` UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(l.c) OR (l.c)
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 ____
OR
[_] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report: N/A
Commission file number 0001322587
ARIES MARITIME TRANSPORT LIMITED
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(Exact name of Registrant as specified in its charter)
BERMUDA
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(Jurisdiction of incorporation or organization)
Aries Maritime Transport Limited
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18 Zerva Nap., Glyfada, Athens 166 75, Greece
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(Address of principal executive offices)
Securities registered or to be registered pursuant to section 12(b) of the Act.
NONE
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Securities registered or to be registered pursuant to section 12(g) of the Act.
Common Stock par value $0.01 per share
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
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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.
28,416,877 shares of Common Stock, par value $0.01 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act
Yes |_| No | X |
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 |_| No| X |
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No|_|
Indicate by check mark whether 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|_| Accelerated filer |_| Non-accelerated filer |X|
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 |_| No |X|
TABLE OF CONTENTS
Page
ITEM 1. Identity Of Directors, Senior Management And Advisers...........2
ITEM 2. Offer Statistics And Expected Timetable.........................2
ITEM 3. Key Information.................................................2
ITEM 4. Information On The Company.....................................17
ITEM 4A. Unresolved Staff Comments .....................................32
ITEM 5. Operating And Financial Review And Prospects...................32
ITEM 6. Directors, Senior Management And Employees................... 48
ITEM 7. Major Shareholders And Related Party Transactions. ............52
ITEM 8. Financial Information. ........................................53
ITEM 9. The Offer And Listing..........................................53
ITEM 10. Additional Information.........................................53
ITEM 11. Quantitative And Qualitative Disclosures About Market Risk.....65
ITEM 12. Description Of Securities Other Than Equity Securities ........66
ITEM 13. Defaults, Dividend Arrearages And Delinquencies................67
ITEM 14. Material Modifications To The Rights Of Security
Holders And Use Of Proceeds....................................67
ITEM 15. Controls And Procedures........................................67
ITEM 16A. Audit Committee Financial Expert...............................67
ITEM 16B. Code Of Ethics ................................................67
ITEM 16C. Principal Accountant Fees And Services ........................68
ITEM 16D. Exemptions From The Listing Standards For Audit Committees.....68
ITEM 16E. Purchases Of Equity Securities By The Issuer And Affiliated
Purchases .....................................................68
ITEM 17. Financial Statements...........................................69
ITEM 18. Financial Statements...........................................69
ITEM 19. Exhibits......................................................104
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes assumptions, expectations, projections, intentions
and beliefs about future events. These statements are intended as
"forward-looking statements". We caution that assumptions, expectations,
projections, intentions and beliefs about future events may and often do vary
from actual results and the differences can be material.
All statements in this document that are not statements of historical
fact are forward-looking statements. Forward-looking statements include, but are
not limited to, such matters as:
o future operating or financial results;
o statements about planned, pending or recent acquisitions,
business strategy, future dividend payments and expected capital
spending or operating expenses, including drydocking and
insurance costs;
o statements about trends in the container vessel and products
tanker shipping markets, including charter rates and factors
affecting supply and demand;
o our ability to obtain additional financing;
o expectations regarding the availability of vessel acquisitions;
o completion of repairs, length of off hire, availability of
charters; and
o anticipated developments with respect to any pending litigation.
The forward-looking statements in this report are based upon various
assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, management's examination of historical operating
trends, data contained in our records and other data available from third
parties. Although Aries Maritime Transport Limited believes 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, Aries Maritime Transport
Limited cannot assure you that it will achieve or accomplish these expectations,
beliefs or projections described in the forward looking statements contained in
this report.
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 changes in charter rates and vessel values, failure of a seller to
deliver one or more vessels, failure of a buyer to accept delivery of a vessel,
inability to procure acquisition financing, default by one or more charterers of
our ships, changes in demand for oil and oil products, the effect of changes in
OPEC's petroleum production levels, worldwide crude oil consumption and storage,
changes in demand that may affect attitudes of time charterers, scheduled and
unscheduled drydocking, additional time spent in completing repairs, changes in
Aries Maritime Transport Limited's voyage and operating expenses, including
bunker prices, dry-docking and insurance costs, changes in governmental rules
and regulations or actions taken by regulatory authorities, potential liability
from pending or future litigation, domestic and international political
conditions, potential disruption of shipping routes due to accidents,
international hostilities and political events or acts by terrorists and other
factors discussed in Aries Maritime Transport Limited's filings with the U.S.
Securities and Exchange Commission from time to time.
When used in this report, the words "anticipate," "estimate," "project,"
"forecast," "plan," "potential," "will," "may," "should," and "expect" reflect
forward-looking statements.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
Unless the context otherwise requires, as used in this report, the terms
"Company," "we," "us," and "our" refer to Aries Maritime Transport Limited and
all of its subsidiaries, and "Aries Maritime Transport Limited" refers only to
Aries Maritime Transport Limited and not to its subsidiaries. We use the term
deadweight, or dwt, in describing the size of vessels. Dwt, expressed in metric
tons each of which is equivalent to 1,000 kilograms, refers to the maximum
weight of cargo and supplies that a vessel can carry. We use the term TEU, or
TEUs, in describing the size of vessels carrying containers. The size of one TEU
is equivalent to 20 feet by 8 feet by 8 feet 6 inches (that is, 5.9 metres by
2.35 metres by 2.39 metres).
A. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated and combined
financial and other data. The selected consolidated and combined financial data
set forth below as of December 31, 2005, 2004 and 2003 and for the periods ended
December 31, 2005, 2004 and 2003 have been derived from our audited consolidated
and predecessor audited combined carve-out financial statements included in this
document. The selected consolidated and combined financial and other data may
not be indicative of the results we would have achieved had we operated as a
public company for the entire period presented or of our future results. This
information should be read in conjunction with "Item 5. Operating And Financial
Review And Prospects" and our historical consolidated and predecessor combined
carve-out financial statements and related notes included elsewhere in this
Annual Report. In accordance with standard shipping industry practice, we did
not obtain from the sellers historical operating data for the vessels that we
acquired, as that data was not material to our decision to purchase the vessels.
Accordingly, we have not included any historical financial data relating to the
results of operations of our vessels for any period before we acquired them.
Please see the discussion in "Item 5. Operating And Financial Review And
Prospects -- Lack of Historical Operating Data for Vessels Before their
Acquisition."
December 31, December 31, December 31,
2003 2004 2005
(Dollars in thousands except per
share data)
Income Statement Data (for
period ending)
Revenue from voyages $ 7,316 $ 48,269 $ 75,905
Gain on disposal of vessels -- 14,724 --
Commissions (150) (1,189) (1,323)
Voyage expenses (24) (312) (224)
Vessel operating expenses (2,660) (12,460) (17,842)
General & administrative expenses (34) (75) (1,649)
Depreciation (1,721) (12,724) (19,446)
Amortization of drydocking and
special survey expenses (271) (1,552) (1,958)
Management fees (199) (893) (1,511)
Net operating income 2,257 33,788 31,952
Interest expense (1,539) (8,616) (18,793)
Other income (expenses), net 11 134 662
Change in fair value of
derivatives (215) (33) 950
Net income 514 25,273 14,771
Earnings per share (basic and
diluted) $ 0.03 $ 1.56 $ 0.64
Weighted average number of
shares (basic and diluted) 16,176,877 16,176,877 23,118,466
Balance Sheet Data (at period
end)
Cash and cash equivalents $ 667 $ 5,334 $ 19,248
Restricted cash 109 4,803 10
Total current assets 890 12,371 22,438
Total assets 45,534 245,725 377,898
Total current liabilities 4,177 34,666 21,356
Current portion of long-term debt 2,667 21,910 --
Long-term debt, net of current
portion 37,743 185,050 183,820
Total liabilities 45,020 229,072 222,217
Total stockholders' equity 514 16,653 155,681
Other Financial Data (for period
ending)
Net cash provided by operating
activities $ 4,426 $ 21,899 $ 38,870
Net cash used in investing
activities (41,612) (161,773) (115,897)
Net cash provided by financing
activities 37,853 144,541 90,941
Net increase in cash and cash
equivalents 667 4,667 13,914
Fleet Data (at period end)
Number of products tankers owned 2 7 8
Number of container vessels owned -- 3 5
ADJUSTED EBITDA
Period
from
inception
(All amounts in thousands through Year ended Year ended
of U.S. dollars, unless December 31, December 31, December 31,
otherwise stated) 2003 2004 2005
ADJUSTED EBITDA(1)
NET INCOME 514 25,273 14,771
plus Net interest expense 1,534 8,558 18,121
plus Depreciation and 1,992 5,221 12,112
Amortization
Plus/(minus) Change in 215 33 (950)
fair value of derivatives
ADJUSTED EBITDA 4,255 39,085 44,054
(1) We consider Adjusted EBITDA to represent the aggregate of net
income, net interest expense, depreciation, amortization and change in the fair
value of derivatives. The Company's management uses Adjusted EBITDA as a
performance measure. The Company believes that Adjusted EBITDA is useful to
investors, because the shipping industry is capital intensive and may involve
significant financing costs. Adjusted EBITDA is not a measure recognized by GAAP
and should not be considered as an alternative to net income, operating income
or any other indicator of a Company's operating performance required by GAAP.
The Company's definition of Adjusted EBITDA may not be the same as that used by
other companies in the shipping or other industries.
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. RISK FACTORS
The following risks relate principally to the industry in which we
operate and our business in general. Other risks relate to the securities market
and ownership of our common stock. If any of the circumstances or events
described below actually arises or occurs, our business, results of operations,
cash flows, financial condition and ability to pay dividends could be materially
adversely affected. In any such case, the market price of our common shares
could decline, and you may lose all or part of your investment.
Industry Specific Risk Factors
Charter rates for products tankers and container vessels are at historically
high levels and may decrease in the future, which may adversely affect our
earnings.
If the shipping industry, which has been highly cyclical, is depressed
in the future when our charters expire or at a time when we may want to sell a
vessel, our earnings and available cash flow may be adversely affected. Our
ability to re-charter our vessels on the expiration or termination of our
current charters, the charter rates payable under any replacement charters and
vessel values will depend upon, among other things, economic conditions in the
products tanker and container vessel markets at that time, changes in the supply
and demand for vessel capacity and changes in the supply and demand for oil and
oil products and container transportation.
Factors beyond our control may adversely affect the demand for and value of our
vessels.
The factors affecting the supply and demand for products tankers and
container vessels are outside of our control, and the nature, timing and degree
of changes in industry conditions are unpredictable.
The factors that influence the demand for vessel capacity include:
o demand for oil and oil products;
o changes in oil production and refining capacity;
o the globalization of manufacturing;
o global and regional economic and political conditions;
o developments in international trade;
o changes in seaborne and other transportation patterns, including
changes in the distances over which cargoes are transported;
o environmental and other regulatory developments;
o currency exchange rates; and
o weather.
The factors that influence the supply of vessel capacity include:
o the number of newbuilding deliveries;
o the scrapping rate of older vessels;
o the number of vessels that are out of service; and
o port or canal congestion.
If the number of new ships delivered exceeds the number of vessels being
scrapped and lost, vessel capacity will increase. If the supply of vessel
capacity increases but the demand for vessel capacity does not increase
correspondingly, charter rates and vessel values could materially decline.
The value of our vessels may fluctuate, adversely affecting our liquidity and
causing us to breach our new credit facility.
Vessel values can fluctuate substantially over time due to a number of
different factors, including:
o general economic and market conditions affecting the shipping
industry;
o competition from other shipping companies;
o the types and sizes of available vessels;
o the availability of other modes of transportation;
o increases in the supply of vessel capacity;
o the cost of newbuildings;
o prevailing charter rates; and
o the cost of retrofitting or modifying second-hand vessels, as a
result of charterer requirements, technological advances in
vessel design or equipment, changes in applicable environmental
or other regulations or standards, or otherwise.
In addition, as vessels grow older, they generally decline in value. Due
to the cyclical nature of the products tanker and container vessel markets, if
for any reason we sell vessels at a time when prices have fallen, we could incur
a loss and our business, results of operations, cash flows, financial condition
and ability to pay dividends could be adversely affected.
The market value of our vessels, which are currently at high levels, may
decline, which could lead to a default under our loan agreements and the loss of
our vessels.
If the market value of our fleet declines, we may not be in compliance
with certain provisions of our new credit facility and we may not be able to
refinance our debt or obtain additional financing. If we are unable to pledge
additional collateral, our lenders could accelerate our debt and foreclose on
our fleet. For instance, if the market value of our fleet declines below 140% of
the aggregate outstanding principal balance of our borrowings under our new
credit facility, we will not be in compliance with certain provisions of our new
credit facility and, as a result, we will not be able to pay dividends and may
not be able to refinance our debt or obtain additional financing.
We are subject to complex laws and regulations, including environmental
regulations that can adversely affect the cost, manner or feasibility of doing
business.
Our operations are subject to numerous laws and regulations in the form
of international conventions and treaties, national, state and local laws and
national and international regulations in force in the jurisdictions in which
our vessels operate or are registered, which can significantly affect the
ownership and operation of our vessels. These requirements include, but are not
limited to, 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 Prevention of Marine Pollution of 1973, the IMO
International Convention for the Safety of Life at Sea of 1974, the
International Convention on Load Lines of 1966 and the U.S. Marine
Transportation Security Act of 2002. Compliance with such laws, regulations and
standards, where applicable, may require installation of costly equipment or
operational changes and may affect the resale value or useful lives of our
vessels. We may also incur additional costs in order to comply with other
existing and future regulatory obligations, including, but not limited to, costs
relating to air emissions, the management of ballast waters, maintenance and
inspection, elimination of tin-based paint, development and implementation of
emergency procedures and insurance coverage or other financial assurance of our
ability to address pollution incidents. These costs could have a material
adverse effect on our business, results of operations, cash flows and financial
condition and our ability to pay dividends.
A failure to comply with applicable laws and regulations may result in
administrative and civil penalties, criminal sanctions or the suspension or
termination of our operations. Some environmental laws often impose strict
liability for remediation of spills and releases of oil and hazardous
substances, which could subject us to liability without regard to whether we
were negligent or at fault. Under OPA, for example, owners, operators and
bareboat charterers are jointly and severally strictly liable for the discharge
of oil within the 200-mile exclusive economic zone around the United States. An
oil spill could result in significant liability, including fines, penalties,
criminal liability and remediation costs for natural resource damages under
other federal, state and local laws, as well as third-party damages. We are
required to satisfy insurance and financial responsibility requirements for
potential oil (including marine fuel) spills and other pollution incidents.
Although we have arranged insurance to cover certain environmental risks, there
can be no assurance that such insurance will be sufficient to cover all such
risks or that any claims will not have a material adverse effect on our
business, results of operations, cash flows and financial condition and our
ability to pay dividends.
The shipping industry has inherent operational risks that could negatively
impact our results of operations.
Our vessels and their cargoes are at risk of being damaged or lost
because of events such as marine disasters, bad weather, mechanical failures,
human error, war, terrorism, piracy and other circumstances or events. All these
hazards can result in death or injury to persons, loss of revenues or property,
environmental damage, higher insurance rates, damage to our customer
relationships, delay or rerouting.
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. We may have to pay drydocking costs that our insurance does not
cover in full. The loss of earnings while these vessels are being repaired and
repositioned, as well as the actual cost of these repairs, would decrease our
earnings. If one of our vessels were involved in an accident with the potential
risk of environmental contamination, it could have a material adverse effect on
our business, results of operations, cash flows, financial condition and ability
to pay dividends.
Our insurance may not be adequate to cover our losses.
We carry insurance to protect us against most of the accident-related
risks involved in the conduct of our business, including marine hull and
machinery insurance, protection and indemnity insurance, which includes
pollution risks, crew insurance, war risk insurance and off-hire insurance.
However, we may not be adequately insured to cover losses from our operational
risks, which could have a material adverse effect on us. Additionally, our
insurers may refuse to pay particular claims and our insurance may be voidable
by the insurers if we take, or fail to take, certain action, such as failing to
maintain certification of our vessels with applicable maritime regulatory
organizations. Any significant uninsured or under-insured loss or liability
could have a material adverse effect on our business, results of operations,
cash flows and financial condition and our ability to pay dividends. In
addition, we may not be able to obtain adequate insurance coverage at reasonable
rates in the future during adverse insurance market conditions.
Because we obtain some of our insurance through protection and indemnity
associations, we may also be subject to calls in amounts based not only on our
own claim records, but also the claim records of other members of the protection
and indemnity associations.
We may be subject to calls in amounts based not only on our claim
records but also the claim records of other members of the protection and
indemnity associations through which we receive insurance coverage for tort
liability, including pollution-related liability. Our payment of these calls
could result in significant expense to us, which could have a material adverse
effect on our business, results of operations, cash flows, financial condition
and ability to pay dividends.
Labor interruptions could disrupt our business.
Our vessels are manned by masters, officers and crews that are employed
by third parties. If not resolved in a timely and cost-effective manner,
industrial action or other labor unrest could prevent or hinder our operations
from being carried out normally and could have a material adverse effect on our
business, results of operations, cash flows, financial condition and ability to
pay dividends.
Maritime claimants could arrest our vessels, which could interrupt our cash
flow.
Crew members, suppliers of goods and services to a vessel, shippers of
cargo and other parties may be entitled to a maritime lien against that vessel
for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien
holder may enforce its lien by arresting a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our vessels could
interrupt our cash flow and require us to pay a significant amount of money to
have the arrest lifted. In addition, in some jurisdictions, such as South
Africa, under the "sister ship" theory of liability, a claimant may arrest both
the vessel that is subject to the claimant's maritime lien and any "associated"
vessel, which is any vessel owned or controlled by the same owner. Claimants
could try to assert "sister ship" liability against one vessel in our fleet for
claims relating to another vessel in our fleet.
Increased inspection procedures, tighter import and export controls and new
security regulations could increase costs and cause disruption of our container
shipping business.
International container shipping is subject to security and customs
inspection and related procedures in countries of origin, destination and
trans-shipment points. These security procedures can result in cargo seizure,
delays in the loading, offloading, trans-shipment, or delivery of containers and
the levying of customs duties, fines or other penalties against exporters or
importers and, in some cases, carriers.
Since the events of September 11, 2001, U.S. authorities have more than
doubled container inspection rates to approximately 5% of all imported
containers. Government investment in non-intrusive container scanning technology
has grown, and there is interest in electronic monitoring technology, including
so-called "e-seals" and "smart" containers that would enable remote, centralized
monitoring of containers during shipment to identify tampering with or opening
of the containers, along with potentially measuring other characteristics such
as temperature, air pressure, motion, chemicals, biological agents and
radiation.
It is unclear what changes, if any, to the existing security procedures
will ultimately be proposed or implemented, or how any such changes will affect
the container shipping industry. These changes have the potential to impose
additional financial and legal obligations on carriers and, in certain cases, to
render the shipment of certain types of goods by container uneconomical or
impractical. These additional costs could reduce the volume of goods shipped in
containers, resulting in a decreased demand for container vessels. In addition,
it is unclear what financial costs any new security procedures might create for
container vessel owners, or whether carrier companies may seek to pass on
certain of the costs associated with any new security procedures to vessel
owners. Any additional costs or a decrease in container volumes could have an
adverse impact on our business, results of operations, cash flows, financial
condition and ability to pay dividends.
Governments could requisition our vessels during a period of war or emergency
without adequate compensation.
A government could requisition or seize our vessels. Under requisition
for title, a government takes control of a vessel and becomes its owner. Under
requisition for hire, a government takes control of a vessel and effectively
becomes its charterer at dictated charter rates. Generally, requisitions occur
during periods of war or emergency. Although we would be entitled to
compensation in the event of a requisition, the amount and timing of payment
would be uncertain.
Terrorist attacks and international hostilities can affect the shipping
industry, which could adversely affect our business.
Terrorist attacks like those of September 11, 2001 or war or
international hostilities, including those currently underway in Iraq and the
Middle East, could adversely affect the world economy, the availability of and
demand for crude oil and petroleum products and the charter rates in the
products tanker and container vessel markets. Terrorist attacks, such as the
attack on the M/T Limburg in October 2002, could also adversely affect our
operations and directly impact our vessels or our charterers. We conduct our
operations outside of the United States, and our business, results of
operations, cash flows, financial condition and ability to pay dividends may be
adversely affected by changing economic, political and government conditions in
the countries and regions where our vessels are employed or registered.
Moreover, we operate in a sector of the economy that is likely to be adversely
impacted by the effects of political instability, terrorist or other attacks,
war or international hostilities.
Company Specific Risk Factors
We cannot assure you that we will pay dividends.
We will make dividend payments to our shareholders only if our board of
directors, acting in its sole discretion, determines that such payments would be
in our best interest and in compliance with relevant legal and contractual
requirements. The principal business factors that our board of directors expects
to consider when determining the timing and amount of dividend payments will be
our earnings, financial condition and cash requirements at the time. Currently,
the principal contractual and legal restrictions on our ability to make dividend
payments are those contained in our new senior secured credit agreement and
those created by Bermuda law.
Our new credit facility prohibits us from paying a dividend if an event
of default under the credit agreement is continuing or would result from the
payment of the dividend. Our new credit facility further requires us to maintain
specified financial ratios and minimum liquidity and working capital amounts.
Our obligations pursuant to these and other terms of our new credit facility
could prevent us from making dividend payment, under certain circumstances.
Under Bermuda law, we may not declare or pay dividends if there are
reasonable grounds for believing that (1) we are, or would after the payment be,
unable to pay our liabilities as they become due or (2) the realizable value of
our assets would thereby be less than the sum of our liabilities, our issued
share capital (the total par value of all outstanding shares) and share premium
accounts (the aggregate amount paid for the subscription for our shares in
excess of the aggregate par value of such shares). Consequently, events beyond
our control, such as a reduction in the realizable value of our assets, could
cause us to be unable to make dividend payments.
We may incur other expenses or liabilities that would reduce or
eliminate the cash available for distribution as dividends. We may also enter
into new agreements or new legal provisions may be adopted that will restrict
our ability to pay dividends. As a result, we cannot assure you that dividends
will be paid with the frequency set forth in this Annual Report or at all.
Our historical financial and operating data may not be representative of our
future results because we have a limited operating history as a stand-alone
entity or as a publicly traded company.
Our historical financial and operating data may not be representative of
our future results because we are a newly formed company with limited operating
history as a stand-alone entity or as a publicly traded company. Our combined
financial statements included in this document have been carved out of the
consolidated financial statements of Aries Energy Corporation, or Aries Energy,
a private company which owned and operated two products tankers during the
period from March 2003 to December 31, 2003 and seven products tankers and five
container vessels during the year ended December 31, 2004. Consistent with
shipping industry practice, we have not obtained, nor do we present in this
document, historical operating data for our vessels prior to their acquisition.
Although our results of operations, cash flows and financial condition reflected
in our combined financial statements include all expenses allocable to our
business, due to factors such as the additional administrative and financial
obligations associated with operating as a publicly traded company, they may not
be indicative of the results of operations that we would have achieved had we
operated as a public entity for all periods presented or of future results that
we may achieve as a publicly traded company with our current holding company
structure.
We depend upon a few significant charterers for a large part of our revenues.
The loss of one or more of these charterers could adversely affect our financial
performance.
We have historically derived a significant part of our revenue from a
small number of charterers. During 2005, all of our revenue was derived from
seven charterers, PDVSA Petroleo, S. A., d'Amico Societa di Navigazione, ST
Shipping and Transportation Inc., Deiulemar Compagnia di Navigazione S.p.A, CMA
CGM S.A., China Shipping Container Lines (Asia) Co. Ltd. and Navigazione
Montanari S.p.A. During April 2006, the charters with d'Amico Societa di
Navigazione were terminated and the respective vessels were chartered to
Trafigura Beheer B.V. In addition, we took delivery of two newbuilding vessels
which we bareboat chartered to companies of the Stena Group, thus increasing the
number of our charterers to nine. If we were to lose any of these charterers, or
if any of these charterers significantly reduced its use of our services or was
unable to make charter payments to us, our results of operations, cash flows and
financial condition would be adversely affected.
Our charterers may terminate or default on their charters, which could adversely
affect our results of operations and cash flow.
Our charters may terminate earlier than the dates indicated in the
section "Our Fleet" in "Item 4. Information on the Company". The terms of our
charters vary as to which events or occurrences will cause a charter to
terminate or give the charterer the option to terminate the charter, but these
generally include a total or constructive total loss of the related vessel, the
requisition for hire of the related vessel or the failure of the related vessel
to meet specified performance criteria. In addition, the ability of each of our
charterers to perform its obligations under a charter will depend on a number of
factors that are beyond our control. These factors may include general economic
conditions, the condition of a specific shipping market sector, the charter
rates received for specific types of vessels and various operating expenses. The
costs and delays associated with the default by a charterer of a vessel may be
considerable and may adversely affect our business, results of operations, cash
flows and financial condition and our ability to pay dividends.
We cannot predict whether our charterers will, upon the expiration of
their charters, recharter our vessels on favorable terms or at all. If our
charterers decide not to re-charter our vessels, we may not be able to recharter
them on terms similar to the terms of our current charters or at all. In the
future, we may also employ our vessels on the spot charter market, which is
subject to greater rate fluctuation than the time charter market.
If we receive lower charter rates under replacement charters or are
unable to recharter all of our vessels, the amounts available, if any, to pay
dividends to our shareholders may be significantly reduced or eliminated.
Servicing our debt will substantially limit our funds available for other
purposes, such as vessel acquisitions and the payment of dividends.
We intend to finance future vessel acquisitions through borrowings under
our new credit facility. A large part of our cash from operations may be
required to pay principal and interest on that debt. Our debt service payments
will reduce our funds available for other purposes, including those that may be
in the best interests of our shareholders. We cannot assure you that our future
cash flows will be adequate to fund future vessel acquisitions or to pay
dividends.
Our new credit facility imposes significant operating and financial
restrictions.
Our new credit facility requires us to adhere to certain financial covenants as
of the end of each fiscal quarter, including the following:
o our shareholders' equity as a percentage of our total assets, adjusting
the book value of our fleet to its market value, must be no less than
35%;
o we must maintain free cash and cash equivalents of no less than 5% of
interest bearing debt;
o our current liabilities, excluding deferred revenue, may not exceed our
current assets;
o the ratio of EBITDA (earnings before interest, taxes, depreciation and
amortization) to interest expense must be no less than 3.00 to 1.00 on a
trailing four quarter basis; and
o the aggregate fair market value of our vessels must be no less than 140%
of the aggregate outstanding loans under the credit facility.
In addition, Magnus Carriers is required to maintain a credit balance in an
account opened with the lender of at least $1 million. The credit agreement also
requires our two principal beneficial equity holders to maintain a beneficial
ownership interest in our company of no less than 10% each.
Our credit agreement prevents us from declaring dividends if any event of
default, as defined in the credit agreement, occurs or would result from such
declaration. Each of the following will be an event of default under the credit
agreement:
o the failure to pay principal, interest, fees, expenses or other amounts
when due;
o breach of certain financial covenants, including those which require
Magnus Carriers to maintain a minimum cash balance;
o the failure of any representation or warranty to be materially correct;
o the occurrence of a material adverse change (as defined in the credit
agreement);
o the failure of the security documents or guarantees to be effective;
o judgments against us or any of our subsidiaries in excess of certain
amounts;
o bankruptcy or insolvency events; and
o the failure of our principal beneficial equity holders to maintain their
investment in us.
Events beyond our control, including changes in the economic and business
conditions in the shipping markets in which we operate, may affect our ability
to comply with these covenants. We cannot assure you that we will meet these
ratios or satisfy these covenants or that our lenders will waive any failure to
do so. A breach of any of the covenants in, or our inability to maintain the
required financial ratios under, our new credit facility would prevent us from
borrowing additional money under the credit facility and could result in a
default under the credit facility. If a default occurs under our credit
facility, the lenders could elect to declare the outstanding debt, together with
accrued interest and other fees, to be immediately due and payable and proceed
against the collateral securing that debt, which could constitute all or
substantially all of our assets.
Our ability to obtain additional debt financing may depend on the performance of
our then existing charters and the creditworthiness of our charterers.
The actual or perceived credit quality of our charterers, and any
defaults by them, may materially affect our ability to obtain the additional
capital resources that we will require to purchase additional vessels or may
significantly increase our costs of obtaining that capital. Our inability to
obtain additional financing or our ability to obtain additional financing at
higher than anticipated costs may materially and adversely affect our business,
results of operations, cash flows and financial condition and our ability to pay
dividends.
We will depend on Magnus Carriers, a private company, or other management
companies to manage and charter our fleet.
We have contracted the commercial and technical management of all the
vessels in our fleet (with the exception of the Chinook), including crewing,
maintenance and repairs to the management company, Magnus Carriers. In addition,
we expect that we will need to seek approval from our lenders to change our
manager. The loss of Magnus Carriers' services or its failure to perform its
obligations under the management agreements could materially and adversely
affect our business, results of operations, cash flows and financial condition
and our ability to pay dividends. Although we may have rights against Magnus
Carriers if it defaults on its obligations to us, our shareholders will not
directly share that recourse.
The ability of Magnus Carriers to continue providing services for our
benefit will depend in part on its own financial strength. Circumstances beyond
our control could impair Magnus Carriers' financial strength. Because Magnus
Carriers is privately held, it is unlikely that information about its financial
strength would become public prior to any default by Magnus Carriers under the
management agreements. As a result, an investor in our shares might have little
advance warning of problems affecting Magnus Carriers, even though those
problems could have a material adverse effect on us.
Magnus Carriers and its affiliates may acquire or charter vessels that compete
with our fleet.
Magnus Carriers and affiliates may acquire or charter additional
products tankers and container vessels in the future, subject to a right of
first refusal that Magnus Carriers, its principals and affiliates under its
control have granted to us. If we do not purchase or charter these vessels, they
could compete with our fleet, and Magnus Carriers and its affiliates might be
faced with conflicts of interest between their own interests and Magnus
Carriers' obligations to us under the ship management agreements.
We are a holding company, and we depend on the ability of our subsidiaries to
distribute funds to us in order to satisfy our financial and other obligations
and to make dividend payments.
We are a holding company, and we have no significant assets other than
the equity interests in our subsidiaries. Our subsidiaries own all our vessels,
and payments under the charters with our charterers are made to our
subsidiaries. As a result, our ability to satisfy our financial and other
obligations and to pay dividends depends on the performance of our subsidiaries
and their ability to distribute funds to us. If we are unable to obtain funds
from our subsidiaries, we will not be able to pay dividends unless we obtain
funds from other sources. We cannot assure you that we will be able to obtain
the necessary funds from other sources.
We may not be able to grow or effectively manage our growth.
A principal focus of our strategy is to grow by expanding our business.
Our future growth will depend on a number of factors, some of which we can
control and some of which we cannot. These factors include our ability to:
o identify vessels for acquisition;
o consummate acquisitions;
o integrate acquired vessels successfully with our existing
operations; and
o obtain required financing for our existing and new operations.
A deficiency in any of these factors could adversely affect our ability
to achieve anticipated growth in cash flows or realize other anticipated
benefits. In addition, competition from other buyers could reduce our
acquisition opportunities or cause us to pay a higher price than we might
otherwise pay.
The process of integrating acquired vessels into our operations may
result in unforeseen operating difficulties, may absorb significant management
attention and may require significant financial resources that would otherwise
be available for the ongoing development and expansion of our existing
operations. Future acquisitions could result in the incurrence of additional
indebtedness and liabilities that could have a material adverse effect on our
business, results of operations, cash flows, financial condition and ability to
pay dividends. Further, if we issue additional common shares, your interest in
our company will be diluted, and dividends to you, if any, may be reduced.
Capital expenditures and other costs necessary to operate and maintain our
vessels may increase due to changes in governmental regulations, safety or other
equipment standards.
Changes in governmental regulations, safety or other equipment
standards, as well as compliance with standards imposed by maritime
self-regulatory organizations and customer requirements or competition, may
require us to make additional expenditures. In order to satisfy these
requirements, we may, from time to time, be required to take our vessels out of
service for extended periods of time, with corresponding losses of revenues. In
the future, market conditions may not justify these expenditures or enable us to
operate some or all of our vessels profitably during the remainder of their
economic lives.
If we are unable to fund our capital expenditures, we may not be able to
continue to operate some of our vessels, which would have a material adverse
effect on our business and our ability to pay dividends.
In order to fund our capital expenditures, we may be required to incur
borrowings or raise capital through the sale of debt or equity securities. Our
ability to access the capital markets through future offerings may be limited by
our financial condition at the time of any such offering as well as by adverse
market conditions resulting from, among other things, general economic
conditions and contingencies and uncertainties that are beyond our control. Our
failure to obtain the funds for necessary future capital expenditures would
limit our ability to continue to operate some of our vessels and could have a
material adverse effect on our business, results of operations and financial
condition and our ability to pay dividends. Even if we are successful in
obtaining such funds through financings, the terms of such financings could
further limit our ability to pay dividends.
Aries Energy, an affiliate, is able to control our company, including the
outcome of shareholder votes through its wholly owned indirect subsidiary,
Rocket Marine Inc.
Aries Energy, an affiliate, owns approximately 52% of our outstanding
common shares. As a result of this share ownership and for so long as Aries
Energy owns a significant percentage of our outstanding common shares, Aries
Energy will be able to control or influence the outcome of any shareholder vote,
including the election of directors, the adoption or amendment of provisions in
our memorandum of association or bye-laws and possible mergers, amalgamations,
corporate control contests and other significant corporate transactions. This
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control, merger, amalgamation, consolidation, takeover or
other business combination. This concentration of ownership could also
discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of us, which could in turn have an adverse effect
on the market price of our common shares.
Exposure to currency exchange rate fluctuations will result in fluctuations in
our cash flows and operating results.
We generate all our revenues in U.S. dollars, but our manager, Magnus
Carriers, incurs approximately 30% of vessel operating expenses and we incur
general and administrative expenses in currencies other than the U.S. dollar.
This difference could lead to fluctuations in our vessel operating expenses,
which would affect our financial results. Expenses incurred in foreign
currencies increase when the value of the U.S. dollar falls, which would reduce
our profitability. For example, in the year ended December 31, 2005, the value
of the U.S. dollar increased by approximately 13% against the Euro. Our
operating results could suffer as a result.
Our incorporation under the laws of Bermuda may limit the ability of our
shareholders to protect their interests.
We are a Bermuda company. Our memorandum of association and bye-laws and
the Companies Act 1981 of Bermuda, or the BCA, as amended, govern our corporate
affairs. Investors may have more difficulty in protecting their interests in the
face of actions by management, directors or controlling shareholders than would
shareholders of a corporation incorporated in a United States jurisdiction.
Under Bermuda law, a director generally owes a fiduciary duty only to the
company, not to the company's shareholders. Our shareholders may not have a
direct cause of action against our directors. In addition, Bermuda law does not
provide a mechanism for our shareholders to bring a class action lawsuit under
Bermuda law. Further, our bye-laws provide for the indemnification of our
directors or officers against any liability arising out of any act or omission,
except for an act or omission constituting fraud or dishonesty.
Anti-takeover provisions in our organizational documents could have the effect
of discouraging, delaying or preventing a merger, amalgamation or acquisition,
which could adversely affect the market price of our common shares.
Several provisions of our bye-laws could discourage, delay or prevent a
merger or acquisition that shareholders may consider favorable. These include
provisions:
o authorizing our board of directors to issue "blank check"
preference shares without shareholder approval;
o establishing a classified board of directors with staggered,
three-year terms;
o prohibiting us from engaging in a "business combination" with an
"interested shareholder" for a period of three years after the
date of the transaction in which the person becomes an
interested shareholder unless certain conditions are met;
o not permitting cumulative voting in the election of directors;
o authorizing the removal of directors only for cause and only
upon the affirmative vote of the holders of at least 80% of our
outstanding common shares;
o limiting the persons who may call special meetings of
shareholders to our board of directors, subject to certain
rights guaranteed to shareholders under the BCA; and
o establishing advance notice requirements for nominations for
election to our board of directors and for proposing matters
that can be acted on by shareholders at our shareholder
meetings.
These provisions could have the effect of discouraging, delaying or
preventing a merger, amalgamation or acquisition, which could adversely affect
the market price of our common shares.
It may not be possible for investors to enforce U.S. judgments against us.
We and all our subsidiaries are incorporated in jurisdictions outside
the U.S. substantially all of our assets and those of our subsidiaries are
located outside the U.S. In addition, most of our directors and officers are or
will be non-residents of the U.S., and all or a substantial portion of the
assets of these non-residents are or will be located outside the U.S. As a
result, it may be difficult or impossible for U.S. investors to serve process
within the U.S. upon us, our subsidiaries or our directors and officers or to
enforce a judgment against us for civil liabilities in U.S. courts. In addition,
you should not assume that courts in the countries in which we or our
subsidiaries are incorporated or where our or the assets of our subsidiaries are
located (1) would enforce judgments of U.S. courts obtained in actions against
us or our subsidiaries 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 or our subsidiaries based on those laws.
U.S. tax authorities could treat us as a "passive foreign investment company"
which could have adverse U.S. federal income tax consequences to U.S.
shareholders.
A foreign corporation will be treated as a "passive foreign investment
company", or PFIC, 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 those types of "passive
income." For purposes of these tests, "passive income" includes dividends,
interest, and gains from the sale or exchange of investment property and rents
and royalties other than rents and royalties which are received from unrelated
parties in connection with the active conduct of a trade or business. For
purposes of these tests, income derived from the performance of services does
not constitute "passive income." U.S. shareholders of a PFIC are subject to a
disadvantageous U.S. federal income tax regime applicable to the income derived
by the PFIC, the distributions they receive from the PFIC and the gain, if any,
they derive from the sale or other disposition of their shares in the PFIC.
Based on our proposed method of operation, we do not believe that we
will be a PFIC. In this regard, we intend to treat the gross income we derive or
are deemed to derive from our time chartering activities as services income,
rather than rental income. Accordingly, we believe that our income from our time
chartering activities does not constitute "passive income," and the assets that
we own and operate in connection with the production of that income do not
constitute passive assets.
There is, however, no direct legal authority under the PFIC rules
addressing our proposed method of operation. Accordingly, no assurance can be
given that the U.S. Internal Revenue Service, or IRS, or a court of law will
accept our position, and there is a risk that the IRS or a court of law could
determine that we are a PFIC. Moreover, no assurance can be given that we would
not constitute a PFIC for any future taxable year if there were to be changes in
the nature and extent of our operations.
If the IRS were to find that we are or have been a PFIC for any taxable
year, our U.S. shareholders will face adverse and special U.S. tax consequences.
Among other things, the distributions a shareholder received with respect to our
shares and the gain, if any, a shareholder derived from his sale or other
disposition of our shares would be taxable as ordinary income (rather than as
qualified dividend income or capital gain, as the case may be), would be treated
as realized ratably over his holding period in our common shares, and would be
subject to an additional interest charge. However, a U.S. Holder may be able to
make certain tax elections with ameliorate these consequences.
We may have to pay tax on United States source income, which would reduce our
earnings.
Under the Code, 50% of the gross shipping income of a vessel owning or
chartering corporation, such as our company and our subsidiaries, that is
attributable to transportation that begins or ends, but that does not both begin
and end, in the United States is characterized as U.S. source shipping income
and is subject to a 4% United States federal income tax without allowance for
deduction, unless that corporation qualifies for exemption from tax under
Section 883 of the Code and the related Treasury Regulations, which the IRS has
adopted and which became effective on January 1, 2005 for calendar year
taxpayers such as ourselves and our subsidiaries.
We expect that we and each of our subsidiaries qualify for this
statutory tax exemption, and we take this position for United States federal
income tax reporting purposes. However, there are factual circumstances beyond
our control that could cause us to lose the benefit of this tax exemption and
thereby become subject to United States federal income tax on our United States
source income.
For example, Aries Energy Corporation, or Aries Energy (through its
wholly owned subsidiary Rocket Marine Inc., or Rocket Marine) owns approximately
52% of our outstanding common shares. We are ineligible to qualify for exemption
under Section 883 for any taxable year in which Aries Energy alone or together
with other shareholders with a 5% or greater interest in our common shares, or
the 5% shareholder group, own 50% or more of our outstanding common shares on
more than half the days during such taxable year and we are unable to establish
in accordance with the Treasury Regulations that within the 5% shareholder group
there are sufficient qualified shareholders for purposes of Section 883 to
preclude non-qualified shareholders within such group from owning 50% or more of
the value of our common stock for more than half the number of days during the
taxable year. In order to establish this, qualified shareholders within the 5%
shareholder group would have to provide us with certain information in order to
substantiate their identity as qualified shareholders. Captain Gabriel Petridis,
the 50% beneficial owner of Aries Energy, has agreed to provide us with such
information. Notwithstanding this agreement, we may be unable to establish in
conformity with the Treasury Regulations that there are sufficient qualified
shareholders within the 5% shareholder group to allow us to qualify for
exemption under Section 883. Due to the factual nature of the issues involved,
we can give no assurances regarding our tax-exempt status or that of any of our
subsidiaries.
If we or our subsidiaries are not entitled to exemption under Section
883 of the Code for any taxable year, the imposition of a 4% U.S. federal income
tax on our U.S. source shipping income and that of our subsidiaries could have a
negative effect on our business and would result in decreased earnings available
for distribution to our shareholders.
Risks Relating to Our Common Stock
There may not be an active market for our common shares, which may cause our
common shares to trade at a discount and make it difficult to sell the common
shares you purchase.
We cannot assure you that an active trading market for our common shares
will be sustained. We cannot assure you of the price at which our common shares
will trade in the public market in the future or that the price of our shares in
the public market will reflect our actual financial performance. You may not be
able to resell your common shares at or above their current market price.
Additionally, a lack of liquidity may result in wide bid-ask spreads, contribute
to significant fluctuations in the market price of our common shares and limit
the number of investors who are able to buy the common shares.
The products tanker and container vessel sectors have been highly
unpredictable and volatile. The market price of our common shares may be
similarly volatile.
Future sales of our common shares could cause the market price of our common
shares to decline.
The market price of our common shares could decline due to sales of a
large number of shares in the market, including sales of shares by our large
shareholders, or the perception that these sales could occur. These sales, or
the perception that these sales could occur, could also make it more difficult
or impossible for us to sell equity securities in the future at a time and price
that we deem appropriate to raise funds through future offerings of common
shares.
Aries Energy owns approximately 52% of our common shares. Aries Energy
through Rocket Marine is eligible to sell any of our common shares, directly or
indirectly, in the public market following the applicable lock-up period, which
expired in December 2005. We have entered into a registration rights agreement
with Rocket Marine that entitles it to have all of its remaining shares
registered for sale in the public market following the expiration of that
restricted period. In addition, these shares could be sold into the public
market after one year pursuant to Rule 144 under the Securities Act of 1933, as
amended, or the Securities Act, subject to certain volume, manner of sale and
notice requirements. Sales or the possibility of sales of substantial amounts of
our common shares by Aries Energy in the public markets could adversely affect
the market price of our common shares.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We are Aries Maritime Transport Limited, or Aries Maritime, a Bermuda
company incorporated in January 2005 as a wholly owned indirect subsidiary of
Aries Energy Corporation, or Aries Energy. We are an international shipping
company that owns products tankers and container vessels. In March 2005,
subsidiaries of Aries Energy contributed to us all of the issued and outstanding
stock of 10 vessel-owning companies in exchange for shares in our company.
Before this contribution, each of the Aries Energy subsidiaries held 100% of the
issued and outstanding stock of the respective vessel-owning company or
companies owned by it. We now hold 100% of the issued and outstanding stock of
each vessel-owning company. Because our ownership percentage in each
vessel-owning company was identical to each contributing subsidiary's prior
ownership percentage in the same vessel-owning company, the group reorganization
was accounted for as an exchange of equity interests at historical cost. On June
8, 2005 Aries Maritime closed its initial public offering of 12,240,000 common
shares at an offering price of $12.50 per share. Our common stock is listed on
the Nasdaq National Market under the symbol "RAMS". The address of our principal
executive office is 18 Zerva Nap., Glyfada, Athens 166 75, Greece.
Our primary capital expenditures are in connection with the acquisitions
of vessels. Since the date of our incorporation, we have exercised an option to
re-acquire two additional container vessels, CMA CGM Seine and CMA CGM Makassar,
from an affiliate of Aries Energy and took delivery of the ships in June and
July 2005. Also, in October 2005, contracts were entered into for the purchase
of two new products tankers, Stena Compass and Stena Compassion. The Stena
Compass was delivered in February 2006 and the Stena Compassion in June 2006. In
November 2005, we took delivery of the 2001 built product tanker Chinook. As a
result of these acquisitions, our fleet now consists of ten product tankers with
an aggregate capacity of approximately 575,325 dwt and five container vessels
with an aggregate capacity of approximately 12,509 TEU. The aggregate purchase
price of the three vessels we acquired in 2005 was $103.2 million. See note 6 to
our consolidated and predecessor combined carve-out financial statements
included in this report.
B. Business Overview
Our Fleet
Our fleet consists of ten products tankers and five container vessels.
Our ten product tankers consist of five double-hulled MR tankers, one of which
has a cargo-carrying capacity of 41,450 dwt, one which has a cargo-carrying
capacity of 41,502 dwt and three of which have a cargo-carrying capacity of
38,701 dwt; four double-hulled Panamax tankers, two of which have a
cargo-carrying capacity of 73,400 dwt and two of which have a cargo-carrying
capacity of 72,750 dwt; and one double-hulled Aframax tanker, which has a
cargo-carrying capacity of 83,970 dwt. Our products tankers are designed to
transport several different refined petroleum products simultaneously in
segregated coated cargo tanks. These cargoes typically include gasoline, jet
fuel, kerosene, naphtha and heating oil, as well as edible oils. The average age
of our products tankers is approximately 5.9 years. All our products tankers are
currently employed under time charters with remaining terms ranging from
approximately a few months, with the exception of the Bora, to four years. Our
charterers include PDVSA, the state oil company of Venezuela, ST Shipping,
Deiulemar Compagnia di Navigazione S.p.A./Enel S.p.A., Trafigura Beheer B.V. and
two companies of the Stena Group (Panvictory Ltd. and Panvision Ltd.).
Our five container vessels (including the two vessels that we exercised
the option to purchase) range in capacity from 1,799 to 2,917 TEU and have an
average age of 15.6 years. Container vessels of this size are generally utilized
in the North/South trade routes that link Europe and Asia with Latin America,
Africa, India, Australia and New Zealand. Our four largest container vessels are
also utilized in the East/West trade routes that link Europe with the Far East
and the United States. Our smaller container vessel may be employed on the same
trade routes or may serve as a feeder vessel trading between hub ports, where
larger vessels call, and smaller regional ports. All of our container vessels
are currently employed under time charters with remaining terms ranging from
approximately two to five years. One of our container vessels is currently
chartered with a member of the China Shipping Group, and our remaining container
vessels are currently chartered with CMA CGM S.A.
After our time charters expire, we may employ our vessels under new time
charters or in the spot voyage market, between time charters, depending on the
prevailing market conditions at that time.
Net Daily
Year Charter Charterhire
Vessel Name Size Built Charterer Expiration Rate Flag State
Product Tankers
Altius 73,400 dwt 2004 Deiulemar/Enel June 2009 $14,860 Marshall Islands
Fortius 73,400 dwt 2004 Deiulemar/Enel August 2009 $14,860 Marshall Islands
Nordanvind 38,701 dwt 2001 PDVSA October 2008 $19,988 Venezuela/ MI
Bora 38,701 dwt 2000 Marshall Islands
High Land 41,450 dwt 1992 Trafigura April 2008 $16,575 Marshall Islands
High Rider 41,502 dwt 1991 Trafigura April 2008 $16,575 Marshall Islands
Arius ex Citius 83,970 dwt 1986 ST Shipping August 2006 $18,330(1) Marshall Islands
Stena Compass 72,750 dwt 2006 Stena Group August 2008 $18,700(2) Bermuda
Stena Compassion 72,750 dwt 2006 Stena Group December 2008 $18,700(2) Bermuda
Chinook 38,701 dwt 2001 Navigazione January 2007 $13,186 Marshall Islands
Montanari
Container Vessels
CMA CGM Makassar 2,917 TEU 1990 CMA CGM May 2010 $20,400 Marshall Islands
CMA CGM Seine 2,917 TEU 1990 CMA CGM September 2010 $20,400 Marshall Islands
ANL Energy (ex CMA 2,438 TEU 1989 CMA CGM April 2007 $21,954 Marshall Islands
CGM Energy)
CMA CGM Force 2,438 TEU 1989 CMA CGM June 2007 $21,954 Marshall Islands
Ocean Hope 1,799 TEU 1989 China Shipping June 2007 $13,956 Marshall Islands
Container Lines
(1) Plus 50% of profits of over and above $18,800 under profit sharing
provisions of our charter agreement with ST Shipping.
(2) Plus additional income under profit sharing provisions of our charter
agreement with Stena Group
Vessel Charters
Our product tankers and container vessels are currently committed under
long-term agreements with national, regional and international companies.
Pursuant to these agreements, known as charterparties, we provide these
companies, or charterers, with a vessel and crew at a fixed, per-day rate for a
specified term.
The charterers under the time charters referenced below are 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, costs related to towage, pilotage, mooring expenses at loading and
discharging facilities and certain operating expenses. The charterers are not
obligated to pay us charterhire for off-hire days, which include days a vessel
is out of service due to, among other things, repairs or drydockings. Under the
time charters, we are generally required, among other things, to keep the
related vessels seaworthy, to crew and maintain the vessels and to comply with
applicable regulations. We are also required to provide protection and
indemnity, hull and machinery, war risk and oil pollution insurance cover.
Magnus Carriers performs these duties for us under the ship management
agreements.
Charter periods are typically, at the charterer's option, subject to (1)
extension or reduction by between 15 and 60 days at the end of the final charter
period and (2) extension by any amount of time during the charter period that
the vessel is off-hire. A vessel is generally considered to be "off-hire" during
any period that it is out of service due to damage to or breakdown of the vessel
or its equipment or a default or deficiency of its crew. Under certain
circumstances our charters may terminate prior to their scheduled termination
dates. The terms of our charters vary as to which events or occurrences will
cause a charter to terminate or give the charterer the option to terminate the
charter, but these generally include a total or constructive total loss of the
related vessel, the requisition for hire of the related vessel or the failure of
the related vessel to meet specified performance criteria.
Two of our vessels, "Altius" and "Fortius," which are sister ships, are
employed under time charters with Deiulemar Compagnia di Navigazione S.p.A
("Deiulemar"), an Italian shipping company, at a daily charter rate of $14,860
per vessel, net of commissions, commencing August and June 2004, respectively.
Deiulemar has in turn sub-chartered these vessels to Enel.FTL, an Italian energy
company partly owned by the Italian state. Under the Deiulemar charterparties,
Deiulemar has the option to purchase 50% of each vessel's equity upon the
expiration of the charter for 50% of the difference between $29.5 million and
the debt balance on each vessel. If Deiulemar exercises this option, Magnus
Carriers will continue to provide technical management services and Deiulemar
will have a right of first refusal for the provision of commercial management
services for the purchased vessel or vessels. The time charters with Deiulemar
for Altius and Fortius are scheduled to expire in August and June 2009,
respectively, subject to the typical adjustments discussed above.
Our vessel, "Nordanvind" is employed under a time charter with PDVSA,
S.A. ("PDVSA"), the state oil company of Venezuela. Under the terms of the time
charter, PDVSA is required to pay a daily charter rate of $19,988, net of
commissions, until October 2008, subject to the typical adjustments discussed
above. In June 2006, we withdrew our vessel "Bora" from its charter with PDVSA
and began marketing the vessel for a new charter.
Two of our vessels, "High Land" and "High Rider," which are sister
ships, are employed under time charters to Trafigura Beheer B.V., a global
trading group involved in the trade, transportation, storage and distribution of
oil, oil products, minerals and metals. Trafigura is required to pay a daily
charter rate of $16,575 per vessel, net of commissions. The charters will expire
in April 2008.
Our vessel "Arius" (ex "Citius") is employed under a time charter with
ST Shipping and Transportation Inc., ("ST Shipping"), the shipping division of
Glencore International A.G., a company based in Switzerland. Glencore
International A.G. supplies a range of commodities and raw materials to
companies in industries such as automotive, power generation, steel production
and food processing. Under the terms of the time charter, ST Shipping is
required to pay us a basic hire of $18,330 per day, net of commissions. The
charterer is also required to pay us additional hire equaling 50% of any trading
income (revenue less voyage-related expenses) in excess of $18,800 per day. The
charter period to ST Shipping is scheduled to expire in August 2006, subject to
the typical adjustments discussed above. The "Arius" has been out of service
since December 3, 2005 and has undergone drydocking repairs which we expect to
be completed in July 2006.
Our vessel "Chinook" is employed under time charter to Navigazione
Montanari S.p.A., an Italian charterer. Under the terms of the time charter,
Navigazione Montanari is required to pay us a daily charter rate of $13,186 net
of commissions. The charter expires in January 2007.
Our vessels "CMA CGM Makassar" and "CMA CGM Seine," which are sister
ships, are employed under time charters to CMA CGM S.A. ("CMA CGM"), a worldwide
container shipping company based in France. Under the terms of these time
charters, CMA CGM is required to pay a daily charter rate of $15,405 per vessel,
net of commissions. CMA CGM has agreed to extend the terms of these charters for
an additional five years commencing May and September 2005, respectively,
subject to the typical adjustments discussed above, both at a daily charter rate
of $20,400, net of commissions.
Two of our vessels, "CMA CGM Energy" and "CMA CGM Force," which are
sister ships, are also employed under time charters with CMA CGM. Under the
terms of the time charters, CMA CGM is required to pay a daily charter rate of
$21,954 per vessel, net of commissions. The time charters to CMA CGM are
scheduled to expire in April and June 2007, respectively, subject to the typical
adjustments discussed above.
Our vessel "Ocean Hope" is currently employed under a time charter with
China Shipping Container Lines (Asia) Co. Ltd. ("CSCL"), a company within the
China Shipping Group, a state-owned Chinese shipping conglomerate. Under the
terms of the time charter, CSCL is required to pay a daily charter rate of
$13,956, net of commissions. The time charter to CSCL is scheduled to expire in
June 2007, subject to the typical adjustments discussed above.
Our vessels "Stena Compass" and "Stena Compassion" are currently
employed under bareboat charters with two companies of the Stena Group
(Panvictory Ltd. and Panvision Ltd. respectively). Under the terms of the
bareboat charters, the Stena Group companies are required to pay a basic daily
charter rate of $18,466 net of commissions. In addition, the Stena Group
companies are required to pay an additional hire equal to 30% of the weighted
average hire for each quarter after deduction of the basic rate and daily
running cost at $5,500. The bareboat charters expire in August 2008 and December
2008 respectively.
The charterers under the bareboat charters referenced above are
generally responsible for the running cost of the vessels, which include, among
other things, operation, maintenance, insurance (protection and indemnity, hull
and machinery, war risk and oil pollution) and repairs, drydocking and crew.
Also, there are no off-hire days under the bareboat charters.
For the periods ended December 31, 2005, 2004 and 2003, our revenues
from product tankers were $39.20 million, $20 million and $7.32 million
respectively. For the periods ended December 31, 2005 and 2004, our revenues
from container vessels were $27.40 million and $19.20 million respectively. Our
2005 and 2004 revenues exclude Deferred Revenue (for which please refer to the
Notes of the Company's Financial Statements). Our fleet did not have any
container vessels in 2003.
Fleet Management
Each of our vessel-owning subsidiaries has entered into a ten-year ship
management agreement with Magnus Carriers, which is cancelable by us on two
months' prior notice. We expect to cause any subsidiaries owning any vessels we
may acquire in the future to enter into a management agreement with Magnus
Carriers on substantially similar terms as our existing management agreements.
Under these management agreements, Magnus Carriers is responsible for all
technical management of our vessels, including crewing, maintenance, repair,
capital expenditures, drydocking, payment of vessel taxes and other vessel
operating activities. Magnus Carriers is also obligated under our management
agreements to maintain, at our expense, insurance for each of our vessels,
including marine hull and machinery insurance, protection and indemnity
insurance (including pollution risks and crew insurances), war risk insurance
and off-hire insurance.
As compensation for these services, we pay Magnus Carriers an amount
equal to the budgeted vessel operating expenses, which we have established
jointly with Magnus Carriers. These initial vessel operating expenses will
increase by 3% annually, and are subject to adjustment every three years. The
initial annual management fee has been set at $146,000 per vessel. The ship
management agreements provide that, if actual vessel operating expenses exceed
the corresponding budgeted amounts, we and Magnus Carriers will bear the excess
expenditures equally (except for costs relating to any improvement, structural
changes or installation of new equipment required by law or regulation, which
will be paid solely by us). On the other hand, if actual vessel operating
expenses are less than the corresponding budgeted amounts, we and Magnus
Carriers will share the cost savings equally. Vessel operating expenses are
payable by us monthly in advance.
We also use Magnus Carriers and its affiliates non-exclusively for
commercial management, which includes finding employment for our vessels and
identifying and developing vessel acquisition opportunities that will fit our
strategy. Under the terms of the ship management agreements, Magnus Carriers
provides chartering services in accordance with our instructions and we pay
Magnus Carriers 1.25% of any gross charterhire and freight paid to us for new
charters. In addition, Magnus Carriers will supervise the sale of our vessels
and the purchase of additional vessels in accordance with our instructions. We
pay Magnus Carriers 1% of the sale or purchase price in connection with a vessel
sale or purchase that Magnus Carriers brokers for us.
Magnus Carriers has agreed to indemnify us against the consequences of
any failure by Magnus Carriers to perform its obligations under the ship
management agreements up to an amount equal to ten times the annual management
fee. Any indemnification by Magnus Carriers for environmental matters is limited
to the insurance and indemnity coverage it is required to maintain for each
vessel under its ship management agreement.
In addition, as long as Magnus Carriers is our fleet manager, Magnus
Carriers and its principals have granted us a right of first refusal to acquire
or charter any container vessels or any products tankers ranging from 20,000 to
85,000 dwt, which Magnus Carriers, its principals or any of their controlled
affiliates may consider for acquisition or charter in the future.
Magnus Carriers is an established ship management company that provides
ship management services for affiliated companies, such as our company, as well
as third parties including commercial banks. Since its inception in 1997, Magnus
Carriers has managed more than 50 vessels, including oil tankers, products
tankers, LPG tankers, chemical tankers, container vessels, dry bulk carriers and
reefer vessels. Magnus Carriers and its affiliates have offices in Athens,
Greece and London, England and have 37 land-based administrative employees and
employ more than 400 seafarers on approximately 18 vessels.
Crewing and Employees
As of December 31, 2005 our wholly-owned subsidiary, AMT Management Ltd.,
employed 2 employees, all of whom are shore-based. Magnus Carriers Corporation
ensures that all seamen have the qualifications and licenses required to comply
with international regulations and shipping conventions, and that our vessels
employ experienced and competent personnel.
All of the employees of Magnus Carriers Corporation are subject to a
general collective bargaining agreement covering employees of shipping agents.
These agreements set industry-wide minimum standards. We have not had any labor
interruptions with our employees under this collective bargaining agreement.
Environmental and Other Regulation
Government regulation significantly affects the ownership and operation
of our fleet. We are subject to various international conventions and treaties,
laws and regulations in force in the countries in which our vessels may operate
or are registered relating to safety and health and environmental protection
including the storage, handling, emission, transportation and discharge of
hazardous and non-hazardous materials, and the remediation of contamination and
liability for damage to natural resources.
A variety of governmental and private entities subject our vessels to
both scheduled and unscheduled inspections. These entities include the local
port authorities, (applicable national authorities such as the U.S. Coast Guard
and harbor masters), classification societies, flag state administration
(country of registry) and charterers, particularly terminal operators and oil
companies. Some of these entities require us to obtain permits, licenses,
certificates and other authorizations for the operation of our fleet. Our
failure to maintain necessary permits or approvals could require us to incur
substantial costs or temporarily suspend operation of one or more of the vessels
in our fleet.
In recent periods, heightened levels of environmental and quality
concerns among insurance underwriters, regulators and charterers have led to
greater inspection and safety requirements on all ships 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. Magnus Carriers and Ernst Jacob, the technical manager
of our vessel "Chinook", are required to maintain operating standards for all of
our vessels emphasizing operational safety, quality maintenance, continuous
training of our officers and crews and compliance with applicable local,
national and international environmental laws and regulations. We believe that
the operation of our vessels will be in substantial compliance with applicable
environmental laws and regulations and that our vessels have all material
permits, licenses, certificates or other authorizations necessary for the
conduct of our operations; however, because such laws and regulations are
frequently changed and may impose increasingly stricter requirements, we cannot
predict the ultimate cost of complying with these requirements, or the impact of
these requirements on the resale value or useful lives of our vessels. In
addition, a future serious marine incident that results in significant oil
pollution or otherwise causes significant adverse environmental impact could
result in additional legislation or regulation that could negatively affect our
profitability.
International Maritime Organization
The International Maritime Organization, or IMO (the United Nations
agency for maritime safety and the prevention of marine pollution by ships), has
adopted the International Convention for the Prevention of Marine Pollution,
1973, as modified by the Protocol of 1978 relating thereto, which has been
updated through various amendments (the "MARPOL Convention"). The MARPOL
Convention relates to environmental standards including oil leakage or spilling,
garbage management, as well as the handling and disposal of noxious liquids,
harmful substances in packaged forms, sewage and air emissions. The IMO adopted
regulations that set forth pollution prevention requirements applicable to
tankers. These regulations, which have been adopted by over 150 nations,
including many of the jurisdictions in which our tankers operate, provide for,
among other things, phase-out of single-hulled tankers and more stringent
inspection requirements; including, in part, that:
o tankers between 25 and 30 years old must be of double-hulled
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-hulled
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-hulled
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.
In April 2001, the IMO accelerated its existing timetable for the
phase-out of single hull oil tankers which became effective in September 2002.
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. Under the regulations, the flag state administration may allow
for some newer single hull ships registered in its country that conform to
certain technical specifications to continue operating until the 25th
anniversary of their delivery. Any port state, however, may deny entry of those
single hull tankers that are allowed to operate until their 25th anniversary to
ports or offshore terminals.
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, or
MEPC, adopted an amendment to a MARPOL Convention, which became effective in
April 2005. The amendment revised an existing regulation 13G accelerating the
phase-out of single hull oil tankers and adopted a new regulation 13H on the
prevention of oil pollution from oil tankers when carrying heavy grade oil.
Under the revised regulation, single hull oil tankers must be phased out no
later than April 5, 2005 or the anniversary of the date of delivery of the ship
on the date or in the year specified in the following table:
- ---------------------------------------------------------------------------
Category of Oil Tankers Date or Year
- ---------------------------------------------------------------------------
Category 1 oil tankers of 20,000
dwt and above carrying crude oil,
fuel oil, heavy diesel oil or April 5, 2005 for ships delivered
lubricating oil as cargo, and of on April 5, 1982 or earlier; or
30,000 dwt and above carrying other 2005 for ships delivered after
oils, which do not comply with the April 5, 1982
requirements for protectively
located segregated ballast tanks
- ---------------------------------------------------------------------------
Category 2 - oil tankers of 20,000
dwt and above carrying crude oil, April 5, 2005 for ships delivered
fuel oil, heavy diesel oil or on April 5, 1977 or earlier
lubricating oil as cargo, and of 2005 for ships delivered after
30,000 dwt and above carrying other April 5, 1977 but before January 1,
oils, which do comply with the 1978
protectively located segregated 2006 for ships delivered in 1978
ballast 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 2009 for ships delivered in 1983
dwt and above but less than the 2010 for ships delivered in 1984 or
tonnage specified for Category 1 later
and 2 tankers.
- ---------------------------------------------------------------------------
Under the revised regulations, the flag state administration may allow
for some newer single hull oil tankers registered in its country that conform to
certain technical specifications to continue operating until the earlier of the
anniversary of the date of delivery of the vessel in 2015 or the 25th
anniversary of their delivery. Any port state, however, may deny entry of those
single hull oil tankers that are allowed to operate until the earlier of their
anniversary date of delivery in 2015 or their 25th anniversary to ports or
offshore terminals.
The MEPC, in October 2004, adopted a unified interpretation to
regulation 13G that clarified the date of deliver for tankers that have been
converted. Under the interpretation, where an oil tanker has undergone a major
conversion that has resulted in the replacement of the fore-body, including the
entire cargo carrying section, the major conversion completion date of the oil
tanker shall be deemed to be the date of delivery of the ship, provided that:
o the oil tanker conversion was completed before July 6, 1996;
o the conversion included the replacement of the entire cargo
section and fore-body and the tanker complies with all the
relevant provisions of MARPOL Convention applicable at the date
of completion of the major conversion; and
o the original delivery date of the oil tanker will apply when
considering the 15 years of age threshold relating to the first
technical specifications survey to be completed in accordance
with MARPOL Convention.
In December 2003, the MEPC adopted a new regulation 13H on the
prevention of oil pollution from oil tankers when carrying heavy grade oil, or
HGO. The new regulation bans the carriage of HGO in single hull oil tankers of
5,000 dwt and above after April 5, 2005, and in single hull oil tankers of 600
dwt and above but less than 5,000 dwt, no later than the anniversary of their
delivery in 2008.
Under regulation 13H, HGO means any of the following:
o crude oils having a density at 15(0)C higher than 900 kg/m3;
o fuel oils having either a density at 15(0)C higher than 900 kg/
m3 or a kinematic viscosity at 50(0)C higher than 180 mm2/s;
o bitumen, tar and their emulsions.
Under the regulation 13H, the flag state administration may allow
continued operation of oil tankers of 5,000 dwt and above, carrying crude oil
with a density at 15(0)C higher than 900 kg/m3 but lower than 945 kg/m3, that
conform to certain technical specifications and, in the opinion of the such
administration, the ship is fit to continue such operation, having regard to the
size, age, operational area and structural conditions of the ship and provided
that the continued operation shall not go beyond the date on which the ship
reaches 25 years after the date of its delivery. The flag state administration
may also allow continued operation of a single hull oil tanker of 600 dwt and
above but less than 5,000 dwt, carrying HGO as cargo, if, in the opinion of the
such administration, the ship is fit to continue such operation, having regard
to the size, age, operational area and structural conditions of the ship,
provided that the operation shall not go beyond the date on which the ship
reaches 25 years after the date of its delivery.
The flag state administration may also exempt an oil tanker of 600 dwt
and above carrying HGO as cargo if the ship is either engaged in voyages
exclusively within an area under the its jurisdiction, or is engaged in voyages
exclusively within an area under the jurisdiction of another party, provided the
party within whose jurisdiction the ship will be operating agrees. The same
applies to vessels operating as floating storage units of HGO.
Any port state, however, can deny entry of single hull tankers carrying
HGO which have been allowed to continue operation under the exemptions mentioned
above, into the ports or offshore terminals under its jurisdiction, or deny
ship-to-ship transfer of HGO in areas under its jurisdiction except when this is
necessary for the purpose of securing the safety of a ship or saving life at
sea.
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 MARPOL
Convention to address air pollution from ships. Annex VI was ratified in May
2004, and took effect May 19, 2005. Annex VI sets limits on sulfur oxide and
nitrogen oxide emissions from ship exhausts and prohibits 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. Annex
VI regulations pertaining to nitrogen oxide emissions apply to diesel engines on
vessels built on or after January 1, 2000 or diesel engines undergoing major
conversion after such date. We believe that all our vessels comply with Annex VI
in all material respects as of its effective date. Additional or new
conventions, laws and regulations may be adopted that could adversely affect our
business, cash flows, results of operations and financial condition.
The IMO also has adopted the International Convention for the Safety of
Life at Sea, or SOLAS Convention, which imposes a variety of standards to
regulate design and operational features of ships. SOLAS standards are revised
periodically. We believe that all our vessels are in substantial compliance with
SOLAS standards.
Under the International Safety Management Code for the Safe Operation of
Ships and for Pollution Prevention, 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. In 1994, the ISM Code became mandatory with the
adoption of Chapter IX of SOLAS. We intend to rely on the safety management
system that Magnus Carriers has 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 operator has been awarded a
document of compliance, issued by each flag state, under the ISM Code. We
believe that Magnus Carriers has all material requisite documents of compliance
for its offices and safety management certificates for vessels in our fleet for
which the certificates are required by the IMO. Magnus Carriers will be required
to review these documents of compliance and safety management certificates
annually.
Noncompliance with the ISM Code and other IMO regulations may subject
the shipowner to increased liability, may lead to decreases in available
insurance coverage for affected vessels and may result in the denial of access
to, or detention in, some ports. 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 and depending on whether 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 1992 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 will be
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 will be 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
4, 2006. Under the 1969 Convention, the right to limit liability is forfeited
where the spill is caused by the owner's actual fault; under the 1992 Protocol,
a shipowner cannot limit liability where the spill is caused by the owner's
intentional or reckless conduct. Vessels trading in jurisdictions 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
protection and indemnity 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 sector with an extensive
regulatory and liability regime for environmental protection and cleanup of oil
spills, consisting primarily of 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 and the responsible party reports the incident and reasonably
cooperates with the appropriate authorities) 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;
o loss of profits or impairment of earning capacity due to injury,
destruction or loss of real property, personal property and
natural resources; and
o loss of subsistence use of natural resources.
OPA limits the liability of responsible parties to the greater of $1,200
per gross ton or $10 million per tanker that is over 3,000 gross tons per
discharge (subject to possible adjustment for inflation). Under recently
proposed legislation, OPA liability limits would be increased to the greater of
$1,900 per gross ton or $16.0 million per tanker that is over 3,000 gross tons
per discharge (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,
including adjacent waters, 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 vessel owners' responsibilities under these
laws. CERCLA, which applies to owners and operators of vessels, contains a
similar liability regime and provides for cleanup, removal and natural resource
damages. Liability under CERCLA is limited to the greater of $300 per gross ton
or $5 million.
Although OPA is primarily directed at oil tankers, it also applies to
non-tanker vessels, such as container vessels, with respect to the fuel carried
on board. OPA limits the liability of non-tanker owners to the greater of $600
per gross ton or $500,000 per discharge, which may be adjusted periodically for
inflation.
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 gross negligence or willful misconduct of the responsible
party or the responsible party's agent or employee or any person acting in a
contractual relationship with the responsible party. In addition, these limits
do not apply if the responsible party or the responsible party's agent or
employee or any person acting in a contractual relationship with 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 other laws, 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 adopted regulations requiring evidence of financial
responsibility in the amount of $1,500 per gross ton for tankers, combining the
OPA limitation on liability of $1,200 per gross ton with the CERLA liability
limit of $300 per gross ton. Under those regulations, evidence of financial
responsibility may be demonstrated by insurance, surety bond, self-insurance,
guaranty or an alternative method subject to approval by the Director of the
U.S. Coast Guard National Pollution Funds Center. Under OPA regulations, an
owner or operator of more than one vessel is required to demonstrate evidence of
financial responsibility for the entire fleet in an amount equal only to the
financial responsibility requirement of the vessel having the greatest maximum
strict liability under OPA and CERCLA. Magnus Carriers has provided the
requisite guarantees and has received certificates of financial responsibility
from the U.S. Coast Guard for each of our vessels required to have one.
Magnus Carriers has arranged insurance for each of our tankers with
pollution liability insurance in the amount of $1 billion. However, a
catastrophic spill could exceed the insurance coverage available, in which event
there could be a material adverse effect on our business and on Magnus Carriers'
business, which could impair Magnus Carriers' ability to manage our vessels.
Under OPA, oil tankers as to which a contract for construction or major
conversion was put in place after June 30, 1990 are required to have double
hulls. In addition, oil tankers without double hulls will not be permitted to
come to U.S. ports or trade in U.S. waters by 2015. All of the tankers in our
fleet have double hulls.
OPA also amended the Federal Water Pollution Control Act to require that
owners or operators of tankers operating in the waters of the United States must
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, we
conduct regular oil spill response drills in accordance with the guidelines set
out in OPA. 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. Under the management agreement, Magnus Carriers will be
responsible for ensuring our vessels comply with any such additional
regulations.
As discussed above, OPA does not prevent individual states from imposing
their own liability regimes with respect to oil pollution incidents occurring
within their boundaries, including adjacent coastal waters. 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.
Additional U.S. Environmental Requirements
The U.S. Clean Air Act of 1970, as amended by the Clean Air Act
Amendments of 1977 and 1990 (the "CAA"), requires the U.S. Environmental
Protection Agency, or EPA, to promulgate standards applicable to emissions of
volatile organic compounds and other air contaminants. Our vessels are subject
to vapor control and recovery requirements for certain cargoes when loading,
unloading, ballasting, cleaning and conducting other operations in regulated
port areas. Our vessels that operate in such port areas are equipped with vapor
control systems that satisfy these requirements. The CAA also requires states to
draft State Implementation Plans, or SIPs, designed to attain national
health-based air quality standards in primarily major metropolitan and/or
industrial areas. Several SIPs regulate emissions resulting from vessel loading
and unloading operations by requiring the installation of vapor control
equipment. As indicated above, our vessels operating in covered port areas are
already equipped with vapor control systems that satisfy these requirements.
Although a risk exists that new regulations could require significant capital
expenditures and otherwise increase our costs, we believe, based on the
regulations that have been proposed to date, that no material capital
expenditures beyond those currently contemplated and no material increase in
costs are likely to be required.
The Clean Water Act ("CWA") prohibits the discharge of oil or hazardous
substances into navigable waters and imposes strict liability in the form of
penalties for any unauthorized discharges. The CWA also imposes substantial
liability for the costs of removal, remediation and damages. State laws for the
control of water pollution also provide varying civil, criminal and
administrative penalties in the case of a discharge of petroleum or hazardous
materials into state waters. The CWA complements the remedies available under
the more recent OPA and CERCLA, discussed above. Under current regulations of
the EPA, vessels are not required to obtain CWA permits for the discharge of
ballast water in U.S. ports. However, as a result of a recent U.S. federal court
decision, vessel owners and operators may be required to obtain CWA permits for
the discharge of ballast water, or they will face penalties for failing to do
so. Although the EPA is likely to appeal this decision, we do not know how this
matter is likely to be resolved and we cannot assure you that any costs
associated with compliance with the CWA's permitting requirements will not be
material to our results of operations.
The National Invasive Species Act ("NISA") was enacted in 1996 in
response to growing reports of harmful organisms being released into U.S. ports
through ballast water taken on by ships in foreign ports. NISA established a
ballast water management program for ships entering U.S. waters. Under NISA,
mid-ocean ballast water exchange is voluntary, except for ships heading to the
Great Lakes, Hudson Bay, or vessels engaged in the foreign export of Alaskan
North Slope crude oil. However, NISA's exporting and record-keeping requirements
are mandatory for vessels bound for any port in the United States. Although
ballast water exchange is the primary means of compliance with the act's
guidelines, compliance can also be achieved through the retention of ballast
water onboard the ship, or the use of environmentally sound alternative ballast
water management methods approved by the U.S. Coast Guard. If the mid-ocean
ballast exchange is made mandatory throughout the United States, or if water
treatment requirements or options are instituted, the costs of compliance could
increase for ocean carriers.
Our operations occasionally generate and require the transportation,
treatment and disposal of both hazardous and non-hazardous wastes that are
subject to the requirements of the U.S. Resource Conservation and Recovery Act,
or RCRA, or comparable state, local or foreign requirements. In addition, from
time to time we arrange for the disposal of hazardous waste or hazardous
substances at offsite disposal facilities. If such materials are improperly
disposed of by third parties, we might still be liable for clean up costs under
applicable laws.
European Union Tanker Restrictions
In July 2003, in response to the MT Prestige oil spill in November 2002,
the European Union adopted legislation that accelerates the IMO single hull
tanker phase-out timetable and, by 2010 will prohibit all single-hulled tankers
used for the transport of oil from entering into its ports or offshore
terminals. The European Union, following the lead of certain European Union
nations such as Italy and Spain, has also banned, as of October 21, 2003, all
single-hulled tankers carrying heavy grades of 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-hulled 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.
All of the tankers in our fleet are double-hulled; however, because of
certain age restrictions and requirements set forth in the regulations described
above, the "High Land," the "High Rider" and the "Citius" can trade in European
and U.S. waters only until June 2015, July 2015 and June 2014, respectively.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a
variety of initiatives intended to enhance vessel security. On November 25,
2002, the U.S. Maritime Transportation Security Act of 2002, or 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 SOLAS created a
new chapter of the convention dealing specifically with maritime security. The
new chapter became effective in July 2004 and imposes various detailed security
obligations on vessels and port authorities, most of which are contained in the
newly created International Ship and Port Facilities Security Code, or the ISPS
Code. The ISPS Code is designed to protect ports and international shipping
against terrorism. After July 1, 2004, to trade internationally, a vessel must
attain an International Ship Security Certificate from a recognized security
organization approved by the vessel's flag state. Among the various requirements
are:
o on-board installation of automatic identification systems to
provide a means for the automatic transmission of safety-related
information from among similarly equipped ships and shore
stations, including information on a ship's identity, position,
course, speed and navigational status;
o on-board installation of ship security alert systems, which do
not sound on the vessel but only alerts the authorities on
shore;
o the development of vessel security plans;
o ship identification number to be permanently marked on a
vessel's hull;
o a continuous synopsis record kept onboard showing a vessel's
history including, name of the ship and of the state whose flag
the ship is entitled to fly, the date on which the ship was
registered with that state, the ship's identification number,
the port at which the ship is registered and the name of the
registered owner(s) and their registered address; and
o compliance with flag state security certification requirements.
The U.S. Coast Guard regulations, intended to align with international
maritime security standards, exempt from MTSA vessel security measures non-U.S.
vessels that have on board, as of July 1, 2004, a valid ISSC attesting to the
vessel's compliance with SOLAS security requirements and the ISPS Code. Magnus
Carriers has implemented the various security measures addressed by MTSA, SOLAS
and the ISPS Code, and our fleet is in compliance with applicable security
requirements.
Risk of Loss and Insurance
The operation of any cargo vessel includes risks such as mechanical
failure, physical damage, 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. The U.S. Oil Pollution Act of 1990, or OPA, which imposes
virtually unlimited liability upon owners, operators and 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 U.S. market. While we
believe that our present insurance coverage is adequate, not all risks can be
insured against, 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.
We have obtained marine hull and machinery and war risk insurance, which
includes the risk of actual or constructive total loss, for all our vessels. The
vessels are each covered up to at least fair market value.
We also arranged increased value insurance for most of our vessels.
Under the increased value insurance, in case of total loss of the vessel, we
will be able to recover the sum insured under the policy in addition to the sum
insured under our hull and machinery policy. Increased value insurance also
covers excess liabilities that are not recoverable in full by the hull and
machinery policies by reason of under-insurance.
Protection and indemnity insurance, which covers our third party
liabilities in connection with our shipping activities, is provided by mutual
protection and indemnity associations, or P&I Associations. This insurance
covers 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
$1.0 billion per vessel per incident. The 13 P&I Associations that compose 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 $4.5 billion. As a member of a P&I Association that is a member of
the International Group, we are subject to calls payable to the associations
based on our claim records as well as the claim records of all other members of
the individual associations, and members of the International Group.
Inspection by a Classification Society
Our vessels have been certified as being "in-class" by either Nippon
Kaijori Kyokai Corp., Lloyds Register of Shipping, Bureau Veritas, Germanischer
Lloyd, American Bureau of Shipping and Rina S.p.A., each of which is a member of
the International Association of Classification Societies. Every commercial
vessel's hull and machinery is evaluated by a classification society authorized
by its country of registry. The classification society certifies 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. Each vessel is inspected by a surveyor of the classification society in
three surveys of varying frequency and thoroughness: every year for the annual
survey, every two to three years for intermediate surveys and every four to five
years for special surveys. Should any defects be found, the classification
surveyor will issue a "recommendation" for appropriate repairs, which have to be
made by the shipowner within the time limit prescribed. Vessels may be required,
as part of the annual and intermediate survey process, to be drydocked for
inspection of the underwater portions of the vessel and for necessary repair
stemming from the inspection. Special surveys always require drydocking.
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 in the period market through the use
of brokers, who negotiate the terms of the charters based on market conditions.
We compete primarily with owners of container ships and owners of products
tankers in the Aframax, Panamax and Handymax class sizes. Ownership of tankers
is highly fragmented and is divided among major oil companies and independent
vessel owners.
Legal Proceedings Against Us
We are party, as plaintiff or defendant, to a variety of lawsuits for
damages arising principally from personal injury and property casualty claims.
Most claims are covered by insurance, subject to customary deductibles. We
believe that these claims will not, either individually or in the aggregate,
have a material adverse effect on us, our financial condition or results of
operations. From time to time in the future we may be subject to legal
proceedings and claims in the ordinary course of business, principally personal
injury and property casualty claims. Those claims, even if lacking merit, could
result in the expenditure of significant financial and managerial resources. We
have not been involved in any legal proceedings which may have, or have had a
significant effect on our financial position, nor are we aware of any
proceedings that are pending or threatened which may have a significant effect
on our financial position.
C. Organizational Structure
Aries Maritime Transport Limited is the sole owner of all outstanding
shares of the subsidiaries listed in note 1 of our consolidated and predecessor
combined carve-out financial statements included in this report.
D. Properties, Plants and Equipment
We lease office space in Athens, Greece, from Domina Petridou O.E.,
which is owned by Mons S. Bolin, our President and Chief Executive Officer, and
Domina Petridou. In November 2005 we entered into a lease agreement with the
landowner of 6 years' duration. We refer you to "Our Fleet" above in this item
for a discussion of our vessels.
ITEM 4A Unresolved Staff Comments
Not applicable
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated and predecessor
combined carve-out financial statements, which we call our consolidated and
combined financial statements, and the related notes, and the other financial
and other information included in this document. This discussion contains
forward-looking statements, which are based on our assumptions about the future
of our business. Our actual results will likely differ materially from those
contained in the forward-looking statements and such differences may be
material. Please read "Forward-Looking Statements" for additional information
regarding forward-looking statements used in this document. Reference in the
following discussion to "our" and "us" and "the company" refer to our company,
our subsidiaries and the predecessor operations of Aries Maritime Transport
Limited, except where the context otherwise indicates or requires.
General
We are Aries Maritime Transport Limited, or Aries Maritime, a Bermuda
company incorporated in January 2005 as a wholly owned indirect subsidiary of
Aries Energy Corporation, or Aries Energy. We are an international shipping
company that owns products tankers and container vessels. In March 2005,
subsidiaries of Aries Energy contributed to us all of the issued and outstanding
stock of 10 vessel-owning companies in exchange for shares in our company.
Before this contribution, each of the Aries Energy subsidiaries held 100% of the
issued and outstanding stock of the respective vessel-owning company or
companies owned by it. We now hold 100% of the issued and outstanding stock of
each vessel-owning company. Because our ownership percentage in each
vessel-owning company is identical to each contributing subsidiary's prior
ownership percentage in the same vessel-owning company, the group reorganization
was accounted for as an exchange of equity interests at historical cost. On June
8, 2005 Aries Maritime closed its initial public offering of 12,240,000 common
shares at an offering price of $12.50 per share.
The combined financial statements included in this document have been
carved out of the consolidated financial statements of Aries Energy, which owned
and operated two products tankers during the period from March 2003 to December
31, 2003 and seven products tankers and five container vessels during the year
ended December 31, 2004. Results have been included from the respective dates
that the vessel-owning subsidiaries came under the control of the shareholders
of Aries Energy. Aries Energy's shipping interests and other assets,
liabilities, revenues and expenses that do not relate to the vessel-owning
subsidiaries acquired by us are not included in our combined financial
statements. Our financial position, results of operations and cash flows
reflected in our combined financial statements include all expenses allocable to
our business, but may not be indicative of those that would have been achieved
had we operated as a public entity for all periods presented or of future
results. From March 17, 2005, the consolidated financial statements reflect the
consolidated results of Aries Maritime.
A. Operating Results
Important Factors to Consider When Evaluating our Historical and Future Results
of Operations
We acquired our first two vessels, the High Land and the High Rider, in
March 2003. These two vessels were the only vessels in our fleet during the
period ended December 31, 2003 and were the only vessels in our fleet to operate
for the entire year ended December 31, 2004. At various times between April and
December 2004, we acquired five products tankers and five container vessels.
These ten vessels were placed into service shortly after their respective
delivery dates. In December 2004, Aries Energy sold the Makassar and the Seine
to an affiliate. As a result of these disposals, our fleet consisted of seven
products tankers and three container vessels at December 31, 2004.
We exercised an option to re-acquire the Makassar and the Seine shortly
after the closing of the initial public offering and took delivery of these
ships in June and July 2005, respectively. In October 2005, contracts were
entered into for the purchase of two new products tankers: two 72,750 dwt
vessels, Stena Compass and Stena Compassion. The Stena Compass was delivered in
February 2006. The Stena Compassion was delivered in June 2006. In November 2005
we took delivery of the 2001 built products tanker Chinook. As a result of these
acquisitions, our fleet consisted of eight products tankers and five container
vessels at December 31, 2005.
The products tanker and container vessel sectors have historically been
highly cyclical, experiencing volatility in profitability, vessel values and
charter rates. In particular, charter rates are strongly influenced by the
supply of vessels and the demand for oil and oil products and container
transportation services.
Lack of Historical Operating Data for Vessels Before their Acquisition
Consistent with shipping industry practice, other than inspection of the
physical condition of the vessels and examinations of classification society
records, there is no historical financial due diligence process when we acquire
vessels. Accordingly, we do not obtain the historical operating data for the
vessels from the sellers because that information is not material to our
decision to make acquisitions, nor do we believe it would be helpful to
potential investors in our common shares in assessing our business or
profitability. Most vessels are sold under a standardized agreement, which,
among other things, provides the buyer with the right to inspect the vessel and
the vessel's classification society records. The standard agreement does not
give the buyer the right to inspect, or receive copies of, the historical
operating data of the vessel. Prior to the delivery of a purchased vessel, the
seller typically removes from the vessel all records, including past financial
records and accounts related to the vessel. In addition, the technical
management agreement between the seller's technical manager and the seller is
automatically terminated and the vessel's trading certificates are revoked by
its flag state following a change in ownership.
Consistent with shipping industry practice, we treat the acquisition of
a vessel (whether acquired with or without charter) as the acquisition of an
asset rather than a business. Although vessels are generally acquired free of
charter, we have acquired (and may in the future acquire) some vessels with
period charters. Where a vessel has been under a voyage charter, the vessel is
delivered to the buyer free of charter. It is rare in the shipping industry for
the last charterer of the vessel in the hands of the seller to continue as the
first charterer of the vessel in the hands of the buyer. In most cases, when a
vessel is under period charter and the buyer wishes to assume that charter, the
vessel cannot be acquired without the charterer's consent and the buyer's
entering into a separate direct agreement with the charterer to assume the
charter. The purchase of a vessel itself does not transfer the charter, because
it is a separate service agreement between the vessel owner and the charterer.
When we purchase a vessel and assume a related period charter, we must take the
following steps before the vessel will be ready to commence operations:
o obtain the charterer's consent to us as the new owner;
o obtain the charterer's consent to a new technical manager;
o in some cases, obtain the charterer's consent to a new flag for
the vessel;
o arrange for a new crew for the vessel;
o replace all hired equipment on board, such as gas cylinders and
communication equipment;
o negotiate and enter into new insurance contracts for the vessel
through our own insurance brokers;
o register the vessel under a flag state and perform the related
inspections in order to obtain new trading certificates from the
flag state;
o implement a new planned maintenance program for the vessel; and
o ensure that the new technical manager obtains new certificates
for compliance with the safety and vessel security regulations
of the flag state.
The following discussion is intended to help you understand how
acquisitions of vessels affect our business and results of operations.
Our business is comprised of the following main elements:
o employment and operation of our products tankers and container
vessels; and
o management of the financial, general and administrative elements
involved in the conduct of our business and ownership of our
products tankers and container vessels.
The employment and operation of our vessels require the following main
components:
o vessel maintenance and repair;
o crew selection and training;
o vessel spares and stores supply;
o contingency response planning;
o onboard safety procedures auditing;
o accounting;
o vessel insurance arrangement;
o vessel chartering;
o vessel hire management;
o vessel surveying; and
o vessel performance monitoring.
The management of financial, general and administrative elements
involved in the conduct of our business and ownership of our vessels requires
the following main components:
o management of our financial resources, including banking
relationships, i.e., administration of bank loans and bank
accounts;
o management of our accounting system and records and financial
reporting;
o administration of the legal and regulatory requirements
affecting our business and assets; and
o management of the relationships with our service providers and
customers.
Principal Factors that Affect Our Business
The principal factors that affect our financial position, results of
operations and cash flows include:
o charter rates and periods of charterhire;
o vessel operating expenses and voyage costs, which are incurred
in both U.S. Dollars and other currencies, primarily Euros;
o depreciation expenses, which are a function of the cost of our
vessels, significant vessel improvement costs and our vessels'
estimated useful lives;
o financing costs related to our indebtedness, which totalled
$183.8 million at December 31, 2005; and
o fluctuations in foreign exchange rates.
The amounts estimated below are not intended to constitute pro forma
financial information within the meaning of regulations promulgated by the
Securities and Exchange Commission, but in our view, have been determined on a
reasonable basis, and reflect our best currently available estimates and
judgements. These estimates do not represent actual results and should not be
relied upon as being necessarily indicative of future results, and investors are
cautioned not to place undue reliance on this information. This financial
information was not prepared with a view toward compliance with published
guidelines of the Securities and Exchange Commission or the guidelines
established by the American Institute of Certified Public Accountants for
preparation and presentation of prospective financial information. This
forward-looking financial information has been prepared by us, and is our
responsibility.
You should read the following discussion together with the information
contained in the table of vessel information under "Item 4 -- Information on the
Company -- Business Overview -- Our Fleet". The net daily charterhire rates
detailed in that table under "Charterhire" are fixed rates and all detailed
vessels are employed, or in the case of the Stena Compassion contracted to be
employed, under period charters. Revenues from period charters are stable over
the duration of the charter, provided there are no unexpected off-hire periods
and no performance claims from the charterer or charterer defaults. We cannot
guarantee that actual results will be as anticipated.
Our strategy is to employ vessels on period charters in order to
generate stable cash flow over a period of time. All our vessels are employed,
or contracted to be employed, on period charters and, with the exception of the
Stena Compass and Stena Compassion, are employed on time charters. The Stena
Compass and Stena Compassion charters are bareboat charters. The average
remaining term under our existing charters on our fleet was 2.5 years as of
December 31, 2005 with fixed charterhire rates. Our policy is to carry
loss-of-hire insurance, which will provide the equivalent of the charter rate on
the vessel in the event that a vessel is off-hire for more than 14 days.
At the net rates of charterhire detailed in the table under "Our Fleet"
in "Item 4. Information on the Company", the total daily net revenue under
existing charter agreements was $224,975 as of December 31, 2005. The daily net
revenue under our existing charter agreements is augmented by the amortization
of the deferred revenue associated with our assumption of charters when
acquiring certain vessels. The total daily deferred revenue amortization in
respect of the relevant vessels was $43,112 as of December 31, 2005. The
recognition of deferred revenue will only continue for the duration of the
charters assumed with the acquisitions of the relevant vessels.
Vessels typically operate for 360 days per year, which is a level
commonly used as an industry average, and is in line with our past average
number of operating days. The five days of non-operation per year are to provide
for time spent in dry-dock and off-hire time. Should a vessel be operational for
355 days, instead of 360 days in any year, charterhire income from that vessel
would decrease by 1.4% in that year. We earned revenues, excluding deferred
revenue, of $66.6 million in the year ended December 31, 2005. An average 1.4%
decrease in charterhire income for the vessels then comprising our fleet would
have resulted in a decrease of revenues by $0.9 million to $65.7 million.
With regard to total vessel operating expenses, defined as the sum of
the vessel operating expenses, amortization of actual dry-docking and special
survey expenses and management fees, the ship management agreements with Magnus
Carriers Corporation, or Magnus Carriers, for the twelve vessels managed by
Magnus Carriers set out the initial twelve months agreed total daily vessel
operating expenses. For further information on the ship management agreements
with Magnus Carriers please read, "Technical and Commercial Management of Our
Fleet" in "Item 5. Operating And Financial Review And Prospects." Any variance
between the agreed total vessel operating expenses and the actual total vessel
operating expenses will be shared equally between Magnus Carriers and us. The
daily operating expenses detailed in the table under "Our Fleet" in the column
headed "Daily total vessel operating expenses" represent the initial agreed
vessel operating expenses under our management agreements with Magnus Carriers,
with the exception of the daily operating expense detailed for Chinook, which is
the actual daily vessel operating expense for the period from its delivery on
November 30, 2005 to December 31, 2005, as this vessel is not managed by Magnus
Carriers. Chinook is subject to a ship management agreement with an unrelated
company, which contains no variance sharing arrangement. Stena Compass, which
was delivered on February 14, 2006 and Stena Compassion, which was delivered in
June 2006, are both employed on bareboat charters and under such contracts the
charterer is responsible for vessel operating expenses.
The main factors that could increase vessel operating expenses are crew
salaries, insurance premiums, dry-docking and special survey costs, spare parts
orders, repairs that are not covered under insurance policies and lubricants
prices. The ship management agreements provide for a cost of inflation increase
in vessel operating expenses of 3% per annum and are subject to adjustment every
three years.
On the basis of total vessel operating expenses for the twelve ships
subject to the management agreements with Magnus Carriers, at the initial level
contained in those management agreements as set out in the table of vessel
information under "Our Fleet," the aggregate of the daily total vessel operating
expenses, at the inception of our management arrangements, is $57,400 for the
first twelve months of the management agreements.
In the period from the date the management agreements on the twelve
ships under Magnus Carriers management became effective, until December 31,
2005, we incurred vessel operating expenses and management fees totaling $12.5
million. Under the management agreements with Magnus Carriers, the initial
vessel operating expenses and management fees for the same period were expected
to total $10.8 million. The "Vessel operating expenses" in our consolidated and
combined financial statements for the year ended December 31, 2005 have been
adjusted to reflect the variance sharing contribution due from Magnus Carriers
of $0.8 million under the terms of the management agreements. The management
agreements with Magnus Carriers on the twelve ships under their management
became effective from June 8, 2005, with the exception of CMA CGM Seine and CMA
CGM Makassar, which became effective June 24, 2005 and July 15, 2005
respectively.
Revenues
At December 31, 2005, all our revenues were derived from the period
charters of our eight products tankers and five container vessels. Our vessels
are currently chartered to reputable charterers with remaining periods ranging
from approximately five months to 4.5 years, with an average of approximately
2.5 years as of December 31, 2005. Our vessels have been employed with these
charterers for periods ranging from 1.5 years to 3.9 years. We believe that the
performance of the charterers to date has been in accordance with our
charterparties. At the maturity of each charter, we will seek to renew these
charters with the same or other reputable charterers.
Our revenues for the period ended December 31, 2005 reflect the
operation of seven products tankers and three container vessels for the entire
year. During the year ended December 31, 2005, we took delivery of one
additional products tanker and two container vessels, which increased our
revenues for that period in relation to the same period during the prior year.
Our revenues include an amount for the amortization of deferred revenue
arising from the purchase of vessels together with the assumption of a below
market value period charter. We value the liability upon acquisition of the
vessel by determining the difference between the market charter rate and assumed
charter rate, discounting the result using our weighted average cost of capital
and record the balance as deferred revenue, amortizing it to revenue over the
remaining life of the period charter.
Commissions
Chartering commissions are paid to chartering brokers and are typically
based on a percentage of the charterhire rate. We are currently paying
chartering commissions ranging from 1.25% to 3.75%, with an average of 2.75%.
Gain on Disposal of Vessels
Gain on disposal of vessels is the difference between the net proceeds
received from the sale of vessels and their net book value at the date of sale.
Vessel Operating Expenses
Vessel operating expenses are the costs of operating a vessel, primarily
consisting of crew wages and associated costs, insurance premiums, management
fees, lubricants and spare parts, and repair and maintenance costs. Vessel
operating expenses exclude fuel cost, port expenses, agents' fees, canal dues
and extra war risk insurance, which are included in "voyage expenses."
Certain vessel operating expenses are higher during the initial period
of a vessel's operation. Initial daily vessel operating expenses are usually
higher than normal as newly acquired vessels are inspected and modified to
conform to the requirements of our fleet.
Depreciation
Depreciation is the periodic cost charged to our income for the
reduction in usefulness and long-term value of our vessels. We depreciate the
cost of our vessels over 25 years on a straight-line basis. No charge is made
for depreciation of vessels under construction until they are delivered.
Amortization of Special Survey and Dry-docking Costs
Special survey and dry-docking costs incurred are deferred and amortized
over a period of five and two and a half years, respectively, which reflects the
period between each required special survey and minimum period between each
dry-docking.
Interest Expenses
Interest expenses include interest, commitment fees, arrangement fees,
amortization of deferred financing costs, debt discount, interest incurred from
discounting deferred revenue and other similar charges. Interest incurred during
the construction of a newbuilding is capitalized in the cost of the newbuilding.
The amount of interest expense is determined by the amount of loans and advances
outstanding from time to time and interest rates. The effect of changes in
interest rates may be reduced by interest rate swaps or other derivative
instruments. We use interest rate swaps to hedge our interest rate exposure
under our loan agreements.
Change in Fair Value of Derivatives
At the end of each accounting period, the fair values of our interest
rate swaps are assessed by marking each swap to market. Changes in the fair
value between periods are recognized in the statements of income.
Foreign Exchange Rates
Foreign exchange rate fluctuations, particularly between the Euro and
Dollar, have had an impact on our vessel operating expenses and administrative
expenses. We actively seek to manage such exposure. Currently, approximately 30%
of our vessel operating cost is incurred in currencies other than the U.S.
dollar. Close monitoring of foreign exchange rate trends, maintaining foreign
currency accounts and buying foreign currency forward in anticipation of our
future requirements are the main ways we manage our exposure to foreign exchange
risk.
Technical and Commercial Management of Our Fleet
Twelve of our vessel-owning subsidiaries entered into ten-year ship
management agreements with Magnus Carriers, a related party, to provide
primarily for the technical management of our vessels, including crewing,
maintenance, repair, capital expenditures, dry-docking, payment of vessel
tonnage taxes, maintaining insurance and other vessel operating activities.
These ship management agreements are cancellable by the vessel-owning
subsidiaries with two months' notice, while Magnus Carriers has no such option.
Under the ship management agreements, we pay Magnus Carriers an amount
equal to the budgeted total vessel operating expenses, which we have established
jointly with Magnus Carriers, and which range from $4,400 to $5,100 per vessel
per day initially. The budgeted total vessel operating expenses, which include
the management fees paid to Magnus Carriers of $146,000 per annum per vessel,
will increase by 3% annually and will be subject to adjustment every three
years. The ship management agreements provide that if actual total vessel
operating expenses exceed the corresponding budgeted amounts, we and Magnus
Carriers will bear the excess expenditures equally (except for costs relating to
any improvement, structural changes or installation of new equipment required by
law or regulation, which will be paid solely by us). If the actual total vessel
operating expenses are less than the corresponding budgeted amounts, we and
Magnus Carriers will share the cost savings equally.
We also use Magnus Carriers and its affiliates non-exclusively for
commercial management, which includes finding employment for our vessels and
identifying and developing new business that will fit our strategy. For such
services, we will pay Magnus Carriers a commercial management fee equal to 1.25%
of any gross charterhire or freight we receive for new charters. In addition,
Magnus Carriers will supervise the sale or purchase of vessels in accordance
with our instructions. We pay Magnus Carriers 1% of the sale or purchase price
in connection with a vessel sale or purchase that Magnus Carriers brokers for
us. We may also use third parties for commercial management services from time
to time. In the case of the Chinook, whose ship management agreement with an
unrelated ship management company is for technical and operational vessel
management only, we have entered into a separate commercial management agreement
with Magnus Carriers for the provision of commercial and vessel accounting
services for a fixed fee of $60,000 per annum.
In addition, as long as Magnus Carriers is managing vessels in our
fleet, Magnus Carriers and its principals have granted us a right of first
refusal to acquire or charter any container vessels or any products tankers
ranging from 20,000 to 85,000 dwt, which Magnus Carriers, its principals or any
of their controlled affiliates may consider for acquisition or charter in the
future.
Results of Operations
Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
Revenues
Total revenues increased by approximately 57% to $75.9 million in the
year ended December 31, 2005 compared to $48.3 million in the year ended
December 31, 2004. This increase is primarily attributable to the growth of the
Company's fleet and associated increase in operating days during the year ended
December 31, 2005. We have also recognized in our total revenues $1.8 million of
provisions for a cargo claim, speed claims and off-hire periods based on a
review of all outstanding trade receivables at the year ended December 31, 2005.
At various dates between April and December 2004, we took delivery of
ten vessels: five products tankers and five container vessels. Since their
respective dates of delivery, each of these vessels has operated under time
charters. In December 2004 Aries Energy sold the CMA CGM Seine and CMA CGM
Makassar. Revenue from the employment of the ten vessels delivered during the
year ended December 31, 2004 was $30.1 million and revenue from the High Land
and High Rider, which were the only vessels to operate for the entire year ended
December 31, 2004, was $9.1 million. The company benefited from a full year of
operation of these vessels during 2005.
During the year ended December 31, 2005 we acquired one product tanker,
Chinook, two container vessels, CMA CGM Seine and CMA CGM Makassar and contracts
were entered into for the purchase of two new products tankers, Stena Compass
and Stena Compassion. Stena Compass was delivered in February 2006 and Stena
Compassion was delivered in June 2006. Revenue from the three vessels delivered
during the year ended December 31, 2005 was $10.8 million and revenue from the
other vessels in the fleet was $65.1 million.
Of the total revenue earned by our vessels during the year ended
December 31, 2005, 57% was earned by our products tankers and 43% by our
container vessels.
We have recognized $9.3 million of deferred revenue during the year
ended December 31, 2005 compared to $9.1 million the year ended December 31,
2004, as a result of the assumption of charters associated with certain vessel
acquisitions. These assumed charters were at set charter rates, which were less
than market rates at the date of the vessels' acquisition. This increase was
primarily due to the acquisition of the products tanker Chinook in November
2005.
Commissions
Chartering commissions increased by approximately 8% to $1.3 million in
the year ended December 31, 2005, compared to $1.2 million in the year ended
December 31, 2004. This increase is primarily due to the aggregate effect of an
increase in operating days associated with growth of the Company's fleet and
reduced chartering commissions paid to Magnus Carriers following implementation
of new ship management agreements during the year ended December 31, 2005.
Vessel operating expenses
Vessel operating expenses increased by approximately 42% to $17.8
million during the year ended December 31, 2005, compared to $12.5 million
during the year ended December 31, 2004. This increase is primarily due to the
aggregate effect of the growth of the Company's fleet and associated increase in
operating days, together with the implementation under the new ship management
agreements of our arrangement with Magnus Carriers to share equally in expenses
in excess of the budgeted amounts. Excluding the budget variance sharing
arrangement, total vessel operating expenses were $18.7 million for the year
ended December 31, 2005.
Total vessel operating expenses for the vessels delivered during the
year ended December 31, 2005 were $2.2 million.
Of the total vessel operating expenses during the year ended December
31, 2005, 59% was incurred by our products tankers and 41% by our container
vessels.
General & Administrative Expenses
General and administrative expenses were $1.6 million in the year ended
December 31, 2005. Before the initial public offering the main elements of
general and administrative expenses, such as executive and director
compensation, audit fees, liability insurance premium and company administration
costs, were accounted for within the administrative costs of the ship management
company.
Depreciation and Amortization
Depreciation increased by approximately 53% to $19.4 million during the
year ended December 31, 2005 compared to $12.7 million during the year ended
December 31, 2004. Amortization of dry-docking and special survey costs
increased by 27% to $1.9 million in the year ended December 31, 2005, compared
to $1.5 million in the year ended December 31, 2004. These increases are
primarily due to the growth of the Company's fleet and associated increase in
operating days.
Management Fees to Related Party
Management fees paid to Magnus Carriers increased by 67% to $1.5 million
in the year ended December 31, 2005 compared to $0.9 million of the year ended
December 31, 2004. This increase is primarily due to the growth of the Company's
fleet and associated increase in operating days, together with the payment of
the management fees contained in the new ship management agreements.
Interest Expense
Total interest expense increased by approximately 119% to $18.8 million
during the year ended December 31, 2005, compared to $8.6 million during the
year ended December 31, 2004. Interest expense on loans increased by
approximately 47% to $9.0 million, compared to $6.1 million for the year ended
December 31, 2004. This increase is primarily due to the growth of the Company's
fleet and associated increase in financing days. Interest expense relating to
amortization of deferred financing costs increased by approximately 327% to $9.4
million during the year ended December 31, 2005, compared to $2.2 million during
the year ended December 31, 2004. This increase is primarily due to the
acceleration of amortization of deferred financing costs and debt discount.
Interest expense incurred from discounting the deferred revenue expense
increased by approximately 33% to $0.4 million during the year ended December
31, 2005, compared to $0.3 million during the year ended December 31, 2004. This
increase is primarily due to the growth of the Company's fleet.
Interest Rate Swaps
The marking to market of our three interest rate swaps in effect as of
December 31, 2005 resulted in a gain of $0.95 million, compared with a loss as
of December 31, 2004 of $0.03 million, due to the change in fair value over the
period. Interest rates were higher at the end of December 2005, compared with
the end of December 2004.
Net Income
Net income was $14.8 million in the year ended December 31, 2005,
compared to $25.3 million in the year ended December 31, 2004, a decrease of
41%. This decrease is primarily due to there being no disposal of vessels during
the year ended December 31, 2005 compared with a gain on disposal of vessels of
$14.7 million during the year ended December 31, 2004.
Year Ended December 31, 2004 Compared to the Period Ended December 31, 2003
Revenues
Total revenues increased by approximately 560% to $48.3 million in the
year ended December 31, 2004 compared to $7.3 million in the period ended
December 31, 2003. This increase is attributable to the growth in our fleet
during the year ended December 31, 2004. The High Land and High Rider, which
were acquired in March 2003, were the only two vessels in our fleet operating
during the period ended December 31, 2003 and the entire year ended December 31,
2004. The charterhire rate earned by High Rider and High Land during the period
ended December 31, 2003 and the year ended December 31, 2004 was unchanged, at
$12,838 net daily.
At various dates between April and December 2004, we took delivery of
ten vessels: five products tankers and five container vessels. Since their
respective dates of delivery, each of these vessels has operated under time
charters. Revenue from the ten vessels delivered during the year ended December
31, 2004 was $30.1 million and revenue from the High Land and High Rider was
$9.1 million.
Of the total revenue earned by our vessels during the year ended
December 31, 2004, 51% was earned by our products tankers and 49% by our
container vessels.
We have recognized $9.1 million of revenue as a result of the assumption
of charters associated with certain vessel acquisitions during 2004. These
assumed charters had charter rates, which were less than market rates at the
date of the vessels' acquisition.
Gain on Disposal of Vessels
In December 2004, Aries Energy completed the sale of the Makassar and
Seine to International Container Ships KS, an affiliate of Aries Energy, for an
amount of $32.5 million each. The proceeds consisted of cash of $30 million
each, an amount of $1.5 million each paid directly to shareholders and deferred
consideration of $1 million each. The deferred consideration was due and payable
in one balloon payment on December 21, 2010, the final maturity date of the loan
advanced to the buyers or upon sale or total loss of the vessel and interest was
charged on the balance at 3.5% per annum. The vessels had a net book value of
$55.8 million in total and a related deferred revenue of $5.7 million in total.
A total gain on sale of $14.7 million was recorded. In a separate transaction
and subsequent to the sale we entered into an option, or obligation on
successful completion of the initial public offering, to purchase both vessels.
We subsequently re-acquired both vessels. In the period ended December 31, 2003,
there were no disposals of vessels.
Commissions
Chartering commissions increased by approximately 700% to $1.2 million
in the year ended December 31, 2004, compared to $0.15 million in the period
ended December 31, 2003. This increase is attributable to the growth in our
fleet during the year ended December 31, 2004.
Vessel operating expenses
Total vessel operating expenses increased by approximately 363% to $12.5
million during the year ended December 31, 2004, compared to $2.7 million during
the period ended December 31, 2003. This increase is also attributable to the
growth in our fleet during the year ended December 31, 2004, during which we
took delivery of ten vessels. Vessel operating expenses of the High Land
increased from $1.5 million to $1.6 million from the period ended December 31,
2003 to the year ended December 31, 2004. Vessel operating expenses of the High
Rider increased from $1.4 million to $1.6 million from the period ended December
31, 2003 to the year ended December 31, 2004. This increase was substantially
due to the different period of ownership in the respective periods. Vessel
operating expenses for the ten vessels delivered during the year ended December
31, 2004 were $9.4 million.
Of the total vessel operating expenses during the year ended December
31, 2004, 54% was incurred by our products tankers and 46% by our container
vessels.
General & Administrative Expenses
General and administrative expenses were $75,000 in the year ended
December 31, 2004. This comprises only general and administrative expenses
incurred by the vessel owning subsidiaries. Before the initial public offering
the main elements of general and administrative expenses, such as executive and
director compensation, audit fees, liability insurance premium and company
administration costs, were accounted for within the administrative costs of the
ship management company.
Depreciation and Amortization
Depreciation increased by approximately 647% to $12.7 million during the
year ended December 31, 2004 compared to $1.7 million during the period ended
December 31, 2003. Amortization of dry-docking and special survey costs
increased by 400% to $1.5 million in the year ended December 31, 2004, compared
to $0.3 million in the period ended December 31, 2003. These increases are
attributable to the growth in our fleet during the year ended December 31, 2004.
Management Fees to Related Party
Management fees paid to Magnus Carriers increased by 350% to $0.9
million in the year ended December 31, 2004 compared to $0.2 million of the
period ended December 31, 2003. This increase is attributable to the growth in
our fleet during the year ended December 31, 2004.
Interest Expense
Total interest expense increased by approximately 473% to $8.6 million
during the year ended December 31, 2004, compared to $1.5 million during the
period ended December 31, 2003, due to the increase in term loans incurred to
finance the acquisition of the ten vessels added to our fleet and due to
interest expense incurred from discounting the deferred revenue in 2004.
Interest Rate Swaps
The marking to market of our four interest rate swaps in effect as at
December 31, 2004 resulted in a total charge to income of $0.03 million,
compared with a total charge to income as at December 31, 2003 of $0.2 million,
due to the change in fair value over the period. Interest rates were higher at
the end of 2004, compared with the end of 2003.
Net Income
Net income was $25.3 million in the year ended December 31, 2004,
compared to $0.5 million in the period ended December 31, 2003, an increase of
4,960%. This increase is attributable to the growth in our fleet during the year
ended December 31, 2004.
B. Liquidity and Capital Resources
Overview
We operate in a capital intensive industry. During the year ended
December 31, 2005 we refinanced our debt obligations existing at the time of the
initial public offering in June 2005, took delivery of the two additional
container vessels, which we had an option to acquire at the time of the initial
public offering, paid deposits on two products tanker purchase contracts for the
Stena Compass and Stena Compassion and took delivery of a further products
tanker, all from the net proceeds of the initial public offering and borrowings
under our senior secured credit facility, which we entered into in June 2005 and
which we refer to as our existing credit facility. As of December 31, 2005 our
future liquidity requirements relate to: (1) our operating expenses, (2)
payments under our ship management agreements, (3) quarterly payments of
interest and other debt-related expenses and the repayment of principal, (4)
maintenance of financial covenants under our existing credit facility agreement,
(5) maintenance of cash reserves to provide for contingencies, (6) payment of
dividends and (7) completion of the purchase contracts for the Stena Compass and
Stena Compassion.
We believe that cash flows from our charters will be sufficient to fund
our interest and other debt-related expenses, any debt amortization under our
existing credit facility and our working capital requirements for the short and
medium term. We believe that our anticipated cash flows and the availability of
funds under our existing credit facility will be sufficient to permit us to pay
dividends as contemplated by our dividend policy and to meet our liquidity
requirements over the next 12 months.
We refinanced all our indebtedness under our existing credit facility on
April 27, 2006 with a new fully revolving credit facility of $360 million, which
we refer to as our new credit facility and provides for the long term financing
of the three products tanker acquisitions made in 2005 and provides
approximately $75 million of undrawn commitment to enable future growth of the
Company through further vessel acquisitions. Our longer term liquidity
requirements include repayment of the outstanding debt under our new credit
facility. We will require new borrowings and/or issuances of equity capital or
other securities to meet the repayment obligation when our new credit facility
matures in April 2011. For further information on our new credit facility please
read, "Our New Fully Revolving Credit Facility" below.
Cash flows
As of December 31, 2005 and December 31, 2004, we had cash of $19.3
million and $10.1 million, respectively. In the year ended December 31, 2005,
our net cash provided by operating activities was $38.9 million, compared with
$21.9 million during the year ended December 31, 2004. This is primarily due to
the growth of the Company's fleet and associated increase in operating days.
As of December 31, 2004 and December 31, 2003, we had cash of $10.1
million and $0.8 million, respectively. In the year ended December 31, 2004, our
net cash provided by operating activities was $21.9 million, compared with $4.4
million during the period ended December 31, 2003. This is primarily a result of
the increase in net income of $24.8 million and increase in depreciation of $11
million.
In the year ended December 31, 2005, our net cash used in investing
activities was $115.9 million, compared with $161.8 million in the year ended
December 31, 2004. In each of these years, our investing activities primarily
related to funding our investments in our vessels. During the year ended
December 31, 2005, we purchased five vessels compared with the year ended
December 31, 2004, during which we purchased eight vessels.
In the year ended December 31, 2004, our net cash used in investing
activities was $161.8 million, compared with $41.6 million in the period ended
December 31, 2003. In each of these periods, our investing activities related to
funding our investments in our vessels: two of our products tankers were
acquired in March 2003, and five additional products tankers and five container
vessels were delivered at various times in 2004. In the year ended December 31,
2004, proceeds from the disposal of vessels of $59.9 million contributed to our
net cash used in investing activities.
In the year ended December 31, 2005, our net cash provided by financing
activities was $90.9 million, compared to $144.5 million in the year ended
December 31, 2004. The net cash provided by financing activities related
primarily to the net proceeds of the initial public offering and drawings of new
debt under our existing credit facility, which was used in the refinancing of
existing debt and related obligations and payment of $6.5 million in settlement
of the participation liability. The participation liability related to
additional participation arrangements under a fee agreement related to certain
of the loans outstanding with the Bank of Scotland as of December 31, 2004.
In the year ended December 31, 2004, our net cash provided by financing
activities was $144.5 million, compared to $37.9 million in the year ended
December 31, 2003. The net cash provided by financing activities related to
funding our investments in our vessels.
Indebtedness
We had long-term debt outstanding of $183.8 million at December 31,
2005, compared with $214.6 million at December 31, 2004. Our long-term debt at
December 31, 2005 represents amounts borrowed under our existing credit
facility, which is comprised of a term loan and a revolving acquisition
facility. As of December 31, 2005, borrowings under our existing credit facility
bore annual interest rates, excluding the margin, of 4.25% for the term loan
facility and 4.35% for the revolving acquisition facility.
We use interest rate swaps to swap our floating rate interest payment
obligations for fixed rate obligations. For additional information regarding our
interest rate swaps, please read "--Quantitative and Qualitative
Disclosures--Interest Rate Exposure," below.
We entered into our existing credit facility in June 2005. The facility
consists of a $140 million drawn term loan facility and a $150 million revolving
acquisition facility, which was drawn to the extent of $43.8 million at December
31, 2005.
Borrowings under the revolving acquisition facility could only be used
to fund the purchase price (and, with respect to new buildings, reasonable
pre-delivery interest and inspection costs) of one or more additional vessels
that met the following requirements:
o each vessel must be a double-hulled crude or products tanker or
container vessel;
o each vessel must be no older than 12 years old at the time of
acquisition;
o each vessel's purchase price may not exceed its fair market
value;
o each vessel must enter into a minimum employment of 12 months
with a reputable charterer within 6 months of the relevant
drawdown; and
o each vessel must maintain a flag and class acceptable to the
lead arrangers and satisfy certain other conditions.
Revolving loans under the acquisition facility could be incurred from
time to time prior to June 3, 2007.
If the total amount borrowed under the facilities exceeded 55% of the
fair market value of the collateral vessels, we would be unable to borrow
further amounts under the acquisition facility until we either prepaid some of
the debt or the fair market value of the collateral vessels increases. We would
be able to borrow further amounts under the acquisition facility again once the
total amount borrowed under the facilities no longer exceeded 55% of the fair
market value of the collateral vessels. If a vessel became a total loss or is
sold, no further amounts could be borrowed until we had prepaid an amount equal
to the aggregate principal amount outstanding under the term loan and
acquisition facility by a fraction of which the numerator is the fair market
value of the vessel lost or sold and the denominator is the fair market value of
our fleet.
Our obligations under the existing credit facility were secured by a
first priority security interest, subject to permitted liens, in all vessels in
our fleet and any other vessels we would subsequently acquire. In addition, the
lenders had a first priority security interest in all earnings from and
insurances on our vessels, all existing and future charters relating to our
vessels, our ship management agreements and all equity interests in our
subsidiaries. Our obligations under the existing credit facility were also
guaranteed by all subsidiaries that had an ownership interest in any of our
vessels.
The term loan was payable in full in one instalment in June 2009.
Borrowings under the revolving acquisition facility were repayable in quarterly
instalments commencing nine months after a vessel acquisition, unless:
o at least 60% of the principal amount of a revolving loan had
been repaid, in which case no payment needed be made until the
earlier of (1) the date on which the vessel that the relevant
borrowing was used to acquire is 15 years old and (2) June 3,
2009; or
o a vessel had not been chartered for a minimum of 12 months with
a reputable charterer within 6 months of the relevant drawdown,
in which case at least 75% of the purchase price of that vessel
needed be repaid within 9 months of its acquisition.
The amortization period for each loan under the acquisition facility was
equal to the difference between 15 years and the age of the vessel that the loan
was used to acquire. All amounts that remain outstanding under the acquisition
facility in June 2009 would be due at such time.
Indebtedness under the term loan and the acquisition facility bore
interest at an annual rate equal to LIBOR plus a margin equal to:
o 1.25% if our total liabilities divided by our total assets,
adjusting the book value of our fleet to its market value, was
less than 60%; and
o 1.375% if our total liabilities divided by our total assets,
adjusting the book value of our fleet to its market value, was
equal to or greater than 60%.
The interest rate on overdue sums was equal to the applicable rate
described above plus 2%.
We paid a one-time arrangement fee of approximately $2.0 million at the
closing of the facility in June 2005 and incurred an annual commitment fee equal
to 0.5% per annum of the unused commitment of each lender under the acquisition
facility. We could have prepaid all loans under the existing credit facility
without premium or penalty other than customary LIBOR breakage costs.
We were subject to certain financial covenants as of the end of each
fiscal quarter, including the following:
o our shareholders' equity as a percentage of our total assets,
adjusting the book value of our fleet to its market value,
should be no less than 35%;
o we should maintain cash and cash equivalents of no less than the
higher of (1) the amount of interest and principal scheduled to
be repaid in the following two quarters and (2) $5 million,
which increases by $1.25 million per year and by an additional
$800,000 for every $10 million borrowed under the revolving
acquisition facility;
o our current at the time liabilities should not exceed our
current assets;
o the ratio of EBITDA (earnings before interest, taxes,
depreciation and amortization) to interest expense should be no
less than 3.00 to 1.00 on a trailing four quarter basis; and
o the aggregate fair market value of our vessels should be no less
than 145% of the aggregate outstanding loans under the facility.
In addition, Magnus Carriers was required to maintain a credit balance
in an account opened with the lender of at least $1 million. The existing credit
facility also required our two principal beneficial equity holders to maintain a
beneficial ownership interest in our company of no less than 10% each.
We were prohibited from declaring dividends if any event of default, as
defined in the existing credit facility, occurred or would result from such
declaration. Each of the following would constitute an event of default under
the existing credit facility:
o the failure to pay principal, interest, fees, expenses or other
amounts when due;
o breach of certain financial covenants, including those which
require Magnus Carriers to maintain a minimum cash balance;
o the failure of any representation or warranty to be materially
correct;
o the occurrence of a material adverse change (as defined in the
credit agreement);
o the failure of the security documents or guarantees to be
effective;
o judgments against us or any of our subsidiaries in excess of
certain amounts;
o bankruptcy or insolvency events; and
o the failure of our principal beneficial equity holders to
maintain their investment in us.
We had long-term debt, stated gross of debt discount, outstanding of
$214.6 million at December 31, 2004, compared with $43 million at December 31,
2003. Our long-term debt represented amounts borrowed by our vessel-owning
subsidiaries to acquire the vessels we owned at December 31, 2004. As of
December 31, 2004, borrowings under the various loan agreements bore annual
interest rates ranging between 3.29% and 4.02% and were repayable over various
periods ranging from one year to seven years.
In addition, in connection with certain debt agreements entered into
during the year ended December 31, 2004, certain of our vessel-owning
subsidiaries agreed to pay the lender 50% of the difference between: (a) the sum
of their aggregate cumulative earnings net of expenses plus any insurance
proceeds and proceeds from vessel sales, and (b) the sum of their aggregate
indebtedness plus $9 million. Under this agreement, as amended, certain of our
vessel-owning subsidiaries had an option, exercisable within three years of the
date of the agreement, to pay $6.5 million in full settlement of their
obligations under this agreement.
Our New Fully Revolving Credit Facility
On April 3, 2006 we entered into a new $360 million fully revolving
credit facility with Bank of Scotland and Nordea Bank Finland as lead arrangers
("the new credit facility"). We have used the new credit facility to (i)
refinance our existing $140 million drawn term loan; (ii) refinance our existing
revolving acquisition facility, which was drawn to the extent of $43.8 million
at December 31, 2005 and which was further drawn in February 2006 in the amount
of $50.5 million to complete the purchase of the Stena Compass and (iii) was
further drawn in June 2006 in the amount of $50.5 to complete the purchase of
the Stena Compassion. The new credit facility has a five year term and is
subject to fixed reductions during the five years. The other main terms and
conditions of the new credit facility are as follows:
Borrowings under the new credit facility can be used to fund the
purchase price (and, with respect to new buildings, reasonable pre-delivery
interest and inspection costs) of one or more additional vessels that meet the
following requirements:
o each vessel must be a double-hulled crude or products tanker or
container vessel;
o each vessel must be aged 8 years or less, or such other age as
may be agreed by the lenders, at the time of acquisition;
o each vessel's purchase price may not exceed its fair market
value;
o each vessel must enter into a minimum employment of 12 months
with a reputable charterer within 6 months of the relevant
drawdown; and
o each vessel must maintain a flag and class acceptable to the
lead arrangers and satisfy certain other conditions.
The new credit facility may also be used to the extent of $5 million for
general corporate purposes.
For the first thirty months of the new credit facility, if the total
amount borrowed under the facility exceeds 65% of the fair market value of the
collateral vessels, we will be unable to borrow further amounts under the
facility until we either prepay some of the debt or the fair market value of the
collateral vessels increases. We will be able to borrow further amounts under
the facility again once the total amount borrowed under the facilities no longer
exceeds 65% of the fair market value of the collateral vessels. For the second
thirty months of the new credit facility, if the total amount borrowed under the
facility exceeds 60% of the fair market value of the collateral vessels, we will
be unable to borrow further amounts under the facility until we either prepay
some of the debt or the fair market value of the collateral vessels increases.
We will be able to borrow further amounts under the facility again once the
total amount borrowed under the facilities no longer exceeds 60% of the fair
market value of the collateral vessels. If a vessel becomes a total loss or is
sold, no further amounts may be borrowed under this agreement, except for
advances for additional ships already approved by the lenders, until we have
applied the full sale or insurance proceeds in repayment of the facility, unless
the lenders otherwise agree.
Our obligations under the new credit facility are secured by a first
priority security interest, subject to permitted liens, in all vessels in our
fleet and any other vessels we subsequently acquire. In addition, the lenders
will have a first priority security interest in all earnings from and insurances
on our vessels, all existing and future charters relating to our vessels, our
ship management agreements and all equity interests in our subsidiaries. Our
obligations under the credit agreement are also guaranteed by all subsidiaries
that have an ownership interest in any of our vessels.
The $360 million commitment contained in the credit agreement is subject
to a $11 million reduction every six months from the April 3, 2006 closing date,
with the remaining commitment, after nine equal semi-annual reductions of $11
million, of $261 million to be reduced to zero or repaid in full in one
instalment in April 2011.
Indebtedness under the new credit facility will bear interest at an
annual rate equal to LIBOR plus a margin equal to:
o 1.125% if our total liabilities divided by our total assets,
adjusting the book value of our fleet to its market value, is
less than 50%; and
o 1.25% if our total liabilities divided by our total assets,
adjusting the book value of our fleet to its market value, is
equal to or greater than 50% but less than 60%; and
o 1.375% if our total liabilities divided by our total assets,
adjusting the book value of our fleet to its market value, is
equal to or greater than 60% but less than 65%; and
o 1.5% if our total liabilities divided by our total assets,
adjusting the book value of our fleet to its market value, is
equal to or greater than 65%.
The interest rate on overdue sums will be equal to the applicable rate described
above plus 2%.
We will pay a one-time arrangement fee of approximately $2.3 million at
the initial draw down of the facility expected in April 2006 and incur an annual
commitment fee equal to 0.5% per annum of the unused commitment of each lender
under the facility. We may prepay all loans under the credit agreement without
premium or penalty other than customary LIBOR breakage costs.
The new credit facility will require us to adhere to certain financial
covenants as of the end of each fiscal quarter, including the following:
o our shareholders' equity as a percentage of our total assets,
adjusting the book value of our fleet to its market value, must
be no less than 35%;
o we must maintain free cash and cash equivalents of no less than
5% of interest bearing debt;
o our current liabilities, excluding deferred revenue, may not
exceed our current assets;
o the ratio of EBITDA (earnings before interest, taxes,
depreciation and amortization) to interest expense must be no
less than 3.00 to 1.00 on a trailing four quarter basis; and
o the aggregate fair market value of our vessels must be no less
than 140% of the aggregate outstanding loans under the credit
facility.
In addition, Magnus Carriers is required to maintain a credit balance in
an account opened with the lender of at least $1 million. The new credit
facility also requires our two principal beneficial equity holders to maintain a
beneficial ownership interest in our company of no less than 10% each.
Our new credit facility prevents us from declaring dividends if any
event of default, as defined in the credit agreement, occurs or would result
from such declaration. Each of the following will be an event of default under
the credit agreement:
o the failure to pay principal, interest, fees, expenses or other
amounts when due;
o breach of certain financial covenants, including those which
require Magnus Carriers to maintain a minimum cash balance;
o the failure of any representation or warranty to be materially
correct;
o the occurrence of a material adverse change (as defined in the
credit agreement);
o the failure of the security documents or guarantees to be
effective;
o judgments against us or any of our subsidiaries in excess of
certain amounts;
o bankruptcy or insolvency events; and
o the failure of our principal beneficial equity holders to
maintain their investment in us.
C. Research and development, patents and licenses
Not Applicable
D. Trend Information
Not Applicable
E. Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
F. Tabular Disclosure of Contractual Obligations
As of December 31, 2005 significant existing contractual obligations and
contingencies consisted of our obligations as borrower under our existing credit
facility and agreements entered into to purchase vessels. In addition, we had
contractual obligations under interest rate swap contracts and ship management
agreements.
Long-Term Financial Obligations and Other Commercial Obligations
The following table sets out long-term financial and other commercial
obligations, outstanding as of December 31, 2005 (all figures in thousands of
U.S. Dollars):
Payment Due by Period
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
- ----------------------- ----- ------ --------- --------- -------
Long-term debt obligation(1) 183,820 - - - 183,820
Interest payments(2) 65,147 10,147 20,294 34,706 -
Vessel operating expenses(3) 223,821 19,524 40,823 43,309 120,165
Management fees(4) 20,669 1,992 3,759 3,952 10,966
Rental agreement (5) 393 59 127 139 68
Purchase contracts (6) 100,980 100,980 - - -
TOTAL 594,830 132,702 65,003 82,106 315,019
- ----------
Notes:
(1) Refers to our obligations to repay the indebtedness outstanding as of
December 31, 2005.
(2) Refers to our expected interest payments over the term of the indebtedness
outstanding as of December 31, 2005, assuming a weighted average interest
rate of 5.52% per annum.
(3) Refers to our obligations under the 10-year ship management agreements that
twelve of our vessel-owning subsidiaries have entered into with Magnus
Carriers. These figures represent the aggregate amount of the individual
initial vessel operating expenses for 12 vessels, which increases by 3%
every year under the management agreements with an assumed start date of
January 1, 2006. The vessel operating expenses are subject to adjustments
every three years and thus may vary.
(4) Refers to the management fees payable to Magnus Carriers under the 10-year
ship management agreements. These figures represent the aggregate amount of
the individual initial vessel management fees for 12 vessels, which
increases by 3% every year under the management agreements with an assumed
start date of January 1, 2006. The commercial management fees paid to
Magnus Carriers and the technical management fees paid to Ernst Jacob in
respect of the Chinook are also included.
(5) Refers to our obligations under a rental agreement for office space for the
Company.
(6) Refers to our agreement to pay the balance of the purchase price of the
Stena Compass and Stena Compassion.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Exposure
Our debt obligations under our existing credit facility bear interest at
LIBOR plus a margin ranging from 1.25% to 1.375%. Increasing interest rates
could adversely affect our future profitability. We entered into three interest
swap transactions with three banks during 2005. Under these swap agreements we
have limited the interest rate we pay on our term loan of $140 million to a
maximum of 4.885% per annum, excluding the margin, with effect from January 3,
2006 and until the swap agreements mature in June 2009.
A 100 basis point increase in LIBOR would have resulted in an increase
of approximately $1.8 million in our interest expense for the year ended
December 31, 2005.
Foreign Exchange Rate Exposure
Our vessel-owning subsidiaries generate revenues in U.S. dollars but
incur a portion of their vessel operating expenses, and we incur our general and
administrative costs, in other currencies, primarily Euros.
We monitor trends in foreign exchange rates closely and actively manage
our exposure to foreign exchange rates. We maintain foreign currency accounts
and buy foreign currency forward in anticipation of our future requirements in
an effort to manage foreign exchange risk. As of December 31, 2005, a 1% adverse
movement in U.S. dollar exchange rates would have increased our vessel operating
expenses by approximately $58,000.
Critical Accounting Policies
Critical accounting policies are those that reflect significant
judgments of uncertainties and potentially result in materially different
results under different assumptions and conditions. We have described below what
we believe are our most critical accounting policies, because they generally
involve a comparatively higher degree of judgment in their application. For a
description of our significant accounting policies, see Note 2 to our
consolidated and predecessor combined carve-out financial statements included
herein.
Our financial position, results of operations and cash flows include all
expenses allocable to our business, but may not be indicative of the results we
would have achieved had we operated as a public entity under our current
chartering, management and other arrangements for the entire periods presented
or for future periods.
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated and combined financial statements,
which have been prepared in accordance with U.S. GAAP. The preparation of those
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities at the date of our financial
statements. Actual results may differ from these estimates under different
assumptions and conditions.
Depreciation
Our vessels represent our most significant assets. We record the value
of our vessels at their cost (which includes acquisition costs directly
attributable to the vessel and expenditures made to prepare the vessel for its
initial voyage) less accumulated depreciation. We depreciate our vessels on a
straight-line basis over their estimated useful life, which is estimated to be
25 years from date of initial delivery from the shipyard. We believe that a
25-year depreciable life is consistent with that of other shipping companies and
it represents the most reasonable useful life for each of the vessels.
Depreciation is based on cost less the estimated residual scrap value. We
estimate the residual values of our vessels based on a scrap value of $180 or
$190 per lightweight ton, which we believe are levels common in the shipping
industry. An increase in the useful life of a vessel or in its residual value
would have the effect of decreasing the annual depreciation charge and extending
it into later periods. A decrease in the useful life of a vessel or in its
residual value would have the effect of increasing the annual depreciation
charge. However, when regulations place limitations over the ability of a vessel
to trade, the vessel's useful life is adjusted to end at the date such
regulations become effective.
In the year ended December 31, 2005, a one year reduction in useful life
would increase our total depreciation charge by $2.0 million.
If circumstances cause us to change our assumptions in making
determinations as to whether vessel improvements should be capitalized, the
amounts we expense each year as repairs and maintenance costs could increase,
partially offset by a decrease in depreciation expense.
Impairment of Long-lived Assets
We evaluate the carrying amounts and periods over which long-lived
assets are depreciated to determine if events have occurred which would require
modification to their carrying values or useful lives. In evaluating useful
lives and carrying values of long-lived assets, we review certain indicators of
potential impairment, such as undiscounted projected operating cash flows,
vessel sales and purchases, business plans and overall market conditions. We
determine undiscounted projected net operating cash flow for each vessel and
compare it to the vessel carrying value. In the event that an impairment were to
occur, we would determine the fair value of the related asset and record a
charge to operations calculated by comparing the asset's carrying value to the
estimated fair value. We estimate fair value primarily through the use of
third-party valuations performed on an individual vessel basis. To date, we have
not identified any impairment of our long-lived assets.
Deferred Dry-docking and Special Survey Costs
Our vessels are required to be dry-docked approximately every 30 to 36
months for major repairs and maintenance that cannot be performed while the
vessels are operating. Our vessels are required to undergo special surveys every
60 months.
We capitalize the costs associated with dry-dockings and special surveys
as they occur and amortize these costs on a straight-line basis over the period
between dry-dockings and surveys, respectively. We believe that these criteria
are consistent with U.S. GAAP guidelines and industry practice and that our
policy of capitalization reflects the economics and market values of the
vessels.
Revenue Recognition
Revenues are generated from time charters. In recognizing revenue we are
required to make certain estimates and assumptions. Historically differences
between our estimates and actual results have not been material to our financial
results.
Charter revenues are recorded over the term of the charter as service is
provided. The operating results of voyages in progress at a reporting date are
estimated and recognized pro-rata on a per day basis.
Fair Value of Financial Instruments
In determining the fair value of interest rate swaps, a number of
assumptions and estimates are required to be made. These assumptions include
future interest rates.
These assumptions are assessed at the end of each reporting period based
on available information existing at that time. Accordingly, the assumptions
upon which these estimates are based are subject to change and may result in a
material change in the fair value of these items.
Purchase of Vessels
Where we identify any intangible assets or liabilities associated with
the acquisition of a vessel, we record all identified tangible and intangible
assets or liabilities at fair value. Fair value is determined by reference to
market data and the discounted amount of expected future cash flows. Where we
have assumed an existing charter obligation at charter rates that are less than
market charter rates, we record a liability, being the difference between the
assumed charter rate and the market charter rate for an equivalent vessel. This
deferred revenue is amortized to revenue over the remaining period of the
charter. The determination of the fair value of acquired assets and assumed
liabilities requires us to make significant assumptions and estimates of many
variables including market charter rates, expected future charter rates, future
vessel operating expenses, the level of utilization of our vessels and our
weighted average cost of capital. The use of different assumptions could result
in a material change in the fair value of these items, which could have a
material impact on our financial position and results of operations.
Recent Accounting Developments
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 151, "Inventory
Costs - an amendment of ARB No. 43, Chapter 4" ("SFAS 151"), which clarifies
that abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage) should be recognized as a current period expense. In
addition, SFAS 151 requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production
facilities. SFAS 151 is effective for fiscal years beginning after June 15,
2005. Management does not believe that the implementation of SFAS 151 will have
a material impact on the Group's (defined in note 1 to the predecessor combined
carve-out and consolidated financial statements) financial position, results of
operations or cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-Monetary Assets - An Amendment to APB 29" ("SFAS 153"). Accounting
Principles Board Opinion No. 29 ("APB 29") had stated that all exchanges of
non-monetary assets should be recorded at fair value except in a number of
situations, including where the exchange is in relation to similarly productive
assets. SFAS 153 amends APB 29 to eliminate the exception for non-monetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of non-monetary assets that do not have commercial substance. A
non-monetary transaction has commercial substance where the future cash flows of
the business will be expected to change significantly as a result of the
exchange. The provisions of SFAS 153 will be effective for non-monetary
exchanges occurring in fiscal periods beginning after June 15, 2005. Management
does not believe that the implementation of SFAS 153 will have a material impact
on the Group's financial position, results of operations or cash flows.
In March 2005, the Financial Accounting Standards Board issued Statement
No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3. The Statement applies to all voluntary changes
in accounting principle, and changes the requirements for accounting for and
reporting of a change in accounting principle. Statement No. 154 requires
retrospective applications to prior periods' financial statements of a voluntary
change in accounting principle unless it is impracticable. Opinion 20 previously
required that most voluntary change in accounting principle be recognized by
including in net income of the period of the change the cumulative effect of
changing to the new accounting principle. Statement No. 154 improves financial
reporting because its requirements enhance the consistency of financial
information between periods. The Group cannot determine what effect Statement
No. 154 will have with regard to any future accounting changes. This statement
is effective for the Group for the fiscal year beginning on January 1, 2006.
On November 3, 2005, the Financial Accounting Standards Board issued
Financial Staff Position (FSP) numbers 115-1 and 124-1 providing guidance for
the application of FAS 115. This FSP addresses the determination as to when an
investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. It also states that
impairment of investments in debt securities must be assessed on an individual
basis. Adoption of this interpretation is not expected to have a significant
effect on the Group's statement of financial position or results of operations.
This statement will be effective for the Group for fiscal years beginning after
December 15, 2005.
Subsequent Events
Credit facility
With effect from March 1, 2006 the Group voluntarily reduced its
existing $150 million revolving credit facility to $145 million.
The Group entered into a new $360 million revolving credit facility on
April 3, 2006. The $360 million facility, which has a term of five years, is to
be used to replace the current $140 million term loan facility and $150 million
revolving credit facility.
Dividend
On February 13, 2006 the Directors of Aries Maritime declared a dividend
of $0.35 per share in respect of the fourth quarter of 2005. The dividend was
paid on March 9, 2006 to shareholders on record as of February 23, 2006.
Further, on May 8, 2006 the Directors of Aries Maritime declared a
dividend of $0.14 per share in respect of the first quarter of 2006. The
dividend was paid on May 31, 2006 to shareholdes on record as of May 19, 2006.
New Acquisitions
The Company took delivery of two newbuilding tanker vessels, the Stena
Compass and the Stena Compassion in February and June 2006 respectively.
Interest Rate Swap
On April 7, 2006 the interest rate swap with Fortis Bank was terminated
and the settlement proceeds amounted to $490,000 in favor of Aries Maritime.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Set forth below are the names, ages (as of June 30, 2006) and positions
of our directors and executive officers. Our board of directors is elected
annually on a staggered basis, and each director elected holds office until his
successor shall have been duly elected, except in the event of his death,
resignation, removal or the earlier termination of his office. The business
address of each of our executive officers and directors is 18 Zerva Nap.,
Glyfada, Athens 166 75, Greece.
Name Age Position
- -------------------- ----- -------------------------------------------------
Mons S. Bolin 53 Class I Director, President and Chief Executive
Officer
Richard J.H. Coxall 50 Class I Director and Chief Financial Officer
Per Olav Karlsen 52 Class II Director and Chairman
Henry S. Marcus 62 Class II Director
Panagiotis Skiadas 35 Class III Director and Deputy Chairman
Certain biographical information about each of these individuals is set
forth below.
Mons S. Bolin has served as our President, Chief Executive Officer and a
director since April 2005. He has over 30 years of shipping industry experience.
After graduating with distinction in Law (LLB), Economics and Business
Administration from the University of Lund in Sweden, Mr. Bolin completed his
military service as an officer in the Swedish Royal Marines in 1975. Mr. Bolin
worked as a shipbroker for Fearnleys A/S in Oslo, Norway from 1975 to 1977 and
was then a director and partner in the shipbrokering firm of Alexandrakis
Brandts in Greece for eight years before co-founding an oil/commodity trading
and ship operating business, Westminster Oil and Gas Ltd., in London in 1985. In
1991 he co-founded with Gabriel Petridis, Southern Seas Shipping Corporation, an
affiliate of Aries Energy, which he still beneficially owns with Mr Petridis.
From February 1997 to April 2005, Mr. Bolin was co-managing director of Magnus
Carriers. He remains a director of Sea Breeze UK Ltd., an affiliate of Aries
Energy. Mr. Bolin is a citizen of Sweden and a resident of Great Britain.
Richard J. H. Coxall has served as our Chief Financial Officer and a
director since January 2005. Since 2000, Mr. Coxall has been the Finance
Director of Magnus Carriers. Mr. Coxall studied at Havering Technical College
and Polytechnic of Central London. He holds an International Banking Diploma
from the Chartered Institute of Bankers. Between 1974 and 1994 Mr. Coxall worked
for Barclays Bank International in various banking operations and for Barclays
Bank PLC, London as a manager in ship finance. In 1995, Mr. Coxall established
the representative office of the Commercial Bank of Greece in London and ran
that office until 1996, developing shipping finance business for the second
largest bank in Greece. In 1996, Mr. Coxall was appointed director of Barclays
Bank ship finance in Greece. Between 1998 and 2000, Mr. Coxall was an
independent consultant in ship finance and projects to international shipping
companies. Mr. Coxall is a citizen of Great Britain and a resident of Greece.
Per Olav Karlsen has served as the Chairman of our board of directors
since the closing of our initial public offering in June 2005. Since 2000, Mr.
Karlsen has been one of three partners and the joint managing director of
Cleaves Capital Shipbrokers Ltd. Since September 2005, he has been responsible
for the formation of a new marine finance company in Oslo, Norway, Union Marine
Finance AS. From 1993 through 2000, he was President of R.S. Platou (S) Pte
Ltd., a ship brokerage company. Mr. Karlsen has also worked for Fearnleys AS for
10 years in various positions and capacities. Mr. Karlsen also serves as a
resident managing director of Pacship (UK) Ltd, a company controlled by Pacific
Carriers Ltd, a company in the Kuok Group. He has worked in the shipping
industry for approximately 25 years. In 1993, Wind Shipping Group, a company for
which Mr. Karlsen served as a director, was the subject of an insolvency
proceeding. He is a citizen of Norway and a resident of England.
Henry S. Marcus has served as a member of our board of directors since
the closing of our offering in June 2005. Mr. Marcus has been a Professor of
Marine Systems in the Ocean Engineering Department of the Massachusetts
Institute of Technology for over ten years. Mr. Marcus works as a consultant to
various government organizations, academic institutions and corporations. He
holds a bachelor's degree in Naval Architecture and Marine Engineering from the
Webb Institute of Naval Architecture. He holds master's degrees in Shipping and
Shipbuilding Management and Naval Architecture and Marine Engineering from
Massachusetts Institute of Technology. Mr. Marcus also holds a doctorate degree
in business administration, specializing in Transportation and Logistics, from
Harvard University, Graduate School of Business Administration. He is a citizen
and a resident of the United States.
Panagiotis Skiadas has served as a member of our board of directors and
our Deputy Chairman since the closing of our initial public offering in June
2005. Mr. Skiadas has been the Environmental Manager of VIOHALCO S.A., the
parent company of the largest Greek metals group of companies that incorporates
approximately 80 companies. Prior to joing VIOHALCO in April 2006, Mr. Skiadas
served the same role for a subsidiary of VIOHALCO, ELVAL S.A. since 2004. He has
also served as the Section Manager of Environmental Operations for the
Organizational Committee of Olympic Games, Athens 2004 S.A. Mr. Skiadas holds a
bachelor's degree in Environmental Engineering from the University of Florida.
He holds a master's degree in Environmental and Water Quality Engineering from
the Massachusetts Institute of Technology. Mr. Skiadas is a citizen and a
resident of Greece.
B. Compensation
We did not pay any compensation to members of our senior management or
our directors in the years ended December 31, 2003 and 2004. During 2005, we
paid to the members of our senior management and to our directors aggregate
compensation of approximately $408,362 and $45,500 respectively. In addition,
each director will be reimbursed for out-of-pocket expenses incurred while
attending any meeting of the board of directors or any board committee. Officers
who also serve as directors do not receive additional compensation for their
service as directors.
Equity Incentive Plan
We adopted an equity incentive plan, which enables our officers, key
employees and directors to receive options to acquire common shares. We reserved
a total of 500,000 common shares for issuance under the plan. Our board of
directors will administer this plan once it is implemented. Under the terms of
the plan, our board of directors will be able to grant new options exercisable
at a price per common share to be determined by our board of directors. We
expect that the exercise price for the first options granted under the plan will
be equal to the higher of the offering price in our initial public offering or
the price of our common shares on the date the options are granted. All options
will expire no later than 10 years from the date of the grant. Other securities,
including restricted and unrestricted shares, performance shares and stock
appreciation rights, may also be granted under the plan. Unless terminated
earlier pursuant to its terms, the plan will terminate ten years from the date
it was adopted by the board of directors.
C. Board Practices
Committees of the Board of Directors
We have established an audit committee comprised of our three
independent directors responsible for reviewing our accounting controls and
recommending to the board of directors the engagement of our outside auditors.
The members of our audit committee are Messrs. Per Olav Karlsen, Panagiotis
Skiadas and Henry S. Marcus.
Corporate Governance Practices
We have certified to Nasdaq that our corporate governance practices are
in compliance with, and are not prohibited by, the laws of Bermuda. Therefore,
we are exempt from many of Nasdaq's corporate governance practices other than
the requirements regarding the disclosure of a going concern audit opinion,
submission of a listing agreement, notification of material non-compliance with
Nasdaq corporate governance practices and the establishment and composition of
an audit committee and a formal written audit committee charter. The practices
that we follow in lieu of Nasdaq's corporate governance rules are described
below.
o We have a board of directors with a majority of independent
directors which holds at least one annual meeting at which only
independent directors are present, consistent with Nasdaq
corporate governance requirements. We are not required under
Bermuda law to maintain a board of directors with a majority of
independent directors, and we cannot guarantee that we will
always in the future maintain a board of directors with a
majority of independent directors.
o In lieu of a compensation committee comprised of independent
directors, our board of directors is responsible for
establishing the executive officers' compensation and benefits.
Under Bermuda law, compensation of the executive officers is not
required to be determined by an independent committee.
o In lieu of a nomination committee comprised of independent
directors, our board of directors is responsible for identifying
and recommending potential candidates to become board members
and recommending directors for appointment to board committees.
Shareholders may also identify and recommend potential
candidates to become candidates to become board members in
writing. No formal written charter has been prepared or adopted
because this process is outlined in our bye-laws.
o In lieu of obtaining an independent review of related party
transactions for conflicts of interests, consistent with Bermuda
law requirements, our bye-laws require any director who has a
potential conflict of interest to identify and declare the
nature of the conflict to our board of directors at the first
meeting of the board of directors. Our bye-laws additionally
provide that related party transactions must be approved by
independent and disinterested directors.
o In lieu of obtaining shareholder approval prior to the issuance
of securities, we were required to obtain the consent of the
Bermuda Monetary Authority as required by Bermuda law before we
issued securities. We have obtained a blanket consent from the
Bermuda Monetary Authority. If we choose to issue additional
securities, we will not be required to obtain any further
consent so long as our common shares are listed.
o As a foreign private issuer, we are not required to solicit
proxies or provide proxy statements to Nasdaq pursuant to Nasdaq
corporate governance rules or Bermuda law. Consistent with
Bermuda law, we will notify our shareholders of meetings between
15 and 60 days before the meeting. This notification will
contain, among other things, information regarding business to
be transacted at the meeting. In addition, our bye-laws provide
that shareholders must give us advance notice to properly
introduce any business at a meeting of the shareholders. Our
bye-laws also provide that shareholders may designate a proxy to
act on their behalf (in writing or by telephonic or electronic
means as approved by our board from time to time).
o In lieu of holding regular meetings at which only independent
directors are present, our entire board of directors, a majority
of whom are independent, may hold regular meetings as is
consistent with the laws of Bermuda.
Other than as noted above, we are in full compliance with all other
applicable Nasdaq corporate governance standards.
D. Employees
See "Item 4 -- Information on the Company -- Business Overview -- Crewing and
Employees."
E. Share ownership
The common shares beneficially owned by our directors and senior
managers and/or companies affiliated with these individuals are disclosed in
"Item 7. Major Shareholders and Related Party Transactions" below.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
A. Major shareholders.
The following table sets forth information regarding (i) the owners of
more than five percent of our common stock that we are aware of and (ii) the
total number of shares of our common stock held by officers and directors as of
June 30, 2006.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Title of Class Identity of Person or Group Amount Owned Percent of Class
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Common stock, par value $0.01 Rocket Marine Inc. (1) 14,766,877 52%
per share
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Mons Bolin (1) 14,766,877 52%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Captain Gabriel Petridis 14,766,877 52%
(1)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Richard Coxall * *
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Directors and Executive 14,776,877 52%
Officers as a Group
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Wellington Management 2,350,710 8.27%
Company, LLP (2)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Transamerica Investment 2,084,560 7.90%
Management, LLC(3)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ----------
* Less than one percent.
(1) Rocket Marine Inc., a Marshall Islands corporation, is a wholly owned
indirect subsidiary of Aries Energy Corporation, which is also a Marshall
Islands corporation. Mons Bolin and Captain Gabriel Petridis each own 50% of the
issued and outstanding capital stock of Aries Energy Corporation and Magnus
Carriers. Each of Aries Energy Corporation, Mons Bolin and Captain Gabriel
Petridis disclaims beneficial ownership of such shares.
(2) According to Schedule 13G filed with the Securities and Exchange Commission
by Wellington Management Company, LLP on February 14, 2006.
(3) According to Schedule 13G filed with the Securities and Exchange Commission
by Transamerica Investment Management, LLC on July 18, 2005.
B. Related Party Transactions
Aries Energy, through its wholly-owned indirect subsidiary Rocket Marine
Inc., owns 52% of our outstanding common stock. Mr. Mons Bolin, our President,
Chief Executive Officer and a director, owns 50% of the issued and outstanding
capital stock of Aries Energy and of Magnus Carriers.
We have entered into ship management agreements with Magnus Carriers.
Consistent with Bermuda law requirements, our bye-laws require any director who
has a potential conflict of interest to identify and declare the nature of the
conflict to our board of directors at the first meeting of the board of
directors. Our bye-laws additionally provide that related party transactions
must be approved by independent and disinterested directors.
Capital Contribution
In March 2005, we acquired the vessel-owning subsidiaries that own the
first ten vessels in our fleet from subsidiaries of Aries Energy in exchange for
shares in our company. In connection with that transaction, we assumed
approximately $214 million of debt, which these subsidiaries incurred to acquire
the vessels they now own. Based on the initial offering price of $12.50 per
share, the value of the shares acquired by these subsidiaries of Aries Energy
was approximately $3,750. Please read "Item 4. Information on the Company -
History and Development of the Company."
Management fees
The vessel-owning companies included in the Group receive technical and
commercial management services from Magnus Carriers, a company under common
control, pursuant to ship management agreements. Under these agreements, the
Group paid management fees of $1.498 million for the year ended December 31,
2005, $893,000 for the year ended December 31, 2004 and $199,000 for the period
ended December 31, 2003 which is separately reflected in the statements of
income.
Commissions
Each of our subsidiary vessel-owning companies has entered into
management agreements with Magnus Carriers. From the effective date of these
management agreements, Magnus Carriers may receive commission on new charters.
Under the management agreements, Magnus Carriers will be paid 1% of the sale or
purchase price in connection with a vessel sale or purchase that Magnus Carriers
brokers for the Group.
Rental agreement
During 2005, one of our subsidiaries entered into a rental agreement
with a related party, Domina Petridou O.E., which is owned by Mons S. Bolin, our
President and Chief Executive Officer and Domina Petridou. The Group (defined in
note 1 to our consolidated and predecessor combined carve-out financial
statements) paid $4,693 to the related party during the year ended December 31,
2005 (2004 and 2003 $NIL).
Crewing
Crewing for the Group is undertaken by Magnus Carriers through a related
entity, Poseidon Marine Agency. The Group paid manning fees of $310,000 for the
year ended December 31, 2005, $278,000 for the year ended December 31, 2004 and
$58,000 for the period ended December 31, 2003.
Vessel purchase
Aries Maritime exercised its right to acquire the M/T Chinook under the
Right of First Refusal Agreement with Magnus Carriers in October 2005. The
acquisition was offered to Aries Maritime by Magnus Carriers on either of two
bases: (a) with retention of the five year head charter dated June 16, 2003
between the sellers and Pacific Breeze Tankers Ltd. (a joint venture company,
50% of which is ultimately owned between Mons Bolin, President and Chief
Executive Officer of Aries Maritime and Gabriel Petridis equally) as charterers,
at a rate of $13,000 per day, in which case the purchase consideration would be
$30.6 million or, (b) without the head charter, in which case the purchase
consideration would be $32.6 million. Aries Maritime exercised its right on
basis (b). The total purchase consideration of $32.6 million for the M/T
Chinook, paid on November 30, 2005, comprised purchase consideration under the
terms of a Memorandum of Agreement dated October 25, 2005 of $30.6 million and a
$2 million additional purchase consideration to the sellers under the terms of a
separate agreement relating to the termination of the head charter.
Pursuant to an agreement dated December 28, 2004 Aries Maritime
exercised its right to acquire CMA CGM Seine and CMA CGM Makassar in June, 2005
and took delivery of these vessels on June 24, 2005 and July 15, 2005
respectively. Both vessels were purchased from International Container Ships KS
(a Norwegian limited partnership, of which Mons Bolin, President and Chief
Executive Officer of Aries Maritime and Gabriel Petridis equally together,
ultimately owned 25%). The purchase price paid for the CMA CGM Seine was $35.4
million and for the CMA CGM Makassar was $35.3 million.
General and administrative expenses
During the year ended December 31, 2005, we paid to the members of our
senior management and to our directors aggregate compensation of approximately
$408,362 and $45,500, respectively (2004 and 2003 $NIL). Such fees are included
in general and administrative expenses in the accompanying consolidated
statements of income.
C. Interests of experts and counsel.
Not applicable.
ITEM 8. FINANCIAL INFORMATION.
A. Consolidated Statements and Other Financial Information.
See Item 18.
Legal Proceedings Against Us
From time to time in the future we may be subject to legal proceedings
and claims in the ordinary course of business, principally personal injury and
property casualty claims. Those claims, even if lacking merit, could result in
the expenditure of significant financial and managerial resources. We have not
been involved in any legal proceedings which may have, or have had a significant
effect on our financial position, nor are we aware of any proceedings that are
pending or threatened which may have a significant effect on our financial
position.
Dividend Policy
We intend to pay quarterly dividends to the holders of our common shares
in February, May, August and November of each year in amounts substantially
equal to the charterhire received by us under the charters for our vessels
during the preceding calendar quarter, less cash expenses for that quarter
(principally vessel operating expenses and debt service and administrative
expenses) and any reserves our board of directors determines we should maintain.
These reserves may cover, among other things, drydocking, repairs, claims,
liabilities and other obligations, interest expense and debt amortization,
acquisitions of additional assets and working capital.
Under Bermuda law, a company may not declare or pay dividends if there
are reasonable grounds for believing either that the company is, or would after
the payment be, unable to pay its liabilities as they become due, or that the
realizable value of its assets would thereby be less than the sum of its
liabilities, its issued share capital (the total par value of all outstanding
shares) and share premium accounts (the aggregate amount paid for the
subscription for its shares in excess of the aggregate par value of such
shares). If the realizable value of our assets decreases, our ability to pay
dividends may require our shareholders to approve resolutions reducing our share
premium account by transferring an amount to our contributed surplus account.
Our board of directors must approve the declaration and payment of any
dividends. Under the terms of our new credit facility, we will not be able to
declare or pay any dividends if we are in default under our new credit facility
or if paying a dividend will result in a default under the credit facility. In
addition, the requirement that we satisfy various financial covenants under the
credit agreement, as well as the terms under any other loan agreements, which we
may obtain in the future, could impose restrictions on our ability to pay
dividends in the future.
B. Significant Changes.
Not Applicable.
ITEM 9. THE OFFER AND LISTING.
A. Offer and Listing Details
The trading market for our common stock is the Nasdaq National Market,
on which the shares are listed under the symbol "RAMS". The following table sets
forth the high and low closing prices for our common stock since our initial
public offering of common stock at $12.50 per share on June 3, 2005, as reported
by the Nasdaq National Market. The high and low closing prices for our common
stock for the periods indicated were as follows:
High Low
------ ------
For the Fiscal Year Ended December 31, 2005 $15.99 $12.50
(beginning June 3, 2005)
For the Quarter Ended
June 30, 2005 13.60 12.50
September 30, 2005 15.99 12.50
December 31, 2005 15.63 12.63
March 31, 2006 14.47 12.43
For the Month
January 2006 13.72 12.43
February 2006 14.12 12.55
March 2006 14.47 13.86
April 2006 13.97 13.23
May 2006 13.73 10.52
June 2006 (through June 29, 2006) 11.75 10.69
C. Markets
See Item 9. A. 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 30 million shares of
preferred stock, par value $0.01 per share and 100 million shares of common
stock, par value of $0.01 per share.
Common shares
Holders of common shares have no pre-emptive, subscription, redemption,
conversion or sinking fund rights. Holders of common shares are entitled to one
vote for each share held of record on all matters submitted to a vote of our
shareholders. Holders of common shares have no cumulative voting rights. Holders
of common shares are entitled to dividends if and when they are declared by our
board of directors, subject to any preferred dividend right of holders of any
preference shares. Directors to be elected by holders of common shares require a
plurality of votes cast at a meeting at which a quorum is present. For all other
matters, unless a different majority is required by law or our bye-laws,
resolutions to be approved by holders of common shares require approval by a
majority of votes cast at a meeting at which a quorum is present.
Upon our liquidation, dissolution or winding up, our common shareholders
will be entitled to receive, ratably, our net assets available after the payment
of all our debts and liabilities and any preference amount owed to any
preference shareholders.
The rights of our common shareholders, including the right to elect
directors, are subject to the rights of any series of preference shares we may
issue in the future.
Preference Shares
Under the terms of our bye-laws, our board of directors has authority to
issue up to 30 million "blank check" preference shares in one or more series and
to fix the rights, preferences, privileges and restrictions of the preference
shares, including voting rights, dividend rights, conversion rights, redemption
terms (including sinking fund provisions) and liquidation preferences and the
number of shares constituting a series or the designation of a series.
The rights of holders of our common shares will be subject to, and could
be adversely affected by, the rights of the holders of any preference shares
that we may issue in the future. Our board of directors may designate and fix
rights, preferences, privileges and restrictions of each series of preference
shares which are greater than those of our common shares. Our issuance of
preference shares could, among other things:
o restrict dividends on our common shares;
o dilute the voting power of our common shares;
o impair the liquidation rights of our common shares; and
o discourage, delay or prevent a change of control of our company.
Our board of directors does not at present intend to seek shareholder
approval prior to any issuance of currently authorized preference shares, unless
otherwise required by applicable law or Nasdaq requirements. Although we
currently have no plans to issue preference shares, we may issue them in the
future.
Dividends
Under Bermuda law, a company may not declare or pay dividends if there
are reasonable grounds for believing either that the company is, or would after
the payment be, unable to pay its liabilities as they become due, or that the
realizable value of its assets would thereby be less than the sum of its
liabilities, its issued share capital (the total par value of all outstanding
shares) and share premium accounts (the aggregate amount paid for the
subscription for its shares in excess of the aggregate par value of such
shares). If the realizable value of our assets decreases, our ability to pay
dividends may require our shareholders to approve resolutions reducing our share
premium account by transferring an amount to our contributed surplus account.
There are no restrictions on our ability to transfer funds (other than funds
denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to
U.S. residents who are holders of our common shares.
Anti-Takeover Effects of Provisions of Our Constitutional Documents
Several provisions of our bye-laws may have anti-takeover effects. These
provisions are intended to avoid costly takeover battles, lessen our
vulnerability to a hostile change of control and enhance the ability of our
board of directors to maximize shareholder value in connection with any
unsolicited offer to acquire us. However, these anti-takeover provisions, which
are summarized below, could also discourage, delay or prevent (1) the merger,
amalgamation or acquisition of our company by means of a tender offer, a proxy
contest or otherwise, that a shareholder may consider in its best interest and
(2) the removal of our incumbent directors and executive officers.
Blank Check Preference Shares
Under the terms of our bye-laws, subject to applicable legal or Nasdaq
requirements, our board of directors has authority, without any further vote or
action by our shareholders, to issue up to 30 million preference shares with
such rights, preferences and privileges as our board may determine. Our board of
directors may issue preference shares on terms calculated to discourage, delay
or prevent a change of control of our company or the removal of our management.
Classified Board of Directors
Our bye-laws provide for the division of our board of directors into
three classes of directors, with each class as nearly equal in number as
possible, serving staggered, three year terms. One-third (or as near as
possible) of our directors will be elected each year. Our bye-laws also provide
that directors may only be removed for cause upon the vote of the holders of no
less than 80% of our outstanding common shares. These provisions could
discourage a third party from making a tender offer for our shares or attempting
to obtain control of our company. It could also delay shareholders who do not
agree with the policies of the board of directors from removing a majority of
the board of directors for two years.
Business Combinations
Although the BCA does not contain specific provisions regarding
"business combinations" between companies organized under the laws of Bermuda
and "interested shareholders," we have included these provisions in our
bye-laws. Specifically, our bye-laws contain provisions which prohibit us from
engaging in a business combination with an interested shareholder for a period
of three years after the date of the transaction in which the person became an
interested shareholder, unless, in addition to any other approval that may be
required by applicable law:
o prior to the date of the transaction that resulted in the
shareholder becoming an interested shareholder, our board of
directors approved either the business combination or the
transaction that resulted in the shareholder becoming an
interested shareholder;
o upon consummation of the transaction that resulted in the
shareholder becoming an interested shareholder, the interested
shareholder owned at least 85% of our voting shares outstanding
at the time the transaction commenced; or
o after the date of the transaction that resulted in the
shareholder becoming an interested shareholder, the business
combination is approved by the board of directors and authorized
at an annual or special meeting of shareholders by the
affirmative vote of at least 80% of our outstanding voting
shares that are not owned by the interested shareholder.
For purposes of these provisions, a "business combination" includes
mergers, amalgamations, consolidations, exchanges, asset sales, leases, certain
issues or transfers of shares or other securities and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is any person or entity that beneficially owns 15% or more of our
outstanding voting shares and any person or entity affiliated with or
controlling or controlled by that person or entity, except that so long as
Rocket Marine owns 15% or more of our outstanding voting shares, Rocket Marine
shall not be an interested shareholder unless it acquires additional voting
shares representing 8% or more of our outstanding voting shares.
Election and Removal of Directors
Our bye-laws do not permit cumulative voting in the election of
directors. Our bye-laws require shareholders wishing to propose a person for
election as a director (other than persons proposed by our board of directors)
to give advance written notice of nominations for the election of directors. Our
bye-laws also provide that our directors may be removed only for cause and only
upon the affirmative vote of the holders of at least 80% of our outstanding
common shares, voted at a duly authorized meeting of shareholders called for
that purpose, provided that notice of such meeting is served on such director at
least 14 days before the meeting. These provisions may discourage, delay or
prevent the removal of our incumbent directors.
Shareholder Meetings
Under our bye-laws annual meetings of shareholders will be held at a
time and place selected by our board of directors each calendar year. Special
meetings of shareholders may be called by our board of directors at any time and
must be called at the request of shareholders holding at least 10% of our
paid-up share capital carrying the right to vote at general meetings. Under our
bye-laws at least 15, but not more than 60, days' notice of an annual meeting or
any special meeting must be given to each shareholder entitled to vote at that
meeting. Under Bermuda law accidental failure to give notice will not invalidate
proceedings at a meeting. Our board of directors may set a record date between
15 and 60 days before the date of any meeting to determine the shareholders who
will be eligible to receive notice and vote at the meeting.
Limited Actions by Shareholders
Any action required or permitted to be taken by our shareholders must be
effected at an annual or special meeting of shareholders or (except for certain
actions) by unanimous written consent without a meeting. Our bye-laws provide
that, subject to certain exceptions and to the rights granted to shareholders
pursuant to the BCA, only our board of directors may call special meetings of
our shareholders and the business transacted at a special meeting is limited to
the purposes stated in the notice for that meeting. Accordingly, a shareholder
may be prevented from calling a special meeting for shareholder consideration of
a proposal over the opposition of our board of directors and shareholder
consideration of a proposal may be delayed until the next annual meeting.
Subject to certain rights set out in the BCA, our bye-laws provide that
shareholders are required to give advance notice to us of any business to be
introduced by a shareholder at any annual meeting. The advance notice provisions
provide that, for business to be properly introduced by a shareholder when such
business is not specified in the notice of meeting or brought by or at the
direction of our board of directors, the shareholder must have given our
secretary notice not less than 90 nor more than 120 days prior to the
anniversary date of the immediately preceding annual meeting of the
shareholders. In the event the annual meeting is called for a date that is not
within 30 days before or after such anniversary date, the shareholder must give
our secretary notice not later than 10 days following the earlier of the date on
which notice of the annual meeting was mailed to the shareholders or the date on
which public disclosure of the annual meeting was made. The chairman of the
meeting may, if the facts warrant, determine and declare that any business was
not properly brought before such meeting and such business will not be
transacted.
Amendments to Bye-Laws
Our bye-laws require the affirmative vote of the holders of not less
than 80% of our outstanding voting shares to amend, alter, change or repeal the
following provisions in our bye-laws:
o the classified board and director removal provisions;
o the percentage of approval required for our shareholders to
amend our bye-laws;
o the limitations on business combinations between us and
interested shareholders;
o the provisions requiring the affirmative vote of the holders of
not less than 80% of our outstanding voting shares to amend the
foregoing provisions; and
o the limitations on shareholders' ability to call special
meetings, subject to certain rights guaranteed to shareholders
under the BCA.
These requirements make it more difficult for our shareholders to make
changes to the provisions in our bye-laws that could have anti-takeover effects.
C. Material Contracts
As of December 31, 2005 we had long term debt obligations under our
existing credit facility, with a group of international lenders. On April 3,
2006 we entered into a new credit facility for $360 million with Bank of
Scotland and Nordea Bank Finland as joint lead arrangers. For a full description
of our credit facilities see "Item 5. Operating and Financial Review and
Prospects - Indebtedness."
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 following is a discussion of the material Bermuda and United States
federal income tax considerations with respect to the Company and holders of
common shares. This discussion does not purport to deal with the tax
consequences of owning common shares to all categories of investors, some of
which, such as dealers in securities, investors whose functional currency is not
the United States dollar and investors that own, actually or under applicable
constructive ownership rules, 10% or more of our common shares, may be subject
to special rules. This discussion deals only with holders who hold the common
shares as a capital asset. Holders of common shares are encouraged to consult
their own tax advisors concerning the overall tax consequences arising in your
own particular situation under United States federal, state, local or foreign
law of the ownership of common shares.
Bermuda Tax Considerations
As of the date of this document, we are not subject to taxation under
the laws of Bermuda, and distributions to us by our subsidiaries also are not be
subject to any Bermuda tax. As of the date of this document, there is no Bermuda
income, corporation or profits tax, withholding tax, capital gains tax, capital
transfer tax, estate duty or inheritance tax payable by non-residents of Bermuda
in respect of capital gains realized on a disposition of our common shares or in
respect of distributions by us with respect to our common shares. This
discussion does not, however, apply to the taxation of persons ordinarily
resident in Bermuda. Bermuda holders should consult their own tax advisors
regarding possible Bermuda taxes with respect to dispositions of, and
distributions on, our common shares.
United States Federal Income Tax Considerations
The following are the material United States federal income tax
consequences to us of our activities and to U.S. Holders and Non-U.S. Holders,
each as defined below, of our common shares. The following discussion of United
States federal income tax matters is based on the United States Internal Revenue
Code of 1986, or the Code, judicial decisions, administrative pronouncements,
and existing and proposed regulations issued by the United States Department of
the Treasury, all of which are subject to change, possibly with retroactive
effect. The discussion below is based, in part, on the description of our
business as described in "Item 4 -- Information on the Company" above and
assumes that we conduct our business as described in that section. Except as
otherwise noted, this discussion is based on the assumption that we will not
maintain an office or other fixed place of business within the United States.
References in the following discussion to "we" and "us" are to Aries Maritime
Transport Limited and its subsidiaries on a consolidated basis.
United States Federal Income Taxation of Our Company
Taxation of Operating Income: In General
We earn substantially all of our income from the use of vessels, from
the hiring or leasing of vessels for use on a time, voyage or bareboat charter
basis or from the performance of services directly related to those uses, which
we refer to as "shipping income."
Fifty percent of shipping income that is attributable to transportation
that begins or ends, but that does not both begin and end, in the United States
constitutes income from sources within the United States, which we refer to as
"U.S.-source shipping income."
Shipping income attributable to transportation that both begins and ends
in the United States is considered to be 100% from sources within the United
States. We are not permitted to engage in transportation that produces income
which is considered to be 100% from sources within the United States.
Shipping income attributable to transportation exclusively between
non-U.S. ports is not considered to be 100% derived from sources outside the
United States. Shipping income derived from sources outside the United States is
not subject to any United States federal income tax.
In the absence of exemption from tax under Section 883, our gross U.S.
source shipping income is subject to a 4% tax imposed without allowance for
deductions as described below.
Exemption of Operating Income from United States Federal Income Taxation
Under Section 883 of the Code, a foreign corporation will be exempt from
United States federal income taxation on its U.S.-source shipping income if:
(1) it is organized in a qualified foreign country, which is one
that grants an "equivalent exemption" to corporations organized
in the United States in respect of such category of the shipping
income for which exemption is being claimed under Section 883
and which we refer to as the "Country of Organization Test" and
(2) either
(A) more than 50% of the value of its stock is beneficially
owned, directly or indirectly, by individuals who are
"residents" of a qualified foreign country, which we
refer to as the "50% Ownership Test," or
(B) its stock is "primarily and regularly traded on an
established securities market" in its country of
organization, in another qualified foreign country or in
the United States, which we refer to as the "Publicly
Traded Test."
The Country of Organization Test is satisfied since we are incorporated
in Bermuda, and each of our subsidiaries is incorporated in the British Virgin
Islands, the Marshall Islands, or Malta, all of which we believe are qualified
foreign countries in respect of each category of Shipping Income we currently
earn and expect to earn in the future. Therefore, we and our subsidiaries are
exempt from United States federal income taxation with respect to our
U.S.-source shipping income as we and each of our subsidiaries meet either of
the 50% Ownership Test or the Publicly Traded Test. Under a special attribution
rule of Section 883, each of our Subsidiaries is deemed to have satisfied the
50% Ownership Test if we satisfy such test or the Publicly Traded Test. Due to
the widely-held nature of our stock, we may have difficulty satisfying the 50%
Test.
The Treasury Regulations provide, in pertinent part, that stock of a
foreign corporation is considered to be "primarily traded" on an established
securities market if the number of shares of each class of stock that are traded
during any taxable year on all established securities markets in that country
exceeds the number of shares in each such class that are traded during that year
on established securities markets in any other single country. Our common
shares, which are our sole class of issued and outstanding stock, are "primarily
traded" on the Nasdaq National Market, which is an established securities market
in the United States.
Under the Treasury Regulations, our common shares are considered to be
"regularly traded" on an established securities market if one or more classes of
our shares representing 50% or more of our outstanding shares, by total combined
voting power of all classes of shares entitled to vote and total value, is
listed on an established securities market, which we refer to as the listing
threshold. Since our common shares are our sole class of issued and outstanding
stock and are listed on the Nasdaq National Market, we meet the listing
threshold.
It is further required that with respect to each class of stock relied
upon to meet the listing threshold (i) such class of the stock is traded on the
market, other than in minimal quantities, on at least 60 days during the taxable
year or 1/6 of the days in a short taxable year; and (ii) the aggregate number
of shares of such class of stock traded on such market is at least 10% of the
average number of shares of such class of stock outstanding during such year or
as appropriately adjusted in the case of a short taxable year. We satisfy these
trading frequency and trading volume tests. Even if this were not the case, the
Treasury regulations provide that the trading frequency and trading volume tests
will be deemed satisfied if, as we expect to be the case with our common shares,
such class of stock is traded on an established market in the United States and
such stock is regularly quoted by dealers making a market in such stock.
Notwithstanding the foregoing, the Treasury Regulations provide, in
pertinent part, that our shares are not be considered to be "regularly traded"
on an established securities market for any taxable year in which 50% or more of
the vote and value of our outstanding common shares are owned, actually or
constructively under specified stock attribution rules, on more than half the
days during the taxable year by persons who each own 5% or more of the vote and
value of our outstanding stock, which we refer to as the "5 Percent Override
Rule."
To determine the persons who own 5% or more of the vote and value of our
shares, or "5% Shareholders," the Treasury Regulations permit us to rely on
those persons that are identified on Form 13G and Form 13D filings with the
United States Securities and Exchange Commission, or the "SEC," as having a 5%
or more beneficial interest in our common shares. The Treasury Regulations
further provide that an investment company which is registered under the
Investment Company Act of 1940, as amended, will not be treated as a 5%
Shareholder for such purposes.
In the event the 5 Percent Override Rule is triggered, the Treasury
Regulations provide that the 5 Percent Override Rule does not apply if we can
establish in conformity with the Treasury Regulations that within the group of
5% Shareholders, sufficient shares are owned by qualified shareholders for
purposes of Section 883 to preclude non-qualified shareholders in such group
from owning 50% or more of the value of our shares for more than half the number
of days during such year.
Aries Energy (through its wholly owned subsidiary Rocket Marine Inc.)
owns approximately 53% of our outstanding common shares. If Aries Energy alone
or together with other 5% Shareholders were to own 50% of our outstanding shares
on more than half the days of any taxable year, the 5 Percent Override Rule
would be triggered. In order to preclude the application of the 5 Percent
Override Rule, Captain Gabriel Petridis, the 50% beneficial owner of Aries
Energy, have provided information to establish that Captain Petridis is a
qualified shareholder.
As a result, we believe we are able to preclude the application of the 5
Percent Override Rule and therefore satisfy the Publicly Traded Test. However,
there can be no assurance that we are able to continue to satisfy the Publicly
Traded Test if (i) Captain Petridis's status as a qualified shareholder changes,
(ii) the direct or indirect beneficial ownership of the shares held by Captain
Petridis changes, (iii) the ownership of shares not directly or indirectly owned
by Captain Petridis comes to be concentrated in 5% Shareholders that either are
not qualified shareholders or who fail to comply with applicable documentation
requirements or (iv) Captain Petridis, Aries Energy or Rocket Marine fail to
satisfy the applicable documentation requirements.
Even though we believe that we will be able to qualify for the benefits
of Section 883 under the Publicly-Traded Test, we can provide no assurance that
we will be able to continue to so qualify in the future.
Taxation In The Absence of Section 883 Exemption
To the extent the benefits of Section 883 are unavailable, our U.S.
source shipping income, to the extent not considered to be "effectively
connected" with the conduct of a U.S. trade or business, as described below,
would be subject to a 4% tax imposed by Section 887 of the Code on a gross
basis, without the benefit of deductions. Since under the sourcing rules
described above, no more than 50% of our shipping income would be treated as
being derived from U.S. sources, the maximum effective rate of U.S. federal
income tax on our shipping income would never exceed 2% under the 4% gross basis
tax regime.
To the extent the benefits of the Section 883 exemption are unavailable
and our U.S. source shipping income is considered to be "effectively connected"
with the conduct of a U.S. trade or business, as described below, any such
"effectively connected" U.S. source shipping income, net of applicable
deductions, would, in lieu of the 4% gross basis tax described above, be subject
to the U.S. federal corporate income tax currently imposed at rates of up to
35%. In addition, we may be subject to the 30% "branch profits" tax on earnings
effectively connected with the conduct of such trade or business, as determined
after allowance for certain adjustments, and on certain interest paid or deemed
paid attributable to the conduct of our U.S. trade or business.
Our U.S. source shipping income would be considered "effectively
connected" with the conduct of a U.S. trade or business only if:
o we have, or are considered to have, a fixed place of business in
the United States involved in the earning of shipping income;
and
o substantially all of our U.S. source shipping income is
attributable to regularly scheduled transportation, such as the
operation of a vessel that follows a published schedule with
repeated sailings at regular intervals between the same points
for voyages that begin or end in the United States.
We do not have, or permit circumstances that would result in our having,
a fixed place of business in the United States involved in the earning of
shipping income and therefore, we believe that none of our U.S. source shipping
income will be "effectively connected" with the conduct of a U.S. trade or
business.
United States Taxation of Gain on Sale of Vessels
Regardless of whether we qualify for exemption under Section 883, we
will not be subject to United States federal income taxation with respect to
gain realized on a sale of a vessel, provided the sale is considered to occur
outside of the United States under United States federal income tax principles.
In general, a sale of a vessel will be considered to occur outside of the United
States for this purpose if title to the vessel, and risk of loss with respect to
the vessel, pass to the buyer outside of the United States. It is expected that
any sale of a vessel by us will be considered to occur outside of the United
States.
United States Federal Income Taxation of U.S. Holders
As used herein, the term "U.S. Holder" means a beneficial owner of
common shares that is a United States citizen or resident, United States
corporation or other United States entity taxable as a corporation, an estate
the income of which is subject to United States federal income taxation
regardless of its source, or a trust if a court within the United States is able
to exercise primary jurisdiction over the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust.
If a partnership holds our common shares, the tax treatment of a partner
will generally depend upon the status of the partner and upon the activities of
the partnership. If you are a partner in a partnership holding our common
shares, you should consult your tax advisor.
Distributions
Subject to the discussion of passive foreign investment companies below,
any distributions made by us with respect to our common shares to a U.S. Holder
will generally constitute dividends, which may be taxable as ordinary income or
"qualified dividend income" as described in more detail below, to the extent of
our current or accumulated earnings and profits, as determined under United
States federal income tax principles. Distributions in excess of our earnings
and profits will be treated first as a nontaxable return of capital to the
extent of the U.S. Holder's tax basis in his common shares on a dollar for
dollar basis and thereafter as capital gain. Because we are not a United States
corporation, U.S. Holders that are corporations will not be entitled to claim a
dividends received deduction with respect to any distributions they receive from
us. Dividends paid with respect to our common shares will generally be treated
as "passive income" (or "passive category income" for taxable years beginning
after December 31, 2006) or, in the case of certain types of U.S. Holders,
"financial services income," (which will be treated as "general category income"
income for taxable years beginning after December 31, 2006) for purposes of
computing allowable foreign tax credits for United States foreign tax credit
purposes.
Dividends paid on our common shares to a U.S. Holder who is an
individual, trust or estate (a "U.S. Individual Holder") will generally be
treated as "qualified dividend income" that is taxable to such U.S. Individual
Holders at preferential tax rates (through 2010) provided that (1) the common
shares are readily tradable on an established securities market in the United
States (such as the Nasdaq National Market, on which our common shares are
traded); (2) we are not a passive foreign investment company for the taxable
year during which the dividend is paid or the immediately preceding taxable year
(which we do not believe we are, have been or will be); and (3) the U.S.
Individual Holder has owned the common shares for more than 60 days in the
121-day period beginning 60 days before the date on which the common shares
becomes ex-dividend. Therefore, there is no assurance that any dividends paid on
our common shares will be eligible for these preferential rates in the hands of
a U.S. Individual Holder. Any dividends paid by the Company which are not
eligible for these preferential rates will be taxed as ordinary income to a U.S.
Individual Holder. In 2005, legislation was introduced in the U.S. Senate which,
if enacted in its present form, would preclude our dividends from qualifying for
such preferential rates prospectively from the date of enactment.
Special rules may apply to any "extraordinary dividend" generally, a
dividend in an amount which is equal to or in excess of ten percent of a
shareholder's adjusted basis (or fair market value in certain circumstances) in
a common share paid by us. If we pay an "extraordinary dividend" on our common
shares that is treated as "qualified dividend income," then any loss derived by
a U.S. Individual Holder from the sale or exchange of such common shares will be
treated as long-term capital loss to the extent of such dividend.
Sale, Exchange or other Disposition of Common Shares
Assuming we do not constitute a passive foreign investment company for
any taxable year, a U.S. Holder generally recognizes taxable gain or loss upon a
sale, exchange or other disposition of our common shares in an amount equal to
the difference between the amount realized by the U.S. Holder from such sale,
exchange or other disposition and the U.S. Holder's tax basis in such stock.
Such gain or loss is treated as long-term capital gain or loss if the U.S.
Holder's holding period is greater than one year at the time of the sale,
exchange or other disposition. Such capital gain or loss is generally treated as
U.S.-source income or loss, as applicable, for U.S. foreign tax credit purposes.
A U.S. Holder's ability to deduct capital losses is subject to certain
limitations.
Passive Foreign Investment Company Status and Significant Tax Consequences
Special United States federal income tax rules apply to a U.S. Holder
that holds stock in a foreign corporation classified as a passive foreign
investment company for United States federal income tax purposes. In general, we
are treated as a passive foreign investment company with respect to a U.S.
Holder if, for any taxable year in which such holder held our common shares,
either
o at least 75% of our gross income for such taxable year consists
of passive income (e.g., dividends, interest, capital gains and
rents derived other than in the active conduct of a rental
business), or
o at least 50% of the average value of the assets held by the
corporation during such taxable year produce, or are held for
the production of, passive income.
For purposes of determining whether we are a passive foreign investment
company, we are treated as earning and owning our proportionate share of the
income and assets, respectively, of any of our subsidiary corporations in which
we own at least 25 percent of the value of the subsidiary's stock. Income
earned, or deemed earned, by us in connection with the performance of services
would not constitute passive income. By contrast, rental income would generally
constitute "passive income" unless we were treated under specific rules as
deriving our rental income in the active conduct of a trade or business.
Based on our current operations and future projections, we do not
believe that we are, nor do we expect to become, a passive foreign investment
company with respect to any taxable year. Although there is no legal authority
directly on point, and we are not relying upon an opinion of counsel on this
issue, our belief is based principally on the position that, for purposes of
determining whether we are a passive foreign investment company, the gross
income we derive or are deemed to derive from the time chartering and voyage
chartering activities of our wholly owned subsidiaries should constitute
services income, rather than rental income. Correspondingly, such income should
not constitute passive income, and the assets that we or our wholly-owned
subsidiaries own and operate in connection with the production of such income,
in particular, the vessels, should not constitute passive assets for purposes of
determining whether we are a passive foreign investment company. We believe
there is substantial legal authority supporting our position consisting of case
law and Internal Revenue Service pronouncements concerning the characterization
of income derived from time charters and voyage charters as services income for
other tax purposes. However, in the absence of any legal authority specifically
relating to the statutory provisions governing passive foreign investment
companies, the Internal Revenue Service or a court could disagree with our
position. In addition, although we intend to conduct our affairs in a manner to
avoid being classified as a passive foreign investment company with respect to
any taxable year, we cannot assure you that the nature of our operations will
not change in the future.
If we were to be treated as a passive foreign investment company,
special and adverse United States federal income tax rules would apply to a U.S.
Holder of our shares. Among other things, the distributions a U.S. Holder
received with respect to our shares and gains, if any, a U.S. Holder derived
from his sale or other disposition of our shares would be taxable as ordinary
income (rather than as qualified dividend income or capital gain, as the case
may be), would be treated as realized ratably over his holding period in our
common shares, and would be subject to an additional interest charge. However, a
U.S. Holder my be able to make certain tax elections which ameliorate these
consequences.
United States Federal Income Taxation of "Non-U.S. Holders"
A beneficial owner of common shares that is not a U.S. Holder is
referred to herein as a "Non-U.S. Holder."
Dividends on Common Shares
Non-U.S. Holders generally are not subject to United States federal
income tax or withholding tax on dividends received from us with respect to our
common shares, unless that income is effectively connected with the Non-U.S.
Holder's conduct of a trade or business in the United States. If the Non-U.S.
Holder is entitled to the benefits of a United States income tax treaty with
respect to those dividends, that income is taxable only if it is attributable to
a permanent establishment maintained by the Non-U.S. Holder in the United
States.
Sale, Exchange or Other Disposition of Common Shares
Non-U.S. Holders generally are not subject to United States federal
income tax or withholding tax on any gain realized upon the sale, exchange or
other disposition of our common shares, unless:
o the gain is effectively connected with the Non-U.S. Holder's
conduct of a trade or business in the United States. If the
Non-U.S. Holder is entitled to the benefits of an income tax
treaty with respect to that gain, that gain is taxable only if
it is attributable to a permanent establishment maintained by
the Non-U.S. Holder in the United States; or
o the Non-U.S. Holder is an individual who is present in the
United States for 183 days or more during the taxable year of
disposition and other conditions are met.
If the Non-U.S. Holder is engaged in a United States trade or business
for United States federal income tax purposes, the income from the common
shares, including dividends and the gain from the sale, exchange or other
disposition of the stock that is effectively connected with the conduct of that
trade or business is generally subject to regular United States federal income
tax in the same manner as discussed in the previous section relating to the
taxation of U.S. Holders. In addition, if you are a corporate Non-U.S. Holder,
your earnings and profits that are attributable to the effectively connected
income, which are subject to certain adjustments, may be subject to an
additional branch profits tax at a rate of 30%, or at a lower rate as may be
specified by an applicable income tax treaty.
F. Dividends and Paying Agents
Not applicable
G. Statement by Experts
Not applicable
H. Documents On Display
We file annual reports and other information with the SEC. You may read
and copy any document we file with the SEC at its public reference room at 100 F
Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of
this information by mail from the public reference section of the SEC, 100 F
Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference room. Our SEC filings are also available to the public at the
web site maintained by the SEC at http://www.sec.gov, as well as on our website
at http://www.ariesmaritime.com.
I. Subsidiary Information
Not applicable
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 5 - Operating and Financial Review and Prospects -
Quantitative and Qualitative Disclosures About Market Risk".
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Neither we nor any of our subsidiaries have been subject to a material
default in the payment of principal, interest, a sinking fund or purchase fund
installment or any other material default that was not cured within 30 days. In
addition, the payment of our dividends are not, and have not been in arrears or
have not been subject to a material delinquency that was not cured within 30
days.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not Applicable
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
On the date of this report, the Company carried out an evaluation, under
the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, as amended. We evaluated the effectiveness of the Company's disclosure
controls and procedures as of 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.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
We have established an audit committee comprised of three members which
is responsible for reviewing our accounting controls and recommending to the
board of directors the engagement of our outside auditors. Each member is an
independent director under the corporate governance rules of the Nasdaq National
Market. The members of the audit committee are Messrs. Per Olav Karlsen, Henry
S. Marcus and Panagiotis Skiadas. The Company is exempt from the requirement to
have an audit committee financial expert. However, the Company believes that its
Chairman, Per Olav Karlsen, qualifies as an audit committee financial expert.
ITEM 16B. CODE OF ETHICS
As a foreign private issuer, we are exempt from the rules of the Nasdaq
National Market that require the adoption of a code of ethics. However, we have
voluntarily adopted a code of ethics that applies to our principal executive
officer, principal financial officer and persons performing similar functions.
We will also provide any person a hard copy of our code of ethics free of charge
upon written request. Shareholders may direct their requests to the attention of
Mr. Richard Coxall.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our principal accountants for the year ended December 31, 2005 were
PricewaterhouseCoopers S.A. For the 2005 audit they billed us audit fees of
$78,000. There were no tax and audit related fees billed in 2004. For their
services in connection with our initial public offering and follow-on offering
PricewaterhouseCoopers S.A. billed us $471,643.91
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.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASES
None.
PART III
ITEM 17. FINANCIAL STATEMENTS
See Item 18.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements, together with the report of
PricewaterhouseCoopers S.A. thereon, are filed as part of this report:
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND PREDECESSOR
COMBINED CARVE-OUT FINANCIAL STATEMENTS
Page
------------
Report of Independent Registered Public Accounting Firm F-3
Balance Sheets F-4
Statements of Income F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to the Predecessor Combined Carve-out and Consolidated
Financial Statements F-9
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Aries Maritime Transport Limited
We have audited the accompanying predecessor combined carve-out and consolidated
balance sheets of Aries Maritime Transport Limited and its subsidiaries as of
December 31, 2005 and December 31, 2004, and the related predecessor combined
carve-out and consolidated statements of income, stockholders' equity and cash
flows for the years ended December 31, 2005 and 2004 and for the period from
inception (March 7, 2003) through December 31, 2003. These predecessor combined
carve-out and consolidated 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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, the predecessor combined carve-out and consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of Aries Maritime Transport Limited and its subsidiaries at
December 31, 2005 and December 31, 2004, and the results of its operations and
its cash flows for the years ended December 31, 2005 and 2004 and for the period
from inception (March 7, 2003) through December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.
PricewaterhouseCoopers S.A.
April 26, 2006
Piraeus, Greece
ARIES MARITIME TRANSPORT LIMITED
CONSOLIDATED AND PREDECESSOR COMBINED CARVE-OUT BALANCE SHEETS
(All amounts expressed in thousands of U.S. Dollars)
- ---------------------------------------------------------------------------------------
Notes December 31, December 31,
2004 2005
ASSETS
Current assets
Cash and cash equivalents 5,334 19,248
Restricted cash 4 4,803 10
Trade receivables, net 303 176
Other receivables 114 60
Derivative financial instruments 15 - 401
Inventories 5 435 645
Prepaid expenses and other 329 521
Due from managing agent - 84
Due from related parties 19 1,053 1,293
------------ -------------
Total current assets 12,371 22,438
------------ -------------
Restricted cash 4 813 -
Receivables from disposal of vessels 2,000 -
Vessels and other fixed assets, net 6, 19 228,895 341,225
Advances for vessel acquisitions 7 - 11,363
Deferred charges, net 10 1,646 2,872
------------ -------------
Total non-current assets 233,354 355,460
------------ -------------
Total assets 245,725 377,898
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt 11 21,910 -
Accounts payable, trade 8 3,829 4,598
Accrued liabilities 9 1,270 2,880
Deferred income 2,051 3,163
Derivative financial instruments 15 248 -
Deferred revenue 12 5,358 10,715
------------ -------------
Total current liabilities 34,666 21,356
------------ -------------
------------ -------------
Long-term debt, net of current portion 11 185,050 183,820
Fair value of participation liability 11 6,500 -
Deferred revenue 12 2,856 17,041
------------ -------------
Total liabilities 229,072 222,217
------------ -------------
Commitments and contingencies 11,17 - -
Stockholders' equity
Invested equity 16,653 -
Preferred stock, $0.01 par value, 30 million
shares authorized, none issued.
Common Stock, $0.01 par value, 100 million shares
authorized, 28.4 million shares issued and
outstanding at December 31, 2005 (2004: 16.2
million shares) - 284
Additional paid-in capital - 155,397
------------ -------------
Total stockholders'equity 16,653 155,681
------------ -------------
Total liabilities and stockholders' equity 245,725 377,898
============ =============
The accompanying notes are an integral part of these consolidated and
predecessor combined financial statements.
ARIES MARITIME TRANSPORT LIMITED
CONSOLIDATED AND PREDECESSOR COMBINED CARVE-OUT STATEMENTS OF INCOME
(All amounts expressed in thousands of U.S. Dollars, except share and per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------
From inception
(March 7, 2003) to Year ended Year ended
Notes December 31, 2003 December 31, 2004 December 31, 2005
--------------------- ------------------- --------------------
REVENUES:
Revenue from voyages 12,14 7,316 48,269 75,905
Gain on disposal of vessels - 14,724 -
EXPENSES:
Commissions 19 (150) (1,189) (1,323)
Voyage expenses (24) (312) (224)
Vessel operating expenses 18 (2,660) (12,460) (17,842)
General & administrative expenses 19 (34) (75) (1,649)
Depreciation 6 (1,721) (12,724) (19,446)
Amortization of dry-docking and special
survey expense 6 (271) (1,552) (1,958)
Management fees 19 (199) (893) (1,511)
--------------------- ------------------- --------------------
(5,059) (29,205) (43,953)
--------------------- ------------------- --------------------
Net operating income 2,257 33,788 31,952
OTHER EXPENSES:
Interest expense 10,11,12 (1,539) (8,616) (18,793)
Other income (expenses), net 11 134 662
Change in fair value of derivatives 15 (215) (33) 950
--------------------- ------------------- --------------------
Total other expenses, net (1,743) (8,515) (17,181)
--------------------- ------------------- --------------------
--------------------- ------------------- --------------------
NET INCOME 514 25,273 14,771
===================== =================== ====================
Earnings per share:
Basic and diluted $0.03 $1.56 $0.64
===================== =================== ====================
Weighted average number of shares:
Basic and diluted 16,176,877 16,176,877 23,118,466
===================== =================== ====================
The accompanying notes are an integral part of these consolidated and
predecessor combined financial statements.
ARIES MARITIME TRANSPORT LIMITED
CONSOLIDATED AND PREDECESSOR COMBINED CARVE-OUT STATEMENTS OF STOCKHOLDERS' EQUITY
(All amounts expressed in thousands of U.S. Dollars except as indicated)
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock
(Number of Total
Shares in Invested Share Additional Retained Stockholders'
Notes Thousands) Equity Capital Paid-in Capital Earnings Equity
------- -------------- ---------- ------------ ---------------- -------------- --------------
Balance at March 7, 2003 - -
Net income 514 514
Capital contribution 3 3
Distribution to stockholders (3) (3)
---------- --------------
Balance at December 31, 2003 514 514
Net income 25,273 25,273
Capital contribution 9,834 9,834
Distribution to stockholders (18,968) (18,968)
---------- --------------
Balance at December 31, 2004 16,653 16,653
Net income 3,807 3,807
Capital contribution 13 1,200 12 12
-------------- ---------- --------------
Balance at March 17, 2005 1,200 20,472 20,472
Reorganization adjustment (20,472) 12 20,460 - -
Distributions 13 14,977 - 150 (2,058) - (1,908)
Net income - - - 10,964 10,964
Proceeds from initial public
offering, net 1 12,240 - 122 140,807 - 140,929
Dividends paid 13 - - (3,812) (10,964) (14,776)
-------------- ---------- ------------ ---------------- -------------- --------------
Balance at December 31, 2005 28,417 - 284 155,397 - 155,681
============== ========== ============ ================ ============== ==============
The accompanying notes are an integral part of these consolidated and
predecessor combined financial statements.
ARIES MARITIME TRANSPORT LIMITED
CONSOLIDATED AND PREDECESSOR COMBINED CARVE-OUT STATEMENTS OF CASH FLOWS
(All amounts expressed in thousands of U.S. Dollars)
- --------------------------------------------------------------------------------------------------------------------------------
From inception Year ended Year ended
(March 7, 2003) to December 31, December 31,
Notes December 31, 2003 2004 2005
--------- -------------------- ----------------- ----------------
Cash flows from operating activities:
Net income 514 25,273 14,771
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,721 12,724 19,446
Amortization of dry-docking and special survey 271 1,552 1,958
Amortization and write-off of deferred financing costs 44 587 1,598
Amortization of debt discount 480 1,480 7,640
Amortization of deferred revenue - (9,055) (9,275)
Unearned revenue - - (16)
Interest expense of deferred revenue - 294 430
Change in fair value of derivative financial instruments 215 33 (950)
Gain on disposal of vessels - (14,724) -
Changes in working capital 16 1,181 3,735 3,268
-------------------- ----------------- ----------------
Net cash provided by operating activities 4,426 21,899 38,870
-------------------- ----------------- ----------------
Cash flows from investing activities:
Vessel acquisitions (27,489) (221,115) (102,692)
Other fixed asset acquisitions - - (96)
Restricted cash for dry-docking payments (278) (535) 813
Proceeds from disposal of vessels - 59,877 -
Advances for vessels under construction (13,845) - -
Advances for vessel acquisitions - - (11,363)
Vessels' dry-docking / special survey costs - - (2,559)
-------------------- ----------------- ----------------
Net cash used in investing activities (41,612) (161,773) (115,897)
-------------------- ----------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 41,130 246,180 183,820
Principal repayments of long-term debt (2,850) (99,378) (214,600)
Proceeds from termination of derivative
financial instruments - - 301
Payment of participation liability - - (6,500)
Payment of financing costs (318) (1,959) (2,824)
Restricted cash for loan payments (109) (4,694) 4,793
Proceeds from issuance of capital stock - 4,392 140,941
Distribution - - (214)
Dividends paid - - (14,776)
-------------------- ----------------- ----------------
Net cash provided by financing activities 37,853 144,541 90,941
-------------------- ----------------- ----------------
Net increase in cash and cash equivalents 667 4,667 13,914
Cash and cash equivalents
Beginning of year - 667 5,334
-------------------- ----------------- ----------------
End of year 667 5,334 19,248
==================== ================= ================
The accompanying notes are an integral part of these consolidated and
predecessor combined financial statements.
ARIES MARITIME TRANSPORT LIMITED
CONSOLIDATED AND PREDECESSOR COMBINED CARVE-OUT STATEMENTS OF CASH FLOWS (CONTINUED)
(All amounts expressed in thousands of U.S. Dollars)
- ---------------------------------------------------------------------------------------------------------------------------------
From inception Year ended
(March 7, 2003) to Year ended December 31,
Notes December 31, 2003 December 31, 2004 2005
--------- ------------------- ------------------- -----------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 941 5,429 9,838
=================== =================== =================
Issuance of capital stock - - 150
=================== =================== =================
Vessels acquired from issuance of long-term debt 4,750 5,000 -
=================== =================== =================
Vessels acquired from stockholder contributions - 6,141 -
=================== =================== =================
Proceeds receivable from disposal of vessels - 2,000 -
=================== =================== =================
Long-term debt transferred to group - 19,767 -
=================== =================== =================
Proceeds from disposal of vessels paid to shareholders - 3,000 -
=================== =================== =================
Liability assumed in connection with vessel acquisitions - 22,638 28,387
=================== =================== =================
Distribution 13 - - 1,694
=================== =================== =================
The accompanying notes are an integral part of these consolidated and
predecessor combined financial statements.
Notes to the Predecessor Combined Carve-out and Consolidated Financial
Statements
1 Organization and Basis of Presentation
The principal business of Aries Maritime Transport Limited (the "Company" or
"Aries Maritime") is the ownership and chartering of ocean-going vessels
world-wide. The Company conducts its operations through its subsidiaries. The
vessel-owning subsidiaries own products tankers and container vessels that
transport a variety of refined petroleum products and containers world-wide.
Aries Maritime was incorporated on January 12, 2005 for the purpose of being the
ultimate holding company of 100% of the companies listed below:
Company Name Country of Vessel Name Date of Vessel
Incorporation Acquisition
- ------------------------------- --------------------- -------------------- -------------------
Mote Shipping Ltd. Malta ** -
Statesman Shipping Ltd. Malta ** -
Trans Continent Navigation Ltd. Malta ** -
Trans State Navigation Ltd. Malta ** -
Rivonia Marine Limited Cyprus * -
Robin Marine Limited Cyprus * -
AMT Management Ltd. Marshall Islands - -
Olympic Galaxy Shipping Ltd. Marshall Islands M/V CMA CGM Energy April 28, 2004
Bora Limited British Virgin Islands M/T Bora May 25, 2004
Dynamic Maritime Co. Marshall Islands M/V CMA CGM Force June 1, 2004
Jubilee Shipholding S.A. Marshall Islands M/V Ocean Hope July 26, 2004
Vintage Marine S.A. Marshall Islands M/T Citius August 5, 2004
Ermina Marine Ltd. Marshall Islands M/T Nordanvind December 9, 2004
Land Marine S.A. Marshall Islands M/T High Land** March 7, 2003
Rider Marine S.A. Marshall Islands M/T High Rider** March 18, 2003
Altius Marine S.A. Marshall Islands M/T Altius** June 24, 2004
Seine Marine Ltd. Marshall Islands M/V CMA CGM Seine June 24, 2005
Makassar Marine Ltd. Marshall Islands M/V CMA CGM Makassar July 15, 2005
Fortius Marine S.A. Marshall Islands M/T Fortius** August 2, 2004
Chinook Waves Corporation Marshall Islands M/T Chinook November 30, 2005
Compassion Overseas Ltd. Bermuda *** -
Compass Overseas Ltd. Bermuda *** -
- ----------
* These companies were transferred out of the Aries Maritime group of
companies on March 24, 2005.
** These vessels were transferred from Trans Continent Navigation Ltd, Mote
Shipping Ltd, Statesman Shipping Ltd and Trans State Navigation Ltd to
Altius Marine S.A., Land Marine S.A., Rider Marine S.A. and Fortius
Marine S.A. in November, July, August and November 2005 respectively.
The original acquisitions for these vessels were made on June 24, 2004,
on March 7, 2003, on March 18, 2003 and on August 2, 2004 respectively.
*** M/T Stena Compass was delivered on February 14, 2006 and M/T Stena
Compassion was delivered in June, 2006.
Up to March 17, 2005, the predecessor combined carve-out financial statements of
Aries Maritime have been prepared to reflect the combination of certain of the
vessel-owning companies listed above. The companies reflected in the predecessor
combined carve-out financial statements were not a separate legal group prior to
the re-organization, therefore reserves are represented by `Invested Equity'.
In a group re-organization effective March 17, 2005 the stockholders of certain
of the vessel-owning companies listed above contributed their interest in the
individual vessel owning-companies in exchange for an equivalent shareholding in
Aries Maritime. Aries Maritime's ownership percentages in the vessel-owning
companies are identical to the ownership percentages that the previous
shareholders held in each of the vessel-owning companies before the group
reorganization. Accordingly the group reorganization has been accounted for as
an exchange of equity interests at historical cost.
After March 17, 2005, the financial statements reflect the consolidated results
of Aries Maritime.
On June 8, 2005 Aries Maritime closed its initial public offering of 12,240,000
common shares at an offering price of $12.50 per share. The net proceeds of the
offering after expenses were $140.8 million.
Hereinafter, Aries Maritime and its subsidiaries listed above will be referred
to as "the Group".
2. Summary of Significant Accounting Policies
Principles of Combination and Consolidation:
The predecessor combined carve-out and consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the
United States of America. All intercompany balances and transactions have been
eliminated upon combination and consolidation.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, revenues and expenses and
the disclosure of contingent assets and liabilities in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation:
The functional currency of the Group is the U.S. Dollar because the Group's
vessels operate in international shipping markets, which typically utilize the
U.S. Dollar as the functional currency. The accounting records of the companies
comprising the Group are maintained in U.S. Dollars. Transactions involving
other currencies during a period are converted into U.S. Dollars using the
exchange rates in effect at the time of the transactions. At the balance sheet
dates, monetary assets and liabilities, which are denominated in other
currencies, are translated to reflect the period-end exchange rates. Resulting
gains or losses are reflected in the accompanying consolidated statements of
income.
Cash and Cash Equivalents:
The Group considers highly liquid investments, such as time deposits and
certificates of deposit, with an original maturity of three months or less to be
cash equivalents.
Restricted Cash:
Various restricted cash accounts held by the Group, consisting mainly of
retention and debt reserve accounts, are restricted for use as general working
capital unless such balances exceed the next quarter's instalment payments due
to the vessel-owning companies' lenders. The Group considers such accounts to be
restricted cash and classifies them separately from cash and cash equivalents
within current assets. Dry-docking accounts are also restricted for use by the
vessel-owning companies until such time as dry-docking costs are incurred. These
restricted cash accounts are classified as non-current assets.
Trade Receivables:
The amount shown as trade receivables includes estimated recoveries from
charterers for hire, freight and demurrage billings, net of provision for
doubtful accounts. An estimate is made for the provision for doubtful accounts
based on a review of all outstanding trade receivables at year end. Bad debts
are written off in the period in which they are identified. No provision for
doubtful debts has been made for the years ended December 31, 2005 and December
31, 2004 and for the period ended December 31, 2003 and the Group has not
written off any trade receivables during these periods.
Inventories:
Inventories which comprise of lubricants, provisions and stores remaining on
board the vessels at period end, are valued at the lower of cost and market
value. Cost is determined by the first in, first out method.
Vessels and Other Fixed Assets:
Vessels are stated at cost, which consists of the contract price, delivery and
acquisition expenses, interest cost while under construction, and, where
applicable, initial improvements. Subsequent expenditures for conversions and
major improvements are also capitalized when they appreciably extend the life,
increase the earning capacity or improve the efficiency or safety of a vessel;
otherwise, these amounts are charged to expenses as incurred.
Where the Group identifies any intangible assets or liabilities associated with
the acquisition of a vessel, the Group records all identified tangible and
intangible assets or liabilities at fair value. Fair value is determined by
reference to market data and the discounted amount of expected future cash
flows. In addition, the portion of the vessels' capitalized costs that relates
to dry-docking and special survey is treated as a separate component of the
vessels' costs and is accounted for in accordance with the accounting policy for
special survey and dry-docking costs.
Fixed assets are stated at cost and are depreciated utilizing the straight-line
method at rates equivalent to their estimated economic useful lives. The cost
and related accumulated depreciation of fixed assets sold or retired are removed
from the accounts at the time of sale or retirement and any gain or loss is
included in the accompanying statement of income.
Accounting for Special Survey and Dry-docking Costs:
The Group follows the deferral method of accounting for special survey and
dry-docking expenses whereby actual costs incurred are deferred and are
amortized over a period of five and two and a half years, respectively. If a
special survey and or dry-docking is performed prior to the scheduled date, the
remaining unamortized balances are immediately written-off.
The amortization periods for the special survey and dry-docking expenses reflect
the periods between each legally required special survey and dry-docking.
Debt Finance:
Where a secured loan includes the right for the lender to participate in future
appreciation of the underlying vessels under lien, the Group establishes a
participation liability at the inception of the loan equal to the fair value of
the participation feature. At the end of each reporting period, the balance of
the participation liability is adjusted to be equal to the current fair value of
the participation. The corresponding amount of the adjustment is reflected as an
adjustment to the debt discount. As of December 31, 2005 there is no such
participation liability.
Debt discount is amortized using the effective interest method over the term of
the related loan. Any adjustment to the debt discount is amortized
prospectively. The cost is included in interest expense.
Deferred Revenue:
The Group values any liability arising from the below market value time charters
assumed when a vessel is acquired. The liability, being the difference between
the market charter rate and assumed charter rate is discounted using the Group's
weighted average cost of capital and is recorded as deferred revenue and
amortized to revenue over the remaining period of the time charter.
Impairment of Long-lived Assets:
Long-lived assets and certain identifiable intangibles held and used or disposed
of by the Group are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. An impairment loss for an asset held for use should be recognized
when the estimate of undiscounted cash flows, excluding interest charges,
expected to be generated by the use of the asset is less than its carrying
amount.
Measurement of the impairment loss is based on the fair value of the asset as
provided by third parties as compared to its carrying amount. In this respect,
management regularly reviews the carrying amount of each vessel in connection
with the estimated recoverable amount for such vessel. Impairment losses on
assets to be disposed of, if any, are based on the estimated proceeds to be
received, less costs of disposal. The review of the carrying amount in
connection with the estimated recoverable amount for each of the Group's vessels
indicated that no impairment loss has occurred in any of the periods presented.
Depreciation of Vessels and Other Fixed Assets:
Depreciation is computed using the straight-line method over the estimated
useful life of the vessels, after considering the estimated salvage value of the
vessels. Each vessel's salvage value is equal to the product of its lightweight
tonnage and estimated scrap value per lightweight ton. Management estimates the
useful life of the Group's vessels to be 25 years from the date of its initial
delivery from the shipyard. However, when regulations place limitations over the
ability of a vessel to trade, its useful life is adjusted to end at the date
such regulations become effective. Currently, there are no regulations which
affect the vessels' useful lives.
Depreciation of fixed assets is computed using the straight-line method. Annual
depreciation rates, which approximate the useful life of the assets, are:
Furniture, fixtures and equipment: 5 years
Computer equipment and software: 5 years
Financing Costs:
Fees incurred for obtaining new loans or refinancing existing loans are deferred
and amortized over the life of the related debt, using the effective interest
rate method. Any unamortized balance of costs relating to loans repaid or
refinanced is expensed in the period the repayment or refinancing is made.
Fees incurred in a refinancing of existing loans continue to be amortized over
the remaining term of the new loan where there is a modification of the loan.
Fees incurred in a refinancing of existing loans where there is an
extinguishment of the old loan are written off and included in the debt
extinguishment gain or loss.
Interest Expense:
Interest costs are expensed as incurred and include interest on loans, financing
costs and amortization. Interest costs incurred while a vessel is being
constructed are capitalized.
Accounting for Revenue and Expenses:
Revenues are generated from time charters. Time charter revenues are recorded
over the term of the charter as the service is provided. Deferred income
represents revenue applicable to periods after the balance sheet date.
Vessel operating expenses are accounted for on an accrual basis.
Repairs and Maintenance:
Expenditure for routine repairs and maintenance of the vessels is charged
against income in the period in which the expenditure is incurred. Major vessel
improvements and upgrades are capitalized to the cost of vessel.
Derivative Instruments:
Derivative financial instruments are recognized in the balance sheets at their
fair values as either assets or liabilities. Changes in the fair value of
derivatives that are designated and qualify as cash flow hedges, and that are
highly effective, are recognized in other comprehensive income. If derivative
transactions do not meet the criteria to qualify for hedge accounting, any
unrealized changes in fair value are recognized immediately in the income
statement.
Amounts receivable or payable arising on the termination of interest rate swap
agreements qualifying as hedging instruments are deferred and amortized over the
shorter of the life of the hedged debt or the hedge instrument.
During 2003, 2004 and 2005, the Group entered into interest rate swap agreements
that did not qualify for hedge accounting. As such, the fair value of these
agreements and changes therein are recognized in the balance sheets and
statements of income, respectively
Segment Reporting:
The Group reports financial information and evaluates its operations by charter
revenues and not by the type of vessel, length of vessel employment, customer or
type of charter. Management, including the chief operating decision makers,
reviews operating results solely by revenue per day and operating results of the
fleet and, as such, the Group has determined that it operates under one
reportable segment.
Earnings Per Share:
The Group has presented earnings per share for all periods presented based on
the common shares outstanding of Aries Maritime. Accordingly 16,176,877 common
shares have been disclosed as being outstanding for the periods prior to the
initial public offering. The common shares issued as a result of the initial
public offering have been included in the weighted average calculation
prospectively from the date of such offering for purposes of disclosure of
earnings per share. There are no dilutive or potentially dilutive securities;
accordingly there is no difference between basic and diluted earnings per share.
3. Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 151, "Inventory Costs -
an amendment of ARB No. 43, Chapter 4" ("SFAS 151"), which clarifies that
abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage) should be recognized as a current period expense. In
addition, SFAS 151 requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production
facilities. SFAS 151 is effective for fiscal years beginning after June 15,
2005. Management does not believe that the implementation of SFAS 151 will have
a material impact on the Group's financial position, results of operations or
cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-Monetary
Assets - An Amendment to APB 29" ("SFAS 153"). Accounting Principles Board
Opinion No. 29 (<<APB 29) had stated that all exchanges of non-monetary assets
should be recorded at fair value except in a number of situations, including
where the exchange is in relation to similarly productive assets. SFAS 153
amends APB 29 to eliminate the exception for non-monetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance.
A non-monetary transaction has commercial substance where the future cash flows
of the business will be expected to change significantly as a result of the
exchange. The provisions of SFAS 153 will be effective for non-monetary
exchanges occurring in fiscal periods beginning after June 15, 2005. Management
does not believe that the implementation of SFAS 153 will have a material impact
on the Group's financial position, results of operations or cash flows.
In March 2005, the Financial Accounting Standards Board issued FIN 47 as an
interpretation of FASB Statement No. 143, Accounting for Asset Retirement
Obligations (FASB No. 143). This interpretation clarifies that the term
conditional asset retirement obligation as used in FASB Statement No. 143,
refers to a legal obligation to perform an asset retirement activity in which
the timing and/or method of settlement are conditional on a future event that
may or may not be within the control of the entity. The obligation to perform
the asset retirement activity is unconditional even though uncertainty exists
about the timing and/or method of settlement. Accordingly, an entity is required
to recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated. This
interpretation also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. FIN 47
is effective no later than the end of fiscal years ending after December 15,
2005. The adoption of this interpretation did not have an effect on the Group's
statement of financial position or results of operations.
In March 2005, the Financial Accounting Standards Board issued Statement No.
154, Accounting Changes and Error Corrections, a replacement of APB Opinion No.
20 and FASB Statement No. 3. The Statement applies to all voluntary changes in
accounting principle, and changes the requirements for accounting for and
reporting of a change in accounting principle. Statement No. 154 requires
retrospective applications to prior periods' financial statements of a voluntary
change in accounting principle unless it is impracticable. Opinion 20 previously
required that most voluntary changes in accounting principle be recognized by
including in net income of the period of the changes the cumulative effect of
changing to the new accounting principle. Statement No. 154 improves financial
reporting because its requirements enhance the consistency of financial
information between periods. The Group cannot determine what effect Statement
No. 154 will have with regard to any future accounting changes. This statement
is effective for the Group for the fiscal year beginning on January 1, 2006.
On November 3, 2005, the Financial Accounting Standards Board issued Financial
Staff Position (FSP) numbers 115-1 and 124-1 providing guidance for the
application of FAS 115. This FSP addresses the determination as to when an
investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. It also states that
impairment of investments in debt securities must be assessed on an individual
basis. Adoption of this interpretation is not expected to have a significant
effect on the Group's statement of financial position or results of operations.
This statement will be effective for the Group for fiscal years beginning after
December 15, 2005.
4. Restricted Cash
December 31, December 31,
2004 2005
----------------- -----------------
Current
Retention and debt reserve accounts 4,803 -
Other restricted accounts - 10
Non-current
Dry-docking accounts 813 -
----------------- -----------------
5,616 10
================= =================
Cash deposited in retention and debt reserve accounts was made available for
loan repayments within three months after being deposited. Cash deposited in
dry-docking accounts was restricted for use and could only be used for the
purpose of paying for dry-docking or special survey expenses. Maintenance of
such accounts was no longer required when existing loans were refinanced (see
note 11).
5. Inventories
December 31, December 31,
2004 2005
------------------ -----------------
Lubricants 387 581
Provisions (Stores) 48 64
------------------ -----------------
435 645
================== =================
6. Vessels and Other Fixed Assets
Details are as follows:
Other fixed Cost of Special
assets vessel survey Dry-docking Total
------------- -------------- ------------ -------------- --------------
Cost
Balance at March 7, 2003 - - - - -
Additions - 30,572 967 700 32,239
------------- -------------- ------------ -------------- --------------
Balance at December 31, 2003 - 30,572 967 700 32,239
Additions - 263,938 2,834 1,967 268,739
Disposals - (59,177) (474) (438) (60,089)
------------- -------------- ------------ -------------- --------------
Balance at December 31, 2004 - 235,333 3,327 2,229 240,889
Additions - 131,079 1,528 1,031 133,638
Additions 96 - - - 96
------------- -------------- ------------ -------------- --------------
Balance at December 31, 2005 96 366,412 4,855 3,260 374,623
------------- -------------- ------------ -------------- --------------
Accumulated Depreciation and Amortization
Balance at March 7, 2003 - - - - -
Charge for the period - (1,721) (157) (114) (1,992)
------------- -------------- ------------ -------------- --------------
Balance at December 31, 2003 - (1,721) (157) (114) (1,992)
Charge for the year - (12,724) (773) (779) (14,276)
Disposals - 4,127 77 70 4,274
------------- -------------- ------------ -------------- --------------
Balance at December 31, 2004 - (10,318) (853) (823) (11,994)
Charge for the year (9) (19,437) (920) (1,038) (21,404)
------------- -------------- ------------ -------------- --------------
Balance at December 31, 2005 (9) (29,755) (1,773) (1,861) (33,398)
------------- -------------- ------------ -------------- --------------
Net book value - December 31, 2004 - 225,015 2,474 1,406 228,895
------------- -------------- ------------ -------------- --------------
Net book value - December 31, 2005 87 336,657 3,082 1,399 341,225
============= ============== ============ ============== ==============
During the year ended December 31, 2005, the Group acquired three vessels (2004:
five) which included the assumption of time charters which had rates of hire
below the market value at the delivery date. The cost of the vessels totalled
$103.2 million (2004: $107.4 million). The fair value of the liability
associated with the time charters was $28.3 million (2004: $22.6 million). This
has been reflected in the vessels cost and recorded as a liability in deferred
revenue (see note 12 and note 19).
7. Advances For Vessel Acquisitions
At December 31, 2005, the Group had advanced progress payments totaling $11.2
million for the acquisition of two vessels, M/T Stena Compass ($5.6 million) and
M/T Stena Compassion ($5.6 million). The total amount of capitalized interest
and other costs relating to these vessels amounted to $0.1 million.
8. Accounts Payable
December 31, December 31,
2004 2005
----------------- ------------------
Suppliers 3,496 2,106
Agents 182 626
Trade Creditors 151 1,866
----------------- ------------------
3,829 4,598
================= ==================
9. Accrued Liabilities
December 31, December 31,
2004 2005
----------------- ------------------
Accrued interest 768 7
Other accrued expenses 273 617
Crew payroll 229 422
Claims - 1,834
----------------- ------------------
1,270 2,880
================= ------------------
The above amount for claims of $1.8 million represents speed claims of $604,000
and off-hire due to customers of $1.23 million.
10. Deferred Charges
Financing Costs
---------------
Net Book Value at January 1, 2004 274
Additions 1,959
Amortization (321)
Deferred charges written-off (266)
-----------
Net Book Value at December 31, 2004 1,646
Additions 2,824
Amortization (837)
Deferred charges written-off (761)
-----------
Net Book Value at December 31, 2005 2,872
===========
11. Long-Term Debt
Balance as of
Vessel December 31, 2005
-----------------------------------------------------------------------
A) Term loan facility
------------------
M/T Altius 17,333
M/V CMA CGM Seine 13,565
M/T Bora 11,220
M/T Nordanvind 11,890
M/T High Land 9,043
M/T High Rider 8,708
M/T Citius 7,201
M/V Ocean Hope 8,373
M/V CMA CGM Energy 10,885
M/V CMA CGM Force 10,885
M/V CMA CGM Makassar 13,565
M/T Fortius 17,332
--------------
Total 140,000
--------------
Short term -
Long term 140,000
--------------
140,000
--------------
B) Revolving loan facility
-----------------------
M/T Chinook 32,600
M/T Stena Compass 5,610
M/T Stena Compassion 5,610
--------------
Total 43,820
--------------
Short term -
Long term 43,820
--------------
43,820
--------------
Total amount 183,820
==============
Senior secured credit agreement
Simultaneously with the Company's initial public offering, the Company entered
into a senior secured credit agreement ("the credit facility") with a syndicate
of banks led by Fortis Bank, Bank of Scotland and Nordea Bank Finland. The
credit facility is for a total of $290 million and comprises of a delayed-draw
term loan facility of $140 million and a revolving credit facility of $150
million. During the year ended December 31, 2005, twelve of the Group's vessels
(as listed above) repaid their existing loans with a combination of the credit
facility and the proceeds of the Company's initial public offering. As a result,
the Group wrote off $761,000 of financing costs associated with the previous
debt. The $150 million revolving credit facility for the acquisition of
additional vessels was drawn in November 2005 for the purchase of M/T Chinook
($32.6 million) and in October 2005 for deposits on the purchase of M/T Stena
Compass ($5.6 million) and M/T Stena Compassion ($5.6 million). The rest of the
revolving credit facility was undrawn as at December 31, 2005 and is available
for two years until June 3, 2007.
The credit facility of $290 million, including the $140 million delayed-draw
term loan facility and the $150 million revolving credit facility is in the name
of Aries Maritime as borrower and guaranteed by the vessel-owning subsidiaries
supported by first preferred mortgages over their vessels.
The debt agreement also contains various covenants, including (a) restriction as
to changes in management and ownership of the vessels, (b) limitation on
incurring additional indebtedness, (c) mortgaging of vessels and restriction on
payment of dividends, (d) minimum requirement regarding hull cover ratios, (e)
minimum liquidity requirement, (f) maintenance of operating accounts and (g)
minimum insurance values.
Effective April 3, 2006 the Company entered into a new $360 million revolving
credit facility. The $360 million facility, which has a term of five years, is
to be used to replace the current $140 million term loan facility and $150
million revolving credit facility. The $360 million facility is in the name of
Aries Maritime as borrower and guaranteed by the vessel-owning subsidiaries
supported by first preferred mortgages over their vessels.
As at December 31, 2005 repayments of the long-term debt under the new credit
facility are due as follows (see also note 20):
000's
---------------
2006-2010 -
2011 183,820
---------------
Total amount 183,820
===============
Interest on the new credit facility is charged at LIBOR plus a margin equal to
1.125% if the total liabilities divided by the total assets, adjusting the book
value of the fleet to its market value, is less than 50%; and 1.25% if equal to
or greater than 50% but less than 60%; and 1.375% if equal to or greater than
60% but less than 65%; and 1.5% if equal to or greater than 65%.
Interest on the existing credit facility was charged at LIBOR plus a 1.25%
margin when the corporate leverage ratio was less than 60% and at LIBOR plus a
1.375% margin when the corporate leverage ratio was equal to or greater than
60%. Corporate leverage was defined as the ratio of outstanding total
liabilities divided by the total assets, adjusted for the difference between the
fair market value and book value of the collateral vessels. The effective
interest rate at December 31, 2005 was 4.91% p.a. and 5.42% p.a. for the
delayed-draw term loan facility and the revolving credit facility respectively.
Settlement of fee agreement with bank
Certain loans with an aggregate outstanding amount of $135.75 million at
December 31, 2004 contained additional participation arrangements with the Bank
of Scotland. With $6.5 million of the proceeds of the Company's initial public
offering, these obligations were settled in full on June 17, 2005.
12. Deferred Revenue
Deferred
revenue
December 31, 2003 -
Additions 22,638
Amortization (9,055)
Interest 293
Deferred revenue written-off on disposal of vessels (5,662)
--------------
December 31, 2004 8,214
Additions 28,387
Amortization (9,275)
Interest 430
--------------
December 31, 2005 27,756
==============
Short term 10,715
Long term 17,041
--------------
27,756
==============
13. Stockholders' Equity
(a) On incorporation of the Company on January 12, 2005, 12,000 shares were
issued with a par value of $1 per share resulting in net proceeds of $12,000. On
January 17, 2005, the Company proceeded with a stock split resulting in
1,200,000 shares of $0.01 each.
(b) In April 2005, the Company paid a dividend to existing stockholders of $1.9
million. $214,000 of the dividend was paid in cash and the balance of $1.69
million was settled by the transfer of two group companies to existing
stockholders. In June 2005, the Company paid a dividend of $150,000, which the
Company settled by the issuance of 14,976,877 shares.
(c) On November 28, 2005, the Company paid a dividend of $14.78 million to
existing stockholders.
14. Revenue From Voyages
The Group operates on a worldwide basis in one operating segment - the shipping
transportation market. The geographical analysis of revenue from voyages, based
on point of destination, is presented as follows:
December 31, December 31, December 31,
2003 2004 2005
Europe - 12,302 27,413
Asia 3,658 21,846 30,896
Africa 3,658 10,571 4,186
South America (Venezuela) - 3,550 13,410
------------- -------------- -------------
7,316 48,269 75,905
============= ============== =============
During the year ended December 31, 2005, the Group received 91% of its income
from five charterers (33%, 16%, 15%, 14% and 13%, respectively). During the year
ended December 31, 2004, the Group received 79% of its income from three
charterers (43%, 23% and 13%, respectively).
15. Financial Instruments
Fair Values
The carrying amounts of the following financial instruments approximate their
fair values; cash and cash equivalents and restricted cash accounts, trade and
other receivables, due from managing agent, due from related parties, derivative
financial instruments and trade and other payables. The fair values of long-term
loans approximate the recorded values, generally, due to their variable interest
rates.
Credit Risk
The Group believes that no significant credit risk exists with respect to the
Group's cash due to the spread of this risk among various different banks and
the high credit status of these counterparties. The Group is also exposed to
credit risk in the event of non-performance by counterparties to derivative
instruments. However, the Group limits this exposure by entering into
transactions with counterparties that have high credit ratings. Credit risk with
respect to trade accounts receivable is reduced by the Group by chartering its
vessels to established international charterers (refer to note 14).
Interest rate swaps
Outstanding swap agreements involve both the risk of a counterparty not
performing under the terms of the contract and the risk associated with changes
in market value. The Group monitors its positions, the credit ratings of
counterparties and the level of contracts it enters into with any one party. The
counterparties to these contracts are major financial institutions. The Group
has a policy of entering into contracts with counterparties that meet stringent
qualifications and, given the high level of credit quality of its derivative
counter parties, the Group does not believe it is necessary to obtain collateral
arrangements.
The Group has entered into interest rate swap agreements detailed as follows:
Notional Maximum
Amount fixed rate Fair value Fair value Fair value
Value Termination Dec. 31, Dec. 31, Floating Dec. 31, Dec. 31, Dec. 31,
Counterparty Date Date 2005/2004 2005/2004 Rate 2003 2004 2005
- ---------------- ---------- ------------ --------- --------- --------- ---------- ---------- -----------
3-month
Fortis Bank 03/01/06 03/06/09 46,667 4.885% LIBOR - - 127
3-month
Nordea Bank 03/01/06 03/06/09 46,667 4.885% LIBOR - - 121
3-month
Bank of Scotland 03/01/06 03/06/09 46,667 4.885% LIBOR - - 153
3-month
Bank of Scotland 04/06/04 01/06/07 22,500 3.365% LIBOR - 3 -
3-month
Bank of Scotland 18/01/01 30/06/05 12,500 5.5% LIBOR - (247) -
3-month
Bank of Scotland 09/06/04 05/05/09 22,063 3.9% LIBOR - (171) -
3-month
Bank of Scotland 19/03/03 13/03/06 25,750 2.535% LIBOR (215) 167 -
-----------------------------------
(215) (248) 401
===================================
These interest rate swaps are used to hedge the interest expense arising from
the Group's long-term borrowings detailed in Note 11. The interest rate swaps
allow the Group to raise long-term borrowings at floating rates and swap them
into effectively fixed rates. Under the interest rate swaps, the Group agrees
with the counterparty to exchange, at specified intervals, the difference
between a fixed rate and floating rate interest amount calculated by reference
to the agreed notional amount.
The total fair value change of the interest rate swaps indicated above is shown
in the income statement. These amounts were a gain of $950,000 as of December
31, 2005, a loss of $33,000 as of December 31, 2004 and a loss of $215,000 as of
December 31, 2003. These fair values are based upon valuations received from the
relevant financial institutions. The related asset or liability is shown under
derivative financial instruments in the balance sheet.
16. Changes in Working Capital
December 31, December 31, December 31,
2003 2004 2005
--------------- --------------- -----------------
(Increase) decrease in
Trade receivables (1) (302) 120
Other receivables - (114) 54
Inventories (83) (352) (210)
Prepaid expenses and other (30) (299) (192)
Due from managing agent - - (84)
Due from related parties - (1,582) (152)
Increase (decrease) in
Accounts payable, trade 311 3,518 936
Accrued liabilities 209 1,061 1,684
Deferred income 246 1,805 1,112
Due to related parties 529 - -
--------------- --------------- -----------------
1,181 3,735 3,268
=============== =============== =================
17. Commitments and Contingent Liabilities
(a) Commitments
Management agreements
From June 8, 2005, certain of the vessel-owning subsidiaries commenced operating
under new ten-year ship management agreements with Magnus Carriers Corporation
("Magnus Carriers"), a related party under common control. These ship management
agreements are cancellable by the vessel-owning subsidiaries with two months
notice, while Magnus Carriers has no such option. Under these agreements, Magnus
Carriers provides both technical and commercial management services for the
vessel-owning subsidiaries. Each of the vessel-owning subsidiaries pays vessel
operating expenses to Magnus Carriers based on the jointly established budget
per vessel, which will increase by 3% annually and be subject to adjustment
every three years. If actual vessel operating expenses exceed or are below the
budgeted amounts, the relevant subsidiary and Magnus Carriers will bear the
excess expenditures or benefit from the savings equally. Expenses that relate to
any improvement, structural changes or installation of new equipment required by
law or regulation will be paid solely by the relevant subsidiary. Also, each of
these agreements provides for the payment to Magnus Carriers of a management fee
of $146,000 per annum for technical management services, plus $1,000 per month
for office space and administrative support (refer to note 19). With effect from
January 1, 2006 this $1,000 per vessel, per month fee no longer exists.
From November 30, 2005, Chinook Waves Corporation commenced operating its
vessel, M/T Chinook under a ship management agreement with Ernst Jacob
Shipmanagement GmbH ("Ernst Jacob"). Under this agreement, Ernst Jacob provides
technical management services for the vessel-owning subsidiary and receives an
annual management fee of Euro 128,000.
Purchase of vessels
In October 2005, contracts were entered into for the purchase of two products
tankers; two 72,750 (approximately) dwt vessels (M/T Stena Compass and M/T Stena
Compassion) costing $56.1 million each. The M/T Stena Compass was delivered on
February 14, 2006. The M/T Stena Compassion is due to be delivered in May 2006.
Rental agreement
On November 21, 2005 AMT Management Ltd entered into an office rental agreement
with a related party, a company under common control, with effect from December
1, 2005 for six years at a monthly rental of Euro 4,000 plus stamp duty ($4,890)
(refer to note 19).
The following table sets out long-term commercial obligations for rent and
management fees, outstanding as of December 31, 2005:
000's
-----------------
2006 2,051
2007 1,931
2008 1,955
2009 2,015
2010 and thereafter 13,110
-----------------
TOTAL 21,062
=================
(b) Contingencies
Legal proceedings
There are no material legal proceedings to which the Group is a party other than
routine litigation incidental to the Group's business. In the opinion of
management, the disposition of these lawsuits should not have a material impact
on the Group's results of operations, financial position or cash flows.
18. Taxation
The Group is not subject to tax on international shipping income in its
respective jurisdictions of incorporation or in the jurisdictions in which their
respective vessels are registered. However, the vessel-owning companies' vessels
are subject to tonnage taxes, which have been included in the vessel operating
expenses in the accompanying statements of income.
19. Transactions Involving Related Parties
(a) Management fees
The vessel-owning companies included in the Group receive technical and
commercial management services from Magnus Carriers, a company under common
control, pursuant to ship management agreements. Under these agreements, the
Group paid management fees of $1.498 million for the year ended December 31,
2005, $893,000 for the year ended December 31, 2004 and $199,000 for the period
ended December 31, 2003 which is separately reflected in the statements of
income.
(b) Commissions
Magnus Carriers and Trampocean S.A., related companies under common control,
provide chartering services to the vessel-owning companies included in the Group
at a commission of 1.25% of hires and freights earned by the vessels. The Group
paid these companies fees for chartering services of $50,000 for the year ended
December 31, 2005 $368,000 for the year ended December 31, 2004 and $73,000 for
the period ended December 31, 2003. These commissions relate to agreements which
are superseded by the new ship management agreements between Magnus Carriers and
the vessel-owning subsidiaries. From the effective date of the new ship
management agreements Magnus Carriers may only receive commission on new
charters. Under the new ship management agreements, Magnus Carriers will be paid
1% of the sale or purchase price in connection with a vessel sale or purchase
that Magnus Carriers brokers for the Group.
(c) Rental agreement
During 2005, the Group entered into a rental agreement with a related party, a
company controlled by directors (see note 17). The Group paid $4,693 to the
related party during the year ended December 31, 2005 (2004 and 2003 $NIL).
(d) Amounts due from/to related parties
Amounts due from related parties were $1.293 million at December 31, 2005 and
$1.053 million at December 31, 2004. Amounts due to related parties were
$529,000 at December 31, 2003. These amounts represent payments less receipts
made by the Group on behalf of (i) other vessel-owning companies under common
control with the Group, consisting of $392,000 (due from) at December 31, 2005,
$138,000 (due from) at December 31, 2004 and $NIL at December 31, 2003 and (ii)
Magnus Carriers Corporation, consisting of $901,000 (due from) at December 31,
2005, $915,000 (due from) at December 31, 2004 and $529,000 (due to) at December
31, 2003. There are no terms of settlement for these amounts, as of December 31,
2005.
(e) Crewing
Crewing for the Group is undertaken by Magnus Carriers through a related entity,
Poseidon Marine Agency. The Group paid manning fees of $310,000 for the year
ended December 31, 2005, $278,000 for the year ended December 31, 2004 and
$58,000 for the period ended December 31, 2003.
(f) Vessel purchase
Aries Maritime exercised its right to acquire the M/T Chinook under the Right of
First Refusal Agreement with Magnus Carriers in October 2005. The acquisition
was offered to Aries Maritime by Magnus Carriers on either of two bases; (a)
with retention of the five year head charter dated June 16, 2003 between the
sellers and Pacific Breeze Tankers Ltd. (a joint venture company, 50% of which
is ultimately owned between Mons Bolin, President and Chief Executive Officer of
Aries Maritime and Gabriel Petridis equally) as charterers, at a rate of $13,000
per day, in which case the purchase consideration would be $30.6 million or, (b)
without the head charter, in which case the purchase consideration would be
$32.6 million. Aries Maritime exercised its right on basis (b). The total
purchase consideration of $32.6 million for the M/T Chinook, paid on November
30, 2005, comprised purchase consideration under the terms of a Memorandum of
Agreement dated October 25, 2005 of $30.6 million and a $2 million additional
purchase consideration to the sellers under the terms of a separate agreement
relating to the termination of the head charter.
Pursuant to an agreement dated December 28, 2004 Aries Maritime exercised its
right to acquire CMA CGM Seine and CMA CGM Makassar in June, 2005 and took
delivery of these vessels on June 24, 2005 and July 15, 2005 respectively. Both
vessels were purchased from International Container Ships KS (a Norwegian
limited partnership, of which Mons Bolin, President and Chief Executive Officer
of Aries Maritime and Gabriel Petridis equally together, ultimately owned 25%).
The purchase price paid for the CMA CGM Seine was $35.4 million and for the CMA
CGM Makassar was $35.3 million.
(g) General and administrative expenses
During the year ended December 31, 2005 the Group paid directors' fees of
$467,000 (2004 and 2003 $NIL). Such fees are included in general and
administrative expenses in the accompanying consolidated statements of income.
20. Post Balance Sheet Events
a) Credit facility
With effect from March 1, 2006 the Group voluntarily reduced its existing $150
million revolving credit facility to $145 million. The Group entered into a new
$360 million revolving credit facility on April 3, 2006. The $360 million
facility, which has a term of five years, is to be used to replace the current
$140 million term loan facility and $150 million revolving credit facility.
b) Dividend
On February 13, 2006 the Directors of Aries Maritime declared a dividend of
$0.35 per share in respect of the fourth quarter of 2005. The dividend was paid
on March 9, 2006 to shareholders on record as of February 23, 2006.
c) Interest rate swap
On April 7, 2006 the interest rate swap with Fortis Bank was terminated and the
settlement proceeds amounted to $490,000 in favor of Aries Maritime.
Unaudited post balance sheet events
a) On May 8, 2006 the Directors of Aries Maritime Transport Limited declared a
dividend of $0.14 per share in respect of the first quarter of 2006. The
dividend was paid on May 31, 2006 to shareholders on record as of May 19, 2006.
b) The Company took delivery of the vessel Stena Compassion in June 2006.
ITEM 19. EXHIBITS
Number Description of Exhibits
1.1 ____ Articles of Incorporation of Aries Maritime Transport
Limited (1)
1.2 ____ Bye-laws of the Company (2)
4.1 ____ Credit Agreement by and between the Company and The Bank
of Scotland and Nordea Bank Finland as joint lead
arrangers. (3)
8.1 ____ List of Subsidiaries (4)
12.1 ____ Rule 13a-14(a)/15d-14(a) Certification of the Company's
Chief Executive Officer.
12.2 ____ Rule 13a-14(a)/15d-14(a) Certification of the Company's
Chief Financial Officer.
13.1 ____ Certification of the Company's 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 Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
(1) Incorporated by reference to Exhibit 3.1 to the Company's registration
statement on Form F-1 (Registration No. 333-124952).
(2) Incorporated by reference to Exhibit 3.2 to the Company's registration
statement on Form F-1 (Registration No. 333-124952).
(3) To be filed by amendment.
(4) Incorporated by reference to Exhibit 21.1 to the Company's registration
statement on Form F-1 (Registration No. 333-124952).
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 registration statement on its behalf.
ARIES MARITIME TRANSPORT LIMITED
By: /s/ Mon S. Bolin
----------------------------------
Name: Mons S. Bolin
Title: Chief Executive Officer
June 30, 2006