UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(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, 2005
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
OR
[_] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report: N/A
Commission file number 000-50859
TOP TANKERS INC.
(Exact name of Registrant as specified in its charter)
REPUBLIC OF THE MARSHALL ISLANDS
(Jurisdiction of incorporation or organization)
TOP Tankers Inc.
109-111 Messogion Avenue
Politia Centre
Athens 11526
Greece
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.01 per share
Preferred Stock Purchase Rights
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
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.
Common Shares, $0.01 par value 28,080,640 of Common Stock, par
value $0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes |_| No |X|
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Yes |_| No |X|
Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those Sections.
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 whether registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark which financial statement item the Registrant has elected
to follow.
Item 17 |_| Item 18 |X|
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
TABLE OF CONTENTS
Page
ITEM 1. Identity Of Directors, Senior Management And Advisers.............2
ITEM 2. Offer Statistics And Expected Timetable...........................2
ITEM 3. Key Information...................................................2
ITEM 4. Information On The Company.......................................17
ITEM 4A. Unresolved Staff Comments........................................32
ITEM 5. Operating And Financial Review And Prospects.....................32
ITEM 6. Directors, Senior Management And Employees.......................48
ITEM 7. Major Shareholders And Related Party Transactions. ..............52
ITEM 8. Financial Information............................................53
ITEM 9. The Offer And Listing............................................53
ITEM 10. Additional Information...........................................53
ITEM 11. Quantitative And Qualitative Disclosures
About Market Risk................................................65
ITEM 12. Description Of Securities Other Than Equity Securities ..........66
ITEM 13. Defaults, Dividend Arrearages And Delinquencies..................67
ITEM 14. Material Modifications To The Rights Of Security
Holders And Use Of Proceeds......................................67
ITEM 15. Controls And Procedures..........................................67
ITEM 16A. Audit Committee Financial Expert.................................67
ITEM 16B. Code Of Ethics ..................................................67
ITEM 16C. Principal Accountant Fees And Services ..........................68
ITEM 16D. Exemptions From The Listing Standards
For Audit Committees.............................................68
ITEM 16E. Purchases Of Equity Securities By The
Issuer And Affiliated Purchases..................................68
ITEM 17. Financial Statements.............................................69
ITEM 18. Financial Statements.............................................69
ITEM 19. Exhibits........................................................104
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes assumptions, expectations, projections,
intentions and beliefs about future events. These statements are intended as
"forward-looking statements". We caution that assumptions, expectations,
projections, intentions and beliefs about future events may and often do vary
from actual results and the differences can be material.
All statements in this document that are not statements of historical
fact are forward-looking statements. Forward-looking statements include, but are
not limited to, such matters as:
o future operating or financial results;
o statements about planned, pending or recent acquisitions,
business strategy and expected capital spending or operating
expenses, including drydocking and insurance costs;
o statements about crude oil and refined petroleum products tanker
shipping market trends, including charter rates and factors
affecting supply and demand;
o our ability to obtain additional financing;
o expectations regarding the availability of vessel acquisitions;
and
o anticipated developments with respect to pending litigation.
The forward-looking statements in this report 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 TOP Tankers Inc. believes 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, TOP Tankers Inc. cannot assure you that it
will achieve or accomplish these expectations, beliefs or projections described
in the forward looking statements contained in this report.
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 and currencies, general market conditions,
including changes in charter rates and vessel values, failure of a seller to
deliver one or more vessels, failure of a buyer to accept delivery of a vessel,
inability to procure acquisition financing, default by one or more charterers of
our ships, changes in demand for crude oil, refined petroleum products, the
effect of changes in OPEC's petroleum production levels, worldwide crude oil
consumption and storage, changes in demand that may affect attitudes of time
charterers, scheduled and unscheduled drydocking, changes in TOP Tankers Inc.'s
voyage and operating expenses, including bunker prices, dry-docking and
insurance costs, changes in governmental rules and regulations including
requirements for double-hull tankers or actions taken by regulatory authorities,
potential liability from pending or future litigation, domestic and
international political conditions, potential disruption of shipping routes due
to accidents, international hostilities and political events or acts by
terrorists.
When used in this document, the words "anticipate," "estimate,"
"project," "forecast," "plan," "potential," "will," "may," "should," and
"expect" reflect forward-looking statements.
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
Unless the context otherwise requires, as used in this report, the
terms "Company," "we," "us," and "our" refer to TOP Tankers Inc. and all of its
subsidiaries, and "TOP Tankers Inc." refers only to TOP Tankers Inc. and not to
its subsidiaries. We use the term deadweight, or dwt, in describing the size of
vessels. Dwt, expressed in metric tons each of which is equivalent to 1,000
kilograms, refers to the maximum weight of cargo and supplies that a vessel can
carry.
Selected Financial Data
The following table sets forth the selected historical consolidated
financial data and other operating data of TOP Tankers Inc. as of December 31,
2001, 2002, 2003, 2004 and 2005 and for the years ended December 31, 2001, 2002,
2003, 2004 and 2005. The following information should be read in conjunction
with Item 5 "Operating and Financial Review and Prospects" and the consolidated
financial statements and related notes included herein. The following selected
historical consolidated financial data of TOP Tankers Inc. in the table are
derived from our consolidated financial statements and notes thereto which have
been prepared in accordance with U.S. generally accepted accounting principles
("US GAAP") and have been audited for the years ended December 31, 2001, 2002,
2003, 2004 and 2005 by Ernst & Young (Hellas) Certified Auditors Accountants S.A
("Ernst & Young"), independent registered public accounting firm.
Dollars in thousands, except per share
data and average daily results
Year Ended December 31,
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
INCOME STATEMENT DATA
Voyage revenues.................................. $13,344 $11,426 $23,085 $93,829 $244,215
Voyage expenses.................................. 4,413 3,311 5,937 16,898 36,889
Vessel operating expenses........................ 3,345 4,553 8,420 16,859 54,521
General and administrative expenses(1)........... 455 816 1,815 8,579 23,818
Foreign currency (gains) losses, net............. (3) 62 105 75 (68)
Amortization of deferred gain on sale of vessels. - - - - 837
Gain on sale of vessels.......................... - - - 638 10,115
Depreciation and amortization.................... 1,337 2,390 4,203 14,622 53,054
Total operating expenses......................... 9,547 11,132 20,480 56,395 157,262
Operating income................................. 3,797 294 2,605 37,434 86,953
Net interest expense............................. 749 987 1,335 4,720 18,403
Other income (expense), net...................... (1,271) 894 364 80 134
Net income....................................... $1,777 $201 $1,634 $32,794 $68,684
Basic and diluted earnings per share(2).......... $0.30 $0.03 $0.27 $2.54 $2.46
Weighted average basic shares outstanding(2)..... 6,000,000 6,000,000 6,000,000 12,922,449 27,926,771
Weighted average diluted shares outstanding(2)... 6,000,000 6,000,000 6,000,000 12,922,449 27,932,012
Dividends paid per share(2)...................... $0.08 $0.14 $0.10 $0.39 $1.09
BALANCE SHEET DATA, at end of period
Current assets................................... $2,778 $845 $4,862 $141,051 $67,574
Total assets..................................... 18,573 33,474 55,703 539,886 980,897
Current liabilities, including current portion
of long-term debt.............................. 3,387 4,390 9,008 42,811 78,594
Total long-term debt, including current portion.. 9,914 22,875 34,403 194,806 564,103
Stockholders' equity............................. 7,136 8,772 16,319 321,809 369,658
OTHER FINANCIAL DATA
EBITDA(3)........................................ $3,863 $3,578 $7,172 $52,136 $140,141
FLEET DATA
Total number of vessels at end of period......... 2.0 3.0 5.0 15.0 27.0
Average number of vessels(4)..................... 2.0 2.9 4.4 9.6 21.7
Total voyage days for fleet(5)................... 730 961 1,517 3,215 7,436
Total time charter days for fleet................ - 160 543 1,780 5,567
Total spot market days for fleet................. 730 801 974 1,435 1,869
Total calendar days for fleet(6)................. 730 1,042 1,609 3,517 7,905
Fleet utilization(7)............................. 100.0% 92.2% 94.3% 91.4% 94.1%
AVERAGE DAILY RESULTS
Time charter equivalent(8)....................... $12,234 $8,444 $11,304 $23,929 $27,881
Vessel operating expenses(9)..................... 4,582 4,369 5,233 4,794 5,985
General and administrative expenses(10).......... 623 783 1,128 2,439 3,013
Total vessel operating expenses(11).............. 5,205 5,152 6,361 7,233 8,998
(1) We did not pay any compensation to members of our senior management or our
directors in the years ended December 31, 2001, 2002 and 2003. During 2004
and 2005, we paid to the members of our senior management and to our
directors aggregate compensation of approximately $4.4 million and $8.1
million respectively.
(2) All share and per share amounts have been restated to reflect the
retroactive effect of the stock dividend in May 2004.
(3) EBITDA represents earnings before interest and finance costs, net, taxes,
depreciation and amortization. Interest and finance costs, net include gain
or loss from termination of swaps and swap fair value changes. EBITDA is
included in this report because we believe it provides investors with an
understanding of operating performance over comparative periods. EBITDA
should not be considered as a substitute for income from operations, net
income or cash flows from operating activities (all as determined in
accordance with generally accepted accounting principles) for the purpose
of analyzing our operating performance, financial position and cash flows,
as EBITDA is not defined by generally accepted accounting principles. We
presented EBITDA, however, because it is commonly used by certain investors
and analysts to analyze and compare companies on the basis of operating
performance and to determine a company's ability to service and/or incur
debt.
The following table reconciles net income, as reflected in the
consolidated income statements to EBITDA:
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
Net Income................................ $1,777 $201 $1,634 $32,794 $68,684
Depreciation and Amortization............. 1,337 2,390 4,203 14,622 53,054
Interest and finance costs, net........... 749 987 1,335 4,720 18,403
EBITDA.................................... $3,863 $3,578 $7,172 $52,136 $140,141
====== ====== ====== ======= ========
(4) Average number of vessels is the number of vessels that constituted our
fleet for the relevant period, as measured by the sum of the number of days
each vessel was a part of our fleet during the period divided by the number
of calendar days in that period.
(5) Total voyage days for fleet are the total days the vessels were in our
possession for the relevant period net of off hire days associated with
major repairs, drydockings or special or intermediate surveys.
(6) Calendar days are the total days the vessels were in our possession for the
relevant period including off hire days associated with major repairs,
drydockings or special or intermediate surveys.
(7) Fleet utilization is the percentage of time that our vessels were available
for revenue generating voyage days, and is determined by dividing voyage
days by fleet calendar days for the relevant period.
(8) Time charter equivalent, or TCE, is a measure of the average daily revenue
performance of a vessel on a per voyage basis. Our method of calculating
TCE is consistent with industry standards and is determined by dividing net
voyage revenue by voyage days for the relevant time period. Net voyage
revenues are voyage revenues minus voyage expenses. Voyage expenses
primarily consist of port, canal and fuel costs that are unique to a
particular voyage, which would otherwise be paid by the charterer under a
time charter contract, as well as commissions. The following table reflects
calculation of the TCE (all amounts are expressed in thousands of U.S.
dollars, except for Average Daily Time Charter Equivalent amounts and Total
Voyage Days):
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
Dollars in thousands, except average daily results
Voyage revenues................................................. $13,344 $11,426 $23,085 $93,829 $244,215
Less:
Voyage expenses.......................................... (4,413) (3,311) (5,937) (16,898) (36,889)
------- ------- ------- -------- --------
Time charter equivalent revenue.......................... $8,931 $8,115 $17,148 $76,931 $207,326
====== ====== ======= ======= ========
Total voyage days........................................ 730 961 1,517 3,215 7,436
Average Daily Time Charter Equivalent.................... $12,234 $8,444 $11,304 $23,929 $27,881
(9) Daily vessel operating expenses, which includes crew costs, provisions,
deck and engine stores, lubricating oil, insurance, maintenance and
repairs is calculated by dividing vessel operating expenses, excluding
lease payments by fleet calendar days for the relevant time period.
(10) Daily general and administrative expenses are calculated by dividing
general and administrative expenses and stock-based compensation by fleet
calendar days for the relevant time period.
(11) Total vessel operating expenses, or TVOE, is a measurement of our total
expenses associated with operating our vessels. TVOE is the sum of vessel
operating expenses and general and administrative expenses. Daily TVOE is
calculated by dividing TVOE by fleet calendar days for the relevant time
period.
Capitalization and Indebtedness
Not Applicable.
Reasons for the Offer and Use of Proceeds
Not Applicable.
Risk Factors
The following risks relate principally to the industry in which we
operate and our business in general. Any of the risk factors could materially
and adversely affect our business, financial condition or operating results and
the trading price of our common stock.
Additional risks and uncertainties that we are not aware of or that we
currently believe are immaterial may also adversely affect our business,
financial condition, liquidity or results of operation.
Risks Related to Our Industry
The international tanker industry is both cyclical and volatile and
this may lead to reductions and volatility in our charter rates when we
re-charter our vessels, vessel values and our results of operation
The international tanker industry is cyclical with attendant
volatility in charter hire rates and industry profitability. The degree of
charter hire volatility within the tanker industry has varied widely. If we
enter into a charter when charter rates are low, our revenues and earnings will
be adversely affected. In addition, a decline in charter hire rates likely will
cause the value of our vessels to decline. The degree of charter rate volatility
among different types of tankers has varied widely. Although our fleet
deployment strategy may limit our exposure, we are nonetheless exposed to
changes in spot rates for tankers and such changes may affect our earnings and
the value of our vessels at any given time.
The factors affecting the supply and demand for our tankers, are
outside our control and are unpredictable. The nature, timing, direction and
degree of changes in industry conditions are also unpredictable. Factors that
influence demand for tanker capacity include:
o demand for refined petroleum products and crude oil;
o changes in crude oil production and refining capacity;
o the location of regional and global crude oil refining facilities
that affect the distance that refined petroleum products and
crude oil are to be moved by sea;
o global and regional economic and political conditions;
o developments in international trade;
o changes in seaborne and other transportation patterns, including
changes in the distances over which cargoes are transported;
o environmental and other regulatory developments;
o currency exchange rates; and
o weather.
The factors that influence the supply of oceangoing vessel capacity
include:
o the number of newbuilding deliveries;
o the scrapping rate of older vessels;
o the price of steel;
o changes in environmental and other regulations that may limit the
useful lives of vessels;
o port or canal congestion;
o the number of vessels that are out of service; and
o changes in global crude oil production.
The international tanker industry has experienced historically high
charter rates and vessel values in the recent past and there can be no assurance
that these historically high charter rates and vessel values will be sustained
Charter rates in the tanker industry recently have been near
historically high levels. We anticipate that future demand for our vessels, and
in turn our future charter rates, will be dependent upon continued economic
growth in the world's economy as well as seasonal and regional changes in demand
and changes in the capacity of the world's fleet. We believe that these charter
rates are the result of continued economic growth in the world economy that
exceeds growth in global vessel capacity. There can be no assurance that
economic growth will not stagnate or decline leading to a decrease in vessel
values and charter rates. A decline in charter rates could have a material
adverse effect on our business, financial condition, results of operation and
ability to pay dividends.
If we violate environmental laws or regulations, the resulting
liability may adversely affect our earnings and financial condition
Our business and the operation of our vessels are materially affected
by government regulation in the form of international conventions, national,
state and local laws and regulations in force in the jurisdictions in which the
vessels operate, as well as in the country or countries of their registration,
including those governing oil spills, discharges to air and water, ballast water
management, and the handling and disposal of hazardous substances and wastes.
Because such conventions, laws and regulations are often revised, we cannot
predict the ultimate cost of complying with such conventions, laws and
regulations or the impact thereof on the value or useful life of our vessels.
Additional conventions, laws and regulations may be adopted which could limit
our ability to do business or increase the cost of our doing business and which
may materially and adversely affect our operations. We are required by various
governmental and quasi-governmental agencies to obtain certain permits, licenses
and certificates with respect to our operations.
As a result of accidents, such as the oil spill in November 2002
relating to the loss of the m.t. Prestige, a 26-year old single- hull product
tanker unrelated to us, we believe that regulation of the shipping industry will
continue to become more stringent and more expensive for us and our competitors.
Substantial violations of applicable requirements or a catastrophic release from
one of our vessels could have a materially adverse impact on our financial
condition, results of operations and ability to pay dividends.
The operation of our vessels is affected by the requirements set forth
in the ISM Code. The ISM Code requires shipowners and bareboat charterers to
develop and maintain an extensive "Safety Management System" that includes the
adoption of a safety and environmental protection policy setting forth
instructions and procedures for safe operation and describing procedures for
dealing with emergencies. The failure of a shipowner or bareboat charterer to
comply with the ISM Code may subject such party to increased liability, may
decrease available insurance coverage for the affected vessels and may result in
a denial of access to, or detention in, certain ports. Currently, each of the
vessels in our fleet is ISM Code-certified. However, we cannot assure you that
such certification will be maintained indefinitely.
Although the United States is not a party thereto, many countries have
ratified and follow the liability scheme adopted by the IMO and set out in the
International Convention on Civil Liability for Oil Pollution Damage, 1969, as
amended, or CLC, and the Convention for the Establishment of an International
Fund for Oil Pollution of 1971, as amended. Under these conventions, a vessel's
registered owner is strictly liable for pollution damage caused on the
territorial waters of a contracting state by discharge of oil, subject to
certain complete defenses. Many of the countries that have ratified the CLC have
increased the liability limits through a 1992 Protocol to the CLC. The right to
limit liability is also forfeited under the CLC 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 contracting
states must provide evidence of insurance covering the limited liability of the
owner. In jurisdictions where the CLC has not been adopted, various legislative
schemes or common law govern, and liability is imposed either on the basis of
fault or in a manner similar to the CLC.
The United States Oil Pollution Act of 1990, or OPA, established an
extensive regulatory and liability regime for the protection and cleanup of the
environment from oil spills. OPA affects all owners and operators whose vessels
trade in the United States, its territories and possessions or whose vessels
operate in United States waters. OPA allows for potentially unlimited liability
without regard to fault of vessel owners, operators and bareboat charterers for
all containment and clean-up costs and other damages arising from discharges or
threatened discharges of oil from their vessels, including bunkers (fuel oils),
in United States waters. OPA also expressly permits individual states to impose
their own liability regimes with regard to hazardous materials and oil pollution
materials occurring within their boundaries.
We currently maintain, for each of our vessels, pollution liability
coverage insurance of $1 billion per incident. If the damages from a
catastrophic spill exceeded our insurance coverage, it could have a material
adverse effect on our business, financial condition, results of operations and
ability to pay dividends.
Because the market value of our vessels may fluctuate significantly,
we may incur losses when we sell vessels or we may be required to write down
their carrying value, which will adversely affect our earnings
The fair market value of our vessels may increase and decrease
depending on the following factors:
o general economic and market conditions affecting the
international tanker 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 vessels at a time when vessel prices have fallen and before
an impairment adjustment is made to our financial statements, the sale may be at
less than the vessel's carrying amount in our financial statements or if vessel
prices have fallen below the carrying amount in our financial statements we may
be required to write down the carrying amount, with the result that we shall
incur a loss and a reduction in earnings.
An increase in the supply of vessel capacity without an increase in
demand for vessel capacity would likely cause charter rates and vessel values to
decline, which could have a material adverse effect on our revenues and
profitability
The supply of vessels generally increases with deliveries of new
vessels and decreases with the scrapping of older vessels, conversion of vessels
to other uses, such as floating production and storage facilities, and loss of
tonnage as a result of casualties. Currently there is significant new building
activity with respect to virtually all sizes and classes of vessels. If the
amount of tonnage delivered exceeds the number of vessels being scrapped, vessel
capacity will increase. If the supply of vessel capacity increases and the
demand for vessel capacity does not, the charter rates paid for our vessels as
well as the value of our vessels could materially decline. Such a decline in
charter rates and vessel values would likely have a material adverse effect on
our revenues and profitability.
Our operating results from our tankers are subject to seasonal
fluctuations, which may adversely affect our operating results and ability to
pay dividends
We operate our tankers in markets that have historically exhibited
seasonal variations in demand and, therefore, charter rates. This seasonality
may result in quarter-to-quarter volatility in our operating results. The tanker
sector is typically stronger in the fall and winter months in anticipation of
increased oil consumption of oil and petroleum in the northern hemisphere during
the winter months. Our Handymax tankers carry, in part, refined petroleum
products such as gasoline, jet fuel, kerosene, naphtha and heating oil. As a
result, our revenues from our tankers may be weaker during the fiscal quarters
ended June 30 and September 30, and, conversely, revenues may be stronger in
fiscal quarters ended December 31 and March 31. This seasonality could
materially affect our operating results and cash available for dividends in the
future.
Compliance with safety and other vessel requirements imposed by
classification societies may be very costly and may adversely affect our
business
The hull and machinery of every commercial vessel must be classed by a
classification society authorized by its country of registry. The classification
society certifies that a vessel is safe and seaworthy in accordance with the
applicable rules and regulations of the country of registry of the vessel and
the Safety of Life at Sea Convention. Our vessels are currently enrolled with
the American Bureau of Shipping, Lloyd's Register of Shipping or Det Norske
Veritas, each of which is a member of the International Association of
Classification Societies.
A vessel must undergo annual surveys, intermediate surveys and special
surveys. In lieu of a special survey, a vessel's machinery may be placed on a
continuous survey cycle, under which the machinery would be surveyed
periodically over a five-year period. Our vessels are on special survey cycles
for hull inspection and continuous survey cycles for machinery inspection. Every
vessel is also required to be dry docked every two to three years for inspection
of the underwater parts of such vessel.
If any vessel does not maintain its class and/or fails any annual
survey, intermediate survey or special survey, the vessel will be unable to
trade between ports and will be unemployable, which would negatively impact our
revenues.
World events could adversely affect our results of operations and
financial condition
Terrorist attacks such as the attacks on the United States on
September 11, 2001, the bombings in Spain on March 11, 2004 and in London on
July 7, 2005 and the continuing response of the United States to these attacks,
as well as the threat of future terrorist attacks in the United States or
elsewhere, continue to cause uncertainty in the world financial markets and may
affect our business, operating results and financial condition. The continuing
conflict in Iraq may lead to additional acts of terrorism and armed conflict
around the world, which may contribute to further economic instability in the
global financial markets. These uncertainties could also adversely affect our
ability to obtain any additional financing or, if we are able to obtain
additional financing, to do so on terms favorable to us. In the past, political
conflicts have also resulted in attacks on vessels, mining of waterways and
other efforts to disrupt international shipping, particularly in the Arabian
Gulf region. Acts of terrorism and piracy have also affected vessels trading in
regions such as the South China Sea. Any of these occurrences could have a
material adverse impact on our business, financial condition, results of
operations and ability to pay dividends.
Increased inspection procedures and tighter import and export controls
could increase costs and disrupt our business
International shipping is subject to various security and customs
inspection and related procedures in countries of origin and destination.
Inspection procedures can result in the seizure of contents of our vessels,
delays in the loading, offloading or delivery and the levying of customs duties,
fines or other penalties against us.
It is possible that changes to inspection procedures could impose
additional financial and legal obligations on us. Furthermore, changes to
inspection procedures could also impose additional costs and obligations on our
customers and may, in certain cases, render the shipment of certain types of
cargo uneconomical or impractical. Any such changes or developments may have a
material adverse effect on our business, financial condition, results of
operations and ability to pay dividends.
Risks Related to Our Business
If we fail to manage our planned growth properly, we may not be able
to successfully expand our market share
We intend to continue to grow our fleet. Our growth will depend on:
o locating and acquiring suitable vessels;
o identifying and consummating acquisitions or joint ventures;
o integrating any acquired business successfully with our existing
operations;
o enhancing our customer base;
o managing expansion; and
o obtaining required financing.
Growing any business by acquisition presents numerous risks such as
undisclosed liabilities and obligations, difficulty in obtaining additional
qualified personnel, managing relationships with customers and suppliers and
integrating newly acquired operations into existing infrastructures. We cannot
give any assurance that we will be successful in executing our growth plans or
that we will not incur significant expenses and losses in connection therewith.
A decline in the market value of our vessels could lead to a default
under our loan agreements and the loss of our vessels
The loan agreements under our credit facilities contain a covenant
that requires the aggregate market value of the mortgaged vessels to at all
times exceed 140% of the aggregate outstanding principal amount of the loan. If
the market value of our fleet declines, we may be in default of this loan
covenant and we may not be able to refinance our debt or obtain additional
financing. Also, declining vessel values could cause us to breach some of the
covenants under the financing agreements relating to our indebtedness. If we are
unable to pledge additional collateral, our lenders could accelerate our debt
and foreclose on our fleet.
Servicing future debt would limit funds available for other purposes
such as the payment of dividends
To finance our fleet expansion program, we incurred secured
indebtedness. We must dedicate a portion of our cash flow from operations to pay
the principal and interest on our indebtedness. These payments limit funds
otherwise available for working capital, capital expenditures and other
purposes. We will need to take on additional indebtedness as we expand our
fleet, which could increase our ratio of debt to equity. The need to service our
debt may limit funds available for other purposes, including the payment of
dividends, and our inability to service debt could lead to acceleration of our
debt and foreclosure on our fleet.
Our loan agreements contain restrictive covenants that may limit our
liquidity and corporate activities
Our loan agreements impose operating and financial restrictions on us.
These restrictions may limit our ability to:
o incur additional indebtedness;
o create liens on our assets;
o sell capital stock of our subsidiaries;
o make investments;
o engage in mergers or acquisitions;
o pay dividends;
o make capital expenditures;
o change the management of our vessels or terminate or materially
amend the management agreement relating to each vessel; and
o sell our vessels.
Therefore, we may need to seek permission from our lenders in order to
engage in some corporate actions. Our lenders' interests may be different from
ours, and we cannot guarantee that we will be able to obtain our lenders'
permission when needed. This may prevent us from taking actions that are in our
best interest.
We depend on third party managers to manage our fleet
As of December 31, 2005, we have subcontracted the day to day
technical management, crewing and certain purchasing functions of all vessels in
our fleet to third party managers, with the exception of three vessels for which
only the crewing has been assigned to third party managers. Further, we may
subcontract the technical management of vessels acquired in the future to other
third party technical management companies. While our wholly-owned subsidiary,
TOP Tanker Management, has direct oversight responsibility for these third party
managers, the loss of their services or their failure to perform their
obligations could materially and adversely affect the results of our operations.
Although we may have rights against these managers if they default on their
obligations, you will have no recourse against these parties. Further, we expect
that we will need to seek approval from our lenders to change these third party
managers.
Our ability to obtain additional debt financing may be dependent on
the performance of our then existing charters and the creditworthiness of our
charterers
The actual or perceived credit quality of our charterers, and any
defaults by them, may materially affect our ability to obtain the additional
capital resources that we will require to purchase additional vessels or may
significantly increase our costs of obtaining such capital. Our inability to
obtain additional financing at all or at a higher than anticipated cost may
materially affect our results of operation and our ability to implement our
business strategy.
As we expand our business, we will need to improve our operations and
financial systems and staff; if we cannot improve these systems or recruit
suitable employees, our performance may be adversely affected
Our current operating and financial systems may not be adequate as we
implement our plan to expand the size of our fleet, and our attempts to improve
those systems may be ineffective. While we have not experienced any difficulty
in recruiting to date, we cannot guarantee that we will be able to continue to
hire suitable employees as we expand our fleet. If we are unable to operate our
financial and operations systems effectively or to recruit suitable employees as
we expand our fleet, our performance may be adversely affected.
Our earnings may be adversely affected if we do not successfully
employ our vessels
We seek to deploy our vessels both on time charters and in the spot
market in a manner that will optimize our earnings. As of December 31, 2005, 19
of our vessels were contractually committed to time charters. Although these
time charters provide relatively steady streams of revenue as well as a portion
of the revenues generated by the charterer's deployment of the vessels in the
spot market or otherwise, our tankers committed to time charters may not be
available for spot voyages during an upturn in the tanker industry cycle, when
spot voyages might be more profitable. The spot market is highly competitive,
and spot market charter rates may fluctuate dramatically based on the supply and
demand for the major commodities internationally carried by water and other
factors. We cannot assure you that future spot market voyage charters will be
available at rates that will allow us to operate our vessels profitably. As of
December 31, 2005, the remainders of our vessels were trading in the spot
market. If we cannot continue to employ these vessels on time charters or trade
them in the spot market profitably, our results of operations and operating cash
flow may suffer.
In the highly competitive international tanker market, we may not be
able to compete for charters with new entrants or established companies with
greater resources
We employ our vessels in a highly competitive market that is capital
intensive and highly fragmented. Competition arises primarily from other vessel
owners, including major oil companies as well as independent tanker companies,
some of whom have substantially greater resources than we do. Competition for
the transportation of oil and refined petroleum products can be intense and
depends on price, location, size, age, condition and the acceptability of the
vessel and its operators to the charterers. Due in part to the highly fragmented
market, competitors with greater resources could enter and operate larger fleets
through consolidations or acquisitions that may be able to offer better prices
and fleets.
We depend upon a few significant customers for a large part of our
revenues. The loss of one or more of these customers could adversely affect our
financial performance
We have historically derived a significant part of our revenue from a
small number of charterers. In 2005, approximately 52% of our revenue was
derived from 2 charterers; in 2004, approximately 44% of our revenue was derived
from 2 charterers; in 2003, approximately 47% of our revenue was derived from 2
charterers and, in 2002, approximately 65% of our revenue was derived from 3
charterers. During 2005, under time charter contracts, Glencore and Vitol
provided 32% and 20% of our revenues, respectively. The occurrence of any
problems with these charterers may adversely affect our revenues.
We may be unable to attract and retain key management personnel and
other employees in the international tanker industry, which may negatively
affect the effectiveness of our management and our results of operations
Our success depends to a significant extent upon the abilities and
efforts of our management team. We have entered into employment contracts with
our President, Chief Executive Officer and Director, Evangelos Pistiolis, our
Chief Financial Officer and Director, Stamatios Tsantanis and our Executive Vice
President and Director, Vangelis Ikonomou. Our success will depend upon our
ability to hire and retain key members of our management team. The loss of any
of these individuals could adversely affect our business prospects and financial
condition. Difficulty in hiring and retaining personnel could adversely affect
our results of operations. We do not intend to maintain "key man" life insurance
on any of our officers.
Risks involved with operating ocean going vessels could affect our
business and reputation, which would adversely affect our revenues and stock
price
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 mechanical failure, human error, war, terrorism, political action
in various countries, labor strikes or adverse weather
conditions.
Any of these circumstances or events could result in death or injury
to persons, loss of revenues or property, environmental damage, higher insurance
rates, damage to our customer relationships, delay or rerouting, and 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 vessel operator. If one of our vessels were involved in an accident
with the potential risk of environmental contamination, the resulting media
coverage could have a material adverse effect on our business, results of
operations, cash flows, financial condition and ability to pay dividends.
Rising fuel prices may adversely affect our profits
Fuel is a significant, if not the largest, operating expense for many
of our shipping operations when our vessels are not under period charter. The
price and supply of fuel is unpredictable and fluctuates based on events outside
our control, including geopolitical developments, supply and demand for oil and
gas, actions by OPEC and other oil and gas producers, war and unrest in oil
producing countries and regions, regional production patterns and environmental
concerns. As a result, an increase in the price of fuel may adversely affect our
profitability. Further, fuel may become much more expensive in future, which may
reduce the profitability and competitiveness of our business versus other forms
of transportation, such as truck or rail.
Our vessels may suffer damage and we may face unexpected drydocking
costs, which could affect our cash flow and financial condition
If our vessels suffer damage, they may need to be repaired at a
drydocking facility. The costs of drydock repairs are unpredictable and can be
substantial. We may have to pay drydocking costs that our insurance does not
cover. The inactivity of these vessels while they are being repaired and
repositioned, as well as the actual cost of these repairs, would decrease our
earnings. In addition, space at drydocking facilities is sometimes limited and
not all drydocking facilities are conveniently located. We may be unable to find
space at a suitable drydocking facility or we may be forced to move to a
drydocking facility that is not conveniently located to our vessels' positions.
The loss of earnings while our vessels are forced to wait for space or to
relocate to drydocking facilities that are farther away from the routes on which
our vessels trade would decrease our earnings.
Purchasing and operating previously owned, or secondhand, vessels may
result in increased operating costs and vessels off-hire, which could adversely
affect our earnings
While we inspect previously owned, or secondhand, vessels prior to
purchase, this does not normally provide us with the same knowledge about their
condition and cost of any required (or anticipated) repairs that we would have
had if these vessels had been built for and operated exclusively by us. Also, we
do not receive the benefit of warranties from the builders if the vessels we buy
are older than one year.
In general, the costs to maintain a vessel in good operating condition
increase with the age of the vessel. Older vessels are typically less fuel
efficient and more costly to maintain than more recently constructed vessels due
to improvements in engine technology. Cargo insurance rates increase with the
age of a vessel, making older vessels less desirable to charterers.
Governmental regulations, safety or other equipment standards related
to the age of vessels may require expenditures for alterations, or the addition
of new equipment, to our vessels and may restrict the type of activities in
which the vessels may engage. We cannot assure you that, as our vessels age,
market conditions will justify those expenditures or enable us to operate our
vessels profitably during the remainder of their useful lives. If we sell
vessels, we are not certain that the price for which we sell them will equal at
least their carrying amount at that time.
We may not have adequate insurance to compensate us if we lose our
vessels
We procure insurance for our fleet against those types of risks
commonly insured against by vessel owners and operators. These insurances
include hull and machinery insurance, protection and indemnity insurance, which
includes environmental damage and pollution insurance coverage, war risk
insurance and insurance against loss of hire, which covers business
interruptions that result in the loss of use of a vessel. While we currently
have loss of hire insurance that covers, subject to annual coverage limits, all
of the vessels in our fleet, we may not purchase loss of hire insurance to cover
newly acquired vessels. 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. The 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.
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 the United States. Changing economic, political and governmental
conditions in the countries where we are engaged in business or where our
vessels are registered affect us. In the past, political conflicts, particularly
in the Arabian Gulf, resulted in attacks on tankers, mining of waterways and
other efforts to disrupt shipping in the area. Terrorist attacks such as the
attacks on the United States on September 11, 2001 and the United States'
continuing response to these attacks, as well as the threat of future terrorist
attacks, continues to cause uncertainty in the world commercial markets,
including the energy markets. The recent conflict in Iraq may lead to additional
acts of terrorism, armed conflict and civil disturbance around the world, which
may contribute to further instability in the oil markets. Terrorist attacks,
such as the attack on the M/T Limburg in October 2002, may also negatively
affect our operations 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.
Maritime claimants could arrest our vessels, 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 large sums 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.
Certain existing stockholders, who hold approximately 16.4% of our
common stock, may have the power to exert control over us, which may limit your
ability to influence our actions
Sovereign Holdings Inc., or Sovereign Holdings, a company that is
wholly owned by our President, Chief Executive Officer and Director, Evangelos
J. Pistiolis, and Kingdom Holdings Inc., or Kingdom Holdings, a company owned
primarily by adult relatives of our President, Chief Executive Officer and
Director, Evangelos J. Pistiolis own, directly or indirectly, approximately
16.4% of the outstanding shares of our common stock. While these shareholders
have no agreement, arrangement or understanding relating to the voting of their
shares of common stock, due to the number of shares of our common stock they
own, they have the power to exert considerable influence over our actions.
Investor confidence and the market price of our common stock may be
adversely impacted if we are unable to comply with Section 404 of the
Sarbanes-Oxley Act of 2002.
We will become subject to Section 404 of the Sarbanes-Oxley Act of
2002, which will require us to include in our annual report on Form 20-F our
management's report on, and assessment of the effectiveness of, our internal
controls over financial reporting. In addition, our independent registered
public accounting firm will be required to attest to and report on management's
assessment of the effectiveness of our internal controls over financial
reporting. These requirements will first apply to our annual report for the
fiscal year ending December 31, 2006. If we fail to achieve and maintain the
adequacy of our internal controls over financial reporting, we will not be in
compliance with all of the requirements imposed by Section 404. Any failure to
comply with Section 404 could result in an adverse reaction in the financial
marketplace due to a loss of investor confidence in the reliability of our
financial statements, which ultimately could harm our business and could
negatively impact the market price of our common stock. We believe the total
cost of our initial compliance and the future ongoing costs of complying with
these requirements may be substantial.
We may have to pay tax on United States source income, which would
reduce our earnings
Under the United States Internal Revenue Code of 1986, or the Code,
50% of the gross shipping income of a vessel owning or chartering corporation,
such as ourselves and our subsidiaries, that is attributable to transportation
that begins or ends, but that does not begin and end, in the United States is
characterized as United States source shipping income and such income is subject
to a 4% United States federal income tax without allowance for deduction, unless
that corporation qualifies for exemption from tax under Section 883 of the Code.
We expect that we and each of our subsidiaries will qualify for this
statutory tax exemption and we will take this position for United States federal
income tax return reporting purposes. However, there are factual circumstances
beyond our control that could cause us to lose the benefit of this tax exemption
and thereby become subject to United States federal income tax on our United
States source income. Therefore, 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 exemption under
Section 883 for any taxable year, we or our subsidiaries would be subject for
those years to a 4% United States federal income tax on our U.S. source shipping
income. The imposition of this taxation could have a negative effect on our
business.
U.S. tax authorities could treat us as a "passive foreign investment
company," which could have adverse U.S. federal income tax consequences to U.S.
holders
A foreign corporation will be treated as a "passive foreign investment
company," or PFIC, for U.S. federal income tax purposes if either (1) at least
75% of its gross income for any taxable year consists of certain types of
"passive income" or (2) at least 50% of the average value of the corporation's
assets produce or are held for the production of those types of "passive
income." For purposes of these tests, "passive income" includes dividends,
interest, and gains from the sale or exchange of investment property and rents
and royalties other than rents and royalties which are received from unrelated
parties in connection with the active conduct of a trade or business. For
purposes of these tests, income derived from the performance of services does
not constitute "passive income." U.S. shareholders of a PFIC are subject to a
disadvantageous U.S. federal income tax regime with respect to the income
derived by the PFIC, the distributions they receive from the PFIC and the gain,
if any, they derive from the sale or other disposition of their shares in the
PFIC.
Based on our proposed method of operation, we do not believe that we
will be a PFIC with respect to any taxable year. In this regard, we intend to
treat the gross income we derive or are deemed to derive from our time
chartering activities as services income, rather than rental income.
Accordingly, we believe that our income from our time chartering activities does
not constitute "passive income," and the assets that we own and operate in
connection with the production of that income do not constitute passive assets.
There is, however, no direct legal authority under the PFIC rules
addressing our proposed method of operation. Accordingly, no assurance can be
given that the U.S. Internal Revenue Service, or IRS, or a court of law will
accept our position, and there is a risk that the IRS or a court of law could
determine that we are a PFIC. Moreover, no assurance can be given that we would
not constitute a PFIC for any future taxable year if there were to be changes in
the nature and extent of our operations.
If the IRS were to find that we are or have been a PFIC for any
taxable year, our U.S. shareholders will face adverse U.S. tax consequences.
Under the PFIC rules, unless those shareholders make an election available under
the Code (which election could itself have adverse consequences for such
shareholders, as discussed below under "Tax Considerations--U.S. Federal Income
Taxation of U.S. Holders"), such shareholders would be liable to pay U.S.
federal income tax at the then prevailing income tax rates on ordinary income
plus interest upon excess distributions and upon any gain from the disposition
of our common stock, as if the excess distribution or gain had been recognized
ratably over the shareholder's holding period of our common stock. See "Tax
Considerations--U.S. Federal Income Taxation of U.S. Holders" for a more
comprehensive discussion of the U.S. federal income tax consequences to U.S.
shareholders if we are treated as a PFIC.
Because we generate all of our revenues in U.S. dollars but incur a
portion of our expenses in other currencies, exchange rate fluctuations could
hurt our results of operations
We generate all of our revenues in U.S. dollars but incur
approximately 9% of our expenses in currencies other than U.S. dollars. This
difference could lead to fluctuations in net income due to changes in the value
of the U.S. dollar relative to the other currencies, in particular the Euro.
Expenses incurred in foreign currencies against which the U.S. dollar falls in
value can increase, decreasing our revenues. For example, in the 12 months ended
December 31, 2005, the value of the U.S. dollar increased by 13.23% as compared
to the Euro. We have not hedged these risks. Our operating results could suffer
as a result.
We are incorporated in the Republic of the Marshall Islands, which
does not have a well-developed body of corporate law
Our corporate affairs are governed by our Articles of Incorporation
and Bylaws and by the Marshall Islands Business Corporations Act, or BCA. The
provisions of the BCA resemble provisions of the corporation laws of a number of
states in the United States. However, there have been few judicial cases in the
Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary
responsibilities of directors under the law of the Republic of the Marshall
Islands are not as clearly established as the rights and fiduciary
responsibilities of directors under statutes or judicial precedent in existence
in certain United States jurisdictions. Security holder rights may differ as
well. While the BCA does specifically incorporate the non-statutory law, or
judicial case law, of the State of Delaware and other states with substantially
similar legislative provisions, our security holders may have more difficulty in
protecting their interests in the face of actions by the management, directors
or controlling shareholders than would security holders of a corporation
incorporated in a United States jurisdiction.
ITEM 4. INFORMATION ON THE COMPANY
History and Development of the Company
Our predecessor, Ocean Holdings Inc. was formed in January 2000, under
the laws of Marshall Islands and renamed to TOP Tankers Inc. in May 2004. On
July 23, 2004, our common stock was listed on the Nasdaq National Market, under
the symbol "TOPT", in connection with our initial public offering. The net
proceeds of our initial public offering, approximately $124.6 million, were
primarily used to finance the acquisition of 10 vessels, comprised of 8
ice-class double-hull Handymax tankers and 2 double-hull Suezmax tankers. The
total cost of the acquisition was approximately $251.3 million. The address of
our principal executive office is 109-111 Messogion Avenue, Politia Centre,
Athens 11526 Greece. The telephone number of our registered office is + 30 210
6978000.
On November 5, 2004, we completed a follow-on offering of our common
stock. The net proceeds of our follow-on offering, approximately $139.5 million,
were used primarily to finance the acquisition of 5 double-hull Suezmax tankers.
The total cost of the acquisition was approximately $249.3 million.
During 2005, we acquired 5 double-hull Handymax and 4 double-hull
Suezmax tankers at a total cost of $453.4 million and sold 1 double-hull
Handymax and our last single-hull Handysize tanker. We finally sold and
leased-back 5 double-hull Handymax tankers for a period of 7 years.
We are a provider of international seaborne transportation services,
carrying refined petroleum products and crude oil. As of December 31, 2005, our
fleet consisted of 27 vessels (including 5 vessels sold and leased-back),
comprised of 14 double-hull Handymax product tankers and 13 double-hull Suezmax
tankers, with a total cargo carrying capacity of approximately 2.6 million
deadweight tons, or dwt. We actively manage the deployment of our fleet between
spot market voyage charters, which generally last from several days to several
weeks, and time charters, which can last up to several years.
Following the agreement to sell and lease back 9 double-hull Suezmax
and 4 double-hull Handymax tankers for a period of 5 to 7 years, in early April
2006, we own and operate a fleet of 27 vessels, consisting of 9 tankers fully
owned and 18 tankers chartered-in and fully controlled.
Business Overview
Business Strategy
Our business strategy is focused on building and maintaining enduring
relationships with participants in the international tanker industry, including
leading charterers, oil companies, oil traders, brokers, suppliers,
classification societies, insurers and others. We seek to continue to create
long-term value principally by acquiring and operating high quality double-hull,
refined petroleum products and crude oil tankers.
We believe we have established a reputation in the international ocean
transport industry for operating and maintaining our fleet with high standards
of performance, reliability and safety. We have assembled a management team
comprised of executives who have extensive experience operating large and
diversified fleets of tankers and who have strong ties to a number of national,
regional and international oil companies, charterers and traders.
Our Fleet
We are a provider of international seaborne transportation services,
carrying refined petroleum products and crude oil. As of December 31, 2005, our
fleet consisted of 27 vessels (including 5 vessels sold and leased-back),
comprised of 14 double-hull Handymax product tankers and 13 double-hull Suezmax
tankers, with a total cargo carrying capacity of approximately 2.6 million dwt.
We actively manage the deployment of our fleet between spot market voyage
charters, which generally last from several days to several weeks, and time
charters, which can last up to several years. As of December 31, 2005, the
vessels in our fleet have a total cargo capacity of approximately 2.6 million
dwt. Over 88.8% of our fleet by dwt were sister ships, which enhances the
revenue generating potential of our fleet by providing us with operational and
scheduling flexibility. Sister ships also increase our operating efficiencies
because technical knowledge can be applied to all vessels in a series and
creates cost efficiencies and economies of scale when ordering spare parts,
supplying and crewing these vessels.
During 2005, we acquired 5 double-hull Handymax and 4 double-hull
Suezmax tankers at a total cost of $453.4 million and sold 1 double-hull
Handymax and our last single-hull Handysize tanker. We sold and leased-back 5
double-hull Handymax tankers for a period of 7 years.
We recently agreed to sell and lease back 9 double-hull Suezmax and 4
double-hull Handymax tankers for a period of 5 to 7 years. We currently own and
operate a fleet of 27 vessels, consisting of 9 tankers fully owned and 18
tankers chartered-in and fully controlled.
Chartering of the Fleet
As of December 31, 2005 all 14 of our Handymax tankers operated under
time charter contracts expiring from 2007 to 2010. Four of our Handymax tankers
were deployed under 60 month time charter contracts that have a base rate for
the first two years of $14,500 per day. From the third year until expiration of
the contracts, base rate will change to $14,000 per day. Should the vessels
generate revenues, on a quarterly basis, in excess of the base rate, we will
receive 100% of the first $500 per day in excess of the base rate. Thereafter we
will receive 50% of the excess. Five of our Handymax tankers were deployed under
30 month time charter contracts that have a base rate of $14,250 per day until
December 31, 2005 and $13,250 per day until expiration of the contracts. Should
the vessels generate revenues, on a quarterly basis, in excess of the base rate,
we will receive 100% of the first $250 per day in excess of the base rate until
December 31, 2005 and $1,250 per day until expiration of the contracts.
Thereafter we will receive 50% of the excess. Four of our Handymax tankers were
deployed under 60 month time charter contracts that have a base rate for the
first year of $17,000 per day. From the second year until expiration of the
contracts, base rate will change to $16,250 per day. Should the vessels generate
revenues, on a quarterly basis, in excess of the base rate, in the first year we
will receive 30% of the excess and from the second year until expiration, we
will receive 100% of the first $1,000 per day in excess of the base rate and 50%
of the excess thereafter. One of our Handymax tankers was deployed under 60
month time charter contract that has a base rate of $18,000 per day. Should the
vessel generate revenue, on a quarterly basis, in excess of the base rate, in
the first year we will receive 35% of the excess and from the second year until
expiration, we will receive 100% of the first $1,000 per day in excess of the
base rate and 50% of the excess thereafter. Our Suezmax tankers operated on the
spot market.
Management of the Fleet
Since July 1, 2004, TOP Tanker Management, our wholly-owned
subsidiary, has been responsible for all of the chartering, operational and
technical management of our fleet, including crewing, maintenance, repair,
capital expenditures, drydocking, vessel taxes, maintaining insurance and other
vessel operating expenses under management agreements with our vessel owning
subsidiaries. Prior to July 1, 2004, the operations of our fleet were managed by
Primal Tankers Inc., which was wholly-owned by the father of our Chief Executive
Officer.
As of December 31, 2005, TOP Tanker Management has subcontracted the
day to day technical management and crewing of 6 Handymax tankers and 12 Suezmax
tankers to V.Ships Management Limited, a ship management company operating in
Scotland, Norway and Switzerland and has subcontracted the day to day technical
management and crewing of 5 Handymax tankers and 1 Suezmax tanker to Hanseatic
Shipping Company Ltd, a ship management company operating in Cyprus. TOP Tanker
Management has subcontracted the crewing of 2 Handymax tankers to V. Ships
Management Limited, a ship management company operating in Greece and has
subcontracted the crewing of 1 Handymax tanker to Hanseatic Shipping Company
Ltd, a ship management company operating in Cyprus. TOP Tanker Management pays a
monthly fee of $10,000 per vessel for the 18 vessels under its agreements with
V. Ships Management and a monthly fee of $7,083.33 per vessel for the 6 vessels
under its agreements with Hanseatic Shipping Company.
Crewing and Employees
As of December 31, 2004 and 2005, we had 3 employees, while our
wholly-owned subsidiary, TOP Tanker Management, employed approximately 35
employees in 2004 and 58 employees in 2005, all of whom are shore-based. TOP
Tanker Management ensures that all seamen have the qualifications and licenses
required to comply with international regulations and shipping conventions, and
that our vessels employ experienced and competent personnel.
V. Ships Management and Hanseatic Shipping Company are responsible for
the crewing of the fleet. Such responsibilities include training,
transportation, compensation and insurance of the crew.
All of the employees of TOP Tanker Management are subject to a general
collective bargaining agreement covering employees of shipping agents. These
agreements set industry-wide minimum standards. We have not had any labor
problems with our employees under this collective bargaining agreement and
consider our workplace and labor union relations to be good.
Environmental and Other Regulation
Government regulation significantly affects the ownership and
operation of our tankers. Our fleet is subject to international conventions,
national, state and local laws and regulations in force in the countries in
which our vessels may operate or are registered.
A variety of governmental and private entities subject our vessels to
both scheduled and unscheduled inspections. These entities include the local
port authorities (U.S. Coast Guard, harbor master or equivalent), classification
societies, flag state administration (country of registry) and charterers,
particularly terminal operators and oil companies. Certain of these entities
require us to obtain permits, licenses and certificates for the operation of our
tankers. Failure to maintain necessary permits or approvals could require us to
incur substantial costs or temporarily suspend operation of one or more of our
vessels.
We believe that the heightened level of environmental and quality
concerns among insurance underwriters, regulators and charterers is leading to
greater inspection and safety requirements on all vessels and may accelerate the
scrapping of older vessels throughout the industry. Increasing environmental
concerns have created a demand for vessels that conform to the stricter
environmental standards. We are required to maintain operating standards for all
of our vessels that will emphasize operational safety, quality maintenance,
continuous training of our officers and crews and compliance with U.S. and
international regulations. We believe that the operation of our vessels is in
substantial compliance with applicable environmental laws and regulations;
however, because such laws and regulations are frequently changed and may impose
increasingly stricter requirements, such future requirements may limit our
ability to do business, increase our operating costs, force the early retirement
of our vessels, and/or affect their resale value, all of which could have a
material adverse effect on our financial condition and results of operations.
Environmental Regulation
International Maritime Organization (IMO)
The International Maritime Organization, or IMO (the United Nations
agency for maritime safety and the prevention of marine pollution by ships), has
adopted the International Convention for the Prevention of Marine Pollution from
Ships, 1973, as modified by the Protocol of 1978 relating thereto, which has
been updated through various amendments, or the "MARPOL Convention". The MARPOL
Convention relates to environmental standards including oil leakage or spilling,
garbage management, as well as the handling and disposal of noxious liquids,
harmful substances in packaged forms, sewage and air emissions. In March 1992,
the IMO adopted regulations that set forth pollution prevention requirements
applicable to tankers. , which became effective in July 1993. These regulations,
which have been adopted by over 150 nations, including many of the jurisdictions
in which our tankers operate, provide for, among other things, phase-out of
single hull tankers and more stringent inspection requirements; including, in
part, that:
o tankers between 25 and 30 years old 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 (loading
less cargo into a tanker so that in the event of a breach of the
hull, water flows into the tanker, displacing oil upwards instead
of into the sea);
o tankers 30 years old or older must be of double-hull construction
or mid-deck design with double sided construction; and
o all tankers are subject to enhanced inspections.
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.
In April 2001, the IMO accelerated its existing timetable for the
phase-out of single- hull oil tankers. which became effective in September 2002.
These regulations require the phase-out of most single- hull oil tankers by 2015
or earlier, depending on the age of the tanker and whether it has segregated
ballast tanks. Under the regulations, the flag state administration may allow
for some newer single hull ships registered in its country that conform to
certain technical specifications to continue operating until the 25th
anniversary of their delivery. Any port state, however, may deny entry of those
single hull tankers that are allowed to operate until their 25th anniversary to
ports or offshore terminals.
In December 2003, the Marine Environmental Protection Committee of the
IMO, or MEPC, adopted an amendment to a MARPOL Convention, which became
effective in April 2005. The amendment revised an existing regulation 13G
accelerating the phase-out of single hull oil tankers and adopted a new
regulation 13H on the prevention of oil pollution from oil tankers when carrying
heavy grade oil. Under the revised regulation, single hull oil tankers must be
phased out no later than April 5, 2005 or the anniversary of the date of
delivery of the ship on the date or in the year specified in the following
table:
Category of Oil Tankers Date or Year
----------------------- ------------
Category 1 oil tankers of 20,000 April 5, 2005 for ships delivered
dwt and above carrying crude oil, on April 5, 1982 or earlier; or
fuel oil, heavy diesel oil or 2005 for ships delivered after
lubricating oil as cargo, and of April 5, 1982
30,000 dwt and above carrying other
oils, which do not comply with the
requirements for protectively
located segregated ballast tanks
Category 2 - oil tankers of 20,000 dwt April 5, 2005 for ships delivered on
and above carrying crude oil, fuel oil, April 5, 1977 or earlier 2005 for
heavy diesel oil or lubricating oil as ships delivered after April 5, 1977
cargo, and of 30,000 dwt and above but before January 1, 1978
carrying other oils, which do comply
with the protectively located 2006 for ships delivered in 1978
segregated ballast tank requirements and 1979
2007 for ships delivered in 1980 and
and 1981
2008 for ships delivered in 1982
Category 3 - oil tankers of 5,000 dwt 2009 for ships delivered in 1983
and above but less than the tonnage 2010 for ships delivered in 1984 or
specified for Category 1 and 2 tankers. later
Under the revised regulations, the flag state administration may allow
for some newer single hull oil tankers registered in its country that conform to
certain technical specifications to continue operating until the earlier of the
anniversary of the date of delivery of the vessel in 2015 or the 25th
anniversary of their delivery. Any port state, however, may deny entry of those
single hull oil tankers that are allowed to operate until the earlier of their
anniversary date of delivery in 2015 or their 25th anniversary to ports or
offshore terminals.
The MEPC, in October 2004, adopted a unified interpretation to
regulation 13G that clarified the date of deliver for tankers that have been
converted. Under the interpretation, where an oil tanker has undergone a major
conversion that has resulted in the replacement of the fore-body, including the
entire cargo carrying section, the major conversion completion date of the oil
tanker shall be deemed to be the date of delivery of the ship, provided that:
o the oil tanker conversion was completed before July 6, 1996;
o the conversion included the replacement of the entire cargo
section and fore-body and the tanker complies with all the
relevant provisions of MARPOL Convention applicable at the date
of completion of the major conversion; and
o the original delivery date of the oil tanker will apply when
considering the 15 years of age threshold relating to the first
technical specifications survey to be completed in accordance
with MARPOL Convention.
In December 2003, the MEPC adopted a new regulation 13H on the
prevention of oil pollution from oil tankers when carrying heavy grade oil, or
HGO. The new regulation bans the carriage of HGO in single hull oil tankers of
5,000 dwt and above after April 5, 2005, and in single hull oil tankers of 600
dwt and above but less than 5,000 dwt, no later than the anniversary of their
delivery in 2008.
Under regulation 13H, HGO means any of the following:
o crude oils having a density at 15(0)C higher than 900 kg/m3;
o fuel oils having either a density at 15(0)C higher than 900 kg/
m3 or a kinematic viscosity at 50(0)C higher than 180 mm2/s;
o bitumen, tar and their emulsions.
Under the regulation 13H, the flag state administration may allow
continued operation of oil tankers of 5,000 dwt and above, carrying crude oil
with a density at 15(0)C higher than 900 kg/m3 but lower than 945 kg/m3, that
conform to certain technical specifications and, in the opinion of the such
administration, the ship is fit to continue such operation, having regard to the
size, age, operational area and structural conditions of the ship and provided
that the continued operation shall not go beyond the date on which the ship
reaches 25 years after the date of its delivery. The flag state administration
may also allow continued operation of a single hull oil tanker of 600 dwt and
above but less than 5,000 dwt, carrying HGO as cargo, if, in the opinion of the
such administration, the ship is fit to continue such operation, having regard
to the size, age, operational area and structural conditions of the ship,
provided that the operation shall not go beyond the date on which the ship
reaches 25 years after the date of its delivery.
The flag state administration may also exempt an oil tanker of 600 dwt
and above carrying HGO as cargo if the ship is either engaged in voyages
exclusively within an area under the its jurisdiction, or is engaged in voyages
exclusively within an area under the jurisdiction of another party, provided the
party within whose jurisdiction the ship will be operating agrees. The same
applies to vessels operating as floating storage units of HGO.
Any port state, however, can deny entry of single hull tankers
carrying HGO which have been allowed to continue operation under the exemptions
mentioned above, into the ports or offshore terminals under its jurisdiction, or
deny ship-to-ship transfer of HGO in areas under its jurisdiction except when
this is necessary for the purpose of securing the safety of a ship or saving
life at sea.
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 was ratified in May 2004 and became effective
in May 2005. Annex VI sets limits on sulfur oxide and nitrogen oxide emissions
from ship exhausts and prohibits 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. 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 operation of our vessels is also affected by the requirements set
forth in the IMO's Management Code for the Safe Operation of Ships and Pollution
Prevention, or ISM Code. The ISM Code requires the party with operational
control of a vessel to develop an extensive safety management system that
includes, among other things, the adoption of a safety and environmental
protection policy setting forth instructions and procedures for operating its
vessels safely and describing procedures for responding to emergencies. We are
certified as an approved ship manager under the ISM Code.
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 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 or by an appointed
classification society, under the ISM Code. All of our vessels have obtained
safety management certificates.
Noncompliance with the ISM Code and other IMO regulations may subject
the ship-owner or a bareboat charterer to increased liability, may lead to
decreases in available insurance coverage for affected vessels and may result in
the denial of access to, or detention in, some ports. Both the U.S. Coast Guard
and EU authorities have indicated that vessels not in compliance with the ISM
Code will be prohibited from trading in U.S. and European Union ports., as the
case may be.
Many countries have ratified and currently follow the liability plan
adopted by the IMO and set out in the International Convention on Civil
Liability for Oil Pollution Damage of 1969, or the 1969 Convention. Under this
convention, 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 in November 2003 for vessels of 5,000 to 140,000
gross tons (a unit of measurement for the total enclosed spaces within a
vessel), liability is limited to approximately $ 6.5 million plus approximately
$913 for each additional gross ton over 5,000. For vessels of over 140,000 gross
tons, liability is limited to approximately 129.9 million. As the 1969
Convention calculates liability in terms of basket currencies, these figures are
based on currency exchange rates on March 20, 2006. Under the 1969 Convention,
the right to limit liability is forfeited where the spill is caused by the
owner's actual fault; under the 1992 Protocol, a shipowner cannot limit
liability where the spill is caused by the owner's intentional or reckless
conduct. Vessels trading in jurisdictions that are parties to these conventions
must provide evidence of insurance covering the liability of the owner. In
jurisdictions where the 1969 Convention has not been adopted, including the
United States, various legislative schemes or common law govern, and liability
is imposed either on the basis of fault or in a manner similar to that
convention. We believe that our protection and indemnity insurance will cover
the liability under the plan adopted by the IMO.
The United States Oil Pollution Act of 1990
The United States Oil Pollution Act of 1990, or OPA, established an
extensive regulatory and liability regime for the protection and cleanup of the
environment from oil spills. OPA affects all owners and operators whose vessels
trade in the United States, its territories and possessions, or whose vessels
operate in United States waters, which includes the United States' territorial
sea and its two hundred nautical mile exclusive economic zone. Although OPA is
primarily directed at oil tankers and product tankers, it applies to discharges
by non-tanker ships, including drybulk carriers, of fuel oil, or bunkers, used
to power such vessels.
Under OPA, vessel owners, operators and bareboat charterers are
"responsible parties" and are jointly, severally and strictly liable (unless the
spill results solely from the act or omission of a third party, an act of God or
an act of war) for all containment and clean-up costs and other damages arising
from discharges or threatened discharges of oil from their vessels, including
bunkers. OPA defines these other damages broadly to include:
o natural resources damages and the costs of assessment thereof;
o real and personal property damages;
o net loss of taxes, royalties, rents, fees and other lost
revenues;
o lost profits or impairment of earning capacity due to property or
natural resources damage; and
o net cost of public services necessitated by a spill response,
such as protection from fire, safety or health hazards, and loss
of subsistence use of natural resources.
Title VII of the Coast Guard and Maritime Transportation Act of 2004,
or the CGMTA, recently amended OPA to require the owner or operator of any
non-tank vessel of 400 gross tons or more, that carries oil of any kind as a
fuel for main propulsion, including bunkers, to prepare and submit a response
plan for each vessel on or before August 8, 2005. Previous law was limited to
vessels that carry oil in bulk as cargo. The vessel response plans include
detailed information on actions to be taken by vessel personnel to prevent or
mitigate any discharge or substantial threat of such a discharge of ore from the
vessel due to operational activities or casualties.
OPA limits the liability of responsible parties to the greater of $600
per gross ton or $0.5 million per drybulk carrier that is over 300 gross tons
(subject to possible adjustment for inflation). OPA limits the liability of
responsible parties to the greater of $1,200 per gross ton or $10 million per
tanker that is over 3,000 gross tons per discharge (subject to possible
adjustment for inflation). These limits of liability do not apply if an incident
was directly caused by violation of applicable United States federal safety,
construction or operating regulations or by a responsible party's gross
negligence or willful misconduct, or if the responsible party fails or refuses
to report the incident or to cooperate and assist in connection with oil removal
activities. In addition, the Comprehensive Environmental Response, Compensation
and Liability Act, or CERCLA, which applies to the discharge of hazardous
substances (other than oil) whether on land or at sea, contains a similar
liability regime and provides for cleanup, removal and natural resource damages.
Liability under CERCLA is limited to the greater of $300 per gross ton or $5.0
million for vessels not carrying hazardous substances as cargo or residue,
unless the incident is caused by gross negligence, willful misconduct, or a
violation of certain regulations, in which case liability is unlimited. We
believe that we are in substantial compliance with OPA, CERCLA and all
applicable state regulations in the ports where our tankers 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 potential strict liability under OPA. 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 will be required to
demonstrate evidence of financial responsibility for the entire fleet in an
amount equal only to the financial responsibility requirement of the tanker
having the greatest maximum liability under OPA and CERCLA. We have provided
requisite guarantees and received certificates of financial responsibility from
the U.S. Coast Guard for each of our vessels required to have one.
We insure each of our vessels with pollution liability insurance in
the maximum commercially available amount of $1 billion per vessel per incident.
A catastrophic spill could exceed the insurance coverage available, in which
event there could be a material adverse effect on our business.
Under OPA, with certain 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, from 1995 to 2015, 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:
o discharging at the Louisiana Offshore Oil Port, also known as the
LOOP; or
o unloading with the aid of another vessel, a process referred to
in the industry as lightering, within authorized lightering zones
more than 60 miles off-shore.
Owners or operators of tankers operating in the waters of the U.S.
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
cleanup actions.
We have obtained vessel response plans approved by the U.S. Coast
Guard for our vessels operating in U.S. waters. In addition, the U.S. Coast
Guard has announced it intends to propose similar regulations requiring certain
tanker vessels to prepare response plans for the release of hazardous
substances.
Additional U.S. Environmental Requirements
The U.S. Clean Air Act of 1970, as amended by the Clean Air Act
Amendments of 1977 and 1990, or the CAA, requires the U.S. Environmental
Protection Agency, or EPA, to promulgate standards applicable to emissions of
volatile organic compounds and other air contaminants. Our vessels are subject
to vapor control and recovery requirements for certain cargoes when loading,
unloading, ballasting, cleaning and conducting other operations in regulated
port areas. Our vessels that operate in such port areas are equipped with vapor
control systems that satisfy these requirements. The CAA also requires states to
draft State Implementation Plans, or SIPs, designed to attain national
health-based air quality standards in primarily major metropolitan and/or
industrial areas. Several SIPs regulate emissions resulting from vessel loading
and unloading operations by requiring the installation of vapor control
equipment. As indicated above, our vessels operating in covered port areas are
already equipped with vapor control systems that satisfy these requirements.
Although a risk exists that new regulations could require significant capital
expenditures and otherwise increase our costs, we believe, based on the
regulations that have been proposed to date, that no material capital
expenditures beyond those currently contemplated and no material increase in
costs are likely to be required.
The Clean Water Act, or the CWA, prohibits the discharge of oil or
hazardous substances into navigable waters and imposes strict liability in the
form of penalties for any unauthorized discharges. The CWA also imposes
substantial liability for the costs of removal, remediation and damages. State
laws for the control of water pollution also provide varying civil, criminal and
administrative penalties in the case of a discharge of petroleum or hazardous
materials into state waters. The CWA complements the remedies available under
the more recent OPA and CERCLA, discussed above. Under current regulations of
the EPA, vessels are not required to obtain CWA permits for the discharge of
ballast water in U.S. ports. However, as a result of a recent U.S. federal court
decision, vessel owners and operators may be required to obtain CWA permits for
the discharge of ballast water, or they will face penalties for failing to do
so. Although the EPA is likely to appeal this decision, we do not know how this
matter is likely to be resolved and we cannot assure you that any costs
associated with compliance with the CWA's permitting requirements will not be
material to our results of operations.
The National Invasive Species Act, or NISA, was enacted in 1996 in
response to growing reports of harmful organisms being released into U.S. ports
through ballast water taken on by ships in foreign ports. NISA established a
ballast water management program for ships entering U.S. waters. Under NISA,
mid-ocean ballast water exchange is voluntary, except for ships heading to the
Great Lakes, Hudson Bay, or vessels engaged in the foreign export of Alaskan
North Slope crude oil. However, NISA's exporting and record-keeping requirements
are mandatory for vessels bound for any port in the United States. Although
ballast water exchange is the primary means of compliance with the act's
guidelines, compliance can also be achieved through the retention of ballast
water onboard the ship, or the use of environmentally sound alternative ballast
water management methods approved by the U.S. Coast Guard. If the mid-ocean
ballast exchange is made mandatory throughout the United States, or if water
treatment requirements or options are instituted, the costs of compliance could
increase for ocean carriers.
Our operations occasionally generate and require the transportation,
treatment and disposal of both hazardous and non-hazardous wastes that are
subject to the requirements of the U.S. Resource Conservation and Recovery Act,
or RCRA, or comparable state, local or foreign requirements. In addition, from
time to time we arrange for the disposal of hazardous waste or hazardous
substances at offsite disposal facilities. If such materials are improperly
disposed of by third parties, we might still be liable for clean up costs under
applicable laws.
Several of our vessels currently carry cargoes to U.S. waters
regularly and we believe that all of our vessels are suitable to meet OPA and
other U.S. environmental requirements and that they would also qualify for trade
if chartered to serve U.S. ports.
European Union Tanker Restrictions
In July 2003, the European Union adopted regulations that accelerate
the IMO single hull tanker phase-out timetable. Under the regulation no oil
tanker is allowed to operate under the flag of a EU member state, nor shall any
oil tanker, irrespective of its flag, be allowed to enter into ports or offshore
terminals under the jurisdiction of a EU member state after the anniversary of
the date of delivery of the ship in the year specified in the following table,
unless such tanker is a double hull oil tanker:
Category of Oil Tankers Date or Year
Category 1 oil tankers of 20,000 dwt and 2003 for ships delivered in 1980
above carrying crude oil, fuel oil, or earlier
heavy diesel oil or lubricating oil as 2004 for ships delivered in 1981
cargo, and of 30,000 dwt and above 2005 for ships delivered in 1982 or
carrying other oils, which do not comply later
with the requirements for protectively
located segregated ballast tanks
Category 2 - oil tankers of 20,000 dwt 2003 for ships delivered in 1975 or
and above carrying crude oil, fuel oil, earlier
heavy diesel oil or lubricating oil as 2004 for ships delivered in 1976
cargo, and of 30,000 dwt and above 2005 for ships delivered in 1977
carrying other oils, which do comply 2006 for ships delivered in 1978 and
with the protectively located 1979
segregated ballast tank requirements 2007 for ships delivered in 1980 and
1981
2008 for ships delivered in 1982
and 2009 for ships delivered in 1983
2010 for ships delivered in 1984 or
Category 3 - oil tankers of 5,000 dwt later
and above but less than the tonnage
specified for Category 1 and 2 tankers.
Furthermore, under the regulation, all oil tankers of 5,000 dwt or
less must comply with the double hull requirements no later than the anniversary
date of delivery of the ship in the year 2008. The regulation, however, provides
that oil tankers operated exclusively in ports and inland navigation may be
exempted from the double hull requirement provided that they are duly certified
under inland water legislation.
The European Union, following the lead of certain European Union
nations such as Italy and Spain, as of October 2003, has also banned all single-
hull tankers of 600 dwt and above carrying HGO, regardless of flag, 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 also considering legislation that would: (1) ban
manifestly sub-standard vessels (defined as those over 15 years old that have
been detained by port authorities at least twice in a six -month period) from
European waters and create an obligation of port states to inspect vessels
posing a high risk to maritime safety or the marine environment; and (2) provide
the European Union with greater authority and control over classification
societies, including the ability to seek to suspend or revoke the authority of
negligent societies. It is impossible to predict what legislation or additional
regulations, if any, may be promulgated by the European Union or any other
country or authority.
Since the terrorist attacks of September 11, 2001, there have been a
variety of initiatives intended to enhance vessel security. On November 25,
2002, the Maritime Transportation Security Act of 2002, or MTSA, came into
effect. To implement certain portions of the MTSA, in July 2003, the U.S. Coast
Guard issued regulations requiring the implementation of certain security
requirements aboard vessels operating in waters subject to the jurisdiction of
the United States. Similarly, in December 2002, amendments to the International
Convention for the Safety of Life at Sea, or SOLAS, created a new chapter of the
convention dealing specifically with maritime security. The new chapter came
into effect in July 2004 and imposes various detailed security obligations on
vessels and port authorities, most of which are contained in the newly created
International Ship and Port Facilities Security Code, or ISPS Code. 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. vessels from MTSA vessel security
measures provided such vessels have on board a valid International Ship Security
Certificate that attests to the vessel's compliance with SOLAS security
requirements and the ISPS Code. We have implemented the various security
measures addressed by the MTSA, SOLAS and the ISPS Code.
Inspection by Classification Societies
Every seagoing vessel must be "classed" by a classification society.
The classification society certifies that the vessel is "in class," signifying
that the vessel has been built and maintained in accordance with the rules of
the classification society and complies with applicable rules and regulations of
the vessel's country of registry and the international conventions of which that
country is a member. In addition, where surveys are required by international
conventions and corresponding laws and ordinances of a flag state, the
classification society will undertake them on application or by official order,
acting on behalf of the authorities concerned.
The classification society also undertakes on request other surveys
and checks that are required by regulations and requirements of the flag state.
These surveys are subject to agreements made in each individual case and/or to
the regulations of the country concerned.
For maintenance of the class, regular and extraordinary surveys of
hull, machinery, including the electrical plant, and any special equipment
classed are required to be performed as follows:
Annual Surveys: For seagoing ships, annual surveys are conducted for
the hull and the machinery, including the electrical plant, and where applicable
for special equipment classed, at intervals of 12 months from the date of
commencement of the class period indicated in the certificate.
Intermediate Surveys: Extended annual surveys are referred to as
intermediate surveys and typically are conducted two and one-half years after
commissioning and each class renewal. Intermediate surveys may be carried out on
the occasion of the second or third annual survey.
Class Renewal Surveys: Class renewal surveys, also known as special
surveys, are carried out for the ship's hull, machinery, including the
electrical plant, and for any special equipment classed, at the intervals
indicated by the character of classification for the hull. At the special
survey, the vessel is thoroughly examined, including audio-gauging to determine
the thickness of the steel structures. Should the thickness be found to be less
than class requirements, the classification society would prescribe steel
renewals. The classification society may grant a one-year grace period for
completion of the special survey. Substantial amounts of money may have to be
spent for steel renewals to pass a special survey if the vessel experiences
excessive wear and tear. In lieu of the special survey every four or five years,
depending on whether a grace period was granted, a shipowner has the option of
arranging with the classification society for the vessel's hull or machinery to
be on a continuous survey cycle, in which every part of the vessel would be
surveyed within a five-year cycle.
At an owner's application, the surveys required for class renewal may
be split according to an agreed schedule to extend over the entire period of
class. This process is referred to as continuous class renewal.
All areas subject to survey as defined by the classification society
are required to be surveyed at least once per class period, unless shorter
intervals between surveys are prescribed elsewhere. The period between two
subsequent surveys of each area must not exceed five years.
Most vessels are also dry-docked every 30 to 36 months for inspection
of the underwater parts and for repairs related to inspections. If any defects
are found, the classification surveyor will issue a "recommendation" which must
be rectified by the ship owner within prescribed time limits.
Most insurance underwriters make it a condition for insurance coverage
that a vessel be certified as "in class" by a classification society which is a
member of the International Association of Classification Societies. All our
vessels are certified as being "in class" by the American Bureau of Shipping,
Lloyd's Register of Shipping or Det Norske Veritas. All new and secondhand
vessels that we purchase must be certified prior to their delivery under our
standard contracts and memorandum of agreement. If the vessel is not certified
on the date of closing, we have no obligation to take delivery of the vessel.
Risk of Loss and Liability Insurance General
The operation of any cargo vessel includes risks such as mechanical
failure, collision, property loss, cargo loss or damage and business
interruption due to political circumstances in foreign countries, hostilities
and labor strikes. In addition, there is always an inherent possibility of
marine disaster, including oil spills and other environmental mishaps, and the
liabilities arising from owning and operating vessels in international trade.
OPA, which imposes virtually unlimited liability upon owners, operators and
demise charterers of any vessel trading in the United States exclusive economic
zone for certain oil pollution accidents in the United States, has made
liability insurance more expensive for ship owners and operators trading in the
United States market. While we carry loss of hire insurance to cover 100% of our
fleet, we may not be able to maintain this level of coverage. Furthermore, while
we believe that our present insurance coverage is adequate, not all risks can be
insured, and there can be no guarantee that any specific claim will be paid, or
that we will always be able to obtain adequate insurance coverage at reasonable
rates.
Hull and Machinery Insurance
We have obtained marine hull and machinery and war risk insurance,
which includes the risk of actual or constructive total loss, for all of the
vessels in our fleet. The vessels in our fleet are each covered up to at least
fair market value, with deductibles of $100,000 per vessel per incident, except
for 4 of our Suezmax tankers, which have deductibles of $200,000 per vessel per
incident. We also arranged increased value coverage for each vessel. Under this
increased value coverage, in the event of total loss of a vessel, we will be
able recover for amounts not recoverable under the hull and machinery policy by
reason of any under-insurance.
Protection and Indemnity Insurance
Protection and indemnity insurance is provided by mutual protection
and indemnity associations, or P&I Associations, which covers our third party
liabilities in connection with our shipping activities. This includes third
party liability and other related expenses of injury or death of crew,
passengers and other third parties, loss or damage to cargo, claims arising from
collisions with other vessels, damage to other third party property, pollution
arising from oil or other substances, and salvage, towing and other related
costs, including wreck removal. Protection and indemnity insurance is a form of
mutual indemnity insurance, extended by protection and indemnity mutual
associations, or "clubs." Subject to the "capping" discussed below, our
coverage, except for pollution, is unlimited.
Our current protection and indemnity insurance coverage for pollution
is $1 billion per vessel per incident. The fourteen P&I Associations that
comprise the International Group insure approximately 90% of the world's
commercial tonnage and have entered into a pooling agreement to reinsure each
association's liabilities. Each P&I Association has capped its exposure to this
pooling agreement at $4.25 billion. As a member of a P&I Association, which is a
member of the International Group, we are subject to calls payable to the
associations based on its claim records as well as the claim records of all
other members of the individual associations, and members of the pool of P&I
Associations comprising the International Group.
Competition
We operate in markets that are highly competitive and based primarily
on supply and demand. We compete for charters on the basis of price, vessel
location, size, age and condition of the vessel, as well as on our reputation as
an operator. We arrange our time charters and voyage charters in the spot market
through the use of brokers, who negotiate the terms of the charters based on
market conditions. We compete primarily with owners of tankers in the Suezmax
and Handymax class sizes. Ownership of tankers is highly fragmented and is
divided among major oil companies and independent vessel owners.
Seasonality
We operate our tankers in markets that have historically exhibited
seasonal variations in demand and, therefore, charter rates. This seasonality
may result in quarter-to-quarter volatility in our operating results. The tanker
sector is typically stronger in the fall and winter months in anticipation of
increased oil consumption of oil and petroleum in the northern hemisphere during
the winter months. Our Handymax tankers carry, in part, refined petroleum
products such as gasoline, jet fuel, kerosene, naphtha and heating oil. As a
result, our revenues from our tankers may be weaker during the fiscal quarters
ended June 30 and September 30, and, conversely, revenues may be stronger in
fiscal quarters ended December 31 and March 31.
Legal Proceedings Against Us
We are party, as plaintiff or defendant, to a variety of lawsuits for
damages arising principally from personal injury and property casualty claims.
Most claims are covered by insurance, subject to customary deductibles. We
believe that these claims will not, either individually or in the aggregate,
have a material adverse effect on us, our financial condition or results of
operations. From time to time in the future we may be subject to legal
proceedings and claims in the ordinary course of business, principally personal
injury and property casualty claims. Those claims, even if lacking merit, could
result in the expenditure of significant financial and managerial resources. We
have not been involved in any legal proceedings which may have, or have had a
significant effect on our financial position, nor are we aware of any
proceedings that are pending or threatened which may have a significant effect
on our financial position.
Organizational Structure
TOP Tankers Inc. is the sole owner of all outstanding shares of the
subsidiaries listed in Note 1 of our Consolidated Financial Statements under
Item 18. See also Exhibit 8.1.
Properties, Plants and Equipment
We lease office space in Athens, Greece, from Pyramis Technical Co.,
SA which is wholly-owned by John Pistiolis, the father of our Chief Executive
Officer. In addition, our newly established subsidiary TOP TANKERS (U.K.)
LIMITED, a representative company in London, leases office space in London, from
an unrelated third party. We refer you to "Our Fleet" in this section for a
discussion of our vessels.
In January 2006, we entered into an agreement to lease office space in
Athens, Greece. The agreement is for duration of twelve years beginning May 2006
with a lessee's option for an extension of ten years.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following is a discussion of our financial condition and results
of operations for the years ended December 31, 2005, 2004 and 2003. You should
read this section together with the consolidated financial statements including
the notes to those financial statements for the periods mentioned above.
We are a provider of international seaborne transportation services,
carrying refined petroleum products and crude oil. As of December 31, 2005, our
fleet consisted of 27 vessels, comprised of 14 Product tankers and 13 Suezmax
tankers, with a total cargo carrying capacity of approximately 2.6 million
deadweight tons, or dwt.
We actively manage the deployment of our fleet between spot market
voyage charters, which generally last from several days to several weeks, and
time charters, which can last up to several years. A spot market voyage charter
is generally a contract to carry a specific cargo from a load port to a
discharge port for an agreed upon total amount. Under spot market voyage
charters, we pay voyage expenses such as port, canal and fuel costs. A time
charter is generally a contract to charter a vessel for a fixed period of time
at a specified daily rate. Under time charters, the charterer pays voyage
expenses such as port, canal and fuel costs. Under both types of charters, we
pay for vessel operating expenses, which include crew costs, provisions, deck
and engine stores, lubricating oil, insurance, maintenance and repairs, as well
as for commissions on gross charter rates. We are also responsible for the
vessel's intermediate and special survey costs.
Vessels operating on time charters provide more predictable cash
flows, but can yield lower profit margins than vessels operating in the spot
market during periods characterized by favorable market conditions. Vessels
operating in the spot market generate revenues that are less predictable but may
enable us to capture increased profit margins during periods of improvements in
vessel rates although we are exposed to the risk of declining vessel rates,
which may have a materially adverse impact on our financial performance. We are
constantly evaluating opportunities to increase the number of our vessels
deployed on time charters, but only expect to enter into additional time
charters if we can obtain contract terms that satisfy our criteria.
Results of Operations
For discussion and analysis purposes only, we evaluate performance
using time charter equivalent, or TCE, revenues. TCE revenues are voyage
revenues minus voyage expenses. Voyage expenses primarily consist of port, canal
and fuel costs that are unique to a particular voyage, which would otherwise be
paid by a charterer under a time charter, as well as commissions. We believe
that presenting voyage revenues, net of voyage expenses, neutralizes the
variability created by unique costs associated with particular voyages or the
deployment of vessels on the spot market and presents a more accurate
representation of the revenues generated by our vessels.
We calculate daily TCE rates by dividing TCE revenues by voyage days
for the relevant time period. TCE revenues include demurrage revenue, which
represents fees charged to charterers associated with our spot market voyages
when the charterer exceeds the agreed upon time required to load or discharge a
cargo. We calculate daily direct vessel operating expenses and daily general and
administrative expenses for the relevant period by dividing the total expenses
by the aggregate number of calendar days that we owned each tanker for the
period.
We depreciate our tankers on a straight-line basis over their
estimated useful lives determined to be 25 years from the date of their initial
delivery from the shipyard. Depreciation is based on cost less the estimated
residual value. We capitalize the total costs associated with a drydocking and
amortize these costs on a straight-line basis over the period when the next
drydocking becomes due, which is typically 30 months. Regulations and/or
incidents may change the estimated dates of next drydockings.
Year ended December 31, 2005 compared to the year ended December 31, 2004
VOYAGE REVENUES--Voyage revenues increased by $150.4 million, or
160.3%, to $244.2 million for 2005 compared to $93.8 million for the prior year.
This increase is due to the acquisition of 3 tankers, 6 tankers and 5 tankers
during the first, second and fourth quarters of 2005, respectively, which
contributed $96.1 million in voyage revenues and is due to the overall increase
in operating days which increased the voyage revenues generated by the remaining
vessels to $148.1 million in 2005 from $93.8 million in 2004.
VOYAGE EXPENSES--Voyage expenses primarily consist of port, canal and
fuel costs that are unique to a particular voyage. These expenses, which are
paid by the charterer under a time charter contract, as well as commissions,
increased $20.0 million, or 118.3%, to $36.9 million for 2005 compared to $16.9
million for the prior year. This increase is primarily due to the increase in
the average number of tankers in our fleet during 2005 compared to the prior
year, as well as the increase in the cost of fuel to operate the tankers.
NET VOYAGE REVENUES--Net voyage revenues, which are voyage revenues
minus voyage expenses, increased by $130.4 million, or 169.6%, to $207.3 million
for 2005 compared to $76.9 million for the prior year. This increase is the
result of the increase in the average number of tankers in our fleet and the
overall increase in operating days during 2005 compared to the prior year. The
average number of tankers in our fleet increased 126.0% to 21.7 tankers during
2005 compared to 9.6 tankers during the prior year.
2004 2005
---- -----
Dollars in thousands
Voyage revenues...................... $93,829 $244,215
Less Voyage expenses................. (16,898) (36,889)
Net voyage revenues.................. $76,931 $207,326
======== ========
The following describes our charter revenues for 2005 as compared to
the prior year:
o Average daily TCE rate increased by $3,952, or 16.5%, to $27,881
for 2005 compared to $23,929 for the prior year.
o $125,626,000, or 60.6%, of net voyage revenue was generated by
time charter contracts and $81,700,000, or 39.4%, of net voyage
revenue was generated in the spot market during 2005, compared to
$32,138,000, or 41.7%, of net voyage revenue generated by time
charter contracts, and $44,793,000, or 58.3%, of net voyage
revenue generated in the spot market during the prior year.
o Tankers operated an aggregate of 5,567 days, or 74.9%, on time
charter contracts and 1,869 days, or 25.1%, in the spot market
during 2005, compared to 1,780 days, or 55.4%, on time charter
contracts and 1,435 days, or 44.6%, in the spot market during the
prior year.
o Average daily time charter rate was $22,566 for 2005 compared to
average daily time charter rate of $18,055 for the prior year.
o Average daily spot rate was $43,713 for 2005 compared to average
daily spot rate of $31,215 for the prior year.
VESSEL OPERATING EXPENSES -- Vessel operating expenses, which include
crew costs, provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs and lease payments, increased by $37.6 million, or
222.5%, to $54.5 million for 2005 compared to $16.9 million for the prior year.
This increase is primarily due to the increase in the average number of tankers
in our fleet, which increased 126.0% between the periods. In addition, the
Company entered into a sale & leaseback transaction for 5 vessels. This
transaction is treated as an operating lease and the relevant lease payments of
$7.2 million are included in the operating expenses. Daily vessel operating
expenses per tanker, excluding lease payments, increased by $1,191, or 24.8%, to
$5,985 for 2005 compared to $4,794 for the prior year. This increase is a result
of the significant increase at our Suezmax vessels, which generally require
higher operating expenses as compared to Handymax vessels.
MANAGEMENT FEES, SUB-MANAGER FEES, GENERAL AND ADMINISTRATIVE EXPENSES
AND STOCK-BASED COMPENSATION--General and administrative expenses, which include
all of our onshore expenses and the fees paid to V.Ships Management Limited,
Unicom Management and Hanseatic Shipping Company Ltd., increased by $15.3
million, or 177.9%, to $23.9 million for 2005 compared to $8.6 million for the
prior year. This increase is due to increased staff and additional
administrative costs in connection with the operation of our larger fleet, and
the duties typically associated with public companies and to the compensation of
our senior management and directors, which was in the aggregate amount of $8.1
million, compared to $4.4 million paid last year. Daily general and
administrative expenses per tanker increased $574, or 23.5%, to $3,013 for 2005
compared to $2,439 for the prior year.
FOREIGN CURRENCY GAINS OR LOSSES--We incurred a $68,000 foreign
currency gain for 2005 compared to a loss of $75,000 for the prior year.
GAIN ON SALE OF VESSELS--During the third quarter of 2005 we sold the
vessels M/T Fearless and M/T Yapi and we realized a total gain of $10,115,000.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization, which
include depreciation of tankers, office furniture and equipment as well as
amortization of drydockings, increased by $38.5 million, or 263.7%, to $53.1
million for 2005 compared to $14.6 million for the prior year. This increase is
primarily due to the increase in the average number of tankers in our fleet, the
increase in the book value of our fleet as a result of our acquisitions of
tankers during 2005, and the amortization of capitalized expenses associated
with drydockings that occurred for the first time to vessels that are part of
our fleet.
2004 2005
---- ----
Dollars in thousands
Vessels depreciation expense......................... $13,073 $46,911
Office furniture and equipment depreciation expense.. 35 144
Amortization of drydockings.......................... 1,514 5,999
----- -----
$14,622 $53,054
Depreciation of vessels increased by $33.8 million, or 258.0%, to
$46.9 million for 2005 compared to $13.1 million for the prior period. This
increase is due to the increase in the book value of our fleet as a result of
our acquisitions of tankers during 2005 compared to the prior year.
Amortization of drydockings increased by $4.5 million, or 300.0%, to
$6.0 million for 2005 compared to $1.5 million for the prior year. This increase
includes amortization associated with $10.5 million of capitalized expenditures
relating to our tankers during 2005 compared to $7.4 million of capitalized
expenditures during the prior year. This increase is the result of the
amortization of capitalized expenses associated mainly with drydockings which
took place in 2005, most of which relate to tankers which have capitalized
drydocking expenditures for the first time since we acquired them. We anticipate
that the amortization associated with drydockings will continue to increase in
2006 due to the increase in the average number of tankers in our fleet, the
increase in costs associated with drydockings, and that we are currently
drydocking vessels for the first time since these vessels became part of our
fleet.
NET INTEREST EXPENSE--Net interest expense increased by $13.7 million,
or 291.5%, to $18.4 million for 2005 compared to $4.7 million for the prior
year. This increase is the result of the increase in our weighted average
outstanding debt as a result of our acquisitions of tankers. Net interest
expense is anticipated to decrease in 2006 as a result of the debt prepayment in
connection with the sale and lease-back of 5 tankers in 2005.
OTHER NET--We recognized a gain of $0.1 million during 2005 and 2004.
NET INCOME--Net income was $68.7 million for 2005 compared to net
income of $32.8 million for the prior year.
Year ended December 31, 2004 compared to the year ended December 31, 2003
VOYAGE REVENUES--Voyage revenues increased by $70.7 million, or
306.1%, to $93.8 million for 2004 compared to $23.1 million for the prior year.
This increase is due to the acquisition of 2 tankers and 10 tankers during the
first and third quarter of 2004, respectively, which contributed $66.7 million
in voyage revenues and the overall stronger spot market during 2004 which
increased the voyage revenues generated by the remaining vessels to $27.1
million in 2004 from $23.1 million in 2003.
VOYAGE EXPENSES--Voyage expenses primarily consist of port, canal and
fuel costs that are unique to a particular voyage. These expenses, which are
paid by the charterer under a time charter contract, as well as commissions,
increased $11.0 million, or 186.4%, to $16.9 million for 2004 compared to $5.9
million for the prior year. This increase is primarily due to the increase in
the average number of tankers in our fleet during 2004 compared to the prior
year, as well as the increase in the cost of fuel to operate the tankers.
NET VOYAGE REVENUES--Net voyage revenues, which are voyage revenues
minus voyage expenses, increased by $59.8 million, or 349.7%, to $76.9 million
for 2004 compared to $17.1 million for the prior year. This increase is the
result of the increase in the average number of tankers in our fleet and the
overall stronger spot market during 2004 compared to the prior year. The average
number of tankers in our fleet increased 118.2% to 9.6 tankers during 2004
compared to 4.4 tankers during the prior year.
2003 2004
---- ----
Dollars in thousands
Voyage revenues............................ $23,085 $93,829
Less Voyage expenses....................... (5,937) (16,898)
Net voyage revenues........................ $17,148 $76,931
======== =======
The following describes our charter revenues for 2004 as compared to
the prior year:
o Average daily TCE rate increased by $12,625, or 111.7%, to
$23,929 for 2004 compared to $11,304 for the prior year.
o $32,138,000, or 41.7%, of net voyage revenue was generated by
time charter contracts and $44,793,000, or 58.3%, of net voyage
revenue was generated in the spot market during 2004, compared to
$7,506,000, or 43.9%, of net voyage revenue generated by time
charter contracts, and $9,642,000, or 56.1%, of net voyage
revenue generated in the spot market during the prior year.
o Tankers operated an aggregate of 1,780 days, or 55.4%, on time
charter contracts and 1,435 days, or 44.6%, in the spot market
during 2004, compared to 543 days, or 35.8%, on time charter
contracts and 974 days, or 64.2%, in the spot market during the
prior year.
o Average daily time charter rate was $18,055 for 2004 compared to
average daily time charter rate of $13,824 for the prior year.
o Average daily spot rate was $31,215 for 2004 compared to average
daily spot rate of $9,899 for the prior year.
VESSEL OPERATING EXPENSES -- Vessel operating expenses, which include
crew costs, provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs, increased by $8.5 million, or 101.2%, to $16.9 million
for 2004 compared to $8.4 million for the prior year. This increase is primarily
due to the increase in the average number of tankers in our fleet, which
increased 118.2% between the periods. Daily vessel operating expenses per tanker
decreased by $439, or 8.4%, to $4,794 for 2004 compared to $5,233 for the prior
year. This decrease is the result of lower crewing and insurance expenses
associated with the economies of scale of operating a larger fleet during the
year, compared to the previous year and the subcontracting of the day to day
technical management, crewing and certain purchasing functions of our vessels to
V.Ships Management Limited and Unicom Management during the third quarter of
2004. Our vessel operating expenses depend on a variety of factors, many of
which are beyond our control and affect the entire shipping industry.
MANAGEMENT FEES, SUB-MANAGER FEES AND GENERAL AND ADMINISTRATIVE
EXPENSES--General and administrative expenses, which include all of our onshore
expenses, the fees that Primal Tankers Inc., our former management company,
charged to manage our vessels, and the fees paid to V.Ships Management Limited
and Unicom Management, increased by $6.8 million, or 377.8%, to $8.6 million for
2004 compared to $1.8 million for the prior year. This increase is due to
increased staff and additional administrative costs in connection with the
operation of our larger fleet, and the duties typically associated with public
companies and to the compensation of our senior management and directors, which
was in the aggregate amount of $4.4 million, compared to $0 in prior year. Daily
general and administrative expenses per tanker increased $1,311, or 116.2%, to
$2,439 for 2004 compared to $1,128 for the prior year.
FOREIGN CURRENCY GAINS OR LOSSES--We incurred a $75,000 foreign
currency loss for 2004 compared to a loss of $105,000 for the prior year.
GAIN ON SALE OF VESSELS--During the last quarter of 2004 we sold the
vessels M/T Tireless and M/T Med Prologue and we realized a total gain of
$638,000.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization, which
include depreciation of tankers, office furniture and equipment as well as
amortization of drydockings, increased by $10.4 million, or 247.6%, to $14.6
million for 2004 compared to $4.2 million for the prior year. This increase is
primarily due to the increase in the average number of tankers in our fleet, the
increase in the book value of our fleet as a result of our acquisitions of
tankers during 2004, and the amortization of capitalized expenses associated
with drydockings that occurred for the first time to vessels that are part of
our fleet.
2003 2004
---- ----
Dollars in thousands
Vessels depreciation expense............................ $3,604 $13,073
Office furniture and equipment depreciation expense..... 0 35
Amortization of drydockings............................. $599 1,514
------ -------
$4,203 $14,622
====== =======
Depreciation of vessels increased by $9.5 million, or 263.9%, to $13.1
million for 2004 compared to $3.6 million for the prior period. This increase is
due to the increase in the book value of our fleet as a result of our
acquisitions of tankers during 2004 compared to the prior year.
Amortization of drydockings increased by $0.9 million, or 150.0%, to
$1.5 million for 2004 compared to $0.6 million for the prior year. This increase
includes amortization associated with $7.4 million of capitalized expenditures
relating to our tankers during 2004 compared to $2.4 million of capitalized
expenditures during the prior year. This increase is the result of the
amortization of capitalized expenses associated mainly with drydockings which
took place after September 30, 2004, all of which relate to tankers which have
capitalized drydocking expenditures for the first time since we acquired them.
We anticipate that the amortization associated with drydockings will continue to
increase in 2005 due to the increase in the average number of tankers in our
fleet, the increase in costs associated with drydockings, and that we are
currently drydocking vessels for the first time since these vessels became part
of our fleet.
NET INTEREST EXPENSE--Net interest expense increased by $3.4 million,
or 261.5%, to $4.7 million for 2004 compared to $1.3 million for the prior year.
This increase is the result of the increase in our weighted average outstanding
debt as a result of our acquisitions of tankers. Net interest expense is
anticipated to continue to increase in 2005 as a result of the debt that we
incurred in connection with our acquisition of additional tankers.
OTHER NET--We recognized a gain of $0.1 million during 2004 compared
to a gain of $0.4 million during the prior year. The amount relating to 2003
relates to the excess amount the Company received in connection with a claim for
damages to its vessels compared to the actual costs associated with the repairs.
NET INCOME--Net income was $32.8 million for 2004 compared to net
income of $1.6 million for the prior year.
Liquidity and capital resources
Since our formation, our sources of funds have been equity provided by
our shareholders, long-term borrowings and operating cash flows. Our principal
use of funds has been capital expenditures to establish and grow our fleet,
maintain the quality of our vessels, comply with international shipping
standards and environmental laws and regulations, fund working capital
requirements, make principal repayments on outstanding loan facilities, and pay
dividends. We expect to rely upon operating cash flows, long-term borrowings and
equity financings to implement our growth plan. We believe that our current cash
balance as well as operating cash flows will be sufficient to meet our liquidity
needs for the next year.
Our practice has been to acquire vessels using a combination of funds
received from equity investors and bank debt secured by mortgages on our
vessels. Our business is capital intensive and its future success will depend on
our ability to maintain a high-quality fleet through the acquisition of newer
vessels and the selective sale of older vessels. These acquisitions will be
principally subject to management's expectation of future market conditions as
well as our ability to acquire vessels on favorable terms.
Cash and cash equivalents decreased $97.3 million to $17.5 million as
of December 31, 2005 compared to $114.8 million as of December 31, 2004. That
decrease results primarily from using a portion of the proceeds of our follow-on
offering on November 5, 2004, to finance the acquisition of 5 Suezmax tankers.
Working capital is current assets minus current liabilities, including the
current portion of long-term debt. Working capital deficit was $10.6 million as
of December 31, 2005, compared to a working capital surplus of $98.2 million as
of December 31, 2004. The current portion of long-term debt, net of unamortized
deferred financing costs, included in our current liabilities was $45.3 million
and $19.5 million as of December 31, 2005 and December 31, 2004, respectively.
EBITDA, as defined in Footnote 3 to the "Selected Financial Data" in
Item 3 above, increased by $88.0 million, or 168.9%, to $140.1 million for 2005
compared to $52.1 million for the prior year. This increase is due to the growth
of our fleet and the overall increase in operating days in 2005 compared to the
prior year.
EBITDA, increased by $44.9 million, or 623.6%, to $52.1 million for
2004 compared to $7.2 million for the prior year. This increase is due to the
growth of our fleet and the overall stronger tanker market during 2004 compared
to the prior year.
NET CASH FROM OPERATING ACTIVITIES--increased 231.1% to $94.7 million
during 2005, compared to $28.6 million during the prior year. This increase is
primarily attributable to net income of $68.7 million and depreciation and
amortization, which includes depreciation for vessels, depreciation for office
furniture and equipment, amortization of deferred drydocking costs and
amortization of deferred financing fees, of $54.5 million for 2005, compared to
net income of $32.8 million and depreciation and amortization of $15.4 million
during the prior year.
NET CASH USED IN INVESTING ACTIVITIES--was $524.9 million during 2005
compared to net cash used in investing activities of $344.9 million during the
prior year. During 2005, we expended $677.1 million for the acquisition of 14
tankers, compared to expending $327.6 million for the acquisition of 12 tankers
during the prior year.
NET CASH FROM FINANCING ACTIVITIES--was $332.9 million during 2005
compared to net cash from financing activities of $428.7 million during the
prior year. The change in cash provided by financing activities relates to the
following:
o Net proceeds from borrowing under long-term debt were $472.5
million in connection with the acquisition of 9 Suezmax tankers
and 5 product tankers during 2005 compared to $281.9 million in
connection with the acquisition of 4 Suezmax tankers and 8
product tankers during the prior year.
o Principal repayments of long-term debt were $100.0 million during
2005 compared to $119.5 million during the prior year.
o Net issuance of common stock and capital contributions to
additional paid-in capital were $281.1 million during 2004 as a
result of our initial public offering on July 23, 2004 and our
follow-on offering on November 5, 2004.
o Dividends of $30.5 million paid during 2005 compared to $2.3
million paid during the prior year.
NET CASH FROM OPERATING ACTIVITIES--increased 483.7% to $28.6 million
during 2004, compared to $4.9 million during the prior year. This increase is
primarily attributable to net income of $32.8 million and depreciation and
amortization, which includes depreciation for vessels, depreciation for office
furniture and equipment, amortization of deferred drydocking costs and
amortization of deferred financing fees, of $15.4 million for 2004, compared to
net income of $1.6 million and depreciation and amortization of $4.3 million
during the prior year.
NET CASH USED IN INVESTING ACTIVITIES--was $344.9 million during 2004
compared to net cash used in investing activities of $19.7 million during the
prior year. During 2004, we expended $327.6 million for the acquisition of 12
tankers, compared to expending $19.6 million for the acquisition of 2 tankers
during the prior year.
NET CASH FROM FINANCING ACTIVITIES--was $428.7 million during 2004
compared to net cash from financing activities of $17.0 million during the prior
year. The change in cash provided by financing activities relates to the
following:
o Net proceeds from borrowing under long-term debt were $281.9
million in connection with the acquisition of 4 Suezmax tankers
and 8 product tankers during 2004 compared to $25.9 million in
connection with our acquisition of 2 product tankers during the
prior year.
o Principal repayments of long-term debt were $119.5 million during
2004 compared to $14.3 million during the prior year.
o Net issuance of common stock and capital contributions to
additional paid in capital were $281.1 million during 2004
compared to $6.5 million during the prior year as a result of our
initial public offering on July 23, 2004 and our follow-on
offering on November 5, 2004.
o Dividends of $2.3 million paid during 2004 compared to $0.6
million paid during the prior year.
Off Balance Sheet Arrangements
We did not have any off-balance sheet arrangements, as of December 31,
2005.
Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations and their
maturity dates as of December 31, 2005.
Payments due by period
2-3 4-5 More than
Contractual Obligations: Total 1 year years years 5 years
----------------------- ----- ------ ----- ----- -------
(in thousands of $)
Long term debt 569,517 46,475 89,842 81,300 351,900
------- ------ ------ ------ -------
Operating leases 2,530 552 1,104 874 -
------- ------ ------ ------ -------
Lease payments under sale and lease-back 140,218 21,061 42,121 42,121 34,915
------- ------ ------ ------ -------
Total 712,265 68,088 133,067 124,295 386,815
Long Term Debt:
As of December 31, 2005, the outstanding balance of our long-term debt
consisted of three credit facilities, with Royal Bank of Scotland, which we
refer to as the RBS credit facility, DVB Bank, which we refer to as the DVB
credit facility and HSH Nordbank, which we refer to as the HSH credit facility.
The long-term debt obligations presented in the above table do not include
interest payments.
RBS Credit Facility:
In February 2005, we entered into a financing agreement with the Royal
Bank of Scotland, to partially finance the acquisition of 3 of the 5 additional
Suezmax tankers acquired in connection with the follow-on offering of our common
shares (the M/T Priceless, the M/T Noiseless and the M/T Faultless), 4 Handymax
tankers (the M/T Taintless, the M/T Dauntless, the M/T Soundless and the M/T
Topless) and to refinance the then outstanding balance of $197.0 million. The
new credit facility was for the amount of $424.8 million divided into three
tranches of $197.0 million, $83.8 million and $144.0 million (Tranches A, B and
C, respectively). The $197.0 million tranche was payable in 16 equal consecutive
semi-annual installments of $10.0 million each, beginning on March 31, 2005,
together with a balloon payment of $37.0 million payable with the final
installment. The $83.8 million tranche was payable in 14 varying semi-annual
installments beginning on July 31, 2005, together with a balloon payment of
$17.0 million payable with the final installment. The $144.0 million tranche is
payable in 17 semi-annual installments of $6.3 million, beginning on November
30, 2005, together with a balloon payment of $36.9 million payable with the
final installment. In August and September 2005, following the sale of M/T
Fearless and M/T Yapi and the sale and lease-back of M/T Restless, M/T
Sovereign, M/T Relentless, M/T Invincible and M/T Victorious discussed below, we
prepaid $68.8 million. In November 2005, the loan was restructured and we
concluded also a revolving credit facility. The new loan of $195.7 million was
to refinance the then outstanding amount under Tranches A and B mentioned above
and is payable in 15 semi-annual instalments. The first instalment of $10.7
million was paid on November 30, 2005 to be followed by 14 semi-annual
instalments of $10.5 million each, from May 31, 2006 to November 2012, plus a
balloon payment of $38.0 million payable together with the last instalment. The
revolving credit facility was to refinance the then outstanding amount of
Tranche C mentioned above and to partially finance up to an additional amount of
$206.0 million the acquisition of tankers meeting specific criteria. The
revolving credit facility is payable in 10 semi-annual instalments starting
April 30, 2011, plus a balloon payment payable together with the last
instalment. On November 8, 2005, $34.2 million was drawn down to partially
finance the acquisition cost of vessel M/T Ioannis P. Additional terms and
conditions of the RBS credit facility are as follows:
The initial interest rate on the RBS credit facility is 87.5 and 85
basis points over LIBOR, for the loan and the revolving credit facility,
respectively. The interest rate will be adjusted quarterly to 100 basis points
over LIBOR if the aggregate amount drawn to aggregate value of ships is greater
than 60%. The RBS credit facility is collateralized by a first priority mortgage
on each of the 16 out of 22 vessels we owned as of December 31, 2005.
The RBS credit facility contains, among other things, financial
covenants requiring us to: ensure that the aggregate market value of our fleet
at all times exceeds 140% of the aggregate outstanding principal amount under
the credit facility; maintain minimum liquid funds with the lender of not less
than the greater of $10.0 million or $0.5 million per vessel in our fleet;
ensure that our total assets minus our debt will not at any time be less than
$250.0 million and at all times exceed 35% of our total assets; ensure that
EBITDA (as defined in the RBS credit facility) will at all times exceed 120% of
the aggregate of interest expenses and debt due at a particular period; and meet
minimum liquid funds requirements. The RBS credit facility also contains general
covenants that require us to maintain adequate insurance coverage and obtain the
bank's consent before we incur new indebtedness that is secured by the vessels
mortgaged thereunder. In addition, the RBS credit facility prohibits us, without
the lender's consent, from appointing a chief executive officer other than
Evangelos Pistiolis and requires that the vessels mortgaged thereunder be
managed by TOP Tanker Management, which will subcontract the technical
management of the mortgaged vessels to V.Ships Management Limited, Hanseatic
Shipping Company Ltd., and any other company acceptable to the lender. We will
be permitted to pay dividends under the RBS credit facility so long as we are
not in default of a loan covenant.
During 2005, we paid a fee of 1.0%, 0.75% and 0.5% of the amount of
Tranche B, C and the committed amount of the revolving credit facility,
respectively on the date that we signed the loan agreement, and a commitment fee
of 0.35% per annum shall accrue on the amount of the undrawn balance of the
committed amount under the revolving credit facility from the date that we
signed the offer letter which shall be payable quarterly in arrears.
In connection with the Tranche A discussed above, on August 26, 2004,
we entered into an interest rate swap agreement with declining notional balance
for an initial balance of $98.5 million in order to hedge the variable interest
rate exposure. The swap agreement would expire in September 2007 and had a fixed
interest rate of 3.61% plus the applicable bank margin. In connection with the
Tranches A, B and C discussed above, we entered also into the following interest
rate swap agreements with declining notional balances in order to hedge the
variable interest rate exposure, with effective date March 31, 2005; (i) for an
initial notional amount of $93.5 million and for a period of five years, with a
fixed interest rate of 4.72% plus the applicable bank margin; (ii) for an
initial notional amount of $27.9 million and for a period of four years, with a
fixed interest rate of 4.5775% plus the applicable bank margin; and (iii) for an
initial notional amount of $36.5 million and for a period of four years, with a
fixed interest rate of 4.66% plus the applicable bank margin. As a result of the
sale of vessels and prepayment of the loan of $68.8 million mentioned above, we
terminated the swap of $98.5 million. In November 2005 upon the loan
restructuring, the then existing swaps were restructured into a new swap with
declining notional balances in order to hedge the variable interest rate
exposure, with effective date November 3, 2005; for an initial notional amount
of $100.5 million and for a period of five years, with a fixed interest rate of
4.63% plus the applicable bank margin. The swap of $36.5 million was also
amended to a new swap with declining notional balances in order to hedge the
variable interest rate exposure, with effective date November 3, 2005; for an
initial notional amount of $36.5 million and for a period of four years, with a
fixed interest rate of 4.66% plus the applicable bank margin.
DVB Credit Facility:
In March 2005, we entered into a credit facility with DVB Bank, for a
total of $56.5 million, to finance the purchase of 2 Suezmax tankers, the M/T
Stopless and the M/T Stainless. The loan is payable in 28 varying quarterly
installments beginning on July 29, 2005 and a balloon payment of $10.2 million,
payable together with the last installment. The interest rate on the DVB credit
facility is 125 basis points over LIBOR. Beginning on the date of the credit
facility and ending on the final drawdown date, we paid the lender a quarterly
commitment fee of 0.25% of the average undrawn amount of the loan. The DVB
credit facility is collateralized by a first priority mortgage on the M/T
Stopless and the M/T Stainless. A fee of 1% was paid upon drawdown of the loan.
The DVB credit facility contains, among other things, financial
covenants requiring us to: ensure that the aggregate market value of the
mortgaged vessels is equal to at least 130% of the outstanding principal amount
under the loan, ensure that our total assets minus our debt will not at any time
be less than $200.0 million or 35% of our total assets, to ensure that our
EBITDA (as defined in the DVB credit facility agreement) will not at any time be
less than 120% of the aggregate of interest expenses and debt due at a
particular period, and maintain certain minimum liquid funds of not less than
the greater of $10.0 million or $0.5 million per vessel in our fleet. In
addition, the DVB credit facility prohibits us, without the lender's consent,
from appointing a chief executive officer other than Evangelos Pistiolis and
requires that the mortgaged vessels are managed by TOP Tanker Management, which
may subcontract the technical management of the mortgaged vessels to V.Ships
Management Limited, Hanseatic Shipping Company Ltd., or any other company
acceptable to the lender.
HSH Credit Facility:
In November 2005, we concluded a bank loan of $154.0 million to
partially finance the acquisition cost of vessels M/T Stormless, M/T Ellen P.,
M/T Errorless and M/T Edgeless. The loan is divided into 2 tranches of $130.0
million and $24.0 million respectively. Tranche A is payable in 32 consecutive
quarterly instalments of $2.7 million each, starting March 13, 2006, plus a
balloon payment of $42.0 million payable together with the last instalment.
Tranche B is payable in 16 consecutive quarterly instalments of $1.5 million
each, starting March 13, 2006. The initial interest rate in respect of Tranche A
is 80 basis points over LIBOR. The interest rate will be adjusted to 90 basis
points over LIBOR if the aggregate amount drawn to aggregate value of ships is
greater than 60% but equal or below 70% and will be adjusted to 110 basis points
over LIBOR if the aggregate amount drawn to aggregate value of ships is greater
than 70%. The initial interest rate in respect of Tranche B is 110 basis points
over LIBOR. The interest rate will be adjusted to 135 basis points over LIBOR if
the aggregate amount drawn to aggregate value of ships is greater than 65% but
equal or below 75% and will be adjusted to 160 basis points over LIBOR if the
aggregate amount drawn to aggregate value of ships is greater than 75%.The loan
was subject to a fee of 1% paid upon signing of the agreement.
The HSH credit facility contains, among other things, financial
covenants requiring us to: ensure that the aggregate market value of the
mortgaged vessels is equal to at least 140% of the outstanding principal amount
under the loan, until the Tranche B repayment and 130% thereafter, ensure that
our total assets minus our debt will not at any time be less than $250.0 million
or 35% of our total assets, to ensure that our EBITDA (as defined in the HSH
credit facility agreement) will not at any time be less than 120% of the
aggregate of interest expenses, lease payments and debt due at a particular
period, and maintain certain minimum liquid funds of not less than the greater
of $10.0 million or $0.5 million per vessel in our fleet, including the sold and
leased-back vessels. In addition, the HSH credit facility prohibits us, without
the lender's consent, from appointing a chief executive officer other than
Evangelos Pistiolis and requires that the mortgaged vessels are managed by TOP
Tanker Management, which may subcontract the technical management of the
mortgaged vessels to V.Ships Management Limited, Hanseatic Shipping Company
Ltd., or any other company acceptable to the lender.
Operating Leases:
In July 2004, we entered into an agreement to lease office space in
Athens, Greece from Pyramis Technical Co. SA, which is wholly owned by the
father of our Chief Executive Officer. The agreement is for a duration of six
years initially, with an option for an extension of four years. The monthly
rental is Euro 39,000 adjusted annually for inflation effective January 1, 2006.
The total minimum rental payable under this lease for the six years ending
December 31, 2010, before any adjustment for inflation and translated using the
exchange rate of US$/Euro on December 31, 2005, is approximately $2.5 million.
Lease payments under sale and lease-back:
In August and September 2005, we sold the M/T Restless, M/T Sovereign,
M/T Relentless, M/T Invincible and M/T Victorious, and entered into bareboat
charter agreements to leaseback the vessels, for a period of seven years. During
2005, lease payments relating to the bareboat charters of the vessels were $7.2
million. The total minimum lease payments required to be made after December 31,
2005, related to the bareboat charters of the vessels are $140.2 million.
Other contractual obligations:
TOP Tanker Management, our wholly-owned subsidiary, is responsible for
the chartering, operational and technical management of our tanker fleet,
including crewing, maintenance, repair, capital expenditures, drydocking, vessel
taxes, maintaining insurance and other vessel operating expenses under
management agreements with our vessel owning subsidiaries. As of December 31,
2005, TOP Tanker Management has subcontracted the day to day technical
management and crewing of 6 Handymax tankers and 12 Suezmax tankers to V.Ships
Management Limited, a ship management company operating in Scotland, Norway and
Switzerland and has subcontracted the day to day technical management and
crewing of 5 Handymax tankers and 1 Suezmax tanker to Hanseatic Shipping Company
Ltd, a ship management company operating in Cyprus. TOP Tanker Management has
subcontracted the crewing of 2 Handymax tankers to V. Ships Management Limited,
a ship management company operating in Greece and has subcontracted the crewing
of 1 Handymax tanker to Hanseatic Shipping Company Ltd, a ship management
company operating in Cyprus. TOP Tanker Management pays a monthly fee of $10,000
per vessel for the 18 vessels under its agreements with V. Ships Management and
a monthly fee of $7,083.33 per vessel for the 6 vessels under its agreements
with Hanseatic Shipping Company.
Other major capital expenditures include funding our maintenance
program of regularly scheduled intermediate survey or special survey drydocking
necessary to preserve the quality of our vessels as well as to comply with
international shipping standards and environmental laws and regulations.
Although we have some flexibility regarding the timing of this maintenance, the
costs are relatively predictable. Management anticipates that these vessels
which are younger than 15 years are required to undergo in-water intermediate
surveys 2.5 years after a special survey drydocking and that vessels are to be
drydocked every five years, while vessels 15 years or older are to be drydocked
for an intermediate survey every 2.5 years in which case the additional
intermediate survey drydockings take the place of in-water surveys.
During 2005, we had 270 off hire days associated with 8 drydockings.
During 2004, we had 250 off hire days associated with 5 drydockings. During 2003
we had 83 off hire days associated with 2 drydockings. Each intermediate survey
drydocking is estimated to require approximately 25 days and each special survey
drydocking is estimated to require approximately 35 days. In addition to the
costs described above, drydockings result in off hire time for a vessel, during
which the vessel is unable to generate revenue. Off hire time includes the
actual time the vessel is in the shipyard as well as ballast time to the
shipyard from the port of last discharge. The ability to meet this maintenance
schedule will depend on our ability to generate sufficient cash flows from
operations or to secure additional financing.
Recent developments:
The following table sets forth our contractual obligations and their
maturity dates as of April 6, 2006.
Payments due by period
2-3 4-5 More than
Contractual Obligations: Total 1 year years years 5 years
----- ------ ----- ----- -------
(in thousands of $)
Long term debt 307,750 17,000 34,000 26,500 230,250
--------- ------- ------- ------- -------
Operating leases 20,736 1,152 3,456 3,456 12,672
--------- ------- ------- ------- -------
Lease payments under sale and lease-back 714,832 97,006 237,847 237,729 142,250
--------- ------- ------- ------- -------
Total 1,043,318 115,158 275,303 267,685 385,172
--------- ------- ------- ------- -------
Sale and Lease-back / Credit Facilities:
In early March, 2006 we concluded the sale of M/T Priceless, M/T
Timeless, M/T Flawless, M/T Stopless, M/T Vanguard, M/T Faithful, M/T Spotless,
M/T Doubtless, M/T Faultless, M/T Stainless, M/T Noiseless, M/T Limitless and
M/T Endless, and entered into bareboat charter agreements to leaseback the
vessels, for a period of five to seven years. The total minimum lease payments
required to be made, related to the bareboat charters of the vessels are $574.6
million. In relation to the sale of vessels, the then outstanding balance of
$50.1 million under the DVB credit facility, and the then outstanding balance of
loan of $185.0 million under the RBS credit facility were fully repaid. In
addition we repaid $20.3 million from the revolving credit facility we have with
RBS.
Interest Rate Swaps:
In connection with the HSH credit facility discussed above, we entered
into an interest rate swap agreement with declining notional balances in order
to hedge the variable interest rate exposure, with effective date January 30,
2006, for an initial notional amount of $45.0 million and for a period of five
years, with a fixed interest rate of 4.8% plus the applicable bank margin.
In relation to the sale and lease-back of vessels in 2006, the
interest rate swap agreement, of $100.5 million with RBS was terminated.
Dividends:
On January 23, 2006, we paid dividend on our common shares of $0.21
per share to shareholders of record as of January 17, 2006. On March 13, 2006,
following the sale and lease back of the 13 vessels, we declared a special
dividend on our common shares of $5.00 per share that was paid on March 27,
2006, to shareholders of record of our common shares as of March 22, 2006. On
April 6, 2006, we declared a special dividend on our common shares of $2.50 per
share that will be paid on April 25, 2006, to shareholders of record of our
common shares as of April 17, 2006.
Lease agreement:
In January 2006, we entered into an agreement to lease office space in
Athens, Greece. The agreement is for duration of twelve years beginning May 2006
with an option for an extension of ten years. The monthly rental is Euro 120,000
adjusted annually for inflation increase plus 1%, effective January 1, 2007. The
minimum rentals payable under operating leases for the year ending December 31,
2006 will be approximately $1.1 million and approximately $1.7 million for each
of the years ending December 31, 2007 through May 1, 2018.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles, or
U.S. GAAP. The preparation of those financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are those that reflect significant
judgments or uncertainties, and potentially result in materially different
results under different assumptions and conditions. We have described below what
we believe are our most critical accounting policies that involve a higher
degree of judgment and the methods of their application. For a description of
all of our significant accounting policies, see Note 2 to our consolidated
financial statements included herein.
Depreciation. We record the value of our vessels at their cost (which
includes acquisition costs directly attributable to the vessel and expenditures
made to prepare the vessel for its initial voyage) less accumulated
depreciation. We depreciate our vessels on a straight-line basis over their
estimated useful lives, estimated to be 25 years from the date of initial
delivery from the shipyard. We believe that a 25-year depreciable life is
consistent with that of other shipowners. Depreciation is based on cost of the
vessel less its residual value which is estimated to be $160 per light-weight
ton. A decrease in the useful life of the vessel or in the residual value would
have the effect of increasing the annual depreciation charge. When regulations
place limitations over the ability of a vessel to trade on a worldwide basis,
the vessel's useful life is adjusted at the date such regulations become
effective.
Deferred drydock costs. Our vessels are required to be drydocked for
major repairs and maintenance that cannot be performed while the vessels are
operating, approximately every 30 months. We capitalize the costs associated
with the drydocks as they occur and amortize these costs on a straight line
basis over the period between drydocks. Costs capitalized as part of the drydock
include actual costs incurred at the drydock yard, including but not limited to,
drydock dues and general services for vessel preparation, coating of WBT/COT,
steelworks, piping works and valves, machinery works and electrical works. In
addition, we capitalize all voyage expenses related to the drydock, including
but not limited to, costs of bunkers consumed, port and canal dues between the
vessel's last discharge port prior to the drydock and the time the vessel leaves
the drydock yard; cost of hiring riding crews to effect repairs on a ship and
parts used in making such repairs that are reasonably made in anticipation of
reducing the duration or cost of the drydock; cost of travel, lodging and
subsistence of our personnel sent to the drydock site to supervise; and the cost
of hiring a third party to oversee a drydock. We believe that these criteria are
consistent with industry practice, and that our policy of capitalization
reflects the economics and market values of the vessels.
Impairment of long-lived assets. We evaluate the carrying amounts
(primarily for vessels and related drydock costs) and periods over which
long-lived assets are depreciated to determine if events have occurred which
would require modification to their carrying values or useful lives. In
evaluating useful lives and carrying values of long-lived assets, we review
certain indicators of potential impairment, such as undiscounted projected
operating cash flows, vessel sales and purchases, business plans and overall
market conditions. We determine undiscounted projected net operating cash flows
for each vessel and compare them to the vessel carrying value including
unamortized drydock costs. If our estimate of undiscounted future cash flows for
any vessel is lower than the vessel's carrying value plus any unamortized
drydock costs, the carrying value is written down, by recording a charge to
operations, to the fair market value if the fair market value is lower than the
vessel's carrying value. We estimate fair market value primarily through the use
of third party valuations performed on an individual vessel basis. As vessel
values are volatile, the actual fair market value of a vessel may differ
significantly from estimated fair market values within a short period of time.
Allowance for doubtful accounts. Revenue is based on contracted voyage
and time charter parties and, although our business is with customers who we
believe to be of the highest standard, there is always the possibility of
dispute, mainly over terms, calculation and payment of demurrages. In such
circumstances, we assess the recoverability of amounts outstanding and we
estimate a provision if there is a possibility of non-recoverability. Although
we believe our provisions to be based on fair judgment at the time of their
creation, it is possible that an amount under dispute is not recovered and the
estimated provision for doubtful recoverability is inadequate.
Forward-Looking Statements
Matters discussed in this Item 5 include assumptions, expectations,
projections, intentions and beliefs about future events. These statements are
intended as "forward-looking statements". We caution that assumptions,
expectations, projections, intentions and beliefs about future events may and
often do vary from actual results and the differences can be material. Please
see "Cautionary Statement Regarding Forward-Looking Statements" in this Report.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Executive Officers
Set forth below are the names, ages and positions of our directors,
executive officers and key employees. Our board of directors is elected annually
on a staggered basis, and each director elected holds office for a three-year
term. Officers are elected from time to time by vote of our board of directors
and hold office until a successor is elected.
Name Age Position
---- --- --------
Thomas F. Jackson ...........58 Director and Chairman of the Board
Evangelos J. Pistiolis ......33 Director, President and Chief Executive Officer
Stamatios N. Tsantanis ......34 Director and Chief Financial Officer
Vangelis G. Ikonomou ........41 Director and Executive Vice President
Michael G. Docherty .........46 Director
Christopher J. Thomas .......46 Director
Roy Gibbs ...................56 Director
Stavros Emmanuel.............63 Chief Operating Officer of TOP Tanker
Management
George Goumopoulos...........56 Chief Technical Officer of TOP Tanker
Management
Eirini Alexandropoulou ......34 Secretary
Biographical information with respect to each of our directors and executives is
set forth below.
Thomas F. Jackson is the Chairman of our board of directors since July
2004. In 2000, Mr. Jackson established Paralos Finance Corporation as a provider
of financial consultancy services to select shipping companies. From 1967 to
1999, Mr. Jackson served in a number of managerial capacities with National
Westminster Bank, including Head of Shipping in Greece. Mr. Jackson is an
Associate of the Chartered Institute of Bankers (ACIB).
Evangelos J. Pistiolis founded our company in 2000, is our President
and Chief Executive Officer and serves on our board of directors since July
2004. Mr. Pistiolis graduated from Southampton Institute of Higher Education in
1999 where he studied shipping operations and from Technical University of
Munich in 1994 with a bachelor's degree in mechanical engineering. His career in
shipping started in 1992 when he was involved with the day to day operations of
a small fleet of drybulk carriers. From 1994 through 1995 he worked at Howe
Robinson & Co. Ltd., a London shipbroker specializing in container vessels.
While studying at the Southampton Institute of Higher Education, Mr. Pistiolis
oversaw the daily operations of Compass United Maritime Container Vessels, a
ship management company located in Greece.
Stamatios N. Tsantanis is our Chief Financial Officer and serves on
our board of directors since July 2004. Mr. Tsantanis was previously employed by
Alpha Finance, a member of the Alpha Bank group, a leading Greek financial
institution, from 1999 to 2004. In his capacity as a senior investment banker he
participated in a number of equity, debt and convertible securities offerings in
Europe and the United States in the transportation sector and shipping in
particular. Prior to that, Mr. Tsantanis worked in the operations department of
Athlomar Shipping and Trading. Mr. Tsantanis holds a Masters degree in Shipping
Trade and Finance from the City University Business School in London, and a
Bachelors degree in Shipping Economics from the University of Piraeus.
Vangelis G. Ikonomou is our Executive Vice President and serves on our
board of directors since July 2004. Prior to joining the Company, Mr. Ikonomou
was the Commercial Director of Primal Tankers Inc. From 2000 to 2002, Mr.
Ikonomou worked with George Moundreas & Company S.A. where he was responsible
for the purchase and sale of second-hand vessels and initiated and developed a
shipping industry research department. Mr. Ikonomou worked, from 1993 to 2000,
for Eastern Mediterranean Maritime Ltd., a ship management company in Greece, in
the commercial as well as the safety and quality departments. Mr. Ikonomou holds
a Masters degree in Shipping Trade and Finance from the City University Business
School in London, a Bachelors degree in Business Administration from the
University of Athens in Greece and a Navigation Officer Degree from the Higher
State Merchant Marine Academy in Greece.
Michael G. Docherty serves on our board of directors since July 2004.
Mr. Docherty is a founding partner of Independent Average Adjusters Ltd., an
insurance claims adjusting firm located in Athens, Greece, which he co-founded
in 1997. Mr. Docherty has 23 years of international experience handling maritime
insurance claims.
Christopher J. Thomas serves on our board of directors since July
2004. Since November 2001, Mr. Thomas has been an independent financial
consultant to numerous international shipowning and operating companies. Mr.
Thomas is also the Chief Financial Officer of Dryships Inc. and serves on the
board of directors of Omninet International Limited, each of which is a publicly
traded company with shares registered under the Securities Exchange Act of 1934,
as amended. From 1999 to 2004, Mr. Thomas was the Chief Financial Officer and a
director of Excel Maritime Carriers Ltd., which is also a publicly traded
company with securities registered under the Securities Exchange Act of 1934.
Prior to joining Excel, Mr. Thomas was the Chief Financial Officer of Cardiff
Marine Inc. Mr. Thomas holds a degree in Business Administration from Crawley
University, England.
Roy Gibbs serves on our board of directors since July 2004. Mr. Gibbs
has been the chief executive officer of Standard Chartered Grindlays Bank,
Greece, formerly ANZ Grindlays, since 1992. From 1988 to 1992, Mr. Gibbs was the
chief manager of domestic banking at ANZ Grindlays, London. Prior to that he was
assistant director for property, construction and shipping at ANZ London. Mr.
Gibbs joined National and Grindlays Bank in 1965.
Captain Stavros Emmanuel is the Chief Operating Officer of TOP Tanker
Management since July 2004. Prior to joining TOP Tanker Management, Captain
Emmanuel served as General Manager of Primal Tankers Inc., where his
responsibilities included chartering, operations and technical management. Prior
to joining Primal Tankers in 2000, Captain Emmanuel worked in various management
capacities for Compass United Maritime Container Vessels. Captain Emmanuel
obtained a Naval Officers degree from ASDEN Nautical Academy of Aspropirgos,
Greece and earned a Master Mariners degree in 1971.
George Goumopoulos is the Chief Technical Officer of TOP Tanker
Management since July 2004. Prior to joining TOP Tanker Management, Mr.
Goumopoulos served as Technical Manager of Primal Tankers Inc. From 1981 to
2003. Mr. Goumopoulos worked for Athenian Sea Carriers as Fleet Manager, Deputy
Technical Manager and finally as Technical Manager. Mr. Goumopoulos holds a
Bachelor degree from the University of Michigan, USA in Marine Engineering and
Naval Architecture, where he also completed his postgraduate studies in the same
fields. He holds a Diploma from NTUA (EMA Athens) in Marine Engineering and
Electrical Engineering.
Eirini Alexandropoulou is our Secretary since August 2004. Mrs.
Alexandropoulou's principal occupation for the past 7 years is as a legal
advisor providing legal services to ship management companies with respect to
corporate and commercial as well as shipping and finance law issues in Greece.
From 2001 to 2004, Mrs. Alexandropoulou served as a legal advisor to
Eurocarriers SA, a ship manager. Most recently, from 2000 to 2001, Mrs.
Alexandropoulou served as a legal advisor to Belize's ship registry office in
Piraeus. Mrs. Alexandropoulou has been a member of the Athens Bar Association
since 1997 and has a law degree from the Law Faculty of the University of
Athens.
Committees of the Board of Directors
We have established an audit committee comprised of three members,
which pursuant to a written audit committee charter, is responsible for
reviewing our accounting controls and recommending to the board of directors the
engagement of our outside auditors. Each member is an independent director under
the corporate governance rules of the Nasdaq National Market. The members of the
audit committee are Messrs. Docherty, Gibbs and Thomas. While the Company is
exempt from the requirement to have an audit committee financial expert, both
Mr. Thomas and Mr. Gibbs meet the qualifications of an audit committee financial
expert.
Compensation of Directors and Senior Management
We did not pay any compensation to members of senior management or our
directors for the fiscal year ended December 31, 2002 or for the fiscal year
ended December 31, 2003. We did not pay any benefits in 2002 or 2003. During the
fiscal year ended December 31, 2004, and 2005, we paid to the members of our
senior management and to our directors aggregate compensation of $4.4 million
and $8.1 million respectively. We do not have a retirement plan for our officers
or directors.
Equity Incentive Plan
In April 2005 our board of directors has adopted the TOP Tankers Inc.
2005 Stock Incentive Plan, or the Plan, under which our officers, key employees
and directors may be granted options to acquire common stock. A total of
1,000,000 shares of common stock were reserved for issuance under the Plan,
which is administered by our board of directors. The Plan also provides for the
issuance of stock appreciation rights, dividend equivalent rights, restricted
stock, unrestricted stock, restricted stock units, and performance shares at the
discretion of our board of directors. The Plan will expire 10 years from the
date of its adoption.
On July 1, 2005 (the "grant date") the Company granted restricted
shares pursuant to the Company's Incentive Plan ("the Plan"), which was adopted
in April 2005 to provide certain key persons (the "Participants"), on whose
initiatives and efforts the successful conduct of the Company's business
depends, and who are responsible for the management, growth and protection of
the Company's business, with incentives to: (a) enter into and remain in the
service of the Company, a Company's subsidiary, or Company's joint venture, (b)
acquire a proprietary interest in the success of the Company, (c) maximize their
performance, and (d) enhance the long-term performance of the Company (whether
directly or indirectly) through enhancing the long-term of Company subsidiary or
Company joint venture.
The Company's Board of Directors administers the Plan and identified
45 key persons (including the Company's CEO and other 8 officers and independent
members of the Board) to whom shares of restricted common stock of the Company
(the "Shares") were granted. For this purpose 249,850 new shares were granted,
out of which 190,000 shares were granted to the Company's CEO, 48,300 shares to
8 officers and independent members of the Board and the remaining 11,550 shares
were granted to 36 employees.
The "Restricted Stock Agreements" were signed between the Company and
the Participants on July 1, 2005. Under these agreements, the Participants have
the right to receive dividends and the right to vote the Shares, subject to the
following restrictions:
Company's CEO
The Participant shall not sell, assign, exchange, transfer, pledge,
hypothecate or otherwise dispose of or encumber any of the Shares other than to
a company, which is wholly owned by the Participant. The restrictions lapse on
the earlier of (i) July 1, 2006 or (ii) termination of the Participant's
employment with the Company for any reason.
Other Participants
The Participants shall not sell, assign, exchange, transfer, pledge,
hypothecate or otherwise dispose of or encumber any of the Shares. The
restrictions lapse on July 1, 2006 conditioned upon the Participant's continued
employment with the Company from the date of the agreement (i.e. July 1, 2005)
until the date the restrictions lapse (the "restricted period").
As the shares granted to the Company's CEO do not contain any future
service vesting conditions, all such shares are considered vested shares on the
grant date.
Alternatively, in the event another Participant's employment with the
Company terminates for any reason before the end of the restricted period, that
Participant shall forfeit all rights to all Shares that have not yet vested as
of such date of termination. However, it is the intention of the Company's Board
of Directors not to seek repayment of the dividends earned during the restricted
period, even if the unvested shares ultimately are forfeited. As these Shares
granted to other Participants contain a time-based service vesting condition,
such shares are considered non-vested shares on the grant date.
A summary of the status of the Company's non-vested shares as of
December 31, 2005 and movement during the year ended December 31, 2005, is
presented below:
Non-vested shares Number of shares
Non-vested at January 1, 2005 --
Granted 59,850
Vested --
Forfeited (200)
Non-vested at December 31, 2005 59,650
During October 2005, the employment of one of other Participants was
terminated and 200 restricted shares that were granted to him under the Plan
were forfeited.
On January 3, 2006, the Company granted 125,000 restricted shares
pursuant to the Company's Incentive Plan ("the Plan").Of the 125,000 new shares
granted, 80,000 shares were granted to the Company's CEO, 38,000 shares to 8
officers and independent members of the Board and the remaining 7,000 shares
were granted to 20 employees.
Employees
As of December 31, 2005, we had 3 employees, while our wholly-owned
subsidiary, TOP Tanker Management, employed approximately 58 employees, all of
whom are shore-based. As of December 31, 2005 we employed also 559 sea going
employees, indirectly through our sub-managers.
Share ownership
The common shares beneficially owned by our directors and senior
managers and/or companies affiliated with these individuals are disclosed in
"Item 7. Major Shareholders and Related Party Transactions" below.
Board practices and exemptions from Nasdaq corporate governance rules
The Company has certified to Nasdaq that its corporate governance
practices are in compliance with, and are not prohibited by, the laws of the
Republic of the Marshall Islands. Therefore, the Company is exempt from all of
Nasdaq's corporate governance practices other than the requirements regarding
the disclosure of a going concern audit opinion, notification of material
non-compliance with Nasdaq corporate governance practices, and the establishment
and composition of an audit committee that complies with SEC Rule 10A-3 and a
formal written audit committee charter. The practices followed by the Company in
lieu of Nasdaq's corporate governance rules are described below.
o In lieu of a compensation committee comprised of independent
directors, the full Board of Directors determines compensation.
o In lieu of a nomination committee comprised of independent
directors and a formal written charter addressing the nominations
process, the full Board of Directors, as set forth in the
Company's by-laws, regulates nominations.
o The Company holds annual meetings of shareholders under the BCA,
similar to Nasdaq requirements.
o In lieu of obtaining an independent review of related party
transactions for conflicts of interests, the disinterested
members of the Board of Directors approve related party
transactions under the BCA.
o In lieu of obtaining shareholder approval prior to the issuance
of designated securities, the Company complies with provisions of
the BCA providing that the Board of Directors approves share
issuances.
o The Company's Board does not hold regularly scheduled meetings at
which only independent directors are present.
The Company complies with the Nasdaq corporate governance requirements
pertaining to the board of directors, a majority of which must be independent,
the disclosure of a going concern audit opinion, the distribution of annual and
interim reports; shareholder meetings, quorum, peer review, and direct
registration program and the disclosure of a notification of material
non-compliance.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
Major shareholders.
The following table sets forth information regarding (i) the owners of
more than five percent of our common stock that we are aware of and (ii) the
total amount of capital stock owned by our officers and directors as of March
31, 2006. All of the shareholders, including the shareholders listed in this
table, are entitled to one vote for each share of common stock held.
Amount Percent
Title of Class Identity of Person or Group Owned of Class
-------------- --------------------------- ----- --------
Common Stock, par value Kingdom Holdings Inc.* 3,123,181 11.1%
$.01 per share
Evangelos Pistiolis** 1,506,129 5.3%
Officers and directors
Evangelos Pistiolis 100,000 0.4%
All officers and directors 1,606,129 5.7%
as a group
_______________________
* A company owned primarily by adult relatives of our President, Chief
Executive Officer and Director, Evangelos Pistiolis.
** By virtue of the shares owned indirectly through Sovereign Holdings Inc.,
a company wholly-owned by Evangelos Pistiolis.
Related party transactions.
In July 2004, we entered into an agreement to lease office space in
Athens, Greece from Pyramis Technical Co. SA, which is wholly owned by the
father of our Chief Executive Officer. The agreement is for a duration of six
years initially, with an option for an extension of four years. The monthly
rental is Euro 39,000 adjusted annually for inflation effective January 1, 2006.
The total minimum rental payable under this lease for the six years ending
December 31, 2010, before any adjustment for inflation and translated using the
exchange rate of US$/Euro on December 31, 2005, is approximately $2.5 million.
Up to June 30, 2004, the ship-owning companies had a management
agreement with Primal Tankers Inc., which was wholly owned by the father of the
Company's Chief Executive Officer, under which management services were provided
in exchange for a fixed monthly fee per vessel, which was renewed annually. The
fees charged by Primal Tankers Inc. during 2002, 2003 and 2004 amounted to $0.7
million, $1.7 million and $1.1 million, respectively. During 2004, Top Tanker
Management Inc. acquired from Primal Tankers Inc. office furniture and equipment
for a consideration of $0.1 million.
Interests of experts and counsel.
Not applicable.
ITEM 8. FINANCIAL INFORMATION.
Consolidated Statements and Other Financial Information.
See Item 18.
DIVIDEND POLICY
On April 6, 2006 our Board of Directors decided to discontinue the
Company's policy of paying regular quarterly dividends. The declaration and
payment of any future special dividends shall remain subject to the discretion
of the Board of Directors and shall be based on general market and other
conditions including the Company's earnings, financial strength and cash
requirements and availability.
Significant Changes.
Not Applicable.
ITEM 9. THE OFFER AND LISTING.
Price Range of Common Stock
The trading market for our common stock is the Nasdaq National Market,
on which the shares are listed under the symbol "TOPT." The following table sets
forth the high and low closing prices for our common stock since our initial
public offering of common stock at $11.00 per share on July 23, 2004, as
reported by the Nasdaq National Market. The high and low closing prices for our
common stock for the periods indicated were as follows:
HIGH LOW
---- ---
For the Fiscal Year Ended December 31, 2005 $22.00 $12.27
For the Fiscal Year Ended December 31, 2004 $24.14 $10.51
(beginning July 23, 2004)
For the Quarter Ended
September 30, 2004 (beginning July 23, 2004) 16.55 10.51
December 31, 2004 24.14 14.70
March 31, 2005 22.00 14.25
June 30, 2005 19.38 14.21
September 30, 2005 16.90 13.75
December 31, 2005 15.01 12.27
March 31, 2006 18.32 11.80
For the Month: HIGH LOW
April 2006 (Only for the Period of April 1-11) 12.96 11.51
March 2006 18.32 12.78
February 2006 13.48 11.80
January 2006 13.24 12.25
December 2005 14.14 12.27
November 2005 14.78 12.73
ITEM 10. ADDITIONAL INFORMATION
Articles of Incorporation and Bylaws. Our purpose, as stated in
Section B of our Articles of Incorporation, is to engage in any lawful act or
activity for which corporations may now or hereafter be organized under the
Marshall Islands Business Corporations Act. Our articles of incorporation and
bylaws do not impose any limitations on the ownership rights of our
shareholders.
Under our bylaws, annual shareholder meetings will be held at a time
and place selected by our board of directors. The meetings may be held in or
outside of the Marshall Islands. Special meetings may be called by shareholders
holding not less than one-tenth of all the outstanding shares entitled to vote
at such meeting. Notice of every annual and special meeting of shareholders
shall be given at least 15 but not later than 60 days before such meeting to
each shareholder of record entitled to vote thereat.
Directors. Our directors are elected by a majority of the votes cast
by shareholders entitled to vote. There is no provision for cumulative voting.
The board of directors must consist of at least one member.
Shareholders may change the number of directors only by the affirmative vote of
holders of a majority of the outstanding common stock. The board of directors
may change the number of directors only by the vote of not less than 66 2/3% of
the entire board. Each director shall be elected to serve until the third
succeeding annual meeting of shareholders and until his successor shall have
been duly elected and qualified, except in the event of his death, resignation,
removal, or the earlier termination of his term of office. The board of
directors has the authority to fix the amounts which shall be payable to the
members of our board of directors for attendance at any meeting or for services
rendered to us.
Dissenters' Rights of Appraisal and Payment. Under the Business
Corporation Act of the Republic of the Marshall Islands, or BCA, our
shareholders have the right to dissent from various corporate actions, including
any merger or sale of all or substantially all of our assets not made in the
usual course of our business, and receive payment of the fair value of their
shares. In the event of any further amendment of the articles, a shareholder
also has the right to dissent and receive payment for his or her shares if the
amendment alters certain rights in respect of those shares. The dissenting
shareholder must follow the procedures set forth in the BCA to receive payment.
In the event that, among other things, the institution of proceedings in the
circuit court in the judicial circuit in the Marshall Islands in which our
Marshall Islands office is situated. The value of the shares of the dissenting
we and any dissenting shareholder fail to agree on a price for the shares, the
BCA procedures involve shareholder is fixed by the court after reference, if the
court so elects, to the recommendations of a court-appointed appraiser.
Shareholders' Derivative Actions. Under the BCA, any of our
shareholders may bring an action in our name to procure a judgment in our favor,
also known as a derivative action, provided that the shareholder bringing the
action is a holder of common stock both at the time the derivative action is
commenced and at the time of the transaction to which the action relate.
Anti-takeover Provisions of our Charter Documents. Several provisions
of our articles of incorporation and by-laws may have anti-takeover effects.
These provisions are intended to avoid costly takeover battles, lessen our
vulnerability to a hostile change of control and enhance the ability of our
board of directors to maximize shareholder value in connection with any
unsolicited offer to acquire us. However, these anti-takeover provisions, which
are summarized below, could also discourage, delay or prevent (1) the merger or
acquisition of our company by means of a tender offer, a proxy contest or
otherwise, that a shareholder may consider in its best interest and (2) the
removal of incumbent officers and directors.
Blank Check Preferred Stock
Under the terms of our articles of incorporation, our board of
directors has authority, without any further vote or action by our shareholders,
to issue up to 20,000,000 shares of blank check preferred stock. Our board of
directors may issue shares of preferred stock on terms calculated to discourage,
delay or prevent a change of control of our company or the removal of our
management.
Classified Board of Directors
Our articles of incorporation provide for the division of our board of
directors into three classes of directors, with each class as nearly equal in
number as possible, serving staggered, three-year terms. Approximately one-third
of our board of directors will be elected each year. This classified board
provision could discourage a third party from making a tender offer for our
shares or attempting to obtain control of our company. It could also delay
shareholders who do not agree with the policies of the board of directors from
removing a majority of the board of directors for two years.
Election and Removal of Directors
Our articles of incorporation prohibit cumulative voting in the
election of directors. Our by-laws require parties other than the board of
directors to give advance written notice of nominations for the election of
directors. Our articles of incorporation also provide that our directors may be
removed only for cause and only upon the affirmative vote of the holders of at
least 80% of the outstanding shares of our capital stock entitled to vote for
those directors. These provisions may discourage, delay or prevent the removal
of incumbent officers and directors.
Limited Actions by Shareholders
Our articles of incorporation and our by-laws provide that any action
required or permitted to be taken by our shareholders must be effected at an
annual or special meeting of shareholders or by the unanimous written consent of
our shareholders. Our articles of incorporation and our by-laws provide that,
subject to certain exceptions, only our board of directors may call special
meetings of our shareholders and the business transacted at the special meeting
is limited to the purposes stated in the notice. Accordingly, a shareholder may
be prevented from calling a special meeting for shareholder consideration of a
proposal over the opposition of our board of directors and shareholder
consideration of a proposal may be delayed until the next annual meeting.
Material Contracts
Long Term Debt
--------------
As of December 31, 2005 we had long term debt obligations under three
credit facilities, the RBS credit facility, the DVB Bank credit facility and the
HSH Nordbank credit facility. For a full description of our credit facilities
see "Tabular Disclosure of Contractual Obligations - Long Term Debt" above.
Stockholders Rights Agreement
-----------------------------
We entered into a Stockholders Rights Agreement with Computershare
Investor Services, LLC, as Rights Agent, as of August 19, 2005. Under this
Agreement, we declared a dividend payable of one preferred share purchase right,
or Right, to purchase one one-thousandth of the Company's Series A
Participating Cumulative Preferred Stock for each outstanding share of TOP
Tankers common stock, par value $0.01 per share.
Sales Agreement with Canton Fitzgerald & Co.
--------------------------------------------
We entered into a Sales Agreement with Cantor Fitgerald & Co. on April
13, 2006, pursuant to which we agree that from time to time we will issue and
sell an agreed upon number of our shares of common stock through Cantor
Fitgerald & Co. who will act as agent and/or principal for us in the sale of
these shares.
Exchange controls
The Marshall Islands imposes no exchange controls on non-resident
corporations.
Tax Considerations
The following is a discussion of the material Marshall Islands and
United States federal income tax considerations relevant to an investment
decision by a U.S. Holder, as defined below, with respect to the common stock.
This discussion does not purport to deal with the tax consequences of owning
common stock to all categories of investors, some of which, such as dealers in
securities and investors whose functional currency is not the United States
dollar, may be subject to special rules. You should consult your own tax
advisors concerning the overall tax consequences arising in your own particular
situation under United States federal, state, local or foreign law of the
ownership of common stock.
Marshall Islands Tax Considerations
In the opinion of Seward & Kissel LLP, the following are the material
Marshall Islands tax consequences of our activities to us and shareholders of
our common stock. We are incorporated in the Marshall Islands. Under current
Marshall Islands law, we are not subject to tax on income or capital gains, and
no Marshall Islands withholding tax will be imposed upon payments of dividends
by us to our shareholders.
United States Federal Income Tax Considerations
In the opinion of Seward & Kissel LLP, our United States counsel, the
following are the material United States federal income tax consequences to us
of our activities and to U.S. Holders, as defined below, of our common stock.
The following discussion of United States federal income tax matters is based on
the Internal Revenue Code of 1986, or the Code, judicial decisions,
administrative pronouncements, and existing and proposed regulations issued by
the United States Department of the Treasury, all of which are subject to
change, possibly with retroactive effect. Treasury Regulations promulgated in
August of 2003 interpreting Code Section 883, became effective on January 1,
2005 for calendar year taxpayers such as ourselves and our subsidiaries. The
discussion below is based, in part, on the description of our business as
described in "Business" above and assumes that we conduct our business as
described in that section. Except as otherwise noted, this discussion is based
on the assumption that we will not maintain an office or other fixed place of
business within the United States. References in the following discussion to
"we" and "us" are to TOP Tankers Inc. and its subsidiaries on a consolidated
basis.
United States Federal Income Taxation of Our Company
Taxation of Operating Income: In General
Unless exempt from United States federal income taxation under the
rules discussed below, a foreign corporation is subject to United States federal
income taxation in respect of any income that is derived from the use of
vessels, from the hiring or leasing of vessels for use on a time, voyage or
bareboat charter basis, from the participation in a pool, partnership, strategic
alliance, joint operating agreement, code sharing arrangements or other joint
venture it directly or indirectly owns or participates in that generates such
income, or from the performance of services directly related to those uses,
which we refer to as "shipping income," to the extent that the shipping income
is derived from sources within the United States. For these purposes, 50% of
shipping income that is attributable to transportation that begins or ends, but
that does not both begin and end, in the United States constitutes income from
sources within the United States, which we refer to as "U.S.-source shipping
income."
Shipping income attributable to transportation that both begins and
ends in the United States is considered to be 100% from sources within the
United States. We do not expect to engage in transportation that produces income
which is considered to be 100% from sources within the United States.
Shipping income attributable to transportation exclusively between
non-U.S. ports will be considered to be 100% derived from sources outside the
United States. Shipping income derived from sources outside the United States
will not be subject to any United States Federal income tax.
In the absence of exemption from tax under Section 883, our gross U.S.
source shipping income would be subject to a 4% tax imposed without allowance
for deductions as described below.
Exemption of Operating Income from United States Federal Income Taxation
Under Section 883 of the Code and the regulations thereunder, we will
be exempt from United States federal income taxation on our U.S.-source shipping
income if:
(1) we are organized in a foreign country (our "country of organization")
that grants an "equivalent exemption" to corporations organized in the
United States; and
(2) either
(A) more than 50% of the value of our stock is owned, directly or
indirectly, by individuals who are "residents" of our country of
organization or of another foreign country that grants an
"equivalent exemption" to corporations organized in the United
States, which we refer to as the "50% Ownership Test," or
(B) our stock is "primarily and regularly traded on an established
securities market" in our country of organization, in another
country that grants an "equivalent exemption" to United States
corporations, or in the United States, which we refer to as the
"Publicly-Traded Test".
The Marshall Islands, Cyprus and Liberia, the jurisdictions where our
ship-owning subsidiaries are incorporated, each grant an "equivalent exemption"
to United States corporations. Therefore, we will be exempt from United States
federal income taxation with respect to our U.S.-source shipping income if
either the 50% Ownership Test or the Publicly-Traded Test is met.
The regulations provide, in pertinent part, that stock of a foreign
corporation will be considered to be "primarily traded" on an established
securities market if the number of shares of each class of stock that are traded
during any taxable year on all established securities markets in that country
exceeds the number of shares in each such class that are traded during that year
on established securities markets in any other single country. Our common stock,
which is our sole class of issued and outstanding stock, is and we anticipate
will continue to be "primarily traded" on the Nasdaq National Market.
Under the regulations, our common stock will be considered to be
"regularly traded" on an established securities market if one or more classes of
our stock representing 50% or more of our outstanding shares, by total combined
voting power of all classes of stock entitled to vote and total value, is listed
on the market which we refer to as the listing threshold. Since our common
stock, our sole class of stock, is listed on the Nasdaq National Market, we will
satisfy the listing requirement.
It is further required that with respect to each class of stock relied
upon to meet the listing threshold, (i) such class of stock be traded on the
market, other than in minimal quantities, on at least 60 days during the taxable
year or one-sixth of the days in a short taxable year; and (ii) the aggregate
number of shares of such class of stock traded on such market is at least 10% of
the average number of shares of such class of stock outstanding during such year
or as appropriately adjusted in the case of a short taxable year. We believe we
will satisfy the trading frequency and trading volume tests. Even if this were
not the case, the regulations provide that the trading frequency and trading
volume tests will be deemed satisfied if, as is the case with our common stock,
such class of stock is traded on an established market in the United States and
such stock is regularly quoted by dealers making a market in such stock.
Notwithstanding the foregoing, the regulations provide, in pertinent
part, that each class of our stock will not be considered to be "regularly
traded" on an established securities market for any taxable year in which 50% or
more of each class of our outstanding shares of the stock are owned, actually or
constructively under specified stock attribution rules, on more than half the
days during the taxable year by persons who each own 5% or more of the value of
each class of our outstanding stock, which we refer to as the "5 Percent
Override Rule."
For purposes of being able to determine the persons who own 5% or more
of our stock, or "5% Shareholders," the regulations permit us to rely on those
persons that are identified on Schedule 13G and Schedule 13D filings with the
United States Securities and Exchange Commission, or the "SEC," as having a 5%
or more beneficial interest in our common stock. The regulations further provide
that an investment company identified on a SEC Schedule 13G or Schedule 13D
filing which is registered under the Investment Company Act of 1940, as amended,
will not be treated as a 5% shareholder for such purposes.
In the event the 5 Percent Override Rule is triggered, the regulations
provide that the 5 Percent Override Rule will not apply if we can establish that
among the closely-held group of 5% Shareholders, there are sufficient 5%
Shareholders that are considered to be qualified shareholders for purposes of
Section 883 to preclude non-qualified 5% Shareholders in the closely-held group
from owning 50% or more of each class of our stock for more than half the number
of days during such year.
We believe that we currently satisfy the Publicly-Traded Test and are
not subject to the 5 percent override Rule and we will take this position for
U.S. federal income tax reporting purposes. However, there are factual
circumstances beyond our control which could cause us to lose the benefit of
this exemption.
Taxation in the Absence of Code Section 883 Exemption
To the extent the benefits of Code Section 883 are unavailable, our
U.S. source shipping income, to the extent not considered to be "effectively
connected" with the conduct of a U.S. trade or business, as described below,
would be subject to a 4% tax imposed by Section 887 of the Code on a gross
basis, without the benefit of deductions. Since under the sourcing rules
described above, no more than 50% of our shipping income would be treated as
being derived from U.S. sources, the maximum effective rate of U.S. federal
income tax on our shipping income would never exceed 2% under the 4% gross basis
tax regime.
To the extent the benefits of the Code Section 883 exemption are
unavailable and our U.S. source shipping income is considered to be "effectively
connected" with the conduct of a U.S. trade or business, as described below, any
such "effectively connected" U.S. source shipping income, net of applicable
deductions, would be subject to the U.S. federal corporate income tax currently
imposed at rates of up to 35%. In addition, we may be subject to the 30% "branch
profits" taxes on earnings effectively connected with the conduct of such trade
or business, as determined after allowance for certain adjustments, and on
certain interest paid or deemed paid attributable to the conduct of its U.S.
trade or business.
Our U.S. source shipping income would be considered "effectively
connected" with the conduct of a U.S. trade or business only if:
o We have, or are considered to have, a fixed place of business in
the United States involved in the earning of shipping income; and
o substantially all of our U.S. source shipping income is
attributable to regularly scheduled transportation, such as the
operation of a vessel that follows a published schedule with
repeated sailings at regular intervals between the same points
for voyages that begin or end in the United States.
We do not have currently or intend to have, or permit circumstances
that would result in having any vessel operating to the United States on a
regularly scheduled basis. Based on the foregoing and on the expected mode of
our shipping operations and other activities, we believe that none of our U.S.
source shipping income will be "effectively connected" with the conduct of a
U.S. trade or business.
United States Taxation of Gain on Sale of Vessels
Regardless of whether we qualify for exemption under Code Section 883,
we will not be subject to United States federal income taxation with respect to
gain realized on a sale of a vessel, provided the sale is considered to occur
outside of the United States under United States federal income tax principles.
In general, a sale of a vessel will be considered to occur outside of the United
States for this purpose if title to the vessel, and risk of loss with respect to
the vessel, pass to the buyer outside of the United States. It is expected that
any sale of a vessel by us will be considered to occur outside of the United
States.
United States Federal Income Taxation of U.S. Holders
As used herein, the term "U.S. Holder" means a beneficial owner of common stock
that
o is a United States citizen or resident, United States corporation
or other United States entity taxable as a corporation, an estate
the income of which is subject to United States federal income
taxation regardless of its source, or a trust if a court within
the United States is able to exercise primary jurisdiction over
the administration of the trust and one or more United States
persons have the authority to control all substantial decisions
of the trust,
o owns the common stock as a capital asset, generally, for
investment purposes, and
o owns less than 10% of our common stock for United States federal
income tax purposes.
If a partnership holds our common stock, the tax treatment of a
partner will generally depend upon the status of the partner and upon the
activities of the partnership. If you are a partner in a partnership holding our
common stock, you should consult your tax advisor.
Distributions
Subject to the discussion of passive foreign investment companies
below, any distributions made by us with respect to our common stock to a U.S.
Holder will generally constitute dividends, which may be taxable as ordinary
income or "qualified dividend income" as described in more detail below, to the
extent of our current or accumulated earnings and profits, as determined under
United States federal income tax principles. Distributions in excess of our
earnings and profits will be treated first as a nontaxable return of capital to
the extent of the U.S. Holder's tax basis in his common stock on a dollar for
dollar basis and thereafter as capital gain. Because we are not a United States
corporation, U.S. Holders that are corporations will not be entitled to claim a
dividends received deduction with respect to any distributions they receive from
us. Dividends paid with respect to our common stock will generally be treated as
"passive income" or, in the case of certain types of U.S. Holders, "financial
services income," for purposes of computing allowable foreign tax credits for
United States foreign tax credit purposes.
Dividends paid on our common stock to a U.S. Holder who is an
individual, trust or estate (a "U.S. Individual Holder") should be treated as
"qualified dividend income" that is taxable to such U.S. Individual Holders at
preferential tax rates (through 2008) provided that (1) the common stock is
readily tradable on an established securities market in the United States (such
as the Nasdaq National Market on which our stock is currently traded); (2) we
are not a passive foreign investment company for the taxable year during which
the dividend is paid or the immediately preceding taxable year (which we do not
believe we are, have been or will be); and (3) the U.S. Individual Holder has
owned the common stock for more than 60 days in the 121-day period beginning 60
days before the date on which the common stock becomes ex-dividend.. Therefore,
there is no assurance that any dividends paid on our common stock will be
eligible for these preferential rates in the hands of a U.S. Individual Holder.
Any dividends paid by the Company which are not eligible for these preferential
rates will be taxed as ordinary income to a U.S. Individual Holder.
Special rules may apply to any "extraordinary dividend" generally, a
dividend in an amount which is equal to or in excess of ten percent of a
shareholder's adjusted basis (or, at the election of the U.S. Individual Holder,
the stock's then fair market value) in a share of common stock paid by us. If we
pay an "extraordinary dividend" on our common stock that is treated as
"qualified dividend income," then any loss derived by a U.S. Individual Holder
from the sale or exchange of such common stock will be treated as long-term
capital loss to the extent of such dividend.
Sale, Exchange or other Disposition of Common Stock
Assuming we do not constitute a passive foreign investment company for
any taxable year, a U.S. Holder generally will recognize taxable gain or loss
upon a sale, exchange or other disposition of our common stock in an amount
equal to the difference between the amount realized by the U.S. Holder from such
sale, exchange or other disposition and the U.S. Holder's tax basis in such
stock. Such gain or loss will be treated as long-term capital gain or loss if
the U.S. Holder's holding period is greater than one year at the time of the
sale, exchange or other disposition. Such capital gain or loss will generally be
treated as U.S.-source income or loss, as applicable, for U.S. foreign tax
credit purposes. A U.S. Holder's ability to deduct capital losses is subject to
certain limitations.
Passive Foreign Investment Company Status and Significant Tax Consequences
Special United States federal income tax rules apply to a U.S. Holder
that holds stock in a foreign corporation classified as a passive foreign
investment company for United States federal income tax purposes. In general, we
will be treated as a passive foreign investment company with respect to a U.S.
Holder if, for any taxable year in which such holder held our common stock,
either
o at least 75% of our gross income for such taxable year consists
of passive income (e.g., dividends, interest, capital gains and
rents derived other than in the active conduct of a rental
business), or
o at least 50% of the average value of the assets held by the
corporation during such taxable year produce, or are held for the
production of, passive income.
For purposes of determining whether we are a passive foreign
investment company, we will be treated as earning and owning our proportionate
share of the income and assets, respectively, of any of our subsidiary
corporations in which we own at least 25 percent of the value of the
subsidiary's stock. Income earned, or deemed earned, by us in connection with
the performance of services would not constitute passive income. By contrast,
rental income would generally constitute "passive income" unless we were treated
under specific rules as deriving our rental income in the active conduct of a
trade or business.
Based on our current operations and future projections, we do not
believe that we are, nor do we expect to become, a passive foreign investment
company with respect to any taxable year. Although there is no legal authority
directly on point, and we are not relying upon an opinion of counsel on this
issue, our belief is based principally on the position that, for purposes of
determining whether we are a passive foreign investment company, the gross
income we derive or are deemed to derive from the time chartering and voyage
chartering activities of our wholly-owned subsidiaries should constitute
services income, rather than rental income. Correspondingly, such income should
not constitute passive income, and the assets that we or our wholly-owned
subsidiaries own and operate in connection with the production of such income,
in particular, the vessels, should not constitute passive assets for purposes of
determining whether we were a passive foreign investment company. We believe
there is substantial legal authority supporting our position consisting of case
law and Internal Revenue Service pronouncements concerning the characterization
of income derived from time charters and voyage charters as services income for
other tax purposes. However, in the absence of any legal authority specifically
relating to the statutory provisions governing passive foreign investment
companies, the Internal Revenue Service or a court could disagree with our
position. In addition, although we intend to conduct our affairs in a manner to
avoid being classified as a passive foreign investment company with respect to
any taxable year, we cannot assure you that the nature of our operations will
not change in the future.
As discussed more fully below, if we were to be treated as a passive
foreign investment company for any taxable year, a U.S. Holder would be subject
to different taxation rules depending on whether the U.S. Holder makes an
election to treat us as a "Qualified Electing Fund," which election we refer to
as a "QEF election." As an alternative to making a QEF election, a U.S. Holder
should be able to make a "mark-to-market" election with respect to our common
stock, as discussed below.
Taxation of U.S. Holders Making a Timely QEF Election
If a U.S. Holder makes a timely QEF election, which U.S. Holder we
refer to as an "Electing Holder," the Electing Holder must report each year for
United States federal income tax purposes his pro rata share of our ordinary
earnings and our net capital gain, if any, for our taxable year that ends with
or within the taxable year of the Electing Holder, regardless of whether or not
distributions were received from us by the Electing Holder. The Electing
Holder's adjusted tax basis in the common stock will be increased to reflect
taxed but undistributed earnings and profits. Distributions of earnings and
profits that had been previously taxed will result in a corresponding reduction
in the adjusted tax basis in the common stock and will not be taxed again once
distributed. An Electing Holder would generally recognize capital gain or loss
on the sale, exchange or other disposition of our common stock. A U.S. Holder
would make a QEF election with respect to any year that our company is a passive
foreign investment company by filing one copy of IRS Form 8621 with his United
States federal income tax return and a second copy in accordance with the
instructions to such form. If we were to be treated as a passive foreign
investment company for any taxable year, we would provide each U.S. Holder with
all necessary information in order to make the qualified electing fund election
described below.
Taxation of U.S. Holders Making a "Mark-to-Market" Election
Alternatively, if we were to be treated as a passive foreign
investment company for any taxable year and, as we anticipate, our stock is
treated as "marketable stock," a U.S. Holder would be allowed to make a
"mark-to-market" election with respect to our common stock, provided the U.S.
Holder completes and files IRS Form 8621 in accordance with the relevant
instructions and related Treasury Regulations. If that election is made, the
U.S. Holder generally would include as ordinary income in each taxable year the
excess, if any, of the fair market value of the common stock at the end of the
taxable year over such holder's adjusted tax basis in the common stock. The U.S.
Holder would also be permitted an ordinary loss in respect of the excess, if
any, of the U.S. Holder's adjusted tax basis in the common stock over its fair
market value at the end of the taxable year, but only to the extent of the net
amount previously included in income as a result of the mark-to-market election.
A U.S. Holder's tax basis in his common stock would be adjusted to reflect any
such income or loss amount. Gain realized on the sale, exchange or other
disposition of our common stock would be treated as ordinary income, and any
loss realized on the sale, exchange or other disposition of the common stock
would be treated as ordinary loss to the extent that such loss does not exceed
the net mark-to-market gains previously included by the U.S. Holder.
Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election
Finally, if we were to be treated as a passive foreign investment
company for any taxable year, a U.S. Holder who does not make either a QEF
election or a "mark-to-market" election for that year, whom we refer to as a
"Non-Electing Holder," would be subject to special rules with respect to (1) any
excess distribution (i.e., the portion of any distributions received by the
Non-Electing Holder on our common stock in a taxable year in excess of 125
percent of the average annual distributions received by the Non-Electing Holder
in the three preceding taxable years, or, if shorter, the Non-Electing Holder's
holding period for the common stock), and (2) any gain realized on the sale,
exchange or other disposition of our common stock. Under these special rules:
o the excess distribution or gain would be allocated ratably over
the Non-Electing Holders aggregate holding period for the common
stock;
o the amount allocated to the current taxable year would be taxed
as ordinary income; and
o the amount allocated to each of the other taxable years would be
subject to tax at the highest rate of tax in effect for the
applicable class of taxpayer for that year, and an interest
charge for the deemed deferral benefit would be imposed with
respect to the resulting tax attributable to each such other
taxable year.
These penalties would not apply to a qualified pension, profit sharing
or other retirement trust or other tax-exempt organization that did not borrow
money or otherwise utilize leverage in connection with its acquisition of our
common stock. If a Non-Electing Holder who is an individual dies while owning
our common stock, such holders successor generally would not receive a step-up
in tax basis with respect to such stock.
United States Federal Income Taxation of "Non-U.S. Holders"
A beneficial owner of common stock that is not a U.S. Holder is
referred to herein as a "Non-U.S. Holder."
Dividends on Common Stock
Non-U.S. Holders generally will not be subject to United States
federal income tax or withholding tax on dividends received from us with respect
to our common stock, unless that income is effectively connected with the
Non-U.S. Holder's conduct of a trade or business in the United States. If the
Non-U.S. Holder is entitled to the benefits of a United States income tax treaty
with respect to those dividends, that income is taxable only if it is
attributable to a permanent establishment maintained by the Non-U.S. Holder in
the United States. Sale, Exchange or Other Disposition of Common Stock
Sale, Exchange or Other Disposition of Assets
Non-U.S. Holders generally will not be subject to United States
federal income tax or withholding tax on any gain realized upon the sale,
exchange or other disposition of our common stock, unless:
o the gain is effectively connected with the Non-U.S. Holder's
conduct of a trade or business in the United States. If the
Non-U.S. Holder is entitled to the benefits of an income tax
treaty with respect to that gain, that gain is taxable only if it
is attributable to a permanent establishment maintained by the
Non-U.S. Holder in the United States; or
o the Non-U.S. Holder is an individual who is present in the United
States for 183 days or more during the taxable year of
disposition and other conditions are met.
If the Non-U.S. Holder is engaged in a United States trade or business
for United States federal income tax purposes, the income from the common stock,
including dividends and the gain from the sale, exchange or other disposition of
the stock that is effectively connected with the conduct of that trade or
business will generally be subject to regular United States federal income tax
in the same manner as discussed in the previous section relating to the taxation
of U.S. Holders. In addition, if you are a corporate Non-U.S. Holder, your
earnings and profits that are attributable to the effectively connected income,
which are subject to certain adjustments, may be subject to an additional branch
profits tax at a rate of 30%, or at a lower rate as may be specified by an
applicable income tax treaty.
Backup Withholding and Information Reporting
In general, dividend payments, or other taxable distributions, made
within the United States to you will be subject to information reporting
requirements and backup withholding tax if you are a non-corporate U.S. Holder
and you:
o fail to provide an accurate taxpayer identification number;
o are notified by the Internal Revenue Service that you have failed
to report all interest or dividends required to be shown on your
federal income tax returns; or
o in certain circumstances, fail to comply with applicable
certification requirements.
Non-U.S. Holders may be required to establish their exemption from
information reporting and backup withholding by certifying their status on IRS
Form W-8BEN, W-8ECI or W-8IMY, as applicable.
If you sell your common stock to or through a United States office or
broker, the payment of the proceeds is subject to both United States backup
withholding and information reporting unless you certify that you are a non-U.S.
person, under penalties of perjury, or you otherwise establish an exemption. If
you sell your common stock through a non-United States office of a non-United
States broker and the sales proceeds are paid to you outside the United States
then information reporting and backup withholding generally will not apply to
that payment. However, United States information reporting requirements, but not
backup withholding, will apply to a payment of sales proceeds, even if that
payment is made to you outside the United States, if you sell your common stock
through a non-United States office of a broker that is a United States person or
has some other contacts with the United States.
Backup withholding tax is not an additional tax. Rather, you generally
may obtain a refund of any amounts withheld under backup withholding rules that
exceed your income tax liability by filing a refund claim with the Internal
Revenue Service.
Documents on display.
We file annual reports and other information with the SEC. You may
read and copy any document we file with the SEC at its public reference room at
100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain
copies of this information by mail from the public reference section of the SEC,
100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference room. Our SEC filings are also available to the public
at the web site maintained by the SEC at http://www.sec.gov, as well as on our
website at http://www.toptankers.com.
Incorporation by Reference
This Form 20-F is hereby incorporated by reference to the registration
statement on Form F-3 filed on August 1, 2005 (Registration No. 333-127086).
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Fluctuation. The international tanker shipping industry
is capital intensive, requiring significant amounts of investment. Much of this
investment is provided in the form of long-term debt. Our debt usually contains
interest rates that fluctuate with LIBOR. Increasing interest rates could
adversely impact future earnings.
Our interest expense is affected by changes in the general level of
interest rates. As an indication of the extent of our sensitivity to interest
rate changes, the following table sets forth the sensitivity of all credit
facilities in U.S. dollars to a 100 basis points increase in LIBOR on December
31 of each repayment year. The following table takes into account the four year
interest rate swap agreement under the initial credit facility.
Interest Expense Sensitivity to 100 Basis Point Change in LIBOR
---------------------------------------------------------------
December 31, 2005............................ 4,012,397
December 31, 2006............................ 2,223,096
December 31, 2007............................ 2,123,152
December 31, 2008............................ 2,023,207
December 31, 2009............................ 2,144,847
December 31, 2010............................ 2,286,314
December 31, 2011............................ 2,055,285
December 31, 2012............................ 1,833,775
Foreign Exchange Rate Risk. We generate all of our revenues in U.S.
dollars but incur approximately 7% of our expenses in currencies other than U.S.
dollars. For accounting purposes, expenses incurred in Euros are translated into
U.S. dollars at the exchange rate prevailing on the date of each transaction. We
constantly monitor the U.S Dollar exchange rate and we try to achieve more
favorable exchange rates from the financial institutions we work with.
Inflation. Although inflation has had a moderate impact on our trading
fleet's operating and voyage expenses in recent years, management does not
consider inflation to be a significant risk to operating or voyage costs in the
current economic environment. However, in the event that inflation becomes a
significant factor in the global economy, inflationary pressures would result in
increased operating, voyage and financing costs.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Neither we nor any of our subsidiaries have been subject to a material
default in the payment of principal, interest, a sinking fund or purchase fund
installment or any other material default that was not cured within 30 days. In
addition, the payment of our dividends are not, and have not been in arrears or
have not been subject to a material delinquency that was not cured within 30
days.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not Applicable
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
On the date of this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer 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
Securities and Exchange Commission filings.
Changes in internal controls.
There have been no significant changes in our internal controls or in
other factors that could have significantly affected those controls subsequent
to the date of the Company's most recent evaluation of internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
We have established an audit committee comprised of three members
which is responsible for reviewing our accounting controls and recommending to
the board of directors the engagement of our outside auditors. Each member is an
independent director under the corporate governance rules of the Nasdaq National
Market. The members of the audit committee are Messrs. Docherty, Gibbs and
Thomas. While the Company is exempt from the requirement to have an audit
committee financial expert, both Mr. Thomas and Mr. Gibbs meet the
qualifications of an audit committee financial expert.
ITEM 16B. CODE OF ETHICS
As a foreign private issuer, we are exempt from the rules of the
Nasdaq National Market that require the adoption of a code of ethics. However,
we have voluntarily adopted a code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer and
persons performing similar functions. We will also provide any person a hard
copy of our code of ethics free of charge upon written request. Shareholders may
direct their requests to the attention of Mr. Evangelos Pistiolis.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our principal accountants for the years ended December 31, 2003, 2004
and 2005 were Ernst and Young (Hellas), Certified Auditors Accountants S.A. For
the 2004 and 2005 audits they billed us audit fees of Euro 168,000 and Euro
220,000, respectively. Additionally, in 2005, they billed us audit related fees
of Euro 117,000. There were no tax and audit related fees billed in 2004. The
audit for the year ended December 31, 2003, was conducted in conjunction with
the audits for the years ended December 31, 2001 and 2002, as part of our
initial public offering and our follow-on offering in July 2004 and November
2004, respectively and their billing consists part of our offering expenses. For
their services in connection with our initial public offering and follow-on
offering Ernst and Young (Hellas), Certified Auditors Accountants S.A. billed us
Euro 489,501.
Our audit committee pre-approves all audit, audit-related and
non-audit services not prohibited by law to be performed by our independent
auditors and associated fees prior to the engagement of the independent auditor
with respect to such services.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
See Item 16A above.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES
None.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements, together with the report of Ernst
& Young (Hellas) Certified Auditors Accountants S.A. thereon, are filed as part
of this report:
TOP TANKERS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2004 and 2005 F-2
Consolidated Statements of Income for the years ended
December 31, 2003, 2004 and 2005 F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2003, 2004 and 2005 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2004 and 2005 F-5
Notes to Consolidated Financial Statements F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
TOP Tankers Inc.
We have audited the accompanying consolidated balance sheets of TOP Tankers Inc.
as of December 31, 2004 and 2005, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 2005. 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 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. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TOP Tankers Inc.
at December 31, 2004 and 2005, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2005, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young (Hellas)
Certified Auditors Accountants S.A.
Athens, Greece
February 24, 2006
TOP TANKERS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of U.S. Dollars - except share and per share data)
ASSETS
2004 2005
----------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 114,768 17,462
Accounts receivable trade, net 19,971 39,527
Insurance claims 98 258
Inventories (Note 4) 3,221 6,308
Due from related parties (Note 3) 219 -
Prepayments and other 2,774 4,019
----------------- ----------------
Total current assets 141,051 67,574
----------------- ----------------
FINANCIAL INSTRUMENTS (Note 8) - 425
----------------- ----------------
FIXED ASSETS:
Advances for vessel acquisitions (Note 5) 25,650 -
Vessels, net (Notes 6 and 8) 355,997 886,754
Office furniture and equipment, net (Note 3) 440 1,128
----------------- ----------------
Total fixed assets 382,087 887,882
----------------- ----------------
OTHER NON CURRENT ASSETS:
Deferred charges, net (Note 7) 6,748 11,516
Restricted cash (Note 8) 10,000 13,500
----------------- ----------------
Total assets 539,886 980,897
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 8) 19,540 45,329
Dividends payable 5,845 -
Accounts payable 10,358 12,405
Accrued liabilities (Note 9) 3,766 13,297
Unearned revenue 3,054 5,112
Deferred income, current portion (Note 11) - 2,451
----------------- ----------------
Total current liabilities 42,563 78,594
----------------- ----------------
FINANCIAL INSTRUMENTS (Note 8) 248 -
----------------- ----------------
LONG-TERM DEBT, net of current portion (Note 8) 175,266 518,774
----------------- ----------------
DEFERRED INCOME, net of current portion (Note 11) - 13,871
----------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 20,000,000 shares
authorized; none issued (Note 12) - -
Common stock, $0.01 par value; 100,000,000 shares
authorized; 27,830,990 and 28,080,640 shares issued and
outstanding at December 31, 2004 and 2005, respectively
(Note 12) 278 280
Additional paid-in capital (Note 12) 294,240 297,716
Accumulated other comprehensive income (loss) (Note 8) (248) 98
Retained earnings 27,539 71,564
----------------- ----------------
Total stockholders' equity 321,809 369,658
----------------- ----------------
Total liabilities and stockholders' equity 539,886 980,897
================= ================
The accompanying notes are an integral part of these consolidated statements.
TOP TANKERS INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(Expressed in thousands of U.S. Dollars - except share and per share data)
2003 2004 2005
--------------- ---------------- ---------------
REVENUES:
Voyage revenues (Note 1) 23,085 93,829 244,215
--------------- ---------------- ---------------
EXPENSES:
Voyage expenses (Note 15) 5,937 16,898 36,889
Vessel operating expenses (Note 15) 8,420 16,859 54,521
Depreciation (Note 6) 3,604 13,108 47,055
Amortization of dry-docking costs (Note 7) 599 1,514 5,999
Management fees charged by a related party (Note 3) 1,686 1,120 -
Sub-Manager fees (Note 1) - 803 3,159
General and administrative expenses 129 6,656 20,659
Foreign currency (gains) / losses, net 105 75 (68)
Amortization of deferred gain on sale of vessels (Note 11) - - (837)
Gain on sale of vessels (Note 6) - (638) (10,115)
--------------- ---------------- ---------------
Operating income 2,605 37,434 86,953
--------------- ---------------- ---------------
OTHER INCOME (EXPENSES):
Interest and finance costs (Notes 8 and 16) (1,336) (5,201) (20,177)
Interest income 1 481 1,774
Other, net (Note 17) 364 80 134
--------------- ---------------- ---------------
Total other income (expenses), net (971) (4,640) (18,269)
--------------- ---------------- ---------------
Net Income 1,634 32,794 68,684
=============== ================ ===============
Earnings per share, basic and diluted (Notes 12 and 14) 0.27 2.54 2.46
=============== ================ ===============
Weighted average common shares outstanding, basic 6,000,000 12,922,449 27,926,771
=============== ================ ===============
Weighted average common shares outstanding, diluted 6,000,000 12,922,449 27,932,012
=============== ================ ===============
The accompanying notes are an integral part of these consolidated statements.
TOP TANKERS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(Expressed in thousands of U.S. Dollars - except share and per share data)
Accumulated
Common Stock Additional Other
Comprehensive ------------------------ Paid-in Comprehensive Retained
Income # of Shares Par Value Capital Income (loss) Earnings Total
------ ----------- --------- ------- ------------- -------- -----
BALANCE, December 31, 2002 6,000,000 60 6,867 - 1,845 8,772
Net income 1,634 - - - - 1,634 1,634
Contributions to additional
paid-
in capital - - - 6,484 - - 6,484
Dividends paid ($0.10 per
share) - - - - - (571) (571)
Comprehensive income 1,634 - - - - - -
BALANCE, December 31, 2003 6,000,000 60 13,351 - 2,908 16,319
Net income 32,794 - - - - 32,794 32,794
Dividends paid ($0.39 per
share) - - - - - (2,318) (2,318)
Contributions to additional
paid-
in capital - - - 17,077 - - 17,077
Issuance of common stock - 21,830,990 218 263,812 - - 264,030
Dividends declared ($0.21 per
share) - - - - - (5,845) (5,845)
Other comprehensive income
- Unrealized loss on cash
flow
hedges (248) - - - (248) - (248)
Comprehensive income 32,546 - - - - - -
BALANCE, December 31, 2004 27,830,990 278 294,240 (248) 27,539 321,809
Net income 68,684 - - - - 68,684 68,684
Dividends paid ($0.21 per
share) - - - - - (5,844) (5,844)
Dividends paid ($0.21 per
share) - - - - - (5,897) (5,897)
Dividends paid ($0.25 per
share) - - - - - (7,020) (7,020)
Dividends paid ($0.21 per
share) - - - - - (5,898) (5,898)
Issuance of restricted shares,
net
of forfeitures - 249,650 2 3,476 - - 3,478
Other comprehensive income
- Unrealized gain on cash flow
hedges 1,517 - - - 1,517 - 1,517
- Reclassification of gains to
earnings due to
discontinuance
of cash flow hedges (1,171) - - - (1,171) - (1,171)
Comprehensive income 69,030 - - - - - -
BALANCE, December 31, 2005 28,080,640 280 297,716 98 71,564 369,658
The accompanying notes are an integral part of these consolidated statements.
TOP TANKERS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(Expressed in thousands of U.S. Dollars)
2003 2004 2005
---- ---- ----
Cash Flows from Operating Activities:
Net income 1,634 32,794 68,684
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 3,604 13,108 47,055
Amortization of dry-docking costs 599 1,514 5,999
Amortization and write off of 121 755 1,407
deferred
financing costs
Stock-based compensation expense - - 3,478
Change in fair value of financial - - (327)
instruments
Amortization of deferred income - - (837)
Gain on sale of vessels - (638) (10,115)
(Increase) Decrease in:
Accounts receivable (689) (19,153) (19,556)
Insurance claims (787) 967 (160)
Inventories (220) (2,712) (3,087)
Due from related parties - (219) 219
Prepayments and other (72) (2,647) (1,245)
Increase (Decrease) in:
Accounts payable 1,883 7,331 2,047
Due to related parties (204) (105) -
Accrued liabilities 320 3,072 9,531
Unearned revenue 1,155 1,899 2,058
Payments for dry-docking (2,414) (7,365) (10,478)
Net Cash from Operating Activities 4,930 28,601 94,673
Cash Flows from (used in) Investing
Activities:
Advances for vessel acquisitions - (25,650) -
Vessel acquisitions and
improvements (19,550) (327,629) (677,111)
Advances to related parties (151) 319 -
Net proceeds from sale of vessels - 8,536 153,085
Expenditures for property and - (475) (833)
equipment
Net Cash used in Investing Activities (19,701) (344,899) (524,859)
Cash Flows from (used in) Financing
Activities:
Proceeds from long-term debt 25,850 281,900 472,549
Principal payments of long-term (3,059) (4,251) (31,180)
debt
Repayment of long-term debt (11,230) (115,260) (68,853)
Increase in restricted cash (300) (9,700) (3,500)
Contributions to additional 6,484 17,077 -
paid-in capital
Issuance of common stock - 264,030 -
Payment of financing costs (154) (2,755) (5,632)
Dividends paid (571) (2,318) (30,504)
Net Cash from Financing Activities 17,020 428,723 332,880
Net increase (decrease) in cash and 2,249 112,425 (97,306)
cash
equivalents
Cash and cash equivalents at beginning 94 2,343 114,768
of year
Cash and cash equivalents at end of year 2,343 114,768 17,462
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid 1,045 3,157 18,683
The accompanying notes are an integral part of these consolidated
statements.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
1. Basis of Presentation and General Information:
The accompanying consolidated financial statements include the accounts of
Top Tankers Inc. (formerly Ocean Holdings Inc.), ("TOP") and its
wholly-owned subsidiaries (collectively the "Company"). Ocean Holdings
Inc. was formed on January 10, 2000, under the laws of Marshall Islands,
was renamed to Top Tankers Inc. in May 2004 and is the sole owner of all
outstanding shares of the following subsidiaries:
(a) TOP Tanker Management Inc., (the "Manager") established on May 24,
2004, under the laws of Marshall Islands, is responsible for all of
the chartering, operational and technical management of the Company's
fleet. Up to June 30, 2004 the operations of the vessels were managed
by Primal Tankers Inc., a related Liberian corporation which was
wholly owned by the father of the Company's Chief Executive Officer
(Note 3). Since July 1, 2004 the Company's ship-owning subsidiaries
have a management agreement with the Manager, under which management
services are provided in exchange for a fixed monthly fee per vessel.
The Manager has an office in Greece located at 109-111, Messogion
Avenue 115 26 Athens, Greece. The Manager has subcontracted the day
to day technical management of the vessels to unaffiliated ship
management companies, Unicom Management Services Ltd, V. Ships
Management Limited and Hanseatic Shipping Company Ltd (collectively
the "Sub-Managers"). The Sub-Managers provide day to day operational
and technical services to the Company's vessels at a fixed monthly
fee per vessel. Such fees for the years ended December 31, 2003, 2004
and 2005 totaled $ 0, $ 803 and $ 3,159 respectively and are
separately reflected in the accompanying consolidated statements of
income. At December 31, 2004 and 2005 the amount due to the
Sub-Managers totaled $ 2,139 and $ 2,714 respectively and is included
in Accounts Payable in the accompanying consolidated balance sheets.
(b) Top Bulker Management Inc, incorporated on April 7, 2005 under the
laws of Marshall Islands, for the purpose to undertake the management
of a fleet of bulk carriers which were never actually acquired.
(c) Top Tankers (U.K.) Limited, incorporated in England and Wales on
January 12, 2005, as a representative company in London. Top Tankers
(U.K) Limited entered into a lease agreement for office space in
London. The original agreement had a one year duration ending
December 31, 2005 and in early January 2006 was extended for one
year. The annual rental is GBP 123,600, payable quarterly in advance.
(d) Helidona Shipping Company Limited ("Helidona"), incorporated in the
Marshall Islands in May 2003, owner of the 29,998 DWT (built in
1989), tanker vessel "Yapi", which was sold in September 2005.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
1. Basis of Presentation and General Information - (continued):
(e) Gramos Shipping Company Inc. ("Gramos"), incorporated in the Marshall
Islands in January 2003, owner of the 45,720 DWT (built in 1992),
tanker vessel "Faithful", which was acquired in July 2003 and Vermio
Shipping Company Limited, incorporated in the Marshall Islands in
December 2001, owner of vessel "Faithful" for the period from
February 2002 to July 2003.
(f) Rupel Shipping Company Inc. ("Rupel"), incorporated in the Marshall
Islands in January 2003, owner of the 44,646 DWT (built in 1992)
tanker vessel "Fearless", which was sold in July 2005.
(g) Mytikas Shipping Company Ltd. ("Mytikas"), incorporated in the
Marshall Islands in February 2004, owner of the 136,055 DWT (built in
1993) tanker vessel "Limitless", which was acquired in March 2004.
(h) Litochoro Shipping Company Ltd. ("Litochoro"), incorporated in the
Marshall Islands in March 2004, owner of the 135,915 DWT (built in
1992) tanker vessel "Endless", which was acquired in March 2004.
(i) Falakro Shipping Company Ltd. ("Falakro"), incorporated in Liberia in
July 2004, owner of the 47,076 DWT (built in 1991) tanker vessel
"Doubtless", which was acquired in August 2004.
(j) Pageon Shipping Company Ltd. ("Pageon"), incorporated in Cyprus in
July 2004, owner of the 47,084 DWT (built in 1992) tanker vessel
"Vanguard", which was acquired in August 2004.
(k) Vardousia Shipping Company Ltd. ("Vardousia"), incorporated in Cyprus
in July 2004, owner of the 47,084 DWT (built in 1992) tanker vessel
"Invincible", which was acquired in August 2004 and sold and leased
back in September 2005.
(l) Psiloritis Shipping Company Ltd. ("Psiloritis"), incorporated in
Liberia in July 2004, owner of the 47,084 DWT (built in 1991) tanker
vessel "Victorious", which was acquired in August 2004 and sold and
leased back in September 2005.
(m) Parnon Shipping Company Ltd. ("Parnon"), incorporated in Cyprus in
July 2004, owner of the 47,084 DWT (built in 1992) tanker vessel
"Relentless", which was acquired in August 2004 and sold and leased
back in September 2005.
(o) Menalo Shipping Company Ltd. ("Menalo"), incorporated in Cyprus in
July 2004, owner of the 47,084 DWT (built in 1991) tanker vessel
"Restless", which was acquired in August 2004 and sold and leased
back in August 2005.
(p) Pintos Shipping Company Ltd. ("Pintos"), incorporated in Cyprus in
July 2004, owner of the 47,084 DWT (built in 1992) tanker vessel
"Sovereign", which was acquired in August 2004 and sold and leased
back in August 2005.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
1. Basis of Presentation and General Information - (continued):
(q) Pylio Shipping Company Ltd. ("Pylio"), incorporated in Liberia in
July 2004, owner of the 154,970 DWT (built in 1991) tanker vessel
"Flawless", which was acquired in September 2004.
(r) Idi Shipping Company Ltd. ("Idi"), incorporated in Liberia in July
2004, owner of the 47,094 DWT (built in 1991) tanker vessel
"Spotless", which was acquired in September 2004.
(s) Taygetus Shipping Company Ltd. ("Taygetus"), incorporated in Liberia
in July 2004, owner of the 154,970 DWT (built in 1991) tanker vessel
"Timeless", which was acquired in September 2004.
(t) Kalidromo Shipping Company Limited ("Kalidromo"), incorporated in the
Marshall Islands in May 2003, owner of the 31,766 DWT (built in 1980)
tanker vessel "Tireless", which was sold in September 2004.
(u) Olympos Shipping Company Limited ("Olympos"), incorporated in the
Marshall Islands in May 2003, owner of the 29,990 DWT (built in
1985), tanker vessel "Med Prologue" which was sold in December 2004
and Olympos Shipping Company Limited, incorporated in British Cayman
Islands in December 1999, former owner of the vessel.
(v) Kisavos Shipping Company Limited ("Kisavos"), incorporated in the
Marshall Islands in November 2004, owner of the 154,970 DWT (built in
1991) tanker vessel "Priceless", which was acquired in February 2005.
(w) Imitos Shipping Company Limited ("Imitos"), incorporated in the
Marshall Islands in November 2004, owner of the 149,554 DWT (built in
1992) tanker vessel "Noiseless", which was acquired in April 2005.
(x) Parnis Shipping Company Limited ("Parnis"), incorporated in the
Marshall Islands in November 2004, owner of the 149,599 DWT (built in
1992) tanker vessel "Stainless", which was acquired in April 2005.
(y) Parnasos Shipping Company Limited ("Parnasos"), incorporated in
Liberia in November 2004, owner of the 154,970 DWT (built in 1992)
tanker vessel "Faultless", which was acquired in April 2005.
(z) Vitsi Shipping Company Limited ("Vitsi"), incorporated in Liberia in
November 2004, owner of the 154,970 DWT (built in 1991) tanker vessel
"Stopless", which was acquired in April 2005.
(aa) Giona Shipping Company Limited ("Giona"), incorporated in Marshall
Islands in March 2005, owner of the 46,217 DWT (built in 1999) tanker
vessel "Taintless", which was acquired in March 2005.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
1. Basis of Presentation and General Information - (continued):
(bb) Lefka Shipping Company Limited ("Lefka"), incorporated in Marshall
Islands in March 2005, owner of the 46,168 DWT (built in 1999) tanker
vessel "Dauntless", which was acquired in March 2005.
(cc) Agrafa Shipping Company Limited ("Agrafa"), incorporated in Marshall
Islands in March 2005, owner of the 46,185 DWT (built in 1999) tanker
vessel "Soundless", which was acquired in April 2005.
(dd) Agion Oros Shipping Company Limited ("Agion Oros"), incorporated in
Marshall Islands in February 2005, owner of the 47,262 DWT (built in
1998) tanker vessel "Topless", which was acquired in April 2005.
(ee) Nedas Shipping Company Limited ("Nedas"), incorporated in Marshall
Islands in April 2005, owner of the 150,038 DWT (built in 1993)
tanker vessel "Stormless", which was acquired in October 2005.
(ff) Ilisos Shipping Company Limited ("Ilisos"), incorporated in Marshall
Islands in April 2005, owner of the 46,346 DWT (built in 2003) tanker
vessel "Ioannis P.", which was acquired in November 2005.
(gg) Sperhios Shipping Company Limited ("Sperhios"), incorporated in
Marshall Islands in April 2005, owner of the 146,286 DWT (built in
1996) tanker vessel "Ellen P.", which was acquired in November 2005.
(hh) Ardas Shipping Company Limited ("Ardas"), incorporated in Marshall
Islands in April 2005, owner of the 147,048 DWT (built in 1993)
tanker vessel "Errorless", which was acquired in November 2005.
(ii) Kifisos Shipping Company Limited ("Kifisos"), incorporated in
Marshall Islands in April 2005, owner of the 147,048 DWT (built in
1994) tanker vessel "Edgeless", which was acquired in December 2005.
The Company is engaged in the ocean transportation of crude oil and
refined petroleum products worldwide through the ownership and
operation of the tanker vessels mentioned above.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
1. Basis of Presentation and General Information - (continued):
On December 31, 2005, eight vessels were operating under voyage charters
and nineteen vessels under long-term time charters, with an estimated
average duration of 36 months. Seventeen out of nineteen time charters
include profit sharing agreements, which are settled on a calendar quarter
basis. During 2005, 52% of the Company's voyage revenues derived from these
time charter agreements. During 2003, 2004 and 2005 three charterers
individually accounted for more than 10% of the Company's voyage revenues
as follows:
Charterer 2003 2004 2005
--------- ---- ---- ----
A 31% 29% 20%
B 16% -- --
C -- 15% 32%
2. Significant Accounting Policies:
(a) Principles of Consolidation: The accompanying consolidated financial
statements have been prepared in accordance with U.S generally
accepted accounting principles ("US GAAP") and include the accounts
and operating results of Top Tankers Inc. and its wholly-owned
subsidiaries referred to in Note 1. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) Use of Estimates: The preparation of consolidated financial
statements in conformity with U.S generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
(c) Other Comprehensive Income (Loss): The Company follows the provisions
of Statement of Financial Accounting Standards "Statement of
Comprehensive Income" (SFAS 130), which requires separate
presentation of certain transactions, which are recorded directly as
components of stockholders' equity.
(d) Foreign Currency Translation: The Company's functional currency is
the U.S. Dollar because all vessels operate in international shipping
markets, and therefore primarily transact business in U.S. Dollars.
The Company's books of accounts are maintained in U.S. Dollars.
Transactions involving other currencies during the year are converted
into U.S. Dollars using the exchange rates in effect at the time of
the transactions. At the balance sheet dates, monetary assets and
liabilities, which are denominated in other currencies, are
translated to reflect the year-end exchange rates. Resulting gains or
losses are reflected separately in the accompanying consolidated
statements of income.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
2. Significant Accounting Policies - (continued):
(e) Cash and Cash Equivalents: The Company considers highly liquid
investments such as time deposits and certificates of deposit with an
original maturity of three months or less to be cash equivalents.
(f) Accounts Receivable--Trade: The amount shown as Accounts
Receivable--Trade at each balance sheet date, includes estimated
recoveries from charterers for hire, freight and demurrage billings,
net of a provision for doubtful accounts. At each balance sheet date,
all potentially uncollectible accounts are assessed individually for
purposes of determining the appropriate provision for doubtful
accounts. Provision for doubtful accounts at December 31, 2004 and
2005 totalled $ 132 and $ 316, respectively.
(g) Insurance Claims: Insurance claims are recorded on the accrual basis
and represent the claimable expenses, net of deductibles, incurred
through December 31 of each year, which are expected to be recovered
from insurance companies.
(h) Inventories: Inventories consist of bunkers, lubricants and
consumable stores which are stated at the lower of cost or market.
Cost is determined by the first in, first out method.
(i) Vessel Cost: Vessels are stated at cost, which consists of the
contract price and any material expenses incurred upon acquisition
(initial repairs, improvements and delivery expenses). Subsequent
expenditures for conversions and major improvements are also
capitalized when they appreciably extend the life, increase the
earning capacity or improve the efficiency or safety of the vessels.
Otherwise these amounts are charged to expense as incurred.
(j) Impairment of Long-Lived Assets: The Company applies SFAS 144
"Accounting for the Impairment or Disposal of Long-lived Assets",
which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The standard requires that
long-lived assets and certain identifiable intangibles held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not
be recoverable. When the estimate of undiscounted cash flows,
excluding interest charges, expected to be generated by the use of
the asset is less than its carrying amount, the Company should
evaluate the asset for an impairment loss. Measurement of the
impairment loss is based on the fair value of the asset as provided
by third parties. In this respect, management regularly reviews the
carrying amount of the vessels in connection with the estimated
recoverable amount for each of the Company's vessels. The review for
impairment of each vessel's carrying amount as of December 31, 2003,
2004 and 2005, did not result in an indication of an impairment loss.
Furthermore, in the period a long-lived asset meets the "held for
sale" criteria of SFAS No. 144, a loss is recognized for any initial
adjustment of the long-lived asset's carrying amount to fair value
less cost to sell. For the years ended December 31, 2003, 2004 and
2005, no such adjustments were identified.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
2. Significant Accounting Policies - (continued):
(k) Vessel Depreciation: Depreciation is calculated using the
straight-line method over the estimated useful life of the vessels,
after deducting the estimated salvage value. Each vessel's salvage
value is equal to the product of its lightweight tonnage and
estimated scrap rate. Management estimates the useful life of the
Company's vessels to be 25 years from the date of initial delivery
from the shipyard. Second hand vessels are depreciated from the date
of their acquisition through their remaining estimated useful life.
When regulations place limitations over the ability of a vessel to
trade on a worldwide basis, its useful life is adjusted at the date
such regulations are adopted.
(l) Accounting for Dry-Docking Costs: The Company follows the deferral
method of accounting for dry-docking costs whereby actual costs
incurred are deferred and are amortized on a straight-line basis over
the period through the date the next dry-docking becomes due. Costs
capitalized as part of the drydock include actual costs incurred at
the dry-dock yard, including but not limited to, dry-dock dues and
general services for vessel preparation, coating of WBT/COT,
steelworks, piping works and valves, machinery works and electrical
works. In addition, we capitalize all voyage expenses related to the
dry-dock, including but not limited to, costs of bunkers consumed,
port and canal dues between the vessel's last discharge port prior to
the dry-dock and the time the vessel leaves the dry-dock yard; cost
of hiring riding crews to effect repairs on a ship and parts used in
making such repairs that are reasonably made in anticipation of
reducing the duration or cost of the dry-dock; cost of travel,
lodging and subsistence of our personnel sent to the dry-dock site to
supervise; and the cost of hiring a third party to oversee a
dry-dock. Unamortized dry-docking costs of vessels that are sold are
written off and included in the calculation of the resulting gain or
loss in the year of the vessel's sale.
(m) Financing Costs: Fees incurred and paid to the lenders for obtaining
new loans or refinancing existing ones are recorded as deferred
charges and classified as a contra to debt. Such fees are amortized
to interest expense over the life of the related debt using the
effective interest method, with the exception of those related to
undrawn portion of loans. The latter are classified as assets and
amortized over the term in which the loan may be drawn. Unamortized
fees relating to loans repaid or refinanced are expensed when a
repayment or refinancing is made and charged to interest and finance
costs.
(n) Pension and Retirement Benefit Obligations--Crew: The ship-owning
companies included in the consolidation, employ the crew on board,
under short-term contracts (usually up to nine months) and
accordingly, they are not liable for any pension or post retirement
benefits.
(o) Staff leaving Indemnities - Administrative personnel: The Company's
employees are entitled to termination payments in the event of
dismissal or retirement with the amount of payment varying in
relation to the employee's compensation, length of service and manner
of termination (dismissed or retired). Employees who resign, or are
dismissed with cause are not entitled to termination payments. The
Company's liability on an actuarially determined basis, at December
31, 2004 and 2005 amounted to $ 77 and $ 116, respectively.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
2. Significant Accounting Policies - (continued):
(p) Accounting for Revenue and Expenses: Revenues are generated from
voyage and time charter agreements. Time charter revenues are
recorded over the term of the charter as service is provided. Profit
sharing represents the excess of agreed daily base rate generated
every quarter, if any, and is settled and recorded on a quarterly
basis. Under a voyage charter the revenues, including demurrages and
associated voyage costs, with the exception of port expenses which
are recorded as incurred, are recognized on a proportionate
performance method over the duration of the voyage. A voyage is
deemed to commence upon the completion of discharge of the vessel's
previous cargo and is deemed to end upon the completion of discharge
of the current cargo. Demurrage income represents payments by the
charterer to the vessel owner when loading or discharging time
exceeded the stipulated time in the voyage charter. Vessel operating
expenses are accounted for on the accrual basis. Unearned revenue
represents cash received prior to year-end related to revenue
applicable to periods after December 31 of each year.
(q) Repairs and Maintenance: All repair and maintenance expenses and
underwater inspection expenses are expensed in the year incurred.
Such costs are included in vessel operating expenses in the
accompanying consolidated statements of income.
(r) Earnings per Share: Basic earnings per share are computed by dividing
net income by the weighted average number of common shares deemed
outstanding during the year. Diluted earnings per share reflect the
potential dilution that could occur if securities or other contracts
to issue common stock were exercised.
(s) Segment Reporting: The Company reports financial information and
evaluates its operations by charter revenues and not by the length of
ship employment for its customers, i.e., spot or time charters. The
Company does not have discrete financial information to evaluate the
operating results for each such type of charter. Although revenue can
be identified for these types of charters, management cannot and does
not identify expenses, profitability or other financial information
for these charters. As a result, management, including the chief
operating decision maker, reviews operating results solely by revenue
per day and operating results of the fleet and thus the Company has
determined that it operates under one reportable segment.
Furthermore, when the Company charters a vessel to a charterer, the
charterer is free to trade the vessel worldwide and, as a result, the
disclosure of geographic information is impracticable.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
2. Significant Accounting Policies - (continued):
(t) Derivatives: SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (as amended) establishes accounting and reporting
standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability
measured at its fair value, with changes in the derivatives' fair
value recognized currently in earnings unless specific hedge
accounting criteria are met.
During 2004 and 2005, the Company engaged in interest rate swap
agreements in order to hedge the exposure of interest rate
fluctuations associated with the cash flows on a portion of the
Company's variable rate borrowings (Note 8). For swap agreements that
are designated and qualified as cash flow hedges their fair value is
included in financial instruments in the accompanying consolidated
balance sheets with changes in the effective portion of the
instruments' fair value recorded in accumulated other comprehensive
income (loss). The ineffective portion of the change in fair value of
the derivative financial instruments is immediately recognized in the
income statement as a component of interest and finance costs. If the
hedged item is a forecasted transaction that becomes probable of not
occuring, then the derivative financial instrument no longer
qualifies as an effective cash flow hedge from that date and, as a
result, cumulative fair value changes that were previously recorded
in accumulated other comprehensive income (loss) are immediately
reclassified into earnings as a component of interest and finance
costs. In all other instances, when a derivative financial instrument
ceases to qualify as an effective cash flow hedge but if it is still
possible the hedged forecasted transaction may occur, hedge
accounting ceases from that date and the instrument is prospectively
marked to market through earnings, but previously recorded changes in
fair value remain in accumulated other comprehensive income until the
hedged item affects earnings or until it becomes probable that the
hedged forecasted transaction will not occur.
The off-balance sheet risk in outstanding option agreements involves
the risk of a counter party not performing under the terms of the
contract. The Company monitors its positions, the credit ratings of
counterparties and the level of contracts it enters into with any one
party. The Company has a policy of entering into contracts with
parties that meet stringent qualifications and, given the high level
of credit quality of its derivative counterparty, the Company does
not believe it is necessary to obtain collateral for such
arrangements.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
2. Significant Accounting Policies - (continued):
(u) Recent Accounting Pronouncements:
i) FASB Interpretation No. 46R: In December 2003, the Financial
Accounting Standards Board ("FASB") issued Interpretation No.
46R, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (the "Interpretation"), which
revised Interpretation No. 46, issued in January 2003. The
Interpretation addresses the consolidation of business
enterprises (variable interest entities) to which the usual
condition (ownership of a majority voting interest) of
consolidation does not apply. The Interpretation focuses on
financial interests that indicate control. It concludes that in
the absence of clear control through voting interests, a
company's exposure (variable interest) to the economic risks and
potential rewards from the variable interest entity's assets and
activities are the best evidence of control. Variable interests
are rights and obligations that convey economic gains or losses
from changes in the value of the variable interest entity's
assets and liabilities. Variable interests may arise from
financial instruments, service contracts, and other arrangements.
If an enterprise holds a majority of the variable interests of an
entity, it would be considered the primary beneficiary. The
primary beneficiary would be required to include assets,
liabilities, and the results of operations of the variable
interest entity in its financial statements. The Company was
required to adopt the provisions of FIN 46R for entities created
prior to February 2003, in 2004 and 2005. The adoption of FIN 46R
in 2004 and 2005 did not have any impact on the Company's
consolidated financial position, results of operations or cash
flows.
(ii) FASB Statement No.123(R): In December 2004, the FASB issued FASB
Statement No. 123 (revised 2004), Share-Based Payment, which is a
revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. Statement 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its
equity instruments for goods or services. Statement 123(R)
focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment
transactions. Statement 123(R) applies to public entities that do
not file as small business issuers as of the beginning of the
first interim or annual reporting period that begins after June
15, 2005. Statement 123(R) applies to all awards granted after
the required effective date and to awards modified, repurchased,
or cancelled after that date. The Company elected the early
adoption of Statement 123(R) for interim or annual reports,
beginning January 1, 2005, the results of which are discussed in
Note 13. As the Company did not previously engage in share-based
payment activity prior to 2005, there is no transitional impact
from the adoption of FAS 123(R) at January 1, 2005.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
2. Significant Accounting Policies - (continued):
(iii) FASB Statement No. 154: In May 2005, the FASB issued FASB
Statement No. 154, "Accounting Changes and Error Corrections"
(SFAS No. 154). SFAS No. 154 is a replacement of APB Opinion No.
20, "Accounting Changes" (APB 20) and FASB Statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements"
(SFAS No. 3). SFAS No. 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections. It
establishes retrospective application as the required method for
reporting a voluntary change in accounting principle. APB 20
previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new
accounting principle. SFAS No. 154 provides guidance for
determining whether retrospective application of a change in
accounting principle is impracticable and for reporting a change
when retrospective application is impracticable. SFAS No. 154
also requires that a change in method of depreciation,
amortization, or depletion for long-lived, nonfinancial assets be
accounted for as a change in accounting estimate that is effected
by a change in accounting principle. APB 20 previously required
that such a change be reported as a change in accounting
principle. SFAS No. 154 carries forward many provisions of APB 20
without change, including the provisions related to the reporting
of a change in accounting estimate, a change in the reporting
entity, and the correction of an error. SFAS No. 154 also carries
forward the provisions of SFAS No. 3 that govern reporting
accounting changes in interim financial statements. SFAS No. 154
is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 31, 2005. The
Company will adopt this pronouncement beginning in fiscal year
2006.
3. Transactions with Related Parties:
(a) Primal Tankers Inc.: As discussed in Note 1, up to June 30, 2004, the
Company's ship-owning subsidiaries had management agreements with
Primal Tankers Inc., under which management services were provided in
exchange for a fixed monthly fee per vessel, which was renewed
annually. The fees charged by Primal Tankers Inc. during 2003 and
2004 amounted to $ 1,686 and $ 1,120, respectively, and they are
separately reflected in the accompanying consolidated statements of
income. On December 31, 2004, the amount due from Primal Tankers Inc.
totalled $ 219 and is separately reflected in the 2004 accompanying
consolidated balance sheet. During 2004, the Manager acquired from
Primal Tankers Inc. office furniture and equipment for a
consideration of $ 150.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
3. Transactions with Related Parties - (continued):
(b) Pyramis Technical Co. S.A.: On July 9, 2004, the Company entered into
an agreement to lease office space in Athens, Greece from Pyramis
Technical Co. SA, which is wholly owned by the father of the
Company's Chief Executive Officer. The agreement is for duration of
six years beginning July 2004 with a lessee's option for an extension
of four years. The monthly rental is Euro 39,000 adjusted annually
for inflation increase effective January 1, 2006. General and
administrative expenses for the years ended December 31, 2004 and
2005 include $ 281 and $ 586, respectively of rentals paid to Pyramis
Technical Co. S.A. The minimum rentals payable under non-cancelable
operating leases for each of the years ending December 31, 2006
through December 31, 2010 before any adjustment for inflation
(approximately 3% annually) and translated using the exchange rate of
$/Euro at December 31, 2005 are:
Year Amount
------------------------------- ------------------
2006 552
2007 552
2008 552
2009 and thereafter 874
------------------
------------------
2,530
==================
4. Inventories:
The amounts shown in the accompanying consolidated balance sheets are
analyzed as follows:
2004 2005
------------ -----------
------------ -----------
Bunkers 2,096 3,976
Lubricants 805 1,501
Consumable stores 320 831
------------ -----------
3,221 6,308
============ ===========
5. Advances for Vessels Acquisitions:
In November 2004, Kisavos, Imitos, Parnis, Parnasos and Vitsi entered into
memoranda of agreement to acquire the vessels Priceless, Noiseless,
Stainless, Faultless and Stopless, respectively, for a total amount of $
256,500. Under the terms of the agreements, the Company, as of December
31, 2004, paid $ 25,650 representing a 10% deposit on the purchase price
of each vessel. The acquisitions were financed from the proceeds of the
Company's follow-on public offering discussed in Note 12 and from
long-term bank financing discussed in Note 8(a), (b) and (c).
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
6. Vessels, net:
The amounts in the accompanying consolidated balance sheets are analyzed
as follows:
Vessel Accumulated Net Book
Cost Depreciation Value
---- ------------ -----
Balance, December 31, 2003 55,946 (7,872) 48,074
-Acquisitions 327,629 - 327,629
-Disposals (10,024) 3,391 (6,633)
-Depreciation - (13,073) (13,073)
--------- -------- ---------
Balance, December 31, 2004 373,551 (17,554) 355,997
-Acquisitions 702,761 - 702,761
-Disposals (139,921) 14,828 (125,093)
-Depreciation - (46,911) (46,911)
--------- -------- ---------
Balance, December 31, 2005 936,391 (49,637) 886,754
========= ======== =========
Acquisitions during the year ended December 31, 2004 represent (a) the
acquisition cost of the vessels Limitless and Endless for a total amount
of $ 75,846, (b) the acquisition cost of the ten vessels discussed in Note
1(i) through Note 1(s) for a total amount of $ 251,257 and (c)
improvements of $ 526 on the vessel Yapi. Acquisitions during the year
ended December 31, 2005 represent (a) the acquisition cost of the five
vessels discussed in Note 1(v) through Note 1(z) for a total amount of $
249,340, (b) the acquisition cost of the four vessels discussed in Note
1(aa) through Note 1(dd) for a total amount of $ 163,629 and (c) the
acquisition cost of the five vessels discussed in Note 1(ee) through Note
1(ii) for a total amount of $ 289,792.
In September and December 2004 vessels Tireless and Med Prologue,
respectively, were sold for an aggregate price of $ 8,900. These sales,
after the related sales expenses of $ 364 and the unamortized dry-docking
costs written off of $ 1,265, resulted in a gain of $ 638, which is
separately reflected in the accompanying 2004 consolidated statement of
income.
In July and September 2005 vessels Fearless and Yapi were sold for an
aggregate price of 38,348. These sales, after the related sale expenses of
$ 5,968 and the unamortized dry-docking costs written-off of $ 716,
resulted in a gain of $ 10,115, which is separately reflected in the
accompanying 2005 consolidated statement of income.
In August and September 2005, the Company sold the Restless, Sovereign,
Relentless, Invincible and Victorious for an aggregate price of 120,705,
net of related sales expenses of $ 5,545, and entered simultaneously into
bareboat charter agreements to leaseback the vessels for a period of seven
years (Note 11).
All Company's vessels, having a total carrying value of $ 886,754 at
December 31, 2005, have been provided as collateral to secure the loans
discussed in Note 8.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
7. Deferred Charges:
The unamortized amounts included in the accompanying consolidated balance
sheets represent dry-docking costs and financing fees for the undrawn
portion of the revolving credit facility (Note 8) and are analyzed as
follows:
Financing
Dry-Docking Fees Total
----------- ---- -----
Balance, December 31, 2003 2,148 - 2,148
--Additions 7,365 - 7,365
--Write-off due to sale of vessels (Note 6) (1,251) - (1,251)
--Amortization (1,514) - (1,514)
Balance, December 31, 2004 6,748 - 6,748
--Additions 10,478 1,022 11,500
--Write-off due to sale of vessels (Note 6) (716) - (716)
--Amortization (5,999) (17) (6,016)
Balance, December 31, 2005 10,511 1,005 11,516
Write-off of deferred dry-docking costs due to sale of vessels is included
in gain on sale of vessels in the accompanying consolidated statements of
income.
8. Long-term Debt:
The amounts in the accompanying consolidated balance sheets are analyzed
as follows:
Borrower(s) 2004 2005
----------- ---- ----
(a) The Company 194,806 512,315
(b) Vitsi - 25,894
(c) Parnis - 25,894
------------ ----------
Total 194,806 564,103
Less- current portion (19,540) (45,329)
------------ ----------
Long-term portion 175,266 518,774
============ ==========
(a) The Company: In late July 2004, the Company concluded a bank loan to
partially finance the acquisition cost of the ten tanker vessels discussed
in Note 6 and to refinance the Company's existing loans, with the exception
of the Kalidromo loan that was repaid in full in September 2004 from the
sale proceeds of the vessel Tireless. The loan was for the amount of $
222,000 divided into 2 tranches of $ 197,000 and $ 25,000, respectively.
The $ 197,000 tranche was payable in 16 consecutive semi-annual
installments of $ 10,000 each, from March 31, 2005 to September 2012, plus
a balloon payment of $ 37,000 payable together with the last installment.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
8. Long-term Debt - (continued):
The $ 25,000 tranche, which was partially repaid in September 2004 ($
2,310) from the sale proceeds of the vessel Tireless, was repaid in full on
November 15, 2004, from the proceeds of the Company's follow-on offering
(Note 12).
In February and March 2005, the Company concluded two bank loans bearing
interest at LIBOR plus a margin as follows:
(i) In February 2005, a bank loan to partially finance the acquisition
cost of vessels Priceless, Noiseless and Faultless and to
refinance the loan discussed above. The loan is for the amount of
$ 280,794 divided into two tranches of $ 197,000 and $ 83,794,
respectively. The $ 197,000 tranche is payable in 16 equal
consecutive semi-annual instalments of $ 10,000 each, from March
31, 2005 to September 2012, plus a balloon payment of $ 37,000
payable together with the last instalment. The $ 83,794 tranche
was subject to a fee of 1% paid on draw down and the tranche was
payable in 14 varying semi-annual instalments starting July 31,
2005, plus a balloon payment of $ 17,041 payable together with the
last instalment. The loan bears interest at LIBOR plus a margin.
(ii) In March 2005, a bank loan to partially finance the acquisition
cost of the vessels Topless, Dauntless, Soundless and Taintless.
The loan, which is for the amount of $ 144,000 was provided as
Tranche C of the loan discussed under (i) above, was subject to
fee of 0.75% paid on draw down and is payable in 17 equal
consecutive semi-annual instalments of $ 6,300 each, starting
November 30, 2005, plus a balloon payment of $ 36,900 payable
together with the last instalment. The loan bears interest at
LIBOR plus a margin.
In August and September 2005, following the sale of Fearless and Yapi
discussed in Note 6 and the sale and leaseback of Restless, Sovereign,
Relentless, Invincible and Victorious discussed in Notes 6 and 11, the
Company prepaid $ 68,853 of the then outstanding amount of Tranche A.. In
November 2005, all three tranches were restructured and the Company
simultaneously concluded an additional $ 206,000 revolving credit facility
with the same lender. The new loan of $ 195,657 was to refinance the then
outstanding amount under (i) mentioned above and is payable in 15
semi-annual instalments. The first instalment of $ 10,657 was paid on
November 30, 2005 to be followed by 14 semi-annual instalments of $ 10,500
each, from May 31, 2006 to November 2012, plus a balloon payment of $ 38,000
payable together with the last instalment. The revolving credit facility was
concluded in order to refinance the then outstanding amount of $ 144,000
under (ii) mentioned above and to partially finance up to an additional
amount of $ 206,000 the acquisition of tankers meeting specific criteria.
The $ 206,000 was subject to a fee of 0.5% paid on signing of the agreement.
On November 8, 2005, $ 34,255 was drawn down to partially finance the
acquisition cost of vessel Ioannis P (Note 6). The new loan and the
revolving credit facility bear interest at LIBOR plus a margin.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
8. Long-term Debt - (continued):
As of December 31, 2005 the outstanding amount under the revolving credit
facility was $ 178,255, payable in 10 semi-annual instalments of
approximately $ 11,587 starting April 30, 2011, plus a balloon payment of $
62,389 payable together with the last instalment, if no further amounts are
drawn.
In November 2005, the Company concluded an additional bank loan of $
154,000 to partially finance the acquisition cost of vessels Stormless,
Ellen P., Errorless and Edgeless (Note 6). The loan is divided into 2
tranches of $ 130,000 and $ 24,000 respectively. Tranche A is payable in
32 consecutive quarterly instalments of $ 2,750 each, starting March 13,
2006, plus a balloon payment of $ 42,000 payable together with the last
instalment. Tranche B is payable in 16 consecutive quarterly instalments
of $ 1,500 each, starting March 13, 2006. The loan was subject to a fee of
1% paid upon signing of the agreement. The loan bears interest at LIBOR
plus a margin. The applicable interest rate as of December 31, 2005 was
5.46%.
(b), (c) Vitsi - Parnis: Loan for an amount of $ 56,500 divided into two
tranches, obtained in March 2005, to partially finance the acquisition
cost of vessels Stainless and Stopless (Note 6). The loan is payable in 28
varying quarterly instalments starting July 29, 2005, plus a balloon
payment of $ 10,170 payable together with the last instalment. The loan
was subject to a fee of 1% paid on draw down. The loan bears interest at
LIBOR plus a margin. The applicable interest rate as of December 31, 2005
was 5.49%.
The loans are secured as follows:
o First priority mortgages over the Company's vessels;
o Assignments of insurance and earnings of the mortgaged vessels;
o Corporate guarantee of the TOP Tankers Inc;
o Pledge over the earnings accounts of the vessels.
The loans contain financial covenants, calculated on a consolidated basis,
requiring the Company to ensure that the aggregate market value of the
mortgaged vessels at all times exceed 130% of the aggregate outstanding
principal amounts under the loans, to ensure that total assets minus total
debt will not at any time be less than $ 200,000 ($ 250,000 in case of the
$ 154,000 loan) and to maintain liquid funds which at any time be not less
than the higher of $ 10,000 or $ 500 per vessel. As a result, the minimum
liquid funds required under the loan covenants of $ 10,000 and $ 13,500 on
a consolidated basis, as of December 31, 2004 and 2005 respectively, have
been classified as restricted cash and are separately reflected in the
accompanying consolidated balance sheets. The Company is permitted to pay
dividends under the loans so long as they are not in default of a loan
covenant or if such dividend payment would not result in a default of a
loan covenant.
Interest expense for the years ended December 31, 2003, 2004 and 2005,
amounted to $ 1,128, $ 4,161 and $ 19,700 respectively and is included in
interest and finance costs in the accompanying consolidated statements of
income (Note 16).
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
8. Long-term Debt - (continued):
The annual principal payments required to be made after December 31, 2005,
are as follows:
Year ending December 31, Amount
------------------------ ------
2006 46,475
2007 45,627
2008 44,215
2009 43,650
2010 and thereafter 389,550
---------------
---------------
569,517
Less unamortized financing fees (5,414)
---------------
---------------
564,103
===============
In connection with the loan discussed under (a) above, on August 26, 2004,
the Company entered into an interest rate swap agreement with declining
notional balance for an initial balance of $ 98,500 in order to hedge its
variable interest rate exposure. The swap agreement would have expired in
September 2007 and had a fixed interest rate of 3.61% plus the applicable
bank margin. In connection with the loans discussed under (a)(i) and
(a)(ii) above, the Company entered into the following interest rate swap
agreements with declining notional balances in order to hedge its variable
interest rate exposure, with effective date March 31, 2005;
(i) for an initial notional amount of $ 93,500 and for a period of
five years, with a fixed interest rate of 4.72% plus the
applicable bank margin; and
(ii) for an initial notional amount of $ 27,931 and for a period of
four years, with a fixed interest rate of 4.5775% plus the
applicable bank margin; and
(iii) for an initial notional amount of $ 36,550 and for a period of
four years, with a fixed interest rate of 4.66% plus the
applicable bank margin.
As a result of the sale of vessels and prepayment of the loan of $ 68,853
mentioned above, the Company terminated the swap of $ 98,500, which at
that time was in a gain position. The swap's termination resulted in a
reclassification adjustment from other comprehensive income to earnings
for the accumulated swap gain of $ 1,171, which is included in interest
and finance costs (Note 16). In November 2005, upon the loan restructuring
discussed under (a) above, the then existing swaps were restructured into
a new swap with declining notional balances in order to hedge the variable
interest rate exposure, with effective date November 3, 2005; for an
initial notional amount of $ 100,500 and for a period of five years, with
a fixed interest rate of 4.63% plus the applicable bank margin. The swap
of $ 36,550 under (iii) above was also amended to a new swap with
declining notional balances in order to hedge the variable interest rate
exposure, with effective date November 3, 2005; for an initial notional
amount of $ 36,550 and for a period of four years, with a fixed interest
rate of 4.66% plus the applicable bank margin.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
8. Long-term Debt - (continued):
As of December 31, 2004 and 2005, the swaps' fair values, based on third
party valuations, are in a net loss position of ($ 248) and a net gain
position of $ 425, respectively. The 2004 change in fair value on the swap
agreement was recorded entirely as a component of other comprehensive loss
as there was no hedge ineffectiveness. The 2005 change in fair value of $
327 on the swap agreements with initial notional balances of $ 98,500, $
93,500 and $ 27,931 was recorded in interest and finance costs, as the
Company considers that the future cash outflows hedged by these swaps are
probable of not occurring. The change in fair value of $ 98 of the swap
agreement with initial notional balance of $ 36,550 was recorded in other
comprehensive income (loss) as the Company considers that the related
future cash outflows being hedged are probable of occurring.
The total impact in the income statement for the year ended December 31,
2005, arising from the swap termination and year-end swap valuations, is a
gain of $ 1,498, included in interest and finance costs (Note 16).
9. Accrued Liabilities:
The amounts in the accompanying consolidated balance sheets are analyzed
as follows:
2004 2005
---- ----
Interest on long-term debt 1,170 2,187
Vessels' operating and voyage expenses 2,019 4,222
General and administrative expenses 577 6,888
----- -------
Total 3,766 13,297
====== ======
10. Contingencies:
Various claims, suits, and complaints, including those involving
government regulations and product liability, arise in the ordinary course
of the shipping business. In addition, losses may arise from disputes with
charterers, agents, insurance and other claims with suppliers relating to
the operations of the Company's vessels. Currently, management is not
aware of any such claims or contingent liabilities, which should be
disclosed, or for which a provision should be established in the
accompanying consolidated financial statements.
The Company accrues for the cost of environmental liabilities when
management becomes aware that a liability is probable and is able to
reasonably estimate the probable exposure. Currently, management is not
aware of any such claims or contingent liabilities, which should be
disclosed, or for which a provision should be established in the
accompanying consolidated financial statements. A minimum of up to $1
billion of the liabilities associated with the individual vessels actions,
mainly for sea pollution, are covered by the Protection and Indemnity
(P&I) Club insurance.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
11. Deferred Income:
2004 2005
---- ----
Gain on sale-leaseback transactions - 16,322
Less current portion - (2,451)
----------- ------------
Long-term portion - 13,871
=========== ============
(a) Gain on sale-leaseback transactions: In August and September 2005, the
Company sold the Restless, Sovereign, Relentless, Invincible and
Victorious and realized a total gain of $ 17,160. The Company entered into
bareboat charter agreements to leaseback the vessels for a period of seven
years. The charter back agreements are accounted for as operating leases
and the gain on the sale was deferred and is being amortized to income
over the seven-year lease period; the amortization of which is separately
reflected in the accompanying 2005 consolidated statement of income.
During the year ended December 31, 2005, lease payments relating to the
bareboat charters of the vessels were $ 7,206 and are included in Vessel
Operating Expenses in the 2005 accompanying consolidated statements of
income (Note 15).
The Company's future minimum lease payments required to be made after
December 31, 2005, related to the bareboat charters of the vessels
Restless, Sovereign, Relentless, Invincible and Victorious, are as
follows:
Year ending December 31, Amount
------------------------ ------
2006 21,060.5
2007 21,060.5
2008 21,060.5
2009 21,060.5
2010 and thereafter 55,975.5
----------
140,217.5
==========
12. Common Stock and Additional Paid-In Capital:
On May 10, May 27, 2004 and July 22, 2005 the Company's Articles of
Incorporation were amended. Under the amended articles of incorporation
the Company was renamed to TOP Tankers Inc. and currently, its authorized
capital stock consists of 100,000,000 shares of common stock, par value
$0.01 per share and 20,000,000 preferred shares with par value of $0.01.
The Board of Directors shall have the authority to establish such series
of preferred stock and with such designations, preferences and relative,
participating, optional or special rights and qualifications, limitations
or restrictions as shall be stated in the resolutions providing for the
issue of such preferred stock.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
12. Common Stock and Additional Paid-In Capital - (continued):
On July 23, 2004 the Company completed its initial public offering in the
United States under the United States Securities Act of 1933, as amended.
In this respect 12,278,570 shares of common stock at par value of $ 0.01
were issued for $ 11.00 per share. The net proceeds to the Company totaled
$ 124,563 of which approximately $ 109,000 were used to acquire the ten
vessels discussed in Note 6.
On November 5, 2004 the Company completed a follow on public offering in
the United States under the United States Securities Act of 1933, as
amended. In this respect 9,552,420 shares of common stock at par value of
$ 0.01 were issued for $ 15.50 per share. The net proceeds to the Company
totaled $ 139,467.
The amounts shown in the accompanying consolidated statements of
stockholders' equity as contributions to additional paid-in capital,
represent (a) payments made by the stockholders ($ 6,484 and $ 17,077 in
2003 and 2004, respectively), prior to the Company's initial public
offering discussed above, at various dates to finance vessel acquisitions
in excess of the amounts of bank loans obtained and advances for working
capital purposes and (b) the net proceeds of the offerings discussed in
the preceding paragraphs in excess of the par value per share ($ 263,812
in 2004) and (c) issuance of restricted shares granted to Company's
directors and employees, discussed in Note 13 ($3,476 in 2005).
The Company paid dividends of $ 571, $ 2,318 and $ 30,504 during the years
ended December 31, 2003, 2004 and 2005, respectively.
13. Stock Incentive Plan:
On July 1, 2005 (the "grant date") the Company granted restricted shares
pursuant to the Company's Incentive Plan ("the Plan"), which was adopted
in April 2005 to provide certain key persons (the "Participants"), on
whose initiatives and efforts the successful conduct of the Company's
business depends, and who are responsible for the management, growth and
protection of the Company's business, with incentives to: (a) enter into
and remain in the service of the Company, a Company's subsidiary, or
Company's joint venture, (b) acquire a proprietary interest in the success
of the Company, (c) maximize their performance, and (d) enhance the
long-term performance of the Company (whether directly or indirectly)
through enhancing the long-term of Company subsidiary or Company joint
venture.
The Company's Board of Directors administers the Plan and identified 45
key persons (including the Company's CEO and other 8 officers and
independent members of the Board) to whom shares of restricted common
stock of the Company (the "Shares") were granted. For this purpose 249,850
new shares were granted, out of which 190,000 shares were granted to the
Company's CEO, 48,300 shares to 8 officers and independent members of the
Board and the remaining 11,550 shares were granted to 36 employees.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
13. Stock Incentive Plan - (continued):
The "Restricted Stock Agreements" were signed between the Company and the
Participants on July 1, 2005. Under these agreements, the Participants
have the right to receive dividends and the right to vote the Shares,
subject to the following restrictions:
Company's CEO
-------------
The Participant shall not sell, assign, exchange, transfer, pledge,
hypothecate or otherwise dispose of or encumber any of the Shares other
than to a company, which is wholly owned by the Participant. The
restrictions lapse on the earlier of (i) July 1, 2006 or (ii) termination
of the Participant's employment with the Company for any reason.
Other Participants
------------------
The Participants shall not sell, assign, exchange, transfer, pledge,
hypothecate or otherwise dispose of or encumber any of the Shares. The
restrictions lapse on July 1, 2006 conditioned upon the Participant's
continued employment with the Company from the date of the agreement (i.e.
July 1, 2005) until the date the restrictions lapse (the "restricted
period").
As the shares granted to the Company's CEO do not contain any future
service vesting conditions, all such shares are considered vested shares
on the grant date.
Alternatively, in the event another Participant's employment with the
Company terminates for any reason before the end of the restricted period,
that Participant shall forfeit all rights to all Shares that have not yet
vested as of such date of termination. However, it is the intention of the
Company's Board of Directors not to seek repayment of the dividends earned
during the restricted period, even if the unvested shares ultimately are
forfeited. As these Shares granted to other Participants contain a
time-based service vesting condition, such shares are considered
non-vested shares on the grant date.
A summary of the status of the Company's non-vested shares as of December
31, 2005 and movement during the year ended December 31, 2005, is
presented below:
Non-vested shares Number of shares
Non-vested at January 1, 2005 --
Granted 59,850
Vested --
Forfeited (200)
Non-vested at December 31, 2005 59,650
During October 2005, the employment of one of other Participants was
terminated and 200 restricted shares that were granted to him under the
Plan were forfeited.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
13. Stock Incentive Plan - (continued):
As disclosed in Note 2(u), effective January 1, 2005, the Company adopted
FASB Statement 123(R) for purposes of accounting for share-based payments.
As the Company did not engage in share-based compensation arrangements
prior to the date of adoption, all share-based compensation provided to
employees (and provided to non-employee directors for their services as
directors) is recognized in accordance with the provisions of Statement
123(R) and classified as general and administrative expenses in the
consolidated income statement.
The fair value of each share on the grant date was $ 15.82 which is equal
to the market value of the Company's common stock on that date. The grant
date fair value of the vested shares granted to the CEO amounted to $
3,006 and was recognized in full as compensation in the 2005 consolidated
income statement on the grant date. The grant date fair value of the
non-vested shares granted to the remaining Participants, net of
forfeitures, amounted to $ 944 and is being recognized ratably as
compensation in the consolidated income statements over the one-year
vesting period, of which $ 472 was recognized in the year ended December
31, 2005. In total $ 3,478 of share-based compensation expense was
recognized in the 2005 consolidated income statement, classified as
general and administrative expenses. As of December 31, 2005, the total
unrecognized compensation cost related to non-vested share awards is $
472, which is expected to be recognized over the first six months of 2006.
The dividends declared on shares granted under the Plan are recognized in
the financial statements as a charge to retained earnings, except for the
dividends declared on non-vested shares that are forfeited or expected to
be forfeited before the end of the vesting period. In that case, dividends
declared on such shares are recognized as compensation in the consolidated
income statement.
Due to the low historical employee turnover, the Company's management
assumes no non-vested shares will be forfeited before the end of the
vesting period. Thus no dividends have been recognized as compensation in
the consolidated income statement for the year ended December 31, 2005.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
13. Stock Incentive Plan - (continued):
The amount of dividends on the granted shares, recognized as a charge to
retained earnings, is presented in the following table:
Type of Quarterly Special Total Dividends
Shares Dividend Dividend Paid in Q3 Paid in Q4
granted per share per share 2005 2005
------- --------- --------- ---- ----
Vested 0.21 0.25 87 40
Non-vested 0.21 0.25 27 13
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
14. Earnings Per Common Share:
All shares issued (including non-vested shares issued under the Company's
Incentive Plan) are the Company's common stock and have equal rights to
vote and participate in dividends. However, for the purposes of
calculating basic earnings per share, such non-vested shares are not
considered outstanding until the time-based vesting restriction has
lapsed. Furthermore, dividends declared during the year for non-vested
shares are deducted from net income as reported for purposes of
calculating net income available to common shareholders for the
computation of basic earnings per share.
For purposes of calculating diluted earnings per share, dividends declared
during the year for non-vested shares are not deducted from net income as
reported since such calculation assumes non-vested shares were fully
vested from the grant date. However, the denominator of the diluted
earnings per share calculation includes the incremental shares assumed
issued under the treasury stock method weighted for the period the
non-vested shares were outstanding.
The components of the calculation of basic and diluted earnings per share
for the years ended December 31, 2003, 2004 and 2005 are as follows:
2003 2004 2005
Net Income as reported: $ 1,634 $ 32,794 $ 68,684
Less: Dividends declared during
the year for non-vested shares - - (40)
--------- ---------- ----------
Net income available to common
shareholders 1,634 32,794 68,644
========= ========== ==========
Weighted average common shares
outstanding, basic 6,000,000 12,922,449 27,926,771
Add: Dilutive effect of non-vested
shares - - 5,241
Weighted average common shares
outstanding, diluted 6,000,000 12,922,449 27,932,012
Earnings per share, basic and
diluted 0.27 2.54 2.46
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
15. Voyage and Vessel Operating Expenses:
The amounts in the accompanying consolidated statements of income are
analyzed as follows:
Voyage Expenses 2003 2004 2005
--------------- ---- ---- ----
Port charges 1,824 5,181 9,271
Bunkers 3,367 8,588 19,893
Commissions 746 3,129 7,725
------ ------ -------
Total 5,937 16,898 36,889
===== ====== =======
Vessel Operating Expenses 2003 2004 2005
------------------------- ---- ---- ----
Crew wages and related costs 3,638 7,285 18,119
Insurance 1,323 2,873 6,561
Repairs and maintenance 1,874 2,842 11,449
Spares and consumable stores 1,559 3,804 10,992
Taxes (Note 18) 26 55 194
Lease payments - - 7,206
------- ------ -------
Total 8,420 16,859 54,521
===== ====== =======
16. Interest and Finance Costs:
The amounts in the accompanying consolidated statements of income are
analyzed as follows:
2003 2004 2005
---- ---- ----
Interest on long-term debt (Note 8) 1,128 4,161 19,700
Bank charges 87 285 568
Non-qualifying swaps' fair value change/
reclassification gain from swap termination - - (1,498)
Amortization and write-off of financing fees 121 755 1,407
----- ----- -------
Total 1,336 5,201 20,177
===== ===== =======
In August and September 2005, the Company following the loan prepayments
discussed in Note 8(a) terminated the related interest rate swap
agreement. The termination resulted in a reclassification gain of $ 1,171
from other comprehensive income, which is included in non-qualifying
swaps' fair value change / reclassification gain from swap termination in
the table above.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
17. Other, net:
The amounts in the accompanying consolidated statements of income are
analyzed as follows:
2003 2004 2005
---- ---- ----
Insurance claims recoveries 364 - -
Miscellaneous - 80 134
----- ---- -----
Total 364 80 134
===== ==== =====
Insurance claim recoveries represent the excess amount the Company
received in connection with claims for damages to its vessels compared to
actual costs associated with the repairs.
18. Income Taxes:
Marshall Islands, Cyprus and Liberia do not impose a tax on international
shipping income. Under the laws of Marshall Islands, Cyprus and Liberia,
the countries of the companies' incorporation and vessels' registration,
the companies are subject to registration and tonnage taxes, which have
been included in vessels' operating expenses in the accompanying
consolidated statements of income.
Pursuant to the Internal Revenue Code of the United States (the "Code"),
U.S. source income from the international operations of ships is generally
exempt from U.S. tax if the company operating the ships meets both of the
following requirements, (a) the Company is organized in a foreign country
that grants an equivalent exception to corporations organized in the
United States and (b) either (i) more than 50% of the value of the
Company's stock is owned, directly or indirectly, by individuals who are
"residents" of the Company's country of organization or of another foreign
country that grants an "equivalent exemption" to corporations organized in
the United States (50% Ownership Test) or (ii) the Company's stock is
"primarily and regularly traded on an established securities market" in
its country of organization, in another country that grants an "equivalent
exemption" to United States corporations, or in the United States
(Publicly-Traded Test). Under the regulations, a Company's stock will be
considered to be "regularly traded" on an established securities market if
(i) one or more classes of its stock representing 50 percent or more of
its outstanding shares, by voting power and value, is listed on the market
and is traded on the market, other than in minimal quantities, on at least
60 days during the taxable year; and (ii) the aggregate number of shares
of stock traded during the taxable year is at least 10% of the average
number of shares of the stock outstanding during the taxable year.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
18. Income Taxes - (continued):
Treasury regulations under the Code were promulgated in final form in
August 2003. These regulations apply to taxable years beginning after
September 24, 2004. As a result, such regulations became effective for
calendar year taxpayers, like the Company, beginning with the calendar
year 2005. The Marshall Islands, Cyprus and Liberia, the jurisdictions
where the Company and its ship-owning subsidiaries are incorporated, grant
an "equivalent exemption" to United States corporations. Therefore, the
Company is exempt from United States federal income taxation with respect
to U.S.-source shipping income if either the 50% Ownership Test or the
Publicly-Traded Test is met. The Company believes that for periods prior
to its initial public offering in July 2004, the 50% Ownership Test is
satisfied. The Company also believes that for periods subsequent to its
initial public offering, it satisfies the publicly traded requirements of
the statute on the basis that more than 50% of the value of its stock is
primarily and regularly traded on the Nasdaq National Market and,
therefore, the Company and its subsidiaries are entitled to exemption from
U.S. federal income tax, in respect of their U.S. source shipping income.
19. Financial Instruments:
The principal financial assets of the Company consist of cash on hand and
at banks, accounts receivable due from charterers and interest rate swap
agreements. The principal financial liabilities of the Company consist of
long-term bank loans and accounts payable due to suppliers.
(a) Interest rate risk: The Company's interest rates and long-term loan
repayment terms are described in Note 8.
(b) Concentration of Credit risk: Financial instruments, which
potentially subject the Company to significant concentrations of
credit risk, consist principally of cash and trade accounts
receivable. The Company places its temporary cash investments,
consisting mostly of deposits, with high credit qualified financial
institutions. The Company performs periodic evaluations of the
relative credit standing of those financial institutions with which
it places its temporary cash investments. The Company limits its
credit risk with accounts receivable by performing ongoing credit
evaluations of its customers' financial condition and generally does
not require collateral for its accounts receivable.
(c) Fair value: The carrying values of cash and cash equivalents,
accounts receivable and accounts payable are reasonable estimates of
their fair value due to the short-term nature of these financial
instruments. The fair value of long-term bank loan discussed in Note
8 bearing interest at variable interest rates approximates the
recorded value. The carrying value of the interest rate swap
agreements approximates their fair value as the fair value estimates
the amount the Company would have received, had the interest rate
swap agreements been terminated on the balance sheet date.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2005
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
20. Subsequent Events:
(a) Interest Rate Swaps: In connection with the loan of $ 154,000
discussed in Note 8(a), the Company entered into an interest rate
swap agreement with declining notional balances in order to hedge its
variable interest rate exposure, with effective date January 30,
2006, for an initial notional amount of $ 45,000 and for a period of
five years, with a fixed interest rate of 4.8% plus the applicable
bank margin.
(b) Restricted shares: On January 3, 2006, the Company granted 125,000
restricted shares pursuant to the Company's Incentive Plan ("the
Plan"), discussed in Note 13.
Of the 125,000 new shares granted, 80,000 shares were granted to the
Company's CEO, 38,000 shares to 8 officers and independent members of
the Board and the remaining 7,000 shares were granted to 20
employees.
The fair value of each share on the grant date was $ 12.71. The fair
value of the vested shares granted to the CEO amounted to $ 1,017 and
will be recognized in full as compensation in the 2006 consolidated
income statement on the grant date. The fair value of the non-vested
shares granted to the remaining Participants amounted to $ 572 and
will be recognized as compensation in the consolidated income
statements, over the one-year vesting period.
(c) Dividends: In January 2006, the Company declared and paid dividends of
$ 0.21 per share, amounted to $ 5,923.
(d) Lease agreement: In January 2006 the Company entered into an
agreement to lease office space in Athens, Greece. The agreement is
for duration of twelve years beginning May 2006 with a lessee's
option for an extension of ten years. The monthly rental is Euro
120,000 adjusted annually for inflation increase (approximately 3%
annually) plus 1%, effective January 1, 2007. The minimum rentals
payable under operating leases for the year ending December 31, 2006
will be approximately $ 1,152 and approximately $ 1,728 for each of
the years ending December 31, 2007 through May 1, 2018.
(e) Sale and lease-back (Unaudited): In early March, the Company concluded
the sale and leaseback of thirteen vessels (M/T Flawless, M/T
Timeless, M/T Stopless, M/T Priceless, M/T Limitless, M/T Endless, M/T
Faultless, M/T Noiseless, M/T Stainless, M/T Spotless, M/T Doubtless,
M/T Faithful and M/T Vanguard) for a period of five to seven years.
The Manager shall continue to be responsible for the operation and
commercial management of the vessels. The aggregate sale price of the
vessels amounted to $ 550,000 and the net cash proceeds after
repayment of corresponding vessel loans and other expenses are
expected to be approximately $ 240,000. The Company expects to
generate a gain of approximately $ 90,000, which will be amortized
over the respective lease period. The leases of the vessels following
their sale are expected to qualify as operating leases under U.S.
GAAP. On March 13, 2006, following the sale and leaseback of the 13
vessels, the Company declared a special dividend of $ 5.00 per share
that was paid on March 27, 2006, to shareholders of record of common
shares as of March 22, 2006. On April 6, 2006, the Company declared a
special dividend of $ 2.50 per share that will be paid on April 25,
2006, to shareholders of record of common shares as of April 17, 2006.
ITEM 19. EXHIBITS
Number Description of Exhibits
------ -----------------------
1.1 ____ Amended and Restated Articles of Incorporation of TOP
Tankers Inc. (1)
1.2 ____ By-Laws of the Company (2)
4.1 ____ TOP Tankers Inc. 2005 Stock Option Plan
4.2 ____ Loan Agreement between the Company and the Royal Bank of
Scotland plc dated August 10, 2004 and supplemented
September 30, 2004 (3)
4.3 ____ Loan Agreement between the Company and DVB Bank dated
March 10, 2005.
4.4 ____ Credit Facility between the Company and the Royal Bank of
Scotland dated November 1, 2005.
4.5 ____ Credit Facility between the Company and HSH NORDBANK AG,
dated November 7, 2005.
4.6 ____ Sales Agreement between the Company and Cantor Fitzgerald &
Co. dated April 13, 2006.
4.7 ____ Shareholder Rights Agreement with Computershare Investor
Services, LLC, as Rights Agent as of August 19, 2005.(4)
12.1 ____ Rule 13a-14(a)/15d-14(a) Certification of the Company's
Chief Executive Officer.
12.2 ____ Rule 13a-14(a)/15d-14(a) Certification of the Company's
Chief Financial Officer.
13.1 ____ Certification of the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
13.2 ____ Certification of the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
15.1 ____ Consent of Independent Registered Public Accounting Firm.
-------------------------
(1) Incorporated by reference from Exhibit 3.1 to the company's Registration
Statement on Form F-1, filed on October 18, 2004 (File No. 333-119806)
(2) Incorporated by reference from Exhibit 3.4 to the Company's Registration
Statement on Form F-1, filed on July 7, 2004 (Filed No. 333-117213).
(3) Incorporated by reference from Exhibit 10.1 to the Company's Registration
Statement on Form F-1, filed on November 12, 2004 (Filed No. 333-119806).
(4) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A (File No. 000-50859).
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this registration statement on its behalf.
TOP Tankers Inc.
By: /s/ Evangelos Pistiolis
--------------------------------
Name: Evangelos Pistiolis
Title: Chief Executive Officer
Date: April 13, 2006
23116-0001#660639