UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
|
For the quarterly period ended September 30, 2008
OR
|
|
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
|
For the period from to
Commission file number: 001-32343
Arlington Tankers Ltd.
(Exact name of Registrant as specified in its charter)
|
|
|
|
Bermuda
(Jurisdiction of incorporation or organization)
|
|
98-0460376
(I.R.S. Employer Identification No.)
|
First Floor, The Hayward Building
22 Bermudiana Road
Hamilton HM 11, Bermuda
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(441) 292-4456
Former name, former address and former fiscal year, if changes since last report:
Not applicable.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large accelerated filer
o
|
Accelerated filer
þ
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
Smaller reporting company
o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act)
Yes
o
No
þ
THE
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER’S CLASSES OF
COMMON STOCK, AS OF NOVEMBER 7, 2008:
Common Stock, par value $0.01 per share: 15,500,000 shares
ARLINGTON TANKERS LTD. AND SUBSIDIARIES
INDEX
2
Item 1. Financial Statements
The Company’s condensed consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles. The Company’s condensed consolidated financial statements
are expressed in U.S. dollars. In this report, references to “dollars,” “U.S. $” or “$” are to
United States dollars.
ARLINGTON TANKERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30,
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,268
|
|
|
$
|
6,274
|
|
|
Short-term investments
|
|
|
—
|
|
|
|
12,500
|
|
|
Prepaid expenses and accrued income
|
|
|
92
|
|
|
|
184
|
|
|
Other receivables
|
|
|
1,167
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,527
|
|
|
|
19,262
|
|
|
NONCURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Vessels, net
|
|
|
317,829
|
|
|
|
329,330
|
|
|
Deferred debt issuance costs, net
|
|
|
539
|
|
|
|
717
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
334,895
|
|
|
$
|
349,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
2,804
|
|
|
$
|
451
|
|
|
Unearned charter revenue
|
|
|
3,409
|
|
|
|
5,693
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,213
|
|
|
|
6,144
|
|
|
NONCURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Interest rate swap at fair value
|
|
|
7,552
|
|
|
|
7,453
|
|
|
Long-term debt
|
|
|
229,500
|
|
|
|
229,500
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
243,265
|
|
|
|
243,097
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
Founder shares, $1.00 par value per share, 12,000 authorized, none issued or outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Preference shares, $0.01 par value per share, 4,000,000 authorized, none issued or
outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $0.01 par value per share, 60,000,000 authorized, 15,500,000 shares
issued and outstanding
|
|
|
155
|
|
|
|
155
|
|
|
Additional paid-in capital
|
|
|
91,475
|
|
|
|
106,734
|
|
|
Accumulated deficit
|
|
|
—
|
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
91,630
|
|
|
|
106,212
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
334,895
|
|
|
$
|
349,309
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
ARLINGTON TANKERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE THREE MONTHS
|
|
|
FOR THE NINE MONTHS
|
|
|
|
|
ENDED SEPTEMBER 30,
|
|
|
ENDED SEPTEMBER 30,
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter revenues
|
|
$
|
17,851
|
|
|
$
|
17,512
|
|
|
$
|
52,847
|
|
|
$
|
52,630
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel operating expenses, other
|
|
|
5,138
|
|
|
|
4,937
|
|
|
|
15,568
|
|
|
|
14,901
|
|
|
Depreciation
|
|
|
3,891
|
|
|
|
3,861
|
|
|
|
11,501
|
|
|
|
11,456
|
|
|
Administrative expenses
|
|
|
2,748
|
|
|
|
564
|
|
|
|
4,205
|
|
|
|
1,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OPERATING EXPENSES
|
|
|
11,777
|
|
|
|
9,362
|
|
|
|
31,274
|
|
|
|
28,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
6,074
|
|
|
|
8,150
|
|
|
|
21,573
|
|
|
|
24,566
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
68
|
|
|
|
216
|
|
|
|
266
|
|
|
|
645
|
|
|
Interest (expense), other
|
|
|
(3,452
|
)
|
|
|
(3,452
|
)
|
|
|
(10,282
|
)
|
|
|
(10,244
|
)
|
|
Unrealized (loss) on interest rate swap
|
|
|
(269
|
)
|
|
|
(4,955
|
)
|
|
|
(99
|
)
|
|
|
(2,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE), NET
|
|
|
(3,653
|
)
|
|
|
(8,191
|
)
|
|
|
(10,115
|
)
|
|
|
(12,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
2,421
|
|
|
$
|
(41
|
)
|
|
$
|
11,458
|
|
|
$
|
12,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share, basic and diluted
|
|
$
|
0.16
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.74
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
15,500,000
|
|
|
|
15,500,000
|
|
|
|
15,500,000
|
|
|
|
15,500,000
|
|
See notes to condensed consolidated financial statements.
4
ARLINGTON TANKERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(DOLLARS IN THOUSANDS)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
Paid-in
|
|
Accumulated
|
|
|
|
|
|
Stock
|
|
Capital
|
|
Deficit
|
|
Total
|
|
Balance as of January 1, 2008
|
|
$
|
155
|
|
|
$
|
106,734
|
|
|
$
|
(677
|
)
|
|
$
|
106,212
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
11,458
|
|
|
|
11,458
|
|
|
Cash dividends paid
|
|
|
—
|
|
|
|
(15,259
|
)
|
|
|
(10,781
|
)
|
|
|
(26,040
|
)
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 (unaudited)
|
|
$
|
155
|
|
|
$
|
91,475
|
|
|
$
|
—
|
|
|
$
|
91,630
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
ARLINGTON TANKERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE NINE MONTHS
|
|
|
|
|
ENDED SEPTEMBER 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,458
|
|
|
$
|
12,343
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
11,501
|
|
|
|
11,456
|
|
|
Unrealized loss on interest rate swap
|
|
|
99
|
|
|
|
2,624
|
|
|
Amortization of debt issuance costs
|
|
|
178
|
|
|
|
178
|
|
|
CHANGE IN OPERATING ASSETS AND LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
(863
|
)
|
|
|
(216
|
)
|
|
Prepaid expenses and accrued income
|
|
|
92
|
|
|
|
546
|
|
|
Accrued expenses and other current liabilities
|
|
|
2,353
|
|
|
|
90
|
|
|
Unearned charter revenue
|
|
|
(2,284
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
22,534
|
|
|
|
27,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Sale of short-term investments
|
|
|
12,500
|
|
|
|
31,400
|
|
|
Purchase of short-term investments
|
|
|
—
|
|
|
|
(30,900
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
12,500
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Dividend payments from retained earnings
|
|
|
(10,781
|
)
|
|
|
(17,258
|
)
|
|
Dividend payments from paid in capital
|
|
|
(15,259
|
)
|
|
|
(9,712
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(26,040
|
)
|
|
|
(26,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
8,994
|
|
|
|
551
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
6,274
|
|
|
|
3,210
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
15,268
|
|
|
$
|
3,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information — Cash paid for interest
|
|
$
|
10,282
|
|
|
$
|
10,244
|
|
See notes to condensed consolidated financial statements.
6
ARLINGTON TANKERS LTD. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. GENERAL
Arlington Tankers Ltd. (the “Company” or “Arlington”) was incorporated in September 2004 under
the laws of Bermuda for the purpose of acquiring six tanker vessels (the “Initial Vessels”)
consisting of two V-MAX VLCCs from Concordia Maritime AB (“Concordia”), two Product tankers from
Stena AB (“Stena”), and two Panamax tankers from subsidiaries of Stena, Concordia and two companies
owned 75% by Stena and 25% by Fram Shipping Co. Ltd (“Fram”). In November 2004, the Company
completed its initial public offering by issuing and selling to the public 11,450,000 common
shares, par value $0.01 per share, at a price to the public of $20.00 per share, raising gross
proceeds of $229 million before the deduction of underwriting discounts, commissions and expenses
of approximately $17.7 million. Simultaneously, the Company issued a total of 4,050,000 common
shares at a price of $20.00 per share to Stena, Concordia and Fram, for total consideration of $81
million, as part of the settlement of the purchase price of the Initial Vessels. On that date the
Company also raised $135 million of secured debt (before expenses of approximately $0.8 million) as
part of the financing of the Initial Vessels. On acquisition of the Initial Vessels, the excess of
the purchase price of $426.5 million over the historical book value of $283.2 million at which the
predecessor shareholders carried the Initial Vessels on their books was considered a deemed
distribution of $143.3 million to those predecessor shareholders. An aggregate of 1,717,500 of
these shares were sold in the initial public offering in connection with the underwriters’ exercise
of their over-allotment option. The Company did not receive any proceeds from the sale of shares by
Stena, Concordia, and Fram. Concurrent with the closing of the initial public offering, the Company
completed the acquisition of the Initial Vessels.
In December 2005, the Company entered into a five-year term loan agreement with The Royal Bank
of Scotland. The term loan agreement provides for a facility of up to $229.5 million. The purpose
of the term loan agreement was to (1) refinance the Company’s previous debt facility, (2) finance
the purchase price of two new Product tankers from Stena and (3) general corporate purposes. The
Company completed the refinancing of its previous debt facility in December 2005 and completed the
acquisition of the two Stena Product tankers in January 2006. The term loan agreement matures on
January 5, 2011. All amounts outstanding under the term loan agreement must be repaid on that
maturity date. There is no principal amortization required prior to maturity. Borrowings under the
term loan agreement bear interest at the London Inter-Bank Offer Rate (“LIBOR”) plus a margin of 75
basis points. The margin would increase to 85 basis points if the ratio of the fair market value of
the Company’s Vessels to the amount outstanding under the loan facility falls below 2.0 (the
“Ratio”). The increased interest margin is equivalent to approximately $229,500 per year in
increased interest costs in the event the Ratio falls below 2.0. In connection with the term loan
agreement, the Company entered into an interest rate swap agreement with The Royal Bank of
Scotland. As a result of this swap, the Company has effectively fixed the interest rate on the term
loan agreement at 5.7325%, or 5.8325% if the Ratio falls below 2.0.
On January 5, 2006, the Company entered into a series of agreements with certain Stena
subsidiaries, Stena Bulk, Northern Marine Management Ltd. (“Northern Marine”), and Stena Maritime
(the “Stena Parties”), pursuant to which the Company, through wholly owned subsidiaries, purchased
from subsidiaries of Stena Maritime two Product tankers known as the
Stena Concept
and the
Stena
Contest
(the “Additional Vessels”) for a purchase price per Additional Vessel of $46,000,000. In
connection with the acquisition of the Additional Vessels, the Company and the Stena Parties also
entered into certain related agreements with the Stena Parties and amended certain of its
agreements with the Stena Parties related to the Initial Vessels. At the closing of this
acquisition, the Company’s subsidiaries that purchased the Additional Vessels and Stena Bulk
entered into new time charter party agreements with respect to the Additional Vessels. Under the
new time charter parties, which are substantially similar to the time charter parties that the
Company’s subsidiaries have entered into for the Initial Vessels, the Company’s subsidiaries that
purchased the Additional Vessels time chartered the Additional Vessels to Stena Bulk for an initial
period of three years at the fixed daily Basic Hire without any Additional Hire provision. In May
2008, Stena Bulk exercised its option to extend the time charters for an additional 30 months,
effective January 5, 2009. As a result, beginning on January 5, 2009, the Company will become
eligible to earn Additional Hire on the
Stena Concept
and
Stena Contest
and Stena Bulk has two
additional one-year charter options following the 30 month extension, at the fixed daily Basic Hire
set forth below, but without an Additional Hire provision.
At the closing of the acquisition of the Additional Vessels, the time charter parties for the
Company’s existing Product tankers and Panamax tankers were amended. These amendments modified the
charter periods for the Company’s previously-acquired Product tankers and Panamax tankers and
provided certain changes to the calculation of Additional Hire under these time charter parties.
The amendments to the terms of the charters provided that (1) the five-year fixed term for one of
the Product tankers (
Stena Consul
) and one of the Panamax tankers (
Stena Compatriot
) were extended
to November 2010, followed by three one-year options exercisable by Stena Bulk and (2) the
five-year fixed term for one of the Product tankers (
Stena Concord
) and one of the Panamax tankers
(
Stena
7
Companion
) were reduced so that it expired in November 2008, followed by three one-year
options exercisable by Stena Bulk. In May 2008, Stena Bulk exercised the first of its three
one-year options for the
Stena Concord
and the
Stena Companion
, effective November 11, 2008. The
term of the charters for the V-MAX tankers was not amended. The amendments to the Additional Hire
provisions provided for certain favorable adjustments to fuel consumption metrics used in the
calculation of Additional Hire for the Product tankers and Panamax tankers.
At the closing of the acquisition of the Additional Vessels, the ship management agreements
for the Company’s Initial Vessels were also amended. These amendments included modifications to the
provisions relating to drydocking of the Vessels. Specifically, the amendments provided that all
drydockings that occur during the term of the ship management agreements are to be at the sole cost
and expense of Northern Marine. Under the terms of the amended ship management agreements, the
cost of these intermediate and special surveys is covered by a portion of the monthly vessel
management fees that the Company pays to Northern Marine. Such portion of the vessel management
fees is referred to as the “Drydocking Provision.” Upon redelivery of the Vessels to the Company
at the expiration of the ship management agreements, Northern Marine has agreed to return to the
Company any Drydocking Provision paid, but not used, from the completion of the last drydocking
during the term of the applicable Ship Management Agreement (or if no drydocking occurs during the
term of such agreement, from the date of commencement of such agreement), to the date of
redelivery. The amount of the Drydocking Provision that may be due to the Company will be paid at
the daily rates specified in the applicable ship management agreement. No amounts will be
recognized in the Company’s financial statements for the potentially refundable portion of the
Drydocking Provision until such time as it has been determined that a subsequent drydocking will
occur after redelivery of a Vessel to the Company.
Based on their filings with the SEC, as of May 7, 2008, Stena and Concordia directly and
indirectly owned an aggregate of approximately 18.0% of the Company’s outstanding common shares.
As a result of Stena’s purchase of additional common shares in 2007, Stena and Concordia may be
considered “interested shareholders” for purposes of the Company’s bye-laws. Stena and Concordia’s
ownership interest in the Company can have a significant influence over the Company, including the
outcome of shareholder votes and the Company’s ability to conduct future business or modify
existing agreements with Stena or Concordia.
On August 5, 2008, the Company entered into a definitive Agreement and Plan of Merger and
Amalgamation (the “Merger Agreement”) with General Maritime Corporation (“General Maritime”). The
Merger Agreement provides that, upon the terms and subject to the conditions set forth in the
Merger Agreement, Galileo Merger Corporation, a wholly-owned subsidiary of Galileo Holding
Corporation ( “New Parent”), a newly-formed subsidiary of the Company and General Maritime, will
merge with and into General Maritime, with General Maritime continuing as the surviving corporation
of such merger (the “Merger”), and the Company will amalgamate with Archer Amalgamation Limited, a
wholly owned subsidiary of New Parent, with the resulting amalgamated company continuing as the
surviving entity (the “Amalgamation”). As a result of the Merger and the Amalgamation: (i) the
Company and General Maritime will each become a wholly-owned subsidiary of New Parent, which will
be renamed “General Maritime Corporation”; and (ii) the Company’s shareholders will receive 1 share
in New Parent for each Company share held, and General Maritime’s shareholders will receive 1.34
shares in New Parent for each General Maritime share held. Upon consummation of the transactions
contemplated by the Merger Agreement, including the Merger and the Amalgamation, shareholders of
the Company will hold approximately 27% of the outstanding common stock of New Parent and
shareholders of General Maritime will hold approximately 73% of the outstanding common stock of New
Parent. The Merger Agreement is subject to approval by the respective shareholders of the Company
and General Maritime, and other customary closing conditions. The Company has entered into an
agreement with the Royal Bank of Scotland pursuant to which certain provisions of the Company’s
term loan agreement will be amended if the transaction closes. See Note 8. Although the
transaction is expected to be completed by the end of the fourth quarter of 2008, there can be no
assurance that the transaction will be completed during such timeframe, or at all.
The Company’s eight vessels (the “Vessels”) are currently owned by eight wholly-owned
subsidiaries of the Company (each, a “Vessel Subsidiary”). The primary activity of each of the
Vessel Subsidiaries is the ownership and operation of a Vessel. The flag state of each of the
Company’s Vessels is Bermuda.
8
The following table sets out the details of the Vessels included in these consolidated
financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Charter
|
|
Latest Charter
|
|
Vessel Type
|
|
Year Built
|
|
Dwt
|
|
Date Acquired
|
|
Expiration Date(1)
|
|
Expiration Date (1)
|
|
V-MAX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena Victory
|
|
|
2001
|
|
|
|
314,000
|
|
|
November 10, 2004
|
|
November 9, 2009
|
|
November 9, 2012
|
|
Stena Vision
|
|
|
2001
|
|
|
|
314,000
|
|
|
November 10, 2004
|
|
November 9, 2009
|
|
November 9, 2012
|
|
Panamax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena Companion
|
|
|
2004
|
|
|
|
72,000
|
|
|
November 10, 2004
|
|
November 9, 2008
|
|
November 9, 2011
|
|
Stena Compatriot
|
|
|
2004
|
|
|
|
72,000
|
|
|
November 10, 2004
|
|
November 9, 2010
|
|
November 9, 2013
|
|
Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena Concord
|
|
|
2004
|
|
|
|
47,400
|
|
|
November 10, 2004
|
|
November 9, 2008
|
|
November 9, 2011
|
|
Stena Consul
|
|
|
2004
|
|
|
|
47,400
|
|
|
November 10, 2004
|
|
November 9, 2010
|
|
November 9, 2013
|
|
Stena Concept
|
|
|
2005
|
|
|
|
47,400
|
|
|
January 5, 2006
|
|
January 4, 2009
|
|
July 4, 2011
|
|
Stena Contest
|
|
|
2005
|
|
|
|
47,400
|
|
|
January 5, 2006
|
|
January 4, 2009
|
|
July 4, 2011
|
|
|
|
|
|
(1)
|
|
Each of the charters contains renewal options described in greater detail below.
|
Effective November 10, 2004 for the Initial Vessels and January 5, 2006 for the Additional
Vessels, the Company has chartered the Vessels to subsidiaries of Stena and Concordia (the
“Charterers”) under three, four and five-year fixed rate charters, increasing annually by an amount
equal to the annual increase in the fees under the Company’s ship management agreements. Under the
charters, in addition to the fixed rate Basic Hire, certain Vessels have the possibility of
receiving Additional Hire from the Charterers through profit sharing arrangements related to the
performance of the tanker markets on specified geographic routes, or from actual time charter
rates. Additional Hire is not guaranteed except Additional Hire related to the Sun International
sub-charter, and correlates to weighted average historical voyage rates for the specified routes.
The charters contain options on the part of the Charterers to extend the terms of the charters.
Stena and Concordia have each agreed to guarantee the obligations of their respective subsidiaries
under the charters.
Effective November 10, 2004 for the Initial Vessels and January 5, 2006 for the Additional
Vessels, the Company has also entered into ship management agreements with Northern Marine. The
ship management agreements provide for the technical management of the Vessels.
The Basic Hire rate for each of the Vessels is payable to the Company monthly in advance and
will increase annually by an amount equal to the annual increase in the fee payable under the
applicable ship management agreement.
The following table sets forth the daily Basic Hire, daily base operating costs and operating
margin for the Company’s two V-MAX vessels, the
Stena Vision
and the
Stena Victory
. The operating
margin is calculated by subtracting the amount of the base operating costs from the amount of Basic
Hire.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Basic Hire
|
|
Base Operating Costs
|
|
Operating Margin
|
|
Nov. 11, 2007 — Nov. 10, 2008
|
|
$
|
36,882
|
|
|
$
|
8,682
|
|
|
$
|
28,200
|
|
|
Nov. 11, 2008 — Nov. 10, 2009
|
|
|
37,316
|
|
|
|
9,116
|
|
|
|
28,200
|
|
|
Nov. 11, 2009 — Nov. 10, 2010
|
|
|
37,772
|
|
|
|
9,572
|
|
|
|
28,200
|
|
|
(Option Year 1)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nov. 11, 2010 — Nov. 10, 2011
|
|
|
38,251
|
|
|
|
10,051
|
|
|
|
28,200
|
|
|
(Option Year 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nov. 11, 2011 — Nov. 10, 2012
|
|
|
38,753
|
|
|
|
10,553
|
|
|
|
28,200
|
|
|
(Option Year 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Charterer has the option to extend these Charters on a vessel-by-vessel
basis for 3 additional 1 year terms. There can be no assurance that the Charterer will exercise any
such option.
|
9
The following table sets forth the daily Basic Hire, daily base operating costs and operating
margin for two of the Company’s vessels, the
Stena Companion
and the
Stena Concord
, with initial
charter expiration dates in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena Companion
|
|
Stena Concord
|
|
|
|
|
|
|
|
Base
|
|
|
|
|
|
|
|
|
|
Base
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Operating
|
|
|
|
|
|
Operating
|
|
Operating
|
|
Period
|
|
Basic Hire
|
|
Costs
|
|
Margin
|
|
Basic Hire
|
|
Costs
|
|
Margin
|
|
Nov. 11, 2007 —
Nov. 10, 2008
|
|
$
|
18,306
|
|
|
$
|
6,656
|
|
|
$
|
11,650
|
|
|
$
|
16,335
|
|
|
$
|
6,135
|
|
|
$
|
10,200
|
|
|
Nov. 11, 2008 —
Nov. 10, 2009
|
|
|
18,639
|
|
|
|
6,989
|
|
|
|
11,650
|
|
|
|
16,642
|
|
|
|
6,442
|
|
|
|
10,200
|
|
|
(Option Year 1)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nov. 11, 2009 —
Nov. 10, 2010
|
|
|
18,989
|
|
|
|
7,339
|
|
|
|
11,650
|
|
|
|
16,964
|
|
|
|
6,764
|
|
|
|
10,200
|
|
|
(Option Year 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nov. 11, 2010 —
Nov. 10, 2011
|
|
|
19,356
|
|
|
|
7,706
|
|
|
|
11,650
|
|
|
|
17,303
|
|
|
|
7,103
|
|
|
|
10,200
|
|
|
(Option Year 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Charterer has the option to extend these Charters on a vessel-by-vessel
basis for 3 additional 1 year terms. In May 2008, the Charterer exercised the first of these
one-year options for both vessels. There can be no assurance that the Charterer will exercise any
additional options.
|
The following table sets forth the daily Basic Hire, daily base operating costs and operating
margin for two of the Company’s vessels, the
Stena Compatriot
and the
Stena Consul
, with initial
charter expiration dates in 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena Compatriot
|
|
Stena Consul
|
|
|
|
|
|
|
|
Base
|
|
|
|
|
|
|
|
|
|
Base
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Operating
|
|
|
|
|
|
Operating
|
|
Operating
|
|
Period
|
|
Basic Hire
|
|
Costs
|
|
Margin
|
|
Basic Hire
|
|
Costs
|
|
Margin
|
|
Nov. 11, 2007 —
Nov. 10, 2008
|
|
$
|
18,306
|
|
|
$
|
6,656
|
|
|
$
|
11,650
|
|
|
$
|
16,335
|
|
|
$
|
6,135
|
|
|
$
|
10,200
|
|
|
Nov. 11, 2008 —
Nov. 10, 2009
|
|
|
18,639
|
|
|
|
6,989
|
|
|
|
11,650
|
|
|
|
16,642
|
|
|
|
6,442
|
|
|
|
10,200
|
|
|
Nov. 11, 2009 —
Nov. 10, 2010
|
|
|
18,989
|
|
|
|
7,339
|
|
|
|
11,650
|
|
|
|
16,964
|
|
|
|
6,764
|
|
|
|
10,200
|
|
|
Nov. 11, 2010 —
Nov. 10, 2011
|
|
|
19,356
|
|
|
|
7,706
|
|
|
|
11,650
|
|
|
|
17,303
|
|
|
|
7,103
|
|
|
|
10,200
|
|
|
(Option Year 1)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nov. 11, 2011 —
Nov. 10, 2012
|
|
|
19,741
|
|
|
|
8,091
|
|
|
|
11,650
|
|
|
|
17,658
|
|
|
|
7,458
|
|
|
|
10,200
|
|
|
(Option Year 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nov. 11, 2012 —
Nov. 10, 2013
|
|
|
20,145
|
|
|
|
8,495
|
|
|
|
11,650
|
|
|
|
18,031
|
|
|
|
7,831
|
|
|
|
10,200
|
|
|
(Option Year 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Charterer has the option to extend these Charters on a vessel-by-vessel basis for 3
additional 1 year terms. There can be no assurance that the Charterer will exercise any such
option.
|
10
The following table sets forth the daily Basic Hire, daily base operating costs and operating
margin for the Company’s two Additional Vessels, the
Stena Concept
and the
Stena Contest
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Operating
|
|
|
|
Period
|
|
Basic Hire
|
|
Costs
|
|
Operating Margin
|
|
Jan. 5, 2007 — Jan 4, 2008
|
|
$
|
20,043
|
|
|
$
|
5,843
|
|
|
$
|
14,200
|
|
|
Jan. 5, 2008 — Jan. 4, 2009
|
|
|
20,335
|
|
|
|
6,135
|
|
|
|
14,200
|
|
|
Jan. 5, 2009 — Jan. 4, 2010
(Option Period 1)(1)
|
|
|
17,942
|
|
|
|
6,442
|
|
|
|
11,500
|
|
|
Jan. 5, 2010 — Jan. 4, 2011
(Option Period 1)
|
|
|
18,264
|
|
|
|
6,764
|
|
|
|
11,500
|
|
|
Jan. 5, 2011 — July 4, 2011
(Option Period 1)
|
|
|
18,603
|
|
|
|
7,103
|
|
|
|
11,500
|
|
|
July 5, 2011 — July 4, 2012
(Option Period 2) (2)
|
|
|
21,158
|
|
|
|
7,458
|
|
|
|
13,700
|
|
|
July 5, 2012 — July 4, 2013
(Option Period 3)
|
|
|
21,531
|
|
|
|
7,831
|
|
|
|
13,700
|
|
|
|
|
|
|
(1)
|
|
In May 2008, the Charterer exercised its option to extend these Charters for an
additional 30-month period expiring on July 4, 2011. As a result, the Company will be eligible to
earn Additional Hire in addition to Basic Hire during this 30-month period.
|
|
|
|
(2)
|
|
This period is the first for which the Charterer has the option to extend these Charters
as a result of exercising the option described in Footnote 1 above. The Company would not be
eligible to earn Additional Hire over the term of any extension. There can be no assurance that
the Charterer will exercise any such option.
|
In addition to the Basic Hire, the Charterers may pay the Company quarterly in arrears an
Additional Hire payment for the Initial Vessels. Under the charters, the Additional Hire, if any,
in respect of each Initial Vessel, is payable on the 25th day following the end of each calendar
quarter.
The Additional Hire, if any, payable in respect of an Initial Vessel, other than the V-MAX
tankers as described below, for any calendar quarter is an amount equal to 50% of the weighted
average hire, calculated as described below, for the quarter after deduction of the Basic Hire in
effect for that quarter. The weighted average hire is a daily rate equal to the weighted average of
the following amounts:
|
|
•
|
|
a weighted average of the time charter hire per day received by the Charterer for any
periods during the calculation period, determined as described below, that the Initial
Vessel is sub-chartered by the Charterer under a time charter, less ship broker commissions
paid by the Charterer in an amount not to exceed 2.5% of such time charter hire and
commercial management fees paid by the Charterer in an amount not to exceed 1.25% of such
time charter hire; and
|
|
|
|
|
•
|
|
the time charter equivalent hire for any periods during the calculation period that the
Vessel is not sub-chartered by the Charterer under a time charter.
|
The calculation period is the twelve-month period ending on the last day of each calendar
quarter, except that in the case of the first three full calendar quarters following the
commencement of the Company’s charters, the calculation period is the three, six and nine month
periods, respectively, ending on the last day of such calendar quarter and the first calendar
quarter also includes the period from the date of the commencement of the Company’s charters to the
commencement of the first full calendar quarter.
As a result of Stena Bulk exercising its option to extend the Charters for the Additional
Vessels, the Company will become eligible to earn Additional Hire for those Vessels during the
30-month period commencing January 5, 2009.
At the time the Company acquired its two V-MAX Vessels, these Vessels were sub-chartered by
Concordia to Sun International. The sub-charter with Sun International relating to the
Stena
Victory
expired on October 20, 2007. The sub-charter with Sun International relating to the
Stena
Vision
expired on September 11, 2008.
11
The sub-charter rate that Concordia received from Sun International with respect to the
Stena
Victory
and the
Stena Vision
was greater than the Basic Hire rate that the Company received from
Concordia. Therefore, the Company earned Additional Hire revenue while the
Stena Victory
and the
Stena Vision
were sub-chartered to Sun International. The amount of this Additional Hire was equal
to the difference between the amount paid by Sun International under its sub-charters with
Concordia and the Basic Hire rate in effect, less ship broker commissions paid by the Charterer in
an amount not to exceed 2.5% of the charterhire received by the Charterer and commercial management
fees paid by the Charterer in an amount not to exceed 1.25% of the charterhire received by the
Charterer.
Immediately following the expiration of the sub-charter of the
Stena Victory
with Sun
International, on October 20, 2007, the Vessel commenced operating under a new two-year sub-charter
agreement between Concordia and Eiger Shipping, S.A. (“Eiger Shipping”), an affiliate of the
shipping branch of LukOil commonly known as Litasco. In addition, immediately following the
expiration of the sub-charter of the
Stena Vision
with Sun International on September 11, 2008, the
Vessel commenced operating under a new two-year sub-charter agreement between Concordia and Eiger
Shipping. The sub-charter rate that Eiger Shipping is obligated to pay to Concordia is greater than
the Basic Hire rate that the Company will receive from Concordia. Therefore, the Company expects to
earn Additional Hire revenue while the V-MAX vessels are under the Eiger Shipping sub-charters in
addition to the guaranteed Basic Hire. The Additional Hire revenue will not be exposed to
fluctuations in spot market rates. Additional Hire for the V-MAX tankers under the Eiger Shipping
sub-charters will be based on the time charter hire received by Concordia under the sub-charters.
Additional Hire revenues under the Eiger Shipping sub-charters are not guaranteed, meaning that the
Company will earn Additional Hire only when the Vessels are in service. In the event that the
V-MAX tankers are off-hire, the Company will not be eligible to earn Additional Hire revenue from
the profit sharing provisions on the days that the Vessel is off-hire. Based on the time charter
rates under the Eiger Shipping sub-charters and assuming that both V-MAX vessels operate for 90
days per quarter, the Company expects the V-MAX tankers to generate Additional Hire revenues of
approximately $350,000 per Vessel per quarter in addition to the guaranteed Basic Hire levels,
while the Vessels are sub-chartered to Eiger Shipping.
The Vessel Subsidiaries have entered into fixed-rate ship management agreements with Northern
Marine. Under the ship management agreements, Northern Marine is responsible for all technical
management of the Vessels, including crewing, maintenance, repair, drydockings, vessel taxes and
other vessel operating and voyage expenses. Northern Marine has outsourced some of these services
to third-party providers. The Company has agreed to guarantee the obligations of each of the
Company’s Vessel Subsidiaries under the ship management agreements.
Under the ship management agreements, Northern Marine has agreed to return the Vessels
in-class and in the same good order and condition as when delivered, except for ordinary wear and
tear.
Northern Marine is also obligated under the ship management agreements to maintain insurance
for each of the Company’s Vessels, including marine hull and machinery insurance, protection and
indemnity insurance (including pollution risks and crew insurances), war risk insurance and
off-hire insurance. Under the ship management agreements, the Company pays Northern Marine a fixed
fee per day per Vessel for all of the above services, which increases 5% per year, for so long as
the relevant charter is in place. Under the ship management agreements, Northern Marine has agreed
to indemnify the Company for the loss of the Basic Hire for each of the Vessels in the event, for
circumstances specified under the charters, the Vessel is off-hire or receiving reduced hire for
more than five days during any twelve-month period, or six days during a leap year, net of amounts
received by us from off-hire insurance. Stena has agreed to guarantee this indemnification by
Northern Marine. Both the Company and Northern Marine have the right to terminate any of the ship
management agreements if the relevant charter has been terminated.
Tables setting forth the daily base operating costs, which are payable by the Company monthly
in advance, for each of the Company’s Vessels are set forth above. For the Initial Vessels, the
first charter year commenced on November 10, 2004 and ended on November 10, 2005. Each subsequent
charter year will begin on November 11 of the applicable year and end on the subsequent November
10. For the Additional Vessels, the first charter year commenced on January 5, 2006 and ended on
January 4, 2007. Each subsequent charter year will begin on January 5 of the applicable year and
end on the subsequent January 4. As a result of the exercise of the 30-month charter extension
options for the Additional Vessels, the final six months of the 30-month option term will expire on
July 4, 2011. If subsequent extension options are exercised, charter years will begin on July 5
and end on July 4.
The Company has also agreed to pay to Northern Marine an incentive fee for each day a Vessel
is on hire in excess of 360 days during any twelve-month period following the date the applicable
Vessel was delivered to the Company in an amount equal to the daily Basic Hire for such Vessel. If
the Company terminates its ship management agreements with Northern Marine because Northern Marine
has failed to perform its obligations under such agreements, Stena has agreed to provide a
replacement ship manager to perform the obligations set forth in the ship management agreements on
the same terms and for the same fixed amounts payable to Northern Marine.
12
Northern Marine provides technical and crewing management and payroll and support services to
the Stena Sphere shipping divisions and several other clients, including ChevronTexaco Corporation,
Technip Offshore UK and Gulf Marine Management. Northern Marine has offices in Glasgow, Aberdeen,
Mumbai, Kiel, Houston, Manila, Rotterdam and Singapore and has over 4,400 seafarers employed on
approximately 90 vessels.
2. ACCOUNTING POLICIES
Basis of accounting and presentation
The unaudited condensed consolidated interim financial statements are prepared in accordance
with accounting principles generally accepted in the United States and the Securities and Exchange
Commission’s instructions to Form 10-Q. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the financial position
and results of operations for the periods presented have been included. The condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31,
2007. The results of operations for the interim periods ended September 30, 2008, are not
necessarily indicative of the results for the entire year ending December 31, 2008. The condensed
consolidated financial statements include the assets and liabilities, results of operations and
cash flows of the Company and its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated upon consolidation.
Cash and cash equivalents and short-term investments
The Company considers all demand and time deposits and all highly liquid investments with an
original maturity of three months or less as of the date of purchase to be cash equivalents. The
Company considers all demand and time deposits and all highly liquid investments with an original
maturity of greater than three months as of the date of purchase to be short-term investments. Cash
and cash equivalents of $15.3 million as of September 30, 2008 are pledged as described in Note 8
and are held at a single financial institution with a Standard & Poor’s rating of A-1+. The
carrying value of cash and cash equivalents approximates its fair value. The Company had no
short-term investments as of September 30, 2008.
Drydocking provisions
In addition to vessel acquisition, other major expenditures include the monthly funding of the
Company’s maintenance program of regularly scheduled intermediate surveys or special surveys
necessary to preserve the quality of the Company’s Vessels as well as to comply with international
shipping standards and environmental laws and regulations. Management anticipates that the Vessels
will undergo intermediate surveys 2.5 years after special surveys and that the Vessels will undergo
special surveys every five years. In the three months ended September 30, 2008, no vessels
completed an intermediate survey or a special survey. Under the terms of the Company’s ship
management agreements with Northern Marine, the cost of these intermediate and special surveys is
covered by a portion of the vessel management fees that the Company pays to Northern Marine.
During the duration of these intermediate and special surveys, the Company will not have the
opportunity to earn Additional Hire revenues from profit-sharing arrangements.
Estimates and concentrations
The preparation of financial statements in accordance with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual results could differ from such
estimates.
The Company operates in the shipping industry which historically has been cyclical with
corresponding volatility in profitability and vessel values. Vessel values are strongly influenced
by charter rates which in turn are influenced by the level and pattern of global economic growth
and the world-wide supply and demand for vessels. The spot market for tankers is highly competitive
and charter rates are subject to significant fluctuations. Dependence on the spot market may result
in lower utilization. Each of the aforementioned factors are important considerations associated
with the Company’s assessment of whether the carrying amount of its owned Vessels are recoverable.
The Company seeks to mitigate the effect of such factors by various means such as by obtaining long
term charter contracts. There is a concentration of credit risk because all revenues are due solely
from the Charterers. See Note 4.
13
Earnings (loss) per share
Earnings (loss) per share are based on the weighted average number of common shares
outstanding for the period presented. For all periods presented, the Company had no potentially
dilutive securities outstanding and therefore basic and diluted earnings (loss) per share are the
same.
Distributions to shareholders
The Company has paid a quarterly cash distribution denominated in U.S. dollars to the holders
of its common shares in amounts substantially equal to the charter hire received from the
Charterers, less cash expenses and less any cash reserves established by the Company’s Board of
Directors. The Company has generally declared those dividends in January, April, July and October
of each year and paid those dividends in the subsequent month. Distributions to shareholders are
applied first to retained earnings. When retained earnings are not sufficient, distributions are
applied to additional paid-in capital.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 157,
“Fair Value Measurements”
(“SFAS 157”). SFAS 157
establishes a single definition of fair value and a framework for measuring fair value, sets out a
fair value hierarchy to be used to classify the source of information used in fair value
measurements, and requires new disclosures of assets and liabilities measured at fair value based
on their level in the hierarchy. This statement applies under other accounting pronouncements that
require or permit fair value measurements. In February 2008, the FASB issued Staff Positions (FSPs)
No. 157-1 and No. 157-2, which, respectively, remove leasing transactions from the scope of SFAS
157 and defer its effective date for one year relative to certain nonfinancial assets and
liabilities. As a result, the application of the definition of fair value and related disclosures
of SFAS 157 (as impacted by these two FSPs) was effective for the Company beginning January 1, 2008
on a prospective basis with respect to fair value measurements of all financial assets and
liabilities. This adoption did not have a material impact on the Company’s consolidated results of
operations or financial condition. The remaining aspects of SFAS 157 for which the effective date
was deferred under FSP No. 157-2 are currently being evaluated by the Company. Areas impacted by
the deferral relate to nonfinancial assets and liabilities that are measured at fair value, but are
recognized or disclosed at fair value on a nonrecurring basis. This deferral applies to items such
as long-lived asset groups measured at fair value for an impairment assessment. The effects of the
remaining aspects of SFAS 157 are to be applied by the Company to fair value measurements
prospectively beginning January 1, 2009. The Company does not expect them to have a material impact
on its consolidated results of operations or financial condition. In October 2008, the FASB issued
Staff Position No. FAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for
That Asset is Not Active”
(“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157, which
the Company adopted as of January 1, 2008, in cases where a market is not active. The Company has
considered the guidance provided by FSP 157-3 and determined that the impact was not material on
estimated fair values as of September 30, 2008. See Note 10 for disclosures required by this new
pronouncement.
In December 2007 the FASB issued SFAS No. 160, “
Noncontrolling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51
” (“SFAS 160”). SFAS 160 is intended to improve
the relevance, comparability and transparency of financial information that a reporting entity
provides in its consolidated financial statements with reference to a noncontrolling interest in a
subsidiary. Such a noncontrolling interest, sometimes called a minority interest, is the portion of
equity in a subsidiary not attributable, directly or indirectly, to the parent entity. SFAS 160 is
effective for fiscal years beginning on or after December 15 2008. The Company does not expect the
adoption of SFAS 160 to have a material impact on its financial statements.
In December 2007 the FASB issued SFAS No. 141 (revised 2007), “
Business Combinations
” (“SFAS
141R”). The objective of SFAS 141R is to improve the relevance, representational faithfulness and
comparability of the information that a reporting entity provides in its financial reports about a
business combination and its effects. To accomplish this, SFAS 141R establishes principles and
requirements for how the acquirer a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any non-controlling interest in the
acquiree, b) recognizes and measures the goodwill acquired in the business combination or a gain
from a bargain price, and c) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business combination. SFAS
141R is effective for fiscal years beginning on or after December 15, 2008. The Company does not
expect the adoption of SFAS 141R to have a material impact on its financial statements.
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and
Hedging Activities—An Amendment of FASB Statement No. 133”
(“SFAS 161”). SFAS 161 applies to all
derivative instruments and related hedged items accounted for under SFAS No. 133,
“Accounting for
Derivative Instruments and Hedging Activities”
(“SFAS 133”), and requires
14
entities to provide greater transparency about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS
133 and its related interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, results of operations, and cash flows. SFAS 161 is
effective for fiscal years and interim periods beginning after November 15, 2008. This standard is
not expected to have a material impact on the Company’s future consolidated financial statements.
Additionally, because SFAS 161 applies only to financial statement disclosures, it will not have a
material impact on the Company’s consolidated financial position, results of operations, and cash
flows.
In May 2008, the FASB issued SFAS No. 162,
“The Hierarchy of Generally Accepted Accounting
Principles”
(“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a
consistent framework, or hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with generally accepted accounting principles
in the United States for non-governmental entities. SFAS 162 is effective 60 days following
approval by the SEC of the Public Company Accounting Oversight Board’s amendments to AU Section
411,
“The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles”
.
The Company does not expect SFAS 162 to have a material impact on the Company’s consolidated
financial statements.
4. CHARTER REVENUES
The future revenues that the Company expects to receive under the time charters in effect as
of September 30, 2008, are $295.8 million. This estimate represents the Basic Hire under the time
charters in effect between the Company and Stena and Concordia that expire in November 2008 with
respect to two of the Company’s Vessels, in 2009 with respect to four of the Company’s Vessels and
in 2010 with respect to two of the Company’s Vessels. This estimate also includes future revenues
that the Company may receive if the Charterers exercise all of their options to extend the charters
and forecasted Additional Hire revenue related to Concordia’s sub-charters of the two V-MAX vessels
to Sun International and Eiger Shipping. As discussed further in Note 1, the sub-charter relating
to the
Stena Victory
expired on October 20, 2007 and the sub-charter relating to the
Stena Vision
expired on September 11, 2008. Immediately following the expiration of the respective Sun
International sub-charters of the
Stena Victory
and the
Stena Vision
, each Vessel commenced
operating under a new two-year sub-charter agreement with Eiger Shipping. During the term of these
new sub-charters, the Company will continue to earn guaranteed Basic Hire from Concordia and will
also earn Additional Hire under the profit sharing provisions of the Charters. The table below
assumes that Additional Hire of approximately $350,000 per Vessel per quarter is paid on the V-MAX
Vessels throughout the term of the Eiger Shipping sub-charters, and assumes that the V-MAX Vessels
operate for 90 days per quarter.
|
|
|
|
|
|
|
|
|
Minimum Future
|
|
Year
|
|
Charter Revenue
|
|
|
|
(In thousands of $)
|
|
2008
|
|
|
17,756
|
|
|
2009
|
|
|
68,818
|
|
|
2010
|
|
|
68,062
|
|
|
2011
|
|
|
67,401
|
|
|
2012
|
|
|
53,764
|
|
|
Thereafter
|
|
|
19,954
|
|
5. OTHER RECEIVABLES
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands of $)
|
|
Additional hire revenue due from Stena and Concordia
|
|
$
|
1,167
|
|
|
$
|
304
|
|
|
|
|
|
|
|
|
$
|
1,167
|
|
|
$
|
304
|
|
|
|
|
|
As of September 30, 2008 and December 31, 2007 other receivables represent amounts due under
the Additional Hire profit share arrangement. These amounts are calculated quarterly in arrears.
15
6. VESSELS, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands of $)
|
|
Vessels
|
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
402,426
|
|
|
$
|
402,426
|
|
|
Accumulated depreciation
|
|
|
(84,597
|
)
|
|
|
(73,096
|
)
|
|
|
|
|
|
Net book value at end of period
|
|
|
317,829
|
|
|
|
329,330
|
|
|
Spare parts
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Vessels, net
|
|
$
|
317,829
|
|
|
$
|
329,330
|
|
|
|
|
|
There have been no drydocking costs capitalized through September 30, 2008.
7. DEFERRED DEBT ISSUANCE COST
Deferred debt issuance cost represents debt arrangement fees that are capitalized and
amortized on a straight-line basis to interest expense over the term of the relevant debt.
Amortization is included in other interest expense. As of September 30, 2008 and December 31, 2007
the balance relates entirely to the Company’s $229.5 million secured credit facility with The Royal
Bank of Scotland. Deferred debt issuance cost is comprised of the following amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands of $)
|
|
Debt arrangement fees
|
|
$
|
1,200
|
|
|
$
|
1,200
|
|
|
Accumulated amortization
|
|
|
(661
|
)
|
|
|
(483
|
)
|
|
|
|
|
|
|
|
|
|
Deferred debt issuance cost
|
|
$
|
539
|
|
|
$
|
717
|
|
|
|
|
|
8. DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands of $)
|
|
Secured credit facility
|
|
$
|
229,500
|
|
|
$
|
229,500
|
|
|
|
|
|
|
Total debt
|
|
$
|
229,500
|
|
|
$
|
229,500
|
|
|
|
|
|
As of September 30, 2008 and December 31, 2007, the Company had $229.5 million in debt
outstanding under its facility with The Royal Bank of Scotland plc. In December 2005, the Company
entered into a five-year term loan agreement with The Royal Bank of Scotland for a facility of
$229.5 million. The term loan agreement is secured by first priority mortgages over each of the
eight Vessels, assignment of earnings and insurances and the Company’s rights under the time
charters for the Vessels and the ship management agreements, a pledge of the shares of the
Company’s wholly-owned subsidiaries and a security interest in certain of the Company’s bank
accounts. The term loan agreement with The Royal Bank of Scotland matures on January 5, 2011. All
amounts outstanding under the term loan agreement must be repaid on that maturity date. There is no
principal amortization prior to maturity. Borrowings under the term loan agreement bear interest
at LIBOR plus a margin of 75 basis points. The margin would increase to 85 basis points if the
Ratio falls below 2.0. The increased interest margin is equivalent to approximately $229,500 per
year in increased interest costs in the event the Ratio falls below 2.0. In connection with the
term loan agreement, the Company has entered into an interest rate swap agreement with The Royal
Bank of Scotland. As a result of this swap, the Company has effectively fixed the interest rate on
the term loan agreement at 5.7325%, or 5.8325% if the ratio falls below 2.0.
The term loan agreement provides that if at any time the aggregate fair value of the Company’s
Vessels that secure the obligations under the loan agreement is less than 125% of the loan amount,
the Company must either provide additional security or prepay a portion of the loan to reinstate
such percentage. The term loan agreement also contains financial covenants requiring that at the
end of each financial quarter (1) the Company’s total assets (adjusted to give effect to the market
value of the Vessels) less total liabilities is equal to or greater than 30% of such total assets
and (2) the Company has positive working capital. At September 30, 2008 and December 31, 2007 the
Company was in compliance with the financial covenants of the loan agreement.
On September 25, 2008, the Company, The Royal Bank of Scotland and certain subsidiaries of the
Company entered into an agreement (the “Agreement”) under which The Royal Bank of Scotland
consented to the proposed transactions contemplated by the Merger Agreement. In accordance with
the terms of the Merger Agreement, General Maritime has consented to the modification of the Loan
Agreement on the terms set forth in the Agreement. The Agreement provides The Royal Bank of
Scotland’s consent to the
16
transactions contemplated by the Merger Agreement, subject to the terms and conditions set
forth in the Agreement. In particular, pursuant to the terms of the Agreement, among other things,
the Margin (as defined in the term loan agreement) is increased to 1.25% and the Company is
required to pay a one percent prepayment fee if the secured credit facility is prepaid within two
years of the Company’s acceptance of the Agreement. The foregoing provisions of the Agreement will
become effective only upon the closing of the transactions contemplated by the Merger Agreement.
Except as specifically set forth in the Agreement, the provisions in the term loan agreement remain
unchanged and the loan agreement remains in full force and effect.
9. FINANCIAL INSTRUMENTS
Derivative instruments and hedging activities
SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities”
(“SFAS 133”)
requires that all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of each derivative is recorded each period in current earnings or other
comprehensive income, depending on whether the derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction.
As of September 30, 2008 and December 31, 2007 the Company had not designated any derivatives
as part of a hedge transaction.
In December 2005, the Company entered into a $229.5 million secured credit facility with The
Royal Bank of Scotland. In conjunction with the credit facility, the Company entered into an
interest rate swap to change the characteristics of the interest payments on its secured debt
facility from LIBOR to a fixed rate of 5.7325%, or 5.8325% if the Ratio falls below 2.0. The
interest rate swap agreement was not designated nor qualified as a cash flow hedge pursuant to SFAS
133, accordingly changes in the fair value of this swap are recorded in current earnings. The fair
value of the swap at September 30, 2008 was a liability of $7.6 million. The fair value of the
swap at December 31, 2007 was a liability of $7.5 million. Accordingly, the Company recorded a
non-cash decrease in the fair value of the interest rate swap of $99,000 in current earnings as an
unrealized loss for the nine months ended September 30, 2008 and the Company recorded a non-cash
decrease in the fair value of the interest swap of $269,000 in current earnings as an unrealized
loss the three months ended September 30, 2008. The fair market value of the Company’s interest
rate swap will generally fluctuate based on the implied forward interest rate curve for the 3-month
LIBOR. If the implied forward interest rate curve decreases, the fair market value of the interest
rate swap will decrease which will result in an unrealized loss in current earnings. If the
implied forward interest rate curve increases, the fair market value of the interest rate swap will
increase and result in an unrealized gain in current earnings. In either case, changes in the
unrealized gain or loss as a result of fluctuations in the fair value of the interest rate swap did
not impact the Company’s cash dividend payments.
The base floating rate of three-month LIBOR plus margin of 75 basis points for the quarters
ended September 30, 2008 and 2007 were 2.8% and 5.36%, respectively. For the nine months ended
September 30, 2008 the Company had approximately $2.7 million of reclassifications to increase
interest expense. For the nine months ended September 30, 2007 the Company had approximately
$653,000 of reclassifications to decrease interest expense. These reclassifications did not impact
the Company’s obligations under its credit facility. These amounts represent the net payments made
under the swap agreement that represent interest costs paid in excess of the variable interest
incurred or interest benefit realized under the interest rate swap agreement. The following table
summarizes interest expense incurred under the Company’s credit facility and interest rate swap
agreement for the nine months ended September 30, 2008 and September 30, 2007, exclusive of
amortized deferred debt issuance costs and other interest costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
Nine months ended
|
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
|
|
(In thousands of $)
|
|
Interest related to floating rate debt facility
|
|
$
|
7,319
|
|
|
$
|
10,630
|
|
|
Interest cost (benefit) related to swap agreement
|
|
|
2,694
|
|
|
|
(653
|
)
|
|
|
|
|
|
Total interest incurred under debt facility and interest rate swap
|
|
$
|
10,013
|
|
|
$
|
9,977
|
|
|
|
|
|
Except for the interest rate swap, the Company had no other outstanding derivative instruments
as of September 30, 2008 and December 31, 2007.
17
The Company is exposed to credit risk in the event of non-performance by the counter-parties
to its swap contracts. The Company minimizes its credit risk on these transactions by endeavoring
to only deal with credit-worthy financial institutions, and therefore the Company views the risk of
non-performance by the counter-parties as low.
10. FAIR VALUE MEASUREMENT
Under SFAS 157, fair value is defined as the exit price, or the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants as of the measurement date. SFAS 157 also establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are inputs market participants would use in valuing the asset or liability
developed based on market data obtained from sources independent of the Company. Unobservable
inputs are inputs that reflect the Company’s assumptions about the factors market participants
would use in valuing the asset or liability developed based upon the best information available in
the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted
prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include
quoted prices for similar assets or liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active, and inputs (other than quoted prices)
that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are
unobservable inputs for the asset or liability.
Categorization within the valuation hierarchy is based upon the lowest level of input that is
significant to the fair value measurement.
For the Company, effective January 1, 2008, fair value under SFAS 157 (as impacted by FSP Nos.
157-1 and 157-2) principally applied to a certain derivative instrument, namely the interest rate
swap. Interest rate swaps were previously and will continue to be marked-to-market at each
reporting period; however, the definition of fair value used for these marks-to-market are now
applied using SFAS 157.
The Company considers interest rate swaps as level 2 measurements. For level 2 derivatives,
Arlington uses inputs other than quoted prices that are observable for the asset or liability. The
level 2 derivative positions are valued using standard calculations/models that use as their basis
readily observable market parameters. The resulting valuations are validated through a
counterparty and third party quotes on a quarterly basis. As discussed in Note 9, the fair value
of the swap at September 30, 2008 was a liability of $7.6 million.
11. SHARE CAPITAL
As of September 30, 2008 and December 31, 2007, the Company’s authorized share capital is
comprised of 12,000 founder shares, par value $1.00 per share, which have been authorized but not
issued, 60,000,000 common shares, par value $0.01 per share, and 4,000,000 preference shares, par
value $0.01 per share. In June 2008, in connection with the Rights Agreement described below, the
Company designated 60,000 of such preference shares as “Series A Junior Participating Preference
Shares.”
Effective June 26, 2008, the Board of Directors of the Company declared a dividend of one
right (collectively, the “Rights”) to buy one one-thousandth of a Series A Junior Participating
Preferred Share for each outstanding common share to shareholders of record at the close of
business on July 7, 2008. Initially, the Rights are not exercisable and will be attached to all
certificates representing outstanding common shares, and no separate Rights Certificates will be
distributed. The Rights will expire at the close of business on June 26, 2018 unless earlier
redeemed or exchanged. Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including the right to vote or to receive dividends. The
rights are not immediately exercisable. Subject to the terms and conditions of the Rights Agreement
entered into by the Company with American Stock Transfer & Trust Company, LLC, as Rights Agent (the
“Rights Agreement”), the Rights will become exercisable upon the earlier of (1) 10 business days
following the later of (a) the first date of a public announcement that a person or group (an
“Acquiring Person”) acquires, or obtained the right to acquire, beneficial ownership of 20% or more
of the outstanding common shares or (b) the first date on which an executive officer of the Company
has actual knowledge that an Acquiring Person has become such or (2) 10 business days following the
commencement of a tender offer or exchange offer that would result in a person or group
beneficially owning 20% or more of the outstanding common shares.
Each right entitles the holder to purchase one one-thousandth of a Series A Junior Preferred
Share at an initial purchase price of $95.00 in cash, subject to adjustment. In the event that any
person or group becomes an Acquiring Person, unless the event causing the 20% threshold to be
crossed is an offer permitted pursuant to the Rights Agreement, each Right not owned by the
Acquiring Person will entitle its holder to receive, upon exercise, that number of common shares
(or in certain circumstances, cash, property or other
18
securities of the Company), which equals the exercise price of the Right divided by 50% of the
current market price (as defined in the Rights Agreement) per common share at the date of the
occurrence of the event. In the event that, at any time after any person or group becomes an
Acquiring Person, (i) the Company is consolidated with, or merged with and into, another entity and
the Company is not the surviving entity of such consolidation or merger (other than a consolidation
or merger which follows an offer permitted pursuant to the Rights Agreement) or if the Company is
the surviving entity, but its outstanding common shares are changed or exchanged for shares or
securities (of any other person) or cash or any other property, or (ii) more than 50% of the
Company’s assets or earning power is sold or transferred, each holder of a Right (except Rights
which previously have been voided as set forth in the Rights Agreement) shall thereafter have the
right to receive, upon exercise, that number of common shares of the acquiring company which equals
the exercise price of the Right divided by 50% of the current market price of such common shares at
the date of the occurrence of the event.
Prior to the execution of the Merger Agreement, the Company entered into an amendment to the
Rights Agreement. Such amendment, among other things, renders the Rights Agreement inapplicable to
the Amalgamation and the Merger.
As of September 30, 2008 and December 31, 2007, the Company had 15,500,000 common shares
issued, outstanding and fully paid. There were no founder or preference shares issued and
outstanding.
12. COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
(In thousands of $)
|
|
Ship mortgages
|
|
$
|
229,500
|
|
|
$
|
229,500
|
|
As of September 30, 2008 and December 31, 2007, ship mortgages represent first mortgages on
the eight Vessels as collateral for amounts outstanding under the secured credit facility with a
maturity date of January 11, 2011.
The minimum future Vessel operating expenses to be paid by the Company under the ship
management agreements in effect as of September 30, 2008 that will expire in 2008, 2009, and 2010,
and which increase 5% per year on November 9
th
, and assuming that the charter options
will be exercised through 2011, 2012, and 2013 is $97.6 million. Below is a summary by year of the
minimum future Vessel operating expenses:
|
|
|
|
|
|
|
Year
|
|
Minimum Future Vessel Operating Expenses
|
|
|
|
(In thousands of $)
|
|
2008
|
|
|
5,189
|
|
|
2009
|
|
|
21,275
|
|
|
2010
|
|
|
22,339
|
|
|
2011
|
|
|
22,792
|
|
|
2012
|
|
|
17,972
|
|
|
Thereafter
|
|
|
8,024
|
|
The Company has guaranteed the obligations of each of the Vessel Subsidiaries under the
charters and ship management agreements described in Note 1.
The Company has entered into a registration rights agreement with subsidiaries of Stena and
Concordia and the companies owned by Stena and Fram pursuant to which the Company has agreed to
register the shares owned by such companies for sale to the public. The Company’s expenses under
this agreement are limited to the first $0.5 million and 50% of the expenses thereafter. As of
September 30, 2008 no such expenses had been incurred.
Effective July 12, 2005, the Company adopted a tax-qualified employee savings plan (the
“Savings Plan”). Pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended,
eligible employees of the Company are able to make deferral contributions, subject to limitations
under applicable law. Participants’ accounts are self-directed and the Company bears all costs
associated with administering the Savings Plan. The Company matches 100% eligible compensation
deferred by employees. All of the Company’s employees are eligible to participate in the Savings
Plan. The Company has elected to operate the Savings Plan under
19
applicable safe harbor provisions of the Code, whereby among other things, the Company must
make contributions for all eligible employees and all matches contributed by the Company
immediately vest 100%. For the nine months ended September 30, 2008 the Company’s matching
contribution was $32,300.
13. RELATED PARTY TRANSACTIONS
As described in Note 1, the Company was formed for the purpose of acquiring the six Initial
Vessels from subsidiaries of Stena, Concordia and companies owned jointly by Stena and Fram. The
acquisition was completed in November 2004. In January 2006 the Company acquired the two Additional
Vessels from Stena. Prior to their acquisitions, the Vessels were traded in the spot market. The
Company has entered into time charters for the eight Vessels with subsidiaries of Stena and
Concordia that expire in 2008 with respect to two of the Vessels, in 2009 with respect to four of
the Vessels and in 2010 with respect to two of the Vessels. The revenue received from Stena and
Concordia for the nine months ended September 30, 2008 under these contracts was $52.8 million.
The Company has also entered into ship management arrangements with a subsidiary of Stena that
expire in 2008, 2009, and 2010. The amounts charged by this Stena subsidiary under these agreements
for the nine months ended September 30, 2008 was $15.6 million.
14. SUBSEQUENT EVENTS
On October 21, 2008, the Company declared a cash dividend of $8,835,000, or $0.57 per share,
and paid that dividend on November 4, 2008 to shareholders of record as of October 31, 2008.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements and information
relating to us that are based on beliefs of our management as well as assumptions made by us and
information currently available to us, in particular in this “Item 2. Management’s Discussions and
Analysis of Financial Condition and Results of Operations.” When used in this document, words such
as “believe,” “intend,” “anticipate,” “estimate,” “project,” “forecast,” “plan,” “potential,”
“will,” “may,” “should,” and “expect” and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such statements. All
statements in this document that are not statements of historical fact are forward-looking
statements. Forward-looking statements include, but are not limited to, such matters as:
|
|
•
|
|
our ability to consummate our pending combination with General Maritime Corporation;
|
|
|
|
|
•
|
|
future operating or financial results;
|
|
|
|
|
•
|
|
future payments of quarterly dividends and the availability of cash for payment of
quarterly dividends;
|
|
|
|
|
•
|
|
statements about future, pending or recent acquisitions, business strategy, areas of
possible expansion, and expected capital spending or operating expenses;
|
|
|
|
|
•
|
|
statements about tanker market trends, including charter rates and factors affecting
vessel supply and demand;
|
|
|
|
|
•
|
|
expectations about future revenues from sub-charters;
|
|
|
|
|
•
|
|
expectations about the availability of vessels to purchase, the time which it may take to
construct new vessels, or vessels’ useful lives; and
|
|
|
|
|
•
|
|
our ability to repay our secured credit facility at maturity, to obtain additional
financing and to obtain replacement charters for our Vessels.
|
Such statements reflect our current views with respect to future events and are subject to
certain risks, uncertainties and assumptions. Many factors could cause our actual results,
performance or achievements to be materially different from any future results, performance or
achievements that may be expressed or implied by such forward-looking statements, including, among
others, the factors described in Part II, Item 1A below under the heading “Risk Factors” and the
factors otherwise referenced in this report. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results may vary materially
from those described in the forward-looking statements included herein. We do not intend, and do
not assume any obligation, to update these forward-looking statements.
You should read this information together with our consolidated financial statements and
related notes included in “Item 1. Financial Statements.”
OVERVIEW
We are an international seaborne transporter of crude oil and petroleum products. We were
incorporated in September 2004 under the laws of Bermuda.
In November 2004, we completed our initial public offering by issuing and selling to the
public 11,450,000 common shares, par value $0.01 per share, at a price to the public of $20.00 per
share, raising gross proceeds of $229 million before the deduction of underwriting discounts,
commissions and expenses of approximately $17.7 million. Affiliates of Stena, Concordia and Fram
sold an additional 1,717,500 shares in the initial public offering in connection with the
underwriters’ exercise of their over-allotment option. We did not receive any proceeds from the
sale of these shares by Stena, Concordia, and Fram. Concurrently with the closing of our initial
public offering, we completed the acquisition of our six initial vessels, which we refer to as the
Initial Vessels. In order to fund a portion of the purchase price of our Initial Vessels, we
issued a total of 4,050,000 common shares at a price of $20.00 per share to Stena, Concordia and
Fram, for total consideration of $81 million. We financed the remainder of the purchase price of
our Initial Vessels through a secured debt financing of $135 million, before expenses of
approximately $0.8 million, which we terminated in
21
December of 2005. On the date that we purchased our Initial Vessels, we made a deemed
distribution of $143.3 million to Stena, Concordia and Fram which consisted of the difference
between the $426.5 million purchase price of our Initial Vessels and the historical book value of
$283.2 million at which Stena, Concordia and Fram carried the Initial Vessels on their books.
Stena and Concordia continue to be shareholders of the Company and, based on their filings
with the SEC, purchased an additional 3.6% of our outstanding common shares in 2007 such that, as
of May 7, 2008, they directly and indirectly owned an aggregate of approximately 18.0% of our
outstanding common shares. As a result of Stena’s purchase of additional common shares in 2007,
Stena and Concordia may be considered “interested shareholders” for purposes of our bye-laws.
Please see “Part II. Item 1A. Risk Factors — Company Specific Risk Factors — Stena and
Concordia’s ownership interest in our company can have significant influence over our company,
including the outcome of shareholder votes and our ability to conduct future business or modify
existing agreements with Stena or Concordia.”
In December 2005, we entered into a five-year term loan agreement with The Royal Bank of
Scotland in order to (1) refinance our indebtedness under our prior debt facility, (2) finance the
purchase price of our two additional vessels, which we refer to as the Additional Vessels, from
Stena and (3) general corporate purposes. We completed the refinancing of our previous debt
facility in December 2005 and completed the acquisition of the Additional Vessels in January 2006.
The term loan agreement provides for a credit facility of $229.5 million. The term loan agreement
matures on January 5, 2011. All amounts outstanding under the term loan agreement must be repaid on
that maturity date. There is no principal amortization prior to maturity. Borrowings under the
term loan agreement bear interest at LIBOR plus a margin of 75 basis points. The margin would
increase to 85 basis points if the ratio of the fair market value of our Vessels to the amount
outstanding under the loan facility falls below 2.0, which we refer to as the Ratio. The increased
interest margin is equivalent to approximately $229,500 per year in increased interest costs in the
event the Ratio falls below 2.0. In connection with the term loan agreement, we entered into an
interest rate swap agreement with The Royal Bank of Scotland. As a result of this swap, we have
effectively fixed the interest rate on the term loan agreement at 5.7325%, or 5.8325% if the Ratio
falls below 2.0.
On January 5, 2006, we entered into a series of agreements with Stena Maritime, certain
subsidiaries of Stena, Stena Bulk and Northern Marine, pursuant to which we, through our
wholly-owned subsidiaries, purchased two Additional Vessels, the
Stena Concept
and the
Stena
Contest
, from subsidiaries of Stena Maritime for a purchase price per Additional Vessel of $46
million. In connection with the acquisition of our Additional Vessels, we also entered into certain
related agreements with the Stena Parties relating to our Additional Vessels and amended certain of
our prior agreements with the Stena Parties relating to our six Initial Vessels which are described
in greater detail below under the headings “Our Charters” and “Our Ship Management Agreements”.
Our eight Vessels are currently owned by eight subsidiaries that we wholly own. The primary
activity of each Vessel Subsidiary is the ownership and operation of a Vessel. The flag state of
each of our Vessels is Bermuda.
The following table sets out certain details relating to our Vessels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Charter
|
|
Latest Charter
|
|
Vessel Type
|
|
Year Built
|
|
Dwt
|
|
Date Acquired
|
|
Expiration Date(1)
|
|
Expiration Date (1)
|
|
V-MAX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena Victory
|
|
|
2001
|
|
|
|
314,000
|
|
|
November 10, 2004
|
|
November 9, 2009
|
|
November 9, 2012
|
|
Stena Vision
|
|
|
2001
|
|
|
|
314,000
|
|
|
November 10, 2004
|
|
November 9, 2009
|
|
November 9, 2012
|
|
Panamax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena Companion
|
|
|
2004
|
|
|
|
72,000
|
|
|
November 10, 2004
|
|
November 9, 2008
|
|
November 9, 2011
|
|
Stena Compatriot
|
|
|
2004
|
|
|
|
72,000
|
|
|
November 10, 2004
|
|
November 9, 2010
|
|
November 9, 2013
|
|
Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena Concord
|
|
|
2004
|
|
|
|
47,400
|
|
|
November 10, 2004
|
|
November 9, 2008
|
|
November 9, 2011
|
|
Stena Consul
|
|
|
2004
|
|
|
|
47,400
|
|
|
November 10, 2004
|
|
November 9, 2010
|
|
November 9, 2013
|
|
Stena Concept
|
|
|
2005
|
|
|
|
47,400
|
|
|
January 5, 2006
|
|
January 4, 2009
|
|
July 4, 2011
|
|
Stena Contest
|
|
|
2005
|
|
|
|
47,400
|
|
|
January 5, 2006
|
|
January 4, 2009
|
|
July 4, 2011
|
|
|
|
|
|
(1)
|
|
Each of the charters contains renewal options described in greater detail below.
|
PENDING MERGER WITH GENERAL MARITIME
On August 5, 2008, we entered into a definitive Agreement and Plan of Merger and Amalgamation
(the “Merger Agreement”) with General Maritime Corporation (“General Maritime”). The Merger
Agreement provides that, upon the terms and subject to the
22
conditions set forth in the Merger Agreement, Galileo Merger Corporation, a wholly-owned
subsidiary of Galileo Holding Corporation (which we refer to as “New Parent”), a newly-formed
subsidiary of us and General Maritime, will merge with and into General Maritime, with General
Maritime continuing as the surviving corporation of such merger, and we will amalgamate with Archer
Amalgamation Limited, a wholly owned subsidiary of New Parent, with the resulting amalgamated
company continuing as the surviving entity. As a result of such merger and amalgamation: (i) we
and General Maritime will each become a wholly-owned subsidiary of New Parent, which will be
renamed “General Maritime Corporation”; and (ii) our shareholders will receive 1 share in New
Parent for each of our common shares held, and General Maritime’s shareholders will receive 1.34
shares in New Parent for each General Maritime share held. Upon consummation of the transactions
contemplated by the Merger Agreement, including the merger and the amalgamation, our shareholders
will hold approximately 27% of the outstanding common stock of New Parent and shareholders of
General Maritime will hold approximately 73% of the outstanding common stock of New Parent. The
Merger Agreement is subject to approval by our shareholders and by General Maritime’s shareholders,
and other customary closing conditions. We have entered into an agreement with the Royal Bank of
Scotland pursuant to which certain provisions of our term loan agreement will be amended if the
transaction closes. See “—Liquidity and Capital Resources.” Although the transaction is expected
to be completed by the end of the fourth quarter of 2008, there can be no assurance that the
transaction will be completed in a timely manner, or at all.
OUR CHARTERS
Effective November 10, 2004 for the Initial Vessels and January 5, 2006 for the Additional
Vessels, we have chartered our Vessels to subsidiaries of Stena and Concordia, who we refer to as
the Charterers, under fixed rate charters with initial periods of three, four and five-years.
At the closing of the purchase of the Additional Vessels, our subsidiaries that purchased the
Additional Vessels and Stena Bulk entered into new time charter party agreements with respect to
the Additional Vessels. Under the new time charter parties, which are substantially similar to the
time charter parties that our subsidiaries have entered into for the Initial Vessels, our
subsidiaries that purchased the Additional Vessels time chartered the Additional Vessels to Stena
Bulk for an initial period of three years at a fixed daily Basic Hire without any Additional Hire
provision. In May 2008, Stena Bulk exercised its option to extend the time charters for both
Additional Vessels for an additional 30 months, at the fixed daily Basic Hire. As a result, there
will be an Additional Hire provision during the 30-month period. Furthermore, as a result of Stena
Bulk exercising the 30-month option, there are two additional one-year options, exercisable by
Stena Bulk, at the fixed daily Basic Hire set forth below, but without an Additional Hire
provision.
At the closing of the acquisition of the Additional Vessels, we also amended the time charter
parties for our four previously acquired Product tankers and Panamax tankers. These amendments
modified the charter periods for these four Vessels and made changes to the calculation of
Additional Hire under these time charter parties. The amendments to the terms of the charters
provided that (1) the initial five-year fixed term for one of the Product tankers (
Stena Consul
)
and one of the Panamax tankers (
Stena Compatriot
) was extended to November 2010, followed by three
one-year options exercisable by Stena Bulk and (2) the initial five-year fixed term for one of the
Product tankers (
Stena Concord
) and one of the Panamax tankers (
Stena Companion
) was reduced so
that it expired in November 2008, followed by three one-year options exercisable by Stena Bulk. In
May 2008, Stena Bulk exercised the first of its three one-year options for the
Stena Concord
and
the
Stena Companion
, effective November 11, 2008. The term of the charters for the V-MAX tankers
was not amended. The amendments to the Additional Hire provisions provided for certain favorable
adjustments to fuel consumption metrics used in the calculation of Additional Hire for the Product
tankers and Panamax tankers.
Basic Hire under Our Charters
The Charters provide for the payment of Basic Hire fees that increase annually by an amount
equal to the annual increase in the fees under our ship management agreements, which are described
below under the heading “Our Ship Management Agreements.” The Basic Hire rate for each of the
Vessels is payable monthly in advance and will increase annually by an amount equal to the annual
increase in the fee payable under the applicable ship management agreement. Stena and Concordia
have each agreed to guarantee the obligations of their respective subsidiaries under the Charters.
23
The following table sets forth the daily Basic Hire, daily base operating costs and operating
margin for our two V-MAX vessels, the
Stena Vision
and the
Stena Victory
. The operating margin is
calculated by subtracting the amount of the base operating costs from the amount of Basic Hire.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base
|
|
|
|
|
|
Basic
|
|
Operating
|
|
Operating
|
|
Period
|
|
Hire
|
|
Costs
|
|
Margin
|
|
Nov. 11, 2007 — Nov. 10, 2008
|
|
$
|
36,882
|
|
|
$
|
8,682
|
|
|
$
|
28,200
|
|
|
Nov. 11, 2008 — Nov. 10, 2009
|
|
|
37,316
|
|
|
|
9,116
|
|
|
|
28,200
|
|
|
Nov. 11, 2009 — Nov. 10, 2010
(Option Year 1)(1)
|
|
|
37,772
|
|
|
|
9,572
|
|
|
|
28,200
|
|
|
Nov. 11, 2010 — Nov. 10, 2011
(Option Year 2)
|
|
|
38,251
|
|
|
|
10,051
|
|
|
|
28,200
|
|
|
Nov. 11, 2011 — Nov. 10, 2012
(Option Year 3)
|
|
|
38,753
|
|
|
|
10,553
|
|
|
|
28,200
|
|
|
|
|
|
|
(1)
|
|
The Charterer has the option to extend these Charters on a vessel-by-vessel basis for 3
additional 1 year terms. There can be no assurance that the Charterer will exercise any such
option.
|
The following table sets forth the daily Basic Hire, daily base operating costs and operating
margin for two of our vessels, the
Stena Companion
and the
Stena Concord
, with initial charter
expiration dates in 2008
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena Companion
|
|
Stena Concord
|
|
|
|
|
|
|
|
Base
|
|
|
|
|
|
|
|
|
|
Base
|
|
|
|
|
|
Basic
|
|
Operating
|
|
Operating
|
|
Basic
|
|
Operating
|
|
Operating
|
|
Period
|
|
Hire
|
|
Costs
|
|
Margin
|
|
Hire
|
|
Costs
|
|
Margin
|
|
Nov. 11, 2007 —
Nov. 10, 2008
|
|
$
|
18,306
|
|
|
$
|
6,656
|
|
|
$
|
11,650
|
|
|
$
|
16,335
|
|
|
$
|
6,135
|
|
|
$
|
10,200
|
|
|
Nov. 11, 2008 —
Nov. 10, 2009
(Option Year 1)(1)
|
|
|
18,639
|
|
|
|
6,989
|
|
|
|
11,650
|
|
|
|
16,642
|
|
|
|
6,442
|
|
|
|
10,200
|
|
|
Nov. 11, 2009 —
Nov. 10, 2010 (Option Year 2)
|
|
|
18,989
|
|
|
|
7,339
|
|
|
|
11,650
|
|
|
|
16,964
|
|
|
|
6,764
|
|
|
|
10,200
|
|
|
Nov. 11, 2010 —
Nov. 10, 2011 (Option Year 3)
|
|
|
19,356
|
|
|
|
7,706
|
|
|
|
11,650
|
|
|
|
17,303
|
|
|
|
7,103
|
|
|
|
10,200
|
|
|
|
|
|
|
(1)
|
|
The Charterer has the option to extend these Charters on a vessel-by-vessel basis for 3
additional 1 year terms. In May 2008, the Charterer exercised the first of these one-year options
for both vessels. There can be no assurance that the Charterer will exercise any additional
options.
|
24
The following table sets forth the daily Basic Hire, daily base operating costs and operating
margin for two of our vessels, the
Stena Compatriot
and the
Stena Consul,
with initial charter
expiration dates in 2010
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena
Compatriot
|
|
Stena
Consul
|
|
|
|
|
|
|
|
Base
|
|
|
|
|
|
|
|
|
|
Base
|
|
|
|
|
|
Basic
|
|
Operating
|
|
Operating
|
|
Basic
|
|
Operating
|
|
Operating
|
|
Period
|
|
Hire
|
|
Costs
|
|
Margin
|
|
Hire
|
|
Costs
|
|
Margin
|
|
Nov. 11, 2007 —
Nov. 10, 2008
|
|
$
|
18,306
|
|
|
$
|
6,656
|
|
|
$
|
11,650
|
|
|
$
|
16,335
|
|
|
$
|
6,135
|
|
|
$
|
10,200
|
|
|
Nov. 11, 2008 —
Nov. 10, 2009
|
|
|
18,639
|
|
|
|
6,989
|
|
|
|
11,650
|
|
|
|
16,642
|
|
|
|
6,442
|
|
|
|
10,200
|
|
|
Nov. 11, 2009 —
Nov. 10, 2010
|
|
|
18,989
|
|
|
|
7,339
|
|
|
|
11,650
|
|
|
|
16,964
|
|
|
|
6,764
|
|
|
|
10,200
|
|
|
Nov. 11, 2010 —
Nov. 10, 2011 (Option Year 1)(1)
|
|
|
19,356
|
|
|
|
7,706
|
|
|
|
11,650
|
|
|
|
17,303
|
|
|
|
7,103
|
|
|
|
10,200
|
|
|
Nov. 11, 2011 —
Nov. 10, 2012 (Option Year 2)
|
|
|
19,741
|
|
|
|
8,091
|
|
|
|
11,650
|
|
|
|
17,658
|
|
|
|
7,458
|
|
|
|
10,200
|
|
|
Nov. 11, 2012 —
Nov. 10, 2013 (Option Year 3)
|
|
|
20,145
|
|
|
|
8,495
|
|
|
|
11,650
|
|
|
|
18,031
|
|
|
|
7,831
|
|
|
|
10,200
|
|
|
|
|
|
|
(1)
|
|
The Charterer has the option to extend these Charters on a vessel-by-vessel basis for 3
additional 1 year terms. There can be no assurance that the Charterer will exercise any such
option.
|
The following table sets forth the daily Basic Hire, daily base operating costs and operating
margin for our two Additional Vessels, the
Stena Concept
and the
Stena Contest.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base
|
|
|
|
|
|
Basic
|
|
Operating
|
|
Operating
|
|
Period
|
|
Hire
|
|
Costs
|
|
Margin
|
|
Jan. 5, 2007 — Jan 4, 2008
|
|
$
|
20,043
|
|
|
$
|
5,843
|
|
|
$
|
14,200
|
|
|
Jan. 5, 2008 — Jan. 4, 2009
|
|
|
20,335
|
|
|
|
6,135
|
|
|
|
14,200
|
|
|
Jan. 5, 2009 — Jan. 4, 2010
(Option Period 1)(1)
|
|
|
17,942
|
|
|
|
6,442
|
|
|
|
11,500
|
|
|
Jan. 5, 2010 — Jan. 4, 2011
(Option Period 1)
|
|
|
18,264
|
|
|
|
6,764
|
|
|
|
11,500
|
|
|
Jan. 5, 2011 — July 4, 2011
(Option Period 1)
|
|
|
18,603
|
|
|
|
7,103
|
|
|
|
11,500
|
|
|
July 5, 2011 — July 4, 2012
(Option Period 2) (2)
|
|
|
21,158
|
|
|
|
7,458
|
|
|
|
13,700
|
|
|
July 5, 2012 — July 4, 2013
(Option Period 3)
|
|
|
21,531
|
|
|
|
7,831
|
|
|
|
13,700
|
|
|
|
|
|
|
(1)
|
|
In May 2008, the Charterer exercised its option to extend these Charters for an
additional 30-month period expiring on July 4, 2011. As a result, we will be eligible to earn
Additional Hire in addition to Basic Hire during this 30-month period.
|
|
|
|
(2)
|
|
This period is the first for which the Charterer has the option to extend these Charters
as a result of exercising the option described in Footnote 1 above. We would not be eligible to
earn Additional Hire over the term of any extension. There can be no assurance that the Charterer
will exercise any such option.
|
25
Additional Hire under Our Charters
Under the Charters, in addition to the fixed rate Basic Hire, each Initial Vessel has the
possibility of receiving Additional Hire from the Charterers through profit sharing arrangements
related to the performance of the tanker markets on specified geographic routes, or from actual
time charter rates. The Additional Hire, if any, in respect of each Initial Vessel, is payable on
the 25th day following the end of each calendar quarter. Additional Hire is not guaranteed under
our Charters.
The Additional Hire, if any, payable in respect of an Initial Vessel, other than the V-MAX
tankers as described below, for any calendar quarter is an amount equal to 50% of the weighted
average hire, calculated as described below, for the quarter after deduction of the Basic Hire in
effect for that quarter. The weighted average hire is a daily rate equal to the weighted average of
the following amounts:
|
|
•
|
|
a weighted average of the time charter hire per day received by the Charterer for any
periods during the calculation period, determined as described below, that the Initial
Vessel is sub-chartered by the Charterer under a time charter, less ship broker commissions
paid by the Charterer in an amount not to exceed 2.5% of such time charter hire and
commercial management fees paid by the Charterer in an amount not to exceed 1.25% of such
time charter hire; and
|
|
|
|
|
•
|
|
the time charter equivalent hire for any periods during the calculation period that the
Vessel is not sub-chartered by the Charterer under a time charter.
|
The calculation period is the twelve-month period ending on the last day of each calendar
quarter, except that in the case of the first three full calendar quarters following the
commencement of our Charters, the calculation period is the three, six and nine month periods,
respectively, ending on the last day of such calendar quarter and the first calendar quarter also
includes the period from the date of the commencement of our charters to the commencement of the
first full calendar quarter.
As a result of Stena Bulk exercising its option to extend the Charters for the Additional
Vessels, we will become eligible to earn Additional Hire for those Vessels during the 30-month
period commencing January 5, 2009.
At the time we acquired our two V-MAX tankers, these Vessels were sub-chartered by Concordia
to Sun International Limited Bermuda, which we refer to as Sun International, an indirect wholly
owned subsidiary of Sunoco, Inc.
The sub-charter with Sun International relating to the
Stena Victory
expired on October 20,
2007. The sub-charter with Sun International relating to the
Stena Vision
expired on September 11,
2008.
The sub-charter rate that Concordia received from Sun International with respect to the
Stena
Victory
and the
Stena Vision
was greater than the Basic Hire rate that we received from Concordia.
Therefore, we earned Additional Hire revenue while the
Stena Victory
and
Stena Vision
were
sub-chartered to Sun International. The amount of this Additional Hire was equal to the difference
between the amount paid by Sun International under its sub-charters with Concordia and the Basic
Hire rate in effect, less ship broker commissions paid by the Charterer in an amount not to exceed
2.5% of the charterhire received by the Charterer and commercial management fees paid by the
Charterer in an amount not to exceed 1.25% of the charterhire received by the Charterer.
Immediately following the expiration of the respective Sun International sub-charter of the
Stena Victory
and the
Stena Vision
, each Vessel commenced operating under a new two-year
sub-charter agreement between Concordia and Eiger Shipping S.A. (“Eiger Shipping”), an affiliate of
the shipping branch of LukOil commonly know as Litasco. The sub-charter rate that Eiger Shipping
is obligated to pay to Concordia is greater than the Basic Hire rate that we will receive from
Concordia. Therefore, we expect to earn Additional Hire revenue while the V-MAX vessels are under
the Eiger Shipping sub-charters in addition to the Basic Hire. The Additional Hire revenue will not
be exposed to fluctuations in spot market rates. Additional Hire for the V-MAX tankers under the
Eiger Shipping sub-charters will be based on the time charter hire received by Concordia under the
sub-charters. Additional Hire revenues under the Eiger Shipping sub-charters are not guaranteed,
meaning that we will earn Additional Hire only when the Vessels are in service. In the event that
the V-MAX tankers are off-hire, we will not be eligible to earn Additional Hire revenue from the
profit sharing provisions on the days that the Vessel is off-hire. Based on the time charter rates
under the Eiger Shipping sub-charters and assuming that both V-MAX vessels operate for 90 days per
quarter, we expect the V-MAX tankers to generate Additional Hire revenues of approximately $350,000
per Vessel per quarter in addition to the Basic Hire levels, while the Vessels are sub-chartered to
Eiger Shipping.
26
OUR SHIP MANAGEMENT AGREEMENTS
Our Vessel Subsidiaries have entered into fixed-rate ship management agreements with Northern
Marine. Under the ship management agreements, Northern Marine is responsible for all technical
management of the Vessels, including crewing, maintenance, repair, drydockings, vessel taxes and
other vessel operating and voyage expenses. Northern Marine has outsourced some of these services
to third-party providers. We have agreed to guarantee the obligations of each of our Vessel
Subsidiaries under the ship management agreements.
At the closing of the acquisition of the Additional Vessels, the ship management agreements
for our Initial Vessels were amended. These amendments included modifications to the provisions
relating to drydocking of the Vessels. Specifically, the amendments provided that all drydockings
that occur during the term of the ship management agreements are to be at the sole cost and expense
of Northern Marine. Under the terms of the amended ship management agreements, the cost of these
intermediate and special surveys is covered by a portion of the monthly vessel management fees that
we pay to Northern Marine. We refer to such portion of the vessel management fees as the
“Drydocking Provision.” Upon redelivery of the Vessels to us at the expiration of the ship
management agreements, Northern Marine has agreed to return to us any Drydocking Provision paid,
but not used, from the completion of the last drydocking during the term of the applicable Ship
Management Agreement (or if no drydocking occurs during the term of such agreement, from the date
of commencement of such agreement), to the date of redelivery. The amount of the Drydocking
Provision that may be paid to us will be paid at the daily rates specified in the applicable ship
management agreement.
Under the ship management agreements, Northern Marine has agreed to return the Vessels
in-class and in the same good order and condition as when delivered, except for ordinary wear and
tear.
Northern Marine is also obligated under the ship management agreements to maintain insurance
for each of our Vessels, including marine hull and machinery insurance, protection and indemnity
insurance (including pollution risks and crew insurances), war risk insurance and off-hire
insurance. Under the ship management agreements, we pay Northern Marine a fixed fee per day per
Vessel for all of the above services, which increases 5% per year, for so long as the relevant
charter is in place. Under the ship management agreements, Northern Marine has agreed to indemnify
us for the loss of the Basic Hire for each of the Vessels in the event, for circumstances specified
under the charters, the Vessel is off-hire or receiving reduced hire for more than five days during
any twelve-month period, net of amounts received by us from off-hire insurance. Stena has agreed
to guarantee this indemnification by Northern Marine. Both we and Northern Marine have the right
to terminate any of the ship management agreements if the relevant charter has been terminated.
Tables setting forth the daily base operating costs for each of our Vessels can be found above
in the section entitled “—Basic Hire under Our Charters.”
We have also agreed to pay to Northern Marine an incentive fee for each day a Vessel is on
hire for over 360 days during any twelve-month period following the date the applicable Vessel was
delivered to us in amount equal to the daily Basic Hire for such Vessel. If we terminate the ship
management agreements with Northern Marine because Northern Marine has failed to perform its
obligations under such agreements, Stena has agreed to provide a replacement ship manager to
perform the obligations set forth in the ship management agreements on the same terms and for the
same fixed amounts payable to Northern Marine.
Northern Marine provides technical and crewing management and payroll and support services to
the Stena Sphere shipping divisions and several other clients, including ChevronTexaco Corporation,
Technip Offshore UK and Gulf Marine Management. Northern Marine has offices in Glasgow, Aberdeen,
Mumbai, Kiel, Houston, Manila, Rotterdam and Singapore and has over 4,400 seafarers employed on
approximately 90 vessels.
DIVIDEND POLICY
We have paid quarterly cash dividends on our common shares since our initial public offering
in November 2004 in amounts substantially equal to the charterhire received by us under the
Charters, less cash expenses and any cash reserves established by our Board of Directors. We have
generally declared these dividends in January, April, July and October of each year and made
payments in the subsequent month. Distributions to shareholders are applied first to retained
earnings. When retained earnings are not sufficient, distributions are applied to additional
paid-in capital.
There are restrictions that limit our ability to declare dividends, including those
established under Bermuda law and under our existing secured term loan agreement. The terms of any
future indebtedness we may enter into, including indebtedness that refinances our existing secured
credit facility, may have stricter restrictions on our ability to pay dividends. Furthermore,
higher interest rates or different repayment terms of future indebtedness, such as principal
amortization requirements, may reduce the amount of cash that we would have available to pay future
dividends. In addition to the discussion below, please see “Part II. Item 1A. Risk Factors —
27
Company Specific Risk Factors — We cannot assure you that we will pay any dividends,” “— If
we cannot refinance our secured credit facility, or in the event of a default under the facility,
we may have to sell our Vessels, which may leave no additional funds for distributions to
shareholders” and “—We may not be able to re-charter our Vessels profitably after they expire,
unless they are extended at the option of the Charterers.”
Under Bermuda law a company may not declare or pay dividends if there are reasonable grounds
for believing either that the company is, or would after the payment be, unable to pay its
liabilities as they become due, or that the realizable value of its assets would thereby be less
than the sum of its liabilities and its issued share capital, which is the par value of our shares
and share premium accounts, which is the amount of consideration paid for the subscription of
shares in excess of the par value of those shares. As a result, in future years, if the realizable
value of our assets decreases, our ability to pay dividends may require our shareholders to approve
resolutions reducing our share premium account by transferring an amount to our contributed surplus
account.
The declaration and payment of any dividends must be approved by our Board of Directors.
Under the terms of our credit facility, we may not declare or pay any dividends if we are in
default under the credit facility.
There can be no assurance that we will not have other cash expenses, including extraordinary
expenses, which could include the costs of claims and related litigation expenses. There can be no
assurance that we will not have additional expenses or liabilities, that the amounts currently
anticipated for the items set forth above will not increase, that we will not have to fund any
required capital expenditures for our Vessels or that our Board of Directors will not determine to
establish cash reserves. The vessel operating expenses payable under our ship management
agreements are fixed over the periods specified in those agreements. However, our cash
administrative expenses, primarily related to salaries and benefits, travel and entertainment
expenses, office costs, general insurance and other administrative costs, are not fixed, and may
increase or decrease each year based on the factors described above in this paragraph.
The Company is not providing dividend guidance for the remainder of 2008 and beyond because
future dividends will be the responsibility of the combined company in the pending combination with
General Maritime, assuming the transaction closes before the end of 2008.
In January 2008, we declared a dividend of $0.56 per share, and paid that dividend on February
12, 2008 to shareholders of record as of February 8, 2008. The January 2008 dividend was based on
our operating results for the fourth quarter ended December 31, 2007. In that period, we earned
Additional Hire of $900,000, including Additional Hire on our V-MAX vessels of approximately
$600,000 and Additional Hire of approximately $300,000 on our two Product tankers and our two
Panamax tankers that are currently eligible to earn Additional Hire. In April 2008, we declared a
dividend of $0.56 per share and paid that dividend on May 6, 2008 to shareholders of record as of
May 2, 2008. The April 2008 dividend was based on our operating results for the first quarter
ended March 31, 2008. In that period, we earned Additional Hire of $800,000, including Additional
Hire on our V-MAX vessels of approximately $600,000 and Additional Hire of approximately $200,000
on our two Product tankers and our two Panamax tankers that are currently eligible to earn
Additional Hire. In July 2008, we declared a dividend of $0.56 per share and paid that dividend on
August 5, 2008 to shareholders of record as of August 1, 2008. The July 2008 dividend was based on
our operating results for the second quarter ended June 30, 2008. In that period, we earned
Additional Hire of $900,000, including Additional Hire on our V-MAX vessels of approximately
$600,000 and Additional Hire of approximately $300,000 on our two Product tankers and our two
Panamax tankers that are currently eligible to earn Additional Hire. In October 2008, we declared a
dividend of $0.57 per share and paid that dividend on November 4, 2008 to shareholders of record as
of October 31, 2008. The October 2008 dividend was based on our operating results for the third
quarter ended September 30, 2008 and the draw down of $2.2 million of cash reserves that were
previously established by our Board of Directors. In that period, we earned Additional Hire of
$1.2 million, including Additional Hire on our V-MAX vessels of approximately $700,000 and
Additional Hire of approximately $500,000 on our two Panamax tankers.
In January 2007, we declared a dividend of $0.57 per share, and paid that dividend on February
12, 2007 to shareholders of record as of February 9, 2007. The January 2007 dividend was based on
our operating results for the fourth quarter ended December 31, 2006. In that period, we earned
Additional Hire of $1.0 million, including Additional Hire on our V-MAX vessels of $600,000 and
Additional Hire of $400,000 on our Product and Panamax tankers. In April 2007, we declared a
dividend of $0.58 per share, and paid that dividend on May 7, 2007 to shareholders of record as of
May 4, 2007. The April 2007 dividend was based on our operating results for the first quarter ended
March 31, 2007. In that period, we earned Additional Hire of $1.1 million, including Additional
Hire on our V-MAX vessels of $539,000 and Additional Hire of $514,000 on our two Product tankers
and our two Panamax tankers that are currently eligible to earn Additional Hire. In July 2007, we
declared a dividend of $0.59 per share, and paid that dividend on August 6, 2007 to shareholders of
record as of August 3, 2007. The July 2007 dividend was based on our operating results for the
second quarter ended June 30, 2007. In that period, we earned Additional Hire of $1.3 million,
including Additional Hire on our V-MAX vessels of $545,000 and Additional Hire of $751,000 on our
two Product tankers and our two Panamax tankers that are
28
currently eligible to earn Additional Hire. In October 2007, we declared a dividend of $0.59
per share, and paid that dividend on November 6, 2007 to shareholders of record as of November 2,
2007. The October 2007 dividend was based on our operating results for the third quarter ended
September 30, 2007. In that period, we earned Additional Hire of $1.0 million, including Additional
Hire on our V-MAX vessels of approximately $600,000 and Additional Hire of approximately $400,000
on our two Product tankers and our two Panamax tankers that are currently eligible to earn
Additional Hire.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007
Total operating revenues
Total operating revenues were $17.9 million for the three months ended September 30, 2008
compared to $17.5 million for the three months ended September 30, 2007. Revenues for the three
months ended September 30, 2008 consisted of $16.7 million in Basic Hire and approximately $1.2
million in Additional Hire. During the three months ended September 30, 2008, the Charterers
operated our two Panamax tankers, both of which are eligible to earn Additional Hire, on time
charters at a rate of $27,000 per day. These operations resulted in payment to us of approximately
$500,000 of Additional Hire. In addition, the two V-MAX tankers generated approximately $700,000 of
Additional Hire during the third quarter.
We expect that total operating revenues for 2008, including anticipated Additional Hire
revenues from our V-MAX tankers in 2008, and September 2008 year-to-date Additional Hire revenues
from our profit sharing arrangements for the two Product and two Panamax tankers, will be
approximately $70.0 million.
The Vessels had 7.81 days and 7 days, respectively, off-hire during the three months ended
September 30, 2008 and 2007.
Total vessel operating expenses
Total vessel operating expenses were $5.1 million for the three months ended September 30,
2008 compared to $4.9 million for the three months ended September 30, 2007. The increase in vessel
operating expenses reflects the increase in the vessel management fees under the vessel management
agreements with Northern Marine. We expect vessel operating expenses in 2008 to be approximately
$20.3 million principally due to the annual increases in vessel management fees to Northern Marine.
Depreciation
Depreciation was $3.9 million for the three months ended September 30, 2008 and 2007. We
estimate that depreciation in 2008 will be approximately $15.6 million.
Administrative expenses
Administrative expenses were $2.7 million for the three months ended September 30, 2008
compared to $564,000 for the three months ended September 30, 2007. The administrative expenses in
the third quarter of 2008 were higher than in the third quarter of 2007, primarily as a result of
costs associated with our entering into the Merger Agreement. During the third quarter of 2008, we
incurred approximately $2.3 million in administrative expenses related to our pending combination
with General Maritime. We estimate that administrative expenses for 2008 will be approximately
$5.4 million. This estimate includes $3.2 million of advisory and legal fees related to the
pending General Maritime combination.
Net Other Expense
Net other expense represents interest expense, net of interest income and other financial
items. Net other expense was $3.7 million for the three months ended September 30, 2008, compared
to $8.2 million for the three months ended September 30, 2007. For the three months ended September
30, 2008, net other expense includes $3.4 million in interest expense related to our credit
facility with The Royal Bank of Scotland, which matures in January 2011 and an unrealized loss of
$269,000 on our interest rate swap, offset by $68,000 of interest income. Net other expense of $8.2
million for the three months ended September 30, 2007 reflects interest expense of $3.4 million on
our credit facility with The Royal Bank of Scotland and an unrealized loss of $5.0 million on our
interest rate swap, offset by $216,000 of interest income.
29
With respect to our $229.5 million term loan credit facility, by entering into an interest
rate swap agreement, we have effectively fixed the interest rate under the facility at 5.7325%
(5.8325% if the ratio of the value of our Vessels to the amount outstanding under the loan facility
falls below 2.0) for the five-year term. The interest rate swap agreement was not designated nor
qualified as a cash flow hedge pursuant to SFAS No. 133. Accordingly, changes in the fair value of
this swap are recorded in current earnings. The fair value of the swap at September 30, 2008 was a
liability of $7.6 million. The fair value of the swap at June 30, 2008 was a liability of $7.3
million. Accordingly, we recorded a non-cash decrease in the fair value of the interest rate swap
of $269,000 in current earnings as an unrealized loss in the third quarter of 2008. In the third
quarter of 2007, we recorded a non-cash decrease in the fair value of the interest rate swap of
$5.0 million in current earnings as an unrealized loss.
Based upon the effectively fixed interest rate under the terms of the swap agreement, we
estimate that interest expense under the $229.5 million secured credit facility with The Royal Bank
of Scotland plc, which matures in January 2011, will be approximately $13.2 million per year.
Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
Total operating revenues
Total operating revenues were $52.8 million for the nine months ended September 30, 2008
compared to $52.6 million for the nine months ended September 30, 2007. Revenues for the nine
months ended September 30, 2008 consisted of $49.9 million in Basic Hire and $2.9 million in
Additional Hire. During the nine months ended September 30, 2008, the Charterers operated our two
Product tankers that are currently eligible to earn Additional Hire in the spot market. Beginning
in January 2008, the Charterers operated our two Panamax tankers pursuant to time charters at a
rate of $27,000 per day. This resulted in payment to us of $1.0 million of Additional Hire. In
addition, the two V-MAX tankers generated $1.9 million of Additional Hire for the nine months ended
September 30, 2008.
The Vessels had 15.61 days and 7 days, respectively, off-hire during the nine months ended
September 30, 2008 and 2007.
Total vessel operating expenses
Total vessel operating expenses were $15.6 million for the nine months ended September 30,
2008 compared to $14.9 million for the nine months ended September 30, 2007. Vessel operating
expenses for the nine months ended September 30, 2008 were higher than the same period in 2007
reflecting the annual increase in daily vessel management fees under our ship management
agreements.
Depreciation
Depreciation was $11.5 million for the nine months ended September 30, 2008 and 2007.
Administrative expenses
Administrative expenses were $4.2 million for the nine months ended September 30, 2008
compared to $1.7 million for the nine months ended September 30, 2007. The $2.5 million increase in
administrative expenses reflects higher costs in the first nine months of 2008 associated with our
strategic alternatives analysis and our pending combination with General Maritime.
Net Other Expense
Net other expense represents interest expense, net of interest income and other financial
items. Net other expense was $10.1 million for the nine months ended September 30, 2008, compared
to $12.2 million for the nine months ended September 30, 2007. For the nine months ended September
30, 2008, net other expense includes $10.3 million in interest expense related to our credit
facility with The Royal Bank of Scotland, and an unrealized loss of $99,000 on our interest rate
swap offset by $266,000 of interest income. Net other expense for the nine months ended September
30, 2007 includes $10.2 million in interest expense related to our credit facility with The Royal
Bank of Scotland, plc., and an unrealized loss of $2.6 million on our interest rate swap offset by
$645,000 of interest income.
The fair value of the swap at September 30, 2008 was a liability of $7.6 million. The fair
value of the swap at December 31, 2007 was a liability of $7.5 million. Accordingly, we recorded a
non-cash decrease in the fair value of the interest rate swap of $99,000 in
30
current earnings as an unrealized loss for the nine months ended September 30, 2008. For the
nine months ended September 30, 2007, we recorded a non-cash decrease in the fair value of the
interest rate swap of $2.6 million in current earnings as an unrealized loss.
LIQUIDITY AND CAPITAL RESOURCES
We operate in a capital intensive industry. Our liquidity requirements relate to our
operating expenses, including payments under our ship management agreements, quarterly payments of
interest and the payment of principal at maturity under our $229.5 million secured credit facility
and maintaining cash reserves to provide for contingencies.
In December 2005, we entered into a five-year term loan agreement with The Royal Bank of
Scotland. The term loan agreement provides for a facility of $229.5 million. The purpose of the
term loan agreement was to (1) refinance our existing indebtedness, (2) finance the purchase price
of two Product tankers from Stena and (3) general corporate purposes. We completed the refinancing
of our indebtedness in December 2005 and completed the Additional Vessel acquisition in January
2006. The term loan agreement matures on January 5, 2011. All amounts outstanding under the term
loan agreement must be repaid on that maturity date. There is no principal amortization prior to
maturity. Borrowings under the term loan agreement bear interest at LIBOR plus a margin of 75
basis points. The margin would increase to 85 basis points if the ratio of the fair market value of
our Vessels to the amount outstanding under the credit facility, which we refer to as the Ratio,
falls below 2.0. The increased interest margin is equivalent to approximately $229,500 per year in
increased interest costs in the event the Ratio falls below 2.0. In connection with the term loan
agreement, we have entered into an interest rate swap agreement with The Royal Bank of Scotland. As
a result of this swap, we effectively fixed the interest rate on the term loan agreement at
5.7325%. The term loan agreement provides that if at any time the aggregate market value of our
Vessels that secure the obligations under the Loan Agreement is less than 125% of the loan amount,
we must either provide additional security or prepay a portion of the loan to reinstate such
percentage. The term loan agreement also contains financial covenants requiring that at the end of
each financial quarter (1) our total assets (adjusted to give effect to the market value of the
Vessels) less total liabilities is equal to or greater than 30% of such total assets and (2) we
have positive working capital.
We had outstanding long term debt of $229.5 million as of September 30, 2008 and December 31,
2007. This amount reflects outstanding borrowings under our secured credit facility, which matures
in January 2011. By entering into an interest rate swap agreement, we have effectively fixed the
interest rate under the facility at approximately 5.7325% per year.
We anticipate that we will seek to refinance our secured credit facility at or prior to its
maturity. There can be no assurance that we will be able to do so on acceptable terms. Interest
rates may be higher than current rates at the time we seek to refinance our secured credit facility
and the prevailing market terms for loans such as the type we would need to refinance our secured
credit may require periodic payments to amortize the outstanding principal. Such higher rates,
principal amortization requirements or other terms could prevent our ability to complete a
refinancing or could adversely impact our future results, including the amount of cash available
for future dividends. Please see “Part II. Item 1A. Risk Factors — Company Specific Risk Factors
— We cannot assure you that we will pay any dividends,” “— If we cannot refinance our secured
credit facility, or in the event of a default under the facility, we may have to sell our Vessels,
which may leave no additional funds for distributions to shareholders” and “— We may not be able
to recharter our Vessels profitably after they expire, unless they are extended at the option of
the Charterers.”
On September 25, 2008, we and certain of our subsidiaries entered into an Agreement with The
Royal Bank of Scotland under which The Royal Bank of Scotland consented to the proposed
transactions contemplated by the Merger Agreement. In accordance with the terms of the Merger
Agreement, General Maritime has consented to the modification of the term loan agreement on the
terms set forth in the Agreement. The Agreement provides The Royal Bank of Scotland’s consent to
the transactions contemplated by the Merger Agreement, subject to the terms and conditions set
forth in the Agreement. In particular, pursuant to the terms of the Agreement, among other things,
the Margin (as defined in the term loan agreement) is increased to 1.25% and we are required to pay
a one percent prepayment fee if the secured credit facility is prepaid within two years of our
acceptance of the Agreement. The foregoing provisions of the Agreement will become effective only
upon the closing of the transactions contemplated by the Merger Agreement. Except as specifically
set forth in the Agreement, the provisions in the term loan agreement remain unchanged and the term
loan agreement remains in full force and effect.
As of September 30, 2008, we had cash and cash equivalents of $15.3 million. Net cash
provided by operating activities for the nine months ended September 30, 2008 was $22.5 million.
Net cash provided by investing activities for the nine months ended September 30, 2008 was
12.5 million. This amount relates to the sale of $12.5 million in marketable securities during the
nine months ended September 30, 2008 with original maturities greater than 90 days. We did not
purchase any marketable securities during the first nine months of 2008.
Net cash used in financing activities for the nine months ended September 30, 2008 was $26.0
million, which consisted solely of dividend payments made in February, May, and August 2008.
31
We collect our Basic Hire monthly in advance and pay our ship management fees monthly in
advance. We receive Additional Hire payable quarterly in arrears. We expect charter revenues will
be sufficient to cover our ship management fees, interest payments, administrative expenses and
other costs and to continue to pay quarterly dividends as described above under the caption
“Dividend Policy”.
We believe that our cash flow from our Charters and our cash reserves will be sufficient to
fund our interest payments under our secured credit facility and our working capital requirements
until the anticipated closing of our pending combination with General Maritime. If the transaction
is not completed, our longer term liquidity requirements will include repayment of the principal
balance of our secured credit facility in January 2011. We would require new borrowings, issuances
of equity, or funds from a combination of these sources to meet this repayment obligation.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are more fully described in Note 2 to the Notes to Condensed
Consolidated Financial Statements included elsewhere in this report. As disclosed in Note 2 to the
Notes to Consolidated Financial Statements, the preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires management to make
estimates and assumptions about future events that affect the amounts reported in the financial
statements and accompanying notes. Future events and their effects cannot be determined with
absolute certainty. Therefore, the determination of estimates requires the exercise of judgment.
The process of determining significant estimates is fact specific and takes into account factors
such as historical experience, current and expected economic and industry conditions, present and
expected conditions in the financial markets, and in some cases, the credit worthiness of
counterparties to contracts. We regularly reevaluate these significant factors and make adjustments
where facts and circumstances dictate. The following is a discussion of the accounting policies
that we apply and that we consider to involve a higher degree of judgment in their application.
Revenue Recognition
Revenues are generated from time charters and the spot market. Charter revenues are earned
over the term of the charter as the service is provided. Probable losses on voyage charters are
accrued in full at the time such losses can be estimated.
Vessels, Depreciation and Impairment
Our Vessels represent our most significant assets and we state them at cost less accumulated
depreciation. Depreciation of our Vessels is computed using the straight-line method over their
estimated useful lives of 25 years. This is a common life expectancy applied in the shipping
industry. Significant vessel improvement costs are capitalized as additions to the vessel rather
than being expensed as a repair and maintenance activity. Should certain factors or circumstances
cause us to revise our estimate of vessel service lives, depreciation expense could be materially
lower or higher. If circumstances cause us to change our assumptions in making determinations as to
whether vessel improvements should be capitalized, the amounts we expense each year as repairs and
maintenance costs could increase, partially offset by a decrease in depreciation expense.
We review long-lived assets used in our business on an annual basis for impairment, or
whenever events or changes in circumstances indicate that the carrying amount of an asset or a
group of assets may not be recoverable. We assess recoverability of the carrying value of the asset
by estimating the future net cash flows expected to result from the asset, including eventual
disposition. If the future undiscounted net cash flows are less than the carrying value of the
asset, an impairment loss is recorded equal to the difference between the asset’s carrying value
and its fair value. We estimate fair value based on sales price negotiations, active markets, if
available, and projected future cash flows discounted at a rate determined by management to be
commensurate with our business risk. The estimation of fair value using these methods is subject to
numerous uncertainties which require our significant judgment when making assumptions of revenues,
operating costs, selling and administrative expenses, interest rates and general economic business
conditions, among other factors.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk arising from changes in interest rates, primarily resulting from
the floating rate of our borrowings. We use interest rate swaps to manage such interest rate risk.
We have not entered into any financial instruments for speculative or trading purposes.
At September 30, 2008 and December 31, 2007, we had $229.5 million outstanding under our debt
facility. The borrowings under our debt facility bear interest at LIBOR (reset quarterly) plus a
margin of 0.75%, or 0.85% if the Ratio falls below 2.0. We have
32
entered into an interest rate swap agreement that has effectively fixed the interest rate
under the facility at approximately 5.7325% per year. Periodic cash settlements under the swap
agreements occur quarterly corresponding with interest payments under the secured credit facility.
The fair value of the interest rate swap agreement as of September 30, 2008 was a liability of $7.6
million. The fair value of the interest rate swap agreement as of December 31, 2007 was a
liability of $7.5 million.
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our
disclosure controls and procedures as of September 30, 2008. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
or Exchange Act, means controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the
company’s management, including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Our management recognizes that
any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of September 30, 2008, our Chief Executive
Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2008 that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
33
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The nature of our business, i.e., the acquisition, chartering and ownership of our Vessels,
exposes us to the risk of lawsuits for damages or penalties relating to, among other things,
personal injury, property casualty and environmental contamination. Under rules related to maritime
proceedings, certain claimants may be entitled to attach charterhire payable to us in certain
circumstances. There are no actions or claims pending against us as of the date of this Quarterly
Report on Form 10-Q.
Item 1A. Risk Factors
Risk Factors
The following important factors, among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this report or presented elsewhere by
management from time to time.
Company Specific Risk Factors
We cannot assure you that we will pay any dividends
If our pending combination with General Maritime is completed, future dividends will be the
responsibility of the combined company. If the combination is not completed, we currently intend
to pay dividends on a quarterly basis in amounts determined by our Board of Directors. Our
dividends have historically been substantially equal to the charterhire received by us under the
Charters, less cash expenses and any cash reserves established by our Board of Directors. Such
expenses consist primarily of fees under our ship management agreements, directors’ fees, salaries
and benefits of our employees, payment of interest under our secured credit facility, and other
administrative costs and other expenses. There can be no assurance that we will not have other cash
expenses, including extraordinary expenses, which could include the costs of claims and related
litigation expenses. There can be no assurance that we will not have additional expenses or
liabilities, that the amounts currently anticipated for the items set forth above will not increase
or that we will not have to fund any required capital expenditures for our Vessels. Other than the
fees under our ship management agreements, none of our fees or expenses is fixed.
We anticipate that, as a stand-alone company independent from General Maritime, our cash
available for dividends in 2009 would decline from the cash available in 2008. In addition, we
anticipate that our cash available for dividends would decline in each year after 2009. Therefore,
we expect that, as a stand-alone company independent from General
Maritime, our dividend level would
likely remain materially below the range of dividends paid in all prior years. Furthermore, due to
the expected refinancing of our term loan agreement with amortizing debt prior to 2011, as a
stand-alone company independent from General Maritime, a decline in dividends of more than 40% is
expected to occur in 2011.
The amount of future dividends, if any, could also be affected by various factors, including
the loss of a Vessel, the number of days a Vessel is off-hire, the timing of the commencement or
expiration of any sub-charters for our Vessels, the effect of global demand for tanker capacity on
Additional Hire calculations, required capital expenditures, cash reserves established by our Board
of Directors, increased or unanticipated expenses, a change in our dividend policy, increased
borrowings, more restrictive debt covenants, higher interest rates, principal amortization
requirements or future issuances of securities, many of which are beyond our control. As a result,
the amount of dividends actually paid may vary from period to period and such variations may be
material.
The amount of dividends we may be able to pay can also be affected by the terms of our
current, or any future, indebtedness. Our existing secured credit facility provides that we may
not pay dividends if an event of default under the facility agreement has occurred and continues or
if the market value of our Vessels is less than 140% of our borrowings under the facility (or, if
at the time of the proposed dividend, all of our Vessels are on time charter for a remaining period
of 12 months, less than 125% of the loan amount). The terms of any future indebtedness we may
enter into, including indebtedness that refinances our existing secured credit facility, may have
stricter restrictions on our ability to pay dividends. Furthermore, higher interest rates or
different repayment terms of future indebtedness, such as principal amortization requirements, may
reduce the amount of cash that we would have available to pay future dividends.
34
The declaration of dividends is subject to current and future debt covenants, compliance with
Bermuda law and is subject at all times to the discretion of our Board of Directors. There can be
no assurance that dividends will be paid in amounts anticipated or at all.
We are highly dependent on the Charterers and their guarantors, Stena and Concordia
All of our Vessels are chartered to the Charterers, which are subsidiaries of Stena and
Concordia. The Charterers’ payments to us under these Charters are our sole source of revenue. We
are highly dependent on the performance by the Charterers of their obligations under the Charters
and by their guarantors, Stena and Concordia, of their obligations under their respective
guarantees. Any failure by the Charterers or the guarantors to perform their obligations would
materially and adversely affect our business and financial position. Our shareholders do not have
any recourse against the Charterers or the guarantors.
If we cannot refinance our secured credit facility, or in the event of a default under the
facility, we may have to sell our Vessels, which may leave no additional funds for distributions
to shareholders
Under the terms of the Loan Agreement providing for our secured credit facility, we are
required to repay the total amount outstanding at maturity, January 5, 2011. Borrowings under the
facility are guaranteed by each of our Vessel Subsidiaries and are secured by mortgages over all of
our Vessels; assignments of earnings, insurances and requisition compensation with respect to our
Vessels; and assignments of our interests in the Charters and our ship management agreements.
Whether or not the Charterers renew the Charters, the Loan Agreement will mature in January 2011
and we will be obligated to repay or refinance the total amount due under the loan at that time.
There is no assurance that we will be able to repay or refinance this amount. In addition, even if
the Charterers renew the Charters for one or more of our Vessels, if we are unable to refinance our
secured credit facility on acceptable terms, we may be forced to attempt to sell some or all of our
Vessels. Interest rates may be higher than current rates at the time we seek to refinance our
secured credit facility and the prevailing market terms for loans such as the type we would need to
refinance our secured credit may require periodic payments to amortize the outstanding principal.
Such higher rates, principal amortization requirements or other terms could prevent our ability to
complete a refinancing or could adversely impact our future results, including the amount of cash
available for future dividends. In such event, we may conclude that such a refinancing is not on
acceptable terms. In addition, in the event of a default under our secured credit facility all of
our Vessels could be sold to satisfy amounts due to the lender under our secured credit facility.
Depending on the market value for our Vessels at the time, it is possible that after payment of the
amounts outstanding under our secured credit facility there would not be any funds to distribute to
our shareholders. In addition, under our bye-laws, any sale of a Vessel would require the approval
of at least a majority of our shareholders voting at a meeting. Furthermore, our current Charters
provide that we may not sell the related Vessel without the Charterer’s consent, which consent may
be withheld in the Charterer’s sole discretion. Accordingly, there can be no assurance that we
would be able to sell a Vessel at a time when we would need to do so to satisfy the obligations
under our secured credit facility.
Because we currently intend to distribute dividends to our shareholders in an amount
substantially equal to our charterhire, less cash expenses and any cash reserves established by our
Board of Directors, we do not believe we will be able to repay our secured credit facility in
January 2011 without either refinancing our debt or selling some or all of our Vessels. As a
result, we anticipate that we will seek to refinance our secured credit facility at or prior to its
maturity. There can be no assurance that we will be able to do so on acceptable terms.
We may not be able to re-charter our Vessels profitably after their Charters expire, unless they
are extended at the option of the Charterers
Two of our Charters have initial expiration dates in 2008, four have initial expiration dates
in 2009 and two have initial expiration dates in 2010. The Charterers have options to extend the
terms of the Charters for each of our Vessels. In May 2008, the options for four of our Vessels
were exercised. The Charterers have the sole discretion as to exercising their options. Notice
that the Charterer is exercising its option to extend the term of a Charter is required to be
delivered no later than six months prior to the expiration of the charter period in effect at that
time. We cannot predict whether the Charterers will exercise any additional extension options
under one or more of the Charters. The Charterers do not owe any fiduciary or other duty to us or
our shareholders in deciding whether to exercise their extension options, and the Charterers’
decision may be contrary to our interests or those of our shareholders.
We cannot predict any of the factors that the Charterers will consider in deciding whether to
exercise any of their extension options under the Charters. It is likely, however, that the
Charterers would consider a variety of factors, which may include the age and
35
specifications of the particular Vessel, whether a Vessel is surplus or suitable to the
Charterers’ requirements and whether competitive charterhire rates are available to the Charterers
in the open market at that time.
If the Charterers decide not to extend our current Charters, we may not be able to re-charter
our Vessels with terms similar to the terms of our Charters, or at all. We may also directly employ
the Vessels on the spot charter market, which is subject to greater rate fluctuation than the time
charter market.
Under our ship management agreements, Northern Marine, a wholly owned subsidiary of Stena, is
responsible for all of the technical and operational management of our Vessels for a fixed
management fee that increases 5% annually. Northern Marine has also agreed to indemnify us against
specified off-hire and reduced hire for our Vessels in excess of five days per year. However, this
indemnification only extends to the amount payable to us as Basic Hire and would not extend to any
amounts that would otherwise be payable to us as Additional Hire if the Vessels were not off-hire.
Our ship management agreements with Northern Marine may be terminated by either party if the
relevant Charter is terminated or expires. If our ship management agreements with Northern Marine
were to terminate, we may not be able to obtain similar fixed rate terms or indemnification for
off-hire and reduced hire periods from another ship manager.
If we receive lower charter rates under replacement charters, are unable to re-charter all of
our Vessels or we incur greater expenses under replacement management agreements, the amounts
available, if any, to pay distributions to our shareholders may be significantly reduced or
eliminated.
Under our Charters, there is no obligation to pay Additional Hire, during any period when the
obligation to pay Basic Hire is suspended under the Charter if due to technical reasons the Vessel
is off-hire, unless the Vessel is off-hire as a result of a class condition or recommendation
determined by the Vessel’s classification society during the inspection of the Vessel undertaken by
us in connection with the purchase of the Vessel and such condition or recommendation cannot be
remedied or complied with during a regularly scheduled drydocking without increasing the duration
of such drydocking.
Stena and Concordia’s ownership interest in our company can have significant influence over the
Company, including the outcome of shareholder votes and our ability to conduct future business or
modify existing agreements with Stena or Concordia
Based on their filings with the SEC, as of May 7, 2008, Stena and Concordia directly and indirectly
owned an aggregate of approximately 18.0% of our outstanding common shares. As a result of their
share ownership and for so long as either Stena or Concordia directly or indirectly owns a
significant percentage of our outstanding common shares, Stena and Concordia are able to influence
us, including the outcome of any shareholder vote, such as the election of directors. In addition,
as a result of Stena’s purchase of additional common shares in 2007, Stena and Concordia may be
considered “interested shareholders” for purposes of our bye-laws. Under our “interested
shareholder” bye-law, in addition to any other approval that may be required by applicable law, any
“business combination” with an interested shareholder within a period of three years after the date
of the transaction in which the person became an interested shareholder must be approved by our
board and authorized at an annual or special general meeting by the affirmative vote of at least 66
2/3% of our issued and outstanding voting shares that are not owned by the interested shareholder,
unless:
|
|
•
|
|
prior to the date of the transaction that resulted in the shareholder becoming an
interested shareholder, our board of directors approved either the business combination
or the transaction that resulted in the shareholder becoming an interested shareholder;
or
|
|
|
|
|
•
|
|
upon consummation of the transaction that resulted in the shareholder becoming an
interested shareholder, the interested shareholder owned at least 85% of our issued and
outstanding voting shares at the time the transaction commenced.
|
For purposes of these provisions, “business combinations” include specified mergers,
amalgamations, consolidations and specified sales, leases, exchanges, mortgages, pledges, transfers
and other dispositions of assets having an aggregate market value equal to 10% or more of either
the aggregate market value of all of our assets determined on a consolidated basis or the aggregate
market value of all of our issued and outstanding shares. Accordingly, our interested shareholder
bye-law may make it more difficult for us to conduct future business or modify existing agreements
with Stena or Concordia.
36
We are leveraged and subject to restrictions in our financing agreements that impose constraints
on our operating and financing flexibility
We have a secured credit facility under which we have borrowed $229.5 million as of September
30, 2008, to finance a portion of the cash purchase price for our Additional Vessels and refinance
pre-existing debt. We are required to apply a substantial portion of our cash flow from operations
to the payment of interest on borrowings under the facility. Our facility, which is secured by,
among other things, mortgages on our Vessels, pledges of our time charters and assignments of
earnings, insurances and requisition compensation in respect to our Vessels, requires that we
comply with various operating covenants and maintain certain financial ratios including that the
market value of our Vessels exceeds 125% of the total facility amount outstanding and that the
market value of our Vessels exceeds 140% of our borrowings (or 125% if the loan amount at the time
of such dividend all of our Vessels are on time charter for a remaining period of at least 12
months) in order for us to pay dividends. The facility also requires that Northern Marine remain as
technical manager for our Vessels.
We have a floating rate of interest under our secured credit facility. However, we have
entered into an interest rate swap agreement that effectively fixes the interest rate at 5.7325%,
or 5.8325% per year, based upon the ratio of the fair market value of the Company’s Vessels to the
amount outstanding under the loan facility, through maturity of the facility in January 2011. By
utilizing this interest rate swap, we potentially forego benefits that might result from declines
in interest rates.
Our combination with General Maritime may not be completed
In June 2008, we announced that we were engaged in a process to review and evaluate strategic
alternatives to enhance shareholder value. As a result of that process, on August 5, 2008, we
entered into the Merger Agreement with General Maritime. Pursuant to the Merger Agreement our
business and the business of General Maritime will be combined. Upon consummation of the
transactions contemplated by the Merger Agreement, our shareholders will hold approximately 27% of
the outstanding common stock of the combined company and shareholders of General Maritime will hold
approximately 73% of the outstanding common stock of the combined company. The Merger Agreement is
subject to approval by our shareholders and by General Maritime’s shareholders, and other customary
closing conditions. There can be no assurance that the transaction will be completed in a timely
manner, or at all. In addition, even if the transaction is completed, there can be no assurance
that it will ultimately prove to be beneficial to our shareholders.
We are a holding company, and we depend on the ability of our subsidiaries to distribute funds to
us in order to satisfy our financial and other obligations
We are a holding company, and have no significant assets other than the equity interests in
our subsidiaries. Our subsidiaries own all of our Vessels, and payments under our Charters are made
to our subsidiaries. As a result, our ability to pay dividends depends on the performance of our
subsidiaries and their ability to distribute funds to us. The ability of a subsidiary to make these
distributions could be affected by a claim or other action by a third party, including a creditor,
or by Bermuda law which regulates the payment of dividends by companies. If we are unable to obtain
funds from our subsidiaries, we will not be able to pay dividends unless we obtain funds from other
sources. We cannot assure you that we will be able to obtain funds from other sources.
U.S. tax authorities could treat us as a “passive foreign investment company,” which could have
adverse U.S. federal income tax consequences to U.S. shareholders
A foreign corporation will be treated as a “passive foreign investment company,” or PFIC, for
U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable
year consists of certain types of “passive income” or (2) at least 50% of the average value of the
corporation’s assets produce or are held for the production of those types of “passive income.” For
purposes of these tests, “passive income” includes dividends, interest, and gains from the sale or
exchange of investment property and rents and royalties other than rents and royalties which are
received from unrelated parties in connection with the active conduct of a trade or business. For
purposes of these tests, income derived from the performance of services does not constitute
“passive income.” U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income
tax regime with respect to the income derived by the PFIC, the distributions they receive from the
PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the
PFIC.
Based on our method of operation, we do not believe that we were a PFIC for our most recent
taxable year or that we will become a PFIC with respect to any future taxable year. In this regard,
we treat the gross income we derive or are deemed to derive from our time chartering activities as
services income, rather than rental income. Accordingly, we believe that our income from our time
37
chartering activities does not constitute “passive income,” and the assets that we own and
operate in connection with the production of that income do not constitute passive assets.
There is, however, no direct legal authority under the PFIC rules addressing our method of
operation. Accordingly, no assurance can be given that the U.S. Internal Revenue Service, or IRS,
or a court of law will accept our position, and there is a risk that the IRS or a court of law
could determine that we are a PFIC. Moreover, no assurance can be given that we would not
constitute a PFIC for any future taxable year if there were to be changes in the nature and extent
of our operations.
If the IRS were to find that we are or have been a PFIC for any taxable year, our U.S.
shareholders would face adverse U.S. tax consequences. Under the PFIC rules, unless those
shareholders make an election available under the Internal Revenue Code of 1986, as amended, or the
Code, such shareholders would be liable to pay U.S. federal income tax at the then prevailing
income tax rates on ordinary income plus interest upon certain distributions and upon any gain from
the disposition of our common shares, as if the distribution or gain had been recognized ratably
over the shareholder’s holding period of our common shares. In addition, a step-up in the tax basis
of our shares may not be available upon the death of an individual shareholder, and the
preferential U.S. federal income tax rates currently applicable to qualified dividend income of
certain U.S. investors would not apply.
Our operating income could fail to qualify for an exemption from U.S. federal income taxation,
which would reduce our cash flow
A foreign corporation is subject to U.S. federal income taxation at a rate of 4% on its U.S.
source shipping income, including, unless exempt as income from the international operation of
ships, 50% of its shipping income that is attributable to transportation that begins or ends in the
United States. Under Code Section 883 and applicable U.S. Treasury regulations, a foreign
corporation’s U.S. source income from the international operation of ships is exempt from U.S.
federal income taxation if: (1) the corporation is organized in a foreign country that grants an
“equivalent exemption” from taxation to U.S. corporations and (2) either (A) its common shares are
“primarily and regularly traded on an established securities market” in that same foreign country,
in the United States or in another country that grants an “equivalent exemption” to U.S.
corporations or (B) more than 50% of the value of its shares is treated as owned, directly or
indirectly, for at least half of the number of days in the taxable year by one or more “qualified
shareholders.”
Bermuda, our country of organization, is a foreign country that grants an “equivalent
exemption” from taxation to U.S. corporations with respect to income from the international
operation of ships. In addition, our common shares are currently “primarily and regularly traded”
on the New York Stock Exchange, which is an established securities market in the United States.
Therefore, we believe that our time chartering income qualifies for the exemption from U.S. federal
income taxation.
Our qualification for the exemption, however, is based upon certain complex factual
determinations that are not completely within our control and, therefore, there can be no assurance
that we will qualify for the exemption either now or in the future. If we were not to qualify for
the exemption, our income from the international operation of ships, to the extent characterized as
U.S. source income, would be subject to a 4% U.S. federal income tax on a gross basis without
allowance for deduction. In addition, if we were to generate U.S. source income of a type that does
not qualify for the exemption, such as income that is attributable to transportation that both
begins and ends in the United States, it would also be subject to U.S. federal income taxation. If
we were subject to U.S. federal income taxation, our cash available for distributions to
shareholders would be correspondingly reduced.
U.S. investors who own our common shares may have more difficulty in protecting their interests
than U.S. investors who own shares of a Delaware corporation
The Companies Act 1981 of Bermuda, which applies to us, differs in certain material respects
from laws generally applicable to U.S. corporations and their shareholders. Set forth below is a
summary of certain significant provisions of the Companies Act which differ in certain respects
from provisions of Delaware corporate law. Because the following statements are summaries, they do
not discuss all aspects of Bermuda law that may be relevant to us and our shareholders.
Interested Directors.
Bermuda law and our bye-laws provide that if a director has an interest
in a material contract or proposed material contract with us or any of our subsidiaries or has a
material interest in any person that is a party to such a contract, the director must disclose the
nature of that interest at the first opportunity either at a meeting of directors or in writing to
the directors. Our bye-laws provide that, after a director has made such a declaration of interest,
he is allowed to be counted for purposes of determining whether a quorum is present and to vote on
a transaction in which he has an interest, unless disqualified from doing so by the chairman of the
relevant board meeting. Under Delaware law such transaction would not be voidable if:
38
|
|
•
|
|
the material facts as to such interested director’s relationship or interests were
disclosed or were known to the Board of Directors and the board had in good faith authorized
the transaction by the affirmative vote of a majority of the disinterested directors;
|
|
|
|
|
•
|
|
such material facts were disclosed or were known to the stockholders entitled to vote on
such transaction and the transaction was specifically approved in good faith by vote of the
majority of shares entitled to vote thereon; or
|
|
|
|
|
•
|
|
the transaction was fair as to the corporation as of the time it was authorized, approved
or ratified.
|
Under Delaware law, the interested director could be held liable for a transaction in which
the director derived an improper personal benefit.
Shareholders’ Suits.
Class actions and derivative actions are generally not available to
shareholders under Bermuda law. The Bermuda courts, however, would ordinarily be expected to permit
a shareholder to commence an action in the name of a company to remedy a wrong to the company where
the act complained of is alleged to be beyond the corporate power of the company or illegal, or
would result in the violation of the company’s memorandum of association or bye-laws. Furthermore,
consideration would be given by a 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 which is oppressive or
prejudicial to the interests of some part of the shareholders, one or more shareholders may apply
to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order
regulating the conduct of the company’s affairs in the future or ordering the purchase of the
shares of any shareholders by other shareholders or by the company.
Our bye-laws contain a provision by virtue of which our shareholders waive any claim or right
of action that they have, both individually and on our behalf, against any director or officer in
relation to any action or failure to take action by such director or officer, except in respect of
any fraud or dishonesty of such director or officer.
Class actions and derivative actions generally are available to stockholders under Delaware
law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in
accordance with applicable law. In such actions, the court has discretion to permit the winning
party to recover attorneys’ fees incurred in connection with such action.
Indemnification of Directors.
Section 98 of the Companies Act provides generally that a
Bermuda company may indemnify its directors, officers and auditors against any liability which by
virtue of any rule of law would otherwise be imposed on them in respect of any negligence, default,
breach of duty or breach of trust, except in cases where such liability arises from fraud or
dishonesty of which such director, officer or auditor may be guilty in relation to the 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 in which they are acquitted or granted
relief by the Supreme Court of Bermuda pursuant to section 281 of the Companies Act.
We have adopted provisions in our bye-laws that provide that we shall indemnify our officers
and directors in respect of their actions and omissions, except in respect of their fraud or
dishonesty. Our bye-laws provide that the shareholders waive all claims or rights of action that
they might have, individually or in right of the company, against any of the company’s directors or
officers for any act or failure to act in the performance of such director’s or officer’s duties,
except in respect of any fraud or dishonesty of such director or officer. Section 98A of the
Companies Act permits us to purchase and maintain insurance for the benefit of any officer or
director in respect of any loss or liability attaching to him in respect of any negligence,
default, breach of duty or breach of trust, whether or not we may otherwise indemnify such officer
or director. We have purchased and maintain a directors’ and officers’ liability policy for such a
purpose.
Under Delaware law, a corporation may indemnify a director or officer of the corporation
against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in defense of an action, suit or proceeding by reason of such
position if such director or officer acted in good faith and in a manner he or she reasonably
believed to be in or not be opposed to the best interests of the corporation and, with respect to
any criminal action or proceeding, such director or officer had no reasonable cause to believe his
or her conduct was unlawful.
39
Bermuda law and our bye-laws permit our Board of Directors to establish preference shares having
terms which could reduce or eliminate dividends payable to our common shareholders
Bermuda law and our bye-laws permit our Board of Directors to issue preference shares with
dividend rates, relative voting rights, conversion or exchange rights, redemption rights,
liquidation rights and other relative participation, optional or other special rights,
qualifications, limitations or restrictions as may be determined by resolution of the board without
shareholder approval. Such preference shares could have terms that provide for the payment of
dividends prior to the payment of dividends in respect of the common shares. As a result, the
issuance of these preference shares could reduce or eliminate dividends payable to common
shareholders.
Our bye-laws restrict shareholders from bringing certain legal action against our officers and
directors
Our bye-laws contain a broad waiver by our shareholders of any claim or right of action, both
individually and on our behalf, against any of our officers or directors. The waiver applies to any
action taken by an officer or director, or the failure of an officer or director to take any
action, in the performance of his or her duties, except with respect to any matter involving any
fraud or dishonesty on the part of the officer or director. This waiver limits the right of
shareholders to assert claims against our officers and directors unless the act or failure to act
involves fraud or dishonesty.
We have anti-takeover provisions in our bye-laws that may discourage a change of control
Our bye-laws contain provisions that could make it more difficult for a third party to acquire
us without the consent of our Board of Directors. These provisions provide for:
|
|
•
|
|
a classified Board of Directors with staggered three-year terms, elected without
cumulative voting;
|
|
|
|
|
•
|
|
directors can only be removed for cause and only with the affirmative vote of holders of
at least 80% of the common shares issued and outstanding;
|
|
|
|
|
•
|
|
advance notice for nominations of directors by shareholders and for shareholders to
include matters to be considered at annual meetings;
|
|
|
|
|
•
|
|
our Board of Directors to determine the powers, preferences and rights of our preference
shares and to issue the preference shares without shareholder approval; and
|
|
|
|
|
•
|
|
a requirement that amalgamations, sales of assets and certain other transactions with
persons owning 15% or more of our voting securities, which we refer to as interested
shareholders, be approved by holders of at least 66 2/3% of our issued and outstanding
voting shares not owned by the interested shareholder, subject to certain exceptions.
|
These provisions could make it more difficult for a third party to acquire us, even if the
third party’s offer may be considered beneficial by many shareholders. As a result, shareholders
may be limited in their ability to obtain a premium for their shares.
Our shareholder rights plan could prevent a change in control of us in instances in which some
shareholders may believe a change in control is in their best interests
Under the rights agreement that establishes our shareholder rights plan, we issued to each of
our shareholders one preferred share purchase right for each outstanding common share. Each right,
when exercisable, will entitle its holder to purchase from us one one-thousandth of a Series A
Junior Participating Preferred Share at a purchase price of $95 in cash, subject to adjustment.
Our shareholder rights plan is intended to protect shareholders in the event of an unfair or
coercive offer to acquire us and to provide our Board of Directors with adequate time to evaluate
unsolicited offers. We also believe that our shareholder rights plan will allow us to proceed with
our strategic alternatives analysis in an orderly manner. The rights plan may have anti-takeover
effects. The rights plan will cause substantial dilution to a person or group that attempts to
acquire us on terms that our Board of Directors does not believe are in our best interests and
those of our shareholders and may discourage, delay or prevent a merger or acquisition that
shareholders may consider favorable.
40
Industry Specific Risk Factors
The highly cyclical nature of the tanker industry may lead to volatile changes in charter rates
and vessel values which may adversely affect our earnings
If the tanker industry, which has been highly cyclical, is depressed in the future when our
Charters expire or at a time when we may want to sell a Vessel, our earnings and available cash
flow may decrease. Our ability to re-charter our Vessels on the expiration or termination of the
Charters and the charter rates that we may receive under any renewal or replacement charters will
depend upon, among other things, economic conditions in the tanker market at that time.
Fluctuations in charter rates and vessel values result from changes in the supply and demand
for tanker capacity and changes in the supply and demand for oil and oil products. For example,
charter rates and vessel values were at a high level during 2004. Charter rates declined from that
high level during 2005 and 2006, and have remained at these lower rates during 2007 and 2008. There
can be no assurance that charter rates and Vessel values will not decline further in the future.
Our Vessels are operated under time charters with the Charterers. We receive a fixed minimum
daily base charter rate and may receive Additional Hire under the Charters. Additional Hire is not
guaranteed under our Charters. Additional Hire, if any, is paid quarterly in arrears. The amount of
Additional Hire is subject to variation depending on the charterhire received by the Charterers
under time charters, spot charters and on general tanker market conditions. The amount of
Additional Hire that we may earn is based on a formula of notional voyages and expenses on routes
that we agreed to with the Charterers. The payment of Additional Hire, if any, has no correlation
to our potential future time charter equivalent earnings. If a Vessel is off-hire, that Vessel is
not eligible to earn Additional Hire during the off-hire period. We cannot assure you that we will
receive Additional Hire for any quarter.
Factors beyond our control may adversely affect the value of our Vessels
The factors affecting the supply and demand for tanker vessels are outside of our control, and
the nature, timing and degree of changes in industry conditions are unpredictable and may adversely
affect the value of our Vessels. The factors that influence the demand for tanker capacity include:
|
|
•
|
|
demand for oil and oil products, which affect the need for tanker capacity;
|
|
|
|
|
•
|
|
global and regional economic and political conditions which among other things, could
impact the supply of oil as well as trading patterns and the demand for various types of
vessels;
|
|
|
|
|
•
|
|
changes in the production of crude oil, particularly by OPEC members and other key
producers, which impact the need for tanker capacity;
|
|
|
|
|
•
|
|
developments in international trade;
|
|
|
|
|
•
|
|
changes in seaborne and other transportation patterns, including changes in the distances
that cargoes are transported;
|
|
|
|
|
•
|
|
environmental concerns and regulations;
|
|
|
|
|
•
|
|
weather; and
|
|
|
|
|
•
|
|
competition from alternative sources of energy.
|
The factors that influence the supply of tanker capacity include:
|
|
•
|
|
the number of newbuilding deliveries;
|
|
|
|
|
•
|
|
restrictions on vessels from entering into certain trades based upon their age, safety or
other factors;
|
|
|
|
|
•
|
|
the scrapping rate of older vessels; and
|
|
|
|
|
•
|
|
the number of vessels that are out of service.
|
41
An over supply of new vessels may adversely affect charter rates and vessel values
If the number of new ships delivered exceeds the number of tankers being scrapped and lost,
tanker capacity will increase. In addition, according to Clarkson Research Studies Ltd. in a report
published at the end of 2007, the total newbuilding order book for vessels with capacity of 20,000
dwt or more scheduled to enter the fleet through 2010 currently equals 29% of the existing fleet
and we cannot assure you that the order book will not increase further in proportion to the
existing fleet. If the supply of tanker capacity increases and the demand for tanker capacity does
not increase correspondingly, charter rates could materially decline and the value of our Vessels
could be adversely affected.
Terrorist attacks and international hostilities can affect the tanker industry, which could
adversely affect our business
Additional attacks like those of September 11, 2001 or longer-lasting war or international
hostilities, including those currently underway in Iraq and the Middle East, could damage the world
economy, adversely affect the availability of and demand for crude oil and petroleum products and
adversely affect our ability to re-charter our Vessels on the expiration or termination of the
Charters and the charter rates payable under any renewal or replacement charters. We conduct our
operations outside the United States, and our business, financial condition and results of
operations may be adversely affected by changing economic, political and government conditions in
the countries and regions where our Vessels are employed. Moreover, we operate in a sector of the
economy that is likely to be adversely impacted by the effects of political instability, terrorist
or other attacks, war or international hostilities.
The value of our Vessels may fluctuate and adversely affect our liquidity and may result in
breaches under our secured credit facility
Tanker values have generally experienced high volatility. Investors can expect the fair market
value of our tankers to fluctuate, depending on general economic and market conditions affecting
the tanker industry and competition from other shipping companies, types and sizes of vessels and
other modes of transportation. In addition, although our Panamax and Product tankers were built in
2004 and 2005 and our V-MAX tankers were built in 2001, they generally decline in value as they
age. These factors will affect the value of our Vessels at the termination of their Charters or
earlier at the time of any sale, which during the term of the Charters will require the consent of
the Charterer and the lenders under our secured credit facility. Borrowings under our credit
agreement bear interest at LIBOR plus a 75 basis points margin, which would increase to 85 basis
points if the ratio of the fair market value of the Company’s Vessels to the amount outstanding
under the loan facility falls below 2.0. The increased interest margin is equivalent to
approximately $229,500 per year in increased interest costs in the event the ratio falls below 2.0.
In the event of the sale or loss of a Vessel, we might be required to repay a percentage of the
loan earlier than we planned or increase our payments under the facility, which could affect our
financial condition and ability to make payments to our shareholders. Declining tanker values could
adversely affect our ability to refinance our secured credit facility at its maturity in January
2011 and thereby adversely impact our business and operations and liquidity. Due to the cyclical
nature of the tanker market, if for any reason we sell tankers at a time when tanker prices have
fallen, the sale may be at less than the tanker’s carrying amount on our financial statements, with
the result that we would also incur a loss and a reduction in earnings.
We operate in the highly competitive international tanker market which could affect our position
if the Charterers do not renew our Charters
The operation of tanker vessels and transportation of crude oil and petroleum products are
extremely competitive. Competition arises primarily from other tanker owners, including major oil
companies, as well as independent tanker companies, some of which have substantially larger fleets
and substantially greater resources than we do. Competition for the transportation of oil and oil
products can be intense and depends on price, location, size, age, condition and the acceptability
of the tanker and its operators to the charterers. During the term of our Charters with the
Charterers we are not exposed to the risk associated with this competition. However, if the
Charterers do not exercise their options to renew the Charters, we will have to compete with other
tanker owners, including major oil companies and independent tanker companies for charterers. Due
in part to the fragmented tanker market, competitors with greater resources could enter and operate
larger fleets through acquisitions or consolidations and may be able to offer better prices and
fleets than us, which could result in our achieving lower revenues from our Vessels.
Compliance with environmental laws or regulations may adversely affect our business
The shipping industry is affected by numerous regulations in the form of international
conventions, national, state and local laws and national and international regulations in force in
the jurisdictions in which such tankers operate, as well as in the country or
42
countries in which such tankers are registered. These regulations include the U.S. Oil
Pollution Act of 1990, or OPA, the International Convention on Civil Liability for Oil Pollution
Damage of 1969, International Convention for the Prevention of Pollution from Ships, the IMO
International Convention for the Safety of Life at Sea of 1974, or SOLAS, the International
Convention on Load Lines of 1966 and the U.S. Marine Transportation Security Act of 2002. In
addition, vessel classification societies also impose significant safety and other requirements on
our Vessels. We believe our tankers, two of which were built in 2005, four of which were built in
2004 and two of which were built in 2001, are maintained in compliance with present regulatory and
class requirements relevant to areas in which they operate, and are operated in compliance with
applicable safety and environmental laws and regulations. However, regulation of tankers,
particularly in the areas of safety and environmental impact, may change in the future and require
significant capital expenditures be incurred on our Vessels to keep them in compliance. Although
the Charterers will be responsible for all capital expenditures required due to changes in law,
classification society or regulatory requirements in an amount less than $100,000 per year per
Vessel, all other required capital expenditures during the charter period will be split between us
and the applicable Charterer based on the remaining charter period and the remaining depreciation
period of the Vessel, which is calculated as 25 years from the year the Vessel was built.
The shipping industry has inherent operational risks, which may not be adequately covered by
insurance
Our tankers and their cargoes are at risk of being damaged or lost because of events such as
marine disasters, bad weather, mechanical failures, human error, war, terrorism, piracy and other
circumstances or events. In addition, transporting crude oil across a wide variety of international
jurisdictions creates a risk of business interruptions due to political circumstances in foreign
countries, hostilities, labor strikes and boycotts, the potential for changes in tax rates or
policies, and the potential for government expropriation of our Vessels. Any of these events may
result in loss of revenues, increased costs and decreased cash flows to the Charterer, which could
impair its ability to make payments to us under our Charters.
In the event of a casualty to a vessel or other catastrophic event, we will rely on our
insurance to pay the insured value of the vessel or the damages incurred. Under our ship management
agreements, Northern Marine is responsible for obtaining insurance for our fleet against those
risks that we believe the shipping industry commonly insures against. These insurances include
marine hull and machinery insurance, protection and indemnity insurance, which includes pollution
risks and crew insurances and war risk insurance. Northern Marine has also obtained off-hire
insurance in respect of each of our Vessels. Currently, the amount of coverage for liability for
pollution, spillage and leakage available to us on commercially reasonable terms through protection
and indemnity associations and providers of excess coverage is $1 billion per vessel per
occurrence. We cannot assure you that we will be adequately insured against all risks. Under the
ship management agreements, Northern Marine performs all technical management, including crewing
and providing insurance for a fixed management fee. However, we may not be able to obtain adequate
insurance coverage at reasonable rates for our fleet in the future in the event our existing
Charters are not renewed at the expiration of their terms. Additionally, our insurers may refuse to
pay particular claims. Any significant loss or liability for which we are not insured could have a
material adverse effect on our financial condition. In addition, the loss of a Vessel would
adversely affect our cash flows and results of operations.
Maritime claimants could arrest our tankers, which could interrupt the Charterers’ or our cash
flow
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties
may be entitled to a maritime lien against that vessel for unsatisfied debts, claims or damages. In
many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through
foreclosure proceedings. The arrest or attachment of one or more of our Vessels could interrupt the
Charterers’ or our cash flow and require us to pay a significant amount of money to have the arrest
lifted. In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of
liability, a claimant may arrest both the vessel which is subject to the claimant’s maritime lien
and any “associated” vessel, which is any vessel owned or controlled by the same owner. Claimants
could try to assert “sister ship” liability against one vessel in our fleet for claims relating to
another vessel in our fleet.
Governments could requisition our Vessels during a period of war or emergency without adequate
compensation
The government of the United Kingdom, the country under which our Bermuda flagged Vessels
would fall, could requisition or seize our Vessels. Under requisition for title, a government takes
control of a vessel and becomes its owner. Under requisition for hire, a government takes control
of a vessel and effectively becomes its charterer at dictated charter rates. Generally,
requisitions occur during periods of war or emergency. Although we would be entitled to
compensation in the event of a requisition, the amount and timing of payment would be uncertain.
43
Rising or high oil prices may affect demand for oil, and subsequently demand for oil tankers may
fall
Crude oil and oil products are commodities that experience price volatility. Prices for these
commodities are set in an open market. We are an independent transporter of cargoes of crude oil
and oil products and have no control over the price of the cargoes that we carry. We depend on
circumstances where there are suitable cargoes available for our Vessels to transport. In a rising
or high oil price environment, demand for crude oil and oil products may be reduced, which could
reduce demand for our tanker Vessels. Such a reduction in demand for our tanker Vessels could
adversely affect our results of operations, possibly materially.
Risks Related To Our Common Shares
If a significant number of our common shares are sold in the market, the market price of our
common shares could significantly decline, even if our business is doing well
The market price of our common shares could decline due to sales of a large number of shares
in the market including sales of shares by our large shareholders, or the perception that these
sales could occur. These sales or the perception that these sales could occur could also make it
more difficult or impossible for us to sell equity securities in the future at a time and price
that we deem appropriate.
Stena, Concordia and Fram were not eligible to sell the remaining shares that they held after
our initial public offering until their lock-up agreements expired on August 1, 2005. We have
entered into registration rights agreements with them that entitle them to have all or a portion of
their remaining shares registered for sale in the public market following that lock-up period. In
addition, these shares became eligible for sale into the public market pursuant to Rule 144 under
the Securities Act on November 10, 2005. Any sales under Rule 144 would be subject to certain
volume and manner of sale limitations prescribed by the Rule.
44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
(A) Exhibits:
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description of Exhibit(1)
|
|
|
|
|
|
10.1
|
|
Letter agreement, dated as of
August 5, 2008 and countersigned by the Company on
September 25, 2008, as amended by the letters dated
September 2, 2008 and September 23, 2008, by and among the
Company, The Royal Bank of Scotland plc and certain subsidiaries of
the Company
|
|
|
|
|
|
10.2
|
|
Executive Retention Agreement,
dated as of October 17, 2008, by and between the Company and Edward Terino
|
|
|
|
|
|
12.1
|
|
Statement re: Computation of Ratio of Earnings to Fixed Charges.
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934.
|
|
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
|
|
|
|
|
|
(1)
|
|
Unless otherwise noted, each exhibit is filed herewith.
|
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
ARLINGTON TANKERS LTD.
|
|
|
|
By:
|
/s/ EDWARD TERINO
|
|
|
|
|
Name:
|
Edward Terino
|
|
|
|
|
Title:
|
Chief Executive Officer, Chief Financial Officer and
President
|
|
|
|
Date: November 10, 2008
46
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description of Exhibit(1)
|
|
|
|
|
|
10.1
|
|
Letter agreement, dated as of
August 5, 2008 and countersigned by the Company on
September 25, 2008, as amended by the letters dated
September 2, 2008 and September 23, 2008, by and among the
Company, The Royal Bank of Scotland plc and certain subsidiaries of
the Company
|
|
|
|
|
|
10.2
|
|
Executive Retention Agreement,
dated as of October 17, 2008, by and between the Company and Edward Terino
|
|
|
|
|
|
12.1
|
|
Statement re: Computation of Ratio of Earnings to Fixed Charges
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934.
|
|
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
|
|
|
|
|
|
(1)
|
|
Unless otherwise noted, each exhibit is filed herewith.
|
47
Arlington Tankers (NYSE:ATB)
Historical Stock Chart
From Oct 2024 to Nov 2024
Arlington Tankers (NYSE:ATB)
Historical Stock Chart
From Nov 2023 to Nov 2024
