As filed with the Securities and Exchange Commission on June 25, 2001
Registration No. 333-62326
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AMERICAN EAGLE TANKERS INC. LIMITED
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
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Bermuda 4412 76-0445673
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
15 Exchange Place
Suite 110
Jersey City, New Jersey 07302
(201) 985-0060
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------
Gregory A. McGrath
15 Exchange Place
Suite 110
Jersey City, New Jersey 07302
(201) 985-0060
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Raymond J. Fisher, Esq. Richard J.B. Price, Esq.
Milbank, Tweed, Hadley & McCloy LLP Shearman & Sterling Stamford
One Chase Manhattan Plaza 6 Battery Road, #25-03
New York, New York 10005 Singapore 049909
(212) 530-5000 (65) 230-3800
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Aggregate Amount of
Title of Each Class of Offering Registration
Securities to be Registered Price(/1/) Fee(/2/)
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Common shares, par value $1 per common share.... $151,368,750 $37,842.19
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(1) Estimated solely for the purpose of computing the amount of the
registration fee, in accordance with Rule 457(o) under the Securities Act
of 1933.
(2) Previously paid.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission may determine.
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SUBJECT TO COMPLETION, DATED JUNE 25, 2001
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state or jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
U.S. PROSPECTUS
[LOGO OF AMERICAN EAGLE]
6,750,000 Shares
American Eagle Tankers Inc. Limited
Common Shares
$ per share
--------
We are selling 6,750,000 common shares. Of the common shares that we are
selling, 4,725,000 shares are being offered in the United States and Canada by
the U.S. underwriters named in this prospectus, and 2,025,000 shares, directly
or in the form of Singapore Depositary Receipts representing common shares, are
being offered at the same time outside the United States and Canada by a
syndicate of international underwriters. We have granted the underwriters an
option to purchase up to 1,012,500 additional shares to cover over-allotments.
This is our initial public offering. We currently expect the initial public
offering price to be between $17.60 and $19.50 per share. The common shares
have been approved for listing on the New York Stock Exchange under the symbol
"AEH", subject to official notice of issuance.
--------
Investing in our common shares involves risks. See "Risk Factors" beginning on
page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
--------
Per Share Total
--------- -----
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to American Eagle Tankers (before expenses) $ $
The underwriters expect to deliver the shares to purchasers on or about
, 2001.
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Salomon Smith Barney
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ABN AMRO Rothschild LLC Morgan Stanley Dean Witter
, 2001
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
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TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 14
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial and Other Data........................................ 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Industry................................................................. 33
Business................................................................. 44
Regulation............................................................... 57
Management............................................................... 62
Relationship with NOL and Certain Transactions........................... 66
Principal Shareholder.................................................... 70
Description of Capital Stock............................................. 71
Shares Eligible for Future Sale.......................................... 75
Taxation................................................................. 77
Underwriting............................................................. 83
Other Expenses of Issuance and Distribution.............................. 86
Legal Matters............................................................ 86
Independent Accountants.................................................. 86
Where You Can Find More Information...................................... 86
Service of Process and Enforcement of Liabilities........................ 87
Index to the Financial Statements........................................ F-1
Annex A: Glossary of Shipping Terms...................................... A-1
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Until , 2001 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our common shares, whether or not participating
in the global offering, may be required to deliver a prospectus. This is in
addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus and may not contain all information that is important to you. Before
investing in our common shares, you should read this entire prospectus
carefully for a more complete understanding of our business and this offering,
including the section entitled "Risk Factors" and our financial statements and
related notes. We have also included, as Annex A to this prospectus, a glossary
of shipping industry terminology for convenience of reference.
American Eagle Tankers
We are a leading provider of petroleum transportation services in the
Atlantic basin. We currently own or operate a fleet of 24 Aframax tankers, 21
of which are double-hulled and three of which are double-sided. There are no
single-hulled tankers in our fleet. We intend to have an exclusively double-
hulled fleet by the end of 2003, which we believe will likely make us the first
major crude-oil tanker operator to achieve this milestone. Prior to this
offering, we have been wholly owned by Neptune Orient Lines Limited, or NOL, a
leading provider of international shipping and logistics operations. We operate
all of NOL's crude-oil tanker business.
We have one of the youngest tanker fleets in the world. As of May 1,
2001, our tankers had an average age of 6.5 years, compared with the industry
average for Aframax tankers of 11.8 years and an average age for the world
tanker fleet of 14.1 years. Over the past decade, there has been a growing
demand for quality in tankers and tanker operations, as charterers and
regulators have become more concerned with safety and environmental protection.
The stricter regulatory environment is accelerating the obsolescence of older,
lower quality tankers in our principal markets, which should benefit operators
of younger fleets. We believe that our young fleet, safety record and
reputation for reliability make us a preferred tanker operator in the Atlantic
basin.
We are one of the leading independent transporters of crude oil into the
United States. In 2000, we transported approximately 463 million barrels of
crude oil in the Atlantic basin, including approximately 411 million barrels
that were delivered to the United States, or approximately 13% of total U.S.
oil imports. We are one of the leading Aframax tanker companies in the U.S.-
bound Caribbean and Mexican markets. We estimate that we transported
approximately 18% of the oil imported into the United States from Mexico in
2000. We are also active in the intra-Europe market, the Mediterranean region
and trans-Atlantic trade. In 2000, we transported approximately 42 million
barrels of oil to or from the North Sea region and approximately 14 million
barrels within the Mediterranean region.
We have contracted for the newbuilding of five Aframax tankers and two
Very Large Crude Carriers, or VLCCs, to be delivered over an 18-month period
beginning in February 2002. These additions will increase the cargo capacity we
own or operate by approximately 33% from 2.4 million deadweight tons to 3.2
million deadweight tons, net of double-sided vessels we intend to replace.
We provide three principal services to our customers, each of which can
be performed by any of our fleet of 24 tankers:
. Lightering. Lightering is the transfer of crude oil from long-range,
very large tankers to Aframax or other smaller tankers that are
capable of entering shallow-water ports. We are one of only three
independent lightering operators in the U.S. Gulf. Lightering rates
generally command a premium over voyage rates due to the specialized
nature of the business. Approximately 19% of our gross revenues were
derived from our lightering operations in 2000 and approximately 23%
in the three months ended March 31, 2001.
1
. Voyage chartering. Voyage chartering is the transportation of crude
oil from loading port to discharging port. The charterer hires our
tanker on a single or multiple voyage basis, and we are responsible
for the voyage expenses and the vessel's operating costs. We provide
voyage chartering in the U.S. Gulf and, to a lesser extent, in the
North Sea and the Mediterranean region. Approximately 69% of our gross
revenues were derived from voyage chartering operations in 2000 and
approximately 65% in the three months ended March 31, 2001.
. Long-term time chartering. Long-term time charters provide a steady
source of revenues. Under a time charter, the charterer hires our
tanker for a specified period and pays us on a per-day basis. The
charterer also pays for voyage expenses while we are responsible for
the vessel's operating costs. Four of our tankers are on 12-year time
charters expiring in 2008 or 2009 to a wholly owned subsidiary of
TOSCO Corporation, which owns one of the largest refinery operations
in the United States. Approximately 12% of our gross revenues were
derived from time charters in each of 2000 and the three months ended
March 31, 2001.
We believe that the diversity of our operations, the size of our fleet
and the interchangeability of our tankers enable us to deploy our fleet
efficiently and to provide our customers with prompt and reliable service. In
2000, we generated gross operating revenues of $272.0 million and net income of
$61.6 million. In the three months ended March 31, 2001, we generated gross
operating revenues of $73.6 million and net income of $23.1 million.
We acquire and hold tankers under one of three arrangements:
. we own 12 tankers directly or through subsidiaries;
. we charter in seven tankers under long-term 15-year bareboat charters,
that include an option to purchase the tanker at any time during the
charter period; and
. we charter in two tankers under five-year time charters, two tankers
under three-year time charters and one tanker under a five-year
bareboat charter. We have no option to purchase these tankers.
Under a bareboat charter, we charter only the vessel from the tanker
owner, and we provide the crew and pay all operating and voyage expenses. Of
the vessels we time-charter in, two of the tankers were delivered to us in late
May and early June 2001.
Our Key Strengths
We believe that our principal strengths include the following:
. Diverse revenue stream from three complementary service areas;
. High fleet utilization rate, averaging 97.6% for the past five years,
due to the critical mass of our fleet of interchangeable tankers;
. Low operating expenses, principally as a result of the young age of
our fleet, which has low fuel consumption, and the similarity of our
vessels, which enables us to buy parts and supplies in bulk;
. Well positioned to benefit from more stringent environmental
regulations, which will require single-hulled tankers to be phased out
at a time when we expect our fleet to be exclusively double-hulled;
and
. Strong network of customer relationships and focus on safety and
quality service, resulting in high levels of repeat business from some
of the world's largest oil companies.
2
These key strengths have resulted in freight rates that we believe are
generally higher than market averages. Freight rates are referred to in the
industry as time-charter-equivalent, or TCE, rates. The following chart
compares our TCE rates to a leading benchmark indicator of TCE rates for
Aframax tankers, as calculated by Clarkson Research Studies, or Clarkson, based
on an average of market rates for seven specified routes worldwide. TCE rates
presented in this chart have been adjusted to reflect the Clarkson method of
calculation, as explained in more detail under "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Aframax Annual TCE Rate Comparison
Our Adjusted TCE vs. Clarkson Aframax Average
TCE (US$/Day)
1996 1997 1998 1999 2000
Our Company 22,222 24,082 20,786 17,347 29,792
Clarkson 17,095 21,016 15,921 13,170 30,448
Source: Clarkson (industry data only)
Because of our higher utilization and diversified revenue mix, our TCE
rates generally are higher than the Clarkson Aframax average in stable and low
rate environments. In contrast, during 2000, because of the rising spot rates,
our revenues from fixed-rate lightering contracts slightly trailed rapidly
rising spot rates. Our TCE rates in the first quarter of 2001 were
significantly lower than the Clarkson Aframax average. This was principally due
to sharp rate increases that affected several of the routes measured by
Clarkson more than they affected our routes. In addition, many of our fixed-
rate lightering contracts were renegotiated to reflect the higher market spot
rates only during the second half of the quarter.
Our Business Strategy
Our objective is to enhance our leadership position as a premium provider
of quality petroleum transportation services. Specifically, we are aggressively
pursuing the following strategies:
. Selectively grow our fleet by adding larger tankers, which we will
coordinate with our lightering operations to provide long-haul port-
to-port capability;
. Expand into related markets, particularly in the North Sea and the
Mediterranean region, using the strong customer relationships we have
formed in the Atlantic basin;
. Continue to maximize fleet utilization and TCE rates through a
balanced service mix among lightering, voyage chartering and long-term
time chartering; and
. Capitalize on our reputation for high quality service and safety by
likely becoming the first major crude-oil tanker company to have an
exclusively double-hulled fleet.
3
Our Relationship with Neptune Orient Lines
NOL is a leading provider of international shipping and logistics
operations that owns or operates 96 ships worldwide, exclusive of the 24
tankers forming our fleet. We were formed in 1994 by NOL to own and operate
NOL's crude-oil tanker business. We have been wholly owned by NOL from our
incorporation through the present. Prior to year-end 2000, we held the majority
of NOL's crude-oil tanker assets and operated NOL's crude-oil tanker business.
NOL continued to own seven crude-oil tankers in its own name and to own or
operate four oil tankers through two of its subsidiaries, although all but four
of these were time chartered to us. In order to streamline the crude-oil tanker
operations and consolidate all of NOL's interests in this business in one
company, at December 29, 2000, NOL transferred those seven crude-oil tankers
and its 65% equity interest in the two subsidiaries to us as a capital
contribution.
Our senior management is separate from that of NOL. Our chief executive
officer is also group chief operating officer and chief executive officer for
chartering and enterprises for NOL, but he plans to resign from these positions
prior to the completion of this offering. Historically, NOL has provided us
with staff support in certain areas, and we will continue to rely on NOL for
limited treasury, legal and corporate secretarial support. We expect that we
will no longer need to rely on NOL for these services after year-end 2001
unless it is most cost-effective to do so. We intend to continue to purchase
insurance with NOL on a joint basis. In addition, NOL has guaranteed $167.8
million of our indebtedness, and two members of our board of directors also sit
on NOL's board.
Our goal for this offering is to achieve the following:
. increase our financing flexibility to facilitate our business
expansion plan;
. create a more targeted investment for investors who wish to invest in
our company; and
. increase our strategic focus on our core business.
After the global offering, NOL will hold 73.4% of our outstanding common
shares, or 70.6% if the underwriters' over-allotment option is exercised in
full. NOL has informed us that it currently intends to maintain a majority
shareholding in our company.
----------------
We were incorporated in Bermuda in January 1994 with limited liability
under the Companies Act, 1981 of Bermuda, or the Companies Act. Our principal
executive office is located at 15 Exchange Place, Suite 110, Jersey City, New
Jersey 07302, telephone (201) 985-0060. Our registered office, maintained in
compliance with the Companies Act, is located at Milner House, 18 Parliament
Street, Hamilton, Bermuda HM FX, telephone (441) 295-4630.
4
The Global Offering
Common shares offered in the
global offering............. 6,750,000 shares
The global offering.......... The global offering consists of the U.S.
offering and the international offering.
U.S. offering.............. 4,725,000 common shares
International offering..... 2,025,000 common shares, directly or in the form
of Singapore Depositary Receipts or SDRs. Each
SDR represents one-tenth of a common share.
Common shares to be
outstanding after the
global offering............. 25,376,544 common shares
Use of proceeds.............. The net proceeds of the global offering will be
used to fund a portion of our fleet expansion
program. See "Use of Proceeds".
New York Stock Exchange
symbol...................... "AEH"
The number of common shares to be outstanding after the global offering
is based on 18,626,544 common shares outstanding as of May 1, 2001 and
excludes 2,500,000 common shares reserved for future grants under our share
option plan. We expect to grant options at the completion of this offering for
approximately 700,000 common shares, exercisable at the initial offering price
per share. Unless otherwise stated, information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
---------------
Important Assumptions Used in This Prospectus
Clarkson has provided us with industry statistical data, graphs and
tables that we use in the discussion of the tanker market contained in the
sections entitled "Summary", "Industry" and "Business". Clarkson has advised
us, with respect to the statistical data, graphs and tables supplied by it,
that:
. some industry data included in this prospectus is based on estimates
or subjective judgments in circumstances where data for actual market
transactions either does not exist or is not publicly available;
. the published information of other maritime data collection experts
may differ from this data; and
. while Clarkson has taken reasonable care in the compilation of the
industry statistical data, graphs and tables and believes them to be
correct, data compilation is subject to limited audit and validation
procedures.
Clarkson has also advised us, with respect to the statistical data,
graphs and tables supplied by it, that:
. the term "world tanker fleet" refers to all tankers greater than
10,000 deadweight tons but does not include combined carriers such as
oil/bulk/ore carriers; and
. deadweight ton, or dwt, figures supplied by Clarkson are in dwt metric
tons except where they refer to a size range or limit, where they are
expressed in dwt long tons.
5
Summary Financial and Other Data
The following statement of operations and cash flow data for the years
ended December 31, 1998, 1999 and 2000 and balance sheet data at December 31,
1999 and 2000 are derived from the financial statements appearing elsewhere in
this prospectus. The statement of operations and cash flow data for the two
years ended December 31, 1996 and 1997 and the balance sheet data at December
31, 1996, 1997 and 1998 are derived from unaudited financial information not
included in this prospectus. Financial data for the three months ended March
31, 2000 and 2001 are derived from unaudited financial information appearing
elsewhere in this prospectus. These statements and data were prepared to
reflect NOL's transfer to us on December 29, 2000 of its crude-oil tanker
business, as described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Basis of Presentation of Our Financial
Statements". These data should be read together with the financial statements
and related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Three Months
Year Ended December 31, Ended March 31,
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1996 1997 1998 1999 2000 2000 2001
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(in thousands of U.S. dollars, except per share and fleet
data)
Statement of Operations
Data:
Gross operating
revenues............... $118,206 $143,472 $157,019 $177,607 $271,986 $ 53,589 $ 73,590
Brokerage and
commission............. 1,309 1,607 4,128 4,574 3,674 822 1,119
Vessel voyage expenses.. 26,047 23,356 26,867 41,759 61,890 14,738 12,784
Vessel operating
expenses............... 28,488 28,269 28,040 31,804 42,845 10,300 11,218
Charter-hire expenses... 24,035 21,255 37,246 56,451 60,401 14,350 14,014
Depreciation and
amortization........... 23,375 28,396 30,093 27,537 28,593 7,054 7,974
General and
administrative
expenses............... 4,238 3,589 5,018 4,439 7,106 1,523 1,141
Total operating
expenses............... 107,492 106,472 131,392 166,564 204,509 48,787 48,250
Operating income........ 10,655 38,498 24,904 11,093 71,309 4,820 25,387
Net income.............. 381 18,881 11,447 924 61,620 2,363 23,100
Basic and diluted
earnings per share, as
adjusted (1)........... 0.02 1.01 0.61 0.05 3.31 0.13 1.24
Balance Sheet Data (at
period-end):
Cash and cash
equivalents............ $ 23,171 $ 32,553 $ 64,171 $ 54,935 $ 62,205 $ 61,937 $ 50,789
Working capital......... (88,708) 20,764 59,240 75,198 11,942 81,304 29,183
Total assets............ 509,213 547,421 529,550 514,250 578,032 526,655 565,098
Long-term debt, net of
current portion........ 159,393 266,751 243,604 234,851 179,291 233,762 176,477
Total shareholders'
equity................. 197,144 215,529 225,170 223,442 283,728 224,982 306,312
Other Financial Data:
Net cash from operating
activities............. $ 42,620 $ 30,145 $ 11,761 $ 81,843 $ 15,844 $ 45,122
Net cash from (used in)
investing activities... (42,344) 33,702 10,535 (51,961) (138) (43,530)
Net cash from (used in)
financing activities... 9,106 (32,229) (31,532) (22,612) (8,704) (13,008)
EBITDA (2).............. 66,894 54,997 38,630 99,902 11,874 33,361
Net operating revenues
(3).................... $ 90,850 $118,509 $126,024 $131,274 $206,422 $ 38,029 $ 59,687
Fleet Data:
Average number of
tankers................ 13 15 17 21 22 22 22
Average fleet age (in
years) (4)............. 4.5 4.4 5.1 5.1 6.1 5.4 6.4
Average TCE (5)......... $ 21,032 $ 22,623 $ 20,412 $ 17,778 $ 27,207 $ 20,043 $ 32,341
Adjusted average TCE
(6).................... 22,222 24,082 20,786 17,347 29,792 20,675 36,260
Average ship operating
expenses per day (7)... 6,290 5,020 4,731 4,385 5,054 5,259 4,856
Average fleet
utilization (8)........ 98.2% 98.5% 97.5% 97.1% 96.8% 97.1% 97.6%
- --------
(1) Total outstanding shares used in the calculation of earnings per share
have been adjusted to reflect the issuance of 11,880,000 common shares
after December 31, 2000.
(2) EBITDA represents net income before net interest expense, income tax
expense, depreciation and amortization expense, equity in profit / (loss)
of a joint venture and minority interest. EBITDA is not recognized by U.S.
generally accepted accounting principles, or U.S. GAAP, and should not be
considered as an alternative to net income or any other indicator of
performance required by U.S. GAAP. Our EBITDA may not be comparable with
that of other companies due to different ways companies define these
terms.
(3) Net operating revenue is gross operating revenues less brokerage and
commission and vessel voyage expenses.
(4) Average fleet age is unweighted and calculated at the end of each period
for all tankers then owned, leased or time-chartered in.
(5) TCE, or time charter equivalent, rates are a measure of the average daily
revenue performance of a tanker. We calculate average TCE rates by
dividing net operating revenues of our fleet, including a vessel owned by
a joint venture and vessels time chartered to third parties, by the number
of days our vessels are available, which excludes days in dry-docking and
under repair. This calculation differs from Clarkson's methodology, as
explained below.
(6) Adjusted average TCE rates are calculated, for comparison purposes, on the
same basis as industry data published by Clarkson and exclude vessels time
chartered to third parties. Clarkson does not subtract brokerage
commissions from gross revenues and assumes 100% utilization.
(7) Average ship operating expenses per day consist of expenses relating to
the operation of our tankers (other than vessel voyage expenses),
including ship management expenses for crewing, normal maintenance and
repair, and stores, as well as insurance and spare parts.
(8) Average fleet utilization is the percentage of time that the tankers in
our possession were producing revenue and is determined by dividing the
number of days our tankers produced revenue by the number of days our
tankers were available for revenue producing activities, which excludes
days in dry-docking and under repair.
6
RISK FACTORS
An investment in our common shares involves a high degree of risk. You
should carefully consider the risks described below before making an investment
decision. Our business, financial condition and results of operations could be
seriously harmed by any of these risks. The trading price of our common shares
could decline due to any of these risks, and you could lose all or part of your
investment.
Risks Relating to Our Company
Any decrease in shipments of crude oil from the major oil-producing regions
or in oil import levels by the United States or Europe could negatively
impact our revenues.
Our revenues are dependent on crude oil production and shipments from the
Arabian Gulf, Mexico, Venezuela and the North Sea. A substantial decrease in
the shipment of crude oil from any of these regions would have a material
adverse effect on our revenues. Among the factors that could cause shipments of
crude oil from any of these areas to decrease are:
. a decision by the Organization of Petroleum Exporting Countries, or
OPEC, and other major oil producing nations to increase their oil
prices or to further decrease or limit their crude-oil production;
. armed conflict in these areas or along oil trading routes;
. political and regulatory factors causing a decline in the volume of
oil transported from these areas; and
. the increased demand for oil substitutes such as natural gas, coal,
hydroelectric power and other alternative sources of energy.
Our business is also dependent on United States and European oil-import
levels. Increases in oil production in the United States or Europe or a
significant decrease in oil consumption or oil imports in these regions could
result in a decline in our revenues. Approximately 88.6% of all of our
shipments of crude oil in 2000, including our lightering business, were
transported to the United States, our principal market. Our remaining
deliveries were principally to Europe.
Our lightering operations are subject to certain special risks that could
lead to accidents, oil spills or property damage.
Lightering is subject to special risks arising from the difficulty of
bringing two large moving tankers next to each other and mooring them for
lightering operations. Lightering operations thus require a high level of
expertise and present a higher risk of collision than when docking a vessel at
port. Lightering also involves risks outside of the control of the operator,
such as the condition of and mechanical failures and human error on the oil-
discharging tanker. Lightering operations are highly dependent on favorable
weather conditions at sea and subject to particular risks when these conditions
change rapidly, as frequently occurs in the U.S. Gulf.
Since 1995, we have experienced four minor oil spills in the U.S. Gulf,
out of a total of more than 1,600 lightering operations. In each case, no oil
reached the shore, and our insurance fully covered any property and pollution
damage. We cannot assure you that accidents will not occur in the future or
that our insurance will be adequate to cover any future incidents.
We are dependent on a few key customers to generate a substantial portion
of our revenues, and the loss of any one of these key customers could
adversely affect our results.
Our top five customers accounted for 44.0% of our gross revenues in 2000
and 50.2% of our gross revenues in 1999. Bayway Refining Company, a wholly
owned subsidiary of TOSCO Corporation, accounted for 12.3% of our gross
revenues in 2000 and 18.8% of our gross revenues in 1999. One other customer
accounted for 14.3% of our gross revenues in 1999. We are therefore dependent
upon a limited number of
7
customers for a substantial portion of our revenues. The oil industry has been
and may continue to be in a period of consolidation, which could result in the
acquisition of one or more of our key customers. If we lose a significant
customer, or if a significant customer decreases the amount of business it
transacts with us, and we do not find a replacement, our revenues could be
materially adversely affected.
Our income from shipping operations to or from the United States may become
subject to U.S. tax under proposed regulations.
Section 883 of the U.S. Internal Revenue Code provides an exemption, from
U.S. federal income tax on the income from the international operation of
ships, to foreign corporations that meet certain requirements. In February
2000, the Internal Revenue Service, or IRS, issued proposed regulations, not
yet in effect, that may affect our qualification for the section 883 exemption.
After the global offering, NOL will be our largest shareholder and will own
more than 50% of the value of our common shares. There is a risk that we could
no longer qualify under the section 883 exemption if NOL's stock is not
considered to be "regularly traded" for purposes of the exemption, which would
be the case if 50% or more of the value of NOL's stock is held by persons
owning 5% or more of the value of NOL's stock. Based on information provided to
us by NOL with respect to its shareholders, we expect to meet the requirements
in the proposed regulations and to continue to qualify for the exemption.
However, there is a risk that future changes in our stock ownership or in NOL's
stock ownership could occur that could cause us no longer to be eligible for
the exemption.
In the absence of the section 883 exemption, 50% of our income from
shipping operations to or from the United States would be subject to a 4% gross
basis tax. Our taxation position in more fully described under "Taxation--U.S.
Tax Considerations".
Our income from lightering operations in the U.S. Gulf may become subject
to U.S. tax.
We have historically taken the position without challenge that our income
from lightering operations in the U.S. Gulf constitutes income from the
international operation of ships and is eligible for exemption from U.S. tax
under section 883 of the U.S. Internal Revenue Code. However, we have not
obtained a ruling from the IRS on this point, and we cannot assure you that the
IRS will not challenge our position, whether for current periods or
retroactively.
Under the proposed regulations issued by the IRS in February 2000, our
income from our U.S. Gulf lightering operations would not be treated as income
from the international operation of ships and, consequently, would not be
exempt from tax under section 883. If the regulations are finalized in the form
proposed, it would appear that the IRS position is that income from lightering
operations would be subject to regular U.S. corporate tax rates of up to 35%,
plus an additional "branch profits tax" of 30%. We cannot assure you as to
whether the proposed regulations will be adopted or when or what their final
form might be. Our taxation position is more fully described under "Taxation--
U.S. Tax Considerations".
If we fail to comply with our loan agreements, we could forfeit our rights
in our tankers and their charters or be required to refinance our loans.
We have pledged seven of the tankers we own and related collateral as
security to the lenders under our loan agreements. The aggregate amount of
these loans at March 31, 2001 was approximately $187.3 million. If we default
under any of these loan agreements, the lenders could foreclose on the
mortgages over the tankers and the related collateral, and we could lose our
rights in the tankers and their charters. When final payments are due under our
loan agreements, we must repay any borrowings outstanding. Similarly, the
financing documents for the new VLCCs we have contracted to purchase contain a
requirement that we maintain a specified ratio of vessel value to loan value
through prepayments. In order to make required prepayments, we may need to
refinance some or all of our loan agreements or replace them with alternate
credit arrangements. We may not be able to refinance or replace our loan
agreements at the time they become due, which could result in the loss of our
vessels. In addition, the terms of any refinancing or alternate credit
arrangements may be more onerous than those under our current loan agreements
and may restrict our financial and operating flexibility.
8
If the owner of a tanker that we charter defaults under any of its
financing agreements, our charter may be affected.
We believe that the owners of most, if not all, of the tankers that we
have chartered have pledged these tankers and related collateral as security to
their lenders under their respective financing agreements. If the owners
default under any of these financing agreements, the lenders could foreclose on
the mortgages over the tankers and the related collateral, prematurely
terminating our charter with the owner. This could require us to charter
tankers from the market at potentially uneconomic rates in order to meet our
obligations to customers.
We may not have sufficient insurance coverage, which could cause our
business to suffer.
We carry insurance to protect against most of the accident-related risks
involved in the conduct of our business and maintain environmental damage and
pollution insurance coverage. We cannot assure you that we have adequately
insured against all risks, that any future claim will be paid or that we will
be able to procure adequate insurance coverage at commercially reasonable rates
in the future. If environmental regulations become even more stringent, our
insurance expenses may increase further or make insurance unavailable against
the risks of environmental damage or pollution. Moreover, we do not carry
insurance covering the loss of revenue when our tankers are not chartered. Even
if our insurance coverage is otherwise adequate, our earnings may be affected
if we are not able to make necessary repairs on a timely basis or to obtain a
replacement tanker in the event of damage or loss.
We may face unexpected repair costs for our tankers.
The timing and costs of repairs of our tankers are difficult to predict
with certainty and may be substantial. Many of these expenses, such as dry-
docking and certain repairs for normal wear and tear, are typically not covered
by our insurance. Large repair expenses could decrease our profits. In
addition, repair time means a loss of revenue, particularly since we do not
insure for the time that our tankers are not under charter.
We depend on certain key employees. Loss of any of them could adversely
affect our business.
Our success depends to a significant degree upon the continued
contributions of members of our senior management. In particular, we rely on
the efforts of our President and Chief Executive Officer Joseph Kwok and Vice
Presidents Captain Raymond Ambrose for marketing, Captain Ernesto Violetta for
operations and Gregory McGrath for finance. We do not maintain key-man
insurance for any of these persons. The loss of any one of them could have a
material adverse effect on our business.
The international nature of our business exposes us to political and
economic risks that we would not face if we were a wholly domestic company.
Our operations require us to dispatch our tankers to various countries in
Latin America, the Middle East and Europe where we load or unload oil,
including especially Venezuela and Mexico. We are thus exposed to the political
and economic risks that come with conducting business in each of these
countries, including the risk of seizure of our vessels that enter the waters
of those countries or the risk that political and economic developments may
cause a decrease or halt in shipments of petroleum to or from those countries.
Risks Relating to the Tanker Industry
Historically, the tanker industry has been highly cyclical, experiencing
volatility in profitability and asset values. Our performance and growth
depend heavily on the supply of tankers relative to the demand.
The profitability and asset values of companies in our industry have
fluctuated greatly based on changes in the supply and demand for tanker
capacity. The supply of tanker capacity is affected by the number of new
tankers built and older tankers scrapped, converted to other uses or lost, as
well as by government and
9
industry regulation of maritime transportation. Our industry is characterized
by periodic tanker oversupply. An increase in the supply of tanker capacity
without a corresponding increase in demand for that capacity could cause
charter rates to decline, as occurred in 1999. Falling charter rates could
materially adversely affect our results of operations.
The demand for tanker services is influenced by, among other factors,
global and regional economic conditions, increases and decreases in industrial
production and demand for crude oil and petroleum products. For example, in
1999, tanker markets were adversely affected by crude oil production cuts led
by OPEC. Accordingly, time-charter rates for Aframax tankers trended downward
for most of that year, registering a decline in excess of 10% in the Caribbean
market relative to 1998.
Because many of the factors influencing the supply of and demand for
tanker capacity are unpredictable, the nature, timing and degree of changes in
tanker industry conditions are also unpredictable.
The market for crude oil transportation services is highly competitive, and
we may not be able to compete effectively.
Our tankers are employed in a highly competitive market, and we cannot
assure you that we can sustain our competitive position in the future. Any
inability to compete favorably will negatively impact our results of operations
and financial condition. To the extent we enter new geographic areas or provide
new services, we cannot assure you that we will be able to compete successfully
in these new markets. For example, we intend to enter the market for long-haul
transportation with two newly built VLCCs to be delivered in 2002 and are
exploring opportunities to acquire additional VLCC, Suezmax or other tankers.
Some of our competitors in the tanker market have greater operating resources,
longer operating history and larger fleets than ours.
The U.S. Gulf lightering business competes with alternative methods of
delivering crude oil to ports, which may constrain our freight rates.
Our U.S. Gulf lightering business faces competition from alternative
methods of delivering crude oil shipments to port. Large tankers, such as VLCC
and Suezmax tankers, can discharge all or some of their crude oil at the
Louisiana Offshore Oil Port, known as LOOP, which is a 19 mile-long underwater
pipeline connecting Louisiana with an offshore discharge facility. Large crude
carriers can also ship some of their cargo to storage terminals in the
Caribbean for onward shipment to the United States. We believe that lightering
continues to offer competitive advantages over alternative methods of
delivering crude oil to U.S. Gulf ports and that each of these other methods
suffers from capacity constraints. However, the freight rates charged by
lightering operators, and therefore our lightering revenues, will to some
extent be constrained by the availability of such alternative methods.
Changes to environmental and other regulations could increase our expenses
and adversely affect our business.
The tanker industry is affected by extensive and changing environmental
protection laws and other regulations. Complying with these laws has
historically been expensive and has required tanker modifications and changes
in operating procedures across the industry. We believe that the Atlantic
basin, including ports in the United States and Europe and the West Coast of
the United States, are currently among the most environmentally sensitive
tanker markets, and the companies that operate there must meet more stringent
environmental regulations than companies operating elsewhere. If we fail to
meet those or any future requirements, our operations in these regions could be
restricted and our results of operations could be materially adversely
affected.
10
The loss, damage, arrest or requisition of any of our vessels could result
in a loss of revenues or increased expenses, which would adversely affect
our business.
Our tankers and their cargoes are at risk of being damaged or lost
because of events such as catastrophic marine disasters, bad weather,
mechanical failures, human error, war, terrorism, piracy and other
circumstances or events. In addition, transporting crude oil is subject to a
risk of business interruptions due to
political circumstances in foreign countries, hostilities, labor strikes and
boycotts. Our tankers are also at risk of being arrested or requisitioned. If
we are unable to pay our debts to crew members, suppliers of goods or services
to a tanker, shippers of cargo or other parties that have obtained maritime
liens, these parties may be entitled to arrest one of our tankers through a
foreclosure proceeding. The arrest or attachment of one or more of our tankers
could result in a significant loss of earnings for the resulting off-hire
period. Also, a government could requisition for title or seize our tankers.
Although in such cases the government would normally be required to pay us
compensation, they could dictate charter rates to us. These requisitions
typically occur during a period of war or emergency. The amount and timing of
any payment under these circumstances would be uncertain. Any of these events
may result in loss of revenues and increased expenses.
Risks Relating to Our Relationship with NOL
We cannot assure you that we will continue to obtain technical management
services from Neptune Shipmanagement on favorable terms or at all.
Neptune Shipmanagement provides technical management services for 20 of
our 24 tankers. Our contracts with Neptune Shipmanagement are reviewed and
renewed annually. Neptune Shipmanagement is under no obligation to renew these
arrangements. If Neptune Shipmanagement's services become unavailable for any
reason, we will not be able to continue operating our tankers until we find a
replacement technical management company. Such a disruption could adversely
affect our results of operations.
In addition, we believe that we obtain Neptune Shipmanagement's services
on terms and rates that are commercially reasonable and at service levels that
are favorable, and we do not know if we would be able to obtain alternative
services at a cost and of a quality comparable to those provided by Neptune
Shipmanagement. A significant portion of our total operating expenses consists
of technical management expenses, which accounted for 13.7% of total operating
expenses in 2000 and 15.7% of total operating expenses in the three months
ended March 31, 2001. Any increase in these expenses could have an adverse
effect on our results of operations.
We are controlled by NOL, which limits your ability to influence or control
corporate actions.
Prior to the global offering, we were a wholly owned subsidiary of NOL.
After the global offering, NOL will beneficially own an aggregate of
approximately 73.4% of our common shares, or 70.6% if the underwriters exercise
their over-allotment option in full. Two of our seven directors are also
directors of NOL. NOL has informed us that it presently intends to maintain a
majority shareholding in our company. As a result, NOL will be able to exercise
control over most matters requiring approval by our shareholders, including:
. the election of directors;
. amending our by-laws;
. approval of significant corporate transactions; and
. issuing additional common shares.
NOL's interests may differ from your interests. As a result, NOL could
prevent or delay a change in control of our company, even if a transaction of
that sort would be beneficial to you or in the best interest of our company.
11
We will have ongoing business arrangements with NOL, which may give rise to
potential conflicts of interest.
After completion of the global offering, we will continue to have
contractual and other business relationships with NOL and its affiliates and
may engage in transactions with them from time to time that are material to us.
Although the audit committee of our board of directors will review all material
transactions between our company and NOL, circumstances may arise in which the
interests of NOL and its affiliates could conflict with the interests of our
other shareholders.
We may be unwilling or unable to exercise our right of first refusal in
respect of proposed NOL tanker and tanker business acquisitions.
We have entered into an agreement with NOL, under which NOL has agreed,
for an initial five-year period, to grant a right of first refusal to us to
acquire any crude-oil tankers or crude-oil tanker businesses proposed to be
acquired by NOL at the price agreed between NOL and the proposed seller. After
five years, NOL will continue to grant us a right of first refusal so long as
it remains the single largest shareholder and is able to control the business
operations of our company. We will evaluate each such opportunity on its own
merits as it arises, and we cannot assure you now that we will choose to
exercise our right of first refusal in any such instance. We also cannot assure
you that we will have the financial resources necessary to exercise that right.
If we do not or are not able to exercise this right, NOL could begin competing
with us.
Our expenses and financial results as a wholly owned subsidiary of NOL may
not be representative of what we would experience as a separate company
following the offering.
The financial information we have included in this prospectus includes
certain allocations of expenses incurred by NOL on our behalf, but does not
necessarily reflect what our financial position, results of operations and cash
flows would have been had we been a separate, stand-alone entity during the
periods presented. Our expenses reflect charges from NOL for centralized
corporate services including:
. treasury, accounting, legal and cash management;
. obtaining financing; and
. payroll and employee benefits.
We cannot assure you that these have always been provided on the same
terms as would have been available from third parties. Following this offering,
we may need to supplement our financial, administrative and other staff, which
will place additional demands on our management. In addition, by relying on NOL
for insurance, accounting, treasury, financing, credit-support and other
services, we may have achieved more favorable terms then we may be able to
achieve as a stand-alone company.
If NOL chooses not to purchase insurance coverage jointly with us, our
costs of insurance may increase, and our business could suffer.
We currently obtain insurance coverage under group policies negotiated by
NOL. We believe this arrangement enables us, and other members of the NOL
group, to obtain insurance coverage on more competitive terms due to the
economies of bulk purchasing. Under this arrangement, our future insurance
expenses and coverage may be affected by NOL's future claims. In addition,
while we believe that we and NOL will continue with this arrangement after the
global offering, NOL has no obligation to do so. If we do not obtain insurance
with NOL, we will have to obtain insurance on our own or through similar
arrangements with other shipping companies. The costs of doing so may be
higher, which could affect our results of operations.
12
Certain actions or events involving NOL could result in a default under our
loan agreements, which are secured by several of our tankers. If we fail to
pay any such debt when accelerated, we could lose those tankers.
NOL has guaranteed $167.8 million of our current existing indebtedness
under four separate vessel financing loans. The largest of the guaranteed loans
is from the Development Bank of Singapore Limited, or DBS, and is secured by
four of our tankers. Each of the other loans are secured by one of our tankers.
NOL has also agreed to guarantee two loans of $27 million each from Lepta
Shipping Co. Ltd., or Lepta, to be disbursed in 2003 to finance the purchase of
two Aframax tankers new buildings. The NOL guarantee on the Lepta loans expires
on completion of this offering but may be reinstated in the event that NOL
ceases to be our single largest shareholder and is thereby unable to control
our business. In addition, in May 2001 we entered into an unguaranteed loan of
$100 million divided into two advances of $50 million each from Danmarks
Skibskreditfond, or Danish Ship Finance to be disbursed in 2002, to finance the
purchase of two VLCC tankers.
Under the terms of the DBS, Lepta and Danish Ship Finance loan
agreements, a change in NOL's controlling interest in or management control of
our company may result in a mandatory prepayment event resulting in
acceleration of our debt or, in the case of the Danish Ship Finance and Lepta
loan agreements, the requirement for NOL to provide an alternative guarantee of
those loans. If we or NOL are unable to perform our obligations under the loan
agreements, we could lose some or all of the vessels we own that are subject to
liens.
Risks Relating to the Global Offering
You may not be able to resell your shares at or above the initial public
offering price. As a result, you may lose all or part of your investment.
Prior to the global offering, there has been no public market for our
shares. The initial public offering price for the shares will be determined by
negotiations between us and the representatives of the underwriters and may not
be indicative of prices that will prevail in the secondary trading market. You
may not be able to resell your shares at or above the initial public offering
price and, as a result, you may lose all or part of your investment.
The future sales of securities by our company or NOL may depress the market
price of our shares.
The market price of our common shares could decline as a result of sales
of a large number of common shares or the perception that these sales could
occur. These sales also might make it more difficult for us to sell securities
in the future at a time and at a price that we deem appropriate. After the
global offering, NOL will hold 18,626,544 of our common shares, equalling all
shares that are not offered in the global offering. These shares held by NOL
will equal 73.4% of our outstanding common shares, assuming no exercise by the
underwriters of the over-allotment option. We, our officers and directors and
NOL have agreed not to offer, sell, pledge or otherwise dispose of, directly or
indirectly, or announce the offering of, any of our common shares or any
security convertible into or exercisable or exchangeable for, our common shares
for a 180-day period after the date of this prospectus, without the prior
written consent of Salomon Smith Barney Inc. After this period, it is expected
that NOL will be free to dispose of all its shares of our company, although
these shares will be restricted as to their transfer under U.S. securities laws
absent registration with the Securities and Exchange Commission. We cannot
assure you, however, that future sales of such shares will not have an adverse
effect on our share price or on our ability to issue and sell further shares.
13
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus. Our forward-
looking statements contain information regarding, among other things, our
financial condition, results of operations, fleet expansion plans and business
strategy. These statements are principally contained in the sections entitled
"Summary", "Use of Proceeds", "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Industry", "Business" and
"Regulation".
We have based these forward-looking statements on our current
expectations and projections about future events. Although we believe that
these expectations and projections are reasonable, these forward-looking
statements are inherently subject to risks, uncertainties and assumptions about
us, including, among other things:
. general economic and business conditions affecting the oil and tanker
industries;
. changes in laws and regulations that apply to the oil or tanker
industry;
. changes in political conditions worldwide, particularly in the
Arabian Gulf and the U.S. Gulf;
. our ability to expand into new markets and related lines of business;
. our ability to finance the purchase of additional, high-quality
tankers;
. risks of liability for environmental damage or safety breaches;
. our ability to diversify risk among our various operations; and
. the success of our business strategy.
We undertake no obligation to publicly update or revise any forward-
looking statements contained in this prospectus, whether as a result of new
information, future events or otherwise, except as required by law. In light of
these risks, uncertainties and assumptions, the forward-looking events
discussed in this prospectus might not occur, and our actual results could
differ materially from those anticipated in these forward-looking statements.
14
USE OF PROCEEDS
We estimate that our net proceeds from the global offering, after
deducting underwriting discounts and estimated offering expenses, will be
approximately $114.7 million, or approximately $132.4 million if the
underwriters exercise their over-allotment option in full. This estimate
assumes an initial public offering price of $18.55 per share, which is the mid-
point of the offering price range indicated on the cover of this prospectus.
We expect to use all of the net proceeds of the global offering to pay
the purchase price of crude-oil tankers or crude-oil tanker businesses that we
acquire over the next 12 months under our fleet expansion program.
As part of our fleet expansion program, we have contracted for the
purchase of seven tanker newbuildings, at a total cost of approximately $340
million, comprising five double-hulled Aframax tankers scheduled to be
delivered over an 18-month period beginning in February 2002, and two double-
hulled VLCC tankers scheduled to be delivered in 2002. In addition, we will
also consider any or all of the following:
. the purchase of existing double-hulled tankers, including Aframax,
Suezmax or VLCC tankers, of five years of age or less;
. the purchase of newbuilding contracts for Aframax, Suezmax or VLCC
tankers, with delivery schedules over the next 12 to 24 months; and
. the acquisition of other tanker companies.
Other than the seven tanker newbuildings, we have no other contractual
commitments or understandings to purchase crude-oil tankers or crude-oil tanker
businesses at this time. We cannot assure you that our fleet expansion program
will occur within the schedule currently contemplated or that we will be able
to obtain the necessary additional financing on terms favorable to us, if at
all. Pending the use of proceeds in the manner described above, we intend to
invest the proceeds in short-term, investment-grade money market instruments.
DIVIDEND POLICY
We currently intend to declare and pay dividends on our common shares
from time to time, subject to our financial results and approval of dividends
by our board of directors. The declaration and payment of dividends will be
subject to the discretion of our board of directors. In making its
recommendation as to the timing and amount of any dividend payments, our board
of directors will consider, among other things, our results of operations,
financial condition and cash requirements; any restrictions contained in our
financing agreements; the requirements under the Companies Act of Bermuda; and
other factors.
15
CAPITALIZATION
The following table shows our capitalization as of March 31, 2001:
. on an actual basis; and
. as adjusted to reflect the issuance and sale of 6,750,000 common
shares in the global offering, based on an assumed initial public
offering price of $18.55 per common share, after deducting
underwriting discounts and estimated offering expenses.
You should read this table together with "Selected Financial and Other
Data", "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements and the related notes included
elsewhere in this prospectus.
As of March 31, 2001
--------------------
Actual As Adjusted
-------- -----------
(in thousands)
Current portion of long-term debt.......................... $ 6,648 $ 6,648
======== ========
Long-term debt, net of current portion (1)................. $176,477 $176,477
-------- --------
Stockholders' equity:
Common shares, $1 par value (2).......................... 18,627 25,377
Share premium............................................ 54,120 162,070
Additional paid-in capital............................... 209,190 209,190
Retained earnings........................................ 24,375 24,375
-------- --------
Total stockholders' equity................................. 306,312 421,012
-------- --------
Total capitalization....................................... $482,789 $597,489
======== ========
- --------
(1) Of the amounts shown, $157.0 million represents debt guaranteed by NOL,
excluding the outstanding $4.2 million loan of our joint venture, Crystal,
the results of which have not been consolidated. All of this debt is
secured by various of our tankers.
(2) 100,000,000 shares authorized, par value $1.00 per share; 18,626,544
shares issued and outstanding, actual; and 25,376,544 shares issued and
outstanding, as adjusted. Excludes 2,500,000 common shares which are
reserved for future grants under our share option plan. To date, no
options have been granted under our share option plan. We expect to grant
options at the completion of this offering for approximately 700,000
common shares, exercisable at the initial offering price per share.
16
DILUTION
Our net tangible book value, which is calculated as total assets minus
net goodwill, minus total liabilities, minus minority interest, as of March 31,
2001 was $306.2 million, or $16.44 per common share. Net tangible book value
per common share is determined by dividing the net tangible book value as of
March 31, 2001 by the number of outstanding shares at that date. Dilution in
net tangible book value per common share represents the difference between the
amount per common share that you pay in the global offering and the net
tangible book value per common share immediately after the global offering.
Based on the issuance by us of 6,750,000 common shares in the global
offering (including common shares represented by SDRs), at the initial public
offering price of $18.55 per share, after deducting underwriting discounts and
estimated offering expenses payable by us, our net tangible book value as of
March 31, 2001 would have been $420.9 million, or $16.59 per share. This
represents an immediate increase in net tangible book value of $0.15 per share
to our existing shareholders and an immediate dilution in net tangible book
value of $1.96 per share to new investors. The following table illustrates this
per share dilution:
Per
Share
------
Assumed initial public offering price per share.............. $18.55
Net tangible book value per share as of March 31, 2001..... $16.44
Increase in net tangible book value per share attributable
to new investors.......................................... 0.15
Net tangible book value per share after the global
offering.................................................. 16.59
------
Dilution in net tangible book value per share to new
investors................................................... $ 1.96
======
The discussion and table above assume no exercise of share options. To
the extent that any share options are granted and exercised, there will likely
be further dilution to new investors. See "Management" for a description of our
share option plans.
The following table summarizes, as of March 31, 2001, the total number of
shares purchased from us, the total consideration paid to us and the average
price paid per share by our existing shareholders and by our new public
investors in the offering at the assumed initial public offering price of
$18.55 per share, before deducting the estimated underwriting discounts and
commissions and offering expenses payable by us.
Total
Shares Purchased Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
NOL..................... 18,626,544 73.4% $289,829,025 69.8% $15.56
New public investors.... 6,750,000 26.6% 125,212,500 30.2% 18.55
---------- ------ ------------ ------
Total................. 25,376,544 100.0% $415,041,525 100.0%
========== ====== ============ ======
If the underwriters' over-allotment option is exercised in full, after
the global offering,
. NOL will hold approximately 70.6% of our outstanding common shares;
and
. the number of common shares held by new investors will increase to
7,762,500 common shares, or approximately 29.4% of our outstanding
common shares.
17
SELECTED FINANCIAL AND OTHER DATA
The following selected financial and other data should be read together
with, and are qualified by reference to, our financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which are included elsewhere in this prospectus. The
statement of operations and cash flow data for the years ended December 31,
1998, 1999 and 2000 and the balance sheet data at December 31, 1999 and 2000
have been derived from our audited financial statements, which have been
prepared in U.S. dollars in accordance with U.S. generally accepted accounting
principles, or U.S. GAAP. The statement of operations, cash flow and balance
sheet data for the three months ended March 31, 2000 and March 31, 2001 are
derived from unaudited financial information appearing elsewhere in this
prospectus. The results for the three months ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the full year.
We believe that this quarterly information includes all adjustments, consisting
of normally recurring adjustments, that are necessary for a fair presentation
of our financial position and results of operations for these periods. The
statement of operations and cash flow data for the years ended December 31,
1996 and 1997 and the balance sheet data at December 31, 1996, 1997 and 1998
are derived from unaudited financial information not included in this
prospectus.
In preparation for this offering, NOL transferred its crude-oil tanker
business to us as of December 29, 2000. Accordingly, our historical financial
statements (except as at and for the three months ended March 31, 2001) have
been prepared on an "as-if pooled" basis, under which our statements of
operations and cash flows and our balance sheets presented for dates preceeding
this transfer have been combined with those of the transferred crude-oil tanker
business and include certain "carve-out" adjustments to reflect costs which
were incurred by NOL on our behalf. The financial data presented here (except
as at and for the three months ended March 31, 2001) reflect this method of
presentation, which is described in more detail under "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Basis of
Presentation of our Financial Statements". The financial information reflected
in the table below may not necessarily reflect what our results of operations,
financial position and cash flows would have been if we had been a stand-alone
entity during the periods presented.
Three Months
Ended
Year Ended December 31, March 31,
------------------------------------------------ ------------------
1996 1997 1998 1999 2000 2000 2001
-------- -------- -------- -------- -------- -------- --------
(in thousands, except per share and fleet data)
Statement of Operations
Data:
Gross operating
revenues............... $118,206 $143,472 $157,019 $177,607 $271,986 $ 53,589 $ 73,590
Brokerage and
commission............. 1,309 1,607 4,128 4,574 3,674 822 1,119
Vessel voyage expenses.. 26,047 23,356 26,867 41,759 61,890 14,738 12,784
Vessel operating
expenses............... 28,488 28,269 28,040 31,804 42,845 10,300 11,218
Charter-hire expenses... 24,035 21,255 37,246 56,451 60,401 14,350 14,014
Depreciation and
amortization........... 23,375 28,396 30,093 27,537 28,593 7,054 7,974
General and
administrative
expenses............... 4,238 3,589 5,018 4,439 7,106 1,523 1,141
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses............... 107,492 106,472 131,392 166,564 204,509 48,787 48,250
Other operating income
(expenses)............. (59) 1,498 (723) 50 3,832 18 47
-------- -------- -------- -------- -------- -------- --------
Operating income........ 10,655 38,498 24,904 11,093 71,309 4,820 25,387
Equity in profit /
(loss) of a joint
venture................ 1,373 1,658 (9) 119 1,568 22 388
Interest expense........ (13,509) (22,787) (16,366) (14,562) (16,711) (4,150) (3,366)
Interest income......... 950 1,188 2,930 3,648 4,561 1,344 751
Income tax.............. (69) (73) (103) (103) (136) (23) (44)
Minority interest....... 981 397 91 729 1,029 350 (16)
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 381 $ 18,881 $ 11,447 $ 924 $ 61,620 $ 2,363 $ 23,100
======== ======== ======== ======== ======== ======== ========
Per-Share Data:
Total outstanding
shares, as adjusted
(1).................... 18,627 18,627 18,627 18,627 18,627 18,627 18,627
Basic and diluted
earnings per share, as
adjusted............... $ 0.02 $ 1.01 $ 0.61 $ 0.05 $ 3.31 $ 0.13 $ 1.24
Balance Sheet Data (at
period-end):
Cash and cash
equivalents............ $ 23,171 $ 32,553 $ 64,171 $ 54,935 $ 62,205 $ 61,937 $ 50,789
Working capital......... (88,708) 20,764 59,240 75,198 11,942 81,304 29,183
Total assets............ 509,213 547,421 529,550 514,250 578,032 526,655 565,098
Long-term debt, net of
current portion........ 159,393 266,751 243,604 234,851 179,291 233,762 176,477
Total shareholders'
equity................. 197,144 215,529 225,170 223,442 283,728 224,982 306,312
18
Three Months Ended
Year Ended December 31, March 31,
---------------------------------------------- --------------------------------
1996 1997 1998 1999 2000 2000 2001
------- -------- -------- -------- -------- ------- --------
(in thousands, except per share and fleet
data)
Other Financial Data:
Net cash provided by
operating activities... $ 42,620 $ 30,145 $ 11,761 $ 81,843 $15,844 $ 45,122
Net cash provided by
(used in) investing
activities............. (42,344) 33,702 10,535 (51,961) (138) (43,530)
Net cash provided by
(used in) financing
activities............. 9,106 (32,229) (31,532) (22,612) (8,704) (13,008)
EBITDA (2).............. 66,894 54,997 38,630 99,902 11,874 33,361
Net operating revenues
(3).................... 90,850 118,509 126,024 131,274 206,422 38,029 59,687
Fleet Data:
Average number of
tankers................ 13 15 17 21 22 22 22(4)
Average fleet age (in
years) (5)............. 4.5 4.4 5.1 5.1 6.1 5.4 6.4
Average TCE (6)......... $21,032 $ 22,623 $ 20,412 $ 17,778 $ 27,207 $20,043 $ 32,341
Adjusted average TCE
(7).................... 22,222 24,082 20,786 17,347 29,792 20,675 36,260
Average ship operating
expenses per day (8)... 6,290 5,020 4,731 4,385 5,054 5,259 4,856
Average fleet
utilization (9)........ 98.2% 98.5% 97.5% 97.1% 96.8% 97.1% 97.6%
- --------
(1) Total outstanding shares used in the calculation of earnings per share
have been adjusted to reflect the issuance of 11,880,000 common shares
after December 31, 2000.
(2) EBITDA represents net income before net interest expense, income tax
expense, depreciation and amortization expense, equity in profit / (loss)
of a joint venture and minority interest. EBITDA is included because these
data are used by some investors to measure a company's financial
performance. EBITDA is not recognized by U.S. GAAP and should not be
considered as an alternative to net income or any other indicator of
performance required by U.S. GAAP. Our EBITDA may not be comparable with
that of other companies due to different ways companies define these
terms.
(3) Net operating revenue is gross operating revenues less brokerage and
commission and vessel voyage expenses.
(4) Does not include two tankers acquired under time charter in May 2001.
(5) Average fleet age is unweighted and calculated at the end of each period
for all tankers then owned, leased or time-chartered in.
(6) TCE, or time charter equivalent, rates are a measure of the average daily
revenue performance of a tanker. We calculate average TCE rates by
dividing net operating revenues of our fleet, including a vessel owned by
a joint venture and vessels time chartered to third parties, by the number
of days our vessels are available, which excludes days in dry-docking and
under repair. This calculation differs from Clarkson's methodology, as
explained below and under "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--TCE Rates".
(7) Adjusted average TCE rates are calculated, for comparison purposes, on the
same basis as industry data published by Clarkson and exclude vessels time
chartered to third parties. Clarkson's method does not subtract brokerage
commissions from gross revenues and assumes 100% utilization.
(8) Average ship operating expenses per day consist of expenses relating to
the operation of our tankers (other than vessel voyage expenses),
including ship management expenses for crewing, normal maintenance and
repair, and stores, insurance and spare parts.
(9) Average fleet utilization is the percentage of time that the tankers in
our possession were producing revenue and is determined by dividing the
number of days our tankers produced revenue by the number of days our
tankers were available for revenue producing activities, which excludes
days in dry-docking and under repair.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We are an international tanker company that owns or operates a fleet of
24 Aframax tankers in the Atlantic basin. Of our fleet of 24 Aframax tankers,
12 are owned by us or our subsidiaries and joint venture, eight are held and
operated by us under bareboat charters and four are held under time charters.
We have options to purchase seven of the eight bareboat-chartered vessels at
commercially reasonable prices throughout the charter term. Of the 12 vessels
that we, our subsidiaries and joint venture own directly, seven are subject to
financing liens to banks. In addition to our 24 Aframax tankers, we have placed
orders for five additional Aframax tankers and two VLCC tankers.
Cyclicality and Seasonality
The tanker industry has been highly cyclical, characterized by volatility
in charter rates and vessel values resulting from changes in the supply of and
demand for tanker capacity. From 1995 to 1997, tanker charter rates increased
gradually. Tanker demand grew during this period while tanker supply remained
unchanged, as the scrapping of older tankers offset newbuilding deliveries. In
the latter part of 1997 and into 1998, orders for newbuildings increased
significantly because of stronger charter rates and the expected scrapping of
older tonnage. In 1999, the tanker charter market experienced a severe decline,
as significant newbuilding deliveries from the excessive ordering of previous
years coincided with oil production cuts led by OPEC countries. The depressed
tanker charter rates encouraged many owners to scrap old and uneconomical
tankers.
During 2000, tanker spot charter rates sharply increased. The increase
resulted from the relatively tight availability of tankers combined with
increased oil production led by the OPEC countries. Oil production was
increased due to refiners having drawn inventories in the previous year to
mitigate the effects of supply cutbacks. Also, political pressures to ease oil
prices led many producing countries to increase production and supply. At the
same time, the size of the world tanker fleet had decreased due to increased
scrapping of tankers in 1999 and the first half of 2000, and a substantial
decrease in the supply of newbuilding tankers to the market from the prior
year.
During the first quarter of 2001, tanker spot charter rates remained
strong. Although OPEC countries announced a cut-back in oil production, several
non-OPEC countries increased production, contributing to significant
differences in rates between different routes and to extremely high charter
rates on certain routes. By May 2001, tanker TCE rates, as measured by the
unadjusted Clarkson Aframax average for that month, had fallen to levels that
were slightly below the unadjusted Clarkson Aframax average for 2000.
Tanker charter markets have also historically exhibited seasonal
variations in demand. Tanker markets are typically stronger in the winter
months as a result of increased oil consumption in the northern hemisphere. As
a result, our revenues have typically been strongest in the first and fourth
quarters of each year.
Basis of Presentation of Our Financial Statements
Our financial statements have been prepared in accordance with generally
accepted accounting principles in the United States, or U.S. GAAP and are
expressed in U.S. dollars. Prior to this offering, we were a wholly-owned
subsidiary of NOL. In preparation for this offering, substantially all of the
assets and liabilities relating to NOL's crude-oil tanker businesses were
transferred to us on December 29, 2000. The tanker businesses transferred by
NOL to us included seven Aframax tankers and NOL's 65% equity interest in two
of its subsidiaries, Trilith Shipping Pte Ltd and Trilithon Shipping Pte Ltd.
Since the transfer of NOL's tanker businesses is considered to be a
transfer between entities under common control, our financial statements
included in this prospectus (other than as at and for the three months
20
ended March 31, 2001) have been prepared on an "as-if pooled" basis. Under this
method of preparation, the balance sheets, statements of operations and cash
flows of AET and the NOL crude-oil tanker businesses have been combined for all
years and dates presented before the date of the transfer.
Since AET and NOL's transferred crude-oil tanker businesses were owned
and controlled by NOL, certain management and corporate overhead functions have
historically been performed by NOL on behalf of AET and NOL's tanker
businesses. Certain "carve-out" adjustments have been made to the historical
financial information of AET and NOL's tanker businesses to allocate and
reflect a cost of such services that we deem to be reasonable in the combined
results of operations. These allocations relate to the estimated cost of (a)
finance, accounting, legal and cash management and (b) payroll and employee
benefits. These corporate overhead expenses were allocated based on the ratio
of time spent by NOL personnel on matters involving our company compared with
total time spent on the NOL group.
Chartering of Tankers
Tankers are chartered under one of three arrangements:
. Bareboat charters involve hiring out or leasing out tankers for long-
term periods. The charterer provides the crew and is responsible for
the operating and voyage expenses.
. Time charters involve hiring out tankers for medium to long-term
periods. The tanker owner is paid on a per-day basis and is
responsible for providing the crew and paying operating expenses. The
charterer is responsible for paying the voyage expenses except for
certain specific exceptions such as loss of time arising from
breakdowns and routine maintenance.
. Voyage charters are contracts in which the charterer pays us for the
use of our ship's cargo space on a single or multiple-voyage basis.
The tanker owner is responsible for paying both operating and voyage
expenses.
We charter tankers out to our customers under time charters and voyage
charters. We charter tankers in under bareboat charters and time charters from
unaffiliated third parties. On occasion, to meet customer requirements, we
charter tankers in on a voyage basis.
Revenues
We earn gross operating revenues from our three different service
offerings described below: lightering, voyage chartering and long-term time
chartering. Gross operating revenues from voyage or lightering charters are
recognized evenly over the period from a vessel's departure from its previous
discharge point to its projected departure from its next discharge point. Gross
operating revenues from time charters are recognized over the term of the
contract based on the total contract amount.
Net operating revenues are gross operating revenues less brokerage
commission and vessel voyage expenses. Our mix of services minimizes the
fluctuations of our revenues. Specifically, net operating revenues from voyage
chartering are derived from market rates, which can be volatile. Rates on our
long-term time charters are determined on a contractual basis and are not
subject to the fluctuations of the spot market. Lightering contracts tend to
yield higher revenues on a per-day basis but, because of the length of the
contracts, lag slightly behind increases and decreases in the spot market. Our
mix of these three services thus reduces our exposure to downturns and
fluctuations in any one of our three service areas.
Our revenues are affected by:
. the number of vessels which we own or operate;
. the utilization rates achieved on those vessels; and
. the rates that we are able to charge for our services (analyzed by us
in terms of time-charter equivalent, or TCE, rates).
21
Rates are affected by the supply of available tankers, the level of oil
production, petroleum demand in oil-consuming countries and other factors. We
operated an average of 22 tankers in the three months ended March 31, 2001, 22
tankers in 2000, 21 tankers in 1999 and 17 tankers in 1998. We expect to add
additional vessels to our fleet beginning in 2002, as discussed above. Our
utilization rates have been relatively constant over the past several years, at
97.6% for the first quarter of 2001, 96.8% for 2000, 97.1% for 1999 and 97.5%
for 1998. Our adjusted average TCE rates for spot voyages, including a vessel
owned by a joint venture and adjusted to industry benchmarks, realized were
$36,260 per day for the first quarter of 2001, $29,792 per day in 2000, $17,347
per day in 1999 and $20,786 per day in 1998. The rates we charge for our
services are subject to market fluctuations that vary among our three service
offerings. Our exposure to these fluctuations is somewhat mitigated, since
these three complementary services are exposed to market fluctuations to
differing degrees.
Operating Expenses
Vessel voyage expenses. Vessel voyage expenses consist of expenses which
specifically relate to a particular voyage such as fuel or bunkers, port
charges, agent's expenses and other similar variable expenses.
Vessel operating expenses. Vessel operating expenses consist principally
of technical management fees and insurance. Technical management fees consist
of fees paid to our technical manager, Neptune Shipmanagement, and cover
expenses for crew, stores and repairs, maintenance expenses and a ship
management fee. Most of these expenses, such as technical management fees, are
fixed for each period and typically do not vary significantly from period to
period. We incur fixed and variable vessel operating expenses on tankers that
we (a) own and operate or (b) voyage-charter out. We incur fixed (but not
variable) vessel operating expenses on tankers that we time-charter out. These
expenses are directly influenced by the number of ships for which we cover the
operating expenses, versus those for which a third-party charterer covers the
operating expenses, and by the type of charter arrangement chosen. This mix can
vary from year to year, depending on deployment of the tankers in response to
market conditions and demand.
Charter-hire expenses. Charter-hire expenses consists of payments made to
the owners and/or operators of the vessels that we charter-in, both on a
bareboat-charter and a time-charter basis. Charter-hire expense fluctuates
primarily in relation to the number of vessels we charter-in per year, as well
as to general market conditions.
Depreciation and amortization. We depreciate our owned Aframax tankers on
a straight-line basis, assuming a useful tanker life of 22 years, with a
residual value calculated on the basis of scrap prices at market levels. Our
assumption as to useful life takes into account increasingly stringent
regulations governing tanker age and quality. We capitalize our dry-dock
expenses and amortize their cost on a straight-line basis over a 2.5-year
period, which is based on the average period for each vessel until the next
dry-docking.
Taxation
For U.S. tax return reporting purposes, we take the position that we are
entitled to a statutory exemption from U.S. federal income taxation on the
income we derive from the voyages made by our vessels to or from the United
States. We believe, in reliance on advice from our U.S. tax counsel,
Cadwalader, Wickersham & Taft, and based on certain information and
assumptions, that our position is correct. If, however, we were not entitled to
the benefits of this statutory tax exemption, 50% of the gross shipping income
derived by us from such voyages (without allowance for deductions) generally
would be subject to a 4% U.S. federal income tax.
The Internal Revenue Service, or IRS, issued proposed regulations in
2000, not yet in effect, that would exclude the income from our U.S. Gulf
lightering operations from being treated as shipping income eligible for
exemption from U.S. tax. If these regulations were finalized without change, it
would appear from the proposed regulations that the IRS position is that the 4%
tax would not apply and, instead, 100% of the income from such U.S. Gulf
lightering operations would be subject to regular U.S. corporate tax rates
(after
22
allowance for deductions). In any such event, the applicable rate would be up
to 35% (assuming a timely income tax return were filed). In addition, in any
such event, an additional branch profits tax of 30% may be imposed on the
after-tax profits not timely re-invested in our U.S. business and on certain
interest allocable to these lightering operations. There is a risk that this
IRS position would be sustained by the courts. In addition, there are certain
circumstances under which our other shipping income would not qualify for
exemption. Our taxation position is more fully described under "Taxation --
U.S. Tax Considerations".
If we and our non-U.S. subsidiaries had not been eligible for the
exemption from U.S. tax in 2001, 2000, 1999 and 1998, a maximum of 50% of our
gross revenues would have been subject to the 4% U.S. federal income tax as
described above. However, our U.S. Gulf lightering income could be taxed at
the higher tax rates set forth in the previous paragraph. In the three months
ended March 31, 2001 and in 2000, 1999 and 1998, U.S. source income from
lightering operations constituted approximately 23%, 19%, 25% and 20%,
respectively, of our gross revenues.
TCE Rates
Consistent with industry practice, we use TCE rate calculations as a
measure of analyzing fluctuations in net operating revenue between financial
periods. TCE rates are generally calculated as (a) net operating revenues
divided by (b) the number of days the tankers are available for operations.
Net operating revenues are primarily a function of the tanker charter rates
prevailing in the market and the type of charter, with charter rates being
either determined by reference to spot-market prices or fixed in advance. Net
operating revenues also vary with the expenses used in their calculation,
which typically include port, canal and fuel costs and which differ for each
particular trade route. These expenses are typically paid by us directly,
although by contractual arrangement they can be paid by our ship management
company and invoiced to us.
Tanker owners generally base economic decisions regarding the deployment
of vessels on anticipated TCE rates. In addition, TCE rates are widely used by
industry analysts and other industry consultants as a measure of performance
of tanker companies. We believe that our competitive strengths have resulted
in TCE rates that are higher, on average, than averages indicated by industry
data, because, we believe, TCE rates for our lightering business are generally
higher than average TCE rates for the crude-oil tanker industry as a whole.
This is due primarily to the specialized nature of lightering, which generally
commands a premium to market rates. We believe that we also maintain high
fleet utilization rates.
We calculate the two components of TCE rates, net operating revenues and
days available, as follows:
. we calculate net operating revenues as gross operating revenues of our
fleet, including a vessel owned by our joint venture, net of vessel
voyage expenses (such as fuel costs and port charges) and brokerage
and commissions, which are applicable to those vessels; and
. we assume that each vessel is available for 365 days of the year (or
for such lesser period that it is a part of our fleet), without
subtracting days spent waiting or periods of weather delay, less the
number of days spent out of service for drydocking or scheduled
repairs.
You should be aware that each vessel operator in the industry establishes
its own method for calculating TCE rates. Thus, TCE rates are not easily
comparable from company to company. In the "Summary" and "Business" sections
of this prospectus, we adjust our TCE rates to compare with calculations of a
leading benchmark indicator of TCE rates for Aframax tankers, provided by
Clarkson. Our adjusted TCE rates are somewhat higher than the unadjusted rates
we use in our financial presentations and discussions. These adjusted TCE-rate
calculations do not include vessels time chartered-out to third parties. These
adjusted TCE rates also reflect gross revenues prior to deduction of brokers'
commissions and assume 100% utilization (exclusive of break-downs and
unscheduled repairs), which make them more comparable to averages published by
Clarkson. The Clarkson data we present were also adjusted one month forward,
to account for the fact that Clarkson calculates TCE rates based on the date
that chartering arrangements are entered into, and we calculate TCE rates
based on the date of completion of each charter.
23
The Clarkson data provide an indicator of average charter rates based on
seven selected routes on the basis of certain standardized assumptions
governing voyage costs and utilization. Thus, volatility in the rates achieved
on the seven routes measured by Clarkson may result in fluctuations in the
Clarkson Aframax average that are not reflected in our TCE rates. An example of
this occurred in the first quarter of 2001 following an announcement by OPEC
countries of a cut-back in oil production and an increase in production by
several non-OPEC countries. As a result, there were significant differences in
rates between different routes, and a sharp increase in rates affected several
of the routes measured by Clarkson more than it affected the Caribbean routes
on which most of our vessels operate.
Results of Operations
Three Months Ended March 31, 2001 Compared with Three Months Ended March
31, 2000
Gross operating revenues. Gross operating revenues increased 37.3% to
$73.6 million in the three months ended March 31, 2001 from $53.6 million in
the three months ended March 31, 2000. The increase was primarily due to more
favorable market conditions which was only partially offset by the effect of
123 fewer revenue-producing days for the entire fleet, as a result of the
scheduled drydockings of four vessels during the three months ended March 31,
2001, while there were no vessels drydocked in the comparable period of 2000.
For the three months ended March 31, 2001, 81.4% of our gross operating
revenues were attributable to customers domiciled in the Americas, 18.1% to
customers domiciled in Europe and 0.5% to customers domiciled in other regions.
For the three months ended March 31, 2000, 83.2% of our gross operating
revenues were attributable to customers domiciled in the Americas and 16.8% to
customers domiciled in Europe.
Brokerage and commission. Brokerage and commission expenses were $1.1
million or 1.5% of gross operating revenues in the three months ended March 31,
2001, and $0.8 million or 1.5% of gross operating revenues in the three months
ended March 31, 2000. We consider these rates to be within shipping-industry
standards.
Vessel voyage expenses. Vessel voyage expenses decreased 13.3% to $12.8
million in the three months ended March 31, 2001 from $14.7 million in the
three months ended March 31, 2000. The decrease was primarily due to lower port
and related charges due to 123 fewer voyage days for the entire fleet as
described above.
Vessel operating expenses. Vessel operating expenses increased 8.9% to
$11.2 million in the three months ended March 31, 2001 from $10.3 million in
the three months ended March 31, 2000. Vessel operating expenses consist
principally of crewing expenses, normal maintenance and repair costs and
insurance expenses. The increase was primarily due to normal inflationary
increases in shipmanagement fees, as well as one-time preventive maintenance
expenses on one of our vessels during the three-month period in 2001, partially
offset by lower insurance expenses.
Charter-hire expenses. Charter-hire expenses decreased 2.3% to $14.0
million in the three months ended March 31, 2001 from $14.4 million in the
three months ended March 31, 2000. The decrease in charter-hire expenses during
the three months ended March 31, 2001 reflected the purchase of two vessels at
the end of 2000 that had been bareboat chartered in the three months ended
March 31, 2000. This decrease was largely offset by higher costs incurred in
chartering vessels to cover contractual requirements, stemming from generally
higher market rates in the 2001 period, as well as somewhat higher charter hire
rates for several of our vessels, resulting from contractual rate increases in
the three months ended March 31, 2001 compared to the corresponding period in
2000.
Depreciation and amortization. Depreciation and amortization increased
13.0% to $8.0 million in the three months ended March 31, 2001 from $7.1
million in the three months ended March 31, 2000. The increase was primarily
due to higher depreciation expense resulting from the purchase at year-end 2000
of two
24
vessels that we previously held on long-term bareboat charter. Also,
drydocking expenses were slightly higher in the 2001 period.
General and administrative expenses. General and administrative expenses
decreased 25.1% to $1.1 million in the three months ended March 31, 2001 from
$1.5 million in the three months ended March 31, 2000. This decrease is
principally due to a lower allocation of NOL corporate overhead expense in the
three months ended March 31, 2001.
Other operating income (expenses). Other operating income was virtually
nil in both periods.
Equity in profit/(loss) of a joint venture. Our share of the results of
our joint venture Crystal was a profit of $0.4 million for the three months
ended March 31, 2001 compared with a much smaller profit for the three months
ended March 31, 2000. Our increased profits from Crystal during the three
months ended March 31, 2001 resulted from substantially improved market
conditions, which were partially offset by 29 fewer revenue producing days in
the three months ended March 31, 2001 due to a scheduled drydocking for the
vessel owned by Crystal.
Interest expenses. Interest expenses decreased 18.9% to $3.4 million in
the three months ended March 31, 2001 from $4.2 million in the three months
ended March 31, 2000. These expenses are principally the interest charges
associated with our long-term debt. The decrease in the three months ended
March 31, 2001 is primarily due to lower debt balances.
Interest income. Interest income decreased 44.1% to $0.8 million in the
three months ended March 31, 2001 from $1.3 million in the three months ended
March 31, 2000. The decrease in interest income during the three months ended
March 31, 2001 was principally due to lower balances of cash and cash
equivalents during the three months ended March 31, 2001 compared with the
three months ended March 31, 2000. The lower balances were due to vessel
acquisitions and debt reduction payments in the 2001 period.
Income Tax. A nominal expense was recorded under income tax for the
three months ended March 31, 2001 and March 31, 2000, respectively.
Net income. Net income increased significantly to $23.1 million in the
three months ended March 31, 2001 from $2.4 million in the three months ended
March 31, 2000.
TCE rates. We measure our performance and make most commercial business
decisions on the basis of our TCE rates. TCE rates are a measure we use to
evaluate the rates we are able to achieve in the tanker market. TCE rates are
not a measure of financial performance, although we believe they are an
important component of the explanation of our financial results.
Our adjusted average TCE rates, calculated to reflect spot voyages,
including by a vessel owned by a joint venture, and adjusted to industry
benchmarks increased to approximately $36,260 per day in the three months
ended March 31, 2001 from approximately $20,675 per day in the three months
ended March 31, 2000. The increase in TCE rates is principally due to more
favorable market conditions in the three months ended March 31, 2001 compared
with the corresponding period of 2000, resulting from increased average daily
OPEC oil production, which was approximately 1.9 million barrels per day
higher in the three months ended March 31, 2001 than the corresponding period
of 2000 and the slowdown of newbuilding vessels being delivered. However,
scrapping of older vessels was also lower in the 2001 period.
Our TCE rates were significantly lower than the Clarkson Aframax average
rates in the three months ended March 31, 2001, primarily due to many of our
fixed-rate lightering contracts being renegotiated at higher rates only during
the first quarter of 2001. In addition, the volatile and sharply higher
charter rates during the quarter affected certain routes measured by Clarkson
more than the Caribbean routes on which most of our vessels operate.
25
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
Gross operating revenues. Gross operating revenues increased 53.1% to
$272.0 million in 2000 from $177.6 million in 1999. The increase was due
primarily to a general increase in industry freight rates in 2000 compared with
1999 resulting from an increase in oil production from OPEC combined with a
decrease in the number of older tankers and newbuilding deliveries of Aframax
vessels. During 1999, OPEC countries cut back on oil production and at the same
time a relatively large number of newbuilding Aframax tankers were delivered in
the market. In addition, our revenue producing days in 2000 increased by 3.2%
or by 241 days.
In 2000, 73.7% of our gross operating revenues were attributable to
customers domiciled in the Americas, 24.9% to customers domiciled in Europe and
1.4% to customers domiciled in other regions. In 1999, 84.9% of our gross
operating revenues were attributable to customers domiciled in the Americas,
11.1% to customers domiciled in Europe and 4.0% to customers domiciled in other
regions.
Brokerage and commission. Brokerage and commission expenses decreased to
$3.7 million or 1.4% of gross operating revenues in 2000 from $4.6 million or
2.6% of gross revenues in 1999. We consider these rates to be within shipping-
industry standards.
Vessel Voyage Expenses. Vessel voyage expenses increased 48.2% to $61.9
million in 2000 from $41.8 million in 1999. The increase was primarily due to
higher fuel prices which increased by 40.5% for fuel purchased in 2000 compared
with 1999, as well as higher port related charges due to more voyage days and
an increase in the per voyage port expenses.
Vessel operating expenses. Vessel operating expenses increased 34.7% to
$42.8 million in 2000 from $31.8 million in 1999. Vessel operating expenses
consist principally of shipmanagement fees, which accounted for 65.2% in 2000;
insurance expenses, which accounted for 17.1% in 2000 and normal maintenance,
repair and other costs, which accounted for 11.5% in 2000. The increase was
primarily due to the full-year effect in 2000 of three newbuilding vessels that
were delivered on a staggered basis during 1999, as well as the full-year
effect in 2000 of operating our lightering support vessels as owners, whereas
in 1999 we time-chartered the vessels from a third party for a large part of
the year. This accounted for 1,092 days on hire in 2000 and 726 days on hire in
1999. Less significantly, our insurance premiums increased on a per-ship basis
due to market conditions, and we incurred a one-time preventive maintenance
expense on two of our vessels.
Charter-hire expenses. Charter-hire expenses increased 7.0% to $60.4
million in 2000 from $56.5 million in 1999. The increase in charter-hire
expenses during 2000 principally reflected the full year effect in 2000 of
three bareboat charters that began on a staggered basis during 1999. This
accounted for 1,092 days on hire in 2000 and 726 days on hire in 1999.
Depreciation and amortization. Depreciation and amortization increased
3.8% to $28.6 million in 2000 from $27.5 million in 1999. Depreciation between
these two periods remained roughly constant because the average number of
tankers that are capitalized did not increase, and the increase is primarily
due to the costs, which we amortize, of dry-docking four vessels during 2000
compared with two during 1999.
General and administrative expenses. General and administrative expenses
increased 60.1% to $7.1 million in 2000 from $4.4 million in 1999. This
increase is principally due to an increase in staff compensation costs in 2000,
due to a $0.8 million provision for bonus payments in 2000, slightly higher
staff levels and slightly higher salaries amounting to $0.3 million; a
provision of $0.7 million for non-recurring professional fees and $0.6 million
higher expenses due to the growth of our business.
Other operating income (expenses). Other income increased to $3.8 million
in 2000 from virtually nil in 1999. This income in 2000 consists largely of a
$4.8 million gain from the sale of two contracts for the delivery of
newbuilding vessels to a third party, partially offset by a provision of $1.0
million for a non-recurring expense, which we currently expect to be covered by
payments made under our insurance policy.
26
Equity in profit / (loss) of a joint venture. Our share of the results of
our joint venture Crystal, which has not been consolidated, was a profit of
$1.6 million for 2000 compared with a profit of $0.1 million for 1999. Our
increased profits from Crystal during 2000 resulted from the more favorable
market conditions described above.
Interest expense. Interest expense increased 14.8% to $16.7 million in
2000 from $14.6 million in 1999. These expenses are principally the interest
charges associated with our long-term debt. The increase in 2000 is due to the
average interest rates that increased by 1.3%, which were partially offset by
lower average debt balances, which decreased by $16.6 million.
Interest income. Interest income increased 25.0% to $4.6 million in 2000
from $3.6 million in 1999. The increase in interest income during 2000 is
principally due to higher average interest rates and higher average interest-
bearing balances during the year compared with 1999.
Income tax. An expense of $0.1 million was recorded under income tax for
each of 2000 and 1999. Although no income tax was paid in 2000 or 1999, we made
a provision for taxation that could become due arising from the transfer
pricing mechanisms used with respect to U.S. subsidiaries.
Net income. Net income increased to $61.6 million in 2000 from $0.9
million in 1999 for the reasons discussed above.
TCE Rates. Our adjusted average TCE rates, calculated to reflect spot
voyages, including by a vessel owned by a joint venture, and adjusted to
reflect industry benchmarks, increased 71.7% to $29,792 per day in 2000 from
$17,347 per day in 1999. The increase was due to a general increase in industry
freight rates in 2000 compared with 1999 combined with a decrease in the number
of older tankers and newbuilding deliveries of Aframax vessels. In contrast,
during 1999, OPEC countries cut back on oil production and, at the same time, a
relatively large number of newbuilding Aframax tankers were delivered in the
market, resulting in a decline in industry freight rates. TCE rates are not a
measure of financial performance, although we believe they are an important
component of the explanation of our financial results.
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Gross operating revenues. Gross operating revenues increased 13.1% to
$177.6 million in 1999 from $157.0 million in 1998. The increase was primarily
due to a 21.0% or 1,316 day increase in revenue producing days resulting from
the dates on which we received newbuilding vessels, as two vessels were
delivered in the last quarter of 1998 and three additional vessels were
delivered in 1999. The increase was in spite of less favorable market
conditions principally due to OPEC-led oil production cuts and an increase in
the supply of newbuilding vessels to the market in 1999.
In 1998, 86.5% of our gross operating revenues were attributable to
customers domiciled in the Americas, 10.5% to customers domiciled in Europe and
3.0% to customers domiciled in other regions.
Brokerage and commission. Brokerage and commission expenses increased to
$4.6 million or 2.6% of gross operating revenues in 1999 from $4.1 million or
2.6% of gross revenues in 1998.
Vessel Voyage Expenses. Vessel voyage expenses increased 55.4% to $41.8
million in 1999 from $26.9 million in 1998. The increase was primarily due to
higher fuel expenses related to 1,316 more voyage days stemming from the timing
of newbuilding deliveries and higher prices for fuel which led to an increase
of 40.4% for fuel purchased in 1999 compared with 1998. Also, port related
expenses increased primarily due to the increase in voyage days.
Vessel operating expenses. Vessel operating expenses increased 13.4% to
$31.8 million in 1999 from $28.0 million in 1998. This increase is primarily
due to the delivery of three additional newbuilding vessels in 1999 and the
full year effect of two newbuilding deliveries received at various times during
the year in 1998. These three ships accounted for 1,456 days on hire in 1999
and 172 days on hire in 1998.
27
Charter-hire expenses. Charter-hire expenses increased 51.6% to $56.5
million in 1999 from $37.2 million in 1998. This increase is due to the
delivery of three newbuilding vessels in 1999 and the full-year effect in 1999
of the delivery of two newbuilding vessels in 1998. All of these newbuilding
vessels are bareboat-chartered in from third parties. In addition, two vessels
were time-chartered at different times during the year in 1998. In 1999, they
were time-chartered for the full year. These newbuilding and time-chartered
vessels accounted for 2,186 days on hire in 1999 and 663 days on hire in 1998.
Depreciation and amortization. Depreciation and amortization decreased
8.5% to $27.5 million in 1999 from $30.1 million in 1998. This decrease was
primarily due to lower depreciation expense of $1.5 million due to the sale of
two vessels and a decrease of $1.5 million in amortization of drydocking costs
due to the sale of one of those vessels.
General and administrative expenses. General and administrative expenses
decreased 11.5% to $4.4 million in 1999 from $5.0 million in 1998. The decrease
was a result of a $0.6 million lower allocation to AET of NOL group overhead
expenses in 1999.
Other operating income (expenses). Other loss decreased to virtually nil
in 1999 from a loss of $0.7 million in 1998. The loss in 1998 consists
substantially of a one-time loss from an asset disposal.
Equity in profit / (loss) of a joint venture. Our share of the results of
Crystal increased to $0.1 million in 1999 from a slight loss in 1998.
Interest expenses. Interest expenses decreased 11.0% to $14.6 million in
1999 from $16.4 million in 1998. These expenses are the interest charges
associated with our long-term debt. The decrease in 1999 is due to $32.0
million lower average debt balances in 1999.
Interest income. Interest income increased 24.5% to $3.6 million in 1999
from $2.9 million in 1998. The increase in interest income is principally due
to an increased level of interest-bearing balances during 1999.
Income tax. An expense of $0.1 million was recorded under income tax for
each of 1999 and 1998. Although no income tax was paid in 1999 or 1998, this
expense reflects the provision described above that we made with respect to
U.S. subsidiaries.
Net income. Net income decreased to $0.9 million in 1999 from $11.4
million in 1998 for the reasons discussed above.
TCE Rates. Our adjusted average TCE rates, calculated to reflect spot
voyages, including by a vessel owned by a joint venture, and adjusted to
reflect industry benchmarks, decreased 16.5% to $17,347 per day in 1999 from
$20,786 per day in 1998. The decrease in our TCE rates was principally due to
OPEC-led oil-production cuts and an increase in the supply of newbuilding
vessels to the market in 1999, thereby depressing industry freight rates. TCE
rates are not a measure of financial performance, although we believe they are
an important component of the explanation of our financial results.
28
Liquidity and Capital Resources
Cash Flows for the Three Months Ended March 31, 2001 and 2000 and the Years
Ended December 31, 2000, 1999 and 1998
The following table summarizes our cash-flow activity during the three
months ended March 31, 2001 and 2000 and the years ended December 31, 1998,
1999 and 2000:
Year Ended December Three Months
31, Ended March 31,
---------------------- -----------------
1998 1999 2000 2000 2001
------ ------ ------ ------- --------
(in millions)
Net cash provided by operating
activities........................ $ 30.1 $ 11.8 $ 81.8 $ 15.8 $ 45.1
Net cash provided by (used in)
investing activities.............. 33.7 10.5 (52.0) (0.1) (43.5)
Net cash provided by (used in)
financing activities.............. (32.2) (31.5) (22.6) (8.7) (13.0)
Cash and cash equivalents, end of
year.............................. 64.2 54.9 62.2 61.9 50.8
Cash flow from operating activities. Our cash flow from operations was
$45.1 million in the three months ended March 31, 2001 and $15.8 million in the
three months ended March 31, 2000. Our cash flow from operations equaled $81.8
million in 2000, $11.8 million in 1999 and $30.1 million in 1998. These
fluctuations in cash flow from operations reflect changes in our net income
arising from general changes in market conditions as described above.
Cash flow from investing activities. In the three months ended March 31,
2001, our net cash used in investing activities was $43.5 million compared to
$0.1 million in the three months ended March 31, 2000. In January and February
2001, we paid for the purchase of two Aframax vessels previously held by us
under bareboat charters and made installment payments on two Aframax new
buildings. In 2000, our net cash used in investing activities was $52.0
million, compared with net cash provided by investing activities of $10.5
million in 1999 and $33.7 million in 1998. In 2000, this negative figure
reflects down-payments on vessel purchases, partially offset by proceeds from
vessel disposals. In 1998, the positive figure reflects principally cash
received from the sale of a vessel.
Cash flow from financing activities. Net cash used in financing
activities was $13.0 million in the three months ended March 31, 2001 and $8.7
million in the three months ended March 31, 2000. Net cash used in financing
activities was $22.6 million in 2000, $31.5 million in 1999 and $32.2 million
in 1998. The crude-oil tanker business consisting of the seven Aframax tankers
which were transferred by NOL to us on December 29, 2000 has historically
relied on NOL to provide financing. Changes in cash flows from financing
activities principally reflect fluctuations in the advances to and from NOL in
relation to the financings of this business, and the repayment of long-term
debt to third parties. Fluctuations in advances to and from NOL in relation to
the crude-oil tanker business of the seven Aframax tankers reflect the
operational performance of this business.
Anticipated Expenditures
We require funds or financing principally for the purchase of additional
vessels, payment of vessel operating expenses, debt service, charter hire
expenses, drydocking, brokerage commissions and payment of other management and
operating expenses. Depending on prevailing market conditions, we anticipate
expenditure of approximately $600 million to purchase additional vessels over
the next three years, including the two VLCC and five Aframax tankers already
contracted for. In addition, we had long-term indebtedness of approximately
$176.5 million at March 31, 2001, and we expect to incur at least an additional
$154.0 million of indebtedness in connection with the purchase of the two VLCC
tankers and two of the Aframax tankers.
29
We have entered into commitments for the purchase of the two new VLCC
tankers and five new Aframax tankers that will require us to make additional
payments of $49.5 million in 2001, $104.5 million in 2002 and $120.6 million in
2003. In addition, we intend to spend approximately $260 million over the next
three years for the purchase of additional tankers of five years of age or
less.
The following table summarizes our profile of indebtedness as at March
31, 2001:
Long-Term Debt as at March 31, 2001
Outstanding
Loan
Amount (1) Currency Final Maturity Amortization Interest Type
----------- -------- ----------------- -------------- ------------------
(in millions
of dollars)
$127.5 Dollars December 30, 2006 Semiannual (2) SIBOR + 0.625% (3)
29.6 Yen (4) March 31, 2003 None LIBOR + 0.35%
26.0 Dollars March 29, 2003 None LIBOR + 0.375%
------
$183.1 (5)
======
- --------
(1) Includes current portion of long-term debt.
(2) In 11 equal installments of $3.3 million semi-annually commencing June 30,
2001 and a final 12th installment of the outstanding balance on December
30, 2006.
(3) SIBOR is the Singapore inter-bank offered rate.
(4) Our exposure to currency risk is hedged by a currency swap in the full
principal amount.
(5) This amount does not include the outstanding $4.2 million loan of our joint
venture, Crystal, the results of which have not been consolidated into our
results.
Our outstanding loan of $127.5 million is secured by a lien on four of
our tankers, and each of the other two loans is secured by a lien on one of our
tankers. None of these loan agreements contains any financial or other
covenants that would materially restrict our operations. See note 8 to the
financial statements for a more detailed description of these loans.
On February 21, 2001, we secured commitments under a bank facility for an
aggregate of $54.0 million in loans, to be disbursed in 2003 for the financing
of amounts due on two Aframax tanker new buildings to be delivered in that
year. These loans are denominated in U.S. dollars, and interest accrues at
LIBOR plus a margin. These loans are repayable in 32 quarterly installments
each consisting of 1/48 of the aggregate principal amount of the loans, with
the outstanding amount to be paid in the final installment. Neither of these
loan agreements contains any financial or other covenants that would materially
restrict our operations. We are currently negotiating similar arrangements with
respect to the additional two Aframax newbuildings on order.
On May 29, 2001, we entered into an unguaranteed loan of $100 million
divided into two advances of $50 million each, from Danish Ship Finance, to be
disbursed in 2002 for the financing of amounts due on the two new VLCC tankers
to be delivered in that year. The advances are to be secured by the two
tankers. Interest on these loans is calculated as LIBOR plus a margin. These
loans are to be repayable in 24 semi-annual payments comprising 23 installments
of $1.67 million commencing June 1, 2002 and December 1, 2002 respectively and
a final payment of $10 million on the 24th installment payment date. Material
terms of this loan agreement include covenants to repay indebtedness as needed
so that the aggregate market value of the two VLCCs does not fall below 115% of
the outstanding principal amount of the loan and to repay all outstanding
indebtedness if there is a change of ownership of the vessels or the borrower
without the prior written consent of the lenders. We do not currently expect
that any additional covenants to be contained in these loan agreements will
materially restrict our operations.
We hold 12 of our vessels under charter. Our scheduled charter payments
over the next three years equal $58.1 million for 2001, $66.8 million for 2002
and $56.8 million for 2003. These amounts are payable in U.S. dollars.
30
Anticipated Sources of Funds
Since our formation, our principal sources of funds have been equity
contributions from our parent company NOL, cash flow from operations,
borrowings from banks and supplier credits. We expect that, going forward, we
will finance acquisitions of new vessels with a combination of the proceeds of
the global offering, bank borrowings and operating cash flows. We expect that
our other cash requirements will be met through operating cash flows.
We do not currently have in place any bank lines of credit or other pre-
arranged sources of liquidity. We believe that, for at least the next two
years, our cash flows from operations, proceeds from the global offering,
access to bank financing and other sources of liquidity will be adequate to
meet all of our anticipated obligations and capital-expenditure requirements.
However, if our obligations and capital expenditure requirements are in excess
of anticipated levels, or if our cash flows from operations are lower than
anticipated, we may be required to seek additional equity or debt financing.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including changes in market
prices of financial instruments and including interest rates and foreign-
exchange rates. Our primary market risk exposures relate to interest rate
movements on borrowings and exchange rate movements on foreign currency
denominated borrowings and operating expenses.
Historically, NOL has managed our exposure to these risks on a group-wide
basis. NOL uses derivative financial instruments, including cross-currency and
interest-rate swaps, to limit foreign-currency exchange-rate and interest-rate
exposures. Since the counterparties to these contractual arrangements are
limited to major financial institutions, our exposure to credit losses in the
event of non-performance by these counterparties is limited. We have not
experienced non-performance by counterparties to these contracts. We do not and
do not intend to use derivative financial instruments for trading purposes.
After the completion of the global offering, we intend to manage our
interest-rate and foreign-currency exchange-rate exposure independently from
NOL, using a similar mix of derivative financial instruments.
The following discussion and analysis, which constitute "forward-looking
statements" that involve risk and uncertainties, summarize our market-sensitive
financial instruments. We have estimated our exposure to market risk by using a
sensitivity analysis based on projected changes in earnings, assuming a 10%
hypothetical adverse change in market rates. The results of the sensitivity
analysis are summarized below. Actual changes in interest rates or market
prices may differ from the hypothetical change. This discussion addresses
market risk only and does not address other risks that we face in the normal
course of business, including country risk, credit risk and legal risk.
Interest-Rate Risk
Our interest-rate risk is primarily associated with the debt used to
finance purchases of vessels. NOL manages interest-rate risk on a group-wide
basis with a combination of fixed and floating-rate instruments designed to
balance the fixed and floating interest rates. We have entered into interest-
rate swaps to adjust interest-rate risk exposures when appropriate, based on
market conditions. The differential paid or received under interest-rate swap
agreements is accrued as interest rates change and is recognized as an
adjustment to interest expense. Premiums and receipts, if any, are recognized
as adjustments to interest expense over the lives of the individual contracts.
Assuming a 10% increase in the interest rates related to the loans
outstanding at December 31, 2000, and assuming that rate and the outstanding
loan balances remain unchanged throughout the year, the corresponding increase
in interest on loans would decrease earnings by $1.6 million.
31
We also have five operating leases that include a variable component tied
to LIBOR rates. Assuming a 10% increase in LIBOR rates at December 31, 2000,
and assuming that rate and the lease obligations remain unchanged throughout
the year, the corresponding increase in lease rates would decrease earnings for
2001 by $1.2 million.
Foreign-Currency Exchange-Rate Risk
Our functional currency is the U.S. dollar. Our foreign currency
transactions are accounted for at the exchange rate prevailing at the date of
the transactions. During the year ended December 31, 2000 and the three months
ended March 31, 2001, virtually all of our revenues were U.S. dollar
denominated. Since foreign currency-denominated operating expenses represent a
relatively small portion of our total operating expenses, and given our
flexibility to shift our purchase of goods and services from one country to
another and, thus, from one currency to another on relatively short notice, we
do not expect a significant change in foreign-currency exchange rates relative
to the U.S. dollar to have a material impact on our operating results. Foreign
currency transaction exposure has not materially affected us in the past.
We also have debt denominated in Japanese yen, the foreign currency
exchange rate exposure on which is hedged by a cross-currency interest-rate
swap contract in the full principal amount of the loan.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair
value. SFAS 133 requires that changes in the derivative's fair market value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting treatment for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133". SFAS 137 amends SFAS 133 and defers the effective date of
SFAS 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB
issued SFAS 138, which addresses a number of issues relating to difficulties in
implementing SFAS 133. These standards will be applicable to us for the year
ended December 31, 2001.
We have adopted SFAS 133, 137 and 138 as of January 1, 2001. The adoption
of these statements did not have a material effect on our current financial
position or results of operations, and we do not expect that it will have a
material effect on our future financial position or results of operations.
32
INDUSTRY
The information in this section should be read in conjunction with the
section of this prospectus entitled "Summary -- Important Assumptions Used in
this Prospectus".
Overview
Our industry is the seaborne transportation of petroleum, primarily crude
oil. The market for seaborne oil transportation is serviced by two main types
of operators: captive fleets of major oil companies and independent tanker
fleets. According to Clarkson data, as of February 1, 2001, the oil companies
own, or control through long-term time-charters, less than 26% of the current
world tanker capacity. A large number of independent companies own or control
the balance of the fleet. Historically, the industry has been highly
fragmented. Recently, however, there has been some consolidation within the
industry through mergers, acquisitions and joint marketing arrangements among
tanker owners. According to Clarkson, as of February 1, 2001, there were
approximately 559 tanker owners, with a world fleet of approximately 3,422
tankers, or 295.9 million deadweight tons. The ten largest owners accounted for
24.9% of the world tanker fleet including combined carriers, at that date,
according to Clarkson, compared with 18.6% at December 31, 1996.
In the past decade, there has been an increased focus in the United
States and Europe on the environmental safety of tankers. This is largely due
to the occurrence of several high-profile oil spills, including the Exxon
Valdez in Prince William Sound, Alaska in 1989, the Erika off the coast of
France in 1999 and the Jessica near the environmentally sensitive Galapagos
Islands in January 2001, as well as to a generally greater awareness of
environmental issues worldwide. This increased focus has led to regulations in
the United States, such as the Oil Pollution Act of 1990, or OPA 90, that
requires tankers entering U.S. waters, including the exclusive economic zone,
to be exclusively double-hulled by January 1, 2015. In response to the Erika
incident, even more stringent regulations are expected to be adopted in the
United States and Europe this year, following the promulgation of new
regulations by the International Maritime Organization, or IMO.
The proposed IMO guidelines adopted by the IMO's Marine Environment
Protection Committee in April 2001, if accepted by the IMO, would require the
phasing out of most non double-hulled tankers built prior to 1982 by the end of
2007. Based upon Clarkson's data, as of February 1, 2001, 92.4 million dwt of
non double-hulled tonnage, or approximately 31% of the world tanker fleet, was
built in 1981 or earlier. We believe that the greater environmental awareness
and the proposed regulations will provide a significant advantage to fleets
that include a greater number of younger, double-hulled vessels, especially in
the U.S. and European markets. First, oil companies and traders in these
markets will come under increased pressure to rely exclusively on double-hulled
tankers. Second, we believe that the replacement of older, single-hulled
tankers may limit the capacity growth of the tanker companies that operate
these tankers. Third, we believe that the pressure of regulatory deadlines may
increase the price of double-hulled tankers.
The seaborne oil transportation industry has been affected by
consolidation in the past several years within the oil industry. Recent mergers
include: (a) BP and Amoco in early 1999, (b) Exxon and Mobil in late 1999, (c)
Total Fina and Elf Aquitaine in the first quarter of 2000 and (d) BP Amoco and
ARCO in the second quarter of 2000. Large oil companies that have announced
mergers include (a) Chevron and Texaco and (b) Philips Petroleum and TOSCO.
Consolidation has resulted in increased competition among tanker operators to
establish and maintain strong customer relationships to attract and retain
market share within target markets. We believe that tanker companies having
larger and higher quality fleets and superior service will be best positioned
to respond to these competitive pressures.
33
The World Tanker Fleet
The world tanker fleet is generally divided into the following types of
tankers, based on deadweight tons, or dwt, a measure of tanker carrying
capacity:
. Ultra Large Crude Carriers, or ULCCs, of 320,000 dwt or more;
. Very Large Crude Carriers, or VLCCs, of 200,000 to 320,000 dwt;
. Suezmax tankers of 120,000 to 200,000 dwt;
. Aframax tankers of 80,000 to 120,000 dwt; and
. Smaller tankers (such as Panamax and Handysize) of 10,000 to 80,000
dwt.
In order to benefit from economies of scale, tanker charterers
transporting crude oil will typically charter the largest tanker available in
the market that is appropriate for the intended journey. Factors considered
include charterers' preference to use larger tankers for longer-haul trades and
smaller tankers for medium to short-haul trades, port and canal size
restrictions and cargo sizes.
The map below shows the pattern of seaborne crude oil transportation in
1999.
[MAP]
Map showing pattern of seaborne crude oil transportation in 1999. Principal
export regions are the Arabian Gulf, the Caribbean and North Africa. Principal
import regions are North America, Europe and the Far East.
In addition to tankers that carry only oil, the tanker fleet includes
oil/bulk/ore carriers, or O/B/Os, which are combination carriers of various
sizes that are capable of carrying either crude oil or dry bulk cargoes. Unless
otherwise stated, all fleet information in this prospectus exclude O/B/Os.
34
ULCC and VLCC. ULCCs and VLCCs typically transport crude oil in long-haul
trades, mainly from the Arabian Gulf to Western Europe and the United States
via the Cape of Good Hope and from the Arabian Gulf to Asia. More recently,
VLCCs have been used to transport crude oil from West Africa to the United
States and Europe. As of February 2001, the combined cargo capacity of ULCCs
and VLCCs accounted for an aggregate of 129.3 million dwt and represented
approximately 44% of world oil tanker cargo capacity. While the ULCC and VLCC
market differs from the markets for smaller tankers, ULCCs and VLCCs influence
the tanker charter market in general because of their cargo-carrying and long-
haul capabilities. According to Clarkson, ownership of the VLCC fleet is
concentrated in the hands of relatively few entities, with eight owners
accounting for approximately 43% of the fleet. Approximately 55% of the VLCC
fleet is less than 10 years old, and approximately one-third of the current
fleet is both built in 1981 or earlier and non-double-hulled. The proposed IMO
guidelines, as of May 1, 2001, would require the phasing out of most non-
double-hulled tankers built prior to 1982 by end of 2007.
Suezmax
Like VLCCs, Suezmax tankers engage in, and realize economies of scale on,
long-haul crude oil trades as well as medium-haul crude oil trades, such as
from West Africa and the North Sea to the east coast of the United States. Due
to an increasing number of ports becoming capable of handling Suezmax tankers,
additional routes have also opened up in recent years in North and South
America, North Africa, the Black Sea and the Mediterranean region, which may
displace a portion of the traditional Aframax tanker business from those
routes. Additionally, upon the opening of the Caspian Sea pipelines and the
subsequent increase in Black Sea exports, it is expected that Suezmax tankers
may experience significant growth in demand as VLCCs are too large to navigate
the Bosphorus Straits which give access to the area. One of the primary markets
for Suezmax tankers is the North Sea. As of February 1, 2001, data compiled by
Clarkson showed that Suezmax tankers accounted for an aggregate of 41.2 million
dwt, or approximately 14% of world oil tanker cargo capacity. As of February 1,
2001, 29% of the world Suezmax fleet was 20 years of age or older. Due in part
to increasingly stringent environmental regulation, the average age of Suezmax
tankers calling on North Sea ports has decreased.
35
Aframax
Aframax tankers serve different trade routes than the larger classes of
tanker and generally engage in both medium and short-haul trades carrying crude
oil. The shallower draft and shorter length of these tankers enable them to
enter a greater number of ports than the larger tankers, which makes Aframax
tankers well suited for lightering operations. Aframax tankers can carry a
variety of cargoes and are large enough to allow them to benefit from economies
of scale in some regional markets. Data compiled by Clarkson showed that, as of
February 1, 2001, there were 530 Aframax tankers in the world tanker fleet,
accounting for an aggregate of 51.0 million dwt, or approximately 17% of world
oil tanker cargo capacity. According to Clarkson, over the past five years, the
size of the world Aframax fleet increased from approximately 43 million dwt to
approximately 51 million dwt. As of February 1, 2001, approximately 20% of the
world Aframax fleet was 20 years of age or older. The chart below shows
deliveries of vessels currently in the world Aframax fleet by year, as of
February 1, 2001.
World Aframax Fleet Deliveries by Year
in Millions of dwt
Non-double-hulled Double-hulled
Aframax Aframax
prior to 1972 0.2 0.0
1973 0.2 0.0
1974 1.0 0.0
1975 1.4 0.0
1976 2.1 0.0
1977 0.8 0.0
1978 0.7 0.0
1979 1.2 0.0
1980 2.4 0.0
1981 2.5 0.0
1982 0.4 0.0
1983 0.7 0.0
1984 0.3 0.0
1985 1.4 0.1
1986 1.9 0.3
1987 1.5 0.3
1988 1.3 0.3
1989 1.5 0.5
1990 2.2 0.4
1991 1.7 0.7
1992 0.8 2.3
1993 0.2 2.3
1994 0.0 2.0
1995 0.1 1.2
1996 0.0 1.5
1997 0.0 1.8
1998 0.0 3.5
1999 0.0 4.9
2000 0.0 2.2
Source: Clarkson
36
The graph below shows the age profile of the current world tanker fleet
as of February 1, 2001, classified by type.
World Tanker Fleet by Age Profile and by Size
Total Dwt (in millions)
20 yrs & over 15-19 yrs 10-14 yrs 5-9 yrs 0-4 yrs
VLCC/ULCC 32% 2% 11% 29% 26%
Suezmax 28% 4% 11% 28% 29%
Aframax 21% 10% 21% 21% 27%
Other 30% 25% 13% 13% 19%
Total 30% 9% 13% 23% 25%
Source: Clarkson
Chartering of Tankers
Tankers are usually employed under one of three types of charters: voyage
charters, time charters and bareboat charters. The table below provides some of
the primary distinctions among these types of charters:
Voyage Charter Time Charter Bareboat Charter
---------------------- ------------------------- ------------------
Running
Expenses
(1) Tanker owner pays Tanker owner pays Charterer pays
Voyage
Expenses
(2) Tanker owner pays Charterer pays Charterer pays
Idle Time Charterer does not pay Charterer pays as long as Charterer pays
tanker is available for
operations
Typical
charter
length Single voyage One year or more Five years or more
- --------
(1) Running expenses, which we record as vessel operating expenses, include
items such as crew wages, insurance on the tanker, routine maintenance and
a provision for periodic dry-docking of the tanker.
(2) Voyage expenses include such items as fuel, port charges and canal tolls.
Voyage charters are typically for shorter intervals, usually one round
voyage for the tanker, and are done on either a spot or advance contractual
basis. Rates for spot or pre-arranged voyage charters are generally the most
volatile of the three types of rates. Bareboat charters often are used as a
financing vehicle, with the charterer assuming full control and performance
risk.
Charter Revenue
The pricing of spot and contract charter rates is highly competitive, due
to the large number of operators in the market. For uniformity and comparison,
spot rates are often translated into TCE rates. Owners
37
who can achieve above-average utilization rates while operating under voyage
charters will generally achieve above-average TCE rates.
A spot charter on a voyage basis typically includes payment for the time
required for the tanker to return to the loading port after discharging its
cargo. By securing cargo closer to the discharge port, shipowners can increase
the utilization and the revenue generation of their tankers. High vessel
utilization tends to create higher average TCE rates even though an operator
may charge no more than its competitors for a particular voyage.
Industry Fundamentals
Tanker Demand
Tanker demand is a function of a number of factors, including world oil
supply and demand and the locations of oil production, refining and
consumption. Tanker demand is measured in "ton-miles", which are calculated as
the product of (a) the amount, or tonnage, of crude oil transported in tankers
and (b) the distance over which this oil is transported.
Oil Demand
The overall increase in world oil demand over the past four years has
strongly affected the market for seaborne oil transportation. Demand for oil is
driven by the growth or decline in economic activity and industrial production.
According to the International Energy Agency, or IEA, between 1995 and 2000,
world oil consumption increased at a compound annual growth rate of 1.5% and
North American oil consumption increased at a compound annual growth rate of
2.1%. In April 2001, the IEA forecast that oil consumption in 2001 will grow
2.0% worldwide, 1.7% in North America and 1.3% in Europe. The following table
indicates the geographic breakdown of world oil demand during the past six
years, as calculated by IEA, and as forecasted by IEA for 2001.
World Oil Demand
(millions of barrels per day)
CAGR
1995 1996 1997 1998 1999 2000 2001 (1) (1995-2000)
------ ---- ---- ---- ---- ---- -------- -----------
North America............ 21.6 22.2 22.7 23.1 23.9 24.0 24.4 2.1%
Annual growth in North
America................. (0.3)% 2.8% 2.3% 1.8% 3.5% 0.4% 1.7%
Europe................... 14.6 14.9 15.0 15.3 15.1 15.0 15.2 0.5%
Pacific.................. 8.7 8.8 9.0 8.4 8.6 8.6 8.7 (0.2)%
World.................... 70.0 71.8 73.1 73.5 74.8 75.4 76.7 1.5%
- --------
(1) Forecast.
Source: IEA Annual Statistical Supplement for 1998; IEA Monthly Oil Market
Report dated April 2001.
The United States, our principal market, is the largest crude-oil
importing country in the world, accounting for approximately 23% of total world
crude oil imports in 2000. In 2000, according to the U.S. Energy Information
Administration, or EIA, the United States imported 3.3 billion barrels of crude
oil, of which approximately 1.9 billion barrels were imported through the
Petroleum Administration Defense District III, or PADD III (which corresponds
to the states bordering the U.S. Gulf, excluding Florida). The U.S. Gulf is the
location of almost half of all U.S. refining capacity. Some other refineries
elsewhere in the U.S. can also be supplied through pipelines originating in the
U.S. Gulf. In 2000, approximately 57% of U.S. seaborne crude oil imports were
destined for ports in the U.S. Gulf, according to the EIA. The chart below
shows the level of U.S. oil imports imported through the U.S. Gulf for the
1996-2000 period.
38
U.S. Gulf Crude Oil Imports (1996-2000)
in Millions of barrels
1996 1,586 1
1997 1,683 1
1998 1,783 1
1999 1,805 1
2000 1,862 1
Source: EIA
We believe U.S. oil imports are likely to remain strong, notwithstanding
a possible economic slowdown in the United States. The level of U.S. petroleum
imports has been increasing over the past several years. Oil production in the
United States has fallen substantially from 8.6 million barrels per day, or
bpd, in 1980 to 5.8 million bpd in 2000, one of the lowest years since 1949 and
35% less than the record U.S. domestic production level of approximately 8.9
million bpd set in 1985. According to the EIA, U.S. domestic crude oil
production in 2001 should rise slightly to approximately 5.9 million bpd. Over
the past several years, consumption has risen, stimulated by the strong U.S.
economy. The EIA forecasts that U.S. dependence on petroleum imports will reach
a record high of 70% of U.S. demand in 2001. The chart below sets forth the
rates of U.S. oil consumption and production between 1990 and 2000:
39
U.S. Oil Consumption and Production between 1990 and 2000
Difference
Production Consumption between Production and Consumption
1990 7.4 17.0 9.6
1991 7.4 16.7 9.3
1992 7.2 17.0 9.9
1993 6.8 17.2 10.4
1994 6.7 17.7 11.1
1995 6.6 17.7 11.2
1996 6.5 18.3 11.8
1997 6.5 18.6 12.2
1998 6.3 18.9 12.7
1999 5.9 19.5 13.6
2000 5.8 19.5 13.7
Source: EIA
Demand for oil in OECD countries in Europe in 2000 is estimated by the
IEA to have averaged 15 million bpd, 285,000 bpd short of its recent peak in
1998. The IEA expects growth of 205,000 bpd for the year 2001 to reach 15.2
million bpd on average for the year.
Transportation Distance
The distance over which oil is transported is an important element of the
ton-mile tanker demand equation. It is determined by seaborne trading and
distribution patterns, which are principally influenced by the relative
advantages of the various sources of production and locations of consumption.
Seaborne trading patterns are also periodically influenced by geopolitical
events, such as wars and trade embargoes, that divert tankers from normal
trading patterns, as well as by inter-regional oil trading activity created by
oil supply and demand imbalances. Traditionally, the level of exports from the
Middle East has had a strong effect on the tanker market as a whole due to the
relatively long distance between this supply source and the typical discharge
points. Over the past ten years, ton-mile demand has grown at a compound annual
growth rate of 2.0%, which is approximately twice the rate of oil production
growth of 0.9% for the same period. This growth reflects the increased
production in the Middle East and the need to transport crude oil the
relatively long distances from that region.
According to the EIA, as of January 1, 2000, the Middle East had
approximately 65% of the world's oil reserves and approximately 45% of its
incremental oil production capacity. Thus it is expected that the Middle East
will supply the largest percentage of any growth in world oil consumption. We
believe that this will create growth opportunities for tanker companies,
particularly those in the VLCC, Suezmax and Aframax segments.
40
Tanker Supply
Tanker supply is a function of (a) scrapping of older tankers and other
loss of tanker supply, such as conversion of tankers to floating production and
storage facilities and loss as a result of casualties and (b) newbuilding
deliveries of tankers. The graph below shows historical tanker deliveries,
scrapping and the net growth of the world fleet:
Growth of the World Tanker Fleet
in Millions of dwt
Scrappings Deliveries Net Change
1970 -0.8 21.0 20.2
1971 -0.6 20.8 20.2
1972 -2.3 20.8 18.6
1973 -1.4 28.5 27.1
1974 -2.0 41.3 39.2
1975 -8.1 47.1 38.9
1976 -10.1 38.9 28.8
1977 -8.4 20.4 12.0
1978 -13.4 10.6 -2.8
1979 -6.2 7.8 1.6
1980 -7.9 7.1 -0.8
1981 -12.8 8.4 -5.6
1982 -23.5 6.4 -17.1
1983 -23.6 5.1 -18.5
1984 -20.0 3.8 -16.2
1985 -25.8 4.4 -21.4
1986 -10.8 7.4 -3.4
1987 -6.6 5.7 -0.9
1988 -2.4 7.3 4.9
1989 -1.2 9.0 7.9
1990 -2.7 9.1 6.4
1991 -2.5 11.8 9.2
1992 -10.0 16.3 6.3
1993 -11.8 17.5 5.7
1994 -12.4 10.5 -1.9
1995 -10.8 11.6 0.7
1996 -6.0 12.1 6.1
1997 -3.5 8.2 4.7
1998 -6.5 13.3 6.8
1999 -16.8 20.0 3.2
2000 -13.9 21.2 7.3
Historically, tankers were scrapped when they became unsafe to operate or
when the cost of maintaining them at standards required by classification
societies exceeded their projected earning capacity. According to Clarkson,
between 1990 and 2000, an average of 8.8 million dwt of tankers were scrapped
each year, with an average age of 25 years. As shown in the chart above titled
"World Tanker Fleet by Age Profile and by Size", as of February 2001
approximately 86.3 million dwt, that is 29.2%, of the tanker fleet is presently
over 20 years old, and an additional 40.6 million dwt, or 13.7%, will become so
by the end of 2007.
We believe that the rate of scrapping will be accelerated as a result of
an increasing emphasis on environmental protection through legislation and
regulations, such as OPA 90, and the regulations adopted by the IMO. See
"Regulation". In recent years, there has been heightened environmental concern
evidenced by international conventions and protocols, classification society
procedures and requirements of protection and indemnity insurance in
association and charter contracts. We believe these factors have increased
demand for higher quality tanker construction, management, operation,
maintenance and repair.
OPA 90 in the United States prohibits all single-hulled tankers from
operating in U.S. waters, including in the exclusive economic zone, after
January 1, 2010. Current IMO regulations set similar standards in other parts
of the world. However, it is possible that the European Community will adopt
even stricter IMO guidelines, currently proposed by the IMO, that would require
an even faster conversion. The IMO guidelines adopted by the IMO's Marine
Environment Protection Committee in April, 2001 would, if accepted by the IMO,
require the phasing out of most non double-hulled tankers built prior to 1982
by the end of 2007. Based upon Clarkson's data, as of February 1, 2001, 92.4
million dwt of non double-hulled tonnage, or approximately 31% of the world
tanker fleet, was built in 1981 or earlier.
41
In addition, as a result of concerns about liability and negative
publicity, tanker charterers have begun to exhibit a marked preference for
modern tankers. The table below, compiled by Clarkson, shows the percentage
change in the number of charters for both old (pre-1980) and modern (post-
1990) tankers in 2000 compared with 1999:
Age Profile of Tankers Chartered in 2000 vs. 1999 (% Change)
Pre-1980 Tankers Post-1990 Tankers
---------------- -----------------
VLCC (22)% 37%
Suezmax (47)% 13%
Aframax (42)% 15%
Source: Clarkson
We believe that the combination of technical and economic obsolescence
brought about by the fleet age profile and an increasingly stringent
regulatory climate, coupled with a customer preference for younger tankers,
will result in significantly higher average annual scrapping over the next
five years than occurred during the 1990-2000 period. We believe that the
expected acceleration of scrappings has contributed to the current high
charter rates for modern tankers.
New tankers are supplied by a limited number of shipyards. We believe
that, in the short term, growth in the supply of new tankers may be
constrained by limited shipyard capacity and demand for other types of
vessels. Tanker shipbuilding capacity may increase, however, as a result of
expansion in existing shipyard capacity, shifting of shipyard production from
other vessels to tankers or the construction of new shipyards. In the past,
periods of limited supply and constant or increasing demand have led to higher
charter rates. The chart below shows the total order-book for each type of
tanker:
Forward Orderbook as of February 2001
(in millions of dwt, by year of delivery)
All tankers
(in excess of
Year Aframax Suezmax VLCC 10,000 dwt)
---- ------- ------- ----- -------------
2001 1.2 2.5 9.0 15.9
2002 3.8 3.6 12.8 23.5
2003 2.2 3.2 5.2 12.0
2004 0.0 0.5 0.0 0.6
----- ----- ----- -----
Total Orderbook 7.3 9.8 27.0 51.9
----- ----- ----- -----
Current Fleet 51.0 41.2 129.3 295.9
Orderbook as % of fleet 14.2% 23.7% 20.9% 17.6%
% of existing fleet > 20 years old 20% 29% 32% 29%
- --------
Source: Clarkson
Note: Orderbook data is based on Clarkson estimates. Shipbuilding contracts
are not always publicly reported and may be subject to revision or
cancellation.
42
U.S. Gulf Lightering Business
Lightering involves transferring crude oil from large tankers that are
unable to enter shallow-water ports fully laden to smaller tankers that
transport the cargo to the destination port. The U.S. Gulf lightering business
evolved in response to operating restrictions imposed by the region's shallow
coastline, the development of major refining centers and interstate pipeline
networks in Louisiana and Texas and the growing dependence of the United States
upon imports of crude oil. A large proportion of these imports is acquired from
long-haul sources of supply, such as the Arabian Gulf, where the need to
minimize transport costs necessitates the use of larger tankers, such as VLCCs
and ULCCs. These deep draft tankers are unable to discharge directly at U.S.
mainland ports, and must (a) lighter, (b) tranship through Caribbean storage
terminals, (c) discharge at the Louisiana Offshore Oil Port or (d) use a
combination of these methods to deliver the cargo to the mainland.
To transport oil to port by lightering, a Suezmax, VLCC or ULCC goes to
one of the six designated lightering areas off the coast of Texas, Louisiana or
Mississippi. These lightering areas are generally located approximately 50 to
60 miles from shore. There, the larger tanker is met by a lightering tanker,
generally accompanied by a support vessel carrying fenders and cargo hoses. If
sea conditions are favorable, fenders are attached to the side of one of the
two tankers, and the tankers draw alongside each other. The two tankers are
then secured, cargoes and tanks are checked, equipment is connected and pumping
is commenced. In ideal conditions, one Aframax lightering, from commencement of
fendering to completion of unmooring, takes approximately 20 hours, with as
many as four Aframax lighterings required to unload a fully laden VLCC.
The lightering business in the U.S. Gulf is characterized by close
relationships between the independent lightering operators and the oil
companies and traders who use their services. Since the introduction of the OPA
90 regulatory environment, greater emphasis has been placed on the provision of
modern, well-managed tankers that comply with the more stringent operational
requirements and safety standards.
The demand for lightering services in the U.S. Gulf depends primarily
upon the aggregate amount of crude oil delivered to the U.S. Gulf, the
proportion of the region's crude oil imports delivered by large tankers and the
relative costs and benefits of alternative methods of discharging these
tankers. Lightering rates generally command a premium over voyage rates due to
the specialized nature of the business.
43
BUSINESS
We are a leading provider of petroleum transportation services in the
Atlantic basin. We currently own or operate a fleet of 24 Aframax tankers, 21
of which are double-hulled and three of which are double-sided. We do not
operate any single-hulled tankers. We intend to have a fleet that is
exclusively double-hulled by the end of 2003, which we believe will likely make
us the first major crude oil tanker operator to achieve this milestone. We have
contracted for the newbuilding of five Aframax tankers and two VLCCs, which
will increase the cargo capacity we own or operate from 2.4 million deadweight
tons to 3.2 million deadweight tons, net of double-sided tankers we intend to
replace.
Prior to this offering, we have been wholly owned by NOL. Since year-end
2000, we hold all of NOL's crude oil-tanker assets and operate all of NOL's
crude oil-tanker business. After the global offering is completed, NOL will own
73.4% of our outstanding common shares, or 70.6% if the underwriters' over-
allotment option is exercised in full.
We have one of the youngest tanker fleets in the world. As of May 1,
2001, our tankers have an average age of 6.5 years, compared with the industry
average for Aframax tankers of 11.8 years and an average age for the world
tanker fleet of 14.1 years as indicated by Clarkson data, and an expected
useful life of 22 to 25 years. We believe that our young fleet, safety record
and reputation among our major oil customers for reliability give us a strong
competitive profile. This is particularly true because an increasingly
stringent regulatory environment is accelerating the obsolescence of older,
lower quality tankers in the markets in which we operate.
In recent years, we have been increasing our presence beyond the U.S.
Gulf and the Caribbean to the North Sea and Mediterranean region and currently
intend to expand opportunistically in these markets. We will continue to focus
on our Aframax business; however, we are planning selective expansion of our
fleet into larger tankers, such as VLCC and Suezmax tankers. We intend to use
these larger tankers to offer our customers a wider variety of petroleum
transportation services, including a long-haul port-to-port capability for
U.S.-bound cargoes.
Tankers are chartered under one of three different charter arrangements:
. Bareboat charters involve hiring or leasing out tankers for long-term
periods under which the charterer provides the crew and is
responsible for the operating and voyage expenses.
. Time charters involve hiring out tankers for medium to long-term
periods. The tanker owner is paid on a per-day basis and is
responsible for providing the crew and paying operating expenses. The
charterer is responsible for paying the voyage expenses except for
certain costs such as loss of time arising from breakdowns and
routine maintenance.
. Voyage charters are contracts in which the charterer pays for the use
of the tanker's cargo space on a single or multiple-voyage basis. The
tanker owner is responsible for paying both operating and voyage
expenses.
We charter tankers out to our customers under time charters and voyage
charters. We do not charter tankers out under bareboat charters.
We acquire and hold tankers under one of three arrangements:
. We own 12 tankers directly or through subsidiaries, having purchased
them under bank financing agreements or with cash from operations.
. We charter in seven tankers under long-term 15-year bareboat
charters. These charters include an option to purchase the tanker at
any time during the charter period at a fixed price.
. We charter in two tankers under five-year time charters, two tankers
under three-year time charters and one tanker under a five-year
bareboat charter. We have no options to purchase these tankers.
44
Our Key Strengths
We believe that our principal strengths include the following:
Diverse revenue stream
The diversity of our business, which includes lightering, voyage and time
charter operations, helps us to reduce our exposure to downturns and
fluctuations in any one of our three service areas. We believe we are the only
independent operator involved in all three of our major service areas. Our 12-
year time charters with a wholly owned subsidiary of TOSCO Corporation provide
us with a steady revenue stream that represented approximately 12.3% of our
gross revenues in 2000 and 11.8% of our gross revenues in the three months
ended March 31, 2001. In addition, the critical mass of our fleet allows us
readily to allocate our tankers between our lightering and voyage operations,
depending on the relative demand and rates offered by each business. Our
diverse operations also allow us to reduce the time that our tankers spend
empty on the return segment of charter assignments (referred to as ballasting
time). Our ballasting time accounted for only 21.4% of our total charter time
in 2000 and 20.8% in 1999 (in each case, excluding the four tankers employed on
long-term time charters). Our charter rates also benefit from our strong
customer relationships and our reputation for high-quality, timely service. Our
diverse revenue sources help to minimize fluctuations in our revenues, but they
cannot eliminate cyclical variations in the rates paid for tanker services
generally in the market.
High fleet utilization rate
We have consistently been able to maintain high utilization rates. Over
the past five years, our average fleet utilization rate was 97.6%. There are
three primary reasons for this result:
. The similarity and the critical fleet mass of our Aframax tankers
provide us the flexibility and efficiency to allocate the right ship
for the right cargo assignment on a timely basis. This flexibility
allows us to reduce our waiting time between charter assignments.
. Our younger fleet requires less downtime for maintenance and repair
than would an older fleet.
. Our strong network of customer relationships generates consistent
levels of repeat business.
Our calculations of utilization rates are based on the number of days available
for revenue producing voyages, which excludes only dry-docking and repair time.
Low operating expenses
We believe that we generally are able to maintain low operating expenses
that are competitive with other operators. Newer tankers such as ours tend to
have higher fuel efficiencies and require less frequent repairs. The size of
our fleet and the similarity of our tankers also helps to reduce costs since we
are able to purchase parts and supplies in bulk and obtain discounts. The
similarity of our tankers also results in more productive and cost-effective
crews, since training and experience gained on any of our tankers easily
transfers to any of our other tankers.
45
The table below provides a comparison of the age of our tankers with the
age of the world Aframax fleet, based on number of vessels. While we cannot
assure you that the age of a fleet will always correlate to its average
operating expenses, we believe that younger fleets generally benefit from a
cost advantage.
Aframax Fleet Age Distribution
(as of May 1, 2001)
Percentage
20 years Average double
Percentage 0-4 years 5-9 years 10-14 years 15-19 years or more Fleet size age hulled
- ---------- --------- --------- ----------- ----------- -------- ---------- ------- ----------
AET 50% 32% 18% 0% 0% 22 6.5 82%
World Aframax Fleet 25% 21% 21% 10% 22% 531 11.8 48%
- --------
Source: Company fleet data and Clarkson
The strengths described above have resulted in average TCE rates that are
generally superior to averages indicated by Clarkson data. The following table
compares our annual TCE rates to average TCE rates for Aframax tankers as
calculated by Clarkson from 1996 to 2000. Our TCE rates presented in this table
have been adjusted to reflect the Clarkson method of calculation, which is
based on gross revenues before deduction of brokerage commissions and assumes
100% utilization. Clarkson data are also adjusted one month forward, to adjust
for the fact that Clarkson calculates TCE rates based on the date that
chartering arrangements are entered into, but we calculate TCE rates based on
the date of completion of each charter.
Adjusted TCE Annual Averages
(in dollars per day, except percentages)
Average
Percentage
1996 1997 1998 1999 2000 Difference
------ ------ ------ ------ ------ ----------
Clarkson Aframax Average 17,095 21,016 15,921 13,170 30,448 --
Our Fleet 22,222 24,082 20,786 17,347 29,792 --
Percentage Difference 30% 14.6% 30.4% 31.8% (2.2)% 20.9%
- --------
Source: Company data and Clarkson
Because of our mix of diversified revenue sources, this trend of above-
average TCE rates is accentuated in low and stable rate environments. In 2000,
as annual average spot rates moved sharply upward to reach the highest level
since 1990 (when Clarkson first began tracking TCE rates), our TCE rates fell
slightly behind the Clarkson Aframax average, as our contractual lightering
rates slightly trailed the rapidly rising spot rates.
In the first quarter of 2001, tanker spot rates remained strong, and our
adjusted average TCE rate of $36,260 per day was lower than the Clarkson
Aframax average, which recorded a sharp increase to $46,288 per day. Our TCE
rates were lower than the Clarkson average, primarily due to sharp rate
increases that affected several of the routes measured by Clarkson more than
they affected our routes. In addition, many of our fixed-rate lightering
contracts were renegotiated to reflect the higher market spot rates during the
second half of the quarter. By May 2001, tanker TCE rates, as measured by the
unadjusted Clarkson Aframax average for that month, had fallen to levels that
were slightly below the unadjusted Clarkson Aframax average for 2000.
Well positioned to benefit from more stringent environmental regulations
We believe that the composition of our fleet provides us with significant
competitive advantages as stricter environmental regulations in our target
markets accelerate the obsolescence of older, lower quality tankers. As of May
1, 2001, 82% of our fleet was double-hulled compared to 48% for the world
Aframax tanker fleet, and we expect to have an exclusively double hulled fleet
by the end of 2003. In particular, OPA 90 prohibits single-hulled tankers from
operating in U.S. waters, including the exclusive economic zone, after January
1, 2010, and the IMO regulations adopted by the Marine Environment Protection
Committee in April 2001, if accepted by the IMO, would set similar standards
with deadlines between 2003 and 2015 for single-hulled tankers in other parts
of the world, depending on the category and age of the vessel.
46
In comparison with our competitors, who generally have a higher
percentage of older, single-hulled tankers, the quality of our fleet provides
the following key advantages:
. Our customers are coming under increasing pressure to rely
exclusively on double-hulled tankers, even before implementation of
proposed new environmental regulations, and may therefore be more
inclined to use our services rather than those of our competitors.
. The need for our competitors with a higher percentage of single-
hulled tankers to replace older, single-hulled tankers may limit
their ability to increase capacity.
. Our early conversion to double-hulled tankers will help us to avoid
excessive capital expenditures compared with other fleet operators
who may be forced to scrap and replace tankers when prices of tankers
have risen under the pressure of regulatory deadlines for fleet
conversion.
Strong network of customer relationships and reputation for quality service
We have established a strong network of customer relationships and a
reputation for safe and reliable transportation, which we believe has led to
significant levels of repeat business. Our top five customers for the past
three years have included some of the largest oil companies operating in the
Atlantic basin, including:
. A wholly owned subsidiary of TOSCO Corporation, which accounted for
12.3% of gross revenues in 2000;
. Koch Petroleum Group, which accounted for 9.0%;
. Lyondell Citgo Company Limited, which accounted for 8.8%;
. Equiva Trading International (a trading company formed by Royal Dutch
Shell, Texaco Inc. and Saudi Refining Inc.), which accounted for
7.1%; and
. Exxon Mobil Corporation, which accounted for 6.8%.
We have recently experienced increases in business from other large oil
companies that have also been long-standing customers, including BP Amoco,
TotalElfFina and Shell (none of which accounted for more than 10% of gross
revenues in 2000). We believe that major tanker customers and charterers are
increasingly making transportation decisions based on the proven track record
of the transporter, due to an increased focus on timeliness and environmental
safety. Our strong environmental safety record, as well as the age and quality
of our fleet and our record of timely delivery, are of critical importance to
our customers.
Position in the specialized lightering business
For the last five years, we have been one of only three independent
lightering companies with substantial operations in the U.S. Gulf. We have
performed over 1,370 lighterings in the U.S. Gulf over the past five years. We
are the only major tanker company in the Atlantic basin to be involved in both
significant lightering and voyage chartering operations. Lightering rates
generally command a premium over voyage rates in low and stable markets.
Historically, lightering has provided us with a reliable stream of income.
We believe that there are significant barriers to entry into the U.S.
Gulf lightering business, including the need for customized infrastructure,
specialized expertise and the preference of customers for the reliability
offered by existing providers of their lightering services. Our expertise and
reliability result from our seven years of lightering in the U.S. Gulf and the
extensive training of our shipboard crew. Also, for environmental and other
safety reasons, we believe that most oil companies prefer to conduct their
lightering business with companies that they already know well.
47
Strong presence in the Atlantic basin
We are one of the leading independent transporters of petroleum in the
Atlantic basin and we believe that we have one of the larger Aframax fleets in
the region. In 2000, we transported or lightered approximately 463 million
barrels of crude oil in the Atlantic basin, including approximately 411 million
barrels that were delivered to the United States, or approximately 13% of total
U.S. oil imports. We are also active in the U.S.-bound Caribbean and Mexican
markets, the intra-European market, the Mediterranean region and trans-Atlantic
trade. By focusing on the Atlantic basin, we have developed an established
market presence in this region, facilitating comprehensive coverage of our
customers' requirements and providing a base for efficient operation and a high
degree of capacity utilization.
Experienced management team
Our senior management team is led by Joseph Kwok, our President and CEO,
and includes Vice Presidents Captain Raymond Ambrose for marketing, Captain
Ernesto Violetta for operations and Gregory McGrath for finance. These key
individuals each have in excess of 20 years of experience in the oil and tanker
industries. Our management team has developed close working relationships with
the key personnel at major oil companies, traders and refiners that help us
maintain strong customer relationships.
Our Business Strategy
Our objective is to enhance our leadership position as a premium provider
of quality petroleum transportation services. Specifically, we are aggressively
pursuing the following strategies for achieving this objective:
Selectively grow our fleet to provide our customers with a long-haul port-
to-port capability for U.S.-bound cargo
We are seeking to develop capacity as a long-haul port-to-port petroleum
transportation provider for U.S.-bound cargoes. To implement this strategy, we
have contracted for the newbuilding of two VLCCs scheduled for delivery in
February and September 2002. We are exploring opportunities to acquire Suezmax
or additional VLCC or other tankers. Each of these long-distance carriers,
combined with our existing Aframax fleet, will enable us to offer long-haul
transportation for U.S.-bound routes that we do not currently service, such as
from North Africa and the Arabian Gulf and West Africa to the U.S. and Europe.
We intend to market these tankers to our existing customers on the basis of
service, quality and integration with our lightering business. We believe that
the operating efficiencies that we can achieve by integrating these businesses
will lower costs, enhance our reputation among our customers and strengthen our
competitive position.
Opportunistically expand into related markets, particularly the North Sea
and the Mediterranean region
We seek to identify expansion opportunities in new geographic areas and
related markets. For example, we are considering expanding our existing
presence in the European market to take advantage of additional voyage-charter
opportunities there. Suezmax and Aframax tankers are particularly well suited
to, and have traditionally transported significant amounts of crude oil within,
the North Sea region. We believe that we can also use a portion of our existing
Aframax fleet to operate competitively in the Black Sea and Mediterranean
markets, where we do not currently have a significant presence. We could use
any Suezmax or additional VLCC or other tankers that we acquire in this region
as well. We believe these markets provide growth opportunities that we can
exploit using our experience in the Atlantic basin. We are also exploring
additional opportunities in the worldwide lightering market, where we have a
competitive advantage because of our existing expertise in U.S. Gulf lightering
operations and strong customer relationships.
48
Continue to maximize fleet utilization and TCE rates through a balanced
service mix between lightering and voyage chartering
We intend to continue to maximize fleet utilization and TCE rates by
actively managing our tankers through a combination of lightering and
chartering operations. Our high utilization rates increase our average TCE
rates. Our average TCE rate from 1996 to 2000 was 21.0% higher than the
Clarkson Aframax average for the same period as estimated by Clarkson. We
believe this strategy will enable us to continue our record of achieving long-
term profitability.
Capitalize on our reputation for high-quality service and safety
We believe that the major oil companies, traders and refiners we
principally service consider factors other than cost when chartering a tanker,
including the tanker operator's reputation. We believe that we have
established a reputation in the international tanker industry for maintaining
high standards of performance, reliability and safety. We intend to augment
this reputation by replacing our double-sided tankers with new double-hulled
tankers by the end of 2003. We believe that we will likely be the first major
crude oil tanker company in either the Atlantic or Pacific basin to have an
exclusively double-hulled fleet, which should enhance our reputation as a
premium operator and give us a strong competitive profile. We believe that our
growth plan will help us capitalize on our reputation to attract new customers
and to increase revenue from our existing customers.
Our Fleet
We currently own or operate 24 Aframax tankers, 21 of which are double-
hulled and three of which are double-sided. All of our tankers are registered
under the Singapore flag except for the Eagle Lyra, the Glenross, the Lochness
and the Genmar George, which are registered under the Liberian flag, and the
Bunga Kelana Dua, which is registered under the Malaysian flag.
We acquire and hold tankers under one of three arrangements:
. full ownership, either directly or through majority-owned
subsidiaries;
. long-term bareboat charters that typically run for periods up to 15
years and include an option to purchase the tanker at any time during
the charter period at a fixed price; and
. time charters where we have no option to purchase the tanker at the
end of the lease period.
49
The following table sets forth certain information with respect to our
current fleet of Aframax tankers, in order of age.
Our Current Tanker Fleet
Deadweight Year
Tanker tonnage Hull Type Built Shipyard Ownership interest
- ------ ---------- ------------- ----- --------------------- --------------------
Eagle
Atlanta 107,160 double-hulled 1999 Imabari (Japan) bareboat charter (1)
Eagle
Anaheim 107,160 double-hulled 1999 Imabari (Japan) bareboat charter (1)
Eagle
Augusta 105,345 double-hulled 1999 Samsung (Korea) bareboat charter (2)
Eagle
Albany 107,160 double-hulled 1998 Imabari (Japan) bareboat charter (2)
Eagle
Austin 105,426 double-hulled 1998 Samsung (Korea) bareboat charter (2)
Eagle
Charlotte 107,169 double-hulled 1997 Imabari (Japan) bareboat charter (3)
Eagle
Columbus 107,166 double-hulled 1997 Imabari (Japan) bareboat charter (3)
Bunga
Kelana Dua 105,967 double-hulled 1997 Hyundai (Korea) time charter (8)
Eagle
Birmingham 99,343 double-hulled 1997 Samsung (Korea) 100%
Eagle
Boston 99,328 double-hulled 1996 Samsung (Korea) 100%
Eagle
Baltimore 99,405 double-hulled 1996 Samsung (Korea) 100%
Eagle
Beaumont 99,448 double-hulled 1996 Samsung (Korea) 100%
Lochness 90,679 double-hulled 1994 Stocznia (Poland) time charter (4)
Eagle Otome 95,663 double-hulled 1994 Imabari (Japan) 65% (5)
Eagle
Subaru 95,675 double-hulled 1994 Imabari (Japan) 65% (6)
Eagle
Auriga 102,352 double-hulled 1993 Shin Kurushima (Japan) 65% (7)
Eagle Lyra 97,047 double-hulled 1993 Samsung (Korea) bareboat charter (8)
Glenross 90,607 double-hulled 1993 Stocznia (Poland) time charter (4)
Eagle
Corona 95,634 double-hulled 1993 Imabari (Japan) 100%
Eagle
Carina 95,639 double-hulled 1992 Imabari (Japan) 100%
Eagle
Centaurus 95,644 double-hulled 1992 Imabari (Japan) 100%
Genmar
George 94,995 double-sided 1989 Imabari (Japan) time charter (8)
Eagle
Memphis 104,385 double-sided 1987 Hyundai (Korea) 100%
Eagle
Milwaukee 104,385 double-sided 1987 Hyundai (Korea) 100%
- --------
(1) Trilithon Shipping Pte Ltd (our 65%-owned subsidiary) bareboat charters in
both the Eagle Atlanta and the Eagle Anaheim for 15-year periods expiring
2014. We in turn bareboat-charter these tankers for the same period from
Trilithon. Under each charter, Trilithon has an option to purchase the
tanker at any time during the charter period.
(2) We bareboat-charter these tankers in for 15-year periods expiring in 2013
or 2014. Under each charter we have an option to purchase the tanker at any
time during the charter period.
(3) We bareboat-charter these tankers in for 15-year periods. Under each
charter, the owner has the right to sell the tanker at any time during the
charter period, subject to our right of first refusal to buy the tanker at
the selling price. We have an option to purchase the tanker at any time
during the charter period.
(4) We time-charter these tankers in from third parties for three-year periods
expiring 2004. We have no option to purchase the tankers at the expiration
of the charters.
(5) We time-charter the Eagle Otome in from our 65%-owned subsidiary Trilith
Shipping Pte Ltd.
(6) We time-charter the Eagle Subaru in from our 65%-owned joint venture,
Crystal Shipowning Co. Pte Ltd, or Crystal, which time charters the vessel
from our 65%-owned subsidiary Trilithon.
(7) Crystal owns this tanker.
(8) We bareboat or time-charter these tankers in from third parties for five-
year periods expiring 2003. We have no option to purchase these tankers at
the expiration of the charters.
50
Three of our vessels are owned through 65%-owned subsidiaries, as
indicated in the preceding table. In each case, the remaining 35% of each
subsidiary is held by Mitsui & Co. or one of its affiliates. Each of these
subsidiaries is incorporated in Singapore. In the case of our subsidiaries
Trilith and Trilithon, we control these subsidiaries through our control of 65%
of votes of equityholders. In the case of Crystal, an affiliate of Mitsui
possesses, through its contractual arrangements with us, significant
participating rights in the management of Crystal that require us to treat our
interest in Crystal as an equity investment rather than as a consolidated
subsidiary.
All of our Aframax tankers are substantially identical in design and
function, but our modern tankers benefit from stronger engines and higher
deadweight tonnage capacities. Our tankers are largely interchangeable,
providing scheduling flexibility and greater economies of scale. Other benefits
of owning or operating substantially identical tankers include similarities in
technical specifications, operating procedures and spare parts. These
advantages can generate operating efficiencies.
Expansion of the Fleet
To augment our existing fleet, we have contracted for:
. the newbuilding of two modern double-hulled VLCCs, each of 318,000
dwt, which we will use for long-haul petroleum transportation; and
. the newbuilding of five modern double-hulled Aframax tankers, each of
107,000 dwt, three of which we will use to replace the three non-
double-hulled Aframax tankers currently in our fleet.
The following table sets forth certain information, including expected
delivery dates, in respect of tankers we have contracted to purchase or time
charter:
Deadweight Expected Ownership
Tanker tonnage Hull Type Delivery Date Shipyard interest
------- ---------- ------------- -------------- --------------- ---------
VLCC 318,000 double-hulled February 2002 Hyundai (Korea) 100%
VLCC 318,000 double-hulled September 2002 Hyundai (Korea) 100%
Aframax 107,000 double-hulled October 2002 Imabari (Japan) 100%
Aframax 107,000 double-hulled March 2003 Imabari (Japan) 100%
Aframax 107,000 double-hulled May 2003 Imabari (Japan) 100%
Aframax 107,000 double-hulled August 2003 Imabari (Japan) 100%
Aframax 107,000 double-hulled September 2003 Imabari (Japan) 100%
We intend to monitor opportunities in the tanker industry and may from
time to time pursue opportunities to acquire additional tankers or
complementary assets or businesses. We intend to acquire and operate only those
tankers that meet our strict standards, including criteria with respect to age,
tanker design and technology and shipbuilder. These criteria are intended to
maintain the overall quality and standard of our fleet of tankers.
Operation of Tankers
We offer our customers three principal services: (a) lightering in the
U.S. Gulf; (b) voyage chartering and (c) long-term time chartering.
51
U.S. Gulf Lightering
We have been engaged in the lightering business in the U.S. Gulf for
major oil companies since 1994. We conduct our lightering business on both a
contractual and a spot basis. We currently devote about two-thirds of our
tankers (exclusive of the four tankers which we charter out to Bayway Refining
Company) to the Caribbean voyage and U.S. Gulf lightering businesses. We
believe that this allocation provides us with a competitive advantage, allowing
us to maximize fleet utilization and shift tankers between the lightering and
voyage markets more easily than our principal competitors in the U.S. Gulf
lightering business, which operate fewer tankers. We may also charter
additional tankers in from time to time on a voyage-charter or time-charter
basis for use in our lightering operations.
Voyage Charters
The tankers utilized in our lightering business are also employed to a
substantial extent in voyage charter activities. We conduct our voyaging
business on both a contractual and a spot basis. We use primarily the tankers
in our own fleet, but may charter additional tankers for use in our voyage
business to take advantage of market opportunities and meet customer demand.
Our voyage charters are arranged by our marketing personnel directly with
customers or through brokers. Most of our charters are for voyages from ports
in Latin America to ports along the U.S. Gulf or the U.S. Atlantic Coast. In
addition, we from time to time have as many as five tankers operating on voyage
charters in the North Sea and Mediterranean regions as well as from these
regions to the U.S. Atlantic Coast and Latin America. We intend to continue
selectively exploiting voyage-charter opportunities in the Atlantic basin in
the future.
Long-Term Time Charters
The tankers we time charter-out provide regular fixed revenues that
balance the inherently cyclical nature of revenues from our voyage-charter and
lightering businesses. We may expand our long-term time charter operations from
time to time by entering into additional time charter contracts for modern
tankers with major oil companies, traders or refiners.
Four of our tankers are on separate 12-year time charters to a subsidiary
of TOSCO until 2008 or 2009. Under the terms of each of these long-term time
charters, we are paid monthly in advance, on a per-day basis for the length of
the charter. As is typically the case with a time charter, we are responsible
for paying all running expenses, while the charterer is responsible for paying
voyage-related operating expenses. In the event the value of the chartered
tanker falls outside a specified range, the charters provide each party with
the right to call for the sale of the tanker, with the other party having the
right of first refusal.
Technical Management
Each of our tankers is manned by officers and crew supplied by Neptune
Shipmanagement, an affiliated company wholly owned by NOL, except for the Bunga
Kelana Dua, the Genmar George, the Glenross and the Lochness, which we time-
charter from third parties that manage the tankers. Neptune Shipmanagement
provides our management and maintenance services under separate, but
substantially similar, technical management agreements for each vessel. These
services include:
. maintaining, repairing and arranging for the repair of the tankers;
. arranging and paying wages for qualified crew;
. arranging for and conducting shipyard and port supervision and
inspections;
. storing and equipping our tankers;
. complying with licensing and certification requirements, including
regular inspections of our tankers and ensuring that they meet the
regulations set forth by classification societies and the standards
required by our customers;
52
. inspection of newbuilding construction; and
. prevention and containment of oil spills.
Under the terms of the technical management agreements, we pay Neptune
Shipmanagement a fixed fee monthly in advance which covers expenses such as
crew, stores, repairs and maintenance expenses and a ship management fee. We
pay, or if Neptune Shipmanagement pays we reimburse Neptune Shipmanagement on a
cost-recovery basis, for all expenses relating to dry-docking maintenance and
repairs, spare parts and other related expenses.
We periodically review Neptune Shipmanagement's fees against those of
other technical ship managers. We believe that this enables us to maintain ship
management fees that are in line with those prevailing in the industry. We
believe that the services we obtain from Neptune Shipmanagement are at
commercially reasonable rates and are as at least favorable as rates that could
have been negotiated with an unaffiliated party.
Our technical management agreements with Neptune Shipmanagement are
subject to review and renewal annually. We anticipate that we will enter into
similar agreements with Neptune Shipmanagement to provide for the operation and
maintenance of any other tankers that we acquire. If, contrary to our current
expectations, any of the technical management agreements were to be terminated
or not to be renewed, we believe that we could enter into replacement
management agreements with third parties on substantially similar terms,
although we can give no assurance that we would be able to obtain comparable
rates.
Neptune Shipmanagement has obtained a certificate of compliance with ISO
9002 standards. ISO 9002 is a series of international standards for quality
systems that is commonly used in the shipping industry and that is administered
by the Independent Standards Organization.
Customers
Our customers include oil companies, refiners, traders and other tanker
operators. We believe that major oil companies will increasingly make
transportation decisions based on the proven track record of the tanker
company, due to an increased focus on timeliness and environmental safety. Many
of our customers are repeat customers as a result of our service and long-
standing business relationships.
Our customers include some of the major oil companies operating in the
Atlantic basin. In the past two years, our top five customers have been:
1999 2000
- -------------------------------------- --------------------------------------------
Customer % of Revenues Customer % of Revenues
- ----------------------- ------------- ------------------------------ -------------
Bayway Refining Company 18.8% Bayway Refining Company 12.3%
Koch Petroleum Group 14.3 Koch Petroleum Group 9.0
Exxon Corporation 7.1 Lyondell Citgo Company Limited 8.8
Equiva Trading
International 6.5 Equiva Trading International 7.1
Mobil Corporation 3.6 Exxon Mobil Corporation 6.8
Our top five customers accounted for 44.0% of our gross revenues in 2000
and 50.2% of our gross revenues in 1999. Bayway Refining Company, a wholly
owned subsidiary of TOSCO Corporation, accounted for 12.3% of our gross
revenues in 2000 and 18.8% of our gross revenues in 1999. This customer
operates four of our tankers on time-charter through 2008 or 2009. One other
customer, Koch Petroleum Group, accounted for 14.3% of our gross revenues in
1999. No other customer accounted for over 10% of our revenues in 1999 or 2000.
In 2000, our gross revenues by domicile of customers were derived 73.7%
from the Americas, 24.9% from Europe and 1.4% from Asia and the Middle East.
53
Competition
Seaborne crude oil transportation is provided by two main types of
operators: fleets owned by independent tanker companies and fleets of oil
companies (both private and state-owned). Many oil companies and other oil
trading companies, the primary charterers of the tankers we own, also operate
their own tankers and transport oil for themselves and third-party charterers
in direct competition with independent owners and operators. Competition for
charters is based upon price; the size, age and condition of the tanker; the
quality and reputation of the tanker's operator and the tanker's location.
In the Aframax market, we compete principally with other Aframax owners
for voyage and time charters, principally on the basis of the quality and size
of our fleet and crew and on our ability to provide prompt and customer-
friendly service. However, competition in the Aframax market is also affected
by the availability of tankers of other sizes. Suezmax, O/B/O and Panamax
tankers can compete for many of the same charters for which we compete. Because
ULCCs and VLCCs cannot enter the ports we serve due to their large size, they
rarely compete directly with our tankers for specific charters. Other large
operators of Aframax tankers in the Atlantic basin include Teekay Shipping
Corporation, General Maritime Corporation, PDV Marina and Overseas Shipholding
Group, Inc. There are also numerous, smaller tanker operators in the Atlantic
basin.
Competition in the U.S. Gulf lightering business is more limited because
of the specialized equipment and expertise required, although other competitors
could potentially enter the market by making the necessary investments. A
majority of the lightered cargoes carried in the U.S. Gulf in 2000 were carried
by three independent lightering companies, Skaugen PetroTrans Inc., Marine
Transport Lines Petrolink, or MTLP, and us, while the remainder were carried
principally by the fleets of oil majors carrying cargoes to their own
refineries. In 2000, we performed 366 lighterings. Over the past five years, we
performed 1,373 lighterings in the U.S. Gulf. However, we are unable to
calculate our market share with precision because of inadequate industry-wide
data.
We believe that competition in the U.S. Gulf lightering business, to a
greater extent than in other segments of the tanker industry, depends upon
long-term customer relationships, reputation for quality and safety and
possession of a fleet of sufficient size to meet customer requirements rapidly
and flexibly. As liabilities for oil pollution have increased over recent
years, risk containment has become a more important factor for charterers in
selecting tankers and tanker operators. Accordingly, the criteria for selecting
among competing tanker operators, which include age and condition of an
operator's tankers and the overall quality of a tanker owner's operations,
standards of service and reputation, have increased in importance.
The lightering industry generally also faces competition from alternative
methods of delivering crude oil shipments to port. VLCCs can, to a certain
extent, discharge all or some of their crude oil at the Louisiana Offshore Oil
Port, known as LOOP, which is a 19-mile long underwater pipeline connecting
Louisiana with offshore tankers. The LOOP operated at 92.0% of capacity in
2000. Large crude carriers can also ship some of their cargo to storage
terminals in the Caribbean, from where it is shipped to the United States.
We expect to take delivery of two newly built VLCCs in February and
September 2002 and are exploring opportunities to acquire Suezmax or additional
VLCC or other tankers. These acquisitions, combined with our lightering
business, will help us provide our customers with a long-haul port-to-port
capability for U.S.-bound cargoes. We believe that we are able to achieve
operating efficiencies by integrating the VLCCs and any other tankers we
acquire with our existing Aframax fleet.
Employees and Crew
As of December 31, 2000, we had 27 employees. Historically, we have used
NOL staff for certain support services, including legal, accounting and
financing activities. NOL pays its staff and charges us a pro-rata portion of
NOL's cost of providing these services. We anticipate that in future years we
will hire employees directly to perform services currently provided by NOL. As
of December 31, 1999 and 1998,
54
respectively, we had 26 and 24 employees. All of our employees are based in our
offices in New Jersey, Houston and London. Our Houston office supports our
operations in the U.S. Gulf and elsewhere in the Americas and conducts our
marketing and operating activities. Our other offices, including our principal
executive office in New Jersey, market voyage and time charters directly with
our customers.
The tankers comprising our company's fleet (other than the Genmar George
and the Bunga Kelana Dua) are manned by officers and crew employed by Neptune
Shipmanagement. The normal crew of an Aframax tanker consists of 22 to 24
seamen, including deck officers and crew as well as engineers and engine crew.
Most of the officers and crew manning our fleet have been trained by Neptune
Shipmanagement and have several years of experience on tankers in our fleet or
tankers owned by our parent, NOL.
Inspection by a Classification Society
Every commercial seagoing tanker must be "classed" by a classification
society. The classification society certifies that the tanker is "in class",
signifying that the tanker has been built and maintained in accordance with the
rules of the classification society and complies with applicable rules and
regulations of the tanker's country of registry and the international
conventions of which that country is a member. In addition, every commercial
tanker's hull and machinery is evaluated by a classification society authorized
by its country of registry. All of our tankers have been certified as being "in
class" by Det Norske Veritas, the American Bureau of Shipping, Nippon Kaiji
Kyokai or Lloyd's Register of Shipping. Each of these classification societies
is a member of the International Association of Classification Societies.
Each tanker is inspected by a surveyor of the classification society in
three surveys of varying frequency and thoroughness: every year for the annual
survey, every two to three years for the intermediate survey and every four to
five years for the special survey. Tankers may be required, as part of the
intermediate survey process, to be dry-docked every 24 to 30 months for
inspection of the underwater portions of the tanker and for necessary repair
related to that inspection. Special surveys always require dry-docking.
Insurance underwriters make it a condition of insurance coverage for
tankers to be "in class". In addition to the classification inspections, many
of our customers regularly inspect our tankers as a precondition to chartering
voyages on those tankers. Also, local port authorities at any port at which our
tankers call may, without prior notice, inspect our tankers to ensure that we
have the necessary safety certifications to operate in that port's waters.
Risk of Loss and Insurance
Our business is affected by a number of risks, including:
. mechanical failure of the tankers;
. collisions and groundings;
. property loss to the tankers;
. cargo loss or damage;
. business interruption due to political circumstances in foreign
countries, hostilities and labor strikes;
. catastrophic marine disaster, including oil spills and other
environmental mishaps; and
. the liabilities arising from owning and operating tankers in
international trade.
55
We believe that we have arranged for insurance coverage adequate to
protect against the accident-related risks involved in the conduct of our
business and risks of liability for environmental damage and pollution,
consistent with industry practice. We cannot assure you, however, that all
risks are adequately insured against, that any particular claims will be paid
or that we will be able to procure adequate insurance coverage at commercially
reasonable rates in the future. We are not insured against the loss of any of
our key personnel.
We currently obtain insurance coverage under group policies negotiated by
NOL. We believe this arrangement enables us, and other members of the NOL
group, to obtain insurance coverage on more competitive terms due to the
economies of bulk purchasing. Under this arrangement, our future insurance
expenses and coverage may be affected by NOL's future claims. In addition,
while we believe that we and NOL will continue with this arrangement after the
global offering, NOL has no obligation to do so. If we do not obtain insurance
with NOL, we will have to obtain insurance on our own or through similar
arrangements with other shipping companies. We may not be able to do so at
comparable rates.
Our hull and machinery insurance covers risks of actual or constructive
loss from collision, fire, grounding and engine breakdown up to the higher of
the market value or the book value of our tankers. Our war-risks insurance
covers risks of confiscation, seizure, capture, vandalism, sabotage and other
war-related risks. Our freight, demurrage and defense insurance covers the cost
of legal expenses for contract disputes involving our tanker charters. While
some tanker owners and operators obtain loss-of-hire insurance covering the
loss of revenue during extended tanker off-hire periods, several tanker
operators, including us, do not have this type of coverage. We believe that,
given our diversified operations and high utilization, this type of coverage is
not economical and is of limited value to us.
Our protection and indemnity insurance covers third-party liabilities and
other related expenses from, among other things, injury or death of crew,
passengers and other third parties, claims arising from collisions, damage to
cargo, damage to third-party property, and pollution arising from oil or other
substances. Our current protection and indemnity insurance coverage for
pollution is $1 billion per tanker per incident and is provided by mutual
protection and indemnity, or P&I, associations. Each of the tankers currently
in our fleet is entered in a P&I association that is a member of the
International Group of P&I mutual assurance associations. The 14 P&I
associations that comprise the International Group insure approximately 90% of
the world's commercial tonnage and have entered into a pooling agreement to
reinsure each association's liabilities. Each P&I association has capped its
exposure to this pooling agreement at approximately $4.3 billion. As a member
of P&I associations, which are members of the International Group, we are
subject to calls payable to the associations based on our claim records, as
well as the claim records of all other members of the individual associations
and members of the pool of P&I associations comprising the International Group.
Properties
We lease approximately 1,870 square feet of office space for our
principal executive office in New Jersey, approximately 4,886 square feet of
office space in Houston, Texas, and approximately 300 square feet of office
space in London. We own approximately 6.7 acres of land in Galveston, Texas,
which house our lightering support vessels and equipment. Our Galveston
property is not subject to any liens.
Legal Proceedings
The nature of our business exposes us to the risk of lawsuits for damages
or penalties relating to, among other things, personal injury, property,
casualty and environmental contamination. As of the date of this prospectus, we
are not party to any proceedings that are or could reasonably be expected to be
materially adverse to our business, financial condition or results of
operations.
56
REGULATION
Government regulation significantly affects the ownership and operation
of our tankers. Our tankers are subject to international conventions, national,
state and local laws and regulations in force in the countries in which they
operate as well as in Singapore or other country of their registration.
Although we believe that we have a strong record of compliance with applicable
environmental regulations, we cannot predict the ultimate cost of complying
with these requirements, or the impact of these requirements on the resale
value or useful lives of our tankers. Various governmental and quasi-
governmental agencies require us to obtain permits, licenses and certificates
for the operation of our tankers. While we believe that we are substantially in
compliance with applicable environmental and regulatory laws and have all
permits, licenses and certificates necessary for the conduct of our operations,
future non-compliance or failure to maintain necessary permits or approvals
could require us to incur substantial costs or temporarily suspend operation of
one or more of our tankers.
We maintain operating standards for all of our tankers that emphasize
operational safety, quality maintenance, continuous training of our crews and
officers, care for the environment and compliance with U.S. and international
regulations. Our tankers are subject to both scheduled and unscheduled
inspections by a variety of governmental and private entities, each of which
may have unique requirements. These entities include the local port authorities
(U.S. Coast Guard, harbor master or equivalent), classification societies, flag
state administration (country of registry) and charterers, particularly
terminal operators and oil companies.
U.S. Environmental Regulation and Liability
The U.S. Oil Pollution Act of 1990 and U.S. State Regulation
The U.S. Oil Pollution Act of 1990, or OPA 90, affects all tankers
trading in U.S. waters including the exclusive economic zone extending 200
miles seaward. OPA 90 sets forth various technical and operating requirements
for tankers operating in U.S. waters. Existing single-hulled, double-sided and
double-bottomed tankers are to be phased out of service between 1995 and 2015
based on their tonnage and age. Under existing interim rules, four of our
tankers will be precluded from trading to the United States in the year 2015.
We believe that the phaseout requirements will not prevent us from using any of
the affected tankers throughout their useful lives. We intend to substitute
these four tankers with newly built, double-hulled Aframax tankers by the end
of 2003.
Owners or operators of tankers operating in U.S. waters must file tanker
oil spill response plans with the U.S. Coast Guard and operate in compliance
with the plans. These response plans must, among other things:
. address a "worst case" scenario and identify and ensure, through
contract or other approved means, the availability of necessary
private response resources;
. describe crew training and drills; and
. identify a qualified individual with specific authority and
responsibility to implement removal actions in the event of an oil
spill.
Our tanker response plans have been approved by the U.S. Coast Guard, and
each seaman on our tankers has been trained to comply with these guidelines. In
addition, we conduct regular oil-spill response drills in accordance with the
guidelines set out in OPA 90.
In addition, numerous states have enacted or are considering legislation
or regulations involving at least some of the following provisions: tanker-free
zones, contingency planning, state inspection of tankers, additional operating
and maintenance and safety requirements. A few states require compliance with
tanker contingency plan regulations, which typically involve a demonstration by
companies of a plan of response to
57
oil spills in state waters where the geography may demand special action. We
comply with these contingency plan requirements where they apply.
We believe that all of our tankers comply with OPA 90 and all applicable
state regulation.
Liability
OPA 90 may impose strict liability on responsible parties, including
owners, operators and bareboat charterers, for all oil spill and containment
and clean-up costs and other damages arising from spills attributable to their
tankers. A complete defense is available only when the responsible party
establishes that it exercised due care with respect to the oil and took
precautions against foreseeable acts or omissions of third parties and when the
spill is caused solely by an act of God, act of war (including civil war and
insurrection) or a third party other than an employee or agent or party in a
contractual relationship with the responsible party. These limited defenses may
be lost if the responsible party fails to report the incident or reasonably
cooperate with the appropriate authorities or refuses to comply with an order
concerning clean-up activities. Even if the spill is caused solely by a third
party, the owner or operator must pay removal costs and damage claims and then
seek reimbursement from the third party or the trust fund established under OPA
90.
OPA 90 limits the liability of each responsible party for a tanker to the
greater of $1,200 per gross registered ton or $10 million per discharge. This
limit does not apply where, among other things, the spill is caused by gross
negligence or willful misconduct of, or a violation of an applicable federal
safety, construction or operating regulation by, a responsible party or its
agent or employee or any person acting in a contractual relationship with a
responsible party.
In addition to removal costs, OPA 90 provides for recovery of damages,
including:
. natural resource damages and related assessment costs;
. real and personal property damages;
. net loss of taxes, royalties, rents, fees and other lost revenues;
. net costs of public services necessitated by a spill response, such
as protection from fire, safety or health hazards;
. loss of profits or impairment of earning capacity due to the injury,
destruction or loss of real property, personal property and natural
resources; and
. loss of subsistence use of natural resources.
OPA 90 expanded the pre-existing financial responsibility requirements
for tankers operating in U.S. waters and requires owners and operators of
tankers to establish and maintain with the U.S. Coast Guard evidence of their
financial responsibility sufficient to meet their potential liabilities imposed
by OPA 90. Under the regulations, we need to provide insurance, a surety bond,
self-insurance or a guaranty to evidence our financial responsibility. We have
all requisite guarantees from a U.S. Coast Guard-approved mutual insurance
organization and received certificates of financial responsibility from the
U.S. Coast Guard for all of our tankers required to have one.
OPA 90 expressly provides that individual states are entitled to enforce
their own pollution liability laws, even if inconsistent with or imposing
greater liability than OPA 90. There is no uniform liability scheme among the
states. Some states have OPA 90-like schemes for limiting liability to various
amounts and some rely on common law fault-based remedies, while others impose
strict and unlimited liability on an owner or operator. Virtually all coastal
states have enacted their own pollution prevention, liability and response
laws, whether statutory or by common law, with many providing for some form of
unlimited liability. We believe that
58
the liability provisions of OPA 90 and the similar state laws have greatly
expanded potential liability in the event of an oil spill, even where we are
not at fault. Some states have also established their own requirements for
financial responsibility.
Parties affected by the oil pollution may pursue relief from the Oil
Spill Liability Trust Fund, absent full recovery by them against a responsible
party. Responsible parties may seek contribution from the fund for costs
incurred that exceeded the liability limits of OPA 90. The responsible party
would need to establish that it is entitled to both a statutory defense against
liability and to a statutory limitation of liability to obtain contribution
from the fund. If we are deemed a responsible party for an oil pollution
incident and are ineligible for contribution from the fund, the costs of
responding to an oil pollution incident could have a material adverse effect on
our results of operations and financial condition.
We are also subject to potential liability arising under the U.S.
Comprehensive Environmental Response, Compensation and Liability Act, or
CERCLA, which applies to the discharge of hazardous substances, whether on land
or at sea. Specifically, CERCLA provides for liability of owners and operators
of tankers for cleanup and removal of hazardous substances and provides for
additional penalties in connection with environmental damage. Liability under
CERCLA is limited to the greater of $300 per gross ton or $5 million per
incident.
We are required to show proof of insurance, surety bond, self insurance
or other evidence of financial responsibility to pay damages under OPA and
CERCLA in the amount of $1,500 per gross ton for tankers, consisting of the sum
of OPA 90 liability limit of $1,200 per gross ton and the CERCLA liability
limit of $300 per gross ton or $5 million per discharge. These requirements can
be satisfied by meeting the requirements for a U.S. Coast Guard Certificate of
Financial Responsibility. OPA 90 and CERCLA each preserve the right to recover
damages under other existing laws, including maritime tort law.
Proposed European Regulation
Following the 1999 Erika spill, the European Commission has proposed to
the European Parliament a general ban on single-hull oil tankers. If adopted,
the timetable for the ban would be similar to that set by the United States
under OPA 90 in order to prevent tankers banned from U.S. waters from shifting
their trades to Europe. The ban plans for a gradual phase-out of tankers
depending on vessel type:
. Single-hulled tankers larger than 20,000 dwt without protective
ballast tanks around the cargo tanks are proposed to be phased out by
2007.
. Single-hulled oil tankers larger than 20,000 dwt in which the cargo
tank area is partly protected by segregated ballast tanks are
proposed to be phased out between 2003 and 2015.
. Single-hulled tankers below 20,000 dwt are proposed to be phased out
between 2003 and 2015.
We believe that all of our tankers will comply with European regulations.
The International Maritime Organization
The International Safety Management Code
The requirements contained in the International Safety Management Code
for the Safe Operation of Ships and Pollution Prevention, or ISM Code, also
affect our operations. The ISM Code was promulgated by the International
Maritime Organization, or IMO. The ISM Code requires the party with operational
control of a tanker to develop an extensive safety management system that
includes, among other things, the adoption of a safety and environmental
protection policy setting forth instructions and procedures for operating its
tankers safely and describing procedures for responding to emergencies. We
intend to rely upon the safety management system that we and our technical
managers have developed, which we believe complies with the requirements of the
ISM Code.
59
The ISM Code requires that tanker operators obtain a safety management
certificate for each tanker they operate. This certificate evidences compliance
by a tanker's management with code requirements for a safety management system.
No tanker can obtain a certificate unless its manager has been awarded a
document of compliance, issued by each flag state, under the ISM Code. We have
documents of compliance for our offices and safety management certificates for
all of our tankers for which the certificates are required by the IMO.
Non-compliance with the ISM Code and other IMO regulations may subject
the shipowner or a bareboat charterer to increased liability, may lead to
decreases in available insurance coverage for affected tankers and may result
in the denial of access to, or detention in, some ports. Both the U.S. Coast
Guard and European Union authorities have indicated that tankers not in
compliance with the ISM Code by the applicable deadlines will be prohibited
from trading in U.S. and European Union ports, as the case may be. We believe
that all of our tankers are in compliance with the ISM Code and other
applicable IMO regulations. We intend that all of the tankers, now in our fleet
and any which we acquire in the future will be in compliance with the ISM Code
and applicable IMO regulations.
IMO Regulations
The IMO has adopted regulations addressing standards of tanker design and
inspection. These regulations provide for the phasing out of certain 25 and all
30-year-old tankers that do not have double-hulled construction or mid-deck
design with double-sided construction, and provide that all tankers will be
subject to enhanced inspections. Newly constructed tankers must be of double-
hulled construction or of a mid-deck design with double-sided construction or
be of another approved design ensuring the same level of protection against oil
pollution if the tanker:
. is the subject of a contract for a major conversion or original
construction on or after July 6, 1993;
. commenced a major conversion or has its keel laid on or after January
6, 1994; or
. completed a major conversion or is a newbuilding delivered on or
after July 6, 1996.
Pending IMO and European Regulations
The IMO is in the process of establishing amended regulations for the
accelerated phasing-out of tankers that are not double-hulled. The proposal was
adopted by the IMO's Marine Environment Protection Committee in April 2001, and
will be deemed to have been accepted by the IMO on March 1, 2002 unless prior
to by that date at least one-third of the Parties to the IMO or Parties whose
merchant fleets combined constitute 50 percent or more of the world's merchant
fleet have communicated their objections to the IMO. If accepted, the amendment
will take effect on September 1, 2002. Under the amended regulation, tankers
delivered in 1976 and 1977 and which do not comply with the requirements for
protectively located segregated ballast tanks will be phased out in 2005. Those
non double-hulled tankers delivered in 1976 and 1977 which do comply with the
requirements of protectively located segregated ballast tanks will be phased
out in 2010.
Following the Erika spill, the European Commission issued "communications
on the safety of oil transport by sea", sometimes called the "Erika
communication". As referred to under "Proposed European Regulations", if
adopted, the proposals in these communications would include prevention of
single-hulled tankers from operating in European waters under the accelerated
timetable like that adopted by the IMO.
Other Regulations
Convention on Civil Liability
Outside the United States, many countries have ratified and follow the
liability scheme set out in the International Convention on Civil Liability for
Oil Pollution Damage 1992, or CLC. The United States is not a
60
party to the CLC. Under the CLC, a tanker's registered owner may be liable for
pollution damage caused in the territorial waters and in the exclusive economic
zone of a contracting state by the escape or discharge of persistent oil,
subject to certain very limited defenses. Pollution damage includes the costs
of preventive measures and further loss or damage caused by preventive
measures. Save for certain limited exceptions, liability is strict but is
currently limited to 3,000,000 units of account for a ship not exceeding 5,000
units of tonnage and for a vessel exceeding 5,000 units of tonnage, an
additional 420 units of account for each additional unit of tonnage beyond
5,000 units of tonnage provided, however, that this aggregate amount shall not
in any event exceed 59.7 million units of account. The units of account
referred to are the special drawing rights as defined by the International
Monetary Fund, which amount may vary according to the national currency being
used for the conversion. If it is proved that the pollution damage resulted
from our personal act or omission, committed with the intent to cause such
damage, or recklessly and with the knowledge that such damage would probably
result, we would have no right to limit our liability.
Pursuant to Article VII of the CLC, the owner of ships registered in a
state party thereto and carrying in bulk as cargo more than 2,000 tons of oil,
shall be required to maintain insurance or other financial security in the sums
of applying the limits of liability above to cover their liability for
pollution damage under the CLC.
Singapore has also ratified the CLC and has given effect to it by
enacting the Merchant Shipping (Civil Liability and Compensation for Oil
Pollution) Act (Cap 180), or the MSCLCOPA, which came into effect on September
18, 1998. Under the MSCLCOPA, a ship, if it is a Singapore ship, shall not
enter or leave any port or territorial sea of any other country, unless it has
a certificate issued by a Director of Marine appointed under the Singapore
Merchant Shipping Act showing that it has a contract of insurance or other
security satisfying the requirements of Article VII of the CLC. The failure to
have such insurance in force is an offence and the master or owner shall be
liable on conviction to a fine not exceeding S$1 million. We believe that we
comply with all applicable Singapore regulations in this respect.
In jurisdictions where the CLC has not been adopted, various legislative
schemes or common law govern and liability is imposed either on the basis of
fault or in a manner similar to the CLC.
Other Environmental Initiatives
More stringent standards may be adopted by state regulatory agencies in
the United States in the area of ballast water regulations, air emissions and
vessel routing and by U.S. federal and state agencies in respect of National
Resource Damage Assessment, invasive species in ships' ballast water and
increased financial responsibility. The European Commission has proposed
legislation that will affect our operations and our potential liability
exposure for oil pollution. While it is impossible to predict what legislation,
if any, may be promulgated by the United States, the European Union or any
other country or authority, OPA 90 is likely to influence such legislation, and
we expect more stringent standards will be introduced in the United States and
elsewhere.
61
MANAGEMENT
Directors and Executive Officers
Our board of directors currently consists of seven members, and our by-
laws sets the minimum number of directors at two. Two of our board members, Mr.
Lua and Mr. Jacobs, are also directors of NOL. NOL will own 73.4% of our common
shares upon completion of the global offering (assuming no exercise by the
underwriters of their over-allotment option) and will be able to control
actions over most matters requiring approval by our shareholders, including the
election of directors.
The following table sets forth information regarding our directors and
executive officers.
Name Age Position
- ---- --- --------
Lua Cheng Eng 63 Chairman of the Board of Directors
Flemming R. Jacobs 58 Vice Chairman
Joseph Sin Kin Kwok 47 Director, President and Chief Executive Officer
Ernst Gabriel Frankel (1) 78 Director
Sir David Thomson (1) 61 Director
John T. Olds (1) 57 Director
Robert F. Klausner (1) 62 Director
Gregory A. McGrath 50 Vice President, Finance and Administration
Captain Raymond Ambrose 52 Vice President, Marketing
Captain Ernesto Violetta 57 Vice President, Marine Operations
- --------
(1) Member of the audit committee.
None of our directors or executive officers is related to another.
Biographies
Lua Cheng Eng
Mr. Lua has been our Chairman since we were incorporated in 1994. Mr. Lua
joined the NOL group of companies in 1969 and is currently the non-executive
group Chairman. Mr. Lua is either the Chairman or a director of several
publicly traded companies in Singapore, including International Factors
(Singapore) Ltd., SembCorp Industries Ltd., Intraco Ltd, Sincere Watch Ltd. and
Lim Kah Ngam Ltd. Mr. Lua's public appointments in Singapore include the
presidency of the Singapore Shipping Association, a Board seat with the
Maritime and Port Authority of Singapore and the deputy chairman position for
the Singapore International Chamber of Commerce. Mr. Lua is also the Chairman
of the Southeast Asia Committee of Nippon Kaiji Kyokai, a Counsellor for the
Baltic and International Maritime Council and a director of the Britannia Steam
Ship Insurance Association. He holds a Bachelor of Arts degree from the
University of London and is a graduate of the Program for Management
Development at the Harvard Graduate School of Business. He was elected a Fellow
of the Chartered Institute of Transport (U.K.) in 1985.
Flemming R. Jacobs
Mr. Jacobs is our Vice Chairman. Mr. Jacobs joined the NOL group of
companies in May 1999 as the designated Group President and Chief Executive
Officer and was formally appointed as the President and Chief Executive Officer
for the group in June 1999. Mr. Jacobs sits on the boards of most of the NOL
group companies, including our own and is Vice Chairman of APL Logistics. Prior
to joining NOL, Mr. Jacobs served in various positions in the A.P. Moller Group
for more than 30 years, primarily in Maersk Lines' container transportation and
logistics activities. He was a partner in the A.P. Moller Group from January
1997 until 1999 and the chief executive officer for that group's tanker
activities. He serves on the advisory councils of Port of Singapore Authority,
the Panama Canal Authority and the European Institute of Business
Administration, or INSEAD. Mr. Jacobs is also a graduate of the Program for
Management Development at the Harvard Graduate School of Business.
62
Joseph Sin Kin Kwok
Mr. Kwok has been our President and Chief Executive Officer and a
director of AET since 1994. Mr. Kwok joined the NOL group of companies in 1981
and has held many key positions with NOL, including Group Chief Operating
Officer, Chief Executive Officer of the Chartering Division and Chairman of
Neptune Shipmanagement. He serves as a board member of Baltic International
Maritime Council and an executive committee member of Intertanko. He is a
director of The American Bureau of Shipping, or ABS, and the chairman of the
ABS's Southeast Asia Regional Committee and a board member of the United
Kingdom Protection and Indemnity, or P&I, club. He holds a naval architecture
degree from Fachhochschule, Hamburg, a welding engineering degree from
Schweisstechnische Versuchanstalt, Hamburg, and a master's degree in Ocean
Systems Management from the Massachusetts Institute of Technology. Mr. Kwok is
also a graduate of the Advanced Management Program at the Harvard Graduate
School of Business.
Ernst Gabriel Frankel
Professor Frankel has been a director of AET since 1994 and is a member
of our audit committee. Professor Frankel was a director of NOL from 1988 to
1999, and since 1998 has been a director of APL Limited, American President
Lines (each NOL affiliates) and American Eagle Tankers. He served as Chairman
of American President Lines from 1998 to 1999. He also served as a director of
Ocean Futures Foundation from 1997 to 1999 and as Senior Advisor to the
International Maritime Organization of the United Nations from 1989 to 1999.
Professor Frankel has consulted extensively for the World Bank and governments
of many countries in shipping, shipbuilding and ports. Professor Frankel has
been employed by Harland and Wolf Shipbuilders, Peninsula and Orient Steam
Navigation Co. and Zim Navigation Company. He served as Technical Director of
the Shipbuilding Group of Litton Industries, Advisor for Ports, Shipping and
Aviation for the World Bank and as Head of the Operations Department of the
U.S. Maritime Administration. He is a Professor of Management at the Sloan
School of Management and a Professor Emeritus of Ocean Systems at the School of
Engineering at the Massachusetts Institute of Technology. Professor Frankel
holds a Bachelor of Sciences degree in Marine Engineering from London
University, an MBA degree in Operations Management from Boston University, a
Ph.D. in Transport Economics from the University of Wales and a DBA in Systems
Management from Boston University.
Sir David Thomson
Sir David Thomson is an independent, non-executive director and member of
our audit committee. Sir David was appointed as a director in May of this year.
He is a director of several publicly traded companies. Sir David was also
formerly a Director of The Ben Line from 1964 to 1989. In addition to his
directorships, Sir David is also currently the Chairman of the Britannia Club,
protection and indemnity insurers.
Sir David holds a Bachelor of Arts degree from Oxford University.
John T. Olds
Mr. Olds is an independent, non-executive director and member of our
audit committee. Mr. Olds was appointed as a director in May of this year.
Prior to joining us, Mr. Olds served in various positions for more than 24
years for J.P. Morgan & Co., including as head of Euroclear in Belgium and as a
managing director in New York. He is currently a special advisor to The
Development Bank of Singapore Limited, having been Chief Executive Officer and
a director of DBS Group Holdings Ltd. Mr. Olds is a director of Keppel Marine
Industries Ltd. Mr. Olds holds a Bachelor of Arts from the University of
Pennsylvania.
Robert F. Klausner
Mr. Klausner is an independent, non-executive director and member of our
audit committee. Mr. Klausner was appointed as a director in May of this year.
Prior to joining us Mr. Klausner served in various executive positions within
Exxon Corporation including as President of Standard Marine Services Inc. (a
63
subsidiary of Exxon Corporation). He was a director of the Oil Companies
International Marine Forum and the American Bureau of Shipping Council from
1995 to 2000, and was Chairman of the U.S. Merchant Marine Academy Foundation
from 1990 to 1995. Mr. Klausner holds Bachelor of Sciences degree from the U.S.
Merchant Marine Academy and an MBA from the Wharton School, University of
Pennsylvania.
Gregory A. McGrath
Mr. McGrath joined AET as Vice President, Finance and Administration in
1995. He was previously Vice President of Finance and Administration for Marine
Transport Lines, Inc., a large U.S.-based bulk shipping operator, and spent 16
years with Mobil Oil Corporation in various financial, shipping and supply and
distribution positions. Mr. McGrath holds a Bachelor of Arts degree from
Fairfield University in Connecticut and a Masters of Business Administration
degree.
Captain Raymond Ambrose
Captain Ambrose joined the NOL group of companies in 1977 and was
appointed our Vice President, Marketing in 1998. From 1994 to 1998 he served as
Vice President of our chartering department. Prior to that he served as Manager
of the Tanker Department in NOL's Chartering Division and as Owners'
Representative for Chartering in New York. He serves on the Hogansac Houston
Galveston Navigation and Safety Advisory Committee and has served as a council
member of Intertanko. Captain Ambrose holds a Master Certificate of Competency
from the City of London Polytechnic and is a graduate of the Advanced
Management Program at INSEAD.
Captain Ernesto Violetta
Captain Violetta joined us in 1993 as General Manager of Operations of
our predecessor company US Marine and Offshore Services, Inc. and has served as
our Vice President, Marine Operations since 1998. Captain Violetta also served
as General Manager of Operations for Nordic American Shipping Inc. of Houston
for several years and held the operations positions of Master and Port Captain
on chemical tankers with Globe Tankers and crude oil tankers with Gulf Oil
Transport over the past 30 years. Captain Violetta is a graduate of the Luigi
Rizzo Nautical Academy in Italy.
The business address of each of our directors and officers is c/o
American Eagle Tankers Inc. Limited, 15 Exchange Place, Suite 110, Jersey City,
New Jersey 07302.
Audit Committee
The audit committee of the board of directors reviews, acts on and
reports to the board of directors with respect to various auditing and
accounting matters, including:
. the recommendation of our independent auditors;
. the scope of the annual audits;
. fees to be paid to the independent auditors;
. the performance of our independent auditors;
. related party transactions; and
. our accounting practices.
The members of the audit committee are currently Ernst Gabriel Frankel,
John Olds, Sir David Thomson and Robert Klausner.
64
Compensation of Directors and Executive Officers
The aggregate amount of compensation paid to all of our directors and
executive officers in respect of the fiscal year ended December 31, 2000 was
approximately $1.1 million. Our directors are reimbursed for certain expenses
in connection with their attendance at board and committee meetings. The
compensation paid to our directors on an aggregate basis for the two financial
years ended December 31, 1999 and December 31, 2000 was approximately $405,000
and $490,000 respectively. In addition, we contribute to a 401(k) plan on
behalf of our employees but do not otherwise maintain or fund a pension plan
for our employees or management.
Share Option Plan
We intend to adopt a share option plan for our employees and directors,
effective upon consummation of the offering. An initial pool of options in
respect of an aggregate of 2,500,000 common shares will be issuable under the
plan.
Under the plan, the exercise price of options issued for common shares
will not be less than the actual price of the shares as reported on the New
York Stock Exchange on the date of grant, except that, at the time of the
global offering, options may be granted at an exercise price per common share
equal to the initial public offering price. In addition, the share option plan
allows us to award shares to our employees or directors from time to time at a
price not less than 85% of the then current market price. We have no plans to
award any such shares at this time.
The plan provides for the adjustment of the number of common shares
underlying each option, and the exercise price thereof, to take into account
any variation of our share capital by rights issue, consolidation, subdivision
or reduction of capital, or other similar events.
Concurrently with the consummation of the offering, we intend to grant
options under the plan to certain of our employees for an aggregate of 700,000
common shares, all exercisable at the initial public offering price per share.
The distribution of the remaining options under the plan will be at the
discretion of a compensation committee of our board of directors. Based on our
present number of employees and directors, we expect an annual grant of options
under the plan not to exceed 350,000 common shares per year.
65
RELATIONSHIP WITH NOL AND CERTAIN TRANSACTIONS
We were formed in 1994 by NOL to own and operate NOL's crude-oil tanker
business. We have been wholly owned by NOL from our incorporation through the
present. Prior to year-end 2000, we held the majority of NOL's crude-oil tanker
assets and operated NOL's crude-oil tanker business. NOL continued to own seven
crude- oil tankers in its own name and to own or operate four crude-oil tankers
through two of its subsidiaries, although all but four of these were time
chartered to us. In order to streamline the crude-oil tanker operations and
consolidate all of NOL's interests in this business in one company, at December
29, 2000, NOL transferred those seven crude oil tankers and its 65% equity
interest in the two subsidiaries to us as a capital contribution. NOL currently
holds no crude oil-tanker assets and operates no crude oil-tanker business
other than through us. NOL has granted, for an initial five-year period, a
right of first refusal to us, to acquire any tankers or tanker businesses
proposed to be acquired by NOL at the price agreed between NOL and the proposed
seller. NOL has informed us that it is not currently its intention to re-enter
the business of crude-oil transportation in tankers as operated by our company.
After the global offering, NOL will hold 73.4% of our outstanding common
shares, or 70.6% if the underwriters' over-allotment option is exercised in
full. NOL has informed us that it currently intends to maintain a majority
shareholding in our company.
Since inception, we have operated with separate senior management. Joseph
Kwok, our President and Chief Executive Officer, has simultaneously held
management positions with us and with NOL. Mr. Kwok plans to resign from the
positions of group chief operating officer and chief executive officer for
chartering and enterprises which he holds with NOL prior to the completion of
this offering. He may continue to hold non-executive directorships with some
NOL subsidiaries depending on the needs of the NOL group. No other members of
our senior management hold positions with NOL.
Our senior management is separate from that of NOL. Historically, NOL has
provided us with staff support in certain areas, and we will continue to rely
on NOL for limited treasury, legal and corporate secretarial support. We expect
that we will no longer need to rely on NOL for these services after year-end
2001. We intend to continue to purchase insurance with NOL on a joint basis. In
addition, NOL has guaranteed $167.8 million of our indebtedness, and two
members of our board of directors also sit on NOL's board.
Under a capital restructuring approved by NOL on March 16, 2001, we
declared a dividend to NOL of $64.8 million. NOL also subscribed for
approximately 11.88 million shares at a subscription price of $66.0 million.
Our historical financial statements have been restated to reflect this capital
restructuring as of December 31, 2000.
Through its controlling ownership, NOL will be able to exercise a
controlling influence over our company, including determinations with respect
to mergers or other business combinations, the acquisition or disposition of
assets, our access to the capital markets, the payment of dividends and any
change of control of our company. In these and other situations, various
conflicts of interest between NOL and our other shareholders could arise.
Furthermore, ownership interests of our directors and officers in NOL's
ordinary shares or service as a director or officer of both us and NOL could
create, or appear to create, potential conflicts of interest when directors and
officers are faced with decisions that could have different implications for us
and NOL. We cannot assure you that conflicts of interest will not arise or will
be resolved in a manner favorable to us.
Continuing Arrangements and Agreements
For purposes of governing certain on-going relationships between NOL and
us, we have entered into various agreements or arrangements, including those
described below. The agreements and arrangements described below were
negotiated in the context of the offering and are therefore not the result of
arm's-length negotiations between independent parties. We cannot provide any
assurance, therefore, that these agreements and arrangements will be on terms
as favorable to us as could have been obtained from unaffiliated third parties.
66
Rights of First Refusal in Respect of Proposed NOL Tanker and Tanker
Business Acquisitions
We have entered into an agreement with NOL, under which NOL has agreed,
for an initial five-year period to grant a right of first refusal to us to
acquire any crude-oil tankers or crude-oil tanker businesses proposed to be
acquired by NOL at the price agreed between NOL and the proposed seller.
Continuing Technical Management Services
We historically have contracted with Neptune Shipmanagement to provide
certain technical management services to most of our fleet, under individual
but substantially similar technical management agreements relating to each
tanker. These technical management agreements are described in detail under
"Business--Technical Management". Under the terms of the technical management
agreements, which each have a term of one year, we pay Neptune Shipmanagement a
fixed fee monthly in advance, which covers expenses such as crew, stores,
repairs and maintenance expenses and a ship management fee. In 2000, we paid
Neptune Shipmanagement an aggregate of $30.0 million under all contracts. We
pay (or, if Neptune Shipmanagement pays, we reimburse Neptune Shipmanagement on
a cost-recovery basis) for all expenses relating to dry-docking maintenance and
repairs, spare parts and other related expenses. We intend to continue to
manage our tankers through Neptune Shipmanagement. We believe that the services
we purchase from Neptune Shipmanagement are at commercially reasonable rates
and are as favorable as rates that could have been negotiated with an
unaffiliated party.
Continuing Purchase of Marine Insurance through NOL
We currently obtain insurance coverage under group policies negotiated by
NOL. Under this arrangement the insurance premium and coverage for each vessel
is stipulated under group policies. We make payment of premiums in respect of
our vessels through NOL and channel claims through NOL, who then deal with the
insurance underwriters. We believe this arrangement enables us, and other
members of the NOL group, to obtain insurance coverage on more competitive
terms due to the economies of bulk purchasing.
We have entered into a support services agreement dated May 24, 2001 with
NOL whereby NOL has agreed to continue to provide us with insurance procurement
services, as well as the transitional services described in the next paragraph,
after the global offering. NOL will charge us $500,000 per year as the cost of
providing these services.
Transitional Services
Historically, we have relied on NOL for certain treasury, financial,
legal and related services, including cash management, maintenance of our books
and records and applications to banks for financing. NOL has agreed to continue
to provide us with treasury, legal and corporate secretarial support services
for a period of six months after the global offering, after which we have an
option to extend the period for another six months. We expect to hire
additional personnel so that we no longer need to rely on NOL for these
services, unless it is most cost-effective to do so.
Certain Related Party Transactions
Financing Arrangements in Respect of the Seven Vessels Transferred in
December 2000
On December 29, 2000, NOL transferred seven tankers and related assets to
us by way of capital contribution at book value for an aggregate consideration
of $265.9 million. Loans of $140.5 million then on NOL's books in respect of
those tankers granted by The Development Bank of Singapore Limited, or DBS,
were left outstanding on the books of NOL which on-lent $127.5 million to us.
On March 5, 2001 this interim intercompany loan was refinanced by a $127.5
million loan from DBS to us. NOL is the sole guarantor of our outstanding
payment obligations to DBS under this loan facility, which is secured by four
of our tankers, bears interest at a floating rate and which will mature on
December 30, 2006. Commencing on the completion of the
67
offering, NOL will charge a guarantee fee of 0.125% per annum of our
outstanding payment obligations under this loan. Material terms of this loan
agreement include:
. our obligation to prepay the outstanding amount of the loan plus
ancillary costs including any break in funding costs within 14 days
of our becoming aware that NOL has ceased to be our largest single
shareholder;
. the triggering of an event of default resulting in an acceleration of
our debt where: either we or NOL (a) become subject to an insolvency
event, (b) are unable to comply with the terms of the loan agreement
and related financing documents, (c) fail to pay any indebtedness in
respect of borrowed monies when due and within any applicable grace
periods provided that any such payment default on our part exceeds $1
million and any such payment default on the part of NOL exceeds $5
million, and (d) cease to carry on a substantial part of their
business.
Charter Assignments and NOL Guarantees of Charter Obligation
NOL guarantees our performance obligations under each of our four time
charters with a subsidiary of TOSCO until such time as our charter obligations
are fully discharged. Our arrangements with this company are more fully
described under "Business -- Operation of Tankers". NOL currently receives no
guarantee fee or other compensation for providing these guarantees on our
behalf.
NOL Guarantees of the Loan Payment Obligations of our Subsidiaries
NOL has guaranteed the loan payment obligations of the following
subsidiaries through which we own tankers. Commencing on the completion of the
offering, NOL will charge a guarantee fee of 0.125% per annum of the
outstanding payment obligations under these loans.
. Trilith Shipping (which owns Eagle Otome). NOL currently guarantees
65% of Trilith Shipping Pte. Ltd.'s payment obligations to its lender
syndicate outstanding in respect of its initial loan facility of $40
million. Currently, $26 million remains outstanding in respect of
this loan facility secured over the Eagle Otome, which will mature in
March 2003 and which bears interest at a floating rate. Trilith is
incorporated in Singapore, and we hold 65% of its shares.
. Trilithon Shipping (which owns Eagle Subaru). NOL currently
guarantees 65% of Trilithon Shipping Pte. Ltd.'s outstanding
obligations in respect of its loan facility of $50 million.
Currently, $29.6 million remains outstanding in respect of this
facility which is secured by the Eagle Subaru. This loan facility
will mature in March 2003 and bears interest at a floating rate.
Trilithon is incorporated in Singapore, and we hold 65% of its
shares.
. Crystal Shipowning (which owns Eagle Auriga). NOL is currently the
sole guarantor of Crystal Shipowning Pte. Ltd.'s remaining
obligations, in respect of its loan facility of $36.5 million
(subject to a 35% counter indemnity from our 35% joint venture
partner). Currently, $4.2 million remains outstanding in respect of
this facility which is secured by the Eagle Auriga. This loan
facility will mature in January 2002 and bears interest at a floating
rate. Crystal is incorporated in Singapore, and we hold 65% of its
shares.
NOL Guarantees of our Aframax Newbuilding Loan Payment Obligations
Under letters of guarantee entered into by NOL in February 2001, NOL has
agreed to guarantee our payment obligations in respect of our two loan
facilities in the amount of $27 million each from Lepta Shipping Co., Ltd. (a
wholly-owned subsidiary of Mitsui & Co. Ltd). These loans are expected to be
disbursed in 2003 and are to be used to make final payment on our purchase of
two newbuilding Aframax tankers. The loans are secured by the two tankers.
These guarantee obligations fall away upon completion of this offering.
However, NOL has agreed to provide an alternative performance guarantee if,
following this offering: (a) NOL
68
ceases to be our single largest shareholder, (b) as a result, NOL is no longer
able to control our business operations and (c) we do not prepay all
outstanding loans commitments. NOL currently receives no guarantee fee or other
compensation for providing these guarantees on our behalf but will charge a
guarantee fee of 0.125% per annum of our outstanding payment obligations under
these loans if its guarantee obligations are re-instated. Material terms of
these loan agreements include the triggering of an event of default resulting
in an acceleration of our debt where:
. we default in the payment of any debt due to the Mitsui group of
companies; and
. either we or NOL (if it remains as guarantor): (a) become subject to
an insolvency event, (b) become unable to comply with the terms of
these loan agreements and related financing documents, (c) cease to
carry on a substantial part of their business, or (d) becomes subject
to a material adverse change in its financial condition.
Acquisition of the Eagle Memphis and the Eagle Milwaukee
Until January 5, 2001 we leased the Eagle Milwaukee and the Eagle Memphis
from Nepline Bhd, or Nepline, an affiliate of NOL. In August 2000, we agreed to
acquire the two tankers from Nepline for a net aggregate consideration of $35.3
million. NOL held a 21% shareholding in Nepline as at December 31, 2000.
Inter-Company Loans
We have historically entered into inter-company loan arrangements with
affiliated companies within the NOL group. At present, there are no such inter-
company loans outstanding, and we currently have no intention of entering into
such arrangements in future, other than ordinary-course-of-business trade
arrangements.
69
PRINCIPAL SHAREHOLDER
Prior to the global offering, all of our outstanding common shares were
owned by NOL. Immediately after the global offering, NOL will own approximately
73.4% of our common shares, or approximately 70.6% if the underwriters exercise
their over-allotment option in full. None of our executive officers or
directors currently owns any of our common shares. An aggregate of 2,500,000
common shares have been reserved for future grants to our directors, officers
and employees under our share option plan.
NOL is a Singapore-based company with extensive worldwide shipping and
logistics operations. NOL owns or operates 96 vessels worldwide (exclusive of
the 24 tankers forming our fleet). NOL has three core businesses: container
liner shipping under the brand name APL, transportation logistics under the
brand name APL Logistics and tankers (which it operates through us). NOL no
longer owns or operates any crude oil tankers, other than through us.
The terms of our common shares do not provide for differential voting
rights.
70
DESCRIPTION OF CAPITAL STOCK
We were incorporated in Bermuda on January 13, 1994 with limited
liability under the Companies Act, 1981 of Bermuda. We are registered in the
Bermuda Registry of Companies under company number EC19019. Our corporate
objects as stated in our Memorandum of Association, permit us to engage in such
activities as:
. moving and transporting petroleum and hydro carbon products including
oil and oil products;
. ship carriage of goods of all kinds;
. ship owners, managers, operators, and agents;
. acquiring, owning, selling and chartering ships; and
. acting as holding company for our investments.
In addition, the Memorandum of Association includes a wide variety of
other corporate purposes in which we are not currently engaged.
Our authorized capital consists of 100,000,000 common shares, par value
$1.00 per share. Upon completion of the global offering, there will be
25,376,544 outstanding common shares and outstanding options to purchase up to
700,000 common shares.
Common Shares
The holders of common shares are entitled to receive dividends out of
assets legally available for such purposes at times and in amounts as our board
of directors may from time-to-time determine. Each shareholder is entitled to
one vote for each common share held on all matters submitted to a vote of
shareholders. The common shares are not entitled to preemptive rights and are
not subject to conversion or redemption. Upon the occurrence of a liquidation
or winding-up, the holders of common shares would be entitled to share ratably
in the distribution of all of our assets remaining available for distribution
after satisfaction of all our liabilities.
Material Provisions of Bermuda Law and Our Organizational Documents
We are an exempted company organized under the Companies Act. The rights
of our shareholders, including those persons who will become shareholders in
connection with the global offering, are governed by Bermuda law and our
Memorandum of Association and by-laws. The Companies Act differs in some
material respects from laws generally applicable to U.S. corporations and their
shareholders. The following is a summary of the material provisions of Bermuda
law and our organizational documents. Bermuda law does not prohibit NOL from
enacting changes in our Memorandum of Association or by-laws that would make it
more difficult for other shareholders to gain control of us, including through
staggering directorships or issuing preferred shares that become redeemable
upon a change in control. Likewise, our Memorandum of Association and by-laws
do not currently prohibit us from issuing such redeemable preferred shares. Our
board of directors is authorized to issue redeemable preferred shares.
Dividends. Under Bermuda law, a company may pay dividends that are
declared from time to time by its board of directors unless there are
reasonable grounds for believing that the company is or would, after the
payment of the dividend, be unable to pay its liabilities as they become due or
that the realizable value of its assets would thereby be less than the
aggregate of its liabilities and issued share capital and share premium
accounts.
Voting rights. Under Bermuda law, except as otherwise provided in the
Companies Act or our by-laws, questions brought before a general meeting of
shareholders are decided, on a poll, by a majority vote of shareholders present
at the meeting. Our by-laws provide that, subject to the provisions of the
Companies Act and as otherwise specifically provided in our by-laws, any
question proposed for the consideration of the shareholders will be decided by
a simple majority of the votes cast, on a show of hands, with each shareholder
present (and each person holding proxies for any shareholder) entitled to one
vote for each common share held
71
by the shareholder unless a poll is demanded by (a) the chairman of the
shareholders' meeting, or (b) at least three shareholders present in person or
by proxy, or (c) a shareholder or shareholders, present in person or by proxy,
holding an aggregate of not less than one tenth of the total voting rights of
all shareholders, or (d) a shareholder or shareholders, present in person or
by proxy, holding an aggregate of not less than one tenth of the total sum
paid up on shares having a right to vote at the meeting.
Rights in liquidation. Under Bermuda law, in the event of liquidation or
winding-up of a company, after satisfaction in full of all claims of creditors
and subject to the preferential rights accorded to any series of preferred
shares, the proceeds of the liquidation or winding-up are distributed ratably
among the holders of a company's common shares.
Meetings of shareholders. Under Bermuda law, a company is required to
convene at least one general shareholders' meeting each calendar year. Bermuda
law provides that a special general meeting may be called by the board of
directors and must be called upon the request of shareholders holding not less
than 10% of the paid-up capital of the company carrying the right to vote.
Bermuda law also requires that shareholders be given at least five days'
advance notice of a general meeting but the accidental omission to give notice
to any person does not invalidate the proceedings at a meeting. Under our by-
laws, we must give each shareholder at least 14 days' notice of the annual
general meeting and of any other special general meeting unless (a) all the
shareholders entitled to attend and vote at the annual general meeting, or (b)
in the case of a special general meeting, a majority in number of the
shareholders having the right to vote at the meeting having not less than 95%
of the nominal value of the shares giving that right, consent to a shorter
period of notice.
Under Bermuda law, the number of shareholders constituting a quorum at
any general meeting of shareholders is determined by the by-laws of a company.
Our by-laws provide that the presence in person or by proxy of the holders of
more than one third of our issued common shares constitutes a quorum.
Under Bermuda law, shareholders may act by written consent only if the
written consent is unanimous.
Access to books and records and dissemination of information. Members of
the general public have the right to inspect the public documents of a company
available at the office of the Registrar of Companies in Bermuda. These
documents include a company's Certificate of Incorporation, its Memorandum of
Association and any alteration to its Memorandum of Association. The
shareholders have the additional right to inspect the bye-laws of a company,
minutes of general meetings and a company's audited financial statements,
which must be presented at the annual general meeting. The register of
shareholders of a company is also open to inspection by shareholders without
charge and by members of the general public on the payment of a fee. A company
is required to maintain its share register in Bermuda but may, subject to the
provisions of Bermuda law, establish a branch register outside Bermuda. We
maintain a share register in Hamilton, Bermuda. A company is required to keep,
at its registered office, a register of its directors and officers which is
open for inspection for not less than two hours each day by members of the
public without charge. Bermuda law does not, however, provide a general right
for shareholders to inspect or obtain copies of any other corporate records.
Election or removal of directors. Under Bermuda law and our by-laws,
directors are elected or appointed at the annual general meeting and serve
until re-elected or re-appointed or until their successors are elected or
appointed, unless they are earlier removed or resign. Cumulative voting for
the election of directors is not provided for in our by-laws, which means that
the holders of a majority of the common shares voted can elect all of the
directors then standing for election.
Under Bermuda law and our by-laws, a director may also be removed at a
special general meeting of shareholders specifically called for that purpose,
provided the director is served with at least 14 days' notice. The director
has a right to be heard at that meeting. Any vacancy created by the removal of
a director at a special general meeting may be filled at that meeting by the
election of another director in his or her place or, in the absence of any
such election, by the board of directors.
72
Amendment of Memorandum of Association and by-laws. Bermuda law provides
that the Memorandum of Association and by-laws of a company may be amended by a
resolution passed at a general meeting of shareholders of which due notice has
been given. An amendment to the Memorandum of Association, other than an
amendment which alters or reduces a company's share capital as provided in the
Companies Act may also require the approval of the Minister of Finance of
Bermuda, who may grant or withhold approval at his discretion.
Under Bermuda law, the holders of an aggregate of at least 20% in par
value of a company's issued share capital or any class of issued share capital
have the right to apply to the Bermuda Court for an annulment of any amendment
of the Memorandum of Association adopted by shareholders at any general
meeting, other than an amendment which alters or reduces a company's share
capital as provided in the Companies Act. Where such an application is made,
the amendment becomes effective only to the extent that it is confirmed by the
Bermuda Court. An application for the annulment of an amendment of the
Memorandum of Association must be made within 21 days after the date on which
the resolution altering the company's Memorandum of Association is passed and
may be made on behalf of the persons entitled to make the application by one or
more of their number as they may appoint in writing for the purpose. No such
application may be made by persons voting in favor of the amendment.
Appraisal rights and shareholder suits. Under Bermuda law, in the event
of an amalgamation of two Bermuda companies, a shareholder who is not satisfied
that fair value has been paid for his shares may apply to the Bermuda Court to
appraise the fair value of his shares. The Companies Act requires the
amalgamation agreement to be approved by the board of directors and, except
where the amalgamation is between a holding company and one or more of its
wholly owned subsidiaries or between the two or more wholly owned subsidiaries,
by meetings of the holders of shares of each company and of each class of such
shares.
Class actions and derivative actions are generally not available to
shareholders under Bermuda law. The Bermuda Court, however, would ordinarily be
expected to permit a shareholder to commence an action in the name of a company
to remedy a wrong done to the company where the act complained of is alleged to
be beyond the corporate power of the company or is illegal or would result in
the violation of the company's Memorandum of Association or by-laws. Further
consideration would be given by the Bermuda Court to acts that are alleged to
constitute a fraud against the minority shareholders or, for instance, where an
act requires the approval of a greater percentage of the company's shareholders
than that which actually approved it.
When the affairs of a company are being conducted in a manner oppressive
or prejudicial to the interests of some part of the shareholders, one or more
shareholders may apply to the Bermuda Court for an order regulating the
company's conduct of affairs in the future or compelling the purchase of the
stock by any shareholder, by other shareholders or by the company.
Listing
The common shares have been approved for listing on the New York Stock
Exchange under the symbol "AEH", subject to official notice of issuance, and we
have applied to have the SDRs listed on the Singapore Exchange Securities
Trading Limited. The common shares will be listed on the New York Stock
Exchange in U.S. dollars and settlement will take place through The Depository
Trust Company in U.S. dollars.
Transfer Agent and Registrar
American Stock Transfer & Trust Company will act as transfer agent and
registrar for the common shares.
Certain Bermuda Company Considerations
We are designated as non-resident of Bermuda for exchange control
purposes by the Bermuda Monetary Authority whose permission has been obtained
for the issuance of the common shares pursuant to the terms of the global
offering to, and their subsequent transfer by, persons regarded as resident
outside Bermuda
73
for exchange control purposes to be effected without obtaining the specific
consent for each issuance or transfer under the Exchange Control Act, 1972 and
related regulations. Issues and transfers of common shares involving any person
regarded as resident in Bermuda for exchange control purposes require specific
prior approval under the Exchange Control Act, 1972. In addition, prior to the
global offering this prospectus will be filed with the Registrar of Companies
in Bermuda in accordance with Bermuda law.
In granting this permission and upon accepting this prospectus for
filing, the Bermuda Monetary Authority and the Registrar of Companies in
Bermuda will accept no responsibility for the financial soundness of any
proposals or for the correctness of any of the statements made or opinions
expressed with regard to them.
There are no limitations on the rights of non-Bermuda owners of the
common shares to hold or vote their common shares. Because we have been
designated as non-resident for Bermuda exchange control purposes, there are no
restrictions on our ability to transfer funds in and out of Bermuda or to pay
dividends to U.S. residents who are holders of our common shares, other than in
respect of local Bermuda currency.
In accordance with Bermuda law, share certificates are only issued in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, we are not
bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust.
We will not be bound to see to the execution of any trust applicable to
any of our common shares whether or not we had notice of such trust.
As an "exempted company", we are exempt from Bermuda laws which restrict
the percentage of share capital that may be held by non-Bermudians, but as an
exempted company, we may not participate in certain business transactions
including:
. the acquisition or holding of land in Bermuda without the express
authorization of the Bermuda legislature;
. the taking of mortgages on land in Bermuda to secure an amount in
excess of 50,000 Bermuda dollars without the consent of the Minister
of Finance of Bermuda;
. the acquisition of securities created or issued by, or any interest
in, any local company or business, other than certain types of
Bermuda government securities or securities of another "exempted"
company, partnership or other corporation resident in Bermuda but
incorporated abroad; and
. the carrying on of business of any kind in Bermuda, except in so far
as may be necessary for the carrying on of its business outside
Bermuda or under a license granted by the Minister of Finance of
Bermuda.
The Bermuda government actively encourages foreign investment in
"exempted" entities like us that are based in Bermuda but do not operate in
competition with local business. In addition to having no restrictions on the
degree of foreign ownership, we are not subject either to taxes on our income
or dividends nor to any foreign exchange controls in Bermuda. In addition,
there is no capital gains tax in Bermuda, and profits can be accumulated by us,
as required, without limitation. There is no income tax treaty between the
United States and Bermuda pertaining to the taxation of income other than
applicable to insurance enterprises.
There is no minimum subscription which must be raised by the issue of the
common shares pursuant to the global offering in order to provide for the
matters listed in Section 28 of the Companies Act.
74
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the global offering, there has not been any market for the
common shares, and no prediction can be made as to the effect, if any, that
sales of common shares or the availability of such shares for sale will have on
the market price of the common shares prevailing from time to time. Sales of
substantial amounts of the common shares in the public market, or the
perception that such sales may occur, could have an adverse impact on the
market price of the common shares.
Upon completion of the global offering, we will have 25,376,544 common
shares issued and outstanding (including common shares represented by SDRs),
assuming the underwriters do not exercise their over-allotment option. The
6,750,000 common shares sold in the global offering (including common shares
represented by SDRs) will be freely tradable in the United States, except that
any common shares held by "affiliates" as defined under Rule 144 under the
Securities Act may only be sold in compliance with the limitations described
below. The remaining 18,626,544 common shares are held by NOL and are deemed
"restricted securities" under Rule 144 and may be sold in the United States
only if registered or if they qualify for an exemption from registration under
the Securities Act, including Rule 144 or Regulation S.
In general, under Rule 144 as currently in effect, if one year has
elapsed since the later of the date of acquisition of restricted common shares
from our company or any of our affiliates, the purchaser or subsequent holder
of the common shares is entitled to sell within any three-month period a number
of common shares that does not exceed the greater of:
. 1% of our then outstanding common shares (including common shares
represented by SDRs); or
. the average weekly trading volume of our common shares (including
common shares represented by SDRs) on all national exchanges and/or
reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding the
date on which notice of the sale is filed with the U.S. Securities
and Exchange Commission.
Sales by our affiliates are subject to these same volume limitations.
Sales under Rule 144 are also subject to manner-of-sale provisions,
notice requirements and the availability of current public information about
our company. If two years have elapsed since the later of the date of
acquisition of restricted common shares from our company or from any of our
affiliates, and the purchaser or subsequent holder of those common shares is
deemed not to have been our affiliate at any time during the 90 days preceding
a sale, that person would be entitled to sell their common shares in the public
market under Rule 144(k) without regard to the volume limitations, manner-of-
sale provisions, notice requirements or public information requirements.
The following chart sets out the number of shares that are freely
tradable at various times after the completion of the offering:
After After After
90 days 180 days one year (1)
--------- ---------- ------------
Freely tradable shares(1)(2).............. 6,750,000 7,003,765 7,511,295
Affiliate shares available for sale (3)... 0 18,372,779 17,865,249
- --------
(1) After the 180-day lock-up period agreed with the underwriters, affiliate
shares available for sale will become freely tradable in an amount that,
over any three-month period, will equal at least 1% of the then outstanding
shares, and may exceed this amount depending on the history of the weekly
trading volume at time of sale.
(2) Assumes no exercise of the underwriters over-allotment option.
(3) Available for sale only in a registered offering or pursuant to an
exemption from registration under the Securities Act. Assumes no exercise
of shares under the share option plan.
75
NOL and we and our officers and directors have agreed, for a 180-day
period after the date of this prospectus, not to offer, sell, pledge or
otherwise dispose of, directly or indirectly, or announce the offering of, any
of our common shares or any security convertible into or exercisable or
exchangeable for, our common shares without the prior written consent of
Salomon Smith Barney Inc.
In addition, NOL has informed us that it intends to maintain a majority
shareholding in our company. We are not aware of any plans by NOL to dispose of
significant amounts of shares. We cannot assure you, however, that NOL will not
dispose of a significant amount of shares after the lock-up period.
76
TAXATION
Bermuda Tax Considerations
In the opinion of Cox, Hallet & Wilkinson, our Bermuda tax counsel, the
following discussion sets forth the material Bermuda income-tax consequences to
us and to holders of our shares.
Our taxation
We are currently exempt from taxation in Bermuda. Bermuda law allows us
to receive assurances from the Minister of Finance as to our tax-free status
going forward. Accordingly, we have received an assurance from the Minister of
Finance of Bermuda to the effect that, in the event that any legislation is
enacted in Bermuda that imposes:
. tax computed on profits or income,
. tax computed on any capital asset, gain or appreciation, or
. tax in the nature of estate duty or inheritance tax,
then the imposition of any such tax will not be applicable to us or any of our
operations or our shares, debentures or other obligations until March 28, 2016.
These assurances are subject to the proviso that they are not construed so as
to prevent the application of any tax or duty to such persons as are ordinarily
resident in Bermuda or to prevent the application of any tax payable in
accordance with the provisions of the Land Tax Act, 1967 of Bermuda or
otherwise payable in relation to any land leased to us in Bermuda.
We are required to pay a fixed annual Bermuda government fee currently in
the amount of $9,345.
Taxation to our holders of common shares
Currently, there is no Bermuda withholding tax on dividends paid by us or
tax on capital gains.
U.S. Tax Considerations
In the opinion of Cadwalader, Wickersham & Taft, our U.S. tax counsel,
the following discussion sets forth the material U.S. federal income-tax
consequences to us and to holders of our shares. The discussion is based upon
current provisions of the Internal Revenue Code of 1986, or the Code,
legislative history, treasury regulations, administrative rulings and court
decisions. These laws and regulations are subject to change, and any change
could affect the continuing accuracy of this discussion. We have not obtained a
ruling from the Internal Revenue Service, or IRS, on the matters discussed
below, and the views expressed below have no binding effect on the IRS. We
cannot assure you that our conclusions below would be sustained by a court of
law if challenged by the IRS.
Our taxation
As discussed below, we believe that income from our voyaging and time-
charter business is currently exempt from U.S. taxation and should continue to
be so exempt even if currently proposed regulations are promulgated in their
present form. In addition, we believe that income from our lightering business
is currently exempt from U.S. taxation, although that exemption could terminate
in part under the proposed regulations if promulgated in their current form.
These views are highly qualified, as described in detail below.
The Tax Reform Act of 1986, or the 1986 Act, significantly changed the
U.S. federal income tax treatment of income from shipping operations. Certain
of the relevant provisions of the 1986 Act have not yet been subject to
judicial or final administrative interpretation. However, in February 2000, the
IRS issued proposed regulations (the "Proposed Regulations") interpreting the
exemption for certain shipping income provided by section 883 of the Code. The
Proposed Regulations are proposed to be effective for taxable years ending 30
days or more after they are finalized and thus are not currently in effect. If
finalized as proposed, however, they could apply to our 2001 taxable year.
77
Under section 883 of the Code, certain foreign corporations are exempt
from U.S. federal income taxes on (or in respect of) U.S.-source shipping
income. A foreign corporation can qualify for the section 883 exemption if (i)
the foreign country in which the corporation is organized grants an equivalent
exemption for income from the international operation of ships ("International
Shipping Income") of sufficiently broad scope to U.S. corporations ("Equivalent
Exemption") and (ii) more than 50% in value of the stock of the corporation is
directly or indirectly owned by individuals who are residents of one or more
foreign countries that grant an Equivalent Exemption (the "Stock Ownership
Test"). In applying the Stock Ownership Test to a corporate shareholder, stock
of a foreign corporation (i) that is organized in a foreign country that grants
an Equivalent Exemption and (ii) whose stock is primarily and regularly traded
on an established securities market in the United States or in a foreign
country which grants an Equivalent Exemption (the "Publicly Traded Test") is
deemed to be owned by individuals resident in the Equivalent Exemption country
of organization ("Deemed Ownership Rule"). In addition, a foreign corporation
which derives International Shipping Income that itself is organized in an
Equivalent Exemption jurisdiction and meets the Publicly Traded Test qualifies
for the exemption without regard to whether its shareholders actually satisfy
the Stock Ownership Test.
Our U.S. tax counsel has advised us that our International Shipping
Income will qualify for exemption from U.S. federal income taxation under
section 883 of the Code. This conclusion is based upon (1) an IRS revenue
ruling holding that Bermuda, the country where we are organized, and Singapore,
the country where NOL is organized and where its stock is traded, are
Equivalent Exemption jurisdictions, (2) NOL owning more than 50% of the value
of our stock, and (3) the assumption, based upon information provided by NOL,
that NOL satisfies, and will continue to satisfy, the Publicly Traded Test such
that all of the stock of NOL, and therefore more than 50% of our stock, is
deemed to be owned by individuals resident in Singapore under the Deemed
Ownership Rule.
The Proposed Regulations provide a "Closely-Held Exception" to the
Publicly Traded Test if persons who own at least 5% of the value of the
outstanding shares of a foreign corporation's stock own, in the aggregate, 50%
or more of the value of the foreign corporation's stock. The assumption of our
U.S. tax counsel described in clause (3) of the previous paragraph is based on
(a) the fact that NOL has not received notices of 5% or greater ownership by
NOL shareholders under section 82 of Chapter 50 of the Singapore Companies Act
that aggregate 50% or more of NOL's stock and (b) the content of notices of
beneficial ownership of NOL stock received from nominee company holders of NOL
stock under section 92 of the Singapore Companies Act. As a result, the
Closely-Held Exception should not apply to NOL.
However, while it is possible that the Proposed Regulations will be
finalized with certain modifications to the Publicly Traded Test that would
make our qualification for the section 883 exemption even more certain, it is
possible that the Proposed Regulations could be finalized in a fashion that
could adversely affect our qualification for the exemption. Further, because
the definitions of 5% shareholders are not identical under the Singapore
Companies Act and the Proposed Regulations, there is a theoretical but small
possibility that there could be 5% shareholders under the Proposed Regulations
that are not 5% shareholders under the Singapore Companies Act. In addition,
future changes in our stock ownership could occur that could cause us to cease
to qualify for the exemption.
Our U.S. tax counsel has advised us that our income from lightering
operations in the U.S. Gulf is International Shipping Income and therefore is
exempt under section 883 of the Code. However, the Proposed Regulations take
the contrary view. While it is possible that this IRS interpretation may be
changed in the finalized regulations, if the Proposed Regulations'
interpretation were to be adopted without change, and if the IRS interpretation
were to be sustained by the courts, the income from our lightering operations
in the U.S. Gulf would be subject to U.S. tax. The following discussion
describes how we would be taxed if section 883 did not apply to our lightering
income or to our other shipping income.
Section 887 of the Code imposes a 4% gross basis tax (without allowance
for deductions) on "United States source gross transportation income", which is
transportation income treated as being from U.S. sources under section
863(c)(2) of the Code. Under section 863(c)(2) of the Code, 50% of
transportation income which
78
begins or ends in the United States (but not both) is U.S. source ("50/50
sourcing") and is potentially subject to the 4% tax (if the section 883
exemption does not apply). In addition, income that is effectively connected
with the conduct of a trade or business in the United States ("effectively
connected income") is not subject to tax under section 887 of the Code. Our
income subject to 50/50 sourcing would not be treated as effectively connected
income under section 887(b)(4) of the Code because substantially all of our
U.S. source gross transportation income would not be attributable to regularly
scheduled transportation under section 887 (b)(4) of the Code. Consequently, in
2000, if the section 883 exemption had not applied to us, a maximum of 50% of
our gross revenues would have been subject to the 4% tax (not taking into
account income from our U.S. Gulf lightering operations, which is addressed
separately below.)
If the section 883 exemption were not to apply to our lightering
operations in the U.S. Gulf, our U.S. tax counsel has advised us that 50/50
sourcing would apply to our income from lightering operations so that such
income also would be subject to the 4% tax. However, the IRS position in the
Proposed Regulations appears to be that income from such lightering operations
is not subject to 50/50 sourcing and is instead 100% U.S.-source income and
effectively connected income. If the IRS interpretation were sustained by the
courts, then 100% of our income from lightering operations in the U.S. Gulf
would be treated as U.S.-source income and would be subject to regular
corporate tax rates of up to 35% (after allowance for deductions, provided that
a timely income tax return were filed), and an additional branch profits tax of
30% on after-tax profits not timely reinvested in our U.S. business. In
addition, some of the interest paid or accrued by us could be subject to 30%
U.S. branch interest taxes. In 2000, U.S. source income from such lightering
operations constituted approximately 19% of our gross revenues.
We currently own two subsidiaries organized in the United States,
American Eagle Tankers Agencies, Inc. and its wholly owned subsidiary, Pelican
Offshore Services Company, Inc. These subsidiaries provide shipping services
and lease U.S. real property to us. These subsidiaries are subject to regular
rates of U.S. corporate tax of up to 35%, after allowance for deductions, on
fees and rents derived from us, as determined on an arm's length basis. Any
dividends paid to us by these subsidiaries would be subject to a U.S.
withholding tax of 30%. We do not believe that the taxes that may be imposed on
the income of these subsidiaries would have a material effect on our worldwide
earnings.
Taxation to our holders of common shares
The following is a discussion of certain U.S. federal income tax
consequences of the purchase of our common shares without regard to the
particular facts and circumstances of each holder. Generally, this discussion
considers only holders who own our common shares as capital assets. This
discussion generally does not discuss all aspects of U.S. federal income
taxation which may be important to particular holders in light of their
individual investment circumstances, such as banks, tax-exempt entities,
insurance companies, regulated investment companies, currency or securities
dealers, traders in securities who elect mark-to-market tax treatment,
investors liable for alternative minimum tax, persons that hold our common
shares as part of a straddle, "hedge," or "conversion transaction" with other
investments, persons that own 10% or more of our voting stock and persons whose
functional currency is not the U.S. dollar. This discussion also assumes that
any dividends will be payable, and sales and exchanges of our common shares
will be effected, in U.S. dollars.
The discussion below does not address potential tax effects relevant to
us or those tax considerations that depend upon circumstances specific to each
investor. Purchasers of our common shares should therefore satisfy themselves
as to the overall tax consequences of their ownership of our common shares,
including the state, local and foreign tax consequences thereof (which are not
reviewed herein). We urge you to consult your own tax advisors with respect to
your particular circumstances.
As used herein, the term U.S. holder means a beneficial owner of our
common shares who is
(i) A citizen or individual resident of the United States;
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(ii) A corporation or partnership created or organized in or under
the laws of the United States or any state thereof (including the
District of Columbia);
(iii) An estate, the income of which is subject to U.S. federal
income taxation regardless of its source;
(iv) A trust, if both
(a) a U.S. court is able to exercise primary supervision over
the administration of the trust, and
(b) one or more of U.S. persons have the authority to control
all substantial decisions of the trust; or
(v) A trust that elected to be treated as a U.S. person.
A non-U.S. holder is a beneficial owner of our common shares who is not a
U.S. holder. Except to the limited extent discussed below, this summary does
not consider the U.S. tax consequences to a non-U.S. holder.
U.S. Holders
Dividends paid by us on our common shares will be taxable to U.S. holders
as ordinary income to the extent such dividends are paid out of our current or
accumulated earnings and profits (as determined for U.S. federal income tax
purposes). Any distribution by us in excess of our current and accumulated
earnings and profits will be treated first as a return of capital, which will
reduce the U.S. holder's adjusted tax basis in our common shares (but not below
zero). To the extent such a distribution exceeds the U.S. holder's adjusted tax
basis in our common shares, the distribution will constitute capital gain from
the sale or exchange of property. Dividends received on our common shares by a
corporate holder generally will not be eligible for the dividends received
deduction.
For foreign tax credit purposes, we expect that dividends paid on our
common shares will be treated as foreign source income and generally will
constitute passive income. To the extent that foreign tax were to be imposed on
the distribution of such dividends and that tax were a creditable tax for U.S.
federal income tax purposes, U.S. holders would be required to take into
account the gross amount of the distribution under the rules set forth in the
preceding paragraph, and U.S. holders would have the option of claiming the
amount of any income taxes withheld at source either as a deduction from gross
income or as a dollar-for-dollar credit, subject to certain limitations against
their U.S. federal income tax liability.
A U.S. holder will, upon the sale or exchange of our common shares,
recognize capital gain or a loss for U.S. federal income tax purposes in an
amount equal to the difference between the amount realized and the U.S.
holder's adjusted tax basis in our common shares. Such gain or loss will be
long-term capital gain or loss if our common shares were held for more than one
year. A non-corporate U.S. holder, including an individual, generally will be
subject to tax on the net amount of his or her long-term capital gain at a
maximum rate of
(i) 20% if our common shares are held for more than one year; and
(ii) 18% if our common shares are held for more than five years.
Special rules (and generally lower maximum rates) apply for individuals
whose taxable income is below certain levels. Gain realized by a U.S. holder on
the sale or other disposition of our common shares in most cases will be
treated as income from U.S. sources for purposes of applicable foreign tax
credit limitations. The deductibility of capital losses is subject to certain
limitations.
U.S. federal income tax law contains special rules regarding the tax
treatment of U.S. persons who own stock in a foreign corporation that is
classified under the Code as a foreign personal holding company, or
80
FPHC; a controlled foreign corporation, or CFC; or a passive foreign investment
company, or PFIC. Based upon the expected distribution of our common shares
among holders, and, in the case of the FPHC provisions, the income that we
expect to derive, we do not expect to be a CFC or an FPHC. In any case, even if
we were a CFC, you would not have any adverse tax consequences unless you owned
10% or more of our voting stock.
We could be classified as a PFIC if we met either an income test or an
asset test. The income test would be met if 75% or more of our gross income
were "passive income" (generally, dividends, interest, rents, royalties, and
gains from the disposition of assets producing passive income, such as shares
of stock, subject to certain exceptions). The asset test would be met if at
least 50% of the quarterly average value of our assets produced, or were held
for the production of, passive income. Based upon the present and anticipated
composition of income and assets, we believe that we currently are not a PFIC,
and we do not expect to be classified as a PFIC in the future.
If, contrary to our expectations, we were classified as a PFIC,
notwithstanding the above-described rules regarding distributions and
dispositions, special rules would apply to certain U.S. holders (or to the
direct or indirect beneficial owners of certain non-U.S. holders). Each U.S.
person who is treated as owning our common shares for the purposes of the PFIC
rules would be subject to special U.S. tax rules that, in general, impose
either a tax at ordinary income rates plus an interest charge on certain
"excess distributions", a tax on undistributed income (if a "qualified electing
fund" election is made), or a tax at ordinary income rates on fluctuations in
the market value of our common shares (if a "mark to market" election is made).
Persons who are considering purchasing our common shares should be aware
that if, contrary to our expectations, we were classified as a PFIC, we might
not be able or willing to satisfy record-keeping requirements that would enable
U.S. persons to make a "qualified electing fund" election. Potential purchasers
should consult their tax advisers with respect to how the PFIC rules could
affect their tax situation.
A U.S. holder may be subject to backup withholding at the rate of 31%
with respect to certain payments to such holder, such as proceeds of a sale,
redemption or other disposition of our common shares, and dividends thereon,
unless such holder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates that fact or (ii) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with any applicable
requirements. In addition, such payments, including dividends, may be subject
to information reporting. Any amount actually withheld may be credited against
the holder's U.S. federal income tax liability and may entitle such holder to a
refund, provided that the required information is furnished to the IRS.
Non-U.S. Holders
Except as described below, a non-U.S. holder generally will not be
subject to U.S. federal income tax on dividends paid on our common shares
unless such dividends are effectively connected income and, if certain treaty
provisions apply, are attributable to a U.S. permanent establishment. In
addition, except as described below, a non-U.S. holder will not be subject to
U.S. federal income tax on gain recognized upon the sale or exchange of our
common shares unless (i) the gain is effectively connected and, if certain
treaty provisions apply, is attributable to a U.S. permanent establishment or,
(ii) in the case of a non-U.S. holder who is a nonresident alien individual,
the non-U.S. holder is present in the United States for 183 days or more in the
taxable year of the sale and certain other conditions are met. Non-U.S. holders
should also consult applicable income tax treaties, if any, which may exempt
them from U.S. taxation on any such gain.
Non-U.S. holders generally may be subject to information reporting and
backup withholding at a rate of 31% with respect to payment within the United
States of dividends on our common shares or payment of proceeds from the
disposition of our common shares to or through the U.S. office of a U.S. or
foreign broker, unless the holder provides a taxpayer identification number,
certifies as to its foreign status on IRS Form W-8BEN or other applicable form,
or otherwise establishes an exemption. With respect to the payment by a
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foreign office of a broker of proceeds from the disposition of our common
shares, or to payment of dividends on our common shares outside of the United
States, non-U.S. holders in some instances also may be subject to information
reporting and backup withholding. Even where applicable, however, such backup
withholding and information reporting can be avoided where the holder provides
a taxpayer identification number, certifies as to its foreign status, or
otherwise establishes an exemption.
Taxation Outside of Bermuda and the United States
We also may be subject to tax in any country our tankers visit. We do not
believe that any such tax will have a material effect on our worldwide
earnings.
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UNDERWRITING
The global offering consists of:
. an offering of a total of 4,725,000 common shares in the United
States and Canada, and
. an offering of a total of 2,025,000 common shares, directly or in the
form of SDRs, outside the United States and Canada.
Salomon Smith Barney Inc. is the global coordinator and sole book running
manager of the global offering. Salomon Smith Barney Inc., ABN AMRO Rothschild
LLC and Morgan Stanley & Co. Incorporated are acting as representatives of the
U.S. underwriters named below. Salomon Brothers International Limited, ABN AMRO
Rothschild and Morgan Stanley & Co. International Limited are acting as
representatives of the international underwriters named below. The Development
Bank of Singapore Ltd is acting as sponsor to the secondary listing in
Singapore.
Subject to the terms and conditions stated in the U.S. underwriting
agreement dated the date of this prospectus, each U.S. underwriter named below
has agreed to purchase, and we have agreed to sell to that underwriter, the
number of common shares set forth opposite the underwriter's name.
Number of
Underwriter Common Shares
----------- -------------
Salomon Smith Barney Inc.......................................
ABN AMRO Rothschild LLC........................................
Morgan Stanley & Co. Incorporated..............................
---------
Total........................................................ 4,725,000
=========
Subject to the terms and conditions stated in the international
underwriting agreement dated the date of this prospectus, each international
underwriter named below has agreed to purchase, and we have agreed to sell to
that underwriter, the number of common shares (including common shares
represented by SDRs) set forth opposite the international underwriter's name.
Number of
Underwriter Common Shares
----------- -------------
Salomon Brothers International Limited.........................
ABN AMRO Rothschild............................................
Morgan Stanley & Co. International Limited.....................
The Development Bank of Singapore Ltd..........................
---------
Total........................................................ 2,025,000
=========
The U.S. and international underwriting agreements provide that the
obligations of the underwriters to purchase the common shares included in the
global offering are subject to approval of legal matters by counsel and to
other conditions. The underwriters are obligated to purchase all the common
shares pursuant to their respective agreements (other than those covered by the
over-allotment option described below) if they purchase any of them. The
offering price per common share for the U.S. offering and the international
offering are identical. In addition, the U.S. and the international offerings
are each conditioned on the closing of the other.
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The U.S. underwriters propose to offer some of the common shares directly
to the public at the public offering price set forth on the cover page of this
prospectus and some of the common shares to dealers at the public offering
price less a concession not to exceed $ per share. The U.S. underwriters may
allow, and dealers may reallow, a concession not to exceed $ per share on
sales to other dealers. If all of the common shares are not sold at the initial
offering price, the U.S. representatives may change the public offering price
and the other selling terms. The U.S. representatives have advised us that the
U.S. underwriters do not intend to confirm any sales to any accounts over which
they exercise discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to 1,012,500 additional common
shares (directly or in the form of SDRs) at the public offering price less the
underwriting discount. The underwriters may exercise the option solely for the
purpose of covering over-allotments, if any, in connection with the global
offering. To the extent the option is exercised, each underwriter must purchase
a number of additional common shares (directly or in the form of SDRs)
approximately proportionate to that underwriter's initial purchase commitment.
The underwriters for each of the offerings have entered into an agreement
in which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer common shares or SDRs. The underwriters also
have agreed that they may sell common shares between their respective
underwriting syndicates. The number of common shares actually allocated to each
offering may differ from the amount offered due to reallocation between the
U.S. and the international offerings.
The SDRs have not been registered under the U.S. Securities Act of 1933
or any state securities laws and are not being offered in the United States or
to U.S. persons (as defined under Regulation S under the U.S. Securities Act).
NOL, we and our officers and directors have agreed, for a period of 180
days from the date of this prospectus, not to dispose of or hedge any of our
common shares or any securities convertible into or exchangeable for our common
shares without the prior written consent of Salomon Smith Barney Inc. Salomon
Smith Barney Inc. in its sole discretion may release any of the securities
subject to these lock-up agreements at any time without notice.
Prior to the global offering, there has been no public market for our
common shares or the SDRs. Consequently, the initial public offering price for
the common shares and the SDRs was determined by negotiations between us and
the underwriters. Among the factors considered in determining the initial
public offering price were our record of operations, our current financial
condition, our future prospects, our markets, the economic conditions in and
future prospects for the industry in which we compete, our management, and
currently prevailing general conditions in the equity securities markets,
including current market valuations of publicly traded companies considered
comparable to our company. We cannot assure you, however, that the prices at
which the common shares or the SDRs will sell in the public market after the
global offering will not be lower than the initial public offering price or
that an active trading market in the common shares or the SDRs will develop and
continue after the global offering.
The common shares have been approved for listing on the New York Stock
Exchange under the symbol "AEH", subject to official notice of issuance. The
underwriters have undertaken to sell common shares to a minimum of 2,000
beneficial owners in lots of 100 or more common shares to meet the New York
Stock Exchange distribution requirements for trading.
The following table shows the underwriting discounts and commissions that
we are to pay to the underwriters (except the Development Bank of Singapore
with respect to sales in Singapore) in connection with the global, offering.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional common shares.
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Paid by us
-----------------
No Full
Exercise Exercise
-------- --------
Per Common Share........................................... $ $
Total...................................................... $ $
We have agreed to pay The Development Bank of Singapore Ltd underwriting
and selling commissions of $ per common share, or a total of approximately
$ , with respect to sales in Singapore to non-institutional investors.
In connection with the global offering, Salomon Smith Barney Inc. and
Salomon Brothers International Limited, on behalf of the underwriters, may
purchase and sell common shares or SDRs in the open market. These transactions
may include short sales, syndicate covering transactions and stabilizing
transactions. Short sales involve syndicate sales of common shares or SDRs in
excess of the number of common shares (including common shares in the form of
SDRs) to be purchased by the underwriters in the global offering, which creates
a syndicate short position. "Covered" short sales are sales of common shares or
SDRs made in an amount up to the number of common shares represented by the
underwriters' over-allotment option. In determining the source of common shares
to close out the covered syndicate short position, the underwriters will
consider, among other things, the price of common shares or SDRs available for
purchase in the open market as compared with the price at which they may
purchase common shares through the over-allotment option. Transactions to close
out the covered syndicate short involve either purchases of common shares or
SDRs in the open market after the distribution has been completed or the
exercise of the over-allotment option. The underwriters may also make "naked"
short sales of common shares or SDRs in excess of the over-allotment option.
The underwriters must close out any naked short position by purchasing common
shares or SDRs in the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be downward pressure
on the price of the common shares or SDRs in the open market after pricing that
could adversely affect investors who purchase in the global offering.
Stabilizing transactions consist of bids for or purchases of common shares or
SDRs in the open market while the global offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc. repurchases common shares or SDRs originally sold by
that syndicate member in order to cover syndicate short positions or make
stabilizing purchases.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the common shares or SDRs. They may also cause
the price of the common shares or SDRs to be higher than the price that would
otherwise exist in the open market in the absence of these transactions. The
underwriters may conduct these transactions on the New York Stock Exchange, the
Singapore stock exchange, in the over-the-counter market, or otherwise. If the
underwriters commence any of these transactions, they may discontinue them at
any time.
We estimate that the total expenses of the global offering will be $3.0
million.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters. The representatives may agree to
allocate a number of common shares to underwriters for sale to their online
brokerage account holders. The representatives will allocate common shares to
underwriters that may make Internet distributions on the same basis as other
allocations. In addition, common shares may be sold by the underwriters to
securities dealers who resell common shares to online brokerage account
holders.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make because of any of those
liabilities.
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OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We estimate the expenses in connection with the global offering, other
than underwriting discounts and commissions, as follows:
Securities and Exchange Commission registration fee................. $ 37,842
New York Stock Exchange listing fee................................. 161,600
NASD filing fee..................................................... 15,637
Singapore stock exchange listing fee................................ 11,381
Singapore Registry of Companies and Businesses registration fee..... 2,699
Printing and engraving expenses..................................... 600,000
Legal fees and expenses............................................. 841,000
Auditors' fees and expenses......................................... 750,000
Blue Sky fees and expenses.......................................... 7,000
Miscellaneous costs................................................. 572,841
----------
Total............................................................. $3,000,000
==========
All amounts are estimated except the Securities and Exchange Commission
registration fee, the New York Stock Exchange listing fee and the NASD filing
fee.
LEGAL MATTERS
Certain legal matters will be passed upon for us by Milbank, Tweed,
Hadley & McCloy LLP, New York and Singapore, Allen & Gledhill, Singapore and
Cox Hallett Wilkinson, Hamilton, Bermuda and for the underwriters by Shearman &
Sterling Stamford, Singapore. Tax matters will be passed upon for us by
Cadwalader, Wickersham & Taft, New York. Milbank, Tweed, Hadley & McCloy LLP
and Shearman & Sterling may rely upon Cox Hallett Wilkinson with respect to all
matters of Bermuda law, including the validity of the common shares.
INDEPENDENT ACCOUNTANTS
Our financial statements as of December 31, 2000 and 1999 and for each of
the three years in the period ended December 31, 2000, which are included in
this prospectus, have been so included in reliance on the reports of
PricewaterhouseCoopers, independent accountants, given on the authority of said
firm as experts in auditing and accounting. Their business address is 8 Cross
Street #17-00, PWC Building, Singapore 048424.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form F-1, which
includes amendments, exhibits, schedules and supplements with respect to the
common shares offered by this prospectus. Although this prospectus, which is a
part of the registration statement, contains all material information included
in the registration statement, part of the registration statement has been
omitted from this prospectus as permitted by the SEC. For further information
with respect to our company and the common shares offered by this prospectus,
please refer to the registration statement. Statements contained in this
prospectus as to the contents of any contract or other document referred to in
this prospectus are not necessarily complete, and where the contract or other
document is an exhibit to the registration statement, each such statement is
qualified in all respects by the provisions of the applicable exhibit, to which
reference is now made.
Upon completion of the global offering, we will be subject to the
information requirements of the Securities Exchange Act of 1934 that are
applicable to foreign private issuers. As a result, we will be required
86
to file reports, including annual reports on Form 20-F, reports on Form 6-K and
other information with the SEC. We currently intend to submit to the SEC
quarterly reports on Form 6-K which will include unaudited quarterly financial
information, within 45 days for the first three quarters of each fiscal year,
in addition to our annual report on Form 20-F which will include audited annual
financial information within 90 days.
These reports and other information filed or to be filed by us can be
inspected and copied at the public reference facilities maintained by the SEC
at:
Judiciary Plaza Seven World Trade Center
450 Fifth Street, N.W. 13th Floor
Room 1024 New York, New York 10048
Washington, D.C. 20549
Northwestern Atrium Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661-2511
Copies of these materials can also be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington D.C. 20549, at
prescribed rates.
The SEC maintains a website at www.sec.gov that contains reports, proxy
and information statements, and other information regarding registrants that
make electronic filings with the SEC using its EDGAR system. As a foreign
private issuer, we are not required to use the EDGAR system, but currently
intend to do so in order to make our reports available over the Internet.
Upon approval of the common shares for listing on the New York Stock
Exchange, our periodic reports and other information may also be inspected at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
As a foreign private issuer, we will be exempt from the rules under the
Securities Exchange Act prescribing the furnishing and content of proxy
statements, and our executive officers, directors and principal shareholders
will be exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Securities Exchange Act.
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
We are a Bermuda company, and most of our assets are seaborne and may at
any given time be located outside the United States. As a result, it may be
difficult for our shareholders to serve notice of a lawsuit on us within the
United States. In addition, three of our seven directors are resident outside
the United States and may possess few if any assets in the United States, and
it may be difficult for you to serve process against any of those individuals
or to collect on any judgment issued against those individuals by a U.S. court.
It may also be difficult for our shareholders to enforce, in Bermuda,
judgments obtained in U.S. courts. We have been advised by our legal counsel in
Bermuda, Cox Hallett Wilkinson, that there is some doubt as to the enforcement
in Bermuda, in original actions or in actions for enforcement of judgments of
U.S. courts, of liabilities predicated upon U.S. federal securities laws
(including civil liabilities under such laws), although Bermuda courts will
generally enforce foreign judgments for liquidated amounts in civil matters
subject to certain conditions and exceptions.
We have expressly submitted to the jurisdiction of the U.S. federal and
New York state courts sitting in the City of New York for the purpose of any
suit, action or proceeding arising out of the global offering. We have
appointed our chief financial officer, Gregory A. McGrath, to accept service of
process in any such action.
87
This prospectus has been filed with the Registrar of Companies in Bermuda
pursuant to Part III of the Companies Act and the Bermuda Monetary Authority
has given its consent to the issue and transfer of the common shares offered in
the global offering. In accepting this prospectus for filing and granting the
appropriate approvals or permissions, the Registrar of Companies and the
Bermuda Monetary Authority accept no responsibility for the financial soundness
of any proposals or for the correctness of any statements made or opinions
expressed with regard to them. Approvals or permissions received from the
Bermuda Monetary Authority do not constitute a guarantee by the Bermuda
Monetary Authority as to performance or our creditworthiness. As a result, in
giving such approvals or permissions, the Bermuda Monetary Authority shall not
be liable for our performance or our default or for the correctness of any
opinions or statements expressed in this prospectus.
88
AMERICAN EAGLE TANKERS
INDEX TO THE FINANCIAL STATEMENTS
Audited Financial Statements
Report of Independent Accountants........................................ F-2
Combined Balance Sheet as of December 31, 1999 and Consolidated Balance
Sheet as of
December 31, 2000....................................................... F-3
Combined Statements of Operations for the years ended December 31, 1998,
1999 and 2000........................................................... F-4
Combined Statements of Shareholders' Equity as of December 31, 1998 and
1999 and
Consolidated Statement of Shareholders' Equity as of December 31, 2000.. F-5
Combined Statements of Cash Flows for the years ended December 31, 1998,
1999 and 2000........................................................... F-6
Notes to the Financial Statements for the years ended December 31, 1998,
1999 and 2000........................................................... F-7
Unaudited Financial Statements
Audited Consolidated Balance Sheet as of December 31, 2000 and Unaudited
Consolidated
Balance Sheet as of March 31, 2001...................................... F-28
Unaudited Combined Statement of Operations for the three months ended
March 31, 2000 and Unaudited Consolidated Statement of Operations for
the three months ended March 31, 2001................................... F-29
Unaudited Combined Statement of Cash Flows for the three months ended
March 31, 2000 and Unaudited Consolidated Statement of Cash Flows for
the three months ended March 31, 2001................................... F-30
Notes to the Unaudited Financial Statements.............................. F-31
F-1
Report of Independent Accountants
To the Board of Directors and Shareholders of American Eagle Tankers Inc.
Limited:
In our opinion, the accompanying combined balance sheet as of December
31, 1999, the consolidated balance sheet as of December 31, 2000 and the
related combined statements of operations, shareholders' equity and cash flows
for the years ended December 31, 1998, 1999 and 2000 present fairly, in all
material respects, the combined financial position of American Eagle Tankers
Inc. Limited and the NOL Tanker Businesses as of December 31, 1999, the
consolidated financial position of American Eagle Tankers Inc. Limited and its
subsidiaries as of December 31, 2000, and the combined results of the
operations and cash flows of American Eagle Tankers and the NOL Tanker
Businesses for each of the years ended December 31, 1998, 1999 and 2000, in
conformity with generally accepted accounting principles in the United States.
These financial statements are the responsibility of the management of American
Eagle Tankers; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards in the United States.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers
Singapore
March 21, 2001
F-2
AMERICAN EAGLE TANKERS
COMBINED BALANCE SHEET AS OF DECEMBER 31, 1999 AND
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2000
In thousands of U.S. dollars
As of December 31,
-------------------------
1999 2000
(combined) (consolidated)
---------- --------------
ASSETS
Current assets:
Cash and cash equivalents (Note 4).................. $ 54,935 $ 62,205
Accounts receivable, net of allowances of $80 and
$500 as of December 31, 1999 and 2000,
respectively....................................... 12,168 21,632
Amounts due from NOL and NOL affiliates (Note 11)... 32,056 7,161
Inventories......................................... 5,857 6,233
Prepaid expenses and other receivables.............. 2,514 3,213
-------- --------
Total current assets............................... 107,530 100,444
Equity investments in a joint venture (Note 5)....... 11,770 16,633
Vessels and other properties, net (Note 6)........... 381,506 447,372
Deferred expenditure, net............................ 7,027 6,862
Other non-current assets............................. 6,417 6,721
-------- --------
Total assets..................................... $514,250 $578,032
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 2,787 $ 3,121
Accrued expenses and other current liabilities (Note
7)................................................. 12,989 15,095
Amount due to NOL and NOL affiliates (Note 11)...... 5,476 63,076
Current portion of long term debt (Note 8).......... 10,648 6,648
Income taxes payables............................... 432 562
-------- --------
Total current liabilities.......................... 32,332 88,502
Long-term debt, net of current portion (Note 8)...... 234,851 179,291
Other non-current liability.......................... 8,560 12,475
-------- --------
Total liabilities................................ 275,743 280,268
-------- --------
Commitments and contingencies (Note 13)..............
Minority interest.................................... 15,065 14,036
Shareholders' equity:
Common shares....................................... 6,747 18,627
Share premium....................................... -- 54,120
Additional paid-in capital.......................... 60,790 209,706
Retained earnings................................... 10,669 1,275
Deferred stock compensation......................... (17) --
-------- --------
American Eagle Tanker Inc. Limited shareholders'
equity............................................. 78,189 283,728
Net assets of contributed NOL Tanker Businesses..... 145,253 --
-------- --------
Total shareholders' equity....................... 223,442 283,728
-------- --------
Total liabilities and shareholders' equity....... $514,250 $578,032
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
AMERICAN EAGLE TANKERS
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
Year Ended December 31,
----------------------------------
1998 1999 2000
(combined) (combined) (combined)
---------- ---------- ----------
Gross operating revenue................... $ 157,019 $ 177,607 $ 271,986
Operating expenses:
Brokerage and commission................. 4,128 4,574 3,674
Vessel voyage expenses................... 26,867 41,759 61,890
Vessel operating expenses................ 28,040 31,804 42,845
Charter hire expenses.................... 37,246 56,451 60,401
Depreciation and amortization............ 30,093 27,537 28,593
General and administrative expenses...... 5,018 4,439 7,106
---------- ---------- ----------
Total operating expenses................ 131,392 166,564 204,509
Other operating income (expenses)......... (723) 50 3,832
---------- ---------- ----------
Operating income.......................... 24,904 11,093 71,309
Equity in profit (loss) of a joint
venture.................................. (9) 119 1,568
Interest expense.......................... (16,366) (14,562) (16,711)
Interest income........................... 2,930 3,648 4,561
---------- ---------- ----------
Income before income taxes................ 11,459 298 60,727
Income taxes (Note 9)..................... (103) (103) (136)
---------- ---------- ----------
Income after income taxes................. 11,356 195 60,591
Minority interest......................... 91 729 1,029
---------- ---------- ----------
Net income................................ $ 11,447 $ 924 $ 61,620
========== ========== ==========
Shares used in per share computation (Note
17)...................................... 18,626,544 18,626,544 18,626,544
Basic and diluted earnings per share (Note
17)...................................... $ 0.61 $ 0.05 $ 3.31
The accompanying notes are an integral part of these financial statements.
F-4
AMERICAN EAGLE TANKERS
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY AS OF DECEMBER 31, 1998 AND 1999
AND CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AS OF DECEMBER 31, 2000
In thousands of U.S. dollars, except share data
Consolidated American Eagle Tankers Inc. Limited
------------------------------------------------------------ Net Assets
Common Shares Additional Deferred of NOL
------------------ Share Paid-in Retained Stock Tanker
No. Amount Premium Capital Earnings Compensation Businesses Total
---------- ------- ------- ---------- -------- ------------ ---------- --------
Combined balance as of
January 1, 1998........ 6,746,544 $ 6,747 -- $ 65,231 $ 23,294 -- $ 120,257 $215,529
Net income (loss)...... -- -- -- -- (1,852) -- 13,299 11,447
Deemed dividends to
NOL................... -- -- -- (1,806) -- -- -- (1,806)
---------- ------- ------- -------- -------- ---- --------- --------
Combined balance as of
December 31, 1998...... 6,746,544 6,747 -- 63,425 21,442 -- 133,556 225,170
Net income (loss)...... -- -- -- -- (10,773) -- 11,697 924
Deemed dividends to
NOL................... -- -- -- (2,768) -- -- -- (2,768)
Deferred stock
compensation.......... -- -- -- 133 -- $(17) -- 116
---------- ------- ------- -------- -------- ---- --------- --------
Combined balance as of
December 31, 1999...... 6,746,544 6,747 -- 60,790 10,669 (17) 145,253 223,442
Net income............. -- -- -- -- 55,373 -- 6,247 61,620
Amortization of
deferred stock
compensation.......... -- -- -- -- -- $ 17 -- 17
Deemed dividends to
NOL................... -- -- -- (2,584) -- -- -- (2,584)
Contribution of net
assets of NOL Tanker
Businesses to American
Eagle Tankers, by NOL
on December 29, 2000.. -- -- -- 151,500 -- -- $(151,500) --
Dividend declared (Note
17)................... -- -- -- -- (64,767) -- -- (64,767)
Shares issued after the
financial year (Note
17)................... 11,880,000 11,880 $54,120 -- -- -- -- 66,000
---------- ------- ------- -------- -------- ---- --------- --------
Consolidated balance as
of December 31, 2000... 18,626,544 $18,627 $54,120 $209,706 $ 1,275 -- -- $283,728
========== ======= ======= ======== ======== ==== ========= ========
The accompanying notes are an integral part of these financial statements.
F-5
AMERICAN EAGLE TANKERS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars
Year ended December 31,
--------------------------------
1998 1999 2000
(Combined) (Combined) (Combined)
---------- ---------- ----------
Cash Flows From Operating Activities
Net income................................... $ 11,447 $ 924 $ 61,620
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 30,093 27,537 28,593
(Gain)loss on disposal of assets............ 814 -- (4,786)
Equity in profit(loss) of a joint venture... 9 (119) (1,568)
Deemed dividends to NOL..................... (1,806) (2,768) (2,584)
Minority interest in net income............. (91) (729) (1,029)
-------- -------- --------
40,466 24,845 80,246
-------- -------- --------
Changes in operating assets and liabilities
Trade accounts receivables.................. (7,457) 5,469 (9,464)
Inventories................................. (1,551) (2,407) (376)
Other current assets........................ 267 (9,724) 4,172
Deferred expenditure........................ (7,630) (5,886) (5,340)
Other non-current assets.................... (1,864) (1,113) (503)
Accounts payable............................ 2,447 159 (279)
Other current liabilities................... 2,844 3,345 14,105
Increase in interest payable................ 2,503 (3,017) (848)
Increase in tax payable..................... 120 90 130
-------- -------- --------
Net cash provided by operating activities.... 30,145 11,761 81,843
-------- -------- --------
Cash Flows From Investing Activities
Purchase of vessels and other properties..... (1,786) (465) (92,674)
Proceeds from sale of vessels and other
properties.................................. 35,488 11,000 44,008
Purchase of additional shares in a joint
venture..................................... -- -- (3,295)
-------- -------- --------
Net cash provided by(used in) investing
activities.................................. 33,702 10,535 (51,961)
-------- -------- --------
Cash Flows From Financing Activities
Repayment of long-term debt.................. (34,987) (13,072) (42,648)
Repayment of bank overdraft.................. (342) (351) --
Net cash transfers from(to) NOL.............. 3,100 (18,109) 20,036
-------- -------- --------
Net cash used in financing activities........ (32,229) (31,532) (22,612)
-------- -------- --------
Changes in cash and cash equivalents......... 31,618 (9,236) 7,270
Cash and cash equivalents, beginning of
year........................................ 32,553 64,171 54,935
-------- -------- --------
Cash and cash equivalents, end of year....... $ 64,171 $ 54,935 $ 62,205
======== ======== ========
Supplemental disclosures of cash flow
information
Cash paid for interest....................... $ 13,863 $ 17,579 $ 17,559
Unpaid Consideration for vessels purchased... -- -- $35,300
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-6
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
1 Description of Business
American Eagle Tankers Inc. Limited (the "Company") was incorporated on
January 13, 1994 in Bermuda. The Company has three wholly owned subsidiaries,
American Marine Offshore Services Limited ("AMOS"), American Eagle Tankers
Agencies Inc. ("AET Agencies") and Pelican Offshore Services Company, Inc.
("POSC"). This group is collectively referred to as AET. AET provides marine
transportation services to oil companies, producers, traders and refiners
active in the international crude oil market. AET's primary focus is on the
transportation of crude oil with a fleet of Aframax tankers in the U.S.
Gulf/Caribbean, Atlantic Basin, North Sea, Trans-Atlantic and Mediterranean
tanker trades. The Company is a wholly owned subsidiary of Neptune Orient Lines
Limited ("NOL"), a company incorporated in Singapore.
In the US Gulf/Caribbean voyage trade, AET's tankers load crude oil from
ports in Mexico, Colombia, Venezuela and various other Caribbean ports, for
delivery to the United States. AET also operates an offshore ship to ship
transfer business (commonly referred to as lightering) in the Gulf of Mexico,
transferring crude oil from larger tankers whose overall size prevents them
from entering most U.S. Gulf ports. In the Atlantic Basin, AET focuses on
transportation of crude oil between ports.
2 Transfer of NOL's Tanker Businesses and Other Acquisitions
On December 29, 2000, as part of NOL's effort to consolidate its tanker
operations under AET, AET and NOL entered into an agreement under which NOL
transferred to AET substantially all of the assets and liabilities relating to
its tanker businesses that were similar to AET's tanker business (the
"Transfer"). The tanker businesses transferred by NOL to AET comprised NOL's
interest in seven Aframax tankers and its 65% equity interest in two Singapore
incorporated subsidiaries, Trilith Shipping Pte Ltd ("Trilith") and Trilithon
Shipping Pte Ltd ("Trilithon"). Collectively the businesses transferred to AET
are referred to herein as the "NOL Tanker Businesses". The assets and
liabilities of the NOL Tanker Businesses were transferred at their historical
costs at the date of the Transfer since the Transfer was considered to be a
transaction between entities under common control. AET and the NOL Tanker
Businesses are collectively referred to as the "AET Group" or the "Group",
before and after the Transfer.
The Statement of Shareholders' Equity reflects NOL's transfer of its
investment in the NOL Tanker Businesses. The results of operations of the NOL
Tanker Businesses will be consolidated from December 30, 2000. The balance
sheet of the NOL Tanker Businesses is consolidated as of December 31, 2000.
On December 29, 2000, AET also acquired an additional 15% equity interest
in Crystal Shipowning Pte Ltd ("Crystal") from a third party for a cash
consideration of $3,295 which increased AET's equity interest in Crystal to
65%.
3 Principal Accounting Policies and Basis of Presentation
Basis of Presentation
The financial statements are expressed in United States (U.S.) dollars
and are prepared in accordance with accounting principles generally accepted in
the United States ("U.S. GAAP") consistently applied for all periods.
F-7
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
Since the Transfer (Note 2) was considered to be a transaction between
entities under common control, the financial statements for the periods and
dates prior to the Transfer have been prepared on an as-if-pooled basis. The
financial statements therefore include:
. A combined balance sheet as of December 31, 1999, which includes the
combined assets, liabilities, and shareholders" equity of AET and the
NOL Tanker Businesses.
. A consolidated balance sheet as of December 31, 2000 for the AET
Group, which includes the assets and liabilities of the NOL Tanker
Businesses that were contributed to AET on December 29, 2000 (Note
2).
. The combined results of operations and cash flows for the years ended
December 31, 1998, 1999 and 2000, which includes the results of
operations and cash flows of both AET and the NOL Tanker Businesses.
. A statement of movements in shareholders' equity which reflects the
combined shareholders' equity for AET and the NOL Tanker Businesses
and movements therein as of and for the years ended December 31, 1998
and 1999 and the consolidated shareholders' equity of the AET Group
as of December 31, 2000 after the transfer of the NOL Tanker
Businesses to AET.
The combined financial statements reflect specifically identifiable
assets, liabilities, revenues and expenses as well as the allocation of certain
corporate general and administrative expenses. Corporate overhead expenses
attributable to the NOL Tanker Businesses are allocated based on the ratio of
time spent by NOL personnel on matters involving the NOL Tanker Businesses to
total time spent on the NOL Group. These allocated expenses include legal,
accounting, shipbuilding services, treasury and other NOL corporate and
infrastructure expenses. The Group's management believes that the allocation
method used to allocate such overhead expenses is reasonable. However, the
financial information included herein may not be indicative of the future
consolidated financial position, operating results, changes in shareholders'
equity and cash flows of AET or what they would have been if the NOL Tanker
Businesses had been transferred to AET at the beginning of the periods
presented in these financial statements.
Basis of combination and consolidation
The combined and consolidated financial statements include the financial
statements of wholly owned and majority-owned and controlled subsidiaries. All
significant inter-company balances and transactions have been eliminated in the
combination and consolidation.
The equity method of accounting is used to account for investments in
corporate entities in which the Company has joint control or exercises
significant influence, which is presumed to exist when the Company holds a 20%-
50% ownership interest.
Risks and uncertainties
The Group's future results of operations include a number of risks and
uncertainties. Factors that could affect the Group's future operating results
causing actual results to vary materially from expectations include, but are
not limited to, dependence on the highly cyclical nature of the crude oil and
tanker industry as well as the competition in the market.
Use of estimates
The preparation of these financial statements in accordance with U.S.
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of
F-8
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
contingent assets and liabilities at the date of the financial statements and
the revenue and expenses during the reporting period. Actual results could
differ from these estimates.
Foreign currency transactions
The functional currency of all entities of the Group is the U.S. dollar.
Transactions in currencies other than U.S. dollars are translated into U.S.
dollars at the rates of exchange in effect at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at the rates of exchange prevailing at the balance
sheet date. Foreign currency gains or losses are included in the results of
operations.
Cash and cash equivalents and concentration of credit risk
The Group considers short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents. They are
carried at cost plus accrued interest, which approximate fair values.
Certain of the Group's treasury management activities during the years
presented were undertaken by NOL on behalf of the Group. The Group companies
participate in a pooled cash management program, which requires the Group
companies to place surplus cash with NOL as short-term advances of less than
three months. Surplus cash placed with NOL was $41,905 and $53,704 as of
December 31, 1999 and 2000, respectively. The interest income associated with
these short-term advances to NOL were $1,806, $2,768 and $2,584 for the years
ended December 31, 1998, 1999 and 2000, respectively, and reflects market-based
rates. This interest income is included in the Statements of Operations. As NOL
did not and does not intend to pay AET interest on these short-term advances,
this interest income has been reflected as deemed dividend payments to NOL in
the Statement of Shareholders' Equity.
Inventories
Inventories, which comprise fuel and consumable stores, are carried at
the lower of cost or market value. Cost is determined on a weighted-average
basis.
Vessels and other properties
Vessels and other properties are stated at cost. Additions, improvements
and major overhauls are capitalized. For vessels in operations, the cost less
estimated residual value is depreciated on a straight-line basis over the
estimated useful life of 22 years. Other properties are depreciated on a
straight-line basis over their estimated useful lives as follows:
Vessel equipment 10 years
Lightering and warehouse equipment 2-8 years
Workboats 40 years
Building 15 years
Furniture, fittings and other assets 3-5 years
No depreciation is provided for vessels under construction and freehold
land.
The cost of borrowings related to vessels under construction is included
in the cost of vessels, and is, upon the completion of such assets, depreciated
together with the purchase consideration at rates of depreciation applicable to
such assets.
F-9
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
Intangibles
The excess of purchase price paid over the estimated fair values of net
tangible and identifiable intangible assets acquired has been recorded as
goodwill and is amortized using the straight-line method over the estimated
period to be benefited of not more than 7 years. As of December 31, 1999 and
2000, the gross amount capitalized in connection to the acquisition of AMOS was
$1,957 and the related accumulated amortization as of those dates amounted to
$1,640 and $1,839, respectively.
Deferred expenditure
Normal vessel repair and maintenance expenses are charged to expenses
when incurred. Expenditure for major overhauls of the vessels are incurred
during drydockings, which take place at intervals averaging two and a half
years. Drydocking expenditures are capitalized and amortized over a period from
the current drydocking date to the next estimated drydocking date.
When significant drydocking expenditures recur prior to the expiry of the
amortization period, the remaining unamortized expenditure of the previous
drydocking is expensed in the month of the subsequent drydocking.
Impairment of long-lived assets
Management reviews the values assigned to long-lived assets in accordance
with the provisions of Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". This Statement requires that long-lived assets and
other identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets is assessed using a comparison of the
aggregate undiscounted future net cash flows expected to be generated by the
asset to its carrying value. If assets are considered to be impaired, the
impairment recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets based on aggregate discounted
future net cash flows.
Operating leases
Operating lease expenses are charged on a straight-line basis over the
lease term.
The Company had entered into a sale and leaseback agreement for a vessel
during the year ended December 31, 1998. This lease is classified as an
operating lease under the provisions of SFAS No. 13, "Accounting for Leases". A
loss of $814 on this transaction was recognized in the income statement during
the year ended December 31, 1998.
Derivatives
The Group's exposure to fluctuations in foreign exchange rates and
certain interest rates was managed by NOL for the financial years ended
December 31, 1998, 1999 and 2000. NOL, Trilith and Trilithon are parties to the
derivative contracts which are disclosed in Note 14. These contracts were
entered into in connection with NOL's management of its overall exposure to
fluctuations in foreign exchange rates and interest rates. These financial
exposures were managed in accordance with NOL's corporate policies and
procedures.
F-10
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
Subsequent to December 29, 2000, the Group has assumed management of its
exposure to fluctuations in foreign exchange rates and interest rates. The
Group does not plan to use derivative contracts for trading or speculative
purposes. NOL will assign the derivative contracts, which are designated for
the loans transferred to the Group, from its foreign exchange and interest rate
portfolio. This assignment will not alter the original terms of the contracts
being transferred. Gains and losses related to foreign exchange contracts being
transferred have been allocated to the Group and are included in the operating
income in Statement of Operations.
Interest rate swap agreements
NOL has used interest rate swaps to change the nature of debts in order
to achieve its overall desired mix of fixed and floating rate instruments. All
interest rate swaps are directly related to designated loans and are accounted
for under the accrual method.
The differential to be paid or received pursuant to interest rate swaps
is accrued as interest rates change and is recognized as an adjustment to
interest expense. Premium and receipts, if any, are recognized as adjustments
to interest expense over the lives of the individual contracts.
Cross currency interest rate swap agreements
Gains and losses arising from cross currency interest rate swaps which
hedge existing debts are recognized in the Statement of Operations at the end
of each period. Such gains or losses offset translation gains and losses on the
related foreign currency denominated debts.
Any unrealized gains and losses on cross currency interest rate swaps
that do not qualify for hedge accounting are recognized in the Statement of
Operations at the end of each period. Any realized gains and losses on cross
currency interest rate swaps are immediately recognized in the Statement of
Operations.
Revenue and expense recognition
Voyage revenues and expenses are recognized on the percentage of
completion method of accounting. For the recognition of voyage revenues of
vessels operating on voyage or lightering charters, the percentage of
completion of voyages is calculated on a discharge-to-discharge basis. Under
this method, voyage revenue is recognized evenly over the period from a
vessel's departure from its previous discharge point to its projected departure
from its next discharge point. The balance sheets reflect the deferred portion
of revenues and expenses applicable to subsequent periods.
For vessels operating on time charters, voyage revenues are recognized
over the term of the contract based on total contracted amount.
Estimated losses on voyages are provided for in full at the time such
losses become evident. Our revenue recognition policies are in compliance with
Staff Accounting Bulletin No. 101.
Vessel voyage expenses comprise of incremental expenses specifically
attributable to voyages, primarily comprising fuel and port charges.
Vessel operating expenses comprise all expenses relating to the operation
of vessels (other than variable voyage expenses), including ship management
fees, crew costs, repairs and maintenance, insurance, stores, lubes,
communications, and other operating expenses.
F-11
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
Income taxes
The Group's historical operating results include the historical results
of AET and the NOL Tanker Businesses. The legal jurisdictions of the countries
in which the Company and NOL Tanker Businesses are incorporated do not impose
income taxes upon shipping-related activities. The Company's subsidiaries
incorporated in the United States are subject to income taxes (Note 9).
The NOL Tanker Businesses' operating results historically have been
included in NOL's income tax returns and in the tax returns of Trilith and
Trilithon. The provision for income taxes in the Group's financial statements
has been determined on a separate-return basis.
The Group accounts for income taxes using the liability method described
in SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets and
liabilities are recognized for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported
amounts, and are reduced by a valuation allowance to the extent management
determines that realization of the asset more likely than not will not occur.
Accounting for stock-based compensation
The Group accounts for stock-based compensation under Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and has disclosed the required pro forma effect on net income and
earnings per share as if the fair value method of accounting as prescribed in
SFAS No. 123, "Accounting for Stock-Based Compensation", had been applied (Note
15).
Comprehensive income
The Group follows Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting and
displaying comprehensive income and its components in the consolidated
financial statements. For the years ended December 31, 1998, 1999 and 2000, the
Group did not have any components of other comprehensive income.
Segment reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", effective for fiscal years beginning after December 15, 1997,
requires that segment disclosures follow the internal reporting to senior
management of the Group. The Company's Chief Operating Decision Maker, or CODM,
assesses performance of the fleet and plans utilization of vessels based on
overall fleet financial information and Time Charter Equivalent, or TCE, which
is based on voyage revenues net of variable costs. Expense information is not
available by type of service because many of the Company's costs and expenses
relate to the maintenance of a particular ship over time and cannot be
meaningfully allocated to a particular voyage or type of service. All vessels
can be used to generate revenues in any of the three service areas. The Company
does not have managers that are responsible for the management of the
lightering, time and voyage chartering services, and uses a central planning
department that is responsible for the allocation of the available fleet
capacity to the demand for any of the three services. The Group's management
has determined that the Group is operating as one segment, since it does not
review results other than for the Group as a whole.
F-12
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
Significant customers and concentration of credit risk
The Group has a number of major customers in North America. During the
years ended December 31, 1998, 1999 and 2000, the Group's largest customer
accounted for 21.7%, 18.8% and 12.3% of gross operating revenues, respectively.
The Group's three largest customers collectively accounted for approximately
50.8%, 40.2% and 30.1% for the years ended December 31, 1998, 1999 and 2000,
respectively. The Group anticipates that significant customer concentrations
will continue for the foreseeable future, although the profile of these
significant customers may change. The Group believes that the concentration of
its credit risk in trade receivables is mitigated substantially by its credit
evaluation process, credit policies, and credit control and collection
procedures.
The Group performs ongoing credit evaluations of its customers as it
considers necessary, and makes provisions for potential credit losses as
required. As of December 31, 1999 and 2000, the Group provided for potential
credit loss of $80 and $500, respectively.
Cash and cash equivalents include deposits with major banks and financial
institutions located in United States, United Kingdom, Hong Kong and Singapore.
The Group is exposed to credit risk in the event of default by the financial
institutions or issuers of these deposits to the extent of amounts recorded in
the balance sheet. The Group believes that this risk is remote as the credit
quality of these financial institutions is high. As of December 31, 1999 and
2000, the deposits were $13,030 and $8,501, respectively.
In addition, certain of the Group's treasury management activities are
undertaken by NOL or its affiliates. The Group participates in a pooled cash
management program and places short-term advances with NOL.
Earnings per share
Net income per share is computed by dividing the net income available to
common shareholders for the period by the number of common shares outstanding
as of December 31, 2000. The number of shares has been adjusted retroactively
to account for the change in capital structure and the dividend payout after
the year-end (Note 17). There are no potential dilutive common shares as of
December 31, 1998, 1999 and 2000.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
The Statement establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair market value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset gains and losses on the
hedged item in the Statement of Operations, and requires that a company must
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement No. 133". SFAS 137 is an amendment of SFAS
133 and defers the effective date of SFAS 133 to fiscal years beginning after
June 15, 2000.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activity -- an amendment of SFAS
133", which amended certain provisions of SFAS 133. Management has assessed the
impact of SFAS 133 as amended, and believes the adoption of SFAS 133 will not
have a material effect on the Group's current or future financial position or
results of operations (Note 14).
F-13
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
4 Cash and Cash Equivalents
Cash and cash equivalents as of December 31, 1999 and 2000 consist of the
following:
As of December
31,
---------------
1999 2000
------- -------
Cash at banks............................................... $ 1,034 $ 1,478
Fixed deposits placed with banks............................ 11,996 7,023
Cash equivalents -- NOL pooled cash (Note 11)............... 41,905 53,704
------- -------
$54,935 $62,205
======= =======
NOL pooled cash represents the surplus cash placed by AET with NOL as
part of the pooled cash management program (Note 3).
5 Equity Investments in a Joint Venture -- Crystal
% of Equity share Carrying
Shareholdings Cost in income value
------------- ------- ------------ --------
As of December 31, 2000......... 65% $12,443 $4,190 $16,633
As of December 31, 1999......... 50% $ 9,148 $2,622 $11,770
On December 29, 2000, AET acquired an additional 15% interest in Crystal
from GEE Corporation for a purchase consideration of $3,295. Total interest in
Crystal after the acquisition is 65%. The transaction has been accounted for as
a purchase transaction in accordance with APB No. 16, "Business Combinations".
In the consolidated financial statements, Crystal continues to be accounted for
as a joint venture using the equity method of accounting because of significant
participating rights retained by the minority shareholders under the
shareholders' agreement.
6 Vessels and Other Properties
Vessels and other properties consist of:
As of December 31,
--------------------
1999 2000
--------- ---------
Vessels under construction............................. -- $ 52,463
Vessels in operation................................... $ 497,334 532,633
Vessels equipment...................................... 1,253 1,849
Lightering and warehouse equipment..................... 2,464 2,858
Workboats.............................................. 3,758 3,758
Freehold land and building............................. 1,250 1,250
Furniture, fittings and other assets................... 235 192
Less: Accumulated depreciation......................... (124,788) (147,631)
--------- ---------
Vessels and other properties, net...................... $ 381,506 $ 447,372
========= =========
Depreciation expense was $24,447, $22,882 and $22,888 for the years ended
December 31, 1998, 1999 and 2000, respectively.
F-14
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
7 Accrued Expense and Other Current Liabilities
As of December
31,
---------------
1999 2000
------- -------
Accrued interest............................................ $ 1,418 $ 570
Accrued payroll............................................. -- 750
Accrued voyage expenses..................................... 2,334 3,063
Accrued operating expenses and other creditors.............. 4,682 5,347
Deferred revenue............................................ 4,555 5,365
------- -------
$12,989 $15,095
======= =======
8 Long Term Debts
Long term debts consist of the following:
As of December
31,
-----------------
1999 2000
-------- --------
Term Loan 1................................................ $ 26,000 $ 26,000
Term Loan 2................................................ 36,000 --
Term Loan 3................................................ 147,156 127,500
Term Loan 4................................................ 36,343 32,439
-------- --------
245,499 185,939
Less: Current portion...................................... (10,648) (6,648)
-------- --------
$234,851 $179,291
======== ========
The proceeds from Term Loan 1 were used towards the refinancing of the
acquisition cost of the vessel, Eagle Otome. The U.S. dollar loan is
collateralized by way of a statutory mortgage on Eagle Otome. NOL and Mitsui &
Co. Limited ("Mitsui"), a company incorporated in Japan, guarantee the payment
obligations in respect of the loan. Eagle Otome has a net book value of $46,981
as of December 31, 2000. The loan had a fixed interest rate per annum up to
December 29, 2000. Subsequent to this date, as provided under Term Loan 1, the
loan attracted a floating interest rate. The interest rate on this loan ranged
from 7.16% to 8.5% for the year ended December 31, 2000. The principal is
repayable in full in March 2003.
The proceeds from Term Loan 2 were used towards the purchase of the
vessel, Eagle Corona. The U.S. dollar loan was terminated in October 2000. The
breakfunding cost incurred as a result of the termination was not material. The
interest rate on this loan ranged from 6.75% to 7.54% for the year ended
December 31, 2000.
The proceeds from Term Loan 3 were used partly towards the purchase of
the vessels, Eagle Beaumont and Eagle Birmingham and partly to refinance the
acquisition costs of Eagle Boston and Eagle Baltimore. Prior to October 20,
2000, Term Loan 3 was represented by four Australian dollar ("AUD") loans drawn
down by NOL for a total amount of AUD214,175. In October 2000, these four loans
were refinanced by NOL using the proceeds from U.S. dollar loans from The
Development Bank of Singapore ("DBS") amounting to $143,832. As of December 31,
2000, Term Loan 3 was used to fund an interim intercompany loan from NOL to
AET. The DBS loans were collateralized by statutory mortgages on Eagle Carina,
Eagle Centaurus, Eagle Beaumont, Eagle Birmingham and Eagle Aries. Eagle Aries
is owned by NOL. These vessels
F-15
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
had a total net book value of $152,383 as of December 31, 2000. In March 2001,
Term Loan 3 was refinanced by a $127,500 loan from DBS to AET. This loan is
collateralized by way of a statutory mortgage over Eagle Carina, Eagle
Centaurus, Eagle Beaumont and Eagle Birmingham. NOL guarantees the payment
obligations in respect of the loan. These vessels had a total net book value of
$144,645 as of December 31, 2000. The loan is repayable in 12 semi-annual
payments comprising 11 installments of $3,324 and a final payment of the then
outstanding principal on December 30, 2006. The interest rate on Term Loan 3
ranged from 6.13% to 7.24% for the year ended December 31, 2000.
Term Loan 4 has an original amount of Japanese Yen ("Yen") 4,100,000 and
the proceeds were used to refinance the acquisition cost of the vessel, Eagle
Subaru. The Yen loan is collateralized by way of a statutory mortgage over
Eagle Subaru which has a net book value of $48,830 as of December 31, 2000. NOL
and Mitsui guarantee the payment obligations in respect of the loan. This loan
is repayable in full in March 2003. The interest rate on this loan ranged from
0.46% to 0.67% for the year ended December 31, 2000.
Interest expense on long term debts for the years ended December 31,
1998, 1999 and 2000 were $14,856, $12,947 and $16,227, respectively.
The aggregate annual long-term debt principal repayments required to be
made for the five fiscal years subsequent to December 31, 2000 are as follows:
As of
December 31, 2000
-----------------
Payable during the period ending December 31,
2001....................................................... $ 6,648
2002....................................................... 6,648
2003....................................................... 65,087
2004....................................................... 6,648
2005....................................................... 6,648
Thereafter................................................. 94,260
--------
$185,939
========
9 Income Taxes
No provision is made for taxation on shipping income derived from AET as
such income is tax exempt in Bermuda under The Exempted Undertaking Tax
Protection Act, 1966. In addition, no provision for taxation is made on the
income derived from AMOS which is incorporated in Cayman Islands as such income
is not subjected to tax in Cayman Islands. No provision is made for taxation on
the shipping income derived from the NOL Tanker Businesses as such income is
tax exempt in Singapore pursuant to section 13(a) of the Singapore Income Tax
Act. The Company's subsidiaries incorporated in the United States are subject
to income taxes in accordance with the tax laws of the United States. Provision
for tax payable was $432 and $562 as of December 31, 1999 and 2000,
respectively. There was no income tax paid in the last three years.
The Bermuda and foreign components of income (loss) before income taxes
are as follows:
Year ended December 31,
--------------------------
1998 1999 2000
--------- -------- -------
Bermuda........................................... $ 679 $(4,174) $60,635
Foreign........................................... (12,138) 4,472 92
--------- -------- -------
$(11,459) $ 298 $60,727
========= ======== =======
F-16
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
A reconciliation of the income tax attributable at the statutory income
tax rates to the income tax expense is as follows:
Year ended December 31,
------------------------
1998 1999 2000
-------- ------- -------
Income tax expense computed at the statutory
rates........................................... $ 3,136 $ 2,664 $ 584
Exempt income.................................... (3,271) (2,915) (1,357)
Deemed inter-company revenue..................... 238 354 909
-------- ------- -------
$ 103 $ 103 $ 136
======== ======= =======
The income tax expense at statutory rates above was computed based on a
weighted average basis using the statutory rate of 35% for income derived from
the United States and 26% in 1998 and 1999 and 25.5% in 2000 for income
derived from Singapore. Income from Bermuda is tax exempt. Income from Cayman
Islands is not subjected to tax.
Deferred tax assets and deferred tax liabilities as of December 31, 1999
and 2000 were not material.
No deferred tax liability has been provided on interest income of the
Singapore subsidiaries not received or deemed received in Singapore as defined
under section 10(15) of the Singapore Income Tax Act. The Group has no
intention of remitting this interest income to Singapore in the foreseeable
future. As of December 31, 1999 and 2000, the amount of total liability not
provided for is $1,050 and $1,086, respectively, by applying the Singapore
statutory taxation rates.
Pursuant to the Internal Revenue Code of the United States (the "Code"),
U.S. source income from the international operations of vessels is generally
exempt from U.S. tax if the company operating the ships meets certain
requirements. Among other things, in order to qualify for this exemption, the
company operating the vessels must be incorporated in a country which grants
an equivalent exemption from income taxes to U.S. citizens and U.S.
corporations and must be more than 50% owned by individuals who are residents,
as defined, in such country or another foreign country that grants an
equivalent exemption to U.S. citizens and U.S. corporations. The management of
the Company believes that by virtue of the above provisions, it was not
subject to tax on its U.S. source income.
10 Share Capital
Share capital as of December 31, 1998, 1999 and 2000 consists of the
following:
As of December 31,
---------------------------------
1998 1999 2000
---------- ---------- -----------
Authorized share capital:
100,000,000 (1998 and 1999: 30,000,000)
common shares of $1 each................... 30,000,000 30,000,000 100,000,000
========== ========== ===========
Issued and fully paid share capital:
18,626,544 (1998 and 1999: 6,746,544) common
shares of $1 each.......................... 6,746,544 6,746,544 18,626,544
========== ========== ===========
The authorized share capital and the issued and fully paid share capital
as of December 31, 2000 has been increased by 70,000,000 and 11,880,000,
respectively as a result of the capital restructuring subsequent to the
financial year-end (Note 17).
F-17
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
The share premium may only be applied in paying up unissued shares to be
issued to shareholders, paying up in whole or in part the balance unpaid on
shares in issue, in writing off preliminary expenses and share and debenture
issue expenses and by provision for premiums payable on the redemption of
redeemable preferred shares. The Company has not utilized any amounts in the
share premium account for the above mentioned purposes.
11 Related Party Transactions
The following related party transactions took place during the years
ended December 31, 1998, 1999 and 2000.
The Company leased two vessels, Eagle Memphis and Eagle Milwaukee, from
Nepline Bhd ("Nepline"), NOL's affiliate until January 5, 2001. On August 17,
2000, the Company entered into an agreement to acquire the two vessels from
Nepline for a net consideration of $35,300. NOL has a 21% shareholding in
Nepline as of December 31, 2000, and Joseph Kwok, the Group's President and
CEO, is a director of Nepline.
The Group's vessels are substantially managed by Neptune Shipmanagement
Services Pte Ltd ("NSSPL"). NSSPL is a wholly owned subsidiary of NOL as of
December 31, 2000.
The Company manages the operations of Crystal, Trilith and Trilithon.
The related party transactions for the years ended December 31, 1998,
1999 and 2000 are as follows:
Year ended December 31,
-----------------------
1998 1999 2000
------- ------- -------
Charter hire expense paid to Nepline............... $ 7,665 $ 7,665 $ 7,098
Charter hire income received from Crystal.......... -- 1,192 7,025
Charter hire expense paid to Crystal............... -- 1,022 6,630
Consideration to Nepline for the purchase of Eagle
Memphis and Eagle Milwaukee....................... -- -- 35,300
Interest income from NOL........................... 251 96 1,002
Interest income received from Crystal.............. 205 210 417
Interest income on deposits placed with NOL........ 1,806 2,768 2,584
Management fees paid to NOL........................ 250 250 250
Ship management fees paid to NSSPL................. $21,657 $25,610 $27,924
F-18
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
The related party balances as of December 31, 1999 and 2000 are as
follows:
As of December
31,
---------------
1999 2000
------- -------
Deposits with NOL (Note 4).................................. $41,905 $53,704
======= =======
Non-trade amounts due from:
Nepline..................................................... $ 2,720 --
NOL......................................................... 20,036 --
Crystal..................................................... 2,944 $ 783
------- -------
25,700 783
Trade amounts due from:
NSSPL....................................................... 485 --
Crystal..................................................... 201 --
------- -------
686 --
Loan to Crystal............................................. 5,670 6,378
------- -------
$32,056 $ 7,161
======= =======
As of December
31,
---------------
1999 2000
------- -------
Non-trade amounts due to:
APL (Bermuda) Ltd (a subsidiary of NOL)..................... -- $ 2,209
Nepline..................................................... -- 35,300
NOL......................................................... $ 4,689 25,140
------- -------
4,689 62,649
Trade amounts due to:
NSSPL....................................................... 11 119
Nepline..................................................... 613 --
Crystal..................................................... 163 240
Orient Marine Pte Ltd (a subsidiary of NOL )................ -- 68
------- -------
787 427
------- -------
$ 5,476 $63,076
======= =======
The deposits with NOL pertain to excess cash transferred to the pooling
account of NOL for overnight placements (Note 3).
The non-trade amounts due from NOL affiliates are unsecured, interest
free and repayable on demand. The non-trade amount due from NOL is unsecured,
repayable on demand and bears interest indicative of the market rates. The
interest earned for the years ended December 31, 1998, 1999 and 2000 were $251,
$96 and $1,002, respectively.
The loan to Crystal is unsecured, repayable on demand and bears interest
at rates reflective of market rates. The interest income for the financial year
ended December 31, 1998, 1999 and 2000 was $205, $210, and $417, respectively.
F-19
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
The non-trade amounts due to NOL and NOL affiliates are unsecured,
interest free and repayable on demand.
Management had represented that, with the exception of ship-management
services and insurance services rendered by NOL or its affiliates, all other
significant arrangements will be terminated after the Offering. It is not
anticipated that changes, if any, in these expenses and revenues would have a
material effect on the Company's results of operations or consolidated
financial position.
12 Employee Benefit Plans
Central Provident Fund
All eligible employees in Singapore receive benefits from a Central
Provident Fund (CPF), which is a defined contribution plan required by the
Government of Singapore. Both the employee and employer make contributions to
the plan. Employees are required to contribute 20% of their salary. Employers
were required to contribute 20% of the employee's salary for 1998, 10% of the
employee's salary for 1999 to March 31, 2000 and 12% of the employee's salary
for April 1, 2000 onwards. Contributions made by the Company for the years
ended December 31,1998, 1999 and 2000 were not material.
401(k) Plan
AET's U.S. eligible employees may participate in AET Agencies' 401(k)
Savings Plan ("AET 401(k) Plan"), which is an employee savings plan, which
incorporates a profit-sharing feature. The AET 401(k) Plan qualifies under
section 401 of the Internal Revenue Code of 1986, as amended. Originally set up
on January 7, 1989 (by a predecessor company), the plan was subsequently
amended on January 7, 1998. The AET 401(k) Plan allows eligible participants to
defer a portion of their eligible compensation on a pre-tax basis.
Participants may elect to defer 1% to 20% of their eligible compensation.
Matching contributions are made by the Company in an amount equal to 100% of
the participant's contribution with a maximum of 6% of such participant's
annual eligible compensation, subject to certain regulatory and plan
limitations. Contributions are subjected to tax only upon withdrawal from the
Plan, subject to penalties under certain circumstances. Participant
contributions are 100% vested after 1000 hours of service.
In addition, AET may make discretionary contributions to a profit-sharing
plan, which are allocated to eligible employees based on eligible compensation.
AET's contribution to the profit-sharing plan may range from 0% to 15% of the
participants' compensation each year.
The maximum combined contribution by AET to the AET 401(k) plan for each
employee is subject to the federal law limitation being the lesser of $30 or
25% of eligible employee's annual compensation. The matching and profit sharing
contributions were not material for the years ended December 31, 1998, 1999 and
2000.
F-20
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
13 Commitments and Contingencies
Operating lease commitments
(a) Charter-out commitment
The Group leases four vessels on a long term time charter to a
significant customer, Bayway Refining Company, for a period of 12 years. These
leases terminate at various dates through 2008 and 2009. Future principal
receipts and minimum lease commitments as of December 31, 2000 are as follows:
As of
December 31, 2000
-----------------
Receivable during the period ending December 31,
2001....................................................... $ 34,707
2002....................................................... 35,278
2003....................................................... 35,296
2004....................................................... 35,392
2005....................................................... 35,296
Thereafter................................................. 99,030
--------
$274,999
========
The net book value of the four vessels as of December 31, 1999 and 2000
are $152,318 and $143,969, respectively.
The minimum future revenues are received in United States dollars and
should not be construed to reflect total charter hire revenues for any of the
years.
NOL guarantees the Group's performance obligations under the above time
charter arrangement until the charter commitments are fully discharged.
(b) Charter-in commitments
The Group has vessels under long-term lease agreements and a sale and
leaseback agreement that are classified as operating leases. These leases
terminate at various dates.
As of December 31, 2000, the Group has commitments in respect of future
minimum lease payments under non-cancellable operating lease agreements for 10
vessels are as follows:
As of
December 31, 2000
-----------------
Payables during the period ending December 31,
----------------------------------------------
2001....................................................... $ 48,898
2002....................................................... 48,640
2003....................................................... 38,609
2004....................................................... 31,397
2005....................................................... 31,822
Thereafter................................................. 239,664
--------
Total minimum lease payments............................... $439,030
========
F-21
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
All lease commitments are paid in United States dollars.
Charter hire expense incurred pursuant to such operating leases amounted
to $33,676, $50,417 and $58,308 for the years ended December 31, 1998, 1999 and
2000. Included in the charter hire expense were contingent rents amounting to
$155 and $1,823 for the years ended December 31, 1999 and 2000, respectively.
Other operating commitments
(c) Office rental commitments
Rental expense for the years ended December 31, 1998, 1999 and 2000 was
$138, $143 and $177, respectively.
Capital commitments
(d) Acquisition of vessels
As of December 31, 2000, the Company has commitments for the construction
of two Very Large Crude Carriers ("VLCC"), scheduled for delivery between early
2001 and 2003, with an aggregate unpaid cost of $79,294.
Contingent Liability
Protection and Indemnity (P&I) insurance has been arranged by the Group
through NOL to cover the legal liability of the Group for its shipping
operations. Vessels operated by the Group are entered in P&I Clubs, either the
United Kingdom P&I Club or the Britannia P&I Club, mutual protection and
indemnity associations which are members of the international Group of P&I
Associations. A member of mutual associations is subject to calls payable to
the associations based on the member's claim records as well as the claim
records of all other members of the associations. In a mutual association,
premiums are paid as advance calls during the policy year and these premiums
form a basic fund out of which claims and other expenses are met.
This fund is invested and any income earned is added to it. The fund is
supplemented, if necessary by calls made after the end of the policy year so
that when the policy year is finally closed there is neither profit nor loss.
An unsecured contingent liability exists for the Group to the extent that
the aggregate claim records of all the members of the associations show
significant deterioration which may result in additional calls on the members.
14 Fair Value of Financial Instruments
The estimated fair values of the Group's financial instruments are as
follows:
At December 31,
-----------------------------------
1999 2000
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Cash and cash equivalents.............. $ 54,935 $ 54,935 $ 62,205 $ 62,205
Long term debts (including accrued
interest)............................. 246,917 223,916 186,509 186,509
Interest rate swap (net receivable).... 491 2,065 -- --
Cross currency interest rate swaps (net
payable).............................. $ 8,530 $ 8,593 $ 12,457 $ 12,404
F-22
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
The Group transacts with investment grade rated financial institutions
and requires no collateral from these institutions.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and cash equivalents
The carrying amounts of cash and cash equivalents, which are highly
liquid, are a reasonable estimate of their fair value.
Interest rate swap
The fair value of interest rate swap is the estimated amount that
Trilith would pay to terminate the swap at the reporting date, taking into
account current interest rates and the credit worthiness of the swap
counterparty.
Details of the interest rate swap outstanding as of December 31, 1999
and 2000 are as follows:
Group
-----------------------
Principal Inception date Maturity date Receives Pays
--------- -------------- --------------- -------- --------
$26,000 March 29, 1995 March 29, 2003* Fixed Floating
* The interest rate swap was terminated on December 29, 2000. No gain
or loss resulted from the termination of the interest rate swap.
Cross-currency interest rate swap
The fair value of the cross-currency interest rate swaps is the
estimated amount that the Group would receive or pay to terminate the swap at
the reporting date, taking into account current exchange rate and the credit
worthiness of the swap counterparty. Details of cross-currency interest rate
swaps outstanding as of December 31, 1999 and 2000 are as follows:
Principal Interest Rate
Maturity date/termination Group Group
Inception date, whichever is ---------------------- -----------------
date earlier Receives Pays Receives Pays
- --------- ------------------------- ------------- -------- -------- --------
April 25,
1995 April 25, 2003 Yen 2,050,000 $25,200 Floating Floating
May 15,
1995 May 15, 2003 Yen 1,662,400 19,697 Floating Floating
April 28,
1997 October 20, 2000* AUD 42,469 32,956 Fixed Floating
April 28,
1997 October 20, 2000* AUD 43,943 34,100 Fixed Floating
April 28,
1997 October 20, 2000* AUD 51,031 39,600 Fixed Floating
April 28,
1997 October 20, 2000* AUD 52,191 40,500 Fixed Floating
December
16, 1994 January 15, 2000** 38,000 S$55,870 Floating Floating
January 3,
1995 January 15, 2000** S$55,371 37,796 Floating Floating
December
28, 1995 January 15, 2000** 37,796 S$53,386 Floating Floating
January 2,
1996 January 15, 2000** S$53,011 $37,530 Floating Floating
* These swaps were terminated on October 20, 2000 together with their
underlying loans. The breakfunding cost incurred as a result of the
termination of these swaps were not material.
** These swaps were terminated on January 15, 2000. There were no
breakfunding cost incurred as a result of the termination of these swaps.
S$ refers to Singapore dollars.
F-23
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
Long-term debts
The fair value of the Group's debt is the estimated amount that the Group
would pay to terminate the loans at the reporting date.
15 Share Ownership and Option Plans
Staff share ownership scheme
Effective 1985, AET Group's employees have generally been able to
contribute up to 20 percent of their base compensation to the monthly purchase
of units in a unit trust owning NOL's common shares under NOL's Staff Share
Ownership Scheme. This trust is managed externally by a bank appointed as
trustee. Under this plan, every dollar contributed by the employee to purchase
units is matched by a contribution of fifty cents by NOL. These contributions
are used to purchase units of shares based on market value on the date of the
contribution.
The Staff Share Ownership Scheme was accounted for in accordance with APB
No. 25. Compensation expense in the amount of the NOL contribution is recorded
at the date of contribution when it is used to purchase unit interests in
shares at fair market value.
The allocated portion of compensation expense attributable to AET
employees under the plan for the years ended December 1998, 1999 and 2000 was
not material.
NOL Share Option Plan
Eligible AET employees participate in the NOL Executive Share Option
Scheme and the NOL Group Share Option Plan. The NOL Group Share Option Plan is
effective May 3, 2000 and replaces the NOL Executive Share Option Scheme, which
was terminated on the same date. However, the termination of the old plan and
the adoption of the new plan do not affect the rights of the holders of the
outstanding options awarded under the old plan.
Options under the plan will be exercisable commencing one year from the
date of grant and will lapse five years from the date of grant for options
granted under the NOL Executive Share Option Scheme and ten years from the date
of grant for options granted under the NOL Group Share Option Plan.
The exercise price of share options granted under the NOL Executive Share
Option Scheme is in Singapore dollars ("S$") and is equal to the fair market
value of NOL's common share on the date the option is granted. NOL's
Compensation Committee, in certain cases, may choose to establish a discounted
exercise price at no less than 80 percent of fair market value on the grant
date. AET applies the intrinsic value method prescribed by APB 25 in accounting
for share options granted to the Combined AET's employees. Accordingly,
compensation expense is recognized only when options are granted with a
discounted exercise price, or if subsequent changes are made to the option
exercise price or number of options. Any compensation expense is recognized
ratably over the vesting period. In July 22, 1999 a new measurement date was
established for outstanding options when NOL amended the exercise price and
number of shares under these options. These options are accounted for as
variable from July 1, 2000 until the date they are exercised, forfeited, or
they expire, due to implementation of FASB Interpretation No. 44. Compensation
expense attributable to AET employees was not material for the years ended
December 1998, 1999 and 2000.
F-24
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
The Company plans to implement its own share option plan after the
offering (Note 17). The adoption of the Company's own share option plan does
not affect the rights of the holders of the outstanding awards under the NOL
Group Share Option Plan and NOL Executive Share Option Scheme.
Impact of applying Fair Value Based Method
Pro forma net earnings and earnings per share information, as required by
SFAS No. 123, "Accounting for Stock-Based Compensation", has been determined as
if the Group had accounted for employee share options granted to employees in
the Group under the fair value method in SFAS No. 123.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the one year average vesting period of the
options. If the Group has determined compensation expenses based on the fair
value at the grant date for its share options in accordance with SFAS No. 123,
the Group's net income would have been reduced or increased to the pro forma
amounts indicated below:
Year ended December 31,
---------------------------
1998 1999 2000
-------- ------- --------
Net income
As reported.................................... $ 11,447 $ 924 $ 61,620
Pro forma...................................... 11,427 1,001 61,528
Basic and diluted earnings per share
As reported.................................... 0.61 0.05 3.31
Pro forma...................................... $ 0.61 $ 0.05 $ 3.30
The pro forma disclosures provided are not likely to be representative of
the effects on reported net income for future years due to future grants and
the vesting requirements of the share options.
The fair value of these options was estimated using the Black-Scholes
Option Pricing Model with the following weighted-average assumptions:
Year ended December 31,
---------------------------
1998 1999 2000
-------- ------- --------
Dividend yield.................................. 0.00% 0.00% 0.00%
Expected volatility............................. 0.59 0.53 0.50
Risk-free rate of return........................ 3.79% 3.69% 4.09%
Expected life (years)........................... 2.50 2.28 6.42
F-25
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
The following summarizes activities under NOL's Share Option Plan in
respect of NOL's shares that relate to the Group's employees:
Weighted-Average
Exercise Price Per
Number of Options Share
-------------------------- --------------------
Year ended December
Year ended December 31, 31,
-------------------------- --------------------
1998 1999 2000 1998 1999 2000
------- -------- ------- ------ ------ ------
Options outstanding at
beginning of the period..... 380,000 410,000 224,552 S$1.58 S$1.43 S$1.42
Granted
- --at fair market value....... 100,000 100,000 598,000 1.00 1.53 1.40
- --at below fair market
value....................... -- 5,266 -- -- 1.32 --
Exercised.................... -- (220,000) (35,714) -- 1.19 1.50
Expired...................... (70,000) (70,714) (35,714) 1.63 2.26 1.66
------- -------- -------
Options outstanding at end of
the period.................. 410,000 224,552 751,124 1.43 1.42 1.39
======= ======== =======
Options vested/exercisable at
end of the period........... 310,000 122,990 153,124 S$1.57 S$1.34 S$1.34
======= ======== =======
The following summarizes information for share options outstanding as of
December 31, 2000:
Weighted-average Weighted-average
Number of options Exercise price exercise price remaining contractual life
- ----------------- -------------- ---------------- --------------------------
103,124 S$1.00 S$1.00 3.30
50,000 2.05 2.05 4.10
120,000 1.52 1.52 9.25
478,000 1.37 1.37 9.80
-------
751,124 S$1.39 S$1.39 8.44
=======
16 Business Segment Data and Major Customer Information
The Group operates in a single reportable segment, providing marine
transportation services that meet the changing needs of oil companies,
producers, traders and refiners active in the international crude oil market.
The Group's gross operating revenue based on the country of domicile of
customers is as follows:
Year ended December 31,
--------------------------
1998 1999 2000
-------- -------- --------
Americas region.................................. $135,826 $150,736 $200,529
Europe region.................................... 16,413 19,830 67,805
Asia/Middle East region.......................... 4,780 7,041 3,652
-------- -------- --------
$157,019 $177,607 $271,986
======== ======== ========
The Group's tangible assets consist primarily of vessels and vessel
equipment, which are utilized across geographic markets, and therefore, have
not been allocated. These vessels and vessel equipment are primarily used for
the shipment of crude oil within the Atlantic basin, Arabian Gulf, Venezuela,
the North Sea and West Africa. Other properties of the Group are located in
the Americas region.
F-26
AMERICAN EAGLE TANKERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In thousands of U.S. dollars, except share and per share data
Revenues from major customers, as a percentage of gross revenue, were as
follows:
Year ended December 31,
-------------------------
1998 1999 2000
------- ------- -------
Customer A........................................ 21.7% 18.8% 12.3%
Customer B........................................ 15.1 7.1 6.8
Customer C........................................ 14.0 14.3 9.0
Others............................................ 49.2 59.8 71.9
------- ------- -------
100.0% 100.0% 100.0%
======= ======= =======
17 Subsequent Events
Initial Public Offering
After December 31, 2000, the Company commenced preparation for an initial
public offering in the United States under the Securities Act of 1933, as
amended.
Capital restructuring
On March 16, 2001, the directors approved the restructuring of the
Company's capital. Under this capital restructuring, the authorized share
capital of the Company was increased by 70,000,000 shares. The Company also
declared a dividend of $64,767 out of retained earnings to NOL. On the same
date, NOL subscribed for 11,880,000 newly issued common shares of AET, for a
total consideration of $66,000. The increase in the Company's capital will be
reflected by an increase of $11,880 and $54,120 in issued share capital and
share premium, respectively.
The capital restructuring has been retroactively reflected in the
consolidated financial statements for the financial year ended December 31,
2000.
Earnings per share and the ordinary shares used in the calculation of
earnings per share have been presented retroactively herein to reflect the
impact of this capital restructuring.
Delivery of Aframax tankers
On January 5, 2001, the Company took delivery of two vessels, Eagle
Memphis and Eagle Milwaukee from Nepline under the sale and purchase contract
(Note 11).
Acquisition of Aframax tankers under construction
The Company entered into a series of shipbuilding contracts with third
parties for the construction of five Aframax tankers. The total consideration
under the terms of the contracts for the five tankers is $195,200. One of the
tankers is expected to be delivered in 2002 and four of the tankers in 2003
with stage payments of 10% in advance, 10% on keel laying, 10% on launching and
70% at delivery.
F-27
AMERICAN EAGLE TANKERS
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND MARCH 31, 2001
In thousands of U.S. dollars
As of As of
December 31, 2000 March 31, 2001
(Consolidated) (Consolidated)
----------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................... $ 62,205 $ 50,789
Accounts receivable, net of allowances of
$500 and $466 as of December 31, 2000 and
March 31, 2001, respectively................ 21,632 15,893
Amounts due from NOL and NOL affiliates (Note
3).......................................... 7,161 7,530
Inventories.................................. 6,233 5,471
Prepaid expenses and other receivables....... 3,213 2,467
-------- --------
Total current assets........................ 100,444 82,150
Equity investments in a joint venture......... 16,633 16,573
Vessels and other properties, net............. 447,372 449,210
Deferred expenditure, net..................... 6,862 10,494
Other non-current assets...................... 6,721 6,671
-------- --------
Total assets.............................. $578,032 $565,098
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 3,121 $ 3,376
Accrued expenses and other current
liabilities (Note 4)........................ 15,095 20,588
Amount due to NOL and NOL affiliates (Note
3).......................................... 63,076 21,750
Current portion of long term debt............ 6,648 6,648
Income taxes payables........................ 562 605
-------- --------
Total current liabilities................... 88,502 52,967
Long-term debt, net of current portion........ 179,291 176,477
Other non-current liability................... 12,475 15,289
-------- --------
Total liabilities......................... 280,268 244,733
-------- --------
Minority interest............................. 14,036 14,053
Shareholder's equity:
Common shares................................ 18,627 18,627
Share premium................................ 54,120 54,120
Additional paid-in capital................... 209,706 209,190
Retained earnings............................ 1,275 24,375
-------- --------
Total shareholder's equity................ 283,728 306,312
-------- --------
Total liabilities and shareholder's
equity................................... $578,032 $565,098
======== ========
The accompanying notes are an integral part of these financial statements.
F-28
AMERICAN EAGLE TANKERS
UNAUDITED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
In thousands of U.S. dollars, except share and per share data
Three months ended March 31,
--------------------------------
2000 2001
(Combined) (Consolidated)
-------------- ---------------
(Unaudited) (Unaudited)
Gross operating revenue... $ 53,589 $ 73,590
Operating expenses:
Brokerage and
commission.............. 822 1,119
Vessel voyage expenses... 14,738 12,784
Vessel operating
expenses................ 10,300 11,218
Charter hire expenses.... 14,350 14,014
Depreciation and
amortization............ 7,054 7,974
General and
administrative
expenses................ 1,523 1,141
-------------- --------------
Total operating
expenses............... 48,787 48,250
Other operating income
(expenses)............... 18 47
-------------- --------------
Operating income.......... 4,820 25,387
Equity in profit of a
joint venture............ 22 388
Interest expense.......... (4,150) (3,366)
Interest income........... 1,344 751
-------------- --------------
Income before income
taxes.................... 2,036 23,160
Income taxes.............. (23) (44)
-------------- --------------
Income after income
taxes.................... 2,013 23,116
Minority interest......... 350 (16)
-------------- --------------
Net income................ $ 2,363 $ 23,100
============== ==============
Shares used in per share
computation.............. 18,626,544 18,626,544
Basic and diluted earnings
per share................ $ 0.13 $ 1.24
The accompanying notes are an integral part of these financial statements.
F-29
AMERICAN EAGLE TANKERS
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
In thousands of U.S. dollars
Three months ended
March 31,
--------------------------
2000 2001
(Combined) (Consolidated)
----------- --------------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities
Net income......................................... $ 2,363 $ 23,100
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 7,054 7,974
Equity in profit of a joint venture............... (22) (388)
Deemed dividends to NOL........................... (837) (516)
Minority interest in net income................... (350) 16
------- --------
8,208 30,186
------- --------
Changes in operating assets and liabilities
Trade accounts receivables........................ (1,508) 5,740
Inventories....................................... (623) 762
Other current assets.............................. 49 347
Deferred expenditure.............................. (1,493) (5,192)
Other non-current assets.......................... (136) 476
Accounts payable.................................. 3,000 254
Other current liabilities......................... 8,845 12,270
Increase in interest payable...................... (521) 235
Increase in tax payable........................... 23 44
------- --------
Net cash provided by operating activities.......... 15,844 45,122
------- --------
Cash Flows From Investing Activities
Purchase of vessels and other properties........... (138) (43,530)
------- --------
Net cash used in investing activities.............. (138) (43,530)
------- --------
Cash Flows From Financing Activities
Repayment of non-trade amount due to NOL........... -- (13,008)
Net cash transfers from NOL........................ (8,704) --
------- --------
Net cash used in financing activities.............. (8,704) (13,008)
------- --------
Changes in cash and cash equivalents............... 7,002 (11,416)
Cash and cash equivalents, beginning of period..... 54,935 62,205
------- --------
Cash and cash equivalents, end of period........... $61,937 $ 50,789
======= ========
Supplemental disclosures of cash flow information
Cash paid for interest............................. $ 4,671 $ 3,131
======= ========
The accompanying notes are an integral part of these financial statements.
F-30
AMERICAN EAGLE TANKERS
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
In thousands of U.S. dollars
1 Basis of Presentation
The unaudited interim financial statements included herein have been
prepared in accordance with U.S. GAAP. These financial statements reflect all
adjustments, consisting of normal recurring accruals which, in the opinion of
management, are necessary for a fair presentation of the information contained
therein. The accompanying financial statements and footnotes have been
condensed and therefore do not contain all disclosures required by generally
accepted accounting principles.
These financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 2000 and the
footnotes related thereto included elsewhere in this Prospectus.
Results of operations for interim periods are not necessarily indicative
of those for a full fiscal year.
2 Earnings per share
Net income per share is computed by dividing the net income available to
common shareholders for the period by the number of common shares outstanding
at the end of the period, except for periods up to December 2000 where the
number of common shares outstanding have been restated retroactively to
account for the change in capital structure and the dividend payout on March
16, 2001. There are no potential dilutive common shares as of March 31, 2000
and 2001.
3 Related Party Transactions
The related party balances as of December 31, 2000 and March 31, 2001
are as follows:
As of As of
December 31, 2000 March 31, 2001
----------------- --------------
Deposits with NOL......................... $53,704 $34,913
======= =======
Non-trade amounts due from Crystal........ $ 783 $ 972
Loan to Crystal........................... 6,378 6,558
------- -------
$ 7,161 $ 7,530
======= =======
Non-trade amounts due to:
APL Bermuda (a subsidiary of NOL)......... $ 2,209 --
Nepline................................... 35,300 --
NOL....................................... 25,140 $14,703
------- -------
62,649 14,703
Trade amounts due to:
NSSPL..................................... 119 6,721
Crystal................................... 240 197
Orient Marine Pte Ltd (a subsidiary of
NOL)..................................... 68 129
------- -------
427 7,047
------- -------
$63,076 $21,750
======= =======
F-31
AMERICAN EAGLE TANKERS
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
In thousands of U.S. dollars
4 Accrued Expense and Other Current Liabilities
As of As of
December 31, 2000 March 31, 2001
----------------- --------------
Accrued interest.......................... $ 570 $ 805
Accrued payroll........................... 750 --
Accrued voyage expenses................... 3,063 3,610
Accrued drydocking expenditure............ -- 4,766
Other accrued operating expense and other
creditors................................ 5,347 5,143
Deferred revenue.......................... 5,365 6,264
------- -------
$15,095 $20,588
======= =======
5 Business Segment Data and Major Customer Information
The Group operates in a single reportable segment, providing marine
transportation services that meet the changing needs of oil companies,
producers, traders and refiners active in the international crude oil market.
The Group's gross operating revenue based on the country of domicile of
customers is as follows:
Three months ended March 31,
-----------------------------
2000 2001
-------------- --------------
Americas region................................ $44,575 $59,931
Europe region.................................. 9,014 13,319
Asia/Middle East region........................ -- 340
-------------- --------------
$53,589 $73,590
============== ==============
The Group's tangible assets consist primarily of vessels and vessel
equipment, which are utilized across geographic markets, and therefore, have
not been allocated. These vessels and vessel equipment are primarily used for
the shipment of crude oil within the Atlantic basin, Arabian Gulf, Venezuela,
the North Sea and West Africa. Other properties of the Group are located in
the Americas region.
F-32
AMERICAN EAGLE TANKERS
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
In thousands of U.S. dollars
Revenues from major customers, as a percentage of gross revenue, were as
follows:
Three
months
ended March
31,
------------
2000 2001
----- -----
Customer A........................................................ 14.3% 11.8%
Customer B........................................................ 11.8 2.4
Customer C........................................................ 5.5 10.6
Customer D........................................................ 7.7 15.6
Customer E........................................................ 11.7 4.8
Others............................................................ 49.0 54.8
----- -----
100.0% 100.0%
===== =====
6 Change in Accounting Policy
Effective January 1, 2001, we have adopted the provisions of FASB No.
133, 137 and 138. The adoption of these standards did not have a material
effect on our financial position or results of operations.
F-33
ANNEX A
GLOSSARY OF SHIPPING TERMS
These definitions are provided for convenience only. For an understanding
of each term as used in this prospectus, you should rely on the usage and
explanation of that term in its context. These definitions are derived from
Peter Brodie, Dictionary of Shipping Terms (Second Edition).
Aframax Carrier A tanker of approximately 80,000 to 120,000 dwt.
Ballast A tanker is in ballast when it is steaming without cargo
and is instead loaded down with sea water for stability
and improved handling. Given that oil production is
concentrated in certain parts of the world, a tanker will
generally spend a significant amount of time "ballasting"
as it returns from discharge port to load port.
Atlantic Basin The Atlantic Ocean and the ports and seas surrounding it,
including the eastern seaboard of the United States and
Canada, the U.S. Gulf and Caribbean Sea, the northern and
eastern coasts of South America, the North Sea, the Black
Sea and the Mediterranean Sea.
Bareboat Charter The hiring or leasing of a tanker for a certain period of
time under which the shipowner provides only the ship,
while the charterer provides the crew and is responsible
for the operating and voyage expenses. See "Time Charter"
and "Voyage Charter".
Barrel A volumetric unit of measure for crude oil and petroleum
products equivalent to 42 U.S. gallons.
Charterer The individual or company hiring a tanker or the service
of a tanker for a period of time.
Crude Oil Carrier A tanker designed to carry crude oil or other dirty
products in bulk.
Double-hulled Hull construction design in which a tanker has an inner
and outer side and bottom.
Double-sided Hull construction design in which a tanker has an inner
and outer side.
Draft Depth to which a ship is immersed in water. Also widely
used to designate the depth of water at a port of place.
Dry-Docking The removal of a tanker from the water into an enclosed
basin for inspection and/or repair of normally submerged
parts.
Dwt Deadweight tons: a unit of the weight of cargo and
supplies that can be carried by a tanker, expressed in
long tons (2,240 pounds).
Freight The price paid to a shipowner or shipping line for the
transportation of a cargo.
Gross Ton Unit of 100 cubic feet or 2.831 cubic meters, used in
measuring the total of all enclosed spaces within a ship.
Handysize Carrier
A tanker of approximately 30,000 to 50,000 dwt.
A-1
Hire
Money paid to the shipowner by a charterer for the hire
of a tanker under a time charter. Can be expressed as an
amount per day, or per deadweight tonne per month.
IMO International Maritime Organization, a United Nations
agency that issues international trade standards for
shipping.
Intermediate The inspection of a tanker by a classification society
Survey surveyor which takes place two to three years before and
after each Special Survey for such tanker.
Lightering The use of smaller ships or barges for the purpose of
carrying cargo discharged from an ocean ship in order to
lighten and reduce draft.
LOOP The Louisiana Offshore Oil Port, a 19 mile-long
underwater pipeline connecting Louisiana with offshore
tankers. The LOOP provides VLCCs and ULCCs with an
alternative method of delivering crude oil to port rather
than Caribbean transshipments and lightering.
Newbuilding A newly constructed tanker.
O/B/O An oil/bulk/ore carrier. A multi-purpose carrier capable
of carrying crude oil or dry bulk cargoes.
Off-hire Day Each day, or part thereof, during which a tanker is not
earning revenue from the charterer.
OPA 90 The U.S. Oil Pollution Act of 1990.
OPEC Organization of Petroleum Exporting Countries. Members
include Algeria, Gabon, Indonesia, Iran, Iraq, Kuwait,
Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates
and Venezuela.
Operating The expenses incurred by the shipowner during a voyage or
expenses time charter, and by the charterer in a bareboat charter.
Comprised mainly of: brokerage and commission expenses,
vessel voyage expenses, crew wages and associated
expenses; insurance (hull and machinery, and protection
and indemnity premiums); cost of lubricants and spare
parts; repair and maintenance (routine maintenance, dry-
dockings and classification fees).
Panamax Carrier A tanker whose dimensions enable her to transit the
Panama Canal where lock width is the determining factor.
Ships are approximately 55,000 to 80,000 dwt.
Petroleum Refined crude oil comprising dirty products (e.g. fuel
Products oil) and clean products (e.g. gasoline and jet fuel).
Protection and Mutual protection provided by an association of
Indemnity shipowners against liabilities not covered by insurance.
Insurance
Special Survey The inspection of a tanker's hull and machinery carried
out every five years by a classification society survey
or for the purpose of maintaining class.
Spot Market The market for immediate chartering of a tanker.
Suezmax Carrier A tanker whose dimensions enable her to transit fully
loaded through the Suez Canal. Ships are approximately
120,000 to 200,000 dwt.
A-2
Time Charter
The hiring of a tanker from a shipowner for a period of
time. As operator, the shipowner is paid on a per-day
basis and is responsible for providing the crew and
paying operating expenses. The charterer is responsible
for paying the voyage expenses, save for certain specific
exceptions such as loss of time arising from tankers
breakdown and routine maintenance. See "Voyage Charter"
and "Bareboat Charter".
To Charter To hire or hire out a tanker.
Tonne A metric ton, 1,000 kilograms or 2,204.6 pounds.
Tonne-mile
Quantity transported multiplied by average voyage
distance.
ULCC Ultra Large Crude Carrier of more than 320,000 dwt.
U.S. Gulf The Gulf of Mexico.
VLCC Very Large Crude Carrier of 200,000 to 320,000 dwt.
Voyage Charter
A contract in which a charterer pays a shipowner for the
use of a ship's cargo space for one, or sometimes more
than one, voyage. The shipowner is the operator,
responsible for paying both operating expenses and voyage
expenses.
Voyage Expenses Fuel costs, port charges and canal dues (or tolls)
incurred during the course of a voyage.
A-3
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6,750,000 Shares
American Eagle Tankers Inc. Limited
Common Shares
[LOGO OF AMERICAN EAGLE]
------------
PROSPECTUS
, 2001
------------
Salomon Smith Barney
ABN AMRO Rothschild LLC
Morgan Stanley Dean Witter
- --------------------------------------------------------------------------------
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 6.Indemnification of Directors and Officers.
Section 98 of the Companies Act of Bermuda allows us to indemnify our
directors, officers and certain other persons against any liability which by
virtue of Bermuda law otherwise would be imposed on them, except in cases where
such liability arises from fraud or dishonesty of which such officer, director
or auditor may be guilty in relation to our company. Section 98 further
provides that a Bermuda company may indemnify its directors, officers and
auditors against any liability incurred by them in defending any proceedings,
whether civil or criminal, in which judgment is awarded in their favor or they
are acquitted or in which they are acquitted or granted relief by the Supreme
Court of Bermuda in certain proceedings arising under Section 281 of the
Companies Act.
We have adopted provisions in our by-laws that provide that we will
indemnify our officers and directors in civil actions for actions made in good
faith and in criminal actions for actions which an officer or director had no
reasonable cause to believe was unlawful. We have also entered into
indemnification agreements with our directors and officers to provide them
indemnification for actions that are not knowingly fraudulent or deliberately
dishonest and do not constitute willful misconduct.
We maintain directors and officers insurance.
Item 7.Recent Sales of Unregistered Securities
The registrant has not issued or sold any securities within the past
three years.
Item 8.Exhibits and Financial Statement Schedules.
(a) Exhibits. Filed herewith are the following exhibits:
1.1 Form of Underwriting Agreement
3.1 Memorandum of Association
3.2 By-Laws
4.1 Specimen Certificate for the common shares*
5.1 Opinion of Cox Hallett Wilkinson as to the legality of the common shares
dated June 25, 2001
8.1 Opinion of Cox Hallett Wilkinson as to certain Bermuda tax matters dated
June 25, 2001
8.2 Opinion of Cadwalader, Wickersham & Taft as to certain U.S. tax matters
dated June 25, 2001
10.1 Loan Agreement, dated as of March 5, 2001, among The Development Bank of
Singapore Limited, Neptune Orient Lines Limited and the registrant*
10.2 Share Option Plan of the registrant*
10.3 Shareholder's Support Services Agreement, dated as of June 5, 2001,
between Neptune Orient Lines Limited and the registrant*
10.4 Form of Ship Technical Management Agreement*
10.5 Shareholder's Agreement, dated as of June 5, 2001 between Neptune Orient
Lines Limited and the registrant*
10.6 Guarantee Fee Letter, dated as of June 5, 2001 from the registrant to
Neptune Orient Lines Limited*
10.7 Loan Agreement, dated as of May 29, 2001 between the Lenders set forth
therein, Danmarks Skibskreditfond and the registrant
15.1 Deleted
21.1 List of subsidiaries of the registrant*
23.1 Consent of PricewaterhouseCoopers
23.2 Consent of Cox Hallett Wilkinson (included in Exhibit 5.1)
23.3 Consent of Cadwalader, Wickersham & Taft (included in Exhibit 8.2)
23.4 Consent of Clarkson*
24.1 Power of Attorney (included as part of this signature page hereto)
- --------
* Filed as part of Amendment No. 1 to the Registration Statement on June 6,
2001.
(b) Financial Statement Schedules
[Not applicable.]
II-1
Item 9.Undertakings.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424 (b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form F-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in New Jersey on June 25, 2001.
AMERICAN EAGLE TANKERS INC. LIMITED
/s/ Joseph Sin Kin Kwok
By: _________________________________
Name:Joseph Sin Kin Kwok
Title:President
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned directors and officers of American Eagle Tankers Inc.
Limited, do hereby constitute and appoint Joseph Sin Kin Kwok, Gregory A.
McGrath and Wang Chan Tak, and each of them, our true and lawful attorneys-in-
fact and agents, with full power of substitution and resubstitution in each of
them, to do any and all acts and things in our respective names and on our
respective behalves in the capacities indicated below that Joseph Sin Kin Kwok,
Gregory A. McGrath and Wang Chan Tak, or any one of them, may deem necessary or
advisable to enable American Eagle Tankers Inc. Limited to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but not limited to, power and authority to
sign for us in our respective names in the capacities indicated below any and
all amendments (including post-effective amendments) hereto or any related
registration statement, including any registration statement to be filed
pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same,
with all exhibits thereto and other documents therewith, with the Securities
and Exchange Commission; and we do hereby ratify and confirm all that Joseph
Sin Kin Kwok, Gregory A. McGrath and Wang Chan Tak, or any one of them, shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed on June 25, 2001 by the following
persons in the capacities indicated.
/s/ Lua Cheng Eng
_________________________________
Lua Cheng Eng
Chairman of the Board
/s/ Joseph Sin Kin Kwok
_________________________________
Joseph Sin Kin Kwok
President and Director
(Principal Executive Officer)
/s/ Gregory A. McGrath
_________________________________
Gregory A. McGrath
Vice President, Finance and
Administration
(Principal Financial and Accounting
Officer)
/s/ Flemming R. Jacobs
_________________________________
Flemming R. Jacobs
Vice Chairman
/s/ Ernst Gabriel Frankel
_________________________________
Ernst Gabriel Frankel
Director
*
_________________________________
Sir David Thomson
Director
*
_________________________________
John T. Olds
Director
/s/ Robert F. Klausner
_________________________________
Robert F. Klausner
Director
EXHIBIT INDEX
Exhibit Description
------- -----------
1.1 Form of Underwriting Agreement
3.1 Memorandum of Association
3.2 By-Laws
4.2 Specimen Certificate for the common shares*
5.1 Opinion of Cox Hallett Wilkinson as to the legality of the common
shares dated June 25, 2001
8.1 Opinion of Cox Hallett Wilkinson as to certain Bermuda tax matters
dated June 25, 2001
8.2 Opinion of Cadwalader, Wickersham & Taft as to certain U.S. tax
matters dated June 25, 2001
10.1 Loan Agreement, dated as of March 5, 2001, among the Development Bank
of Singapore Limited, Neptune Orient Lines Limited and the registrant*
10.2 Share Option Plan of the registrant*
10.3 Shareholder's Support Services Agreement, dated as of June 5, 2001,
between Neptune Orient Lines Limited and the registrant*
10.4 Form of Ship Technical Management Agreement*
10.5 Shareholder's Agreement, dated as of June 5, 2001 between Neptune
Orient Lines Limited and the registrant*
10.6 Guarantee Fee Letter, dated as of June 5, 2001 from the registrant to
Neptune Orient Lines Limited*
10.7 Loan Agreement, dated as of May 29, 2001 between the Lenders set forth
therein, Danmarks Skibskreditfond and the registrant
15.1 Deleted
21.1 List of subsidiaries of the registrant*
23.1 Consent of PricewaterhouseCoopers
23.2 Consent of Cox Hallett Wilkinson (included in Exhibit 5.1)
23.3 Consent of Cadwalader, Wickersham & Taft (included in Exhibit 8.2)
23.4 Consent of Clarkson*
24.1 Power of Attorney (included as part of the signature page hereto)
- --------
* Filed as part of Amendment No. 1 to the Registration Statement on June 6,
2001.