UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F/A
(Mark One)
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
------------------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
--------------------------------------------------
Commission file number 0-22704
----------------------------------------------------------
Frontline Ltd.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Frontline Ltd.
--------------------------------------------------------------------------------
(Translation of Registrant's name into English)
Bermuda
--------------------------------------------------------------------------------
(Jurisdiction of incorporation or organisation)
Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda
--------------------------------------------------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to section 12(b) of the Act.
Title of each class Name of each exchange
on which registered
Ordinary Shares, $2.50 Par Value New York Stock Exchange
-------------------------------- -----------------------
Securities registered or to be registered pursuant to section 12(g) of the Act.
--------------------------------------------------------------------------------
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
Ordinary Shares, $2.50 Par Value
--------------------------------------------------------------------------------
(Title of class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the
annual report.
73,647,930 Ordinary Shares, $2.50 Par Value
--------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [_] Item 18 [X]
INDEX TO REPORT ON FORM 20-F
PART I PAGE
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS................1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE............................. 1
ITEM 3. KEY INFORMATION..................................................... 1
ITEM 4. INFORMATION ON THE COMPANY.......................................... 8
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS........................23
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..........................37
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS........................................................39
ITEM 8. FINANCIAL INFORMATION...............................................40
ITEM 9. THE OFFER AND LISTING...............................................41
ITEM 10. ADDITIONAL INFORMATION..............................................42
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...................................................44
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES...................................................45
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.....................46
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS.................................................46
ITEM 15. CONTROLS AND PROCEDURES.............................................46
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT....................................46
ITEM 16B. CODE OF ETHICS......................................................46
ITEM 16C. PRINCIPAL ACCOUNTANT FEES...........................................46
ITEM 16D. EXEMPTIONS FOM THE LISTING STANDARDS FOR
AUDIT COMMITTEES....................................................47
PART III
ITEM 17. FINANCIAL STATEMENTS................................................47
ITEM 18. FINANCIAL STATEMENTS................................................48
ITEM 19. EXHIBITS............................................................49
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Matters discussed in this document may constitute forward-looking statements.
The Private Securities Litigation Reform Act of 1995 provides safe harbor
protections for forward-looking statements in order to encourage companies to
provide prospective information about their business. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements, which
are other than statements of historical facts.
Frontline Ltd., or the Company, desires to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this cautionary statement in connection with this safe harbor
legislation. This document and any other written or oral statements made by us
or on our behalf may include forward-looking statements, which reflect our
current views with respect to future events and financial performance. The words
"believe," "anticipate," "intends," "estimate," "forecast," "project," "plan,"
"potential," "will," "may," "should," "expect" and similar expressions identify
forward-looking statements.
The forward-looking statements in this document are based upon various
assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, management's examination of historical operating
trends, data contained in our records and other data available from third
parties. Although we believe that these assumptions were reasonable when made,
because these assumptions are inherently subject to significant uncertainties
and contingencies which are difficult or impossible to predict and are beyond
our control, we cannot assure you that we will achieve or accomplish these
expectations, beliefs or projections.
In addition to these important factors and matters discussed elsewhere herein,
important factors that, in our view, could cause actual results to differ
materially from those discussed in the forward-looking statements include the
strength of world economies, fluctuations in currencies and interest rates,
general market conditions, including fluctuations in charterhire rates and
vessel values, changes in demand in the tanker market, including changes in
demand resulting from changes in OPEC's petroleum production levels and world
wide oil consumption and storage, changes in the Company's operating expenses,
including bunker prices, drydocking and insurance costs, changes in governmental
rules and regulations or actions taken by regulatory authorities, potential
liability from pending or future litigation, general domestic and international
political conditions, potential disruption of shipping routes due to accidents
or political events, and other important factors described from time to time in
the reports filed by the Company with the Securities and Exchange Commission.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The selected income statement data of the Company with respect to the fiscal
years ended December 31, 2003, 2002 and 2001 and the selected balance sheet data
of the Company with respect to the fiscal years ended December 31, 2003 and 2002
have been derived from the Company's Consolidated Financial Statements included
herein and should be read in conjunction with such statements and the notes
thereto. The selected income statement data with respect to the fiscal years
ended December 31, 2000 and 1999 and the selected balance sheet data with
respect to the fiscal years ended December 31, 2001, 2000 and 1999 has been
derived from consolidated financial statements of the Company not included
herein. The following table should also be read in conjunction with Item 5.
"Operating and Financial Review and Prospects" and the Company's Consolidated
Financial Statements and Notes thereto included herein.
Fiscal Year Ended December 31,
-------------------------------------------------------
2003 2002 2001 2000 1999
(in thousand of $, except Ordinary Shares, per Ordinary Share data and ratios)
Income Statement Data:
Total operating revenues(1) $1,173,783 $ 551,595 $716,478 $692,717 $ 367,876
Total operating expenses(1) $ 687,007 $ 454,691 $376,678 $322,328 $ 344,307
Net operating income (loss) $ 492,402 $ 95,676 $375,420 $374,269 $(12,210)
Net income (loss) from continuing operations before
income taxes and minority interest $ 443,130 $ 7,150 $330,551 $305,951 $(91,150)
Net income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 443,127 $ 7,172 $330,107 $305,910 $(86,896)
Discontinued operations(2) $ - $ (1,929) $ 21,076 $ 7,957 $ -
Cumulative effect of change in accounting principle $ (33,767) $(14,142) $ 31,545 $ - $ -
Net (loss) income $ 409,360 $ (8,899) $382,728 $313,867 $(86,896)
Earnings (loss) from continuing operations before
cumulative effect of change in accounting principle
per Ordinary Share
- basic $ 5.92 $ 0.09 $ 4.30 $ 4.17 $ (1.76)
- diluted $ 5.90 $ 0.09 $ 4.29 $ 4.16 $ (1.76)
Earnings (loss) per Ordinary Share
- basic $ 5.47 $ (0.12) $ 4.99 $ 4.28 $ (1.76)
- diluted $ 5.45 $ (0.12) $ 4.98 $ 4.27 $ (1.76)
Cash dividends paid per Ordinary Share $ 4.55 $ 0.25 $ 1.50 $ - $ -
Certain comparative figures have been reclassified to conform to the
presentation adopted in the current period.
(1) Previously we have reported net operating revenues in our income statement
data. Effective December 31, 2003 we have reclassified voyage expenses and
commission as a component of total operating revenues and now report total
operating revenues and total operating expenses.
(2) During the year ended December 31, 2002 the Company sold a portion of its
dry-bulk operations which have been recorded as discontinued operations in
2002, 2001 and 2000. These operations were acquired in 2000.
Balance Sheet Data (at end of year):
Cash and cash equivalents $ 124,189 $ 92,078 $ 178,176 $ 103,514 $ 65,467
Newbuildings and vessel purchase options $ 8,370 $ 27,405 $ 102,781 $ 36,326 $ 32,777
Vessels and equipment, net $ 2,165,239 $ 2,373,329 $ 2,196,959 $ 2,254,921 $ 1,523,112
Vessels under capital lease, net $ 765,126 $ 264,902 $ 317,208 $ 108,387 $ -
Investments in associated companies $ 173,329 $ 119,329 $ 109,898 $ 27,361 $ 16,274
Total assets $ 4,463,535 $ 3,034,743 $ 3,033,774 $ 2,780,988 $ 1,726,793
Short-term debt and current portion of long-term debt $ 191,131 $ 167,807 $ 227,597 $ 212,767 $ 116,814
Current portion of obligations under capital lease $ 20,138 $ 13,164 $ 17,127 $ 7,888 $ -
Long-term debt $ 2,091,286 $ 1,277,665 $ 1,164,354 $ 1,331,372 $ 962,880
Obligations under capital lease $ 753,823 $ 259,527 $ 283,663 $ 101,875 $ -
Share capital $ 184,120 $ 191,166 $ 191,019 $ 195,172 $ 152,405
Stockholders' equity $ 1,255,417 $ 1,226,973 $ 1,252,401 $ 1,029,490 $ 557,300
Ordinary Shares outstanding 73,647,930 76,466,566 76,407,566 78,068,811 60,961,860
Weighted average ordinary shares outstanding 74,901,900 76,456,340 76,714,000 73,390,654 49,467,490
Cash Flow Data
Cash provided by operating activities $ 523,280 $ 142,025 $ 477,607 $ (508,938) $ 175,532
Cash provided by (used in) financing activities $ (233,303) $ (5,230) $ (299,163) $ 275,403 $ (230,585)
Cash provided by (used in) investing activities $ (269,058) $ (222,893) $ (103,782) $ (508,938) $ 175,532
Other Financial Data
Equity to assets ratio (percentage)(3) 28.1% 40.5% 41.3% 37.0% 32.3%
Debt to equity ratio(4) 2.4 1.4 1.4 1.6 1.9
Price earnings ratio(5) 4.3 neg 2.1 3.3 neg
Net voyage revenues $ 765,985 $ 354,212 $ 551,515 $ 559,601 $ 223,334
The Company's vessels are operated under time charters, bareboat charters,
voyage charters pool arrangements and COAs. Under a time charter, the charterer
pays substantially all of the vessel voyage costs. Under a bareboat charter the
charterer pays substantially all of the vessel voyage and operating costs. Under
a voyage charter, the vessel owner pays such costs. Vessel voyage costs are
primarily fuel and port charges. Accordingly, charter income from a voyage
charter would be greater than that from an equally profitable time charter to
take account of the owner's payment of vessel voyage costs. In order to compare
vessels trading under different types of charters, it is standard industry
practice to measure the revenue performance of a vessel in terms of average
daily time charter equivalent earnings, or TCEs. For voyage charters, this is
calculated by dividing net voyage revenues by the number of days on charter.
Days spent off-hire are excluded from this calculation. Net voyage revenues, a
non-GAAP measure, provides more meaningful information to us than voyage
revenues, the most directly comparable GAAP measure. Net voyage revenues are
also widely used by investors and analysts in the tanker shipping industry for
comparing financial performance between companies and to industry averages. The
following table reconciles our net voyage revenues to voyage revenues.
2003 2002 2001 2000 1999
Voyage revenues 1,089,583 489,286 639,807 656,917 339,996
Voyage expenses and commission (323,598) (135,074) (88,292) (97,316) (116,662)
------------------------------------------------
Net voyage revenues 765,985 354,212 551,515 559,601 223,334
================================================
----------------
(3) Equity to assets ratio is calculated as total stockholders' equity divided
by total assets.
(4) Debt to equity ratio is calculated as total interest bearing current and
long-term liabilities, including obligations under capital leases, divided
by stockholders' equity.
(5) Price earnings ratio is calculated using the closing year end share price
divided by basic Earnings per Share.
B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable
D. RISK FACTORS
We are engaged primarily in transporting crude oil and oil products. The
following summarises some of the risks that may materially affect our business,
financial condition or results of operations. Please note, in this section,
"we", "us" and "our" all refer to the Company and its subsidiaries.
The cyclical nature of the tanker industry may lead to volatile changes in
charter rates and vessel values which may adversely affect our earnings
Historically, the tanker industry has been highly cyclical, with volatility in
profitability and asset values resulting from changes in the supply of and
demand for tanker capacity. If the tanker market is depressed in the future our
earnings and available cash flow may decrease. Our ability to re-charter our
vessels on the expiration or termination of their current spot and time charters
and the charter rates payable under any renewal or replacement charters will
depend upon, among other things, economic conditions in the tanker market.
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.
The factors affecting the supply and demand for oil tankers are outside of our
control, and the nature, timing and degree of changes in industry conditions are
unpredictable. The factors that influence demand for tanker capacity include:
o demand for oil and oil products;
o global and regional economic conditions;
o the distance oil and oil products are to be moved by sea; and
o changes in seaborne and other transportation patterns.
The factors that influence the supply of tanker capacity include:
o the number of newbuilding deliveries;
o the scrapping rate of older vessels;
o the number of vessels that are out of service; and
o national or international regulations that may effectively cause reductions
in the carrying capacity of vessels or early obsolescence of tonnage.
We are highly dependent on spot oil voyage charters. Any decrease in spot
charter rates in the future may adversely affect our earnings
The majority of our vessels currently operate on a spot charter basis or under
contracts of affreightment under which we carry an agreed upon quantity of cargo
over a specified route and time period. Although spot chartering is common in
the tanker industry, the spot charter market is highly competitive and spot
charter rates may fluctuate significantly based upon tanker and oil supply and
demand. The successful operation of our vessels in the spot charter market
depends upon, among other things, obtaining profitable spot charters and
minimising, to the extent possible, time spent waiting for charters and time
spent travelling unladen to pick up cargo. We cannot assure you that future spot
charters will be available at rates sufficient to enable our vessels trading in
the spot market to operate profitably. In addition, bunkering, or fuel, charges
that account for a substantial portion of the operating costs, and generally
reflect prevailing oil prices, are subject to sharp fluctuations.
Our revenues experience seasonal variations that may affect our income
We operate our tankers in markets that have historically exhibited seasonal
variations in demand and, therefore, charter rates. Tanker markets are typically
stronger in the winter months in the northern hemisphere due to increased oil
consumption. In addition, unpredictable weather patterns in the winter months
tend to disrupt vessel scheduling. The oil price volatility resulting from these
factors has historically led to increased oil trading activities and demand for
vessels. The change in demand for vessels may affect the charter rates that we
receive.
We charter 46 vessels from our subsidiary Ship Finance International Limited at
fixed rates on long-term charters. We are obliged to make fixed rate hire
payments to Ship Finance even though our income may decrease to levels that make
these charters unprofitable.
The long term time charters to us extend for various periods depending on the
age of the vessels, ranging from approximately seven to 22 years. With certain
exceptions, the daily base charter rates, which are payable by us are as
follows:
Year VLCC Suezmax
---- ------- -------
2003 to 2006 ........................... $25,575 $21,100
2007 to 2010 ........................... $25,175 $20,700
2011 and beyond ........................ $24,175 $19,700
If our earnings from use of these vessels fall below these rates we will incur
losses.
Because the market value of our vessels may fluctuate significantly, we may
incur losses when we sell vessels which may adversely affect our earnings
The fair market value of vessels may increase and decrease depending on the
following factors:
o general economic and market conditions affecting the shipping industry;
o competition from other shipping companies;
o types and sizes of vessels;
o other modes of transportation;
o cost of newbuildings;
o governmental or other regulations;
o prevailing level of charter rates; and
o technological advances.
If we sell a vessel at a time when ship prices have fallen, the sale may be at
less than the vessel's carrying amount on our financial statements, with the
result that we could incur a loss and a reduction in earnings. In addition, if
we determine at any time that a vessel's future limited useful life and earnings
require us to impair its value on our financial statements, that could result in
a charge against our earnings and the reduction of our shareholder's equity. It
is possible that the market value of our vessels will decline in the future.
An acceleration of the current prohibition to trade deadlines for our non-double
hull tankers could adversely affect its operations.
Our tanker fleet includes 19 non-double hull tankers. The United States, the
European Union and the International Maritime Organization, or the IMO, have all
imposed limits or prohibitions on the use of these types of tankers in specified
markets after certain target dates, which range from 2010 to 2015. The sinking
of the single hull m.t. Prestige offshore Spain in November 2002 has led to
proposals by the European Union and the IMO to accelerate the prohibition to
trade of all non-double hull tankers, with certain limited exceptions. In
December 2003, the Marine Environmental Protection Committee of the IMO adopted
a proposed amendment to the International Convention for the Prevention of
Pollution from Ships to accelerate the phase out of single hull tankers from
2015 to 2010 unless the relevant flag states extend the date to 2015. This
proposed amendment will take effect in April 2005 unless objected to by a
sufficient number of states. We do not know whether any of our vessels will be
subject to this accelerated phase-out, but this change could result in a number
of our vessels being unable to trade in many markets after 2010. As a result,
the estimated useful lives of fourteen of the Company's wholly owned vessels and
two vessels owned by associated companies were reduced in the fourth quarter of
2003. A change in accounting estimate was recognised to reflect this decision,
resulting in an increase in depreciation expense and consequently decreasing net
income by $1.3 million and basic and diluted earnings per share by $0.02, for
2003. Moreover, the IMO may still adopt regulations in the future that could
adversely affect the useful lives of our non-double hull tankers as well as its
ability to generate income from them.
Compliance with safety, environmental and other governmental and other
requirements 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 vessels are maintained in good condition in compliance with
present regulatory and class requirements relevant to areas in which they
operate, and are operated in compliance with applicable safety/environmental
laws and regulations. However, regulation of vessels, 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.
Competition
The operation of tankers and transportation of crude and petroleum products and
the other businesses in which we operate are extremely competitive. Through our
operating subsidiaries we compete with other oil tanker and dry bulk carrier
owners (including major oil companies as well as independent companies), and, to
a lesser extent, owners of other size vessels. Our market share currently is
insufficient to enforce any degree of pricing discipline in the markets in which
we compete. It is possible that our competitive position will erode in the
future.
Our debt service obligations could affect our ability to incur additional
indebtedness or engage in certain transactions
Our existing financing agreements impose operational and financing restrictions
on us which may significantly limit or prohibit, among other things, our ability
to incur additional indebtedness, create liens, sell capital shares of
subsidiaries, make certain investments, engage in mergers and acquisitions,
purchase and sell vessels, enter into time or consecutive voyage charters or pay
dividends without the consent of our lenders. In addition, our lenders may
accelerate the maturity of indebtedness under our financing agreements and
foreclose on the collateral securing the indebtedness upon the occurrence of
certain events of default, including our failure to comply with any of the
covenants contained in our financing agreements, not rectified within the
permitted time. For instance, declining vessel values could lead to a breach of
covenants under our financing agreements. If we are unable to pledge additional
collateral or obtain waivers from our lenders, our lenders could accelerate our
debt and foreclose on our vessels.
An increase in interest rates could materially and adversely affect our
financial performance
At December 31, 2003 we had total long-term debt outstanding of $2,282.4
million, of which $1,095.1 million is floating rate debt. The Company uses
interest rate swaps to manage interest rate risk. As at December 31, 2003 the
Company's interest rate swap arrangements effectively fix the Company's interest
rate exposure on $140.5 million of floating rate debt. Our maximum exposure to
interest rate fluctuations is $954.6 million at December 31, 2003. If interest
rates rise significantly, that could materially and adversely affect our results
of operations.
Fluctuations in the Yen could affect our earnings
Certain of our vessels have charters and financing arrangements that require
payments of principal and interest or charter hire in Yen. As we have not hedged
our Yen exposure against the Dollar, a change in the exchange rate for Yen could
have an adverse impact on our financial condition and results of operations.
We may be unable to attract and retain key management personnel in the tanker
industry, which may negatively impact the effectiveness of our management and
our results of operation
Our success depends to a significant extent upon the abilities and efforts of
our senior executives, and particularly John Fredriksen, our Chairman and Chief
Executive Officer, and Tor Olav Tr0im, our Vice-President, for the management of
our activities and strategic guidance. While we believe that we have an
experienced management team, the loss or unavailability of one or more of our
senior executives, and particularly Mr. Fredriksen or Mr. Tr0im, for any
extended period of time could have an adverse effect on our business and results
of operations.
Risks involved with operating ocean-going vessels could affect our business and
reputation, which would adversely affect our revenues
The operation of an ocean-going vessel carries inherent risks. These risks
include the possibility of:
o marine disaster;
o piracy;
o environmental accidents;
o cargo and property losses or damage; and
o business interruptions caused by mechanical failure, human error, war,
terrorism, piracy, political action in various countries, labour strikes,
or adverse weather conditions.
Any of these circumstances or events could increase our costs or lower our
revenues. The involvement of our vessels in an oil spill or other environmental
disaster may harm our reputation as a safe and reliable tanker operator.
We may not have adequate insurance to compensate us if our vessels are damaged
or lost
We procure insurance for our fleet against those risks that we believe the
shipping industry commonly insures against. These insurances include hull and
machinery insurance, protection and indemnity insurance, which includes
environmental damage and pollution insurance coverage, and war risk insurance.
We can give no assurance that we are adequately insured against all risks. We
may not be able to obtain adequate insurance coverage at reasonable rates for
our fleet in the future. Additionally, our insurers may not pay particular
claims. Our insurance policies contain deductibles for which we will be
responsible, limitations and exclusions which, although we believe are standard
in the shipping industry, may nevertheless increase our costs or lower our
revenue.
An increase in costs could materially and adversely affect our financial
performance
Our vessel operating expenses depend on a variety of factors including crew
costs, provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs, many of which are beyond our control and affect the
entire shipping industry. Some of these costs, primarily insurance and enhanced
security measures implemented after September 11, 2001, are increasing. The
terrorist attack of the VLCC Limburg in Yemen during October 2002 has resulted
in even more emphasis on security and pressure on insurance rates. If costs
continue to rise, that could materially and adversely affect our results of
operations.
Maritime claimants could arrest our tankers, which could interrupt our cash flow
Crew members, suppliers of goods and services to a vessel, shippers of cargo and
other parties may be entitled to a maritime lien against that vessel for
unsatisfied debts, claims or damages. In many jurisdictions a maritime
lienholder may enforce its lien by arresting a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our vessels could
interrupt our cash flow and require us to pay a significant amount of money to
have the arrest lifted.
In addition, in some jurisdictions, such as South Africa, under the "sister
ship" theory of liability, a claimant may arrest both the vessel which is
subject to the claimant's maritime lien and any "associated" vessel, which is
any vessel owned or controlled by the same owner. Claimants could try to assert
"sister ship" liability against one vessel in our fleet for claims relating to
another of our ships.
Governments could requisition our vessels during a period of war or emergency,
resulting in loss of earnings
A government could requisition for title or seize our vessels. Requisition for
title occurs when a government takes control of a vessel and becomes her owner.
Also, a government could requisition our vessels for hire. Requisition for hire
occurs when a government takes control of a vessel and effectively becomes her
charterer at dictated charter rates. Generally, requisitions occur during a
period of war or emergency. Government requisition of one or more of our vessels
would negatively impact our revenues.
Our operations outside the United States expose us to global risks that may
interfere with the operation of our vessels
We are an international company and primarily conduct our operations outside of
the United States. Changing economic, regulatory, political and governmental
conditions in the countries where we are engaged in business or where our
vessels are registered affect us. Hostilities or other political instability in
regions where our vessels trade could affect our trade patterns and adversely
affect our operations and performance. The terrorist attacks against targets in
the United States on September 11, 2001 and the military response by the United
States has increased the likelihood of acts of terrorism worldwide. Acts of
terrorism, regional hostilities or other political instability, as shown by the
attack on the Limburg in Yemen in October 2002, attacks on oil pipelines during
and subsequent to the Iraq war in 2003 and attacks on expatriate workers in the
Middle East could adversely affect the oil trade and reduce our revenue or
increase our expenses.
Terrorist attacks, such as the attacks on the United States on September 11,
2001, and other acts of violence or war may affect the financial markets and our
business, results of operations and financial condition
As a result of the September 11, 2001 terrorist attacks and subsequent events,
there has been considerable uncertainty in the world financial markets. The full
effect of these events, as well as concerns about future terrorist attacks, on
the financial markets is not yet known, but could include, among other things,
increased volatility in the price of securities. These uncertainties could also
adversely affect our ability to obtain additional financing on terms acceptable
to us or at all. Future terrorist attacks may also negatively affect our
operations and financial condition and directly impact our vessels or our
customers. Future terrorist attacks could result in increased volatility of the
financial markets in the United States and globally and could result in an
economic recession in the United States or the world. Any of these occurrences
could have a material adverse impact on our operating results, revenue, and
costs.
Because we are a foreign corporation, you may not have the same rights that a
shareholder in a U.S. corporation may have
We are a Bermuda corporation. Our memorandum of association and bye-laws and the
Bermuda Companies Act 1981, as amended, govern our affairs. Investors may have
more difficulty in protecting their interests in the face of actions by
management, directors or controlling shareholders than would shareholders of a
corporation incorporated in a United States jurisdiction. Under Bermuda law a
director generally owes a fiduciary duty only to the company; not to the
company's shareholder. Our shareholders may not have a direct course of action
against our directors. In addition, Bermuda law does not provide a mechanism for
our shareholders to bring a class action lawsuit under Bermuda law. Further, our
Bye-laws provide for the indemnification of our directors or officers against
any liability arising out of any act or omission except for an act or omission
constituting fraud, dishonesty or illegality.
Because our offices and most of our assets are outside of the United States, you
may not be able to bring suit against us, or enforce a judgment obtained against
us, in the United States
Our executive officers, administrative activities and assets are located outside
the United States. As a result, it may be more difficult for investors to effect
service of process within the United States upon us, or to enforce both in the
United States and outside the United States judgments against us in any action,
including actions predicated upon the civil liability provisions of the federal
securities laws of the United States.
We may not be exempt from U.S. taxation on our U.S. source shipping income,
which would reduce our net income and cash flow by the amount of the applicable
tax
Under the United States Internal Revenue Code of 1986, or the Code, a portion of
the gross shipping income of a vessel owning or chartering corporation, such as
ourselves and our subsidiaries, may be subject to a 4% United States federal
income tax on 50% of the gross shipping income that is attributable to
transportation that begins or ends, but that does not both begin and end, in the
U.S., unless that corporation is entitled to a special tax exemption under the
Code which applies to the international shipping income derived by some
non-United States corporations. We believe that we and each of our subsidiaries
qualify for this statutory tax exemption for the year ended December 31, 2003.
However, due to the absence of final Treasury regulations or other definitive
authority concerning some aspects of this tax exemption under the relevant
provisions of the Code and to the factual nature of the issues involved, we can
give no assurances on our tax-exempt status or that of any of our subsidiaries.
If we or our subsidiaries are not entitled to this statutory tax exemption for
any taxable year, we or our subsidiaries could be subject for those years to an
effective 4% United States federal income tax on the portion of the income we or
our subsidiaries derive during the year from United States sources. The
imposition of this taxation could have an adverse effect on our net income and
cash flow.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The Company
We are Frontline Ltd., a Bermuda based shipping company that is engaged
primarily in the ownership and operation of oil tankers. We were incorporated in
Bermuda on June 12, 1992 (Company No. EC-17460). Our registered and principal
executive offices are located at Par-la-Ville Place, 14 Par-la-Ville Road,
Hamilton, HM 08, Bermuda, and our telephone number is +1 (441) 295-6935.
We are engaged primarily in the ownership and operation of oil tankers,
including oil/bulk/ore, or OBO carriers. We operate tankers of two sizes: very
large crude carriers, or VLCCs, which are between 200,000 and 320,000 deadweight
tons, or dwt, and Suezmaxes, which are vessels between 120,000 and 170,000 dwt.
In addition, we have three dry bulk carriers. We operate through subsidiaries
and partnerships located in Bermuda, Isle of Man, Liberia, Norway, Panama,
Singapore, Sweden, Cayman Islands, the United States and the Bahamas. We are
also involved in the charter, purchase and sale of vessels. Since 1996, we have
emerged as a leading tanker company within the VLCC and Suezmax size sectors of
the market.
We have our origin in Frontline AB, which was founded in 1985, and which was
listed on the Stockholm Stock Exchange from 1989 to 1997. In May 1997, Frontline
AB was redomiciled from Sweden to Bermuda and its shares were listed on the Oslo
Stock Exchange. The change of domicile was executed through a share for share
exchange offer from the then newly formed Frontline Ltd., or Old Frontline, in
Bermuda. Old Frontline was incorporated under the laws of Bermuda on April 29,
1997 for the purpose of succeeding to the business of Frontline AB and,
commencing in June 1997, the shares in Frontline AB were exchanged for shares in
Old Frontline. The ordinary shares of Old Frontline were thereafter listed on
the Oslo Stock Exchange and delisted from the Stockholm Stock Exchange.
In September 1997, Old Frontline initiated an amalgamation with London &
Overseas Freighters Limited ("LOF"), also a Bermuda company. This process was
completed in May 1998. In the business combination, which left LOF as the
surviving company, Old Frontline's shareholders exchanged Old Frontline shares
for LOF shares and LOF was subsequently renamed Frontline Ltd. As a result of
this transaction, Frontline became listed on the London Stock Exchange and on
the NASDAQ National Market (in the form of American Depositary Shares, or ADSs,
represented by American Depositary Receipts, or ADRs) in addition to its listing
on the Oslo Stock Exchange.
In July 2001 the Company gave notice of termination of the ADR program to the
Bank of New York as Depositary. The ADR program was terminated on October 5,
2001 and the ADSs were delisted from the Nasdaq National Market on August 3,
2001. The Company's Ordinary Shares began trading on the NYSE on August 6, 2001.
With this listing, Frontline became one of the few companies to list its shares
directly on three international securities exchanges.
In December 2003, our subsidiary Ship Finance International Limited issued $580
million of 8.5% Senior Notes due 2013. In the first quarter of 2004, Ship
Finance has used the proceeds of the Notes issue, together with a refinancing of
existing debt, to fund the acquisition from us of a fleet of 47 crude oil
tankers (including one purchase option for a VLCC) and we have chartered each of
the ships back for most of their remaining lives. We also entered into fixed
rate management and administrative services agreements with Ship Finance to
provide for the operation and maintenance of these vessels and administrative
support services. The charters and the management agreements were each given
economic effect as of January 1, 2004. These transactions are discussed further
below in "Spin-Off of Ship Finance International Limited and Future Strategy".
Ship Finance International Limited's shares are listed on the New York Stock
Exchange as of June 17, 2004 under ticker symbol "SFL".
B. BUSINESS OVERVIEW
We are a world leader in the international seaborne transportation of crude oil.
Our tanker fleet, which is one of the largest and most modern in the world,
consists of 25 wholly owned, and 2 part-owned VLCCs and 28 wholly owned, Suezmax
tankers, of which 8 are Suezmax OBOs. In addition, we have three wholly owned
dry bulk carriers, being two Capesize and one Handymax size carriers. We also
charter in thirteen modern VLCCs and three modern Suezmax tankers. At June 15,
2004 we also have a purchase option to acquire a further VLCC.
In 2003, we took delivery of one wholly-owned double-hulled VLCC newbuilding
which was subsequently sold prior to the end of 2003 and we sold two 2001 built
Suezmax tankers. In addition, in 2003 we sold and leased back two 2000 built
VLCCs and two 2001 built Suezmax tankers. In 2003 we disposed of our 50 per cent
interests in two VLCCs and increased our investment in five VLCCs from 33.33 per
cent to 50.1 per cent. In 2003 we also acquired the remaining 50 per cent of a
VLCC from a joint venture partner thereby obtaining 100 per cent ownership.
In December 2003, we agreed with our joint venture partner, Overseas
Shipholding, Group, Inc ("OSG"), to swap interests in six joint venture
companies, which each own a VLCC. In February 2004, these agreements resulted in
us exchanging our interest in the vessels Dundee, Sakura I and Tanabe for OSG's
interest in the vessels Edinburgh, Ariake and Hakata, thereby increasing our
interests in these vessels to 100% each.
In May, 2004 we exercised our option to acquire all of the shares of Independent
Tankers Corporation ("ITC") from Hemen Holding Ltd, a related party. ITC
operates a fleet of six VLCCs and four Suezmax tankers which are all on
long-term charters to BP and Chevron.
As of June 15, 2004 the fleet that we operate has a total tonnage of
approximately 17.1 million dwt, and our tanker vessels have an average age of
7.8 years compared with an estimated industry average of over 8.6 years. We
believe that our vessels comply with the most stringent of generally applicable
environmental regulations for tankers.
We own various vessel owning and operating subsidiaries. Our operations take
place substantially outside of the United States. Our subsidiaries, therefore,
own and operate vessels which may be affected by changes in foreign governments
and other economic and political conditions. We are engaged primarily in
transporting crude oil products and, in addition, raw materials like coal and
iron ore. Our VLCCs are specifically designed for the transportation of crude
oil and, due to their size, are primarily used to transport crude oil from the
Middle East Gulf to the Far East, Northern Europe, the Caribbean and the
Louisiana Offshore Oil Port, or LOOP. Our Suezmax tankers are similarly designed
for worldwide trading, but the trade for these vessels is mainly in the Atlantic
Basin. Historically, the tanker industry has been highly cyclical, with
attendant volatility in profitability and asset values resulting from changes in
the supply of and demand for tanker capacity. Our OBO carriers are specifically
designed to carry oil or dry cargo and may be used to transport either oil or
dry cargo on any voyage. When freight rates in both the oil and dry cargo
markets are equivalent OBO carriers are operated most profitably transporting
oil on one leg of the voyage and dry cargo on the other leg of a voyage. The
supply of tanker and OBO capacity is influenced by the number of new vessels
built, the number of older vessels scrapped, converted, laid up and lost, the
efficiency of the world tanker or OBO fleet and government and industry
regulation of maritime transportation practices. The demand for tanker and OBO
capacity is influenced by global and regional economic conditions, increases and
decreases in industrial production and demand for crude oil and petroleum
products, the proportion of world oil output supplied by middle eastern and
other producers, political changes and armed conflicts (including wars in the
Middle East) and changes in seaborne and other transportation patterns. The
demand for OBO capacity is, in addition, influenced by increases and decreases
in the production and demand for raw materials such as iron ore and coal. In
particular, demand for our tankers and our services in transporting crude oil
and petroleum products and dry cargoes has been dependent upon world and
regional markets. Any decrease in shipments of crude oil or raw materials in
world markets could have a material adverse effect on our earnings.
Historically, these markets have been volatile as a result of, among other
things, general economic conditions, prices, environmental concerns, weather and
competition from alternative energy sources. Because many factors influencing
the supply of and demand for tankers and OBO carriers are unpredictable, the
nature, timing and degree of changes in industry conditions are also
unpredictable.
We are committed to providing quality transportation services to all of our
customers and to developing and maintaining long term relationships with the
major charterers of tankers. Increasing global environmental concerns have
created a demand in the petroleum products/crude oil seaborne transportation
industry for vessels that are able to conform to the stringent environmental
standards currently being imposed throughout the world. Our fleet of modern
single hull VLCCs may discharge crude oil at LOOP until the year 2015, and our
modern single hull Suezmax tankers may call at U.S. ports until the year 2010
under the phase-in schedule for double hull tankers presently prescribed under
OPA.
The tanker industry is highly cyclical, experiencing volatility in
profitability, vessel values and freight rates. Freight rates are strongly
influenced by the supply of tanker vessels and the demand for oil
transportation.
2003 was a good year for the tanker market as freight rates increased
dramatically compared to 2002, mainly due to limited fleet growth and strong
growth in the demand for oil, and implicitly for oil tankers.
According to the International Energy Agency, world oil demand grew by 1.7
million barrels per day (mb/d) compared to 2002 with total world demand rising
to 78.7 mb/d. The main driver of this growth was strong economic growth in China
resulting in record import levels.
The world supply of oil increased by 2.8 mb/d compared with 2002 to a total of
79.4 mb/d in 2003. Repercussions of the oil workers' strike in Venezuela led to
low inventories in the United States and the necessary oil to replenish them
came to a large extent from the Middle East. At the moment Venezuela is still
producing some 0.5 mb/d less than before the strike. This resulted in strong
demand for VLCCs, and a very healthy market for most of the year. In addition,
strong growth in the demand for oil in China gave the market additional
strength. The war in Iraq reduced output from that country to 0.3-0.4 mb/d.
However, during the fall season output continued to climb and averaged about 2.0
mb/d in the 4th quarter of 2003.
The size of the world tanker fleet increased by 2.5% in 2003. The VLCC segment
of the market was unchanged, but Suezmax and smaller tankers increased by 4.5%.
A total of 19.9 million deadweight tons (mill dwt) of tankers were scrapped in
2003, including 27 VLCC's and 13 Suezmaxes. A total of 49.3 mill dwt , including
51 VLCC's and 55 Suezmaxes, were added to orderbooks in the same period.
The total orderbook for tankers stood at 75.3 mill dwt at the end of 2003. This
represents 24.6% of the current tanker fleet, compared to about 19% at the same
time in 2002.
The outlook for the tanker market for the remainder of 2004 is positive since it
seems that continued growth in oil consumption will ensure a positive demand for
tankers. The freight forward market for the second half of 2004, as of June 15,
2004, stands at $75,000 per day for VLCC tankers.
The Company's three remaining dry bulk vessels are fixed on medium to long-term
bareboat or time charters, which expire in 2005 and 2014.
Our business strategy is primarily based upon the following principles:
o emphasising operational safety and quality maintenance for all of our
vessels;
o complying with all current and proposed environmental regulations;
o outsourcing technical operations and crewing;
o controlling operational costs of vessels;
o operating one of the most modern and homogeneous fleets of tankers in the
world;
o achieving high utilisation of our vessels;
o achieving competitive financing arrangements; and
o developing and maintaining relationships with major oil companies and
industrial charterers.
After having delivered their cargo, spot market vessels typically operate in
ballast, meaning that they are not carrying cargo until they are rechartered. It
is the time element associated with these ballast legs that we seek to minimise
by efficiently chartering our OBO carriers and tankers. We seek to maximise
earnings in employing vessels in the spot market, under time charters or under
Contracts of Affreightment, or COAs.
In December 1999, the Company joined with five other shipowners to form Tankers
International LLC, or Tankers to pool the commercial operation of the
participating companies' modern VLCC fleets. Revenues allocated to each
shipowner who participates in Tankers are calculated on the basis of the pool's
total earnings and the tonnage committed into Tankers by the shipowner. In July
2002 we withdrew from Tankers and the commercial operations of our other VLCCs
has been brought back under our direct management.
Since 1998 Frontline and OMI Corporation, a major international shipping
company, have combined Suezmax tanker fleets for commercial purposes and created
Alliance Chartering LLC, or Alliance. Alliance currently markets 44 Suezmax
tankers, the majority of which are employed in the Atlantic Basin. Alliance's
control of this large modern fleet of Suezmaxes has enabled it to strengthen
relationships with a number of customers. These arrangements may allow Alliance
the opportunity to increase its Suezmax fleet utilisation through backhauls when
cargo is available (that is, transporting cargo on the return trip when a ship
would normally be empty) which would improve vessel earnings. Alliance mainly
employs vessels in the spot market, although it also from time to time enters
into COAs and time charters. Revenues allocated to each shipowner who
participates in Alliance are based on the actual earnings from the vessels
contributed to Alliance by the shipowner.
Similar to structures commonly used by other shipping companies, our vessels are
all owned by, or chartered to, separate subsidiaries or associated companies.
Frontline Management AS, or Frontline Management, and Frontline Management
(Bermuda) Limited, both wholly-owned subsidiaries of the Company, support us in
the implementation of our decisions. Frontline Management is responsible for the
commercial management of our shipowning subsidiaries, including chartering and
insurance. Each vessel owned by the Company is registered under the Bahamas,
French, Hong Kong, Liberian, Philippines, Singaporean, Norwegian, Isle of Man or
Panamanian flag.
Frontline has a strategy of extensive outsourcing. Ship management, crewing and
accounting services are provided by a number of independent and competing
suppliers.
o Our vessels are managed by independent ship management companies. Pursuant
to management agreements, each of the independent ship management companies
provides operations, ship maintenance, crewing, technical support, shipyard
supervision and related services to Frontline. A central part of our
strategy is to benchmark operational performance and cost level amongst our
ship managers.
o Independent ship managers provide crewing for our vessels. Currently, our
vessels are crewed with Russian, Ukranian, Croatian, Baltic, Indian and
Filipino officers and crews, or combinations of these nationalities.
o Accounting services for each of our shipowning subsidiaries are provided by
the ship managers.
Spin-Off of Ship Finance International Limited and Future Strategy
Ship Finance International Limited ("Ship Finance"), initially a wholly-owned
subsidiary of the Company, was incorporated in Bermuda in October 2003 for the
purpose of acquiring certain of our shipping assets. In December 2003, Ship
Finance issued $580 million of 8.5% Senior Notes due 2013. In the first quarter
of 2004, Ship Finance has used the proceeds of the Notes issue, together with a
refinancing of existing debt, to fund the acquisition from us of a fleet of 47
crude oil tankers (including one purchase option for a VLCC) and we have
chartered each of the ships back for most of their remaining lives. We also
entered into fixed rate management and administrative services agreements with
Ship Finance to provide for the operation and maintenance of the Company's
vessels and administrative support services. The charters and the management
agreements were each given economic effect as of January 1, 2004.
The long term time charters to us extend for various periods depending on the
age of the vessels, ranging from approximately seven to 22 years. Nine of the
vessels that Ship Finance acquired are on existing long term time charters and
three vessels are on existing long term bareboat charters. Ship Finance has
agreed with us that it will treat all of these vessels as being under time
charters to us, on the same terms and effective on the same date as the other 34
vessels for all economic purposes. With certain exceptions, the daily base
charter rates, which are payable to us monthly in advance for a maximum of 360
days per year (361 days per leap year), are as follows:
Year VLCC Suezmax
---- ------- -------
2003 to 2006 ........................... $25,575 $21,100
2007 to 2010 ........................... $25,175 $20,700
2011 and beyond ........................ $24,175 $19,700
Under the terms of a charter ancillary agreement, beginning with the 11-month
period from February 1, 2004 and for each calendar year after that, we have
agreed to pay Ship Finance a profit sharing payment equal to 20% of the charter
revenues for the applicable period, calculated on a TCE basis, realised by us
from use of our fleet in excess of average rates of $25,575 per day for each
VLCC and $21,100 per day for each Suezmax tanker.
On May 28, 2004, we announced the distribution of 25% of Ship Finance's common
shares to our common shareholders in a partial spin off. On June 16, 2004, each
Frontline shareholder of record on June 7, 2004, received one share in Ship
Finance for every four Frontline shares held. The record date for the
distribution was June 7, 2004, and the distribution date was June 16, 2004. On
June 17, 2004, the Ship Finance common shares commenced trading on the New York
Stock Exchange under the ticker symbol "SFL".
Following the spin off of 25% of Ship Finance, our operations will be comprised
of four main components as follows:
o Our charter and management agreements with Ship Finance including a
$250 million cash deposit we are required to reserve to secure the
charters.
o The ownership of 75 per cent of Ship Finance.
o The ownership of ITC.
o The ownership of our remaining vessels which include our three dry
bulk carriers, nine VLCCs and three Suezmaxes chartered in under
long-term leases, two joint venture owned VLCCs and one wholly-owned
non-recourse financed VLCC.
It is the Frontline Board's intention that during 2004, Frontline shall divest
all its shares in Ship Finance either through a straight sale, a corporate
transaction or through further distributions to Frontline's shareholders.
Our strategy is to become, over time, a world leading chartering company with
flexibility to adjust our exposure to the tanker market depending on cyclical
conditions. In addition, we will, when financing arrangements permit, consider
divesting the "non Ship Finance" vessels. This may be done through sale and
leaseback or straight sales of the vessels.
Following the spin off of Ship Finance we will be more financially exposed to
the chartering market. This is likely to increase our activity in the chartering
market with respect to both short and long-term charters of vessels in and out.
Our purpose will be to manage risk through a portfolio of charters.
Consolidation of the tanker market will remain an important objective for the
Company.
Importance of Fleet Size
We believe that fleet size in the industrial shipping sector is important in
negotiating terms with major clients and charterers. We believe that a large,
high-quality VLCC and Suezmax fleet will enhance our ability to obtain
competitive terms from suppliers and shipbuilders and to produce cost savings in
chartering and operations.
Seasonality
Historically, oil trade and therefore charter rates increased in the winter
months and eased in the summer months as demand for oil in the Northern
Hemisphere rose in colder weather and fell in warmer weather. The tanker
industry in general is less dependent on the seasonal transport of heating oil
than a decade ago as new uses for oil and oil products have developed, spreading
consumption more evenly over the year.
Customers
Our customers include major oil companies, petroleum products traders,
government agencies and various other entities. During each of the years ended
December 31, 2003, 2002 and 2001, no single customer accounted for 10 per cent
or more of our consolidated freight revenues.
Competition
The market for international seaborne crude oil transportation services is
highly fragmented and competitive. Seaborne crude oil transportation services
generally are provided by two main types of operators: major oil company captive
fleets (both private and state-owned) and independent shipowner fleets. In
addition, several owners and operators pool their vessels together on an ongoing
basis, and such pools are available to customers to the same extent as
independently owned and operated fleets. Many major oil companies and other oil
trading companies, the primary charterers of the vessels owned or controlled by
the Company, also operate their own vessels and use such vessels not only to
transport their own crude oil but also to transport crude oil for third party
charterers in direct competition with independent owners and operators in the
tanker charter market. Competition for charters is intense and is based upon
price, location, size, age, condition and acceptability of the vessel and its
manager. Competition is also affected by the availability of other size vessels
to compete in the trades in which the Company engages.
Risk of Loss and Insurance
Our business is affected by a number of risks, including mechanical failure of
the vessels, collisions, property loss to the vessels, cargo loss or damage and
business interruption due to political circumstances in foreign countries,
hostilities and labour 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.
Frontline Management is responsible for arranging for the insurance of our
vessels in line with standard industry practice. In accordance with that
practice, we maintain 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. From time to time we
carry insurance covering the loss of hire resulting from marine casualties in
respect of some 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
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 procure adequate insurance
coverage at commercially reasonable rates in the future.
Inspection by a Classification Society
Every commercial vessel's hull and machinery is "classed" by a classification
society authorised by its country of registry. The classification society
certifies that the vessel has been built and maintained in accordance with the
rules of such classification society and complies with applicable rules and
regulations of the country of registry of the vessel and the international
conventions to which that country is a member. Our vessels have all been
certified as "in class."
Each vessel is inspected by a surveyor of the classification society every year,
every two and a half years and every four to five years. 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.
Environmental and Other Regulations
International conventions and national, state and local laws and regulations of
the jurisdictions where our tankers operate or are registered significantly
affect the ownership and operation of our tankers. We believe we are currently
in substantial compliance with applicable environmental and regulatory laws
regarding the ownership and operation of our tankers. However, because existing
laws may change or new laws may be implemented, we cannot predict the ultimate
cost of complying with all applicable requirements or the impact they will have
on the resale value or useful lives of our tankers. Future, non-compliance could
require us to incur substantial costs or to temporarily suspend operation of our
tankers.
We believe the heightened environmental and quality concerns of insurance
underwriters, regulators and charterers are leading to greater inspection and
safety requirements on all vessels and creating an increasing demand for modern
vessels that are able to conform to the stricter environmental standards. We
maintain high operating standards for our vessels that emphasizes operational
safety, quality maintenance, continuous training of our crews and officers and
compliance with United States and international regulations. Our vessels are
subject to both scheduled and unscheduled inspections by a variety of
governmental and private entities, each of which may have unique requirements.
These entities include the local port authorities such as the U.S. Coast Guard,
harbour master or equivalent, classification societies, flag state
administration or country of registry, and charterers, particularly terminal
operators and major oil companies which conduct frequent vessel inspections.
Each of these entities may have unique requirements that we must comply with.
Environmental Regulation--IMO
The United Nation's International Maritime Organization, or IMO, has adopted
regulations that set forth pollution prevention requirements for tankers. These
regulations, which have been implemented in many jurisdictions in which our
tankers operate, provide, in part, that:
o 25-year old tankers must be of double-hull construction or of a
mid-deck design with double-sided construction, unless:
(1) they have wing tanks or double-bottom spaces not used for the
carriage of oil which cover at least 30% of the length of the cargo
tank section of the hull or bottom; or
(2) they are capable of hydrostatically balanced loading, which means
that they are loaded in such a way that if the hull is breached, water
flows into the tanker, displacing oil upwards instead of into the sea;
o 30-year old tankers must be of double-hull construction or mid-deck
design with double-sided construction.
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:
o is the subject of a contract for a major conversion or original
construction on or after July 6, 1993;
o commences a major conversion or has its keel laid on or after January
6, 1994; or
o completes a major conversion or is a newbuilding delivered on or after
July 6, 1996.
The IMO recently adopted regulations that require the phase-out of most single
hull tankers by 2015 or earlier, depending on the age of the vessel and whether
or not it complies with requirements for protectively located segregated ballast
tanks. Under these new regulations, which became effective in September 2002,
the maximum permissible age for tankers after 2007 will be 25 years. The new
regulations also provide for increased inspection and verification requirements.
However, as a result of the oil spill in November 2002 relating to the loss of
the m.t. Prestige, which was owned by a company not affiliated with us, in
December 2003 the Marine Environmental Protection Committee of the IMO adopted a
proposed amendment to the International Convention for the Prevention of
Pollution from Ships to accelerate the phase out of single hull tankers from
2015 to 2010 unless the relevant flag states extend the date to 2015. This
proposed amendment will come into effect in April 2005 unless objected to by a
sufficient number of member states. We do not know whether any of our vessels
will be subject to this accelerated phase-out, but this could result in a number
of our vessels being unable to trade in many markets after 2010. Moreover, the
IMO may still adopt regulations in the future that could adversely affect the
remaining useful lives of our single hull tankers as well as our ability to
generate income from them. Our tanker fleet includes 19 non-double hull tankers.
The IMO has also negotiated international conventions that impose liability for
oil pollution in international waters and a signatory's territorial waters. In
September 1997, the IMO adopted Annex VI to the International Convention for the
Prevention of Pollution from Ships to address air pollution from ships. Annex VI
is expected to be ratified during 2004, and will become effective 12 months
after ratification. Annex VI, when it becomes effective, will set limits on
sulfur oxide and nitrogen oxide emissions from ship exhausts and prohibit
deliberate emissions of ozone depleting substances, such as chlorofluorocarbons.
Annex VI also includes a global cap on the sulfur content of fuel oil and allows
for special areas to be established with more stringent controls on sulfur
emissions. We are formulating a plan to comply with the Annex VI regulations
once they come into effect. Compliance with these regulations could require the
installation of expensive emission control systems and could have an adverse
financial impact on the operation of our vessels. Additional or new conventions,
laws and regulations may be adopted that could adversely affect our ability to
manage our ships.
The IMO's International Safety Management Code, or ISM Code, also affects our
operations. The ISM Code requires the party with operational control of a vessel
to develop a safety management system that includes, among other things, the
adoption of a safety and environmental protection policy setting forth
instructions and procedures for operating its vessels safely and describing
procedures for responding to emergencies. We will rely upon the safety
management system that we and our third party technical managers have developed.
The ISM Code requires that vessel operators obtain a safety management
certificate for each vessel they operate. This certificate evidences compliance
by a vessel's management with ISM Code requirements for a safety management
system. No vessel can obtain a certificate unless its manager has been awarded a
Document of Compliance, issued by each flag state, under the ISM Code. All of
our vessels and their operators have received ISM certification. We are required
to renew these documents of compliance and safety management certificates
annually.
Non-compliance with the ISM Code and other IMO regulations may subject the
vessel owner or a bareboat charterer to increased liability, may lead to
decreases in available insurance coverage for affected vessels and may result in
a tankers denial of access to, or detention in, some ports. Both the U.S. Coast
Guard and European Union authorities have indicated that vessels not in
compliance with the ISM Code by the applicable deadlines will be prohibited from
trading in U.S. and European Union ports, as the case may be.
The IMO continues to review and introduce new regulations. It is impossible to
predict what additional regulations, if any, may be passed by the IMO and what
effect, if any, such regulations might have on the operation of oil tankers.
Environmental Regulation--OPA/CERCLA
The U.S. Oil Pollution Act of 1990, or OPA, established an extensive regulatory
and liability regime for environmental protection and cleanup of oil spills. OPA
affects all owners and operators whose vessels trade with the U.S. or its
territories or possessions, or whose vessels operate in the waters of the U.S.,
which include the U.S. territorial waters and the two hundred nautical mile
exclusive economic zone of the U.S. The Comprehensive Environmental Response,
Compensation and Liability Act, or CERCLA, which also impacts our operations,
applies to the discharge of hazardous substances (other than oil) whether on
land or at sea.
Under OPA, vessel owners, operators and bareboat or "demise" charterers are
"responsible parties" who are liable regardless of fault, individually and as a
group, for all containment costs, clean-up costs and for other damages arising
from oil spills from their vessels. These other damages may include natural
resources damages and related assessment costs, real and personal property
damages, loss of subsistence use of natural resources, the loss of taxes, rents,
royalties, profits and earnings capacity resulting from an oil spill and the
cost of public services necessitated by an oil spill. OPA limits a responsible
party's liability to the greater of $1,200 per gross ton or $10 million per
vessel over 3,000 gross tons, subject to adjustment for inflation. OPA
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 liability
regime similar to OPA 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 party's gross negligence or
wilful misconduct. These limits do not apply if the responsible party fails or
refuses to report the incident or to co-operate 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. We believe that
we are in substantial compliance with OPA, CERCLA and all applicable state
regulations in the ports where our vessels will call.
OPA 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 aggregate potential strict liability under OPA and CERCLA. The
U.S. Coast Guard has enacted regulations requiring evidence of financial
responsibility in the amount of $1,500 per gross ton for tankers, coupling the
OPA limitation on liability of $1,200 per gross ton with the CERCLA liability
limit of $300 per gross ton. Under the regulations, evidence of financial
responsibility may be demonstrated by insurance, surety bond, self-insurance or
guaranty. Under OPA regulations, an owner or operator of more than one tanker
must 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 liability under OPA/CERCLA. We have provided
requisite guarantees and have received certificates of financial responsibility
from the U.S. Coast Guard for each of our tankers required to have one.
Under OPA, with limited exceptions, all newly built or converted tankers
operating in U.S. waters must be built with double-hulls. Existing vessels that
do not comply with the double-hull requirement must be phased out over a 20-year
period beginning in 1995 based on size, age and place of discharge, unless
retrofitted with double-hulls. Notwithstanding the phase-out period, OPA
currently permits existing single-hull tankers to operate until the year 2015 if
their operations within U.S. waters are limited to discharging at the Louisiana
Offshore Oil Port or unloading with the aid of another vessel, a process
referred to as "lightering," within authorized lightering zones more than 60
miles off-shore.
OPA also amended the Federal Water Pollution Control Act to require owners or
operators of tankers operating in the waters of the United States must file
vessel response plans with the U.S. Coast Guard, and their tankers are required
to operate in compliance with their U.S. Coast Guard approved plans. These
response plans must, among other things:
o address a "worst case" scenario and identify and ensure, through
contract or other approved means, the availability of necessary
private response resources to respond to a "worst case discharge";
o describe crew training and drills; and
o identify a qualified individual with full authority to implement
removal actions.
Vessel response plans for our tankers operating in the waters of the United
States have been approved by the U.S. Coast Guard. In addition, the U.S. Coast
Guard has announced it intends to propose similar regulations requiring certain
vessels to prepare response plans for the release of hazardous substances. We
are responsible for ensuring our vessels comply with any additional regulations.
Environmental Regulation--Other
Although the United States is not a party to these conventions, many countries
have ratified and follow the liability plan adopted by the IMO and set out in
the International Convention on Civil Liability for Oil Pollution Damage of 1969
and the Convention for the Establishment of an International Fund for Oil
Pollution of 1971. Under these conventions, and depending on whether the country
in which the damage results is a party to the 1992 Protocol to the International
Convention on Civil Liability for Oil Pollution Damage, a vessel's registered
owner is strictly liable for pollution damage caused in the territorial waters
of a contracting state by discharge of persistent oil, subject to certain
complete defenses. Under an amendment that became effective November 1, 2003 for
vessels of 5,000 to 140,000 gross tons (a unit of measurement for the total
enclosed spaces within a vessel), liability will be limited to approximately
$6.7 million plus $938 for each additional gross ton over 5,000. For vessels of
over 140,000 gross tons, liability will be limited to approximately $133.4
million. The current maximum amount is approximately $81.2 million. As the
convention calculates liability in terms of a basket of currencies, these
figures are based on currency exchange rates on January 2, 2004. The right to
limit liability is forfeited under the International Convention on Civil
Liability for Oil Pollution Damage where the spill is caused by the owner's
actual fault and under the 1992 Protocol where the spill is caused by the
owner's 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 governs, and liability is imposed either on
the basis of fault or in a manner similar to that convention. We believe that
our P&I insurance covers the liability under the plan adopted by the IMO.
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 from
entering into its ports or offshore terminals by 2010. The European Union 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 will also be restricted from entering or leaving European Union ports or
offshore terminals and anchoring in areas under European Union jurisdiction. The
European Union is 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
Commission with greater authority and control over classification societies,
including the ability to seek to suspend or revoke the authority of negligent
societies. The sinking of the m.t. Prestige and resulting oil spill in November
2002 has lead to the adoption of other environmental regulations by certain
European Union nations, which could adversely affect the remaining useful lives
of all of our tankers and our ability to generate income from them. For example,
Italy announced a ban of single-hull crude oil tankers over 5,000 dwt from most
Italian ports, effective April 2001. Spain has announced a similar prohibition.
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.
In addition, most U.S. states that border a navigable waterway have enacted laws
that impose strict liability for clean-up costs and damages resulting from a
discharge of oil or a release of a hazardous substance. As permitted by OPA,
these state laws may provide for unlimited liability for oil spills occurring
within their boundaries.
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 (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 (SOLAS) created a new chapter of the convention
dealing specifically with maritime security. The new chapter is scheduled to go
into effect in July 2004 and will impose various detailed security obligations
on vessels and port authorities, most of which are contained in the newly
created International Ship and Port Facilities Security (ISPS) Code. Among the
various requirements are:
o on-board installation of automatic information systems, or AIS, to
enhance vessel-to-vessel and vessel-to-shore communications;
o on-board installation of ship security alert systems;
o the development of vessel security plans; and
o compliance with flag state security certification requirements.
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 International Ship
Security Certificate (ISSC) that attests to the vessel's compliance with SOLAS
security requirements and the ISPS Code. The Manager will implement the various
security measures addressed by the MTSA, SOLAS and the ISPS Code and ensure that
our tankers attain compliance with all applicable security requirements within
the prescribed time periods. We do not believe these additional requirements
will have a material financial impact on our operations.
C. ORGANIZATIONAL STRUCTURE
Our vessels are all owned by, or chartered to, separate subsidiaries, associated
companies or joint ventures. The following table sets out the details of our
significant subsidiaries and equity interests as of June 21, 2004:
Name Country of Ownership
Vessel/Activity Incorporation Percentage
CalPetro Tankers (Bahamas I) Ltd Cygnus Voyager Bahamas 100%
CalPetro Tankers (Bahamas II) Ltd Altair Voyager Bahamas 100%
CalPetro Tankers (Bahamas III) Ltd Virgo Voyager Bahamas 100%
Granite Shipping Co. Ltd. Front Granite Bahamas 100%
Frontline Management (Bermuda) Ltd Management company Bermuda 100%
ICB Shipping (Bermuda) Limited Management company Bermuda 100%
Mosvold Shipping Limited Holding company Bermuda 100%
Ship Finance International Limited Holding company Bermuda 75%
Buckingham Shipping Plc British Pioneer Isle of Man 100%
Caernarfon Shipping Plc British Progress Isle of Man 100%
CalPetro Tankers (IOM) Ltd Sirius Voyager Isle of Man 100%
Golden Current Limited Opalia Isle of Man 100%
Golden State Petro (IOM 1-A) PLC Antares Voyager Isle of Man 100%
Golden State Petro (IOM 1-B) PLC Phoenix Voyager Isle of Man 100%
Holyrood Shipping Plc British Pride Isle of Man 100%
Oscilla Shipping Ltd Option to acquire VLCC Isle of Man 100%
Sandringham Shipping Plc British Purpose Isle of Man 100%
Ariake Transport Corporation Ariake Liberia 100%
Bonfield Shipping Ltd. Front Driver Liberia 100%
Edinburgh Navigation SA Edinburgh Liberia 100%
Fourways Marine Limited Front Spirit Liberia 100%
Front Ardenne Inc. Front Ardenne Liberia 100%
Front Brabant Inc. Front Brabant Liberia 100%
Front Eagle Corporation Front Eagle Liberia 100%
Front Falcon Inc Front Falcon Liberia 100%
Front Glory Shipping Inc. Front Glory Liberia 100%
Front Pride Shipping Inc. Front Pride Liberia 100%
Front Saga Inc Front Page Liberia 100%
Front Serenade Inc. Front Serenade Liberia 100%
Front Splendour Shipping Inc. Front Splendour Liberia 100%
Front Stratus Inc. Front Stratus Liberia 100%
Front Tobago Inc. Front Tobago Liberia 40%
Golden Aquarian Corporation Cos Hero Liberia 100%
Golden Bayshore Shipping Corporation Navix Astral Liberia 100%
Golden Channel Corporation Front Commodore Liberia 100%
Golden Estuary Corporation Front Comanche Liberia 100%
Golden Fjord Corporation Ocana (ex Front Commerce) Liberia 100%
Golden Fountain Corporation Golden Fountain Liberia 50%
Golden Hilton Shipping Corporation Channel Navigator Liberia 100%
Golden President Shipping Corporation Channel Alliance Liberia 100%
Golden Seaway Corporation New Vanguard Liberia 100%
Golden Sound Corporation New Vista Liberia 100%
Golden Strait Corporation Golden Victory Liberia 100%
Golden Stream Corporation Golden Stream Liberia 100%
Golden Tide Corporation Omalia (ex New Circassia) Liberia 100%
Hitachi Hull # 4983 Corporation Otina (ex Hakata) Liberia 100%
Katong Investments Ltd. Front Breaker Liberia 100%
Kea Navigation Ltd Front Melody Liberia 100%
Langkawi Shipping Ltd. Front Birch Liberia 100%
Millcroft Maritime SA Front Champion Liberia 100%
Otina Inc. Front Tina Liberia 100%
Optimal Shipping SA Front Symphony Liberia 100%
Pablo Navigation SA Front Chief Liberia 100%
Patrio Shipping Ltd. Front Hunter Liberia 100%
Rakis Maritime SA Front Fighter Liberia 100%
Ryan Shipping Corporation Front Warrior Liberia 100%
Saffron Rose Shipping Limited Front Crown Liberia 100%
Sea Ace Corporation Front Ace Liberia 100%
Sibu Shipping Ltd. Front Maple Liberia 100%
South West Tankers Inc Front Sunda Liberia 100%
Tidebrook Maritime Corporation Front Commander Liberia 100%
Ultimate Shipping Ltd. Front Century Liberia 100%
West Tankers Inc. Front Comor Liberia 100%
Frontline Management AS Management company Norway 100%
Puerto Reinosa Shipping Co SA Front Lillo Panama 100%
Aspinall Pte Ltd. Front Viewer Singapore 100%
Blizana Pte Ltd. Front Rider Singapore 100%
Bolzano Pte Ltd. Mindanao Singapore 100%
Cirebon Shipping Pte Ltd. Front Vanadis Singapore 100%
Fox Maritime Pte Ltd. Front Sabang Singapore 100%
Front Dua Pte Ltd. Front Duchess Singapore 100%
Front Empat Pte Ltd. Front Highness Singapore 100%
Front Enam Pte Ltd. Front Lord Singapore 100%
Front Lapan Pte Ltd. Front Climber Singapore 100%
Front Lima Pte Ltd. Front Lady Singapore 100%
Front Tiga Pte Ltd. Front Duke Singapore 100%
Front Tujuh Pte Ltd. Front Emperor Singapore 100%
Front Sembilan Pte Ltd. Front Leader Singapore 100%
Rettie Pte Ltd. Front Striver Singapore 100%
Transcorp Pte Ltd. Front Guider Singapore 100%
D. PROPERTY, PLANT AND EQUIPMENT
The Company's Vessels
We operate a substantially modern fleet of tankers and the following table sets
forth the fleet that we operate:
TANKER FLEET
Owned Tonnage
Approximate Type of
----------- -------
Vessel Built Dwt. Construction Flag Employment
------ ----- ---- ------------ ---- ----------
VLCCs
-----
Front Sabang 1990 286,000 Single-hull SG Spot market
Front Vanadis 1990 286,000 Single-hull SG Spot market
Front Highness 1991 284,000 Single-hull SG Spot market
Front Lady 1991 284,000 Single-hull SG Spot market
Front Lord 1991 284,000 Single-hull SG Spot market
Front Duke 1992 284,000 Single-hull SG Spot market
Front Duchess 1993 284,000 Single-hull SG Spot market
Front Tobago (40%) 1993 261,000 Single-hull LIB Tankers Pool
Front Edinburgh 1993 302,000 Double-side LIB Spot market
Front Ace 1993 275,000 Single-hull LIB Spot market
Golden Fountain (50%) 1995 302,000 Single-hull PAN Spot market
Golden Stream 1995 276,000 Single-hull PAN Spot market
Navix Astral 1996 276,000 Single-hull PAN Bareboat charter
New Vanguard 1998 300,000 Double-hull HK Bareboat charter
New Vista 1998 300,000 Double-hull HK Bareboat charter
Antares Voyager 1998 308,500 Double-hull BA Bareboat charter
Phoenix Voyager 1999 308,500 Double-hull BA Bareboat charter
Omalia (ex New Circassia) 1999 306,000 Double-hull IoM Bareboat charter
Opalia 1999 302,000 Double-hull IoM Bareboat charter
Front Comanche 1999 300,000 Double-hull FRA Time charter
Ocana (ex Front Commerce) 1999 300,000 Double-hull IoM Bareboat charter
Ariake 2001 299,000 Double-hull BA Spot market
Front Serenade 2002 299,000 Double-hull LIB Spot market
Otina (ex Hakata) 2002 296,000 Double-hull IoM Bareboat charter
Front Stratus 2002 299,000 Double-hull LIB Spot market
Front Falcon 2002 308,000 Double-hull BA Spot market
Front Page 2002 299,000 Double-hull LIB Spot market
Suezmax OBO Carriers
--------------------
Front Breaker 1991 169,000 Double-hull MI Time charter
Front Climber 1991 169,000 Double-hull SG Time charter
Front Driver 1991 169,000 Double-hull NIS Time charter
Front Guider 1991 169,000 Double-hull SG Time charter
Front Leader 1991 169,000 Double-hull SG Time charter
Front Rider 1992 169,000 Double-hull SG Time charter
Front Striver 1992 169,000 Double-hull SG Time charter
Front Viewer 1992 169,000 Double-hull SG Time charter
Suezmaxes
---------
Front Lillo 1991 147,000 Single-hull MI Spot market
Front Birch 1991 152,000 Double-side MI Spot market
Front Maple 1991 152,000 Double-side MI Spot market
Front Granite 1991 142,000 Single-hull NIS Spot market
Front Emperor 1992 147,000 Single-hull SG Spot market
Front Sunda 1992 142,000 Single-hull NIS Spot market
Virgo Voyager 1992 150,000 Single-hull BA Bareboat charter
Cygnus Voyager 1993 150,000 Double-hull BA Bareboat charter
Altair Voyager 1993 130,000 Double-hull BA Bareboat charter
Front Spirit 1993 147,000 Single-hull MI Spot market
Front Comor 1993 142,000 Single-hull NIS Spot market
Front Pride 1993 150,000 Double-hull NIS Spot market
Sirius Voyager 1994 150,000 Double-hull BA Bareboat charter
Front Glory 1995 150,000 Double-hull NIS Spot market
Front Splendour 1995 150,000 Double-hull NIS Spot market
Front Ardenne 1997 153,000 Double-hull NIS Spot market
Front Brabant 1998 153,000 Double-hull NIS Spot market
Mindanao 1998 158,000 Double-hull SG Spot market
Front Fighter 1998 153,000 Double-hull NIS Spot market
Front Hunter 1998 153,000 Double-hull NIS Spot market
Chartered In Tonnage
Approximate Type of
----------- -------
Vessel Built Dwt Construction Flag Employment
------ ----- --- ------------ ---- ----------
VLCCs
-----
Front Century 1998 311,000 Double-hull BA Spot market
Front Champion 1998 311,000 Double-hull BA Spot market
Front Chief 1999 311,000 Double-hull BA Spot market
Front Commander 1999 311,000 Double-hull BA Spot market
Front Crown 1999 311,000 Double-hull BA Spot market
Golden Victory 1999 305,000 Double-hull PAN Spot market
British Pioneer 1999 307,000 Double-hull IoM Bareboat charter
Front Tina 2000 298,000 Double-hull LIB Spot market
Front Commodore 2000 299,000 Double-hull LIB Time charter
British Pride 2000 307,000 Double-hull IoM Bareboat charter
British Progress 2000 307,000 Double-hull IoM Bareboat charter
British Purpose 2000 307,000 Double-hull IoM Bareboat charter
Front Eagle 2002 309,000 Double-hull BA Spot market
Suezmax
-------
Front Warrior 1998 153,000 Double-hull BA Spot market
Front Melody 2001 150,000 Double-hull LIB Spot market
Front Symphony 2001 150,000 Double-hull LIB Spot market
Our chartered in fleet is contracted to us under leasing arrangements with fixed
terms of between eight and twenty four years. Lessors have options to require us
to extend 12 of these leases by up to an additional 5 years from expiry of the
fixed term. We have fixed price purchase options to buy 12 of these vessels at
certain future dates and the lessors have fixed price options to put 12 of these
vessels to us at the end of the lease period. The remaining four lease
agreements are not cancellable by us without agreement of end-user of the
vessel.
DRY BULK FLEET
Owned Tonnage
Approximate Type of
----------- -------
Vessel Built Dwt. Construction Flag Employment
------ ----- ---- ------------ ---- ----------
Capesize
--------
Channel Alliance 1996 172,000 Single-hull PHI Time Charter
Channel Navigator 1997 172,000 Single-hull PHI Time Charter
Handymax
--------
Cos Hero 1999 46,000 Single-hull PAN Bareboat Charter
Key to Flags:
BA - Bahamas, HK - Hong Kong, IoM - Isle of Man, LIB - Liberia, NIS - Norwegian
International Ship Register, PAN - Panama, PHI - Philippines, SG - Singapore,
FRA - France, MI - Marshall Islands.
Other than its interests in the vessels described above, we do not own any
material physical properties. We lease office space in Hamilton, Bermuda from an
unaffiliated third party. Frontline Management leases office space, at market
rates, in Oslo, Norway from Sea Shipping AS, a company indirectly affiliated
with Hemen Holding Ltd, or Hemen, our principal shareholder.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
The following discussion should be read in conjunction with Item 3 "Selected
Financial Data" and the Company's audited Consolidated Financial Statements and
Notes thereto included herein.
The Company's principal focus and expertise is the transportation of crude oil
and oil products cargoes for major integrated oil companies and other customers.
The Company's tanker fleet, which is one of the largest and most modern in the
world, consists of 25 wholly owned VLCCs, two part owned VLCCs, one option to
acquire a VLCC and 28 wholly owned Suezmax tankers, of which 8 are Suezmax OBOs.
In addition, the Company owns three dry bulk carriers. The Company also charters
in 13 modern VLCCs and 3 modern Suezmax tankers on long-term charters. The
Company also has a purchase option to acquire a further VLCC tanker. A full
fleet list is provided in Item 4 "Information on the Company"
Fleet Changes
In 2001, the Company took delivery of two wholly-owned newbuilding double-hull
Suezmax tankers for total delivered cost of $108.2 million, and joint ventures
in which the Company had a 33.3 % interest took delivery of three newbuilding
double-hull VLCCs for total delivered cost of $240.7 million. The Company also
acquired four double-hull VLCCs through the exercise of purchase options for
total delivered cost of $293.1 million. In addition the Company acquired two mid
1970s built VLCCs for $21.4 million that were subsequently sold for proceeds of
$21.2 million and three contracts for newbuilding double-hull VLCCs to be
delivered in 2002 and 2003 for $53.0 million
In 2001, the Company also sold two 1993-built VLCCs for proceeds of $104.0
million realising gains of $14.8 million and a 2000 built Suezmax tanker for
proceeds of $64.0 million realising a gain of $19.4 million
In 2002, the Company took delivery of five wholly-owned newbuilding double-hull
VLCCs for total delivered cost of $383.7 million and joint ventures in which the
Company had a 33.3 % interest took delivery of two newbuilding double-hulled
VLCCs for total delivered cost of $161.8 million. In addition, the Company sold
five dry bulk carriers for total proceeds of $93.4 million, realising a net loss
of $3.1 million.
In 2003, the Company acquired two Suezmax tankers for $6.7 million which were
previously 40% and 35% owned, These vessels were subsequently sold for proceeds
of $8.1 million realising gains of $1.2 million. A further two Suezmax tankers
were sold in 2003 for proceeds of $100.3 million realising gains of $7.1
million. The Company also took delivery of a newbuilding double-hull VLCC for
delivered cost of $79.2 million which was subsequently sold for $76.0 million
realising a loss of $2.7 million and acquired the remaining 50% of a double-hull
VLCC which was already 50% owned for $9.5 million. Through a reorganisation of
interests in joint ventures the Company disposed of 50% interests in 2 VLCCs and
increased interests in a further 4 double-hull VLCCs from 33.3% to 50.1% through
a combination of sale, acquisition and exchange of interest transactions. Our
net cash investment in these transactions was $3.3 million and we recorded
impairment losses of $5.2 million.
In February 2004 through a further reorganistion of joint ventures the Company
exchanged its 50.1% interests in 3 double-hull VLCCs for the remaining 49.9%
interests in 3 double-hull VLCCs of which the Company already owned 50.1%. We
accounted for these exchanges as non-cash exchanges of assets at book value. We
received a net cash settlement of $2.3 million as a result of equalization of
the values of the assets exchanged and recorded a gain of $0.2 million on the
transactions.
Acquisition of Independent Tankers Corporation
In May 2004, the Company exercised its option to acquire all of the issued
shares of Independent Tankers Corporation. Through this transaction the Company
acquired a fleet of six modern double-hull VLCCs and four Suezmax tankers, three
of which are double-hull. The Company consolidated the assets and liabilities of
ITC with effect from December 31, 2003 as a result of implementation of FASB
Interpretation 46, Consolidation of Variable Interest Entities (as described
below in "Accounting Changes").
All of ITC's vessels are on long-tem bareboat charters to Chevron and BP. The
initial fixed terms of the charters range from 8 to 10 years. After the initial
fixed term the charterers have options to extend the charters of the vessels for
further periods of between 8 to 12 years.
ITC is financed by Term and Serial Notes. These Notes mature between 2004 and
2021 and are secured on ITC's vessels and long-term charters. Interest is
payable on the Notes at fixed rates which range between 6.42% and 8.52%.
Spin-Off of Ship Finance International Limited and Future Strategy
In December 2003, our wholly owned subsidiary, Ship Finance issued $580 million
of 8.5% Senior Notes. In the first quarter of 2004, Ship Finance has used the
proceeds of the Notes issue, together with a refinancing of existing debt, to
fund the acquisition from us of a fleet of 47 crude oil tankers (including one
purchase option for a VLCC) and we have chartered each of the ships back for
most of their remaining lives. We also entered into fixed rate management and
administrative services agreements with Ship Finance to provide for the
operation and maintenance of the Company's vessels and administrative support
services. The charters and the management agreements were each given economic
effect as of January 1, 2004.
Under the terms of a charter ancillary agreement, beginning with the 11-month
period from February 1, 2004 and for each calendar year after that, we have
agreed to pay Ship Finance a profit sharing payment equal to 20% of the charter
revenues for the applicable period, calculated on a TCE basis, realised by us
from use of their fleet in excess of average rates of $25,575 per day for each
VLCC and $21,100 per day for each Suezmax tanker.
These arrangements are described in detail in Item 4 "Information on the
Company"
On May 28, 2004, we announced the distribution of 25 % of Ship Finance's common
shares to our common shareholders in a partial spin off.
Following the spin off of 25 % of Ship Finance, our operations will be comprised
of four main components as follows:
o Our charter and management agreements with Ship Finance including a
$250 million cash deposit we are required to reserve to secure the
charters.
o The ownership of 75 % of Ship Finance.
o The ownership of ITC.
o The ownership of our remaining vessels which include our three dry
bulk carriers, nine VLCCs and three Suezmaxes chartered in under
long-term leases, two joint venture owned VLCCs and one wholly-owned
non-recourse financed VLCC.
It is the Frontline Board's intention that during 2004, Frontline shall divest
all its shares in Ship Finance either through a straight sale, a corporate
transaction or through further distributions to Frontline's shareholders.
Our strategy is to become, over time, a world leading chartering company with
flexibility to adjust our exposure to the tanker market depending on cyclical
conditions. In addition, we will, when the financing arrangements permit,
consider divesting the "non Ship Finance" vessels. This may be done through sale
and leaseback or straight sales of the vessels.
Following the spin off of Ship Finance we will be more financially exposed to
the chartering market. This is likely to increase our activity in the chartering
market with respect to both short and long-term charters of vessels in and out.
Our purpose will be to manage risk through a portfolio of charters.
Consolidation of the tanker market will remain an important objective for the
Company.
Market Overview
2003 was a good year for the tanker market as freight rates increased
dramatically compared to 2002, mainly due to limited fleet growth and strong
growth in the demand for oil, and implicitly for oil tankers.
According to the International Energy Agency, world oil demand grew by 1.7
million barrels per day (mb/d) compared to 2002 with total world demand rising
to 78.7 mb/d. The main driver of this growth was strong economic growth in China
resulting in record import levels.
The world supply of oil increased by 2.8 mb/d compared with 2002 to a total of
79.4 mb/d in 2003. Repercussions of the oil workers' strike in Venezuela led to
low inventories in the United States and the necessary oil to replenish them
came to a large extent from the Middle East. At the moment Venezuela is still
producing some 0.5 mb/d less than before the strike. This resulted in strong
demand for VLCCs, and a very healthy market for most of the year. In addition,
strong growth in the demand for oil in China gave the market additional
strength. The war in Iraq reduced output from that country to 0.3-0.4 mb/d.
However, during the fall season output continued to climb and averaged about 2.0
mb/d in the 4th quarter of 2003.
The size of the world tanker fleet increased by 2.5% in 2003. The VLCC segment
of the market was unchanged, but Suezmax and smaller tankers increased by 4.5%.
A total of 19.9 million deadweight tons (mill dwt) of tankers were scrapped in
2003, including 27 VLCC's and 13 Suezmaxes. A total of 49.3 mill dwt , including
51 VLCC's and 55 Suezmaxes, were added to orderbooks in the same period.
The total orderbook for tankers stood at 75.3 mill dwt at the end of 2003. This
represents 24.6% of the current tanker fleet, compared to about 19% at the same
time in 2002.
The outlook for the tanker market for the remainder of 2004 is positive since it
seems that continued growth in oil consumption will ensure a positive demand for
tankers. The freight forward market for the second half of 2004, as of June 15,
2004, stands at $75,000 per day for VLCC tankers.
Effective December 31, 2003, we have presented our income statement using total
operating revenues and total operating expenses. The Company's vessels are
operated under time charters, bareboat charters, voyage charters pool
arrangements and COAs. Under a time charter, the charterer pays substantially
all of the vessel voyage costs. Under a bareboat charter the charterer pays
substantially all of the vessel voyage and operating costs. Under a voyage
charter, the vessel owner pays such costs. Vessel voyage costs are primarily
fuel and port charges. Accordingly, charter income from a voyage charter would
be greater than that from an equally profitable time charter to take account of
the owner's payment of vessel voyage costs. In order to compare vessels trading
under different types of charters, it is standard industry practice to measure
the revenue performance of a vessel in terms of average daily time charter
equivalent earnings, or TCEs. For voyage charters, this is calculated by
dividing net voyage revenues by the number of days on charter. Days spent
off-hire are excluded from this calculation. Net voyage revenues, a non-GAAP
measure, provides more meaningful information to us than voyage revenues, the
most directly comparable GAAP measure. Net voyage revenues are also widely used
by investors and analysts in the tanker shipping industry for comparing
financial performance between companies and to industry averages. The following
table reconciles our net voyage revenues to voyage revenues.
2003 2002 2001 2000 1999
Voyage revenues 1,089,583 489,286 639,807 656,917 339,996
Voyage expenses and commission (323,598) (135,074) (88,292) (97,316) (116,662)
------------------------------------------------------------------
Net voyage revenues 765,985 354,212 551,515 559,601 223,334
==================================================================
The following table sets out the daily TCEs earned by the Company's tanker fleet
over the last five years:
2003 2002 2001 2000 1999
(in $ per day)
VLCC 42,300 22,500 40,800 46,300 20,000
Suezmax 33,900 18,400 30,700 35,500 16,700
Suezmax OBO 31,900 17,700 28,900 33,300 16,800
The Company's fleet of dry bulk carriers are all fixed on medium to long-term
bareboat or time charters. These arrangements provide sufficient cash flows to
cover the debt service on this fleet.
Accounting Changes
In December 2003 the Company implemented the provisions of FASB Interpretation
46, Consolidation of Variable Interest Entities ("FIN 46"). The effect of
implementation of FIN 46 by the Company was to require consolidation of certain
entities in which the Company held interests but which had not previously been
consolidated. This resulted in the Company recording an increase in total assets
of $918.3 million, an increase in total liabilities of $952.1 million and the
cumulative effect of a change in accounting principle of $33.8 million effective
December 31, 2003 as discussed below.
The Company owns 50% of the issued shares of and has made loans to Golden
Fountain Corporation, owner of a VLCC. Prior to the adoption of FIN 46 Frontline
accounted for its interest in Golden Fountain Corporation using the equity
method. We have determined that Golden Fountain Corporation is a variable
interest entity and that Frontline is the primary beneficiary. Accordingly we
have consolidated the assets and liabilities of Golden Fountain Corporation
effective December 31, 2003. The effect of consolidation of Golden Fountain
Corporation as of December 31, 2003 is to increase total assets by $7.8 million,
increase total liabilities by $16.4 million and to record the cumulative effect
of a change in accounting principle of $8.5 million.
On July 1, 2003, the Company's subsidiary Golden Ocean Group Ltd, purchased a
call option to acquire all of the shares of Independent Tankers Corporation
("ITC") from Hemen Holding Ltd, a related party, for a total consideration of
$4.0 million plus 4 % interest per year. ITC operates a total of six VLCCs and
four Suezmax tankers, which are on long-term charters to BP and Chevron. Golden
Ocean paid $10.0 million for the option, which expires on July 1, 2010. Prior to
the adoption of FIN 46 Frontline did not consolidate ITC. We have determined
that ITC is a variable interest entity and that Frontline is the primary
beneficiary. Accordingly we have consolidated the assets and liabilities of ITC
effective December 31, 2003. The effect of consolidation of ITC as of December
31, 2003 is to increase total assets by $910.5 million, increase total
liabilities by $935.7 million and to record the cumulative effect of a change in
accounting principle of $25.2 million.
The company leases twelve vessels from special purpose lessor entities which
were established and are owned by independent third parties who provide
financing through debt and equity participation. Prior to the adoption of FIN
46R these special purpose entities were not consolidated by Frontline. Four of
these leases are accounted for as operating leases and eight of these leases are
accounted for as capital leases. We have determined that due to the existence of
certain put and call options over the leased vessels, these entities are
variable interest entities. The determination of the primary beneficiary of a
variable interest entity requires knowledge of the participations in the equity
of that entity by individual and related equity holders. Our lease agreements
with the leasing entities do not give us any right to obtain this information
and after exhaustive efforts we have been unable to obtain this information by
other means. Accordingly we are unable to determine the primary beneficiary of
these leasing entities. At December 31, 2003, the original cost to the lessor of
the assets under such arrangements was approximately $856.5 million. At December
31, 2003, the company's residual value guarantees associated with these leases,
which represent the maximum exposure to loss, are $132.3 million.
The Company has both an obligation and an option to purchase the VLCC Oscilla on
expiry of a five-year time charter, which commenced in March 2000. Oscilla is
owned and operated by an unrelated special purpose entity. Prior to the adoption
of FIN 46R this special purpose entity was not consolidated by Frontline. We
have determined that the entity that owns Oscilla is a variable interest entity
and that Frontline is the primary beneficiary. At the current date after
exhaustive efforts we have been unable to obtain the accounting information
necessary to be able to consolidate the entity that owns Oscilla. If the Company
has exercised its option at December 31, 2003, the cost to the Company of the
Oscilla would have been approximately $42.3 million and the maximum exposure to
loss was $17.4 million.
With effect from December 2003, the International Maritime Organisation
implemented new regulations that result in the accelerated phase-out of single
hull vessels. As a result of this, the Company has re-evaluated the estimated
useful life of its single hull vessels and determined this to be either 25 years
or the vessel's anniversary date in 2015 whichever comes first. As a result, the
estimated useful lives of fourteen of the Company's wholly owned vessels and two
vessels owned by associated companies were reduced in the fourth quarter of
2003. A change in accounting estimate was recognised to reflect this decision,
resulting in an increase in depreciation expense and consequently decreasing net
income by $1.3 million and basic and diluted earnings per share by $0.02, for
2003.
In 2001, the Company changed its accounting policy for drydockings. Prior to
2001, provisions for future drydockings were accrued and charged to expense on a
pro-rata basis over the period to the next scheduled drydockings. Since January
1, 2001 the Company has recognised the cost of a drydocking at the time the
drydocking takes place, that is it applies the "expense as incurred" method. The
expense as incurred method is considered by management to be a more reliable
method of recognising drydocking costs as it eliminates the uncertainty
associated with estimating the cost and timing of future drydockings. The
cumulative effect of this change in accounting principle is shown separately in
the consolidated statements of operations for the year ended December 31, 2001
and resulted in a credit to income of $31.5 million in 2001. The cumulative
effect of this change as of January 1, 2001 on the Company's consolidated
balance sheet was to reduce total liabilities by $32.3 million. Assuming the
"expense as incurred" method had been applied retroactively, the pro forma
income before cumulative effect of change in accounting principle for 2000 and
1999 would have been increased by $6.3 million and $7.0 million, or $0.09 and
$0.14 per basic and diluted share, respectively.
In June 2001, the FASB approved SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 applies to all acquired intangible assets whether
acquired singly, as part of a group, or in a business combination. SFAS 142
superseded APB Opinion No. 17, "Intangible Assets". This statement is effective
for fiscal years beginning after December 15, 2001. SFAS 142 requires that
goodwill and indefinite lived intangible assets will no longer be amortized but
will be reviewed annually for impairment. Intangible assets that are not deemed
to have an indefinite life will continue to be amortised over their useful
lives. At December 31, 2001, the Company had unamortised goodwill of $14.1
million. The Company adopted SFAS 142 effective January 1, 2002 and recorded an
impairment charge of $14.1 million for the unamortised goodwill on that date
that is shown separately in the consolidated statement of operations as a
cumulative effect of change in accounting principle. The valuation of the fair
value of the reporting unit used to assess the recoverability of goodwill was a
combination of independent third party valuations and the quoted market price.
As of January 1, 2001, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 133, "Accounting for Derivatives and Hedging Activities"
("SFAS 133"). Certain hedge relationships met the hedge criteria prior to SFAS
133, but do not meet the criteria for hedge accounting under SFAS 133. The
Company adopted SFAS 133 in the first quarter of fiscal year 2001 and upon
initial adoption recognised the fair value of its derivatives as assets of $0.4
million and liabilities of $0.6 million. A gain of $0.3 million was recognised
in income and a charge of $0.5 million made to other comprehensive income. On
January 1, 2002, the Company discontinued hedge accounting for two interest rate
swaps previously accounted for as cash flow hedges. This resulted in a balance
of $4.1 million being frozen in accumulated other comprehensive income as at
that date and this will be reclassified to the income statement over the life of
the underlying instrument.
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements in accordance with
accounting principles generally accepted in the United States requires that
management make estimates and assumptions affecting the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following is a discussion of the
accounting policies applied by the Company that are considered to involve a
higher degree of judgement in their application. See Note 2 to the Company's
audited Consolidated Financial Statements included herein for details of all of
the Company's material accounting policies.
Revenue Recognition
Revenues are generated from freight billings, time charter and bareboat charter
hires. Time charter and bareboat charter revenues are recorded over the term of
the charter as service is provided. Under a voyage charter the revenues and
associated voyage costs are recognised rateably over the estimated duration of
the voyage. The operating results of voyages in progress at a reporting date are
estimated and recognised pro-rata on a per day basis. Probable losses on voyages
are provided for in full at the time such losses can be estimated. Amounts
receivable or payable arising from profit sharing arrangements are accrued based
on the estimated results of the voyage recorded as at the reporting date.
Revenues and voyage expenses of the vessels operating in pool arrangements, are
pooled and the resulting net pool revenues, calculated on a time charter
equivalent basis, are allocated to the pool participants according to an agreed
formula. Formulae used to allocate net pool revenues vary among different pools
but generally allocate revenues to pool participants on the basis of the number
of days a vessel operates in the pool with weighting adjustments made to reflect
vessels' differing capacities and performance capabilities. The same revenue and
expenses principles stated above are applied in determining the pool's net pool
revenues. Certain pools are responsible for paying voyage expenses and
distribute net pool revenues to the participants. We account for the net pool
revenues allocated by these pools as "pool revenues" in our statements of
operations. Certain pools require the participants to pay and account for voyage
expenses, and distribute gross pool revenues to the participants such that the
participants' resulting net pool revenues are equal to net pool revenues
calculated according to the agreed formula. We account for gross pool revenues
allocated by these pools as "pool revenues" in our statements of operations.
Vessels and Depreciation
The cost of the Company's vessels is depreciated on a straight-line basis over
the vessels' remaining economic useful lives. Management estimates the useful
life of the Company's vessels to be 25 years. This is a common life expectancy
applied in the shipping industry. With effect from April 2001, the IMO
implemented new regulations that result in the accelerated phase-out of single
hull vessels. As a result of this, the Company re-evaluated the estimated useful
life of its single hull vessels and determined this to be either 25 years or the
vessel's anniversary date in 2017, whichever comes first. As a result, the
estimated useful lives of six of the Company's vessels were reduced in the
fourth quarter of 2001. In December 2003, the Marine Environmental Protection
Committee of the IMO adopted a proposed amendment to the International
Convention for the Prevention of Pollution from Ships to accelerate the phase
out of single hull tankers from 2015 to 2010 unless the relevant flag states
extend the date to 2015. This proposed amendment will take effect in April 2005
unless objected to by a sufficient number of states. As a result, the Company
has re-evaluated the estimated useful lives of its single hull vessels and
determined this to be the earlier of 25 years or the vessel's anniversary date
in 2015, resulting in the reduction of the estimated useful lives of fourteen of
the Company's vessels in the fourth quarter of 2003
If the estimated economic useful life is incorrect, or circumstances change such
that the estimated economic useful life has to be revised, an impairment loss
could result in future periods. The Company will continue to monitor the
situation and revise the estimated useful lives of its non-double hull vessels
as appropriate when new regulations are implemented.
The vessels held and used by the Company are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In assessing the recoverability of the vessels' carrying
amounts, the Company must make assumptions regarding estimated future cash
flows. These assumptions include assumptions about the spot market rates for
vessels, the operating costs of our vessels and the estimated economic useful
life of our vessels. In making these assumptions the Company refers to
historical trends and performance as well as any known future factors. Factors
we consider important which could affect recoverability and trigger impairment
include significant underperformance relative to expected operating results, new
regulations that change the estimated useful economic lives of our vessels and
significant negative industry or economic trends.
Variable Interest Entities
A variable interest entity is a legal entity that lacks either (a) equity
interest holders as a group that lack the characteristics of a controlling
financial interest, including: decision making ability and an interest in the
entity's residual risks and rewards or (b) the equity holders have not provided
sufficient equity investment to permit the entity to finance its activities
without additional subordinated financial support. FASB Interpretation 46
requires a variable interest entity to be consolidated if any of its interest
holders are entitled to a majority of the entity's residual return or are
exposed to a majority of its expected losses.
In applying the provisions of Interpretation 46, the Company must make
assumptions in respect of, but not limited to, the sufficiency of the equity
investment in the underlying entity. These assumptions include assumptions about
the future revenues, operating costs and estimated economic useful lives of
assets of the underlying entity.
The Company initially applied the provisions of Interpretation 46 to all special
purpose entities and other entities created after January 31, 2003 on December
31, 2003. The Company initially applied its provisions to entities that are not
considered to be special purpose entities that were created before January 31,
2003 as of March 31, 2004. The impact on the results of operations and financial
position of the Company is explained above in "Accounting Changes".
Leases
Leases are classified as either capital leases or operating leases based on an
assessment of the terms of the lease. Classification of leases involves the use
of estimates or assumptions about fair values of leased vessels, expected future
values of vessels and, if lessor's rates of return are not known, lessee's cost
of capital. We generally base our estimates of fair value on the average of 3
independent broker valuations of a vessel. Our estimates of expected future
values of vessels are based on current fair values amortised in accordance with
our standard depreciation policy for owned vessels. Lessee's cost of capital is
estimated using an average which includes estimated return on equity and
estimated incremental borrowing cost. The classification of leases in our
accounts as either capital leases or operating leases is sensitive to changes in
these underlying estimates and assumptions.
Factors Affecting Our Historical Results and Our Future Results Prior to Our
Spin-Off of Ship Finance
The principal factors that have affected our historical results of operations
and financial position and our future results prior to our spin-off of Ship
Finance include:
o the earnings of our vessels in the charter market;
o vessel expenses;
o administrative expenses;
o depreciation;
o interest expense; and
o foreign exchange.
We have derived our earnings from bareboat charters, time charters, voyage
charters, pool arrangements and contracts of affreightment.
A bareboat charter is a contract for the use of a vessel for a specified period
of time where the charterer pays substantially all of the vessel voyage costs
and operating costs. A time charter is a contract for the use of a vessel for a
specific period of time during which the charterer pays substantially all of the
vessel voyage costs but the vessel owner pays the operating costs. A voyage
charter is a contract for the use of a vessel for a specific voyage in which the
vessel owner pays substantially all of the vessel voyage costs and operating
costs. Revenues and voyage expenses of vessels operating in pool arrangements,
are pooled and net operating revenues, calculated on a time charter equivalent
basis, are allocated to the pool participants according to an agreed formula. A
contract of affreightment is a form of voyage charter in which the owner agrees
to carry a specific type and quantity of cargo in two or more shipments over an
agreed period of time. Accordingly, charter income from a voyage charter would
be greater than that from an equally profitable time charter to take account of
the owner's payment of vessel voyage costs. In order to compare vessels trading
under different types of charters, it is standard industry practice to measure
the revenue performance of a vessel in terms of average daily time charter
equivalent earnings, or TCEs. For voyage charters, this is calculated by
dividing net voyage revenues by the number of days on charter. Days spent
off-hire are excluded from this calculation.
As at December 31, 2003, 2002 and 2001, 51, 53 and 29 respectively, of our
vessels operated in the voyage charter market. The tanker industry 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 tanker vessels and the demand for oil
transportation services.
The Company's fleet of dry bulk carriers are all fixed on medium to long-term
bareboat or time charters. These arrangements provide sufficient cash flows to
cover the debt service on this fleet.
Operating costs are the direct costs associated with running a vessel and
include crew costs, vessel supplies, repairs and maintenance, drydockings,
lubricating oils and insurance.
Administrative expenses are composed of general corporate overhead expenses,
including personnel costs, property costs, legal and professional fees and other
general administrative expenses. Personnel costs include, among other things,
salaries, pension costs, fringe benefits, travel costs and health insurance. In
2002 and 2001, administrative expenses also included administrative costs
associated with Frontline's participation in Tankers International LLC, or
Tankers, a pooling arrangement for the commercial operation of the VLCCs of
Frontline and five other VLCC operators, entered into in December of 1999.
Frontline withdrew from the pool in July of 2002 and these costs ceased in the
second half of 2002.
Depreciation, or the periodic cost charged to our income for the reduction in
usefulness and long-term value of our vessels, is also related to the number of
vessels we own. We depreciate the cost of our vessels, less their estimated
residual value, over their estimated useful life on a straight-line basis. No
charge is made for depreciation of vessels under construction until they are
delivered.
Interest expense relates to vessel specific debt facilities and corporate debt.
Interest expense depends on our overall borrowing levels and may significantly
increase when we acquire vessels or on the delivery of newbuildings. Interest
incurred during the construction of a newbuilding is capitalized in the cost of
the newbuilding. Interest expense may also change with prevailing interest
rates, although the effect of these changes may be reduced by interest rate
swaps or other derivative instruments. As at December 31, 2003, 48% of our debt
was floating rate debt. We may enter into interest rate swap arrangements if we
believe it is advantageous to do so. As at December 31, 2003, certain of our
subsidiaries had Yen denominated debt and charters denominated in Yen, which
expose us to exchange rate risk. As at December 31, 2003 and 2002, we had Yen
denominated debt in subsidiaries of (Y)9.6 billion and (Y)5.1 billion
respectively.
Ship Finance has a $1.058 billion secured six-year credit facility with a
syndicate of financial institutions. This credit facility provided Ship Finance
with a portion of the capital required to complete the acquisition of their
fleet of vessels from us and to refinance related secured indebtedness. They
have entered into interest rate swaps to fix the interest on $500.0 million of
the borrowings under this facility for a period of five years at an average rate
of 3.4%.
Factors Affecting Our Future Results After Our Spin Off of Ship Finance
Principal factors that are expected to affect our future results of operations
and financial position after our spin-off of Ship Finance include:
o the earnings of our vessels;
o the earnings and expenses related to any additional vessels that we
acquire;
o charter payments we make to Ship Finance;
o profit sharing payments we make to Ship Finance;
o vessel operating costs of vessels we manage for Ship Finance;
o administrative expenses and;
o depreciation
Initially after our spin-off of Ship Finance, our future revenues will derive
primarily from our operation of the 47 vessels that we charter from Ship Finance
under long term charters, described above under "Spin-Off of Ship Finance
International Limited and Future Strategy." In addition, beginning with the
final 11-month period in 2004 and for each calendar year thereafter, we will pay
Ship Finance profit sharing payment if our earnings from use of vessels we
charter from Ship Finance exceed certain amounts.
The Company's future expenses after our spin-off of Ship Finance will consist
primarily of vessel operating costs and administrative expenses. With respect to
vessel operating costs, our subsidiary Frontline Management has entered into
fixed cost management agreements with Ship Finance under which Frontline
Management will be responsible for all technical management of the vessels we
charter from Ship Finance, including crewing, maintenance, repair, capital
expenditures, drydocking, vessel taxes and other vessel operating and voyage
expenses. Frontline Management will receive a fixed fee of $6,500 per day per
vessel for all of the above services.
Frontline Management has entered into an administrative services agreement with
Ship Finance under which Frontline Management will provide Ship Finance with
administrative support services such as the maintenance of corporate books and
records, the preparation of tax returns and financial statements, assistance
with corporate and regulatory compliance matters not related to Ship Finance's
vessels, payroll services, legal services, and other non-vessel related
administrative services. Ship Finance will pay Frontline Management a fixed fee
of $20,000 per year per vessel for its services under the agreement, and
reimburse Frontline Management for reasonable third party costs, if any,
advanced on their behalf by Frontline, including directors fees and expenses,
shareholder communications and public relations, registrars, audit, legal fees
and listings costs.
The accounting impact of our spin-off of Ship Finance will depend in part on the
method through which it is effected, that is whether the spin-off is achieved
through a straight sale, a corporate transaction or through a distribution to
Frontline's shareholders. Given the level of contractual arrangements that will
exist between Frontline and Ship Finance, management are in the process of
considering the accounting treatment of a spin-off transaction, including
whether the financial results and position of Ship Finance can be deconsolidated
from Frontline.
Inflation
Although inflation has had a moderate impact on our vessel operating expenses
and corporate overheads, management does not consider inflation to be a
significant risk to direct costs in the current and foreseeable economic
environment. In addition, in a shipping downturn, costs subject to inflation can
usually be controlled because shipping companies typically monitor costs to
preserve liquidity and encourage suppliers and service providers to lower rates
and prices in the event of a downturn.
Results of Operations
Year ended December 31, 2003 compared with the year ended December 31, 2002
Total operating revenues increased by 113 % to $1,173.8 million in 2003 compared
with $551.6 million in 2002. Net voyage revenues increased by 116 % to $766.0
million in 2003 compared with $354.2 million in 2002. Voyage charter revenue
represents 93 % of our total operating revenues in 2003 and as a result, the
Company's revenues are significantly affected by the prevailing spot market
rates in which the vessels operate. Traditionally, spot market rates are highly
volatile and are determined by market forces such as worldwide demand, changes
in the production of crude oil, changes in seaborne and other transportation
patterns including changes in the distances that cargoes are transported,
environmental concerns and regulations and competition from other sources of
energy. As discussed in the market overview above, the 2003 tanker market
experienced significantly stronger charter rates. The annual average daily TCEs
earned by the Company's VLCCs, Suezmax tankers, and Suezmax OBO carriers for
2003 year were $42,300, $33,900 and $31,900 respectively compared with $22,500,
$18,400 and $17,700, respectively in 2002.
Ship operating expenses, which include drydocking costs, increased 8 % to $117.6
million from $109.3 million in 2002. This increase reflects the increase in the
size of the fleet due to fleet additions in 2002. Average daily operating costs,
including drydockings, of the Company's VLCCs, Suezmax tankers and Suezmax OBO
carriers were $6,300, $5,500 and $5,500 respectively compared with $6,300,
$5,600 and $5,700 respectively in 2002. In 2003, 11 of our vessels drydocked
compared with 15 in 2002.
Charterhire expenses increased to $81.0 million in 2003 from $60.6 million in
2002, principally due to the inclusion a full year's expense in 2003 for four
vessels on charter from BP Shipping Ltd., the shipping arm of BP Plc - these
charters commenced in July 2002 and were terminated in December 2003 and January
2004.
Administrative expenses increased 40% to $17.9 million in 2003 from $12.8
million in 2002. Administrative expenses are reported net of management fee
income of $3.8 million and $3.6 million for 2003 and 2002, respectively.
Included in fee income was $0.6 million and $0.8 million received from related
parties for 2003 and 2002 respectively. The increase in administrative expenses
is primarily as a result of the Company recording a non-cash charge of $5.5
million in connection with employee stock options compared with $0.5 million in
2002.
Depreciation and amortisation increased 7% to $146.9 million in 2003 from $136.9
million in 2002. The increase relates to the inclusion of a full year's
depreciation on five new vessels acquired in 2002.
Net interest expense (being interest expense net of interest income) for 2003
was $65.9 million, an increase of 13% compared with $58.3 million in 2002.
Interest income decreased to $9.1m in 2003 from $13.0 million in 2002 mainly as
a result of a decrease in interest income from loans to associated companies.
Interest expense increased to $75.1 million from $71.3 million in 2002 with the
increase primarily relating to an increase in capital lease interest expense as
a result of the sale and leaseback of four vessels in the year. Additionally
interest costs of $2.1 million were incurred due to the issuance in December
2003 of $580 million 8.5% Senior Notes by Ship Finance International Limited, a
wholly-owned subsidiary of the Company.
The Company's share in results of associated companies increased to earnings of
$33.5 million from a loss of $10.7 million in 2002. This increase is due to a
combination of the strength of tanker earnings in 2003 compared with 2002 and
foreign currency exchange losses recognised in associated companies with Yen
denominated long-term debt. In 2003, the Company recorded an impairment charge
of $5.2 million related to the other-than-temporary decline in value of its
investments in Golden Lagoon Corporation and Ichiban Transport Corporation. This
impairment charge was triggered by signing agreements on June 25, 2003 for the
sale of our investments for proceeds which were less than the book value of
those investments.
The Company incurred foreign currency exchange losses of $17.1 million in 2003
compared with losses of $10.9 million in 2002, as a result of the strengthening
of the Yen against the US Dollar from 118.54 at December 31, 2002 to 107.1 at
December 31, 2003. At December 31, 2003, the Company had Yen debt of Yen 16.8
billion, compared with Yen 13.1 billion at December 31, 2002.
Other financial items changed from an expense of $8.6 million in 2002 to income
of $0.3 million in 2003. In both years, other financial items consists primarily
of market value adjustments on derivative instruments including interest rate
swaps and freight future agreements. In September 2001 the Company established a
facility for a Stock Indexed Total Return Swap Programme or Equity Swap Line
with the Bank of Nova Scotia, or BNS, whereby the latter acquired shares in the
Company, and the Company carried the risk of fluctuations in the share price.
The Company terminated this Equity Swap Line on June 17, 2003 resulting in
3,070,000 shares being repurchased at an average cost of $8.98 per share at a
time when the market share price was $16.31 As a result the Company recorded
income of $22 million in 2003 compared to a charge of $4.0 million in 2002. We
incurred losses on freight future contracts amounting to $33.0 million in 2003
($0.5 million in 2002). This increase substantially relates to speculative
freight forward agreements based on the Baltic Capesize Index. In addition, in
2003, the Company recorded income of $6.1 million relating to the market value
adjustment on the Company's interest rate swaps compared to a charge of $3.0
million in 2002.
The Company adopted FIN 46 Consolidation of Variable Interest Entities on
December 31, 2003 and recorded the cumulative effect of change in accounting
principle of $33.8 million. Net income for 2003 before the cumulative effect of
change in accounting principle was $443.1 million and basic earnings per share
were $5.92 (diluted - $5.90).
Year ended December 31, 2002 compared with the year ended December 31, 2001
Total operating revenues decreased by 23 per cent to $551.1 million from $716.5
million. Total net voyage revenues decreased by 36 per cent to $354.2 million in
2002 compared with $551.5 million in 2001. In 2002, the Company took delivery of
five wholly-owned double-hulled VLCCs and two double-hulled VLCCs in which the
Company has a 33.33 per cent interest. In addition, the Company sold five dry
bulk carriers and sold its 50 per cent interest in two joint ventures, each
owning a dry bulk carrier. However, the decrease in net operating revenues
primarily reflects the significantly weaker tanker market experienced in 2002.
The annual average daily TCEs earned by the Company's VLCCs, Suezmax tankers,
and Suezmax OBO carriers for 2002 year were $22,500, $18,400 and $17,700,
respectively, compared with $40,800, $30,700 and $28,900, respectively in 2001.
Ship operating expenses, which include drydocking costs, decreased six per cent
to $109.3 million from $116.3 million in 2001. This decrease is a result of a
cost saving exercise in 2002. The average daily operating costs, including
drydockings, of the Company's VLCCs, Suezmax tankers and Suezmax OBO carriers
was $6,300, $5,600 and $5,700 respectively compared with $6,300, $5,700 and
$9,000 in 2001. In 2001, 12 of our vessels drydocked compared with 15 in 2002.
Charterhire expenses increased to $60.6 million in 2002 from $41.9 million in
2001, principally due to the inclusion in the second half of the year of four
additional vessels on short-term charters from BP Shipping Ltd., the shipping
arm of BP Plc.
Administrative expenses decreased two per cent to $12.8 million in 2002 from
$13.0 million in 2001. Administrative expenses are reported net of fee income of
$3.6 million and $3.2 million for 2002 and 2001, respectively. Included in fee
income was $0.8 million and $0.5 million received from related parties for 2002
and 2001, respectively. In 2001, the Company recorded a non-cash charge of $1.2
million in connection with employee stock options. In 2002, this charge was
reduced to $0.5 million. Offsetting this reduction were increased administrative
expenses due to an increase in the number of employees.
Depreciation and amortisation increased 17 per cent from $117.2 million in 2001
to $136.9 million in 2002. The increase relates to the acquisition of five new
vessels in 2002 and the impact for a full year of the reduced expected useful
life for six of the Company's vessels following the implementation of IMO
regulations in 2001.
Net interest expense for 2002 was $58.3 million, a decrease of 24 per cent
compared with $77.0 million in 2001. Interest income was unchanged at $13.0
million for both 2001and 2002. Interest expense decreased from $90.0 million in
2001 to $71.3 million in 2002. At December 31, 2002 the Company had $1,424.9
million of floating rate debt and the decrease in the interest expense reflects
the benefit of lower interest rates throughout 2002.
The share in result of associated companies decreased from earnings of $22.3
million in 2001 to a loss of $10.7 million in 2002. Certain of the associated
companies in which the Company has investments, have Yen denominated long-term
debt. In 2002 the loss is due to a combination of lower revenues and the Yen
strengthened against the U.S. Dollar with the resulting unrealised foreign
exchange loss included within the share in results of associated companies.
The Company incurred a foreign currency exchange loss of $10.9 million in 2002
compared with a gain of $15.5 million in 2001, as a result of the strengthening
of the Yen against the US Dollar from 131.14 at December 31, 2001 to 118.54 at
December 31, 2002. At December 31, 2002, the Company has Yen debt (including Yen
denominated capital leases) of Yen 13.1 billion, compared with Yen 25.7 billion
at December 31, 2001.
The charge for other financial items increased from $5.7 million in 2001 to $8.6
million in 2002. In both years, other financial items consists primarily of
market value adjustment on derivatives following the adoption of SFAS No. 133 on
January 1, 2001. In September 2001 the Company established a twelve month
facility for a Stock Indexed Total Return Swap Programme or Equity Swap Line
with the Bank of Nova Scotia, or BNS, whereby the latter acquires shares in the
Company, and the Company carries the risk of fluctuations in the share price of
those acquired shares. In 2001 the mark to market valuation of the Equity Swap
Line resulted in a credit to income of $4.4 million. This was offset by a charge
of $9.8 million in connection with the market value adjustments on interest
rates swaps. In 2002 the Company incurred a $4.0 million charge relating to the
market value adjustment on the Company's Equity Swap Line and a $3.0 million
charge relating to the market value adjustments for interest rate swaps.
Net income from continuing operations before income taxes and before the
cumulative effect of change in accounting principle was $7.2 million in 2002
compared with $330.6 million in 2001. In 2002, the Company sold a portion of its
dry bulk operations and these disposals have been recorded as a charge of $1.9
million for discontinued operations.
The Company adopted FAS 142 effective January 1, 2002 and recognised an
impairment loss on goodwill of $14.1 million that is shown separately in the
consolidated statement of operations as a cumulative effect of change in
accounting principle. Net income for 2002 before the cumulative effect of change
in accounting principle was $5.2 million and earnings per share were $0.07.
Liquidity and Capital Resources
Liquidity:
The Company operates in a capital intensive industry and has historically
financed its purchase of tankers and other capital expenditures through a
combination of cash generated from operations, equity capital and borrowings
from commercial banks. Our ability to generate adequate cash flows on a short
and medium term basis depends substantially on the trading performance of our
vessels in the market. Market rates for charters of our vessels have been
volatile historically. Periodic adjustments to the supply of and demand for oil
tankers causes the industry to be cyclical in nature. We expect continued
volatility in market rates for our vessels in the foreseeable future with a
consequent effect on our short and medium term liquidity.
The Company's funding and treasury activities are conducted within corporate
policies to maximise investment returns while maintaining appropriate liquidity
for the Company's requirements. Cash and cash equivalents are held primarily in
U.S. dollars with some balances held in Japanese Yen, British Pound and
Norwegian Kroner.
Short-term liquidity requirements of the Company relate to servicing our debt,
payment of operating costs, lease payments for our chartered in fleet, funding
working capital requirements and maintaining cash reserves against fluctuations
in operating cash flows. Sources of short-term liquidity include cash balances,
restricted cash balances, short-term investments and receipts from our
customers. Revenues from time charters and bareboat charters are generally
received monthly or fortnightly in advance while revenues from voyage charters
are received upon completion of the voyage.
At December 31, 2003 we estimated cash breakeven average daily TCE rates of
$15,900 for our Suezmax tankers and $21,400 for our VLCCs. These are the daily
rates our vessels must earn to cover payment of budgeted operating costs
(including corporate overheads), estimated interest and scheduled loan principal
repayments. These rates do not take into account loan bullet repayments at
maturity, which we expect to refinance with new loans.
Long-term liquidity requirements of the Company include funding the equity
portion of investments in new or replacement vessels, repayment of long-term
debt balances including our $580 million 8.5% Senior Notes due 2013 and funding
any payments we may be required to make due to lessor put options on certain
vessels we charter in. Sources of funding our long-term liquidity requirements
include new loans or equity issues, vessel sales and sale and leaseback
arrangements.
As of December 31, 2003, 2002 and 2001, the Company had cash and cash
equivalents of $124.2 million, $92.1 million and $178.2 million, respectively.
As of December 31, 2003, 2002 and 2001, the Company had restricted cash balances
of $891.9 million, $8.2 million and $11.1 million respectively. Our restricted
cash balances contribute to our total short and medium term liquidity as they
are used to fund payment of certain loans and lease payments which would
otherwise be paid out of our cash balances. The large increase in restricted
cash balances as at December 31, 2003 is due to two factors. A cash deposit of
$565.5 million, representing net proceeds from our offering of $580.0 million
8.5% Senior Notes due 2013, was retained by the Trustee pending our satisfaction
of certain covenants. We satisfied those covenants during the first quarter of
2004 and the cash deposit was released to us. We consolidated the assets and
liabilities of Independent Tankers Corporation ("ITC") with effect from December
31, 2003. ITC's assets included $323.8 million of restricted cash deposits. Use
of these deposits is restricted to lease payments for 4 chartered in VLCCs.
In the first quarter of 2004 we established a new restricted deposit of $250.0
million. We are required to maintain this minimum deposit as part of our
commitment to secure payment of lease obligations to Ship Finance. Use of the
deposit is restricted to making lease payments to Ship Finance under certain
circumstances which may arise if our earnings from use of Ship Finance's fleet
are lower than the charter rates we have agreed to pay for Ship Finance's
vessels.
Borrowing activities:
In December 2003, our wholly-owned subsidiary Ship Finance issued $580.0 million
principal amount of 8.5% Senior Notes due 2013. Our newly-acquired subsidiary
ITC had $604.7 million outstanding Note liabilities at December 31, 2003. ITC's
Notes mature between 2004 and 2021 and incur fixed rates of interest between
6.42% and 8.52%. Our ability to issue further Notes in future will depend
substantially on the availability and pricing of capital for shipping industry
projects.
In January and February 2004 our wholly-owned subsidiary Ship Finance refinanced
substantially all of its secured bank debt with a new $1,058.0 million
syndicated senior secured credit facility. This facility bears interest Libor
plus 1.25% and is repayable between 2004 and 2010 with a final bullet of $499.7
million payable on maturity. In common with other secured loans, this facility
contains a minimum value covenant which requires that the aggregate value of
Ship Finance's vessels exceed 140% of the outstanding amount of the facility.
Frontline does not guarantee any of Ship Finance's debt facilities.
Covenants contained in our secured loan agreements may restrict our ability to
obtain new secured facilities in future. We were in compliance with all loan
covenants at December 31, 2003.
Acquisitions and Disposals:
In the year ended December 31, 2003 we took delivery of a VLCC. We paid a total
amount of $66.6 million in 2003 for this vessel which was partly financed with a
new loan of $47.3 million.
We reorganised our joint venture interests during 2003 by disposing of two 50%
interests in VLCCs and increasing our interests in four VLCCs from 33.3% to
50.1%. Our total investment in joint ventures was $91.6 million in the year,
partly offset by dividends and sale proceeds of $18.9 million.
A further reorganistion occurred in the first quarter of 2004 whereby we
exchanged interests with our joint venture partner. As a result we disposed of
our 50.1% interests in 3 VLCCs and increased our interests in 3 VLCCs from 50.1%
to 100%. We received net cash proceds of $2.3 million in this exchange.
In the year ended December 31, 2003 we sold 3 VLCCs and 6 Suezmax tankers for
aggregate cash proceeds of $427.3 million plus 2 million common share of OMI
Corporation which had a value of $7.08 per share at the time of sale. These
sales include 2 Suezmax tankers and 2 VLCCs which were subsequently leased back
by the Company on long-term charters. We used $234.6 million of these proceeds
to retire debt secured on the vessels, thereby increasing total liquidity by
$192.7 million. We subsequently sold all of the OMI shares for cash, realising a
profit of $0.6 million.
Equity:
In June 2003, the company exercised it call option on Frontline shares held by
the Bank of Nova Scotia under an Equity Swap Line facility. This transaction
involved the Company acquiring 3,070,000 shares at a cost of $8.97 per share at
a time when the market price per share was $16.31 As a result the Company
recorded a gain of $22.5 million. These shares were immediately cancelled.
During 2003 the Company received $2.9 million proceeds from the issuance of
shares in connection with the exercise of employee share options. At December
31, 2003 there were 295,436 unexercised employee stock options. These all became
exercisable by June 2004 and were exercised. The Company's Board currently has
no plan to issue further employee stock options.
Derivative Activities:
The Company uses financial instruments to reduce the risk associated with
fluctuations in interest rates. The Company has a portfolio of interest rate
swaps that swap floating rate interest to fixed rate, which from a financial
perspective hedge interest rate exposure. The Company does not hold or issue
instruments for speculative or trading purposes. As at December 31, 2003 the
Company's interest rate swap arrangements effectively fix the Company's interest
rate exposure on $140.5 million of floating rate debt. These interest rate swap
agreements expire between January 2006 and August 2008.
In connection with its new $1,058.0 million syndicated senior secured credit
facility, Ship Finance entered into new 5-year interest rate swaps with a
combined principal amount of $500.0 million in the first quarter of 2004. These
swaps are at rates between 3.3% and 3.5%.
The Company enters into forward freight agreements for trading purposes in order
to manage its exposure to the risk of movements in the spot market for certain
trade routes and, to some extent, for speculative purposes. Market risk exists
to the extent that spot market fluctuations may have a negative effect on the
Company's cash flows and consolidated statements of operations. See Item 11.
"Quantitative and Qualitative Disclosures about Market Risk".
Tabular disclosure of contractual obligations:
At December 31 2003, the Company had the following contractual obligations and
commitments:
Payment due by period
Less than 1 year 1 - 3 years 3 - 5 years After 5 years Total
-------------------------------------------------------------------------
In thousands of $
$580 million 8.5% notes (1) -- -- -- 580,000 580,000
Term notes (7.84% to 8.52%) (2) 3,355 16,068 28,989 435,688 484,100
Serial notes (6.42% to 7.62%) (2) 34,450 55,370 24,500 6,300 120,620
Other long-term debt 153,326 461,750 230,778 251,843 1,097,697
Operating lease obligations 33,210 67,585 67,814 63,325 231,934
Capital lease obligations 80,260 161,236 165,014 813,988 1,220,498
-------------------------------------------------------------------------
Total contractual cash obligations 304,601 762,009 517,095 2,151,144 3,734,849
-------------------------------------------------------------------------
(1) In December, 2003, Ship Finance International Limited, a wholly owned
subsidiary of Frontline Ltd., issued $580 million 8.5% senior notes which
mature in 2013.
(2) These are term and serial notes included as a result of the consolidation
of ITC at December 31, 2003. The term notes mature between 2006 and 2021,
while the serial notes have maturity dates between 2004 and 2010.
At December 31 2003, the Company leased twelve vessels that were sold by the
Company at various times during the period from November 1998 to December 2003,
and leased back on charters that range for periods of eight to twelve and a half
years with lessors' options to extend the charters for periods that range up to
five years. Four of these vessels are accounted for as operating leases and
eight as capital leases. The Company has fixed price purchase options at certain
specified dates and the lessors have options to put these twelve vessels to the
Company at the end of each lease term.
Additionally, the Company's newly acquired subsidiary ITC leases 4 VLCCs on 24
year charters which began on delivery of the vessels in 1999 and 2000. These
leases are classified as capital leases and the liabilities have been
consolidated with effect from December 31, 2003.
Off balance sheet financing:
Charter hire payments to third parties for certain contracted-in vessels are
accounted for as operating leases. The Company is also committed to make rental
payments under operating leases for office premises. The future minimum rental
payments under the Company's non-cancellable operating leases are disclosed
above in "Tabular disclosure of contractual obligations"
The total amount that the Company could be required to pay under put options
with respect vessels leased under operating leases is $56.8 million.
At December 31, 2003 joint ventures which the Company accounts for using the
equity method had secured bank debt totalling $87.2 million. Frontline was
guarantor to $37.7 million of this debt.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Information concerning each director and executive officer of the Company is set
forth below.
Name Age Position
---- --- --------
John Fredriksen 60 Chairman, Chief Executive Officer, President and
Director
Tor Olav Tr0im 41 Vice-President and Director
Kate Blankenship 39 Chief Accounting Officer, Company Secretary and
Director
Tom E. Jebsen 46 Chief Financial Officer of Frontline Management
Oscar Spieler 43 Chief Executive Officer of Frontline Management
Certain biographical information about each of the directors and executive
officers of the Company is set forth below.
John Fredriksen has been the Chairman of the Board, Chief Executive Officer,
President and a director of the Company since November 3, 1997. He was
previously the Chairman and Chief Executive Officer of Old Frontline. Mr.
Fredriksen has served for over eight years as a director of Seatankers
Management Co. Ltd. ("Seatankers"), a ship operating company and an affiliate of
the Company's principal shareholder. Mr. Fredriksen indirectly controls Hemen
Holding Ltd, a Cyprus company who is our principal shareholder. Mr. Fredriksen
is a director of and indirectly controls Golar LNG Limited, a Bermuda company
listed on the Oslo Stock Exchange and the Nasdaq National Market.
Tor Olav Tr0im has been Vice-President and a director of the Company since
November 3, 1997. He previously served as Deputy Chairman of Frontline from July
4, 1997, and was a director of Old Frontline from July 1, 1996. Until April,
2000 Mr. Tr0im was the Chief Executive Officer of Frontline Management AS, a
company which supports the Company in the implementation of decisions made by
the Board of Directors. Mr. Tr0im also serves as a consultant to Seatankers and
since May 2000, has been a director and Vice-Chairman of Knightsbridge Tankers
Ltd, a Bermuda company listed on the Nasdaq National Market. He is a director of
Aktiv Inkasso ASA and Northern Oil ASA, both Norwegian Oslo Stock Exchange
listed companies and Northern Offshore Ltd., a Bermuda company listed on the
Oslo Stock Exchange. Mr. Tr0im is President and Chief Executive Officer of Ship
Finance International since October 15, 2003. Prior to his service with
Frontline, from January 1992, Mr. Tr0im served as Managing Director and a member
of the Board of Directors of DNO AS, a Norwegian oil company. Mr. Tr0im has
served as a director of Golar LNG Limited since May 2001.
Kate Blankenship is Chief Accounting Officer and Secretary of the Company and
has been a director since August, 2003. Mrs. Blankenship joined the Company in
1994. Prior to joining the Company, she was a Manager with KPMG Peat Marwick in
Bermuda. She is a member of the Institute of Chartered Accountants in England
and Wales. Mrs. Blankenship has been Chief Financial Officer of Knightsbridge
Tankers Ltd since April 2000 and Secretary of Knightsbridge since December 2000.
Mrs. Blankenship is Director and Secretary of Ship Finance International Limited
since October 15, 2003. Mrs.Blankenship has served as a director of Golar LNG
Limited since July, 2003.
Tom E. Jebsen has served as Chief Financial Officer of Frontline Management
since June 1997. From December 1995 until June 1997, Mr. Jebsen served as Chief
Financial Officer of Tschudi & Eitzen Shipping ASA, a publicly traded Norwegian
shipowning company. From 1991 to December 1995, Mr. Jebsen served as Vice
President of Dyno Industrier ASA, a publicly traded Norwegian explosives
producer. Mr. Jebsen is also a director of Assuranceforeningen Skuld and Hugin
ASA, an internet company.
Oscar Spieler has served as Chief Executive Officer of Frontline Management AS
since October 2003, and prior to that time as Technical Director of Frontline
Management AS since November 1999. From 1995 until 1999, Mr. Spieler served as
Fleet Manager for Bergesen, a major Norwegian gas tanker and VLCC owner. From
1986 to 1995, Mr. Spieler worked with the Norwegian classification society DNV,
working both with shipping and offshore assets.
B. COMPENSATION
During the year ended December 31, 2003, the Company paid to its directors and
executive officers (five persons) aggregate cash compensation of $1,018,755 and
an aggregate amount of $61,360 for pension and retirement benefits.
The Company did not grant any options to acquire Ordinary Shares of the Company
to the Directors and officers during 2003.
C. BOARD PRACTICES
In accordance with the Bye-laws of the Company the number of Directors shall be
such number not less than two as the Company by Ordinary Resolution may from
time to time determine and each Director shall hold office until the next annual
general meeting following his election or until his successor is elected. The
Company has three Directors. The Board does not have any committees.
The officers of the Company are elected by the Board of Directors as soon as
possible following each Annual General Meeting and shall hold office for such
period and on such terms as the Board may determine.
There are no service contracts between the Company and any of our Directors
providing for benefits upon termination of their employment or service.
The Company does not currently have an audit committee.
D. EMPLOYEES
As of December 31, 2003, the Company and its subsidiaries employed approximately
40 people in their respective offices in Bermuda and Oslo. The Company contracts
with independent ship managers to manage and operate its vessels.
E. SHARE OWNERSHIP
The beneficial interests of our Directors and officers in the Ordinary Shares of
the Company as of June 4, 2004, were as follows:
Percentage of
Ordinary Shares of Ordinary Shares
Director or Officer $2.50 each Outstanding
------------------- ------------------ ---------------
John Fredriksen* 35,079,053 47.45%
Tor Olav Tr0im 194,934 **
Kate Blankenship 10,000 **
Tom E. Jebsen 39,557 **
Oscar Spieler 19,000 **
* Includes Ordinary Shares held by Hemen Holding Ltd. and other companies
indirectly controlled by Mr. John Fredriksen.
** Less than one per cent
As of June 4, 2004 none of the Company's Directors and officers hold any options
to acquire Ordinary Shares of the Company.
As of June 4, 2004, there are no authorised and unissued Ordinary Shares
reserved for issue pursuant to subscription under options granted under the
Company's share option plans.
The Company maintained a Bermuda Employee Share Option Plan and a United Kingdom
Employee Share Option Plan. These plans have expired as at June 4, 2004 and have
currently not been replaced.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The Company is indirectly controlled by another corporation (see below). The
following table presents certain information regarding the current ownership of
the Ordinary Shares with respect to (i) each person who is known by the Company
to own more than five per cent of the Company's outstanding Ordinary Shares; and
(ii) all directors and officers as a group as of June 4, 2004.
Ordinary Shares
---------------
Owner Amount Per cent
----- ---------- --------
Hemen Holding Ltd. and associated companies (1) 35,079,053 47.45%
All Directors and Officers as a group (five persons) (2) 35,342,544 47.81%
(1) Hemen Holding Ltd. is a Cyprus holding company indirectly controlled by Mr.
John Fredriksen, who is the Chairman and Chief Executive Officer of the
Company.
(2) Includes Ordinary Shares held by Hemen Holding Ltd. and associated
companies indirectly controlled by Mr. John Fredriksen.
At both June 2003 and June 2002 Hemen Holding Ltd. and associated companies held
47.74% and 45.22% of the Company's Ordinary Shares, respectively.
The Company's major shareholders have the same voting rights as other
shareholders of the Company.
As at May 31, 2004, 5,527,107 of the Company's Ordinary Shares were held by 103
holders of record in the United States.
No corporation or foreign government owns more than 50% of the Company's
outstanding Ordinary Shares.
The Company is not aware of any arrangements, the operation of which may at a
subsequent date result in a change in control of the Company.
B. RELATED PARTY TRANSACTIONS
Management believes transactions with related parties are under terms similar to
those that would be arranged with other parties.
On December 5, 2000, a subsidiary of Frontline made a short-term loan of $20
million to World Shipholding Ltd.. This loan was repaid in full on February 6,
2001. Fees and interest totalling $234,680 were recorded in 2001. World
Shipholding Ltd. is indirectly controlled by John Fredriksen who is Frontline
Ltd's Chairman and a major stockholder in the Company.
In February 2001, the Company acquired newbuilding contracts from Seatankers
Management Co. Ltd for the construction and purchase of three VLCC tankers at
the Hitachi shipyard in Japan. These contracts were acquired for the original
contract price of $72 million each plus $0.5 million per contract. These three
newbuildings were delivered in 2002. Seatankers Management Co. Ltd is indirectly
controlled by John Fredriksen who is Frontline Ltd's Chairman and a major
stockholder.
In the years ended December 31, 2003, 2002 and 2001, Frontline provided services
to Seatankers Ltd. These services comprise management support and administrative
services including administration of a newbuilding project known as the Uljanik
Project. In the years ended December 31, 2003, 2002 and 2001 the Company earned
management fees of $107,995, $253,762 and $277,855, respectively from Seatankers
Ltd. As at December 31, 2003, 2002 and 2001 amounts of $17,880, $141,359 and
$314,923 respectively were due from Seatankers Ltd in respect of these fees and
for the reimbursement of costs incurred on behalf of Seatankers Ltd. Seatankers
Ltd. is indirectly controlled by John Fredriksen who is Frontline Ltd's Chairman
and a major stockholder in the Company.
In the years ended December 31, 2003 and 2002 Frontline has provided management
support and administrative services to Osprey Maritime Ltd ("Osprey"). In the
years ended December 31, 2003 and 2002 the Company earned management fees of
$51,600 and $42,000 respectively from Osprey. As at December 31, 2003 and 2002
amounts of $18,719 and $18,000 respectively were due from Osprey in respect of
these fees and for the reimbursement of costs incurred on behalf of Osprey. At
December 31, 2002, an amount of $103,838 was due to Osprey in respect of Tankers
pool distributions due to Osprey that were received by the Company. Osprey is
indirectly controlled by John Fredriksen who is Frontline Ltd's Chairman and a
major stockholder in the Company.
In the years ended December 31, 2003, 2002 and 2001, Frontline has provided
services to Golar LNG Limited ("Golar"). The services provided include
management support, corporate and administrative services. In the years ended
December 31, 2003, 2002 and 2001, the Company earned management fees of
$261,000, $391,153 and $258,960, respectively from Golar. As at December 31,
2003, 2002 and 2001, amounts of $79,335, $86,343 and $547,966 respectively were
due from Golar in respect of these fees and for the reimbursement of costs
incurred on behalf of Golar. Golar is indirectly controlled by John Fredriksen
who is Frontline Ltd's Chairman and a major stockholder in the Company.
In the year ended December 31, 2003 and 2002 Frontline has provided management
support and administrative services to Northern Offshore Ltd, ("NOF"), In the
years ended 31 December 2003 and 2002 the Company earned management fees of
$134,016 and $173,724 respectively from NOF. As at December 31, 2003 and 2002
amounts of $2,422 and $31,071 respectively were due from NOF in respect of these
fees and for the reimbursement of costs incurred on behalf of NOF. NOF is
indirectly controlled by John Fredriksen who is Frontline Ltd's Chairman and a
major stockholder in the Company.
C. INTERESTS OF EXPERTS AND COUNSEL
Not Applicable
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18.
Legal Proceedings
The Company is a party, as plaintiff or defendant, to several lawsuits in
various jurisdictions for demurrage, damages, off-hire and other claims and
commercial disputes arising from the operation of its vessels, in the ordinary
course of business or in connection with its acquisition activities. The
Company's management believes that the resolution of such claims will not have a
material adverse effect on the Company's operations or financial condition.
Dividend Policy
In May 2003, the Company announced that it was seeking to adopt a policy that
provided a more predictable minimum dividend stream and has consequently adopted
a dividend policy whereby the Company seeks to have a minimum quarterly dividend
of $0.25 per share, equivalent to $1.00 per share per annum. Prior to May 2003,
the Company had not paid regular quarterly or annual dividends pursuant to a
specific policy since 1997 and it had been the Company's policy to pay dividends
only when considered appropriate by the Company's Board of Directors. The
Company has paid the following dividends in 2001, 2002 and 2003.
Record Date Payment Date Amount per Share
----------- ------------ ----------------
2001
----
May 21, 2001 June 7, 2001 $1.00
August 23, 2001 September 5, 2001 $0.40
November 22, 2001 December 5, 2001 $0.10
2002
----
March 13, 2002 March 20, 2002 $0.20
May 31, 2002 June 12, 2002 $0.05
2003
----
March 10, 2003 March 24, 2003 $0.15
May 20, 2003 June 6, 2003 $1.00
June 23, 2003 July 7, 2003 $1.00
August 18, 2003 September 2, 2003 $1.10
November 28, 2003 December 12, 2003 $1.30
On February 29, 2004 the Company announced a dividend of $4.50 per share,
representing a $0.25 ordinary dividend and a $4.25 special dividend, payable
March 29, 2004. On May 28, 2004 the Company announced a dividend of $5.00 per
share, representing a $0.25 ordinary dividend and a $4.75 special dividend,
payable June 16, 2004.
The timing and amount of dividends, if any, is at the discretion of the
Company's Board of Directors and will depend upon the Company's results of
operations, financial condition, cash requirements, restrictions in financing
arrangements and other relevant factors.
B. SIGNIFICANT CHANGES
Ship Finance, a wholly-owned subsidiary of the Company, was incorporated in
Bermuda in October 2003 for the purpose of acquiring certain of the shipping
assets of the Company. In December 2003, Ship Finance issued $580 million of
8.5% Senior Notes. In the first quarter of 2004, Ship Finance used the proceeds
of the Notes issue, together with a refinancing of existing debt, to fund the
acquisition of a fleet of 47 crude oil tankers (including one purchase option
for a VLCC) from the Company and has chartered each of the ships back to the
Company for most of their remaining lives. Ship Finance also entered into fixed
rate management and administrative services agreements with the Company to
provide for the operation and maintenance of the Company's vessels and
administrative support services. In May 2004, the Company announced the
distribution of 25 per cent of Ship Finance's common shares to Frontline's
ordinary shareholders in a partial spin off. Each Frontline shareholder received
one share in Ship Finance for every four Frontline shares held. The Company
further announced that it is the Board's intention that during 2004, the Company
shall divest all its shares in Ship Finance either through a straight sale, a
corporate transaction, or through further dividend distribution to Frontline's
shareholders. In conjunction with the spin-off of Ship Finance, the Company's
strategy will be focussed on becoming a world-leading chartering company. See
Item 4. Information on the Company - Spin-Off of Ship Finance International
Limited and Future Strategy.
ITEM 9. THE OFFER AND LISTING
Not applicable except for Item 9.A. 4. and Item 9. C.
The Company's Ordinary Shares are traded on the New York Stock Exchange
("NYSE"), the Oslo Stock Exchange ("OSE") and on the London Stock Exchange
("LSE") under the symbol "FRO".
The Company's ADSs, each of which represented one Ordinary Share, were traded on
the Nasdaq National Market under the symbol "FRONY" until August 3, 2001 when
the ADSs were delisted. The ADR program was terminated on October 5, 2001. The
Company's Ordinary Shares began trading on the NYSE on August 6, 2001.
The New York Stock Exchange is the Company's "primary listing". As an overseas
company with a secondary listing on the LSE, the Company is not required to
comply with certain listing rules applicable to companies with a primary listing
on the LSE. The listing on the OSE is also a secondary listing. The Company's
Ordinary Shares have been thinly traded on the London Stock Exchange since 1999.
The following table sets forth, for the five most recent fiscal years, the high
and low prices for the Ordinary Shares on the NYSE and OSE and the high and low
prices for the ADSs as reported by the Nasdaq National Market.
NYSE OSE NASDAQ
-------------- -------------------- -----------------
High Low High Low High Low
Fiscal year ended December 31
2003 $27.69 $8.93 NOK185.00 NOK61.00 -- --
2002 $13.05 $3.19 NOK108.50 NOK25.90 -- --
2001 $15.45 $6.55 NOK215.50 NOK59.50 $24.50 $11.563
2000 -- -- NOK164.00 NOK37.00 $18.250 $3.938
1999 -- -- NOK45.00 NOK16.00 $4.250 $3.000
The following table sets forth, for each full financial quarter for the two most
recent fiscal years, the high and low prices of the Ordinary Shares on the NYSE
and the OSE.
NYSE OSE
--------------- ---------------------
High Low High Low
Fiscal year ended December 31, 2003
First quarter $12.54 $8.93 NOK87.50 NOK61.00
Second quarter $16.85 $10.00 NOK117.00 NOK73.00
Third quarter $19.89 $13.40 NOK146.50 NOK95.50
Fourth quarter $27.69 $15.47 NOK185.00 NOK108.50
Fiscal year ended December 31, 2002
First quarter $12.50 $9.05 NOK108.50 NOK81.50
Second quarter $13.05 $8.79 NOK108.50 NOK64.00
Third quarter $9.76 $3.19 NOK73.50 NOK25.90
Fourth quarter $9.41 $4.06 NOK69.00 NOK28.50
The following table sets forth, for the most recent six months, the high and low
prices for the Ordinary Shares on the NYSE and OSE.
NYSE OSE
--------------- ---------------------
High Low High Low
May 2004 $35.37 $24.36 NOK237.00 NOK172.00
April 2004 $31.10 $25.25 NOK216.50 NOK173.50
March 2004 $35.89 $25.10 NOK249.50 NOK175.50
February 2004 $32.45 $28.75 NOK225.00 NOK201.50
January 2004 $31.30 $25.50 NOK214.00 NOK165.50
December 2003 $27.69 $20.65 NOK185.00 NOK139.00
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not Applicable
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The Memorandum of Association of the Company has previously been filed as
Exhibit 3.1 to the Company's Registration Statement on Form F-1, (Registration
No. 33-70158) filed with the Securities and Exchange Commission on October 13,
1993, and is hereby incorporated by reference into this Annual Report.
On April 5, 2004, the Company adopted revised Bye-laws. These Amended and
Restated Bye-Laws of the Company as adopted by shareholders on April 5, 2004 are
filed as Exhibit 1.4 to this Annual Report.
The action necessary to change the rights of holders of the stock and the
conditions governing the manner in which annual general meetings and
extraordinary meetings if shareholders are invoked, including the conditions of
admission, are described in the Company's Bye-laws.
The Company's Bye-laws contain certain restrictions with respect to the
registration of shares which are summarised below:
(i) The Board may decline to register the transfer of any share held through
the Verdipapirsentralen, or VPS, the computerised central share registry
maintained in Oslo, Norway, for bodies corporate whose shares are listed
for trading on the OSE, if the registration of such transfer would be
likely, in the opinion of the Board, to result in fifty per cent or more of
the aggregate issued share capital of the Company or shares of the Company
to which are attached fifty per cent or more of the votes attached to all
outstanding shares of the Company being held or owned directly or
indirectly, (including, without limitation, through the VPS) by a person or
persons resident for tax purposes in Norway (or such other jurisdiction as
the Board may nominate from time to time).
(ii) If fifty per cent or more of the aggregate issued share capital of the
Company or shares to which are attached fifty per cent or more of the votes
attached to all outstanding shares of the Company are found to be held or
owned directly or indirectly (including, without limitation, through the
VPS) by a person or persons resident for tax purposes in Norway (or such
other jurisdiction as the Board may nominate from time to time), other than
the Registrar in respect of those shares registered in its name in the
Register as nominee of persons whose interests in such shares are reflected
in the VPS, the Board shall make an announcement to such effect through the
OSE, and the Board and the Registrar shall thereafter be entitled and
required to dispose of such number of shares of the Company or interests
therein held or owned by such persons as will result in the percentage of
the aggregate issued share capital of the Company held or owned as
aforesaid being less than fifty per cent.
The Company has in place a Shareholders Rights Plan that would have the effect
of delaying, deferring, preventing a change in control of the Company. The
Shareholders Rights Plan has been filed as part of the Form 8-A filed with the
Securities and Exchange Commission on December 9, 1996, and is hereby
incorporated by reference into this Annual Report.
C. MATERIAL CONTRACTS
None
D. EXCHANGE CONTROLS
The Company is classified by the Bermuda Monetary Authority as a non-resident of
Bermuda for exchange control purposes.
The transfer of Ordinary Shares between persons regarded as resident outside
Bermuda for exchange control purposes may be effected without specific consent
under the Exchange Control Act of 1972 and regulations thereunder and the
issuance of Ordinary Shares to persons regarded as resident outside Bermuda for
exchange control purposes may be effected without specific consent under the
Exchange Control Act of 1972 and regulations thereunder. Issues and transfers of
Ordinary Shares involving any person regarded as resident in Bermuda for
exchange control purposes require specific prior approval under the Exchange
Control Act of 1972.
The owners of Ordinary Shares who are ordinarily resident outside Bermuda are
not subject to any restrictions on their rights to hold or vote their shares.
Because the Company has been designated as a non-resident for Bermuda exchange
control purposes, there are no restrictions on its ability to transfer funds in
and out of Bermuda or to pay dividends to U.S. residents who are holders of
Ordinary Shares, other than in respect of local Bermuda currency.
As an "exempted company", the Company is exempt from Bermuda laws which restrict
the percentage of share capital that may be held by non-Bermudians.
E. TAXATION
Bermuda currently imposes no tax (including a tax in the nature of an income,
estate duty, inheritance, capital transfer or withholding tax) on profits,
income, capital gains or appreciations derived by, or dividends or other
distributions paid to U.S. Shareholders of Ordinary Shares. Bermuda has
undertaken not to impose any such Bermuda taxes on U.S. Shareholders of Ordinary
Shares prior to the year 2016 except in so far as such tax applies to persons
ordinarily resident in Bermuda.
There is no income tax treaty between the United States and Bermuda pertaining
to the taxation of income except in the case of insurance enterprises. There
also is no estate tax treaty between the United States and Bermuda.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable
G. STATEMENT BY EXPERTS
Not Applicable
H. DOCUMENTS ON DISPLAY
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements the
Company files reports and other information with the Securities and Exchange
Commission. These materials, including this annual report and the accompanying
exhibits, may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549. You may obtain information on the operation of the public reference
room by calling 1 (800) SEC-0330, and you may obtain copies at prescribed rates
from the Public Reference Section of the Commission at its principal office in
Washington, D.C. 20549. The SEC maintains a website (http://www.sec.gov.) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. In addition,
documents referred to in this annual report may be inspected at the Company's
headquarters at Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, Bermuda.
I. SUBSIDIARY INFORMATION
Not Applicable
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including interest rates, spot
market rates for vessels and foreign currency fluctuations. The Company uses
interest rate swaps to manage interest rate risk. The Company has entered into
forward freight agreements and futures for trading purposes in order to manage
its exposure to the risk of movements in the spot market for certain trade
routes and, to some extent, for speculative purposes. The Company enters into
other derivative instruments from time to time for speculative purposes.
Our exposure to interest rate risk relates primarily to our debt and related
interest rate swaps. The majority of this exposure derives from our floating
rate debt, which totalled $1,095.1 million at December 31, 2003 (2002: $1,424.9
million). The Company has entered into interest rate swap agreements to manage
its exposure to interest rate changes by swapping floating interest rates with
fixed interest rates. At December 31, 2003, we had three swaps with a total
notional principal of $140.5 million (2002 - eight swaps with notional principal
of $352.7 million). The swap agreements mature between January 2006 and August
2008, and we estimate that we would have to pay $9.1 million to terminate these
agreements as of December 31, 2003 (2002 - $4.1 million). Our net exposure to
interest rate fluctuations is $954.6 million at December 31, 2003 (2002:
$1,072.2 million). Our net exposure is based on our total floating rate debt
less the notional principal of our floating to fixed interest rate swaps. A one
per cent change in interest rates would increase or decrease interest expense by
$9.5 million per year as of December 31, 2003 (2002: $10.7 million).
The fair market value of our fixed rate debt was $1,194.9 million as of December
31, 2003 (2002: $13.3 million). If interest rates were to increase or decrease
by one per cent with all other variables remaining constant, we estimate that
the market value of our fixed rate debt would decrease or increase by
approximately $72.1 and $79.4 million respectively (2002: $0.1 million).
We are exposed to market risk in relation to our forward freight agreements and
futures contracts. Fluctuations in underlying freight market indices upon which
our forward agreements are based has a consequent effect on the Company's cash
flows and consolidated statements of operations. As at December 31, 2003, the
notional principal amounts of our forward freight contracts and futures
contracts was $31.3 million. A ten per cent change in underlying freight market
indices would increase or decrease net income by $6.9 million as of December 31,
2003 (2002: $3.4 million).
The majority of the Company's transactions, assets and liabilities are
denominated in U.S. dollars, the functional currency of the Company. Certain of
the Company's subsidiaries report in Sterling, Swedish kronor or Norwegian
kroner and risks of two kinds arise as a result: a transaction risk, that is,
the risk that currency fluctuations will have an effect on the value of the
Company's cash flows; and a translation risk, which is the impact of currency
fluctuations in the translation of foreign operations and foreign assets and
liabilities into U.S. dollars in the Company's consolidated financial
statements. Certain of the Company's subsidiaries, and associated companies in
which the Company has investments, have Yen denominated long-term debt and
charter contracts denominated in Yen. There is a risk that currency fluctuations
will have a negative effect on the value of the Company's cashflows. At December
31, 2003, the Company had Yen denominated long-term debt, including capital
leases, of (Y)16.8 billion and its share of Yen denominated long-term debt in
associate companies was nil (2002 - (Y)13.1 billion and (Y)7.2 billion,
respectively). At December 31, 2003 the Company was not party to any forward
currency exchange contracts which would have an effect on the Company's
financial condition and results of operations.
ITEM 12. DESCRIPTION OF SECURITIES
Not Applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None
ITEM 15. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As of December 31, 2003, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon
that evaluation, the principal executive officers and principal financial
officers concluded that the Company's disclosure controls and procedures
are effective in alerting them timely to material information relating to
the Company required to be included in the Company's periodic SEC filings.
(b) Not Applicable
(c) Not Applicable
(d) Changes in internal controls over financial reporting
There have been no changes in internal controls over financial reporting
(identified in connection with management's evaluation of such internal
controls over financial reporting) that occurred during the year covered by
this annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal controls over financial
reporting.
ITEM 16 A. AUDIT COMMITTEE FINANCIAL EXPERT
The Company does not currently have a separate audit committee. The Company
expects to have an audit committee and an audit committee financial expert in
the year 2005.
ITEM 16 B. CODE OF ETHICS.
The Company has adopted a Code of Ethics, filed as Exhibit 14.1 to this Annual
Report that applies to all employees.
ITEM 16 C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(a) Audit Fees
The following table sets forth, for the two most recent fiscal years, the
aggregate fees billed for professional services rendered by the principal
accountant for the audit of the Company's annual financial statements and
services provided by the principal accountant in connection with statutory and
regulatory filings or engagements for the two most recent fiscal years.
Fiscal year ended December 31, 2003 $ 1,585,759
Fiscal year ended December 31, 2002 $ 1,158,004
(b) Audit -Related Fees
For the fiscal years ended December 31, 2003 and 2002, there have been no
assurance and related services rendered by the principal accountant related to
the performance of the audit or review of the Company's financial statements
which have not been reported under Audit Fees above.
(c) Tax Fees
The following table sets forth, for the two most recent fiscal years, the
aggregate fees billed for professional services rendered by the principal
accountant for tax compliance, tax advice and tax planning.
Fiscal year ended December 31, 2003 $ 33,504
Fiscal year ended December 31, 2002 $ 65,626
(d) All Other Fees
The following table sets forth, for the two most recent fiscal years, the
aggregate fees billed for professional services rendered by the principal
accountant for services other than audit fees, audit-related fees and tax fees
set forth above.
Fiscal year ended December 31, 2003 $ nil
Fiscal year ended December 31, 2002 $ nil
(e) Audit Committee's Pre-Approval Policies and Procedures
The Company's Board of Directors has adopted pre-approval policies and
procedures in compliance with paragraph (c) (7)(i) of Rule 2-01 of Regulation
S-X that require the Board to approve the appointment of the independent auditor
of the Company before such auditor is engaged and approve each of the audit and
non-audit related services to be provided by such auditor under such engagement
by the Company. All services provided by the principal auditor in 2003 were
approved by the Board pursuant to the pre-approval policy.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable
ITEM 17. FINANCIAL STATEMENTS
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
The following financial statements listed below and set forth on pages F-1
through F- 33 are filed as part of this annual report:
Financial Statements for Frontline Ltd.
Index to Consolidated Financial Statements F-1
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-3
Report of Independent Auditors F-4
Report of Independent Registered Public Accounting Firm F-5
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 F-6
Consolidated Balance Sheets as of
December 31, 2003 and 2002 F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 F-8
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2003, 2002 and 2001 F-9
Notes to Consolidated Financial Statements F-10
ITEM 19. EXHIBITS
Number Description of Exhibit
1.1* Memorandum of Association of the Company, incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement
on Form F-1, Registration No. 33-70158 filed on October 12, 1993
(the "Original Registration Statement").
1.4* Amended and Restated Bye-Laws of the Company as adopted by
shareholders on April 5, 2004, incorporated by reference to
Exhibit 1.4 of the Company's Annual Report filed on form 20-F on
June 30, 2004.
2.1* Form of Ordinary Share Certificate, incorporated by reference to
Exhibit 4.1 of the Original Registration Statement.
2.2* Form of Deposit Agreement dated as of November 24, 1993, among
Frontline Ltd. (F/K/A London & Overseas Freighters Limited), The
Bank of New York as Depositary, and all Holders from time to time
of American Depositary Receipts issued thereunder, including form
of ADR, incorporated by reference to Exhibit 4.2 of the Original
Registration Statement.
2.3* Form of Deposit Agreement dated as of November 24, 1993, as
amended and restated as of May 29, 2001, among Frontline Ltd.
(F/K/A London & Overseas Freighters Limited), The Bank of New
York as Depositary, and all Holders from time to time of American
Depositary Receipts issued thereunder, including form of ADR,
incorporated by reference to Exhibit 2 of the Company's Annual
Report on Form 20-F, filed on June 13, 2001 for the fiscal year
ended December 31, 2000.
2.4* Rights Agreement (the "Rights Agreement") between the Company and
the Bank of New York incorporated by reference to Exhibit 1.3 of
the Company's Registration Statement on Form 8-A, File No.0-22704
filed on December 9, 1996.
2.5* Amendment No. 1 to the Rights Agreement incorporated by reference
to Exhibit 4.3 of the Amalgamation Registration Statement.
2.6* The Subregistrar Agreement related to the registration of certain
securities issued by Frontline Ltd. in the Norwegian Registry of
Securities between Frontline Ltd. and Christiania Bank og
Kreditkasse ASA together with the Form of Warrant Certificate and
Conditions attaching thereto, incorporated by reference to
Exhibit 1.1 of the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 1998.
4.1* Form of United Kingdom Share Option Plan, incorporated by
reference to Exhibit 10.1 of the Original Registration Statement.
4.2* Form of Bermuda Share Option Plan, incorporated by reference to
Exhibit 10.2 of the Original Registration Statement.
4.3* The Subordinated Convertible Loan Facility Agreement USD
89,000,000 dated July 13, 1999, between Frontline Ltd. as
Borrower and Metrogas Holdings Inc. as Lender, incorporated by
reference to Exhibit 2.1 of the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 1998.
4.4* Master Agreement, dated September 22, 1999, among Frontline AB
and Frontline Ltd (collectively "FL"), Acol Tankers Ltd.
("Tankers"), ICB Shipping AB ("ICB"), and Ola Lorentzon (the
"Agent"), incorporated by reference to Exhibit 3.1 of the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 1999.
8.1* Subsidiaries of the Company incorporated by referene to Exhibit
8.1 of the Company's Annual Report filed on Form 20-F on June 30,
2004.
14.1* Code of Ethics incorporated by referene to Exhibit
14.1 of the Company's Annual Report filed on Form 20-F on June
30, 2004.
31.1 Certification of the Principal Executive Officer
31.2 Certification of the Principal Financial Officer
32.1 Certifications under Section 906 of the Sarbanes-Oxley act of
2002 of the Principal Executive Officer
32.2 Certifications under Section 906 of the Sarbanes-Oxley act of
2002 of the Principal Financial Officer
* Incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorised.
Frontline Ltd.
----------------------------------------
(Registrant)
Date October 8, 2004 By /s/ Kate Blankenship
-------------------------------------
Kate Blankenship
Company Secretary and Chief Accounting
Officer
Index to Consolidated Financial Statements of Frontline Ltd
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-3
Report of Independent Auditors F-4
Report of Independent Registered Public Accounting Firm F-5
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 F-6
Consolidated Balance Sheets as of
December 31, 2003 and 2002 F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 F-8
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2003, 2002 and 2001 F-9
Notes to Consolidated Financial Statements F-10
Report of Independent Registered Public Accounting Firm
To the Board of Directors
and Stockholders of Frontline Ltd.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of Frontline Ltd. and its subsidiaries at December 31, 2003 and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
As discussed in Note 3 to the financial statements the Company adopted FASB
Interpretation No. 46 Revised on December 31, 2003.
PricewaterhouseCoopers DA
Oslo, Norway
June 24, 2004
Report of Independent Registered Public Accounting Firm
To the Board of Directors
and Stockholders of Frontline Ltd.
In our opinion, based on our audit and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of operations, of cash flows and of changes in stockholders' equity present
fairly, in all material respects, the financial position of Frontline Ltd. and
its subsidiaries at December 31, 2002 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We did not audit the financial statements of Golden Ocean Group
Limited, a wholly-owned subsidiary, which statements reflect total assets of
$87.9 million at December 31, 2002 and total revenues of approximately $22.3,
million for the year ended December 31, 2002. The financial statements of Golden
Ocean Group Limited were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Golden Ocean Group Limited, is based solely on the report
of the other auditors. We conducted our audit of these statements 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit and the report of other auditors provide a reasonable basis for our
opinion.
As discussed in Note 2 to the financial statements the Company adopted Statement
of Financial Accounting Standard No. 142 on January 1, 2002. As discussed in
Note 27 to the financial statements, the Company adopted Statement of Financial
Accounting Standard No. 144 on January 1, 2002.
PricewaterhouseCoopers
Hamilton, Bermuda
June 24, 2003, except for Note 27 for which the date is July 14, 2003
Golden Ocean Group Limited
Report of Independent Auditors
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF GOLDEN OCEAN GROUP LIMITED
We have audited the accompanying consolidated balance sheets of Golden Ocean
Group Limited and subsidiaries as of December 31, 2002 and 2001 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 2002 and 2001 and the period from October
10, 2000 to December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Golden
Ocean Group Limited and subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2002 and 2001 and the period from October 10, 2000 to
December 31, 2000, in conformity with U.S. generally accepted accounting
principles.
As discussed in note 20 to the financial statements, the Company ceased accruing
drydock costs with effect from January 1, 2001
Moore Stephens
Chartered Accountants
London, England
February 19, 2003
Report of Independent Registered Public Accounting Firm
To the Board of Directors
and Stockholders of Frontline Ltd.
In our opinion, based on our audit and the report of other auditors, the
accompanying consolidated statements of operations, of cash flows and of changes
in stockholders' equity present fairly, in all material respects, the results of
operations Frontline Ltd and its subsidiaries and their cash flows for the year
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We did not audit the
financial statements of Golden Ocean Group Limited, a wholly-owned subsidiary,
which statements reflect total revenues of approximately $82.1 million for the
period ended December 31, 2001. The financial statements of Golden Ocean Group
Limited were audited by other auditors whose report thereon have been furnished
to us, and our opinion expressed herein, insofar as it relates to the amounts
included for Golden Ocean Group Limited, is based solely on the report of the
other auditors. We conducted our audit of these statements 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit and the report of other auditors provide a reasonable basis for our
opinion.
As discussed in Note 2 to the financial statements, on January 1, 2001 the
Company changed its method of accounting for drydocking costs and adopted
Financial Accounting Standard no. 133.
PricewaterhouseCoopers DA
Oslo, Norway
June 28, 2002, except for Note 27 for which the date is July 14, 2003
Frontline Ltd.
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001
(in thousands of $, except per share data)
2003 2002 2001
Operating revenues
Time charter revenues 56,270 30,385 44,655
Bareboat charter revenues 27,930 31,924 32,016
Voyage charter revenues 1,089,583 489,286 639,807
---------------------------------------------------------------------------------------------------
Total operating revenues 1,173,783 551,595 716,478
---------------------------------------------------------------------------------------------------
Gain (loss) on sale of assets 5,626 (1,228) 35,620
Operating expenses
Voyage expenses and commission 323,598 135,074 88,292
Ship operating expenses 117,604 109,286 116,291
Charterhire expenses 81,009 60,634 41,858
Administrative expenses 17,889 12,806 13,012
Depreciation and amortisation 146,907 136,891 117,225
---------------------------------------------------------------------------------------------------
Total operating expenses 687,007 454,691 376,678
---------------------------------------------------------------------------------------------------
Net operating income 492,402 95,676 375,420
---------------------------------------------------------------------------------------------------
Other income (expenses)
Interest income 9,185 13,042 12,951
Interest expense (75,097) (71,311) (89,952)
Share in results from associated companies 33,533 (10,711) 22,317
Foreign currency exchange gain (loss) (17,193) (10,932) 15,524
Other financial items, net 300 (8,614) (5,709)
---------------------------------------------------------------------------------------------------
Net other expenses (49,272) (88,526) (44,869)
---------------------------------------------------------------------------------------------------
Net income from continuing operations before income taxes 443,130 7,150 330,551
Income taxes (3) (22) 444
---------------------------------------------------------------------------------------------------
Net income from continuing operations before
cumulative effect of change in accounting principle 443,127 7,172 330,107
---------------------------------------------------------------------------------------------------
Discontinued operations -- (1,929) 21,076
---------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle (33,767) (14,142) 31,545
---------------------------------------------------------------------------------------------------
Net (loss) income 409,360 (8,899) 382,728
===================================================================================================
Earnings (loss) per share:
Basic earnings per share from continuing operations
before cumulative effect of change in accounting principle $5.92 $0.09 $4.30
Diluted earnings per share from continuing operations
before cumulative effect of change in accounting principle $5.90 $0.09 $4.29
Basic earnings per share before cumulative
effect of change in accounting principle $5.92 $0.07 $4.57
Diluted earnings per share before cumulative
effect of change in accounting principle $5.90 $0.07 $4.56
Basic earnings (loss) per share $5.47 $(0.12) $4.99
Diluted earnings (loss) per share $5.45 $(0.12) $4.98
===================================================================================================
See accompanying Notes that are an integral part of these Consolidated Financial
Statements
Frontline Ltd.
Consolidated Balance Sheets as of December 31, 2003 and 2002
(in thousands of $)
2003 2002
ASSETS
Current Assets
Cash and cash equivalents 124,189 92,078
Restricted cash 891,887 8,220
Marketable securities 44 42
Trade accounts receivable 48,165 37,091
Other receivables 19,459 10,898
Inventories 26,148 28,723
Voyages in progress 60,282 49,221
Prepaid expenses and accrued income 12,241 6,342
Net investment in finance lease, current portion 15,511 --
Derivative instruments receivable amounts 78 390
-------------------------------------------------------------------------------------
Total current assets 1,198,004 233,005
Newbuildings and vessel purchase options 8,370 27,405
Vessels and equipment, net 2,165,239 2,373,239
Vessels and equipment under capital lease, net 765,126 264,902
Investment in associated companies 173,329 119,329
Net investment in finance lease, long term portion 120,894 --
Deferred charges 22,454 5,659
Other long-term assets 10,119 11,204
-------------------------------------------------------------------------------------
Total assets 4,463,535 3,034,743
=====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of long-term debt 191,131 167,807
Current portion of obligations under capital leases 20,138 13,164
Trade accounts payable 7,289 7,717
Accrued expenses 76,910 40,324
Deferred charter revenue 5,309 1,067
Mark to market valuation of derivatives 9,217 17,442
Other current liabilities 11,318 12,300
-------------------------------------------------------------------------------------
Total current liabilities 321,312 259,821
Long-term liabilities
Long-term debt 2,091,286 1,277,665
Obligations under capital leases 753,823 259,527
Deferred gains on sales of vessels 21,964 7,138
Other long-term liabilities 19,733 3,619
-------------------------------------------------------------------------------------
Total liabilities 3,208,118 1,807,770
Commitments and contingencies -- --
Stockholders' equity
Share capital 184,120 191,166
Additional paid in capital 513,859 552,241
Accumulated other comprehensive loss (6,953) (9,498)
Retained earnings 564,391 493,064
-------------------------------------------------------------------------------------
Total stockholders' equity 1,255,417 1,226,973
-------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 4,463,535 3,034,743
=====================================================================================
See accompanying Notes that are an integral part of these Consolidated Financial
Statements
Frontline Ltd.
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001
(in thousands of $)
2003 2002 2001
Operating activities
Net income (loss) 409,360 (8,899) 382,728
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortisation 146,907 139,855 121,725
Amortisation of deferred charges 2,862 2,299 2,233
(Gain) loss from sale of assets (5,626) 4,337 (35,620)
Share in results from associated companies (33,533) 10,711 (22,321)
Unrealised foreign exchange loss (gain) 17,955 14,176 (29,148)
Change in accounting principle 33,767 14,142 (32,339)
Adjustment of derivatives to market value (28,180) 7,495 5,404
Other, net 1,311 1,968 (2,297)
Changes in operating assets and liabilities,
net of effect of acquisitions:
Trade accounts receivable (7,495) 18,066 40,612
Other receivables (8,647) (6,118) 25,921
Inventories 3,489 (17,413) (120)
Voyages in progress (9,853) (40,928) 13,966
Prepaid expenses and accrued income (2,837) (2,951) 4,979
Trade accounts payable (417) 723 1,290
Accrued expenses (3,281) 4,781 (5,234)
Deferred charter revenue 2,727 (500) (1,010)
Other, net 4,771 281 6,838
-------------------------------------------------------------------------------------------
Net cash provided by operating activities 523,280 142,025 477,607
-------------------------------------------------------------------------------------------
Investing activities
Maturity (placement) of restricted cash (559,430) 2,881 1,479
Additions to newbuildings, vessels and equipment (66,589) (376,844) (386,130)
Purchase of option (10,042) -- --
Proceeds from sale of vessels and equipment 427,305 177,902 400,111
Acquisition of subsidiaries and businesses, net
of cash acquired (2,363) -- (64,656)
Investments in associated companies (91,611) (21,790) (60,003)
Dividends received from associated companies 11,581 1,780 2,314
Purchase of minority interest -- (6,822) --
Proceeds from sale of investments in associated
companies 7,343 -- --
Purchases and sales of other assets, net 14,748 -- 3,103
-------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (269,058) (222,893) (103,782)
-------------------------------------------------------------------------------------------
Financing activities
Proceeds from long-term debt 627,300 383,828 324,890
Repayments of long-term debt (465,313) (341,959) (460,725)
Payment of obligations under capital leases (13,134) (24,671) (10,337)
Debt fees paid (18,492) (3,534) (1,459)
Cash dividends paid (338,033) (19,117) (115,206)
Repurchase of shares and warrants (28,562) -- (44,814)
Proceeds from issuance of equity 2,931 223 8,488
-------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (233,303) (5,230) (299,163)
-------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents
before change in accounting principle 20,919 (86,098) 74,662
Cash effect of change in accounting principle 11,192 -- --
Net increase (decrease) in cash and cash equivalents
after change in accounting principle 32,111 (86,098) 74,662
Cash and cash equivalents at beginning of year 92,078 178,176 103,514
Cash and cash equivalents at end of year 124,189 92,078 178,176
===========================================================================================
Supplemental disclosure of cash flow information:
Interest paid, net of capitalised interest 73,206 73,161 96,202
Income taxes paid 3 2,203 11
===========================================================================================
See accompanying Notes that are an integral part of these Consolidated Financial
Statements
Frontline Ltd.
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001
(in thousands of $, except number of shares)
2003 2002 2001
NUMBER OF SHARES OUTSTANDING
Balance at beginning of year 76,466,566 76,407,566 78,068,811
Shares issued 251,364 59,000 546,055
Shares bought back (3,070,000) -- (2,207,300)
------------------------------------------------------------------------------------------------
Balance at end of year 73,647,930 76,466,566 76,407,566
------------------------------------------------------------------------------------------------
SHARE CAPITAL
Balance at beginning of year 191,166 191,019 195,172
Shares issued 629 147 1,365
Shares bought back and cancelled (7,675) -- (5,518)
------------------------------------------------------------------------------------------------
Balance at end of year 184,120 191,166 191,019
------------------------------------------------------------------------------------------------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of year 552,241 552,166 576,677
Shares issued 3,774 75 7,123
Shares bought back and warrants exercised or expired (42,156) -- (31,634)
------------------------------------------------------------------------------------------------
Balance at end of year 513,859 552,241 552,166
------------------------------------------------------------------------------------------------
WARRANTS AND OPTIONS
Balance at beginning of year -- -- 7,662
Options and warrants exercised or expired -- -- (7,662)
------------------------------------------------------------------------------------------------
Balance at end of year -- -- --
------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year (9,498) (11,864) (3,579)
Other comprehensive income (loss) 2,545 2,366 (8,285)
------------------------------------------------------------------------------------------------
Balance at end of year (6,953) (9,498) (11,864)
------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 493,064 521,080 253,558
Net income (loss) 409,360 (8,899) 382,728
Dividends paid (338,033) (19,117) (115,206)
------------------------------------------------------------------------------------------------
Balance at end of year 564,391 493,064 521,080
------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,255,417 1,226,973 1,252,401
------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)
Net income (loss) 409,360 (8,899) 382,728
Unrealised gains (losses) from marketable securities
and cash flow hedging derivative instruments 1,595 1,553 (8,255)
Foreign currency translation and other 950 813 (30)
------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 2,545 2,366 (8,285)
------------------------------------------------------------------------------------------------
Comprehensive income (loss) 411,905 (6,533) 374,443
------------------------------------------------------------------------------------------------
See accompanying Notes that are an integral part of these Consolidated Financial
Statements
1. GENERAL
Frontline Ltd. (the "Company" or "Frontline") is a Bermuda based shipping
company engaged primarily in the ownership and operation of oil tankers,
including oil/bulk/ore ("OBO") carriers. The Company operates tankers of
two sizes: very large crude carriers ("VLCCs") which are between 200,000
and 320,000 deadweight tons ("dwt"), and Suezmaxes, which are vessels
between 120,000 and 170,000 dwt. In addition, the Company owns three dry
bulk carriers. The Company operates through subsidiaries and partnerships
located in Bermuda, Isle of Man, Liberia, Norway, Panama, Singapore,
Sweden, Cayman Islands and the Bahamas. The Company is also involved in the
charter, purchase and sale of vessels.
The Company's ordinary shares are listed on the New York Stock Exchange,
the Oslo Stock Exchange and the London Stock Exchange.
In October 2003 Frontline established a new subsidiary, Ship Finance
International Limited ("SFIL"), in Bermuda. Through transactions executed
in January 2004, Frontline transferred to SFIL ownership of 46
vessel-owning entities each owning one vessel and its corresponding
financing, and one entity owning an option to acquire a VLCC. Frontline
then leased the vessels back on long-term charters. The assets and
liabilities were transferred to, and recorded by SFIL, at the historical
net book value of each asset at December 31, 2003. In May 2004 the Board of
Frontline declared a share dividend of 25% of the issued share capital of
SFIL to Frontline's shareholders. Frontline's shareholders received one
share in SFIL for every four Frontline shares held. SFIL shares are traded
on the New York Stock Exchange under the ticker symbol SFL.
2. ACCOUNTING POLICIES
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 subsidiaries and certain variable interest entities in
which the Company is deemed to be subject to a majority of the risk of loss
from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. All intercompany
balances and transactions have been eliminated on consolidation.
Investments in companies over which the Company exercises significant
influence but does not consolidate, are accounted for using the equity
method. The Company records its investments in equity-method investees on
the consolidated balance sheets as "Investments in associated companies"
and its share of the investees' earnings or losses in the consolidated
statements of operations as "Share in results from associated companies".
The excess, if any, of purchase price over book value of the Company's
investments in equity method investees is included in the accompanying
consolidated balance sheets in "Investment in associated companies".
Investments in which the Company has a majority shareholding but which it
does not control, due to the participating rights of minority shareholders,
are accounted for using the equity method. The preparation of financial
statements in accordance with generally accepted accounting principles
requires that management make estimates and assumptions affecting the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current period. Effective December 31, 2003 we
have reclassified voyage expenses and commission and depreciation and
amortisation as components of total operating expenses.
Cash and cash equivalents
For the purposes of the consolidated statements of cash flows, all demand
and time deposits and highly liquid, low risk investments with original
maturities of three months or less are considered equivalent to cash.
Restricted cash
Restricted cash consists of bank deposits which may only be used to settle
certain pre-arranged loan or lease payments or minimum deposits which must
be maintained in accordance with contractual arrangements.
Marketable Securities
Marketable equity securities held by the Company are considered to be
available-for-sale securities and as such are carried at fair value with
resulting unrealised gains and losses, net of deferred taxes if any,
recorded as a separate component of other comprehensive income in
stockholders' equity.
Inventories
Inventories, which comprise principally of fuel and lubricating oils, are
stated at the lower of cost and market value. Cost is determined on a
first-in, first-out basis.
Vessels and equipment
The cost of the vessels less estimated residual value is depreciated on a
straight-line basis over the vessels' estimated remaining economic useful
lives. The estimated economic useful life of the Company's double hull
vessels is 25 years and for single hull vessels is either 25 years or the
vessel's anniversary date in 2015, whichever comes first. Other equipment
is depreciated over its estimated remaining useful life, which approximates
five years.
With effect from December 2003, the International Maritime Organisation
implemented new regulations that result in the accelerated phase-out of
single hull vessels. As a result of this, the Company has re-evaluated the
estimated useful life of its single hull vessels and determined this to be
either 25 years or the vessel's anniversary date in 2015 whichever comes
first. As a result, the estimated useful lives of fourteen of the Company's
wholly owned vessels and two vessels owned by associated companies were
reduced in the fourth quarter of 2003. A change in accounting estimate was
recognised to reflect this decision, resulting in an increase in
depreciation expense and consequently decreasing net income by $1.3 million
and basic and diluted earnings per share by $0.02, for 2003.
Vessels and equipment under capital lease
The Company charters in certain vessels under agreements that are
classified as capital leases. Depreciation of vessels under capital lease
is included within depreciation and amortisation expense in the Statement
of Operations. Vessels under capital lease are depreciated on a
straight-line basis over the vessels' remaining economic useful lives, or
on a straight-line basis over the term of the lease. The method applied is
determined by the criteria by which the lease has been assessed to be a
capital lease.
Newbuildings and vessel purchase options
The carrying value of the vessels under construction ("Newbuildings")
represents the accumulated costs to the balance sheet date which the
Company has had to pay by way of purchase instalments and other capital
expenditures together with capitalised loan interest and associated finance
costs. No charge for depreciation is made until the vessel is put into
operation.
Vessel purchase options are capitalised at the time option contracts are
acquired or entered into. The Company reviews expected future cash flows,
which would result from exercise of each option contract on a contract by
contract basis to determine whether the carrying value of the option is
recoverable. If the expected future cash flows are less than the carrying
value of the option plus further costs to delivery, provision is made to
write down the carrying value of the option to the recoverable amount. The
carrying value of each option payment is written off as and when the
Company adopts a formal plan not to exercise the option. Purchase price
payments are capitalised and the total of the option payment, if any, and
purchase price payment is transferred to cost of vessels, upon exercise of
the option and delivery of the vessel to the Company.
Impairment of long-lived assets
The carrying value of long-lived assets that are held and used by the
Company are reviewed whenever events or changes in circumstances indicate
that the carrying amount of an asset may no longer be appropriate. 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 net cash flows are less than the carrying value
of the asset, an impairment loss is recorded equal to the difference
between the asset<180>s carrying value and fair value. In addition,
long-lived assets to be disposed of are reported at the lower of carrying
amount and fair value less estimated costs to sell.
Deferred charges
Loan costs, including debt arrangement fees, are capitalised and amortised
on a straight-line basis over the term of the relevant loan. The straight
line basis of amortisation approximates the effective interest method in
the Company's statement of operations. Amortisation of loan costs is
included in interest expense. If a loan is repaid early, any unamortized
portion of the related deferred charges is charged against income in the
period in which the loan is repaid.
Revenue and expense recognition
Revenues and expenses are recognised on the accrual basis. Revenues are
generated from freight billings, time charter and bareboat charter hires.
The operating results of voyages in progress are estimated and recorded
pro-rata on a per day basis in the consolidated statements of operations.
Probable losses on voyages are provided for in full at the time such losses
can be estimated. Time charter and bareboat charter revenues are recorded
over the term of the charter as service is provided. Amounts receivable or
payable arising from profit sharing arrangements are accrued based on the
estimates of amounts earned as at the reporting date.
Revenues and voyage expenses of the vessels operating in pool arrangements
are pooled and the resulting net pool revenues, calculated on a time
charter equivalent basis, are allocated to the pool participants according
to an agreed formula. Formulae used to allocate net pool revenues vary
among different pools but generally allocate revenues to pool participants
on the basis of the number of days a vessel operates in the pool with
weighting adjustments made to reflect vessels' differing capacities and
performance capabilities. The same revenue and expenses principles stated
above are applied in determining the pool's net pool revenues. Certain
pools are responsible for paying voyage expenses and distribute net pool
revenues to the participants. The Company accounts for the net pool
revenues allocated by these pools as "pool revenues" in its statements of
operations. Certain pools require the participants to pay and account for
voyage expenses, and distribute gross pool revenues to the participants
such that the participants' resulting net pool revenues are equal to net
pool revenues calculated according to the agreed formula. The Company
accounts for gross pool revenues allocated by these pools as "pool
revenues" in its statements of operations. .
Drydocking provisions
Normal vessel repair and maintenance costs are charged to expense when
incurred.
In 2001, the Company changed its accounting policy for drydockings. Prior
to 2001, provisions for future drydockings were accrued and charged to
expense on a pro-rata basis over the period to the next scheduled
drydockings. Effective January 1, 2001 the Company recognises the cost of a
drydocking at the time the drydocking takes place, that is, it applies the
"expense as incurred" method. The expense as incurred method is considered
by management to be a more reliable method of recognising drydocking costs
as it eliminates the uncertainty associated with estimating the cost and
timing of future drydockings. The cumulative effect of this change in
accounting principle is shown separately in the consolidated statements of
operations for the year ended December 31, 2001 and resulted in a credit to
income of $31.5 million in 2001. The cumulative effect of this change as of
January 1, 2001 on the Company's consolidated balance sheet was to reduce
total liabilities by $32.3 million.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
assets acquired in business acquisitions accounted for under the purchase
method. Goodwill is presented net of accumulated amortisation and until
December 31, 2001 was being amortised over a period of approximately 17
years. As of January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142") and recorded an impairment charge
of $14.1 million for the unamortised goodwill on that date. This is shown
separately in the 2002 consolidated statement of operations as a cumulative
effect of change in accounting principle. The valuation of the reporting
unit used to assess the recoverability of goodwill, was based on a
combination of independent third party valuations and the quoted market
price of the Company's shares. Supplemental comparative disclosure as if
this accounting change had been retroactively applied is as follows:
---------------------------------------------------------------------------
(in thousands of $, except per share data) 2001
---------------------------------------------------------------------------
Net income (loss)
As reported 382,728
Goodwill amortisation 764
Adjusted net income (loss) 383,492
Basic earnings (loss) per share
As reported $4.99
Goodwill amortisation $0.01
Adjusted basic earnings (loss) per share $5.00
Diluted earnings (loss) per share
As reported $4.98
Goodwill amortisation $0.01
Adjusted diluted earnings (loss) per share $4.99
As at December 31, 2003 and 2002 no goodwill was recorded in our
consolidated financial statements.
Derivatives
The Company enters into interest rate swap transactions to hedge a portion
of its exposure to floating interest rates. These transactions involve the
conversion of floating rates into fixed rates over the life of the
transactions without an exchange of underlying principal. Hedge accounting
may be used to account for these swaps provided certain hedging criteria
are met. As of January 1, 2001, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"). Certain hedge relationships met the hedge
criteria prior to adoption of SFAS 133, but do not meet the criteria for
hedge accounting under SFAS 133. Upon initial adoption of SFAS 133 the
Company recorded certain transition adjustments resulting in recognising
the fair value of its derivatives as assets of $0.4 million and liabilities
of $0.6 million. A gain of $0.3 million was recognised in income and a
charge of $0.5 million recognised in other comprehensive income. On January
1, 2002, the Company discontinued hedge accounting for two interest rate
swaps previously counted for as cash flow hedges. This resulted in a
balance of $4.1 million being frozen in accumulated other comprehensive
income as at that date and this amount is reclassified into the income
statement over the lives of the underlying debt instruments.
SFAS 133, as amended by SFAS 137 "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No.133"
and SFAS 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities an amendment of FASB Statement No. 133", requires an
entity to recognize all derivatives as either assets or liabilities on the
balance sheet and measure these instruments at fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and, if it is, the type of hedge
transaction. In order to qualify for hedge accounting under SFAS 133,
certain criteria and detailed documentation requirements must be met.
The Company enters into forward freight contracts in order to hedge
exposure to the spot market for certain trade routes and in some cases, for
speculative purposes. These transactions involve entering into a contract
to swap theoretical market index based voyage revenues for a fixed daily
rate. The fair values of the forward freight contracts are recognised as
assets or liabilities with changes in fair values recognised in the
consolidated statements of operations.
In 2001 the Company established a facility for a Stock Indexed Total Return
Swap Programme or Equity Swap Line (See Note 20) whereby the counterparty
acquired shares in the Company, and the Company carried the risk of
fluctuations in the share price of those acquired shares. The fair value of
the Equity Swap was recognised as an asset or liability with the change in
fair values recognised in the consolidated statements of operations. This
facility was terminated in 2003. We recorded a gain of $22.1 million in our
consolidated statement of operations for the year ended December 31, 2003
in respect of the change in fair value of the Equity Swap (2002 - loss of
$4.0 million, 2001 - gain of $4.4 million).
Other than the forward freight contracts discussed above, the Company has
not entered into any derivative contracts for speculative or trading
purposes.
Financial Instruments
In determining fair value of its financial instruments, the company uses a
variety of methods and assumptions that are based on market conditions and
risks existing at each balance sheet date. For the majority of financial
instruments including most derivatives and long-term debt, standard market
conventions and techniques such as options pricing models are used to
determine fair value. All methods of assessing fair value result in a
general approximation of value, and such value may never actually be
realised.
Foreign currencies
The Company's functional currency is the U.S. dollar as the majority of
revenues are received in U.S. dollars and a majority of the Company's
expenditures are made in U.S. dollars. The Company's reporting currency is
U.S. dollars. Most of the Company's subsidiaries report in U.S. dollars.
For subsidiaries that maintain their accounts in currencies other than U.S.
dollars, the Company uses the current method of translation whereby the
statements of operations are translated using the average exchange rate and
the assets and liabilities are translated using the year end exchange rate.
Foreign currency translation gains or losses are recorded as a separate
component of other comprehensive income in stockholders' equity.
Transactions in foreign currencies during the year are translated into U.S.
dollars at the rates of exchange in effect at the date of the transaction.
Foreign currency monetary assets and liabilities are translated using rates
of exchange at the balance sheet date. Foreign currency non-monetary assets
and liabilities are translated using historical rates of exchange. Foreign
currency transaction gains or losses are included in the consolidated
statements of operations.
Stock-based compensation
In accordance with Accounting Principles Board Opinion No. 25 ("APB 25")
"Accounting for Stock Issued to Employees" the compensation cost for stock
options is recognised as an expense over the service period based on the
excess, if any, of the quoted market price of the stock at the grant date
of the award or other measurement date, over the exercise price to be paid
to acquire the stock.
In 2003, 2002 and 2001, the Company has recorded compensation expense of
$5.6 million, $0.5 million and $1.2 million, respectively in connection
with employee share options.
Had the compensation costs for these plans been determined consistent with
the fair value method recommended in SFAS 123, the Company's net income and
earnings per share would have been reduced to the following pro forma
amounts in 2003, 2002 and 2001:
-----------------------------------------------------------------------------------------
(in thousands, except per share data) 2003 2002 2001
-----------------------------------------------------------------------------------------
Net income (loss)
As reported 409,360 (8,899) 382,728
Add: Compensation expenses as reported 5,574 481 1,184
Compensation expense determined under fair value
based method for all awards (1,011) (1,711) (1,314)
Adjusted net income (loss), fair value based
method for all awards 413,923 (10,129) 382,598
Basic earnings (loss) per share
As reported $5.47 $(0.12) $4.99
SFAS 123 adjusted $5.53 $(0.13) $4.99
Diluted earnings (loss) per share
As reported $5.45 $(0.12) $4.98
SFAS 123 adjusted $5.51 $(0.13) $4.98
Earnings per share
Basic EPS is computed based on the income (loss) available to common
stockholders and the weighted average number of shares outstanding for
basic EPS. Diluted EPS includes the effect of the assumed conversion of
potentially dilutive instruments (see Note 6).
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities. In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure where (a) the
equity holders lack voting rights consistent with a residual equity
interest (b) equity capital is insufficient to permit the entity to fund
its expected losses or (c) the equity holders lack the right to receive
residual returns or the obligation to bear the entity's expected losses..
Interpretation 46 requires a variable interest entity to be consolidated by
a company if that company is exposed to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority
of the entity's residual returns or both. The consolidation requirements of
Interpretation 46 apply immediately to variable interest entities created
after January 31, 2003. The consolidation requirements apply to entities
considered to be special purpose entities as of December 31, 2003 and to
non-special purpose entities as at March 31, 2004. Certain of the
disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established.
In December 2003, the FASB published a revision to FIN 46 to clarify some
of the provisions of the interpretation and defer to the effective date of
implementation for certain entities.
The company leases twelve vessels from special purpose lessor entities
which were established and are owned by independent third parties who
provide financing through debt and equity participation. Each entity owns
one vessel, which is leased to the Company, and has no other activities.
Prior to the adoption of FIN 46R these special purpose entities were not
consolidated by Frontline. Four of these leases are accounted for as
operating leases and eight of these leases are accounted for as capital
leases. We have determined that due to the existence of certain put and
call options over the leased vessels, these entities are variable interest
entities. The determination of the primary beneficiary of a variable
interest entity requires knowledge of the participations in the equity of
that entity by individual and related equity holders. Our lease agreements
with the leasing entities do not give us any right to obtain this
information and we have been unable to obtain this information by other
means. Accordingly we are unable to determine the primary beneficiary of
these leasing entities. At December 31, 2003, the original cost to the
lessor of the assets under such arrangements was $856.5 million. At
December 31, 2003, the company's residual value guarantees associated with
these leases, which represent the maximum exposure to loss, are $132.3
million.
The following table discloses information about our activity with these
non-consolidated lessor entities in the three year period ended December
31, 2003:-
Year ended December 31,
---------------------------
2003 2002 2001
Incurrence of obligations under capital leases 218,844 68,167 214,159
Repayments of principal obligations under capital leases 13,135 9,634 --
Interest expense for capital leases 29,431 15,395 1,319
Charterhire expense for operating leases 32,195 30,785 35,759
The Company has both an obligation and an option to purchase the VLCC
Oscilla on expiry of a five-year time charter, which commenced in March
2000. Oscilla is owned and operated by an unrelated special purpose entity.
This entity owns the Oscilla, which is leased to a third party, and has no
other activities. Prior to the adoption of FIN 46R this special purpose
entity was not consolidated by Frontline. We have determined that the
entity that owns Oscilla is a variable interest entity and that Frontline
is the primary beneficiary. At the current date we have been unable to
obtain the accounting information necessary to be able to consolidate the
entity that owns Oscilla. If the Company has exercised its option at
December 31, 2003, the cost to the Company of the Oscilla would have been
approximately $42.3 million and the maximum exposure to loss was $17.4
million.
The following table discloses information about the Company's activity with
this non-consolidated entity in the three year period ended December 31,
2003:-
Year ended December 31,
---------------------------
2003 2002 2001
Loan advances made -- 1,489 --
Loan repayments received 2,262 181 3,372
Interest income 1,247 1,147 1,357
The Company owns 50% of the issued shares of and has made loans to Golden
Fountain Corporation, owner of a VLCC. Prior to the adoption of FIN 46
Frontline accounted for its interest in Golden Fountain Corporation using
the equity method. We have determined that Golden Fountain Corporation is a
variable interest entity and that Frontline is the primary beneficiary.
Accordingly we have consolidated the assets and liabilities of Golden
Fountain Corporation effective December 31, 2003. The effect of
consolidation of Golden Fountain Corporation as of December 31, 2003 is to
increase total assets by $7.8 million, increase total liabilities by $16.4
million and to record the cumulative effect of a change in accounting
principle of $8.5 million.
On July 1, 2003, the Company's subsidiary Golden Ocean Group Ltd, purchased
a call option to acquire all of the shares of Independent Tankers
Corporation ("ITC") from Hemen Holding Ltd, a related party, for a total
consideration of $4.0 million plus 4 per cent interest per year. ITC
operates a total of six VLCCs and four Suezmax tankers, which are on
long-term charters to BP and Chevron. Golden Ocean paid $10.0 million for
the option, which expires on July 1, 2010. Prior to the adoption of FIN 46
Frontline did not consolidate ITC. We have determined that ITC is a
variable interest entity and that Frontline is the primary beneficiary.
Accordingly we have consolidated the assets and liabilities of ITC
effective December 31, 2003. The effect of consolidation of ITC as of
December 31, 2003 is to increase total assets by $910.5 million, increase
total liabilities by $935.7 million and to record the cumulative effect of
a change in accounting principle of $25.2 million.
The following table summarises the effects of adoption of FIN 46 on the
Company's balance sheet as at December 31, 2003:
Prior to Consolidation Consolidation After
adoption of Golden of ITC adoption
of FIN 46 Fountain Corp of FIN 46
ASSETS
Current Assets
Cash and cash equivalents 112,996 1,466 9,727 124,189
Restricted cash 568,080 323,807 891,887
Marketable securities 44 44
Trade accounts receivable 45,145 3,020 48,165
Other receivables 19,701 (242) 19,459
Inventories 26,072 76 26,148
Voyages in progress 60,282 60,282
Prepaid expenses and accrued income 9,194 65 2,982 12,241
Net investment in finance lease, current portion -- 15,511 15,511
Derivative instruments receivable amounts 78 78
------------------------------------------------------------------------------------------------------------------------------
Total current assets 841,592 4,385 352,027 1,198,004
Newbuildings and vessel purchase options 18,412 (10,042) 8,370
Vessels and equipment, net 1,981,558 42,664 141,017 2,165,239
Vessels and equipment under capital lease, net 459,695 305,431 765,126
Investment in associated companies 212,574 (39,245) 173,329
Net investment in finance lease, long term portion -- 120,894 120,894
Deferred charges 21,288 1,166 22,454
Other long-term assets 10,119 10,119
Total assets 3,545,238 7,804 910,493 4,463,535
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of long-term debt 153,326 37,805 191,131
Current portion of obligations under capital leases 20,138 20,138
Trade accounts payable 7,289 7,289
Accrued expenses 42,689 304 33,917 76,910
Deferred charter revenue 3,795 1,514 5,309
Mark to market valuation of derivatives 9,217 9,217
Other current liabilities 11,318 11,318
------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 247,772 304 73,236 321,312
Long-term liabilities
Long-term debt 1,524,371 566,915 2,091,286
Obligations under capital leases 458,263 295,560 753,823
Other long-term liabilities 25,648 16,049 41,697
------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,256,054 16,353 935,711 3,208,118
Commitments and contingencies -- --
Stockholders' equity
Share capital 184,120 184,120
Additional paid in capital 513,859 513,859
Accumulated other comprehensive loss (6,953) (6,953)
Retained earnings 598,158 (8,549) (25,218) 564,391
------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,289,184 (8,549) (25,218) 1,255,417
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 3,545,238 7,804 910,493 4,463,535
==============================================================================================================================
4. SEGMENT INFORMATION
The Company has two reportable segments: tankers, including oil bulk ore
carriers, and dry bulk carriers. Prior to the acquisition of Golden Ocean
in 2000, the Company had one reportable segment. Segment results are
evaluated based on income from vessel operations before general and
administrative expenses. The accounting policies used in the reportable
segments are the same as those followed in the preparation of the Company's
consolidated financial statements.
Information about the Company's reportable segments as of and for each of
the years ended December 31, 2003, 2002 and 2001 follows:
(in thousands of $ ) Dry Bulk
Tankers Carriers Total
--------- ------ ---------
2003
----
Total operating revenues 1,155,782 17,455 1,173,237
Voyage expenses 323,378 221 323,599
Ship operating expenses 115,345 2,259 117,604
Depreciation and amortisation 143,295 3,331 146,626
Interest income 227 -- 227
Interest expense 68,695 913 69,608
Share in results from associated companies 33,533 -- 33,533
Net income 437,062 (328) 436,734
Discontinued operations -- -- --
Vessels and equipment, net 2,096,605 67,735 2,164,340
Vessels under capital lease 765,126 -- 756,126
Investment in associated companies 173,329 -- 173,329
Total assets 3,698,488 72,551 3,771,039
Expenditure for vessels 66,589 -- 66,589
(in thousands of $ ) Dry Bulk
Tankers Carriers Total
--------- ------ ---------
2002
----
Total operating revenues 540,742 10,597 551,339
Voyage expenses 135,073 -- 135,073
Ship operating expenses 106,255 3,031 109,286
Depreciation and amortisation 133,486 3,331 136,817
Interest income 371 -- 371
Interest expense 63,436 940 64,376
Share in results from associated companies 9,855 856 10,711
Net income 7,868 (19,995) (12,127)
Discontinued operations -- 1,929 1,929
Vessels and equipment, net 2,300,875 71,065 2,371,940
Vessels under capital lease 264,902 -- 264,902
Investment in associated companies 119,328 -- 119,328
Total assets 2,852,029 73,975 2,926,004
Expenditure for vessels 376,844 -- 376,844
(in thousands of $ ) Dry Bulk
Tankers Carriers Total
--------- ------ ---------
2001
----
Total operating revenues 703,245 13,233 716,478
Voyage expenses 88,284 9 88,292
Ship operating expenses 113,812 2,477 116,289
Depreciation and amortisation 112,200 3,331 115,531
Interest income 8,433 -- 8,433
Interest expense 83,859 1,141 85,000
Share in results from associated companies 17,494 3,519 21,013
Net income 257,755 40,545 298,300
Discontinued operations -- 21,074 21,074
Vessels and equipment, net 2,121,356 74,396 2,195,752
Vessels under capital lease 213,320 103,887 317,207
Investment in associated companies 102,683 4,459 107,142
Total assets 2,776,814 185,751 2,962,565
Expenditure for vessels 396,841 -- 396,841
Reconciliations of reportable segments information to the Company's
consolidated totals follows:
(in thousands of $) 2003 2002 2001
Total operating revenues
Total operating revenues for reportable segments 1,173,237 551,339 716,478
Other operating revenues 546 256 --
-----------------------------------------
Total consolidated operating revenues 1,173,783 551,595 716,478
-----------------------------------------
Interest income
Total interest income for reportable segments 227 371 8,433
Interest income attributable to corporate
holding and management companies 8,958 12,671 4,518
-----------------------------------------
Total consolidated interest income 9,185 13,042 12,951
-----------------------------------------
Interest expense
Total interest expense for reportable segments 69,608 64,376 85,000
Interest expense attributable to corporate
holding and management companies 5,489 6,935 4,952
-----------------------------------------
Total consolidated interest expense 75,097 71,311 89,952
-----------------------------------------
Depreciation
Total depreciation for reportable segments 146,626 136,817 115,531
Depreciation not attributed to segments 281 74 1,694
-----------------------------------------
Total consolidated depreciation 146,907 136,891 117,225
-----------------------------------------
Net income
Net income for reportable segments 436,734 (12,127) 298,300
Net income attributable to corporate holding
and management companies (27,374) 3,228 84,428
-----------------------------------------
409,360 (8,899) 382,728
-----------------------------------------
Vessels and equipment, net
Vessels and equipment, net for reportable segments 2,164,340 2,371,940 2,195,752
Vessels and equipment not attributed to segments 899 1,299 1,210
-----------------------------------------
Total consolidated vessels and equipment, net 2,165,239 2,373,239 2,196,962
-----------------------------------------
Assets
Total assets for reportable segments 3,771,039 2,926,004 2,962,565
Cash and cash equivalents attributable to
holding company 630,633 62,663 --
Other assets attributable to corporate holding
and management companies 61,863 46,076 71,209
-----------------------------------------
Total consolidated assets 4,463,535 3,034,743 3,033,774
-----------------------------------------
============================================================================================
5. TAXATION
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.
United States
The Company does not accrue U.S. income taxes as, in the opinion of U.S.
counsel, the Company is not engaged in a U.S. trade or business and is
exempted from a gross basis tax under Section 883 of the U.S. Internal
Revenue Code.
A reconciliation between the income tax expense resulting from applying the
U.S. Federal statutory income tax rate and the reported income tax expense
has not been presented herein as it would not provide additional useful
information to users of the financial statements as the Company's net
income is subject to neither Bermuda nor U.S. tax.
Other Jurisdictions
Certain of the Company's subsidiaries in other jurisdictions including
Norway, Singapore, Sweden and the United Kingdom are subject to taxation in
their respective jurisdictions. The tax paid by subsidiaries of the Company
which are subject to taxation is not material.
The tax charge for the year comprises:
(in thousands of $) 2003 2002 2001
Current tax (3) (22) 444
Deferred tax -- -- --
---------------------------------------------------------------------------
(3) (22) 444
===========================================================================
Temporary differences and carryforwards which give rise to deferred tax
assets, liabilities and related valuation allowances are as follows:
(in thousands of $) 2003 2002
Deferred tax liability - non current (197) (156)
Tax loss carryforwards 16,836 5,828
Valuation allowance (16,639) (5,672)
---------------------------------------------------------------------------
Net deferred tax asset (liability) -- --
===========================================================================
As of December 31, 2003, 2002 and 2001, the Company had $60,129,000, $20,815,000
and $39,610,000 of net operating loss carryforwards, respectively. In 2003, 2002
and 2001, tax loss carryforwards have been utilised to offset taxable income in
Sweden. Tax loss carryforwards can be utilised only against future taxable
income of the respective subsidiary. Our subsidiary Frontline AB accounts for a
total of $52,571,000 as at December 31, 2003 and our subsidiary Frontline Invest
AB accounts for a total of $7,217,000 as of December 31, 2003. These net
operating losses do not have an expiration date. The Company's deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realised in the future. In 2002, the Company's Swedish subsidiaries
have remained dormant, and as a consequence not generated taxable profits
against which the historical tax losses could be utilized. At this time, the
Company does not intend to engage in any business activities that would generate
taxable income within those Swedish entities that would enable the Company to
utilize the tax carryforwards. Accordingly the Company recorded a full valuation
allowance at December 31, 2002 and 2003.
6. EARNINGS PER SHARE
The computation of basic EPS is based on the weighted average number of
shares outstanding during the year. The computation of diluted EPS assumes
the foregoing and the exercise of stock options and warrants using the
treasury stock method (see Note 21).
The components of the numerator for the calculation of basic EPS and
diluted EPS for net income from continuing operations and net income are as
follows:
--------------------------------------------------------------------------------------
(in thousands of $) 2003 2002 2001
--------------------------------------------------------------------------------------
Net income from continuing operations after tax
before cumulative effect of change in accounting 443,127 7,172 330,107
principle
Discontinued operations -- (1,929) 21,076
Cumulative effect of change in accounting principle (33,767) (14,142) 31,545
--------------------------------------------------------------------------------------
Net income (loss) available to stockholders 409,360 (8,899) 382,728
======================================================================================
The components of the denominator for the calculation of basic EPS and
diluted EPS are as follows:
---------------------------------------------------------------------------------
(in thousands ) 2003 2002 2001
---------------------------------------------------------------------------------
Basic earnings per share:
Weighted average number of ordinary shares outstanding 74,902 76,456 76,714
=================================================================================
Diluted earnings per share:
Weighted average number of ordinary shares outstanding 74,902 76,456 76,714
Warrants and stock options 158 52 181
---------------------------------------------------------------------------------
75,060 76,508 76,895
=================================================================================
Basic EPS and diluted EPS for discontinued operations and basic EPS for the
cumulative effect of change in accounting principle are as follows:
Basic and diluted earnings per share for
discontinued operations -- $(0.02) $0.27
Basic earnings per share for cumulative
effect of change in accounting principle $(0.45) $(0.19) $0.42
In the years ended December 31, 2003, 2002 and 2001 nil, 420,300 and
174,800 options respectively were anti-dilutive in the year and have been
excluded from the calculation of the diluted earnings per share.
7. LEASES
At December 31, 2003 the Company leased in sixteen vessels on long-term
time charters and bareboat charters from third parties. Four of those
leases are classified as operating leases and twelve as capital leases. The
Company's long-term leases of vessels generally contain optional renewal
periods and purchase options.
Rental expense
Charter hire payments to third parties for certain contracted-in vessels
are accounted for as operating leases. The Company is also committed to
make rental payments under operating leases for office premises. The future
minimum rental payments under the Company's non-cancellable operating
leases, are as follows:
---------------------------------------------------------------------------
Year ending December 31,
(in thousands of $)
---------------------------------------------------------------------------
2004 33,210
2005 33,815
2006 33,770
2007 33,901
2008 33,913
2009 and later 63,325
---------------------------------------------------------------------------
Total minimum lease payments 231,934
===========================================================================
Total rental expense for operating leases was $81,835,000, $61,429,000 and
$42,376,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
The following table discloses information about the terms of the Company's
leases of vessels contracted in which are accounted for as operating
leases:-
Lessor's
Expiry of Extended Extended Company's Option Period
Mandatory Lease Periods Lease Periods Option Periods to Put the
Period at Lessor's at Company's to Purchase Vessel to
Vessel (Type) of Lease Option Option the Vessel the Company
------------- -------- ------ ------ ---------- -----------
Front Warrior (Suezmax) 2007 2008-2011 2010-2011 2007 to 2011 2011
Front Champion (VLCC) 2006 2007-2010 2009-2013 2004 to 2013 2010
Front Century (VLCC) 2006 2007-2010 2009-2013 2004 to 2013 2010
Golden Victory (VLCC) 2007 2008-2014 2012-2014 2004 to 2011 2011
A liability for put options on vessels leased under leases classified as
operating leases is recorded at such time that market conditions make it
likely that a put option will be exercised on the exercise date. A
liability is recognised based on the amount, if any, by which the put
option price exceeds the fair market value of the related vessel. At
December 31, 2003 no such liability had arisen.
At December 31, 2003 the Company leased out twenty seven of its vessel to
third parties on time and bareboat charters with initial periods ranging
between six months and ten years. Twenty three of those leases are
classified as operating leases and four as capital leases.
Rental income
The minimum future revenues to be received on time and bareboat charters
which are accounted for as operating leases and other contractually
committed income as of December 31, 2003 are as follows:
--------------------------------------------------------------------------------------------------
Year ending December 31, Yen revenues Dollar revenues Total
(in thousands of (Y) and $) (in (Y)) ($ equivalent)
--------------------------------------------------------------------------------------------------
2004 995,520 9,295 165,242 174,537
2005 992,800 9,270 132,484 141,754
2006 385,900 3,603 99,128 102,731
2007 226,300 2,113 68,643 70,756
2008 226,920 2,119 44,646 46,765
2009 and later 1,139,560 10,640 46,952 57,592
--------------------------------------------------------------------------------------------------
Total minimum lease revenues 3,967,000 37,040 557,095 594,135
==================================================================================================
The cost and accumulated depreciation of the vessels leased to a third
party at December 31, 2003 were approximately $1,580.5 million and $416.4
million, respectively, and at December 31, 2002 were approximately $432.7
million and $37.2 million, respectively.
8. MARKETABLE SECURITIES
Marketable securities held by the Company are equity securities considered
to be available-for-sale securities.
---------------------------------------------------------------------------
(in thousands of $) 2003 2002
---------------------------------------------------------------------------
Cost 59 51
Gross unrealised loss (15) (9)
---------------------------------------------------------------------------
Fair value 44 42
===========================================================================
The net unrealised loss on marketable securities, including a component of
foreign currency translation, included in comprehensive income increased by
$6,000 for the year ended December 31, 2003 (2002 - increase in net
unrealised loss of $6,000).
---------------------------------------------------------------------------
(in thousands of $ ) 2003 2002 2001
---------------------------------------------------------------------------
Proceeds from sale of available-for-sale securities 12,689 -- 3,101
Realised gain (loss) 402 (984) 717
===========================================================================
The cost of sale of available-for-sale marketable securities is calculated
on an average costs basis.
9. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are presented net of allowances for doubtful
accounts amounting to $1,486,000 and $800,000 for each of the years ended
December 31, 2003 and 2002, respectively.
10. OTHER RECEIVABLES
---------------------------------------------------------------------------
(in thousands of $) 2003 2002
---------------------------------------------------------------------------
Agent receivables 5,623 5,773
Due from related parties (464) 179
Other receivables 14,300 4,946
---------------------------------------------------------------------------
19,459 10,898
===========================================================================
Other receivables are presented net of allowances for doubtful accounts
amounting to $nil for each of the years ended December 31, 2003 and 2002.
11. NEWBUILDINGS AND VESSEL PURCHASE OPTIONS
---------------------------------------------------------------------------
(in thousands of $) 2003 2002
---------------------------------------------------------------------------
Newbuildings -- 19,035
Vessel purchase options 8,370 8,370
---------------------------------------------------------------------------
8,370 27,405
===========================================================================
The carrying value of newbuildings represents the accumulated costs to the
balance sheet date, which the Company has paid by way of purchase
instalments, and other capital expenditures together with capitalised loan
interest. Interest capitalised in the cost of newbuildings amounted to
$290,000 and $1,902,000 in 2003 and 2002, respectively. The Company took
delivery of one newbuilding during 2003.
The Company has both an obligation and an option to purchase the VLCC
Oscilla on expiry of a five-year time charter, which commenced in March
2000. The purchase price is equal to the outstanding mortgage debt under
four loan agreements between lenders and the vessel's owning company. As at
December 31, 2003 the outstanding mortgage debt of the Oscilla's owning
company amounted to $35,990,067 plus (Y)674,645,262 (equivalent to
$6,299,209). (2002 - $43,013,215 plus (Y)759,454,316 (equivalent to
$6,406,735). Included in this amount at December 31, 2003 is debt of
$9,023,091 due to the Company (2002 - $10,191,000). The fair value assigned
to this option and obligation is $8,370,000. Fair value was calculated at
the time of purchase as the difference between the fair value of the vessel
and the mortgage debt outstanding.
12. VESSELS AND EQUIPMENT, NET
---------------------------------------------------------------------------
(in thousands of $) 2003 2002
---------------------------------------------------------------------------
Cost 2,997,286 3,079,916
Accumulated depreciation (832,047) (706,676)
---------------------------------------------------------------------------
Net book value at end of year 2,165,239 2,373,239
===========================================================================
Included in the above amounts as at December 31, 2003 and 2002 is equipment
with a net book value of $899,000 and $1,459,000 respectively. Depreciation
expense for vessels and equipment was $122.8 million, $139.9 million and
$115.6 million for the years ended December 31, 2003, 2002 and 2001,
respectively, including amounts recorded in discontinued operations.
13. VESSELS UNDER CAPITAL LEASE, NET
At December 31 2003, the Company held twelve vessels under capital leases
(2002 - four). These leases are for terms that range from eight to twenty
four years. Four of these vessels were sold by the Company in 2003 and
leased back for a period of nine years with lessor's options to extend the
charters for a further two years followed by a further two years. The
Company has purchase options over eight of these vessels at certain
specified dates and the lessor has options to put these vessels to the
Company at the end of the lease term.
The following table discloses information about the terms of the Company's
leases of vessels contracted in which are accounted for as capital leases:-
Lessor's
Expiry of Extended Extended Company's Option Period
Mandatory Lease Periods Lease Periods Option Periods to Put the
Period at Lessor's at Company's to Purchase Vessel to
Vessel (Type) of Lease Option Option the Vessel the Company
------------- -------- ------ ------ ---------- -----------
Front Crown (VLCC) 2009 2010-2014 2013-2014 2009 to 2014 2014
Front Chief (VLCC) 2009 2010-2014 2013-2014 2009 to 2014 2014
Front commander (VLCC) 2009 2010-2014 2013-2014 2009 to 2014 2014
Front Eagle (VLCC) 2010 2011-2015 2014-2015 2010 to 2015 2015
Front Melody (Suezmax) 2011 2012-2015 2014-2015 2011 to 2015 2015
Front Symphony (Suezmax) 2011 2012-2015 2014-2015 2011 to 2015 2015
Front Tina (VLCC) 2011 2012-2015 2014-2015 2011 to 2015 2015
Front Commodore (VLCC) 2011 2012-2015 2014-2015 2011 to 2015 2015
British Pioneer (VLCC) 2024 none Note (2) Note (1) none
British Progress (VLCC) 2025 none Note (2) Note (1) none
British Purpose (VLCC) 2025 none Note (2) Note (1) none
British Pride (VLCC) 2025 none Note (2) Note (1) none
Put options on vessels leased under leases classified as capital leases are
recorded as part of the lease's minimum lease payments. Lease liabilities
are amortised so that the remaining balance at the date the put option
becomes exercisable is equal to the put option amount. An additional
liability is recognised based on the amount, if any, by which the put
option price exceeds the fair market value of the related vessel. At
December 31, 2003 no such additional liability had arisen.
Note 1. - The Company does not have options to purchase the vessel but it has
first refusal if the vessel's owner offers the vessel for sale.
Note 2. - The Company has the right to terminate the lease at any time but only
with permission of the charterer.
---------------------------------------------------------------------------
(in thousands of $) 2003 2002
---------------------------------------------------------------------------
Cost 853,169 282,325
Accumulated depreciation (88,043) (17,423)
---------------------------------------------------------------------------
Net book value at end of year 765,126 264,902
===========================================================================
Depreciation expense for vessels under capital lease was $24.0 million,
$16.6 million and $5.3 million for the years ended December 31, 2003, 2002
and 2001, respectively.
The outstanding obligations under capital leases are payable as follows:
---------------------------------------------------------------------------
Year ending December 31,
(in thousands of $)
---------------------------------------------------------------------------
2004 80,260
2005 80,360
2006 80,876
2007 82,039
2008 82,976
2009 and later 813,988
---------------------------------------------------------------------------
Minimum lease payments 1,220,499
---------------------------------------------------------------------------
Less imputed interest (446,538)
---------------------------------------------------------------------------
Present value of obligations under capital leases 773,961
===========================================================================
14. INVESTMENT IN ASSOCIATED COMPANIES
At December 31, 2003, the Company has the following participation in
investments that are recorded using the equity method:
Percentage
Front Tobago Inc 40.00%
Alliance Chartering LLC 50.00%
Dundee Navigation SA 50.10%
Edinburgh Navigation SA 50.10%
Ariake Transport Corporation 50.10%
Sakura Transport Corporation 50.10%
Tokyo Transport Corporation 50.10%
Hitachi Hull No 4983 Ltd. 50.10%
With the exception of Alliance Chartering LLC, the equity method investees
are engaged in the ownership and operation of oil tankers or dry bulk
carriers.
Summarised balance sheet information of the Company's equity method
investees is as follows:
---------------------------------------------------------------------------
(in thousands of $) 2003 2002
---------------------------------------------------------------------------
Current assets 38,057 62,724
Noncurrent assets 417,653 730,940
Current liabilities 115,323 120,454
Non current liabilities 205,087 647,755
Summarised statement of operations information of the Company's equity
method investees is as follows:
---------------------------------------------------------------------------
(in thousands of $ ) 2003 2002 2001
---------------------------------------------------------------------------
Net operating revenues 108,489 82,641 82,286
Net operating income 91,732 25,740 42,637
Net income (loss) 54,768 (16,149) 45,432
In the year ended December 31, 2003, the Company recorded an impairment
charge of $5.2 million related to the other-than-temporary decline in value
of its investments in Golden Lagoon Corporation and Ichiban Transport
Corporation. This impairment charge was triggered by signing agreements on
June 25, 2003 to restructure the Company's investments in certain
associated companies. These agreements provided for the sale of the
Company's investments in Golden Lagoon Corporation and Ichiban Transport
Corporation and the increase in the Company's investments in Ariake
Transport Corporation, Sakura Transport Corporation, Tokyo Transport
Corporation and Hitachi Hull No 4983 Ltd from 33.33% to 50.10%. These
transactions were completed in July 2003 through a combination of sale,
acquisition and exchange of interest transactions which were accounted for
using the book values of assets exchanged.
The company held 33.3% of the shares of Ichiban Transport Corporation and
50% of the shares of Golden Lagoon Corporation until July 2003 when these
investments were sold. The statement of operations includes 33.3% of the
earnings of Ichiban Transport Corporation and 50% of the earnings of Golden
Lagoon Corporation until the date of sale.
The Company held 50% of the shares of Golden Tide Corporation during the
year ended December 31, 2002 and the six months ended June 30, 2003. The
statement of operations includes 50% share of the earnings of Golden Tide
Corporation for the year ended December 31, 2002 and the six months ended
June 30, 2003. On June 30, 2003, the Company acquired the remaining 50% of
the shares of Golden Tide Corporation for $9.5 million, being $2.4 million
net of cash acquired, and has combined the assets, principally the vessel,
and liabilities, principally the long-term debt, from that date. The
statement of operations includes 100% of Golden Tide Corporation's earnings
for the period from June 30, 2003 to December 31, 2003.
The Company has determined that it is the primary beneficiary of Golden
Fountain Corporation under FIN 46 and has therefore consolidated the entity
as of December 31, 2003.
15. INVESTMENT IN FINANCE LEASES
The consolidation of ITC has resulted in the Company recording a net
investment in finance leases. Four Suezmax vessels are on long term
charters to Chevron Transport Corporation ("Chevron"). Each charter has a
term expiring on April 1, 2015 subject to Chevron's right to terminate on
certain specified dates. Chevron has the right to terminate each charter on
any of four, in the case of the double-hulled vessels, or three, in the
case of the single-hulled vessel, termination dates which, for each vessel,
occur at two-year intervals as disclosed below. Chevron is required to
provide non-binding notice of its intent to exercise an option at least
twelve months prior to the termination date. Irrevocable notice that the
initial termination option will be exercised must be received nine months
prior to the date and for each option subsequent to the initial termination
option, irrevocable notice must be received seven months prior to the
termination date. Chevron is required to pay the following termination
payments on or prior to the termination date:
Approximate Termination Payments (in thousands of $)
Optional Termination Date Sirius Voyager Altair Voyager Cygnus Voyager Virgo Voyager
-------------------- -------------- -------------- -------------- -------------
April 1, 2003 13,400
April 1, 2004 12,200
April 1, 2005 12,260 10,930
April 1, 2006 11,110 5,050
April 1, 2007 11,120 9,910
April 1, 2008 10,030 4,570
April 1, 2009 9,970 8,890
April 1, 2010 8,940 4,080
April 1, 2011 7,880
Chevron holds options to purchase each vessel for $1 on April 1, 2015
provided no earlier optional termination of the bareboat charter has
occurred.
The following schedule lists the components of the net investment in
finance lease:
---------------------------------------------------------------------------
(in thousands of $) 2003
---------------------------------------------------------------------------
Total minimum lease payments to be received 203,674
Less : Unearned income 67,269
---------------------------------------------------------------------------
Net investment in finance leases 136,405
===========================================================================
Lease payments under the charter agreement for each of the five succeeding
years are as follows: $26.6 million in 2004, $23.4 million in 2005, $20.6
million in 2006, $19.1 million in 2007 and $18.2 million in 2008.
16. DEFERRED CHARGES
Deferred charges represent debt arrangement fees that are capitalised and
amortised on a straight-line basis to interest expense over the life of the
debt instrument. The deferred charges are comprised of the following
amounts:
---------------------------------------------------------------------------
(in thousands of $) 2003 2002
---------------------------------------------------------------------------
Debt arrangement fees 39,411 17,436
Accumulated amortisation (16,957) (11,777)
---------------------------------------------------------------------------
22,454 5,659
===========================================================================
17. OTHER LONG-TERM ASSETS
---------------------------------------------------------------------------
(in thousands of $) 2003 2002
---------------------------------------------------------------------------
Long-term debt receivable 9,023 10,191
Other 1,096 1,013
---------------------------------------------------------------------------
10,119 11,204
===========================================================================
18. ACCRUED EXPENSES
---------------------------------------------------------------------------
(in thousands of $) 2003 2002
---------------------------------------------------------------------------
Voyage expenses 11,520 3,258
Ship operating expenses 9,391 27,501
Administrative expenses 5,668 3,948
Interest expense 38,490 5,483
Taxes 188 134
Other 11,653 --
---------------------------------------------------------------------------
76,910 40,324
===========================================================================
19. DEBT
---------------------------------------------------------------------------------
(in thousands of $) 2003 2002
---------------------------------------------------------------------------------
US Dollar denominated floating rate debt
(LIBOR + 0.70% to 2.75%) due through 2011 937,936 1,314,183
Yen denominated floating rate debt
(LIBOR + 1.125% to 1.313%) due through 2011 157,210 110,718
Fixed rate debt 0% due through 2005 2,000 2,000
Fixed rate debt 8.00% due through 2005 -- 11,250
8.5% Senior notes 580,000 --
Serial notes (6.42% to 7.62%) 120,620 --
Term notes (7.84% to 8.52%) 484,100 --
---------------------------------------------------------------------------------
2,281,867 1,438,151
Credit facilities 550 7,321
---------------------------------------------------------------------------------
Total debt 2,282,417 1,445,472
Less: short-term and current portion of long-term debt (191,131) (167,807)
---------------------------------------------------------------------------------
2,091,286 1,277,665
=================================================================================
The outstanding debt as of December 31, 2003 is repayable as follows:
---------------------------------------------------------------------------
Year ending December 31,
(in thousands of $)
---------------------------------------------------------------------------
2004 191,131
2005 281,792
2006 251,396
2007 157,067
2008 127,200
2009 and later 1,273,831
---------------------------------------------------------------------------
Total debt 2,282,417
===========================================================================
The weighted average interest rate for the floating rate debt denominated
in US dollars was 3.08 per cent as of December 31, 2003 (2002 - 3.93 per
cent). The weighted average interest rate for the floating rate debt
denominated in Yen was 1.33 per cent as of December 31, 2003 (2002 - 1.27
per cent). These rates take into consideration related interest rate swaps.
Certain of the fixed rate debt, floating rate debt, term notes and serial
notes are collateralised by ship mortgages and, in the case of some debt,
pledges of shares by each guarantor subsidiary. The Company's existing
financing agreements impose operation and financing restrictions on the
Company which may significantly limit or prohibit, among other things, the
Company's ability to incur additional indebtedness, create liens, sell
capital shares of subsidiaries, make certain investments, engage in mergers
and acquisitions, purchase and sell vessels, enter into time or consecutive
voyage charters or pay dividends without the consent of our lenders. In
addition, our lenders may accelerate the maturity of indebtedness under our
financing agreements and foreclose upon the collateral securing the
indebtedness upon the occurrence of certain events of default, including
our failure to comply with any of the covenants contained in our financing
agreements. Various debt agreements of the Company contain certain
covenants which require compliance with certain financial ratios. Such
ratios include equity ratio covenants, minimum value clauses, and minimum
free cash restrictions. As of December 31, 2003 and 2002, the Company
complied with all the debt covenants of its various debt agreements.
20. SHARE CAPITAL
Authorised share capital:
---------------------------------------------------------------------------
(in thousands of $) 2003 2002
---------------------------------------------------------------------------
125,000,000 ordinary shares of $2.50 each 312,500 312,500
===========================================================================
Issued and fully paid share capital:
---------------------------------------------------------------------------
(in thousands of $, except share numbers) 2003 2002
---------------------------------------------------------------------------
73,647,930 ordinary shares of $2.50 each 184,120 191,166
(2002 - 76,466,566)
===========================================================================
The Company's ordinary shares are listed on the New York Stock Exchange,
the Oslo Stock Exchange and the London Stock Exchange.
Of the authorised and unissued ordinary shares at December 31, 2003,
295,436 are reserved for issue pursuant to subscription under options
granted under the Company's share option plans. As at December 31, 2003,
except for the shares which would be issued on the exercise of the options,
no unissued share capital of the Company is under option or is
conditionally or unconditionally to be put under option. In 2003 and 2002
the Company issued 251,364 and 59,000 shares respectively, in connection
with the exercise of employee share options.
In 2001 the Company bought back and cancelled a total of 2,207,300 of its
Ordinary Shares, respectively, in a number of separate market transactions.
These share buybacks were made within a Board of Directors authority to buy
back up to 7,500,000 ordinary shares.
In September 2001 the Company established a twelve month facility for a
Stock Indexed Total Return Swap Programme or Equity Swap Line with the Bank
of Nova Scotia ("BNS"), whereby the latter acquired shares in the Company,
and the Company carried the risk of fluctuations in the share price of
those acquired shares. BNS was compensated at their cost of funding plus a
margin. In 2002, the term of the Equity Swap Line was extended until
February 2004. At December 31, 2002 and 2001, BNS had acquired a total of
2,695,000 and 2,100,000 Frontline shares under the Programme, respectively.
In June 2003, the Equity Swap Line was terminated and the Company
consequently acquired and cancelled 3,070,000 of its Ordinary Shares.
A number of the Company's bank loans contain a clause that permit dividend
payments subject to the Company meeting certain equity ratio and cash
covenants immediately after such dividends being paid.
On December 6, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Plan"). The Company adopted the Plan to protect
shareholders against unsolicited attempts to acquire control of the Company
that do not offer an adequate price to all shareholders or are otherwise
not in the best interests of the Company and its shareholders. Under the
Plan, each shareholder of record on December 20, 1996 received one right
for each Ordinary Share held, and each registered holder of outstanding
warrants received one right for each Ordinary Share for which they are
entitled to subscribe. Each right entitles the holder to purchase from the
Company one-quarter of an Ordinary Share at an initial purchase price of
$1.50. The rights will become exercisable and will detach from the Ordinary
Shares a specified period of time after any person has become the
beneficial owner of 20 per cent or more of the Company's Ordinary Shares.
If any person becomes the beneficial owner of 20 per cent or more of the
Company's Ordinary Shares, each right will entitle the holder, other than
the acquiring person, to purchase for the purchase price, that number of
Ordinary Shares having a market value of eight times the purchase price.
If, following an acquisition of 20 per cent or more of the Company's
Ordinary Shares, the Company is involved in certain amalgamations or other
business combinations or sells or transfers more than 50% of its assets or
earning power, each right will entitle the holder to purchase for the
purchase price ordinary shares of the other party to the transaction having
a market value of up to eight times the purchase price.
The Company may redeem the rights at a price of $0.001 per right at any
time prior to a specified period of time after a person has become the
beneficial owner of 20 per cent or more of its Ordinary Shares. The rights
will expire on December 31, 2006, unless earlier exchanged or redeemed.
In connection with the Company's one-for-ten reverse stock split, the
rights were adjusted pursuant to the Plan, so that there are currently ten
rights attached to each outstanding Ordinary Share.
21. WARRANTS AND SHARE OPTION PLANS
Pursuant to the terms of the Amalgamation Agreement, warrants to purchase
2,600,000 shares in the Company were granted on the date of Amalgamation.
These warrants were recorded at an estimated fair value at November 1, 1997
using the Black-Scholes option pricing model. These warrants entitled the
holder to subscribe for one ordinary share in the Company at a price of
$15.91 and were exercisable at any time up to May 11, 2001. In the period
from January 1, 2001 to May 11, 2001 a total of 2,591,732 warrants were
exercised and on May 11, 2001 any warrants that had not been exercised
expired.
The Company has in place a Bermuda Share Option Plan (the "Bermuda Plan")
and a United Kingdom Share Option Plan (the "U.K. Plan"). Both share option
plans are accounted for as variable plans. Under the terms of the plans,
the exercise price set on the grant of share options may not be less than
the average of the fair market value of the underlying shares for the three
dealing days before the date of grant. The number of shares granted under
the plans may not in any ten year period exceed 7 per cent of the issued
share capital of the Company. No consideration is payable for the grant of
an option. In 2001, the Bermuda Plan was amended to provide that the
exercise price set on the grant can subsequently be adjusted so that
dividends paid after the date of grant will be deducted from the exercise
price.
Under the Bermuda Plan, options may be granted to any director or eligible
employee of the Company or subsidiary. Options are exercisable for a
maximum period of nine years following the first anniversary date of the
grant.
The following summarises the share options transactions relating to the
Bermuda Plan:
---------------------------------------------------------------------------
(in thousands, except per share data) Shares Weighted
average
exercise
price
---------------------------------------------------------------------------
Options outstanding at December 31, 2000 319 $5.50
Granted 194 $11.76
Exercised (130) $3.49
Cancelled (23) $11.76
Options outstanding at December 31, 2001 360 $7.71
Granted 252 $11.90
Exercised (59) $4.47
Cancelled (6) $11.90
Options outstanding at December 31, 2002 547 $11.24
Granted -- --
Exercised (252) $6.86
Cancelled -- --
---------------------------------------------------------------------------
Options outstanding at December 31, 2003 295 $8.49
===========================================================================
Options exercisable at:
December 31, 2001a 190 $4.07
===========================================================================
December 31, 2002a 187 $8.09
===========================================================================
December 31, 2003a 94 $9.14
===========================================================================
Under the U.K. Plan, options may be granted to any full-time director or
employee of the Company or subsidiary. Options are only exercisable during
the period of seven years following the third anniversary date of the
grant.
At December 31, 2003, 2002 and 2001 there were no options remaining
outstanding under the U.K. Plan.
There were no options granted in the year ended December 31, 2003. The
weighted average fair value of options granted under the Bermuda Plan in
the year ended December 31, 2002 and 2001 was $6.80 and $6.79,
respectively. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model using the following
weighted average assumptions:
---------------------------------------------------------------------------
2002 2001
---------------------------------------------------------------------------
Risk free interest rate 2.8% 4.9%
Expected life 5 years 5 years
Expected volatility 64% 60%
Expected dividend yield 0% 0%
The options outstanding under the Bermuda Plan as at December 31, 2003 have
exercise prices of $2.50 (7,500 options) $7.30 (177,336 options) and $10.80
(110,600 options). The exercise prices are reduced by any dividends
declared after the date of grant. The options that were not exercisable at
December 31, 2003, vested over a period from January 2004 to June 2004. The
options outstanding under the Bermuda Plan as at December 31, 2003 have a
weighted average contractual life of 4.98 years.
22. FINANCIAL INSTRUMENTS
Interest rate risk management
In certain situations, the Company may enter into financial instruments to
reduce the risk associated with fluctuations in interest rates. The Company
has a portfolio of swaps that swap floating rate interest to fixed rate,
which from a financial perspective hedge interest rate exposure. The
Company does not hold or issue instruments for speculative or trading
purposes. The counterparties to such contracts are J.P. Morgan Chase,
Credit Agricole Indosuez, Deutsche Schiffsbank and Den norske Bank. Credit
risk exists to the extent that the counterparties are unable to perform
under the contracts.
The Company manages its debt portfolio with interest rate swap agreements
in U.S. dollars to achieve an overall desired position of fixed and
floating interest rates. The Company has entered into the following
interest rate swap transactions involving the payment of fixed rates in
exchange for LIBOR:
---------------------------------------------------------------------------
Principal Inception Maturity Fixed
Date Date Interest
---------------------------------------------------------------------------
(in thousands of $) Rate
$50,000 January 2001 January 2006 5.635%
$49,338 reducing monthly to $29,793 March 1998 March 2006 7.288%
$53,352 reducing monthly to $17,527 September 1998 August 2008 7.490%
As at December 31, 2003, the notional principal amounts subject to such
swap agreements was $140,460,000 (2002 - $352,690,000).
Foreign currency risk
The majority of the Company's transactions, assets and liabilities are
denominated in U.S. dollars, the functional currency of the Company.
Certain of the Company's subsidiaries report in Sterling, Swedish kronor or
Norwegian kroner and risks of two kinds arise as a result: a transaction
risk, that is, the risk that currency fluctuations will have a negative
effect on the value of the Company's cash flows; and a translation risk,
the impact of adverse currency fluctuations in the translation of foreign
operations and foreign assets and liabilities into U.S. dollars for the
Company's consolidated financial statements. Certain of the Company's
subsidiaries have Yen denominated long-term debt which as of December 31,
2003 stood at Yen 16,830,409,959 and charter contracts denominated in Yen
with contracted payments as set forth in Note 7. There is a risk that
currency fluctuations will have a negative effect on the value of the
Company's cashflows. The Company has not entered into derivative contracts
for either transaction or translation risk. Accordingly, such risk may have
an adverse effect on the Company's financial condition and results of
operations.
Forward freight contracts
The Company may enter into forward freight contracts and futures contracts
in order to manage its exposure to the risk of movements in the spot market
for certain trade routes. Market risk exists to the extent that spot market
fluctuations have a negative effect on the Company's cash flows and
consolidated statements of operations.
As at December 31, 2003, the notional principal amounts subject to such
forward freight contracts and futures contracts was $49,862,649 (2002:
$31,264,000).
Fair Values
The carrying value and estimated fair value of the Company's financial
instruments at December 31, 2003 and 2002 are as follows:
-------------------------------------------------------------------------------------------
2003 2003 2002 2002
(in thousands of $) Fair Carrying Fair Carrying
Value Value Value Value
-------------------------------------------------------------------------------------------
Non-Derivatives:
Cash and cash equivalents 124,189 124,189 92,078 92,078
Restricted cash 891,887 891,887 8,220 8,220
Marketable securities 44 44 262 262
Floating rate debt and credit facilities 1,095,696 1,095,696 1,424,901 1,424,901
Fixed rate debt 0% due through 2005 1,843 2,000 2,000 2,000
Fixed rate debt 8.00% due through 2005 -- -- 11,250 11,250
8.5% Senior notes 580,000 580,000 -- --
Serial notes (6.42% to 7.62%) 127,378 120,620 -- --
Term notes (7.84% to 8.52%) 485,631 484,100 -- --
Derivatives:
Interest rate swap transactions (9,216) (9,216) (16,894) (16,894)
Equity swap Line -- -- 390 390
Forward freight contracts 78 78 (548) (548)
The carrying value of cash and cash equivalents, which are highly liquid,
is a reasonable estimate of fair value.
The estimated fair value of marketable securities is based on the quoted
market price of these or similar instruments when available.
The estimated fair value for floating rate long-term debt is considered to
be equal to the carrying value since it bears variable interest rates,
which are reset on a quarterly basis. The estimated fair value for fixed
rate long-term debt is considered to be equal to the carrying value due to
its company specific nature and the lack of a market in such debt.
The fair value of interest rate swaps is estimated by taking into account
the cost of entering into interest rate swaps to offset the Company's
outstanding swaps.
The fair value of the Equity Swap Line (see Note 20) is based on the quoted
market price of the Company's shares held by the Bank of Nova Scotia minus
the acquisition cost of those shares.
The fair value of forward freight contracts is estimated by taking into
account the cost of entering into forward freight contracts to offset the
Company's outstanding contracts.
Concentrations of risk
There is a concentration of credit risk with respect to cash and cash
equivalents to the extent that substantially all of the amounts are carried
with Skandinaviska Enskilda Banken, BNP Paribas, Den norske Bank and Nordea
Bank Norge. There is a concentration of credit risk with respect to
restricted cash to the extent that substantially all of the amounts are
carried with the Pacific Life and in escrow with Wilmington Trust. However,
the Company believes this risk is remote as these banks are high credit
quality financial institutions.
The majority of the vessels' gross earnings are receivable in U.S. dollars.
In 2003, 2002 and 2001, no customer accounted for 10 per cent or more of
freight revenues.
23. RELATED PARTY TRANSACTIONS
On December 5, 2000, a subsidiary of Frontline made a short-term loan of
$20 million to World Shipholding Ltd.. This loan was repaid in full on
February 6, 2001. Fees and interest totalling $234,680 were recorded in
2001. World Shipholding Ltd. is indirectly controlled by John Fredriksen
who is Frontline Ltd's Chairman and a major stockholder in the Company.
In February 2001, the Company acquired newbuilding contracts from
Seatankers Management Co. Ltd for the construction and purchase of three
VLCC tankers at the Hitachi shipyard in Japan. These contracts were
acquired for the original contract price of $72 million each plus $0.5
million per contract. These three newbuildings were delivered in 2002.
Seatankers Management Co. Ltd is indirectly controlled by John Fredriksen
who is Frontline Ltd's Chairman and a major stockholder.
In the years ended December 31, 2003, 2002 and 2001, Frontline provided
services to Seatankers Ltd. These services comprise management support and
administrative services including administration of a newbuilding project
known as the Uljanik Project. In the years ended December 31, 2003, 2002
and 2001 the Company earned management fees of $107,995, $253,762 and
$277,855, respectively from Seatankers Ltd. As at December 31, 2003, 2002
and 2001 amounts of $17,880, $141,359 and $314,923 respectively were due
from Seatankers Ltd in respect of these fees and for the reimbursement of
costs incurred on behalf of Seatankers Ltd. Seatankers Ltd. is indirectly
controlled by John Fredriksen who is Frontline Ltd's Chairman and a major
stockholder in the Company. The Company recognizes these fees as a
reduction in our total administrative expenses.
In the years ended December 31, 2003 and 2002 Frontline has provided
management support and administrative services to Osprey Maritime Ltd
("Osprey"). In the years ended December 31, 2003 and 2002 the Company
earned management fees of $51,600 and $42,000 respectively from Osprey. As
at December 31, 2003 and 2002 amounts of $18,719 and $18,000 respectively
were due from Osprey in respect of these fees and for the reimbursement of
costs incurred on behalf of Osprey. At December 31, 2002, an amount of
$103,838 was due to Osprey in respect of Tankers pool distributions due to
Osprey that were received by the Company. Osprey is indirectly controlled
by John Fredriksen who is Frontline Ltd's Chairman and a major stockholder
in the Company. The Company recognizes these fees as a reduction in our
total administrative expenses.
In the years ended December 31, 2003, 2002 and 2001, Frontline has provided
services to Golar LNG Limited ("Golar"). The services provided include
management support, corporate and administrative services. In the years
ended December 31, 2003, 2002 and 2001, the Company earned management fees
of $261,000, $391,153 and $258,960, respectively from Golar. As at December
31, 2003, 2002 and 2001, amounts of $79,335, $86,343 and $547,966
respectively were due from Golar in respect of these fees and for the
reimbursement of costs incurred on behalf of Golar. Golar is indirectly
controlled by John Fredriksen who is Frontline Ltd's Chairman and a major
stockholder in the Company. The Company recognizes these fees as a
reduction in our total administrative expenses.
In the year ended December 31, 2003 and 2002 Frontline has provided
management support and administrative services to Northern Offshore Ltd,
("NOF"), In the years ended 31 December 2003 and 2002 the Company earned
management fees of $134,016 and $173,724 respectively from NOF. As at
December 31, 2003 and 2002 amounts of $2,422 and $31,071 respectively were
due from NOF in respect of these fees and for the reimbursement of costs
incurred on behalf of NOF. NOF is indirectly controlled by John Fredriksen
who is Frontline Ltd's Chairman and a major stockholder in the Company. The
Company recognizes these fees as a reduction in our total administrative
expenses.
24. ACQUISITIONS OF BUSINESSES
In April 2001, the Company announced an offer for all of the shares of
Mosvold Shipping Limited ("Mosvold"), a Bermuda company whose shares were
listed on the Oslo Stock Exchange. Through a combination of shares acquired
and acceptances of the offer, as at May 31 2001, Frontline controlled 97
per cent of the shares of Mosvold. The remaining 3 per cent of the shares
of Mosvold were acquired during 2001 through a compulsory acquisition. The
total acquisition price paid was approximately $70.0 million. The
difference between the purchase price and the net assets acquired, has been
assigned to the identifiable long-term assets of Mosvold.
The following table reflects unaudited pro-forma combined results of
operations of the Company on the basis that the acquisition of Mosvold had
taken place at January 1, 2001:
---------------------------------------------------------------------------
(in thousands of $, except per share data) 2001
(unaudited)
---------------------------------------------------------------------------
Net operating revenues 655,527
Net income 384,453
Basic earnings per share $5.01
Diluted earnings per share $5.00
25. COMMITMENTS AND CONTINGENCIES
Assets Pledged
---------------------------------------------------------------------------
(in thousands of $) 2003 2002
---------------------------------------------------------------------------
Ship mortgages 2,164,340 2,238,905
Restricted bank deposits 891,887 8,220
---------------------------------------------------------------------------
3,056,227 2,247,125
===========================================================================
Other Contractual Commitments
The Company insures the legal liability risks for its shipping activities
with Assuranceforeningen SKULD, Assuranceforeningen Gard Gjensidig and
Britannia Steam Ship Insurance Association Limited, all mutual protection
and indemnity associations. As a member of these mutual associations, the
Company is subject to calls payable to the associations based on the
Company's claims record in addition to the claims records of all other
members of the associations. A contingent liability exists to the extent
that the claims records of the members of the associations in the aggregate
show significant deterioration, which result in additional calls on the
members.
Certain of the Company's subsidiaries have contractual rights to
participate in the profits of the vessels New Vanguard, New Vista and
Channel Alliance. Revenues arising from these arrangements have been
accrued to the balance sheet date.
The charterers of three of the Company's vessels have contractual rights to
participate in the profits on sale of those vessels. In the case of the Cos
Hero, the charterer is entitled to 50 per cent of the profit realised on
any qualifying sale. The Cos Hero may only be sold if the profit from sale
will exceed $3.0 million. Profit is defined as sale proceeds less debt
outstanding in the relevant profit share agreements. If the New Vanguard or
New Vista are sold, the charterer is entitled to claim up to $1 million to
cover losses incurred on subcharters of the vessel. Any remaining profit is
to be split 60:40 in favour of the owner.
The charterer of the Company's vessel, Navix Astral, holds a purchase
option denominated in yen to purchase the vessel. The purchase option
reduces on a sliding scale over the term of the related charter and is at a
strike price that is in excess of the related debt on the vessel. The
option is exercisable at any time after the end of the seventh year of the
charter.
At December 31, 2003, the Company had twelve vessels that were sold by the
Company at various times during the period from November 1998 to December
31, 2003, and leased back on charters that range for periods of eight to
twelve and a half years with options on the lessors' side to extend the
charters for periods that range up to five years. Eight of these charters
are accounted for as capital leases and four are accounted for as operating
leases. The Company has purchase options at certain specified dates and the
lessor has options to put the vessels on the Company at the end of the
lease terms for all of these twelve vessels. The total amount that the
Company would be required to pay under these put options with respect to
the operating leases is $56.8 million.
At December 31, 2003 Chevron Transport Corporation charters four vessels on
long-term bareboat charters recorded as investments in finance leases.
Chevron holds options to purchase each vessel for $1 on April 1, 2015
provided no earlier optional termination of the bareboat charter has
occurred. Details of Chevron's optional termination dates for the charters
are contained in Note 15.
26. SUPPLEMENTAL INFORMATION
Non-cash investing and financing activities included the following:
-----------------------------------------------------------------------------------
(in thousands of $) 2003 2002 2001
-----------------------------------------------------------------------------------
Sales of vessels:
Proceeds received in the form of shares 14,160 -- --
Sale and leaseback of vessels:
Additions to vessels under capital leases, net 218,844 68,167 --
Incurrence of obligations under capital leases (218,844) (68,167) --
Exchange of interests in associated companies:
Additions to investments in associated companies 9,902 -- --
Disposals of investments in associated companies (9,902) -- --
Acquisition of subsidiaries and businesses:
Assets acquired, including goodwill 75,949 -- 83,403
Liabilities assumed and incurred 53,470 -- 14,033
Minority interest recorded -- -- 1,152
Exercise of employee share options:
Non-cash proceeds recorded for issuance of shares: 2,685 -- --
27. DISCONTINUED OPERATIONS
During the year ended December 31, 2002, the Company sold a portion of its
dry bulk operations. The portion sold has been recorded as discontinued
operations in accordance with the requirements of FAS 144 adopted on
January 1, 2002. These activities have previously been reported in the dry
bulk carriers segment (See Note 4).
The following table presents the information required by FAS 144 in respect
of discontinued operations:
---------------------------------------------------------------------------
(in thousands of $) 2003 2002 2001
---------------------------------------------------------------------------
Carrying amount of assets disposed of -- 95,548 --
Carrying amount of debt or lease retired -- 70,215 --
Amounts recorded in discontinued operations
Net operating revenues -- 12,505 19,159
Net income (loss) before cumulative effect
of change in accounting principle -- (1,929) 20,280
Gain (loss) on disposal -- (3,109) --
===========================================================================
28. SUBSEQUENT EVENTS
In December 2003, Frontline agreed with its partner, Overseas Shipholding,
Group, Inc ("OSG"), to swap interests in six joint venture companies, which
each own a VLCC. These agreements resulted in Frontline exchanging its
interest in the vessels Dundee, Sakura I and Tanabe for OSG's interest in
the vessels Edinburgh, Ariake and Hakata, thereby increasing its interest
in these vessels to 100.0% each. The exchanges of interests were completed
on February 24, 2004. Frontline received a net cash settlement of $2.3
million in the exchange transaction to reflect the difference in values of
the assets exchanged. These transactions were recorded as a non-monetary
exchange of productive assets. The Company recorded the increases of its
investments at the book value of its investments given up in the exchanges.
A gain on $0.2 million was recognised in connection with the exchange
insofar as it related to the cash element received in the transaction.
On February 17, 2004 the Company's subsidiary Ship Finance International
Ltd entered into a senior secured credit facility agreement with a
syndicate of banks with principal amount $1,058.0 million. This facility
bears interest at LIBOR plus 1.25% payable quarterly in arrears and may be
prepaid without penalty. The principal amortization schedule in respect of
our senior secured credit facility, assuming that it is fully drawn upon,
will be as follows:
Year Amount
(dollars in millions)
---------------------
2004 $93.7
2005 93.7
2006 93.7
2007 93.7
2008 93.7
2009 89.8
At maturity in 2010 499.7
On February 29, 2004, the Board declared a dividend of $4.50 per share,
which was paid on March 29, 2004.
On May 25, 2004, the Company's wholly owned subsidiary SFIL, commenced an
offer (the "Exchange Offer") to exchange all of its outstanding 8 1/2%
senior notes due December 15, 2013, that were issued in a private placement
on December 18, 2003, for an equal principal amount of 8 1/2% senior notes
due December 15, 2013, that are registered under the Securities Act of
1933, as amended (the "Exchange Notes"). The terms of the Exchange Notes
are identical to those of the currently outstanding notes except that the
Exchange Notes are registered under the Securities Act of 1933 and will not
be subject to restrictions on transfer. The Exchange Offer and the right to
withdraw any outstanding notes that have been tendered in the Exchange
Offer are scheduled to expire on July 26, 2004, unless extended by Ship
Finance International.
On May 26, 2004, SFIL, filed a registration statement to register its
common shares under the Securities Exchange Act of 1934. The registration
statement became effective on June 1, 2004 and SFIL's common shares became
eligible for listing on the New York Stock Exchange. The shares were
initially listed on June 17, 2004.
On May 27, 2004 the Company's subsidiary Golden Ocean Group Ltd exercised
its option to acquire all of the shares of Independent Tankers Corporation
("ITC") from Hemen Holdings Ltd, a related party. ITC operates a fleet of
six VLCCs and four Suezmax tankers which are all on long-term charters to
BP and Chevron. Golden Ocean Group Ltd paid Hemen $4.1 million to acquire
the shares and had previously paid Hemen $10.0 million to acquire the
option in 2003. ITC's most recent financial statements are dated March 31,
2004 and they show that ITC has assets of $907.8 million and liabilities of
$916.0 million. Frontline has consolidated the assets and liabilities of
ITC effective December 31, 2003 as disclosed in Note 3, "Recently Issued
Accounting Standards".
On May 28, 2004, the Company announced a partial spin-off of SFIL. Each
Frontline shareholder received one SFIL share for every four Frontline
shares held. The shares were distributed to Frontline's shareholders on
June 16, 2004 and began trading on the New York Stock Exchange under the
ticker symbol SFL.
On May 28, 2004, the Company declared a dividend of $5.00 per share which
was paid on June 16, 2004.