FACTORS AFFECTING OUR RESULTS
After the closing of the IPO on October 18, 2005, the principal factors that affect our results of operations and financial condition include:
| | · | the fixed basic charter rate that we are paid under our charters; |
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| | · | the amount of additional hire that we receive under our charter arrangements; |
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| | · | the number of off hire days during which we will not be entitled, under our charter arrangements, to receive either the fixed basic charter rate or additional hire; |
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| | · | the amount of daily technical management fees payable under our ship management agreements; |
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| | · | our general and administrative and other expenses; |
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| | · | our insurance premiums and vessel taxes; |
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| | · | any future vessel acquisitions; and |
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| | · | our interest expense. |
Our revenues are principally derived from fixed rate time charters with subsidiaries of OSG to which our seven vessels have been chartered. In addition, the amount of additional hire that we receive under our charter arrangements is dependent on the revenues of our vessels in the Tankers International (VLCCs) and the Aframax International (Aframaxes) pools. These revenues are sensitive to patterns of supply and demand. Rates for the transportation of crude oil are determined by market forces, such as the supply and demand for oil, the distance that cargoes must be transported and the number of vessels expected to be available at the time such cargoes need to be transported. The demand for oil shipments is significantly affected by the state of the global economy. The number of vessels is affected by newbuilding deliveries and by the removal of existing vessels from service, primarily because of scrapping. The tanker industry has historically been highly cyclical, experiencing volatility in profitability, vessel values and freight rates.
Our expenses are expected to consist primarily of daily technical management fees payable under our ship management agreements, interest expense, insurance premiums, vessel taxes, financing expenses and general and administrative expenses. Our vessel owning subsidiaries have entered into ship management agreements with Tanker Management, a subsidiary of OSG, under which it is responsible for all technical management of the vessels, including crewing, maintenance and ordinary repairs, scheduled drydockings (subject to certain adjustments when the agreement is terminated), stores and supplies, lubricating oils and insurance deductibles (subject to the limits on deductibles set forth in the ship management agreements). Under these agreements, we pay a fixed daily fee for the cost of vessels’ operations, including scheduled drydockings, for each vessel, which will increase by 2.5% annually after the second year. Other than (i) the technical management fees payable under our ship management agreements, which have a duration of two years, and are cancelable by Tanker Management upon 90 days notice, (ii) interest that is payable on any indebtedness that we have incurred and may incur in the future under our credit facility, (iii) commitment fees under our credit facility (for so long as we do not make any further borrowings under the vessel acquisition facility or the working capital facility), (iv) salary paid to our current executive officers, which is fixed during the terms of their employment agreements and any additional employment agreements we may enter into in the future, and (v) our directors’ fees, none of our future fees or expenses are fixed. Changes to our business, such as the hiring of additional employees, will affect our expenses and our results.
The charterers pay us a fixed basic charter rate monthly in advance and additional hire, if any, quarterly in arrears. We pay daily technical management fees under our ship management agreements monthly in advance. We are required to pay interest under our credit facility quarterly, insurance premiums either annually or more frequently (depending on the policy) and our vessel taxes annually.
The following table sets forth the average daily time charter equivalent rates earned by our vessels during the last three years.
| | | Year Ended December 31, 2006 | | | 2005 | | | Year Ended December 31, 2004 | |
| | | | | | Oct 18 – Dec 31 | | | Jan 1 – Oct 17 | | | | |
| VLCCs | | $ | 46,900 | | | $ | 50,300 | | | $ | 53,392 | | | $ | 77,422 | |
| Aframaxes | | $ | 26,200 | | | $ | 30,200 | | | $ | 33,296 | | | $ | 38,831 | |
CRITICAL ACCOUNTING POLICIES
The financial statements for DHT and our combined carve-out financial statements for our predecessor are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates in the application of our accounting policies based on the best assumptions, judgments, and opinions of management. Following is a discussion of the accounting policies that involve a higher degree of judgment and the methods of their application. For a complete description of all of our material accounting policies, see Note A to our consolidated and predecessor combined carve-out financial statements, included as item 18 to this report.
Carve-out of the Financial Statements of OSG
For all periods prior to and through October 17, 2005, our combined carve-out financial statements include the accounts of seven wholly owned subsidiaries of OSG, a publicly traded company incorporated in Delaware. These combined carve-out financial statement have been prepared to reflect the financial position, results of operations and cash flows of our predecessor, which owned the vessels acquired by our subsidiaries. Our combined carve-out financial statements are prepared in accordance with generally accepted accounting principles in the United States. The assets, liabilities, results of operations and cash flows were carved out of the consolidated financial statements of OSG using specific identification. In the preparation of these predecessor carve-out financial statements, general and administrative expenses, which were not identifiable as relating to specific vessels, were allocated based on our predecessor’s proportionate share of OSG’s total ship operating days for each of the periods presented. Ship operating days consist of the aggregate number of calendar days in a period in which our vessels are owned by us. Management believes these allocations to reasonably present our predecessor’s financial position, results of operations and cash flows. However, the predecessor combined carve-out statements of financial position, operations and cash flow may not be indicative of those that would have been realized had our predecessor operated as an independent stand-alone entity for the periods presented. Had our predecessor operated as an independent stand-alone entity, its results could have differed significantly from those presented herein.
Revenue Recognition
Both prior to and following the IPO, our vessels have generated revenue by operating in pools. Shipping revenue and voyage expenses are pooled and allocated to each pool’s participants on a TCE basis in accordance with an agreed-upon formula. For vessels operating in pools or on time charters, shipping revenues are substantially the same as TCE revenues.
Our three VLCCs participate in the Tankers International Pool and our four Aframaxes participate in the Aframax International Pool. Each of these pools generate a majority of its revenue from voyage charters. Within the shipping industry, there are two methods used to account for voyage revenues: (1) ratably over the estimated length of each voyage and (2) completed voyage. The recognition of voyage revenues ratably over the estimated length of each voyage is the most prevalent method of accounting for voyage revenues and the method used by the pools in which we participate. Under each method, voyages may be calculated on either a load-to-load or discharge-to-discharge basis. In applying its revenue recognition method, management of each of the pools believes that the discharge-to-discharge basis of calculating voyages more accurately estimates voyage results than the load-to-load basis. Since, at the time of discharge, management generally knows the next load port and expected discharge port, the discharge-to-discharge calculation of voyage revenues can be estimated with a greater degree of accuracy. Revenues from time charters performed by vessels in the pools are accounted for as operating leases and are recognized ratably over the periods of such charters, as service is performed. Each of the pools does not begin recognizing voyage revenue until a charter has been agreed to by both the pool and the customer, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage.
Vessel Lives and Impairment
The carrying value of each of our vessels represents its original cost at the time it was delivered less depreciation calculated using an estimated useful life of 25 years from the date such vessel was originally delivered from the shipyard. In the shipping industry, use of a 25-year life has become the standard. The actual life of a vessel may be different. We have evaluated the impact of the revisions to MARPOL Regulation 13G that became effective April 5, 2005 and the EU regulations that went into force on October 21, 2003 on the economic lives assigned to the fleet. Because the fleet consists of modern, double hull vessels, the revised regulations do not affect any of our vessels. If the economic lives assigned to the tankers prove to be too long because of new regulations or other future events, higher depreciation expense and impairment losses could result in future periods related to a reduction in the useful lives of any affected vessels.
The carrying values of our vessels may not represent their fair market value at any point in time since the market prices of second-hand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Historically, both charter rates and vessel values have been cyclical. We record impairment losses only when events occur that cause us to believe that future cash flows for any individual vessel will be less than its carrying value. The carrying amounts of vessels held and used by us are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a particular vessel may not be fully recoverable. In such instances, an impairment charge would be recognized if the estimate of the undiscounted future cash flows expected to result from the use of the vessel and its eventual disposition is less than the vessel’s carrying amount. This assessment is made at the individual vessel level since separately identifiable cash flow information for each vessel is available.
In developing estimates of future cash flows, we must make assumptions about future charter rates, ship operating expenses and the estimated remaining useful lives of the vessels. These assumptions are based on historical trends as well as future expectations. Although management believes that the assumptions used to evaluate potential impairment are reasonable and appropriate, such assumptions are highly subjective.
RESULTS OF OPERATIONS
Combined fiscal 2005 amounts combine predecessor 2005 with successor 2005 by mathematical addition and do not comply with generally accepted accounting principles. Such data is being presented for analysis purposes only.
Income from Vessel Operations
Shipping revenues decreased by $17,514,000, or 16.8%, to $86,793,000 in 2006 from $104,307,000 in 2005. This decrease was primarily attributable to the new charter arrangements for our vessels starting on October 18, 2005.
On October 18, 2005, we acquired the seven vessels from OSG Crude and commenced operating as an independent company and agreed to time charter our vessels to subsidiaries of OSG for periods of five to six and one-half years under charters that provide for fixed monthly payments, plus the potential to earn additional profit sharing payments. For the period from October 18, 2005 through December 31, 2005, shipping revenues were $20,173,000, which consisted of basic hire of $14,667,000 and additional hire of $5,506,000.
During the period from January 1, 2005 through October 17, 2005, Shipping revenues for our predecessor, OSG Crude, were $84,134,000 compared to $136,205,000 for full year 2004. This decrease was a result of a shorter period in 2005 and lower average daily TCE rates in 2005 compared to 2004.
For the period from January 1, 2005 through October 17, 2005 and for the year ended 2004, all of our Shipping revenues were derived from pools which predominantly perform voyage charters. From October 18, 2005 through December 31, 2005 and for the year ended 2006 all of our revenues were derived from our charter arrangements with OSG and consisted of a combination of base hire and additional hire paid to us by OSG.
Prior to October 18, 2005, reliance on the spot market contributed to fluctuations in our predecessor’s revenue, cash flow and net income, but afforded our predecessor greater opportunity to increase income from vessel operations when rates rose. After October 18, 2005, our revenue, cash flow and net income is less dependent on the development in the spot market as the charter arrangements for our seven vessels provide for fixed monthly payments plus the potential to earn additional profit sharing payments when the vessels’ earnings in the commercial pools exceed the fixed monthly payments.
Vessel expenses increased by $582,000 to $18,690,000 in 2006 from $18,108,000 in 2005 principally as a result of the management agreements entered into on October 18, 2005 with a subsidiary of OSG for the technical management of our seven vessels in exchange for a fee that is substantially fixed for the first two years of the agreement.
During the period from January 1, 2005 through October 17, 2005, vessel expenses for our predecessor, OSG Crude, were $14,433,000 compared to $15,601,000 for full year 2004. This decrease is due to a shorter period in 2005 offset by increases in crew costs and running repairs for the Overseas Ania and Rebecca during the period from January 1, 2005 through October 17, 2005. On October 18, 2005, we acquired the seven vessels from OSG Crude and commenced operating as an independent company and entered into management agreements with Tanker Management Ltd., a subsidiary of OSG, for the technical management of our seven vessels in exchange for a fee that is substantially fixed for the first two years of the agreement. For the period from October 18, 2005 through December 31, 2005, vessel expenses were $3,675,000.
Depreciation and amortization decreased by $1,025,000 to $16,915,000 in 2006 from $17,940,000 in 2005. In 2005, depreciation and amortization included $925,000 attributable to amortization of capitalized drydock expenditures, whereas in 2006, the amounts related to drydocking are incorporated in the technical management fees paid to OSG.
During the period from January 1, 2005 through October 17, 2005, depreciation and amortization expenses were $14,462,000 compared to $17,762,000 for the full year 2004. For the period from October 18, 2005 through December 31, 2005, depreciation and amortization expenses were $3,478,000.
General and Administrative Expenses
General and administrative expenses decreased by $4,116,000 to $2,389,000 in 2006 from $6,505,000 in 2005. This decrease was mainly a result of the Company operating as an independent company from October 18, 2005 and from this date no longer being allocated general and administrative expenses by OSG as described below.
General and administrative expenses for 2006 and for the period October 18, 2005 to December 31, 2005 include directors’ fees and expenses, the salary and benefits of our two executive officers, legal fees, fees of independent auditors and advisors, directors and officers insurance, rent and miscellaneous fees and expenses.
General and administrative expenses for our predecessor consisted primarily of salaries and other employee related costs, office rent, legal and professional fees and travel and entertainment. Prior to October 18, 2005, general and administrative expenses were allocated based on our predecessor’s proportionate share of OSG’s total ship operating days for each of the periods presented for our seven vessels. Ship operating days represent the aggregate number of days OSG owned its vessels, and were 2,030 for the period from January 1, 2005 through October 17, 2005 and 2,533 days in 2004. Management believes these allocations reasonably present our predecessor’s financial position, results of operations and cash flows.
During the period from January 1, 2005 through October 17, 2005, general and administrative expenses were $5,759,000 compared to $7,269,000 for the full year 2004. For the period from October 18, 2005 through December 31, 2005, general and administrative expenses were $746,000.
Interest Expense
Interest expense increased by $7,489,000 to $13,957,000 in 2006 from $6,468,000 in 2005 principally as a result of the increase in debt in connection with the acquisition of our seven vessels from OSG effective October 18, 2005.
During the period from January 1, 2005 through October 17, 2005, interest expense was $3,596,000 compared to $8,645,000 for the full year 2004. For the period from October 18, 2005 through December 31, 2005, interest expense, including amortization of deferred debt issuance cost, was $2,872,000.
LIQUIDITY AND SOURCES OF CAPITAL
We operate in a capital intensive industry. We financed the acquisition of our seven vessels with the net proceeds of the IPO, borrowings under our credit facility and through the issuance of shares of our common stock to a subsidiary of OSG. Our working capital requirements relate to our operating expenses, including payments under our ship management agreements, payments of interest, payments of insurance premiums, payments of vessel taxes and the payment of principal under our credit facility. We fund our working capital requirements with cash from operations and, if necessary, borrowings under our credit facility, which includes a $15 million working capital facility. We collect our basic hire monthly in advance and pay our ship management fees monthly in advance. We receive additional hire payable quarterly in arrears. We intend to pay quarterly cash dividends denominated in U.S. dollars to the holders of our common shares in amounts substantially equal to the charter hire received by us under our charters, less cash expenses and any cash reserves established by our board of directors. Since our IPO we have paid the following dividends:
Operating period | | Total payment | | Per share | | Record date | | Payment date |
| October 18-December 31, 2005 | | $12.9 million | | $0.43 | | March 10, 2006 | | March 24, 2006 |
| January 1-March 31, 2006 | | $15.9 million | | $0.53 | | June 1, 2006 | | June 16, 2006 |
| April 1-June 30, 2006 | | $10.8 million | | $0.36 | | August 18, 2006 | | September 4, 2006 |
| July 1-September 30, 2006 | | $12.6 million | | $0.42 | | November 27, 2006 | | December 6, 2006 |
| October 1-December 31, 2006 | | $13.2 million | | $0.44 | | February 22, 2007 | | March 6, 2007 |
We believe that our cash flow from our charters will be sufficient to fund our interest payments under our secured credit facility and our working capital requirements for the short and medium term. We will likely need to fund any future vessel acquisitions with additional borrowings under our credit facility, which includes a $150 million vessel acquisition facility that, subject to the satisfaction of conditions to drawdown, permits us to borrow amounts to pay all or a portion of the purchase price of additional vessels. We may refinance all or a portion of any additional indebtedness that we incur for vessel acquisitions from time to time with the net proceeds of future equity issuances. As of December 31, 2006 we were in compliance with the covenants contained in our secured loan agreement.
For periods prior to October 17, 2005, our combined financial statements represent the operations of our vessels by our predecessor. The acquisition of the vessels by our predecessor and their operations were funded by bank debt and loans from OSG. As a result, our predecessor combined financial statements are not indicative of the financial position, results of operations or cash flows we would have achieved had we operated as an independent stand-alone entity during the periods presented for our predecessor or of future results.
Working capital at December 31, 2006 was approximately $15,431,000 compared with $12,176,000 at December 31, 2005. At December 31, 2006, additional hire related to the period from October 1, 2006 through December 31, 2006, which amounted to $4,009,000, had not been received from the charterers. At December 31, 2005, additional hire related to the period from October 18, 2005 through December 31, 2005, which amounted to $5,506,000, had not been received from the charterers.
Net cash provided by operating activities was $53,998,000 in 2006 compared to $98,932,000 in 2005. This decrease was primarily attributable to new charter arrangements for our vessels, which since October 18, 2005 have been on long term fixed rate charters to OSG. Net cash provided by operating activities was $83,039,000 during the period from January 1, 2005 through October 17, 2005 compared with $84,248,000 in 2004. Net cash provided by operating activities was $15,893,000 from October 18, 2005 through December 31, 2005. We had total debt outstanding of $236,000,000 at December 31, 2006, all of which is due to Royal Bank of Scotland. This was unchanged from December 31, 2005.
During the second quarter of 2005, OSG made a capital contribution to our predecessor, reducing loans payable to OSG to zero.
In July 2005, our predecessor repaid the outstanding balance of its long-term debt with funds advanced by OSG.
AGGREGATE CONTRACTUAL OBLIGATIONS
As of December 31, 2006 our long-term contractual obligations are as follows:
| $ in thousands | | Summary Long-Term Future Contractual Obligations | |
| | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | Thereafter | | | Total | |
Ship management agreements(1) | | | 15,700 | | | | 16,100 | | | | 16,500 | | | | 15,900 | | | | 9,100 | | | | 900 | | | | 74,200 | |
Long-term debt(2) | | | 13,200 | | | | 13,200 | | | | 13,200 | | | | 13,200 | | | | 36,900 | | | | 249,000 | | | | 338,700 | |
| Total | | | 28,900 | | | | 29,300 | | | | 29,700 | | | | 29,100 | | | | 46,000 | | | | 249,900 | | | | 412,900 | |
| (1) | Our ship management agreements are cancelable by us at any time upon 90 days notice. Each charterer has the right to approve the replacement manager that we select; however, such approval may not to be unreasonably withheld. Each charterer also has the right to cause us to change the manager of its vessel under certain circumstances if it is dissatisfied with the manager’s performance. In addition, in the event a ship management agreement is terminated, we will make a payment to Tanker Management in the amount of the aggregate drydocking costs paid by Tanker Management in excess of the aggregate drydock-related management fee payments charged to us, in accordance with the terms set forth in the applicable ship management agreement. If at such time drydock-related management fee payments exceed aggregate drydocking costs, we will receive a payment from Tanker Management in the amount of the difference. |
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| (2) | Amounts shown include contractual interest obligations on $236 million of debt under the term portion of our credit facility. The interest obligations have been determined using an interest rate of 5.60% per annum based on the five year interest rate swap arrangement that was effective as of October 18, 2005. The interest on the balance outstanding is payable quarterly and the principal is payable in quarterly installments of $6,062,500 commencing on January 18, 2011, with a final payment of $120,812,500 on October 18, 2015. |
We collect our fixed basic charter rate monthly in advance and pay our technical management fees monthly in advance. To the extent there are additional hire revenues, we receive such additional hire quarterly in arrears. Although we can provide no assurances, we expect that our cash flow from our chartering arrangements will be sufficient to cover our technical management fees, interest payments, commitment fees and other financing costs under our credit facility, insurance premiums, vessel taxes, general and administrative expenses and other costs and any other working capital requirements for the short and medium term. If necessary, we may also fund our working capital requirements with borrowings under our credit facility, which includes a $15 million working capital facility that may be drawn in full until the credit facility’s fifth anniversary. We may fund our future vessel acquisitions with additional borrowings under our credit facility, which also includes a $150 million vessel acquisition facility that, subject to the satisfaction of conditions to drawdown, permits us to borrow amounts to pay the purchase price of additional vessels. Our longer term liquidity requirements include repayment of the principal balance of our credit facility. We may require new borrowings and/or issuances of equity or other securities to meet this repayment obligation. Alternatively, we can sell our assets and use the proceeds to pay down debt.
Marshall Islands law generally prohibits the payment of dividends other than from surplus or while a company is insolvent or would be rendered insolvent by the payment of such a dividend. In addition, under the terms of our credit facility, we may not declare or pay any dividends if we are in default under the credit facility or if the market value of our vessels is less than 135% of our outstanding borrowings under the credit facility plus the actual or notional cost of terminating any interest rate swaps that we enter.
RISK MANAGEMENT
Our predecessor was exposed, and we expect to be exposed, to market risk from changes in interest rates, which could affect our results of operation and financial position. Our predecessor managed exposure to interest rate risk through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We also manage this risk by entering into an interest rate swap agreements in which we exchange fixed and variable interest rates based on agreed upon notional amounts. We use such derivative financial instruments as risk management tools and not for speculative or trading purposes. In addition, the counterparty to the derivative financial instrument is a major financial institution in order to manage exposure to nonperformance by counterparties.
As of December 31, 2006, we had a five year swap effective as of October 18, 2005 with a notional amount of $236,000,000 outstanding. The swap converted the LIBOR-based interest rate on the debt to a fixed rate of 5.60% per annum including the applicable margin of 0.70%.
The shipping industry’s functional currency is the U.S. dollar. All of our revenues and most of our operating costs are in U.S. dollars.
EFFECTS OF INFLATION
We do not believe that inflation has had or is likely, in the foreseeable future, to have a significant impact on vessel operating expenses, drydocking expenses and general and administrative expenses.
OFF BALANCE SHEET ARRANGEMENTS
With the exception of the above mentioned interest rate swap, we do not currently have any liabilities, contingent or otherwise, that we would consider to be off balance sheet arrangements.
OUR CREDIT FACILITY
The following summary of the material terms of our secured credit facility does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the provisions of the Secured Loan Facility Agreement. Because the following is only a summary, it does not contain all information that you may find useful. For more complete information, you should read the entire Secured Loan Facility Agreement filed as an exhibit to this report.
General
On October 18, 2005, we entered into a $401 million secured credit facility with The Royal Bank of Scotland for a term of ten years, with no principal amortization for the first five years. The credit facility consists of a $236 million term loan, a $150 million vessel acquisition facility and a $15 million working capital facility. We are the borrower under the credit facility and each of our seven vessel owning subsidiaries have guaranteed our performance thereunder.
We borrowed the entire amount available under the term loan upon the completion of IPO to fund a portion of the purchase price for the seven vessels that we are acquired from OSG. Subject to the satisfaction of the conditions to draw down described below, we will be permitted to borrow up to the full amounts of the vessel acquisition facility and the working capital facility for a period of five years from the closing of the credit facility. Commencing on the fifth anniversary of the closing of the credit facility, amounts that we are able to borrow under both facilities will be reduced as set forth below.
Borrowings under the term loan and the working capital facility bear interest at an annual rate of LIBOR plus a margin of 0.70%. Borrowings under the vessel acquisition portion of the credit facility bear interest at an annual rate of LIBOR plus a margin of 0.85%. To reduce our exposure to fluctuations in interest rates, we entered an interest rate swap on October 18, 2005 pursuant to which we fixed the interest rate for five years on the full amount of our term loan at 5.60%. We were required to pay a $1.5 million fee in connection with the arrangement of our credit facility (which we funded with a portion of the net proceeds from the IPO) and a commitment fee of 0.3% per annum, which will be payable quarterly in arrears, on the undrawn portion of the facility.
Our ability to borrow under the vessel acquisition facility, in each case, will be subject to the target vessel being a double hull tanker that is at least 45,000 dwt and no more than fifteen years old at the maturity of the facility. Our ability to borrow under the vessel acquisition facility will be subject to all of our borrowings under the credit facility not exceeding 65% of the charter-free market value of the vessels that secure our obligations under the credit facility, calculated as though we had completed the subject transaction. In addition, we will need our lender’s approval of the vessel acquisition. Our lender’s approval of the vessel acquisition will be in its sole discretion, taking into account such factors as the vessel’s ability to generate earnings that are sufficient to fund principal payments as they become due and our ability to raise additional capital through equity issuances in amounts acceptable to our lender.
We will be required to repay the term loan commencing three months after the fifth anniversary of the facility closing date in twenty quarterly installments of $6,062,500 and a final repayment of $114,750,000 occurring simultaneously with the last quarterly repayment. In addition, the vessel acquisition facility will reduce (with any excess borrowing becoming repayable at the time of reduction) quarterly commencing three months after the fifth anniversary of the facility closing date in increments of $7.5 million. The working capital facility will also reduce (with any excess borrowing becoming repayable at the time of reduction) commencing three months after the fifth anniversary of the facility closing date in twenty quarterly installments of $750,000. We may voluntarily reduce undrawn amounts under the facility from time to time in minimum amounts of $1.0 million.
Security
The credit facility provides that the borrowings thereunder are secured by the following:
| | · | a first priority mortgage on each of the vessels we have agreed to purchase and any additional vessels that we acquire; |
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| | · | an assignment of charter hire guarantees and earnings from, and insurances on, each of the vessels we have agreed to purchase and any additional vessels that we acquire; |
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| | · | a pledge of the balances in our bank accounts which we have agreed to keep with The Royal Bank of Scotland; and |
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| | · | an unconditional and irrevocable guarantee by each of our seven vessel owning subsidiaries. |
The facility agreement provides that in the event of either the sale or total loss of a vessel, we must prepay an amount under the credit facility proportionate to the market value of the sold or lost vessel compared with the total market value of all of our vessels before such sale or loss together with accrued interest on the amount prepaid and, if such prepayment occurs on a date other than an interest payment date, any interest breakage costs.
Covenants
The facility agreement contains restrictive covenants that prohibit us and each of our subsidiaries from, among other things:
| | · | incurring additional indebtedness without the prior consent of the lenders; |
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| | · | permitting liens on assets; |
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| | · | merging or consolidating with other entities or transferring all or substantially all of our assets to another person; |
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| | · | paying dividends if the charter-free market value of our vessels that secure our obligations under the credit facility is less than 135% of our borrowings under the credit facility plus the actual or notional cost of terminating any interest rates swaps that we enter, if there is a continuing default under the credit facility or if the payment of the dividend would result in a default or breach of a loan covenant; |
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| | · | changing the technical manager of our vessels without the prior consent of the lenders; |
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| | · | making certain loans, advances or investments; entering into certain material transactions with affiliated parties; |
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| | · | entering into certain types of charters, including bareboat charters and time charters or consecutive voyage charters of greater than 13 months (excluding our charters with OSG’s subsidiaries); |
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| | · | de-activating any of our vessels or allowing work to be done on any vessel in an aggregate amount greater than $2.0 million without first obtaining a lien waiver; |
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| | · | making non-ordinary course acquisitions or entering into a new line of business or establishing a place of business in the United States or any of its territories; |
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| | · | selling or otherwise disposing of a vessel or other assets or assigning or transferring any rights or obligations under our charters and our ship management agreements. |
The facility agreement also contains a financial covenant requiring that at all times the charter-free market value of our vessels that secure our obligations under the credit facility be no less than 120% of our borrowings under the credit facility plus the actual or notional cost of terminating any of our interest rates swaps. In the event that the aggregate charter-free market value of the vessels that secure our obligations under the credit facility is less 120% of our borrowings under the credit facility plus the actual or notional cost of terminating any of our interest rates swaps, the difference shall be recovered by pledge of additional security acceptable to the lenders or by a prepayment of the amount outstanding at the option of the borrowers.
Events of Default
Each of the following events with respect to us or any of our subsidiaries, in some cases after the passage of time or notice or both, is an event of default under the facility agreement:
| | · | non-payment of amounts due under the credit facility; |
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| | · | breach of our covenants; |
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| | · | misrepresentation; |
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| | · | cross-defaults to other indebtedness in excess of $2.0 million; |
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| | · | materially adverse judgments or orders; |
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| | · | event of insolvency or bankruptcy; |
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| | · | acceleration of any material amounts that us or any of our subsidiaries is obligated to pay; |
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| | · | breach of a time charter or a charter hire guaranty in connection with any of our vessels; |
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| | · | default under any collateral documentation or any swap transaction; |
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| | · | cessation of operations; |
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| | · | unlawfulness or repudiation; |
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| | · | if, in the reasonable determination of the lender, it becomes impossible or unlawful for us or any of our subsidiaries to comply with our obligations under the loan documents; and |
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| | · | if any event occurs that, in the reasonable opinion of the lender, has a material adverse effect on our and our subsidiaries’ operations, assets or business, taken as a whole. |
The facility agreement provides that upon the occurrence of an event of default, the lenders may require that all amounts outstanding under the credit facility be repaid immediately and terminate our ability to borrow under the credit facility and foreclose on the mortgages over the vessels and the related collateral.
ITEM 6. | | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
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A. | | DIRECTORS AND SENIOR MANAGEMENT |
The following table sets forth information regarding our executive officers and directors. Our board of directors is elected annually on a staggered basis, and each director elected holds office for a three-year term. Each of our directors was elected in July 2005, and Rolf Wikborg was reelected as our Class III director at our annual stockholders meeting on June 22, 2006. All of our current directors are independent.
| Name | | Age | | Position |
| Erik A. Lind | | 51 | | Class I Director and Chairman |
| Randee Day | | 58 | | Class II Director |
| Rolf A. Wikborg | | 48 | | Class III Director |
| Ole Jacob Diesen | | 59 | | Chief Executive Officer |
| Erik Ubøe | | 46 | | Chief Financial Officer |
| Tom R. Kjeldsberg | | 35 | | Senior Vice President, Business Development |
The term of our Class I director expires in 2008, the term of our Class II director expires in 2007 and the term of our Class III director expires in 2009.
Set forth below is a brief description of the business experience of our directors and executive officers.
Erik A. Lind—Chairman of the Board. Mr. Erik A. Lind has been chief executive of Tufton Oceanic and Managing Director of Tufton Oceanic Ltd. since 2004. Tufton Oceanic is a Fund Management and Investment banking firm for the Marine and Energy related sectors. Mr. Lind has more than 25 years experience in corporate banking, global shipping and specialized and structured asset financing. From 1995 to 2001, Mr. Lind served as Executive Vice President and a member of the Executive Management Committee at IM Skaugen ASA, a Norwegian public bulk shipping and logistics company engaged in the transportation of petrochemical gases, LPG and organic chemicals as well as crude oil lightering, in various financial management, operational and corporate and business development roles. Mr. Lind has also held senior and executive positions with Manufacturers Hanover Trust Company, Oslobanken and GATX Capital. He has been actively involved in corporate recapitalization, financial restructurings, acquisitions, structured finance and joint venture investments. In addition to his positions within Tufton Oceanic. Mr. Lind currently serves on the boards of Frilin AS, a Norwegian private investment company, and Christiania Capital Partners, a private financial advisory and consulting firm based in Norway. Mr. Lind is a resident of the United Kingdom and a citizen of Norway.
Randee Day—Director. Ms. Randee Day has been a Managing Director at Seabury Transportation Holdings LLC, a leading advisory and consulting firm specializing in the transportation industry, since 2004 and is responsible for all of Seabury’s activities related to the maritime industry. Ms. Day has more than 25 years of specialized international financial experience in the marine and energy sectors. From 1985 to 2004, Ms. Day was president and chief executive officer of Day & Partners, Inc., a financial advisory and consulting firm focused on the maritime, energy and cruise industries with a diversified client base consisting of shipping companies, commercial banks and government agencies. Ms. Day has an extensive background in international trust and maritime law and has worked with clients on bankruptcies, foreign judgments and strategies for disposing of real estate and shipping assets in various international jurisdictions. Ms. Day has served as an independent director and audit committee chair of TBS International Ltd., a Bermuda based operator of one of the world’s largest controlled fleets of multipurpose tweendeck bulk carriers, since 2001. From 1979 to 1985, Ms. Day served as the head of J.P. Morgan’s Marine Transportation and Finance department in New York, where she was responsible for managing a $1 billion loan portfolio and overseeing relationships with the bank’s shipping clients in the Western Hemisphere and the Far East. She also served in the London offices of J.P. Morgan, Continental Illinois National Bank & Trust and Bank of America. Ms. Day is a resident and citizen of the United States.
Rolf A. Wikborg—Director. Mr. Rolf A. Wikborg is Managing Director of AMA Norway A/S and a director of AMA Capital Partners in New York, a maritime merchant banking group involved in mergers and acquisitions, restructurings and financial engineering in the shipping, offshore and cruise sector. Mr. Wikborg has extensive experience arranging operating and financial leases for operators in the maritime field and recently has been active arranging mergers and acquisitions. Prior to founding the AMA group in New York in 1987, Mr. Wikborg was a Managing Director at Fearnleys, Mexico, for two years after having worked in the Project Department of Fearnleys, an Oslo based ship-broker. Mr. Wikborg holds a Bachelor of Science in Management Sciences from the University of Manchester, England. Mr. Wikborg is an officer in the Royal Norwegian Navy and is a citizen and resident of Norway.
Ole Jacob Diesen—Chief Executive Officer. Mr. Ole Jacob Diesen has been an independent corporate and financial management consultant since 1997, serving a diverse group of clients primarily in the tanker industry. Mr. Diesen has advised on a broad range of shipping transactions, including mergers and acquisitions, corporate reorganizations, joint ventures, asset sales, equity, debt and lease financings and vessel charters, pooling and technical management agreements. Mr. Diesen’s career in shipping and shipping finance spans over 30 years. From 1991 to 1997, Mr. Diesen served as Managing Director of Skaugen PetroTrans ASA, a Norwegian public company that was listed on the Oslo Stock Exchange. Skaugen PetroTrans is an established crude oil lightering company in the U.S. Gulf and operator of a fleet of medium sized tankers. From 1984 to 1991, Mr. Diesen headed Fearnley Group (UK) Ltd., a privately held corporate finance advisory firm specializing in the maritime and oil industries. Prior to this, Mr. Diesen served for ten years with Manufacturers Hanover Trust, a predecessor to JPMorgan Chase, in positions including Vice President and Deputy Regional Manager, where he was responsible for the bank’s portfolios of shipping and Scandinavian corporate credits after having spent two years as a tanker chartering broker. Mr. Diesen currently serves on a number of boards including PetroTrans Holdings Ltd., Bermuda, the largest independently owned U.S. Gulf lightering business; I.M. Skaugen Marine Services Pte Ltd., Singapore, an owner of LPG/ethylene carriers; Leif Höegh (UK) Ltd., a U.K. owner of car carriers and LNG vessels; Dole (UK) Ltd., a U.K. owner of reefer vessels; and FSN Capital Holding Ltd., Jersey, a private equity firm. Mr. Diesen is a citizen of Norway.
Eirik Ubøe—Chief Financial Officer. Mr. Eirik Ubøe has been involved in international accounting and finance for approximately 20 years, which includes time spent in ship finance and as the chief financial officer for companies listed on the Oslo Stock Exchange. From March 2002 through December 2004, Mr. Ubøe served as the chief executive and chief financial officer of Nutri Pharma ASA, an international health care company listed on the Oslo Stock Exchange. From 1997 through 2002, Mr. Ubøe worked in various positions at the Schibsted Group, the largest Norwegian media group with newspaper, television and online interests in Scandinavia, the Baltics, Switzerland, France and Spain, including as the finance director of the Schibsted Group and as chief financial officer of Schibsted’s newspaper initiative in Switzerland, France and Spain. Mr. Ubøe has also served as a vice president in the corporate finance and ship finance departments of various predecessors to JPMorgan Chase both in New York and Oslo for a total of eight years. Mr. Ubøe holds an MBA from the University of Michigan’s Ross School of Business and a Bachelor in Business Administration from the University of Oregon. Mr. Ubøe is a citizen of Norway.
Tom R. Kjeldsberg – Senior Vice President, Business Development. Mr. Kjeldsberg has 10 years investment banking experience, mainly within the maritime/transportation industries. From 2002 through 2007, he was a Director in the Corporate Finance division of DnB NOR Markets, Oslo, one of the world’s leading shipping and offshore banks. Mr. Kjeldsberg has also served as an Associate in the Corporate Finance group of Merrill Lynch in London and Analyst in the Project Finance group of Cambridge Partners in New York. He holds an MBA from the IESE Business School in Barcelona, Spain. Mr. Kjeldsberg is a citizen of Norway.
DIRECTORS COMPENSATION
Each member of our board of directors is currently paid an annual fee of $42,500, plus reimbursement for expenses incurred in the performance of duties as members of our board of directors. We pay our chairman an additional $12,500 per year to compensate him for the extra duties incident to that office. We pay the head of our audit committee an additional $8,750 per year and an additional $3,750 per year to each of the other members of the audit committee. We pay the heads of our compensation committee and nominating and corporate governance committee an additional $5,000 each per year. We pay each director $1,250 for each board meeting attended. On May 10, 2006, we awarded each of our directors 1,000 shares of restricted stock. These shares of restricted stock vested and were issued on October 18, 2006. On November 8, 2006 each member of our board of directors was awarded 3,614 shares of restricted stock of which 2,614 vest in three equal amounts in May 2007, May 2008 and May 2009, subject to each member of our board of directors remaining a member of our board of directors and certain performance hurdles being met. The remaining 1,000 shares of restricted stock each vest in three equal amounts in May 2007, May 2008 and May 2009, subject to each member of our board of directors remaining a member of our board of directors. During the vesting period of the shares of restricted stock awarded to our directors on November 8, 2006, each director will be credited with an additional number of shares of restricted stock in an amount equal to the value of the dividends that would have been paid on the awarded shares had the shares vested on the date of the award. These additional shares will be transferred to each director as the shares vest.
We have no service contracts between us and any of our directors providing for benefits upon termination of their employment or service.
EXECUTIVE COMPENSATION, EMPLOYMENT AGREEMENTS
Our chief executive officer, Mr. Ole Jacob Diesen, receives an annual salary of $400,000, which includes benefits. Our chief financial officer, Mr. Eirik Ubøe receives an annual salary of NOK 1,625,000, which includes benefits. In addition, each is reimbursed for expenses incurred in the performance of their duties as our executive officers and receives the equity based compensation described below. Our senior vice president, Mr. Tom R. Kjeldsberg, receives an annual salary of NOK 1,500,000.
Executive Officer Employment Agreements
We have entered into employment agreements with Mr. Diesen and Mr. Ubøe that set forth their rights and obligations as our chief executive officer and chief financial officer, respectively. The employment agreements are substantially similar. The agreements have an initial term of three years and are extendable at our option with six months advance notice prior to the expiration of their initial term. Either the executive or we may terminate the employment agreements for any reason and at any time.
Pursuant to the employment agreements, Mr. Diesen receives a base salary per year in the amount of $400,000 and Mr. Ubøe receives a base salary per year in the amount of NOK 1,625,000. In addition, in connection with the IPO both Mr. Diesen and Mr. Ubøe received a combination of stock options and restricted stock that had a grant date value of $75,000 split equally between stock options and restricted stock. The 69,446 stock options have an exercise price of $12 per share and expire on October 18, 2015. Each executive is also eligible for additional grants under our 2005 Incentive Compensation Plan, as determined by the compensation committee of our board of directors. On November 8, 2006, Mr. Diesen and Mr. Ubøe were awarded 14,457 and 9,939 shares of restricted stock, respectively, of which 11,332 and 6,814, respectively, vest in three equal amounts in May 2007, May 2008 and May 2009, subject to continued employment with DHT and certain performance hurdles being met. The remaining 3,125 shares of restricted stock each vest in three equal amounts in May 2007, May 2008 and May 2009, subject to continued employment with DHT. During the vesting period of the shares of restricted stock awarded to Mr. Diesen and Mr. Ubøe on November 8, 2006, Mr. Diesen and Mr. Ubøe will each be credited with an additional number of shares of restricted stock in an amount equal to the value of the dividends that would have been paid on the awarded shares had the shares vested on the date of the award. These additional shares will be transferred to Mr. Diesen and Mr. Ubøe as the shares vest.
In the event that (i) we terminate either executive’s employment without cause (as such term is defined in the employment agreement), (ii) elect not to extend the initial term of either executive’s employment agreement without cause (as such term is defined in the employment agreement) or (iii) either executive terminates his employment for good reason (as such term is defined in the employment agreement) within one year following a change of control, then we will continue to pay such executive’s salary through the later of (1) the third anniversary of the commencement of the employment agreement or (2) the first anniversary of the date of notice of termination (also, if the executive loses his position for good reason within six months following a change of control, the executive may under certain circumstances be entitled to payment in lieu of any other cash payments equal to twice the executive’s annual base salary and any unvested equity wards will become fully vested). In addition, in the event an executive is terminated without cause pursuant to clause (i) above, all of his equity based compensation, including initial grants, will immediately vest and become exercisable. If an executive’s employment is terminated due to death or disability, we will continue to pay his salary through the first anniversary of such date of termination. In the event that an executive’s employment is terminated for cause, we are only obligated to pay his salary and unreimbursed expenses through the termination date.
Pursuant to the employment agreements, each of Mr. Diesen and Mr. Ubøe has agreed to protect our confidential information. They have also agreed during the term of the agreements and for a period of one year following his termination, not to (i) engage in any business in any location that is involved in the voyage chartering or time chartering of crude oil tankers, (ii) solicit any business from a person that is a customer or client of ours or any of our affiliates, (iii) interfere with or damage any relationship between us or any of our affiliates and any employee, customer, client, vendor or supplier or (iv) form, or acquire a two percent or greater equity ownership, voting or profit participation in, any of our competitors.
We have also entered into an indemnification agreement with each of Mr. Diesen and Mr. Ubøe pursuant to which we have agreed to indemnify them substantially in accordance with the indemnification provisions related to our officers and directors in our bylaws.
We have entered into an employment agreement with Mr. Kjeldsberg that sets forth his rights and obligations as our senior vice president. Either Mr. Kjeldsberg or we may terminate the employment agreement for any reason at any time. Pursuant to the employment agreement, Mr. Kjeldsberg receives a base salary per year in the amount of NOK 1,500,000. In addition, Mr. Kjeldsberg is eligible to receive equity awards pursuant to the 2005 Incentive Compensation Plan. In the event of a change of control, Mr. Kjeldsberg is entitled to an amount equal to twice his annual base salary, subject to certain conditions. In the event we terminate Mr. Kjeldsberg’s employment, he is entitled to one year of severance, subject to certain conditions. Pursuant to the employment agreement, Mr. Kjeldsberg has agreed to protect our confidential information. He has also agreed during the term of the agreement and for a period of one year following his termination not to (i) engage in any business that is involved in the voyage chartering or time chartering of crude oil tankers, (ii) solicit any business from a person that is a customer or client of ours or (iii) form, or acquire a two percent or greater equity ownership, voting or profit participation in, any of our competitors.
Stock Plan
2005 Incentive Compensation Plan
We established the 2005 Incentive Compensation Plan, which we call the Plan, prior to the consummation of our IPO for the initial benefit of our directors and officers (including prospective directors and officers). The following description of the Plan is qualified by reference to the full text thereof, a copy of which is filed as an exhibit to this report.
Awards
The Plan provides for the grant of options intended to qualify as incentive stock options, or ISOs, under Section 422 of the Internal Revenue Code of 1986, as amended and non-statutory stock options, or NSOs, restricted stock awards, restricted stock units, or RSUs, cash incentive awards and other equity-based or equity-related awards.
Plan administration
The Plan will be administered by the compensation committee of our board of directors or such other committee as our board may designate to administer the plan. Initially, our entire board will perform the functions of the compensation committee and will administer the Plan. Subject to the terms of the plan and applicable law, the compensation committee has sole and plenary authority to administer the Plan, including, but not limited to, the authority to (i) designate Plan participants, (ii) determine the type or types of awards to be granted to a participant, (iii) determine the number of shares of our common stock to be covered by awards, (iv) determine the terms and conditions of any awards, including vesting schedules and performance criteria, (v) amend or replace an outstanding award and (vi) make any other determination and take any other action that the compensation committee deems necessary or desirable for the administration of the Plan.
Shares available for awards
Subject to adjustment as provided below, the aggregate number of shares of our common stock that may be delivered pursuant to awards granted under the Plan is 300,000, of which the maximum number of shares that may be delivered pursuant to ISOs granted under the Plan is 150,000. The maximum number of shares of our common stock with respect to which awards may be granted to any participant in the Plan in any fiscal year is 75,000. If an award granted under the Plan is forfeited, or otherwise expires, terminates or is canceled without the delivery of shares, then the shares covered by such award will again be available to be delivered pursuant to awards under the Plan.
In the event of any corporate event affecting the shares of our common stock, the compensation committee in its discretion may make such adjustments and other substitutions to the Plan and awards under the Plan as it deems equitable or desirable in its sole discretion.
Stock options
The compensation committee may grant both ISOs and NSOs under the Plan. Except as otherwise determined by the compensation committee in an award agreement, the exercise price for options cannot be less than the fair market value (as defined in the Plan) of our common stock on the date of grant. In the case of ISOs granted to an employee who, at the time of the grant of an option, owns stock representing more than 10% of the voting power of all classes or our stock or the stock of any of our affiliates, the exercise price cannot be less than 110% of the fair market value of a share of our common stock on the date of grant. All options granted under the Plan will be NSOs unless the applicable award agreement expressly states that the option is intended to be an ISO.
Subject to any applicable award agreement, options shall vest and become exercisable on each of the first three anniversaries of the date of grant. The term of each option will be determined by the compensation committee; provided that no option will be exercisable after the tenth anniversary of the date the option is granted. The exercise price may be paid with cash (or its equivalent) or by other methods as permitted by the compensation committee.
Restricted shares and restricted stock units
Restricted shares and RSUs may not be sold, assigned, transferred, pledged or otherwise encumbered except as provided in the Plan or the applicable award agreement; provided, however, that the compensation committee may determine that restricted shares and RSUs may be transferred by the participant. Upon the grant of a restricted share, certificates will be issued and registered in the name of the participant and deposited by the participant, together with a stock power endorsed in blank, with us or a custodian designated by the compensation committee or us. Upon lapse of the restrictions applicable to such restricted shares, we or the custodian, as applicable, will deliver such certificates to the participant or his or her legal representative.
An RSU will have a value equal to the fair market value of a share of our common stock. RSUs may be paid in cash, shares of our common stock, other securities, other awards or other property, as determined by the committee, upon the lapse of restrictions applicable to such RSU or in accordance with the applicable award agreement. The committee may provide a participant who holds restricted shares or RSUs with dividends or dividend equivalents payable in cash, shares of our common stock or other property.
The compensation committee may provide a participant who holds restricted shares with dividends or dividend equivalents, payable in cash, shares of our common stock or other property.
Cash incentive awards
Subject to the provisions of the Plan, the compensation committee may grant cash incentive awards payable upon the attainment of one or more individual, business or other performance goals or similar criteria.
Other stock-based awards
Subject to the provisions of the Plan, the compensation committee may grant to participants other equity-based or equity-related awards. The compensation committee may determine the amounts and terms and conditions of any such awards provided that they comply with applicable laws.
Amendment and termination of the plan
Subject to any government regulation and to the rules of the New York Stock Exchange or any successor exchange or quotation system on which shares of our common stock may be listed or quoted, the Plan may be amended, modified or terminated by our board of directors without the approval of our stockholders except that stockholder approval shall be required for any amendment that would (i) increase the maximum number of shares of our common stock available for awards under the Plan or increase the maximum number of shares of our common stock that may be delivered pursuant to ISOs granted under the Plan or (ii) modify the requirements for participation under the Plan. No modification, amendment or termination of the Plan that is adverse to a participant will be effective without the consent of the affected participant, unless otherwise provided by the compensation committee in the applicable award agreement.
The compensation committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate any award previously granted, prospectively or retroactively; provided, however, that, unless otherwise provided by the compensation committee in the applicable award agreement, any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would materially and adversely impair the rights of any participant to any award previously granted will not to that extent be effective without the consent of the affected participant.
Change of control
The Plan provides that, unless otherwise provided in an award agreement, in the event we experience a change of control, unless provision is made in connection with the change of control for assumption for, or substitution of, awards previously granted:
| | · | any options outstanding as of the date the change of control is determined to have occurred will become fully exercisable and vested, as of immediately prior to the change of control; |
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| | · | all cash incentive awards will be paid out as if the date of the change of control were the last day of the applicable performance period and “target” performance levels had been attained; and |
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| | · | all other outstanding awards will automatically be deemed exercisable or vested and all restrictions and forfeiture provisions related thereto will lapse as of immediately prior to such change of control. |
Unless otherwise provided pursuant to an award agreement, a change of control is defined to mean any of the following events, generally:
| | · | the consummation of a merger, reorganization or consolidation or sale or other disposition of all or substantially all of our assets; |
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| | · | the approval by our stockholders of a plan of our complete liquidation or dissolution; or |
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| | · | an acquisition by any individual, entity or group of beneficial ownership of 50% or more of either the then outstanding shares of our common stock or the combined voting power of our then outstanding voting securities entitled to vote generally in the election of directors. |
Term of the plan
No award may be granted under the Plan after June 7, 2015, the tenth anniversary of the date the Plan was approved by our stockholders.
BOARD OF DIRECTORS
Our business and affairs are managed under the direction of our board of directors. The board is currently composed of three directors, all of whom are independent under the applicable rules of the New York Stock Exchange.
BOARD COMMITTEES
Our board of directors, which is entirely composed of independent directors under the applicable rules of the New York Stock Exchange, performs the functions of our audit committee, compensation committee and nominating and corporate governance committee.
The purpose of the audit committee is to oversee (i) management’s conduct of our financial reporting process (including the development and maintenance of systems of internal accounting and financial controls), (ii) the integrity of our financial statements, (iii) our compliance with legal and regulatory requirements and ethical standards, (iv) significant financial transactions and financial policy and strategy, (v) the qualifications and independence of our outside auditors, (vi) the performance of our internal audit function and (vii) the outside auditors’ annual audit of our financial statements. Ms. Day is our “audit committee financial expert” as that term is defined in Item 401(h) of Regulation S-K.
The purpose of the compensation committee is to (i) discharge the board’s responsibilities relating to the evaluation and compensation of our executives, (ii) oversee the administration of our compensation plans, (iii) review and determine director compensation and (iv) prepare any report on executive compensation required by the rules and regulations of the SEC.
The purpose of the nominating and corporate governance committee to (i) identify individuals qualified to become board members and recommend such individuals to the board for nomination for election to the board, (ii) make recommendations to the board concerning committee appointments, (iii) review and make recommendations for executive management appointments, (iv) develop, recommend and annually review corporate governance guidelines for the Company and oversee corporate governance matters and (v) coordinate an annual evaluation of the board and its chairman.
DIRECTORS
Our directors are elected by a plurality of the votes cast by stockholders entitled to vote. There is no provision for cumulative voting.
Our bylaws provide that our board of directors must consist of at least three members. Stockholders may change the number of directors only by the affirmative vote of holders of a majority of the outstanding common stock. The board of directors may change the number of directors only by a majority vote of the entire board.
As of December 31, 2006, we had 2 employees. Our employees are not represented by any collective bargaining agreements and we have never experienced a work stoppage. In March 2007, we hired an additional employee to take on responsibilities relating to business development.
See “Item 7.A Major Shareholders”.
ITEM 7. | | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
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A. | | MAJOR SHAREHOLDERS |
The following table sets forth certain information regarding (i) the owners of more than 5% of our common stock that we are aware of and (ii) the total amount of common stock owned by all of our officers and directors, individually and as a group, in each case immediately preceding and after giving effect to the IPO. Following the completion of the IPO we have one class of common stock outstanding and each outstanding share will be entitled to one vote.
Prior to the IPO, OIN, owned 100 shares, or 100%, of our common stock. As part of the purchase price for our fleet of seven vessels, we issued 13,999,900 shares or 46.7%, of our common stock to OIN. OIN granted the underwriters the right to purchase up to 2,400,000 of these shares to cover over-allotments. The underwriters’ exercised their option to purchase 648,500 of these shares, and accordingly, OIN owned 13,351,400 shares, or 44.5%, of our common stock upon completion of the IPO. We did not receive any of the proceeds from the exercise of the over-allotment option. As of December 31, 2006, OIN owned 13,351,400 shares, or 44.5%, of our common stock. On January 23, 2007, OIN sold 4,600,000 shares of our common stock in a registered public offering underwritten by Merrill Lynch & Co., reducing OIN’s beneficial ownership in DHT to approximately 29.17%.
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Name | | Number of Shares | | Percent |
Persons owning more than 5% of a class of our equity securities. | | | | |
OSG International, Inc.(1) | | 8,751,000 | | 29.17% |
Scott A. Bommer(2) | | 1,705,527 | | 5.68% |
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Directors | | | | |
Erik A. Lind(3) | | 1,000 | | * |
Randee Day(3) | | 1,000 | | * |
Rolf A. Wikborg(3) | | 1,000 | | * |
Executive Officers | | | | |
Ole Jacob Diesen(4) | | 14,700 | | * |
Eirik Ubøe(5) | | 14,700 | | * |
| Directors and executive officers as a group (five persons) | | 32,400 | | * |
| * | Less than 1% |
(1) | We were incorporated on April 14, 2005 in the Marshall Islands as a wholly owned subsidiary of OSG International, Inc., which is a wholly owned subsidiary of OSG. The principal address of OSG International, Inc. is Trust Company Complex, Ajeltake Island, Ajeltake Road, Majuro, Marshall Islands MH96960. |
(2) | Based on a Schedule 13G filed with the Commission on February 26, 2007 by Scott A. Bommer, individually and (a) as managing member of SAB Capital Advisors, L.L.C., for itself and as the general partner of (i) SAB Capital Partners, L.P. and (ii) SAB Capital Partners II, L.P.; and (iii) SAB Overseas Master Fund, L.P.; and (b) as managing member of SAB Capital Management, L.L.C., for itself and as the general partner of SAB Capital Management, L.P. The address of the principal business office of each of these reporting persons is 712 Fifth Avenue, 42nd Floor, New York, NY 10019. |
(3) | Does not include 3,614 shares of restricted stock subject to vesting conditions. |
(4) | Includes 11,575 options to purchase common stock with an exercise price of $12 per share and expiring on October 18, 2015. Does not include 23,148 options with an exercise price of $12 per share and expiring on October 18, 2015 subject to vesting conditions or 14,457 shares of restricted stock subject to vesting conditions. |
(5) | Includes 11,575 options to purchase common stock with an exercise price of $12 per share and expiring on October 18, 2015. Does not include 23,148 options with an exercise price of $12 per share and expiring on October 18, 2015 subject to vesting conditions or 9,939 shares of restricted stock subject to vesting conditions. |
Our major shareholders have the same voting rights as our other shareholders. No corporation or foreign government or other natural or legal person(s) owns more than 50% of our outstanding stock. We are not aware of any arrangements, the operation of which may at a subsequent date result in a change of control of DHT.
We entered into a registration rights agreement with OIN pursuant to which it had three demand registration rights relating to the common stock that it holds, subject to the requirements that any demand registration made by OIN cover at least 5% of our outstanding common stock. The registration rights agreement provides that OIN has the right to assign its rights under the agreement in connection with a transfer of its shares of common stock, provided the transferee purchases at least 5% of our outstanding common stock in such transfer. In any event, we will be subject to a maximum of three demand registrations under the agreement. If OIN exercises its demand registration rights, we will file a registration statement or report and undertake an offering in the United States, as requested by it. In addition to its demand registration rights, OIN will have piggyback registration rights whenever we register additional common stock, subject to certain cutbacks (the shares to be registered by OIN would be the first to be cut back) and certain other conditions.
OIN has agreed to pay all costs and expenses in connection with demand registrations and to pay its portion of costs and expenses in connection with piggyback registrations, and in either case we will not pay any underwriting discounts or commissions applicable to the securities sold by OIN or any of its legal fees or expenses. We have agreed to indemnify OIN against certain liabilities, including liabilities under the Securities Act in connection with each registration.
OIN has exercised one of its three demand registration rights under the registration rights agreement. On January 23, 2007, OIN sold 4,600,000 shares of our common stock that were registered pursuant to the registration rights agreement.
For more detailed information regarding the terms of the registration rights agreement, please see the form of registration rights agreement filed as an exhibit to this report.
B. | | RELATED PARTY TRANSACTIONS |
We were incorporated on April 14, 2005 as a wholly owned indirect subsidiary of OSG and we acquired our assets, which consists of our fleet of seven vessels, from subsidiaries of OSG simultaneously with the completion of our IPO. We also entered into ship management agreements with Tanker Management, a wholly owned subsidiary of OSG. Our bylaws permit us to enter into related party transactions with one or more of our directors or officers, or their affiliates, if: (i) the material facts as to the interested parties role in the transaction are disclosed to our board and the disinterested members of our board in good faith authorize the transaction, (ii) the material facts as to the interested party’s role in the transaction are disclosed to the stockholders and the transaction is approved in good faith by vote of the stockholders or (iii) the contract or transaction is fair to us at the time it is authorized, approved or ratified by the board or the stockholders.
THE CHARTERS
Our wholly owned subsidiaries have time chartered our vessels to the charterers, which are wholly owned subsidiaries of OSG. The basic hire is payable to us under the charters and is fixed in advance for the length of the initial charter. In addition to the basic hire, OIN, the charterers’ parent, and the charterers have agreed to pay us additional hire quarterly in arrears pursuant to our charter framework agreement with OIN and the charterers. OSG has agreed to guarantee the charter payments under our charter arrangements, including the payment of basic hire and additional hire. We have agreed to guarantee the obligations of each of our subsidiaries under the charters. Please see the section of this report entitled “Item 4. Information on the Company ─ Charter Arrangements” for a more detailed description of the charters.
SHIP MANAGEMENT AGREEMENTS
Our vessel owning subsidiaries have entered into fixed rate ship management agreements with Tanker Management, a wholly owned subsidiary of OSG. Under these agreements, which are coterminous with the charters of each of the vessels, Tanker Management assumed all responsibilities for the technical management and most of the operating costs of the vessels in exchange for a technical management fee that will be fixed for the first two years of the agreements. Please see the section of this report entitled “Business—Ship Management Agreements” for a more detailed description of the ship management agreements.
REGISTRATION RIGHTS AGREEMENT
We have entered into a registration rights agreement with OIN, pursuant to which we have agreed to register for sale to the public the 13,351,400 shares that OSG or its subsidiaries hold in us. OIN has exercised one of its three demand registration rights under the registration rights agreement. On January 23, 2007, OIN sold 4,600,000 shares of our common stock that were registered pursuant to the registration rights agreement.
C. | | INTEREST OF EXPERTS AND COUNSEL |
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| | | Not applicable. |
ITEM 8. | | FINANCIAL INFORMATION |
| | | |
A. | | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION |
| 1. | | AUDITED CONSOLIDATED FINANCIAL STATEMENTS See Item 18. |
| | | |
| 2. | | THREE YEARS COMPARATIVE FINANCIAL STATEMENTS See Item 18. |
| | | |
| 3. | | AUDIT REPORT See Report of Independent Registered Public Accounting Firm at page F-2. |
| | | |
| 4. | | LATEST AUDITED FINANCIAL STATEMENTS MAY BE NO OLDER THAN 15 MONTHS We have complied with this requirement. |
| | | |
| 5. | | INTERIM FINANCIAL STATEMENTS IF DOCUMENT IS MORE THAN NINE MONTHS SINCE LAST AUDITED FINANCIAL YEAR Not applicable. |
| | | |
| 6. | | EXPORT SALES IF SIGNIFICANT See Item 18. |
| | | |
| 7. | | LEGAL PROCEEDINGS |
The nature of our business, i.e., the acquisition, chartering and ownership of our vessels, exposes us to risk of lawsuits for damages or penalties relating to, among other things, personal injury, property casualty and environmental contamination. Under rules related to maritime proceedings, certain claimants may be entitled to attach charterhire payable to us in certain circumstances. There are no actions or claims pending against us as of the date of this report.
We intend to pay quarterly dividends to the holders of our common stock in March, June, September and December of each year, in amounts substantially equal to the available cash from our operations during the previous quarter less cash expenses and any reserves established by our board.
Our board of directors may review and amend our dividend policy from time to time in accordance with any future growth of our fleet or for other reasons. Although we do not currently have any commitment in place to purchase any specific vessels, we intend to grow our fleet by acquiring additional vessels in the future in a manner that is accretive to earnings and dividends per share over time. We expect to fund all or a portion of any future vessel acquisitions with borrowings under the $150 million vessel acquisition tranche of our credit facility. Upon acquiring an additional vessel or vessels, our board of directors may limit our dividends per share to the amount that we would have been able to pay if all or a portion of our acquisition related debt had been financed with equity. In such a case, (i) our available cash from operations would be increased by the amount of interest expense incurred on the debt deemed to have been financed with equity during the related period, and (ii) the number of shares outstanding would be increased by a number of shares that, if issued, would have generated net proceeds that would have been sufficient to repay the debt deemed to have been financed with equity as of the beginning of the related period (based on the market price of our common stock as of the determination date).
The timing and amount of dividend payments will be determined by our board of directors and will depend on, among other things, our cash earnings, financial condition, cash requirements other factors. Other than (i) the technical management fees payable under our ship management agreements, which after two years are cancelable by Tanker Management upon 90 days notice, (ii) interest payable on the $236 million of indebtedness that is outstanding under our credit facility, which we fixed for five years at a rate of 5.6% effective as of October 18, 2005, (iii) commitment fees under our credit facility (for so long as we do not make any further borrowings under the vessel acquisition facility or working capital facility), (iv) salary paid to our executive officers, which is fixed during the terms of the their employment agreements, and (v) our directors’ fees, none of our fees or expenses are fixed.
The amount of future dividends, if any, could be affected by various factors, including our cash earnings, financial condition and cash requirements, the loss of a vessel, the acquisition of one or more vessels, required capital expenditures, reserves established by our board of directors, increased or unanticipated expenses, our ability to comply with the terms of our credit facility, a change in our dividend policy, additional borrowings or future issuances of securities, many of which will be beyond our control.
Marshall Islands law generally prohibits the payment of dividends other than from surplus or while a company is insolvent or would be rendered insolvent by the payment of such a dividend. We do not expect to pay any income taxes in the Marshall Islands. We also do not expect to pay any income taxes in the United States. Please see the sections of this report entitled “Taxation”.
B. | | SIGNIFICANT CHANGES |
| | | |
| | | None. |
ITEM 9. | | THE OFFER AND LISTING |
| | | |
A. | | OFFER AND LISTING DETAILS |
| 1. | | EXPECTED PRICE Not applicable. |
| | | |
| 2. | | METHOD TO DETERMINE EXPECTED PRICE Not applicable. |
| | | |
| 3. | | PRE-EMPTIVE EXERCISE RIGHTS Not applicable. |
| | | |
| 4. | | STOCK PRICE HISTORY |
The Company’s common stock is listed for trading on the New York Stock Exchange and is traded under the symbol “DHT”. The following table lists the high and low closing market prices for the Company’s common stock for the periods indicated as reported:
| | | High | | | Low | |
| Year ended December 31, 2006 | | $ | 16.44 | | | $ | 12.10 | |
| | | | | | | | | |
| Quarter ended: | | | | | | | | |
| March 31, 2006 | | | 14.25 | | | | 12.57 | |
| June 30, 2006 | | | 13.50 | | | | 12.10 | |
| September 30, 2006 | | | 15.49 | | | | 12.25 | |
| December 31, 2006 | | | 16.44 | | | | 13.01 | |
| | | | | | | | | |
| Month ended: | | | | | | | | |
| October 31, 2006 | | | 14.35 | | | | 13.01 | |
| November 30, 2006 | | | 14.24 | | | | 13.53 | |
| December 31, 2006 | | | 16.44 | | | | 13.98 | |
| January 31, 2007 | | | 16.42 | | | | 14.36 | |
| February 28, 2007 | | | 15.45 | | | | 14.25 | |
| March 31, 2007 | | | 15.18 | | | | 14.04 | |
| | | | | | | | | |
| 5. | | TYPE AND CLASS OF SECURITIES Not applicable. |
| | | |
| 6. | | LIMITATIONS OF SECURITIES Not applicable. |
| | | |
| 7. | | RIGHTS CONVEYED BY SECURITIES ISSUED Not applicable. |
| | | |
B. | | PLAN OF DISTRIBUTION |
| | | |
| | | Not applicable. |
| | | |
C. | | MARKETS FOR STOCK |
| | | |
| | | The Company’s common stock is listed for trading on the New York Stock Exchange and is traded under the symbol “DHT”. |
| | | |
D. | | SELLING SHAREHOLDERS |
| | | |
| | | Not applicable. |
| | | |
E. | | DILUTION FROM OFFERING |
| | | |
| | | Not applicable. |
| | | |
F. | | EXPENSES OF OFFERING |
| | | |
| | | Not applicable. |
ITEM 10. | | ADDITIONAL INFORMATION |
| | | |
A. | | SHARE CAPITAL |
| | | |
| | | Not applicable. |
| | | |
B. | | MEMORANDUM AND ARTICLES OF ASSOCIATION |
The following is a description of the material terms of our amended and restated articles of incorporation and bylaws. Because the following is only a summary, it does not contain all information that you may find useful. For more complete information you should read our amended and restated articles of incorporation and bylaws listed as an exhibit to this report.
PURPOSE
Our purpose, as stated in our amended and restated articles of incorporation, is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the Business Corporations Act of the Marshall Islands, or the BCA. Our amended and restated articles of incorporation and bylaws do not impose any limitations on the ownership rights of our stockholders.
AUTHORIZED CAPITALIZATION
Under our amended and restated articles of incorporation, our authorized capital stock consists of 100,000,000 shares of common stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par value $.01 per share. As of December 31, 2006, we had outstanding 30,009,250 shares of common stock and no shares of preferred stock. All of our shares of stock are in registered form.
Common Stock
Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of shares of common stock are entitled to receive ratably all dividends, if any, declared by our board of directors out of funds legally available for dividends. Upon our dissolution or liquidation or the sale of all or substantially all or our assets, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders or our common stock will be entitled to receive pro rata our remaining assets available for distribution. Holders of common stock do not have conversion, redemption or preemptive rights to subscribe to any of our securities. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of any shares of preferred stock which we may issue in the future.
Preferred Stock
Our amended and restated articles of incorporation authorize our board of directors to establish one or more series of preferred stock and to determine, with respect to any series of preferred stock, the terms and rights of that series, including:
| | · | the designation of the series; |
| | | |
| | · | the number of shares of the series; |
| | | |
| | · | the preferences and relative, participating, option or other special rights, if any, and any qualifications, limitations or restrictions of such series; and |
| | | |
| | · | the voting rights, if any, of the holders of the series. |
DIRECTORS
Our directors are elected by a plurality of the votes cast by stockholders entitled to vote. There is no provision for cumulative voting.
Our bylaws provide that our board of directors must consist of at least three members. Stockholders may change the number of directors only by the affirmative vote of holders of a majority of the outstanding common stock. The board of directors may change the number of directors only by a majority vote of the entire board.
In February 2007, our board of directors amended sections 3.10 and 3.11 of the bylaws, which relate to actions by written consent of the board and telephonic meetings of the directors, respectively, to permit the board to take action in a more expeditious manner.
STOCKHOLDER MEETINGS
Under our bylaws, annual stockholder meetings will be held at a time and place selected by our board of directors. The meetings may be held in or outside of the Marshall Islands. Special meetings may be called by stockholders holding not less than one-fifth of all the outstanding shares entitled to vote at such meeting. Our board of directors may set a record date between 15 and 60 days before the date of any meeting to determine the stockholders that will be eligible to receive notice and vote at the meeting.
DISSENTERS’ RIGHTS OF APPRAISAL AND PAYMENT
Under the Business Corporation Act of the Republic of the Marshall Islands, or BCA, our stockholders have the right to dissent from various corporate actions, including any merger or consolidation or sale of all or substantially all of our assets not made in the usual course of our business, and receive payment of the fair value of their shares. In the event of any further amendment of our amended and restated articles of incorporation, a stockholder also has the right to dissent and receive payment for his or her shares if the amendment alters certain rights in respect of those shares. The dissenting stockholder must follow the procedures set forth in the BCA to receive payment. In the event that we and any dissenting stockholder fail to agree on a price for the shares, the BCA procedures involve, among other things, the institution of proceedings in the high court of the Republic of the Marshall Islands or in any appropriate court in any jurisdiction in which the company’s shares are primarily traded on a local or national securities exchange.
STOCKHOLDERS’ DERIVATIVE ACTIONS
Under the BCA, any of our stockholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the stockholder bringing the action is a holder of common stock both at the time the derivative action is commenced and at the time of the transaction to which the action relates.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The BCA authorizes corporations to limit or eliminate the personal liability of directors and officers to corporations and their stockholders for monetary damages for breaches of directors’ fiduciary duties. Our bylaws includes a provision that eliminates the personal liability of directors for monetary damages for actions taken as a director to the fullest extent permitted by law.
Our bylaws provide that we must indemnify our directors and officers to the fullest extent authorized by law. We are also expressly authorized to advance certain expenses (including attorneys fees and disbursements and court costs) to our directors and offices and carry directors’ and officers’ insurance providing indemnification for our directors, officers and certain employees for some liabilities. We believe that these indemnification provisions and insurance are useful to attract and retain qualified directors and executive officers.
The limitation of liability and indemnification provisions in our amended and restated articles of incorporation and bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.
There is currently no pending material litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF OUR AMENDED AND RESTATED ARTICLES OF INCORPORATION AND BYLAWS
Several provisions of our amended and restated articles of incorporation and bylaws, which are summarized below, may have anti-takeover effects. These provisions are intended to avoid costly takeover battles, lessen our vulnerability to a hostile change of control and enhance the ability of our board of directors to maximize stockholder value in connection with any unsolicited offer to acquire us. However, these anti-takeover provisions, which are summarized below, could also discourage, delay or prevent (1) the merger or acquisition of our company by means of a tender offer, a proxy contest or otherwise that a stockholder may consider in its best interest and (2) the removal of incumbent officers and directors.
Blank Check Preferred Stock
Under the terms of our amended and restated articles of incorporation, our board of directors has authority, without any further vote or action by our stockholders, to issue up to 1,000,000 shares of blank check preferred stock. Our board of directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of our company or the removal of our management.
Classified Board of Directors
Our amended and restated articles of incorporation provide for the division of our board of directors into three classes of directors, with each class as nearly equal in number as possible, serving staggered, three year terms. Approximately one-third of our board of directors will be elected each year. This classified board provision could discourage a third party from making a tender offer for our shares or attempting to obtain control of us. It could also delay stockholders who do not agree with the policies of our board of directors from removing a majority of our board of directors for two years.
Election and Removal of Directors
Our amended and restated articles of incorporation prohibit cumulative voting in the election of directors. Our bylaws require parties other than the board of directors to give advance written notice of nominations for the election of directors. Our articles of incorporation also provide that our directors may be removed only for cause and only upon the affirmative vote of a majority of the outstanding shares of our capital stock entitled to vote for those directors. These provisions may discourage, delay or prevent the removal of incumbent officers and directors.
Our bylaws provide that stockholders are required to give us advance notice of any person they wish to propose for election as a director if that person is not proposed by our board of directors. These advance notice provisions provide that the stockholder must have given written notice of such proposal not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual general meeting. In the event the annual general meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the stockholder must be given not later than 10 days following the earlier of the date on which notice of the annual general meeting was mailed to stockholders or the date on which public disclosure of the date of the annual general meeting was made.
In the case of a special general meeting called for the purpose of electing directors, notice by the stockholder must be given not later than 10 days following the earlier of the date on which notice of the special general meeting was mailed to stockholders or the date on which public disclosure of the date of the special general meeting was made. Any nomination not properly made will be disregarded.
A director may be removed only for cause by the stockholders, provided notice is given to the director of the stockholders meeting convened to remove the director and provided such removal is approved by the affirmative vote of a majority of the outstanding shares of our capital stock entitled to vote for those directors. The notice must contain a statement of the intention to remove the director and must be served on the director not less than fourteen days before the meeting. The director is entitled to attend the meeting and be heard on the motion for his removal.
Limited Actions by Stockholders
Our amended and restated articles of incorporation and our bylaws provide that any action required or permitted to be taken by our stockholders must be effected at an annual or special meeting of stockholders or by the unanimous written consent of our stockholders. Our amended and restated articles of incorporation and our bylaws provide that, subject to certain exceptions, our chairman or chief executive officer, at the direction of the board of directors or holders of not less than one-fifth of all outstanding shares may call special meetings of our stockholders and the business transacted at the special meeting is limited to the purposes stated in the notice. Accordingly, a stockholder may be prevented from calling a special meeting for stockholder consideration of a proposal over the opposition of our board of directors and stockholder consideration of a proposal may be delayed until the next annual meeting.
TRANSFER AGENT
The registrar and transfer agent for the common stock is Mellon Investor Services LLC.
LISTING
Our common stock is listed on the New York Stock Exchange under the symbol “DHT”.
Other than the Executive Officer Employment Agreements (described below), Charters, the Ship Management Agreement, our Guarantees and our Secured Loan Facility Agreement, we have not entered into any material contracts other than contracts entered into in the ordinary course of business.
Executive Officer Employment Agreements
We have entered into employment agreements with Mr. Diesen and Mr. Ubøe that set forth their rights and obligations as our chief executive officer and chief financial officer, respectively. The employment agreements are substantially similar. The agreements have an initial term of three years and are extendable at our option with six months advance notice prior to the expiration of their initial term. Either the executive or we may terminate the employment agreements for any reason and at any time. We have also entered into an employment agreement with Mr. Tom R. Kjeldsberg that sets forth his rights and obligations as our senior vice president. Either Mr. Kjeldsberg or we may terminate the employment agreement at any time. For additional information on these agreements, see “Item 6. Directors, Senior Management and Employees ─ Executive Compensation, Employment Agreements.”
D. | | EXCHANGE CONTROLS |
| | | |
| None | | |
| | | |
E. | | TAXATION |
The following is a discussion of the material Marshall Islands and United States federal income tax considerations relevant to an investment decision by a United States Holder, as defined below, with respect to the acquisition, ownership and disposition of the common stock of Double Hull Tankers, Inc., or the Company. This discussion does not purport to deal with the tax consequences of owning common stock to all categories of investors, some of which (such as financial institutions, regulated investment companies, real estate investment trusts, tax-exempt organizations, insurance companies, persons holding common stock of the Company as part of a hedging, integrated, conversion or constructive sale transaction or a straddle, traders in securities that have elected the mark-to-market method of accounting for their securities, persons liable for alternative minimum tax, persons who are investors in pass-through entities, dealers in securities or currencies and investors whose functional currency is not the United States dollar) may be subject to special rules.
WE RECOMMEND THAT YOU 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.
MARSHALL ISLANDS TAX CONSIDERATIONS
The following are the material Marshall Islands tax consequences of our activities to us and stockholders of our common stock. We are incorporated in the Marshall Islands. Under current Marshall Islands law, we are not subject to tax on income or capital gains, and no Marshall Islands withholding tax will be imposed upon payments of dividends by us to our stockholders.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations issued thereunder, published administrative interpretations of the Internal Revenue Service, or IRS, and judicial decisions as of the date hereof, all of which are subject to change at any time, possibly on a retroactive basis.
Taxation of Operating Income: In General
The Company’s subsidiaries have elected to be treated as disregarded entities for U.S. federal income tax purposes. As a result, for purposes of the discussion below, the Company’s subsidiaries are treated as branches of it rather than as separate corporations.
Unless exempt from United States federal income taxation under the rules contained in Section 883 of the Code (discussed below), a foreign corporation is subject to United States federal income taxation on its “shipping income” that is treated as derived from sources within the United States, referred to as “United States source shipping income.” For these purposes “shipping income” means any income that is derived from the use of vessels, from the hiring or leasing of vessels for use on a time, voyage or bareboat charter basis, from the participation in a pool, partnership, strategic alliance, joint operating agreement, code sharing arrangement or other joint venture it directly or indirectly owns or participates in that generates such income, or from the performance of services directly related to those uses. For tax purposes, “United States source shipping income” includes (i) 50% of shipping income that is attributable to transportation that begins or ends, but that does not both begin and end, in theUnited States and (ii) 100% of shipping income that is attributable to transportation that both begins and ends in the United States.
Shipping income attributable to transportation exclusively between non-United States 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 any United States federal income tax.
In the absence of exemption from tax under Section 883, the Company’s gross United States source shipping income would be subject to a 4% tax imposed without allowance for deductions as described below. The Company has not, nor does it believe it will, engage in transportation that produces income which is considered to be 100% from sources within the United States.
Exemption of operating income from United States federal income taxation
Under Section 883 of the Code and the regulations thereunder, the Company will be exempt from United States federal income taxation on its United States source shipping income if:
| 1. | | it is organized in a foreign country (the Company’s “country of organization”) that grants an “equivalent exemption” to corporations organized in the United States; and |
| | | |
| 2. | | either |
| | | |
| | | (A) more than 50% of the value of its stock is owned, directly or indirectly, by individuals who are “residents” of its country of organization or of another foreign country that grants an “equivalent exemption” to corporations organized in the United States, referred to as the “50% Ownership Test,” or |
| | | |
| | | (B) its stock is “primarily and regularly traded on an established securities market” in its country of organization, in another country that grants an “equivalent exemption” to United States corporations, or in the United States, referred to as the “Publicly-Traded Test”. |
The Marshall Islands, the jurisdiction where the Company and its ship-owning subsidiaries are incorporated, grants an “equivalent exemption” to United States corporations. Therefore, the Company will be exempt from United States federal income taxation with respect to the Company’s United States source shipping income if either the 50% Ownership Test or the Publicly-Traded Test is met. As a result of the IPO, it is difficult to satisfy the 50% Ownership Test due to the widely-held ownership of the Company’s stock.
As to the Publicly-Traded Test, the regulations under Code Section 883 provide, in pertinent part, that stock of a foreign corporation will be considered to be “primarily traded” on an established securities market in a country if the number of shares of each class of stock that is traded during any taxable year on all established securities markets in that country exceeds the number of shares in each such class that is traded during that year on established securities markets in any other single country. The Company believes that its common stock, which is, and will continue to be, the sole class of its issued and outstanding stock, is , and will continue to be, “primarily traded” on the New York Stock Exchange, which is an established securities market for these purposes.
The Publicly-Traded Test also requires the Company’s common stock be “regularly traded” on an established securities market. Under the regulations, the Company’s common stock is considered to be “regularly traded” on an established securities market if one or more classes of the Company’s stock representing more than 50% of its outstanding shares, by both total combined voting power of all classes of stock entitled to vote and total value, are listed on the market, referred to as the “listing threshold.” The regulations further require that with respect to each class of stock relied upon to meet the listing threshold,(i) such class of stock is traded on the market, other than in minimal quantities, on at least 60 days during the taxable year or 1/6 of the days in a short taxable year; and (ii) the aggregate number of shares of such class of stock traded on such market during the taxable year is at least 10% of the average number of shares of such class of stock outstanding during such year (as appropriately adjusted in the case of a short taxable year). The Company believes it satisfies, and will continue to satisfy, the trading frequency and trading volume tests. However, even if the Company does not satisfy both tests, the regulations provide that the trading frequency and trading volume tests will be deemed satisfied if its common stock is traded on an established market in the United States and such stock is regularly quoted by dealers making a market in such stock. The Company believes this is and will continue to be the case.
Notwithstanding the foregoing, a class of the Company’s stock will not be considered to be “regularly traded” on an established securities market for any taxable year in which 50% or more of the vote and value of the outstanding shares of such class are owned, actually or constructively under certain stock attribution rules, on more than half the days during the taxable year by persons who each own 5% or more of the value of such class of its outstanding stock, referred to as the “5 Percent Override Rule.”
In order to determine the persons who actually or constructively own 5% or more of the Company’s stock, or “5% Stockholders,” the Company is permitted to rely on those persons that are identified on Schedule 13G and Schedule 13D filings with the United States Securities and Exchange Commission, or the SEC, as having a 5% or more beneficial interest in its common stock. In addition, an investment company identified on a Schedule 13G or Schedule 13D filing which is registered under the Investment Company Act of 1940, as amended, will not be treated as a 5% Stockholder for such purposes.
In the event the 5 Percent Override Rule is triggered, the 5 Percent Override Rule will nevertheless not apply if the Company can establish that among the closely-held group of 5% Stockholders, there are sufficient 5% Stockholders that are considered to be “qualified stockholders” for purposes of Section 883 to preclude non-qualified 5% Stockholders in the closely-held group from owning 50% or more of each class of the Company’s stock for more than half the number of days during the taxable year.
As of December 31, 2006, OIN owned approximately 44.5% of the Company’s common stock and is a 5% Stockholder. Based on OIN’s ownership and our review of the SEC filings discussed above, the Company believes that it did satisfy the Publicly-Traded Test and was not subject to the 5 Percent Override Rule during 2006. The Company currently believes that it will continue to satisfy the Publicly-Traded Test, although no assurances can be given that this will be the case.
In any year that the 5 Percent Override Rule is triggered with respect to the Company, the Company is eligible for the exemption from tax under Section 883 only if it can nevertheless satisfy the Publicly-Traded Test (which requires, among other things, showing that the exception to the 5 Percent Override Rule applies) or if it can satisfy the 50% Ownership Test. In either case, the Company would have to satisfy certain substantiation requirements regarding the identity of its stockholders in order to qualify for the Section 883 exemption. These requirements are onerous and there is no assurance that the Company would be able to satisfy them.
To the extent the benefits of Section 883 are unavailable, the Company’s United States source shipping income, to the extent not considered to be “effectively connected” with the conduct of a United States trade or business, as described below, 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 United States source shipping income, the maximum effective rate of United States federal income tax on its shipping income would never exceed 2% under the 4% gross basis tax regime.
To the extent the benefits of the Section 883 exemption are unavailable and the Company’s United States source shipping income is considered to be “effectively connected” with the conduct of a United States trade or business, as described below, any such “effectively connected” United States source shipping income, net of applicable deductions, would be subject to the United States federal corporate income tax currently imposed at rates of up to 35%. In addition, the Company may be subject to the 30% “branch profits” taxes on earnings effectively connected with the conduct of such trade or business, as determined after allowance for certain adjustments, and on certain interest paid or deemed paid attributable to the conduct of its United States trade or business.
The Company’s United States source shipping income would be considered “effectively connected” with the conduct of a United States trade or business only if:
| | · | the Company had, or was considered to have, a fixed place of business in the United States involved in the earning of United States source shipping income; and |
| | | |
| | · | substantially all of the Company’s United States source shipping income was attributable to regularly scheduled transportation, such as the operation of a vessel that followed a published schedule with repeated sailings at regular intervals between the same points for voyages that begin or end in the United States. |
The Company does not have, nor will it permit circumstances that would result in having, any vessel sailing to or from the United States on a regularly scheduled basis. Based on the foregoing and on the expected mode of the Company’s shipping operations and other activities, the Company believes that none of the Company’s United States source shipping income is or will be “effectively connected” with the conduct of a United States trade or business.
United States taxation of gain on sale of vessels
Regardless of whether the Company qualifies for exemption under Section 883, it 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 will be considered to occur outside of the United States.
United States Federal Income Taxation of “United States Holders”
As used herein, the term “United States Holder” means a beneficial owner of common stock that
| | · | is an individual United States citizen or resident, a United States corporation or other United States entity taxable as a corporation, an estate the income of which is subject to United States 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 United States persons have the authority to control all substantial decisions of the trust, |
| | | |
| | · | owns the Company’s common stock as a capital asset, and |
| | | |
| | · | owns less than 10% of the Company’s common stock for United States federal income tax purposes. |
If a partnership holds the Company’s 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 the Company’s common stock, we suggest that you consult your tax advisor.
Distributions
Subject to the discussion of passive foreign investment companies (“PFICs”) below, any distributions made by the Company with respect to its common stock to a United States Holder will generally constitute dividends to the extent of its current or accumulated earnings and profits, as determined under United States federal income tax principles. Distributions in excess of such earnings and profits will be treated first as a nontaxable return of capital to the extent of the United States Holder’s tax basis in his common stock on a dollar-for-dollar basis and thereafter as capital gain. Because the Company is not a United States corporation, United States Holders that are corporations will not be entitled to claim a dividends received deduction with respect to any distributions they receive from the Company. Dividends paid with respect to the Company’s common stock will generally be treated as “passive income” for purposes of computing allowable foreign tax credits for United States foreign tax credit purposes.
Dividends paid on the Company’s common stock to a United States Holder who is an individual, trust or estate (a “United States Non-Corporate Holder”) will generally be treated as “qualified dividend income” that is taxable to such United States Non-Corporate Holder at a preferential tax rate of 15% (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) the Company is not a PFIC for the taxable year during which the dividend is paid or the immediately preceding taxable year (see discussion below); (3) the United States Non-Corporate 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; and (4) the United States Non-Corporate Holder is not under an obligation to make related payments with respect to positions in substantially similar or related property. Special rules may apply to any “extraordinary dividend”—generally, a dividend in an amount which is equal to or in excess of 10% of a stockholder’s adjusted basis in a share of common stock—paid by the Company. If the Company pays an “extraordinary dividend” on its common stock that is treated as “qualified dividend income,” then any loss derived by a United States Non-Corporate Holder from the sale or exchange of such common stock will be treated as long-term capital loss to the extent of such dividend. There is no assurance that any dividends paid on the Company’s common stock will be eligible for these preferential rates in the hands of a United States Non-Corporate Holder, although the Company believes that they will be so eligible provided that it is not a PFIC, as discussed below. Any dividends out of earnings and profits the Company pays which are not eligible for these preferential rates will be taxed as ordinary income to a United States Non-Corporate Holder.
In addition, even if we are not a PFIC, under proposed legislation, dividends of a corporation incorporated in a country without a “comprehensive income tax system” paid to United States Non-Corporate Holders would not be eligible for the 15% tax rate. Although the term “comprehensive income tax system” is not defined in the proposed legislation, we believe this rule would apply to us because we are incorporated in the Marshall Islands.
Sale, exchange or other disposition of common stock
Provided that the Company is not a PFIC for any taxable year, a United States Holder generally will recognize taxable gain or loss upon a sale, exchange or other disposition of the Company’s common stock in an amount equal to the difference between the amount realized by the United States Holder from such sale, exchange or other disposition and the United States Holder’s tax basis in such stock. Such gain or loss will be treated as long-term capital gain or loss if the United States Holder’s holding period is greater than one year at the time of the sale, exchange or other disposition. Such capital gain or loss will generally be treated as United States source income or loss, as applicable, for United States foreign tax credit purposes. Long-term capital gains of United States Non-Corporate Holders are eligible for reduced rates of taxation. A United States Holder’s ability to deduct capital losses is subject to certain limitations.
PFIC status and significant tax consequences
Special United States federal income tax rules apply to a United States Holder that holds stock in a foreign corporation classified as a PFIC for United States federal income tax purposes. In particular, United States Non-Corporate Holders will not be eligible for the 15% tax rate on qualified dividends. In general, the Company will be treated as a PFIC with respect to a United States Holder if, for any taxable year in which such holder held its common stock, either
| | · | at least 75% of the Company’s 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 Company’s assets during such taxable year produce, or are held for the production of, passive income. |
Income earned, or deemed earned, by the Company in connection with the performance of services would not constitute passive income. By contrast, rental income would generally constitute “passive income” unless the Company were treated under specific rules as deriving its rental income in the active conduct of a trade or business.
Cravath, Swaine & Moore, LLP (“Tax Counsel”) provided the Company with an opinion dated January 29, 2007 stating that it was more likely than not that the Company was is not currently a PFIC. This opinion was based on the Company’s operations and certain representations made by OSG and the Company, including representations that the terms of each ship management agreement and time charter, taken as a whole, as well as certain specific terms in each agreement, were in accordance with normal commercial practice for agreements made at arm’s length between unrelated parties. Based on the foregoing, Tax Counsel concluded that, although there was no legal authority directly on point, the gross income the Company derived from the time chartering activities of its subsidiaries more likely than not constituted services income, rather than rental income. Consequently, such income more likely than not did not constitute passive income, and the assets that the Company or its wholly owned subsidiaries owned and operated in connection with the production of such income, in particular, the vessels, more likely than not did not constitute passive assets for purposes of determining whether the Company was a PFIC. Tax Counsel stated that there was legal authority supporting its position, consisting of case law and Internal Revenue Service pronouncements, concerning the characterization of income derived from time charters as services income for other tax purposes. However, there was no legal authority specifically relating to the statutory provisions governing PFICs or relating to circumstances substantially similar to that of the Company. In addition, the opinion of Tax Counsel was based on representations of OSG and the Company that were not reviewed by the IRS. As a result, the Internal Revenue Service or a court could disagree with the Company’s position. No assurance can be given that this result will not occur. The Company has not materially changed its operations since the time the opinion was given, and believes that the representations given to Tax Counsel at the time of the opinion remain true and accurate. The Company therefore believes that it has not been, and is not currently, a PFIC. In addition, although the Company intends to conduct its affairs in a manner to avoid, to the extent possible, being classified as a PFIC with respect to any taxable year, the Company cannot assure you that the nature of its operations will not change in the future, or that it can avoid PFIC status in the future.
As discussed more fully below, if the Company were treated as a PFIC for any taxable year, a United States Holder would be subject to different taxation rules depending on whether the United States Holder made an election to treat the Company as a “Qualified Electing Fund,” which election is referred to as a “QEF election.” As an alternative to making a QEF election, a United States Holder should be able to make a “mark-to-market” election with respect to the Company’s common stock, as discussed below.
Taxation of United States holders making a timely QEF election
If the Company were a PFIC and a United States Holder made a timely QEF election, which United States Holder is referred to as an ���Electing Holder,” the Electing Holder would report each year for United States federal income tax purposes its pro rata share of the Company’s ordinary earnings and the Company’s net capital gain (which gain shall not exceed its earnings and profits for the taxable year), if any, for the Company’s taxable year that ends with or within the taxable year of the Electing Holder, regardless of whether or not distributions were received from the Company by the Electing Holder. Any such ordinary income would not be eligible for the preferential tax rates applicable to qualified dividend income as discussed above. The Electing Holder’s adjusted tax basis in the common stock would be increased to reflect taxed but undistributed earnings and profits. Distributions of earnings and profits that had been previously taxed would, pursuant to this election, result in a corresponding reduction in the adjusted tax basis in the common stock and would not be taxed again once distributed. An Electing Holder would not, however, be entitled to a deduction for its pro rata share of any losses that the Company incurred with respect to any year. An Electing Holder would generally recognize capital gain or loss on the sale, exchange or other disposition of the Company’s common stock. A United States Holder would make a QEF election with respect to any year that the Company is a PFIC by filing one copy of IRS Form 8621 with his United States federal income tax return. If the Company were treated as a PFIC for any taxable year, it would provide each United States Holder with all necessary information in order to make the QEF election described above. Even if a United States Holder makes a QEF election for a taxable year of the Company, if the Company were a PFIC for a prior taxable year during which the holder was a stockholder and for which the holder did not make a timely QEF election, different and more adverse tax consequences would apply.
Taxation of United States holders making a “mark-to-market” election
Alternatively, if the Company were treated as a PFIC for any taxable year and, as the Company believes, its stock is treated as “marketable stock,” a United States Holder would be allowed to make a “mark-to-market” election with respect to the Company’s common stock, provided the United States Holder completes and files IRS Form 8621 in accordance with the relevant instructions and related Treasury regulations. If that election is made, the United States 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 United States Holder would also be permitted an ordinary loss in respect of the excess, if any, of the United States 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 United States 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 the Company’s 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 United States Holder in income.
Taxation of United States holders not making a timely QEF or mark-to-market election
Finally, if the Company were treated as a PFIC for any taxable year, a United States Holder who does not make either a QEF election or a “mark-to-market” election for that year, referred 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 the Company’s common stock in a taxable year in excess of 125% 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 the Company’s common stock. Under these special rules:
| | · | the excess distribution or gain would be allocated ratably over the Non-Electing Holder’s aggregate holding period for the common stock; |
| | | |
| | · | the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which the Company was a PFIC during the Non-Electing Holder’s holding period, would be taxed as ordinary income; and |
| | | |
| | · | 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 qualified pension, profit sharing or other retirement trust or other tax-exempt organization that did not borrow money or otherwise utilize leverage in connection with its acquisition of the Company’s common stock. If the Company were a PFIC and a Non-Electing Holder who was an individual died while owning the Company’s common stock, such holder’s successor generally would not receive a step-up in tax basis with respect to such stock. Certain of these rules would apply to a United States Holder who made a QEF election for one of the Company’s taxable years if it were a PFIC in a prior taxable year during which the holder was a stockholder and for which the holder did not make a QEF election.
United States Federal Income Taxation of “Non-United States Holders”
A beneficial owner of common stock (other than a partnership) that is not a United States Holder is referred to herein as a “Non-United States Holder.”
Dividends on common stock
Non-United States Holders generally will not be subject to United States federal income tax or withholding tax on dividends received from the Company with respect to its common stock, unless that income is effectively connected with the Non-United States Holder’s conduct of a trade or business in the United States. If the Non-United States Holder is entitled to the benefits of a United States income tax treaty with respect to those dividends, that income is taxable only if it is attributable to a permanent establishment maintained by the Non-United States Holder in the United States.
Sale, exchange or other disposition of common stock
Non-United States Holders generally will not be subject to United States federal income tax or withholding tax on any gain realized upon the sale, exchange or other disposition of the Company’s common stock, unless:
| | · | the gain is effectively connected with the Non-United States Holder’s conduct of a trade or business in the United States (and, if the Non-United States Holder is entitled to the benefits of an income tax treaty with respect to that gain, that gain is attributable to a permanent establishment maintained by the Non-United States Holder in the United States); or |
| | | |
| | · | the Non-United States Holder is an individual who is present in the United States for 183 days or more during the taxable year of disposition and other conditions are met. |
If the Non-United States Holder is engaged in a United States trade or business for United States federal income tax purposes, the income from the common stock, including dividends and the gain from the sale, exchange or other disposition of the stock, that is effectively connected with the conduct of that trade or business will generally be subject to regular United States federal income tax in the same manner as discussed in the previous section relating to the taxation of United States Holders. In addition, if you are a corporate Non-United States Holder, your earnings and profits that are attributable to the effectively connected income, which are subject to certain adjustments, may be subject to an additional branch profits tax at a rate of 30%, or at a lower rate as may be specified by an applicable income tax treaty.
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 if you are a non-corporate United States Holder. Such payments or distributions may also be subject to backup withholding tax if you are a non-corporate United States Holder and you:
| | · | fail to provide an accurate taxpayer identification number; |
| | | |
| | · | 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 |
| | | |
| | · | in certain circumstances, fail to comply with applicable certification requirements. |
Non-United States Holders may be required to establish their exemption from information reporting and backup withholding by certifying their status on IRS Form W-8BEN, W-8ECI or W-8IMY, as applicable.
If you are a Non-United States Holder and you sell your common stock to or through a United States office of a broker, the payment of the proceeds is subject to both United States backup withholding and information reporting unless you certify that you are a non-United States person, under penalties of perjury, or you otherwise establish an exemption. If you sell your common stock through a non-United States office of a non-United States 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, United States information reporting requirements, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is made to you outside the United States, if you sell your common stock through a non-United States office of a broker that is a United States person or has some other contacts with the United States. Such information reporting requirements will not apply, however, if the broker has documentary evidence in its records that you are a non-United States person and certain other conditions are met, or you otherwise establish an exemption.
Backup withholding tax 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 Internal Revenue Service.
| F. | | DIVIDENDS AND PAYING AGENTS |
| | | |
| | | Not applicable. |
| | | |
G. | | STATEMENT OF EXPERTS |
| | | |
| | | Not applicable. |
| | | |
H. | | DOCUMENTS ON DISPLAY |
The descriptions of each contract, agreement or other document filed as an exhibit to this report are summaries only and do not purport to be complete. Each such description is qualified in its entirety by reference to such exhibit for a more complete description of the matter involved.
We are subject to the informational requirements of the Exchange Act and in accordance therewith will file reports and other information with the Securities and Exchange Commission. Such reports and other information can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission at its principal offices at 100-F Street, N.E., Washington, D.C. 20549. Copies of such information may be obtained from the Public Reference Section of the Securities and Exchange Commission at 100-F Street, N.E., Washington, D.C. 20549 at prescribed rates. The Commission also maintains a World Wide Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission.
As a foreign private issuer, we are not subject to the proxy rules under Section 14 of the Exchange Act and our officers, directors and principal shareholders are not subject to the insider short-swing profit disclosure and recovery provisions under Section 16 of the Exchange Act.
As a foreign private issuer, we are not required to publish financial statements as frequently or as promptly as United States companies; however, we intend to furnish holders of our common stock with reports annually containing consolidated financial statements audited by independent accountants. We also intend to file quarterly unaudited financial statements under cover of Form 6-K.
I. | | SUBSIDIARY INFORMATION |
| | | |
| | | Not applicable. |
| | | |
ITEM 11. | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
| | | |
| See “Item 5. Operating and Financial Review and Prospects.” |
| | | |
ITEM 12. | | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
| | | |
| | | Not applicable. |
| | | |
PART II |
| | | |
ITEM 13. | | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
| | | |
| | | None. |
| | | |
ITEM 14. | | MATERIAL MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
| | | |
Material Modification to the Rights of Security Holders |
| | | |
| | | Not applicable. |
| | | |
Use of Proceeds |
| | | |
| | | Not applicable. |
| | | |
ITEM 15. | | CONTROLS AND PROCEDURES |
A. | | DISCLOSURE CONTROLS AND PROCEDURES |
As of the end of the period covered by this annual report (the “Evaluation Date”), the Company conducted an evaluation (under the supervision and with the participation of the Company’s management, including its chief executive officer and its chief financial officer, pursuant to Rule 13a-15 of the Exchange Act of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)). Based on this evaluation, the Company’s chief executive officer and its chief financial officer concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
B. | | MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER REPORTING |
In accordance with Rule 13a-15(f) of the Securities Exchange Act of 1934, the management of Double Hull Tankers, Inc. and its subsidiaries (the “Company”) is responsible for the establishment and maintenance of adequate internal controls over financial reporting for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Management has performed an assessment of the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2006 based on the provisions of Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that the Company’s internal controls over financial reporting was effective as of December 31, 2006 based on the criteria in Internal Control—Integrated Framework issued by COSO.
C. | | ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM |
| | | |
| | | Not applicable. |
| | | |
D. | | CHANGES IN INTERNAL CONTROL OVER REPORTING |
| | | |
There were no significant changes in the Company’s internal control over financial reporting identified in connection with the evaluation performed above that occurred during the period covered by this annual report that could significantly affect the Company’s disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken.
ITEM 16A. | | AUDIT COMMITTEE FINANCIAL EXPERT |
The Company’s board of directors has determined that Randee Day is an “audit committee financial expert” as defined in the instructions for Item 16A of Form 20-F. Ms. Day is “independent,” as determined in accordance with the rules of the New York Stock Exchange.
The Company has adopted a Code of Business Conduct and Ethics that applies to all employees including its Chief Executive Officer (its principal executive officer) and Chief Financial Officer (its principal accounting officer). The Company has posted this Code of Ethics to its Web site, www.dhtankers.com, where it is publicly available. In addition, the Company will provide a printed copy of its Code of Business Conduct and Ethics to its shareholders upon request.
ITEM 16C. | | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The following table shows the fees for professional services provided by Ernst & Young LLP, our Independent Registered Public Accounting Firm, for fiscal 2006.
Fees | | 2006 | |
| Audit Fees (1) | | $ | 179,000 | |
| Audit-Related Fees (2) | | | 60,000 | |
| Total | | $ | 239,000 | |
| (1) | Audit fees represent fees for professional services provided in connection with the audit of DHT’s consolidated financial statements as of and for the period ended December 31, 2006. |
| (2) | Audit-related fees consisted of assistance with preparation of the registration statement relating to the sale of 4.6 million shares by OSG. DHT was reimbursed by OSG for these expenses. |
The Audit Committee has the authority to pre-approve permissible audit-related and non-audit services to be performed by DHT’s Independent Registered Public Accounting Firm and associated fees. Engagements for proposed services either may be separately pre-approved by the Audit Committee or entered into pursuant to detailed pre-approval policies and procedures established by the Audit Committee, as long as the Audit Committee is informed on a timely basis of any engagement entered into on that basis. The Audit Committee separately pre-approved all engagements and fees paid to DHT’s Independent Registered Public Accounting Firm in fiscal 2006.
ITEM 16D. | | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE |
| | | |
| None. |
| | | |
ITEM 16E. | | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
| | | |
| None |
| | | |
PART III |
| | | |
ITEM 17. | | FINANCIAL STATEMENTS |
| | | |
| | | Not applicable. |
| | | |
ITEM 18. | | FINANCIAL STATEMENTS |
The following financial statements, together with the related report of Ernst & Young LLP, an independent registered public accounting firm, are filed as part of this Annual Report:
Double Hull Tankers, Inc. Consolidated and Predecessor Combined Carve-Out Financial Statements | | Page |
| | | |
| Reports of Independent Registered Public Accounting Firm | | F-2 |
| | | |
| Consolidated Balance Sheets as of December 31, 2006 and 2005 (successor) | | F-4 |
| | | |
| Consolidated Statement of Operations for the year ended December 31, 2006, the period October 18, 2005 to December 31, 2005 (successor) and Predecessor Combined Carve-Out Statements of Operations for the period January 1, 2005 to October 17, 2005 and the year ended December 31, 2004 (predecessor) | | F-5 |
| | | |
| Consolidated Statement of Changes in Stockholders’ Equity for the year ended December 31, 2006, the period October 18, 2005 to December 31, 2005 (successor) and Predecessor Combined Carve-Out Statements of Changes in Stockholders’ Equity for the period January 1, 2005 to October 17, 2005 and the year ended December 31, 2004 (predecessor) | | F-6 |
| | | |
| Consolidated Statement of Cash Flows for the year ended December 31, 2006, the period October 18, 2005 to December 31, 2005 (successor) and Predecessor Combined Carve-Out Statements of Cash Flows for the period January 1, 2005 to October 17, 2005 and the year ended December 31, 2004 (predecessor) | | F-7 |
| | | |
| Notes to Double Hull Tankers, Inc. Consolidated and Predecessor Combined Carve-Out Financial Statements | | F-8 |
| 1.1* | | Amended and Restated Articles of Incorporation of Double Hull Tankers, Inc. |
| 1.2 | | Bylaws of Double Hull Tankers, Inc., as amended |
| 2.1* | | Form of Common Share Certificate |
| 2.2* | | Registration Rights Agreement |
| 4.1* | | Form of Credit Agreement |
| 4.2.1* | | Time Charter ─ Overseas Ann |
| 4.2.2* | | Time Charter ─ Overseas Chris |
| 4.2.3* | | Time Charter ─ Overseas Regal |
| 4.2.4* | | Time Charter ─ Overseas Cathy |
| 4.2.5* | | Time Charter ─ Overseas Sophie |
| 4.2.6* | | Time Charter ─ Rebecca |
| 4.2.7* | | Time Charter ─ Overseas Ania |
| 4.3.1* | | Ship Management Agreement ─ Overseas Ann |
| 4.3.2* | | Ship Management Agreement ─ Overseas Chris |
| 4.3.3* | | Ship Management Agreement ─ Regal Unity |
| 4.3.4* | | Ship Management Agreement ─ Overseas Cathy |
| 4.3.5* | | Ship Management Agreement ─ Overseas Sophie |
| 4.3.6* | | Ship Management Agreement ─ Rebecca |
| 4.3.7* | | Ship Management Agreement ─ Overseas Ania |
| 4.4* | | Charter Framework Agreement |
| 4.5* | | OSG Guaranty of Charterers’ Payments under Charters and Charter Framework Agreement |
| 4.6* | | Double Hull Tankers, Inc. Guaranty of Vessel Owners’ Obligations under Management Agreement |
| 4.7* | | Double Hull Tankers, Inc. Guaranty of Vessel Owners’ Obligations under Charters |
| 4.8* | | Form of Indemnity Agreement among OSG, OIN and certain subsidiaries of the Company related to existing recommendations. |
| 4.9** | | Employment Agreement of Ole Jacob Diesen |
| 4.9.1* | | Indemnification Agreement for Ole Jacob Diesen |
| 4.10** | | Employment Agreement of Eirik Ubøe |
| 4.10.1** | | Indemnification Agreement for Eirik Ubøe |
| 4.11 | | Employment Agreement of Tom R. Kjeldsberg |
| 4.12* | | 2005 Incentive Compensation Plan |
| 8.1 | | List of Significant Subsidiaries |
| 12.1 | | Certification of Chief Executive Officer required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(b)) |
| 12.2 | | Certification of Chief Financial Officer required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(b)) |
| 13.1 | | Certification furnished pursuant to Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 |
| 14.1 | | Consent of Independent Registered Public Accounting Firm |
* Incorporated herein by reference from the Company’s Registration Statement on Form F-1 (File No. 333 -128460).
** Incorporated herein by reference from the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2005 (File No. 001-32640).
SIGNATURES
The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| Double Hull Tankers, Inc. |
| |
| | |
| By | /s/ OLE JACOB DIESEN |
| | Name: Ole Jacob Diesen |
| | Title: Chief Executive Officer (Principal Executive Officer) |
