UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13944
[_] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report. None
NORDIC AMERICAN TANKER SHIPPING LIMITED
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(Exact name of Registrant as specified in its charter)
ISLANDS OF BERMUDA
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(Jurisdiction of incorporation or organization)
Thistle House
4 Burnaby Street
Hamilton, HM11
Bermuda
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Shares New York Stock Exchange
------------------------- -------------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Common Shares, par value $0.01 21,046,400
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
[_] Yes [X] No
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
[_] Yes [X] No
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [_] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [X] Accelerated filer [_] Non-Accelerated filer [_]
Indicate by check mark which financial statement item the Registrant has elected
to follow.
Item 17 [_] Item 18 [X]
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
[_] Yes [X] No
TABLE OF CONTENTS
Item 1. Identity of Directors, Senior Management and Advisers...........6
Item 2. Offer Statistics And Expected Timetable.........................6
Item 3. Key Information.................................................6
A. Selected Financial Data.........................................6
B. Capitalization And Indebtedness.................................8
C. Reasons For The Offer And Use Of Proceeds.......................8
D. Risk Factors....................................................8
Item 4. Information On The Company.....................................15
A. History And Development Of The Company.........................15
B. Business Overview..............................................16
C. Organizational Structure.......................................28
D. Property, Plant And Equipment..................................28
Item 5. Operating And Financial Review And Prospects...................29
A. Operating Results..............................................33
B. Liquidity and Capital Resources................................30
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC............32
D. Trend Information..............................................32
E. Off Balance Sheet Arrangements.................................32
F. Disclosure Of Contractual Obligations..........................32
Item 6. Directors, Senior Management And Employees.....................33
A. Directors And Senior Management................................33
B. Compensation...................................................36
C. Board Practices................................................37
D. Employees......................................................37
E. Share Ownership................................................37
Item 7. Major Shareholders And Related Party Transactions..............38
A. Major Shareholders.............................................38
B. Related Party Transactions.....................................38
C. Interests Of Experts And Counsel...............................38
Item 8. Financial Information..........................................38
A. Consolidated Statements And Other Financial Information........38
B. Significant Changes............................................39
Item 9. The Offer And Listing..........................................39
Item 10. Additional Information.........................................40
A. Share Capital..................................................40
B. Memorandum And Articles Of Association.........................40
C. Material Contracts.............................................42
D. Exchange Controls..............................................42
E. Taxation.......................................................43
F. Dividends And Paying Agents....................................43
G. Statement By Experts...........................................43
H. Documents On Display...........................................43
I. Subsidiary Information.........................................44
Item 11. Quantitative And Qualitative Disclosures About Market Risk.....44
Item 12. Description Of Securities Other Than Equity Securities.........44
Item 13. Defaults, Dividend Arrearages And Delinquencies................44
Item 14. Material Modifications To The Rights Of Security Holders
And Use Of Proceeds........................................44
Item 15. Controls And Procedures........................................44
Item 16. Reserved.......................................................45
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT...............................45
ITEM 16B. CODE OF ETHICS.................................................45
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................45
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.....46
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER
AND AFFILIATED PERSONS.....................................46
Item 17. Financial Statements...........................................46
Item 18. Financial Statements...........................................46
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed herein may constitute forward-looking statements. The
Private Securities Litigation Reform Act of 1995 provides safe harbor
protections for forward-looking statements in order to encourage companies to
provide prospective information about their business. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements, which
are other than statements of historical facts.
The Company desires to take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 and is including this
cautionary statement in connection with this safe harbor legislation. The words
"believe," "anticipate," "intend," "estimate," "forecast," "project," "plan,"
"potential," "will," "may," "should," "expect," "pending" and similar
expressions identify forward-looking statements.
The forward-looking statements are based upon various assumptions, many of which
are based, in turn, upon further assumptions, including without limitation, our
management's examination of historical operating trends, data contained in our
records and other data available from third parties. Although we believe that
these assumptions were reasonable when made, because these assumptions are
inherently subject to significant uncertainties and contingencies which are
difficult or impossible to predict and are beyond our control, we cannot assure
you that we will achieve or accomplish these expectations, beliefs or
projections. We undertake no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise.
Important factors that, in our view, could cause actual results to differ
materially from those discussed in the forward-looking statements include the
strength of world economies and currencies, general market conditions, including
fluctuations in charter rates and vessel values, changes in demand in the tanker
market, as a result of changes in OPEC's petroleum production levels and world
wide oil consumption and storage, changes in our operating expenses, including
bunker prices, drydocking and insurance costs, the market for our vessels,
availability of financing and refinancing, changes in governmental rules and
regulations or actions taken by regulatory authorities, potential liability from
pending or future litigation, general domestic and international political
conditions, potential disruption of shipping routes due to accidents or
political events, vessels breakdowns and instances of off-hires and other
important factors described from time to time in the reports filed by the
Company with the Securities and Exchange Commission.
Please note in this annual report, "we", "us", "our", and "The Company", all
refer to Nordic American Tanker Shipping Limited and its subsidiaries.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following historical financial information should be read in conjunction
with our audited consolidated financial statements and related notes all of
which are included elsewhere in this document and "Operating and Financial
Review and Prospects." The statement of operations data for each of the three
years ended December 31, 2003, 2004, and 2005 and selected balance sheet data as
of December 31, 2004 and 2005 are derived from our audited financial statements
included elsewhere in this document. The statements of operations data for the
years ended December 31, 2001 and 2002 and selected balance sheet data as of
December 31, 2001, 2002 and 2003 are derived from our audited financial
statements not included in this document.
SELECTED FINANCIAL DATA
December 31,
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All figures in USD 2005 2004 2003 2002 2001
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Voyage revenue 117,110,178 67,451,598 37,370,756 18,057,989 28,359,568
Voyage expenses (30,980,916) (4,925,353) (184,781) (184,781) (184,781)
Vessel operating expense (11,220,770) (1,976,766) - - -
excl. depreciation expense presented below
Administrative expenses (8,492,164) (10,851,688) (468,087) (427,048) (353,739)
Depreciation (17,529,000) (6,918,164) (6,831,040) (6,831,040) (6,831,040)
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Net operating income 48,887,328 42,779,627 29,886,848 10,615,120 20,990,008
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Interest income 850,803 143,230 26,462 21,409 189,244
Interest expense (3,453,963) (1,971,304) (1,797,981) (1,764,424) (1,769,000)
Other financial Income (Charges) 33,574 (135,621) (15,040) (24,837) (24,776)
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Net financial items (2,569,586) (1,963,695) (1,786,559) (1,767,852) (1,604,532)
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Net profit 46,317,742 40,815,932 28,100,289 8,847,268 19,385,476
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Basic and diluted earnings per share 3.03 4.05 2.89 0.91 2.00
Cash dividends declared per share 4.21 4.84 3.05 1.35 3.87
Weighted average shares outstanding basic and diluted 15,263,622 10,078,391 9,706,606 9,706,606 9,706,606
Other financial data:
Net cash from operating activities 51,055,588 62,817,261 29,893,551 12,750,908 36,272,601
Dividend paid 64,279,487 47,195,842 29,605,410 13,103,993 37,564,658
Selected Balance Sheet Data (at period end):
Cash and cash equivalents 14,240,482 30,732,516 565,924 277,783 630,868
Total assets 505,844,453 224,203,411 136,896,298 138,579,559 142,658,488
Total debt 130,000,000 0 30,000,000 30,000,000 30,000,000
Shareholders' equity 370,872,171 221,868,393 105,707,976 106,347,097 111,841,822
B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable
D. RISK FACTORS
Some of the following risks relate principally to the industry in which we
operate and our business in general. Other risks relate principally to the
securities market and ownership of our common stock. The occurrence of any of
the events described in this section could significantly and negatively affect
our business, financial condition, operating results or cash available for
dividends or the trading price of our common stock.
Industry Specific Risk Factors
The cyclical nature of the tanker industry may lead to volatile changes in
charter rates and vessel values which may adversely affect our earnings.
If the tanker market, which has been cyclical, is depressed in the future, our
earnings and available cash flow may decrease. Our ability to recharter our
vessels or to sell them on the expiration or termination of their charters and
the charter rates payable under our two spot market related time charters, our
spot charters, or any renewal or replacement charters, will depend upon, among
other things, economic conditions in the tanker market. Fluctuations in charter
rates and tanker values result from changes in the supply and demand for tanker
capacity and changes in the supply and demand for oil and oil products.
The factors affecting the supply and demand for tankers are outside of our
control, and the nature, timing and degree of changes in industry conditions are
unpredictable.
The factors that influence demand for tanker capacity include:
o demand for oil and oil products,
o supply of oil and oil products,
o regional availability of refining capacity,
o global and regional economic conditions,
o the distance oil and oil products are to be moved by sea, and
o changes in seaborne and other transportation patterns.
The factors that influence the supply of tanker capacity include:
o the number of newbuilding deliveries,
o the scrapping rate of older vessels,
o conversion of tankers to other uses,
o the number of vessels that are out of service, and
o environmental concerns and regulations.
Historically, the tanker markets have been volatile as a result of the many
conditions and factors that can affect the price, supply and demand for tanker
capacity. Changes in demand for transportation of oil over longer distances and
supply of tankers to carry that oil may materially affect our revenues,
profitability and cash flows. Eight of our nine vessels are currently operated
in the spot market or on spot market related time charters. We cannot assure you
that we will receive any minimum level of charterhire for the vessels operated
in the spot market or on spot market related time charters.
We will be dependent on spot charters and any decrease in spot charter rates in
the future may adversely affect our earnings and our ability to pay dividends.
We currently operate a fleet of nine vessels, including the vessel delivered to
us in April 2006. Of those nine vessels, one is on a long term fixed-rate
charter, while the other eight are employed in the spot market or on time
charters with spot market related rates. We are currently also pursuing the
acquisition of a tenth vessel which we would also intend to spot charter in the
near term. Therefore we are highly dependent on spot market charter rates.
We may enter into spot charters for any additional vessels that we may acquire
in the future. Although spot chartering is common in the tanker industry, the
spot charter market may fluctuate significantly based upon tanker and oil supply
and demand. The successful operation of our vessels in the spot charter market
depends upon, among other things, obtaining profitable spot charters and
minimizing, to the extent possible, time spent waiting for charters and time
spent traveling unladen to pick up cargo. The spot market is very volatile, and,
in the past, there have been periods when spot rates have declined below the
operating cost of vessels. We cannot assure you that future spot charters will
be available at rates sufficient to enable our vessels trading in the spot
market to operate profitably and to pay dividends.
Normally, tanker markets are stronger in the fall and winter months (the fourth
and first quarters of the calendar year) in anticipation of increased oil
consumption in the northern hemisphere during the winter months. Unpredictable
weather patterns and variations in oil reserves disrupt tanker scheduling.
Seasonal variations in tanker demand and, as a result, in charter rates will
affect any spot market related rates that we may receive.
Compliance with safety, environmental and other governmental and other
requirements may adversely affect our business.
The shipping industry is affected by numerous regulations in the form of
international conventions, national, state and local laws and national and
international regulations in force in the jurisdictions in which such tankers
operate, as well as in the country or countries in which such tankers are
registered. These regulations include the U.S. Oil Pollution Act of 1990, or
OPA, the International Convention on Civil Liability for Oil Pollution Damage of
1969, the International Convention for the Prevention of Pollution from Ships,
the IMO International Convention for the Safety of Life at Sea of 1974, or
SOLAS, the International Convention on Load Lines of 1966 and the U.S. Marine
Transportation Security Act of 2002, each of which imposes environmental,
technical, safety, operational or financial requirements on us. In addition,
vessel classification societies also impose significant safety and other
requirements on our vessels. Regulation of vessels, particularly in the areas of
safety and environmental impact may change in the future and may limit our
ability to operate our business or require significant capital expenditures be
incurred on our vessels to keep them in compliance.
The value of our vessels may fluctuate and could result in a lower price of our
common shares.
Tanker values have generally experienced high volatility. You should expect the
market value of our oil tankers to fluctuate, depending on general economic and
market conditions affecting the tanker industry and competition from other
shipping companies, types and sizes of vessels, and other modes of
transportation. In addition, as vessels grow older, they generally decline in
value. These factors will affect the value of our vessels. Declining tanker
values could affect our ability to raise cash by limiting our ability to
refinance our vessels, thereby adversely impacting our liquidity, or result in a
breach of our loan covenants, which could result in defaults under our $300
million revolving credit facility, or the New Credit facility. If we determine
at any time that a vessel's future limited useful life and earnings require us
to impair its value on our financial statements, that could result in a charge
against our earnings and the reduction of our shareholders' equity. Due to the
cyclical nature of the tanker market, if for any reason we sell vessels at a
time when tanker prices have fallen, the sale may be at less than the vessel's
carrying amount on our financial statements, with the result that we would also
incur a loss and a reduction in earnings. Any such reduction could result in a
lower share price.
Shipping is an inherently risky business involving global operations and our
vessels are exposed to international risks which could reduce revenue or
increase expenses.
Shipping companies conduct global operations. Our vessels are at risk of damage
or loss because of events such as mechanical failure, collision, human error,
war, terrorism, piracy, cargo loss and bad weather. In addition, changing
economic, regulatory and political conditions in some countries, including
political and military conflicts, have from time to time resulted in attacks on
vessels, mining of waterways, piracy, terrorism, labor strikes and boycotts.
These sorts of events could interfere with shipping routes and result in market
disruptions.
Terrorist attacks, such as the attacks on the United States on September 11,
2001, and other acts of violence or war may affect the financial markets and our
business, results of operations and financial condition.
Terrorist attacks such as the attacks on the United States on September 11, 2001
and the United States' continuing response to these attacks, as well as the
threat of future terrorist attacks, continue to cause uncertainty in the world
financial markets, including the energy markets. The continuing conflict in Iraq
may lead to additional acts of terrorism, armed conflict and civil disturbance
around the world, which may contribute to further instability including in the
oil markets. Terrorist attacks, such as the attack on the M.T. Limburg in Yemen
in October 2002, may also negatively affect our trade patterns or other
operations and directly impact our vessels or our customers. Future terrorist
attacks could result in increased volatility of the financial markets in the
United States and globally and could result in an economic recession in the
United States or the world. Any of these occurrences could have a material
adverse impact on our operating results, revenue and costs.
Arrests of our vessels by maritime claimants could cause a significant loss of
earnings for the related off-hire period.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and
other parties may be entitled to a maritime lien against a vessel for
unsatisfied debts, claims or damages. In many jurisdictions, a maritime
lienholder may enforce its lien by "arresting" or "attaching" a vessel through
foreclosure proceedings. The arrest or attachment of one or more of our vessels
could result in a significant loss of earnings for the related off-hire period.
In addition, in jurisdictions where the "sister ship" theory of liability
applies, a claimant may arrest the vessel which is subject to the claimant's
maritime lien and any "associated" vessel, which is any vessel owned or
controlled by the same owner. In countries with "sister ship" liability laws,
claims might be asserted against us or any of our vessels for liabilities of
other vessels that we own.
Governments could requisition our vessels during a period of war or emergency,
resulting in a loss of earnings.
A government could requisition for title or seize our vessels. Requisition for
title occurs when a government takes control of a vessel and becomes its owner.
Also, a government could requisition our vessels for hire. Requisition for hire
occurs when a government takes control of a vessel and effectively becomes its
charterer at dictated charter rates. Although we, as the owner, would be
entitled to compensation in the event of a requisition, the amount and timing of
payment would be uncertain.
Company Specific Risk Factors
We cannot guarantee that we will continue to make cash distributions.
We have made distributions quarterly since September 1997. It is possible that
our revenues could be reduced as a result of decreases in charter rates or that
we could incur other expenses or contingent liabilities that would reduce or
eliminate the cash available for distribution as dividends. The Credit Facility
prohibits the declaration and payment of dividends if we are in default under
it. We refer you to Item 4--Information on the Company--Business Overview--Our
Credit Facility for more details. In addition, the declaration and payment of
dividends is subject at all times to the discretion of our Board of Directors
and compliance with Bermuda law, and may be dependent upon the adoption at the
annual meeting of shareholders of a resolution effectuating a reduction in our
share premium in an amount equal to the estimated amount of dividends to be paid
in the next succeeding year. We refer you to Item 8--Financial
Information--Dividend Policy for more details. We cannot assure you that we will
pay dividends at rates previously paid or at all.
We may not be able to grow or to effectively manage our growth.
One of our principal strategies is to continue to grow by expanding our
operations and adding to our fleet. Our future growth will depend upon a number
of factors, some of which may not be within our control. These factors include
our ability to:
o identify suitable tankers and/or shipping companies for
acquisitions,
o identify businesses engaged in managing, operating or owning
tankers for acquisitions or joint ventures,
o integrate any acquired tankers or businesses successfully with
our existing operations,
o hire, train and retain qualified personnel and crew to manage
and operate our growing business and fleet,
o identify additional new markets,
o improve our operating, financial and accounting systems and
controls, and
o obtain required financing for our existing and new operations.
Our failure to effectively identify, purchase, develop and integrate any tankers
or businesses could adversely affect our business, financial condition and
results of operations. In addition, in November 2004, we transitioned from a
bareboat charter company to an operating company. We may incur unanticipated
expenses as an operating company. The number of employees of Scandic American
Shipping Ltd., or the Manager, that perform services for us and our current
operating and financial systems may not be adequate as we implement our plan to
expand the size of our fleet, and we may not be able to require the Manager to
hire more employees or adequately improve those systems. In addition, we have
incurred and will continue to incur expenses associated with compliance with the
Sarbanes-Oxley Act of 2002. Section 404 of that Act requires public companies
include in annual reports a report containing management's assessment of the
effectiveness of the Company's internal control over financial reporting and a
related attestation of the Company's independent auditors. This requirement will
first apply to us with respect to the fiscal year ending December 31, 2006. We
have begun a comprehensive effort in preparation for compliance with Section 404
including the documentation, testing and review of our internal controls under
the direction of our management. We cannot be certain at this time that all our
controls will be considered effective. Therefore, we can give no assurances that
our internal control over financial reporting will satisfy the new regulatory
requirements when they become applicable to us. If our independent auditor is
unable to provide us with an unqualified attestation report on a timely basis as
required by Section 404, investors could lose confidence in the reliability of
our financial statements, which could result in a decrease in the value of our
common stock. Finally, acquisitions may require additional equity issuances or
debt issuances (with amortization payments), each of which could lower dividends
per share. If we are unable to execute the points noted above, our financial
condition and dividend rates may be adversely affected.
We are dependent on the Manager and there may be conflicts of interest arising
from the relationship between our Chairman and the Manager.
Our success depends to a significant extent upon the abilities and efforts of
the Manager and our management team. Our success will depend upon our and the
Manager's ability to hire and retain key members of our management team. The
loss of any of these individuals could adversely affect our business prospects
and financial condition. Difficulty in hiring and retaining personnel could
adversely affect our results of operations. We do not maintain "key man" life
insurance on any of our officers.
Herbjorn Hansson, our Chairman, President and Chief Executive Officer, is also
an owner of the Manager. In addition, one of our directors is also an owner of
the Manager. The Manager may engage in business activities other than with
respect to the Company. The fiduciary duty of a director may compete with or be
different from the interests of the Manager and may create conflicts of interest
in relation to that director's duties to the Company.
An increase in operating costs could adversely affect our cash flow and
financial condition.
Under the original bareboat charters to BP Shipping, BP Shipping was responsible
for our vessels' operating and voyage costs. Under the time and spot charters of
eight of our nine vessels, we are responsible for many of such costs. Our vessel
operating expenses include the costs of crew, fuel (for spot chartered vessels),
provisions, deck and engine stores, insurance and maintenance and repairs, which
depend on a variety of factors, many of which are beyond our control. Some of
these costs, primarily relating to insurance and enhanced security measures
implemented after September 11, 2001 and fuel, have been increasing. The price
of fuel is near historical high levels and may increase in the future. If our
vessels suffer damage, they may need to be repaired at a drydocking facility.
The costs of drydock repairs are unpredictable and can be substantial. Increases
in any of these costs would decrease earnings and dividends per share.
Our vessels operate in the highly competitive international tanker market.
The operation of tanker vessels and transportation of crude and petroleum
products is extremely competitive. Competition arises primarily from other
tanker owners, including major oil companies as well as independent tanker
companies, some of whom have substantially greater resources. Competition for
the transportation of oil and oil products can be intense and depends on price,
location, size, age, condition and the acceptability of the tanker and its
operators to the charterers. We will have to compete with other tanker owners,
including major oil companies as well as independent tanker companies.
Our market share may decrease in the future. We may not be able to compete
profitably as we expand our business into new geographic regions or provide new
services. New markets may require different skills, knowledge or strategies than
we use in our current markets, and the competitors in those new markets may have
greater financial strength and capital resources than we do.
Purchasing and operating secondhand vessels may result in increased operating
costs which could adversely affect our earnings and as our fleet ages, the risks
associated with older vessels could adversely affect our operations.
Our current business strategy includes additional growth through the acquisition
of new and secondhand vessels. The ninth vessel that we took delivery of in
early April 2006 is secondhand. Further, we are pursuing the acquisition of a
tenth secondhand modern double-hull Suezmax tanker. While we typically inspect
secondhand vessels prior to purchase, this does not provide us with the same
knowledge about their condition that we would have had if these vessels had been
built for and operated exclusively by us. Generally, we do not receive the
benefit of warranties from the builders for the secondhand vessels that we
acquire.
In general, the costs to maintain a vessel in good operating condition increase
with the age of the vessel. Older vessels are typically less fuel-efficient than
more recently constructed vessels due to improvements in engine technology.
Cargo insurance rates increase with the age of a vessel, making older vessels
less desirable to charterers.
Governmental regulations, safety or other equipment standards related to the age
of vessels may require expenditures for alterations, or the addition of new
equipment, to our vessels and may restrict the type of activities in which the
vessels may engage. We cannot assure you that as our vessels age market
conditions will justify those expenditures or enable us to operate our vessels
profitably during the remainder of their useful lives.
Servicing debt which we may incur in the future would limit funds available for
other purposes and if we cannot service our debt, we may lose our vessels.
Borrowing under the New Credit Facility requires us to dedicate a part of our
cash flow from operations to paying interest on our indebtedness. These payments
limit funds available for working capital, capital expenditures and other
purposes, including making distributions to shareholders and further equity or
debt financing in the future. Amounts borrowed under the New Credit Facility
bear interest at variable rates. Increases in prevailing rates could increase
the amounts that we would have to pay to our lenders, even though the
outstanding principal amount remains the same, and our net income and cash flows
would decrease. We expect our earnings and cash flow to vary from year to year
due to the cyclical nature of the tanker industry. In addition, our current
policy is not to accumulate cash, but rather to distribute our available cash to
shareholders. If we do not generate or reserve enough cash flow from operations
to satisfy our debt obligations, we may have to undertake alternative financing
plans, such as:
o seeking to raise additional capital,
o refinancing or restructuring our debt,
o selling tankers or other assets, or
o reducing or delaying capital investments.
However, these alternative financing plans, if necessary, may not be sufficient
to allow us to meet our debt obligations. If we are unable to meet our debt
obligations or if some other default occurs under the Credit Facility, the
lenders could elect to declare that debt, together with accrued interest and
fees, to be immediately due and payable and proceed against the collateral
securing that debt, which constitutes our entire fleet and substantially all of
our assets.
Our New Credit Facility contains restrictive covenants which may limit our
liquidity and corporate activities.
The New Credit Facility imposes operating and financial restrictions on us.
These restrictions may limit our ability to:
o pay dividends and make capital expenditures if we do not repay
amounts drawn under the New Credit Facility or if there is
another default under the New Credit Facility,
o incur additional indebtedness, including the issuance of
guarantees,
o create liens on our assets,
o change the flag, class or management of our vessels or terminate
or materially amend the management agreement relating to each
vessel,
o sell our vessels,
o merge or consolidate with, or transfer all or substantially all
our assets to, another person, or
o enter into a new line of business.
Therefore, we may need to seek permission from our lenders in order to engage in
some corporate actions. Our lenders' interests may be different from ours and we
cannot guarantee that we will be able to obtain our lenders' permission when
needed. This may limit our ability to pay dividends to you, finance our future
operations or capital requirements, make acquisitions or pursue business
opportunities.
Shipping is an inherently risky business and our insurance may not be adequate
to cover all our losses.
There are a number of risks associated with the operation of ocean-going
vessels, including mechanical failure, collision, human error, war, terrorism,
property loss, cargo loss or damage and business interruption due to political
circumstances in foreign countries, hostilities and labor strikes. Any of these
events may result in loss of revenues, increased costs and decreased cash flows.
In addition, the operation of any vessel is subject to the inherent possibility
of marine disaster, including oil spills and other environmental mishaps, and
the liabilities arising from owning and operating vessels in international
trade. We cannot assure investors that our insurance will protect us against all
risks. We may not be able to maintain adequate insurance coverage at reasonable
rates for our fleet in the future and the insurers may not pay particular
claims. For example, a catastrophic spill could exceed our insurance coverage
and have a material adverse effect on our financial condition. In the past, new
and stricter environmental regulations have led to higher costs for insurance
covering environmental damage or pollution, and new regulations could lead to
similar increases or even make this type of insurance unavailable. Furthermore,
even if insurance coverage is adequate to cover our losses, we may not be able
to timely obtain a replacement ship in the event of a loss. We may also be
subject to calls, or premiums, in amounts based not only on our own claim
records but also the claim records of all other members of the protection and
indemnity associations through which we receive indemnity insurance coverage for
tort liability. Our payment of these calls could result in significant expenses
to us which could reduce our cash flows and place strains on our liquidity and
capital resources.
Because some of our expenses are incurred in foreign currencies, we are exposed
to exchange rate risks.
The charterers of our vessels pay us in U.S. dollars. While we incur most of our
expenses in U.S. dollars, we have in the past incurred expenses in other
currencies, most notably the Norwegian Kroner. Declines in the value of the U.S.
dollar relative to the Norwegian Kroner, or the other currencies in which we
incur expenses, would increase the U.S. dollar cost of paying these expenses and
thus would adversely affect our results of operations.
We may have to pay tax on United States source income, which would reduce our
earnings.
Under the United States Internal Revenue Code of 1986, or the Code, 50% of the
gross shipping income of a vessel owning or chartering corporation, such as
ourselves, attributable to transportation that begins or ends, but that does not
both begin and end, in the U.S. will be characterized as U.S. source shipping
income and such income will be subject to a 4% United States federal income tax
unless that corporation is entitled to a special tax exemption under the Code
which applies to the international shipping income derived by certain non-United
States corporations. We believe that we currently qualify for this statutory tax
exemption and we will take this position for U.S. tax return reporting purposes.
However, there are several risks that could cause us to become taxed on our U.S.
source shipping income. Due to the factual nature of the issues involved, we can
give no assurances on our tax-exempt status.
If we are not entitled to this statutory tax exemption for any taxable year, we
would be subject for any such year to a 4% United States federal income tax on
our U.S. source shipping income. The imposition of this tax could have a
negative effect on our business and would result in decreased earnings available
for distribution to our shareholders.
If U.S. tax authorities were to treat us as a "passive foreign investment
company," that could have adverse consequences on U.S.
holders.
A foreign corporation will be treated as a "passive foreign investment company"
for U.S. Federal income tax purposes if either (1) at least 75% of its gross
income for any taxable year consists of certain types of "passive income," or
(2) at least 50% of the average value of the corporation's assets produce, or
are held for the production of, such types of "passive income." For purposes of
these tests, "passive income" includes dividends, interest, and gains from the
sale or exchange of investment property and rents and royalties other than rents
and royalties which are received from unrelated parties in connection with the
active conduct of trade or business. For purposes of these tests, income derived
from the performance of services does not constitute "passive income." Those
holders of stock in a passive foreign investment company who are citizens or
residents of the United States or domestic entities would alternatively be
subject to a special adverse U.S. Federal income tax regime with respect to the
income derived by the passive foreign investment company, the distributions they
receive from the passive foreign investment company and the gain, if any, they
derive from the sale or other disposition of their shares in the passive foreign
investment company. In particular, dividends paid by us would not be treated as
"qualified dividend income" eligible for preferential tax rates in the hands of
noncorporate U.S. shareholders.
Based on our current and expected future operations, we believe that we are no
longer a passive foreign investment company with respect to the taxable year
2005 and thereafter. As a result, noncorporate U.S. shareholders should be
eligible to treat dividends paid by us in 2006 and thereafter as "qualified
dividend income" which is subject to preferential tax rates (through 2010).
Since we expect to derive more than 25% of our income each year from our time
chartering and voyage chartering activities, we believe that such income will be
treated for relevant U.S. Federal income tax purposes as services income, rather
than rental income. Correspondingly, such income should not constitute "passive
income," and the assets that we own and operate in connection with the
production of that income (which should constitute more than 50% of our assets
each year), in particular our vessels, should not constitute passive assets for
purposes of determining whether we are a passive foreign investment company in
any taxable year. However, no assurance can be given that the Internal Revenue
Service will accept this position or that we would not constitute a passive
foreign investment company for any future taxable year if there were to be
changes in the nature and extent of our operations.
Risks Relating to Our Common Shares
Our common share price may be highly volatile and future sales of our common
shares could cause the market price of our common shares to decline.
The market price of our common shares has historically fluctuated over a wide
range and may continue to fluctuate significantly in response to many factors,
such as actual or anticipated fluctuations in our operating results, changes in
financial estimates by securities analysts, economic and regulatory trends,
general market conditions, rumors and other factors, many of which are beyond
our control. Investors in our common shares may not be able to resell their
shares at or above their purchase price due to those factors, which include the
risks and uncertainties set forth in this annual report.
Because we are a foreign corporation, you may not have the same rights that a
shareholder in a U.S. corporation may have.
We are a Bermuda exempted company. Our memorandum of association and bye-laws
and The Companies Act, 1981 of Bermuda, or the Companies Act, govern our
affairs. The Companies Act does not as clearly establish your rights and the
fiduciary responsibilities of our directors as do statutes and judicial
precedent in some U.S. jurisdictions. Therefore, you may have more difficulty in
protecting your interests as a shareholder in the face of actions by the
management, directors or controlling shareholders than would shareholders of a
corporation incorporated in a United States jurisdiction. There is a statutory
remedy under Section 111 of the Companies Act which provides that a shareholder
may seek redress in the courts as long as such shareholder can establish that
our affairs are being conducted, or have been conducted, in a manner oppressive
or prejudicial to the interests of some part of the shareholders, including such
shareholder. However, the principles governing Section 111 have not been well
developed.
It may not be possible for our investors to enforce U.S. judgments against us.
We are incorporated in the Islands of Bermuda. Substantially all of our assets
and those of our subsidiaries are located outside the United States. As a
result, it may be difficult or impossible for U.S. investors to serve process
within the United States upon us or to enforce judgment upon us for civil
liabilities in U.S. courts. In addition, you should not assume that courts in
the countries in which we are incorporated or where our assets are located (1)
would enforce judgments of U.S. courts obtained in actions against based upon
the civil liability provisions of applicable U.S. federal and state securities
laws or (2) would enforce, in original actions, liabilities against us based
upon these laws.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Nordic American Tanker Shipping Limited, or the Company, was founded on June 12,
1995 under the laws of the Islands of Bermuda and we maintain our principal
offices at Thistle House, 4 Burnaby Street, Hamilton HM 11, Bermuda. Our
telephone number at such address is (441) 292-7202.
The Company was formed for the purpose of acquiring and chartering three Suezmax
tankers that were built in 1997. These three vessels were bareboat chartered to
BP Shipping Ltd., or BP Shipping, for a period of seven years. BP Shipping
redelivered these three vessels to us in September 2004, October 2004 and
November 2004, respectively. We have continued contracts with BP Shipping by
time chartering to it two of our original vessels at spot market related rates
for three-year terms up to the autumn of 2007. We have bareboat chartered the
third of our original three vessels to Gulf Navigation Company LLC, or Gulf
Navigation, of Dubai, U.A.E. for a term of five years at a fixed rate of
charterhire, subject to two one-year extensions at Gulf Navigation's option. We
acquired our fourth vessel in November 2004, our fifth and sixth vessels in
March 2005, our seventh vessel in August 2005, our eighth vessel in November
2005 and our ninth vessel in April 2006. We currently operate eight vessels in
the spot market or on spot market related time charters.
B. BUSINESS OVERVIEW
Our Fleet
Our fleet, including the additional vessel we have acquired in April 2006,
consists of nine modern double-hull Suezmax tankers. The following chart
provides information regarding each vessel, including its employment status.
Year Employment Status
Vessel Yard Built Dwt (Expiration Date) Flag
- ----------------------------------------------------------------------------------------
Gulf Scandic Samsung 1997 151,459 Bareboat (Nov. 2009) Isle of Man
Nordic Hawk Samsung 1997 151,459 TC/Spot(1) (Oct. 2007) Bahamas
Nordic Hunter Samsung 1997 151,459 TC/Spot(1) (Sep. 2007) Bahamas
Nordic Voyager Dalian New 1997 149,591 Spot Norway
Nordic Freedom Daewoo 2005 159,500 Spot (Mar. 2007) Bahamas
Nordic Fighter Hyundai 1998 153,181 Spot Norway
Nordic Discovery Hyundai 1998 153,181 Spot Norway
Nordic Saturn Daewoo 1998 157,332 Spot Marshall Islands
Nordic Jupiter(2) Daewoo 1998 157,332 Spot Marshall Islands
(1) TC/Spot = Time Charter on spot market related terms.
(2) The vessel was delivered to us on April 10, 2006.
Our Charters
We operate our vessels on bareboat charters, time charters and in the spot
market. Our goal is to take advantage of potentially higher market rates through
time charters with spot market related rates and voyage charters. Including our
recent acquisition, we plan to operate eight of our nine vessels in the spot
market or on spot market related time charters, although we may consider
charters at fixed rates depending on market conditions.
Bareboat Charters
We have chartered one of our vessels (the Gulf Scandic) under a bareboat charter
to Gulf Navigation, for a period of five years, terminating in the fourth
quarter of 2009, subject to two one-year extensions at Gulf Navigation's option.
Under the terms of the bareboat charter, Gulf Navigation is obligated to pay a
fixed charterhire of $17,325 per day for the entire charter period. The
charterhire is payable to us monthly in advance. Under certain circumstances,
including in the event the vessel is lost, the bareboat charter will be deemed
terminated and Gulf Navigation will not be obligated to pay the charterhire.
During the charter period, Gulf Navigation will generally be responsible for
operating and maintaining the vessel and will bear all costs and expenses with
respect to the vessel. During the bareboat charter period, we have the
responsibility to insure the vessel at our expense against hull and machinery
and war risks. However, Gulf Navigation is required to insure against protection
and indemnity risks. Upon the expiration of the bareboat charter, Gulf
Navigation is required to redeliver the vessel in the same or as good structure,
state, condition and class as that in which the vessel was delivered, fair wear
and tear not affecting class excepted.
Under the terms of the bareboat charter, Gulf Navigation has agreed to indemnify
us against any loss, damage or expense incurred by us arising out of the
operation of the vessel by Gulf Navigation and against any lien arising out of
an event occurring during the charter period.
Time Charters
We have chartered two of our vessels (the Nordic Hawk and the Nordic Hunter)
under spot market related time charters to BP Shipping for a period of three
years each, terminating between September 1 and October 31, 2007. The amount of
charterhire payable under the charters to BP Shipping is based on a formula
designed to generate earnings to us as if we had operated the vessels in the
spot market on two routes used for the calculation, less 5%. Since the
charterhire paid to us will be based on this formula, at times, the charterhire
payable may be higher or lower than rates achieved by other tanker operators in
the spot market operating on these or other routes. The charterhire is payable
to us monthly.
Under the time charters, BP Shipping is generally responsible for, among other
things, the cost of all fuels with respect to the vessels (with certain
exceptions, including during off-hire periods), port charges, and costs related
to towage, pilotage, mooring loading and discharging facilities and services.
Under time charters, we are generally required, among other things, to keep the
related vessel seaworthy, to crew and maintain the vessel and to comply with
applicable regulations. We are also required to insure the related vessel
against protection and indemnity risks, hull and machinery and war risks, and
provide standard oil pollution insurance cover. If any off-hire period exceeds
thirty consecutive days, BP Shipping will have the option to terminate the
charter.
Spot Charters
We currently operate one vessel (the Nordic Freedom) in the spot market (other
than in a pool). Tankers operating in the spot market typically are chartered
for a single voyage which may last up to several weeks. Tankers operating in the
spot market may generate increased profit margins during improvements in tanker
rates, while tankers operating fixed-rate time charters generally provide more
predictable cash flows.
Under a typical voyage charter in the spot market, we will be paid freight on
the basis of moving cargo from a loading port to a discharge port. We will be
responsible for paying both operating costs and voyage costs and the charterer
will be responsible for any delay at the loading or discharging ports. Under
voyage charters, we are generally required, among other things, to keep the
related vessel seaworthy, to crew and maintain the vessel and to comply with
applicable regulations.
Pooling Arrangements
We currently operate five of our vessels (the Nordic Voyager, Nordic Discovery,
Nordic Fighter, Nordic Saturn and Nordic Jupiter) in spot market pools with
other vessels that are not owned by us. The pools are managed by third party
pool administrators. The pool administrator of each pool has the responsibility
for the commercial management of the participating vessels, including the
marketing, chartering, operation and bunker (fuel oil) purchase of the vessels.
The pool participants remain responsible for all other costs including the
financing, insurance, manning and technical management of their vessels. The
earnings of all of the vessels are aggregated, or pooled, and divided according
to the relative performance capabilities of the vessel and the actual earning
days each vessel is available.
The Management Agreement
Under the Management Agreement by and between the Company and Scandic American
Shipping Ltd., or the Manager, the Manager assumes commercial and operational
responsibility of our vessels and is required to manage our day-to-day business
subject, always, to our objectives and policies as established from time to time
by the Board of Directors. The Manager sub-contracts certain of these duties to
Teekay Marine Services AS (formerly IUM Shipmanagement AS), a third-party
technical manager affiliated with Teekay Shipping Corporation, a publicly traded
shipping company. All decisions of a material nature concerning our business are
reserved to our Board of Directors. The Management will terminate on June 30,
2019, unless earlier terminated pursuant to its terms, as discussed below, or
extended by the parties following mutual agreement.
For its services under the Management Agreement, the Manager is entitled to
cover its costs incurred plus a management fee equal to $100,000 per annum. The
management fee is payable to the Manager quarterly in advance. The Management
Agreement formerly provided that the Manager would receive 1.25% of any gross
charterhire paid to us. In order to further align the Manager's interests with
those of the Company, the Manager agreed with us to amend the Management
Agreement to eliminate this payment, and we issued to the Manager restricted
common shares equal to 2% of our outstanding common shares. Any time additional
common shares are issued, the Manager will receive additional restricted common
shares to maintain the number of common shares issued to the Manager at 2% of
our total outstanding common shares. These restricted shares are nontransferable
for three years from issuance.
Under the Management Agreement, the Manager pays, and receives reimbursement
from us, for our administrative expenses including such items as:
o all costs and expenses incurred on our behalf, including
operating expenses and other costs for vessels that are
chartered out on time charters or traded in the spot market and
for monitoring the condition of our vessel that is operating
under bareboat charter,
o executive officer and staff salaries,
o administrative expenses, including, among others, for third
party public relations, insurance, franchise fees and
registrars' fees,
o all premiums for insurance of any nature, including directors'
and officers' liability insurance and general liability
insurance,
o brokerage commissions payable by us on the gross charter hire
received in connection with the charters,
o directors' fees and meeting expenses,
o audit fees,
o other expenses approved by the Board of the Directors and
o attorneys' fees and expenses, incurred on our behalf in
connection with (A) any litigation commenced by or against us or
(B) any claim or investigation by any governmental, regulatory
or self-regulatory authority involving us.
We have agreed to defend, indemnify and save the Manager and its affiliates
(other than us and our subsidiaries), officers, directors, employees and agents
harmless from and against any and all loss, claim, damage, liability, cost or
expense, including reasonable attorneys' fees, incurred by the Manager or any
such affiliates based upon a claim by or liability to a third party arising out
of the operation of our business, unless due to the Manager's or such
affiliates' negligence or willful misconduct.
We may terminate the Management Agreement in the event that:
o the Manager commits any material breach or omission of its
material obligations or undertakings thereunder that is not
remedied within thirty days of our notice to the Manager of such
breach or omission,
o the Manager fails to maintain adequate authorization to perform
its duties thereunder that is not remedied within thirty days,
o certain events of the Manager's bankruptcy occur, or
o it becomes unlawful for the Manager to perform its duties under
the Management Agreement.
Commercial and Technical Management Agreements
We have entered into a commercial management agreement with Teekay Chartering
Limited, or Teekay, an affiliate of Teekay Shipping Corporation for the Nordic
Freedom. Under the supervision of the Manager, Teekay's duties include seeking
and negotiating charters for this vessel.
We have entered into a commercial management agreement with the Swedish based
Stena Bulk AS, or Stena, for the Nordic Voyager, which is operated in a pool
with other Stena-controlled Suezmax tankers. Under the supervision of the
Manager, Stena's duties in the pool include seeking and negotiating charters for
this vessel.
We have entered into a commercial management agreement with Frontline Management
ASA, or Frontline, for the Nordic Fighter and the Nordic Discovery, which are
operated in a pool with other Frontline controlled Suezmax tankers. Under the
supervision of the Manager, Frontline's duties in the pool include seeking and
negotiating charters for these vessels.
We have entered into a commercial management agreement with the U.S. based OMI
Corporation, or OMI, for the Nordic Saturn and Nordic Jupiter, which are
operated in a pool with other OMI-controlled Suezmax tankers. Under the
supervision of the Manager, OMI's duties in the pool include seeking and
negotiating charters for these vessels. We have entered into a technical
management agreement for Nordic Jupiter with OMI Marine Services under the
supervision of the Manager.
We have entered into a technical management agreement for the Nordic Hawk,
Nordic Hunter, Nordic Voyager, Nordic Freedom and Nordic Saturn with Teekay
Marine Services AS (formerly IUM Shipmanagement AS) under the supervision of the
Manager.
We have entered into a technical management agreement for the Nordic Fighter and
the Nordic Discovery with V.Ships Norway AS, or V.Ships. V.Ships is a marine
service group that provides ship management and related services to a managed
fleet of approximately 650 vessels worldwide.
Compensation under the commercial and technical management agreements is in
accordance with industry standards.
Our Credit Facility
In September 2005, we entered into a new $300 million revolving credit facility,
which we refer to as the New Credit Facility. The New Credit Facility became
effective as of October 2005 and replaced our previous credit facility from
October 2004, a portion of which was set to mature in October 2005. The New
Credit Facility will mature in September 2010.
The New Credit Facility provides funding for future vessel acquisitions and
general corporate purposes. The New Credit Facility cannot be reduced by the
lender and there is no repayment obligation of the principal during the five
year term. Amounts borrowed under the New Credit Facility bear interest at a
rate equal to LIBOR plus a margin between 0.7% and 1.2% (depending on the loan
to vessel value ratio). We must pay a commitment fee of 30% of the applicable
margin on any undrawn amounts.
In September 2005, we borrowed $60.0 million under our previous credit facility
to finance part of the purchase price of our seventh vessel that we acquired in
August 2005, and $7.0 million to finance the down payment for the acquisition of
our eighth vessel.
In October 2005, we refinanced the borrowings of $67.0 million under our
previous credit facility by drawing on our New Credit Facility. In November
2005, we borrowed $63.0 million under our New Credit Facility to finance part of
the purchase price or our eighth vessel that we acquired in September 2005. Our
aggregate borrowings under our New Credit Facility are $130.0 million as of
December 31, 2005.
Borrowings under the New Credit Facility are secured by mortgages over our
existing and new vessels and assignments of earnings and insurances, and
drawings will be available subject to loan to vessel value ratios. We are
subject to mandatory prepayment upon the occurrence of certain events. The terms
and conditions of the New Credit Facility require compliance with certain
restrictive covenants, which we feel are consistent with loan facilities
incurred by other shipping companies. Under the New Credit Facility, we are,
among other things, required to:
o maintain certain loan to vessel value ratios,
o maintain a book equity of no less than $150.0 million,
o remain listed on a recognized stock exchange, and
o obtain the consent of the lenders prior to creating liens on or
disposing of our vessels.
The New Credit Facility provides that we may not pay dividends if following such
payment we would not be in compliance with certain financial covenants or there
is a default under the New Credit Facility.
The International Tanker Market
International seaborne oil and petroleum products transportation services are
mainly provided by two types of operators: major oil company captive fleets
(both private and state-owned) and independent shipowner fleets. Both types of
operators transport oil under short-term contracts (including single-voyage
"spot charters") and long-term time charters with oil companies, oil traders,
large oil consumers, petroleum product producers and government agencies. The
oil companies own, or control through long-term time charters, approximately one
third of the current world tanker capacity, while independent companies own or
control the balance of the fleet. The oil companies use their fleets not only to
transport their own oil, but also to transport oil for third-party charterers in
direct competition with independent owners and operators in the tanker charter
market.
The oil transportation industry has historically been subject to regulation by
national authorities and through international conventions. Over recent years,
however, an environmental protection regime has evolved which has a significant
impact on the operations of participants in the industry in the form of
increasingly more stringent inspection requirements, closer monitoring of
pollution-related events, and generally higher costs and potential liabilities
for the owners and operators of tankers.
In order to benefit from economies of scale, tanker charterers will typically
charter the largest possible vessel to transport oil or products, consistent
with port and canal dimensional restrictions and optimal cargo lot sizes. A
tanker's carrying capacity is measured in deadweight tons, or dwt, which is the
amount of crude oil measured in metric tons that the vessel is capable of
loading. The oil tanker fleet is generally divided into the following five major
types of vessels, based on vessel carrying capacity: (i) Ultra Large Crude
Carrier (ULCC) - with a size range of approximately 320,000 to 450,000 dwt; (ii)
Very Large Crude Carrier (VLCC) with a size range of approximately 200,000 to
320,000 dwt; (iii) Suezmax-size range of approximately 120,000 to 200,000 dwt;
(iv) Aframax-size range of approximately 80,000 to 120,000 dwt; (v) Panamax-size
range of approximately 60,000 to 70,000 dwt; and (v) small tankers of less than
approximately 60,000 dwt. ULCCs and VLCCs typically transport crude oil in
long-haul trades, such as from the Arabian Gulf to Rotterdam via the Cape of
Good Hope. Suezmax tankers also engage in long-haul crude oil trades as well as
in medium-haul crude oil trades, such as from West Africa to the East Coast of
the United States. Aframax-size vessels generally engage in both medium-and
short-haul trades of less than 1,500 miles and carry crude oil or petroleum
products. Smaller tankers mostly transport petroleum products in short-haul to
medium-haul trades.
The Tanker Market 2005
For the third year in a row the tanker market was very profitable for tanker
owners. Even though 2005 was not as robust as 2004 for crude carriers, it was
the second best year since the 1970s. In the single voyage market, VLCCs reached
an average of $55,000 per day, down from the extraordinary high of $89,000 the
year before. Suezmaxes achieved $48,000 per day, versus $65,000 in 2004.
Corresponding rates for Aframaxes were $40,000 compared with $47,000 in 2004.
Estimates indicate an increase in seaborne oil trade of 3.5% from 2004 to 2005
and a slight reduction in average transport distance. Based on industry reports,
there was an increase in waiting time in ports and straits compared with the
year before, leading to a decline in the productivity of the fleet. Our
preliminary estimates show an overall growth of 3% to 4% in tanker tonnage
demand from 2004 to 2005.
The tanker fleet, excluding chemical tankers, rose at the highest rate in many
years on a dwt basis, with deliveries of 28 million dwt, while scrapping and
other removals amounted to no more than 5 million dwt. Fleet growth by dwt in
2005 was as high as 7%, resulting in a drop in the fleet's utilization rate from
91.5% in 2004 to 88.5% in 2005.
The most important trend in the global oil market in 2005 was the stagnation in
oil production outside OPEC. Hurricane-related supply disruptions in the U.S.
Gulf, higher than anticipated North Sea depletion rates and a more moderate
growth in Russian oil output were the main elements behind the stagnation of
non-OPEC production.
The consequence of less oil from non-OPEC sources was an increased demand for
OPEC oil. Since OPEC was already producing at almost full capacity, most of the
extra demand resulted in higher prices. Lack of spare oil production capacity
drove crude oil prices to, at its peak, above $70 per barrel and dampened the
extremely strong growth in oil consumption of close to 4% in 2004 to only 1.3%
in 2005, according to the most recent estimates.
The sale and purchase market for tankers was strong in 2005, especially for very
modern tankers. Values for double hull tankers increased on average
approximately 7.5%, whereas values for single hull tankers on average fell
approximately 10%.
According to the January 2005 Oil and Gas Journal, the Middle East has 57.1% of
the world's proven oil reserves, which will continue to drive long and medium
haul seaborne transportation. World oil production reached 84.6 million barrels
per day in January 2006. OPEC countries located in the Middle East supplied
approximately a quarter of this volume. Given the dominance of world oil
reserves located in this region, this share is expected to grow in coming years
as oil fields in other parts of the world gradually reach maturity and begin a
process of natural decline. The length of transportation distances between the
Middle East and consuming areas means that such a trend would boost ton-miles
(the product of volumes and transport distances) and could be beneficial for
tanker demand.
A significant and ongoing shift toward quality in vessels and operations has
taken place during the last decade as charterers and regulators increasingly
focus on safety and protection of the environment. Since 1990, there has been an
increasing emphasis on environmental protection through legislation and
regulations such as the U.S. Oil Pollution Act of 1990, International Maritime
Organization protocols and classification society procedures, demanding higher
quality tanker construction, maintenance, repair and operations. Operators that
have proven an ability to seamlessly integrate these required safety regulations
into their operations are being rewarded. For example, the emergence of vessels
equipped with double hulls represented a differentiation in vessel quality and
enabled such vessels to command improved earnings in the spot charter markets.
The effect has been a shift in major charterers' preference towards greater use
of double hulls and, therefore, more difficult trading conditions for older
single-hull vessels. These changes were reflected in the sharp increase in
scrapping of older vessels during periods of weaker market conditions in recent
years. As a result, the net increase in transportation capacity for Suezmax
tankers has been relatively low during this period, or 7.0% from 1993 through
2003 according to R.S. Platou Economic Research a.s. However, due to the
increase in oil demand, deliveries have increased and net Suezmax tanker
capacity has grown 13.5% since the beginning of 2003. We believe charterers
generally prefer more modern, double-hull vessels resulting in a portion of the
older vessels achieving lower levels of employment. Two major oil companies have
announced they will no longer charter single-hull tonnage.
Environmental and Other Regulation
Government regulation significantly affects the ownership and operation of our
tankers. They are subject to international conventions, national, state and
local laws and regulations in force in the countries in which our vessels may
operate or are registered.
A variety of governmental and private entities subject our vessels to both
scheduled and unscheduled inspections. These entities include the local port
authorities (U.S. Coast Guard, harbor master or equivalent), classification
societies, flag state administration (country of registry) and charterers,
particularly terminal operators and oil companies. Certain of these entities
require us to obtain permits, licenses and certificates for the operation of our
tankers. Failure to maintain necessary permits or approvals could require us to
incur substantial costs or temporarily suspend operation of one or more of our
vessels.
We believe that the heightened level of environmental and quality concerns among
insurance underwriters, regulators and charterers is leading to greater
inspection and safety requirements on all vessels and may accelerate the
scrapping of older vessels throughout the industry. Increasing environmental
concerns have created a demand for vessels that conform to the stricter
environmental standards. We are required to maintain operating standards for all
of our vessels that will emphasize operational safety, quality maintenance,
continuous training of our officers and crews and compliance with U.S. and
international regulations. We believe that the operation of our vessels is in
substantial compliance with applicable environmental laws and regulations;
however, because such laws and regulations are frequently changed and may impose
increasingly stricter requirements, such future requirements may limit our
ability to do business, increase our operating costs, force the early retirement
of our vessels, and/or affect their resale value, all of which could have a
material adverse effect on our financial condition and results of operations.
Environmental Regulation--IMO
In 1992, the International Maritime Organization, or IMO (the United Nations
agency for maritime safety and the prevention of marine pollution by ships),
adopted regulations that set forth pollution prevention requirements applicable
to tankers. These regulations, which have been adopted by more than 150 nations,
including many of the jurisdictions in which our tankers operate, provide, in
part, that:
o tankers between 25 and 30 years old must be of double-hull
construction or of a mid-deck design with double sided
construction, unless (1) they have wing tanks or double-bottom
spaces not used for the carriage of oil, which cover at least
30% of the length of the cargo tank section of the hull or
bottom; or (2) they are capable of hydrostatically balanced
loading (loading less cargo into a tanker so that in the event
of a breach of the hull, water flows into the tanker, displacing
oil upwards instead of into the sea);
o tankers 30 years old or older must be of double-hull
construction or mid-deck design with double sided construction;
and
o all tankers are subject to enhanced inspections.
Also, under IMO regulations, a tanker must be of double-hull construction or a
mid-deck design with double sided construction or be of another approved design
ensuring the same level of protection against oil pollution if the tanker:
o is the subject of a contract for a major conversion or original
construction on or after July 6, 1993;
o commences a major conversion or has its keel laid on or after
January 6, 1994; or
o completes a major conversion or is a newbuilding delivered on or
after July 6, 1996.
Effective September 2002, the IMO accelerated its existing timetable for the
phase-out of single-hull oil tankers. These regulations require the phase-out of
most single-hull oil tankers by 2015 or earlier, depending on the age of the
tanker and whether it has segregated ballast tanks. After 2007, the maximum
permissible age for single-hull tankers will be 26 years. Compliance with the
new regulations regarding inspections of all tankers, however, could adversely
affect our operations. Under current regulations, retrofitting will enable a
tanker to operate until the earlier of 25 years of age and the anniversary date
of its delivery in 2017. However, as a result of the oil spill in November 2002
relating to the loss of the M/T Prestige, which was owned by a company not
affiliated with us, in December 2003 the Marine Environmental Protection
Committee of the IMO adopted a proposed amendment to the International
Convention for the Prevention of Pollution from Ships to accelerate the phase
out of single-hull tankers from 2015 to 2010 unless the relevant flag state, in
a particular case, extends the date to 2015. This amendment came into effect in
April 2005.
The IMO has also negotiated international conventions that impose liability for
oil pollution in international waters and a signatory's territorial waters. In
September 1997, the IMO adopted Annex VI to the International Convention for the
Prevention of Pollution from Ships to address air pollution from ships. Annex VI
was ratified in May 2004 and became effective in May 2005. Annex VI sets limits
on sulfur oxide and nitrogen oxide emissions from ship exhausts and prohibit
deliberate emissions of ozone depleting substances, such as chlorofluorocarbons.
Annex VI also includes a global cap on the sulfur content of fuel oil and allows
for special areas to be established with more stringent controls on sulfur
emissions. We believe that compliance with the Annex VI regulations will have no
material effect on our results of operations. Additional or new conventions,
laws and regulations may be adopted that could adversely affect our ability to
manage our ships.
Under the International Safety Management Code, or ISM Code, promulgated by the
IMO, the party with operational control of a vessel is required to develop an
extensive safety management system that includes, among other things, the
adoption of a safety and environmental protection policy setting forth
instructions and procedures for operating its vessels safely and describing
procedures for responding to emergencies. We will rely upon the safety
management system that we and our third party technical managers have developed.
The ISM Code requires that vessel operators obtain a safety management
certificate for each vessel they operate. This certificate evidences compliance
by a vessel's management with code requirements for a safety management system.
No vessel can obtain a certificate unless its manager has been awarded a
document of compliance, issued by each flag state, under the ISM Code. We have
the requisite documents of compliance for our offices and safety management
certificates for all of our tankers for which the certificates are required by
the IMO. We are required to renew these documents of compliance and safety
management certificates annually.
Noncompliance with the ISM Code and other IMO regulations may subject the
shipowner or bareboat charterer to increased liability, may lead to decreases in
available insurance coverage for affected vessels and may result in the denial
of access to, or detention in, some ports. For example, the U.S. Coast Guard and
European Union authorities have indicated that vessels not in compliance with
the ISM Code will be prohibited from trading in U.S. and European Union ports.
Although the United States is not a party to these conventions, many countries
have ratified and follow the liability plan adopted by the IMO and set out in
the International Convention on Civil Liability for Oil Pollution Damage of
1969. Under this convention, if the country in which the damage results is a
party to the 1992 Protocol to the International Convention on Civil Liability
for Oil Pollution Damage, a vessel's registered owner is strictly liable for
pollution damage caused in the territorial waters of a contracting state by
discharge of persistent oil, subject to certain complete defenses. Under an
amendment to the Protocol that became effective on November 1, 2003, for vessels
of 5,000 to 140,000 gross tons (a unit of measurement for the total enclosed
spaces within a vessel), liability is limited to approximately $6.7 million plus
$942 for each additional gross ton over 5,000. For vessels of over 140,000 gross
tons, liability is limited to approximately $134 million. As the convention
calculates liability in terms of a basket of currencies, these figures are based
on currency exchange rates on June 6, 2006. The right to limit liability is
forfeited under the International Convention on Civil Liability for Oil
Pollution Damage where the spill is caused by the owner's actual fault and under
the 1992 Protocol where the spill is caused by the owner's intentional or
reckless conduct. Vessels trading to states that are parties to these
conventions must provide evidence of insurance covering the liability of the
owner. In jurisdictions where the International Convention on Civil Liability
for Oil Pollution Damage has not been adopted, various legislative schemes or
common law govern, and liability is imposed either on the basis of fault or in a
manner similar to that convention. We believe that our P&I insurance will cover
the liability under the plan adopted by the IMO.
U.S. Oil Pollution Act of 1990 and Comprehensive Environmental Response,
Compensation and Liability Act
The United States regulates the tanker industry with an extensive regulatory and
liability regime for environmental protection and cleanup of oil spills,
consisting primarily of the U.S. Oil Pollution Act of 1990, or OPA, and the
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA.
OPA affects all owners and operators whose vessels trade with the United States
or its territories or possessions, or whose vessels operate in the waters of the
United States, which include the U.S. territorial sea and the 200 nautical mile
exclusive economic zone around the United States. CERCLA applies to the
discharge of hazardous substances (other than oil) whether on land or at sea.
Both OPA and CERCLA impact our operations.
Under OPA, vessel owners, operators and bareboat charterers are "responsible
parties" who are jointly, severally and strictly liable (unless the spill
results solely from the act or omission of a third party, an act of God or an
act of war) for all containment and clean-up costs and other damages arising
from oil spills from their vessels. These other damages are defined broadly to
include:
o natural resource damages and related assessment costs;
o real and personal property damages;
o net loss of taxes, royalties, rents, profits or earnings
capacity;
o net cost of public services necessitated by a spill response,
such as protection from fire, safety or health hazards; and
o loss of subsistence use of natural resources.
OPA limits the liability of responsible parties to the greater of $600 per gross
ton or $0.5 million per tanker that is over 3,000 gross tons (subject to
possible adjustment for inflation). The act specifically permits individual
states to impose their own liability regimes with regard to oil pollution
incidents occurring within their boundaries, and some states have enacted
legislation providing for unlimited liability for discharge of pollutants within
their waters. In some cases, states that have enacted this type of legislation
have not yet issued implementing regulations defining tanker owners'
responsibilities under these laws. CERCLA, which applies to owners and operators
of tankers, contains a similar liability regime and provides for cleanup and
removal of hazardous substances and for natural resource damages. Liability
under CERCLA is limited to the greater of $300 per gross ton or $5 million.
These limits of liability do not apply, however, where the incident is caused by
violation of applicable U.S. federal safety, construction or operating
regulations, or by the responsible party's gross negligence or willful
misconduct. These limits do not apply if the responsible party fails or refuses
to report the incident or to cooperate and assist in connection with the
substance removal activities. OPA and CERCLA each preserve the right to recover
damages under existing law, including maritime tort law.
OPA also requires owners and operators of vessels to establish and maintain with
the U.S. Coast Guard evidence of financial responsibility sufficient to meet the
limit of their potential strict liability under the act. The U.S. Coast Guard
has enacted regulations requiring evidence of financial responsibility in the
amount of $1,500 per gross ton for tankers, coupling the OPA limitation on
liability of $1,200 per gross ton with the CERCLA liability limit of $300 per
gross ton. Under these regulations, an owner or operator of more than one tanker
is required to obtain a certificate of responsibility for each vessel in the
fleet in an amount equal only to the financial responsibility requirement of the
tanker having the greatest maximum strict liability under OPA and CERCLA. We
have provided evidence of financial responsibility in the form of guarantees
issued by a guarantor approved by the U.S. Coast Guard and received certificates
of financial responsibility from the U.S. Coast Guard for each of our vessels
that calls in U.S. waters.
We insure each of our vessels with pollution liability insurance in the maximum
commercially available amount of $1.0 billion per incident per vessel. A
catastrophic spill could exceed the insurance coverage available, in which event
there could be a material adverse effect on our business.
OPA also amended the Federal Water Pollution Control Act to require owners or
operators of tankers operating in the waters of the United States to file vessel
response plans with the U.S. Coast Guard, and their tankers are required to
operate in compliance with their U.S. Coast Guard approved plans. These response
plans must, among other things:
o address a "worst case" scenario and identify and ensure, through
contract or other approved means, the availability of necessary
private response resources to respond to a "worst case
discharge";
o describe crew training and drills; and
o identify a qualified individual with full authority to implement
removal actions.
Vessel response plans for our tankers operating in the waters of the United
States have been approved by the U.S. Coast Guard. In addition, the U.S. Coast
Guard has announced it intends to propose similar regulations requiring certain
vessels to prepare response plans for the release of hazardous substances. We
are responsible for ensuring our vessels comply with any additional regulations.
OPA does not prevent individual states from imposing their own liability regimes
with respect to oil pollution incidents occurring within their boundaries. In
fact, most U.S. states that border a navigable waterway have enacted
environmental pollution laws that impose strict liability on a person for
removal costs and damages resulting from a discharge of oil or a release of a
hazardous substance. These laws may be more stringent than U.S. federal law.
European Union Tanker Restrictions
In July 2003, the European Union adopted regulations that accelerate the IMO
single hull tanker phase-out timetable. Under the regulation no oil tanker is
allowed to operate under the flag of a EU member state, nor shall any oil
tanker, irrespective of its flag, be allowed to enter into ports or offshore
terminals under the jurisdiction of a EU member state after the anniversary of
the date of delivery of the ship in the year specified in the following table,
unless such tanker is a double hull oil tanker:
- --------------------------------------------------------------------------------
Category of Oil Tankers Date or Year
- --------------------------------------------------------------------------------
Category 1 oil tankers of 20,000 dwt and
above carrying crude oil, fuel oil, heavy 2003 for ships delivered in
diesel oil or lubricating oil as cargo, 1980 or earlier
and of 30,000 dwt and above carrying 2004 for ships delivered in 1981
other oils, which do not comply with 2005 for ships delivered in
the requirements for protectively located 1982 or later
segregated ballast tanks
- --------------------------------------------------------------------------------
Category 2 - oil tankers of 20,000 dwt
and above carrying crude oil, fuel oil, 2003 for ships delivered in
heavy diesel oil or lubricating oil as or 1975 or earlier
cargo, and of 30,000 dwt and above carrying 2004 for ships delivered in 1976
other oils, which do comply with the 2005 for ships delivered in 1977
protectivel located segregated ballast 2006 for ships delivered in 1978
tank requirements and 1979
2007 for ships delivered in 1980
and and 1981
2008 for ships delivered in 1982
Category 3 - oil tankers of 5,000 dwt and 2009 for ships delivered in 1983
above but less than the tonnage specified 2010 for ships delivered in
for Category 1 and 2 tankers. 1984 or later
- --------------------------------------------------------------------------------
Furthermore, under the regulation, all oil tankers of 5,000 dwt or less must
comply with the double hull requirements no later than the anniversary date of
delivery of the ship in the year 2008. The regulation, however, provides that
oil tankers operated exclusively in ports and inland navigation may be exempted
from the double hull requirement provided that they are duly certified under
inland water legislation. The European Union, following the lead of certain
European Union nations such as Italy and Spain, as of October 2003, has also
banned all single- hull tankers of 600 dwt and above carrying high grade oil,
regardless of flag, from entering or leaving its ports or offshore terminals or
anchoring in areas under its jurisdiction. Commencing in 2005, certain single-
hull tankers above 15 years of age will also be restricted from entering or
leaving European Union ports or offshore terminals and anchoring in areas under
European Union jurisdiction.
The European Union has also adopted legislation that: (1) bans manifestly
sub-standard vessels (defined as those over 15 years old that have been detained
by port authorities at least twice in a six -month period) from European waters
and creates an obligation of port states to inspect vessels posing a high risk
to maritime safety or the marine environment; and (2) provides the European
Union with greater authority and control over classification societies,
including the ability to seek to suspend or revoke the authority of negligent
societies. It is impossible to predict what legislation or additional
regulations, if any, may be promulgated by the European Union or any other
country or authority.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there has been a variety of
initiatives intended to enhance vessel security. On November 25, 2002, the
Maritime Transportation Security Act of 2002 (MTSA) came into effect. To
implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard
issued regulations requiring the implementation of certain security requirements
aboard vessels operating in waters subject to the jurisdiction of the United
States. Similarly, in December 2002, amendments to the International Convention
for the Safety of Life at Sea (SOLAS) created a new chapter of the convention
dealing specifically with maritime security. The new chapter went into effect in
July 2004 and imposes various detailed security obligations on vessels and port
authorities, most of which are contained in the newly created International Ship
and Port Facilities Security (ISPS) Code. We are in compliance with the ISPS
Code. Among the various requirements are:
o on-board installation of automatic information systems, or AIS,
to enhance vessel-to-vessel and vessel-to-shore communications;
o on-board installation of ship security alert systems;
o the development of vessel security plans; and
o compliance with flag state security certification requirements.
The U.S. Coast Guard regulations, intended to align with international maritime
security standards, exempt non-U.S. tankers from MTSA vessel security measures
provided such vessels have on board, by July 1, 2004, a valid International Ship
Security Certificate (ISSC) that attests to the vessel's compliance with SOLAS
security requirements and the ISPS Code. We have implemented the various
security measures addressed by the MTSA, SOLAS and the ISPS Code ensure that our
tankers attain compliance with all applicable security requirements within the
prescribed time periods. We do not believe these additional requirements will
have a material financial impact on our operations.
Inspection by Classification Societies
Every seagoing vessel must be "classed" by a classification society. The
classification society certifies that the vessel is "in class," signifying that
the vessel has been built and maintained in accordance with the rules of the
classification society and complies with applicable rules and regulations of the
vessel's country of registry and the international conventions of which that
country is a member. In addition, where surveys are required by international
conventions and corresponding laws and ordinances of a flag state, the
classification society will undertake them on application or by official order,
acting on behalf of the authorities concerned.
The classification society also undertakes on request other surveys and checks
that are required by regulations and requirements of the flag state. These
surveys are subject to agreements made in each individual case and/or to the
regulations of the country concerned.
For maintenance of the class, regular and extraordinary surveys of hull,
machinery, including the electrical plant, and any special equipment classed are
required to be performed as follows:
Annual Surveys: For seagoing ships, annual surveys are conducted for the hull
and the machinery, including the electrical plant, and where applicable for
special equipment classed, at intervals of 12 months from the date of
commencement of the class period indicated in the certificate.
Intermediate Surveys: Extended annual surveys are referred to as intermediate
surveys and typically are conducted two and one-half years after commissioning
and each class renewal. Intermediate surveys may be carried out on the occasion
of the second or third annual survey.
Class Renewal Surveys: Class renewal surveys, also known as special surveys, are
carried out for the ship's hull, machinery, including the electrical plant, and
for any special equipment classed, at the intervals indicated by the character
of classification for the hull. At the special survey, the vessel is thoroughly
examined, including audio-gauging to determine the thickness of the steel
structures. Should the thickness be found to be less than class requirements,
the classification society would prescribe steel renewals. The classification
society may grant a one-year grace period for completion of the special survey.
Substantial amounts of money may have to be spent for steel renewals to pass a
special survey if the vessel experiences excessive wear and tear. In lieu of the
special survey every four or five years, depending on whether a grace period was
granted, a shipowner has the option of arranging with the classification society
for the vessel's hull or machinery to be on a continuous survey cycle, in which
every part of the vessel would be surveyed within a five-year cycle.
At an owner's application, the surveys required for class renewal may be split
according to an agreed schedule to extend over the entire period of class. This
process is referred to as continuous class renewal.
All areas subject to survey as defined by the classification society are
required to be surveyed at least once per class period, unless shorter intervals
between surveys are prescribed elsewhere. The period between two subsequent
surveys of each area must not exceed five years.
Most vessels are also dry-docked every 30 to 36 months for inspection of the
underwater parts and for repairs related to inspections. If any defects are
found, the classification surveyor will issue a "recommendation" which must be
rectified by the ship owner within prescribed time limits.
Most insurance underwriters make it a condition for insurance coverage that a
vessel be certified as "in class" by a classification society which is a member
of the International Association of Classification Societies. All our vessels
are certified as being "in class" by Lloyd's Register of Shipping (one vessel)
and Det norske Veritas (eight vessels). All new and secondhand vessels that we
purchase must be certified prior to their delivery under our standard contracts.
Risk of Loss and Liability Insurance
The operation of any cargo vessel includes risks such as mechanical failure,
collision, property loss, cargo loss or damage and business interruption due to
political circumstances in foreign countries, hostilities and labor strikes. In
addition, there is always an inherent possibility of marine disaster, including
oil spills and other environmental mishaps, and the liabilities arising from
owning and operating vessels in international trade. OPA, which imposes
virtually unlimited liability upon owners, operators and demise charterers of
any vessel trading in the United States exclusive economic zone for certain oil
pollution accidents in the United States, has made liability insurance more
expensive for ship owners and operators trading in the United States market.
While we carry loss of hire insurance to cover 100% of our fleet, we may not be
able to maintain this level of coverage. Furthermore, while we believe that our
present insurance coverage is adequate, not all risks can be insured, and there
can be no guarantee that any specific claim will be paid, or that we will always
be able to obtain adequate insurance coverage at reasonable rates.
Hull and Machinery Insurance
We have obtained marine hull and machinery and war risk insurance, which
includes the risk of actual or constructive total loss, for all of the vessels
in our fleet. The vessels in our fleet are each covered up to at least fair
market value, with deductibles of $350,000 per vessel per incident. We also
arranged increased value coverage for each vessel. Under this increased value
coverage, in the event of total loss of a vessel, we will be able recover for
amounts not recoverable under the hull and machinery policy by reason of any
under-insurance.
Protection and Indemnity Insurance
Protection and indemnity insurance is provided by mutual protection and
indemnity associations, or P&I Associations, which covers our third party
liabilities in connection with our shipping activities. This includes third
party liability and other related expenses of injury or death of crew,
passengers and other third parties, loss or damage to cargo, claims arising from
collisions with other vessels, damage to other third party property, pollution
arising from oil or other substances, and salvage, towing and other related
costs, including wreck removal. Protection and indemnity insurance is a form of
mutual indemnity insurance, extended by protection and indemnity mutual
associations, or "clubs." Our coverage, except for pollution, is unlimited.
Our current protection and indemnity insurance coverage for pollution is $1
billion per vessel per incident. The fourteen P&I Associations that comprise the
International Group insure approximately 90% of the world's commercial tonnage
and have entered into a pooling agreement to reinsure each association's
liabilities. Each P&I Association has capped its exposure to this pooling
agreement at $4.25 billion. As a member of a P&I Association, which is a member
of the International Group, we are subject to calls payable to the associations
based on its claim records as well as the claim records of all other members of
the individual associations, and members of the pool of P&I Associations
comprising the International Group.
Competition
We operate in markets that are highly competitive and based primarily on supply
and demand. We compete for charters on the basis of price, vessel location,
size, age and condition of the vessel, as well as on our reputation as an
operator. We arrange our time charters and voyage charters in the spot market
through the use of brokers, who negotiate the terms of the charters based on
market conditions. We compete primarily with owners of tankers in the Suezmax
and class size. Ownership of tankers is highly fragmented and is divided among
major oil companies and independent vessel owners.
Permits and Authorizations
We are required by various governmental and quasi-governmental agencies to
obtain certain permits, licenses and certificates with respect to our vessels.
The kinds of permits, licenses and certificates required depend upon several
factors, including the commodity transported, the waters in which the vessel
operates, the nationality of the vessel's crew and the age of a vessel. We have
been able to obtain all permits, licenses and certificates currently required to
permit our vessels to operate. Additional laws and regulations, environmental or
otherwise, may be adopted which could limit our ability to do business or
increase the cost of us doing business.
C. ORGANIZATIONAL STRUCTURE
Prior to September 30, 1997, the Company was a wholly owned subsidiary of Ugland
Nordic Shipping ASA, or UNS, a Norwegian shipping company whose shares were
listed on the Oslo Stock Exchange. On September 30, 1997, 11,731,613 warrants
for the purchase of the Company's common shares, which had been sold to the
public in 1995, were exercised. Until May 30, 2003, UNS acted as the Manager,
and provided managerial, administrative and advisory services to the Company
pursuant to the Management Agreement. Since May 30, 2003, Scandic American
Shipping Ltd. has acted as the Company's Manager, and provides such services
pursuant to the Management Agreement. The Management Agreement was amended on
October 12, 2004 to further align the Manager's interests with those of the
Company as a shareholder of the Company. See Item 4--Information on the Company
- -- Business Overview --The Management Agreement.
D. PROPERTY, PLANT AND EQUIPMENT
See Items 4 - Information on the Company - Business Overview - Our Fleet, for a
description of our vessels. The vessels are mortgaged for securing the new
credit facility.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
We present our income statement using voyage revenues and voyage expenses. The
Company's vessels are operated under bareboat charters, spot related time
charters and spot charters. Under a bareboat charter the charterer pays
substantially all of the vessel voyage and operating costs. Under a spot related
time charter, the charterer pays substantially all of the vessel voyage costs.
Under a spot charter, the vessel owner pays all such costs. Vessel voyage costs
consist primarily of fuel, port charges and commissions.
Since the amount of voyage expenses that we incur for a charter depends on the
type of the charter, we use net voyage revenues to provide comparability among
the different types of charters. Net voyage revenue, a non-GAAP financial
measure, provides more meaningful disclosure than voyage revenues, the most
directly comparable financial measure under accounting principles generally
accepted in the United States . Net voyage revenues divided by the number of
days on the charter provides the Time Charter Equivalent (TCE) Rate. For
bareboat charters operating costs must be added in order to calculate TCE rates.
Net voyage revenues and TCE rates are widely used by investors and analysts in
the tanker shipping industry for comparing the financial performance of
companies and for preparing industry averages. The following table reconciles
our net voyage revenues to voyage revenues. In 2004, our calculation methodology
for net voyage revenues was adjusted to better reflect the various commission
schemes under which we operate. Prior period TCE amounts have been adjusted to
conform to the 2004 reconciliation.
Year Ended Year Ended Year Ended
December 31, 2005 December 31, 2004 December 31, 2003
- -------------------------------------------------------------------------------
Voyage Revenue 117,110,178 67,451,598 37,370,756
Voyage Expenses (30,980,916) (4,925,353) (184,781)
- -------------------------------------------------------------------------------
Net Voyage Revenue 86,129,262 62,526,245 37,185,975
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Voyage revenues increased by 73.6% to $117,110,178 in 2005 from $67,451,598 in
2004. Net voyage revenues increased by 37.7% to $86,129,262 in 2005 from
$62,526,245 in 2004. Voyage expenses increased by 529% to $30,980,916 in 2005
from $4,925,353 in 2004. The increase in voyage revenues and net voyage revenues
is primarily due to the growth of the Company. The Company increased its fleet
from 4 vessels as at December 31, 2004 or 1,133 ship days, meaning the number of
days the Company's vessels were generating revenue, during 2004 to 8 vessels as
at December 31, 2005 or 2,193 ship days during 2005. This represents an increase
in cargo capacity of 93.5%.
Vessel operating expenses were $11,220,770 for 2005 compared to $1,976,766 for
2004. The increase is due to the change in the Company's current operating
structure as of October 2004 from a passive leasing company into an operating
company. Prior to October 2004 the original three vessels were on bareboat
charter to BP Shipping. Under bareboat charter agreements all vessel operating
expenses are paid by the charterer.
Administrative expenses were $8,492,164 for 2005 compared to $10,851,688 for
2004. The decrease was due to the non-cash charge of $9,252,365 in 2004 compared
to $3,582,995 in 2005 that is linked to a change in the compensation scheme for
our Manager. This decrease was off-set by a full year of general and
administrative expenses reflecting the new operating structure of the Company as
described above. The original incentive plan for the Manager was a revenue based
cash commission structure. The Manager agreed to eliminate the commission. The
cash commission was replaced by restricted share issuances to the Manager of 2%
of the Company's outstanding common shares from time to time in order to align
the interests of the Manager and the Company. These restricted shares are
non-transferable for three years from issuance. In connection with the
transition to an operating company, the Company introduced a stock incentive
plan with 400,000 shares reserved for issuance of which 320,000 stock options
were granted at December 31, 2005. The initial strike price for options granted
in 2005 was equal to $38.75, which was the offering price per share of our
common shares in our follow-on offering in November 2004. The Company has
recorded a compensation cost of $1,415,000 associated with the employee stock
option awards. For further information, see Item 6 -- Directors, Senior
Management and Employees -- 2004 Stock Incentive Plan.
Net operating income for 2005 increased 14.3% from the comparable period in 2004
from $42,779,627 to $48,887,328 primarily due to increased revenue offset
partially by increased costs as described above.
Depreciation, which includes depreciation of vessels and amortization of
drydockings, increased from $6,918,164 for 2004 to $17,529,000 for 2005. The
increase is due to the increase in book value of our fleet as a result of our
acquisitions of four vessels during 2005 compared to acquisition of one vessel
during 2004.
Interest expense increased from $1,971,304 for 2004 to $3,453,963 for 2005. The
increase is primarily due to the decision of the Board to keep non-retiring debt
on the balance sheet in the region of $15 million per vessel which we believe is
an appropriate debt to equity ratio for the Company.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Voyage revenues increased by 80.5% to $67,451,598 in 2004, from $37,370,756 in
2003. Net voyage revenues increased by 68.1% to $62,526,245 in 2004, from
$37,185,975 in 2003. The increase in voyage revenues and net voyage revenues was
due to higher tanker spot market rates in the twelve month period in 2004 and
the addition of one vessel on November 23, 2004. The tanker spot market rates
are determined by the demand for the carriage of oil and the distance the oil is
to be carried, measured in tonne miles, and the supply of vessels to transport
that oil. As a result of the strong spot market rates during 2004, our TCE rates
increased 46.6% to $62,231 for 2004, from $42,460 for 2003.
Vessel operating expenses were $1,976,766 for 2004. There are no comparable
figures for 2003. The Company did not have vessel operating expenses for the
comparable period of 2003 since all the vessels were chartered to BP Shipping
under bareboat charter agreements. Under bareboat charter agreements all vessels
operating expenses are paid by the charterer.
Administrative expenses increased by 2,218% to $10,851,688 in 2004, from
$468,087 in 2003. The increase is primarily due to share-based expense of
$9,252,365, which results from a change in the compensation scheme for our
Manager, Scandic American Shipping Ltd. The Management Agreement was amended in
2004 from a cash commission structure based on charter revenue to a share-based
structure that provides 2% of the Company's outstanding shares to the Manager.
Other administrative costs have increased as a result of the transition to an
operating company. In 2004, the Company engaged the Manager to assume the
commercial and operational responsibility of our vessels and to manage our
day-to-day business. This agreement is based on cost incurred plus a fixed fee
of $100,000 per annum. Until June 30, 2004, the Company paid an annual fixed fee
of $250,000 for these services. Furthermore, the Company hired our Chief
Executive Officer, Herbjorn Hansson, in 2004.
Net operating income for 2004 increased 43.1% from the comparable period in 2003
from $29,886,849 to $42,779,627 primarily due to increased revenue partially
offset by increased costs as described above.
B. LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Cash flows provided by operating activities decreased by 18.7% in 2005 to
$51,055,588 compared to $62,817,261 in 2004 primarily derived from the growth of
the Company as described above.
Cash flow provided from financing activities was $226,613,441 for 2005 compared
to $33,486,608 for the same period in 2004. The increase was due to (i) increase
in proceeds from 2004 to 2005 of $49.8 million from a follow-on offering, (ii)
increase from 2004 to 2005 in net proceeds from the drawdown of the credit
facility of $160.0 million, offset by (iii) increased dividends paid from 2004
to 2005 of $17.1 million and (iv) decrease from 2004 to 2005 in payment of loan
facility costs of $0.4 million in respect of our $300 million New Credit
Facility.
Cash flow used in investing activities increased by 344.7% in 2005 to
$294,161,063 compared to $66,137,277 in 2004. The increase represents the
acquisition costs of the four vessels acquired during 2005.
In February 2006, the Company agreed to acquire a double hull Suezmax tanker
from an unrelated third party for a purchase price of $69.0 million. The vessel
was delivered to us on April 10, 2006.
In March 2006, the Company sold 4,297,500 shares (including the over-allotment)
in a public offering in the U.S. to repay outstanding debt. The offering was
priced at $28.50 per share, and net proceeds to the Company were $115.2 million.
In April 2006, the Company borrowed $69.0 million under the New Credit Facility
to finance the ninth vessel delivered to the Company on April 10, 2006
The Company believes that its borrowing capacity under the New Credit Facility,
together with its working capital, are sufficient to fund its ongoing operations
and commitment for capital expenditures.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Cash flows provided by operating activities increased to $62,817,261 for 2004
from $29,893,551 for 2003. The majority of the increases resulted from higher
cash flows related to net voyage revenues. The cash flows from customers less
payments for voyage expenses were $67,415,268 and $32,320,191 in 2004 and 2003,
respectively. The increase in cash flows were offset by an increase in cash paid
for vessel operations of $1,925,508 in 2004.
Cash flows provided by financing activities for 2004 was $33,486,608 compared to
cash flows provided by financing activities of $29,605,410 for the same period
in 2003. The increase was due to (i) proceeds from a follow-on offering of
$112.1 million offset by (ii) increased dividends paid from 2003 to 2004 of
$17.6 million, (iii) repayment of $30 million in bank debt and (iv) payment of
loan facility costs of $1.5 million in respect of our $300 million credit
facility.
Cash flow used by investing activities was $66,137,277 which represents the
acquisition cost of the vessel acquired in November 2004. There were no
investing activities for the comparable period of 2003.
In March 2005, the Company sold 3,500,000 shares in a public offering in the US
to fund the $149.2 million acquisition costs of two vessels and to repay
outstanding debt under our credit facility. The offering was priced at $49.50
per share, and net proceeds (after offering costs of $ 11.1 million) to the
Company were $162.1 million.
In June 2005, the Company agreed to acquire a double hull suezmax tanker built
in 1998 for $71.4 million. The vessel is expected to be delivered from the
seller to the Company no later than end August 2005. The Company has an unused
credit facility of $300 million at June 30, 2005.
The Company believes that its borrowing capacity under the credit facility,
together with its working capital is sufficient to fund its ongoing operations
and commitment for capital expenditures.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
Not applicable
D. TREND INFORMATION
The oil tanker industry has been highly cyclical, experiencing volatility in
charterhire rates and vessel values resulting from changes in the supply of and
demand for crude oil and tanker capacity. See Item 4. Information on the Company
- - Business Overview - The Tanker Market 2005.
E. OFF BALANCE SHEET ARRANGEMENTS
Not applicable
F. DISCLOSURE OF CONTRACTUAL OBLIGATIONS
As of December 31, 2005 significant contractual obligations consisted of our
obligations as borrower under our New Credit Facility and our obligations under
the Management Agreement with Scandic American Shipping Ltd.
The following table sets out long-term financial and other commercial
obligations outstanding as of December 31, 2005 (all figures in USD `000)
Payment Due by Period:
- -------------------------------------------------------------------------------
2007 2010 2013
Contractual Obligations Total 2006 -2009 -2012 -2019
- -------------------------------------------------------------------------------
Credit Facility (1) 130,000 0 130,000 0 0
Interest Payments (2) 24,383 6,578 17,805 0 0
Committment Fees (3) 1,342 362 980 0 0
Management Fees (4) 1,400 100 300 300 700
- -------------------------------------------------------------------------------
Total 157,125 7,040 149,085 300 700
- -------------------------------------------------------------------------------
Notes:
(1) Refers to our obligation to repay indebtedness outstanding as of
December 31, 2005
(2) Refers to estimated interest payments over the term of the indebtedness
outstanding as of December 31, 2005 assuming a weighted
average interest rate of 4.99% per annum.
(3) Refers to estimated committment fees over the term of the indebtedness
outstanding as of December 31, 2005
(4) Refers to the management fees payable to Scandic American Shipping Ltd.
under the Management Agreement with the Manager.
CRITICAL ACCOUNTING POLICIES
We prepare our financial statements in accordance with accounting principles
generally accepted in the United States of America (US GAAP). Following is a
discussion of the accounting policies that involve a high degree of judgment and
the methods of their application. For a further description of our material
accounting policies, please read Item 18 - Financial Statements-- Note 1 -
Summary of Significant Accounting Policies.
Revenue recognition
We generate a majority of our revenues from vessels operating in pools and from
spot charters. Within the shipping industry, the two methods used to account for
voyage revenues and expenses are the percentage of completion and the completed
voyage methods. Most shipping companies, including our pool managers and spot
charter managers are using the percentage of completion method. In applying the
percentage of completion method, we believe that in most cases the
discharge-to-discharge basis of calculating voyages more accurately reflects
voyage results than the load-to-load basis. At the time of cargo discharge, we
generally have information about the next load port and expected discharge port,
whereas at the time of loading we are normally less certain what the next load
port will be.
Long-lived assets
A significant part of the Company's total assets consists of our vessels. The
oil tanker market is highly cyclical and the useful lives of our vessels are
dependent on a number of factors, such as future market demand for oil and
future market supply of tanker capacity.
Depreciable lives
Management uses considerable judgment when establishing the depreciable lives of
our vessels. In order to estimate useful lives of our vessels, Management must
make assumptions about future market conditions in the oil tanker market. The
Company considers the establishment of depreciable lives to be a critical
accounting estimate.
Drydocking
Generally, we drydock each vessel every two and a half to five years. We
capitalize a substantial portion of the costs we incur during drydocking and
amortize those costs on a straight-line basis from the completion of a
drydocking to the estimated completion of the next drydocking. We expense costs
related to routine repairs and maintenance incurred during drydocking that do
not improve or extend the useful lives of the assets.
Impairment
Our vessels are evaluated for impairment whenever indicators of impairment
exist. When an impairment indicator is present, the Company must evaluate
whether the carrying amounts of the vessels are recoverable. If an impairment
test is warranted, we assess whether the undiscounted cash flows expected to be
generated by our long-lived assets exceed their carrying value. If this
assessment indicates that the long-lived assets are impaired, the assets are
written down to their fair value. These assessments are based on our judgment,
which includes the estimate of future cash flows from long-lived assets.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29.
The adoption of this statement, effective June 2005, did not have any impact on
the Company's results of operations, financial position or cash flows.
In May 2005, the FASB issued Statement SFAS No. 154, Accounting Changes and
Error Corrections, effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. SFAS 154 requires
voluntary changes in accounting principle be retrospectively applied to
financial statements from previous periods unless such application is
impracticable. Under the newly issued standard changes in depreciation,
amortization, or depletion for long-lived, non-financial assets should be
accounted for as a change in accounting estimate that is affected by a change in
accounting principle. The Company believes that the adoption of this standard
will not have a material impact on the Company's results of operations,
financial position or cash flow.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Directors and Senior Management of the Company and the Manager
Pursuant to the Management Agreement with Scandic American Shipping Ltd., or the
Manager, the Manager provides management, administrative and advisory services
to us. The Manager is owned by Herbjorn Hansson, our Chairman, and Andreas Ove
Ugland, one of our directors, and may engage in business activities other than
with respect to the Company.
Set forth below are the names and positions of the directors of the Company and
executive officers of the Company and the Manager. The directors of the Company
are elected annually, and each director elected holds office until a successor
is elected. Officers of both the Company and the Manager are elected from time
to time by vote of the respective board of directors and hold office until a
successor is elected.
The Company
Name Age Position
- -------------------------------------------------------------------------------
Herbjorn Hansson 58 Chairman, Chief Executive Officer, President and
Director
Turid M. Sorensen 46 Chief Financial Officer
Rolf Amundsen 61 Chief Investor Relations Officer
Hon. Sir David Gibbons 78 Director
George C. Lodge 78 Director
Andreas Ove Ugland 51 Director
Torbjorn Gladso 59 Director
Andrew W. March 50 Director
Paul J. Hopkins 58 Director
The Manager
Name Age Position
- -------------------------------------------------------------------------------
Herbjorn Hansson 58 Director, President and Chief Executive Officer
Turid M. Sorensen 46 Chief Financial Officer
Rolf Amundsen 61 Chief Investor Relations Officer
Frithjof Bettum 44 Vice President Technical Operations & Chartering
Jan Erik Langangen 56 Executive Vice President--Business Development
and Legal
Certain biographical information with respect to each director and executive
officer of the Company and the Manager listed above is set forth below.
Herbjorn Hansson earned his M.B.A. at the Norwegian School of Economics and
Business Administration and Harvard Business School. In 1974 he was employed by
the Norwegian Shipowners' Association. In the period from 1975 to 1980, he was
Chief Economist and Research Manager of INTERTANKO, an industry association
whose members control about 70% of the world's independently owned tanker fleet,
excluding state owned and oil company fleets. During the 1980s, he was Chief
Financial Officer of Kosmos/Andres Jahre, at the time one of the largest
Norwegian based shipping and industry groups. In 1989, Mr. Hansson founded
Ugland Nordic Shipping AS, or UNS, which became one of the world's largest
owners of specialized shuttle tankers. He served as Chairman in the first phase
and as Chief Executive Officer as from 1993 to 2001 when UNS, under his
management, was sold to Teekay Shipping Corporation, or Teekay, for an
enterprise value of $780.0 million. He continued to work with Teekay, most
recently as Vice Chairman of Teekay Norway AS, until he started working
full-time for the Company on September 1, 2004. Mr. Hansson is the founder and
has been Chairman and Chief Executive Officer of the Company since its
establishment in 1995. He also is a member of various governing bodies of
companies within shipping, insurance, banking, manufacturing,
national/international shipping agencies including classification societies and
protection and indemnity associations. Mr. Hansson is fluent in Norwegian and
English, and has a command of German and French for conversational purposes.
Turid M. Sorensen was appointed Chief Financial Officer by the Board of
Directors on February 6, 2006. She has a bachelor degree in Business
Administration from the Norwegian School of Management. Ms. Sorensen has 20
years of experience in the shipping industry. During the period from 1984 to
1987, she worked for Anders Jahre AS and Kosmos AS in Norway and held various
positions within accounting and information technology. In the period from 1987
to 1995, Ms. Sorensen was Manager of Accounting and IT for Skaugen PertroTrans
Inc., in Houston, Texas. After returning to Norway she was employed by Ugland
Nordic Shipping ASA and Teekay Norway AS as Vice President, Accounting. From
October 2004 until her appointment as Chief Financial Officer, she served as our
Treasurer and Controller.
Rolf Amundsen was appointed Chief Investor Relations Officer and Advisor to the
Chairman by the Board of Directors on February 6, 2006 and prior to that time
served as our Chief Financial Officer from June 2004. Mr. Admundsen has an
M.B.A. in economics and business administration, and his entire career has been
in international banking. Previously, Mr. Amundsen has served as the president
of the financial analysts society in Norway. Mr. Amundsen served as the chief
executive officer of a Nordic investment bank for many years, where he
established a large operation for the syndication of international shipping
investments.
Andreas Ove Ugland has been a director of the Company since February 1997. Mr.
Ugland has also served as director and Chairman of Ugland International Holding
plc, a shipping/transport company listed on the London Stock Exchange, Andreas
Ugland & Sons AS, Grimstad, Norway, H0egh Ugland Autoliners AS, Oslo and Buld
Associates Inc., Bermuda. Mr. Ugland has had his whole career in shipping in the
Ugland family owned shipping group. Mr. Ugland is a shareholder and the Chairman
of the Manager.
Andrew W. March has been a director of the Company since June 2005. Mr. March
also currently serves in a management position with Vitol S.A., an international
oil trader, involved in supply, logistics and transport and as a director for
Imarex, an electronic trading platform for freight derivatives. From 1978 to
2004, Mr. March served in various positions with subsidiaries of BP p.l.c., an
international oil major company. Most recently, from January 2001 to 2004, Mr.
March was Commercial Director of BP Shipping Ltd., responsible for all aspects
of the business including long term strategy. From 1986 to 2000, Mr. March was
employed in various positions with BP Trading, serving as Global Product Trading
Manager from 1999. Mr. March received his MBA from Liverpool University.
Sir David Gibbons has been a director of the Company since September 1995. Sir
David served as the Premier of Bermuda from August 1977 to January 1982. Sir
David has served as Chairman of The Bank of N.T. Butterfield and Son Limited
from 1986 to 1997, Chairman of Colonial Insurance Co. Ltd. since 1986 and as
Chief Executive Officer of Edmund Gibbons Ltd. since 1954. Sir David Gibbons is
a member of our Audit Committee.
George C. Lodge has been a director of the Company since September 1995.
Professor Lodge has been a member of the Harvard Business School faculty since
1963. He was named associate professor of business administration at Harvard in
1968 and received tenure in 1972.
Paul J. Hopkins has been a director of the Company since June 2005. Mr. Hopkins
is also a Vice President and a director of Corridor Resources Inc., a Canadian
publicly traded exploration and production company. From 1989 through 1993 he
served with Lasmo as Project Manager during the start-up of the Cohasset/Panuke
oilfield offshore Nova Scotia, the first offshore oil production in Canada.
Earlier, Mr. Hopkins served as a consultant on frontier engineering and
petroleum economic evaluations in the international oil industry. Mr. Hopkins
was seconded to Chevron UK in 1978 to assist with the gas export system for the
Ninian Field. From 1973, he was employed with Ranger Oil (UK) Limited, being
involved in the drilling and production testing of oil wells in the North Sea.
Through the end of 1972 he worked with Shell Canada as part of its offshore
Exploration Group.
Torbjorn Gladso has been a director of the Company since October 2003. Mr.
Gladso is a partner in Saga Corporate Finance AS. He has extensive experience
within investment banking since 1978. He has been the Chairman of the Board of
the Norwegian Register of Securities and Vice Chairman of the Board of Directors
of the Oslo Stock Exchange. Mr. Gladso is Chairman of our Audit Committee.
Jan Erik Langangen is the Executive Vice President, Business Development and
Legal, of the Manager. Mr. Langangen previously served as the Chief Financial
Officer from 1979 to 1983, and as Chairman of the Board from 1987 to 1992, of
Statoil, an oil and gas company that is controlled by the Norwegian government
and that is the largest company in Norway. He also served as Chief Executive
Officer of UNI Storebrand from 1985 to 1992. Mr. Langangen was also Chairman of
the Board of the Norwegian Governmental Value Commission from 1998 to 2001. Mr.
Langangen is a partner of Langangen & Helset, a Norwegian law firm and
previously was a partner of the law firm Langangen & Engesaeth from 1996 to 2000
and of the law firm Thune & Co. from 1994 to 1996. Mr. Langangen received a
Masters of Economics from The Norwegian School of Business Administration and
his law degree from the University of Oslo.
Frithjof Bettum was appointed Vice President--Technical Operations & Chartering
of the Manager on October 1, 2005. Mr. Bettum has a Mechanical Engineering
degree from Vestfold University College. Mr. Bettum has 21 years of experience
in the shipping and the offshore business. From 1984 to 1992, Mr. Bettum was
employed by Allum Engineering AS in Sandefjord, Norway where he served as
project manager. At Allum Engineering AS Mr. Bettum worked on projects in the
areas of engineering, the new building and conversion management of shuttle
tankers, Floating Production, Storage and Offloading (FPSO), semi-submersible
drilling units and the shore based manufacturer industry. From 1993 to 2001, Mr.
Bettum was employed by Nordic American Shipping AS (which later became Ugland
Nordic Shipping ASA) where he served as Vice President--Offshore. In 2004, Mr.
Bettum joined Teekay Norway AS as Vice President Offshore where he was
responsible for business development, the daily operations of the company and
the conversion of shuttle tankers and offshore units.
B. COMPENSATION
Compensation of Directors and Officers
During 2005, the six non-employee directors received, in the aggregate,
approximately $228,100 in cash fees for their services as directors. From June
20, 2005 the Board was expanded from five to seven directors of which each of
the non-employee directors receives a fee at the annual rate of $45,000. We do
not pay director fees to employee directors. We do, however, reimburse our
directors for all reasonable expenses incurred by them in connection with
serving on our board of directors. Directors may receive restricted shares or
other grants under our 2004 Stock Incentive Plan described below.
We have an employment agreement with Herbjorn Hansson, our Chairman, President
and Chief Executive Officer, Turid M. Sorensen, our Chief Financial Officer, and
Rolf Amundsen, our Chief Investor Relations Officer and Advisor to the Chairman.
Mr. Hansson does not receive any additional compensation for serving as a
director or the Chairman of the Board. The aggregate compensation of our
executive officers during 2005 was $475,000. The aggregate compensation of our
executive officers is expected to be approximately $720,000 during 2006. On
certain terms the employment agreement with Mr. Hansson may be terminated by us
or Mr. Hansson upon six months' written notice to the other party. The
employment agreement with Ms. Sorensen may be terminated by us or by Ms.
Sorensen upon six months' written notice to the other party. The employment
agreement with Mr. Amundsen may be terminated by us or Mr. Amundsen upon three
months' written notice to the other party.
2004 Stock Incentive Plan
Under the terms of the Company's 2004 Stock Incentive Plan, the directors,
officers and certain key employees of the Company and the Manager are eligible
to receive awards which include incentive stock options, non-qualified stock
options, stock appreciation rights, dividend equivalent rights, restricted
stock, restricted stock units and performance shares. A total of 400,000 common
shares are reserved for issuance upon exercise of options, as restricted share
grants or otherwise under the plan. Included under the 2004 Stock Incentive Plan
are options to purchase common shares at an exercise price equal to $38.75, the
offering price per share of the Company's common shares in our follow-on
offering in November 2004, subject to annual downward adjustment if the payment
of dividends in the related fiscal year exceed a 3% yield calculated based on
the initial strike price. During 2005 the Company granted, under the terms of
the Company's 2004 Stock Incentive Plan, an aggregate of 320,000 stock options
that the Board of Directors had agreed to issue during 2004. These options will
vest in equal installments on each of the first four anniversaries of the grant
dates.
C. BOARD PRACTICES
The members of the Company's board of directors serve until the next annual
general meeting following his or her election to the board. The members of the
current board of directors were elected at the annual general meeting held in
2005. The Company's Board of Directors has established an Audit Committee,
consisting of two independent directors, Messrs. Gladso and Gibbons. Mr. Gladso
serves as the audit committee financial expert. The members of the Audit
Committee do not receive additional remuneration for serving on the Audit
Committee in this capacity. The Audit Committee provides assistance to the
Company's board of directors in fulfilling their responsibility to shareholders,
and investment community relating to corporate accounting, reporting practices
of the Company, and the quality and integrity of the financial reports of the
Company. The Audit Committee, among other duties, recommends to the Company's
board of directors the independent auditors to be selected to audit the
financial statements of the Company; meets with the independent auditors and
financial management of the Company to review the scope of the proposed audit
for the current year and the audit procedures to be utilized; reviews with the
independent auditors, and financial and accounting personnel, the adequacy and
effectiveness of the accounting and financial controls of the Company; and
reviews the financial statements contained in the annual report to shareholders
with management and the independent auditors.
Pursuant to an exemption for foreign private issuers, we are not required to
comply with many of the corporate governance requirements of the New York Stock
Exchange that are applicable to U.S. listed companies. A description of the
significant differences between our corporate governance practices and the New
York Stock Exchange requirements is available on our website www.nat.bm under
"Corporate Governance".
D. EMPLOYEES
As at December 31, 2005, the Company had one full-time employee and one
part-time employee.
E. SHARE OWNERSHIP
The following table sets forth information regarding the share ownership of the
Company as of June 26, 2006 by its directors and officers. All of the
shareholders are entitled to one vote for each share of common stock held.
Title Identity of Person No. of Shares Percent of Class
Common Herbjorn Hansson(1) 555,594 2.64%
Hon. Sir David Gibbons *
Thorbjorn Gladso *
Andrew W. March *
Paul J. Hopkins *
George C. Lodge *
Andreas Ove Ugland(1) 520,594 2.47%
Turid M. Sorensen *
Rolf Amundsen *
(1) Includes 520,594 shares held by the Manager, of which Messrs. Hansson
and Ugland are sole shareholders.
* Less than 1% of our outstanding shares of common stock.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
According to a Schedule 13G filed on March 31, 2005, Gilder, Gagnon, Howe & Co.
LLC owned 748,559 or 5.9%, as reported in that Schedule 13G, of the Company's
common shares. According to a Schedule 13G filed on June 30, 2005, Gilder,
Gagnon, Howe & Co. LLC own 263,545 or 2.7%, as reported in that Schedule 13G, of
the Company's common shares.
B. RELATED PARTY TRANSACTIONS
Since May 30, 2003, Scandic American Shipping Ltd., which is owned by Messrs.
Ugland and Hansson, has been our Manager pursuant to the Management Agreement
with the Company. See Item 4--Information on the Company -- Business Overview --
The Management Agreement.
Mr. Jan Erik Langangen, Executive Vice President of the Manager, is a partner of
Langangen & Helset Advokatfirma AS which in the past has also provided and may
continue to provide legal services to us.
C. INTERESTS OF EXPERTS AND COUNSEL
Not Applicable
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18
Legal Proceedings
To the best of the Company's knowledge, the Company is not currently involved in
any legal or arbitration proceedings that would have a significant effect on the
Company's financial position or profitability and no such proceedings are
pending or known to be contemplated by governmental authorities.
Dividend Policy
Our policy is to declare quarterly dividends to shareholders, substantially
equal to our net operating cash flow during the previous quarter after reserves
as the Board of Directors may from time to time determine are required, taking
into account contingent liabilities, the terms of our New Credit Facility, our
other cash needs and the requirements of Bermuda law. However, if we declare a
dividend in respect of a quarter in which an equity issuance has taken place, we
calculate the dividend per share as our net operating cash flow for the quarter
(after taking into account the factors described above) divided by the weighted
average number of shares over that quarter. Net operating cash flow represents
net income plus depreciation and non-cash administrative charges. The dividend
paid is the calculated dividend per share multiplied by the number of shares
outstanding at the end of the quarter.
Total dividend paid out in 2005 was $64,279,487 or $4.21 per share. The dividend
payments per share in 2005, 2004, 2003, 2002 and 2001 have been as follows:
Period 2005 2004 2003 2002 2001
1st Quarter $1.62 $1.15 $0.63 $0.36 $1.41
2nd Quarter 1.15 1.70 1.27 0.34 1.19
3rd Quarter 0.84 0.88 0.78 0.33 0.72
4th Quarter 0.60 1.11 0.37 0.32 0.55
Total $4.21 $4.84 $3.05 $1.35 $3.87
The dividend paid out in a quarter is based on the results of the previous
quarter.
The Company declared a dividend of $1.88 per share for the first quarter of 2006
which was paid to shareholders in February 2006. In addition, the Company
declared a dividend of $1.58 per share for the second quarter of 2006, which was
paid to shareholders in May 2006.
B. SIGNIFICANT CHANGES
Not applicable
ITEM 9. THE OFFER AND LISTING
Not applicable except for Item 9.A.4. and Item 9.C
Price Range of Common Shares
Since November 16, 2004, the primary trading market for our common shares has
been the New York Stock Exchange, or the NYSE, on which our shares are listed
under the symbol "NAT." The primary trading market for our common shares was the
American Stock Exchange, or the AMEX, until November 15, 2004, at which time
trading of our common shares on the AMEX ceased. The secondary trading market
for our common shares was the Oslo Stock Exchange, or the OSE, until January 14,
2005, at which time trading of our common share on the OSE ceased.
The following table sets forth the high and low closing prices for shares of our
common stock as reported by the New York Stock Exchange, the American Stock
Exchange and the Oslo Stock Exchange:
NYSE NYSE AMEX AMEX OSE OSE
The year ended: HIGH LOW HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------
2001 N/A N/A $22.89 $13.00 NOK 215.00 NOK 125.00
2002 N/A N/A $16.55 $ 9.86 NOK 145.00 NOK 90.00
2003 N/A N/A $16.90 $11.25 NOK 125.00 NOK 90.00
2004 $41.30 $35.26 $41.59 $15.00 NOK 300.00 NOK 115.00
2005 (1) $56.68 $28.60 N/A N/A NOK 225.00 NOK 205.00
AMEX AMEX NYSE NYSE OSE OSE
For the quarter ended: HIGH LOW HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------
March 31, 2004 $27.10 $15.00 N/A N/A NOK 179.00 NOK 115.00
June 30, 2004 $34.59 $21.25 N/A N/A NOK 225.00 NOK 160.00
September 30, 2004 $37.75 $25.00 N/A N/A NOK 249.00 NOK 210.00
December 31, 2004 (1) $41.59 $31.15 $41.30 $35.26 NOK 300.00 NOK 214.00
March 31, 2005 (1) N/A N/A $56.68 $35.95 NOK 225.00 NOK 205.00
June 30, 2005 N/A N/A $49.79 $37.48 N/A N/A
September 30, 2005 N/A N/A $46.48 $37.30 N/A N/A
December 31, 2005 N/A N/A $37.90 $28.60 N/A N/A
- --------------------------------------------------------------------------------
(1) The AMEX figures are based on trading from the beginning of the
quarter through November 15, 2004 and the NYSE figures are based on
trading from November 16, 2004 through the end of the quarter. The
OSE numbers for 2005 are based on trading through January 14, 2005
The high and low market prices for our common shares by month since December
2005 have been as follows:
NYSE NYSE
For the month: HIGH LOW
- --------------------------------------------------------------------------------
January 2006 $32.50 $29.00
February 2006 $36.92 $28.83
March 2006 $31.11 $27.90
April 2006 $33.53 $28.50
May 2006 $35.99 $29.65
June 1 - June 26, 2006 $35.58 $31.51
C. MARKETS
See Item 9A above.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not Applicable
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The following description of our capital stock summarizes the material terms of
our Memorandum of Association and our bye-laws.
Under our Memorandum of Association, as amended, our authorized capital consists
of 51,200,000 common shares having a par value of $0.01 per share.
The purposes and powers of the Company are set forth in Items 6 and 7 of our
Memorandum of Association and in paragraphs (b) to (n) and (p) to (u) of the
Second Schedule of the Bermuda Companies Act of 1981 (the "Companies Act") which
is attached as an exhibit to our Memorandum of Association. These purposes
include the entering into of any guarantee, contract, indemnity or suretyship
and to assure, support, secure, with or without the consideration or benefit,
the performance of any obligations of any person or persons; and the borrowing
and raising of money in any currency or currencies to secure or discharge any
debt or obligation in any manner.
Our bye-laws provide that our board of directors shall convene and the Company
shall hold annual general meetings in accordance with the requirements of the
Companies Act at such times and places as the Board shall decide. Our board of
directors may call special meetings at its discretion or as required by the
Companies Act. Under the Companies Act, holders of one-tenth of our issued
common shares may call special meetings of shareholders.
Bermuda law permits the bye-laws of a Bermuda company to contain a provision
eliminating personal liability of a director or officer to the company for any
loss arising or liability attaching to him by virtue of any rule of law in
respect of any negligence default, breach of duty or breach of trust of which
the officer or person may be guilty. Bermuda law also grants companies the power
generally to indemnify directors and officers of the company if any such person
was or is a party or threatened to be made a party to a threatened, pending or
completed action, suit or proceeding by reason of the fact that he or she is or
was a director and officer of the company or was serving in a similar capacity
for another entity at the company's request.
Our bye-laws do not prohibit a director from being a party to, or otherwise
having an interest in, any transaction or arrangement with the Company or in
which the Company is otherwise interested. Our bye-laws provide that a director
who has an interest in any transaction or arrangement with the Company and who
has complied with the provisions of the Companies Act and with our bye-laws with
regard to disclosure of such interest shall be taken into account in
ascertaining whether a quorum is present, and will be entitled to vote in
respect of any transaction or arrangement in which he is so interested. Our
bye-laws provide our board of directors the authority to exercise all of the
powers of the Company to borrow money and to mortgage or charge all or any part
of our property and assets as collateral security for any debt, liability or
obligation. Our directors are not required to retire because of their age, and
our directors are not required to be holders of our common shares. Directors
serve for one year terms, and shall serve until re-elected or until their
successors are appointed at the next annual general meeting.
Our bye-laws provide that each director, alternate director, officer, person or
member of a committee, if any, resident representative, or his heirs, executors
or administrators, which we refer to collectively as an indemnitee, will be
indemnified and held harmless out of our funds to the fullest extent permitted
by Bermuda law against all liabilities, loss, damage or expense (including
liabilities under contract, tort and statute or any applicable foreign law or
regulation and all reasonable legal and other costs and expenses properly
payable) incurred or suffered by him as such director, alternate director,
officer, person or committee member or resident representative (or in his
reasonable belief that he is acting as any of the above). In addition, each
indemnitee shall be indemnified against all liabilities incurred in defending
any proceedings, whether civil or criminal, in which judgment is given in such
indemnitee's favor, or in which he is acquitted.
There are no pre-emptive, redemption, conversion or sinking fund rights attached
to our common shares. The holders of common shares are entitled to one vote per
share on all matters submitted to a vote of holders of common shares. Unless a
different majority is required by law or by our bye-laws, resolutions to be
approved by holders of common shares require approval by a simple majority of
votes cast at a meeting at which a quorum is present.
Special rights attaching to any class of our shares may be altered or abrogated
with the consent in writing of not less than 75% of the issued and outstanding
shares of that class or with the sanction of a resolution passed at a separate
general meeting of the holders of such shares voting in person or by proxy.
Our Memorandum of Association and our bye-laws may be amended upon the consent
of not less than two-thirds of the issued and outstanding common shares.
In the event of our liquidation, dissolution or winding up, the holders of
common shares are entitled to share in our assets, if any, remaining after the
payment of all of our debts and liabilities, subject to any liquidation
preference on any outstanding preference shares.
Our bye-laws provide that our board of directors may, from time to time, declare
and pay dividends out of contributed surplus. Each common share is entitled to
dividends if and when dividends are declared by our board of directors, subject
to any preferred dividend right of the holders of any preference shares.
There are no limitations on the right of non-Bermudians or non-residents of
Bermuda to hold or vote our common shares.
Our bye-laws permit the Company to refuse to register the transfer of any common
shares if the effect of that transfer would result in 50% or more of our
aggregated issued share capital, or 50% or more of the outstanding voting power
being held by persons who are resident for tax purposes in Norway or the United
Kingdom.
Our bye-laws permit the Company to increase its capital, from time to time, with
the consent of not less than two-thirds of the outstanding voting power of the
Company's issued and outstanding common shares.
C. MATERIAL CONTRACTS
On May 30, 2003, the Company's shareholders approved a novation agreement by
which the Management Agreement was novated from UNS to our Manager and
thereafter the contract period was extended to 2019.
For a description of our New Credit Facility, see Item 4 -- Information on the
Company -- Business Overview -- Our Credit Facility.
Otherwise, the Company has not entered into any material contracts outside the
ordinary course of business during the past two years.
D. EXCHANGE CONTROLS
The Company has been designated as a non-resident of Bermuda for exchange
control purposes by the Bermuda Monetary Authority, whose permission for the
issue of the Common Shares was obtained prior to the offering thereof.
The transfer of shares between persons regarded as resident outside Bermuda for
exchange control purposes and the issuance of Common Shares to or by such
persons may be effected without specific consent under the Bermuda Exchange
Control Act of 1972 and regulations thereunder. Issues and transfers of Common
Shares involving any person regarded as resident in Bermuda for exchange control
purposes require specific prior approval under the Bermuda Exchange Control Act
1972.
Subject to the foregoing, there are no limitations on the rights of owners of
the Common Shares to hold or vote their shares. Because the Company has been
designated as non-resident for Bermuda exchange control purposes, there are no
restrictions on its ability to transfer funds in and out of Bermuda or to pay
dividends to United States residents who are holders of the Common Shares, other
than in respect of local Bermuda currency.
In accordance with Bermuda law, share certificates may be issued only in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, the Company
is not bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust.
The Company will take no notice of any trust applicable to any of its shares or
other securities whether or not it had notice of such trust.
As an "exempted company", the Company is exempt from Bermuda laws which restrict
the percentage of share capital that may be held by non-Bermudians, but as an
exempted company, the Company may not participate in certain business
transactions including: (i) the acquisition or holding of land in Bermuda
(except that required for its business and held by way of lease or tenancy for
terms of not more than 21 years) without the express authorization of the
Bermuda legislature; (ii) the taking of mortgages on land in Bermuda to secure
an amount in excess of $50,000 without the consent of the Minister of Finance of
Bermuda; (iii) the acquisition of securities created or issued by, or any
interest in, any local company or business, other than certain types of Bermuda
government securities or securities of another "exempted company, exempted
partnership or other corporation or partnership resident in Bermuda but
incorporated abroad; or (iv) the carrying on of business of any kind in Bermuda,
except in so far as may be necessary for the carrying on of its business outside
Bermuda or under a license granted by the Minister of Finance of Bermuda.
There is a statutory remedy under Section 111 of the Companies Act 1981 which
provides that a shareholder may seek redress in the Bermuda courts as long as
such shareholder can establish that the Company's affairs are being conducted,
or have been conducted, in a manner oppressive or prejudicial to the interests
of some part of the shareholders, including such shareholder. However, this
remedy has not yet been interpreted by the Bermuda courts.
The Bermuda government actively encourages foreign investment in "exempted"
entities like the Company that are based in Bermuda but do not operate in
competition with local business. In addition to having no restrictions on the
degree of foreign ownership, the Company is subject neither to taxes on its
income or dividends nor to any exchange controls in Bermuda. In addition, there
is no capital gains tax in Bermuda, and profits can be accumulated by the
Company, as required, without limitation. There is no income tax treaty between
the United States and Bermuda pertaining to the taxation of income other than
applicable to insurance enterprises.
E. TAXATION
The Company is incorporated in Bermuda. Under current Bermuda law, the Company
is not subject to tax on income or capital gains, and no Bermuda withholding tax
will be imposed upon payments of dividends by the Company to its shareholders.
No Bermuda tax is imposed on holders with respect to the sale or exchange of
Shares. Furthermore, the Company has received from the Minister of Finance of
Bermuda under the Exempted Undertakings Tax Protection Act 1966, as amended, an
assurance that, in the event that Bermuda enacts any legislation imposing any
tax computed on profits or income, including any dividend or capital gains
withholding tax, or computed on any capital asset, appreciation, or any tax in
the nature of an estate, duty or inheritance tax, then the imposition of any
such tax shall not be applicable. The assurance further provides that such
taxes, and any tax in the nature of estate duty or inheritance tax, shall not be
applicable to the Company or any of its operations, nor to the shares,
debentures or other obligations of the Company, until March 2016.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable
G. STATEMENT BY EXPERTS
Not Applicable
H. DOCUMENTS ON DISPLAY
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements we file
reports and other information with the Securities and Exchange Commission. These
materials, including this annual report and the accompanying exhibits may be
inspected and copied at the public reference facilities maintained by the
Commission at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may
obtain information on the operation of the public reference room by calling 1
(800) SEC-0330, and you may obtain copies at prescribed rates from the Public
Reference Section of the Commission at its principal office in Washington, D.C.
The SEC maintains a website (http://www.sec.gov.) that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC. In addition, documents referred to in this annual
report may be inspected at the Company's headquarters at Thistle House 4 Burnaby
Street Hamilton, HM11 Bermuda.
We furnish holders of our common shares with annual reports containing audited
financial statements and a report by our independent public accountants, and
intend to make available quarterly reports containing selected unaudited
financial data for the first three quarters of each fiscal year. The audited
financial statements will be prepared in accordance with United States generally
accepted accounting principles. As a "foreign private issuer," we are exempt
from the rules under the Securities Exchange Act prescribing the furnishing and
content of proxy statements to shareholders. While we intend to furnish proxy
statements to shareholders in accordance with the rules of the New York Stock
Exchange, those proxy statements do not conform to Schedule 14A of the proxy
rules promulgated under the Exchange Act. All reports, proxy statements and
other information filed by us with the New York Stock Exchange may be inspected
at the New York Stock Exchange's offices at 20 Broad Street, New York, New York
10005. In addition, as a "foreign private issuer," we are exempt from the rules
under the Exchange Act relating to short swing profit reporting and liability.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates related to
the variable rate of the Company's borrowings, or the Loan under our New Credit
Facility.
Amounts borrowed under the New Credit Facility bears interest at a rate equal to
LIBOR plus a margin between 0.70% to 1.20% per year (depending on the loan to
vessel value ratio). Increasing interest rates could affect our future
profitability. In certain situations, the Company may enter into financial
instruments to reduce the risk associated with fluctuations in interest rates.
A 100 basis point increase in LIBOR would have resulted in an increase of
approximately $0.4 million in our interest expense for the year ended December
31, 2005.
The Company is exposed to the spot market. Historically, the tanker markets have
been volatile as a result of the many conditions and factors that can affect the
price, supply and demand for tanker capacity. Changes in demand for
transportation of oil over longer distances and supply of tankers to carry that
oil may materially affect our revenues, profitability and cash flows. Eight of
our nine vessels are currently operated in the spot market or on spot market
related time charters. We believe that over time, spot employment generates
premium earnings compared to longer-term employment.
We estimate that during 2005, a $1,000 per day decrease in the spot market rate
would have decreased our voyage revenue by approximately $1.8 million.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not Applicable
ITEM 15. CONTROLS AND PROCEDURES.
We evaluated the effectiveness of the Company's disclosure controls and
procedures as December 31, 2005. Based on that evaluation, the chief executive
officer and the chief financial officer concluded that the Company's disclosure
controls and procedures were effective to provide reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms. The
Company believes that a system of controls, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
are met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
or
There have been no changes in internal controls over financial reporting
(identified in connection with management's evaluation of such internal controls
over financial reporting) that occurred during the year covered by this annual
report that has materially affected, or is reasonably likely to materially
affect, the Company's internal controls over financial reporting.
ITEM 16. RESERVED.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that Mr. Torbjorn Gladso is an audit
committee financial expert. Mr. Gladso is "independent" as determined in
accordance with the rules of the New York Stock Exchange.
ITEM 16B. CODE OF ETHICS.
The Company has adopted a code of ethics that applies to all of the Company's
employees, including our principal executive officer, principal accounting
officer or controller. The Code may be downloaded at our website (www.nat.bm).
Additionally, any person, upon request, may ask for a hard copy of electronic
file of the Code. If we make any substantive amendment to the Code of Ethics or
grant any waivers, including any implicit waiver, from a provision of our Code
of Ethics, we will disclose the nature of that amendment or waiver on our
website. During the year ended December 31, 2005, no such amendment was made or
waiver granted.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The Company's Board of Directors has established preapproval and procedures for
the engagement of the Company's independent public accounting firms for all
audit and non-audit services.The following table sets forth, for the two most
recent fiscal years, the aggregate fees billed for professional services
rendered by our principal accountant, Deloitte Statsautoriserte Revisorer AS,
for the audit of the Company's annual financial statements and services provided
by the principal accountant in connection with statutory and regulatory filings
or engagements for the two most recent fiscal years.
FISCAL YEAR ENDED DECEMBER 31, 2005 $71,400
FISCAL YEAR ENDED DECEMBER 31, 2004 $49,700
(b) Audit-Related Fees (1)
FISCAL YEAR ENDED DECEMBER 31, 2005 $150,455
FISCAL YEAR ENDED DECEMBER 31, 2004 $90,400
(1) Audit-Related-Fees consists of accounting consultations related to
accounting, financial reporting or disclosure matters not classified
as "Audit Services".
(c) Tax Fees
Not applicable
(d) All Other Fees
Not applicable.
(e) Audit Committee's Pre-Approval Policies and Procedures
Our audit committee pre-approves all audit, audit-related and non-audit services
not prohibited by law to be performed by our independent auditors and associated
fees prior to the engagement of the independent auditor with respect to such
services.
(f) Not applicable.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PERSONS.
Not Applicable
PART III
ITEM 17. FINANCIAL STATEMENTS
See item 18.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 through F-11
NORDIC AMERICAN TANKER SHIPPING LIMITED
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS F-3
Balance Sheets F-3
Statements of Operations F-4
Statements of Cash Flows F-5
Statements of Shareholders' Equity F-6
Notes to Financial Statements F-7
To the shareholders of Nordic American Tanker Shipping Limited
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Nordic American Tanker Shipping
Limited Bermuda
We have audited the accompanying balance sheets of Nordic American Tanker
Shipping Ltd. (the "Company") as of December 31, 2005 and 2004, and the related
statements of operations, statements of shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined that it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2005 and
2004, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.
Oslo, Norway, May 18, 2006
Deloitte Statsautoriserte Revisorer AS
BALANCE SHEETS
All figures in USD
Notes Dec. 31, 2005 Dec. 31, 2004
- --------------------------------------------------------------------------------
Assets
Current Assets
Cash and Cash Equivalents 14,240,482 30,732,516
Accounts Receivables, net 4 19,556,725 4,539,354
Voyages in Progress 2,445,906 0
Prepaid Expenses and Other Assets 5 3,147,527 1,479,710
Total Current Assets 39,390,640 36,751,580
---------------------------------
Long-term Assets
Vessels, net 6 463,933,101 187,301,038
Other Long-term Assets 2,520,712 150,793
Total Long-term Assets 466,453,813 187,451,831
---------------------------------
Total Assets 505,844,453 224,203,411
---------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts Payable 1,562,188 411,366
Deferred Revenue 11 537,055 1,286,070
Accrued Liabilities 2,873,039 637,582
Total Current Liabilities 12 4,972,282 2,335,018
---------------------------------
Long-term Liabilities
Long-term Debt 9 130,000,000 0
Total Long-term Liabilities 130,000,000 0
---------------------------------
Shareholders' Equity
Common Shares, 13 166,445 130,678
par value $0.1 per share,
issued and outstanding
(51,200,000 shares authorized);
16,644,496 shares issued and
outstanding, (13,067,838 issued
and outstanding in 2004)
Additional Paid-in Capital 432,682,337 265,752,581
Accumulated Deficit (61,976,611) (44,014,866)
Total Shareholders' Equity 370,872,171 221,868,393
Total Liabilities & Shareholders' Equity 505,844,453 224,203,411
---------------------------------
The footnotes are an integral part of these financial statements
STATEMENTS OF OPERATIONS
All figures in USD
Year Ended December 31,
Notes 2005 2004 2003
- --------------------------------------------------------------------------------
Voyage Revenue 3 117,110,178 67,451,598 37,370,756
Voyage Expenses (30,980,916) (4,925,353) (184,781)
Vessel Operating Expenses -
excluding depreciation
expense presented below (11,220,770) (1,976,766) 0
Administrative Expenses 2,7 (8,492,164) (10,851,688) (468,087)
Depreciation 6 (17,529,000) (6,918,164) (6,831,040)
Net Operating Income 48,887,328 42,779,627 29,886,848
-----------------------------------------
Interest Income 850,803 143,230 26,462
Interest Expense 9,10 (3,453,963) (1,971,304) (1,797,981)
Other Financial Income (Charges) 33,574 (135,621) (15,040)
Net Financial Items (2,569,586) (1,963,695) (1,786,559)
-----------------------------------------
Net profit before Tax 46,317,742 40,815,932 28,100,289
-----------------------------------------
Tax Expense 0 0 0
Net Profit for the Year 46,317,742 40,815,932 28,100,289
-----------------------------------------
Basic Earnings per Share 3.03 4.05 2.89
Diluted Earnings per Share 3.03 4.05 2.89
Basic Weighted Average Number
of Shares Outstanding 15,263,622 10,078,391 9,706,606
Diluted Weighted Average Number
of Shares Outstanding 15,263,622 10,078,391 9,706,606
The footnotes are an integral part of these financial statements
STATEMENTS OF CASH FLOWS
All figures in USD
Year Ended December 31,
2005 2004 2003
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Profit 46,317,742 40,815,932 28,100,289
Reconciliation of Net Profit to
Net Cash from
Operating Activities
Depreciation 17,529,000 6,918,164 6,831,040
Amortization of Prepaid Finance Costs 717,910 112,838 14,480
Share-based Compensation 3,582,995 9,252,365 0
Stock Incentive Plan 1,415,000 0 0
Increase/Decrease in:
Accounts Receivables (15,017,371) 3,602,956 (4,865,784)
Accounts Payable and Accrued Liabilities 3,386,273 1,010,626 (178,140)
Deferred Revenue (749,015) 1,286,075 0
Other Assets (6,126,946) (181,695) (8,334)
Net Cash Provided by Operating
Activities 51,055,588 62,817,261 29,893,551
-----------------------------------------
Cash Flows from Investing Activities
Investment in Vessels (294,161,063) (66,137,277) 0
Net Cash Used in Investing Activities (294,161,063) (66,137,277) 0
-----------------------------------------
Cash Flows from Financing Activities
Proceeds from Issuance of Common Stock 161,967,534 112,137,953 0
Proceeds from Use of Credit Facility 135,000,000 96,000,000 0
Repayments of Credit Facility (5,000,000) (126,000,000) 0
Loan Facility Costs (1,074,606) (1,455,503) 0
Dividends Paid (64,279,487) (47,195,842) (29,605,410)
Net Cash Provided by (Used in)
Financing Activities 226,613,441 33,486,608 (29,605,410)
-----------------------------------------
Net (Decrease) Increase in Cash,
and Cash Equivalent (16,492,034) 30,166,592 288,141
-----------------------------------------
Beginning Cash and Cash Equivalents 30,732,516 565,924 277,783
-----------------------------------------
Ending Cash and Cash Equivalents 14,240,482 30,732,516 565,924
-----------------------------------------
Cash paid for Interest 916,104 1,774,264 1,975,125
The footnotes are an integral part of these financial statements
STATEMENTS OF SHAREHOLDERS' EQUITY
All figures in USD, except where noted
Accumulated
Additional Other Total Total
No. of Common Paid-in Accumulated Comprehensive Shareholders' Comprehensive
Shares Shares Capital Deficit Loss Equity Income
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at 01.01.03 9,706,606 97,066 144,395,866 (36,129,835) (2,016,000) 106,347,097
Net Profit 28,100,289 28,100,289 28,100,289
Unrealized Loss on
Derivative Instruments (365,723) (365,723) (365,723)
Adjustment for Losses on
Derivatives Reclassified to Earnings 1,231,723 1,231,723 1,231,723
Dividend Paid (29,605,410) (29,605,410)
Total Comprehensive Income 28,966,289
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at 12.31.03 9,706,606 97,066 144,395,866 (37,634,956) (1,150,000) 105,707,976
- ------------------------------------------------------------------------------------------------------------------------------------
Net Profit 40,815,932 40,815,932 40,815,932
Common Shares Issued 3,361,232 33,612 121,356,715 121,390,327
Unrealized Loss on
Derivative Instruments (20,710) (20,710) (20,710)
Adjustment for Losses on
Derivatives Reclassified to Earnings 1,170,710 1,170,710 1,170,710
Dividend Paid (47,195,842) (47,195,842)
Total Comprehensive Income 41,965,932
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at 12.31.04 13,067,838 130,678 265,752,581 (44,014,866) 0 221,868,393
- ------------------------------------------------------------------------------------------------------------------------------------
Net Profit 46,317,742 46,317,742 46,317,742
Common Shares Issued 3,576,658 35,767 165,514,756 165,550,523
Stock Option Plan Valuation 1,415,000 1,415,000
Dividend Paid (64,279,487) (64,279,487)
Total Comprehensive Income 88,283,674
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at 12.31.05 16,644,496 166,445 432,682,337 (61,976,611) 0 370,872,171
- ------------------------------------------------------------------------------------------------------------------------------------
The footnotes are an integral part of these financial statements
NORDIC AMERICAN TANKER SHIPPING LIMITED
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP).
Nature of Business: The principal business of Nordic American Tanker Shipping
Limited (the "Company") is to own and operate crude oil tankers.
Use of Estimates: Preparation of financial statements in accordance with U.S.
GAAP necessarily includes amounts based on estimates and assumptions made by
management. Actual results could differ from those amounts. The effects of
changes in accounting estimates are accounted for in the same period as the
estimates are changed.
Concentration of Credit Risk: Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of cash and
accounts receivable. The Company maintains its cash with reputable financial
institutions. The terms of these deposits are on demand to minimize risk. The
Company has not experienced any losses related to these cash deposits and
believes it is not exposed to any significant credit risk.
Accounts receivable consist of uncollateralized receivables from international
customers primarily in the international shipping industry. To minimize risk
associated with international transactions, all sales are denominated in U.S.
currency. The Company routinely assesses the financial strength of its
customers. Accounts receivable are presented net of allowances for doubtful
accounts relating to demurrage claims. If amounts become uncollectible, they
will be charged to operations when that determination is made.
Interest Rate Risk: The Company is exposed to interest rate risk for its debt
borrowed under the New Credit Facility. In certain situations, the Company may
enter into financial instruments to reduce the risk associated with fluctuations
in interest rates. The Company has no outstanding derivatives at December 31,
2005 and has not entered into any such arrangements in 2005.
Cash and Cash Equivalents: Cash and cash equivalents consist of deposits with
original maturities of three months or less.
Foreign Currency Risk: The Company's functional currency is the U.S. dollar as
all revenues are received in U.S. dollars and the majority of the Company's
expenditures are made in U.S. dollars. The Company's reporting currency is U.S.
dollars. The Company considers currency risk to be insignificant.
Property and Equipment: Depreciation is provided on a straight-line basis over
the estimated useful lives of the assets. The Company's property and equipment
are recorded at the cost method and consist solely of vessels. The estimated
useful life of the Company's vessels is 25 years from the date the vessel is
delivered from the shipyard. Repairs and maintenance are expensed as incurred.
Impairment of Long-Lived Assets: Long-lived assets are required to be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition is less than the carrying amount of the asset, the
asset is deemed impaired. The amount of the impairment is measured as the
difference between the carrying value and the fair value of the asset.
Revenue and expense recognition: Revenue and expense recognition policies for
voyage and time charter agreements are as follows:
Bareboat: Revenues from bareboat charters are recorded at a fixed charterhire
rate per day over the term of the charter. The charterhire is payable monthly in
advance. During the charter period the charterer will be responsible for
operating and maintaining the vessel and will bear all costs and expenses with
respect to the vessel.
Time charters under spot related terms: The revenue from time charters under
spot related terms payable under the charters is based on a formula designed to
generate earnings to the Company as if the Company had operated the vessels in
the spot market on two routes used for the calculation, less 5% in commission to
the charterer. The charterhire is payable to the Company monthly. The charterer
is responsible for all voyage related costs while the Company is responsible for
providing the crew and paying other operating costs
Spot charters. Voyage revenues and voyage expenses are recognized on a pro rata
basis based on the relative transit time in each period. Estimated losses on
voyages are provided for in full at the time such losses become evident. A
voyage is deemed to commence upon the completion of discharge of the vessel's
previous cargo and is deemed to end upon the completion of discharge of the
current cargo. Voyage expenses primarily include only those specific costs which
are borne by the Company in connection with voyage charters which would
otherwise have been borne by the charterer under time charter agreements. These
expenses principally consist of fuel, canal and port charges. Demurrage income
represents payments by the charterer to the vessel owner when loading and
discharging time exceed the stipulated time in the voyage charter. Demurrage
income is measured in accordance with the provisions of the respective charter
agreements and the circumstances under which demurrage claims arise and is
recognized on a pro rata basis over the length of the voyage to which it
pertains. At December 31, 2005 and 2004, the Company has no reserves against its
due from charterers balance associated with demurrage revenues.
Pooling arrangements: Revenues and voyage expenses of the vessels operating in
pool arrangements are pooled and the resulting net pool revenues, calculated on
a time charter equivalent basis, are allocated to the pool participants
according to an agreed formula. Formulas used to allocate net pool revenues vary
among different pools but generally allocate revenues to pool participants on
the basis of the number of days a vessel operates in the pool with weighting
adjustments made to reflect vessels' differing capacities and performance
capabilities. The same revenue and expenses principles stated above are applied
in determining the pool's net pool revenues. The pool managers are responsible
for collecting voyage revenue, paying voyage expenses and distributing net pool
revenues to the participants.
Based on the guidance from EITF 99-19 earnings generated from pools in which the
Company is the principal of the pool's vessels' activities are recorded based on
gross method. Earnings generated from pools in which the Company is not regarded
as the principal of the vessels' activities are recorded as per net method.
The Company accounts for the net pool revenues allocated by these pools as
"Voyage Revenue" in its statements of operations.
Vessel Operating Expenses: Vessel Operating Expenses include crewing, repair and
maintenance, insurance, stores, lube oils and communication expenses. These
expenses are recognized when incurred.
Accounting for Drydocking Costs: The Company's vessels are required to be
drydocked approximately every 30 to 60 months for major repairs and maintenance
that cannot be performed while the vessels are in operation. The Company follows
the deferral method of accounting for drydocking costs whereby actual costs
incurred are deferred and are amortized on a straight-line basis over the period
through the date the next drydocking is scheduled to become due. Unamortized
drydocking costs of vessels that are sold are written off to income in the year
of the vessel's sale. The capitalized and unamortized drydocking costs are
included in the book value of the vessels. Amortization expense of the
drydocking costs is included in depreciation expense.
Inventories: Inventories, which comprise principally of bunker fuel, are stated
at cost which is determined on a first-in, first-out (FIFO) basis.
Financial Instruments: The fair values of cash and cash equivalents, short-term
investments, accounts receivable, and accounts payable approximate carrying
value because of the short-term nature of these instruments.
Loan Financing costs: Finance costs, including fees, commissions and legal
expenses, which are presented as other assets are capitalized and amortized on a
straight-line basis over the term of the relevant Credit Facility. Amortization
of finance costs is included in interest expense.
Segment Information: The Company has identified only one operating segment under
Statement of Financial Accounting Standards ("SFAS") No. 131 "Segments of an
Enterprise and Related Information." The Company has only one type of vessel -
Suezmax crude oil tankers - operating on time charter contracts at market
related rates, in the spot market and on long-term bareboat contract.
Geographical Segment: The Company currently operates four of its vessels in spot
market pools with other vessels that are not owned by it. The pools are managed
by third party pool administrators. The earnings of all of the vessels are
aggregated, or pooled, and divided according to the relative performance
capabilities of the vessel and the actual earning days each vessel is available.
The pool vessels are operated in the spot market by the pool administrators. As
a significant portion of the Company's vessels are operated in pools it is not
practical to allocate geographical data to each vessel and thereby not giving
meaningful information to the reader.
Derivative Instruments and Hedging Activities: The Company accounts for its
derivative instruments and hedging activities according to SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
SFAS No. 137 and SFAS No. 138. This standard, as amended, requires derivative
instruments to be recorded in the balance sheet at their fair value. Changes in
the fair value of derivatives that do not qualify for hedge treatment, as well
as ineffective portions of any hedge, are recorded to earnings. Changes in fair
value for qualifying cash flow-hedges are recorded in equity and are realized in
earnings in conjunction with the gain or loss on the hedged item or transaction.
Changes in the fair value of qualifying hedges offset corresponding changes in
the fair value of the hedged item in the statement of operations.
Share-Based Compensation: The Company has chosen early adoption of the
accounting standard No. 123 (R) "Share-Based Payment" ("SFAS123R"), which
establishes a fair value-based method of accounting for share-based compensation
plans. The adoption of the standard did not have any significant effect on the
financial statements as the Company previously used the SFAS 123. The Company
applied the modified prospective method.
Earnings per Share: SFAS No. 128 "Earnings Per Share ("EPS"),"requires EPS to be
computed and reported as both basic EPS and diluted EPS. Basic EPS is computed
by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed by dividing net income by
the weighted average number of common shares and dilutive common stock
equivalents (i.e. stock options, warrants) outstanding during the period.
The Company's average stock price during 2005 was above the average exercise
price of the options and a dilutive effect on EPS could potentially arise.
However, the proceeds of an exercise of all outstanding options calculated as
per the Treasury Stock Method would exceed the costs of acquiring shares at the
average 2005 stock price. The potential effect of the outstanding options is
therefore anti-dilutive and is not included in the numbers stated above.
Income taxes: The Company is incorporated in Bermuda. Under current Bermuda law,
the Company is not subject to corporate income taxes.
Reclassifications: Certain amounts on the balance sheets and the statement of
operations in prior year financial accounts have been reclassified to conform to
the current year presentation.
New Pronouncements: In December 2004, the FASB issued SFAS No. 153, "Exchanges
of Non-monetary Assets", an amendment of APB Opinion No. 29. The adoption of
this statement, effective June 2005, did not have any impact on the Company's
results of operations, financial position or cash flows.
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
("SFAS") No. 154, "Accounting Changes and Error Corrections", effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. SFAS 154 requires voluntary changes in accounting
principle be retrospectively applied to financial statements from previous
periods unless such application is impracticable. Under the newly issued
standard changes in depreciation, amortization, or depletion for long-lived,
non-financial assets should be accounted for as a change in accounting estimate
that is affected by a change in accounting principle. The Company believes that
the adoption of this standard will not have a material impact on the Company's
results of operations, financial position or cash flow.
2. RELATED PARTY TRANSACTIONS
The Manager, Scandic American Shipping Ltd., is jointly owned by the Chairman
and CEO of the Company, Mr. Herbjorn Hansson, and a Board Member, Mr. Andreas
Ove Ugland. The Manager, under the Management Agreement, assumes commercial and
operational responsibility of the Company's vessels and is required to manage
the Company's day-to-day business subject, always, to the Company's objectives
and policies as established from time to time by the Board of Directors. For its
services under the Management Agreement, the Manager is entitled to cover the
cost incurred plus a management fee equal to $100,000 per annum. The Manager
also has a right to 2% of the Company's total outstanding shares (see Note 8
"Share-Based Compensation"). The Company has recognized total costs of
$2,196,264 for the services provided under the Management Agreement for the year
ended December 31, 2005. The comparable amount for the years 2004 and 2003 were
$653,799 and $0 respectively. Additionally the Company recognized $3,582,995 in
non-cash share-based compensation expense during the year 2005 related to the
issuance of shares to the Manager (see Note 8 "Share-Based Compensation"). The
comparable amount for the years 2004 and 2003 was $9,252,365 and $0,
respectively. Payable at December 31, 2005 was $396,314 and payable at December
31, 2004 was $105,080. These items are included in the accounts payable. The
costs are included in administrative expenses.
Mr. Jan Erik Langangen, Executive Vice President of the Manager, is a partner of
Langangen & Helset Advokatfirma AS which in the past has also provided and may
continue to provide legal services to us. The Company has recognized costs of
$77,526 for the services provided by Langangen & Helset Advokatfirma AS in 2005.
The comparable amount for the years 2004 and 2003 was $33,435 and $3,361
respectively. Payable at December 31, 2005 was $0 and payable at December 31,
2004 was $38,157. These costs are included as administrative expenses.
3. REVENUE
For the twelve months ending December 31, 2005 the Company's only source of
income was from the Company's eight vessels. The table below shows the current
employment of the vessels. All of the Company's revenues are earned in
international markets.
Charterer*/
Vessel name Employment Commercial Operator
- ----------------------------------------------------------------------------
Gulf Scandic Bareboat Gulf Navigation*
Nordic Hawk Spot / TC BP Shipping*
Nordic Hunter Spot / TC BP Shipping*
Nordic Freedom Spot Teekay Shipping
Nordic Voyager Spot Stena Bulk
Nordic Fighter Spot Frontline
Nordic Discovery Spot Frontline
Nordic Saturn Spot OMI
- ----------------------------------------------------------------------------
One customer accounted for 37%, 97% and 100% of the Company's revenues during
the year ended December 31, 2005, 2004 and 2003, respectively.
4. ACCOUNTS RECEIVABLE
2005 2004
---------------------------------------------------------------------------
BP Shipping 4,030,009 4,310,979
Gulf Navigation Company 0 189,114
Gemini Tankers Ltd 2,725,145 0
Stena Bulk 5,192,581 0
Frontline 4,628,353 0
Teekay Shipping Corporation 2,980,637 0
Others < 10% 0 39,261
---------------------------------------------------------------------------
Total Accounts Receivable 19,556,725 4,539,354
There is no allowance for doubtful accounts as at December 31, 2005 and 2004.
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
2005 2004
---------------------------------------------------------------------------
Bunkers and lubricants inventory 2,136,762 0
Other < 5% 1,010,765 1,479,710
---------------------------------------------------------------------------
Total as per December 31, 3,147,527 1,479,710
6. PROPERTY AND EQUIPMENT
Property and equipment consist of eight modern double hull Suezmax crude oil
tankers. Depreciation is calculated on a straight-line basis over the estimated
useful life of the vessels. The estimated useful life of a new vessel is 25
years.
2005 2004
---------------------------------------------------------------------------
Opening Balance 236,913,247 170,775,970
Acquisitions 294,161,063 66,137,277
---------------------------------------------------------------------------
Closing Balance 531,074,310 236,913,247
Opening Balance (49,612,209) (42,694,045)
Depreciation (17,529,000) (6,918,164)
---------------------------------------------------------------------------
Closing Balance (67,141,209) (49,612,209)
---------------------------------------------------------------------------
Net Book Value as per December 31, 463,933,101 187,301,038
Included in the above amounts as at December 31, 2005 are drydocking charges and
ballast tank improvements with a net book value of $2.2 million. Depreciation
expenses for drydocking and ballast tank improvements were $0.16 million. There
were no such charges for the comparable period of 2004. The Company's vessels
are mortgaged for amounts owing under the New Credit Facility.
7. ADMINISTRATIVE EXPENSES
2005 2004 2003
---------------------------------------------------------------------------
Management fee 100,000 175,000 250,000
Directors and officers insurance 121,427 112,500 101,666
Salary and wages 635,393 165,490 0
Audit, legal and consultants 678,858 587,831 106,281
Outsourced administrative services 1,460,871 313,309 0
Share-based compensation 3,582,995 9,252,365 0
2004 Stock Incentive Plan 1,415,000 0 0
Other fees and expenses 497,620 245,193 10,140
---------------------------------------------------------------------------
Total administrative expenses 8,492,164 10,851,688 468,087
The decrease in total administrative expenses is due to the decrease in
share-based compensation caused by the change in the terms of the Management
Agreement with the Manager effective from October 2004. The Management Agreement
formerly provided that the Manager would receive 1.25% of any gross charterhire
paid to the Company. In order to further align the Manager's interests with
those of the Company, the Manager agreed with us to amend the Management
Agreement to eliminate this payment. The Company issued to the Manager in
October 2004 restricted common shares equal to 2% of the Company's outstanding
common shares. Any time additional common shares are issued, the Manager will
receive additional restricted common shares to maintain the number of common
shares issued to the Manager at 2% of our total outstanding common shares. In
connection with the follow-on offering in March 2005, restricted shares were
issued to the Manager in accordance with the Management Agreement. The
share-based compensation expense related to the issuance of restricted shares to
the Manager of $3,582,995 in 2005 was classified as administrative expenses.
The decrease in share-based compensation is offset by increase in other
administrative expenses due to the change in operating structure as of October
2004 from a passive leasing company into an operating company.
8. SHARE-BASED COMPENSATION
2004 Stock Incentive Plan
Under the terms of the Company's 2004 Stock Incentive Plan, or the Plan, the
directors, officers and certain key employees of the Company and the Manager
will be eligible to receive awards which include incentive stock options,
non-qualified stock options, stock appreciation rights, dividend equivalent
rights, restricted stock, restricted stock units and performance shares. The
Company believes that such awards better align the interests of its employees
with those of its shareholders. A total of 400,000 common shares are reserved
for issuance upon exercise of options, as restricted share grants or otherwise
under the plan. A total of 320,000 options have been issued as at December 31,
2005.
Stock option awards were granted with an exercise price equal to the market
price of the Company's common shares at the date of a public offering in
November 2004, with later adjustments when dividends to shareholders exceed 3%
of the initial stock option exercise price. Stock option awards generally vest
equally over four years from grant date and have a 10-year contractual term.
The fair value of each option award is estimated on the date of grant using the
Black & Scholes option valuation model that uses the assumptions noted in the
following table. Stock options to non-employees are measured at each reporting
date and fair value is estimated with the same model used for estimating fair
value of the options granted to employees. Because the option valuation model
incorporates ranges of assumptions for inputs, those ranges are disclosed.
Expected volatilities are based on implied volatilities from historical
volatility of the Company's stock and other factors. Expected life of the
options is estimated to be equal to the vesting period for employees when
calculating the fair value of the options. When calculating the fair value of
the options issued to non-employees the expected life is equal to the actual
life of options. The Company recognizes the compensation cost for stock options
issued to non-employees over the service period, which is considered to be equal
to the vesting period.
Stock options to employees are measured at fair value at the grant date and the
compensation cost is recognized on a straight-line basis over the vesting
period. The assumptions used when estimating the fair value at grant date are
specified in the table below.
Stock options to non-employees are measured at fair value at the balance sheet
date and the assumptions used are specified separately in the table below.
The risk-free rate for periods within the contractual life of the stock options
is based on the U.S. Treasury yield curve in effect at the time of grant for
options to employees. The risk-free rate at year-end is used for stock options
issued to non-employees.
12.31.2005 12.31.2005
- -----------------------------------------------------------------------
Weighted average figures Employees Non-employees
- -----------------------------------------------------------------------
Expected volatility 42.60% 42.08%
Expected dividends 3% 3%
Expected life 3.81 9.27
Risk-free rate (range) 3.52% - 4.43% 4.53% - 4.61%
A summary of option activity under the Plan as of December 31, 2005, and changes
during the year then ended is presented below:
Shares Shares Weighted-average
Options employees non-employees exercise price
- --------------------------------------------------------------------------------
Outstanding at January 1, 2005 - -
Granted 240,000 80,000 $35.70
Exercised - -
Forfeited or expired - -
Outstanding at December 31, 2005 240,000 80,000 $35.70
Exercisable at December 31, 2005 55,000 12,500 $35.70
Outstanding and exercisable stock options as at December 31, 2005 have a
weighted-average remaining term of 9.07 years for employees and 9.30 for
non-employees. The exercise price for outstanding stock options as at December
31, 2005 is $35.70.
Weighted-
average Weighted-average
grant-date Options- grant-date
Options- fair value Non- fair value-
Employees -Employees employees Non-employees
- -------------------------------------------------------------------------------------------------
Non-vested at January 1, 2005 - - - -
Granted during the year 240,000 $18.44 80,000 $22.93
Vested during the year (55,000) $18.65 (12,500) $29.29
Forfeited during the year - - - -
Estimated forfeitures unvested - - - -
Non-vested at December 31, 2005 185,000 $18.38 67,500 $21.75
Please refer to Note 7 in regards to the compensation cost related to the Plan
recognized in the profit and loss account. Unrecognized compensation cost
related to the Plan is $3,831,763 as at December 31, 2005. That cost is expected
to be recognized over a weighted-average period of 1.95 years.
Restricted Shares
The Management Agreement formerly provided that the Manager would receive 1.25%
of any gross charterhire paid to us. In order to further align the Manager's
interests with those of the Company, the Manager agreed with us to amend the
Management Agreement, effective October 12, 2004, to eliminate this payment, and
we have issued to the Manager restricted common shares equal to 2% of our
outstanding common shares at par value of $0.01 per share. Any time additional
common shares are issued, the Manager will receive additional restricted common
shares to maintain the number of common shares issued to the Manager at 2% of
our total outstanding common shares. These restricted shares are
non-transferable for three years from issuance. During 2005 the Company has
issued to the Manager 76,658 shares at an average fair value of $46.74. The
share-based compensation expense related to the issuance of restricted shares to
the Manager of $3,582,995 in 2005 was classified as administrative expenses.
The shares are considered restricted as the holders of the shares cannot dispose
of them for three years from issuance.
9. LONG-TERM DEBT
In September 2005, the Company entered into a new $300 million revolving credit
facility, which is referred to as the New Credit Facility. The New Credit
Facility became effective as of October 2005 and replaced the previous credit
facility from October 2004, a portion of which was set to mature in October
2005. The New Credit Facility will mature in September 2010.
The New Credit Facility provides funding for future vessel acquisitions and
general corporate purposes. The New Credit Facility cannot be reduced by the
lender and there is no repayment obligation of the principal during the five
year term. Amounts borrowed under the New Credit Facility bear interest at a
rate equal to LIBOR plus a margin between 0.70% and 1.20% (depending on the loan
to vessel value ratio). The Company pays a commitment fee of 30% of the
applicable margin on any undrawn amounts.
Borrowings under the Credit Facility are secured by mortgages over our vessels
and assignment of earnings and insurance. We will be able to pay dividends in
accordance with our dividend policy as long as we are not in default under the
Credit Facility.
In February 2005, the Company borrowed $5.0 million under the previous Credit
Facility to finance part of the purchase price of the second vessel that was
acquired in February 2005. The borrowings were repaid in March 2005.
In September 2005, the Company borrowed $60.0 million under the previous credit
facility to finance part of the purchase price of the seventh vessel that was
acquired in August 2005, and $7.0 million to finance the down payment for the
acquisition of the eighth vessel that was acquired in November 2005.
In October 2005, the Company refinanced the borrowings of $67.0 million under
our previous credit facility by drawing on the New Credit Facility.
In November 2005, the Company borrowed $63.0 million under the New Credit
Facility to finance part of the purchase price of the eighth vessel that was
acquired in September 2005.
Accrued interest as per December 31, 2005 is $900,000 and is payable during the
first quarter of 2006.
10. FINANCIAL ITEMS
Interest expense consists of interest expense on the long-term debt, commitment
fee and loan financing costs related to the $300 million New Credit Facility.
The $130 million borrowed bears an interest rate equal to LIBOR plus a margin
between 0.7% and 1.2%. The loan financing costs are expenses incurred in
connection with the refinancing of the New Credit Facility. These charges are
amortized over the term of the New Credit Facility on a straight-line basis.
Amortization of loan costs is included in the interest expense. The amortization
of loan financing costs was for the years 2005, 2004 and 2003 $717,910, $112,838
and $14,480 respectively. Total capitalized loan financing costs are $1,713,835
as per December 31, 2005 and as per December 31, 2004 $1,357,140.
The amortization of loan financing costs for the years 2006 to 2009 are $364,000
per year and $257,835 for the year 2010.
The commitment fee is based on 30% of the applicable margin on any undrawn
amounts.
11. DEFERRED REVENUE
Deferred revenue of $537,055 represents prepaid freight received from one of the
Company's customers prior to December 31, 2005, for services to be rendered
during January 2006.
12. TOTAL CURRENT LIABILITIES
2005 2004
----------------------------------------------------------------------------
Accounts Payable 751,977 411,366
Accounts Payable, Technical & Commercial Managers 784,425 0
Deferred Revenue 537,055 1,286,070
Accrued Interests 1,170,044 0
Accrued Expenses, Technical & Commercial Managers 1,459,445 0
Other Current Liabilities <5% 269,336 637,582
----------------------------------------------------------------------------
Total Current Liabilities 4,972,282 2,335,018
13. STOCK HOLDERS' EQUITY
Authorized, and issued and outstanding common shares roll-forward is as follows:
Issued and
Authorized Outstanding
Shares Shares
-------------------------------------------------------------------
Balance at 01.01.04 51,200,000 9,706,606
Issuance of Common
Shares in
Secondary Offering 3,105,000
Share-based Compensation 256,232
-------------------------------------------------------------------
Balance at 12.31.04 51,200,000 13,067,838
-------------------------------------------------------------------
Issuance of Common
Shares in
Secondary Offering 3,500,000
Share-based Compensation 76,658
-------------------------------------------------------------------
Balance at 12.31.05 51,200,000 16,644,496
-------------------------------------------------------------------
The total issued and outstanding shares as of December 31, 2005 were 16,644,496
shares of which 332,890 shares were restricted as described in Note 8. The total
issued and outstanding shares as of December 31, 2004 were 13,067,838 shares of
which 256,232 shares were restricted as described in Note 8.
14. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
In 2003, the Company had outstanding a $30 million variable rate loan that was
repaid in November 2004. The Company had hedged the variable interest exposure
by an interest rate swap whereby the Company paid a fixed interest rate and
received a variable interest (LIBOR). The interest rate swap was designated as a
cash flow hedge of the interest payments on the loan. The interest rate swap
matured in 2004. The Company did not hold any derivative instruments at December
31, 2005.
The effective portion of gains and losses on the interest rate swap designated
as a cash flow hedge was deferred to accumulated other comprehensive income and
was reclassified to earnings as the hedged interest payments were recognized.
The Company reclassified $1,170,000 from accumulated other comprehensive income
to earnings in 2004. The reclassified loss was included in interest expense.
The fair value of the swap was recorded as a liability of $1,150,000 at December
31, 2003.
15. COMMITMENTS AND CONTINGENCIES
Litigation and Environmental Matters -The Company may be a party to various
legal proceedings generally incidental to its business and is subject to a
variety of environmental and pollution control laws and regulations. As is the
case with other companies in similar industries, the Company faces exposure from
actual or potential claims and legal proceedings. Although the ultimate
disposition of legal proceedings cannot be predicted with certainty, it is the
opinion of the Company's management that the outcome of any claim which might be
pending or threatened, either individually or on a combined basis, will not have
a materially adverse effect on the financial position of the Company, but could
materially affect the Company's results of operations in a given year.
16. SUBSEQUENT EVENTS
In February 2006, the Company agreed to acquire a double hull Suezmax tanker
from an unrelated third party for a purchase price of $69.0 million. The vessel
was delivered to the Company on April 10, 2006.
In March 2006, the Company sold 4,297,500 shares (including shares sold under
the over-allotment option) in a public offering in the U.S. to fund the
acquisition of the ninth vessel, repay outstanding debt and to fund the
acquisition of the tenth vessel that the Company is actively pursuing. The
offering was priced at $28.50 per share, and net proceeds to the Company were
$115.2 million.
In April 2006, the Company borrowed $69.0 million under the New Credit Facility
to finance the ninth vessel delivered to the Company on April 10, 2006.
ITEM 19. EXHIBITS
1.1 Memorandum of Association of the Company incorporated by reference to
Exhibit 3.1 to the Company's registration statement on Form F-1 filed with
the Securities and Exchange Commission on August 28, 1995 (Registration No.
33-96268).
1.2 Bye-Laws of the Company incorporated by reference to Form 6-K filed with
the Securities and Exchange Commission on November 18, 2004.
2.1 Form of Share Certificate incorporated by reference to Exhibit 4.1 to the
Company's registration statement on Form F-1 filed with the Securities and
Exchange Commission on August 28, 1995 (Registration No. 33-96268).
4.1 Form of Bareboat Charter between Nordic American Tanker Shipping Limited
and BP Shipping Ltd, incorporated by reference to Exhibit 10.3 in the
Registration Statement filed on Form F-1, Registration No. 33-96268.
4.2 Form of Management Agreement between Nordic American Tanker Shipping
Limited and Ugland Nordic Shipping AS incorporated by reference to Exhibit
10.8 in the Registration Statement on Form F-1, Registration No. 33-96268.
4.3 Novation Agreement dated May 30, 2003, among Ugland Nordic Shipping AS,
Scandic American Shipping Ltd. and Nordic American Tanker Shipping Limited
incorporated by reference to Exhibit 4.3 in the Annual Report for the
fiscal year ended December 31, 2002 on Form 20-F, filed with the Securities
and Exchange Commission on June 27, 2003.
4.4 Amended and Restated Management Agreement dated October 12, 2004, between
Scandic American Shipping Ltd. and Nordic American Tanker Shipping Limited
incorporated by reference to Form 6-K filed with the Securities and
Exchange Commission on October 29, 2004.
4.5 2004 Stock Incentive Plan incorporated by reference to Exhibit 4.5 to the
Company's annual report on Form 20-F for the fiscal year ended December 31,
2004 filed with the Securities and Exchange Commission on June 30, 2005.
4.6 Revolving Credit Facility Agreement by and among the Company and the
financial institutions listed in schedule 1 thereto, dated September 14,
2005.
12.1 Rule 13a-14(a) Certification of the Chief Executive Officer.
12.2 Rule 13a-14(a) Certification of the Chief Financial Officer.
13.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
23.1 Consent of Deloitte Statsautoriserte Revisorer AS.
SIGNATURES
The registrant hereby certifies that it meets all of 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.
NORDIC AMERICAN TANKER
SHIPPING LIMITED
By: /s/ Herbjorn Hansson
-----------------------------
Name: Herbjorn Hansson
Title: Chairman, Chief Executive Officer
and President
DATED: June 29, 2006