UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-32343
Arlington Tankers
Ltd.
(Exact name of Registrant as
specified in its charter)
Bermuda
(Jurisdiction of incorporation
or organization)
First Floor, The Hayward Building
22 Bermudiana Road
Hamilton HM 11, Bermuda
(Address of principal executive
offices)
Registrants telephone number, including area code:
(441) 292-4456
Securities registered pursuant to Section 12(b) of the
Act.
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Name of Each Exchange
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Title of Each Class
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on Which Registered
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Common Shares, par value $0.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act.
None
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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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):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer
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(Do not check if a smaller reporting company)
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Smaller reporting
company
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
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No
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The aggregate market value of the registrants common
shares held by non-affiliates of the registrant as of
June 29, 2007, was approximately $364,586,700 based on the
closing price of $28.68 per share for the registrants
common shares as reported on the New York Stock Exchange on that
date.
As of February 28, 2008, the registrant had 15,500,000
common shares issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the registrants proxy statement for
the registrants 2008 Annual General Meeting of
Shareholders to be held on July 17, 2008, which are
expected to be filed pursuant to Regulation 14A within
120 days after the end of the registrants fiscal year
ended December 31, 2007, are incorporated by reference into
Part III of this report.
TABLE OF
CONTENTS
In this Annual Report on
Form 10-K,
references to we, our, us
and the company refer to Arlington Tankers Ltd. and,
as the context requires, our subsidiaries.
PART I
Cautionary
Statement Regarding Forward Looking Statements
This Annual Report on
Form 10-K
contains certain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as
amended, which we refer to as the Exchange Act, 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 under the headings
Item 1. Business and Item 7.
Managements Discussion 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:
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future operating or financial results;
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future payments of quarterly dividends and the availability of
cash for payment of quarterly dividends;
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statements about future, pending or recent acquisitions,
business strategy, areas of possible expansion, and expected
capital spending or operating expenses;
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statements about tanker market trends, including charter rates
and factors affecting vessel supply and demand;
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expectations about future revenues from sub-charters;
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expectations about the availability of vessels to purchase, the
time which it may take to construct new vessels, or
vessels useful lives; and
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our ability to repay our secured credit facility at maturity, to
obtain additional financing and to obtain replacement charters
for our Vessels.
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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
Item 1A. 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.
Overview
We were incorporated in September 2004 under the laws of Bermuda
as a jointly owned subsidiary of Stena AB (publ), or Stena, and
Concordia Maritime AB (publ), or Concordia, a Swedish company
and an affiliate of Stena. Stena is one of the largest privately
held companies in Sweden, with over 6,700 employees.
Concordia has been involved in the shipping business for over
20 years. 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 November 19, 2007, they directly and
indirectly owned an aggregate of approximately 18.0% of our
outstanding common shares. As a result of Stenas purchase
of additional common shares in 2007, Stena and Concordia may be
considered interested shareholders for purposes of
our bye-laws. Please see Item 1A. Risk
Factors Concordia and Stenas 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.
Our fleet consists of eight tankers, which we refer to as the
Vessels. In November 2004, we acquired our original fleet of six
tankers consisting of two V-MAX tankers, two Panamax tankers and
two Product tankers, which
2
we refer to as the Initial Vessels. On January 5, 2006 we
acquired two additional Product tankers, which we refer to as
the Additional Vessels. We have eight wholly owned subsidiaries,
each of which owns one of the Vessels. We purchased the two
V-MAX tankers from subsidiaries of Concordia, the four Product
tankers from subsidiaries of Stena and the two Panamax tankers
from two companies owned 75% by Stena and 25% by Fram Shipping
Ltd., which we refer to as Fram.
We have chartered our two V-MAX tankers to two wholly owned
subsidiaries of Concordia. We have chartered our two Panamax
tankers and four Product tankers to Stena Bulk AB, a wholly
owned subsidiary of Stena. We refer to our charters for our
Vessels as the Charters. We refer to these two Concordia
subsidiaries and Stena Bulk AB collectively as the Charterers.
The Charters have fixed terms that expire at various dates in
2008, 2009 and 2010. The Charterers have options to extend the
term of the Charters for each of the Vessels. We also have an
option to extend the term of the Charters of the Additional
Vessels. The Charters provide for a fixed base charter rate
which we refer to as Basic Hire and, in some cases, the
potential to earn Additional Hire as explained below under the
caption Additional Hire. Each of our wholly owned subsidiaries
has also entered into a fixed rate ship management agreement
with Northern Marine Management Ltd., a wholly owned subsidiary
of Stena which we refer to as Northern Marine, to provide for
the operation and maintenance of each of our Vessels.
At the time we acquired our 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
was
originally due to expire within 30 days of June 30,
2007. However, because that vessel was off-hire for repairs, Sun
International has exercised its right to extend the term of the
sub-charter relating to the Stena Vision so that it is now due
to expire within 30 days of July 31, 2008.
The sub-charter rate that Concordia received from Sun
International with respect to the
Stena Victory
, and the
sub-charter rate that Concordia continues to receive from Sun
International with respect to the
Stena Vision
, is
greater than the Basic Hire rate that we receive from Concordia.
Therefore, we earned Additional Hire revenue while the
Stena
Victory
was sub-chartered to Sun International, and we
continue to earn Additional Hire revenue while the
Stena
Vision
is sub-chartered to Sun International. The amount of
this Additional Hire is 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. The
Additional Hire revenue associated with the ongoing Sun
International sub-charter of the
Stena Vision
is
guaranteed, meaning that we are paid the Additional Hire revenue
by Concordia whether or not the Vessel is in service during the
term of the Sun International sub-charter.
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, SA,
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, we expect the Vessel to commence 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 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
guaranteed Basic Hire levels, while the Vessels are
sub-chartered to Eiger Shipping.
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We believe that our fleet is one of the youngest in the world,
with an average age as of December 31, 2007 of
approximately 4.2 years compared to the world average of
approximately 10.6 years for all tankers according to
Clarkson Research Studies Ltd. The two V-MAX tankers, which came
into service in 2001 are approximately six years old, and the
Panamax and Product tankers, which came into service during 2004
and 2005, are each less than four years old. All of our tankers
have double hulls and are of very high quality.
Strategy
Our strategy is designed to generate stable and generally
predictable cash flow through long-term fixed rate charters,
which reduces our exposure to volatility in the market for
seaborne oil and oil product transportation. We intend to pay
dividends in accordance with our dividend policy, which is
described below in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Dividend Policy. The following are
the key elements of our strategy:
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Acquire high quality tankers.
Our two V-MAX
tankers were built in 2001 and our six other tankers entered
service during 2004 and 2005. All of our tankers have double
hulls and have been designed to provide more efficient
transportation of oil and oil products compared to other
standard ship designs. We will consider acquiring additional
tankers in the future. Any such acquisition will require
additional financing and the consent of our lender under our
current secured credit facility.
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Time charter our tankers to experienced
charterers.
We time charter our tankers to
subsidiaries of Stena and Concordia. Stena and Concordia have
agreed to guarantee their respective subsidiaries
obligations under the Charters. Stena operates a fleet of oil
tankers. Stenas current customers for its fleet of owned
and chartered-in tankers include major oil companies such as
ChevronTexaco Corporation, the Royal Dutch/Shell Group of
Companies, ConocoPhillips and BP plc. The two V-MAX tankers in
our fleet are chartered by Concordia one of these V-MAX tankers
is currently sub-chartered to Sun International and the other is
currently sub-chartered to Eiger Shipping.
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Charter our tankers under long term fixed rate
charters.
Our existing Charters are designed to
generate stable and generally predictable cash flow and reduce
our exposure to the volatility in tanker spot rates. Some of our
charters provide for an opportunity to earn Additional Hire
during favorable market conditions. The Basic Hire payable to us
under our Charters will increase annually by an amount equal to
the annual increase in the fees payable by us under the ship
management agreements.
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Arrange for ship management contracts with an experienced
ship manager.
We have entered into ship
management contracts with Northern Marine for each of our
Vessels. Under these agreements, Northern Marine has assumed all
responsibilities for the technical management of the Vessels,
including crewing, maintenance, repair, drydocking and insurance
for a fixed daily fee per Vessel which increases 5% annually. In
addition, Northern Marine has agreed to indemnify us for our
loss of Basic Hire and direct costs 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 from
off-hire insurance. These arrangements are designed to provide
stable and generally predictable operating costs for our fleet.
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Competitive
Strengths
We believe that our fleet, together with our contractual
arrangements with the Charterers and Northern Marine, give us a
number of competitive strengths, including:
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one of the youngest fleets of tankers in the world;
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diversified exposure to three sub-segments of the tanker market;
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two unique V-MAX tankers;
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vessels managed by Northern Marine, which we believe is one of
the industrys most qualified vessel managers;
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fixed rate time charters intended to provide stable and
generally predictable cash flow, reducing our exposure to
volatility in tanker spot rates, and, in six of our charters,
profit sharing agreements which provide the opportunity to earn
Additional Hire revenues; and
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fixed operating costs under our ship management agreements.
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Our
Fleet
We acquired our six Initial Vessels from Stena, Concordia and
Fram concurrently with the completion of our initial public
offering on November 10, 2004. We acquired
Stena Concept
and
Stena Contest
from Stena on January 5, 2006.
The following chart summarizes certain information about our
fleet.
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Initial Charter
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Latest Charter
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Vessel Type
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Year Built
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Dwt
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Date Acquired
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Expiration Date(1)
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Expiration Date(1)
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V-MAX
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Stena Victory
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2001
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314,000
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November 10, 2004
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November 9, 2009
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November 9, 2012
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Stena Vision
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2001
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314,000
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November 10, 2004
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November 9, 2009
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November 9, 2012
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Panamax
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Stena Companion
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2004
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72,000
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November 10, 2004
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November 9, 2008
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November 9, 2011
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Stena Compatriot
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2004
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72,000
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November 10, 2004
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November 9, 2010
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November 9, 2013
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Product
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Stena Concord
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2004
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47,400
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November 10, 2004
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November 9, 2008
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November 9, 2011
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Stena Consul
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2004
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47,400
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November 10, 2004
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November 9, 2010
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November 9, 2013
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Stena Concept
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2005
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47,400
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January 5, 2006
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January 4, 2009
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July 4, 2011
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Stena Contest
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2005
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47,400
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January 5, 2006
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January 4, 2009
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July 4, 2011
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(1)
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Each of the charters contains renewal options described in
greater detail below.
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All of our tankers have double hulls and are of very high
quality. These tankers are fitted with long-term planned
maintenance software programs so that all routine machinery
adjustments are done effectively and with minimal disruption in
service.
Our V-MAX tankers were designed by Stena and Concordia to
provide more efficient transportation and increased safety over
standard VLCCs. The body of our V-MAX tankers is wider than a
conventional VLCC. This enables these Vessels to carry more
cargo at a shallower draft, which lowers transportation costs.
Our V-MAX tankers also have two rudders and propellers, which
improve vessel maneuverability and port access. These tankers
have been designed for a structural fatigue life of
40 years. Our V-MAX tankers typically load crude oil in
West Africa and discharge in Philadelphia, which is a port that
cannot be accessed by conventional VLCCs.
Our Panamax tankers have fully epoxy coated tanks and a tank
design that permit the Vessels to change from transporting dirty
to clean petroleum products faster than a standard vessel of
this class. Our Panamax tankers also have integrated bridge
systems, unique in vessels of this class, that provide increased
efficiency, safety, visibility, communication and maneuvering
capabilities to the bridge team navigating the vessel. Our
Panamax tankers typically trade in the North, South and Central
Americas primarily carrying crude oil but also clean products.
Our Product tankers have one of the most efficient designs for
vessels in this class and feature 10 completely independent
multiple-grade cargo segregations, which provide increased
flexibility over the six segregations standard in Product
tankers. Compared to standard vessels in this class, our Product
tankers also have more powerful engines that provide flexibility
to respond to weather conditions and market demands and a tank
design that permits quicker discharge and reduced tank
preparation time to load the next cargo. Our Product tankers
currently trade primarily in the Caribbean and the Transatlantic
and primarily carry clean products such as gasoline, diesel and
jetfuel.
5
Our
Charters
The following summary of the material terms of the Charters
does not purport to be complete and is subject to, and qualified
in its entirety by reference to, all the provisions of the
Charters. Because the following is only a summary, it does not
contain all information that you may find useful. For more
complete information, you should read the entire Time Charter
Party for each Vessel incorporated by reference as an exhibit to
this Annual Report on
Form 10-K.
General
Our wholly owned subsidiaries have time chartered our Vessels to
the Charterers. Upon completion of our initial public offering
in November 2004, each of our Initial Vessels was chartered for
a fixed term expiring in November 2009, followed by three
one-year options exercisable at the option of the Charterers. In
January 2006, in connection with our acquisition of the
Additional Vessels from Stena, the fixed term for one of our
Product tankers (
Stena Consul
) and one of our Panamax
tankers (
Stena Compatriot
) was extended to November 2010,
followed by three one-year options exercisable by the Charterer
and the fixed term for one of our Product tankers (Stena
Concord) and one of our Panamax tankers (
Stena Companion
)
was reduced to November 2008, followed by three one-year options
exercisable by the Charterer. The terms of the Charters for our
V-MAX tankers were not amended.
The fixed charter period for the two Additional Vessels that we
acquired in January 2006 expires in January 2009. At the end of
the initial three-year period, both we and the Charterer have
the option to extend the time charters on a
vessel-by-vessel
basis for an additional 30 months. Furthermore, if the
Charterer exercises the
30-month
option, there will be two additional one-year options,
exercisable by the Charterer.
We have agreed to guarantee the obligations of each of our
subsidiaries under the Charters.
The Charterers are Stena Bulk AB, a wholly owned subsidiary of
Stena, and CM V-MAX I Limited and CM
V-MAX
II
Limited, each a wholly owned subsidiary of Concordia.
Under the Charters, we are required to keep the Vessels
seaworthy, and to crew and maintain them. Northern Marine
performs those duties for us under the ship management
agreements described below. If a structural change or new
equipment is required due to changes in law, classification
society or regulatory requirements, the Charterers will be
required to pay for such changes if the cost is less than
$100,000 per year per vessel. Otherwise the cost of any such
improvement or change will be shared between us and the
Charterer of the Vessel based on the remaining charter period
and the remaining depreciation period of the Vessel (calculated
as 25 years from the year built). The Charterers are not
obligated to pay us charterhire for off-hire days of fewer than
five days per Vessel per year, which include days a Vessel is
unable to be in service due to, among other things, repairs or
drydockings. Each Charter also provides that the Basic Hire will
be reduced if the Vessel does not achieve the performance
specifications set forth in the Charter. However, under the ship
management agreements described below, Northern Marine will
reimburse us for any loss of or reduction in Basic Hire, in
excess of five days during any twelve-month period following the
date the vessels are delivered to us, net of any proceeds we
receive from our off-hire insurance.
The terms of the Charters do not provide the Charterers with an
option to terminate the Charter before the end of its term
except in the event of the total loss or constructive total loss
of a Vessel. In addition, each Charter provides that we may not
sell the related Vessel without the Charterers consent,
which consent may be withheld in the Charterers sole
discretion.
At the time we acquired our 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
was
originally due to expire within 30 days of June 30,
2007. However, because that vessel was off-hire for repairs, Sun
International has exercised its right to extend the term of the
sub-charter relating to the
Stena Vision
so that it is
now due to expire within 30 days of July 31, 2008.
The sub-charter rate that Concordia received from Sun
International with respect to the
Stena Victory
, and the
sub-charter rate that Concordia continues to receive from Sun
International with respect to the
Stena Vision
, is
greater than the Basic Hire rate that we receive from Concordia.
Therefore, we earned Additional Hire revenue while the
Stena
Victory
was sub-chartered to Sun International, and we
continue to earn Additional Hire revenue
6
while the
Stena Vision
is sub-chartered to Sun
International. The amount of this Additional Hire is 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. The Additional Hire revenue associated with the
ongoing Sun International sub-charter of the
Stena Vision
is guaranteed, meaning that we are paid the Additional Hire
revenue by Concordia whether or not Vessel is in service during
the term of the Sun International sub-charter.
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.
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, we expect the Vessel to commence 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 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 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 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 guaranteed Basic Hire levels, while the Vessels
are sub-chartered to Eiger Shipping.
The Vessels that we have time chartered to Stena Bulk are not
currently subject to any sub-charters. Stena has agreed to
guarantee the performance of Stena Bulk under the Charters,
including payment of charterhire.
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. The Basic Hire under the
charters for each vessel type during each charter year is set
forth below. The first charter year for the Initial Vessels
commenced on November 10, 2004. Each subsequent charter
year will begin on November 11 of the applicable year and end on
the subsequent November 10. The first charter year for the
Additional Vessels commenced on January 5, 2006. Each
subsequent charter year will begin on January 5 of the
applicable year and end on the subsequent January 4. In
2011, the charter period for the Additional Vessels may be
extended for a six month-period beginning on January 5 and
ending on July 4 and subsequent charter years will begin on July
5 and end on July 4. Stena and Concordia have each agreed
to guarantee the obligations of their respective subsidiaries
under the Charters.
7
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (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 Charterers have the option to extend the Charters on a
vessel-by-vessel
basis for 3 additional 1 year terms. There can be no
assurance that the Charterer will exercise any option.
|
The following table sets forth the daily Basic Hire, daily base
operating costs and operating margin for our two vessels, the
Stena Companion
and the
Stena Concord
, with
initial charter expiration dates in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena Companion
|
|
|
Stena Concord
|
|
|
|
|
|
|
Base Operating
|
|
|
Operating
|
|
|
|
|
|
Base 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 (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 Charterers have the option to extend the Charters on a
vessel-by-vessel
basis for 3 additional 1 year terms. There can be no
assurance that the Charterer will exercise any option.
|
The following table sets forth the daily Basic Hire, daily base
operating costs and operating margin for our two vessels, the
Stena Compatriot
and the
Stena Consul,
with
initial charter expiration dates in 2010. The operating margin
is calculated by subtracting the amount of the base operating
costs from the amount of Basic Hire.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena Consul
|
|
|
|
Stena Compatriot
|
|
|
|
|
|
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 (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 Charterers have the option to extend the Charters on a
vessel-by-vessel
basis for 3 additional 1 year terms. There can be no
assurance that the Charterer will exercise any option.
|
8
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 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 Year 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)
|
|
At the end of the initial fixed charter period expiring on
January 4, 2009, either we or the Charterers may extend the
Charters on a
vessel-by-vessel
basis for an additional
30-month
period expiring on July 4, 2011. If the Charterer extends
the Charter for this
30-month
period, we would be eligible to earn Additional Hire in addition
to Basic Hire. If we extend the Charter for this
30-month
period, we would not be eligible to earn Additional Hire during
this period. There can be no assurance that the Charterer will
exercise any option.
|
|
(2)
|
|
This period is the first for which the Charterer has the option
to extend the Charters if the Charterer exercises the option
described in Footnote 1 above. We would not be eligible to earn
Additional Hire over the term of such extension. There can be no
assurance that the Charterer will exercise any option.
|
Additional
Hire Under Our Charters
Under the Charters, in addition to the fixed rate Basic Hire,
each 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.
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
was
originally due to expire within 30 days of June 30,
9
2007. However, because that vessel was off-hire for repairs, Sun
International has exercised its right to extend the term of the
sub-charter relating to the
Stena Vision
so that it is
now due to expire within 30 days of July 31, 2008.
The sub-charter rate that Concordia received from Sun
International with respect to the
Stena Victory
, and the
sub-charter rate that Concordia continues to receive from Sun
International with respect to the
Stena Vision
, is
greater than the Basic Hire rate that we receive from Concordia.
Therefore, we earned Additional Hire revenue while the
Stena
Victory
was sub-chartered to Sun International, and we
continue to earn Additional Hire revenue while the
Stena
Vision
is sub-chartered to Sun International. The amount of
this Additional Hire is 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. The
Additional Hire revenue associated with the ongoing Sun
International sub-charter of the
Stena Vision
is
guaranteed, meaning that we are paid the Additional Hire revenue
by Concordia whether or not the Vessel is in service during the
term of the Sun International sub-charter.
Immediately following the expiration of the sub-charter of the
Stena Victory
with Sun International, that Vessel
commenced operating under a new two-year sub-charter agreement
between Concordia and Eiger Shipping S.A., an affiliate of the
shipping branch of LukOil, commonly know as Litasco. In
addition, immediately following the expiration of the
sub-charter of the
Stena Vision
with Sun International,
we expect the Vessel to commence 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 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 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 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
guaranteed Basic Hire levels, while the Vessels are
sub-chartered to Eiger Shipping.
The Time Charter Equivalent Hire referred to above is a weighted
average of day rates calculated using the parameters set forth
below, which we call the Daily Value. The Daily Value is
calculated using average spot rates expressed in Worldscale
Points determined by a shipbrokers panel for the routes
specified below which are the routes on which our vessel types
generally trade. We refer to these rates as the Average Spot
Rates and we refer to these routes as the Notional Routes. Daily
Value is determined as follows:
|
|
|
|
|
multiplying the Average Spot Rate expressed in Worldscale Points
by the applicable Worldscale flat rate and multiplying that
product by the cargo size for each vessel type to calculate
freight income;
|
|
|
|
subtracting voyage costs consisting of brokerage commissions of
2.5% and commercial management fees of 1.25%, bunker costs and
port charges to calculate voyage income; and
|
|
|
|
dividing voyage income by voyage duration, including time in
port, to calculate the Daily Value.
|
The Time Charter Equivalent Hire is then determined as a
weighted average of the Daily Values calculated for each of the
Notional Routes for each of our vessel types. In the case of the
V-MAX tankers an amount equal to 10% of such weighted average is
added to the Time Charter Equivalent Hire to adjust for the
additional cargo capacity of V-MAX tankers as compared to a
standard VLCC.
The shipbrokers panel, which we call the Brokers Panel, is the
Association of Shipbrokers and Agents Tanker Broker Panel. We
can change the panel of brokers to a new panel mutually
acceptable to us and the Charterer. On the last day of each
calendar quarter and on the expiration date of the Charter, we
and the Charterer will instruct the Brokers Panel to determine
for each Notional Route the Average Spot Rate over any periods
during the Calculation Period that a Vessel is not sub-chartered
by the Charterer under a time charter. If Worldscale ceases to
be published,
10
the Brokers Panel will use its best judgment in determining the
nearest alternative method of assessing the market rates on the
specified voyages.
We instruct the Brokers Panel to deliver their determination of
the Average Spot Rates no later than the fifth business day
following the instruction to make such determination. The costs
of the Brokers Panel are shared equally between us and the
Charterer. For each Calculation Period, the Charterer will
calculate the amount of Time Charter Equivalent Hire and the
amount of Additional Hire payable, if any, and deliver such
calculation to us no later than the fifth business day following
the date on which the Charterer receives the determination of
Average Spot Rates from the Brokers Panel. These determinations
of the Brokers Panel are binding on us and the Charterer.
The Notional Routes and the weighting to be applied to each
route in calculating the Time Charter Equivalent Hire is as
follows:
|
|
|
Product tankers:
|
|
Rotterdam to New York with 37,000 tons clean (40% weight)
Curacao to New York with 38,000 tons clean (60% weight)
|
|
Panamax tankers:
|
|
Curacao to New York with 50,000 tons dirty (50% weight) Augusta
to Houston with 50,000 tons dirty (50% weight)
|
|
V-MAX tankers:
|
|
West-Africa to LOOP with 260,000 tons of crude (50% weight)
Middle East Gulf to LOOP with 265,000 tons of crude (50% weight)
|
Additional terms used in the calculation of Time Charter
Equivalent Hire are as follows:
|
|
|
|
|
Calculation of freight income.
The freight
income for each Notional Route is calculated by multiplying the
Average Spot Rate for such route, as supplied by the Brokers
Panel, by the Worldscale flat rate for such route as set forth
in the New Worldwide Tanker Nominal Freight Scale issued by the
Worldscale Association and current for the relevant period and
then multiplying such product by the cargo size for such route.
|
|
|
|
Calculation of voyage income.
The voyage
income for each Notional Route is calculated by deducting from
the freight income for such route ship broker commissions equal
to 2.5% of the freight income, commercial management fees equal
to 1.25% of the freight income, the port charges and bunker
costs (equal to the bunkers used multiplied by the bunkers
prices) specified below for each Vessel. Bunkers used are
determined based on speed, distance and consumption of bunkers
at sea and in port.
|
|
|
|
Calculation of voyage duration.
The voyage
duration for each Notional Route is calculated using the
distance, speed and time in port specified below for each Vessel.
|
|
|
|
Data used in calculations.
The following data
is used by the Charterer in the above calculations:
|
|
|
|
Bunkers in
port
|
|
|
|
|
|
For Product tankers: 40 tons per voyage all-inclusive loading
and discharging ports.
|
|
|
|
For Panamax tankers: 65 tons per port call all-inclusive loading
and discharging ports.
|
|
|
|
For V-MAX tankers: loading 12 tons per day; idling 3 tons per
day; discharging 145 tons per day.
|
|
Bunker
prices
|
|
|
|
|
|
For Product tankers and Panamax tankers: the mean of
the average prices during the quarter for Marine Fuel Oil grade
IFO 380 CST prevailing at Houston, New York and Curacao as
published by Platts Bunkerwire, or similar publication, plus
barge delivery charges in amount equal to the average barge
delivery charges in the applicable port over the prior
twelve-month period.
|
11
|
|
|
|
|
For V-MAX tankers: the mean of the average prices
during the quarter for Marine Fuel Oil grade IFO 380 CST
prevailing at Curacao and Fujairah as published by Platts
Bunkerwire, or similar publication, plus barge delivery charges
in amount equal to the average barge delivery charges in the
applicable port over the prior twelve-month period.
|
|
Port
charges
|
|
|
|
|
|
The port charges for loading and discharging ports on each
Notional Route are equal to the published tariffs and exchange
rates in effect on the last calendar day of the quarter and
include all vessel costs for port calls.
|
|
Time in
port
|
|
|
|
|
|
For Product tankers and Panamax
tankers: 5.5 days, which are split 2 days
loading, 2 days discharging and the balance of the time
idling.
|
|
|
|
|
|
For V-MAX tankers: 7.5 days, which are split
3 days loading, 3 days discharging and the balance of
the time idling.
|
|
Distance
|
|
|
|
|
|
The distance for each Notional Route is determined according to
the World-Wide Marine Distance Tables published by
Veson Nautical Distance Tables.
|
|
Speed and
consumption at sea
|
|
|
|
|
|
For Product tankers: 14 knots at 36 tons per day in laden
condition and 14 knots at 35 tons per day in ballast condition
less a steaming allowance of 7.5 percent applied to the
speeds to allow for weather and navigation.
|
|
|
|
|
|
For Panamax tankers: 14 knots at 41.5 tons per day in laden
condition and 14 knots at 39.5 tons per day in ballast condition
less a steaming allowance of 7.5 percent applied to the
speeds to allow for weather and navigation. Fuel consumption for
cargo heating to be actual figures of fuel consumed but not to
exceed 8 tons per day.
|
|
|
|
|
|
For V-MAX tankers: 16.9 knots at 127 tons per day in laden
condition and 17.7 knots at 127 tons per day in ballast
condition less a steaming allowance of 7.5 percent applied
to the speeds to allow for weather and navigation.
|
The Notional Routes are intended to represent routes on which
Product tankers, Panamax tankers and VLCCs are typically used.
If during the term of the Charter, in the Charterers
reasonable opinion, these routes cease to be used by Product
tankers, Panamax tankers or VLCCs, or the assumptions regarding
bunkering ports for purposes of determining bunker prices cease
to be applicable, the Charterer may, with our consent, which we
may not unreasonably withhold, instruct the Brokers Panel to
substitute alternative notional routes and bunkering ports that
most closely match the routes and bunkering ports typically used
by Product tankers, Panamax tankers or VLCCs and to apply
appropriate weights to such routes.
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If in the Charterers reasonable opinion it becomes
impractical or dangerous, due to war, hostilities, warlike
operations, civil war, civil commotion, revolution or terrorism
for Product tankers, Panamax tankers and VLCCs to operate on the
Notional Routes, the Charterer may request our agreement, which
we may not unreasonably refuse, for the Daily Value to be
determined during the period of such danger or restriction of
trading using Average Spot Rates determined by the Brokers Panel
for alternative notional routes proposed by the Charterer that
reasonably reflect realistic alternative round voyage trade for
Product tankers, Panamax tankers and VLCCs during the period of
such danger or restriction of trading. In such event, the Time
Charter Equivalent Hire will be calculated using the Daily Value
for such alternative routes and applying such weights as
determined by the Charterer.
Our Ship
Management Agreements
The following summary of the material terms of the ship
management agreements does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all
the provisions of the ship management agreements. Because the
following is only a summary, it does not contain all information
that you may find useful. For more complete information, you
should read the entire Ship Management Agreement for each Vessel
incorporated by reference as an exhibit to this Annual Report on
Form 10-K.
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 modified the provisions relating to drydocking
of the Vessels. Specifically, the amendments provided that all
drydockings during the term of the ship management agreements
are to be at the sole cost and expense of Northern Marine. In
addition, Northern Marine agreed to conduct at least one
mid-period drydocking for each Product tanker and Panamax tanker
prior to redelivery of such Vessels. Under the terms of the ship
management agreements, the cost of these intermediate and
special surveys is covered by the management fees that we pay to
Northern Marine. Upon redelivery of the Vessels to us at the
expiration of the ship management agreements, Northern Marine
has agreed to re-pay to us any drydocking provision accrued, 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 at the daily rates specified in 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 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
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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.
Risk of
Loss and Insurance
Our operations may be affected by a number of risks, including
mechanical failure of our Vessels, collisions, property loss to
the Vessels, cargo loss or damage and business interruption due
to political circumstances in foreign countries, hostilities and
labor strikes. In addition, the operation of any ocean-going
vessel is subject to the inherent possibility of catastrophic
marine disaster, including oil spills and other environmental
mishaps, and the liabilities arising from owning and operating
vessels in international trade.
Northern Marine is responsible for arranging for the insurance
of our Vessels on terms specified in the ship management
agreements and our secured credit facility, which we believe are
in line with standard industry practice. In accordance with the
ship management agreements, Northern Marine has procured marine
hull and machinery and war risks insurance, which includes the
risk of actual or constructive total loss, and protection and
indemnity insurance with mutual assurance associations. In
accordance with the ship management agreements, 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. Protection and indemnity associations are mutual
marine indemnity associations formed by shipowners to provide
protection from large financial loss to one member by
contribution towards that loss by all members.
We believe that our current insurance coverage is adequate to
protect us against the accident-related risks involved in the
conduct of our business and that we currently maintain
appropriate levels of environmental damage and pollution
insurance coverage, consistent with standard industry practice.
However, there is no assurance that all risks are adequately
insured against, that any particular claims will be paid or that
we will be able to obtain adequate insurance coverage at
commercially reasonable rates in the future following
termination of the ship management agreements.
Inspection
by a Classification Society
Every commercial vessels hull and machinery is evaluated
by a classification society authorized by its country of
registry. All of our tankers have been certified as being
in-class by the American Bureau of Shipping or Det
Norske Veritas (DNT). The American Bureau of Shipping and DNT
are recognized members of the International Association of
Classification Societies and have been recognized by Bermuda as
authorized classification societies. A classification society
certifies that a Vessel has been built and maintained in
accordance with the rules of the classification society and
complies with applicable rules and regulations of the
Vessels country of registry and the international
conventions of which that country is a member. Each Vessel is
inspected by a surveyor of the classification society in three
surveys of varying frequency and thoroughness: every year for
the annual survey, every four or five years for intermediate
surveys and every four to five years for special surveys; the
initial intermediate survey takes place two to three years from
the launch of a vessel and from then on there is an interval of
two to three years between intermediate and special surveys.
Should any defects be found, the classification surveyor will
issue a recommendation for appropriate repairs which
have to be made by the shipowner within the time limit
prescribed. Our ship management agreements provide that Northern
Marine would be responsible for any repairs recommended by the
classification surveyor. Vessels may be required, as part of the
annual and intermediate survey process, to be drydocked for
inspection of the underwater portions of the Vessel and for any
necessary repairs stemming from the inspection. Special surveys
always require drydocking.
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Tanker
Industry Overview
Overview
The tanker industry provides seaborne transportation for the
movement of crude oil and refined petroleum products, which
include among others naphtha, gasoline, jet fuel, kerosene,
gasoil and residual fuel oil. The tanker business can be divided
between crude oil carriers and refined product carriers,
although many tanker owners participate in both segments. The
price for transporting crude oil or refined petroleum products
for one voyage on a specific route is referred to as tanker spot
market freight rate.
Tanker
Types
The tanker fleet is divided into several categories of vessels,
based on their carrying capacity as defined by the vessels
deadweight capacity, which is commonly referred to as dwt. The
different tanker types as classified by their deadweight
capacity are:
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ULCCs tankers over 320,000 dwt;
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VLCCs tankers from 200,000 to 320,000 dwt;
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Suezmax tankers tankers from 120,000 to 200,000 dwt;
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Aframax/LR2 tankers uncoated/coated tankers from
80,000 to 120,000 dwt;
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Panamax/LR1 tankers uncoated/coated tankers from
60,000 to 80,000 dwt;
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Handy product tankers/MR tankers normally coated
tankers from 30,000 to 60,000 dwt; and
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Small tankers normally coated tankers up to 20,000
dwt.
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Crude carriers are either uncoated or partially coated to
protect the cargo tanks from the corrosive properties of crude
or dirty products, such as residual fuel oils. Coated tankers
are those vessels whose cargo carrying tanks are coated to
protect the integrity of the cargo that the vessel is carrying.
Coated vessels are utilized in the transportation of clean
products such as gasoline, jet fuel and gas oil.
Industry
Conditions
Freight rates are set in highly competitive and often volatile
markets, where the daily balance of demand and supply for
particular vessel types is a primary driver. The oil tanker
industry historically has been highly cyclical, experiencing
volatility in spot market freight rates, time charter rates and
vessel values, resulting from changes in the supply of and the
demand for oil and tanker capacity. The demand for tankers is
influenced by, among other factors, global and regional economic
conditions, changes in seaborne transportation patterns, weather
patterns and events, oil production, armed conflicts, port
congestion, canal closures, embargoes and strikes. Demand for
the seaborne carriage of oil depends largely on the distance
between areas that produce crude oil and refined products and
areas that consume them. The incremental supply of tanker
capacity is a function of the delivery of new vessels and the
number of older vessels scrapped, in
lay-up,
converted to other uses, reactivated or lost. This supply may be
affected by regulation of maritime transportation by
governmental and international authorities. These factors are
generally outside of our control, and are unpredictable.
Tanker
Demand
The volume of crude oil and refined petroleum products
transported and the relative distances over which they are
transported determines demand for tankers. Tanker demand is
generally expressed in
ton-miles
and is measured as the product of the volume of oil carried
(measured in metric tons) multiplied by the distance over which
it is carried (measured in miles). Tanker demand is determined
largely by the state of the world economy and the global demand
for crude oil and refined petroleum products. Other factors
affecting tanker demand include relative levels of inventories
of crude oil and refined petroleum products, political events,
conflicts between nations and unexpected variations in weather.
When consuming areas of the world are unable to meet their
domestic demand needs, the incremental supply is generally
satisfied by increased imports which are typically delivered by
tankers.
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Seasonality
Historically, oil trade and charter rates increase in the winter
months and decrease in the summer months. Generally the demand
for oil in the Northern Hemisphere rises in colder weather and
falls in warmer weather. Additionally, due to the long distances
of ocean transportation and delivery time concerns, oil traders
typically require oil transportation in advance of the peak
consumer demand for certain types of oil cargoes.
Tanker
Supply
The supply and availability of tankers, measured in deadweight
tons, is affected by several factors including the age profile
of the global fleet. Older, single hull vessels face a mandatory
phase out required by international conventions. The supply of
tankers is also affected by the delivery schedule of
newbuildings and by the number of vessels removed through
scrapping, conversions to other types of employment such as
floating production and storage facilities, and unforeseen
events such as seaborne casualties. Newbuilding activity is
highly correlated to increases and decreases in charter rates,
but the delivery schedule is constrained by shipyard capacity
and the strength of orders from other marine transportation
segments.
Tanker
Scrapping
Tanker owners may conclude that it is more economical to dispose
of or scrap a vessel that has exhausted its useful life rather
than continue to maintain or upgrade the vessel in accordance
with international standards and rules monitored by the
classification societies. Generally when tankers reach an age of
approximately 25 years, the costs of conducting the
required surveys of the vessel and performing associated repairs
may not be economical, particularly if the repairs require
replacement of steel plate. There are international regulations
that currently call for the mandatory and accelerated scrapping
or disposal of vessels, particularly vessels lacking double
hulls, in certain parts of the world.
Tanker
Values
Tanker values have historically experienced high volatility. The
fair market value of tankers can be expected to fluctuate during
their life. Factors that may determine vessel values may be,
among other things, the general economic and market conditions
affecting the tanker industry, especially the spot voyage
freight market, and the age, type, and the general maintenance
condition of a vessel. As vessels age they typically will
decline in value. We believe that the current market value of
our tanker fleet is at a very high level.
Environmental
Regulation
Government regulation significantly affects the ownership and
operation of our tankers. They are subject to international
conventions, as well as national, state and local laws and
regulations in force in the countries where our tankers operate
or are registered. Under our ship management agreements,
Northern Marine has assumed technical management responsibility
for our fleet, including compliance with all environmental
regulations. If Northern Marine fails to perform its obligations
under the ship management agreements, we could be liable under
environmental laws. If our ship management agreements with
Northern Marine terminate, we would attempt to hire another
party to assume this responsibility, including compliance with
the regulations described in this report and any costs
associated with such compliance. However, we may be unable to
hire another party to perform these and other services for a
fixed fee as is the case with Northern Marine.
A variety of governmental and private entities subject our
tankers to both scheduled and unscheduled inspections. These
entities include the local port authorities, such as the
U.S. Coast Guard, harbor master or equivalent,
classification societies, flag state administration and
charterers, particularly terminal operators and oil companies.
Certain of these entities require us to obtain permits, licenses
and certificates for the operation of our tankers. Failure to
maintain necessary permits or approvals could require us to
incur substantial costs or temporarily suspend operation of one
or more of our tankers.
We believe that the heightened level of environmental and
quality concerns among insurance underwriters, regulators and
charterers is leading to greater inspection and safety
requirements on all tankers and may accelerate
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the scrapping of older tankers throughout the industry.
Increasing environmental concerns have created a demand for
tankers that conform to the stricter environmental standards.
Our two V-MAX tankers were built in 2001 and our six other
tankers were completed in 2004 and 2005. Northern Marine is
required to maintain operating standards for all of our tankers
which address operational safety, quality of maintenance,
training of our officers and crews and compliance with
U.S. and international regulations. We believe that the
operation of our Vessels is in substantial compliance with
applicable environmental laws and regulations. However, because
such laws and regulations are frequently changed and may impose
increasingly strict requirements, we cannot predict the ultimate
cost of complying with these requirements, or the impact of
these requirements on the resale value or useful lives of our
tankers.
International
Maritime Organization
In 1992, the International Maritime Organization adopted
regulations that set forth pollution prevention requirements
applicable to tankers. The International Maritime Organization,
commonly referred to as the IMO, is the United Nations agency
for maritime safety and the prevention of marine pollution by
ships. The IMOs regulations, which have been adopted by
over 150 nations, including many of the jurisdictions in which
our tankers operate, provide, in part, that:
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tankers between 25 and 30 years old must be of double hull
construction or of a mid-deck design with double sided
construction, unless:
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they have wing tanks or double-bottom spaces not used for the
carriage of oil, which cover at least 30% of the length of the
cargo tank section of the hull or bottom; or
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they are capable of hydrostatically balanced loading (loading
less cargo into a tanker so that in the event of a breach of the
hull, water flows into the tanker, displacing oil upwards
instead of into the sea);
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tankers 30 years old or older must be of double hull
construction or mid-deck design with double sided
construction; and
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all tankers are subject to enhanced inspections.
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Also, under IMO regulations, a tanker must be of double hull
construction or a mid-deck design with double sided construction
or be of another approved design ensuring the same level of
protection against oil pollution if the tanker:
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is the subject of a contract for a major conversion or original
construction on or after July 6, 1993;
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commences a major conversion or has its keel laid on or after
January 6, 1994; or
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completes a major conversion or is a newbuilding delivered on or
after July 6, 1996.
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All of our Vessels are double-hulled.
The IMO has also negotiated international conventions that
impose liability for oil pollution in international waters and a
signatorys territorial waters. In September 1997, the IMO
adopted Annex VI to the International Convention for the
Prevention of Pollution from Ships to address air pollution from
ships. Annex VI became effective in May 2005. Annex VI
limits sulfur oxide and nitrogen oxide emissions from ship
exhausts, prohibits deliberate emissions of ozone depleting
substances, such as chlorofluorocarbons, and prohibits onboard
incineration of certain materials, such as contaminated
packaging or polychlorinated biphenyls. Annex VI includes a
global cap on the sulfur content of fuel oil and allows for
special areas to be established with more stringent controls on
sulfur emissions. All of our Vessels are currently compliant
with these regulations. Additional or new conventions, laws and
regulations may be adopted that could adversely affect Northern
Marines ability to manage our ships.
Under the International Safety Management Code, or ISM Code,
promulgated by the IMO, the party with operational control of a
vessel is required to develop an extensive safety management
system that includes, among other things, the adoption of a
safety and environmental protection policy setting forth
instructions and procedures
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for operating its vessels safely and describing procedures for
responding to emergencies. Northern Marine relies upon its
safety management system in connection with its management of
our Vessels.
The ISM Code requires that vessel operators obtain a safety
management certificate for each vessel they operate. This
certificate evidences compliance by a vessels management
with code requirements for a safety management system. No vessel
can obtain a certificate unless its operator has been awarded a
document of compliance, issued by each flag state, under the ISM
Code. Northern Marine has the requisite documents of compliance
for its offices and safety management certificates for all of
our Vessels for which the certificates are required by the IMO.
Northern Marine will be required to renew these documents of
compliance and safety management certificates annually.
Noncompliance with the ISM Code and other IMO regulations may
subject the shipowner or bareboat charterer to increased
liability, may lead to decreases in available insurance coverage
for affected vessels and may result in the denial of access to,
or detention in, some ports. For example, the U.S. Coast
Guard and European Union authorities have indicated that vessels
not in compliance with the ISM Code will be prohibited from
trading in U.S. and European Union ports.
Although the United States is not a party to these conventions,
many countries have ratified and follow the liability and
compensation regime plan adopted by the IMO and set out in the
International Convention on Civil Liability for Oil Pollution
Damage. This convention, originally from 1969, was amended and
updated in 1992, with the 1992 Civil Liability Convention coming
into force on May 30, 1996. As of December 1, 2006
some 115 States are parties to 1992 Civil Liability Convention.
This Convention applies where a discharge of persistent oil
causes pollution damage in the territorial waters or to the
coastline of a State which is a party to it. If so the
registered owner is strictly liable, subject to certain complete
defenses, for the pollution damage, with the limit of liability
dependent upon the gross tonnage of the vessel in question. For
vessels of 5,000 to 140,000 gross tons (a unit of
measurement for the total enclosed spaces within a vessel),
liability is limited to approximately $6.76 million plus
$946 for each additional gross ton over 5,000. For vessels of
over 140,000 gross tons, liability is limited to
approximately $134 million. The Convention limits are
expressed in Special Drawing Rights (SDR) which are calculated
by reference to a basket of currencies, the figures quoted are
based on the SDR/USD exchange rate as at January 5, 2007.
Under the 1969 Convention, the right to limit liability is
forfeited where the spill is caused by the owners actual
fault. Under the 1992 Protocol, a shipowner cannot limit
liability where the spill is caused by the owners
intentional or reckless conduct. Vessels trading to states that
are parties to these conventions must provide evidence of
insurance covering the liability of the owner. In jurisdictions
where the International Convention on Civil Liability for Oil
Pollution Damage has not been adopted, various legislative
schemes or common law govern, and liability is imposed either on
the basis of fault or in a manner similar to that convention. We
believe that our protection and indemnity insurance covers the
liability under the plan adopted by the IMO.
U.S.
Oil Pollution Act of 1990 and Comprehensive Environmental
Response, Compensation, and Liability Act
The United States regulates the tanker industry with an
extensive regulatory and liability regime for environmental
protection and cleanup of oil spills, consisting primarily of
the U.S. Oil Pollution Act of 1990, or OPA, and the
Comprehensive Environmental Response, Compensation, and
Liability Act, or CERCLA. OPA affects all owners and operators
whose vessels trade with the United States or its territories or
possessions, or whose vessels operate in the waters of the
United States, which include the U.S. territorial sea and
the 200 nautical mile exclusive economic zone around the United
States. CERCLA applies to the discharge of hazardous substances
(other than oil) whether on land or at sea. Both OPA and CERCLA
impact our operations.
Under OPA, vessel owners, operators and bareboat charterers are
responsible parties who are jointly, severally and
strictly liable (unless the spill results solely from the act or
omission of a third party, an act of God or an act of war) for
all containment and
clean-up
costs and other damages arising from oil spills from their
vessels. These other damages include:
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natural resource damages and related assessment costs;
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real and personal property damages;
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net loss of taxes, royalties, rents, profits or earnings
capacity;
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net cost of public services necessitated by a spill response,
such as protection from fire, safety or health hazards; and
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loss of subsistence use of natural resources.
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OPA limits the liability of responsible parties to the greater
of $1,900 per gross ton or $16 million per tanker that is
over 3,000 gross tons, subject to possible adjustment for
inflation. The act specifically permits individual states to
impose their own liability regimes with regard to oil pollution
incidents occurring within their boundaries, and some states
have enacted legislation providing for unlimited liability for
discharge of pollutants within their waters. In some cases,
states that have enacted this type of legislation have not yet
issued implementing regulations defining tanker owners
responsibilities under these laws. CERCLA, which applies to
owners and operators of vessels, contains a similar liability
regime and provides for cleanup, removal and natural resource
damages. Liability under CERCLA is limited to the greater of
$300 per gross ton or $5 million.
These limits of liability do not apply, however, where the
incident is caused by violation of applicable U.S. federal
safety, construction or operating regulations, or by the
responsible partys gross negligence or willful misconduct.
These limits do not apply if the responsible party fails or
refuses to report the incident or to cooperate and assist in
connection with the substance removal activities. OPA and CERCLA
each preserve the right to recover damages under existing law,
including maritime tort law.
OPA also requires owners and operators of vessels to establish
and maintain with the U.S. Coast Guard evidence of
financial responsibility sufficient to meet the limit of their
potential strict liability under the act. The U.S. Coast
Guard has enacted regulations requiring evidence of financial
responsibility consistent with the combined maximum limits of
liability described above for OPA and CERCLA. Under the
regulations, evidence of financial responsibility may be
demonstrated by insurance, surety bond, self-insurance, guaranty
or an alternative method subject to approval by the Director of
the U.S. Coast Guard National Pollution Funds Center. Under
OPA regulations, an owner or operator of more than one tanker is
required to demonstrate evidence of financial responsibility for
the entire fleet in an amount equal only to the financial
responsibility requirement of the tanker having the greatest
maximum strict liability under OPA and CERCLA. Northern Marine
has provided the requisite guarantees and has received
certificates of financial responsibility from the
U.S. Coast Guard for each of our tankers required to have
one.
Northern Marine has arranged pollution liability insurance
coverage for each of our tankers in the amount of
$1.0 billion per occurrence. However, a catastrophic spill
could exceed the insurance coverage available, in which event
there could be a material adverse effect on our business, on the
Charterers business, which could impair the
Charterers ability to make payments to us under our
Charters, and on Northern Marines business, which could
impair Northern Marines ability to manage our Vessels.
Under OPA, oil tankers as to which a contract for construction
or major conversion was put in place after June 30, 1990
are required to have double hulls. In addition, oil tankers
without double hulls will not be permitted to come to
U.S. ports or trade in U.S. waters by 2015. All of our
Vessels have double hulls.
OPA also amended the Federal Water Pollution Control Act to
require that owners or operators of tankers operating in the
waters of the United States must file vessel response plans with
the U.S. Coast Guard, and their tankers are required to
operate in compliance with their U.S. Coast Guard approved
plans. These response plans must, among other things:
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address a worst case scenario and identify and
ensure, through contract or other approved means, the
availability of necessary private response resources to respond
to a worst case discharge;
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describe crew training and drills; and
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identify a qualified individual with full authority to implement
removal actions.
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Vessel response plans for our tankers operating in the waters of
the United States have been approved by the U.S. Coast
Guard. In addition, the U.S. Coast Guard has announced it
intends to propose similar regulations
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requiring certain vessels to prepare response plans for the
release of hazardous substances. Northern Marine is responsible
for ensuring that our Vessels comply with any additional
regulations.
OPA does not prevent individual states from imposing their own
liability regimes with respect to oil pollution incidents
occurring within their boundaries. In fact, most
U.S. states that border a navigable waterway have enacted
environmental pollution laws that impose strict liability on a
person for removal costs and damages resulting from a discharge
of oil or a release of a hazardous substance. These laws may be
more stringent than U.S. federal law.
European
Union Tanker Restrictions
In July 2003, in response to the
m.t. Prestige
oil spill
in November 2002, the European Union adopted legislation that
prohibits all single hull tankers used for the transport of oil
from entering into its ports or offshore terminals by 2010. The
European Union, following the lead of certain European Union
nations such as Italy and Spain, has also banned all single hull
tankers carrying heavy grades of oil from entering or leaving
its ports or offshore terminals or anchoring in areas under its
jurisdiction. Commencing in 2005, certain single hull tankers
above 15 years of age also became restricted from entering
or leaving European Union ports or offshore terminals and
anchoring in areas under European Union jurisdiction. The
European Union is also considering legislation that would:
(1) ban manifestly sub-standard vessels (defined as those
over 15 years old that have been detained by port
authorities at least twice in a six-month period) from European
waters and create an obligation of port states to inspect
vessels posing a high risk to maritime safety or the marine
environment; and (2) provide the European Union with
greater authority and control over classification societies,
including the ability to seek to suspend or revoke the authority
of negligent societies. It is impossible to predict what
legislation or additional regulations, if any, may be
promulgated by the European Union or any other country or
authority.
Vessel
Security Regulations
Since the terrorist attacks of September 11, 2001, there
have been a variety of initiatives intended to enhance vessel
security. On November 25, 2002, the Maritime Transportation
Security Act of 2002, or MTSA, came into effect. To implement
certain portions of the MTSA, in July 2003, the U.S. Coast
Guard issued regulations requiring the implementation of certain
security requirements aboard vessels operating in waters subject
to the jurisdiction of the United States. Similarly, in December
2002, amendments to the International Convention for the Safety
of Life at Sea, or SOLAS, created a new chapter of the
convention dealing specifically with maritime security. The new
chapter became effective in July 2004 and imposes various
detailed security obligations on vessels and port authorities,
most of which are contained in the newly created International
Ship and Port Facilities Security Code, or ISPS Code. The ISPS
Code is designed to protect ports and international shipping
against terrorism. After July 1, 2004, to trade
internationally, a vessel must attain an International Ship
Security Certificate from a recognized security organization
approved by the vessels flag state. Among the various
requirements are:
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on-board installation of automatic identification systems, or
AIS, to provide a means for the automatic transmission of
safety-related information from among similarly equipped ships
and shore stations, including information on a ships
identity, position, course, speed and navigational status;
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on-board installation of ship security alert systems, which do
not sound on the vessel but only alerts the authorities on shore;
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the development of vessel security plans;
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ship identification number to be permanently marked on a
vessels hull;
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a continuous synopsis record kept onboard showing a
vessels history including, name of the ship and of the
state whose flag the ship is entitled to fly, the date on which
the ship was registered with that state, the ships
identification number, the port at which the ship is registered
and the name of the registered owners and their registered
addresses; and
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compliance with flag state security certification requirements.
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The U.S. Coast Guard regulations, intended to align with
international maritime security standards, exempt
non-U.S. tankers
from MTSA vessel security measures provided such vessels have on
board, by July 1, 2004, a valid
20
International Ship Security Certificate that attests to the
vessels compliance with SOLAS security requirements and
the ISPS Code. Northern Marine has implemented the various
security measures addressed by the MTSA, SOLAS and the ISPS Code
and all of our tankers are in compliance with these applicable
security requirements.
Employees
As of December 31, 2007, we had 2 employees. Our
employees are not represented by any collective bargaining
agreements and we have never experienced a work stoppage. We
believe that our employee relations are good.
Executive
Officer of the Registrant
Our executive officer, his age and his positions as of
February 28, 2008 is as follows:
Edward Terino
, 54, is our Chief Executive Officer,
President and Chief Financial Officer. Mr. Terino has over
10 years of experience as a senior level executive of
publicly traded companies. Since April 2007, Mr. Terino has
served on the board of directors of S1 Corporation, which
develops and markets customer interaction software for financial
and payments services primarily to banks, credit unions,
insurance companies, retailers and telecommunication companies.
From October 2001 until June 2005, Mr. Terino was Senior
Vice President and Chief Financial Officer of Art Technology
Group, Inc., a provider of Internet-based
e-commerce
and customer service software. From April 1999 to September
2001, he was Senior Vice President and Chief Financial Officer
of Applix, Inc., a provider of business intelligence software
solutions. Mr. Terino has also spent 11 years at
Houghton Mifflin in various senior financial management position
and 9 years at Deloitte and Touche in their consulting
services group. Mr. Terino is a citizen and resident of the
United States.
We maintain a website at
www.arlingtontankers.com.
The
information contained on our website is not included as a part
of, or incorporated by reference into, this Annual Report on
Form 10-K.
We make available free of charge through our website our Annual
Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K,
and amendments to these reports, as soon as reasonably
practicable after electronically filing such material with, or
furnishing such material to, the Securities and Exchange
Commission, or the SEC. Further, we will provide free copies of
any of our SEC filings upon request. Copies of our filings with
the SEC may be requested through the investor
relations section of our website, or by calling our
offices at
441-292-4456.
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
We currently intend to pay dividends on a quarterly basis in
amounts determined by our Board of Directors. We believe our
dividends will be 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, 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
additional cash reserves or change our dividend policy. Other
than the fees under our ship management agreements, none of our
fees or expenses is fixed.
The amount of potential future dividends set forth in
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Dividend Policy represents only an estimate of future
dividends
21
based on our charter contracts, ship management agreements, an
estimate of our other expenses and the other matters and
assumptions set forth therein and assumes that other than our
ship management expenses, none of our expenses increase during
the periods presented in the table. The amount of future
dividends, if any, could 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.
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 the 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 Concordia and Stena. 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
22
majority of our shareholders voting at a meeting. Furthermore,
our current Charters provide that we may not sell the related
Vessel without the Charterers consent, which consent may
be withheld in the Charterers 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 expire in 2008, four expire in 2009 and two
expire in 2010. We have an option to extend the terms of the
Charters on our two Additional Vessels. However, we will not be
eligible to earn Additional Hire with respect to the Additional
Vessels if we make this election. The Charterers also have
options to extend the terms of the Charters for all of our
Vessels. The Charterers have the sole discretion as to
exercising their options. Notice that either party 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 of their 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 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
Vessels 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.
23
Concordia
and Stenas 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 November 19,
2007, 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 Stenas 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:
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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
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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.
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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.
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 December 31, 2007, 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 Companys 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.
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
24
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 corporations 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 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 shareholders 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 corporations
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.
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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:
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the material facts as to such interested directors
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;
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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
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the transaction was fair as to the corporation as of the time it
was authorized, approved or ratified.
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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
companys 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 companys
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
companys affairs in the future or ordering the purchase of
the shares of any shareholders by other shareholders or by the
company.
26
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 companys
directors or officers for any act or failure to act in the
performance of such directors or officers 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.
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.
27
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:
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a classified Board of Directors with staggered three-year terms,
elected without cumulative voting;
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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;
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advance notice for nominations of directors by shareholders and
for shareholders to include matters to be considered at annual
meetings;
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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
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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% of our issued and
outstanding voting shares not owned by the interested
shareholder, subject to certain exceptions.
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These provisions could make it more difficult for a third party
to acquire us, even if the third partys 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.
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.
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, except during the
remaining term of the Sun International sub-charter for the
Stena Vision
which is due to expire within 30 days
of July 31, 2008.
28
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:
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demand for oil and oil products, which affect the need for
tanker capacity;
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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;
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changes in the production of crude oil, particularly by OPEC and
other key producers, which impact the need for tanker capacity;
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developments in international trade;
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changes in seaborne and other transportation patterns, including
changes in the distances that cargoes are transported;
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environmental concerns and regulations;
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weather; and
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competition from alternative sources of energy.
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The factors that influence the supply of tanker capacity include:
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the number of newbuilding deliveries;
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restrictions on vessels from entering into certain trades based
upon their age, safety or other factors;
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the scrapping rate of older vessels; and
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the number of vessels that are out of service.
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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., 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.
29
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 Companys 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 tankers 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 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
30
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
claimants 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.
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
31
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.
Concordia, Stena 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.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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Not Applicable.
We rent an office that contains approximately 150 square
feet of shared office space in Hamilton, Bermuda, which we
occupied and began renting in November 2004. The rent
arrangement in Bermuda is month to month. We believe our
facilities are sufficient to meet our needs for the foreseeable
future and, if needed, additional space will be available in the
near term at a reasonable cost to us. Our monthly rental costs
in Bermuda are $500.
We also rent an office in Westport, Connecticut that contains
approximately 400 square feet of office space, which is
used by our executive officer. We occupied and began renting the
Westport office in July 2005. The rent arrangement in Westport
is month to month. We believe our facilities are sufficient to
meet our needs for the foreseeable future and, if needed,
additional space will be available in the near term at a
reasonable cost to us. Our monthly rental costs in Westport are
approximately $4,000.
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ITEM 3.
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LEGAL
PROCEEDINGS
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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 Annual Report on
Form 10-K.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of our security holders,
through solicitation of proxies or otherwise, during the last
quarter of the year ended December 31, 2007.
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PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market
Price of Arlington Tankers Common Shares and Related
Shareholder Matters
Our common shares are listed on the New York Stock Exchange,
under the symbol ATB. The following table sets
forth, for the period indicated, the high and low closing sales
prices of our common shares on the New York Stock Exchange.
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Fiscal Year Ended December 31, 2007
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High
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Low
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First Quarter (from January 1 to March 31)
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$
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24.08
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$
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22.15
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Second Quarter (from April 1 to June 30)
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$
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28.68
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$
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23.51
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Third Quarter (from July 1 to September 30)
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$
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29.52
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$
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23.04
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Fourth Quarter (from October 1 to December 31)
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$
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25.19
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$
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20.31
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Fiscal Year Ended December 31, 2006
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High
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Low
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First Quarter (from January 1 to March 31)
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$
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23.61
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$
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21.61
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Second Quarter (from April 1 to June 30)
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$
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23.30
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$
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20.63
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Third Quarter (from July 1 to September 30)
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$
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23.37
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$
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21.48
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Fourth Quarter (from October 1 to December 31)
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$
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24.15
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$
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22.00
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On February 28, 2008, we had approximately
47 shareholders of record. This number does not include
beneficial owners for whom shares are held by nominees in street
name.
Dividends
We have paid quarterly cash dividends denominated in
U.S. dollars to the holders of 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 those
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 credit 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. Please see
Item 1A. 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 and the
discussion in Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations Dividend Policy.
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 ending
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 eligible to earn Additional Hire.
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 ending
December 31, 2006. In that period, we earned Additional
Hire of $1.0 million, including
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guaranteed 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 ending 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 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 ending June 30, 2007. In that period, we earned
Additional Hire of $1.3 million, including guaranteed
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 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 ending
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 eligible to earn Additional Hire.
In January 2006, we declared a dividend of $0.53 per share, and
paid that dividend on February 9, 2006 to shareholders of
record as of February 7, 2006. The January 2006 dividend
was based on our operating results for the fourth quarter ending
December 31, 2005. In that period, we earned Additional
Hire of $1.6 million, including Additional Hire on our
V-MAX vessels of $654,000 and Additional Hire of $946,000 on our
Product and Panamax tankers. In April 2006, we declared a
dividend of $0.57 per share. That dividend was paid on
May 9, 2006 to our shareholders of record on May 5,
2006. The April 2006 dividend was based on our operating results
for the first quarter ending March 31, 2006. In that
period, we earned Additional Hire of $1.4 million,
including Additional Hire on our V-MAX vessels of $600,000 and
Additional Hire of $800,000 on our Product and Panamax tankers.
In July 2006, we declared a dividend of $0.59 per share. That
dividend was paid on August 8, 2006 to our shareholders of
record as of August 4, 2006. The July 2006 dividend was
based on our operating results for the second quarter ending
June 30, 2006. In that period, we earned Additional Hire of
$1.3 million, including Additional Hire on our V-MAX
vessels of $600,000 and Additional Hire of $700,000 on our
Product and Panamax tankers. In October 2006, we declared a
dividend of $0.60 per share. That dividend was paid on
November 7, 2006 to our shareholders of record as of
November 3, 2006. The October 2006 dividend was based on
our operating results for the third quarter ending
September 30, 2006. In that period, we earned Additional
Hire of $1.4 million, including Additional Hire on our
V-MAX vessels of $600,000 and Additional Hire of $800,000 on our
Product and Panamax tankers.
Recent
Sales of Unregistered Securities; Uses of Proceeds From
Registered Securities
Not applicable.
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ITEM 6.
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SELECTED
FINANCIAL DATA
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The following selected financial and other data summarizes our
historical financial and other information. We have derived the
selected statement of operations data set forth below for the
years ended December 31, 2007, 2006, and 2005 and the
selected balance sheet data as of December 31, 2007 and
2006 from the audited consolidated financial statements included
in this Annual Report on
Form 10-K.
We have derived the selected financial data for prior periods
from audited financial statements that are not included in this
report. For the year ended December 31, 2004, our audited
consolidated financial statements include the predecessor
combined carve-out financial statements of Concordia Maritime AB
(publ), or Concordia, and Stena AB (publ), or Stena, for the
period January 1, 2004 through November 9, 2004 and
the results of operations of Arlington Tankers and its wholly
owned subsidiaries for the 51 days from November 10,
2004 through December 31, 2004. For the year ended
December 31, 2003 the consolidated financial statements
represent the predecessor combined carve-out financial
statements. The selected carve-out financial data presented
below is not indicative of the results we would have achieved
had we operated as an independent public company for any period
presented. Furthermore, our historical results for any prior
period are not necessarily indicative of results to be expected
for any future period and our historical results for any interim
period are not indicative of results to be expected for a full
fiscal year. This information should be read in conjunction with
our Item 1A. Risk Factors, Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations and our consolidated financial
statements and the notes thereto included in Item 8.
Financial Statements and Supplementary Data set forth in
this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands of $, except per share data)
|
|
|
Selected statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues, net
|
|
$
|
70,198
|
|
|
$
|
69,435
|
|
|
$
|
55,455
|
|
|
$
|
57,958
|
|
|
$
|
28,838
|
|
Total operating expenses
|
|
|
(38,086
|
)
|
|
|
(37,329
|
)
|
|
|
(28,904
|
)
|
|
|
(30,672
|
)
|
|
|
(14,405
|
)
|
Operating income
|
|
|
32,112
|
|
|
|
32,106
|
|
|
|
26,551
|
|
|
|
27,286
|
|
|
|
14,433
|
|
Net income
|
|
|
11,706
|
|
|
|
21,464
|
|
|
|
21,913
|
|
|
|
20,351
|
|
|
|
5,913
|
|
Earnings per common share basic and diluted
|
|
$
|
0.76
|
|
|
$
|
1.38
|
|
|
$
|
1.41
|
|
|
$
|
0.28
|
(1)
|
|
|
|
|
Cash dividend per share earned during the year
|
|
$
|
2.33
|
|
|
$
|
2.33
|
|
|
$
|
2.11
|
|
|
$
|
0.39
|
(1)
|
|
|
|
|
Cash dividend per share declared during the year
|
|
$
|
2.32
|
|
|
$
|
2.29
|
|
|
$
|
1.97
|
|
|
|
|
|
|
|
|
|
Selected balance sheet data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
6,274
|
|
|
|
3,210
|
|
|
|
11,839
|
|
|
|
5,960
|
|
|
|
1,194
|
|
Newbuildings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,185
|
|
Vessels, net
|
|
|
329,330
|
|
|
|
344,973
|
|
|
|
269,031
|
|
|
|
281,441
|
|
|
|
154,465
|
|
Total assets
|
|
|
349,309
|
|
|
|
363,409
|
|
|
|
286,447
|
|
|
|
292,850
|
|
|
|
192,416
|
|
Amount due to Concordia, current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,899
|
|
Long term liabilities
|
|
|
229,500
|
|
|
|
229,500
|
|
|
|
137,160
|
|
|
|
135,000
|
|
|
|
130,317
|
|
Combined predecessor equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,710
|
|
Shareholders equity
|
|
|
106,212
|
|
|
|
130,620
|
|
|
|
144,651
|
|
|
|
154,487
|
|
|
|
|
|
Selected cash flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
38,679
|
|
|
|
34,866
|
|
|
|
35,314
|
|
|
|
31,820
|
|
|
|
15,375
|
|
Net cash (used in) investing activities
|
|
|
500
|
|
|
|
(102,500
|
)
|
|
|
(2,500
|
)
|
|
|
(102,212
|
)
|
|
|
(36,488
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(36,115
|
)
|
|
|
59,005
|
|
|
|
(26,935
|
)
|
|
|
75,158
|
|
|
|
21,717
|
|
Selected fleet data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of tankers owned
|
|
|
8
|
|
|
|
8
|
|
|
|
6
|
|
|
|
6
|
|
|
|
2
|
|
|
|
|
(1)
|
|
The earnings per share and dividend per share earned during the
year 2004 represent the period from November 10, 2004
through December 31, 2004.
|
35
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion of our financial condition and results
of operations should be read in conjunction with our
consolidated financial statements, and the related notes, and
the other financial and other information included elsewhere in
this Annual Report on
Form 10-K.
This discussion contains forward-looking statements based on
assumptions about our future business. Our actual results will
likely differ from those contained in the forward-looking
statements and such differences may be material. This Annual
Report on
Form 10-K
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 7.
Managements 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:
|
|
|
|
|
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 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 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 I,
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.
Overview
We are an international seaborne transporter of crude oil and
petroleum products. We were incorporated in September 2004 under
the laws of Bermuda. We were originally a jointly owned
subsidiary of Stena AB (publ), or Stena, and Concordia Maritime
AB (publ), or Concordia.
In November 2004, we completed our initial public offering and
acquired our six Initial Vessels, consisting of two V-MAX
tankers, two Panamax tankers and two Product tankers. The total
purchase price for the Initial Vessels equaled approximately
$426.5 million, consisting of $345.5 million in cash
and 4,050,000 common shares that we issued to subsidiaries of
Concordia and Stena and two companies owned jointly by Stena and
Fram. We financed the cash portion of the purchase price through
our initial public offering and borrowings under a secured
credit facility. The 4,050,000 shares issued to the sellers
were valued at $81 million, based on the initial public
offering price of $20.00 per share. An aggregate of 1,717,500 of
the shares issued to the vessel sellers were sold in our 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.
36
Effective November 10, 2004, we chartered our six Initial
Vessels to subsidiaries of Stena and Concordia under fixed rate
charters. Under the charters, we receive fixed Basic Hire in
amounts that increase annually at a rate equal to the annual
increase in the fees payable under our ship management
agreements described below. Furthermore, in addition to the
fixed rate Basic Hire, each of our Initial Vessels 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. Additional Hire is not guaranteed,
except for the Additional Hire related to the Sun International
sub-charters, 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, we have also entered into ship
management agreements with Northern Marine. The ship management
agreements provide for the technical management of our Vessels.
Under the ship management agreements, we have agreed to pay
Northern Marine a flat fee per day per Vessel, which increases
5% every year.
As a result of our entering into the Charters, our revenues
since November 2004 have been generated from charter payments
made to us by the Charterers. As a result of our entering into
the ship management agreements, our Vessel operating expenses
for the Vessels are fixed, increasing 5% annually. These
arrangements are designed to provide us with stable and
generally predictable cash flow and reduce our exposure to
volatility in the spot markets for the Vessels.
On December 12, 2005, we entered into a five-year credit
agreement with The Royal Bank of Scotland plc. The credit
agreement provides for a credit facility of up to
$229.5 million. The purpose of the credit agreement was to
(1) refinance the indebtedness under our $135 million
debt facility with a group of banks for which Fortis Bank
(Nederland) N.V. acted as agent, (2) finance the purchase
price of the two Additional Vessels from the subsidiaries of
Stena and (3) general corporate purposes. We completed the
refinancing of our previous debt facility in December 2005 and
completed the Additional Vessel acquisition in January 2006. The
credit agreement matures on January 5, 2011. All amounts
outstanding under the credit agreement must be repaid on that
maturity date. There is no principal amortization prior to
maturity. Borrowings under the credit 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. 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 credit agreement, we 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 loan agreement at 5.7325%. The net annual cash interest
costs will approximate 5.38% due to the cash benefit that we
received in December 2005 from the termination of a swap with
Fortis Bank of $4.8 million. That cash benefit has been
designated by our Board of Directors to offset the higher
interest costs over the life of the $229.5 million credit
facility.
On January 5, 2006, we entered into a series of agreements
with Stena Bulk, Northern Marine and Stena Maritime, which we
refer to as the Stena Parties, pursuant to which we, through
wholly owned subsidiaries, completed the purchase of the
Additional Vessels from subsidiaries of Stena Maritime for a
purchase price per Vessel of $46 million. In connection
with the acquisition of the Additional Vessels from the Stena
Parties we also entered into certain related agreements and
amended certain of the agreements related to the Initial
Vessels. At the closing of the acquisition, our subsidiaries
that purchased the Additional Vessels and Stena Bulk entered
into time charter parties. Under the 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 the fixed daily Basic Hire. At the end
of the initial three-year period, both we and Stena Bulk have
the option to extend the time charters on a
vessel-by-vessel
basis for an additional 30 months, at the fixed daily Basic
Hire. If Stena Bulk exercises this option, there will be an
Additional Hire provision during the
30-month
period. If we exercise this option, there will be no Additional
Hire arrangement. Furthermore, if Stena Bulk exercises the
30-month
option, there will be two additional one-year options,
exercisable by Stena Bulk, at the fixed daily Basic Hire set
forth below, but without an Additional Hire provision.
37
At the closing of the acquisition, the time charter parties for
our existing Product tankers and Panamax tankers were amended.
These amendments modified the charter periods for our 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
) was 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 Companion
) was reduced to a November 2008
expiration date, followed by three one-year options exercisable
by Stena Bulk. The term of the charters for the V-MAX tankers
were 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, the ship management
agreements for our Initial Vessels were also amended. These
amendments modified the provisions relating to drydocking of the
Vessels. Specifically, the amendments provided that all
drydockings during the term of the ship management agreements
are to be at the sole cost and expense of Northern Marine. In
addition, Northern Marine agreed to conduct at least one
mid-period drydocking for each Product tanker and Panamax tanker
prior to redelivery of such Vessels. Furthermore, upon
redelivery of the Vessels to us at the expiration of the ship
management agreements, Northern Marine has agreed to pay to us a
drydocking provision for each day from the completion of the
last special survey drydocking during the term of the applicable
ship management agreement (or if no special survey occurs during
the term of such agreement, from the date of commencement of
such agreement), to date of redelivery at the daily rates
specified in the ship management agreements.
Factors
Affecting Our Results of Operations and Cash Available for
Dividends
The principal factors that have affected our results of
operations, financial position and cash available for dividends
since November, 2004, and that we expect to affect our future
results of operations, financial position and cash available for
dividends include:
|
|
|
|
|
the Basic Hire paid to us under our Charters;
|
|
|
|
the amount of Additional Hire, if any, that we receive under our
Charters;
|
|
|
|
fees under the ship management agreements;
|
|
|
|
depreciation;
|
|
|
|
administrative and other expenses;
|
|
|
|
interest expense, net of the cash benefit from the net gain
realized from the termination of an interest rate swap;
|
|
|
|
any loss of any Vessel;
|
|
|
|
required capital expenditures;
|
|
|
|
any cash reserves established by our board of directors;
|
|
|
|
any change in our dividend policy; and
|
|
|
|
increased borrowings or future issuances of securities.
|
We derive our revenues from our long term fixed rate time
charters with the Charterers. Our Vessels are time chartered to
the Charterers under the Charters. Under a time charter, the
charterer pays substantially all of the voyage expenses, but the
vessel owner pays the vessel operating expenses. In the case of
a spot market charter, the vessel owner pays both the voyage
expenses and the vessel operating expenses. Vessel operating
expenses are the direct costs associated with running a vessel
and include crew costs, vessel supplies, repairs and
maintenance, drydockings, lubricating oils and insurance. Voyage
expenses are fuel costs and port charges. See Item 1.
Business Charter Arrangements for more
information regarding the charters.
38
Our ability to earn Additional Hire under our Charters will
depend on whether the Charterers operate the Vessels under time
charters or in the spot market and the relative freight rates in
each market. We will continue to earn guaranteed Additional Hire
under our V-MAX tanker Charters while those Vessels remain
sub-chartered by subsidiaries of Concordia to Sun International.
We also expect to earn Additional Hire from the sub-charters of
our V-MAX tankers to subsidiaries of Litasco, so long as those
Vessels are in service. With respect to our other Vessels, our
ability to earn Additional Hire will depend on market conditions
in the tanker industry, which has historically been highly
cyclical, experiencing volatility in profitability, vessel
values and freight rates. In particular, freight and charter
rates are strongly influenced by the supply of tankers and the
demand for oil transportation services. Our expenses consist
primarily of fees under our ship management agreements,
depreciation, administrative expenses and interest expense.
Our Vessel owning subsidiaries have entered into ship management
agreements with Northern Marine under which Northern Marine is
responsible for all technical management of the Vessels,
including crewing, maintenance, repair, drydockings, Vessel
taxes, insurance and other Vessel operating and voyage expenses.
Under these agreements we pay a fixed daily fee for each Vessel
which increases 5% annually. See Item 1.
Business Ship Management Agreements for more
information regarding our ship management agreements.
Depreciation is the periodic cost charged to our income for the
reduction in usefulness and long term value of our Vessels. No
charge is made for depreciation of Vessels until they are
delivered. We depreciate the cost of our Vessels less salvage
value over 25 years on a straight-line basis. Including
depreciation on the two new Product tankers that we purchased on
January 5, 2006, we estimate that depreciation will be
approximately $15.7 million per year.
Administrative expenses include salaries and other employee
related costs, office rents, legal and professional fees and
other general administrative expenses. Based on our current
activities we estimate that our administrative expenses will be
approximately $2.4 to $2.5 million in 2008.
Our interest expense prior to December 21, 2005 represented
interest expense under our old credit facility. Subsequent to
December 21, 2005, we began to incur interest expense under
our $229.5 million credit facility, which matures in
January 2011. By entering into an interest rate swap agreement,
we effectively fixed the interest rate under the facility at
approximately 5.7325% per year. In December 2005 as a result of
terminating an interest rate swap and debt facility with a group
of banks led by Fortis Bank N.V., we realized a net gain on the
termination of the swap and debt facility of
$4.055 million. The cash proceeds from the termination of
the swap was $4.8 million. Our Board has designated the
$4.8 million benefit from the Fortis swap as an offset to
the interest costs of the secured credit facility. Accordingly,
we estimate that interest expense under the secured credit
facility will be approximately $13.3 million per year, and
that approximately $1 million per year of interest expense
will be offset by the benefit from the termination of the Fortis
swap.
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 Item 1A. 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.
The Charterers pay us Basic Hire monthly in advance and
Additional Hire, if any, quarterly in arrears. We pay Northern
Marine the ship management fees monthly in advance. We pay
interest under our credit agreement quarterly in arrears.
Although inflation has had a moderate impact on our Vessel
operating expenses and corporate overhead, our management does
not consider inflation to be a significant risk in the current
and foreseeable economic
39
environment. Because substantially all of our revenues and
expenses are denominated in U.S. dollars, we do not expect
foreign exchange fluctuations to have a significant effect on
our future results of operations.
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 voyages are provided for
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 assets
carrying value and its fair value. We estimate fair value based
on independent appraisals, 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.
Results
of Operations
Year
Ended December 31, 2007 Compared To Year Ended
December 31, 2006
Total
operating revenues, net
Total operating revenues were $70.2 million in 2007
compared to $69.4 million in 2006. The 2007 revenues
consisted of $65.9 million in Basic Hire, $2.3 million
in Additional Hire related to the V-MAX vessels and
$2.0 million of Additional Hire revenues related to profit
sharing arrangements for the other eligible vessels. The 2007
revenues were about the same as the 2006 revenues reflecting
slightly higher Basic Higher revenues in 2007,
40
offset by slightly lower Additional Hire revenues. We expect
that revenues related to Basic Hire and Additional Hire related
to the V-MAX vessels will be slightly higher in 2008 at
approximately $69.9 million.
The Vessels were effectively off-hire for a combined total of
40 days in each of 2007 and 2006. The off-hire amount of
five days per vessel per annum is guaranteed through the
management agreements with Northern Marine.
Total
Vessel operating expenses
Total Vessel operating expenses were $20.0 million in 2007
compared to $18.6 million in 2006. The increase in Vessel
operating expenses in 2007 reflects a 5% increase in the vessel
management fees under the vessel management agreements with
Northern Marine. We expect Vessel operating expenses to increase
in 2008 to approximately $21.2 million principally due to
the 5% annual contractual increase in vessel management fees to
Northern Marine.
Depreciation
Depreciation was $15.6 million in 2007 and
$16.1 million in 2006. The decrease in depreciation is
attributed to a revision in the estimated salvage value for the
Vessels in the fleet. We estimate that depreciation in 2008 will
be approximately $15.8 million.
Administrative
expenses
Administrative expenses were $2.5 million in 2007 compared
to $2.7 million in 2006. The decrease in administrative
expenses is primarily attributed to higher expenses incurred in
2006 in connection with our purchase of two additional vessels
and legal and accounting fees related to the universal
shelf Registration Statement on
Form S-3
that we filed in November 2006. We estimate that administrative
expenses for 2008 will be approximately $2.4
$2.5 million.
Other
expenses, net
Other expenses net represents interest expense, net of interest
income and other financial items, including the unrealized gain
or loss on the fair value of an interest rate swap for our
$229.5 million secured credit facility. Other expenses, net
were $20.4 million in 2007 compared to $10.6 million
in 2006. The 2007 amount includes interest expense of
$13.7 million and an unrealized loss of $7.5 million
on the fair value of the interest rate swap on our $229.5
secured credit facility, offset by $828,000 of interest income.
The increase in other expenses, net of $9.8 million over
2006 is entirely attributed to the change in fair value of an
interest rate swap on our $229.5 million secured credit
facility, which was an unrealized gain of $2.2 million in
2006 and an unrealized loss of $7.5 million in 2007.
With respect to our $229.5 secured credit facility, by entering
into an interest rate swap agreement, we have effectively fixed
the interest rate under the facility at 5.7325% for the
five-year term. We estimate that interest expense under the
facility will be approximately $13.3 million per year. Our
Board of Directors has designated the $4.8 million cash
benefit from the termination of interest rate swap to offset the
interest costs under the secured credit facility. We expect to
offset the higher interest costs each quarter through our cash
dividend distribution of a pro rata portion of the
$4.8 million (approximately $240,000 per quarter) benefit
from the interest rate swap. As a result of the prorated benefit
from the termination of the interest rate swap, we expect our
cash interest costs per year to approximate $12.3 million.
Because substantially all of our revenues and expenses are
denominated in U.S. dollars, we do not expect foreign
exchange fluctuations to have a significant effect on our future
results of operations.
Year
Ended December 31, 2006 Compared To Year Ended
December 31, 2005
Total
operating revenues, net
Total operating revenues were $69.4 million in 2006
compared to $55.5 million in 2005. The 2006 revenues
consisted of $64.3 million in Basic Hire, $2.4 million
in guaranteed Additional Hire related to the V-MAX vessels and
$2.7 million of Additional Hire revenues related to profit
sharing arrangements for other eligible Vessels. The 2006
revenues were higher than 2005 principally due to the purchase
of the two Additional Vessels in January 2006.
41
The Vessels were effectively off-hire for a combined total of
40 days in 2006, which compares to 30 off-hire days in
2005. The off-hire amount of five days per vessel per annum is
guaranteed through the management agreements with Northern
Marine.
Total
Vessel operating expenses
Total Vessel operating expenses were $18.6 million in 2006
compared to $14.0 million in 2005. The increase in Vessel
operating expenses in 2006 reflects the additional costs
associated with the two Additional Vessels purchased in January
2006 and a 5% increase in the vessel management fees for the
Initial Vessels under the vessel management agreements with
Northern Marine.
Depreciation
Depreciation was $16.1 million in 2006 and
$12.4 million in 2005. The increase in depreciation is
attributed to the addition of the two Additional Vessels
purchased in January 2006.
Administrative
expenses
Administrative expenses were $2.7 million in 2006 compared
to $2.5 million in 2005. The increase in administrative
expenses is primarily attributed to higher administrative fees
related to the purchase of the two additional vessels in January
2006, legal and accounting fees related to the universal
shelf Registration Statement on
Form S-3
that we filed in November 2006 and higher compensation costs
related to executive bonuses earned in 2006.
Other
expenses, net
Other expenses net represents interest expense, net of interest
income and other financial items, including the gain on the
termination of an interest rate swap, as well as the unrealized
loss on the fair value of an interest rate swap for our
$229.5 million secured credit facility. Other expenses, net
were $10.6 million in 2006 compared to $4.6 million in
2005. The 2006 amount includes interest expense of
$13.6 million offset by $734,000 of interest income and an
unrealized gain of $2.2 million of the fair value of an
interest rate swap on our $229.5 secured credit facility. The
increase in other expenses, net of $6.0 million over 2005
is attributed to $6.9 million in higher interest expense
associated with our $229.5 million term secured credit
facility offset by a net gain of $4.1 million realized in
2005 on the termination of the interest rate swap and debt
facility with Fortis Bank N.V., an improvement of
$2.2 million in the fair value of our interest rate swap,
and a $500,000 increase in interest income.
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 the Companys 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 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 annual cash interest
costs will approximate 5.38% due to the cash benefit
42
that we received in December 2005 from the $4.8 million
termination of a prior swap. That cash benefit has been
designated by the Board of Directors to offset the higher
interest costs over the life of the $229.5 million credit
facility. 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
December 31, 2007 and December 31, 2006. 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 Item 1A. 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.
As of December 31, 2007, we had cash, cash equivalents and
short term investments of $18.8 million. Net cash provided
by operating activities in 2007 was $38.7 million.
Net cash used in investing activities in 2007 was $500,000. This
amount relates to the purchase of $43.4 million in
marketable securities in 2007 with a maturity greater than
90 days, offset by the sale of $43.9 million in
marketable securities with a maturity greater than 90 days.
Net cash used by financing activities in 2006 was
$36.1 million, which consisted entirely of dividend
payments made in 2007.
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 below in under the caption
Dividend Policy.
We believe that our cash flow from our Charters will be
sufficient to fund our interest payments under our secured
credit facility and our working capital requirements for the
next one to three years. To the extent we pursue additional
vessel acquisitions, we will need to obtain additional debt or
equity capital. Our longer term liquidity requirements include
repayment of the principal balance of our secured credit
facility in January 2011. We anticipate requiring new
borrowings, issuances of equity, or funds from a combination of
these sources to meet this repayment obligation.
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.
43
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 Item 1A. 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
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 table below sets forth amounts that would be available to us
for the payment of dividends for each of the fiscal years set
forth below assuming that:
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the Basic Hire is paid on all of our Vessels, all of our Vessels
are on hire for 360 days per fiscal year and the options to
extend the charters are exercised by the Charterers;
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no Additional Hire is paid on our two Panamax Tankers or our two
Product Tankers that are eligible to earn Additional Hire;
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the Additional Hire continues to be paid in connection with the
sub-charter of the
Stena Vision
to Sun International,
which is expected to expire within 30 days of July 31,
2008;
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Additional Hire of approximately $350,000 per Vessel per quarter
is paid on the V-MAX Vessels in connection with the Eiger
Shipping sub-charters, assuming that the V-MAX Vessels operate
for 90 days per quarter (the Eiger Shipping sub-charger for
the
Stena Victory
commenced on October 20, 2007 and
the Eiger Shippin sub-charter for the
Stena Vision
is
expected to commence within 30 days of July 31, 2008);
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the V-MAX Vessels are returned on the notional termination dates
of the sub-charter within the
60-day
delivery window;
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we have no cash expenses or liabilities other than the ship
management agreements, our current directors fees, the
current salaries and benefits of our employees, currently
anticipated administrative and other expenses and interest under
our secured credit facility;
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we pay no U.S. federal income taxes and minimal
U.S. and state payroll taxes;
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we have no requirement to fund any required capital expenditures
with respect to our Vessels;
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44
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we do not suffer the loss or constructive loss of any of our
Vessels;
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no material cash reserves or requirements are established by the
actions of our Board of Directors or management;
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we remain in compliance with our secured credit facility which
requires, among other things, that the fair market value of our
Vessels exceeds 140% of our borrowings under the facility (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 to pay dividends; and
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we do not issue any additional common shares or other securities
or borrow any additional funds.
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The table below does not reflect non-cash charges that we will
incur, primarily depreciation on our Vessels. The timing and
amount of dividend payments will be determined by our Board of
Directors and will depend on our cash earnings, financial
condition, cash requirements and availability and the provisions
of Bermuda law affecting the payment of dividends and other
factors. The table below does not take into account any expenses
we will incur if the subsidiaries of Concordia and Stena and the
two companies owned by Stena and Fram exercise their rights to
have us register their shares under the registration rights
agreement. For an overview of the registration rights agreement,
see Item 3. Quantitative and Qualitative
Disclosures about Market Risk 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.
We cannot assure you that our dividends will in fact be equal to
the amounts set forth below. The amount of future dividends set
forth in the table below represents only an estimate of future
dividends based on the list of assumptions set forth above. The
amount of future dividends, if any, could be affected by various
factors, including the loss of a Vessel, 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
will be beyond our control. As a result, the amount of dividends
actually paid may vary from the amounts currently estimated and
such variations may be material. There can be no assurance that
any dividends will be paid. See Item 1A.
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.
The following table sets forth:
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the amount of cash that was available for dividends in the
fiscal year ended December 31, 2007; and
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based on the assumptions and the other matters in the preceding
paragraphs, our estimate of the amount of cash likely to be
available for dividends for each of the 2008, 2009, and 2010
fiscal years.
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2007
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2008
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2009
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2010
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(In millions of dollars, except
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per share amounts)
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Basic Hire(1)
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$
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65.9
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$
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66.2
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$
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65.3
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$
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66.4
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V-MAX Additional Hire Sun International
sub-charter(s)(2)
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2.0
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.5
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V-MAX Additional Hire Eiger Shipping sub-charters(3)
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.3
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2.2
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2.6
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.8
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Additional Hire Panamax and Product tankers(4)
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2.0
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Vessel operating expenses
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(20.0
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)
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(20.3
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(21.2
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)
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(22.3
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)
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Cash administrative expenses(5)
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(2.2
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)
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(2.4
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(2.5
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)
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(2.5
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)
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Cash interest costs(6)
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(12.0
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)
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(12.3
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)
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(12.3
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)
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(12.3
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Cash available for dividends
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36.1
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33.9
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31.8
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30.1
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Estimated dividends per share(7)
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$
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2.32
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$
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2.19
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$
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2.05
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$
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1.94
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45
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(1)
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Basic Hire revenues for 2008, 2009 and 2010 assume that options
available under the charter contracts are exercised by the
Charterer. Basic Hire reflected in the above table includes
$700,000 of revenue in 2008, $28.8 million of revenue in
2009, and $56.0 million of revenues in 2010 arising from
such option exercises.
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(2)
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The sub-charter with Sun International for the
Stena
Victory expired on October 20, 2007. The Additional
Hire revenue associated with the ongoing sub-charter of the
Stena
Vision to Sun International is guaranteed, meaning
that we will be paid the Additional Hire revenue by Concordia
whether the V-MAX tanker is in service or not in service, during
the term of the sub-charter. The sub-charter with Sun
International for the
Stena Vision
is due to expire
within 30 days of July 31, 2008. Our estimate above
reflects guaranteed V-MAX Additional Hire revenue from Sun
International sub-charter through July 31, 2008.
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(3)
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Immediately following the expiration of the sub-charter of the
Stena Victory
with Sun International, that Vessel
commenced operating under a new sub-charter agreement with Eiger
Shipping. In addition, immediately following the expiration of
the sub-charter of the
Stena Vision
with Sun
International, we expect that Vessel to commence operating under
a new sub-charter agreement with Eiger Shipping. During the term
of these new sub-charters, we will continue to earn guaranteed
Basic Hire from Concordia and we will also earn Additional Hire
under the profit sharing provisions of the Charters. Additional
Hire for the V-MAX tankers under the new sub-charters will be
based on a fixed time charter hire payable by Eiger Shipping to
Concordia under the sub-charters and the Additional Hire is not
exposed to fluctuations in spot market rates. Additional Hire
revenues under these sub-charters are not guaranteed, meaning
that we will earn Additional Hire only if the Vessel is in
service. The sub-charter for Eiger Shipping related to the
Stena Victory
commenced on October 20, 2007. Our
estimated cash available for dividends includes our estimated
Additional Hire for the
Stena Victory
, based on the
October 20, 2007 commencement date. Our estimated cash
available for dividends includes our estimated Additional Hire
for the
Stena Vision
, assuming that the Eiger Shipping
sub-charter for that Vessel begins on August 1, 2008. While
the V-MAX Vessels are sub-chartered to Eiger Shipping, the
profit sharing provisions in the Concordia charters are expected
to result in Additional Hire revenue of approximately $350,000
per Vessel per quarter, based on the time charter rates under
the sub-charters and assuming the Vessels operate 90 days
per quarter, in addition to the guaranteed Basic Hire.
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(4)
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Reflects Additional Hire revenues actually earned in 2007 by our
two Panamax tankers and our two Product tankers that are
eligible to earn Additional Hire. No estimates have been made
for 2008, 2009 and 2010 as these Additional Hire revenues are
not determinable due to volatility and unpredictability of
various factors, including spot market rates which are used to
compute Additional Hire revenues.
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(5)
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General and administrative expenses for 2008 through 2010 do not
include any cost for executive bonuses, which are primarily
performance based.
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(6)
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Cash interest costs reflect the benefit of approximately
$1.0 million per year from the 2005 termination of an
interest rate swap. The interest expense for each year will be
approximately $13.3 million ($229.5 million at
5.7325%).
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(7)
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Based on 15,500,000 issued and outstanding common shares.
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46
Our
Secured Credit Facility
The following summary of the material terms of our credit
facility does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all the provisions of
our Term Loan Agreement. For more complete information, you
should read the entire Secured Loan Facility Agreement
incorporated by reference as an exhibit to this Annual Report on
Form 10-K.
On December 12, 2005, we entered into a five-year term loan
agreement with The Royal Bank of Scotland plc. The term loan
agreement provides for a credit facility of up to $229,500,000.
The purpose of the term loan agreement was to (1) refinance
our existing indebtedness under our prior debt facility with a
group of banks for which Fortis Bank (Nederland) N.V. acted as
agent, (2) finance the purchase price of two Additional
Vessels from Stena and (3) general corporate purposes. We
completed the refinancing of our existing indebtedness of
$135 million 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 value of our 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 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 annual cash interest costs will approximate
5.38% due to the benefit that we received from the termination
of our interest rate swap with Fortis Bank of $4.8 million
that has been designated by the Board of Directors to offset the
higher interest costs of the $229.5 million credit facility.
The term loan agreement contains restrictive covenants that
prohibit us and our Vessel owning subsidiaries from, among other
things: permitting certain liens on assets; selling or otherwise
disposing of the our Vessels or selling other assets other than
in arms-length transactions; acquiring assets outside the
ordinary course of the our business, other than vessels;
merging, amalgamating or entering into similar agreements with
other entities; entering into certain types of vessel charters,
including time charters or consecutive voyage charters of
greater than 13 months (other than the Initial Vessel
Charters and the Additional Vessel Charters); de-activating any
Vessel; and paying dividends in certain circumstances.
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. In addition, the Loan Agreement contains covenants with
respect to providing financial information to the lenders and
the maintenance of insurance on our Vessels.
Events of default under the term loan agreement include, among
others, cross defaults to other indebtedness in excess of
$1 million, certain change of control of Arlington or our
Vessel owning subsidiaries and certain payment breaches under
the Charters. The term loan agreement provides that upon the
occurrence of an event of default, the lenders may require that
all amounts outstanding be repaid immediately and terminate our
ability to borrow under the term loan agreement and foreclose on
the mortgages over the Vessels and the related collateral.
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 Item 1A. 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.
47
Long Term
Financial Obligations and Other Commercial Obligations
Our long term financial obligations and other commercial
obligations as of December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
One Year
|
|
|
2-3
|
|
|
4-5
|
|
|
More Than
|
|
Commercial and Contractual Obligations
|
|
Total
|
|
|
or Less
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In thousands of $)
|
|
|
Long term debt, including current maturities
|
|
$
|
229,500
|
|
|
|
|
|
|
|
|
|
|
$
|
229,500
|
|
|
|
|
|
Interest payments(1)
|
|
|
40,235
|
|
|
|
13,375
|
|
|
|
26,677
|
|
|
|
183
|
|
|
|
|
|
Ship management obligations(2)
|
|
|
101,527
|
|
|
|
20,316
|
|
|
|
43,613
|
|
|
|
32,472
|
|
|
|
5,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
371,262
|
|
|
$
|
33,691
|
|
|
$
|
70,290
|
|
|
$
|
262,155
|
|
|
|
5,126
|
|
|
|
|
(1)
|
|
Refers to our expected interest payments over the term of our
secured credit facility after entering into swap arrangements at
a fixed rate of 5.7325%.
|
|
(2)
|
|
Refers to our fixed daily operating costs for our Vessels under
our ship management agreements with Northern Marine, which
increase 5% annually. These costs are payable by us monthly in
advance. We have assumed that the Charterers will exercise all
of their options available under the Charters.
|
ITEM 7A.
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.
The borrowings under our $229.5 million secured credit
facility bear interest at LIBOR (reset quarterly) plus a margin
of 0.75%. We have 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
unrealized loss on the fair value of the interest rate swap
agreement for the twelve months ending December 31, 2007
was $7.5 million.
48
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Arlington Tankers Ltd.
We have audited the accompanying consolidated balance sheets of
Arlington Tankers, Ltd. as of December 31, 2007 and 2006,
and the related consolidated statements of operations and
comprehensive income, shareholders equity, and cash flows
for each of the years in the two-year period ended
December 31, 2007. We also have audited Arlington Tankers
Ltd.s internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Arlington Tankers Ltd.s management is responsible
for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on these
consolidated financial statements and an opinion on the
companys internal control over financial reporting based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement and whether
effective internal control over financial reporting was
maintained in all material respects. Our audits of the
consolidated financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting
principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included
obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in
accordance with generally accepted accounting principles. A
companys internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance
with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in
accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the companys assets that could have a
material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Arlington Tankers Ltd. as of December 31, 2007
and 2006, and the results of their operations and their cash
flows for each of the years in the two-year period ended
December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America. Also in
our opinion, Arlington Tankers Ltd. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
/s/ Moore Stephens, P.C.
New York, New York
March 11, 2008
50
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Arlington Tankers Ltd.
We have audited the accompanying consolidated statements of
operations and comprehensive income, shareholders equity
and cash flows of Arlington Tankers Ltd. and its subsidiaries
(the Company) for the year ended December 31,
2005. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the results
of operations and cash flows of Arlington Tankers Ltd. and its
subsidiaries for the year ended December 31, 2005 in
conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Stamford, Connecticut
March 10, 2006
51
ARLINGTON
TANKERS LTD.
December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands of $, except share and per share amounts)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,274
|
|
|
$
|
3,210
|
|
Short-term investments
|
|
|
12,500
|
|
|
|
13,000
|
|
Prepaid expenses and accrued income
|
|
|
184
|
|
|
|
208
|
|
Other receivables
|
|
|
304
|
|
|
|
979
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
19,262
|
|
|
|
17,397
|
|
Vessels, net
|
|
|
329,330
|
|
|
|
344,973
|
|
Deferred debt issuance cost
|
|
|
717
|
|
|
|
955
|
|
Interest rate swap agreement at fair value
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
349,309
|
|
|
$
|
363,409
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
451
|
|
|
$
|
1,028
|
|
Unearned charter revenue
|
|
|
5,693
|
|
|
|
2,261
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,144
|
|
|
|
3,289
|
|
Long term liabilities
|
|
|
|
|
|
|
|
|
Interest rate swap agreement at fair value
|
|
|
7,453
|
|
|
|
|
|
Long term debt
|
|
|
229,500
|
|
|
|
229,500
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
243,097
|
|
|
|
232,789
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common shares, par value $0.01 per share, 60,000,000 shares
authorized and 15,500,000 issued and outstanding
|
|
|
155
|
|
|
|
155
|
|
Preference shares, par value $0.01 per share,
4,000,000 shares authorized, none issued or outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
106,734
|
|
|
|
125,590
|
|
Retained earnings (accumulated deficit)
|
|
|
(677
|
)
|
|
|
4,875
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
106,212
|
|
|
|
130,620
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
349,309
|
|
|
$
|
363,409
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these Consolidated Financial
Statements.
52
ARLINGTON
TANKERS LTD.
December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands of $, except share
|
|
|
|
and per share amounts)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter revenues
|
|
$
|
70,199
|
|
|
$
|
69,435
|
|
|
$
|
55,455
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel operating expenses, other
|
|
|
19,956
|
|
|
|
18,592
|
|
|
|
13,999
|
|
Depreciation
|
|
|
15,642
|
|
|
|
16,058
|
|
|
|
12,411
|
|
Administrative expenses
|
|
|
2,488
|
|
|
|
2,679
|
|
|
|
2,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
38,086
|
|
|
|
37,329
|
|
|
|
28,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
32,113
|
|
|
|
32,106
|
|
|
|
26,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
828
|
|
|
|
734
|
|
|
|
233
|
|
Interest (expense), other
|
|
|
(13,696
|
)
|
|
|
(13,620
|
)
|
|
|
(6,766
|
)
|
Unrealized gain (loss) on interest rate swap
|
|
|
(7,538
|
)
|
|
|
2,244
|
|
|
|
(2,160
|
)
|
Net gain on termination of interest rate swap and debt facility
|
|
|
|
|
|
|
|
|
|
|
4,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses), net
|
|
|
(20,406
|
)
|
|
|
(10,642
|
)
|
|
|
(4,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,707
|
|
|
$
|
21,464
|
|
|
$
|
21,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss) on derivative instrument during the
year
|
|
|
|
|
|
|
|
|
|
|
(1,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
(1,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
11,707
|
|
|
$
|
21,464
|
|
|
$
|
20,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic and diluted
|
|
$
|
0.76
|
|
|
$
|
1.38
|
|
|
$
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding basic
and diluted
|
|
|
15,500,000
|
|
|
|
15,500,000
|
|
|
|
15,500,000
|
|
See accompanying notes to these Consolidated Financial
Statements.
53
ARLINGTON
TANKERS LTD.
for the years ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands of $)
|
|
|
SHAREHOLDERS EQUITY COMMON SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year
|
|
$
|
155
|
|
|
$
|
155
|
|
|
$
|
155
|
|
Shares issued
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of founder shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
|
155
|
|
|
|
155
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL PAID-IN CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year
|
|
|
125,590
|
|
|
|
138,038
|
|
|
|
148,828
|
|
Dividend paid in excess of retained earnings
|
|
|
(18,856
|
)
|
|
|
(12,448
|
)
|
|
|
(10,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
|
106,734
|
|
|
|
125,590
|
|
|
|
138,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year
|
|
|
|
|
|
|
|
|
|
|
1,214
|
|
Reclassification to earnings
|
|
|
|
|
|
|
|
|
|
|
(4,076
|
)
|
Current period net changes in hedging transactions
|
|
|
|
|
|
|
|
|
|
|
2,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss)
|
|
|
|
|
|
|
|
|
|
|
(1,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS (ACCUMULATED DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year
|
|
|
4,875
|
|
|
|
6,458
|
|
|
|
4,290
|
|
Net income for 2007, 2006 and 2005
|
|
|
11,707
|
|
|
|
21,464
|
|
|
|
21,913
|
|
Dividends paid
|
|
|
(17,259
|
)
|
|
|
(23,047
|
)
|
|
|
(19,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
|
(677
|
)
|
|
|
4,875
|
|
|
|
6,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
106,212
|
|
|
$
|
130,620
|
|
|
$
|
144,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these Consolidated Financial
Statements.
54
ARLINGTON
TANKERS LTD.
December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands of $)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,707
|
|
|
$
|
21,464
|
|
|
$
|
21,913
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
15,642
|
|
|
|
16,058
|
|
|
|
12,411
|
|
Realized gain from the termination of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
(4,800
|
)
|
Unrealized (gain)/loss on interest rate swap
|
|
|
7,538
|
|
|
|
(2,244
|
)
|
|
|
2,160
|
|
Amortization of debt issuance costs
|
|
|
238
|
|
|
|
238
|
|
|
|
128
|
|
Write-off of debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
665
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and accrued income
|
|
|
24
|
|
|
|
75
|
|
|
|
1,063
|
|
Other receivables
|
|
|
675
|
|
|
|
622
|
|
|
|
501
|
|
Accrued expenses and other current liabilities
|
|
|
(577
|
)
|
|
|
(1,371
|
)
|
|
|
1,076
|
|
Unearned revenue
|
|
|
3,432
|
|
|
|
24
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
38,679
|
|
|
|
34,866
|
|
|
|
35,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditure on vessels
|
|
|
|
|
|
|
(92,000
|
)
|
|
|
|
|
Sale of short-term investments
|
|
|
43,900
|
|
|
|
23,900
|
|
|
|
|
|
Purchase of short-term investments
|
|
|
(43,400
|
)
|
|
|
(34,400
|
)
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
500
|
|
|
|
(102,500
|
)
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long term debt
|
|
|
|
|
|
|
94,500
|
|
|
|
135,000
|
|
Repayment of long term debt
|
|
|
|
|
|
|
|
|
|
|
(135,000
|
)
|
Dividend payments from retained earnings
|
|
|
(18,856
|
)
|
|
|
(23,047
|
)
|
|
|
(19,745
|
)
|
Dividend payments from paid in capital
|
|
|
(17,259
|
)
|
|
|
(12,448
|
)
|
|
|
(10,790
|
)
|
Proceeds from interest rate swap
|
|
|
|
|
|
|
|
|
|
|
4,800
|
|
Increase in debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(1,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(36,115
|
)
|
|
|
59,005
|
|
|
|
(26,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash
|
|
|
3,064
|
|
|
|
(8,629
|
)
|
|
|
5,879
|
|
Cash and cash equivalents at beginning of year
|
|
|
3,210
|
|
|
|
11,839
|
|
|
|
5,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
6,274
|
|
|
$
|
3,210
|
|
|
$
|
11,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information Interest paid
|
|
$
|
13,411
|
|
|
$
|
13,190
|
|
|
$
|
6,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these Consolidated Financial
Statements.
55
ARLINGTON
TANKERS LTD.
December 31,
2007, 2006 and 2005
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 this 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 Companys 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 Companys 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. The net annual cash interest costs will
approximate 5.38% (5.48% if the Ratio falls below 2.0) due to
the cash benefit that the Company received in December 2005 from
the termination of a swap with Fortis Bank of $4.8 million.
That cash benefit has been designated by the Companys
Board of Directors to offset the higher annual interest costs
over the life of the $229.5 million credit facility.
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 Companys 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 Companys
subsidiaries have entered into for the Initial Vessels, the
Companys subsidiaries that purchased the Additional
Vessels time chartered the Additional Vessels to Stena Bulk for
an initial period of
56
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
three years at the fixed daily Basic Hire without any Additional
Hire provision. At the end of the initial three-year period,
both the Company and Stena Bulk have the option to extend the
time charters on a
vessel-by-vessel
basis for an additional 30 months, at the fixed daily Basic
Hire. If Stena Bulk exercises this option, there will be an
Additional Hire provision during the
30-month
period. If the Company exercises this option, there will be no
Additional Hire arrangement. Furthermore, if Stena Bulk
exercises the
30-month
option, there will be 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, the
time charter parties for the Companys existing Product
tankers and Panamax tankers were amended. These amendments
modified the charter periods for the Companys
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 Companion
) were reduced so that it expired
in November 2008, followed by three one-year options exercisable
by Stena Bulk. 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 Companys Initial
Vessels were also amended. These amendments modified the
provisions relating to drydocking of the Vessels. Specifically,
the amendments provided that all drydockings during the term of
the ship management agreements are to be at the sole cost and
expense of Northern Marine. In addition, Northern Marine agreed
to conduct at least one mid-period drydocking for each Product
tanker and Panamax tanker prior to redelivery of such Vessels.
Under the terms of the ship management agreements, the cost of
these intermediate and special surveys is covered by the vessel
management fees that the Company pays to Northern Marine. Upon
redelivery of the Vessels to the Company at the expiration of
the ship management agreements, Northern Marine has agreed to
re-pay to the Company any drydocking provision accrued, 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 at
the daily rates specified in the ship management agreements. No
amounts have been accrued for the potentially refundable portion
of the management fee.
Based on their filings with the SEC, as of November 19,
2007, Stena and Concordia directly and indirectly owned an
aggregate of approximately 18.0% of the Companys
outstanding common shares.
The Companys 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
Companys Vessels is Bermuda.
57
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
The following table sets out the details of the Vessels included
in these consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter Renewal
|
|
|
|
|
|
|
|
|
|
Initial Charter
|
|
Options Expiration
|
|
Vessel Type
|
|
Year Built
|
|
Dwt
|
|
Date Acquired
|
|
Expiration Date
|
|
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 Companys 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 three one-year 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 Basic Hire under the
charters for each vessel type during each charter year is set
forth below. The first charter year for the Initial Vessels
commenced on November 10, 2004. Each subsequent charter
year will begin on November 11 of the applicable year and end on
the subsequent November 10. The first charter year for the
Additional Vessels commenced on January 5, 2006. Each
subsequent charter year will begin on January 5 of the
applicable year and end on the subsequent January 4. In
2011, the charter period for the Additional Vessels may be
extended for a six month-period beginning on January 5 and
ending on July 4 and subsequent charter years will begin on July
5 and end on July 4.
58
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
The following table sets forth the daily Basic Hire, daily base
operating costs and operating margin for the Companys 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
(Option Year 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
|
|
The following table sets forth the daily Basic Hire, daily Base
Operating Costs and Operating Margin for the Companys two
vessels, the
Stena Companion
and the
Stena
Concord
, with initial charter expiration dates in 2008. The
operating margin is calculated by subtracting the amount of the
base operating costs from the amount of Basic Hire.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena
|
|
|
Stena
|
|
|
|
|
|
|
|
|
Stena
|
|
|
|
Stena
|
|
|
Companion
|
|
|
Companion
|
|
|
|
|
|
Stena Concord
|
|
|
Concord
|
|
|
|
Companion
|
|
|
Base Operating
|
|
|
Operating
|
|
|
Stena Concord
|
|
|
Base 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 (Option Year 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
|
|
The following table sets forth the daily Basic Hire, daily Base
Operating Costs and Operating Margin for the Companys two
vessels, the
Stena Compatriot
and the
Stena Consul,
with initial charter expiration dates in 2010. The operating
margin is calculated by subtracting the amount of the base
operating costs from the amount of Basic Hire.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stena
|
|
|
|
|
|
Stena Consul
|
|
|
|
|
|
|
Stena
|
|
|
Stena
|
|
|
Compatriot
|
|
|
|
|
|
Base
|
|
|
Stena Consul
|
|
|
|
Compatriot
|
|
|
Compatriot
|
|
|
Operating
|
|
|
Stena Consul
|
|
|
Operating
|
|
|
Operating
|
|
Period
|
|
Basic Hire
|
|
|
Base Operating 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 (Option Year 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
|
|
59
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
The following table sets forth the daily Basic Hire, daily Base
Operating Costs and Operating Margin for the Companys 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 Year 1)
|
|
|
17,942
|
|
|
|
6,442
|
|
|
|
11,500
|
|
Jan. 5, 2010 Jan. 4, 2011 (Option Year 2)
|
|
|
18,264
|
|
|
|
6,764
|
|
|
|
11,500
|
|
Jan. 5, 2011 July 4, 2011 (Option Period 3 (Six
Months))
|
|
|
18,603
|
|
|
|
7,103
|
|
|
|
11,500
|
|
July 5, 2011 July 4, 2012 (Option Year 4)
|
|
|
21,158
|
|
|
|
7,458
|
|
|
|
13,700
|
|
July 5, 2012 July 4, 2013 (Option Year 5)
|
|
|
21,531
|
|
|
|
7,831
|
|
|
|
13,700
|
|
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 Companys 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 Companys charters to the commencement
of the first full calendar quarter.
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
was
originally due to expire within 30 days of June 30,
2007. However, because that vessel was off-hire for repairs, Sun
International has exercised its right to extend the term of the
sub-charter relating to the
Stena Vision
so that it is
now due to expire within 30 days of July 31, 2008.
The sub-charter rate that Concordia received from Sun
International with respect to the
Stena Victory
, and the
sub-charter rate that Concordia continues to receive from Sun
International with respect to the
Stena Vision
, is
greater than the Basic Hire rate that the Company receives from
Concordia. Therefore, the Company earned Additional Hire revenue
while the
Stena Victory
was sub-chartered to Sun
International, and the Company continues to earn Additional Hire
revenue while the
Stena Vision
is sub-chartered to Sun
International. The amount of this Additional Hire is 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
60
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
the Charterer in an amount not to exceed 1.25% of the
charterhire received by the Charterer. The Additional Hire
revenue associated with the ongoing Sun International
sub-charter of the
Stena Vision
is guaranteed, meaning
that the Company is paid the Additional Hire revenue by
Concordia whether or not the Vessel is in service during the
term of the Sun International sub-charter.
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.
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, we expect the Vessel to commence 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
Companys 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 Companys
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, 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.
The daily base operating costs, which are payable by the Company
monthly in advance, for each charter year are set forth below.
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. If the
charter extension option is exercised, the final six months of
the
30-month
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.
61
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
Tables setting forth the daily base operating costs for each of
our Vessels are above.
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 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.
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.
Basis of
accounting
The consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. The consolidated financial statements include the assets
and liabilities of the Company and its wholly owned
subsidiaries. All intercompany balances and transactions have
been eliminated upon consolidation.
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 voyages are provided for
in full at the time such losses can be estimated.
Comprehensive
income
Comprehensive income is defined as the change in the
Companys equity during the year from transactions and
other events and circumstances from nonowner sources.
Comprehensive income of the Company includes not only net income
but also unrealized gains or losses on derivative instruments
used in cash flow hedges of future variable-rate interest
payments on the Companys debt (see Note 8 and
Note 9). Such items are reported as accumulated other
comprehensive income (loss), a separate component of
shareholders equity, until such time as the amounts are
included in net income. Upon the refinancing of our debt in
2005, all prior cash flow hedges were terminated and the fair
value of these instruments was removed from accumulated other
comprehensive income and included in net income. The Company has
not designated any hedges during 2006 and 2007.
Commissions
Commissions are expensed in the same period as time charter
revenues are recognized. Commissions are deducted from charter
revenues. There are no commissions associated with the time
charters to Stena and Concordia effective November 10, 2004
and January 5, 2006 described in Note 1.
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 and 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
$6.3 million and
short-term
investments of $12.5 million at December 31, 2007 and
cash and cash equivalents of $3.2 million
and short-term investments of $13.0 million at
December 31, 2006 are pledged as described in Note 8
and are held at
62
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
a single financial institution with a Standard &
Poors rating of A+. The carrying value of cash and cash
equivalents and short-term investments approximates its fair
value.
Foreign
currency
The functional currency of the Company and each of the Vessel
Subsidiaries is the U.S. dollar.
Monetary assets and liabilities denominated in foreign
currencies are translated at the year end exchange rates.
Foreign currency revenues and expenses are translated at
transaction date exchange rates. Exchange gains and losses are
included in the determination of net income. In 2007 and 2006
there were no foreign currency exchange gains and losses
Income
taxes
The Company is incorporated in Bermuda. Under current Bermuda
law, the Company is not required to pay taxes in Bermuda on
either income or capital gains. The Company has received written
assurance from the Minister of Finance in Bermuda that, in the
event of any such taxes being imposed, the Company will be
exempted from taxation until the year 2016. Further, as
described in Risk Factors, the Company is exempt
from U.S. federal income taxes under Code Section 883
and applicable U.S. Treasury regulations.
Vessels,
net
The cost of the Vessels less estimated salvage value is
depreciated on a straight-line basis over their estimated useful
lives of 25 years.
Spare parts inventories are stated at cost. The cost of spare
parts is expensed at the time when the spare part is put in use.
The Company held no spare parts inventory at December 31,
2007 and 2006.
Impairment
of long-lived assets
The carrying value of long-lived assets that are held and used
by the Company are reviewed on an annual basis for impairment or
whenever events or changes in circumstances indicate that the
carrying amount of the asset may no longer be appropriate. The
Company assesses 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 assets carrying value and its fair
value. In addition, long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less
estimated costs to sell.
Deferred
debt issuance cost
Debt issuance costs, including debt arrangement fees, are
capitalized and amortized on a straight-line basis over the term
of the relevant debt; due to the
non-amortizing
nature of the loan, this amortization method approximates the
effective interest method. Amortization of debt issuance costs
is included in interest expense.
Drydocking
provisions
In addition to vessel acquisition, other major capital
expenditures include funding our maintenance program of
regularly scheduled intermediate surveys or special surveys
necessary to preserve the quality of our 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. During 2007, two Vessels completed intermediate
surveys. Under the terms of our Vessel management agreements
with Northern Marine, the cost of these intermediate and special
surveys is covered by the vessel management fees that the
Company pays to Northern Marine. During the duration
63
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
of these intermediate and special surveys, the Company will not
have the opportunity to earn Additional Hire revenues from
profit-sharing arrangements with Stena.
Receivables
Receivables are recorded at their expected net realizable value.
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 best 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 Companys 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 in that all
revenues are due solely from the Charterers. See Note 4.
Fair
value of financial instruments
Statement of Financial Accounting Standards (SFAS)
No. 107, Disclosures about Fair Value of Financial
Instruments, requires the disclosure of fair values for
all financial instruments, both on- and off-balance-sheet, for
which it is practicable to estimate fair value. The Company
estimates that there are no material variations between fair
value and book value for its financial assets or liabilities as
of December 31, 2007 and 2006.
Earnings
per share
Earnings 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 dilutive earnings
per share are the same.
Distributions
to shareholders (Dividend)
The Company intends to pay 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 Companys board of
directors. The Company intends to declare those dividends in
January, April, July and October of each year and pay those
dividends in the subsequent month. Distributions to shareholders
are applied first to retained earnings at the beginning of the
quarter. When retained earnings are not sufficient,
distributions are applied to additional paid-in capital.
|
|
3.
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
|
In June 2006, the Financial Accounting Standards Board, or FASB
issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an Interpretation of
FASB Statement 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with FASB Statement No. 109, Accounting
for Income Taxes. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position
64
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
taken or expected to be taken in a tax return. FIN 48 also
provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006, which is the year ending
December 31, 2007. The adoption of FIN 48 did not have
any impact on the Companys financial position, results of
operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require fair value
measurement in which the FASB concluded that fair value was the
relevant measurement, but does not require any new fair value
measurements. SFAS 157 will be effective for us beginning
in fiscal 2008. The Company is currently evaluating the impact
SFAS 157 will have on the Companys financial
position, results of operations and cash flows.
In February 2007, the FASB issued FAS No. 159,
The Fair Value Option from Financial Assets and Financial
Liabilities (FAS 159). FAS 159
includes an amendment of FAS No. 115 and is intended,
as part of the FASBs ongoing measurement goals, to
encourage the application of fair value measurement, allowing
the measurement of many financial instruments at fair value.
FAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We are currently evaluating the
impact of this new standard, but believe that it will not have a
material impact on our financial position, results of operations
or cash flow.
The future revenues that the Company expects to receive under
the time charters in effect as of December 31, 2007, is
$316.8 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 Companys Vessels, in 2009 with respect to four of
the Companys Vessels and in 2010 with respect to two of
the Companys Vessels. This estimate also includes future
revenues that the Company may receive if the Charterers exercise
their options to extend the charters. The estimated future
revenues include the guaranteed Additional Hire revenue related
to Concordias 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
is due to expire within
30 days of July 31, 2008. Immediately following the
expiration of the sub-charter of the
Stena Victory
with
Sun International, the Vessel commenced operating under a new
two-year sub-charter agreement with Eiger Shipping. In addition,
immediately following the expiration of the sub-charter of the
Stena Vision
with Sun International, the Company expects
that Vessel to commence 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 upon commencement 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
|
|
$
|
70,043
|
|
2009
|
|
|
68,818
|
|
2010
|
|
|
68,062
|
|
2011
|
|
|
59,747
|
|
2012
|
|
|
38,142
|
|
2013
|
|
|
11,987
|
|
65
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands of $)
|
|
|
Additional hire revenue due from Stena/Concordia
|
|
$
|
304
|
|
|
$
|
979
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
304
|
|
|
$
|
979
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and December 31, 2006 other
receivables represent amounts due under the Additional Hire
profit share arrangement. These amounts are calculated quarterly
in arrears.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands of $)
|
|
|
Vessels
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
402,426
|
|
|
$
|
402,426
|
|
Accumulated depreciation
|
|
|
(73,096
|
)
|
|
|
(57,453
|
)
|
Net book value at end of period
|
|
|
329,330
|
|
|
|
344,973
|
|
Spare parts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessels, net
|
|
$
|
329,330
|
|
|
$
|
344,973
|
|
|
|
|
|
|
|
|
|
|
There have been no drydocking costs capitalized through
December 31, 2007.
|
|
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
December 31, 2007 and December 31, 2006 the balance
relates entirely to the Companys $229.5 million
secured credit facility with The Royal Bank of Scotland.
Deferred debt issuance cost is comprised of the following
amounts.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands of $)
|
|
|
Debt arrangement fees
|
|
$
|
1,200
|
|
|
$
|
1,200
|
|
Accumulated amortization
|
|
|
(483
|
)
|
|
|
(245
|
)
|
|
|
|
|
|
|
|
|
|
Deferred debt issuance cost
|
|
$
|
717
|
|
|
$
|
955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands of $)
|
|
|
Secured credit facility
|
|
$
|
229,500
|
|
|
$
|
229,500
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
229,500
|
|
|
$
|
229,500
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and December 31, 2006, 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 Companys
66
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
rights under the time charters for the Vessels and the ship
management agreements, a pledge of the shares of the
Companys wholly-owned subsidiaries and a security interest
in certain of the Companys 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 Companys 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 Companys 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
December 31, 2007 and December 31, 2006 the Company
was in compliance with the financial covenants of the loan
agreement.
Derivative
instruments and hedging activities
SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities 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 December 31, 2007 and December 31, 2006 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 debt facility with The Royal Bank of Scotland. In
conjunction with the debt facility, the Company entered into an
interest rate swap to effectively 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 No. 133, accordingly changes in the fair value of
this swap are recorded in current earnings. The fair value of
the swap at December 31, 2007 was a liability of
$7.45 million. The fair value of the swap at
December 31, 2006 was an asset of $84,000. Accordingly, the
Company recorded a non-cash decrease in the fair value of the
interest rate swap of $7.5 million in current earnings as
an unrealized loss for the twelve months ended December 31,
2007. The fair market value of the Companys interest rate
swap will generally fluctuate based on the implied forward
interest rate curve for the
3-month
U.S. Dollar 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 as
a result of an unrealized gain in current earnings. If the
implied forward interest rate curves increase above the fixed
rate of 5.7325%, the fair market value of the swap will increase
and result in an unrealized gain on the swap. 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 Companys cash dividend payments.
The base LIBOR rate before interest margin of 75 basis
points at December 31, 2007 and 2006 were 5.36688% and
5.19183%, respectively. For the twelve months ended
December 31, 2007 the Company had approximately $782,000 of
reclassifications to decrease interest expense. For the twelve
months ended December 31, 2006, the Company had
approximately $267,000 of reclassifications to decrease interest
expense. These reclassifications did
67
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
not impact the Companys obligation under its debt
facilities. However, these amounts represent the net payments
made and received to settle the swap agreement and effectively
fix the interest rate. The following table summarizes interest
expense incurred under the Companys debt facilities and
interest rate swap agreements for the twelve months ended
December 31, 2007 and December 31, 2006, exclusive of
amortized debt issue costs and other interest costs:
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
($ in thousands)
|
|
|
Interest related to floating rate debt facility
|
|
$
|
14,194
|
|
|
$
|
13,457
|
|
Interest (benefit) related to swap agreement
|
|
|
(782
|
)
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
Total interest incurred under debt facility and interest rate
swap
|
|
$
|
13,412
|
|
|
$
|
13,190
|
|
|
|
|
|
|
|
|
|
|
Except for these interest rate swaps, the Company had no other
outstanding derivative instruments as of December 31, 2007
and December 31, 2006.
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.
As of December 31, 2007 and December 31, 2006, the
Companys 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 undesignated preference shares,
par value $0.01 per share.
As of December 31, 2007 and December 31, 2006, the
Company had 15,500,000 common shares issued, outstanding and
fully paid. There were no founder or preference shares issued
and outstanding.
|
|
11.
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands of $)
|
|
|
Ship mortgages
|
|
$
|
229,500
|
|
|
$
|
229,500
|
|
As of December 31, 2007 and December 31, 2006, 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.
68
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
The minimum future Vessel operating expenses to be paid by the
Company under the ship management agreements in effect as of
December 31, 2007 that will expire in 2008, 2009, and 2010,
and which increase 5% per year on November 9th, and
assuming that the charter options will be exercised through
2011, 2012, and 2013 is $101.5 million. Below is a summary
by year of the minimum future Vessel operating expenses:
|
|
|
|
|
|
|
Minimum Future
|
|
|
|
Vessel Operating
|
|
Year
|
|
Expenses
|
|
|
|
(In thousand of $)
|
|
|
2008
|
|
$
|
20,316
|
|
2009
|
|
|
21,275
|
|
2010
|
|
|
22,339
|
|
2011
|
|
|
20,093
|
|
2012
|
|
|
12,378
|
|
2013
|
|
|
5,126
|
|
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 Concordia and Stena 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 Companys expenses under this agreement are
limited to the first $0.5 million and 50% of the expenses
thereafter. As of December 31, 2007 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
Companys employees are eligible to participate in the
Savings Plan. The Company has elected to operate the Savings
Plan under 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 years ended
December 31, 2007, 2006 and 2005 the Companys
matching contributions were approximately $47,000, $44,000, and
$25,000, respectively, and recorded as a component of
administrative expenses.
|
|
12.
|
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
twelve months ended December 31, 2007 and December 31,
2006 under these contracts was $70.2 million and
$69.4 million, respectively.
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 twelve months ended December 31, 2007
was $20.0 million.
69
ARLINGTON TANKERS LTD.
Notes to the Consolidated Financial Statements
(Continued)
On January 29, 2008, the Company declared a cash dividend
of $8,680,000 or $0.56 per share, and paid that dividend on
February 12, 2008 to shareholders of record as of
February 8, 2008.
|
|
NOTE 14.
|
QUARTERLY
FINANCIAL DATA (Unaudited)
|
Quarterly financial data for fiscal year 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Financial Data
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
($ In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
17,343
|
|
|
$
|
17,775
|
|
|
$
|
17,512
|
|
|
$
|
17,569
|
|
Operating expenses
|
|
|
(9,256
|
)
|
|
|
(9,447
|
)
|
|
|
(9,362
|
)
|
|
|
(10,022
|
)
|
Other income (expense), net
|
|
|
(4,238
|
)
|
|
|
206
|
|
|
|
(8,191
|
)
|
|
|
(8,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3,849
|
|
|
|
8,534
|
|
|
|
(41
|
)
|
|
|
(636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS basic and diluted
|
|
$
|
0.25
|
|
|
$
|
0.55
|
|
|
$
|
(0.00
|
)
|
|
$
|
(0.04
|
)
|
Dividend declared per share
|
|
$
|
0.58
|
|
|
$
|
0.59
|
|
|
$
|
0.59
|
|
|
$
|
0.56
|
|
Quarterly financial data for fiscal year 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Financial Data
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
($ In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
17,244
|
|
|
$
|
17,259
|
|
|
$
|
17,600
|
|
|
$
|
17,332
|
|
Operating expenses
|
|
|
(9,440
|
)
|
|
|
(9,206
|
)
|
|
|
(9,197
|
)
|
|
|
(9,485
|
)
|
Other income (expense), net
|
|
|
1,025
|
|
|
|
(330
|
)
|
|
|
(8,366
|
)
|
|
|
(2,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
8,829
|
|
|
|
7,723
|
|
|
|
37
|
|
|
|
4,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS basic and diluted
|
|
$
|
0.57
|
|
|
$
|
0.50
|
|
|
$
|
0.00
|
|
|
$
|
0.31
|
|
Dividend declared per share
|
|
$
|
0.57
|
|
|
$
|
0.58
|
|
|
$
|
0.60
|
|
|
$
|
0.57
|
|
As described in the Companys accounting policy, the
dividend declared per share is the amount of dividend declared
by the Company in the respective quarter and is calculated based
on the previous quarters earnings.
70
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
There have been no disagreements with our independent auditors
on accounting and financial disclosure matters.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
|
|
(a)
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
|
Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures as of
December 31, 2007. The term disclosure controls and
procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the 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 SECs 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
companys 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 December 31, 2007,
our chief executive officer and chief financial officer
concluded that, as of such date, the Companys disclosure
controls and procedures were effective at the reasonable
assurance level.
|
|
(b)
|
Managements
Report on Internal Control Over Financial Reporting
|
The management of Arlington Tankers is responsible for
establishing and maintaining adequate internal control over
financial reporting for the Company. Management conducted an
evaluation of the effectiveness of the internal control over
financial reporting as of December 31, 2007 using the
criteria established in
Internal Control
Integrated Framework
Issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Internal
control over financial reporting is defined in
Rule 13a-15(f)
or
15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers and effected by the companys board of directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and
includes those policies and procedures that:
|
|
|
|
|
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the company;
|
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made
only in accordance with authorizations of management and
directors of the company; and
|
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risks that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with policies and procedures may deteriorate.
71
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2007
and concluded that the Companys internal control over
financial reporting were effective as of December 31, 2007.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2007 has been
audited by Moore Stephens, PC, an independent registered public
accounting firm, as stated in their report, which appears herein.
|
|
(c)
|
Changes
in Internal Control Over Financial Reporting
|
No change in the Companys internal control over financial
reporting occurred during the fiscal quarter ended
December 31, 2007 that has materially affected, or is
reasonably likely to materially affect, the Companys
internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
Not applicable.
PART III
Certain information required by Part III is omitted from
this Annual Report on
Form 10-K
and incorporated herein by reference to the definitive proxy
statement for our 2008 Annual General Meeting, which we will
file with the Securities and Exchange Commission not later than
120 days after the end of the fiscal year covered by this
Report.
ITEM 10.
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
and Executive Officers
Certain information required by this Item is contained under the
heading Executive Officers of the Registrant in
Part I of this Annual Report on
Form 10-K.
Other information required by this Item will appear under the
headings Proposal 1 Election of
Director, Corporate Governance and
Executive Compensation in the proxy statement for
our 2008 Annual General Meeting, which sections are incorporated
herein by reference.
Code of
Ethics
We have a code of ethics that sets forth our commitment to
ethical business practices. Our code of ethics applies to our
President and Chief Financial Officer, or persons performing
similar functions. Our code of ethics is available on our
website,
www.arlingtontankers.com
, and in print from us
without charge upon request. We intend to post amendments to and
waivers of our code of ethics on our website.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required to be disclosed by this Item pursuant
to Item 402 of
Regulation S-K
will be contained in the proxy statement for our 2008 Annual
General Meeting under the captions Corporate
Governance Compensation of Directors, and
Executive Compensation, and is incorporated in this
Annual Report on
Form 10-K
by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
|
The information required to be disclosed by this Item will be
contained in the proxy statement for our 2008 Annual General
Meeting under the caption Executive Compensation,
and is incorporated in this Annual Report on
Form 10-K
by reference.
72
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required to be disclosed by this Item will be
contained in the proxy statement for our 2008 Annual General
Meeting under the caption Certain Relationships and
Related Transactions, and is incorporated in this Annual
Report on
Form 10-K
by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required to be disclosed by this Item will be
contained in the proxy statement for our 2008 Annual General
Meeting under the caption Independent Registered Public
Accounting Firms Fees and Other Matters and is
incorporated in this Annual Report on
Form 10-K
by reference.
PART IV
ITEM 15.
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
(a)(1)
Financial Statements.
For a list of the financial information included herein, see
Index to Financial Statements on
page of this report.
(a)(2)
Financial Statement Schedules.
All schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or
Notes thereto.
(a)(3)
List of Exhibits.
The list of Exhibits filed as a part of this annual report on
Form 10-K
are set forth on the Exhibit Index immediately preceding
such Exhibits, and is incorporated herein by this reference.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 14, 2008.
ARLINGTON TANKERS LTD.
Name: Edward Terino
|
|
|
|
Title:
|
President, Chief Executive Officer, and
|
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Capacity
|
|
Date
|
|
|
|
|
|
|
/s/
Edward
Terino
Edward
Terino
|
|
President, Chief Executive Officer, and Chief Financial Officer
(Principal Executive, Accounting and Financial Officer)
|
|
March 14, 2007
|
|
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/s/
Michael
K. Drayton
Michael
K. Drayton
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Director and Chairman of the Board
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|
March 14, 2007
|
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/s/
Dr. E.
Grant Gibbons
Dr. E.
Grant Gibbons
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Director
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March 14, 2007
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/s/
Stephen
O. Jaeger
Stephen
O. Jaeger
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Director and Deputy Chairman
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March 14, 2007
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74
EXHIBIT INDEX
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
3.1(1)
|
|
Memorandum of Association
|
3.2(1)
|
|
Bye-laws
|
4.1(1)
|
|
Form of Common Share Certificate
|
4.2(1)
|
|
Registration Rights Agreement
|
10.1(1)
|
|
US $135,000,000 Secured Loan Facility Agreement
|
10.2.1(1)
|
|
Memorandum of Agreement for sale of
Stena Companion
|
10.2.2(1)
|
|
Memorandum of Agreement for sale of
Stena Compatriot
|
10.2.3(1)
|
|
Memorandum of Agreement for sale of
Stena Concord
|
10.2.4(1)
|
|
Memorandum of Agreement for sale of
Stena Consul
|
10.2.5(1)
|
|
Memorandum of Agreement for sale of
Stena Victory
|
10.2.6(1)
|
|
Memorandum of Agreement for sale of
Stena Vision
|
10.2.7(5)
|
|
Memorandum of Agreement for sale of
Stena Concept
|
10.2.8(5)
|
|
Memorandum of Agreement for sale of
Stena Contest
|
10.3.1(1)
|
|
Time Charter Party for
Stena Companion
|
10.3.2(2)
|
|
Amendment No. 1 to Time Charter Party for
Stena
Companion
|
10.3.3(5)
|
|
Amendment No. 2 to Time Charter Party for
Stena
Companion
|
10.3.4(1)
|
|
Time Charter Party for
Stena Compatriot
|
10.3.5(2)
|
|
Amendment No. 1 to Time Charter Party for
Stena
Compatriot
|
10.3.6(6)
|
|
Amendment No. 2 to Time Charter Party for
Stena
Compatriot
|
10.3.7(1)
|
|
Time Charter Party for
Stena Concord
|
10.3.8(2)
|
|
Amendment No. 1 to Time Charter Party for
Stena
Concord
|
10.3.9(6)
|
|
Amendment No. 2 to Time Charter Party for
Stena
Concord
|
10.3.10(1)
|
|
Time Charter Party for
Stena Consul
|
10.3.11(2)
|
|
Amendment No. 1 to Time Charter Party for
Stena
Consul
|
10.3.12(6)
|
|
Amendment No. 2 to Time Charter Party for
Stena
Consul
|
10.3.13(1)
|
|
Time Charter Party for
Stena Victory
|
10.3.14(2)
|
|
Amendment No. 1 to Time Charter Party for
Stena
Victory
|
10.3.15(1)
|
|
Time Charter Party for
Stena Vision
|
10.3.16(2)
|
|
Amendment No. 1 to Time Charter Party for
Stena
Vision
|
10.4.1(1)
|
|
Ship Management Agreement for
Stena Companion
|
10.4.2(2)
|
|
Amendment No. 1 to Ship Management Agreement for
Stena
Companion
|
10.4.3(6)
|
|
Amendment No. 2 to Ship Management Agreement for
Stena
Companion
|
10.4.4(1)
|
|
Ship Management Agreement for
Stena Compatriot
|
10.4.5(2)
|
|
Amendment No. 1 to Ship Management Agreement for
Stena
Compatriot
|
10.4.6(6)
|
|
Amendment No. 2 to Ship Management Agreement for
Stena
Compatriot
|
10.4.7(1)
|
|
Ship Management Agreement for
Stena Concord
|
10.4.8(2)
|
|
Amendment No. 1 to Ship Management Agreement for
Stena
Concord
|
10.4.9(6)
|
|
Amendment No. 2 to Ship Management Agreement for
Stena
Concord
|
10.4.10(1)
|
|
Ship Management Agreement for
Stena Consul
|
10.4.11(2)
|
|
Amendment No. 1 to Ship Management Agreement for
Stena
Consul
|
10.4.12(6)
|
|
Amendment No. 2 to Ship Management Agreement for
Stena
Consul
|
10.4.13(1)
|
|
Ship Management Agreement for
Stena Victory
|
75
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
10.4.14(2)
|
|
Amendment No. 1 to Ship Management Agreement for
Stena
Victory
|
10.4.15(6)
|
|
Amendment No. 2 to Ship Management Agreement for
Stena
Victory
|
10.4.16(1)
|
|
Ship Management Agreement for
Stena Vision
|
10.4.17(2)
|
|
Amendment No. 1 to Ship Management Agreement for
Stena
Vision
|
10.4.18(6)
|
|
Amendment No. 2 to Ship Management Agreement for
Stena
Vision
|
10.4.19(6)
|
|
Ship Management Agreement for
Stena Concept
|
10.4.20(6)
|
|
Ship Management Agreement for
Stena Contest
|
10.5.1(1)
|
|
Stena Guaranty of Time Charter for
Stena Companion
|
10.5.2(1)
|
|
Stena Guaranty of Time Charter for
Stena Compatriot
|
10.5.3(1)
|
|
Stena Guaranty of Time Charter for
Stena Concord
|
10.5.4(1)
|
|
Stena Guaranty of Time Charter for
Stena Consul
|
10.5.5(6)
|
|
Stena Guaranty of Time Charter for
Stena Concept
|
10.5.6(6)
|
|
Stena Guaranty of Time Charter for
Stena Contest
|
10.5.7(1)
|
|
Concordia Guaranty of Time Charter for
Stena Victory
|
10.5.8(1)
|
|
Concordia Guaranty of Time Charter for
Stena Vision
|
10.6.1(1)
|
|
Stena Standby Charter Agreement for
Stena Victory
|
10.6.2(1)
|
|
Stena Standby Charter Agreement for
Stena Vision
|
10.7.1(1)
|
|
Stena Guaranty of Off-Hire and Replacement of Ship Manager for
Stena Companion
|
10.7.2(1)
|
|
Stena Guaranty of Off-Hire and Replacement of Ship Manager for
Stena Compatriot
|
10.7.3(1)
|
|
Stena Guaranty of Off-Hire and Replacement of Ship Manager for
Stena Concord
|
10.7.4(1)
|
|
Stena Guaranty of Off-Hire and Replacement of Ship Manager for
Stena Consul
|
10.7.5(1)
|
|
Stena Guaranty of Off-Hire and Replacement of Ship Manager for
Stena Victory
|
10.7.6(1)
|
|
Stena Guaranty of Off-Hire and Replacement of Ship Manager for
Stena Vision
|
10.7.8(6)
|
|
Stena Guaranty of Off-Hire and Replacement of Ship Manager for
Stena Concept
|
10.7.9(6)
|
|
Stena Guaranty of Off-Hire and Replacement of Ship Manager for
Stena Contest
|
10.8.1(1)
|
|
Arlington Guaranty of Time Charter for
Stena Companion
|
10.8.2(1)
|
|
Arlington Guaranty of Time Charter for
Stena Compatriot
|
10.8.3(1)
|
|
Arlington Guaranty of Time Charter for
Stena Concord
|
10.8.4(1)
|
|
Arlington Guaranty of Time Charter for
Stena Consul
|
10.8.5(1)
|
|
Arlington Guaranty of Time Charter for
Stena Victory
|
10.8.6(1)
|
|
Arlington Guaranty of Time Charter for
Stena Vision
|
10.8.7(6)
|
|
Arlington Guaranty of Time Charter for
Stena Concept
|
10.8.8(6)
|
|
Arlington Guaranty of Time Charter for
Stena Contest
|
10.9.1(1)
|
|
Arlington Guaranty of Ship Management Agreement for
Stena
Companion
|
10.9.2(1)
|
|
Arlington Guaranty of Ship Management Agreement for
Stena
Compatriot
|
10.9.3(1)
|
|
Arlington Guaranty of Ship Management Agreement for
Stena
Concord
|
10.9.4(1)
|
|
Arlington Guaranty of Ship Management Agreement for
Stena
Consul
|
10.9.5(1)
|
|
Arlington Guaranty of Ship Management Agreement for
Stena
Victory
|
10.9.6(1)
|
|
Arlington Guaranty of Ship Management Agreement for
Stena
Vision
|
10.9.7(6)
|
|
Arlington Guaranty of Ship Management Agreement for
Stena
Concept
|
10.9.8(6)
|
|
Arlington Guaranty of Ship Management Agreement for
Stena
Contest
|
10.10.1(5)
|
|
Loan Agreement, dated 12 December 2005, between Arlington
Tankers Ltd. and The Royal Bank of Scotland plc.
|
10.11(3)
|
|
Letter Agreement, dated July 1, 2005, between Arlington
Tankers Ltd. and Tara Railton
|
76
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
10.12*(4)
|
|
Change in Control Agreement between Arlington Tankers Ltd. and
Edward Terino, dated October 24, 2005
|
10.13*(7)
|
|
Arlington Tankers Ltd. 2007 Bonus Plan
|
12.1
|
|
Statement re: Computation of Ratio of Earnings to Fixed Charges.
|
14.1(8)
|
|
Code of Ethics
|
21.1
|
|
Subsidiaries
|
23.1
|
|
Consent of Moore Stephens P.C. (Independent Registered Public
Accounting Firm).
|
23.2
|
|
Consent of KPMG LLP (Independent Registered Public Accounting
Firm).
|
31.1
|
|
Certification of President, Chief Executive Officer, and Chief
Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a)
|
32.1
|
|
Certification of President, Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. 1350
|
|
|
|
(1)
|
|
Incorporated herein by reference from the Registrants
Registration Statement on
Form F-1,
filed on October 21, 2004 (File
No. 333-119869).
|
|
(2)
|
|
Incorporated herein by reference from the Registrants
Annual Report on
Form 20-F,
filed on June 6, 2005 (File
No. 001-32343).
|
|
(3)
|
|
Incorporated by reference from the Registrants Current
Report on
Form 8-K,
filed on July 8, 2005 (File
No. 001-32343).
|
|
(4)
|
|
Incorporated by reference from the Registrants Current
Report on
Form 8-K,
filed on October 27, 2005 (File
No. 001-32343).
|
|
(5)
|
|
Incorporated by reference from the Registrants Current
Report on
Form 8-K,
filed on December 16, 2005 (File
No. 001-32343).
|
|
(6)
|
|
Incorporated by reference from the Registrants Current
Report on
Form 8-K,
filed on January 11, 2006 (File
No. 001-32343).
|
|
(7)
|
|
Incorporated by reference from the Registrants Current
Report on
Form 8-K,
filed on April 26, 2007 and Registrants Current
Report on
Form 8-K,
filed on August 22, 2007 (File
No. 001-32343).
|
|
(8)
|
|
Incorporated herein by reference from the Registrants
Annual Report on
Form 10-K,
filed on March 16, 2007 (File
No. 001-32343).
|
|
*
|
|
Management contracts and compensatory plan or arrangements
required to be filed as an exhibit pursuant to Item 15(b)
of
Form 10-K.
|
77
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