SEWARD & KISSEL LLP
ONE BATTERY PARK PLAZA
NEW YORK, NEW YORK 10004
TELEPHONE: (212) 574-1200
Facsimile: (212) 480-8421
www.sewkis.com
September 18, 2007
VIA EDGAR
Mr. Michael Fay
Division of Corporation Finance
Securities and Exchange Commission
CF/AD5
100 F Street, N.E.
Washington, D.C. 20549
Re: TOP Tankers Inc. Form 20-F for Fiscal Year
Ended December 31, 2006 (File No. 000-50859)
Dear Mr. Fay:
This letter responds to follow-on comments of the staff (the "Staff")
of the Securities and Exchange Commission (the "SEC") to the Annual Report on
Form 20-F for the fiscal year ended December 31, 2006 ("Form 20-F") of TOP
Tankers Inc. (the "Company") filed April 20, 2007, as provided in a letter to
Evangelos J. Pistiolis, the Company's President and Chief Executive Officer,
dated September 5, 2007 (the "September Comment Letter"). The Staff had
initially provided comment to the Company's Form 20-F in a letter dated August
2, 2007 (the "August Comment Letter"), and the Company responded to the August
Comment Letter in correspondence filed on EDGAR on August 24, 2007 (the "Initial
Response Letter"). This letter sets forth the Company's responses to the Staff's
comments.
As discussed with the Staff, we are providing the following appendices
to this letter supplementally:
Appendix B,
Appendix C(i), (ii) and (iii),
Appendix D.
For your convenience, the Staff's comments have been restated in their
entirety, with the responses to each comment set forth immediately under the
comment.
Form 20-F For the Year Ended December 31, 2006
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Item 3. Key Information
Selected Financial Information
Comment 1. Refer to your response to our prior comment 1. You state EBITDA
is useful because it is used by financial analysts and because it
facilitates operating performance comparisons from period to
period and from company to company by backing out differences
caused by variations in capital structure, tax positions, and
facilities and equipment. With regard to its use by financial
analysts, this is not a substantive reason specific to you that
justifies usefulness. Refer to footnote 44 of FR-65. With regard
to facilitating operating performance comparisons from period to
period, it does not appear that you have explained how this
measure is useful. If your implication is that EBITDA facilitates
period to period comparisons by eliminating certain variances in
items eliminated, we caution you that a non-GAAP measure should
never be used in an attempt to smooth earnings. With regard to
facilitating operating performance comparisons from company to
company, it is not clear why you believe it is useful for
investors to ignore factors such as capital structure, tax
positions, and facilities and equipment when making such
comparisons. Additionally, interest and tax expenses we already
excluded from operating income, a GAAP measure, so it is not
clear why an alternative measure is necessary to exclude such
amounts. Based on your response, you have not provided
substantive justification as to the usefulness of EBITDA to
investors. Therefore, please revise your filings to eliminate
presentation of this non-GAAP measure.
Response: The Company will refrain from including EBITDA in future filings
on Form 20F.
Consolidated Statements of Cash Flows
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Comment 2. Refer to your response to our prior comment number 3. Please
consider adding disclosure consistent with your response that
explains why restricted cash is presented as both an investing
and financing activity in the statements of cash flows as
applicable.
Response: The Company will add such disclosure in future filings.
Notes to Consolidated Financial Statements
Note 2. Significant Accounting Policies
(m) Accounting for Dry-Docking Costs
Comment 3. We note your responses to our prior comment numbers 4, 5, and 6
and appreciate your detailed responses. You state that upon
survey or inspection of your vessels, you incur costs for tasks
necessary to satisfy requirements of the vessel's classification
society and that you capitalize such costs. The fact that certain
repair and maintenance activities are determined to be necessary
as a result of regulatory inspections should not affect how you
account for the associated costs. While you deem these costs to
be "non-routine" and integral to satisfying inspection
requirements, in large part they appear to be incurred for
repairs and maintenance that do not appreciably extend the useful
life, increase the earning capacity, or improve the efficiency of
the vessels, but rather allow the vessels to continue to be
operated in their current capacity. In this regard, it appears
these costs do not qualify for capitalization but rather should
be expensed as incurred in accordance with your accounting policy
for repairs and maintenance costs, which states that all repairs
and maintenance costs are expensed as incurred. Based on the cost
categories outlined in your response to our prior comment 6,
steelworks, coating of tanks and other components, piping and
valves, and machinery and electrical works costs do not generally
appear eligible for capitalization. With regard to the "other
expenses" category, "oil sludge," "sewage and garbage removal,"
"temporary lighting," "telephone and ventilation services," and
"cleaning of debris" also do not appear eligible for
capitalization. We believe you should amend your Form 20-F for
the year ended December 31, 2006 and subsequent filings, as
appropriate, to restate your financial statements to expense when
incurred the costs indicated in this comment that had been
previously capitalized.
Response: The Company respectfully disagrees with the Staff's assessment
that drydocking costs (also referred to herein as Planned Major
Maintenance Activities or PMMA) should be expensed when incurred
rather than deferred.
Survey processes for tankers are made up of integral steps set
out by the International Maritime Organization ("IMO") and Class
Societies to promote safety of life at sea, to certify the
vessels' seaworthiness, to protect the environment, as well as to
regulate all aspects of a vessel's construction and operation.
IMO requirements are adopted by flag administrations which in
turn delegate the implemenation and issuance of the relevant
certificates to the classification societies.
As discussed below, drydocking occurs in connection with class
and statutory surveys required by a vessel's classification
society and flag. Drydocking is a mandatory step that must be
undertaken in order to satisfy statutory requirements by the IMO
and to obtain or continue a vessel's class certification. Without
the above required certifications, both class and statutory, a
vessel is not able to operate in trade. Therefore, drydocking is
directly analogous to airframe and aircraft engine overhauls
required by civil air regulations at specific maximum periodic
intervals to recertify that the airframe or engine is completely
airworthy.(1) The Airline Guide , as amended in September 2006 by
FASB Staff Position FSP AUG AIR-1 ("FSP AIR"), notes the
principal source of guidance on the accounting for PMMA is the
Airline Guide. FSP AIR permits three alternative methods of
accounting for PMMA as follows: (1) direct expense, (2) built-in
overhaul and (3) deferral.(2) We understand during the
deliberation of the FSP AIR, the Financial Accounting Standards
Board ("FASB") recognized in its meetings that entities in the
shipping industry typically account for PMMA using the deferral
method.(3) FSP AIR further notes the guidance in the FSP is
applicable to entities in all industries.(4)
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(1) AICPA Industry Audit Guide, Audits of Airlines, With Conforming Changes as
of May 2005, Section 3.64. This guide will be referred to hereinafter as
"Airline Guide." It is widely recognized that the Airline Guide is often
applied by analogy by companies in other industries. See, e.g., FASB Staff
Position FSP AUG-AIR-1, paragraph 4 ("The guidance in this FSP is
applicable to entities in all industries").
(2) FSP AUG AIR-1 amended the Airline Guide to delete, effective beginning with
the first fiscal year beginning after December 15, 2006, the
accrual-in-advance method for PMMAs.
(3) Discussed during Board Meeting of the Financial Accounting Standards
Board--Planned Major Maintenance Activities Agenda Request, March 8, 2006.
(4) FASB Staff Position FSP AUG-AIR-1, paragraph 4.
Drydocking costs may be deferred because they are analogous to
the airframe and engine overhauls discussed in the Airline Guide.
The Federal Aviation Administration ("FAA") has established
overhaul cycles for each airframe and engine component in an
effort to prevent potential hazards and to ensure transportation
safety.(5) For accounting purposes, airframe and aircraft engine
overhauls encompass all inspections or replacements of major
components, which the civil air regulations require at specific
maximum periodic intervals to recertify that the airframe or
engine is completely airworthy(6). An overhaul does not include,
however, the cost of routine replacement of minor parts.(7) Under
the Airline Guide, carriers should adopt an accounting method
that recognizes overhaul expenses in the appropriate period.(8)
One acceptable method contained in FSP AIR and the Airline Guide
is the deferral method, under which the actual cost of each
overhaul is deferred and amortized to the next overhaul.(9)
In accordance with FSP AIR, we believe drydocking costs may be
deferred as they are directly analogous to the airframe and
engine overhauls discussed in the Airline Guide. With very few
exceptions, vessels are drydocked only in connection with
statutory and class requirements and the necessary overhauling
performed needs to comply with classification standards and
statutory requirements in order to obtain or maintain the
relevant certificates. As with aircraft, which cannot operate
commercially without being recertified by civil aviation
authorities, a cargo vessel (regardless of whether it is a
tanker, drybulk carrier or container vessel) is not considered
seaworthy, cannot be insured and therefore cannot operate unless
it is certified as being "in class" by the applicable
classification society and in compliance with flag statutory
requirements.(10)
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(5) Airline Guide, Section 3.63.
(6) Airline Guide, Section 3.64.
(7) Id. Also excluded from overhauls are costs accounted for as restoration of
assets, such as extraordinary costs associated with the renewal of major
structural parts beyond the scope of normal periodic overhauls, and other
costs with a life span similar to the depreciable service life of the
related airframe or aircraft engine.
(8) Airline Guide, Section 3.69.
(9) Id. As discussed below, the use of the deferral method for drydocking
expenses has been adopted by almost every listed shipping company.
(10) The International Maritime Organization ("IMO") in its regulation of the
Safety Of Life At Sea ("SOLAS), Regulation 10.a(v), specifically defines
the mandatory survey Dry-Dock ("DD") cycles of all cargo vessels. A copy of
the regulation is attached to this letter as Appendix A. Flag
administrations have approved classification societies that are responsible
for the implementation of these survey requirements.
Each classification society imposes its own requirements that
must be fulfilled in order for the society to issue a
classification certificate to a vessel. With respect to
drydocking requirements, these classification societies'
requirements coincide with the International Maritime
Organization's SOLAS regulation. These requirements concern all
PMMAs, including steelworks, coating of tanks, piping and valves,
etc.(11) These activities and tasks are performed during
drydocking only because they are required for classification
purposes. Unless these tasks and activities are performed
completely and to the full satisfaction of the classification
society, the vessel could not achieve its class certificate.
The International Association of Classification Societies (IACS)
has developed a set of common rules for the vessels' construction
and periodical survey certification process. These common rules
are attached in Appendix D. Each classification society has
adjusted their requirements based on the IACS guidelines.
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(11) Attached as Appendix B are the survey requirements of one of the
classification societies, Det Norske Veritas (DNV), which is currently the
classification society for 12 of the Company's vessels. In addition,
attached as Appendix C(i), C(ii) and C(iii), respectively, are Class Status
Report, Survey Report and Condition Evaluation Report for the vessel
Priceless, which underwent drydocking in 2006. (12) Airline Guide, Section
3.64.
The Company, in accordance with the requirements set by its
classification societies, has developed the following main
drydock works categories, in order to better monitor each process
and account for the relevant expenses accordingly. All of the
following categories include all the works that are required by
IACS Common Rules in sections Z10.1, titled "Hull Surveys of Oil
Tankers" and Sections Z18-Z22, titled "Periodical Survey of
Machinery," "Calibration of Measuring Equipment," "Planned
Maintenance Scheme for Machinery," "Surveys of Propeller Shafts
and Tube Shafts" and Survey Requirements for Automatic Air Pipe
Heads, respectively, which define all necessary inspections,
measurements and works that need to be carried out in Special,
Annual and Intermediate surveys of Oil Tankers.
A. Hull Surveys:
1. Steel works. Section Z10.1defines in detail the measurements
tests, the allowed steel diminution and the required
rectification works if necessary. As stated in the Company's
Initial Response Letter, consistent with these requirements,
the Company conducts ultrasonic measurements for steelwork
evaluation, steelwork in the vessel's cargo and ballast
tanks and steelwork on deck.
2. Coating of Tanks and Other Components. Section Z10.1 defines
the Corrosion Prevention System and coating condition
classifications. As stated in the Company's Initial Response
Letter, "coating of tanks" is the process of applying to the
tanks a special epoxy compound in order to comply with these
requirements. The process starts after the tanks have been
emptied and thoroughly cleaned. Following the cleaning
phase, the surfaces are hydro or sand blasted to remove
rust, and peel away hardened deposits. The special epoxy
compound is then applied to the surface of the tanks through
a highly specialized application process.
3. Piping and Valves. Section Z10.1 defines the piping and
valve inspection method, operational testing and
rectification works, if necessary. As stated in the
Company's Initial Response Letter, the Company performs
piping and valves inspections and overhaul in cargo and
ballast tanks, on deck and in the engine room in order to
meet the requirements of the Section.
B. Machinery Surveys:
4. Machinery and Electrical Works. Sections Z18-Z22 define the
processes of Periodical Survey of Machinery, Calibration of
Measuring Equipment, Planned Maintenance Scheme for
Machinery, Surveys of Propeller Shafts and Tube Shafts, and
Survey Requirements for Automatic Air Pipe Heads. As stated
in the Company's Initial Response Letter, the Company
inspects and performs works performed on the main engine,
the auxiliary engines and generators, the boilers, radio
navigation equipment, automation and electrical equipment,
and other engine room or deck machinery in order to comply
with Sections Z18-Z22.
C. Other drydock related expenses:
5. Other Drydock Expenses. As stated in the Company's Initial
Response Letter, other drydock expenses consist of dry dock
dues, epoxy coatings and general services for vessel
preparation such as pilot and tugboat services, mooring and
unmooring, docking and undocking, wharfage, erection and
removal of keel and side blocks, fire lines and fire
watchmen, cooling, water supply, inspection charges, oil
sludge, sewage and garbage removal, temporary lighting,
telephone and ventilation services, and cleaning of debris
accumulated in connection with drydocking. All these items
are performed only for the drydocking and would be
completely avoided if the vessel was not going into dry
docking and therefore are considered appropriate for
deferral.
The main expense included in the other drydock expenses are the
epoxy coatings and general services for vessel preparation. The
Company defers such items as they are directly related with the
drydocking process and would not have been incurred otherwise.
Although it may appear that some of the activities and tasks
performed during drydocking are of a type that could also be
considered maintenance and repair and allow the vessel to
continue to be operated in its current capacity, the activities
and tasks are performed for recertification purposes and,
therefore, qualify for deferral treatment. As discussed below and
described in the Company's response to Comment 5 in the Initial
Response Letter, after the completion of each drydocking the
technical superintendent and the chief technical officer of the
Company carefully reviews all costs incurred during drydocking
and determines which costs are required for drydocking (i.e.,
recertification) purposes and eligible for deferral and which are
regular maintenance and repair and therefore should be
expensed-as-incurred.
Costs for works and tasks completed in connection with drydocking
can be deferred in accordance with the Airline Guide to the
extent they are part of the required overhaul for class purposes.
Under the Airline Guide, airframe and aircraft engine overhauls
encompass all inspections or replacements of major components
required to recertify that the frame or engine is completely
airworthy.(12)
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(12) Airline Guide, Section 3.64.
This guidance in the Airline Guide sets forth a model for
determining which costs are deferrable in connection with
drydocking for recertification and which are not. As noted above,
FSP AIR promulgated the accounting for PMMA contained in the
Airline Guide for all industries. While the Airline Guide does
not clearly define the costs associated with PMMA, it does state
that costs incurred during recertification are considered PMMA
unless they are incurred with routine replacement of minor parts
or are extraordinary costs associated with the renewal of major
structural parts beyond the scope of normal periodic overhauls.
It is the Company's policy to defer only such costs as are
directly related with the drydocking process or PMMA.
Deferring drydocking costs is industry standard for shipping
companies, and the Company's policy with respect to deferring
costs incurred during drydocking are well within the industry
standard. The Company has surveyed the public filings of 33 cargo
shipowning companies (including the Company). Of those 33
companies, 30 companies use the deferral method for drydocking
expenses, two companies use the expense-as-incurred method and
one company has not disclosed its policy in its filings. A list
of the companies surveyed and their treatment of drydocking costs
is attached as Appendix E to this letter.
Appendix E also lists the surveyed companies' policies with
respect to determining which costs incurred during drydocking may
be deferred and which costs must be expensed-as-incurred, to the
extent such policies were described in the companies' public
filings. Of the 30 companies that use the deferral method, 14
describe which of the costs incurred in connection with
drydocking are deferred. All of those companies have policies
similar to the policy implemented by the Company.
Accordingly, the Company respectfully submits that its treatment
of its drydocking costs is appropriate and in accordance with FSP
AIR and industry standards.
Comment 4. Additionally, in reference to your response to our prior comment
number 5, "costs to be expensed when incurred" should be
identified and recorded in the period in which incurred rather
than at the conclusion of the drydocking, particularly when a
vessel is dry docked for more than one reporting period. Please
reflect this treatment in the amendments referred to in the
preceding comment. If you believe such identification and
accounting is not practicable, please disclose this and the
reason for your belief.
Response: If drydocking is completed within one reporting period, all
routine repairs and maintenance costs incurred during drydocking
are expensed as incurred. If drydocking spans two or more
reporting periods, all actual routine repairs and maintenance
costs incurred are accrued and expensed in each relevant
reporting period, similar to all other vessel operating expenses.
Comment 5. Further, please revise your disclosure consistent with the
treatments specified in the two preceding comments, and
consistent with your responses to our prior comment numbers 4, 5
and 6 to describe in more detail the types of costs considered to
be drydocking costs that are deferred and amortized and those
that are expensed when incurred as repair and maintenance or
other expenses. Also, include a description of how such costs are
identified by you.
Response: Please see the Company's response to Comments 3 and 4 above.
Note 11. Sale and Leaseback of Vessels
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Comment 6. Refer to your response to our prior comment number 7 in regard to
your analysis of criterion number 4. It is not clear why your
incremental borrowing rate for 2006 assumed in your analysis
would be significantly greater than the borrowing rates
associated with the financing of vessels acquired in 2005. Please
advise. Also, provide us with details of how you determined the
12% rate used in your analysis and why this is representative of
your incremental borrowing rate, and provide us with copies of
independent documentation in support of any portion of your
computation of this rate (e.g., rates available from traditional
bank financing and mezzanine financing reflected in the
analysis). Further, explain to us in greater detail how
traditional bank financing assumed in your 2006 incremental
borrowing rate analysis differs from financing you obtained in
prior acquisitions of vessels.
Response: SFAS 13, paragraph 5(l), defines the incremental borrowing rate
(IBR) as "the rate that the lessee would have incurred to borrow
over a similar term the funds necessary to purchase the leased
asset." However, the borrowing rate that a company would obtain
to finance a portion of the value of an asset under a secured
financing arrangement may be materially different than the rate
it would obtain to finance the full value of the asset - i.e. the
IBR. Therefore the rate that the Company financed a portion of
its 2005 vessels under secured credit facilities is not
comparable to the Company's IBR.
Asset prices in the shipping industry are very volatile. For
example, a Suezmax newbuilding ordered in 2002 for $45 million
was worth more than $80 million on its delivery in 2004. Due to
the volatile nature of the industry, shipping finance
institutions are reluctant to finance the full value of the
asset. Instead, they generally provide financing only for a
portion of the asset value, which portion is based on the risk
profile of each asset. Depending on the risk profile, shipping
finance institutions provide secured financings of between 50%
and 80% of the value of the asset.
The risk profile of a specific vessel acquisition is determined
by the following factors:
o The vessel's age - the younger the asset, the higher the
financing ratio.
o Time charter coverage - the longer the period that the
vessel's revenues are secured by period contracts, the higher the
financing ratio.
o The size of the transaction and risk profile of the
corporate entity - the larger the transaction as a percentage of
the corporation's assets, the lower the financing ratio.
o The general levels of asset prices as compared to the
historical (e.g.10-year) average prices - the higher the asset
price from the historical average, the lower the financing ratio.
In order for a company to finance the full value of the asset, it
would have to either inject its own equity to cover any
unfinanced amount or to borrow additional amounts from mezzanine
financing funds, which usually expect equity-like returns.
If the Company were to use its own equity for financing, the IBR
would be calculated as the Company's Weighted Average Cost of
Capital, which the Company determined to be in excess of its IBR.
However, the Company calculated its IBR, assuming it would have
to borrow the full amount of the transaction, secured and
unsecured.
The Company in similar sale and purchase transactions prior to
the sale and lease back, had borrowed approximately 58% of the
considerations in secured debt, while the remaining 42%
was financed with own funds (equity). As explained below, the
rate assumed for the secured part of the Pareto 7-year lease
transaction was the 7-year USD swap rate prevailing on the day of
the transaction, plus the applicable bank spread.
If the Company were to obtain mezzanine financing to finance the
full purchase price of these vessels based on similar sale and
purchase transactions prior to the sale and lease back the
Company determined that it would need to obtain mezzanine
financing for about 42% of the acquisition price, which would
otherwise be financed with own funds (equity).
Based on information obtained by the Company from Cantor
Fitzgerald, an investment bank that has advised a large number of
shipping companies for many forms of equity and debt financings,
the Company assumed that the rate for the mezzanine financing
portion would be in excess of 20%. A copy of email correspondence
between the Company and Cantor Fitzgerald is attached to this
letter as Appendix F.
In order to calculate what the proper debt and equity mix, the
Company used its historical leverage ratios that were incurred in
the three major en block acquisitions since July 2004:
Sovcomflot, 10 vessels: Value: $251.2m Debt: 141.4m (Leverage: 56.3%)
Essar, 5 vessels: Value: $256.5m Debt: 140.3m (Leverage: 54.7%)
Olsen, 3 vessels: Value: $180.5m Debt: 117.5m (Leverage: 65.1%)
Total: Value: $688.2m Debt: $399.2m (Leverage: 58.0%)
The incremental borrowing rate was calculated as follows:
KOMARF + FORTIS
Debt/Equity 58%
Senior Secured Debt 58% 6.2% 3.6% (rate of 6.2% includes 5yr Swap, as of March 13, 2006 of 5.1975%
+ spread of 1.00%)
Private Equity or Mezzanine Capital 42% 20% 8.4% (rate of 20% is the lowest of the range of the 20%-25% provided)
-------- -------
100.0% 12.0%
PARETO
Debt/Equity 58%
Senior Secured Debt 58% 6.4% 3.7% (rate of 6.4% includes 7yr, as of April 6, 2006 Swap of 5.3705%
+ spread of 1.00%)
Private Equity or Mezzanine Capital 42% 20% 8.4% (rate of 20% is the lowest of the range of the 20%-25% provided)
-------- -------
100.0% 12.1%
Mezzanine funds are not commonly available and are generally very
expensive in shipping. A mezzanine fund anticipates significant
returns on its investment, because its portion of the loan is
generally unsecured, since the asset is usually mortgaged to the
senior lender. In addition, vessel prices can be extremely
volatile and a sudden drop in market values can adversely affect
the degree of coverage of hte loan by the value of the vessel.
Therefore, the Company calculated its IBR assuming it would have
to borrow 100% of the sale price to purchase the vessels, even
though generally it would not be possible to obtain financing for
the total purchase price of a vessel. This resulted in an IBR for
2006 that is higher than the borrowing rates to finance the
acquisition of vessels in 2005 because the Company assumed that
100% of the purchase of the vessels would be financed through
third party borrowings. The calculation of the IBR is theoretical
and does not correspond to the 2005 and 2006 acquisitions where
only a portion of the acquisitions were financed through senior
secured credit facilities.
Comment 7. Refer to your response to our prior comment number 8. Please
explain to us in sufficient detail the operating expenses
associated with the repurchased vessels that exceeded your
expectations and the factors that contributed to the difference
in actual results compared to expectations and why such
difference was not determinable at the time of the sale/leaseback
transaction.
Response: The decisions to enter into the sale and lease back transaction
as well as to re-purchase certain vessels were based on the
economics of the Company's Suezmax fleet in total.
At the time the Company evaluated whether to enter into the
sale-leaseback transactions, it assumed that its total average
Suezmax operating expenses would be approximately $6,500 per
vessel per day, That was the targeted daily operating expense
figure that the management expected to incur. However the
majority of the vessels sold and leased back in 2006 proved to
have higher operating expenses due to the increased need for
regular repairs and maintenance. That average daily operating
expenses of the Suezmax fleet for the 12-month period ended March
31, 2007 was approximately $7,895 per vessel per day.
In addition, the largest negative effect to the cash-flow was the
significant decline of the average total Suezmax daily rates. The
Company had assumed that revenues would approximate the 5-year
historical spot average of $43,200 per day. However, freight
market conditions deteriorated during the 12-month period ended
March 31, 2007 to approximately $38,977 per day.
At the inception of the lease period the Company's management had
assumed a Suezmax utilization rate of approximately 90%. However,
five of these vessels underwent their drydockings in 2006 and
early 2007. All of these drydockings required significantly more
time and expense than originally anticipated because of the
unexpected, increased amount of works required and overbooking of
the Chinese shipyards at which the vessels were drydocked, which
caused significant delays. Unfortunately, the full extent of
these works was not known to the Company until the vessels were
in drydock, where the proper measurements and surveys were
conducted under the direction and supervision of the
classification society. That decreased the utilization rate for
the 12-month period ended March 31, 2007 to approximately 80%.
Therefore, the combined adjusted negative cash-flows of higher
operating expenses and lower revenues of approximately $9,093 in
total per Suezmax per day made the transaction uneconomical. The
table below illustrates the above:
Initial
SUEZMAX FLEET Management's
12-month period Q2'06-Q1'07 Estimates Actual (Delta)
- --------------------------- --------- ------ -------
Daily TCE $43,200 $38,977
Utilization 90% 80%
Daily TCE Adjusted for Utilization $38,880 $31,182 -$7,698 A
Daily Operating Expenses -$6,500 -$7,895 -$1,395 B
Average Daily Suezmax Lease Expense -$24,139 -$24,139 $0 C
------- ------- -------
Total daily Cash Inflow / Outflow $8,241 -$ 852 -$9,093 A+B+C
The increased level of operating expenses, deteriorating market
conditions which was outside of management's control and the
decreased utilization rates could not have been determined at the
inception of the deal.
Comment 8. Also, tell us whether your expectations for the repurchased
vessels were significantly different from those associated with
the other vessels subject to the 2006 sales/leaseback
transactions, and if so, why. Tell us whether or not there was a
similar difference between actual results and expectations for
these other vessels as there was for the repurchased vessels. If
a similar variance existed for these other vessels, tell us and
disclose why you did not repurchase these vessels as well and the
actions you are taking or expect to take to rectify any negative
cash flow associated with them or, if true, why you are not
taking any action to rectify this situation. If a similar
variance was not experienced, explain to us the factors that
contributed to the differences in your experience between the
repurchased vessels and the other vessels.
Response: As explained in Comment 7 above, the decisions to enter into the
sale and lease back transaction as well as to re-purchase certain
vessels were based on the economics of the Company's Suezmax
fleet in total.
The decision to repurchase the certain vessels was taken in order
to unwind the leases and subsequently lower the Company's overall
Suezmax break-even rates. Because the leased Suezmax vessels were
the vessels with the highest expenses, the Company decided to
repurchase the vessels with the highest cost and the longest
tenure of leases.
The four Suezmaxes leased from the Korean Marine Fund (KOMARF)
had a remaining lease term of less than four years, which was a
shorter remaining lease period than that of other Suezmaxes that
the Company was leasing. In addition, the Company was informed
that the Korean law prohibits special investment companies such
as KOMARF to sell their assets prior to the end of an initial
5-year period, making it impossible for the Suezmaxes owned by
KOMARF to be sold to the Company at this time. Consequently, the
Company did not approach KOMARF to discuss a repurchase
transaction.
Therefore, the Company approached Pareto, from which the Company
leased five Suezmaxes with remaining lease periods of six years,
and commenced discussions to re-acquire a number of the five
vessels. The Company's financial position at the time of the
repurchase permitted it to proceed with the repurchase of four of
the five Suezmaxes owned by Pareto.
The Company hereby acknowledges that (i) the Company is responsible
for the adequacy and accuracy of the disclosures in the filings; (ii) Staff
comments or changes to disclosures in response to Staff comments in the filings
reviewed by the Staff do not foreclose the SEC from taking any action with
respect to the filing; and (iii) the Company may not assert Staff comments as a
defense in any proceedings initiated by the SEC or any person under the federal
securities laws of the United States.
Thank you for your attention to the Company's reports. If you have any
additional comments or questions, please contact the undersigned at (212)
574-1223 or Anthony Tu-Sekine at (202) 737-8833.
Very truly yours,
SEWARD & KISSEL LLP
By: /s/ Gary J. Wolfe
----------------------
Gary J. Wolfe
Cc: Doug Jones, SEC
Lyn Shenk, SEC
Appendix A
SOLAS Regulation 10
Surveys of structure, machinery and equipment of cargo ships
(a) The structure, machinery and equipment (other than items in respect of which
a Cargo Ship Safety Equipment Certificate and a Cargo Ship Safety Radio
Certificate are issued) of a cargo ship as referred to in paragraph (b)(i) shall
be subject to the surveys and inspections specified below:
(i) an initial survey including an inspection of the outside of the ship's
bottom before the ship is put in service;(*)
- ----------
(*) Refer to the circular concerning inspection of the outside of the ship's
bottom (PSLS 2/Circ. 5).
(ii) a renewal survey at intervals specified by the Administration but not
exceeding 5 years, except where regulation 14(b), (e), (f) and (g) is
applicable;
(iii) an intermediate survey within three months before or after the second
anniversary date or within three months before or after the third
anniversary date of the Cargo Ship Safety Construction Certificate,
which shall take the place of one of the annual surveys specified in
paragraph (a)(iv);
(iv) an annual survey within 3 months before or after each anniversary date
of the Cargo Ship Safety Construction Certificate;
(v) a minimum of two inspections of the outside of the ship's bottom
during any five year period, except where regulation 14(e) or (f) is
applicable. Where regulation 14(e) or (f) is applicable, this five
year period may be extended to coincide with the extended period of
validity of the certificate. In all cases the interval between any two
such inspections shall not exceed 36 months;
(vi) an additional survey as prescribed for passenger ships in regulation
7(b)(iii).
(b) The surveys and inspections referred to in paragraph (a) shall be carried
out as follows:
(i) the initial survey shall include a complete inspection of the
structure, machinery and equipment. This survey shall be such as to
ensure that the arrangements, materials, scantlings and workmanship of
the structure, boilers and other pressure vessels, their
appurtenances, main and auxiliary machinery including steering gear
and associated control systems, electrical installation and other
equipment comply with the requirements of the present regulations, are
in satisfactory condition and are fit for the service for which the
ship is intended and that the required stability information is
provided. In the case of tankers such a survey shall also include an
inspection of the pump-rooms, cargo, bunker and ventilation piping
systems and associated safety devices;
(ii) the renewal survey shall include an inspection of the structure,
machinery and equipment as referred to in paragraph (b)(i) to ensure
that they comply with the requirements of the present regulations, are
in satisfactory condition and are fit for the service for which the
ship is intended;
(iii) the intermediate survey shall include an inspection of the structure,
boilers and other pressure vessels, machinery and equipment, the
steering gear and the associated control systems and electrical
installations to ensure that they remain satisfactory for the service
for which the ship is intended. In the case of tankers, the survey
shall also include an inspection of the pump-rooms, cargo, bunker and
ventilation piping systems and associated safety devices and the
testing of insulation resistance of electrical installations in
dangerous zones;
(iv) the annual survey shall include a general inspection of the structure,
machinery and equipment referred to in paragraph (b)(i), to ensure
that they have been maintained in accordance with regulation 11(a) and
that they remain satisfactory for the service for which the ship is
intended;
(v) the inspection of the outside of the ship's bottom and the survey of
related items inspected at the same time shall be such as to ensure
that they remain satisfactory for the service for which the ship is
intended.
(c) The intermediate and annual surveys and the inspections of the outside
of the ship's bottom referred to in paragraphs (a)(iii), (a)(iv) and
(a)(v) shall be endorsed on the Cargo Ship Safety Construction
Certificate.
Appendix B
Det Norske Veritas Survey Requirements
Submitted separately.
Appendix C(i)
Class Status Report, Priceless
Submitted separately.
Appendix C(ii)
Survey Report, Priceless
Submitted separately.
Appendix C(iii)
Condition Evaluation Report, Priceless
Submitted separately.
Appendix D
International Association of Classification Societies (IACS)
Submitted separately.
Appendix E
Company's Survey of Shipping Companies' Drydocking Policies
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
1 Aegean Marine Pet US Services "D"
Accounting policy
-----------------
Our vessels are generally required to be drydocked approximately every 30 to 60
months for major repairs and maintenance that cannot be performed while the
vessels are operating. We capitalize the costs associated with drydockings as
they occur and amortize these costs on a straight-line basis over the period
between drydockings. Costs capitalized as part of the drydocking include actual
costs incurred at the drydock yard; cost of fuel consumed between the vessel's
last discharge port prior to the drydocking and the time the vessel leaves the
drydock yard; cost of hiring riding crews to effect repairs on a vessel and
parts used in making such repairs that are reasonably made in anticipation of
reducing the duration or cost of the drydocking; cost of travel, lodging and
subsistence of our personnel sent to the drydocking site to supervise; and the
cost of hiring a third party to oversee a drydocking. We believe that these
types of capitalized costs are consistent with practice among other companies in
our industry that apply this method of accounting and that our policy of
capitalization reflects the economics and market values of the vessels.
Although many companies in our industry apply this method of accounting for
deferred drydock costs, some companies apply other methods of accounting, such
as expensing drydock costs as incurred. If we were to adopt that method of
accounting as our accounting policy, our drydock costs would have been as
disclosed under the heading "As Incurred" in the table below, for the periods
presented therein.
Average Number
Year Ended of Tankers Drydock Costs
December 31 Bunkering Non-bunkering As Reported As Incurred
- ----------- --------- ------------- ----------- -----------
(in thousands of U.S. dollars)
2004 6.8 1.0 386 321
2005 9.0 1.0 636 154
2006 1.1 1.3 1,684 10,637
The table above discloses the average number of tankers that we have owned in
each of the periods presented and the drydock costs that we have reported. In
the future, depending on the date a newly-purchased secondhand vessel is
drydocked prior to its delivery to us, we may pay drydocking costs and incur
subsequent amortization expense of these costs sooner after delivery than if the
vessel had been owned by us throughout its life. This would increase our average
drydocking expenses in periods immediately following the acquisition.
Following acquisition of vessels under newbuilding contracts, we would expect to
first pay drydocking costs and incur subsequent amortization expense of these
costs approximately 30 months after the delivery of the vessel from the
shipyard. This would decrease our average drydocking expenses in periods
immediately following the acquisition since we would have no such costs to
amortize in respect of these vessels until they were first drydocked.
Critical Accounting policy
--------------------------
Accounting for Drydocking Costs: The Company's vessels are generally required to
be drydocked every 30 to 60 months for major repairs and maintenance that cannot
be performed while the vessels are in operation. The Company follows the
deferral method of accounting for drydocking costs whereby actual costs incurred
are deferred and are amortized on a straight-line basis over the period through
the date the next drydocking is scheduled to become due. Unamortized drydocking
costs of vessels that are sold are written off against income in the year of the
vessel's sale.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
2 Alexander & Baldwin US Container "D"
Accounting policy
-----------------
Nothing mentionned for drydocking
Critical Accounting policy
--------------------------
Dry-docking: Under U.S. Coast Guard rules, administered through the American
Bureau of Shipping's alternative compliance program, all vessels must meet
specified seaworthiness standards to remain in service. Vessels must undergo
regular inspection, monitoring and maintenance, referred to as "dry-docking," to
maintain the required operating certificates. These dry-docks occur on scheduled
intervals ranging from two to five years, depending on the vessel age. Because
the dry-docks enable the vessel to continue operating in compliance with U.S.
Coast Guard requirements, the costs of these scheduled dry-docks are deferred
and amortized until the next regularly scheduled dry-dock period. Routine vessel
maintenance and repairs that do not improve or extend asset lives are charged to
expense as incurred. Deferred amounts are included on the Consolidated Balance
Sheets in other non-current assets. Amortized amounts are charged to operating
expenses in the Consolidated Statements of Income. Changes in deferred
dry-docking costs are included in the Consolidated Statements of Cash Flows in
Cash Flows from Operating Activities.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
3 Aries Maritime US Dry "D"
Accounting policy
-----------------
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.
Critical Accounting policy
--------------------------
Deferred Dry-docking and Special Survey Costs
Our vessels are required to be dry-docked every 30 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.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
4 Capital Product US Tankers N/A
Partners L.P.
Accounting policy
-----------------
Nothing mentioned because all vessels are new.
Critical Accounting policy
--------------------------
Nothing mentioned because all vessels are new.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
5 D/S Torm US Tankers "D"
Accounting policy
-----------------
Vessels and dry-docking
The increase in tangible fixed assets of USD 157 million to USD 1,324
million in 2006 is attributable to the change in vessels and capitalized
dry-docking and in prepayments on vessels. The carrying value of vessels and
capitalized dry-docking increased by USD 70 million to USD 1,136 million. The
increase relating to vessels amounted to USD 73 million. The addition of new
tonnage amounted to a total acquisition cost of USD 168 million resulting from
two LR2 tanker newbuildings, two LR2 tankers built in 1999 and 2000 and one LR1
tanker newbuilding. One LR1 tanker built in 2006, three Panamax bulk carriers
built in 1990, 1992 and 1993, and two Handysize bulk carriers built in 1997 at a
total carrying amount of USD 43 million were sold during the year and
depreciation on the vessels amounted to USD 52 million. Prepayments on vessels
increased by USD 86 million to USD 183 million due to additional costs relating
to vessels under construction of USD 166 million less the above-mentioned
newbuilding deliveries of USD 80 million.
Total depreciation amounted to USD 59 million in 2006 as compared to USD 48
million in 2005, an increase of USD 11 million. The increase is due to the
expansion and renewal of the fleet during 2005 and 2006.
As at December 31, 2006, TORM's newbuilding programme comprised 17 tanker
vessels to be delivered during 2007 to 2011, and the contractual obligations
under the program amounted to USD 776 million. In addition, the Company called
an option in 2006 to acquire one Panamax bulk carrier on time charter built in
2004, which will be delivered in the second quarter of 2007. The contractual
liability relating to this vessel amounted to USD 19 million as at December 31,
2006.
The market value of the fleet and investment program (5.5 LR2 tanker
newbuildings, 1.5 LR1 tanker newbuildings, 10 MR tanker newbuildings and one
second-hand Panamax bulk carrier) exceeded the carrying value of the fleet
including newbuilding contracts by USD 1,016 million at year-end. This valuation
is based on the average of three internationally acknowledged shipbrokers'
valuations.
Critical Accounting policy
--------------------------
The vessels are required to undergo planned dry-dockings for replacement of
certain components, major repairs and maintenance of other components, which
cannot be carried out while the vessels are operating, approximately every 30
and 60 months depending on the nature of work and external requirements. These
dry-docking costs are capitalized and depreciated on a straight-line basis over
the estimated period until the next dry-docking. The residual value of such
components is estimated at nil. The useful life of the dry-docking costs are
reviewed at least at each financial year-end based on market conditions,
regulatory requirements and TORM's business plans.
A portion of the cost of acquiring a new vessel is allocated to the
components expected to be replaced or refurbished at the next dry-docking. The
two elements are recognized and depreciated separately. For newbuildings, the
initial dry-docking asset is segregated and capitalized separately. The cost of
such asset is estimated based on the expected costs related to the first-coming
dry-docking, which is again based on experience and past history of similar
vessels. For second-hand vessels, a dry-docking asset is also segregated and
capitalized separately, however, taking into account the normal docking
intervals in TORM.
At subsequent dry-dockings, the costs comprise the actual costs incurred at
the dry-docking yard. Drydocking costs may include the cost of hiring crews to
effect replacements and repairs and the cost of parts and materials used, cost
of travel, lodging and supervision of TORM personnel and the cost of hiring
third party personnel to oversee a dry-docking. Dry-docking activities include,
but are not limited to, the inspection, service on turbocharger, replacement of
shaft seals, service on boiler, replacement of hull anodes, applying of
antifouling and hull paint, steel repairs and refurbishment and replacement of
other parts of the vessel.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
6 Danaos Corporation US Container "D"
Accounting policy
-----------------
Amortization of Deferred Drydocking and Special Survey Costs
We follow the deferral method of accounting for special survey and drydocking
costs, whereby actual costs incurred are deferred and are amortized on a
straight-line basis over the period until the nextscheduled survey, which is two
and a half years. If special survey or drydocking is performed prior to the
scheduled date, the remaining unamortized balances are immediately written off.
We capitalize the total costs associated with drydockings, special surveys and
intermediate surveys and amortize these costs on a straight-line basis over 30
months.
Critical Accounting policy
--------------------------
Amortization of Deferred Drydocking and Special Survey Costs
We follow the deferral method of accounting for special survey and drydocking
costs, whereby actual costs incurred are deferred and are amortized on a
straight-line basis over the period until the next scheduled survey, which is
two and a half years. If special survey or drydocking is performed prior to the
scheduled date, the remaining unamortized balances are immediately written off.
We capitalize the total costs associated with drydockings, special surveys and
intermediate surveys and amortize these costs on a straight-line basis over 30
months.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
7 Diana Shipping US Dry "D"
Accounting policy
-----------------
Deferred Drydock Cost
Our vessels are required to be drydocked approximately every 30 to 36 months for
major repairs and maintenance that cannot be performed while the vessels are
operating. We capitalize the costs associated with drydockings as they occur and
amortize these costs on a straight-line basis over the period between
drydockings. Unamortized dry-docking costs of vessels that are sold are written
off and included in the calculation of the resulting gain or loss in the year of
the vessel's sale. Costs capitalized as part of the drydocking include actual
costs incurred at the yard and parts used in the drydocking. We believe
thatthese criteria are consistent with industry practice and that our policy of
capitalization reflects the economics and market values of the vessels.
Critical Accounting policy
--------------------------
Accounting for Dry-Docking Costs: The Company follows the deferral method of
accounting for dry-docking costs whereby actual costs incurred are deferred and
are amortized on a straight-line basis over the period through the date the next
dry-docking is scheduled to become due. Unamortized dry-docking costs of vessels
that are sold are written off and included in the calculation of the resulting
gain or loss in the year of the vessel's sale.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
8 Double Hull Tankers US Tankers "D"
Accounting policy
-----------------
Depreciation and amortization decreased by $1,025,000 to $16,915,000 in 2006
from $17,940,000 in 2005. In 2005, depreciation and amortization included
$925,000 attributable to amortization of capitalized drydock expenditures,
whereas in 2006, the amounts related to drydocking are incorporated in the
technical management fees paid to OSG.
Critical Accounting policy
--------------------------
On October 18, 2005, the Company entered into a management agreement with Tanker
Management Ltd., a subsidiary of OSG, for the technical management of its seven
vessels in exchange for a fee that is fixed for the first two years of the
agreement. As part of the management agreement, OSG is responsible for
drydocking costs.
Prior to October 18, 2005, expenditures incurred during a drydocking are
deferred and amortized on the straight-line basis over the period until the next
scheduled drydocking, generally two and a half to five years. Expenditures for
maintenance and repairs are expensed when incurred. Amortization of capitalized
drydock expenditures, which is included in depreciation and amortization in the
combined statements of operations, amounted to $1,028,025 for the period from
January 1, 2005 through October 17, 2005 and $976,864 in 2004.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
9 DryShips US Dry "D"
Accounting policy
-----------------
Depreciation and Amortization
We depreciate our vessels on a straight-line basis over their estimated useful
lives determined to be 25 years from the date of their initial delivery from the
shipyard. Depreciation is based on cost less the estimated residual value. We
capitalize the costs associated with a drydocking and amortize these costs on a
straight-line basis over the period when the next drydocking becomes due, which
is typically 30 months. Regulations and/or incidents may change the estimated
dates of next drydockings
Critical Accounting policy
--------------------------
Deferred drydock costs: Our vessels are required to be drydocked approximately
every 30 months for major repairs and maintenance that cannot be performed while
the vessel is operating. We capitalize the costs associated with the drydocks as
they occur and amortize these costs on a straight line basis over the period
between drydocks. Costs capitalized as part of the drydock include actual costs
incurred at the drydock yard, and the cost of hiring a third-party to oversee a
drydock. We believe that these criteria are consistent with industry practice
and that our policy of capitalization reflects the economics and market values
of the vessels.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
10 Eagle Bulk Shipping US Dry "D"
Accounting policy
-----------------
CAPITAL EXPENDITURE
For the three-month periods ended June 30, 2007 and 2006, total depreciation and
amortization expense were $6,046,953 and In addition to acquisitions that we may
undertake in future periods, the Company's other major capital expenditures
include funding the Company's maintenance program of regularly scheduled
drydocking necessary to preserve the quality of our vessels as well as to comply
with international shipping standards and environmental laws and regulations.
Although the Company has some flexibility regarding the timing of its dry
docking, the costs are relatively predictable. Management anticipates that
vessels are to be drydocked every two and a half years. Funding of these
requirements is anticipated to be met with cash from operations. We anticipate
that this process of recertification will require us to reposition these vessels
from a discharge port to shipyard facilities, which will reduce our available
days and operating days during that period.
Drydocking costs incurred are amortized to expense on a straight-line basis over
the period through the date the next drydocking for those vessels are scheduled
to occur. For the three-month period ended June 30, 2007, three of our vessels
passed drydock surveys. During the corresponding period in 2006 we did not
drydock any vessels. For the six-month periods ended June 30, 2007 and 2006, we
spent $628,307 and $1,464,473, respectively on vessel drydockings. The following
table represents certain information about the estimated costs for anticipated
vessel drydockings in the next four quarters, along with the anticipated
off-hire days:
Quarter Ending Off-hire Days(1) Projected Costs(2)
- -------------- ---------------- ------------------
September 30, 2007 60 $1.6 million
December 31, 2007 15 $0.4 million
March 31, 2008 30 $0.8 million
June 30, 2008 30 $0.8 million
(1) Actual duration of drydocking will vary based on the condition of the
vessel, yard schedules and other factors.
(2) Actual costs will vary based on various factors, including where the
drydockings are actually performed.
Critical Accounting policy
--------------------------
Deferred Drydock Cost
There are three methods that are used by the shipping industry to account for
drydockings; first is the prepaid method where drydock costs are capitalized
when incurred and amortized over the period to the next scheduled drydock;
second, is the accrual method where the estimated cost of the next scheduled
drydock is accrued over the period preceding such drydock, and lastly; expensing
drydocking costs in the period it is incurred. We use the prepaid method of
accounting for drydock expenses. Under the prepaid method, drydock expenses are
capitalized and amortized on a straight-line basis until the next drydock, which
we estimate to be a period of two to three years. We believe the prepaid method
better matches costs with revenue and minimizes any significant changes in
estimates associated with the accrual method, including the disposal of vessels
before a drydock which has been accrued before it is performed. We use judgment
when estimating the period between drydocks performed, which can result in
adjustments to the estimate amortization of drydock expense. If the vessel is
disposed of before tthe next drydock, the remaining balance in prepaid drydock
is written-off to the gain or loss upon disposal of vessels in the period when
contracted. We expect that our vessels will be required to be drydocked
approximately every 30 to 60 months for major repairs and maintenance that
cannot be performed while the vessels are operating. Cost capitalized as part of
the drydocking include actual costs incurred at the drydock yard and parts and
supplies used in making such repairs.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
11 Euroseas US Dry "D"
Accounting policy
-----------------
Amortization of deferred drydocking and special survey expense. Our vessels are
required to be drydocked approximately every 30 to 60 months for major repairs
and maintenance that cannot be performed while the vessels are trading. We
capitalize the costs associated with drydockings as they occur and amortize
these costs on a straight-line basis over the period between drydockings. Costs
capitalized as part of the drydocking include actual costs incurred at the
drydock yard; cost of hiring riding crews to effect repairs on a vessel and
parts used in making such repairs that are reasonably made in anticipation of
reducing the duration or cost of the drydocking; cost of travel, lodging and
subsistence of our personnel sent to the drydocking site to supervise; and the
cost of hiring a third party to oversee a drydocking. We believe that these
criteria are consistent with industry practice and that our policy of
capitalization reflects the economics and market values of the vessels.
Commencing January 1, 2006, we revised our policy to exclude the cost of hiring
riding crews and the cost of parts used by riding crews from amounts capitalized
as drydocking cost. We have not restated any historical financial statements
because we determined that the impact of such a revision is not material to our
operating income and net income for any periods presented.
Critical Accounting policy
--------------------------
Dry-docking and special survey expenses
Dry-docking and special survey expenses are deferred and amortized over the
estimated period to the next scheduled dry-docking or special survey, which are
generally two and a half years and five years, respectively. Unamortized
dry-docking and special survey expenses of vessels that are sold are written-off
to income in the year of the vessel's sale.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
12 Excel Maritime Carriers US Dry "D"
Accounting policy
-----------------
Accounting for Dry-docking and Special Survey Costs
Our vessels are required to pass drydock and special survey periodically
for major repairs and maintenance that cannot be performed while the vessels are
operating. As of December 31, 2005, dry-docking and special survey costs were
deferred and amortized on a straight-line basis over a period of 2.5 years and 5
years, respectively which approximated the next dry-docking and special survey
due dates. Within 2006 and following management's reassessment of the service
lives of these costs, the amortization period of the deferred special survey
costs was changed from 5 years to the earliest between the date of the next
dry-docking and 2.5 years for all surveys. The effect of this change in
accounting estimate, which does not require retrospective adoption as per SFAS
154 "Accounting Changes and Error Corrections", was to decrease net income and
basic and diluted earnings per share for the year ended December 31, 2006 by
$655,000 and $0.03 per share, respectively.
Unamortized dry-docking and special survey costs of vessels that are sold
are written off and included in the calculation of the resulting gain or loss in
the year of the vessel's sale. Costs capitalized as part of the drydocking and
special survey include actual costs incurred at the yard and parts used in the
drydocking. We believe that these criteria are consistent with industry practice
and that our policy of capitalization reflects the economics and market values
of the vessels.
Critical Accounting policy
--------------------------
Accounting for Dry-Docking and Special Survey Costs: The Company follows the
deferral method of accounting for dry-docking and special survey costs whereby
actual costs incurred are deferred and as of December 31, 2005 were amortized on
a straight-line basis over a period of 2.5 years and 5 years, respectively which
approximated the next dry-docking and special survey due dates. Within 2006 and
following management's reassessment of the service lives of these costs, the
amortization period of the deferred special survey costs was changed from 5
years to the earliest between the date of the next dry-docking and 2.5 years for
all surveys. The effect of this change in accounting estimate, which does not
require retrospective adoption as per SFAS 154 "Accounting Changes and Error
Corrections", was to decrease net income and basic and diluted earnings per
share for the year ended December 31, 2006 by $655 and $0.03 per share,
respectively.
Unamortized dry-docking and special survey costs of vessels that are sold are
written off at the time of the respective vessels' sale and are included in the
calculation of the resulting gain or loss from such sale.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
13 FreeSeas US Dry "D"
Accounting policy
-----------------
Deferred dry-dock and special survey costs. Our vessels are required to be
dry-docked approximately twice in any 60 month period for major repairs and
maintenance that cannot be performed while the vessels are operating. The
vessels are required to undergo special surveys every 60 months that
occasionally coincide with dry-docking due dates, in which case the procedures
are combined in a cost efficient-manner.
We capitalize the costs associated with dry-dockings as they occur and
amortizes these costs on a straight line basis over the period between
dry-dockings. Cost capitalized as part of the dry-docking include actual costs
incurred at the dry-dock yard; cost of fuel consumed between the vessel's last
discharge port prior to the dry-docking and the time the vessel leaves the
dry-dock yard; cost of hiring riding crews to effect repairs on a vessel and
parts used in making such repairs that are reasonably made in anticipation of
reducing the duration or costs of the dry-docking, cost of travel relating to
the dry-docking, lodging and subsistence of our personnel sent to the
dry-docking site to supervise; and the cost of hiring a third party to oversee a
dry-docking. 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. We follow the deferral method of
accounting for special survey and dry-docking costs, whereby actual costs
incurred are deferred and amortized over a period of 60 and approximately 30
months, respectively. If a special survey or dry-docking is performed prior to
the scheduled date, the remaining unamortized balances are immediately written
off.
Critical Accounting policy
--------------------------
Accounting for Special Survey and Dry-docking Costs: The Group follows the
deferral method of accounting for special survey and dry-docking costs, whereby
actual costs incurred are deferred and are amortized over a period of five and
two and a half years, respectively. If special survey or dry-docking is
performed prior to the scheduled date, the remaining un-amortized balances are
immediately written-off.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
14 Frontline US Tankers "E"
Accounting policy
-----------------
MENTIONED AS PART OF OPEX
Ship operating expenses are the direct costs associated with running a vessel
and include crew costs, vessel supplies, repairs and maintenance, drydockings,
lubricating oils and insurance. Overall, ship operating expenses have increased
in 2006 compared with 2005 due to fleet changes and increased drydockings.
Critical Accounting policy
--------------------------
Drydocking
Normal vessel repair and maintenance costs are expensed when incurred. The
Company recognises the cost of a drydocking at the time the drydocking takes
place, that is, it applies the "expense as incurred" method.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
15 Genco Ship & Trade US Dry "D"
Accounting policy
-----------------
DEFERRED DRYDOCKING COSTS-
Our vessels are required to be drydocked approximately every 30 to 60 months for
major repairs and maintenance that cannot be performed while the vessels are
operating. We capitalize the costs associated with drydockings as they occur and
depreciate these costs on a straight-line basis over the period between
drydockings. Capitalized drydocking costs include actual costs incurred at the
drydock yard; cost of parts that are believed to be reasonably likely to reduce
the duration or cost of the drydocking; cost of travel, lodging and subsistence
of our personnel sent to the drydocking site to supervise; and the cost of
hiring a third party to oversee the drydocking. 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.
Critical Accounting policy
--------------------------
Deferred drydocking costs
The Company's vessels are required to be drydocked approximately every 30 to 60
months for major repairs and maintenance that cannot be performed while the
vessels are operating. The Company capitalizes the costs associated with the
drydockings as they occur and depreciates these costs on a straight-line basis
over the period between drydockings. Costs capitalized as part of a vessel's
drydocking include actual costs incurred at the drydocking yard; cost of parts
that are reasonably made in anticipation of reducing the duration or cost of the
drydocking; cost of travel, lodging and subsistence of personnel sent to the
drydocking site to supervise; and the cost of hiring a third party to oversee
the drydocking.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
16 General Maritime Corp US Tankers "D"
Accounting policy
-----------------
DEFERRED DRYDOCK COSTS. Our vessels are required to be drydocked approximately
every 30 to 60 months for major repairs and maintenance that cannot be performed
while the vessels are operating. We capitalize the costs associated with the
drydocks as they occur and amortize these costs on a straight line basis over
the period between drydocks. We believe that these criteria are consistent with
GAAP guidelines and industry practice, and that our policy of capitalization
reflects the economics and market values of the vessels.
Critical Accounting policy
--------------------------
DEFERRED DRYDOCK COSTS, NET. Approximately every 30 to 60 months the Company's
vessels are required to be drydocked for major repairs and maintenance, which
cannot be performed while the vessels are operating. The Company capitalizes
costs associated with the drydocks as they occur and amortizes these costs on a
straight line basis over the period between drydocks. Amortization of drydock
costs is included in depreciation and amortization in the statement of
operations. For the years ended December 31, 2006, 2005 and 2004, amortization
was $6,145, $17,957 and $11,783, respectively. Accumulated amortization as of
December 31, 2006 and 2005 was $7,191 and $3,052, respectively.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
17 Golar LNG US Gas "D"
Accounting policy
-----------------
Nothing mentioned for drydocking
Critical Accounting policy
--------------------------
Vessels and equipment
Vessels and equipment are stated at cost less accumulated depreciation. The cost
of vessels and equipment less the estimated residual value is depreciated on a
straight-line basis over the assets' remaining useful economic lives.
Refurbishments costs incurred during the period are capitalized as part of
vessels and equipment and depreciated over the vessels' remaining useful
economic lives. Refurbishment costs are costs that appreciably increase the
capacity, or improve the efficiency or safety of vessels and equipment. Also,
included in vessels and equipment are drydocking expenditures which are
capitalized when incurred and amortized over the period until the next
anticipated drydocking, which is generally between two and five years. For
vessels that are newly built or acquired, the consideration paid is allocated
between drydocking and other vessels costs to reflect the different useful lives
of the component assets.
Useful lives applied in depreciation are as follows:
Vessels 40 years
Deferred drydocking expenditure two to five years
Office equipment and fittings three to six years
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
18 Navios Maritime US Dry "D"
Accounting policy
-----------------
Dry-docking costs: The Company's vessels are subject to regularly scheduled
dry-docking and special surveys which are carried out every 30 or 60 months to
coincide with the renewal of the related certificates issued by the
Classification Societies, unless a further extension is obtained in rare cases
and under certain conditions. The costs of dry-docking and special surveys are
deferred and amortized over the above periods or to the next dry-docking or
special survey date if such has been determined. Unamortized dry-docking or
special survey costs of vessels sold are written off to income in the year the
vessel is sold. When vessels are acquired the portion of the vessels'
capitalized cost that relates to dry-docking or special survey is treated as a
separate component of the vessels' cost and is deferred and amortized as above.
This cost is determined by reference to the estimated economic benefits to be
derived until the next dry-docking or special survey.
Critical Accounting policy
--------------------------
Deferred Dry-dock and Special Survey Costs: The Company's vessels are subject to
regularly scheduled dry-docking and special surveys which are carried out every
30 or 60 months to coincide with the renewal of the related certificates issued
by the Classification Societies, unless a further extension is obtained in rare
cases and under certain conditions. The costs of dry-docking and special surveys
is deferred and amortized over the above periods or to the next dry-docking or
special survey date if such has been determined. Unamortized dry-docking or
special survey costs of vessels sold are written off to income in the year the
vessel is sold. When vessels are acquired the portion of the vessels'
capitalized cost that relates to dry-docking or special survey is treated as a
separate component of the vessels' cost and is deferred and amortized as above.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
19 Nordic American US Tankers "D"
Tanker
Accounting policy
-----------------
Drydocking
Generally, we drydock each vessel every two and a half to five years. We
capitalize a substantial portion of the costs we incur during drydocking and
amortize those costs on a straight-line basis from the completion of a
drydocking to the estimated completion of the next drydocking. We expense costs
related to routine repairs and maintenance incurred during drydocking that do
not improve or extend the useful lives of the assets.
If we change our estimate of the next drydock date we will adjust our
annual amortization of drydocking expenditures.
Critical Accounting policy
--------------------------
Drydocking: The Company's vessels are required to be drydocked approximately
every 30 to 60 months for major repairs and maintenance that cannot be performed
while the vessels are in operation. The Company follows the deferral method of
accounting for drydocking costs whereby actual costs incurred are deferred and
are amortized on a straight-line basis through the expected date of the next
drydocking. Ballast tank improvements are capitalized and amortized on a
straight-line basis over a period of 8 years. Unamortized drydocking costs of
vessels that are sold are written off to income in the year of the vessel's
sale. The capitalized and unamortized drydocking costs are included in the book
value of the vessels. Amortization expense of the drydocking costs is included
in depreciation expense.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
20 Oceanfreight US Dry "E"
Accounting policy
-----------------
Survey and Drydocking Costs
We will account for special survey and dry-docking costs by expensing actual
costs incurred during the period in which they were incurred. We expect to
maintain cash reserves for anticipated vessel upgrades, repairs and
dry-dockings. We may, however, have unanticipated cash expenses, which could
include major vessel repairs and dry-docking costs in excess of our reserves,
vessel upgrades or modifications that are required by new laws or regulations,
other capital improvements, costs of claims and related litigation expenses or
contingent liabilities.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
21 Omega Navigation US Tankers "D"
Accounting policy
-----------------
Deferred Dry-dock costs: The Company follows the deferral method of accounting
for dry-docking costs whereby actual costs incurred are deferred and are
amortized on a straight-line basis over the period through the date the next
dry-docking is scheduled to become due which is approximately 30 months.
Unamortized dry-docking costs of vessels that are sold are written off and
included in the calculation of the resulting gain or loss in the period of the
vessel's sale.
Critical Accounting policy
--------------------------
Accounting for Dry-Docking Costs: The Company follows the deferral method of
accounting for dry-docking costs whereby actual costs incurred are deferred and
are amortized on a straight-line basis over the period through the date the next
dry-docking is scheduled to become due which is approximately 30 months.
Unamortized dry-docking costs of vessels that are sold are written off and
included in the calculation of the resulting gain or loss in the period of the
vessel's sale.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
22 Overseas Shipholding US Tankers "D"
group
Accounting policy
-----------------
Drydocking
Within the shipping industry, there are two methods that are used to account for
drydockings: (1) capitalize drydocking costs as incurred (deferral method) and
amortize such costs over the period to the next scheduled drydocking, and (2)
expense drydocking costs as incurred. Since drydocking cycles typically extend
over two and a half years or longer, management believes that the deferral
method provides a better matching of revenues and expenses than the
expense-as-incurred method.
Critical Accounting policy
--------------------------
Vessels, deferred drydocking expenditures and other property--Vessels are
recorded at cost and are depreciated to their estimated salvage value on the
straight-line basis, using a vessel life of 25 years. Each vessel's salvage
value is equal to the product of its lightweight tonnage and an estimated scrap
rate. Accumulated depreciation was $377,791,000 and $374,389,000 at December 31,
2006 and 2005, respectively.
Other property, including leasehold improvements, are recorded at cost and
amortized substantially on the straight-line basis over the shorter of the terms
of the leases or the estimated useful lives of the assets, which range from
three to seven years.
2006 Annual Report 67
Interest costs are capitalized to vessels during the period that vessels
are under construction. Interest capitalized aggregated $6,911,000 in 2006,
$3,885,000 in 2005 and $201,000 in 2004.
Expenditures incurred during a drydocking are deferred and amortized on the
straight-line basis over the period until the next scheduled drydocking,
generally two and a half to five years. Expenditures for maintenance and repairs
are expensed when incurred. Amortization of capitalized drydock expenditures,
which is included in depreciation and amortization in the consolidated
statements of operations, amounted to $16,775,000 in 2006, $11,735,000 in 2005
and $9,899,000 in 2004.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
23 Paragon Shipping Inc. US "D"
Accounting policy
-----------------
Deferred drydock costs. Vessels are required to be drydocked for major repairs
and maintenance that cannot be performed while the vessel is operating
approximately every 30 months. Costs associated with drydocks as they are
incurred are deferred and amortized on a straight line basis over the period
between drydocks. Costs deferred as part of the drydock include certain actual
costs incurred at the drydock yard solely as a result of the regulatory
requirement to have the vessels inspected, including but not limited to,
services for vessel preparation, coating, steelworks, piping works and valves,
machinery works and electrical works. Routine repair and maintenance costs
incurred at the dry-docking yard are expensed. We believe that these criteria
are consistent with industry practice, and that the policy of deferment reflects
the economics and market values of the vessels
Critical Accounting policy
--------------------------
Dry-Docking and Special Survey Costs: The Company follows the deferral method of
accounting for dry-docking costs whereby actual costs incurred are deferred and
are amortized on a straight-line basis over the period through the expected date
of the next dry-docking.
Dry-docking costs include all direct costs incurred at the dry-docking yard
solely as a result of the regulatory requirement to have the vessels inspected
including but not limited to, services for vessel preparation, coating,
steelworks, piping works and valves, machinery works and electrical works.
Routine repair and maintenance costs incurred at the dry-docking yard are
expensed. Unamortized dry-docking costs of vessels that are sold are written off
in the year of the vessels' sale.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
24 Quintana Maritime US Dry "D"
Accounting policy
-----------------
Drydocking costs
We follow the deferral method of accounting for drydocking costs whereby actual
costs incurred are deferred and are amortized on a straight-line basis over the
period through the date the next drydocking is scheduled to become due.
Unamortized drydocking costs of vessels that are sold are written off.
Critical Accounting policy
--------------------------
Drydocking costs
The Company follows the deferral method of accounting for drydocking costs,
whereby actual costs incurred are deferred and are amortized on a straight-line
basis over the period through the date of the next drydocking, which is
typically 30 to 60 months. If the Company were to sell a vessel, the unamortized
drydocking costs of that vessel would be written off.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
25 Seaspan Corp US Container "D"
Accounting policy
-----------------
Ongoing Capital Expenditures and Dividends
Our operating fleet is less than five years old; as such, no significant capital
expenditures for drydocking and maintenance have occurred in the past.
Critical Accounting policy
--------------------------
Vessels:
Vessels are carried at cost and include capitalized interest during construction
and other construction, design, supervision and pre-delivery costs.
Depreciation is provided on a straight-line basis over the estimated useful life
of each Vessel. No charge for depreciation is made until each Vessel is put into
operation.
The carrying value of the Vessels is evaluated when events or circumstances
indicate that there has been a possible impairment in value, which would occur
in the period when the net carrying value was no longer expected to be recovered
from future estimated cash flows. Such evaluations include comparison of current
and anticipated operating cash flows, assessment of future operations and other
relevant factors. To the extent that the carrying value of the Vessels exceeded
the undiscounted estimated future cash flows, the Vessels would be written down
to their fair value.
Normal repair and maintenance costs, including such costs incurred during
drydocking, are expensed as incurred.
Drydocking costs, which improve or extend the useful life of the Vessels, are
capitalized as incurred and depreciated prospectively over the period to the
next scheduled drydocking. The time between scheduled drydockings is five years.
As each of the Vessels was put into service in the last five years, no
drydocking costs have been capitalized or depreciated in the periods presented.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
26 Stealthgas US Gas "E"
Accounting policy
-----------------
Nothing mentionned for drydocking
Critical Accounting policy
--------------------------
Accounting for Special Survey and Dry-docking Costs: Special survey and
dry-docking costs and all non-capitalizable repair and maintenance expenses are
expensed in the period incurred.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
27 TBS International US Dry "D"
Accounting policy
-----------------
Drydocking
We used the deferral method to account for planned major maintenance. Under the
deferral method of accounting for drydocking, the actual costs incurred are
deferred and are amortized on a straight-line basis over the period through the
date of the next drydocking.
Critical Accounting policy
--------------------------
Drydocking
We are required, for regulatory and insurance purposes, to perform periodic
inspections and overhaul activities, generally every 30 months. We used the
deferral method to account for planned major maintenance. Under the deferral
method of accounting for drydocking, the actual costs incurred are deferred and
are amortized on a straight-line basis over the period through the date of the
next drydocking.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
28 Teekay LNG US Gas "D"
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
29 Teekay Offshore US Off shore "D"
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
30 Teekay Shipping US Tankers "D"
Accounting policy
-----------------
Drydocking. We must periodically drydock each of our vessels for inspection,
repairs and maintenance and any modifications to comply with industry
certification or governmental requirements. Generally, we drydock each of our
vessels every two and a half to five years, depending upon the type of vessel
and its age. In addition, a shipping society classification intermediate survey
is performed on our LNG carriers between the second and third year of the
five-year drydocking period. We capitalize a substantial portion of the costs
incurred during drydocking and for the survey and amortize those costs on a
straight-line basis from the completion of a drydocking or intermediate survey
to the estimated completion of the next drydocking. We expense as incurred costs
for routine repairs and maintenance performed during drydocking that do not
improve or extend the useful lives of the assets and annual class survey costs
for our FPSO units. The number of drydockings undertaken in a given period and
the nature of the work performed determined the level of drydocking
expenditures.
Critical Accounting policy
--------------------------
Vessels and equipment
All pre-delivery costs incurred during the construction of newbuildings,
including interest, supervision and technical costs, are capitalized. The
acquisition cost and all costs incurred to restore used vessels purchased by the
Company to the standard required to properly service the Company's customers are
capitalized.
Depreciation is calculated on a straight-line basis over a vessel's estimated
useful life, less an estimated residual value. Depreciation is calculated using
an estimated useful life of 25 years for crude oil tankers, 25 to 30 years for
floating production, storage and offloading (or FPSO) units and 35 years for
liquefied natural gas (or LNG) carriers from the date the vessel is delivered
from the shipyard, or a shorter period if regulations prevent the Company from
operating the vessels for 25 years or 35 years, respectively. Depreciation of
vessels and equipment for the years ended December 31, 2006, 2005 and 2004
aggregated $186.6 million, $166.5 million and $189.4 million, respectively.
Depreciation and amortization includes depreciation on all owned vessels and
vessels accounted for as capital leases.
Interest costs capitalized to vessels and equipment for the years ended December
31, 2006, 2005 and 2004 aggregated $15.9 million, $16.6 million and $9.9
million, respectively.
Gains on vessels sold and leased back under capital leases are deferred and
amortized over the remaining estimated useful life of the vessel. Losses on
vessels sold and leased back under capital leases are recognized immediately
when the fair value of the vessel at the time of sale-leaseback is less than its
book value. In such case, the Company would recognize a loss in the amount by
which book value exceeds fair value.
Generally, the Company drydocks each vessel every two and a half to five years.
In addition, a shipping society classification intermediate survey is performed
on the Company's LNG carriers between the second and third year of the five-year
drydocking period. The Company capitalizes a substantial portion of the costs
incurred during drydocking and for the survey and amortizes those costs on a
straight-line basis from the completion of a drydocking or intermediate survey
to the estimated completion of the next drydocking. The Company expenses costs
related to routine repairs and maintenance performed during drydocking that do
not improve or extend the useful lives of the assets and for annual class survey
costs on the Company's FPSO units. When significant drydocking expenditures
occur prior to the expiration of the original amortization period, the remaining
unamortized balance of the original drydocking cost and any unamortized
intermediate survey costs are expensed in the month of the subsequent
drydocking. Amortization of drydocking expenditures for the years ended December
31, 2006, 2005 and 2004 aggregated $15.4 million, $14.9 million and $23.5
million, respectively.
The Company reviews vessels and equipment for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability of these assets is measured by comparison of their
carrying amount to future undiscounted cash flows the assets are expected to
generate over their remaining useful lives. If vessels and equipment are
considered to be impaired, the impairment to be recognized equals the amount by
which the carrying value of the assets exceeds their fair market value (see Note
19).
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
31 Top Tankers US Tankers "D"
Accounting policy
-----------------
Deferred drydock costs. We follow the deferral method of accounting for
dry-docking costs whereby actual costs incurred are deferred and are amortized
on a straight-line basis over the period through the date the next dry-docking
becomes due. Management anticipates that these vessels which are younger than 15
years will be required to undergo in-water intermediate surveys 2.5 years after
a special survey drydocking and that such vessels will be drydocked every five
years, while vessels 15 years or older will be drydocked for an intermediate
survey every 2.5 years in which case the additional intermediate survey
drydockings take the place of in-water surveys. Dry-docking costs for vessels
sold and leased back are amortized on a straight line basis over the period
through the next dry-docking becomes due or through the termination of the
lease, whichever comes first.
Costs capitalized as part of the drydock include all works required by the
vessels' Classification Societies and for the maintenance of the vessels CAP
rating, which may consist of actual costs incurred at the dry-dock yard,
including dry-dock dues and general services for vessel preparation, coating of
WBT/COT, steelworks, piping works and valves, machinery works and electrical
works.
All those works which are carried out during dry-dock time for routine
maintenance according to the Company's Planned Maintenance System as well as
modifications, improvements required by third parties (i.e Port Authorities, Oil
Majors, standards set by the Company etc.) and not required by the vessels'
Classification Societies are not capitalized but expensed as incurred.
Unamortized dry-docking costs of vessels that are sold are written off and
included in the calculation of the resulting gain or loss in the year of the
vessel's sale.
Critical Accounting policy
--------------------------
Accounting for Dry-Docking Costs: The Company follows the deferral method of
accounting for dry-docking costs whereby actual costs incurred are deferred and
are amortized on a straight-line basis over the period through the date the next
dry-docking becomes due.
Costs capitalized as part of the drydock include all works required by the
vessels' Classification Societies and for the maintenance of the vessels
Condition Assessment Program ("CAP") rating, which may consist of actual costs
incurred at the dry-dock yard, including but not limited to, dry-dock dues and
general services for vessel preparation, coating of Water Ballast Tanks/Cargo
Oil Tanks ("WBT/COT"), steelworks, piping works and valves, machinery works and
electrical works.
All those works which are carried out during dry-dock time for routine
maintenance according to the Company's Planned Maintenance System as well as
modifications, improvements required by third parties (i.e Port Authorities, Oil
Majors, standards set by the Company etc.) and not required by the vessels'
Classification Societies are not capitalized but expensed as incurred.
Unamortized dry-docking costs of vessels that are sold are written off and
included in the calculation of the resulting gain or loss in the year of the
vessel's sale.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
32 Tsakos Energy Nav US Tankers "D"
Accounting policy
-----------------
Amortization of deferred charges. In accordance with Classification Society
requirements, a special survey is performed on our vessels every five years. A
further intermediate survey takes place in between special surveys, depending on
the age of the vessel, generally every 2.5 years. In most cases a dry-docking is
necessary with work undertaken to bring the vessel up to the condition required
for the vessel to be given its classification certificate. The costs include the
yard charges for labor, materials and services, possible new equipment and parts
where required, plus part of the participating crew costs incurred during the
survey period. We defer these charges and amortize them over the period up to
the vessel's next scheduled dry-docking.
Critical Accounting policy
--------------------------
Accounting for Special Survey and Dry-docking Costs: The Company follows the
deferral method of accounting for dry-docking and special survey costs whereby
actual costs incurred are reported in Deferred charges and are amortized on a
straight-line basis over the period through the date the next dry-docking is
scheduled to become due. Costs incurred during the dry-docking period relating
to routine repairs and maintenance are expensed. The unamortized portion of
special survey and dry-docking costs for vessels that are sold is included as
part of the carrying amount of the vessel in determining the gain on sale of the
vessel.
- --------------------------------------------------------------------------------
Accounting policy for
DD costs Expensed
("E") / Deferred ("D")
----------------------
33 Ultrapetrol Bahamas US Other shipping "D"
Accounting policy
-----------------
Drydock Costs
Our vessels must be periodically drydocked and pass inspections to maintain
their operating classification and/or as mandated by maritime regulations. Costs
incurred to drydock the vessels are deferred and amortized over the period to
the next drydocking, generally 24 to 36 months. Drydocking costs may be
comprised of painting the vessel hull and sides, recoating cargo and fuel tanks,
and performing other engine and equipment maintenance activities to bring the
vessel into compliance with classification standards. Costs include actual costs
incurred at the yard, cost of fuel consumed, and the cost of hiring riding crews
to effect repairs. The unamortized portion of dry dock costs for vessels that
are sold are written off to and included in the calculation of the resulting
gain or loss in the year of the vessel's sale.
Expenditures for maintenance and minor repairs are expensed as incurred.
Critical Accounting policy
--------------------------
k) Dry dock costs
The Company's vessels must be periodically drydocked and pass inspections
to maintain their operating classification, as mandated by maritime
regulations. Costs incurred to drydock the vessel are deferred and
amortized using the straight - line method over the period to the next
drydocking, generally 24 to 36 months. Drydocking costs are comprised of
painting the vessel hull and sides, recoating cargo and fuel tanks, and
performing other engine and equipment maintenance activities to bring the
vessel into compliance with classification standards. Costs include actual
costs incurred at the yard, cost of fuel consumed, and the cost of hiring
riding crews to effect repairs. The unamortized portion of dry dock costs
for vessels that are sold are written off and included in the calculation
of the resulting gain or loss in the year of the vessels' sale.
Expenditures for maintenance and minor repairs are expensed as incurred.
Appendix F
Cantor Fitzgerald Correspondence
From: Argyropoulos, Anthony
Sent: Thursday, November 09, 2006 0:12
To: Stamatis Tsantanis
Subject:
Dear Stamatis,
With regards to your inquiry on alternative methods of funding the 13 vessels
sold and leased back to TOP Tankers in March we estimate that secured debt and
equity or mezzanine capital could have been raised to fund the acquisition of
these vessels.
Specifically raising secured debt to fund 55% of the purchase price and using a
spread of 1.00% and the 7 year swap rate available in mid March of 5.25% the
cost of debt is estimated to be 6.25%.
The remaining 45% may have been funded with either private equity or mezzanine
capital. Although it is difficult to know exactly the terms that could have been
obtained in March, knowing that in general institutional investors require
returns of 20 to 25% in order to make these illiquid investments particularly in
a highly cyclical industry such as shipping, we are comfortable estimating 20.0%
- - on the low end -as the cost of the remaining 45%.
This yields a total cost of funding 100% of the purchase price with external
capital as follows:
55% @ 6.25%
45% @ 20.0%
100% @ 12.5%
Regards
Anthony
Anthony Argyropoulos
Cantor Fitzgerald & Co
110 East 59th Street, 6th Floor
New York, NY 10017
SK 23116 0001 810747 v2