Company's wholly owned subsidiary Rig Finance entered
into a $165 million secured term loan facility. The Company guarantees $10
million of this debt.
In September 2006, the Company's wholly owned subsidiary Front Shadow
entered into a $22.7 million term loan facility. The Company guarantees
$2.1 million of this debt.
In February 2007, the Company's wholly owned subsidiary Rig Finance II
Limited ("Rig Finance II") entered into a $170 million pre-and
post-delivery secured term loan facility.
The Company has provided a guarantee for $30.0 million of this debt until
delivery of the rig and $20 million thereafter.
In March 2007, three of the Company's wholly owned subsidiaries entered
into a $120.0 million term loan facility. The Company guarantees $48.5
million under this facility until the vessels are delivered (expected
2008) and $30 million of the outstanding debt thereafter.
Other Contractual Commitments
The Company insureshas arranged insurance for the legal liability risks for its
shipping activities with Assuranceforeningen SKULD, Assuranceforeningen
Gard Gjensidig and Britannia Steam Ship Insurance Association Limited, all
mutual protection and indemnity associations. As a memberOn certain of these mutual associations,the vessels
insured, the Company is subject to calls payable to the associations based
on the Company's claims record in addition to the claims records of all
other members of the associations. A contingent liability exists to the
extent that the claims records of the members of the associations in the
aggregate show significant deterioration, which result in additional calls
on the members.
In the ordinary course of the shipping business various claims and losses
may arise from disputes with charterers, agents and other suppliers
relating to the operations of the Company's vessels. Management believes
that all such matters are either adequately covered by insurance or are
not expected to have a material adverse effect on the Company's results
from operations or financial condition.
At December 31, 2006 the Company had contractual commitments under
newbuilding contracts and vessel acquisition agreements totaling $362.5
million.
20. SUBSEQUENT EVENTS
InOn January 20068, 2007, the Company acquiredannounced the VLCCsale of the single hull
Suezmax tanker Front TobagoTransporter for a gross sales price of $38 million.
The Company has agreed to pay Frontline $14.9 million for termination of
the charter. The ship was delivered to the new owner on March 22, 2007.
On January 12, 2007, the Company announced that it had entered into an
agreement with SeaDrill Invest II Ltd. ("SeaDrill Invest II"), a wholly
owned subsidiary of Seadrill to acquire the newbuilding jack-up drilling
rig West Prospero. The purchase price was agreed at $210 million and
expected delivery from Keppel Fels in Singapore is at the end of June
2007. Upon delivery, the rig will be bareboat chartered back to SeaDrill
Invest II for a period of 15 years, fully guaranteed by Seadrill. SeaDrill
Invest II has been granted several fixed price purchase options with the
first one being three years after the commencement of the charter for $142
million and the last one at the end of the charter for $60 million.
On January 12, 2007, the Company announced the appointment of Mr. Svein
Aaser to the Board of Directors.
On January 18, 2007, the Company announced the sale of five single hull
Suezmax tankers: Front Comor, Front Granite, Front Target, Front Traveller
and Front Sunda to Frontline for considerationa gross sales price of $40.0$183.7 million.
Effective January 2006 this vessel has
replaced the Navix Astral and will fulfil the remainderThe Company received a net amount of $119.2 million in March 2007, after
compensation of $64.5 million to Frontline for termination of the
Navix Astral
time charter with Frontlinecharters.
On February 6, 2007, the Company announced the acquisition of two
newbuilding Capesize drybulk vessels from Golden Ocean for a price of $160
million. The vessels are expected to be delivered from Daehan Shipbuilding
Co. Ltd. in the fourth quarter of 2008 and the first quarter of 2009. Upon
delivery, the vessels will commence 15 year bareboat charters back to
Golden Ocean. Golden Ocean has been granted fixed price purchase options
for each of the vessel to its new
owner untilvessels after five, 10 and 15 years from commencement of
the charter termination date in January 2014.relevant charters at $61 million, $44 million and $24 million,
respectively.
On February 17, 2006,27, 2007, the Board of Ship Finance declared an ordinarya dividend of
$0.45 per share and an extraordinary dividend of $0.05$0.54 per share which was paid on March 20, 2006.
In February 2006,22, 2007.
On March 15, 2007, the Company entered intoannounced the re-chartering of the single
hull VLCC Front Vanadis to an unrelated third party in the form of a
total return bond swap linehire-purchase agreement. The vessel will be chartered out for 3.5 years,
with Fortis Banka purchase obligation by the charterer at the end of the charter
period. The charterer paid a gross upfront payment of $12.5 million and
the purchase obligation at the end of the charter is $3 million. In
addition, the charterer will have quarterly purchase options during the
charter, starting at $27.9 million, and reducing gradually over the term
of the charter. The Company has agreed to pay a compensation payment of
approximately $13.2 million to Frontline for the termination of the
previous charter. Delivery to the charterer took place in May 2007.
On March 20, 2007, the Company announced the acquisition of three
newbuilding seismic vessels, including complete seismic equipment from
SCAN Geophysical ASA ("SCAN") for a termprice of twelve months. This swap will facilitate the
buyback of Ship Finance's 8.5% senior notes in the amount of $50$210 million.
In April 2006, the Company entered into an agreement with Horizon Lines
Inc. to acquire five 2,800 TEUS (twenty-foot equivalent units) newbuilding
containerships. The vessels
will be delivered overconstructed at the course of six months
commencingABG Shipyard in early 2007India and delivery is expected
in 2008. Upon delivery the vessels will be immediately placed on long termcommence 12 year bareboat charters
with Horizon Lines Inc.to SCAN. SCAN has been granted fixed purchase options for each of the
vessels after six, 10 and 12 years from commencement of the relevant
charters at $20 million, $14 million and $9 million, respectively. The
Company will finance the transaction by a senior loan facility of $120
million and an equity contribution of $30 million. SCAN will provide a
non-interest bearing seller's credit of $60 million.
On May 26, 2006,30, 2007, the Board of Ship Finance declared an ordinarya dividend of $0.45 per share and an extraordinary dividend of $0.05$0.55
per share which will
bewas paid on June 26, 2006.
In21, 2007.
On June 2006, Frontline's option to sell and leaseback a VLCC newbuilding
to14, 2007, the Company expired.announced that it had signed shipbuilding
contracts for a total of five container vessels with scheduled delivery in
2010. Two 2,500 TEU container vessels will be built at Jiangsu Yangzijiang
Shipbuilding Co. Ltd., China and three 1,700 TEU container vessels will be
built at Guangzhou Wenchong Shipyard Co. Ltd., China. The option agreement was linkedaggregate
construction cost for the five vessels will be approximately $190 million.
The new vessels will be marketed for medium to the sale of the
Suezmax Front Hunter and the Company has, in a subsequent arrangement,
agreed to provide Frontline with an additional payment of $16.0 million.
SK 23153 0001 681182long-term charter
contracts.