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, 2001
--------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
---------------------------------------------
Commission file number 0-22704
-----------------------------------------------------
Frontline Ltd
---------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Frontline Ltd.
---------------------------------------------------------------------------
(Translation of Registrant's name into English)
Bermuda
---------------------------------------------------------------------------
(Jurisdiction of incorporation or organisation)
Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda
---------------------------------------------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to section 12(b) of the
Act.
Title of each class Name of each exchange
on which registered
------------------------------------ ----------------------------------
None
Securities registered or to be registered pursuant to section 12(g) of the
Act.
American Depositary Shares each
representing one Ordinary Share, $2.50 Par Value
---------------------------------------------------------------------------
(Title of class)
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act.
Ordinary Shares, $2.50 Par Value
---------------------------------------------------------------------------
(Title of class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the
annual report.
76,407,566 Ordinary Shares, $2.50 Par Value
---------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------------- ------------
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 Item 18 X
------------- ------------
INDEX TO REPORT ON FORM 20-F
PART I
PAGE
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS........4
ITEM 2. OFFER STATISTICS AND EXPECTED
TIMETABLE....................................................4
ITEM 3. KEY INFORMATION..............................................4
ITEM 4. INFORMATION ON THE COMPANY..................................11
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................28
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..................36
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS................................................39
ITEM 8. FINANCIAL INFORMATION.......................................41
ITEM 9. THE OFFER AND LISTING.......................................41
ITEM 10. ADDITIONAL INFORMATION......................................43
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...........................................45
ITEM 12. DESCRIPTION OF SECURITIES...................................46
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.............47
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS.........................................47
ITEM 15. RESERVED....................................................
ITEM 16. RESERVED....................................................
PART III
ITEM 17. FINANCIAL STATEMENTS........................................48
ITEM 18. FINANCIAL STATEMENTS........................................48
ITEM 19. EXHIBITS....................................................49
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Matters discussed in this document may constitute forward-looking
statements. The Private Securities Litigation Reform Act of 1995 provides
safe harbor protections for forward-looking statements in order to
encourage companies to provide prospective information about their
business. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions and other statements, which are other than statements of
historical facts.
Frontline Ltd., or the Company, desires to take advantage of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995
and is including this cautionary statement in connection with this safe
harbor legislation. This document and any other written or oral statements
made by us or on our behalf may include forward-looking statements, which
reflect our current views with respect to future events and financial
performance. The words "believe," "except," "anticipate," "intends,"
"estimate," "forecast," "project," "plan," "potential," "will," "may,"
"should," "expect" and similar expressions identify forward-looking
statements.
The forward-looking statements in this document are based upon various
assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, management's examination of historical
operating trends, data contained in our records and other data available
from third parties. Although we believe that these assumptions were
reasonable when made, because these assumptions are inherently subject to
significant uncertainties and contingencies which are difficult or
impossible to predict and are beyond our control, we cannot assure you that
we will achieve or accomplish these expectations, beliefs or projections.
In addition to these important factors and matters discussed elsewhere
herein and in the documents incorporated by reference herein, important
factors that, in our view, could cause actual results to differ materially
from those discussed in the forward-looking statements include the strength
of world economies and currencies, general market conditions, including
fluctuations in charterhire rates and vessel values, changes in demand in
the tanker market, including changes in demand resulting from changes in
OPEC's petroleum production levels and world wide oil consumption and
storage, changes in the Company's operating expenses, including bunker
prices, drydocking and insurance costs, changes in governmental rules and
regulations or actions taken by regulatory authorities, potential liability
from pending or future litigation, general domestic and international
political conditions, potential disruption of shipping routes due to
accidents or political events, and other important factors described from
time to time in the reports filed by the Company with the Securities and
Exchange Commission.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The selected income statement data of the Company with respect to the
fiscal years ended December 31, 2001, 2000 and 1999 and the selected
balance sheet data of the Company with respect to the fiscal years ended
December 31, 2001 and 2000 have been derived from the Company's
Consolidated Financial Statements included herein and should be read in
conjunction with such statements and the notes thereto. The selected income
statement data with respect to the fiscal years ended December 31, 1998 and
1997 and the selected balance sheet data with respect to the fiscal years
ended December 31, 1999, 1998 and 1997 has been derived from consolidated
financial statements of the Company not included herein. The selected
financial data with respect to the fiscal years ended December 31, 1998 and
1997 has been restated to reflect the treatment of ICB Aktiebolag (publ)
("ICB") as an investment accounted for in accordance with the equity
method. (See Item 4. A "Information on the Company - History and
development of the Company"). The following table should also be read in
conjunction with Item 5. "Operating and Financial Review and Prospects" and
the Company's Consolidated Financial Statements and Notes thereto included
herein.
Fiscal Year Ended December 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
(restated) (restated)
(in thousands, except Ordinary Shares, per Ordinary Share data and ratios)
Income Statement Data:
----------------------
Net operating revenues $ 647,345 $ 599,944 $ 253,214 $ 203,860 $ 197,197
Net operating (loss) income after depreciation $ 384,754 $ 376,092 $ (12,210) $ 72,455 $ 55,476
Net income (loss) before cumulative effect
of change in accounting principle $ 350,389 $ 313,867 $ (86,896) $ 31,853 $ 22,794
Net (loss) income $ 382,728 $ 313,867 $ (86,896) $ 31,853 $ 22,794
Earnings (loss) per Ordinary Share
- basic $ 4.99 $ 4.28 $ (1.76) $ 0.69 $ 0.63
- diluted $ 4.98 $ 4.27 $ (1.76) $ 0.69 $ 0.63
Cash dividends per Ordinary Share $ 1.50 $ - $ - $ - $ -
Balance Sheet Data (at end of year):
------------------------------------
Cash and cash equivalents $ 178,176 $ 103,514 $ 65,467 $ 74,034 $ 86,870
Newbuildings and vessel purchase options $ 102,781 $ 36,326 $ 32,777 $ 75,681 $ 48,474
Vessels and equipment, net $2,196,959 $2,254,921 $1,523,112 $1,078,956 $ 970,590
Vessels under capital lease, net $ 317,208 $ 108,387 $ - $- $ -
Total assets $3,033,774 $2,780,988 $1,726,793 $1,505,414 $1,369,849
Long-term debt (including current portion) $1,391,951 $1,544,139 $1,079,694 $ 883,021 $ 773,150
Obligations under capital lease (including
current portion) $ 300,790 109,763 - - $ -
Stockholders' equity $1,252,401 1,029,490 557,300 583,574 $ 556,010
Ordinary Shares outstanding 46,106,860
Cash Flow Data
--------------
Cash provided by operating activities $ 477,607 $ 271,582 $ 46,486 $ 69,592 $ 67,449
Cash provided by (used in) investing activities $(103,782) $(496,918) $ 175,532 $(143,955) $(283,299)
Cash provided by (used in) financing activities $(299,163) $ 263,383 $(230,585) $ 61,527 $ 244,717
Other Financial Data
--------------------
EBITDA (1) $ 528,796 $481,789 $82,292 $137,099 $116,795
Cash Earnings (2) $ 443,796 $392,184 $5,662 $82,843 $74,278
Return on capital employed (percentage) (3) 14.7% 18.2% 0.1% 6.5% 6.2%
Equity to assets ratio (percentage) (4) 41.3% 37.0% 32.3% 38.8% 40.6%
Debt to equity ratio (5) 1.4 1.6 1.9 1.5 1.4
Price earnings ratio (6) 2.1 3.3 neg. 2.8 19.8
Footnotes
(1) EBITDA represents net income (loss) before interest expense, income
taxes, depreciation and amortisation expenses. EBITDA is not required
by US generally accepted accounting principles and should not be
considered as an alternative to net income or any other indicator of
the Company's performance required by US generally accepted accounting
principles.
(2) Cash earnings represents net income (loss) before cumulative effect of
change in accounting principle, foreign exchange gains (losses) and
depreciation and amortisation expense. Cash earnings is not required by
US generally accepted accounting principles and should not be
considered as an alternative to net income or any other indicator of
the Company's performance required by US generally accepted accounting
principles.
(3) Return on capital employed is calculated as net income (loss) before
cumulative effect of change in accounting principle, interest expense
and foreign exchange gains (losses), as a percentage of average capital
employed.
(4) Equity to assets ratio is calculated as total stockholders' equity
divided by total assets.
(5) Debt to equity ratio is calculated as total interest bearing current
and long-term liabilities, including obligations under capital leases,
divided by stockholders' equity.
(6) Price earnings ratio is calculated using the closing year end share
price divided by basic Earnings per Share.
B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable
D. RISK FACTORS
We are engaged primarily in transporting crude oil and oil products. The
following summarises some of the risks that may materially affect our
business, financial condition or results of operations. Please note, in
this section, "we", "us" and "our" all refer to the Company and its
subsidiaries.
The cyclical nature of the tanker industry may lead to volatile changes in
charter rates and vessel values which may adversely affect our earnings
Historically, the tanker industry has been highly cyclical, with volatility
in profitability and asset values resulting from changes in the supply of
and demand for tanker capacity. If the tanker market is depressed in the
future our earnings and available cash flow may decrease. Our ability to
recharter our vessels on the expiration or termination of their current
spot and time charters and the charter rates payable under any renewal or
replacement charters will depend upon, among other things, economic
conditions in the tanker market. Fluctuations in charter rates and vessel
values result from changes in the supply and demand for tanker capacity and
changes in the supply and demand for oil and oil products.
The factors affecting the supply and demand for oil tankers are outside of
our control, and the nature, timing and degree of changes in industry
conditions are unpredictable. The factors that influence demand for tanker
capacity include:
o demand for oil and oil products;
o global and regional economic conditions;
o the distance oil and oil products are to be moved by sea; and
o changes in seaborne and other transportation patterns.
The factors that influence the supply of tanker capacity include:
o the number of newbuilding deliveries;
o the scrapping rate of older vessels;
o the number of vessels that are out of service; and
o national or international regulations that may effectively cause
reductions in the carrying capacity of vessels or early obsolescence of
tonnage.
We are highly dependent on spot oil voyage charters. Any decrease in spot
charter rates in the future may adversely affect our earnings
The majority of our vessels currently operate on a spot charter basis or
under contracts of affreightment, under which we carry an agreed upon
quantity of cargo over a specified route and time period. Although spot
chartering is common in the tanker industry, the spot charter market is
highly competitive and spot charter rates may fluctuate significantly based
upon tanker and oil supply and demand. The successful operation of our
vessels in the spot charter market depends upon, among other things,
obtaining profitable spot charters and minimising, to the extent possible,
time spent waiting for charters and time spent travelling unladen to pick
up cargo. We cannot assure you that future spot charters will be available
at rates sufficient to enable our vessels trading in the spot market to
operate profitably. In addition, bunkering, or fuel, charges that account
for a substantial portion of the operating costs, and generally reflect
prevailing oil prices, are subject to sharp fluctuations.
Our revenues experience seasonal variations that may affect our income
We operate our tankers in markets that have historically exhibited seasonal
variations in demand and, therefore, charter rates. Tanker markets are
typically stronger in the winter months in the northern hemisphere due to
increased oil consumption. In addition, unpredictable weather patterns in
the winter months tend to disrupt vessel scheduling. The oil price
volatility resulting from these factors has historically led to increased
oil trading activities and demand for vessels. The change in demand for
vessels may affect the charter rates that we receive.
Because the market value of our vessels may fluctuate significantly, we may
incur losses when we sell vessels which may adversely affect our earnings
The fair market value of vessels may increase and decrease depending on the
following factors:
o general economic and market conditions affecting the shipping industry;
o competition from other shipping companies;
o types and sizes of vessels;
o other modes of transportation;
o cost of newbuildings;
o governmental or other regulations;
o prevailing level of charter rates; and
o technological advances.
If we sell a vessel at a time when ship prices have fallen, the sale may be
at less than the vessel's carrying amount on our financial statements, with
the result that we could incur a loss and a reduction in earnings. Recent
market conditions in the industry have unfavourably affected the market
values of our vessels. It is possible that the market value of our vessels
will decline in the future.
If we violate environmental laws or regulations, the resulting liability
may adversely affect our earnings and financial condition
Our operations are subject to extensive regulation designed to promote
tanker safety, prevent oil spills and generally protect the environment.
Local, national and foreign laws, as well as international treaties and
conventions, can subject us to material liabilities in the event that there
is a release of petroleum or other hazardous substances from our vessels.
For example, the United States Oil Pollution Act of 1990, or OPA, provides
that owners, operators and bareboat charterers are strictly liable for the
discharge of oil in U.S. waters, including the 200 nautical mile zone off
the U.S. coasts. OPA provides for unlimited liability in some
circumstances, such as a vessel operator's gross negligence or willful
misconduct. However, in most cases OPA limits liability to the greater of
$1,200 per gross ton or $10 million per vessel. OPA also permits states to
set their own penalty limits. Most states bordering navigable waterways
impose unlimited liability for discharges of oil in their waters. The
International Maritime Organization, or IMO, has adopted a similar
liability scheme that imposes strict liability for oil spills, subject to
limits that do not apply if the release is caused by the vessel owner's
intentional or reckless conduct.
U.S. law, the law in many of the nations in which we operate, and
international treaties and conventions that impact our operations also
establish strict rules governing vessel safety and structure, training,
inspections, financial assurance, for potential cleanup liability and other
matters. These requirements can limit our ability to operate, and
substantially increase our operating costs. The U.S. has established strict
deadlines for phasing-out single-hull oil tankers, and both the IMO and the
European Union have adopted similar phase-out periods.
Under OPA, with certain limited exceptions, all newly built or converted
tankers operating in United States waters must be built with double hulls
conforming to particular specifications. Tankers that do not have double
hulls are subject to structural and operational measures to reduce oil
spills and the ability to operate these vessels in United States waters
will be phased out between 1995 and 2015 according to size, age, hull
configuration and place of discharge unless retrofitted with double hulls.
In addition, OPA specifies annual inspections, vessel manning, equipment
and other construction requirements that are in various stages of
development, applicable to new and to existing vessels.
The IMO recently approved a revised timetable for the phasing out of
single-hull oil tankers by 2015, or with the consent of the country of
registry of the vessel and subject to certain operational restrictions, by
2017. The proposal identifies three categories of tankers based on cargo
carrying capacity and the presence or absence of protectively located
segregated ballast tanks. Under the new IMO proposal, single-hull oil
tankers with carrying capacities of 20,000 deadweight tons, or dwt, and
above carrying crude oil, fuel oil, heavy diesel oil or lubricating oil as
cargo, and of 30,000 dwt and above carrying other oils, which do not comply
with IMO requirements for protectively located segregated ballast tanks
will be phased out no later than 2007. Single-hull oil tankers with similar
carrying capacities which do comply with IMO requirements for protectively
located segregated ballast tanks are to be phased out by 2015, or in
certain cases 2017, depending on the date the vessel was delivered. All
other single-hull oil tankers with carrying capacities of 5,000 dwt and
above, and not falling into one of the above categories, will also be
phased out by 2015, depending on the date the was delivered vessel.
These requirements can affect the resale value or useful lives of our
vessels. In addition, violations of applicable requirements or a
catastrophic release from one of our vessels could have a material adverse
impact on our financial condition and results of operations.
Our earnings could suffer if we do not successfully employ our dry bulk
vessels when their bareboat charters and time charters terminate
Most of the vessels (nine of the ten vessels) in the dry bulk fleet that we
acquired through our purchase of Golden Ocean Group Limited in 2000 operate
under long-term charters. Although these long-term charters provide steady
streams of revenue, the vessels that are subject to these charters may not
be available for spot voyages during an upswing in the dry bulk market
cycle, when spot voyages might be more profitable. Additionally, if we
cannot recharter those vessels on long term charters or employ them in the
spot market profitably when their current charters expire, this could have
a material adverse impact on our financial condition and results of
operations.
Competition
The operation of tanker vessels and the transportation of crude and
petroleum products and the other businesses in which we operate are
extremely competitive. Through our operating subsidiaries we compete with
other oil tanker and dry bulk carrier owners (including major oil companies
as well as independent companies), and, to a lesser extent, owners of other
size vessels. Our market share currently is insufficient to enforce any
degree of pricing discipline in the markets in which we compete. It is
possible that our competitive position will erode in the future.
Newbuildings
We placed orders for five VLCCs, of which four are expected to be delivered
in 2002 and the final one is expected to be delivered in 2003. We are
required to make progress payments during the construction of these
vessels, but we will not derive any revenue from these vessels until after
their delivery. If the shipyards are unable to complete the contracts or if
we are unable to obtain the financing required to pay for the delivery of
the vessels, we may forfeit all or a portion of the instalments that have
been paid..
Our debt service obligations could affect our ability to incur additional
indebtedness or engage in certain transactions
Our existing financing agreements impose operation and financing
restrictions on us which may significantly limit or prohibit, among other
things, our ability to incur additional indebtedness, create liens, sell
capital shares of subsidiaries, make certain investments, engage in mergers
and acquisitions, purchase and sell vessels, enter into time or consecutive
voyage charters or pay dividends without the consent of our lenders. In
addition, our lenders may accelerate the maturity of indebtedness under our
financing agreements and foreclose on the collateral securing the
indebtedness upon the occurrence of certain events of default, including
our failure to comply with any of the covenants contained in our financing
agreements, not rectified within the permitted time.
Fluctuations in the yen could affect our earnings
Some of our vessels obtained through our acquisition of Golden Ocean Group
Limited, or Golden Ocean, in 2000 have charters and financing arrangements
that require payments of principal and interest or charter hire in Yen.
While many of the charters for the dry bulk vessels that we acquired
through Golden Ocean require the charterers to pay in Yen so as to cover
related Yen denominated debt service, the charterers may also pay a
significant part of the charter hire in Dollars. As we have not hedged our
Yen exposure against the Dollar, a rise in the Yen could have a material
adverse impact on our financial condition and results of operations.
We may be unable to attract and retain key management personnel in the
tanker industry, which may negatively impact the effectiveness of our
management and our results of operation
Our success depends to a significant extent upon the abilities and efforts
of our senior executives, and particularly John Fredriksen, our Chairman
and Chief Executive Officer, and Tor Olav Tr0im, our Vice-President, for
the management of our activities and strategic guidance. While we believe
that we have an experienced management team, the loss or unavailability of
one or more of our senior executives, and particularly Mr. Fredriksen or
Mr. Tr0im, for any extended period of time could have an adverse effect on
our business and results of operations.
Our vessels may suffer damage and we may face unexpected drydocking costs
which could affect our cash flow and our ability to service our debt
If our vessels suffer damage, they may need to be repaired at a drydock or
other type of ship repair facility. The costs of drydock and/or repairs are
unpredictable and can be substantial. We may have to pay drydocking and
repair costs that our insurance does not cover. This would decrease
earnings. Repairs may involve long periods of inactivity which may have a
negative effect on earnings and our ability to service our debt.
Risks involved with operating ocean going vessels could affect our business
and reputation, which would adversely affect our revenues
The operation of an ocean-going vessel carries inherent risks. These risks
include the possibility of:
o marine disaster;
o piracy;
o environmental accidents;
o cargo and property losses or damage; and
o business interruptions caused by mechanical failure, human error, war,
terrorism, piracy, political action in various countries, labour
strikes, or adverse weather conditions.
Any of these circumstances or events could increase our costs or lower our
revenues. The involvement of our vessels in an oil spill or other
environmental disaster may harm our reputation as a safe and reliable
tanker operator.
We may not have adequate insurance to compensate us if our vessels are
damaged or lost
We procure insurance for our fleet against those risks that we believe the
shipping industry commonly insures against. These insurances include hull
and machinery insurance, protection and indemnity insurance, which includes
environmental damage and pollution insurance coverage, and war risk
insurance. We can give no assurance that we are adequately insured against
all risks. We may not be able to obtain adequate insurance coverage at
reasonable rates for our fleet in the future. Additionally, our insurers
may not pay particular claims. Our insurance policies contain deductibles
for which we will be responsible, limitations and exclusions which,
although we believe are standard in the shipping industry, may nevertheless
increase our costs or lower our revenue.
Maritime claimants could arrest our tankers, which could interrupt our cash
flow
Crew members, suppliers of goods and services to a vessel, shippers of
cargo and other parties may be entitled to a maritime lien against that
vessel for unsatisfied debts, claims or damages. In many jurisdictions a
maritime lienholder may enforce its lien by arresting a vessel through
foreclosure proceedings. The arrest or attachment of one or more of our
vessels could interrupt our cash flow and require us to pay a lot of money
to have the arrest lifted.
In addition, in some jurisdictions, such as South Africa, under the "sister
ship" theory of liability, a claimant may arrest both the vessel which is
subject to the claimant's maritime lien and any "associated" vessel, which
is any vessel owned or controlled by the same owner. Claimants could try to
assert "sister ship" liability against one vessel in our fleet for claims
relating to another of our ships.
Governments could requisition our vessels during a period of war or
emergency, resulting in loss of earnings
A government could requisition for title or seize our vessels. Requisition
for title occurs when a government takes control of a vessel and becomes
her owner. Also, a government could requisition our vessels for hire.
Requisition for hire occurs when a government takes control of a vessel and
effectively becomes her charterer at dictated charter rates. Generally,
requisitions occur during a period of war or emergency. Government
requisition of one or more of our vessels would negatively impact our
revenues.
Our operations outside the United States expose us to global risks that may
interfere with the operation of our vessels
We are an international company and primarily conduct our operations
outside of the United States. Changing economic, regulatory, political and
governmental conditions in the countries where we are engaged in business
or where our vessels are registered affect us. Hostilities or other
political instability in regions where our vessels trade could affect our
trade patterns and adversely affect our operations and performance. The
terrorist attacks against targets in the United States on September 11,
2001 and the military response by the United States may increase the
likelihood of acts of terrorism worldwide. Acts of terrorism, regional
hostilities or other political instability could adversely affect the oil
trade and reduce our revenue or increase our expenses.
Terrorist attacks, such as the attacks on the United States on September
11, 2001, and other acts of violence or war may affect the financial
markets and our business, results of operations and financial condition
As a result of the September 11, 2001 terrorist attacks and subsequent
events, there has been considerable uncertainty in the world financial
markets. The full effect of these events, as well as concerns about future
terrorist attacks, on the financial markets is not yet known, but could
include, among other things, increased volatility in the price of
securities. These uncertainties could also adversely affect our ability to
obtain additional financing on terms acceptable to us or at all. Future
terrorist attacks may also negatively affect our operations and financial
condition and directly impact our vessels or our customers. Future
terrorist attacks could result in increased volatility of the financial
markets in the United States and globally and could result in an economic
recession in the United States or the world. Any of these occurrences could
have a material adverse impact on our operating results, revenue, and
costs.
Because we are a foreign corporation, you may not have the same rights that
a shareholder in a U.S. corporation may have
We are a Bermuda corporation. Our articles of incorporation and bye-laws
and the Bermuda Companies Act 1981, as amended, govern our affairs.
Investors may have more difficulty in protecting their interests in the
face of actions by management, directors or controlling shareholders than
would shareholders of a corporation incorporated in a United States
jurisdiction. In addition, our executive officers, administrative
activities, and assets are located outside the United States. As a result,
it may be more difficult for investors to effect service of process within
the United States upon us, or to enforce both in the United States and
outside the United States judgments against us in any action, including
actions predicated upon the civil liability provisions of the federal
securities laws of the United States.
We may 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, a
portion of the gross shipping income of a vessel owning or chartering
corporation, such as ourselves and our subsidiaries, may be subject to a 4%
United States federal income tax on 50% of the gross shipping income that
is attributable to transportation that begins or ends, but that does not
both begin and end, in the U.S., unless that corporation is entitled to a
special tax exemption under the Code which applies to the international
shipping income derived by some non-United States corporations. We believe
that we and each of our subsidiaries qualify for this statutory tax
exemption for the year ended December 31, 2001.
However, due to the absence of final Treasury regulations or other
definitive authority concerning some aspects of this tax exemption under
the relevant provisions of the Code and to the factual nature of the issues
involved, we can give no assurances on our tax-exempt status or that of any
of our subsidiaries.
If we or our subsidiaries are not entitled to this statutory tax exemption
for any taxable year, we or our subsidiaries could be subject for those
years to an effective 4% United States federal income tax on the portion of
the income we or our subsidiaries derive during the year from United States
sources. The imposition of this taxation would have an adverse effect on
our profitability.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The Company
We are Frontline Ltd., a Bermuda based shipping company that is engaged
primarily in the ownership and operation of oil tankers. We were
incorporated in Bermuda on June 12, 1992 (Company No. EC-17460). Our
registered and principal executive offices are located at Par-la-Ville
Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda, and its telephone
number is +1 (441) 295-6935.
We are engaged primarily in the ownership and operation of oil tankers,
including oil/bulk/ore ("OBO") carriers. We operatetwo sizes of tankers:
very large crude carriers ("VLCCs") which are between 200,000 and 320,000
deadweight tons ("dwt"), and Suezmaxes, which are vessels between 120,000
and 170,000 dwt. In addition, through a corporate acquisition completed in
October 2000, we acquired a fleet of dry bulk carriers that includes
Capesize, Panamax and Handymax size bulkers. We operate through
subsidiaries and partnerships located in Bermuda, Liberia, Norway, Panama,
Singapore and Sweden. We are also involved in the charter, purchase and
sale of vessels. Since 1996, we have emerged as a leading tanker company
within the VLCC and Suezmax size sectors of the market.
We have our origin in Frontline AB, which was founded in 1985, and which
was listed on the Stockholm Stock Exchange from 1989 to 1997. In May 1997,
a decision was made to redomicile Frontline AB from Sweden to Bermuda and
to list its shares on the Oslo Stock Exchange. The change of domicile was
executed through a share for share exchange offer from the then newly
formed Frontline Ltd. ("Old Frontline") in Bermuda. Frontline Ltd. was
incorporated under the laws of Bermuda on April 29, 1997 for the purpose of
succeeding to the business of Frontline AB and, commencing in June 1997,
the shares in Frontline AB were exchanged for shares in Old Frontline. The
ordinary shares of Old Frontline were thereafter listed on the Oslo Stock
Exchange and delisted from the Stockholm Stock Exchange.
In September 1997, Old Frontline initiated an amalgamation with London &
Overseas Freighters Limited ("LOF"), also a Bermuda company. This process
was completed in May 1998. In the business combination (discussed below),
which left LOF as the surviving company, Old Frontline's shareholders
exchanged Old Frontline shares for LOF shares and LOF was subsequently
renamed Frontline Ltd. As a result of this transaction, Frontline became
listed on the London Stock Exchange and on the NASDAQ National Market in
addition to its listing on the Oslo Stock Exchange.
Business Acquisitions and Combinations
Amalgamation with London & Overseas Freighters Limited
On September 22, 1997, LOF and Frontline announced that they had entered
into an Agreement and Plan of Amalgamation (the "Amalgamation Agreement"),
providing for a business combination in a three-step transaction. On
September 29, 1997, pursuant to the Amalgamation Agreement, Frontline
commenced a cash tender offer (the "Offer") for at least 50.1 per cent and
up to 90 per cent of the outstanding LOF Ordinary Shares and ADSs for a
price of $15.91 per Ordinary Share. The Offer expired on October 28, 1997,
and effective November 1, 1997 Frontline acquired approximately 79.74 per
cent of the outstanding LOF Ordinary Shares.
In the second step, Frontline amalgamated (the "Amalgamation") with Dolphin
Limited, a Bermuda subsidiary of LOF. Each ordinary share of Frontline was
cancelled in consideration for which the stockholders of Frontline received
(i) 0.32635 Ordinary Shares of LOF and (ii) 0.01902 of a newly issued
warrant ("Frontline Warrants") to purchase one LOF Ordinary Share. In the
third step of the combination, in order to combine the assets and
liabilities, LOF purchased the assets and liabilities of Frontline which
were vested in the amalgamated company at fair market value in exchange for
a promissory note. LOF is the legally surviving entity in this business
combination and has been renamed Frontline Ltd. with effect from May 11,
1998. Frontline is treated as the accounting acquirer and the transaction
treated as a reverse acquisition. The share capital of the Company has been
restated accordingly to reflect the transaction.
Acquisition of ICB
In September 1997, Frontline made a public offer to acquire all of the
shares of ICB Shipping AB (publ) ("ICB"). Through the tender offer, by
October 1997 Frontline acquired 51.7 per cent of the outstanding shares of
ICB at a purchase price of approximately $215 million. The shares purchased
provided Frontline with only 31.4 per cent of the ICB voting rights. On
January 8, 1998, Frontline withdrew its bid for the remaining outstanding
shares of ICB. During 1998, Frontline made further purchases of ICB Shares
in the market and at December 31, 1998 had 34.2 per cent of the voting
power.
In September 1999, pursuant to an agreement (the "ICB Agreement"),
Frontline acquired ICB Shares previously owned by the so-called "A group"
consortium including those controlled by board members of ICB and ICB
shares controlled by the Angelicoussis family. In connection with the ICB
Agreement, four of the VLCCs owned by ICB, were sold to companies
controlled by the Angelicoussis family. As a result of the acquisitions,
Frontline increased its shareholding in ICB to approximately 90 per cent of
the capital and 93 per cent of the voting rights. In October 1999, a new
Board of Directors was appointed in ICB and is consequently controlled by
Frontline. In December 1999, Frontline commenced a compulsory acquisition
for the remaining shares in ICB and ICB was delisted from the Stockholm
Stock Exchange.
In the two year period prior to September 1999, Frontline was unable to
control, or exercise significant influence over, ICB. Accordingly, the
Company previously accounted for its investment in ICB as an
available-for-sale security in accordance with SFAS 115. As a result of
Frontline acquiring control over ICB, the Company's financial statements
have been restated. For the years ended December 31, 1997 and 1998, the
investment in ICB is accounted for in accordance with the equity method.
Through the acquisition of ICB, Frontline, through an indirect subsidiary,
has taken over responsibility for the management of Knightsbridge Tankers
Limited (Knightsbridge"), a company whose shares are listed on the Nasdaq
National Market under the symbol "VLCCF". Knightsbridge owns five VLCCs
(built 1995-96) which are chartered to Shell International Petroleum
Company Limited. Knightsbridge reports to the US Securities and Exchange
Commission pursuant to Section 13 of the Securities Exchange Act of 1934.
The Company has an ownership interest of less than half of one per cent in
Knightsbridge as of June 14, 2002.
Acquisition of Golden Ocean Group Limited
In October 2000, Frontline took control of Golden Ocean Group Limited
("Golden Ocean"), a shipping group which then held interests in 14 VLCCs
and 10 bulk carriers. On the same date Golden Ocean emerged from bankruptcy
protection under Chapter 11 of the U.S. Bankruptcy Code.
In January 2000, Golden Ocean and its fellow subsidiaries, Golden Ocean
Tankers Limited and Channel Rose Holdings Inc. (together the "Debtors")
filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy
Code with the Clerk of the United States Bankruptcy Court for the District
of Delaware (the "Bankruptcy Court"). In July 2000, Frontline filed a
proposed plan of reorganisation (the "Plan of Reorganisation") and
disclosure statement (the "Disclosure Statement") with the Bankruptcy Court
which set forth the manner in which claims against and equity interests in
the Debtors would be treated. On August 4, 2000 the Bankruptcy Court
approved on Frontline's Disclosure Statement and on August 14, 2000
approved the appointment of Frontline as manager of Golden Ocean's
operations with immediate effect. The Plan of Reorganisation was approved
by an overwhelming majority of holders of claims entitled to vote and was
confirmed at a hearing on September 15, 2000.
On October 10, 2000 the Plan of Reorganisation became effective and
Frontline acquired the entire share capital of Golden Ocean. The total
acquisition price paid, including amounts paid to settle allowed claims,
was approximately $63.0 million, including 1,245,998 Frontline ordinary
shares issued at a price of $15.65 per share. The acquisition of Golden
Ocean has been accounted for using the purchase method.
Acquisition of Mosvold Shipping Limited
On April 23, 2001, Frontline announced an offer for all of the shares of
Mosvold Shipping Limited ("Mosvold"), a Bermuda company whose shares were
listed on the Oslo Stock Exchange. Through a combination of shares acquired
and acceptances of the offer, Frontline acquired 97 per cent of the shares
of Mosvold. The remaining 3 per cent of the shares of Mosvold were acquired
during 2001 through a compulsory acquisition. Through the purchase of
Mosvold the Company acquired two mid-70s built VLCCs and three newbuilding
contracts for VLCCs to be delivered. The two mid-70s built VLCCs have
subsequently been sold by the Company. The first of the newbuildings was
delivered in January 2002, the second and third are due for delivery in
September 2002 and June 2003, respectively.
B. BUSINESS OVERVIEW
We are a world leader in the international seaborne transportation of crude
oil. Our tanker fleet, which is one of the largest and most modern in the
world, consists of 29 owned, part-owned or controlled VLCCs and 30 owned,
part-owned or controlled Suezmax tankers, of which 8 are Suezmax OBOs. In
addition, the we have a fleet of 8 wholly owned dry bulk carriers
consisting of 3 Capesize, 2 Panamax and 3 Handymax size carriers and has a
fifty per cent interest in a further two Handymax size bulk carriers. We
also charter in six modern VLCCs and two modern Suezmax tankers. At June
14, 2002 we also had five newbuilding VLCCs on order, including one in
which we have a 33.33 per cent interest, and have a purchase option to
acquire a further VLCC.
In 2001, we took delivery of two wholly-owned Suezmax newbuildings, and
three new double-hulled VLCCs in which we have a 33.33 per cent interest.
In 2001, we also took delivery of four VLCCs built in 1999 and 2000 which
we had purchase options on. In addition, through our acquisition of
Mosvold, we acquired two VLCCs built in the mid 1970s and three newbuilding
contracts for VLCCs. We have subsequently sold the two mid-70s built VLCCs.
The first of the newbuildings was delivered in January 2002, the second and
third are due for delivery in August 2002 and June 2003, respectively. In
2001, we also sold two 1993-built VLCCs and a 2000 built Suezmax tanker.
In 2002 to date, we have taken delivery of three newbuilding VLCCs, two of
which are wholly owned and one in which we have a 33.33 per cent interest.
The fleet that we operate has a total tonnage of approximately 17.7 million
dwt, and its tanker vessels have an average age of 6.4 years compared with
an estimated industry average of over 11.0 years. We believe that our
vessels comply with the most stringent of generally applicable
environmental regulations for tankers. Our dry bulk fleet has an average
age of 4.2 years.
We own various ship owning and operating subsidiaries. Our operations take
place substantially outside of the United States. Our subsidiaries,
therefore, own and operate vessels which may be affected by changes in
foreign governments and other economic and political conditions. We are
engaged primarily in transporting crude oil products and, in addition, raw
materials like coal and iron ore. Our VLCCs are specifically designed for
the transportation of crude oil and, due to their size, are normally used
only to transport crude oil from the Middle East Gulf to the Far East,
Northern Europe, the Caribbean and the Louisiana Offshore Oil Port
("LOOP"). Our Suezmax tankers are similarly designed for worldwide trading,
but the trade for these vessels is mainly in the Atlantic Basin.
Historically, the tanker industry has been highly cyclical, with attendant
volatility in profitability and asset values resulting from changes in the
supply of and demand for tanker capacity. Our carriers are specifically
designed to carry oil or dry cargo and may be used to transport either oil
or dry cargo on any voyage. When freight rates in both the oil and dry
cargo markets are equivalent OBO carriers are operated most profitably
transporting oil on one leg of the voyage and dry cargo on the other leg of
a voyage. The supply of tanker and OBO capacity is influenced by the number
of new vessels built, the number of older vessels scrapped, converted, laid
up and lost, the efficiency of the world tanker or OBO fleet and government
and industry regulation of maritime transportation practices. The demand
for tanker and OBO capacity is influenced by global and regional economic
conditions, increases and decreases in industrial production and demand for
crude oil and petroleum products, the proportion of world oil output
supplied by middle eastern and other producers, political changes and armed
conflicts (including wars in the Middle East) and changes in seaborne and
other transportation patterns. The demand for OBO capacity is, in addition,
influenced by increases and decreases in the production and demand for raw
materials such as iron ore and coal. In particular, demand for our tankers
and our services in transporting crude oil and petroleum products and dry
cargoes has been dependent upon world and regional markets. Any decrease in
shipments of crude oil or raw materials in world markets could have a
material adverse effect on our earnings. Historically, these markets have
been volatile as a result of, among other things, general economic
conditions, prices, environmental concerns, weather and competition from
alternative energy sources. Because many factors influencing the supply of
and demand for tankers and OBO carriers are unpredictable, the nature,
timing and degree of changes in industry conditions are also unpredictable.
We are committed to providing quality transportation services to all of our
customers and to developing and maintaining long term relationships with
major charterers of tankers. Increasing global environmental concerns have
created a demand in the petroleum products/crude oil seaborne
transportation industry for vessels that are able to conform to the
stringent environmental standards currently being imposed throughout the
world. Our fleet of modern single hull VLCCs may discharge crude oil at
LOOP until the year 2015, and our modern single hull Suezmax tankers may
call at U.S. ports until the year 2010 under the phase-in schedule for
double hull tankers presently prescribed under the Oil Pollution Act of
1990 ("OPA 90"). See "Regulation".
The tanker industry is highly cyclical, experiencing volatility in
profitability, vessel values and freight rates. Freight rates are strongly
influenced by the supply of tanker vessels and the demand for oil
transportation.
Freight rates started to improve in spring 2000 after a period of low
activity in 1999. Continuing increases in oil demand through 2000, together
with modest tanker fleet growth due to relatively low newbuilding activity,
resulted in extremely strong market conditions in the winter of 2000/2001.
In spring 2001, rates started to decline following a slow down in economic
growth combined with high crude oil prices. OPEC made large cutbacks in oil
production quotas to avoid a build-up of oil inventories which would have
lead to a collapse in oil prices. During 2001, seaborne oil trade and
overall transport distances declined resulting in decrease in tonnage
demand and tanker fleet utilisation.
The decrease in transport distances was attributable to a relative increase
in non-OPEC production which necessitated significant cuts in OPEC
production to support crude oil prices. The developments in 2001 have
continued to date and VLCC rates in particular have been negatively
affected in 2002 whereas the Suezmax market has been partly supported by
increasing oil exports from the Russian Black Sea where VLCC's are not
allowed to trade.
The VLCC spot market rates started 2001 at a very high level of $70,000 per
day to average around $40,000 for the year, which was down from
approximately $46,000 for the year before. Suezmaxes likewise started the
year at high rates, $60,000 per day and finished the year at $20,000 per
day averaging slightly over $30,000 per day for the year. Declining rates
combined with continuously increasing quality demands caused removal of
approximately 40 VLCCs and 31 Suezmax - through scrappings, conversions or
total losses, in 2001. This trend has continued into 2002. The VLCC fleet
currently consists of 6 per cent fewer vessels than 18 months ago.
All of the Company's dry bulk vessels are fixed on medium to long-term
bareboat or time charters.
Our plan is to create one of the world's largest publicly traded shipping
companies, with a modern, high quality VLCC and Suezmax fleet. Our business
strategy is primarily based upon the following principles:
o emphasising operational safety and quality maintenance for all of our
vessels;
o complying with all current and proposed environmental regulations;
o outsourcing technical operations and crewing; o controlling operational
costs of vessels;
o owning one of the most modern and homogeneous fleets of tankers in the
world;
o achieving high utilisation of our vessels;
o achieving competitive financing arrangements: and
o developing and maintaining relationships with major oil companies and
industrial charterers.
After having delivered their cargo, spot market vessels typically operate
in ballast, meaning that they are not carryin cargo, until they are
rechartered. It is the time element associated with these ballast legs that
the we seek to minimise by efficiently chartering our OBO carriers and
tankers. We seek to maximise earnings in employing vessels in the spot
market, under time charters or under Contracts of Affreightment ("COAs").
In December 1999, the Company, together with A.P. Moller, Euronav
Luxembourg SA, Osprey Maritime Ltd., Overseas Shipholding Group, Inc and
Reederei "Nord" Klaus E. Oldendorff agreed to form Tankers International
LLC, orTankers, to pool the commercial operation of the participating
companies' modern VLCC fleets (the "Tankers Pool"). As at December 31,
2001, Tankers managed a fleet of approximately 55 modern VLCCs, of which we
contributed 26. Tankers mainly employ vessels in the spot market, although
it also from time to time enters into COAs and time charters. Revenues to
each shipowner who participates in Tankers are calculated on the basis of
the pool's total earnings and the tonnage committed to Tankers by the
shipowner. In May 2002, it was announced that the Company would leave the
Tankers Pool. The commercial operations of our VLCCs will be brought back
in-house under our direct management.
In 1998, in order to increase our market share in the Suezmax trades and
increase trading flexibility, the Company and OMI Corporation, a major
international shipping company, combined Suezmax tanker fleets for
commercial purposes and created Alliance Chartering LLC, or Alliance.
Alliance currently markets 42 Suezmax tankers, of which the majority are
employed in the Atlantic Basin. Alliance's control of this large modern
fleet of Suezmaxes has enabled it to strengthen relationships with a number
of customers. These arrangements may allow Alliance the opportunity to
increase its Suezmax fleet utilisation through backhauls when cargo is
available (that is, transporting cargo on the return trip when a ship would
normally be empty) which would improve vessel earnings.
Alliance mainly employs vessels in the spot market, although it also from
time to time enters into COAs and time charters. Revenues to each shipowner
who participates in Alliance are based on the actual earnings from the
vessels contributed to Alliance by the shipowner. The part-owned Suezmax
tanker "Polytraveller", which is employed outside of Alliance, has been
chartered to Navion ASA until January 2003. Since April 2001, "Polytrader",
which was chartered to Navion ASA until April of 2001, has been traded in
the spot market.
Similar to structures commonly used by other shipping companies, our
vessels are all owned by, or chartered to, separate subsidiaries or
associated companies. Frontline Management AS ("Frontline Management") and
Frontline Management (Bermuda) Limited, both wholly-owned subsidiary of the
Company, support us in the implementation of our decisions. Frontline
Management is responsible for the commercial management of our shipowning
subsidiaries, including chartering and insurance. Each vessel owned by the
Company is registered under Bahamas, Bermuda, French, Hong Kong, Liberian,
Philippines, Singaporean, Norwegian, Isle of Man or Panamanian flag.
Frontline has a strategy of extensive outsourcing. Ship management, crewing
and accounting services are provided by a number of independent and
competing suppliers.
o Our vessels are managed by independent ship management companies.
Pursuant to management agreements, each of the independent ship
management companies provides operations, ship maintenance, crewing,
technical support, shipyard supervision and related services to us. A
central part of our strategy is to benchmark operational performance and
cost level amongst our ship managers.
o Independent ship managers provide crewing for our vessels. Currently,
most of our vessels are crewed with full Russian crews, while others
have full Indian or full Filipino crews, or combinations of these
nationalities.
o The accounting management services for each of our shipowning
subsidiaries are provided by the ship managers.
Importance of Fleet Size
We believe that fleet size in the industrial shipping sector is important
in negotiating terms with major clients and charterers. We believe that a
large, high-quality VLCC and Suezmax fleet will enhance our ability to
obtain competitive terms from suppliers and shipbuilders and to produce
cost savings in chartering and operations.
Seasonality
Historically, oil trade and therefore charter rates increased in the winter
months and eased in the summer months as demand for oil in the Northern
Hemisphere rose in colder weather and fell in warmer weather. The tanker
industry in general is less dependent on the seasonal transport of heating
oil than a decade ago as new uses for oil and oil products have developed,
spreading consumption more evenly over the year.
Customers
Our customers include major oil companies, petroleum products traders,
government agencies and various other entities. During each of the years
ended December 31, 2001, 2000 and 1999, no single customer accounted for 10
per cent or more of our consolidated freight revenues.
Competition
The market for international seaborne crude oil transportation services is
highly fragmented and competitive. Seaborne crude oil transportation
services generally are provided by two main types of operators: major oil
company captive fleets (both private and state-owned) and independent
shipowner fleets. In addition, several owners and operators pool their
vessels together on an ongoing basis, and such pools are available to
customers to the same extent as independently owned and operated fleets.
Many major oil companies and other oil trading companies, the primary
charterers of the vessels that we own or control, also operate their own
vessels and use such vessels not only to transport their own crude oil but
also to transport crude oil for third party charterers in direct
competition with independent owners and operators in the tanker charter
market. Competition for charters is intense and is based upon price,
location, size, age, condition and acceptability of the vessel and its
manager. Competition is also affected by the availability of other size
vessels to compete in the trades in which we engage.
Risk of Loss and Insurance
Our business is affected by a number of risks, including mechanical failure
of the vessels, collisions, property loss to our vessels, cargo loss or
damage and business interruption due to political circumstances in foreign
countries, hostilities and labour strikes. In addition, the operation of
any ocean-going vessel is subject to the inherent possibility of
catastrophic marine disaster, including oil spills and other environmental
mishaps, and the liabilities arising from owning and operating vessels in
international trade.
Frontline Management is responsible for arranging for the insurance for our
vessels in line with standard industry practice. In accordance with that
practice, we maintain marine hull and machinery and war risks insurance,
which includes the risk of actual or constructive total loss, and
protection and indemnity insurance with mutual assurance associations. From
time to time we carry insurance to cover the loss of hire resulting from
marine casualties in respect of some of our vessels. Currently, the amount
of coverage for liability for pollution, spillage and leakage available to
us on commercially reasonable terms through protection and indemnity
associations and providers of excess coverage is $1 billion per vessel per
occurrence. Protection and indemnity associations are mutual marine
indemnity associations formed by shipowners to provide protection from
large financial loss to one member by contribution towards that loss by all
members.
We believe that our current insurance coverage is adequate to protect
against the accident-related risks involved in the conduct of our business
and that we maintains appropriate levels of environmental damage and
pollution insurance coverage, consistent with standard industry practice.
However, there is no assurance that all risks are adequately insured
against, that any particular claims will be paid or that we will be able to
procure adequate insurance coverage at commercially reasonable rates in the
future.
Inspection by a Classification Society
Every commercial vessel's hull and machinery is "classed" by a
classification society authorised by its country of registry. The
classification society certifies that the vessel has been built and
maintained in accordance with the rules of such classification society and
complies with applicable rules and regulations of the country of registry
of the vessel and the international conventions to which that country is a
member. Our vessels have all been certified as "in class."
Each vessel is inspected by a surveyor of the classification society every
year, every two and a half years and every four to five years. Should any
defects be found, the classification surveyor will issue a "recommendation"
for appropriate repairs which have to be made by the shipowner within the
time limit prescribed.
Regulations
Government regulation significantly affects the ownership and operation of
the Company's vessels. The various types of governmental regulation that
affect our vessels include international conventions, national, state and
local laws and regulations in force in the countries in which our vessels
may operate or where our vessels are registered. We cannot predict the
ultimate cost of complying with these requirements, or the impact of these
requirements on the resale value or useful lives of our vessels. Various
governmental and quasi-governmental agencies require us to obtain permits,
licenses and certificates for the operation of our vessels. Although we
believe that we are substantially in compliance with applicable
environmental and regulatory laws and have all permits, licenses and
certificates necessary for the conduct of our operations, future
non-compliance or failure to maintain necessary permits or approvals could
require us to incur substantial costs or temporarily suspend operation of
one or more of our vessels.
We believe that the heightened environmental and quality concerns of
insurance underwriters, regulators and charterers are 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 modern vessels that are
able to conform to the stricter environmental standards. We maintain high
operating standards for all of our vessels that emphasize operational
safety, quality maintenance, continuous training of our crews and officers
and compliance with United States and international regulations.
Our vessels are subject to both scheduled and unscheduled inspections by a
variety of governmental and private entities, each of which may have unique
requirements. These entities include the local port authorities such as the
Coast Guard, harbour master or equivalent, classification societies, flag
state administration or country of registry, and charterers, particularly
terminal operators and major oil companies which conduct frequent vessel
inspections.
Environmental Regulation--IMO.
In April 2001, the International Maritime Organization, or IMO, the United
Nations' agency for maritime safety, revised its regulations governing
tanker design and inspection requirements. The proposed regulations, which
are expected to become effective in 2002, provided that they are ratified
by the IMO member states, provide for a more aggressive phase-out of single
hull oil tankers as well as increased inspection and verification
requirements. They provide for the phase-out of most single hull oil
tankers by 2015 or earlier, depending on the age of the vessel and whether
or not the vessel complies with requirements for protectively located
segregated ballast tanks. Segregated ballast tanks use ballast water that
is completely separate from the cargo oil and oil fuel system. Segregated
ballast tanks are currently required by the IMO on crude oil tankers
constructed after 1983. The changes, which will likely increase the number
of tankers that are scrapped beginning in 2004, are intended to reduce the
likelihood of oil pollution in international waters.
The proposed regulations identify three categories of tankers based on
cargo carrying capacity and the presence or absence of protectively located
segregated ballast tanks. Under the new IMO regulations, single-hull oil
tankers with carrying capacities of 20,000 deadweight tons, or dwt, and
above carrying crude oil, fuel oil, heavy diesel oil or lubricating oil as
cargo, and of 30,000 dwt and above carrying other oils, which do not comply
with IMO requirements for protectively located segregated ballast tanks
will be phased out no later than 2007. Single-hull oil tankers with similar
carrying capacities which do comply with IMO requirements for protectively
located segregated ballast tanks are to be phased out by 2015, or with the
consent of the country of registry of the vessel and subject to certain
operational restrictions, by 2017, depending on the date of delivery of the
vessel. All other single-hull oil tankers with carrying capacities of 5,000
dwt and above and not falling into one of the above categories will also be
phased out by 2015, depending on the date of delivery of the vessel.
The requirements contained in the International Safety Management Code, or
ISM Code, promulgated by the IMO, also our operations. 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. Our vessel managers are certified
as approved ship managers 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
and their operators have received ISM Certification.
Noncompliance with the ISM Code and other IMO regulations may subject the
shipowner or a bareboat charterer to increased liability, may lead to
decreases in available insurance coverage for affected vessels and may
result in the denial of access to, or detention in, some ports. Both the
U.S. Coast Guard and European Union authorities have indicated that vessels
not in compliance with the ISM Code by the applicable deadlines will be
prohibited from trading in U.S. and European Union ports, as the case may
be.
All of our vessels delivered since 1997 are of double hull construction and
comply with the IMO regulations upon their effective date. We cannot at the
present time evaluate the likelihood of whether compliance with the new
regulations regarding inspections of all vessels will adversely affect our
operations, or the magnitude of any such adverse effect, due to uncertainty
of interpretation of the IMO regulations.
The IMO has negotiated international conventions that impose liability for
oil pollution in international waters and a signatory's territorial waters.
Additional or new convention, laws and regulations may be adopted which
could limit our ability to do business and which could have a material
adverse effect on our business and results of operations.
Environmental Regulation--United States
The U.S. Oil Pollution Act of 1990, or OPA, established an extensive
regulatory and liability regime for environmental protection and cleanup of
oil spills. OPA affects all owners and operators whose vessels trade with
the U.S. or its territories or possessions, or whose vessels operate in the
waters of the U.S., which include the U.S. territorial waters and the two
hundred nautical mile exclusive economic zone of the U.S. The Comprehensive
Environmental Response, Compensation and Liability Act, or CERCLA, applies
to the discharge of hazardous substances whether on land or at sea. Both
OPA and CERCLA impact our operations.
Under OPA, vessel owners, operators and bareboat or "demise" charterers are
"responsible parties" who are all liable regardless of fault, individually
and as a group, for all containment and clean-up costs and other damages
arising from oil spills from their vessels. These "responsible parties"
would not be liable if the spill results solely from the act or omission of
a third party, an act of God or an act of war. The other damages aside from
clean-up and containment costs are defined broadly to include:
- natural resource damages and related assessment costs;
- real and personal property damages;
- net loss of taxes, royalties, rents, profits or earnings
capacity;
- 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.
OPA limits the liability of responsible parties to the greater of $1,200
per gross ton or $10 million per tanker. This is subject to possible
adjustment for inflation. OPA specifically permits individual states to
impose their own liability regimes with regard to oil pollution incidents
occurring within their boundaries, and some states have enacted legislation
providing for unlimited liability for discharge of pollutants within their
waters. In some cases, states which have enacted their own legislation have
not yet issued implementing regulations defining tanker owners'
responsibilities under these laws.
Under OPA, with limited exceptions, all newly-built or converted tankers
operating in U.S. waters must be built with double-hulls. Existing vessels
that do not comply with the double-hull requirement must be phased out over
a 20-year period beginning in 1995 based on size, age and place of
discharge, unless retrofitted with double-hulls. Notwithstanding the
phase-out period, OPA currently permits existing single-hull tankers to
operate until the year 2015 if their operations within U.S. waters are
limited to:
- discharging at the LOOP; or
- 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.
CERCLA, which applies to owners and operators of vessels, contains a
similar liability regime and provides for cleanup, removal and natural
resource damages. Liability under CERCLA is limited to the greater of $300
per gross ton or $5 million. These limits of liability do not apply,
however, where the incident is caused by violation of applicable U.S.
federal safety, construction or operating regulations, or by the
responsible party's gross negligence or willful misconduct. These limits do
not apply if the responsible party fails or refuses to report the incident
or to cooperate and assist in connection with the substance removal
activities. OPA and CERCLA each preserve the right to recover damages under
existing law, including maritime tort law. We believe that we are in
substantial compliance with OPA, CERCLA and all applicable state
regulations in the ports where our vessels will call.
OPA requires owners and operators of vessels to establish and maintain with
the U.S. Coast Guard evidence of financial responsibility sufficient to
meet the limit of their 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/CERCLA. We currently maintain evidence of
financial responsibility through Shoreline Mutual (Bermuda) Ltd.
We currently insure and, provided such insurance remains available at a
commercially reasonable cost, plan to insure each of our vessels with
pollution, spillage and leakage liability insurance in the amount of $1
billion per vessel per occurrence. This is the amount currently available
to us in the insurance market on commercially reasonable terms. The
liability resulting from a catastrophic spill could exceed the insurance
coverage available, in which event there could be a material adverse effect
on us. Additionally, under OPA, the liability of responsible parties,
United States or foreign, with regard to oil pollution damage in the United
States is not pre-empted by any international convention.
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:
- 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";
- describe crew training and drills; and
- identify a qualified individual with full authority to implement
removal actions.
Our tankers that call in the U.S. meet this requirement.
In addition to federal laws and regulation, most U.S. states that border a
navigable waterway have enacted environmental pollution laws that impose
strict liability on a person for removal costs and damages resulting from a
discharge of oil or a release of a hazardous substance. These laws may be
more stringent than U.S. federal law. OPA specifically permits individual
states to impose their own liability regimes with regard to oil pollution
incidents occurring within their boundaries, and many states have enacted
legislation providing for unlimited liability for oil spills.
Several of our vessels currently carry cargoes to United States waters
regularly and we believe that all of our vessels are suitable to meet OPA
requirements and that thjey would also qualify for trade if chartered to
serve U.S. ports.
It is impossible to predict what additional legislation, if any, may be
promulgated by the United States or any other country or authority.
Environmental Regulation--CLC
Although the U.S. is not a party to these conventions, 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, or CLC. Under this convention, a vessel's registered owner is
strictly liable for pollution damage caused in the territorial waters of a
contracting state by discharge of oil, subject to some complete defenses.
Liability is limited to approximately $270 per gross registered ton or
approximately $28.3 million, whichever is less. If, however, the country in
which the damage results is a party to the 1992 Protocol to the CLC, the
maximum liability rises to $74.9 million. The limit of liability is tied to
a unit of account which varies according to a basket of currencies. The
right to limit liability is 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 states which are party to this convention 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.
Environmental Regulations -- EU
The International Maritime Organization has approved an accelerated
timetable for the phase-out of single hull oil tankers. The new
regulations, expected to take effect in 2002, provided they are ratified by
the IMO member states, require the phase-out of most single hull oil
tankers by 2015 or earlier, depending on the age of the tanker and whether
or not it has segregated ballast tanks. Under the new regulations the
maximum permissible age for single hull tankers after 2007 will be 26
years, as opposed to 30 years under current regulations. The amendments to
the International Convention for the Prevention of Marine Pollution from
Ships 1973, as amended in 1978, accelerates the phase-out schedule
previously set by the IMO in 1992. We expect that the European Union will
incorporate the IMO regulations so that port states may enforce them.
The sinking of the oil tanker "Erika" off the coast of France on December
12, 1999 polluted more than 250 miles of French coastline with heavy oil.
Following the spill, the European Commission adopted a "communication on
the safety of oil transport by sea," also named the "Erika communication."
As a part of this, the Commission has adopted a proposal for a general ban
on single-hull oil tankers. The timetable for the ban shall be similar to
that set by the United States under OPA in order to prevent oil tankers
banned from U.S. waters from shifting their trades to Europe. The ban plans
for a gradual phase-out of tankers depending on vessel type:
- Single-hull oil tankers larger than 20,000 dwt without protective
ballast tanks around the cargo tanks. This category is proposed
to be phased out by 2005.
- Single-hull oil tankers larger than 20,000 dwt in which the cargo
tank area is partly protected by segregated ballast tank. This
category is proposed to be phased out by 2015.
- Single-hull tankers below 20,000 dwt. This category is proposed
to be phased out by 2015.
In addition, Italy announced a ban of single hull crude oil tankers over
5,000 dwt from most Italian ports, effective April 2001, which has since
been delayed. This ban will be placed on oil product carriers, effective
December 1, 2003. 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.
C. ORGANIZATIONAL STRUCTURE
Our vessels are all owned by, or chartered to, separate subsidiaries,
associated companies or joint ventures. The following table sets out the
details of the Company's significant subsidiaries and equity interests as
of June 14, 2002:
Country of Ownership
Name Vessel/Activity Incorporation Percentage
---- --------------- ------------- ----------
Granite Shipping Co. Ltd. Front Granite Bahamas 100%
Frontline Management (Bermuda) Ltd Management company Bermuda 100%
ICB Shipping (Bermuda) Limited Management company Bermuda 100%
Mosvold Shipping Limited Holding company Bermuda 100%
Golden Current Limited Opalia Isle of Man 100%
Ariake Transport Corporation Ariake Liberia 33.33%
Bandama Ltd. Polytrader and Polytraveller Liberia 100%
Bonfield Shipping Ltd. Front Driver Liberia 100%
Dundee Navigation SA Dundee Liberia 50.1%
Edinburgh Navigation SA Edinburgh Liberia 50.1%
Fourways Marine Front Spirit Liberia 100%
Front Ardenne Inc. Front Ardenne Liberia 100%
Front Barbant Inc. Front Barbant Liberia 100%
Front Eagle Corporation Front Eagle Liberia 100%
Front Glory Shipping Inc. Front Glory Liberia 100%
Front Pride Shipping Inc. Front Pride Liberia 100%
Front Serenade Inc. Front Serenade Liberia 100%
Front Splendour Shipping Inc. Front Splendour Liberia 100%
Front Tobago Inc. Front Tobago Liberia 40%
Golden Aquarian Corporation Cos Hero Liberia 100%
Golden Bayshore Shipping Corporation Navix Astral Liberia 100%
Golden Channel Corporation Front Commodore Liberia 100%
Golden Door Corporation Golden Nerina Liberia 100%
Golden Estuary Corporation Front Comanche Liberia 100%
Golden Fjord Corporation Front Commerce Liberia 100%
Golden Fountain Corporation Golden Fountain Liberia 50%
Golden Gulf Corporation Golden Aloe Liberia 100%
Golden Hilton Shipping Corporation Channel Navigator Liberia 100%
Golden Key Corporation Golden Disa Liberia 100%
Golden Lagoon Corporation Pacific Lagoon Liberia 50%
Golden Loch Corporation Golden Protea Liberia 100%
Golden Ocean Tankers Limited Holding Company Liberia 100%
Golden President Shipping Corporation Channel Alliance Liberia 100%
Golden Seaway Corporation New Vanguard Liberia 100%
Golden Sound Corporation New Vista Liberia 100%
Golden Strait Corporation Golden Victory Liberia 100%
Golden Stream Corporation Golden Stream Liberia 100%
Golden Tide Corporation New Circassia Liberia 50%
Ichiban Transport Corporation Ichiban Liberia 33.33%
Katong Investments Ltd. Front Breaker Liberia 100%
Kea Navigation Ltd. Front Melody Liberia 100%
Langkawi Shipping Ltd. Front Birch Liberia 100%
Middleburg Properties Ltd. Golden Daisy Liberia 100%
Millcroft Maritime SA Front Champion Liberia 100%
Neon shipping SA Front Sun Liberia 100%
Otina Inc. Front Tina Liberia 100%
Optimal Shipping SA Front Symphony Liberia 100%
Pablo Navigation SA Front Chief Liberia 100%
Patrio Shipping Ltd. Front Hunter Liberia 100%
Quadrant Marine Inc. Front Sky Liberia 100%
Rakis Maritime SA Front Fighter Liberia 100%
Reese Development Inc. Golden Rose Liberia 50%
Ryan Shipping Corporation Front Warrior Liberia 100%
Sable Navigation SA Channel Poterne Liberia 100%
Saffron Rose Shipping Limited Front Crown Liberia 100%
Sakura Transport Corporation Sakura I Liberia 33.33%
Sea Ace Corporation Front Ace Liberia 100%
Sibu Shipping Ltd. Front Maple Liberia 100%
South West Tankers Inc Front Sunda Liberia 100%
Tokyo Transport Corporation Tanabe Liberia 33.33%
Tidebrook Maritime Corporation Front Commander Liberia 100%
Ultimate Shipping Ltd. Front Century Liberia 100%
West Tankers Inc. Front Comor Liberia 100%
Frontline Management AS Management company Norway 100%
Puerto Reinosa Shipping Co SA Front Lillo Panama 100%
Aspinall Pte Ltd. Front Viewer Singapore 100%
Blizana Pte Ltd. Front Rider Singapore 100%
Bolzano Pte Ltd. Mindanao Singapore 100%
Cirebon Shipping Pte Ltd. Front Vanadis Singapore 100%
Fox Maritime Pte Ltd. Front Sabang Singapore 100%
Front Dua Pte Ltd. Front Duchess Singapore 100%
Front Empat Pte Ltd. Front Highness Singapore 100%
Front Enam Pte Ltd. Front Lord Singapore 100%
Front Lapan Pte Ltd. Front Climber Singapore 100%
Front Lima Pte Ltd. Front Lady Singapore 100%
Front Tiga Pte Ltd. Front Duke Singapore 100%
Front Tujuh Pte Ltd. Front Emperor Singapore 100%
Front Sembilan Pte Ltd. Front Leader Singapore 100%
Rettie Pte Ltd. Front Striver Singapore 100%
Touracous Pte Ltd. Kim Jacob Singapore 100%
Transcorp Pte Ltd. Front Guider Singapore 100%
D. PROPERTY, PLANTS AND EQUIPMENT
The Company's Vessels
We operate a substantially modern fleet of tankers consisting of 35 VLCCs,
24 Suezmax tankers and eight Suezmax OBO carriers. In addition we have five
newbuilding contracts and have a purchase option to acquire a further one
VLCC tanker. We also have a fleet of 10 dry bulk carriers. The following
table sets forth the fleet that we operate as of June 14, 2002:
TANKER FLEET
Owned Tonnage
Approximate Type of
----------- -------
Vessel Built Dwt. Construction Flag Employment
------ ----- ---- ------------ ---- ----------
VLCCs
-----
Front Sabang 1990 285,000 Single-hull SG Tankers Pool
Front Vanadis 1990 285,000 Single-hull SG Tankers Pool
Front Highness 1991 284,000 Single-hull SG Tankers Pool
Front Lady 1991 284,000 Single-hull SG Tankers Pool
Front Lord 1991 284,000 Single-hull SG Tankers Pool
Front Duke 1992 284,000 Single-hull SG Tankers Pool
Front Duchess 1993 284,000 Single-hull SG Tankers Pool
Front Tobago (40%) 1993 261,000 Single-hull LIB Tankers Pool
Front Edinburgh (50.1%) 1993 302,000 Double-side LIB Tankers Pool
Front Dundee (50.1%) 1993 302,000 Double-side LIB Tankers Pool
Front Ace 1993 275,000 Single-hull LIB Tankers Pool
Golden Fountain (50%) 1995 302,000 Single-hull PAN Time Charter
Golden Stream 1995 276,000 Single-hull PAN Time Charter
Navix Astral 1996 276,000 Single-hull PAN Bareboat Charter
New Vanguard 1998 300,000 Double-hull HK Bareboat Charter
New Vista 1998 300,000 Double-hull HK Bareboat Charter
New Circassia (50%) 1999 306,000 Double-hull PAN Bareboat Charter
Opalia 1999 302,000 Double-hull IoM Bareboat Charter
Pacific Lagoon (50%) 1999 306,000 Double-hull PAN Time Charter
Front Comanche 1999 300,000 Double-hull FRA Time Charter
Front Commerce 1999 300,000 Double-hull LIB Tankers Pool
Front Tina 2000 298,000 Double-hull LIB Time Charter
Front Commodore 2000 299,000 Double-hull BDA Tankers Pool
Ichiban 2000 296,000 Double-hull BS Tankers Pool
Ariake 2001 296,000 Double-hull BS Tankers Pool
Sakura I 2001 296,000 Double-hull BS Tankers Pool
Front Eagle 2002 308,000 Double-hull BA Tankers Pool
Front Serenade 2002 298,500 Double-hull LIB Tankers Pool
Tanabe (33.33%) 2002 286,000 Double-hull BA Tankers Pool
Hull No. 4979 2002 299,000 Double-hull LIB
Hull No. 4980 2002 299,000 Double-hull LIB
Hull No. 4983 (33.33%) 2002 308,000 Double-hull BA
Hull No. 1402 2002 308,000 Double-hull BA
Hull No. 1412 2003 308,000 Double-hull BA
Suezmax OBO Carriers
--------------------
Front Breaker 1991 169,000 Double-hull NIS Spot market
Front Climber 1991 169,000 Double-hull SG Spot market
Front Driver 1991 169,000 Double-hull NIS Spot market
Front Guider 1991 169,000 Double-hull SG Spot market
Front Leader 1991 169,000 Double-hull SG Spot market
Front Rider 1992 169,000 Double-hull SG Spot market
Front Striver 1992 169,000 Double-hull SG Spot market
Front Viewer 1992 169,000 Double-hull SG Spot market
Suezmaxes
---------
Polytrader (40%) 1978 126,000 Single-hull NIS Spot market
Polytraveller (35%) 1979 126,000 Single-hull NOR Time charter
Front Lillo 1991 147,000 Single-hull NIS Spot market
Front Birch 1991 152,000 Double-side NIS Spot market
Front Maple 1991 152,000 Double-side NIS Spot market
Front Granite 1991 142,000 Single-hull NIS Spot market
Front Emperor 1992 147,000 Single-hull SG Spot market
Front Sunda 1992 142,000 Single-hull NIS Spot market
Front Spirit 1993 147,000 Single-hull NIS Spot market
Front Comor 1993 142,000 Single-hull NIS Spot market
Front Pride 1993 150,000 Double-hull NIS Spot market
Front Glory 1995 150,000 Double-hull NIS Spot market
Front Splendour 1995 150,000 Double-hull NIS Spot market
Front Ardenne 1997 153,000 Double-hull NIS Spot market
Front Brabant 1998 153,000 Double-hull NIS Spot market
Mindanao 1998 158,000 Double-hull SG Spot market
Front Fighter 1998 153,000 Double-hull NIS Spot market
Front Hunter 1998 153,000 Double-hull NIS Spot market
Front Sun 2000 153,000 Double-hull NIS Spot market
Front Sky 2000 153,000 Double-hull NIS Spot market
Front Melody 2001 150,000 Double-hull NIS Spot market
Front Symphony 2001 150,000 Double-hull LIB Spot market
Chartered In Tonnage
Approximate Type of
----------- -------
Vessel Built Dwt Construction Flag Employment
------ ----- --- ------------ ---- ----------
VLCCs
-----
Front Century 1998 311,000 Double-hull BA Tankers Pool
Front Champion 1998 311,000 Double-hull BA Tankers Pool
Front Chief 1999 311,000 Double-hull BA Tankers Pool
Front Commander 1999 311,000 Double-hull BA Tankers Pool
Front Crown 1999 311,000 Double-hull BA Tankers Pool
Golden Victory 1999 305,000 Double-hull PAN Tankers Pool
Suezmax
-------
Front Warrior 1998 153,000 Double-hull BA Spot market
Kim Jacob 1998 158,000 Double-hull SG Spot market
DRY BULK FLEET
Owned Tonnage
Approximate Type of
----------- -------
Vessel Built Dwt. Construction Flag Employment
------ ----- ---- ------------ ---- ----------
Capesize
--------
Channel Alliance 1996 172,000 Single-hull PHI Time Charter
Channel Navigator 1997 172,000 Single-hull PHI Time Charter
Channel Poterne 1997 172,000 Single-hull PHI Time Charter
Panamax
-------
Golden Disa 1999 75,000 Single-hull PHI Time Charter
Golden Nerina 1999 75,000 Single-hull PHI Time Charter
Handymax
--------
Golden Rose (50%) 1998 47,000 Single-hull PHI Time Charter
Golden Daisy (50%) 1998 47,000 Single-hull PHI Time Charter
Golden Aloe 1998 46,000 Single-hull PHI Time Charter
Golden Protea 1998 46,000 Single-hull PHI Time Charter
Cos Hero 1999 48,000 Single-hull PAN Bareboat Charter
Key to Flags:
BA - Bahamas, BDA - Bermuda, HK - Hong Kong, IoM - Isle of Man, LIB -
Liberia, NOR - Norway, NIS - Norwegian International Ship Register, PAN -
Panama, PHI - Philippines, SG - Singapore, FRA - France.
Other than its interests in the vessels described above, we do not own any
material physical properties. We lease office space in Hamilton, Bermuda
from an unaffiliated third party. Frontline Management leases office space,
at market rates, in Oslo, Norway from Sea Shipping AS, a company indirectly
affiliated with Hemen Holding Ltd., or Hemen, our principal shareholder.
One of our subsidiaries leases office space in London, England from an
unaffiliated third party.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
The following discussion should be read in conjunction with Item 3
"Selected Financial Data" and the Company's audited Consolidated Financial
Statements and Notes thereto included herein.
The Company's principal focus and expertise are to serve major integrated
oil companies and other customers that require transportation of crude oil
and oil products cargoes. The Company's tanker fleet, which is one of the
largest and most modern in the world, consists of 29 owned, part-owned or
controlled VLCCs and 30 owned, part-owned or controlled Suezmax tankers, of
which 8 are Suezmax OBOs. In addition, the Company has a fleet of 8 wholly
owned dry bulk carriers consisting of 3 Capesize, 2 Panamax and 3 Handymax
size carriers and has a fifty per cent interest in a further two Handymax
size bulk carriers. The Company also charters in six modern VLCCs and two
modern Suezmax tankers. At June 14, 2002 the Company also has five
newbuilding VLCCs on order, including one in which it has a 33.33 per cent
interest, and has a purchase option to acquire a further one VLCC.
In 2001, the Company took delivery of two wholly-owned Suezmax
newbuildings, and three new double-hulled VLCCs in which the Company has a
33.33 per cent interest. In 2001, the Company also took delivery of four
1999 and 2000 built VLCCs on which had it had purchase options. In
addition, through its acquisition of Mosvold, it acquired two mid-70s built
VLCCs and three newbuilding contracts for VLCCs. The two mid-70s built
VLCCs have subsequently been sold by the Company. The first of the
newbuildings was delivered in January 2002, the second and third are due
for delivery in September 2002 and June 2003, respectively.
In 2001, the Company sold two 1993-built VLCCs and a 2000 built Suezmax
tanker. The Company also sold three VLCCs to German KG structures and
leased these vessels back on charters each for a period of eight years with
the option on the buyer's side to extend the charter for a further three
year followed by a further two years. Each charter provides that the
Company has the option to acquire the relevant vessels at certain dates in
the future and gives the buyer the option to sell the vessel on the Company
in 2014. These sale and leaseback transactions have been accounted for as
capital leases and the vessels and associated lease liabilities have been
recognised on the Company's balance sheet.
The Company's vessels are operated under either time charters, bareboat
charters, voyage charters or COAs. A time charter is a contract for the use
of a vessel for a specific period of time. A voyage charter is a contract
for the use of a vessel for a specific voyage. Under a time charter, the
charterer pays substantially all of the vessel voyage costs. Under a
bareboat charter the charterer pays substantially all of the vessel voyage
and operating costs. Under a voyage charter, the vessel owner pays such
costs. Vessel voyage costs are primarily fuel and port charges.
Accordingly, for equivalent profitability, charter income under a voyage
charter would be greater than that under a time charter to take account of
the owner's payment of the vessel voyage costs. However, net operating
revenues would be equal. In order to compare vessels trading under
different types of charters, it is standard industry practice to measure
the revenue performance of a vessel in terms of average daily time charter
equivalent earnings ("TCEs"). For voyage charters, this is calculated by
dividing net operating revenues by the number of days on charter. Days
spent offhire are excluded from this calculation.
In December 1999, the Company, together with A.P. Moller, Euronav
Luxembourg SA, Osprey Maritime Ltd., Overseas Shipholding Group, Inc and
Reederei "Nord" Klaus E. Oldendorff agreed to form Tankers International
LLC ("Tankers") to pool the commercial operation of the participating
companies' modern VLCC fleets (the "Tankers Pool"). As at December 31,
2001, Tankers managed a fleet of approximately 55 modern VLCCs, of which
the Company contributed 26. Tankers mainly employs ships in the spot
market, although it also from time to time enters into COAs and time
charters. Revenues to each shipowner who participates in Tankers are
calculated on the basis of the pool's total earnings and the tonnage
committed into Tankers by the shipowner. In May 2002, it was announced that
the Company would leave the Tankers Pool. The commercial operations of the
Company's VLCCs will be brought back in-house under the Company's direct
management.
In 1998, in order to increase the Company's market share in the Suezmax
trades and increase trading flexibility, the Company and OMI Corporation, a
major international shipping company, combined Suezmax tanker fleets for
commercial purposes and created Alliance Chartering LLC ("Alliance").
Alliance currently markets 42 Suezmax tankers. Alliance mainly employs
ships in the spot market, although it also from time to time enters into
COAs and time charters. Revenues to each shipowner who participates in
Alliance are based on the actual earnings from the ships contributed into
Alliance by the shipowner. The part-owned Suezmax "Polytraveller," which is
employed outside of Alliance, has been chartered to Navion ASA until
January 2003. Since April 2001, the "Polytrader," which was chartered to
Navion ASA until April of 2001, has been traded in the spot market since
April 2001.
Market Overview
The tanker industry is highly cyclical, experiencing volatility in
profitability, vessel values and freight rates. In particular, freight
rates are strongly influenced by the supply of tanker vessels and the
demand for oil transportation.
Freight rates started to improve in spring 2000 after a period of low
activity in 1999. Continuing increases in oil demand through 2000, together
with modest tanker fleet growth due to relatively low newbuilding activity,
resulted in extremely strong market conditions in the winter of 2000/2001.
In spring 2001, rates started to decline following a slow down in economic
growth combined with high crude oil prices. OPEC made large cutbacks in oil
production quotas to avoid a build-up of oil inventories which would have
lead to a collapse in oil prices. Over the year 2001, seaborne oil trade
and overall transport distances declined resulting in decrease in tonnage
demand and tanker fleet utilisation.
The decrease in transport distances was attributable to a relative increase
in non-OPEC production which necessitated significant cuts in OPEC
production to support crude oil prices. The developments in 2001 have
continued to date and VLCC rates in particular have been negatively
affected in 2002 whereas the Suezmax market has been partly supported by
increasing oil exports from the Russian Black Sea where VLCC's are not
allowed to trade.
The VLCC spot market rates started 2001 at a very high level of $70,000 per
day to average around $40,000 for the year which was down from
approximately $46,000 for the year before. Suezmaxes likewise started the
year at high rates, $60,000 per day and finished the year at $20,000 per
day averaging slightly over $30,000 per day for the year. Declining rates
combined with continuously increasing quality demands caused removal in
2001 of approximately 40 VLCCs and 31 Suezmax - through scrappings,
conversions or total losses. This trend has continued into 2002. The VLCC
fleet currently consists of 6 per cent fewer vessels than 18 months ago.
The following table sets out the daily TCEs earned on the spot market by
the Company's tanker fleet over the last five years:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in $ per day)
VLCC 40,800 46,300 20,000 31,800 32,700
Suezmax 30,700 35,500 16,700 22,400 24,800
Suezmax OBO 28,900 33,300 16,800 21,800 25,500
The Company's fleet of dry bulk carriers are all fixed on medium to
long-term bareboat or time charters. These arrangements provide sufficient
cash flows to cover the debt service on this fleet.
Inflation
Although inflation has had a moderate impact on operating expenses,
drydocking expenses and corporate overheads, management does not consider
inflation to be a significant risk to direct costs in the current and
foreseeable economic environment. In addition, in a shipping downturn,
costs subject to inflation can usually be controlled because shipping
companies typically monitor costs to preserve liquidity and encourage
suppliers and service providers to lower rates and prices. It is expected
that insurance costs, which have risen considerably in 2001, will continue
to increase in the next few years. However, the Company expects to be
protected against the full impact of such increases due to the fact that it
has fixed certain parts of its premium for multiple years. In the event
that inflation becomes a significant factor in the world economy,
inflationary pressures could result in increased operating and financing
costs.
Change in Accounting Policies
In 2001, the Company changed its accounting policy for drydockings. Prior
to 2001, provisions for future drydockings were accrued and charged to
expense on a pro-rata basis over the period to the next scheduled
drydockings. Since January 1, 2001 the Company has recognised the cost of a
drydocking at the time the drydocking takes place, that is it applies the
"expense as incurred" method. The expense as incurred method is considered
by management to be a more reliable method of recognising drydocking costs
as it eliminates the uncertainty associated with estimating the cost and
timing of future drydockings. The cumulative effect of this change in
accounting principle is shown separately in the consolidated statements of
operations for the year ended December 31, 2001 and resulted in a credit to
income of $32.3 million in 2001. The cumulative effect of this change as of
January 1, 2001 on the Company's consolidated balance sheet was to reduce
total liabilities by $32.3 million. Assuming the "expense as incurred"
method had been applied retroactively, the pro forma income before
cumulative effect of change in accounting principle for 2000 and 1999 would
have been increased by $6.3 million and $7.0 million, or $0.09 and $0.14
per basic and diluted share, respectively.
As of January 1, 2001, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"). Certain hedge relationships met the hedge
criteria prior to SFAS 133, but do not meet the criteria for hedge
accounting under SFAS 133. The Company adopted SFAS 133 in the first
quarter of fiscal year 2001 and upon initial adoption recognised the fair
value of its derivatives as assets of $0.4 million and liabilities of $0.6
million. A gain of $0.3 million was recognised in income and a charge of
$0.5 million made to other comprehensive income.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") approved
SFAS No. 141, "Accounting for Business Combinations" which requires the
application of the purchase method including the identification of the
acquiring enterprise for each transaction. SFAS No. 141 supercedes APB No.
Opinion 16 and applies to all business combinations initiated after June
30, 2001 and all business combinations accounted for by the purchase method
that are completed after June 30, 2001. The adoption of SFAS No. 141 by the
Company on June 30, 2001 did not have any impact on the Company's
consolidated results of operations or financial position.
In June 2001, the FASB approved SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS No. 142 applies to all acquired
intangible assets whether acquired singly, as part of a group, or in a
business combination. SFAS No. 142 will supersede APB Opinion No. 17,
"Intangible Assets". This statement is effective for fiscal years beginning
after December 15, 2001. SFAS No. 142 requires that goodwill and indefinite
lived intangible assets will no longer be amortized but will be reviewed
annually for impairment. Intangible assets that are not deemed to have an
indefinite life will continue to be amortised over their useful lives. At
December 31, 2001, the Company had unamortised goodwill of $14.0 million.
Amortisation expense related to goodwill was $1.9 million, $1.1 million and
$0.5 million for the years ended December 31, 2001, 2000 and 1999,
respectively. The Company has not yet determined what effect the adoption
of SFAS No. 142 will have on its consolidated results of operations or
financial position.
In August 2001, the FASB approved SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS No. 143 requires the fair value
of a legal liability related to an asset retirement be recognized in the
period in which it is incurred. The associated asset retirement costs must
be capitalized as part of the carrying amount of the related long-lived
asset and subsequently amortized to expense. Subsequent changes in the
liability will result from the passage of time (interest cost) and revision
to cash flow estimates. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002, effective January 1,
2003 for the Company. Management does not expect that the adoption of SFAS
No. 143 will have a material effect on the Company's results of operations
or financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). The objectives
of SFAS 144 are to address significant issues relating to the
implementation of FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and to
develop a single accounting model based on the framework established in
SFAS 121, for long-lived assets to be disposed of by sale. The standard
requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value less cost to sell.
Additionally, the standard expands the scope of discontinued operations to
include all components of an entity with operations that can be
distinguished from the rest of the entity and will be eliminated from the
ongoing operations of the entity in a disposal transaction. This statement
is effective for fiscal years beginning after December 15, 2001, and
generally, its provisions are to be applied prospectively. The Company is
currently evaluating the impact of this statement and does not expect the
adoption of SFAS No. 144 to have a material effect on the Company's results
of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This Statement rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement,
FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also rescinds FASB Statement No. 44, Accounting
for Intangible Assets of Motor Carriers. This Statement amends FASB Statement
No. 13, Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions.
This statement is generally for transactions occurring after May 15, 2002.
The Company is currently evaluating the impact of this statement.
Critical Accounting Policies
The preparation of the Company's financial statements in accordance with
accounting principles generally accepted in the United States requires that
management make estimates and assumptions affecting the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The following is a
discussion of the accounting policies applied by the Company that are
considered to involve a higher degree of judgement in their application.
See Note 2. to the Company's audited Consolidated Financial Statements and
Notes thereto included herein for details of all of the Companys' material
accounting policies.
Revenue Recognition
Revenues are generated from freight billings, time charter and bareboat
charter hires. Time charter and bareboat charter revenues are recorded over
the term of the charter as service is provided. Under a voyage charter the
revenues and associated voyage costs are recognised rateably over the
duration of the voyage. The operating results of voyages in progress at a
reporting date are estimated and recognised pro-rata on a per day basis.
Probable losses on voyages are provided for in full at the time such losses
can be estimated.
The operating revenues and voyage expenses of the vessels operating in the
Tankers pool, and certain other pool arrangements, are pooled and net
operating revenues, calculated on a time charter equivalent basis, are
allocated to the pool participants according to an agreed formula. The same
revenue and expenses principles stated above are applied in determining the
pool net operating revenues.
Vessels and Depreciation
The cost of the Company's vessels is depreciated on a straight-line basis
over the vessels' remaining economic useful lives. Management estimates the
useful life of the Company's vessels to be 25 years and this is a common
life expectancy applied in the shipping industry. With effect from April
2001, the IMO implemented new regulations that result in the accelerated
phase-out of single hull vessels. As a result of this, the Company has
re-evaluated the estimated useful life of its single hull vessels and
determined this to be either 25 years or the vessel's anniversary date in
2017, whichever comes first. As a result, the estimated useful lives of
four of the Company's vessels were reduced in the fourth quarter of 2001.
If the estimated economic useful life is incorrect, an impairment loss
could result in future periods.
The vessels held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In assessing the recoverability
of the vessels' carrying amounts, the Company must make assumptions
regarding estimated future cash flows. Factors we consider important which
could effect recoverability and trigger impairment include significant
underperformance relative to expected operating results and significant
negative industry or economic trends.
Results of Operations
Year ended December 31, 2001 compared with the year ended December 31, 2000
Total net operating revenues increased by 8 per cent to $647.3 million in
2001 compared with $599.9 million 2000. This reflects an increase due to a
full years contribution in 2001 from the vessels acquired through the
purchase of Golden Ocean. In 2000, Golden Ocean was only consolidated with
effect from October 2000. Offsetting the increase due to the expanded
fleet, was a decrease due to lower average earnings in the tanker market.
The annual average daily TCEs earned by the VLCCs, Suezmax tankers, and
Suexmaz OBO carriers trading in the spot market were $40,800, $30,700 and
$28,900 in 2001 respectively, compared with $46,300, $35,500 and $33,300 in
2000.
Vessel operating expenses, which include drydocking costs, increased 37 per
cent to $ 121.5 million from $88.5 million in 2000. This increase is
explained by the inclusion of Golden Ocean for the full year in 2001. The
average daily operating costs, including drydockings, of the Company's
VLCCs, Suezmax tankers and Suezmax OBO carriers was $6,300, $5,700 and
$9,000 respectively compared with $6,900, $5,500 and $6,200 in 2000. The
increase in daily operating costs for the Suezmax OBO carriers in 2001 is
due to seven of the eight vessels being dry docked during 2001.
Fluctuations in the other vessel sizes are within expected ranges.
Charterhire expenses increased to $41.9 million in 2001 from $34.4 million
in 2000 due to the inclusion of Golden Ocean for the full year in 2001.
Administrative expenses have increased 41 per cent to $13.2 million in 2001
from $9.3 million in 2000. This reflects an increase in the number of
employees, general corporate activity and also a $1.2 million non-cash
charge in connection with employee stock options.
In 2001, earnings before interest, tax, depreciation and amortisation,
including earnings from associated companies increased 10 per cent to
$528.8 million from $481.8 in 2000.
Depreciation and amortisation increased 31 per cent from $92.9 million in
2000 to $121.7 million in 2001. The increase relates to the acquisition of
new vessels and the inclusion of Golden Ocean for the full year in 2001.
The implementation of IMO regulations has reduced the expected useful life
for four of the Company's vessels, which result in increased depreciation
of $0.5 million in 2001 for those vessels.
Net interest expense for 2001 was $78.8 million compared with $89.3 million
in 2000, a decrease of 12 per cent. This decrease reflects the benefit of
lower interest expense on debt as interest rates fell during 2001 and
increased interest income arising from higher average cash balance. The
Company had total long-term debt outstanding of $1,391.2 million at
December 31, 2001, compared with $1,544.1 million at December 31, 2000. In
addition the Company had a total amount of $300.8 million of obligations
under capital leases at December 31, 2001, compared with $109.8 million at
December 31, 2000.
The share in result of associated companies increased 94 per cent from
$12.8 million in 2000 to $22.3 million due to the inclusion of Golden Ocean
for the full year in 2001. Certain of the associated companies in which the
Company has investments, have Yen denominated long-term debt. In 2001, the
Yen weakened against the US Dollar and the resulting unrealised foreign
exchange gain is included within the share in results of associated
companies. The increase in the foreign exchange gain from $14.6 million in
2000 to $28.3 million in 2001 also reflects the weakening of the Yen and
the $28.3 million represents the unrealised gain in subsidiaries that have
Yen denominated long-term debt.
The charge for other financial items increased from $0.2 million in 2000 to
$5.7 million in 2001 which is attributable to the market value adjustment
on derivatives following the adoption of SFAS No. 133 on January 1, 2001.
In 2001 the Company has incurred a charge of $9.8 million in connection
with the market value adjustments on interest rate swaps. In September 2001
the Company established a twelve month facility for a Stock Indexed Total
Return Swap Programme or Equity Swap Line with the Bank of Nova Scotia
("BNS"), whereby the latter acquires shares in the Company, and the Company
carries the risk of fluctuations in the share price of those acquired
shares. In 2001 the mark to market valuation of the Equity Swap Line
resulted in a credit to income of $4.4 million.
In 2001, the Company changed its accounting policy for drydockings. Prior
to 2001, provisions for future drydockings have been accrued and charged to
expense on a pro-rata basis over the period to the next scheduled
drydockings. Effective January 1, 2001 the Company recognised the cost of a
drydocking at the time the drydocking takes place, that is it applies the
"expense as incurred" method. The expense as incurred method is considered
by management to be a more reliable method of recognising drydocking costs
as it eliminates the uncertainty associated with estimating the cost and
timing of future drydockings. The cumulative effect of this change in
accounting principle resulted in a credit to income of $32.3 million in
2001. The cumulative effect of this change as of January 1, 2001 on the
Company's consolidated balance sheet was to reduce total liabilities by
$32.3 million.
Year ended December 31, 2000, compared with the year ended December 31,
1999 Total net operating revenues increased by 137 per cent in 2000
compared with 1999. This is due to a combination of the strong increase in
TCE rates earned by the Company's tanker fleet in 2000, the increase in the
size of this tanker fleet and the contribution of the dry bulk fleet
acquired as part of the Golden Ocean acquisition. The annual average daily
TCEs earned by the VLCCs, Suezmax tankers, and Suezmax OBO carriers trading
in the spot market were $46,300, $35,500 and $33,300 respectively, compared
with $20,000, $16,700 and $16,800 in 1999.
In 2000, earnings before interest, tax, depreciation and amortisation,
including earnings from associated companies increased 485 per cent from
1999 to $481.8 million. In addition to the tanker market being
significantly weaker in 1999, the prior year results included the Company's
share of the loss on the sale of four VLCCs in connection with the
acquisition of ICB.
Ship operating expenses decreased from $92.7 million in 1999 to $88.5
million in 2000 despite the continued expansion of the fleet as the Company
successfully maintained its low operating costs during 2000. In addition,
the Golden Ocean vessels acquired and operating under bareboat charters do
not have operating costs borne by the owner. The average daily operating
costs of the Company's VLCCs, Suezmax tankers, and Suezmax OBO carriers was
$6,900, $5,500 and $6,200, respectively compared with $6,800, $6,000 and
$6,400 in 1999.
Administrative expenses have decreased 21 per cent in 2000, principally due
to the closure of the office of ICB in Stockholm in early 2000.
Depreciation and amortisation increased 2 per cent from 1999 to 2000. This
relatively small increase reflects the fact that while depreciation
increased due to the inclusion of the results of Golden Ocean from October
10, 2000 and the other additional vessels acquired in 2000, this increase
was partially offset by the change in the estimated remaining economic
useful lives of the vessels acquired in the ICB acquisition and the sale of
four ICB vessels late in 1999. In the fourth quarter of 1999, management
determined that the useful life of these vessels was 25 years rather than
20 years, as previously estimated, and a reduced depreciation charge has
consequently been applied throughout 2000.
The share in results of associated companies increased 318 per cent in 2000
due to the Company's acquisition of a 40 per cent interest in the vessel
"Front Tobago" and the five joint ventures obtained through the Golden
Ocean acquisition. In 2000, the Company recorded a foreign exchange gain of
$14.6 million arising primarily in connection with the Yen financing of
certain vessels in the Golden Ocean fleet.
Net interest expense was $89.3 million compared with $81.2 million in 1999,
an increase of 10 per cent. The Company had total long-term debt
outstanding of $1,544 million at December 31, 2000 compared with $1,080
million at December 31, 1999. In addition the Company had a total amount of
$110 million of obligations under capital lease. All of this latter amount
and $314 million of the total debt outstanding at the end of 2000 related
to the Golden Ocean fleet and these have only impacted the interest expense
in the last quarter of 2000. At December 31, 1999 the Company had
outstanding a specific loan of $54.0 million from Metrogas Holdings
("Metrogas"), a company related to the Company's Chairman. This loan was
repaid in full during 2000 through the conversion to shares in the Company
in an amount equal to $30 million and the remainder through cash repayment.
In 2000, the Company benefited from the repayment of high-margin debt
related to ICB in late 1999, and the low interest rate on Yen debt from
Golden Ocean. This partly offset the increased average interest rate on US
dollar denominated debt in 2000 compared to 1999.
Liquidity and Capital Resources
The Company operates in a capital intensive industry and has historically
financed its purchase of tankers and other capital expenditures through a
combination of cash generated from operations, equity capital and
borrowings from commercial banks. The liquidity requirements of the Company
relate to servicing its debt, funding the equity portion of investments in
vessels, funding working capital and maintaining cash reserves against
fluctuations in operating cash flows. Revenues from time charters and
bareboat charters are received monthly in advance while revenues from
voyage charters are received upon completion of the voyage. The Company
receives distributions from the Tankers International Pool on a weekly
basis.
The Company's funding and treasury activities are conducted within
corporate policies to maximise investment returns while maintaining
appropriate liquidity for the Company's requirements. Cash and cash
equivalents are held primarily in US dollars with some balances held in
Japanese Yen, British Pound and Norwegian Kroner.
As of December 31, 2001, 2000 and 1999, the Company had cash and cash
equivalents of $178.2 million, $103.5 million and $65.5 million,
respectively. The Company generated cash from operations of $477.6 million
in 2001, compared with $271.6 million in 2000 and $46.5 million in 1999.
Net cash used in investing activities in 2001 was $103.8 million compared
with $497.0 million in 2000. In 1999 the Company generated net cash from
investing activities of $175.5 million. In 2001 investing activities
consisted primarily of $386.1 million paid for vessel acquisitions, $64.7
million to acquire Mosvold and $60.0 million investment in associated
companies. The latter related principally to joint ventures through which
the Company acquired one third interests in five vessels and 50.1 per cent
interest in tow vessels. Offsetting these invested amounts was proceeds of
$400.1 million arising on the sale of assets. In 2001 the Company sold two
1993-built VLCCs and a 2000 built Suezmax tanker. The Company also sold
three VLCCs to German KG structures and leased these vessels back on
charters each for a period of eight years with the option on the buyer's
side to extend the charter for a further three year followed by a further
two years. In 2000, investing activities consisted primarily of payments
for vessel acquisitions, totalling $436.0 million, the investment in Golden
Ocean and the investment of $38.6 million in debt of companies connected
with Golden Ocean. In 1999, investing activities consisted primarily of
payments for vessel acquisitions, totalling $200.7 million, proceeds from
the sale of four VLCCs and one Suezmax of $239.0 million and net proceeds
from acquisition of ICB of $126.0 million.
In the Company's opinion, working capital is sufficient for the Company's
present requirements.
Cash used in financing activities was $299.2 million in 2001 compared with
cash provided by financing activities of $263.4 million in 2000 and used
net cash in financing activities totalling $230.6 million in 1999. In 2001
there was $460.7 million in principal repayments, $10.3 million payment for
capital lease obligations, $115.2 million paid as dividends, $44.8 million
for the repurchase of the Company's shares, $8.5 million from the issuance
of new equity and $324.9 million proceeds from long-term debt. In 2000
proceeds from long-term debt were $384.7 million (1999 - $505.9 million).
Repayments of debt were $209.7 million in 2000 of which $24 million related
to repayment of the amount outstanding on the Metrogas Loan and the balance
related to traditional bank financing of vessels. The Company generated
$104.6 million in 2000 through private placements of its equity and through
the exercise of warrants.
The Company had total long-term debt outstanding of $1,392.0 million at
December 31, 2001 compared with $1,544.1 million at December 31, 2000. At
December 31, 2001 $31.5 million of this debt was at a fixed rate of 8 per
cent (2000 - $91.25 million). The Company is exposed to various market
risks, including interest rates and foreign currency fluctuations. The
Company uses interest rate swaps to manage interest rate risk. As at
December 31, 2001 the Company's interest rate swap arrangements effectively
fix the Company's interest rate exposure on $362.8 million of floating rate
debt. The interest rate swap agreements expire between February 2003 and
August 2008. The Company has not entered into any financial instruments for
speculative or trading purposes. See Item 11. "Quantitative and Qualitative
Disclosures about Market Risk".
In February 2001 the Company acquired a 50.1 per cent interest in each of
two joint ventures, each of which acquired a 1993-built VLLC for
approximately $53.0 million. At the same time, a $70 million financing was
secured for the joint ventures.
In 2001 the Company took delivery of four vessels that it had acquired
through the exercise of purchase options, Front Commerce, Front Commodore,
Front Comanche and Opalia. In April 2001, the Company obtained bank
financing for Front Commerce and Front Commodore, for a total amount of
$110 million. In May 2001 the Company obtained bank financing for a total
sum of $ 59 million for the Front Comanche and in July 2001 obtained bank
financing for a total sum of US$50 million for Opalia.
In August 2001, bank financing of $75.0 million was secured for the
delivery of the two newbuildings Suezmax tankers, Front Melody and Front
Symphony. In May 2000 the Company issued $36 million in commercial paper
which was used to retire $50.8 million in yard debt.
During 2000 and 2001, the Company has issued equity in a number of
transactions. The Company issued 4,715,000 ordinary shares at NOK 33.00 per
share to raise approximately $20 million in equity through a private
placement in September 1999. At the same time $35 million of the Metrogas
Loan was converted to equity in exchange for 8,230,000 shares in the
Company issued at NOK 33.00 per share.
In February 2000, the Company issued 3,500,000 ordinary shares in a private
placement at NOK 57.50 per share to raise approximately $24 million in
equity. At the same time another $30 million of the Metrogas Loan was
converted to equity through the issuance of 4,350,000 ordinary shares at
NOK 57.50 per share, leaving $24 million plus interest outstanding. The
outstanding balance on the Metrogas Loan was repaid in full in August 2000.
In March 2000, the Company issued 2,957,500 ordinary shares at NOK 90.00
per share to part finance the acquisition of two VLCCs from Wilh.
Wilhelmsen ASA. In May 2000, the Company issued 3,000,000 ordinary shares
at $10.15 per share in a private placement to raise approximately $30
million in equity. The proceeds of the issue were used to part finance the
acquisition of a newbuilding VLCC, "Front Tina". In June, 2000, the Company
raised approximately $46.8 million through the issuance of 4,000,000
ordinary shares at a price of NOK 104.5 per share in a private placement to
a group of international institutional investors. The proceeds from these
equity issues have been used for specific vessel acquisitions and general
corporate working capital requirements.
In 2000, the Company issued 124,558 ordinary shares pursuant to
subscriptions under warrants that could be exercised at any time up to
December 31, 2003 and issued a total of 8,211 ordinary shares pursuant to
subscriptions under warrants that could be exercised at any time up to May
11, 2001. During 2001 the Company issued 129,500 shares in connection with
the exercise of employee share options and issued 416,555 ordinary shares
pursuant to subscriptions under warrants that could be exercised at any
time up to May 11, 2001.
In September 2000, the Company bought back and cancelled 430,000 of its
ordinary shares at NOK 39.45 per share. These shares were related to an
option the Company secured in connection with issuing 1,910,000 shares as
part consideration for a Suezmax newbuilding contract. Further, in 2000 and
2001, the Company bought back and cancelled a total of another 1,719,845
and 2,207,300 of its ordinary shares, respectively, in a number of separate
market transactions. The total consideration paid in was NOK 200 million
and NOK 295 million in 2000 and 2001, respectively (equivalent to $21.9
million and $32.8 million converted at the rates on the transaction dates).
As of December 31, 2001, 2000 and 1999, the Company complied with the debt
covenants of its various debt agreements. The acquisition of Golden Ocean
was conducted so that the loans held by Golden Ocean's subsidiaries are
non-recourse to Frontline. This implies that any guarantees on behalf of a
Golden Ocean subsidiary are issued only by either Golden Ocean and or other
Golden Ocean subsidiaries. Frontline's exposure to Golden Ocean is
therefore limited to $15 million injected as equity, a $50 million term
loan and a $10 million revolving credit facility provided by Frontline to
Golden Ocean. As of December 31, 2001 the amounts outstanding under the
term loan and revolving credit facility was $2.49 million and $nil,
respectively.
At December 31, 2001, a 100 per cent owned subsidiary of Golden Ocean,
Golden Stream Corporation was party to a loan agreement with Griffin
Shipping Inc. ("Griffin"). The amount outstanding under this loan agreement
was $48,068,000, which was fully repayable on March 30, 2002. Repayment of
the loan is secured by a first mortgage on the vessel Golden Stream, an
assignment of earnings and a pledge of the Company's shares in Golden
Stream Corporation and a performance guarantee issued by Golden Ocean.
Golden Stream Corporation failed to repay the loan on the due date.
Non-payment constitutes a default under the loan agreement and entitles
Griffin to exercise its rights under the loan security documents, which
include taking possession of the vessel Golden Stream, taking control of
Golden Stream Corporation and claiming under the performance guarantee
issued by Golden Ocean.
Griffin has not declared a default under the loan agreement but is working
with the Company's management to renegotiate payment terms and re-schedule
payment of the outstanding amount of $48,068,000. If Griffin were to
declare a default, cross default provisions in other loan agreements
related to Golden Ocean and its subsidiaries could cause all loans to be
repayable immediately. The Golden Ocean management is confident of
achieving a satisfactory agreement with Griffin, which will involve
re-scheduling payment of the outstanding amount in line with projected
cashflows. There is no guarantee, however, that a satisfactory agreement
with Griffin will be achieved and in the event that it is not, Golden Ocean
would be forced to sell assets to pay any shortfall due to Griffin. There
is no guarantee that Golden Ocean would be able to raise sufficient capital
through asset sales to pay any shortfall due to Griffin. These conditions
give rise to substantial doubt as to the ability of Golden Ocean to
continue to operate as a going concern.
At December 31, 2001, Frontline's exposure in the event of a liquidation of
Golden Ocean is a maximum of $15 million in equity and $2.49 million in
debt due from Golden Ocean. At June 30, 2002, Frontline's exposure in the
event of a liquidation of Golden Ocean is a maximum of $15 million in
equity.
In 2001, the Company received an adverse decision from the Swedish
Administrative Court of Appeal with respect to a tax dispute with the
Swedish tax authorities relating to ICB. The dispute arises from a limited
partnership in which ICB invested, and which sold a vessel on the exercise
of a purchase option by a third party in 1990. The Swedish tax authorities
assessed an "exit" tax on ICB and the other members of the limited
partnership and also sought to tax ICB and the other members for income
earned by the partnership. ICB has contested these assessments. The Swedish
Administrative Court of Appeal upheld a decision by a County Administrative
Court finding ICB liable for these assessments. Including accrued interest,
the taxes found due by the court total approximately SEK 90 million, or
$8.5 million at the exchange rate prevailing at December 31, 2001 ($9.8
million at the exchange rate prevailing at June 30, 2002). ICB is appealing
this judgement. In the event that the appeal is not successful, the tax and
accrued interest will be accounted for as an adjustment to the purchase
price of ICB.
Contractual Commitments
In February 2001, the Company entered into five newbuilding contracts. Two
Suezmaxes were ordered with Sasebo Shipyard in Japan for delivery in August
and October, 2001. In addition, three VLCCs were ordered with Hitachi for
delivery in April, August and October 2002. In connection with acquiring
Mosvold Shipping Limited in May 2001, the Company secured control over
another three VLCC newbuilding contracts scheduled for delivery from
Samsung in 2001, 2002 and 2003 respectively. The aforementioned 2001
delivery was subsequently delayed until 2002. In addition, in June 2001,
Frontline announced that two joint ventures in which Frontline owns 33.33
per cent of the share capital, had acquired two newbuilding contracts from
Bergesen. At December 31, 2001, all eight VLCCs were still to be delivered.
Total contract amount for the eight vessels were $591.9 million on a 100
per cent basis or adjusting for other owners shares in the two joint
ventures, $487.2 million. By December 31, 2001 $115.1 million ($102.8
million adjusted for other owners) had been paid to the yards as
instalments in accordance with the respective contracts. The Company
expects to finance the remaining commitments of $476.8 million ($384.4
million adjusted for the other owners shares) through its working capital
and by obtaining bank loans.
At December 31 2001, the Company had outstanding debt of $1,392.0 million
which is repayable as follows:
Year ending December 31,
(in thousands of $)
2002 227,597
2003 294,122
2004 119,374
2005 106,291
2006 245,906
2007 and later 398,661
---------------------------------------------------------------------
Total debt 1,391,951
=====================================================================
At December 31 2001, the Company had eight vessels under capital leases.
The outstanding obligations under capital leases are payable as follows:
Year ending December 31,
(in thousands of $)
-------------------
2002 227,597
2003 294,122
2004 119,374
2005 106,291
2006 245,906
2007 and later 398,661
--------------------------------------------------------------------
Total debt 1,391,951
====================================================================
In March 2001, the Company acquired from a third party, two companies that
owned four drybulk carriers that were chartered in by the Company under
capital leases. These drybulk carriers were then refinanced by traditional
bank financing.
Off-Balance Sheet Financing
In 1998 and 1999, the Company entered into a total of four sale and
leaseback transactions with German KG structures. In addition, one of the
vessels obtained through the acquisition of ICB was also sold and leased
back prior to the Company's acquisition of ICB. The minimum terms of these
leases range up to eight years. The leases of these five vessels are being
accounted for as operating leases. The future minimum rental payments under
the Company's non-cancellable operating leases, are as follows:
Year ending December 31,
(in thousands of $)
-------------------
2002 40,971
2003 24,516
2004 24,123
2005 24,628
2006 24,638
2007 and later 6,023
--------------------------------------------------------------------
Total minimum lease payments 144,899
====================================================================
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Information concerning each director and executive officer of the Company
is set forth below.
Name Age Position
John Fredriksen 58 Chairman, Chief Executive Officer,
President and Director
Tor Olav Tr0im 39 Vice-President and Director
A. Shaun Morris 42 Director
Tammy Richardson 30 Director
Kate Blankenship 37 Chief Accounting Officer and
Company Secretary
Ola Lorentzon 52 Managing Director of
Frontline Management
Tom E. Jebsen 44 Chief Financial Officer of
Frontline Management
Certain biographical information about each of the directors and executive
officers of the Company is set forth below.
John Fredriksen has been the Chairman of the Board, Chief Executive Officer,
President and a director of the Company since November 3, 1997. He was
previously the Chairman and Chief Executive Officer of Old Frontline. Mr.
Fredriksen has served for over seven years as a director of Sea Tankers
Management Co. Ltd. ("Sea Tankers"), a ship operating company and an
affiliate of the Company's principal shareholder. Mr. Fredriksen indirectly
controls Hemen. Mr. Fredriksen is a director of Golar LNG Limited, a Bermuda
company listed on the Oslo Stock Exchange which is indirectly controlled by
Mr. Fredriksen.
Tor Olav Tr0im has been Vice-President and a director of the Company since
November 3, 1997. He previously served as Deputy Chairman of Frontline from
July 4, 1997, and was a director of Old Frontline from July 1, 1996. Until
April, 2000 Mr. Tr0im was the Chief Executive Officer of Frontline
Management, which company supports the Company in the implementation of
decisions made by the Board of Directors. Mr. Tr0im also serves as a
consultant to Sea Tankers and since May 2000, has been a director and
Vice-Chairman of Knightsbridge. He is a director of Aktiv Inkasso ASA and
Northern Oil ASA, both Norwegian Oslo Stock Exchange listed companies and
Northern Offshore Ltd., a Bermuda company listed on the Oslo Stock
Exchange. Prior to his service with Frontline, from January 1992, Mr. Tr0im
served as Managing Director and a member of the Board of Directors of DNO
AS, a Norwegian oil company. Mr. Tr0im has served as a director of Golar
LNG Limited since May 2001.
A. Shaun Morris has been a non-executive director of the Company since
November 3, 1997. Mr. Morris has been a Partner at Appleby, Spurling &
Kempe since April 1995, after joining the firm in 1988 as an associate,
where he specialises in corporate/commercial law.
Tammy Richardson has been a non-executive director of the Company since
June 21, 2002. Ms. Richardson has been an attorney at Appleby Spurling &
Kempe since 1998 where she specialises in corporate/commercial law.
Kate Blankenship is Chief Accounting Officer and Secretary of the Company.
Mrs. Blankenship joined the Company in 1994. Prior to joining the Company,
she was a Manager with KPMG Peat Marwick in Bermuda. She is a member of the
Institute of Chartered Accountants in England and Wales.
Ola Lorentzon has been Managing Director of Frontline Management since
April 2000. Mr. Lorentzon has also been a director of Knightsbridge since
September 18, 1996. He was Vice Chairman of Knightsbridge from September
18, 1996 until May 2000 when he took over as Chairman. Mr. Lorentzon has
been a director and President of ICB since 1987. Until 2000, Mr. Lorentzon
was a director of The Swedish Protection and Indemnity Club (SAAF), Swedish
Ships Mortgage Bank and The Swedish Shipowners' Association, Deputy
Chairman of the Liberian Shipowners Council and a member of the
International Association of Tanker Owners (Intertanko) Council. Since 2001
Mr. Lorentzon has been a director of The UK P&I Club and a member of Den
Norske Veritas Council.
Tom E. Jebsen has served as Chief Financial Officer of Frontline Management
since June 1997. From December 1995 until June 1997, Mr. Jebsen served as
Chief Financial Officer of Tschudi & Eitzen Shipping ASA, a publicly traded
Norwegian shipowning company. From 1991 to December 1995, Mr. Jebsen served
as Vice President of Dyno Industrier ASA, a publicly traded Norwegian
explosives producer. Mr. Jebsen is also a director of Assuranceforeningen
Skuld and Hugin ASA, an internet company.
B. COMPENSATION
During the year ended December 31, 2001, the Company paid to its directors
and executive officers (seven persons) aggregate cash compensation of
$717,513 and an aggregate amount of $64,649 for pension and retirement
benefits.
During the year ended December 31, 2001, the Company granted to the
Directors and officers options to acquire an aggregate amount of 34,500
ordinary shares of the Company. These options have an exercise price of
Norwegian Kroner 104.56 at March 31, 2002 and expire on January 22, 2006.
These options were granted under the Bermuda Employee Share Option Plan
described below.
C. BOARD PRACTICES
In accordance with the Bye-laws of the Company the number of Directors
shall be such number not less than two as the Company by Ordinary
Resolution may from time to time determine and each Director shall hold
office until the next annual general meeting following his election or
until his successor is elected. The Company has four Directors.
The Officers of the Company are elected by the Board of Directors as soon
as possible following each Annual General Meeting and shall hold office for
such period and on such terms as the Board may determine.
There are no service contracts between the Company and any of our Directors
providing for benefits upon termination of their employment or service.
D. EMPLOYEES
As at December 31, 2001, the Company and its subsidiaries employed 37
people in their respective offices in Bermuda, London and Oslo. The Company
contracts with the independent ship managers to manage and operate its
vessels.
E. SHARE OWNERSHIP
The beneficial interests of our Directors and officers in the Ordinary
Shares of the Company as of June 14, 2002, were as follows:
Percentage of
Ordinary Shares of Ordinary Shares
Director or Officer $2.50 each Outstanding
------------------- ------------------ ---------------
John Fredriksen* 34,579,054 45.22%
Tor Olav Tr0im 84,934 **
Tammy Richardson - - - -
A. Shaun Morris - - - -
Kate Blankenship 1,000 **
Ola Lorentzon - - - -
Tom E. Jebsen 2,057 **
*Includes Ordinary Shares held by Hemen Holding Ltd. and other companies
indirectly controlled by Mr. John Fredriksen.
** Less than one per cent
Details of share options held by the Company's Directors and officers at
June 14, 2002 are set out in the following table:
Number of Ordinary Exercise Price per
Director or Officer Shares Subject to Option Ordinary Share Expiration Date
------------------- ------------------------ ------------------ ---------------
John Fredriksen - - - - - -
Tor Olav Troim - - - - - -
Tammy Richardson - - - - - -
A. Shaun Morris - - - - - -
Kate Blankenship 2,000 $ 12.07 November 8, 2004
1,000 $ 11.73 October 31, 2005
1,000 $ 9.98 February 5, 2007
13,000 NOK 28.66 March 15, 2004
9,000 NOK 104.16 January 22, 2006
15,000 $11.90 June 3, 2007
Ola Lorentzon 40,000 NOK 43.16 March 15, 2004
18,000 NOK 104.16 January 22, 2006
20,000 $11.90 June 3, 2007
Tom E. Jebsen 20,000 NOK 28.66 March 15, 2004
7,500 NOK 104.16 January 22, 2006
15,000 $11.90 June 3, 2007
At June 14, 2002 the Norwegian Kroner:US Dollar exchange rate was NOK
7.8594:$ 1.00
The options held by the directors and officers have all been granted under
the Bermuda Employee Share Option Plan discussed below.
As of June 14, 2002, 561,300 of the authorised and unissued Ordinary Shares
were reserved for issue pursuant to subscription under options granted
under the Company's share option plans.
The Company maintains a Bermuda Employee Share Option Plan, the Bermuda
Plan, and a United Kingdom Employee Share Option Plan, the U.K. Plan. Under
the terms of the plans, the exercise price for the options may not be less
than the average of the fair market value of the underlying shares for the
three dealing days before the date of grant. The number of shares granted
under the plans may not exceed 7 per cent of the issued share capital of
the Company. No consideration is payable for the grant of an option.
Under the Bermuda Plan, options may be granted to any director or employee
of the Company or any subsidiary. Options are only exercisable during a
maximum period of nine years following the first anniversary date of the
grant or upon the termination of the option holder from employment with the
Company.
Under the U.K. Plan, options may be granted to any full-time director or
employee of the Company or any subsidiary. Options are only exercisable
during the period of seven years following the third anniversary date of
the grant or upon the termination of the option holder from employment with
the Company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The Company is indirectly controlled by another corporation (see below).
The following table presents certain information regarding the current
ownership of the Ordinary Shares with respect to (i) each person who is
known by the Company to own more than 5 per cent of the Company's
outstanding Ordinary Shares; and (ii) all directors and officers as a group
as of June 14, 2002.
Ordinary Shares
Owner Amount Per cent
Hemen Holding Ltd. and 34,579,054 45.22%
associated companies (1)
All Directors and Officers 34,666,545 45.34%
as a group (seven persons) (2)
(1) Hemen Holding Ltd. is a Cyprus holding company indirectly controlled by
Mr. John Fredriksen, who is the Chairman and Chief Executive Officer of
the Company.
(2) Includes Ordinary Shares held by Hemen Holding Ltd. and associated
companies indirectly controlled by Mr. John Fredriksen.
At June 2001 and June 2000 Hemen Holding Ltd. and associated companies held
45.22% and 44.90% of the Company's Ordinary Shares, respectively.
The Company's major shareholders have the same voting rights as other
shareholders of the Company.
As at June 27, 2002, 7,756,114 of the Company's Ordinary Shares are held by
65 holders of record in the United States.
No corporation or foreign government owns more than 50% of the Company's
outstanding Ordinary Shares.
The Company is not aware of any arrangements, the operation of which may at
a subsequent date result in a change in control of the Company.
B. RELATED PARTY TRANSACTIONS
During 1996, 1997 and January of 1998, Frontline received options to assume
newbuilding contracts for the construction and purchase of five Suezmax
tankers at the Hyundai Heavy Industries Co. Ltd. shipyard in South Korea
for delivery in 1998 and 2000 from single-ship owning companies affiliated
with Hemen Holding Ltd., or Hemen. Hemen is the Company's largest
shareholder and is indirectly controlled by Mr. John Fredriksen, Chairman
and Chief Executive Officer of the Company. The first three of the Suezmax
tankers were delivered during 1998. The remaining two vessels were
delivered in February and April, 2000.
During 1997, Frontline received options to assume five newbuilding
contracts for the construction and purchase of five VLCC tankers from other
Hemen affiliated parties. These options were exercised in March 1998. The
first two VLCC newbuildings were delivered in 1998, the third in January
1999 and the remaining two were delivered in mid 1999.
In May 1998, the Company acquired control of three shipowning and/or
leasing structures which are organised in a non-recourse entity,
Independent Tankers Corporation, or ITC. The Company acquired ITC for $9.5
million. The Company's investment in ITC was subsequently sold to Hemen for
$9.5 million with effect from July 1, 1998. The Company has remained as the
manager of the underlying assets and has received a five year fair value
call option to buy back ITC.
In June 1998, the Company obtained a loan of $87.5 million from Metrogas,
the Metrogas Loan, to finance the acquisition of the five VLCC newbuilding
contracts described above. At December 31, 1998, an amount of $89 million
was outstanding in respect of the Metrogas Loan, including interest accrued
thereon. On September 30, 1999, $35 million of the $89 million Metrogas
Loan was converted to equity by the issuance of 8,230,000 shares at an
issue price of NOK 33.00 per share. In connection with this conversion,
Metrogas offered $15 million of the resulting ordinary shares to existing
Frontline shareholders and warrant holders, excluding US persons. In
connection with this secondary offering by Metrogas, Frontline bore costs
of the offering of $15,000. At December 31, 1999, an amount of $56.7
million was outstanding in respect of the Metrogas Loan, including interest
accrued thereon. On February 25, 2000, $30 million of the Metrogas Loan was
converted to equity, resulting in the issuance of 4,350,000 ordinary shares
at an issue price of NOK 57.50 per share. In connection with this
conversion, Metrogas offered 2,000,000 of the resulting ordinary shares to
existing Frontline shareholders and warrant holders, excluding US persons.
In August 2000, the outstanding principal amount of $24.0 on the Metrogas
Loan was repaid in full, together with $4.3 million accrued thereon. In the
years ended December 31, 2000 and 1999, the Metrogas Loan bore interest at
the rate of 8.0 per cent and the Company incurred interest costs of $1.6
million and $5.4 million, respectively, of which $2.7 million was expensed
in 1999.
In addition to the lending arrangement described above, Hemen affiliated
parties have, during 1998 and 1999, provided additional short term
financing to the Company. Such financing bore interest at a rate of between
6.75 and 8.8 per cent per annum in 2000 and 6.75 per cent in 1999. Interest
expense recorded by the Company in 2000 in respect of such financing was
$1,095,380 (1999 - $428,291).
In September 2000 Frontline acquired a 1993-built VLCC, which was named
Front Ace, from a company affiliated with Hemen. This vessel was acquired
for a price of $53 million which was based on three independent valuations
less a $1 million discount compared to appraised market value.
On December 5, 2000, a subsidiary of Frontline made a short-term loan of
$20 million to World Shipholding Ltd., a company affiliated with Hemen.
This loan was repaid in full on February 6, 2001 together with fees and
interest of $349,680, of which $115,000 was recorded by the Company in 2000
and $234,680 was recorded in 2001.
On December 28, 2000, the Company and Overseas Shipholding Group Inc., or
OSG, entered into an agreement with Osprey Maritime Limited, or Osprey, to
acquire the two VLCCs Golar Edinburgh and Golar Dundee. The agreement was
signed on behalf of a joint venture company to be owned 50.1 per cent by
the Company and 49.9 per cent by OSG. The purchase price for the vessels,
which were delivered in the first quarter of 2001, was $53 million each. At
December 31, 2000, World Shipholding Ltd. held more than 50 per cent of the
shares in Osprey. In February, 2001, World Shipholding Ltd. took control of
Osprey.
In February 2001, the Company acquired newbuilding contracts for the
construction and purchase of three VLCC tankers at the Hitachi shipyard in
Japan for delivery in 2002 from Seatankers Management Co. Ltd, a company
affiliated with Hemen. These contracts were acquired for the original
contract price of $72 million each plus $0.5 million per contract.
In the year ended 31 December, 2001, a subsidiary of Frontline Ltd provided
services to Seatankers Ltd, a company affiliated with Hemen. These services
include management support and administrative services. In the year ended
December 31, 2001, the Company has earned management fees from Seatankers
Ltd. of $277,855 as income. As at December 31, 2001 an amount of $266,930
was due from Seatankers Ltd. in respect of these fees and for the
reimbursement of costs incurred on behalf of Seatankers Ltd.
In the year ended 31 December, 2001, Frontline has provided management
support and administrative services to a newbuilding project known as the
Uljanik Project. As at December 31, 2001, an amount of $47,993 was due from
the Uljanik Project. The Uljanik Project is owned by Seatankers, which is
affiliated with Hemen.
In the year ended 31 December 2001, a subsidiary of the Company provided
services to Golar LNG Limited. Osprey, which is controlled by World
Shipholding, holds 50.01 per cent of Golar LNG Limited. The services
provided include management support, corporate services and administrative
services. In the year ended 31 December 2001, management fees from Golar
LNG Limited of $258,960 have been earned by the Company. As at December 31
2001, an amount of $547,966 was due from Golar LNG in respect of these fees
and for the reimbursement of costs incurred on behalf of Golar LNG Limited.
C. INTERESTS OF EXPERTS AND COUNSEL
Not Applicable
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18.
Legal Proceedings
The Company is a party, as plaintiff or defendant, to several lawsuits in
various jurisdictions for demurrage, damages, off-hire and other claims and
commercial disputes arising from the operation of its vessels, in the
ordinary course of business or in connection with its acquisition
activities. The Company's management believes that the resolution of such
claims will not have a material adverse effect on the Company's operations
or financial condition.
Dividend Policy
Prior to May 2001, the Company has not paid regular quarterly or annual
dividends since 1997, and it has been the Company's policy since that time
to pay dividends only when considered appropriate by the Company's Board of
Directors. On May 8, 2001, the Company announced a dividend of $1.00 per
share, payable to holders of record as of May 21, 2001 and has paid the
following dividends in 2001:
Record Date Payment Date Amount per Share
May 21, 2001 June 7, 2001 $1.00
August 23, 2001 September 5, 2001 $0.40
November 22, 2001 December 5, 2001 $0.10
The timing and amount of dividends, if any, will depend upon the Company's
results of operations, financial condition, cash requirements, restrictions
in financing arrangements and other relevant factors.
B. SIGNIFICANT CHANGES
Not Applicable
ITEM 9. THE OFFER AND LISTING
Not applicable except for Item 9.A. 4. and Item 9. C.
The Company's Ordinary Shares are traded on the New York Stock Exchange
("NYSE"), the Oslo Stock Exchange ("OSE") and on the London Stock Exchange
("LSE") under the symbol "FRO". Prior to the transfer of Frontline to
Bermuda and subsequent listing of its ordinary shares on the OSE, Frontline
AB's shares were listed on the Stockholm Stock Exchange ("SSE").
The Company's ADSs, each of which represents one Ordinary Share, were
traded on the Nasdaq National Market under the symbol "FRONY" until August
3, 2001 when the ADSs were delisted. In March, 2001 the Company announced
its intention to list the Ordinary Shares on the New York Stock Exchange
and in July 2001 gave notice of termination of the ADR program to the Bank
of New York as Depositary. The ADR program was terminated on October 5,
2001. The Company's Ordinary Shares began trading on the NYSE on August 6,
2001.
The New York Stock Exchange is the Company's "primary listing". As an
overseas company with a secondary listing on the LSE, the Company is not
required to comply with certain listing rules applicable to companies with
a primary listing on the LSE. The listing on the OSE is also a secondary
listing. The Company's Ordinary Shares have been thinly traded on the
London Stock Exchange during 1999, 2000 and 2001.
The following table sets forth, for the five most recent fiscal years, the
high and low prices for the Ordinary Shares on the NYSE and OSE and the
high and low prices for the ADSs as reported by the Nasdaq National Market.
In 1997 the Company's Ordinary Shares traded on the SSE and the high and
low closing prices were SEK89 and SEK70, respectively.
NYSE OSE NASDAQ
High Low High Low High Low
Fiscal year ended
December 31
2001 $15.45 $6.55 NOK215.50 NOK59.50 $24.50 $11.563
2000 - - NOK164.00 NOK37.00 $18.250 $3.938
1999 - - NOK45.00 NOK16.00 $4.250 $3.000
1998 - - NOK92.00 NOK8.00 $14.500 $3.125
1997 - - NOK121.00 NOK86.00 $16.000 $11.750
The following table sets forth, for each full financial quarter for the two
most recent fiscal years, the high and low prices for the Ordinary Shares
on the NYSE and the OSE, and the high and low prices for the ADSs as
reported by the Nasdaq National Market.
NYSE OSE NASDAQ
High Low High Low High Low
Fiscal year ended
December 31, 2001
First quarter - - NOK159.50 NOK104.00 $18.188 $11.563
Second quarter - - NOK215.50 NOK157.00 $24.50 $17.00
Third quarter $15.45 $8.85 NOK176.00 NOK78.50 $19.05 $14.35
Fourth quarter $10.50 $6.55 NOK93.00 NOK59.50 - -
Fiscal year
ended December
31, 2000
First quarter - - NOK82.50 NOK37.00 $9.785 $3.938
Second quarter - - NOK106.00 NOK64.00 $12.50 $5.688
Third quarter - - NOK163.00 NOK98.00 $17.875 $14.750
Fourth quarter - - NOK164.00 NOK103.00 $18.250 $11.37
The following table sets forth, for the most recent six months, the high
and low closing prices for the Ordinary Shares on the NYSE and OSE.
NYSE OSE
High Low High Low
May 2002 $13.05 $10.81 NOK108.50 NOK90
April 2002 $11.75 $10.19 NOK104.00 NOK87.50
March 2002 $12.50 $10.75 NOK108.00 NOK97.00
February 2002 $11.25 $9.41 NOK97.50 NOK83.50
January 2002 $10.25 $9.05 NOK90.50 NOK82.00
December 2001 $10.50 $8.45 NOK93.00 NOK76.00
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not Applicable
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The Memorandum of Association of the Company has previously been filed as
Exhibit 3.1 to the Company's Registration Statement on Form F-1,
(Registration No. 33-70158) filed with the Securities and Exchange
Commission on October 13, 1993, and is hereby incorporated by reference
into this Annual Report.
On October 26, 2001, the Company adopted revised Bye-laws. These Amended
and Restated Bye-Laws of the Company as adopted by shareholders on October
26, 2001 are filed as Exhibit 1.4 to this Annual Report.
The action necessary to change the rights of holders of the stock and the
conditions governing the manner in which annual general meetings and
extraordinary meetings if shareholders are invoked, including the
conditions of admission, are described in the Company's Bye-laws filed as
Exhibit 1.4 to this Annual Report.
The Company's Bye-laws contain certain restrictions with respect to the
registration of shares which are summarised below:
(i) The Board may decline to register the transfer of any share held
through the Verdipapirsentralen ("VPS"), the computerised central
share registry maintained in Oslo, Norway, for bodies corporate whose
shares are listed for trading on the OSE, if the registration of such
transfer would be likely, in the opinion of the Board, to result in
fifty per cent or more of the aggregate issued share capital of the
Company or shares of the Company to which are attached fifty per cent
or more of the votes attached to all outstanding shares of the Company
being held or owned directly or indirectly, (including, without
limitation, through the VPS) by a person or persons resident for tax
purposes in Norway (or such other jurisdiction as the Board may
nominate from time to time).
(ii) If fifty per cent or more of the aggregate issued share capital of the
Company or shares to which are attached fifty per cent or more of the
votes attached to all outstanding shares of the Company are found to
be held or owned directly or indirectly (including, without
limitation, through the VPS) by a person or persons resident for tax
purposes in Norway (or such other jurisdiction as the Board may
nominate from time to time), other than the Registrar in respect of
those shares registered in its name in the Register as nominee of
persons whose interests in such shares are reflected in the VPS, the
Board shall make an announcement to such effect through the OSE, and
the Board and the Registrar shall thereafter be entitled and required
to dispose of such number of shares of the Company or interests
therein held or owned by such persons as will result in the percentage
of the aggregate issued share capital of the Company held or owned as
aforesaid being less than fifty per cent.
The Company has in place a Shareholders Rights Plan that would have the
effect of delaying, deferring, preventing a change in control of the
Company. The Shareholders Rights Plan has been filed as part of the Form
8-A filed with the Securities and Exchange Commission on December 9, 1996,
and is hereby incorporated by reference into this Annual Report.
C. MATERIAL CONTRACTS
As described in Item 4., "Information on the Company", in 2000 the Company
sponsored a plan of reorganisation, ir the Plan, for Golden Ocean in the
United States Bankruptcy Court for the District of Delaware. The Plan
became effective on October 10, 2000, at which time the Company acquired
Golden Ocean. As part of the Plan, the Company paid an aggregate amount of
approximately $63 million and issued an aggregate of 1,245,998 Ordinary
Shares to holders of allowed claims against Golden Ocean.
D. EXCHANGE CONTROLS
The Company is classified by the Bermuda Monetary Authority as a
non-resident of Bermuda for exchange control purposes.
The transfer of ADSs or Ordinary Shares between persons regarded as
resident outside Bermuda for exchange control purposes may be effected
without specific consent under the Exchange Control Act of 1972 and
regulations thereunder and the issuance of Ordinary Shares (including
shares to be represented by ADSs) to persons regarded as resident outside
Bermuda for exchange control purposes may be effected without specific
consent under the Exchange Control Act of 1972 and regulations thereunder.
Issues and transfers of ADSs or Ordinary Shares involving any person
regarded as resident in Bermuda for exchange control purposes require
specific prior approval under the Exchange Control Act of 1972.
The owners of ADSs or Ordinary Shares who are ordinarily resident outside
Bermuda are not subject to any restrictions on their rights to hold or vote
their shares. Because the Company has been designated as a non-resident for
Bermuda exchange control purposes, there are no restrictions on its ability
to transfer funds in and out of Bermuda or to pay dividends to U.S.
residents who are holders of ADSs, or ordinary shares, other than in
respect of local Bermuda currency.
As an "exempted company", the Company is exempt from Bermuda laws which
restrict the percentage of share capital that may be held by
non-Bermudians.
E. TAXATION
Bermuda currently imposes no tax (including a tax in the nature of an
income, estate duty, inheritance, capital transfer or withholding tax) on
profits, income, capital gains or appreciations derived by, or dividends or
other distributions paid to US Shareholders of ADSs or Ordinary Shares.
Bermuda has undertaken not to impose any such Bermuda taxes on US
Shareholders of ADSs or Ordinary Shares prior to the year 2016 except in so
far as such tax applies to persons ordinarily resident in Bermuda.
There is no income tax treaty between the United States and Bermuda
pertaining to the taxation of income except in the case of insurance
enterprises. There also is no estate tax treaty between the United States
and Bermuda.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable
G. STATEMENT BY EXPERTS
Not Applicable
H. DOCUMENTS ON DISPLAY
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements the
Company files reports and other information with the Securities and
Exchange Commission. These materials, including this annual report and the
accompanying exhibits, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at 500 West Madison Street, Suite 1400,
Northwestern Atrium Center, Chicago, Illinois 60661. You may obtain
information on the operation of the public reference room by calling 1
(800) SEC-0330, and you may obtain copies at prescribed rates from the
Public Reference Section of the Commission at its principal office in
Washington, D.C. 20549. The SEC maintains a website (http://www.sec.gov.)
that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. In
addition, documents referred to in this annual report may be inspected at
the Company's headquarters at Par-la-Ville Place, 14 Par-la-Ville Road,
Hamilton, Bermuda.
I. SUBSIDIARY INFORMATION
Not Applicable
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including interest rates
and foreign currency fluctuations. The Company uses interest rate swaps to
manage interest rate risk. The Company has not entered into any financial
instruments for speculative or trading purposes.
The exposure to interest rate risk relates primarily to its debt and
related interest rate swaps. The majority of this exposure is the floating
rate debt, which totalled $1,348.6 million at December 31, 2001 (2000:
$1,439.5 million). The Company has entered into interest rate swap
agreements to manage its exposure with interest rates by locking in fixed
interest rates from floating rates. At December 31, 2001, there were eight
swaps with a total notional principal of $362.8 million (2000 - nine swaps
with notional principal of $373.5 million). The swap agreements have
various maturity dates from February 2003 to August 2008, and the Company
would have a loss $4.9 million if it were to terminate the agreements as of
December 31, 2001 (2000 - loss of $0.2 million). The maximum exposure to
the interest rate fluctuations is $985.8 million at December 31, 2001
(2000: $1,066.0 million). A one per cent change in interest rates would
increase (decrease) the interest expense by $9.8 million per year as of
December 31, 2001 (2000: $10.7 million).
The fair market value of the fixed rate debt on the balance sheet was $33.5
million as of December 31, 2001 (2000: $93.3 million). If the interest rate
was to increase (decrease) by one per cent with all other variables
remaining constant, the market value of the fixed rate debt would decrease
(increase) by approximately $0.6 million (2000: $1.5 million).
Marketable equity securities held by the Company are considered to be
available-for-sale securities and as such are carried at fair value with
resulting unrealised gains and losses, net of deferred taxes if any,
recorded as a separate component of other comprehensive income in
stockholders' equity. As a result, the Company's equity is exposed to
fluctuations in the share price of marketable securities considered to be
available-for-sale. A ten per cent change in the market value of such
securities would increase (decrease) equity by $0.1 million as of December
31, 2001 (2000 - $0.4 million).
The majority of the Company's transactions, assets and liabilities are
denominated in U.S. dollars, the functional currency of the Company.
Certain of the Company's subsidiaries report in Sterling, Swedish kronor or
Norwegian kroner and risks of two kinds arise as a result: a transaction
risk, that is, the risk that currency fluctuations will have a negative
effect on the value of the Company's cash flows; and a translation risk,
the impact of adverse currency fluctuations in the translation of foreign
operations and foreign assets and liabilities into U.S. dollars for the
Company's consolidated financial statements. Certain of the Company's
subsidiaries, and associated companies in which the Company has
investments, have Yen denominated long-term debt and charter contracts
denominated in Yen. There is a risk that currency fluctuations will have a
negative effect on the value of the Company's cashflows. At December 31,
2001, the Company had Yen denominated long-term debt of (Y)14,378,176,587
and its share of Yen denominated long-term debt in associate companies was
(Y)9,778,862,882 (2000 - (Y)15,587,000,000 and (Y)17,152,359,010,
respectively. The Company has not entered into forward contracts for either
transaction or translation risk, which may have an adverse effect on the
Company's financial condition and results of operations.
ITEM 12. DESCRIPTION OF SECURITIES
Not Applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
On December 6, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Plan"). The Company adopted the Plan to protect
shareholders against unsolicited attempts to acquire control of the Company
that do not offer an adequate price to all shareholders or are otherwise
not in the best interests of the Company and its shareholders. Under the
Plan, each shareholder of record on December 20, 1996 received one right
for each Ordinary Share held, and each registered holder of outstanding
warrants received one right for each Ordinary Share for which they are
entitled to subscribe. In addition, in connection with the Amalgamation,
the Company issued in the aggregate 47,212,536 rights to Frontline's
shareholders (44,612,536 of which rights were attached to the Ordinary
Shares issued and 2,600,000 of which rights were attached to the Ordinary
Shares underlying the New Warrants issued). The rights generally may not
detach from the related Ordinary Shares. Each right entitles the holder to
purchase from the Company one-quarter of an Ordinary Share at an initial
purchase price of $1.50. The rights will become exercisable and will detach
from the Ordinary Shares a specified period of time after any person has
become the beneficial owner of 20 per cent or more of the Company's
Ordinary Shares. The Plan was amended as of October 29, 1997 to provide
that Frontline's purchase of Ordinary Shares pursuant to its tender offer
in connection with its acquisition of LOF, would not result in the rights
becoming exercisable.
If any person becomes the beneficial owner of 20 per cent or more of the
Company's Ordinary Shares, each right will entitle the holder, other than
the acquiring person, to purchase for the purchase price, that number of
Ordinary Shares having a market value of eight times the purchase price.
If, following an acquisition of 20 per cent or more of the Company's
Ordinary Shares, the Company is involved in certain amalgamations or other
business combinations or sells or transfers more than 50% of its assets or
earning power, each right will entitle the holder to purchase for the
purchase price ordinary shares of the other party to the transaction having
a market value of up to eight times the purchase price.
The Company may redeem the rights at a price of $0.001 per right at any
time prior to a specified period of time after a person has become the
beneficial owner of 20 per cent or more of its Ordinary Shares. The rights
will expire on December 31, 2006, unless earlier exchanged or redeemed.
In connection with the Company's one-for-ten reverse stock split, the
rights were adjusted pursuant to the Plan, so that there are currently ten
rights attached to each outstanding Ordinary Share.
ITEM 15. RESERVED
ITEM 16. RESERVED
PART III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
The following financial statements listed below and set forth on pages F-1
through F-33 are filed as part of this annual report:
Financial Statements for Frontline Ltd.
---------------------------------------
Index to Consolidated Financial Statements F-1
Report of Independent Accountants F-2
Report of Independent Accountants F-3
Report of Independent Accountants F-4
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 F-5
Consolidated Balance Sheets as of
December 31, 2001 and 2000 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 F-7
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999 F-8
Notes to Consolidated Financial Statements F-9
Index to Consolidated Financial Statements of Frontline Ltd.
------------------------------------------------------------
Report of Independent Accountants
Report of Independent Accountants
Report of Independent Accountants
Consolidated Statements of Operations for the years ended December 31, 2001,
2000 and 1999
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999
Consolidated Statements Changes in Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
Report of Independent Accountants
To the Board of Directors
and Stockholders of Frontline Ltd.
In our opinion, based on our audits and the reports of other auditors, the
accompanying consolidated balance sheets and the related consolidated
statements of operations, cash flows and changes in stockholders' equity
present fairly, in all material respects, the financial position of
Frontline Ltd. and its subsidiaries at December 31, 2001 and 2000 and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We did not audit the financial statements of Golden
Ocean Group Limited, a wholly-owned subsidiary, which statements reflect
total assets of approximately $283.9 and $535.1 million at December 31,
2001 and 2000 and total revenues of approximately $82.1 and $23.1 million
for the period ended December 31, 2001 and for the period from October 10,
2000 (date of acquisition) to December 31, 2000. In addition, we did not
audit the financial statements of ICB Shipping AB, a wholly-owned
subsidiary, for the year ended December 31, 1999. The financial statements
of ICB Shipping AB reflect total revenues of approximately $125.8 million
for the year ended December 31, 1999, in conformity with generally accepted
accounting principles in Sweden. We have audited adjustments necessary to
convert the 1999 ICB Shipping AB financial statements to accounting
principles generally accepted in the United States. The financial
statements of Golden Ocean Group Limited and ICB Shipping AB were audited
by other auditors whose reports thereon have been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for
Golden Ocean Group Limited and ICB Shipping AB, is based solely on the
reports of the other auditors and our audit of the adjustments necessary
for a presentation in accordance with generally accepted accounting
principles in the United States. The report of the auditors of Golden Ocean
Group Limited includes an explanatory paragraph regarding substantial doubt
about Golden Ocean Group Limited's ability to continue as a going concern.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits and the reports of other auditors provide a reasonable basis for
our opinion.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for drydocking costs in 2001.
PricewaterhouseCoopers DA
Oslo, Norway
June 28, 2002
Golden Ocean Group Limited
Report of Independent Accountants
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF GOLDEN OCEAN GROUP LIMITED
We have audited the accompanying consolidated balance sheets of Golden
Ocean Group Limited and subsidiaries as of December 31, 2001 and 2000 and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the year ended December 31, 2001 and the period
from October 10, 2000 to December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Golden Ocean Group Limited and subsidiaries as of December 31,
2001 and 2000, and the consolidated results of their operations and their
cash flows for the year ended December 31, 2001 and the period from October
10, 2000 to December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
note 1 to the consolidated financial statements, the Company has failed to
repay a loan of $ 48,068,000, which was fully repayable on March 30, 2002.
Non-payment constitutes a default under the loan agreement, and entitles
the creditor to exercise its rights under the loan security documents,
which include taking possession of the secured vessel taking control of a
subsidiary and claiming under the performance guarantee issued by the
Company. In the event that the creditor declares a default under the loan
agreement, cross default provisions in agreements with other lenders are
such that all of the Company's secured debt could become payable
immediately. Management plans in this regard are also disclosed in note 1.
There is substantial doubt about the ability of the Company to continue as
a going concern. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Moore Stephens
Chartered Accountants
London, England
February 15, 2002
(June 28, 2002 - notes 1 and 21)
Report of Independent Accountant's Report
To the Board of Directors and Stockholders
ICB Shipping AB
We have audited the accompanying consolidated balance sheet of ICB Shipping
AB and subsidiaries as of December 31, 1999, and the related consolidated
statements of income and changes in financial position for the year then
ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
the consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Sweden that are substantially equivalent to auditing standards
generally accepted in the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ICB
Shipping AB and subsidiaries as of December 31, 1999 and the results of
their operations and their changes in financial position for the year then
ended in conformity with accounting principles generally accepted in
Sweden.
Stockholm, Sweden
March 30, 2000
Per Bergman
Authorized Public Accountant
KPMG
Frontline Ltd.
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999 (in thousands of $, except per share data)
2001 2000 1999
Operating revenues
Time charter revenues 63,817 31,590 29,880
Bareboat charter revenues 32,016 8,753 -
Voyage charter revenues 639,807 656,917 339,996
Voyage expenses and commission (88,295) (97,316) (116,662)
------------------------------------------------------------------------------------------------------------------
Net operating revenues 647,345 599,944 253,214
------------------------------------------------------------------------------------------------------------------
Gain (loss) on sale of assets 35,620 1,160 (37,779)
Operating expenses
Ship operating expenses 121,452 88,455 92,708
Charterhire expenses 41,858 34,351 31,719
Administrative expenses 13,176 9,326 11,783
------------------------------------------------------------------------------------------------------------------
Total operating expenses 176,486 132,132 136,210
------------------------------------------------------------------------------------------------------------------
Net operating income before depreciation and amortisation 506,479 468,972 79,225
------------------------------------------------------------------------------------------------------------------
Depreciation and amortisation 121,725 92,880 91,435
------------------------------------------------------------------------------------------------------------------
Net operating income (loss) after depreciation and amortisation 384,754 376,092 (12,210)
------------------------------------------------------------------------------------------------------------------
Other income (expenses)
Interest income 12,953 6,858 7,561
Interest expense (91,800) (96,174) (88,728)
Share in results from associated companies 22,317 12,817 3,067
Foreign currency exchange gain (loss) 28,318 14,563 (1,123)
Other financial items, net (5,709) (248) 283
------------------------------------------------------------------------------------------------------------------
Net other expenses (33,921) (62,184) (78,940)
------------------------------------------------------------------------------------------------------------------
Net income (loss) before income taxes and minority 350,833 313,908 (91,150)
interest
Minority interest - - 4,245
Income taxes 444 41 (9)
------------------------------------------------------------------------------------------------------------------
Net income (loss) before cumulative effect of change in 350,389 313,867 (86,896)
accounting principle
------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle 32,339 - -
------------------------------------------------------------------------------------------------------------------
Net income (loss) 382,728 313,867 (86,896)
==================================================================================================================
Earnings (loss) per share
Basic earnings per share before cumulative $4.57 $ 4.28 $ (1.76)
effect of change in accounting principle
Diluted earnings per share before cumulative $4.56 $ 4.27 $ (1.76)
effect of change in accounting principle
Cumulative effect of change in accounting $0.42 $ - $ -
principle
Basic earnings per share $4.99 $ 4.28 $ (1.76)
Diluted earnings per share $4.98 $ 4.27 $ (1.76)
==================================================================================================================
See accompanying Notes that are an integral part of these Consolidated Financial Statements
Frontline Ltd.
Consolidated Balance Sheets as of December 31, 2001 and 2000
(in thousands of $)
2001 2000
ASSETS
Current Assets
Cash and cash equivalents 178,176 103,514
Restricted cash 11,101 12,580
Marketable securities 1,159 3,713
Trade accounts receivable 55,157 95,769
Other receivables 9,331 35,252
Inventories 11,310 11,190
Voyages in progress 8,293 22,259
Prepaid expenses and accrued income 3,391 8,372
-------------------------------------------------------------------------------
Total current assets 277,918 292,649
Newbuildings and vessel purchase options 102,781 36,326
Vessels and equipment, net 2,196,959 2,254,921
Vessels and equipment under capital lease, net 317,208 108,387
Investment in associated companies 109,898 27,361
Deferred charges 5,061 5,836
Other long-term assets 9,900 41,123
Goodwill 14,049 14,385
-------------------------------------------------------------------------------
Total assets 3,033,774 2,780,988
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of long-term 227,597 212,767
debt
Current portion of obligations under capital leases 17,127 7,888
Trade accounts payable 6,994 10,610
Accrued expenses 35,543 40,777
Deferred charter revenue 1,567 2,577
Provisions for drydocking - 11,440
Mark to market valuation of derivatives 14,723 -
Other current liabilities 11,505 4,332
-------------------------------------------------------------------------------
Total current liabilities 315,056 290,391
Long-term liabilities
Long-term debt 1,164,354 1,331,372
Obligations under capital leases 283,663 101,875
Provisions for drydocking - 19,727
Other long-term liabilities 11,478 2,063
-------------------------------------------------------------------------------
Total liabilities 1,774,551 1,745,428
Commitments and contingencies
Minority interest 6,822 6,070
Stockholders' equity
Share capital 191,019 195,172
Additional paid in capital 552,166 576,677
Warrants and options - 7,662
Accumulated other comprehensive income (loss) (11,864) (3,579)
Retained earnings 521,080 253,558
-------------------------------------------------------------------------------
Total stockholders' equity 1,252,401 1,029,490
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity 3,033,774 2,780,988
===============================================================================
See accompanying Notes that are an integral part of these Consolidated
Financial Statements
Frontline Ltd.
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999 (in thousands of $)
2001 2000 1999
Operating activities
Net income (loss) 382,728 313,867 (86,896)
Adjustments to reconcile net income (loss) to
net cash
provided by operating activities:
Depreciation and amortisation 121,725 92,880 91,435
Amortisation of deferred charges 2,233 1,005 2,922
(Gain) loss from sale of assets (35,620) (1,160) 37,199
Share in results from associated companies (22,321) (12,817) (3,067)
Unrealised foreign exchange gain (29,148) (14,794) -
Change in accounting principle (32,339) - -
Adjustment of financial derivatives to 5,404 - -
market value
Other, net (2,297) (1,552) -
Changes in operating assets and
liabilities, net of effect of
acquisitions:
Trade accounts receivable 40,612 (80,758) (2,676)
Other receivables 25,921 (19,489) 1,521
Inventories (120) 3,560 (4,915)
Voyages in progress 13,966 (7,847) (1,153)
Prepaid expenses and accrued income 4,979 (1,903) 2,049
Trade accounts payable 1,290 (7,866) (1,824)
Accrued expenses (5,234) 2,972 2,805
Deferred charter revenue (1,010) (2,019) -
Provisions for drydocking - 6,858 7,158
Other, net 6,838 645 1,928
------------------------------------------------------------------------------
Net cash provided by operating activities 477,607 271,582 46,486
------------------------------------------------------------------------------
Investing activities
Maturity (placement) of restricted cash 1,479 (4,648) 1,116
Additions to newbuildings, vessels and (386,130) (435,980) (200,736)
equipment
Proceeds from sale of vessels and 400,111 1,315 239,043
equipment
Acquisition of businesses (net of cash (64,656) (41,912) 126,000
acquired)
Investment in associated companies (60,003) (3,993) 4,210
Investment in marketable securities - (983) -
Investment in debt - (38,553) -
Dividends received from associated 2,314 2,346 3,246
companies
Proceeds from sales of other assets 3,103 25,490 2,653
------------------------------------------------------------------------------
Net cash provided by (used in) investing (103,782) (496,918) 175,532
activities
------------------------------------------------------------------------------
Financing activities
Proceeds from long-term debt 324,890 384,690 505,875
Repayments of long-term debt and (460,725) (209,711) (679,210)
debentures
Payment of obligations under capital (10,337) (1,990) -
leases
Debt fees paid (1,459) (2,161) (3,068)
Cash dividends paid (115,206) - (4,714)
Purchase of minority interest - (12,020) (104,148)
Repurchase of shares and warrants (44,814) - -
Proceeds from issuance of equity 8,488 104,575 54,680
------------------------------------------------------------------------------
Net cash (used in) provided by financing (299,163) 263,383 (230,585)
activities
------------------------------------------------------------------------------
Net increase (decrease) in cash and cash 74,662 38,047 (8,567)
equivalents
Cash and cash equivalents at beginning of year 103,514 65,467 74,034
Cash and cash equivalents at end of year 178,176 103,514 65,467
==============================================================================
Supplemental disclosure of cash flow
information:
Interest paid, net of capitalised interest 96,202 92,954 94,633
Income taxes paid 11 26 -
==============================================================================
See accompanying Notes that are an integral part of these Consolidated
Financial Statements
Frontline Ltd.
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999 (in thousands of $, except number of
shares)
2001 2000 1999
NUMBER OF SHARES OUTSTANDING
Balance at beginning of year 78,068,811 60,961,860 46,106,860
Shares issued 546,055 19,256,967 14,855,000
Shares bought back (2,207,300) (2,150,016) -
-------------------------------------------------------------------------------------------------------
Balance at end of year 76,407,566 78,068,811 60,961,860
-------------------------------------------------------------------------------------------------------
SHARE CAPITAL
Balance at beginning of year 195,172 152,405 115,267
Shares issued 1,365 48,142 37,138
Shares bought back (5,518) (5,375) -
-------------------------------------------------------------------------------------------------------
Balance at end of year 191,019 195,172 152,405
-------------------------------------------------------------------------------------------------------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of year 576,677 462,474 435,932
Shares issued 7,123 134,005 26,542
Shares bought back and warrants exercised or expired (31,634) (19,802) -
-------------------------------------------------------------------------------------------------------
Balance at end of year 552,166 576,677 462,474
-------------------------------------------------------------------------------------------------------
WARRANTS AND OPTIONS
Balance at beginning of year 7,662 9,333 9,333
Options and warrants exercised or expired (7,662) (1,671) -
-------------------------------------------------------------------------------------------------------
Balance at end of year - 7,662 9,333
-------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year (3,579) (6,603) (3,545)
Other comprehensive income (loss) (8,285) 3,024 (3,058)
-------------------------------------------------------------------------------------------------------
Balance at end of year (11,864) (3,579) (6,603)
-------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 253,558 (60,309) 26,587
Net income (loss) 382,728 313,867 (86,896)
Dividends paid (115,206) - -
-------------------------------------------------------------------------------------------------------
Balance at end of year 521,080 253,558 (60,309)
-------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,252,401 1,029,490 557,300
-------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)
Net income (loss) 382,728 313,867 (86,896)
Unrealised holding gains (losses) (8,255) 3,138 (2,843)
Foreign currency translation (30) (114) (215)
-------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (8,285) 3,024 (3,058)
-------------------------------------------------------------------------------------------------------
Comprehensive income (loss) 374,443 316,891 (89,954)
-------------------------------------------------------------------------------------------------------
See accompanying Notes that are an integral part of these Consolidated
Financial Statements
1. GENERAL
Frontline Ltd. (the "Company" or "Frontline") is a Bermuda based
shipping company engaged primarily in the ownership and operation of oil
tankers, including oil/bulk/ore ("OBO") carriers. The Company operates
tankers of two sizes: very large crude carriers ("VLCCs") which are
between 200,000 and 320,000 deadweight tons ("dwt"), and Suezmaxes,
which are vessels between 120,000 and 170,000 dwt. In addition, through
a corporate acquisition completed in October 2000, the Company has
acquired a fleet of dry bulk carriers that includes Capesize, Panamax
and Handymax bulkers as well as interests in 14 VLCCs. The Company
operates through subsidiaries and partnerships located in Bermuda, Isle
of Man, Liberia, Norway, Panama, Singapore and Sweden. The Company is
also involved in the charter, purchase and sale of vessels.
The Company has its origin in Frontline AB, which was founded in 1985,
and which was listed on the Stockholm Stock Exchange from 1989 to 1997.
In May 1997, a decision was made to redomicile Frontline AB from Sweden
to Bermuda and to list its shares on the Oslo Stock Exchange. The change
of domicile was executed through a share for share exchange offer from
the then newly formed Frontline Ltd. in Bermuda. Frontline Ltd. was
incorporated under the laws of Bermuda on April 29, 1997 for the purpose
of succeeding to the business of Frontline AB and, commencing in June
1997, the shares in Frontline AB were exchanged for shares in Frontline.
The ordinary shares of Frontline were thereafter listed on the Oslo
Stock Exchange and delisted from the Stockholm Stock Exchange.
In September 1997 Frontline initiated an amalgamation (the
"Amalgamation") with London & Overseas Freighters Limited ("LOF"). This
process was completed in May 1998. In the business combination, which
left LOF as the surviving company, Frontline's shareholders exchanged
Frontline shares for LOF shares and LOF was subsequently renamed
Frontline Ltd. As a result of this transaction, Frontline became listed
on the London Stock Exchange and on the NASDAQ National Market in
addition to its listing on the Oslo Stock Exchange. LOF originally
commenced operations in 1948 as a U.K. company ("LOF plc") and was
listed on the London Stock Exchange in 1950. LOF was incorporated under
the laws of Bermuda on June 12, 1992 for the purpose of succeeding to
the business of LOF plc.
In December 1999, Frontline entered into an agreement with five other
shipowners, A.P. Moller, Euronav Luxembourg SA, Osprey Maritime Ltd.,
Overseas Shipholding Group Inc. and Reederei "Nord" Klaus E. Oldendorff
to establish a Marshall Islands corporation, Tankers International LLC
("Tankers"), to operate a pool of their respective VLCC fleets. Tankers
commenced operations on February 1, 2000 with an initial fleet of 39
modern VLCCs. With the exception of the VLCCs committed to term
charters, all of the Company's VLCCs are currently operated in the
Tankers pool.
Business combinations and Acquisitions
ICB Shipping AB (publ)
In September 1997, Frontline made a public offer to acquire all of the
shares of ICB Shipping AB (publ) ("ICB"). Through the tender offer, by
October 1997 Frontline acquired 51.7 per cent of the outstanding shares
of ICB at a purchase price of approximately $215 million. The shares
purchased provided Frontline with only 31.4 per cent of the ICB voting
rights. On January 8, 1998, Frontline withdrew its bid for the remaining
outstanding shares of ICB. During 1998, Frontline made further purchases
of ICB Shares in the market and at December 31, 1998 had 34.2 per cent
of the voting power.
In September 1999, pursuant to an agreement (the "ICB Agreement"),
Frontline acquired ICB Shares previously owned by the so-called "A
group" consortium including those controlled by board members of ICB and
ICB shares controlled by the Angelicoussis family. In connection with
the ICB Agreement, four of the VLCCs owned by ICB, were sold to
companies controlled by the Angelicoussis family. As a result of the
acquisitions, Frontline increased its shareholding in ICB to
approximately 90 per cent of the capital and 93 per cent of the voting
rights. In October 1999, a new Board of Directors was appointed in ICB
and is consequently controlled by Frontline. In December 1999, Frontline
commenced a compulsory acquisition for the remaining shares in ICB and
ICB was delisted from the Stockholm Stock Exchange.
In the two year period prior to September 1999, Frontline was unable to
control, or exercise significant influence over, ICB. Accordingly, the
Company previously accounted for its investment in ICB as an
available-for-sale security in accordance with SFAS 115. As a result of
Frontline acquiring control over ICB, the Company's financial statements
prior to 1999 have been restated to reflect Frontline's equity in
earnings of ICB.
For the year ended December 31, 1999, ICB has been consolidated with
effect from January 1, 1999. In connection with the ICB Agreement, four
of the VLCCs owned by ICB, were sold to companies controlled by the
Angelicoussis family. This sale has resulted in Frontline recognising a
loss on sale of vessels of $37.9 million in its consolidated statement
of operations for the year ended December 31, 1999. Twenty employees of
ICB have been made redundant as the result of the acquisition by
Frontline and severance costs of approximately $1.4 million have been
incurred in the year ended December 31, 1999. These costs are included
in the determination of the purchase price of ICB.
Golden Ocean Group Limited
In October 2000, Frontline took control of Golden Ocean Group Limited
("Golden Ocean"), a shipping group which holds interest in 14 VLCCs and
10 bulk carriers. On the same date Golden Ocean emerged from bankruptcy
protection under Chapter 11 of the U.S. Bankruptcy Code.
In January 2000, Golden Ocean and its fellow subsidiaries, Golden Ocean
Tankers Limited and Channel Rose Holdings Inc. (together the "Debtors")
filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy
Code with the Clerk of the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). In July 2000, Frontline
filed a proposed plan of reorganisation (the "Plan of Reorganisation")
and disclosure statement (the "Disclosure Statement") with the
Bankruptcy Court which set forth the manner in which claims against and
equity interests in the Debtors would be treated. On August 4, 2000 the
Bankruptcy Court approved on Frontline's Disclosure Statement and on
August 14, 2000 approved the appointment of Frontline as manager of
Golden Ocean's operations with immediate effect. The Plan of
Reorganisation was approved by an overwhelming majority of holders of
claims entitled to vote and was confirmed at a hearing on September 15,
2000.
On October 10, 2000 the Plan of Reorganisation became effective and
Frontline acquired the entire share capital of Golden Ocean. The total
acquisition price paid, including amounts paid to settle allowed claims,
was approximately $63.0 million, including 1,245,998 shares issued at a
price of $15.65 per share. The acquisition of Golden Ocean has been
accounted for using the purchase method. (See Note 11 and Note 24).
Eighteen employees of Golden Ocean have been made redundant as the
result of the acquisition by Frontline and severance costs of
approximately $2.1 million have been incurred by Golden Ocean in the
year ended December 31, 2000. These costs were included in the
determination of the reorganised balance sheet and not in the
determination of the purchase price.
Mosvold Shipping Limited
In April 2001, the Company announced an offer for all of the shares of
Mosvold Shipping Limited ("Mosvold"), a Bermuda company whose shares
were listed on the Oslo Stock Exchange. Through a combination of shares
acquired and acceptances of the offer, Frontline acquired 97 per cent of
the shares of Mosvold. The remaining 3 per cent of the shares of Mosvold
were acquired during 2001 through a compulsory acquisition. Through the
purchase of Mosvold the Company acquired two mid-70s built VLCCs and
three newbuilding contracts for VLCCs. The two mid-70s built VLCCs have
subsequently been sold by the Company. The first of the newbuildings was
delivered in January 2002, the second and third are due for delivery in
September 2002 and June 2003, respectively.
The total acquisition price paid for Mosvold was approximately $70.0
million and the acquisition has been accounted for using the purchase
method. (See Note 24). Thirty employees of Mosvold have been made
redundant as the result of the acquisition by Frontline and severance
costs of approximately $0.3 million have been incurred by Mosvold in the
year ended December 31, 2001. These severance costs are included in the
statement of operations and not in the determination of the purchase
price of Mosvold.
2. ACCOUNTING POLICIES
Basis of accounting
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The
consolidated financial statements include the assets and liabilities of
the Company and its subsidiaries. Investments in companies in which the
Company directly or indirectly holds more than 50 per cent of the voting
control are consolidated, unless the Company is unable to control the
investee. For the year ended December 1, 1999, ICB has been consolidated
with effect from January 1, 1999. For the year ended December 31, 2000,
Golden Ocean has been consolidated with effect from October 10, 2000.
For the year ended December 31 2001, Mosvold has been consolidated with
effect from May 15, 2001. All intercompany balances and transactions
have been eliminated on consolidation.
Investments in companies in which the Company holds between 20 per cent
and 50 per cent of an ownership interest, and over which the Company
exercises significant influence, are accounted for using the equity
method. The Company records its investments in equity-method investees
on the consolidated balance sheets as "Investment in associated
companies" and its share of the investees' earnings or losses in the
consolidated statements of operations as "Share in results from
associated companies". The excess, if any, of the purchase price over
the book value basis of the Company's investment in an equity method
investee is included in the accompanying consolidated balance sheets in
"Investment in associated companies". Two companies in which the Company
owns 50.1 per cent have been accounted for using the equity method as
the Company is not able to exercise control.
The preparation of financial statements in accordance with generally
accepted accounting principles requires that management make estimates
and assumptions affecting the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain of the comparative figures have been reclassified to conform
with the presentation adopted in the current period.
Cash and cash equivalents
For the purposes of the consolidated statements of cash flows, all
demand and time deposits and highly liquid, low risk investments with
original maturities of three months or less are considered equivalent to
cash.
Marketable Securities
Marketable equity securities held by the Company are considered to be
available-for-sale securities and as such are carried at fair value with
resulting unrealised gains and losses, net of deferred taxes if any,
recorded as a separate component of other comprehensive income in
stockholders' equity.
Inventories
Inventories, which comprise principally of fuel and lubricating oils,
are stated at the lower of cost and market value. Cost is determined on
a first-in, first-out basis.
Vessels and equipment
The cost of the vessels less estimated residual value is depreciated on
a straight-line basis over the vessels' estimated remaining economic
useful lives. Other equipment is depreciated over its estimated
remaining useful life, which approximates five years.
The vessels obtained through the acquisition of ICB have been
depreciated on a straight-line basis over the vessels' remaining
economic useful lives, which was determined to be 20 years. In the
fourth quarter of 1999, management determined that the useful life of
these vessels was 25 years rather than 20 years, as previously
estimated. A change in accounting estimate was recognised to reflect
this decision, resulting in a decrease in depreciation expense and
consequently increasing net income by $1.8 million and basic and diluted
earnings per share by $0.04, for 1999.
With effect from April 2001, the International Maritime Organisation
implemented new regulations that result in the accelerated phase-out of
single hull vessels. As a result of this, the Company has re-evaluated
the estimated useful life of its single hull vessels and determined this
to be either 25 years or the vessel's anniversary date in 2017 whichever
comes first. As a result, the estimated useful lives of four of the
Company's vessels were reduced in the fourth quarter of 2001. A change
in accounting estimate was recognised to reflect this decision,
resulting in an increase in depreciation expense and consequently
decreasing net income by $0.5 million and basic and diluted earnings per
share by $0.01, for 2001.
Vessels and equipment under capital lease
The Company bareboat charters in certain vessels under agreements that
are classified as capital leases. Depreciation of vessels under capital
lease is included within depreciation and amortisation expense in the
Statement of Operations. Vessels under capital lease are depreciated on
a straight-line basis over the vessels' remaining economic useful lives,
based on a 25 year useful life, or on a straight-line basis over the
term of the lease. The method applied is determined by the criteria by
which the lease has been assessed to be a capital lease.
Newbuildings and vessel purchase options
The carrying value of the vessels under construction ("Newbuildings")
represents the accumulated costs to the balance sheet date which the
Company has had to pay by way of purchase instalments and other capital
expenditures together with capitalised loan interest and associated
finance costs. No charge for depreciation is made until the vessel is
put into operation.
Vessel purchase options are capitalised at the time option contracts are
acquired or entered into. The Company reviews expected future cash
flows, which would result from exercise of each option contract on a
contract by contract basis to determine whether the carrying value of
the option is recoverable. If the expected future cash flows are less
than the carrying value of the option plus further costs to delivery,
provision is made to write down the carrying value of the option to the
recoverable amount. The carrying value of each option payment is written
off as and when the Company adopts a formal plan not to exercise the
option. Purchase price payments are capitalised and the total of the
option payment, if any, and purchase price payment is transferred to
cost of vessels, net upon exercise of the option and delivery of the
vessel to the Company.
Impairment of long-lived assets
Long-lived assets that are held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition,
long-lived assets to be disposed of are reported at the lower of
carrying amount and fair value less estimated costs to sell.
Deferred charges
Loan costs, including debt arrangement fees, are deferred and amortised
on a straight-line basis over the term of the relevant loan. The
straight line basis of amortisation approximates the effective interest
method in the Company's statement of operations. Amortisation of loan
costs is included in interest expense.
Revenue and expense recognition
Revenues and expenses are recognised on the accrual basis. Revenues are
generated from freight billings, time charter and bareboat charter
hires. The operating results of voyages in progress are estimated and
recorded pro-rata on a per day basis in the consolidated statements of
operations. Probable losses on voyages are provided for in full at the
time such losses can be estimated. Time charter and bareboat charter
revenues are recorded over the term of the charter as service is
provided.
The operating revenues and voyage expenses of the vessels operating in
the Tankers pool, and certain other pool arrangements, are pooled and
net operating revenues, calculated on a time charter equivalent basis,
are allocated to the pool participants according to an agreed formula.
The same revenue and expenses principles stated above are applied in
determining the pool net operating revenues.
Drydocking provisions
Normal vessel repair and maintenance costs are charged to expense when
incurred.
In 2001, the Company changed its accounting policy for drydockings. Prior
to 2001, provisions for future drydockings have been accrued and charged to
expense on a pro-rata basis over the period to the next scheduled
drydockings. Effective January 1, 2001 the Company will recognise the cost
of a drydocking at the time the drydocking takes place, that is it will
apply the "expense as incurred" method. The expense as incurred method is
considered by management to be a more reliable method of recognising
drydocking costs as it eliminates the uncertainty associated with
estimating the cost and timing of future drydockings. The cumulative effect
of this change in accounting principle is shown separately in the
consolidated statements of operations for the year ended December 31, 2001
and resulted in a credit to income of $32.3 million in 2001. The cumulative
effect of this change as of January 1, 2001 on the Company's consolidated
balance sheet was to reduce total liabilities by $32.3 million.
Assuming the "expense as incurred" method had been applied retroactively,
the pro forma income and earnings per share before cumulative effect of
change in accounting principle for 2000 and 1999 would have been as
follows:
(in thousands of $) 2000 1999
----------------------------------------------------------------------------------------------------------
Net income (loss) as previously reported 313,867 (86,896)
Pro forma effect of retroactive application of change in accounting principle 6,281 7,010
----------------------------------------------------------------------------------------------------------
Pro forma net income (loss) 320,148 (79,886)
----------------------------------------------------------------------------------------------------------
Basic earnings per share as previously reported $ 4.28 $ (1.76)
Diluted earnings per share as previously reported $ 4.27 $ (1.76)
Pro forma effect of retroactive application of change in accounting principle $ 0.09 $ 0.14
Pro forma basic earnings per share $ 4.37 $ (1.62)
Pro forma diluted earnings per share $ 4.36 $ (1.62)
==========================================================================================================
Goodwill
Goodwill represents the excess of the purchase price over the fair value
of assets acquired in business acquisitions accounted for under the
purchase method. Goodwill is presented net of accumulated amortisation
and is being amortised over a period of approximately 17 years. See Note
3.
Derivatives
The Company enters into interest rate swap transactions from time to
time to hedge a portion of its exposure to floating interest rates.
These transactions involve the conversion of floating rates into fixed
rates over the life of the transactions without an exchange of
underlying principal. Hedge accounting is used to account for these
swaps provided certain hedging criteria are met. As of January 1, 2001,
the Company adopted Statement of Financial Accounting Standard ("SFAS")
No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS
133"). Certain hedge relationships met the hedge criteria prior to SFAS
133, but do not meet the criteria for hedge accounting under SFAS 133.
The Company adopted SFAS 133 in the first quarter of fiscal year 2001
and upon initial adoption recorded certain transition adjustments
resulting in recognising the fair value of its derivatives as assets of
$0.4 million and liabilities of $0.6 million. A gain of $0.3 million was
recognised in income and a charge of $0.5 million made to other
comprehensive income.
Pre-SFAS 133 Adoption
Hedge accounting is applied where the derivative reduces the risk of the
underlying hedged item and is designated at inception as a hedge with
respect to the hedged item. Additionally, the derivative must result in
payoffs that are expected to be inversely correlated to those of the
hedged item. Derivatives are measured for effectiveness both at
inception and on an ongoing basis. When hedge accounting is applied, the
differential between the derivative and the underlying hedged item is
accrued as interest rates change and recognized as an adjustment to
interest expense. The related amount receivable from or payable to
counterparties is included in accrued interest income or expense,
respectively. Prior to January 1, 2001, the fair values of the interest
rate swaps are not recognized in the financial statements.
If a derivative ceases to meet the criteria for hedge accounting, any
subsequent gains and losses are currently recognized in income. If a
hedging instrument is sold or terminated prior to maturity, gains and
losses continue to be deferred until the hedged instrument is recognized
in income. Accordingly, should a swap be terminated while the underlying
debt remains outstanding, the gain or loss is adjusted to the basis of
the underlying debt and amortized over its remaining useful life.
Post-SFAS 133 Adoption
SFAS 133, as amended by SFAS 137 "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB Statement
No.133" and SFAS 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities an amendment of FASB Statement No. 133",
requires an entity to recognize all derivatives as either assets or
liabilities on the balance sheet and measure these instruments at fair
value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. In order to qualify for hedge accounting
under SFAS 133, certain criteria and detailed documentation requirements
must be met.
The Company has from time to time entered into forward freight contracts
in order to hedge exposure to the spot market for certain trade routes.
These transactions involve entering into a contract to provide a
theoretical voyage at an agreed rate. The fair values of the forward
freight contracts are recognised as assets or liabilities with the
change in fair values recognised in the consolidated statements of
operations.
The Company has established a twelve month facility for a Stock Indexed
Total Return Swap Programme or Equity Swap Line (See Note 20) whereby
the conterparty acquires shares in the Company, and the Company carries
the risk of fluctuations in the share price of those acquired shares.
The fair value of the Equity Swap is recognised as an asset or liability
with the change in fair values recognised in the consolidated statements
of operations.
Other than the forward freight contracts discussed above, the Company
has not entered into any derivative contracts for speculative or trading
purposes.
Financial Instruments
In determining fair value of its financial instruments, the company uses
a variety of methods and assumptions that are based on market conditions
and risks existing at each balance sheet date. For the majority of
financial instruments including most derivatives and long-term debt,
standard market conventions and techniques such as options pricing
models are used to determine fair value. All methods of assessing fair
value result in a general approximation of value, and such value may
never actually be realised.
Foreign currencies
The Company's functional currency is the U.S. dollar as all revenues are
received in U.S. dollars and a majority of the Company's expenditures are
made in U.S. dollars. The Company's reporting currency is U.S. dollars.
Most of the Company's subsidiaries report in U.S. dollars. For
subsidiaries that maintain their accounts in currencies other than U.S.
dollars, the Company uses the current method of translation whereby the
statements of operations are translated using the average exchange rate
and the assets and liabilities are translated using the year end exchange
rate. Foreign currency translation gains or losses are recorded as a
separate component of other comprehensive income in stockholders' equity.
Transactions in foreign currencies during the year are translated into
U.S. dollars at the rates of exchange in effect at the date of the
transaction. Foreign currency monetary assets and liabilities are
translated using rates of exchange at the balance sheet date. Foreign
currency non-monetary assets and liabilities are translated using
historical rates of exchange. Foreign currency transaction gains or
losses are included in the consolidated statements of operations.
Stock-based compensation
In accordance with Accounting Principles Board Opinion No. 25 ("APB 25")
"Accounting for Stock Issued to Employees" the compensation cost for
stock options is recognised as an expense over the service period based
on the excess, if any, of the quoted market price of the stock at the
grant date of the award or other measurement date, over the exercise
price to be paid to acquire the stock.
Earnings per share
Basic EPS is computed based on the income (loss) available to common
stockholders and the weighted average number of shares outstanding for
basic EPS. Diluted EPS includes the effect of the assumed conversion of
potentially dilutive instruments (see Note 6).
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") approved
SFAS No. 141, "Accounting for Business Combinations" which requires the
application of the purchase method including the identification of the
acquiring enterprise for each transaction. SFAS No. 141 supercedes APB
No. Opinion 16 and applies to all business combinations initiated after
June 30, 2001 and all business combinations accounted for by the
purchase method that are completed after June 30, 2001. The adoption of
SFAS No. 141 by the Company on June 30, 2001 did not have any impact on
the Company's consolidated results of operations or financial position.
In June 2001, the FASB approved SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS No. 142 applies to all acquired
intangible assets whether acquired singly, as part of a group, or in a
business combination. SFAS No. 142 will supersede APB Opinion No. 17,
"Intangible Assets". This statement is effective for fiscal years
beginning after December 15, 2001. SFAS No. 142 requires that goodwill
and indefinite lived intangible assets will no longer be amortized but
will be reviewed annually for impairment. Intangible assets that are not
deemed to have an indefinite life will continue to be amortised over
their useful lives. At December 31, 2001, the Company had unamortised
goodwill of $14.0 million. Amortisation expense related to goodwill was
$1.9 million, $1.1 million and $0.5 million for the years ended December
31, 2001, 2000 and 1999, respectively. The Company has not yet
determined what effect the adoption of SFAS No. 142 will have on its
consolidated results of operations or financial position.
In August 2001, the FASB approved SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS No. 143 requires the fair
value of a legal liability related to an asset retirement be recognized
in the period in which it is incurred. The associated asset retirement
costs must be capitalized as part of the carrying amount of the related
long-lived asset and subsequently amortized to expense. Subsequent
changes in the liability will result from the passage of time (interest
cost) and revision to cash flow estimates. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15,
2002, effective January 1, 2003 for the Company. Management does not
expect that the adoption of SFAS No. 143 will have a material effect on
the Company's results of operations or financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). The
objectives of SFAS 144 are to address significant issues relating to the
implementation of FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and
to develop a single accounting model based on the framework established
in SFAS 121, for long-lived assets to be disposed of by sale. The
standard requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less cost to
sell. Additionally, the standard expands the scope of discontinued
operations to include all components of an entity with operations that
can be distinguished from the rest of the entity and will be eliminated
from the ongoing operations of the entity in a disposal transaction.
This statement is effective for fiscal years beginning after December
15, 2001, and generally, its provisions are to be applied prospectively.
The Company is currently evaluating the impact of this statement and
does not expect the adoption of SFAS No. 144 to have a material effect
on the Company's results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". This Statement rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment
of that Statement, FASB Statement No. 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB
Statement No. 44, Accounting for Intangible Assets of Motor Carriers.
This Statement amends FASB Statement No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. This statement is generally for transactions occurring after
May 15, 2002. The Company is currently evaluating the impact of this
statement.
4. SEGMENT INFORMATION
The Company has two reportable segments: tankers, including oil bulk ore
carriers, and dry bulk carriers. Prior to the acquisition of Golden
Ocean in 2000, the Company had one reportable segment. Segment results
are evaluated based on income from vessel operations before general and
administrative expenses. The accounting policies used in the reportable
segments are the same as those followed in the preparation of the
Company's consolidated financial statements.
Information about the Company's reportable segments as of and for each
of the years ended December 31, 2001 and 2000 follows:
(in thousands of $ ) Dry Bulk
Tankers Carriers Total
2001
Net operating revenues 615,109 32,236 647,345
Ship operating expenses 113,812 7,638 121,450
Depreciation and amortisation 112,200 7,831 120,031
Share in results from associated companies 17,494 3,518 21,012
Vessels and equipment, net 2,121,356 74,396 2,195,752
Vessels under capital lease 213,320 103,887 317,207
Investment in associated companies 102,683 4,459 107,142
Total assets 2,776,814 185,751 2,962,565
Expenditure for vessels 396,841 - 396,841
(in thousands of $) Dry Bulk
Tankers Carriers Total
2000
Net operating revenues 591,805 8,065 599,870
Ship operating expenses 85,868 2,129 87,997
Depreciation and amortisation 90,297 1,952 92,249
Share in results from associated companies 11,273 1,544 12,817
Vessels and equipment, net 2,176,303 77,727 2,254,030
Vessels under capital lease - 108,387 108,387
Investment in associated companies 26,420 941 27,361
Total assets 2,451,589 192,808 2,644,397
Expenditure for vessels 468,575 - 468,575
Reconciliations of reportable segments information to the Company's consolidated totals follows:
(in thousands of $) 2001 2000
Net operating revenues
Total net operating revenues for reportable segments 647,345 599,870
Other net operating revenues - 74
Total consolidated net operating revenues 647,345 599,944
Assets
Total assets for reportable segments 2,962,565 2,644,397
Assets not attributed to segments 71,209 136,591
Total consolidated assets 3,033,774 2,780,988
=================================================================================================
5. TAXATION
Bermuda
Under current Bermuda law, the Company is not required to pay taxes in
Bermuda on either income or capital gains. The Company has received
written assurance from the Minister of Finance in Bermuda that, in the
event of any such taxes being imposed, the Company will be exempted from
taxation until the year 2016.
United States
The Company does not accrue U.S. income taxes as, in the opinion of U.S.
counsel, the Company is not engaged in a U.S. trade or business and is
exempted from a gross basis tax under Section 883 of the U.S. Internal
Revenue Code.
A reconciliation between the income tax expense resulting from applying
the U.S. Federal statutory income tax rate and the reported income tax
expense has not been presented herein as it would not provide additional
useful information to users of the financial statements as the Company's
net income is subject to neither Bermuda nor U.S. tax.
Other Jurisdictions
Certain of the Company's subsidiaries in other jurisdictions including
Norway, Singapore, Sweden and the United Kingdom are subject to taxation
in their respective jurisdictions. The tax paid by subsidiaries of the
Company which are subject to taxation is not material.
The tax charge for the year comprises:
(in thousands of $) 2001 2000 1999
Current tax 444 41 (9)
Deferred tax - - -
---------------------------------------------------------------------------
444 41 (9)
===========================================================================
Temporary differences and carryforwards which give rise to deferred tax
assets, liabilities and related valuation allowances are as follows:
(in thousands of $) 2001 2000
Deferred tax asset - non current 116 -
Pension liabilities - 13
Tax loss carryforwards 11,207 19,285
Valuation allowance (11,091) (19,298)
--------------------------------------------------------------------------
Net deferred tax asset (liability) - -
==========================================================================
As of December 31, 2001, 2000 and 1999, the Company had $39,610,000,
$68,875,000 and $62,485,000 of net operating loss carryforwards,
respectively. In 2001, the tax loss carryforwards have been utilised to
offset taxable income in Sweden. The loss carryforward can be utilised
only against future taxable income for the respective subsidiary.
Frontline AB accounts for a total of $27,840,000 as at December 31, 2001
and ICB AB accounts for a total of $11,944,000 as of December 31, 2001.
These net operating losses do not have an expiration date. The Company's
deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realised in the future.
6. EARNINGS PER SHARE
The computation of basic EPS is based on the weighted average number of
shares outstanding during the year. The computation of diluted EPS
assumes the foregoing and the exercise of stock options and warrants
using the treasury stock method (see Note 21).
The components of the numerator for the calculation of basic EPS and diluted EPS are as follows:
(in thousands of $) 2001 2000 1999
-----------------------------------------------------------------------------------------------------------
Net income (loss) available to stockholders 382,728 313,867 (86,896)
===========================================================================================================
The components of the denominator for the calculation of basic EPS and diluted EPS are as follows:
(in thousands ) 2001 2000 1999
-----------------------------------------------------------------------------------------------------------
Basic earnings per share:
Weighted average number of ordinary shares outstanding 76,714 73,391 49,486
===========================================================================================================
Diluted earnings per share:
Weighted average number of ordinary shares outstanding 76,714 73,391 49,468
Warrants and stock options 181 173 -
-----------------------------------------------------------------------------------------------------------
76,895 73,564 49,468
===========================================================================================================
7. LEASES
Rental expense
Charter hire payments to third parties for certain contracted-in vessels
are accounted for as operating leases. The Company is also committed to
make rental payments under operating leases for office premises. The
future minimum rental payments under the Company's non-cancellable
operating leases, are as follows:
Year ending December 31,
(in thousands of $)
------------------------------------------------------------------------
2002 40,971
2003 24,516
2004 24,123
2005 24,628
2006 24,638
2007 and later 6,023
------------------------------------------------------------------------
Total minimum lease payments 144,899
========================================================================
Total rental expense for operating leases was $42,376,000, $34,823,000
and $31,912,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
Rental income
The minimum future revenues to be received on time charters, bareboat
charters and other contractually committed income as of December 31,
2001 are as follows:
Year ending Yen Dollar Total
December 31, revenues revenues
(in thousands of(Y)and $) (in(Y)) ($ equivalent)
-------------------------------------------------------------------------
2002 2,398,050 18,286 68,652 86,938
2003 2,398,050 18,286 65,110 83,396
2004 2,404,620 18,336 62,745 81,081
2005 2,398,050 18,286 61,585 79,871
2006 2,398,050 18,286 58,492 76,778
2007 and later 11,043,780 84,214 98,297 182,511
--------------------------------------------------------------------------
Total minimum lease revenues 23,040,600 175,694 414,881 590,575
==========================================================================
The cost and accumulated depreciation of the vessels leased to a third
party at December 31, 2001 were approximately $354.2 million and $14.6
million, respectively, and at December 31, 2000 were approximately
$518.3 million and $27.4 million, respectively.
8. MARKETABLE SECURITIES
Marketable securities held by the Company are equity securities
considered to be available-for-sale securities.
(in thousands of $) 2001 2000
---------------------------------------------------------------------
Cost 1,874 3,418
Gross unrealised gain 2 702
Gross unrealised loss (717) (407)
----------------------------------------------------------------------
Fair value 1,159 3,713
======================================================================
The net unrealised loss on marketable securities, including a component
of foreign currency translation, included in comprehensive income
increased by $1,010,000 for the year ended December 31, 2001 (2000 -
increase in net unrealised gain of $295,000).
(in thousands ) 2001 2000 1999
------------------------------------------------------------------------
Proceeds from sale of available-for-sale 3,101 10,089 2,653
securities
Realised gain (loss) 717 (1,186) 580
========================================================================
The cost of sale of available-for-sale marketable securities is
calculated on an average costs basis.
9. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are presented net of allowances for doubtful
accounts amounting to $800,000 for each of the years ended December 31,
2001 and 2000, respectively.
10. OTHER RECEIVABLES
(in thousands of $) 2001 2000
---------------------------------------------------------------------
Agent receivables 1,973 1,761
Due from related party - 20,000
Due on sale of marketable securities - 4,101
Short-term debt receivable - 6,418
Mark to market valuation of derivatives 4,411 -
Other receivables 2,947 2,972
---------------------------------------------------------------------
9,331 35,252
=====================================================================
Other receivables are presented net of allowances for doubtful accounts
amounting to $nil for each of the years ended December 31, 2001 and
2000.
11. NEWBUILDINGS AND VESSEL PURCHASE OPTIONS
(in thousands of $) 2001 2000
-----------------------------------------------------------------------
Newbuildings 94,411 -
Vessel purchase options 8,370 36,326
------------------------------------------------------------------------
102,781 36,326
========================================================================
The carrying value of newbuildings represents the accumulated costs to
the balance sheet date, which the Company has paid by way of purchase
installments, and other capital expenditures together with capitalised
loan interest. Interest capitalised in the cost of newbuildings amounted
to $3,034,669 and $400,000 in 2001 and 2000, respectively.
In connection with the acquisition of Golden Ocean, the Company obtained
certain options and obligations to acquire vessels. The Company had
options to purchase the VLCCs Stena Commerce and Stena Comanche for a
purchase price for each vessel equal to 50 per cent of the outstanding
mortgage debt under three joint loan agreements between lenders and the
vessels' owning companies. As at December 31, 2000 the outstanding
mortgage debt of the Stena Commerce and Stena Comanche's owning
companies amounted to $116,400,439 plus (Y)6,019,417,615 (equivalent to
$52,585,111). Of this total debt outstanding, $25,774,680 was due to the
Company at December 31, 2000. This amount is included in other long-term
assets (see Note 16). This debt was acquired at a discount of
approximately 50 per cent from one of the lenders in September 2000. The
fair value assigned to these options in the purchase accounting for
Golden Ocean was $27,956,000, calculated by reference to the discounted
debt acquired by the Company. The Company also had an option to purchase
the vessel Stena Commodore for a purchase price equal to the outstanding
mortgage debt under three loan agreements between lenders and the
vessel's owning company. The fair value assigned to this option in the
purchase accounting for Golden Ocean was $nil. The fair value is
calculated as the difference between the fair of the vessel and the
mortgage debt outstanding.
On October 24, 2000 the Company simultaneously exercised its options to
acquire the Stena Commerce, Stena Comanche and Stena Commodore and took
delivery of the three vessels during May and June 2001.
The Company had an obligation to purchase the VLCC Opalia for a purchase
price equal to 100 per cent of the outstanding mortgage debt under three
loan agreements between lenders and the vessel's owning company. The
fair value assigned to this option in the purchase accounting for Golden
Ocean was $nil. The fair value is calculated as the difference between
the fair value of the vessel and the mortgage debt outstanding. In July
2001, the Company acquired the VLCC Opalia.
The Company has both an obligation and an option to purchase the VLCC
Oscilla on expiry of a five-year time charter, which commenced in March
2000. The purchase price is equal to the outstanding mortgage debt under
four loan agreements between lenders and the vessel's owning company. As
at December 31, 2001 the outstanding mortgage debt of the Oscilla's
owning company amounted to $44,372,526 plus (Y)763,259,970 (equivalent
to $5,820,192). (2000 - $60,005,600 plus (Y)1,247,525,412 (equivalent to
$10,898,274)). Included in this amount at December 31, 2001 is debt of
$9,103,000 due to the Company (2000 - $12,475,000). The fair value
assigned to this option and obligation in the purchase accounting for
Golden Ocean was $8,370,000. The fair value is calculated as the
difference between the fair value of the vessel and the mortgage debt
outstanding.
12. VESSELS AND EQUIPMENT, NET
(in thousands of $) 2001 2000
----------------------------------------------------------------------
Cost 2,692,512 2,684,603
Accumulated depreciation (495,553) (429,682)
----------------------------------------------------------------------
Net book value at end of year 2,196,959 2,254,921
======================================================================
Included in the above amounts as at December 31, 2001 and 2000 is
equipment with a net book value of $836,000 and $904,000, respectively.
Depreciation expense for vessels and equipment was $115.6 million, $90.7
million and $90.9 million for the years ended December 31, 2001, 2000
and 1999, respectively.
13. VESSELS UNDER CAPITAL LEASE, NET
At December 31 2001, the Company had eight vessels under capital leases.
These leases are for terms that range from eight to ten years. For five
of these vessels, there is an obligation to purchase the vessels from
the lessor at the expiration of the leases. These leases expire between
2007 and 2009. The Company has the option to purchase the vessels at any
time during the lease. Three of the vessels under capital leases were
sold by the Company in 2001 and leased back on charters each for a
period of eight years with the option on the lessor's side to extend the
charter for a further three year followed by a further two years. The
Company has purchase options at certain specified dates and the lessor
has options to put the vessels on the Company at the end of the lease
terms.
(in thousands of $) 2001 2000
-----------------------------------------------------------------------
Cost 323,659 109,500
Accumulated depreciation (6,451) (1,113)
------------------------------------------------------------------------
Net book value at end of year 317,208 108,387
========================================================================
Depreciation expense for vessels under capital lease was $5.3 million,
$1.1 million and $nil for the years ended December 31, 2001, 2000 and
1999, respectively.
The outstanding obligations under capital leases are payable as follows:
Year ending December 31,
(in thousands of $)
---------------------------------------------------------------------
2002 34,409
2003 34,517
2004 34,792
2005 35,859
2006 35,980
2007 and later 255,757
---------------------------------------------------------------------
Minimum lease payments 431,314
---------------------------------------------------------------------
Less imputed interest 130,524
---------------------------------------------------------------------
Present value of obligations under capital leases 300,790
=====================================================================
Included in the outstanding obligations under capital leases in the
table above are the following amounts in Japanese Yen and U.S. dollar
equivalent.
Year ending December 31,
(in thousands of $ and (Y)) (in (Y)) ($ equivalent)
---------------------------------------------------------------------
2002 1,209,574 9,224
2003 1,223,815 9,332
2004 1,238,338 9,443
2005 1,253,163 9,556
2006 1,268,303 9,671
2007 and later 6,471,098 49,345
---------------------------------------------------------------------
Minimum lease payments 12,664,291 96,571
---------------------------------------------------------------------
Less imputed interest 1,303,359 9,939
---------------------------------------------------------------------
Present value of obligations under
capital leases 11,360,931 86,632
=====================================================================
14. INVESTMENT IN ASSOCIATED COMPANIES
At December 31, 2001, the Company has the following participation in
investments that are recorded using the equity method:
Percentage
K/S Rasmussen Teamship A/S III 35.00%
K/S Rasmussen Teamship A/S II 40.00%
Front Tobago Inc 40.00%
Golden Lagoon Corporation 50.00%
Golden Fountain Corporation 50.00%
Golden Tide Corporation 50.00%
Middleburg properties Ltd. 50.00%
Reese Development Inc. 50.00%
Alliance Chartering LLC 50.00%
Dundee Navigation SA 50.10%
Edinburgh Navigation SA 50.10%
Ariake Transport Corporation 33.33%
Sakura Transport Corporation 33.33%
Ichiban Transport Corporation 33.33%
Tokyo Transport Corporation 33.33%
Hitachi Hull No 4983 Ltd. 33.33%
With the exception of Alliance Chartering LLC, the equity method
investees are engaged in the ownership and operation of oil tankers or
dry bulk carriers.
Summarised balance sheet information of the Company's equity method
investees is as follows:
(in thousands of $) 2001 2000
------------------------------------------------------------------------
Current assets 46,799 25,614
Noncurrent assets 646,208 280,872
Current liabilities 58,330 16,750
Non current liabilities 579,391 229,242
Summarised statement of operations information of the Company's equity
method investees is as follows:
(in thousands ) 2001 2000 1999
------------------------------------------------------------------------
Net operating revenues 82,287 54,722 14,432
Net operating income 42,637 32,093 9,846
Net income 45,431 43,843 8,686
15. DEFERRED CHARGES
Deferred charges represent debt arrangement fees that are capitalised
and amortised on a straight-line basis to interest expense over the life
of the debt instrument. The deferred charges are comprised of the
following amounts:
(in thousands of $) 2001 2000
------------------------------------------------------------------------
Debt arrangement fees 14,190 12,971
Accumulated amortisation (9,129) (7,135)
------------------------------------------------------------------------
5,061 5,836
========================================================================
16. OTHER LONG-TERM ASSETS
(in thousands of $) 2001 2000
------------------------------------------------------------------------
Long-term debt receivable 9,025 38,533
Other 875 2,590
------------------------------------------------------------------------
9,900 41,123
========================================================================
Included in long-term debt receivable are amounts due to the Company
from third party entities that own vessels over which the Company has
purchase options or obligations (see Note 11).
17. GOODWILL
Goodwill is stated net of related accumulated amortisation as follows:
(in thousands of $) 2001 2000
------------------------------------------------------------------------
Goodwill 17,561 16,009
Accumulated amortisation (3,512) (1,624)
------------------------------------------------------------------------
14,049 14,385
========================================================================
Amortisation expense was $0.7 million, $1.1 million and $0.5 million for
the years ended December 31, 2001, 2000 and 1999, respectively.
18. ACCRUED EXPENSES
(in thousands of $) 2001 2000
------------------------------------------------------------------------
Voyage expenses 3,667 8,689
Ship operating expenses 18,591 13,631
Administrative expenses 1,979 786
Interest expense 6,044 12,446
Taxes 2,233 43
Other 3,029 5,182
------------------------------------------------------------------------
35,543 40,777
========================================================================
19. DEBT
(in thousands of $) 2001 2000
----------------------------------------------------------------------------------------------------------
US Dollar denominated floating rate debt (LIBOR + 0.485% to 1.75%) due 1,238,952 1,303,307
through 2011
Yen denominated floating rate debt (LIBOR + 1.125% to 1.313%) due through 2011 109,640 136,172
Fixed rate debt 0% due through 2005 2,000 2,000
Fixed rate debt 8.00% due through 2005 31,500 91,250
1,382,092 1,532,729
Credit facilities 9,859 11,410
Total debt 1,391,951 1,544,139
Less: short-term and current portion of long-term debt (227,597) (212,767)
1,164,354 1,331,372
The outstanding debt as of December 31, 2001 is repayable as follows:
Year ending December 31,
(in thousands of $)
2002 227,597
2003 294,122
2004 119,374
2005 106,291
2006 245,906
2007 and later 398,661
----------------------------------------------------------------------
Total debt 1,391,951
======================================================================
The weighted average interest rate for the floating rate debt
denominated in US dollars was 4.41 per cent as of December 31, 2001
(2000 - 7.67 per cent). The weighted average interest rate for the
floating rate debt denominated in Yen was 1.37 per cent as of December
31, 2001 (2000 - 2.74 per cent). These rates take into consideration
related interest rate swaps.
Certain of the fixed rate debt and the floating rate debt are
collateralised by ship mortgages and, in the case of some debt, pledges
of shares by each guarantor subsidiary. The Company's existing financing
agreements impose operation and financing restrictions on the Company
which may significantly limit or prohibit, among other things, the
Company's ability to incur additional indebtedness, create liens, sell
capital shares of subsidiaries, make certain investments, engage in
mergers and acquisitions, purchase and sell vessels, enter into time or
consecutive voyage charters or pay dividends without the consent of our
lenders. In addition, our lenders may accelerate the maturity of
indebtedness under our financing agreements and foreclose upon the
collateral securing the indebtedness upon the occurrence of certain
events of default, including our failure to comply with any of the
covenants contained in our financing agreements. Various debt agreements
of the Company contain certain covenants which require compliance with
certain financial ratios. Such ratios include equity ratio covenants,
minimum value clauses, and minimum free cash restrictions. As of
December 31, 2001 and 2000, the Company complied with all the debt
covenants of its various debt agreements.
Metrogas Holdings ("Metrogas"), a company related to the Company's
Chairman, had outstanding as of December 31, 1999 a specific loan of
$54.0 million (the "Metrogas Loan") provided to the Company. The
Metrogas Loan was converted to a separate long-term financing facility
during 1999. The Metrogas loan was repaid in two tranches during 2000.
In February 2000 $30 million were converted into shares in the Company,
as described in Note 20. In August 2000 the remaining $24 million plus
interest accrued was repaid.
The acquisition of Golden Ocean was conducted so that the loans held by
Golden Ocean's subsidiaries are non-recourse to Frontline. This implies
that any guarantees on behalf of a Golden Ocean subsidiary are issued
only by either Golden Ocean and or other Golden Ocean subsidiaries.
Frontline's exposure to Golden Ocean is therefore limited to $15 million
injected as equity, a $50 million term loan and a $10 million revolving
credit facility provided by Frontline to Golden Ocean. As of December
31, 2001 the amounts outstanding under the term loan and revolving
credit facility was $2.49 million and $nil, respectively.
In connection with the transfer of the share capital, or part of the
share capital, in six single purpose entities, each an owner of a VLCC,
from Golden Ocean to the direct ownership of Frontline Ltd in late 2001,
the Company has issued guarantees which replaced guarantees previously
issued by Golden Ocean.
At December 31, 2001, a 100 per cent owned subsidiary of Golden Ocean,
Golden Stream Corporation was party to a loan agreement with Griffin
Shipping Inc. ("Griffin"). The amount outstanding under this loan
agreement was $48,068,000, which was fully repayable on March 30, 2002.
Repayment of the loan is secured by a first mortgage on the vessel
Golden Stream, an assignment of earnings and a pledge of the Company's
shares in Golden Stream Corporation and a performance guarantee issued
by Golden Ocean. Golden Stream Corporation failed to repay the loan on
the due date. Non-payment constitutes a default under the loan agreement
and entitles Griffin to exercise its rights under the loan security
documents, which include taking possession of the vessel Golden Stream,
taking control of Golden Stream Corporation and claiming under the
performance guarantee issued by Golden Ocean.
Griffin has not declared a default under the loan agreement but is
working with the Company's management to renegotiate payment terms and
re-schedule payment of the outstanding amount of $48,068,000. If Griffin
were to declare a default, cross default provisions in other loan
agreements related to Golden Ocean and its subsidiaries could cause all
loans to be repayable immediately. The Golden Ocean management is
confident of achieving a satisfactory agreement with Griffin, which will
involve re-scheduling payment of the outstanding amount in line with
projected cashflows. There is no guarantee, however, that a satisfactory
agreement with Griffin will be achieved and in the event that it is not,
Golden Ocean would be forced to sell assets to pay any shortfall due to
Griffin. There is no guarantee that Golden Ocean would be able to raise
sufficient capital through asset sales to pay any shortfall due to
Griffin. These conditions give rise to substantial doubt as to the
ability of Golden Ocean to continue to operate as a going concern. At
December 31, 2001, Frontline's exposure in the event of a liquidation of
Golden Ocean is a maximum of $15 million in equity and $2.49 million in
debt due from Golden Ocean.
20. SHARE CAPITAL
Authorised share capital:
(in thousands of $) 2001 2000
------------------------------------------------------------------------
125,000,000 ordinary shares of $2.50 each 312,500 312,500
========================================================================
Issued and fully paid share capital:
(in thousands of $, except share numbers) 2001 2000
------------------------------------------------------------------------
76,407,566 ordinary shares of $2.50 each 191,019 195,172
(2000 - 78,068,811)
========================================================================
The Company's ordinary shares are listed on the New York Stock Exchange,
the Oslo Stock Exchange and the London Stock Exchange. The Company's
ordinary shares traded on the Nasdaq National Market in the form of ADSs
until August 3, 2001. Each ADS represented one ordinary share. On August
3, 2001 the Company delisted its ADSs from the Nasdaq National Market
and the ADR program was terminated on October 5, 2001. The Company's
ordinary shares were listed on the New York Stock Exchange on August 6,
2001.
Of the authorised and unissued ordinary shares at December 31, 2001,
360,300 are reserved for issue pursuant to subscription under options
granted under the Company's share option plans. As at December 31, 2001,
except for the shares which would be issued on the exercise of the
options, no unissued share capital of the Company is under option or is
conditionally or unconditionally to be put under option.
On August 21, 2000, at the Annual General Meeting of the Company, the
stockholders approved an increase in the Company's authorised share
capital from 100,000,000 Ordinary Shares of $2.50 par value each to
125,000,000 Ordinary Shares of $2.50 par value each.
On December 20, 1999 the Company issued 1,910,000 ordinary shares at a
price of NOK 37.00 per share in connection with the acquisition of a
Suezmax newbuilding. Frontline had a one year call option to buy back
430,000 of these shares for NOK 37.00 per share plus 10 per cent
interest per annum compensation. In September 2000, Frontline exercised
its call option and bought back these 430,000 shares. In accordance with
Bermuda law, these shares were cancelled on acquisition by the Company.
On February 25, 2000, the Company issued 3,500,000 ordinary shares at
NOK 57.50 per share in a private placement to institutional
shareholders. At the same time, $30 million of the Metrogas Loan was
converted to equity, resulting in the issuance of 4,350,000 ordinary
shares at an issue price of NOK 57.50 per share. In connection with this
conversion, Metrogas offered 2,000,000 of the resulting ordinary shares
to existing Frontline shareholders and warrant holders, excluding US
persons.
On March 30, 2000 Frontline entered into an agreement with Wilh.
Wilhelmsen ASA to buy the two 1993-built VLCCs, Tartar and Tarim. The
agreed purchase price of $45 million per ship was paid by $62 million in
cash and through the issuance of 2,957,500 Frontline shares. The shares
were issued at NOK 80.00 per share.
On May 25, 2000 the Company issued 3,000,000 ordinary shares at $10.15
per share in a private placement to a group of international
institutional investors. The proceeds of the issue were used to part
finance the acquisition of a newbuilding VLCC, subsequently named Front
Tina.
On June 20, 2000, the Company issued 4,000,000 ordinary shares at a
price of NOK 104.5 per share in a private placement to a group of
international institutional investors. Part of the proceeds of the issue
were used to part finance the acquisition of two secondhand Suezmax
tankers, subsequently named Front Ardenne and Front Brabant.
On July 17, 2000, the Company issued 68,700 ordinary shares in
connection with the acquisition of Golden Ocean Bonds. On October 16,
2000, the Company issued 1,245,998 ordinary shares in connection with
the acquisition of Golden Ocean.
In 2000, the Company issued 124,558 ordinary shares pursuant to
subscriptions under warrants that could be exercised at any time up to
December 31, 2003 and issued a total of 8,211 ordinary shares pursuant
to subscriptions under warrants that can be exercised at any time up to
May 11, 2001 (see Note 21). During 2001 the Company issued 129,500
shares in connection with the exercise of employee share options and
issued 416,555 ordinary shares pursuant to subscriptions under warrants
that can be exercised at any time up to May 11, 2001 (see Note 21).
In 2000 and 2001, the Company bought back and cancelled a total of
1,719,845 and 2,207,300 of its ordinary shares, respectively, in a
number of separate market transactions. These share buybacks were made
within a Board of Directors authority to buy back up to 7,500,000
ordinary shares. In September 2000, the Company bought back and
cancelled 430,000 of its ordinary shares at NOK 39.45 per share. These
shares were related to an option the Company secured in connection with
issuing 1,910,000 shares as part consideration for a Suezmax newbuilding
contract.
In September 2001 the Company established a twelve month facility for a
Stock Indexed Total Return Swap Programme or Equity Swap Line with the
Bank of Nova Scotia ("BNS"), whereby the latter acquires shares in the
Company, and the Company carries the risk of fluctuations in the share
price of those acquired shares. BNS is compensated at their cost of
funding plus a margin. At December 31, 2001 BNS had acquired a total of
2,100,000 Frontline shares under the Programme.
A number of the Company's bank loans contain a clause that permit
dividend payments subject to the Company meting certain equity ratio and
cash covenants immediately after such dividends being paid.
21. WARRANTS AND SHARE OPTION PLANS
At the effective date of the Amalgamation, Frontline recorded warrants
to purchase 124,558 shares (restated from 1,245,588) of LOF and options
to purchase 288,000 shares (restated from 2,880,000) of LOF. These
warrants and share options have been recorded at fair value, calculated
using the Black-Scholes option pricing model, as an adjustment to the
purchase price on the acquisition of LOF. These warrants entitle the
holder to subscribe for one ordinary share in the Company at a price of
(pound)4.00 and are exercisable at any time up to December 31, 2003.
During 2000, all of these warrants were exercised.
Pursuant to the terms of the Amalgamation Agreement, warrants to
purchase 2,600,000 shares (restated from 26,000,000) in the Company were
granted on the date of Amalgamation. These warrants have been recorded
at an estimated fair value at November 1, 1997 using the Black-Scholes
option pricing model. These warrants entitle the holder to subscribe for
one ordinary share in the Company at a price of $15.91 and were
exercisable at any time up to May 11, 2001. On May 11, 2001 any warrants
that had not been exercised expired.
The following summarises the warrant transactions:
Number
of Shares
----------------------------------------------------------------------
Warrants outstanding at December 31, 1999 2,724,558
Exercised or cancelled (132,826)
Warrants outstanding at December 31, 2000 2,591,732
Exercised or cancelled (2,591,732)
----------------------------------------------------------------------
Warrants outstanding at December 31, 2001 -
======================================================================
The Company has in place a Bermuda Share Option Plan (the "Bermuda
Plan") and a United Kingdom Share Option Plan (the "U.K. Plan"). Under
the terms of the plans, the exercise price set on the grant of share
options may not be less than the average of the fair market value of the
underlying shares for the three dealing days before the date of grant.
The number of shares granted under the plans may not in any ten year
period exceed 7 per cent of the issued share capital of the Company. No
consideration is payable for the grant of an option. In 2001, the
Bermuda Plan was amended to provide that the exercise price set on the
grant can subsequently be adjusted so that dividends paid after the date
of grant will be deducted from the exercise price.
Under the Bermuda Plan, options may be granted to any director or
eligible employee of the Company or subsidiary. Options are exercisable
for a maximum period of nine years following the first anniversary date
of the grant.
The following summarises the share options transactions relating to the
Bermuda Plan:
(in thousands, except per share data) Shares Weighted
average
exercise
price
----------------------------------------------------------------------
Options outstanding at December 31, 1998 129 $ 14.45
Granted 300 $ 5.53
Cancelled (16) $ 12.58
Options outstanding at December 31, 1999 413 $ 7.89
Granted 15 $ 6.92
Cancelled (109) $ 14.77
Options outstanding at December 31, 2000 319 $ 5.50
Granted 194 $ 11.76
Exercised (130) $ 3.49
Cancelled (23) $ 11.76
----------------------------------------------------------------------
Options outstanding at December 31, 2001 360 $ 7.71
======================================================================
Options exercisable at:
December 31, 1999 113 $ 14.71
======================================================================
December 31, 2000 4 $ 13.21
======================================================================
December 31, 2001 190 $ 4.07
======================================================================
Under the U.K. Plan, options may be granted to any full-time director or
employee of the Company or subsidiary. Options are only exercisable
during the period of seven years following the third anniversary date of
the grant.
The weighted average fair value of options granted under the Bermuda
Plan in the year ended December 31, 2001, 2000 and 1999 was $6.79, $3.27
and $2.61, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing
model using the following weighted average assumptions:
(in thousands ) 2001 2000 1999
------------------------------------------------------------------------
Risk free interest rate 4.9% 6.6% 6.6%
Expected life 5 years 3 years 3 years
Expected volatility 60% 63% 63%
Expected dividend yield 0% 0% 0%
The options outstanding under the Bermuda Plan as at December 31, 2001
have exercise prices between $3.41 and $12.32. The options that were not
exercisable at December 31, 2001, vested on January 22, 2002. The
options outstanding under the Bermuda Plan as at December 31, 2001 have
a weighted average contractual life of 4.01 years.
At December 31, 2001 and 2000 there were no options remaining
outstanding under the U.K. Plan.
In 2001, the Company has recorded compensation expense of $1.2 million
in connection with share options issued in 1999, 2000 and 2001. The
Company had previously recorded no compensation expense for the issuance
of share options in 2000 and 1999. The share options assumed in
connection with the Amalgamation with LOF have been treated as an
adjustment to the purchase price. Had the compensation costs for these
plans been determined consistent with the fair value method recommended
in SFAS 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts in 2001, 2000 and 1999:
(in thousands, except per share data) 2001 2000 1999
(restated)
----------------------------------------------------------------------
Net income
As reported 382,728 313,867 (86,896)
Pro-forma 382,598 313,818 (87,679)
Basic earnings (loss) per share
As reported $ 4.99 $ 4.28 $ (1.76)
Pro-forma $ 4.99 $ 4.28 $ (1.77)
Diluted earnings (loss) per share
As reported $ 4.98 $ 4.27 $ (1.76)
Pro-forma $ 4.98 $ 4.27 $ (1.77)
22. FINANCIAL INSTRUMENTS
Interest rate risk management
In certain situations, the Company may enter into financial instruments
to reduce the risk associated with fluctuations in interest rates. The
Company has a portfolio of swaps that swap floating rate interest to
fixed rate, which from a financial perspective hedge interest rate
exposure. The Company does not hold or issue instruments for speculative
or trading purposes. The counterparties to such contracts are The Chase
Manhattan Bank (J.P. Morgan), Nordea Bank Norge, Credit Agricole
Indosuez, Deutsche Schiffsbank, Midland Bank (HSBC), Den norske Bank and
Skandinaviska Enskilda Banken. Credit risk exists to the extent that the
counterparties are unable to perform under the contracts.
The Company manages its debt portfolio with interest rate swap
agreements in U.S. dollars to achieve an overall desired position of
fixed and floating interest rates. The Company has entered into the
following interest rate swap transactions involving the payment of fixed
rates in exchange for LIBOR:
Principal Inception Maturity Fixed
Date Date Interest
Rate
-----------------------------------------------------------------------------------
(in thousands of $)
$50,000 January 2001 January 2006 5.635%
$50,000 February 1998 February 2003 5.685%
$25,000 August 1998 August 2003 5.755%
$25,000 August 1998 August 2003 5.756%
$50,000 February 1998 February 2003 5.775%
$50,000 March 1998 March 2003 5.885%
$54,585 reducing monthly to $29,793 March 1998 March 2006 7.288%
$58,243 reducing monthly to $17,527 September 1998 August 2008 7.490%
As at December 31, 2001, the notional principal amounts subject to such
swap agreements was $362,828,000 (2000 - $373,476,000).
Foreign currency risk
The majority of the Company's transactions, assets and liabilities are
denominated in U.S. dollars, the functional currency of the Company.
Certain of the Company's subsidiaries report in Sterling, Swedish kronor
or Norwegian kroner and risks of two kinds arise as a result: a
transaction risk, that is, the risk that currency fluctuations will have
a negative effect on the value of the Company's cash flows; and a
translation risk, the impact of adverse currency fluctuations in the
translation of foreign operations and foreign assets and liabilities
into U.S. dollars for the Company's consolidated financial statements.
Certain of the Company's subsidiaries have Yen denominated long-term
debt which as of December 31, 2001 stood at Yen 14,378,176,578 and
charter contracts denominated in Yen with contracted payments as set
forth in Note 7. Certain associated companies also have Yen denominated
debt, the Company's share of this debt amounted to Yen 9,778,862,882 as
December 31, 2001. There is a risk that currency fluctuations will have
a negative effect on the value of the Company's cashflows. The Company
has not entered into derivative contracts for either transaction or
translation risk. Accordingly, such risk may have an adverse effect on
the Company's financial condition and results of operations.
Forward freight contracts
The Company may enter into forward freight contracts in order to manage
its exposure to the risk of movements in the spot market for certain
trade routes. Market risk exists to the extent that spot market
fluctuations have a negative effect on the Company's cash flows and
consolidated statements of operations.
Fair Values
The carrying value and estimated fair value of the Company's financial
instruments at December 31, 2001 and 2000 are as follows:
2001 2001 2000 2000
(in thousands of $) Carrying Value Fair Value Carrying Fair Value
Value
--------------------------------------------------------------------------------------------
Non-Derivatives:
Cash and cash equivalents 178,176 178,176 103,514 103,514
Restricted cash 11,101 11,101 12,580 12,580
Marketable securities 1,159 1,159 3,713 3,713
Short-term debt 227,597 227,597 212,767 212,767
Long-term debt 1,164,354 1,164,354 1,331,372 1,331,372
Derivatives:
Interest rate swap transactions (14,723) (14,723) - (210)
Equity Swap Line 4,412 4,412 - -
The carrying value of cash and cash equivalents, which are highly
liquid, is a reasonable estimate of fair value.
The estimated fair value of marketable securities is based on the quoted
market price of these or similar instruments when available. The
estimated fair value for floating rate long-term debt is considered to
be equal to the carrying value since it bears variable interest rates,
which are reset on a quarterly basis.
The fair value of interest rate swaps is estimated by taking into
account the cost of entering into interest rate swaps to offset the
Company's outstanding swaps.
Fair value of the Equity Swap Line (see Note 20) is based on the quoted
market price of the Company's shares held by the Bank of Nova Scotia
minus the acquisition cost of those shares.
Fair value of forward freight contracts is estimated by taking into
account the cost of entering into forward freight contracts to offset
the Company's outstanding contracts.
Concentrations of risk
There is a concentration of credit risk with respect to cash and cash
equivalents to the extent that substantially all of the amounts are
carried with the Bank of America N.A., Skandinaviska Enskilda Banken,
Nordlandsbanken, Den norske Bank and Nordea Bank Norge. However, the
Company believes this risk is remote as these banks are high credit
quality financial institutions.
The majority of the vessels' gross earnings are receivable in U.S.
dollars. In 2001, 2000 and 1999, no customer accounted for more than 10
per cent or more of freight revenues.
23. RELATED PARTY TRANSACTIONS
Management believes transactions with related parties are under terms
similar to those that would be arranged with other parties.
During 1996, 1997 and January 1998, Frontline received options to assume
newbuilding contracts for the construction and purchase of five Suezmax
tankers at the Hyundai Heavy Industries Co. Ltd. shipyard in South Korea
for delivery in 1998 and 2000 from single-ship owning companies
affiliated with Hemen Holding Ltd. ("Hemen"). Hemen is the Company's
largest shareholder and is indirectly controlled by Mr. John Fredriksen,
Chairman and Chief Executive Officer of the Company. The first three of
the Suezmax tankers were delivered during 1998. The remaining two
vessels were delivered in February and April, 2000.
During 1997, Frontline received options to assume from other Hemen
affiliated parties, five newbuilding contracts for the construction and
purchase of five VLCC tankers. These options were exercised in March
1998. The first two VLCC newbuildings were delivered in 1998, the third
in January 1999 and the remaining two were delivered in mid 1999.
In May 1998, the Company acquired control of three shipowning and/or
leasing structures which are organised in a non-recourse entity,
Independent Tankers Corporation ("ITC"). The Company acquired ITC for
$9.5 million. The Company's investment in ITC was subsequently sold to
Hemen for $9.5 million with effect from July 1, 1998. The Company has
remained as the manager of the underlying assets and has received a five
year fair value call option to buy back ITC.
In June 1998, the Company obtained a loan of $87.5 million from
Metrogas, the Metrogas Loan, to finance the acquisition of the five VLCC
newbuilding contracts described above. At December 31, 1998, an amount
of $89 million was outstanding in respect of the Metrogas Loan,
including interest accrued thereon. On September 30, 1999, $35 million
of the $89 million Metrogas Loan was converted to equity by the issuance
of 8,230,000 shares at an issue price of NOK 33.00 per share. In
connection with this conversion, Metrogas offered $15 million of the
resulting ordinary shares to existing Frontline shareholders and warrant
holders, excluding US persons. In connection with this secondary
offering by Metrogas, Frontline bore costs of the offering of $15,000.
At December 31, 1999, an amount of $56.7 million was outstanding in
respect of the Metrogas Loan, including interest accrued thereon. On
February 25, 2000, $30 million of the Metrogas Loan was converted to
equity, resulting in the issuance of 4,350,000 ordinary shares at an
issue price of NOK 57.50 per share. In connection with this conversion,
Metrogas offered 2,000,000 of the resulting ordinary shares to existing
Frontline shareholders and warrant holders, excluding US persons. In
August 2000, the outstanding principal amount of $24.0 on the Metrogas
Loan was repaid in full, together with $4.3 million accrued thereon. In
the years ended December 31, 2000 and 1999, the Metrogas Loan bore
interest at the rate of 8.0 per cent and the Company incurred interest
costs of $1.6 million and $5.4 million, respectively, of which $2.7
million was expensed in 1999.
In addition to the lending arrangement described above, Hemen affiliated
parties have, during 1998 and 1999, provided additional short term
financing to the Company. Such financing bore interest at a rate of
between 6.75 and 8.8 per cent per annum in 2000 and 6.75 per cent in
1999. Interest expense recorded by the Company in 2000 in respect of
such financing was $1,095,380 (1999 - $428,291).
In September 2000 Frontline acquired a 1993-built VLCC, which was named
Front Ace from a company affiliated with Hemen. This vessel was acquired
for a price of $53 million which was based on three independent
valuations less a $1 million discount compared to appraised market
value.
On December 5, 2000, a subsidiary of Frontline made a short-term loan of
$20 million to World Shipholding Ltd., a company affiliated with Hemen.
This loan was repaid in full on February 6, 2001 together with fees and
interest of $349,680, of which $115,000 was recorded by the Company in
2000 and $234,680 was recorded in 2001.
On December 28, 2000, the Company and Overseas Shipholding Group Inc.
(OSG) entered into an agreement with Osprey Maritime Limited. ("Osprey")
to acquire the two VLCCs Golar Edinburgh and Golar Dundee. The agreement
was signed on behalf of a joint venture company to be owned 50.1 per
cent by the Company and 49.9 per cent by OSG. The purchase price for the
vessels, which were delivered in the first quarter of 2001 was $53
million each. At December 31, 2000, World Shipholding Ltd. held more
than 50 per cent of the shares in Osprey. In February 2001, World
Shipholding Ltd. took control of Osprey.
In February 2001, the Company acquired newbuilding contracts for the
construction and purchase of three VLCC tankers at the Hitachi shipyard
in Japan for delivery in 2002 from Seatankers Management Co. Ltd, a
company affiliated with Hemen. These contracts were acquired for the
original contract pirce of $72 million each plus $0.5 million per
contract.
In the year ended December 31, 2001, a subsidiary of Frontline Ltd
provided services to Seatankers Ltd, a company affiliated with Hemen.
These services include management support and administrative services.
In the year ended December 31, 2001, the Company has earned management
fees from Seatankers Ltd of $277,855 as income. As at December 31, 2001
an amount of $266,930 was due from Seatankers Ltd in respect of these
fees and for the reimbursement of costs incurred on behalf of Seatankers
Ltd.
In the year ended December 31, 2001, Frontline has provided management
support and administrative services to a newbuilding project known as
the Uljanik Project. As at December 31, 2001, an amount of $47,993 was
due from the Uljanik Project. The Uljanik Project is owned by
Seatankers, which is affiliated with Hemen.
In the year ended December 31, 2001, a subsidiary of Frontline Ltd
provided services to Golar LNG Limited. Osprey, which is controlled by
World Shipholding, holds 50.01 per cent of Golar LNG. The services
provided include management support, corporate services and
administrative services. In the year ended 31 December 2001, management
fees from Golar LNG of $258,960 have been earned by the Company. As at
December 31 2001, an amount of $547,966 was due from Golar LNG in
respect of these fees and for the reimbursement of costs incurred on
behalf of Golar LNG.
24. ACQUISITIONS
In April 2001, the Company announced an offer for all of the shares of
Mosvold Shipping Limited ("Mosvold"), a Bermuda company whose shares
were listed on the Oslo Stock Exchange. Through a combination of shares
acquired and acceptances of the offer, as at May 31 2001, Frontline
controlled 97 per cent of the shares of Mosvold. The remaining 3 per
cent of the shares of Mosvold were acquired during 2001 through a
compulsory acquisition. The total acquisition price paid was
approximately $70.0 million. The difference between the purchase price
and the net assets acquired, has been assigned to the identifiable
long-term assets of Mosvold.
On October 10, 2000, Frontline took control of Golden Ocean pursuant to
a Plan of Reorganisation (See Note 1). The total acquisition price paid,
including amounts paid to settle allowed claims, was approximately $63.0
million, including 1,245,998 shares issued at a price of $15.65 per
share. The cash component of the acquisition was funded primarily from
working capital. The acquisition of Golden Ocean has been accounted for
using the purchase method. Prior to the effective date of acquisition,
Golden Ocean adopted fresh-start reporting in accordance with the
provisions of Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The
application of the provisions of SOP 90-7 resulted in the preparation of
a reorganised balance sheet at October 10, 2000, concurrent with the
emergence from bankruptcy protection. The difference between the
purchase price and the net assets acquired, has been recorded as
goodwill. This goodwill is being amortised over the average remaining
life of the identifiable long-term assets acquired which is
approximately 22 years.
In September 1999, Frontline acquired shares in ICB sufficient to
provide voting control of the company. This acquisition followed a
tender offer which commenced in September, 1997 and further acquisitions
of ICB Shares in 1998 and in the first half of 1999 (see Note 1). The
acquisition of ICB was primarily funded by loans from Chase. The
investment in ICB in 1997 and 1998 was originally accounted for as an
available-for-sale security in accordance with SFAS 115. Following
Frontline obtaining control of ICB, the financial statements for 1997
and 1998 have been restated and the investment accounted for using the
equity method. The results of ICB have been consolidated with effect
from January 1, 1999. For the period from the initial acquisition of ICB
Shares in 1997 to September 30, 1999, the principles of step-by-step
acquisition accounting have been applied. At each step of the
acquisition, the purchase price has been allocated to the net assets
acquired based on their estimated fair values. The difference between
the purchase price at each step, and the net assets acquired, has been
assigned to the identifiable long-term assets of ICB or has been
recorded as goodwill, as appropriate.
The following table reflects unaudited pro-forma combined results of
operations of the Company on the basis that the acquisition of Mosvold
had taken place at January 1, 2000:
(in thousands of $, except per share data) 2001 2000
(Unaudited) (unaudited)
------------------------------------------------------------------------
Net operating revenues 655,527 616,367
Net income 384,453 319,883
Basic earnings per share $5.01 $4.36
Diluted earnings per share $5.00 $4.35
In management's opinion, the adoption of fresh-start accounting in the
financial statements of Golden Ocean means that any presentation of
unaudited pro-forma combined results of operations would not provide any
meaningful information to the readers of these financial statements and
no presentation has been made accordingly. In management's opinion, the
unaudited pro-forma combined results of operations are not indicative of
the actual results that would have occurred had the acquisition of ICB
been consummated at the beginning of 1998 or of future operations of the
combined companies.
25. COMMITMENTS AND CONTINGENCIES
Assets Pledged
(in thousands of $) 2001 2000
------------------------------------------------------------------------
Ship mortgages 2,195,752 1,569,848
Restricted bank deposits 11,101 12,580
------------------------------------------------------------------------
2,206,853 1,582,428
========================================================================
Other Contractual Commitments
The Company insures the legal liability risks for its shipping
activities with Assuranceforeningen SKULD, Sveriges Angfartygs Assurans
Forening (The Swedish Club), and the United Kingdom Mutual Steamship
Assurance Association (Bermuda), all mutual protection and indemnity
associations. As a member of these mutual associations, the Company is
subject to calls payable to the associations based on the Company's
claims record in addition to the claims records of all other members of
the associations. A contingent liability exists to the extent that the
claims records of the members of the associations in the aggregate show
significant deterioration, which result in additional calls on the
members.
The Company's subsidiary, Golden Ocean Group Limited, has guaranteed the
yen and dollar long-term borrowings of associated companies for amounts
of (Y)17,152,359,010, which is equivalent to $28,904,000 at December 31,
2001.
Certain of the Company's subsidiaries have contractual commitments to
participate in the profits and losses of the time charterer's
subcharters of the vessel Channel Poterne and in the profits only of the
vessels New Vanguard, New Vista and Channel Alliance. An associated
company participates in the time charterer's profits and losses on
subcharters of the vessel Pacific Lagoon. Another associated company
participates in the charterer's profits on subcharters of the vessel New
Circassia. Revenues or expenses arising from these arrangements have
been accrued to the balance sheet date.
The charterers of four of the Company's vessels have contractual rights
to participate in the profits on sale of those vessels. In the case of
the Channel Poterne and Cos Hero, the charterer is entitled to 50 per
cent of the profit realised on any qualifying sale.. The Cos Hero may
only be sold if the profit from sale will exceed $3.0 million. Profit is
defined as sale proceeds less debt outstanding in the relevant profit
share agreements. If the New Vanguard or New Vista are sold, the
charterer is entitled to claim up to $1 million to cover losses incurred
on subcharters of the vessel. Any remaining profit is to be split 60:40
in favour of the owner.
Certain charterers of the Company's vessels hold purchase options
denominated in yen to purchase the Channel Poterne, Golden Daisy, Golden
Rose, Golden Aloe, Golden Protea, Golden Disa, Golden Nerina and Navix
Astral. All of the purchase options reduce on a sliding scale over the
term of the related charter and are at strike prices which are in excess
of the related debt on the vessel. The option to purchase the Channel
Poterne is exercisable at any time. All other options are exercisable at
any time after the end of the seventh year of the charter. The Golden
Daisy and Golden Rose are owned by associated companies.
At December 31, 2001 the Company had non-cancellable contracts for the
construction of eight newbuilding tankers, including two in which the
Company has a 33.33 per cent interest. These eight vessels are scheduled
for delivery between early 2002 and June 2003. At December 31, 2001, the
Company is committed to make further instalments under these contracts
of $356.6 million in connection with the wholly owned newbuilding
contracts and $120.2 million in connection with the interest in the
joint venture vessels. Bank financing of $105.0 million has been
arranged for the joint venture vessels and $50 million for the first of
the six wholly-owned vessels.
In 2001, the Company received an adverse decision from the Swedish
Administrative Court of Appeal with respect to a tax dispute with the
Swedish tax authorities relating to ICB. The dispute arises from a
limited partnership in which ICB invested, and which sold a vessel on
the exercise of a purchase option by a third party in 1990. The Swedish
tax authorities assessed an "exit" tax on ICB and the other members of
the limited partnership and also sought to tax ICB and the other members
for income earned by the partnership. ICB has contested these
assessments. The Swedish Administrative Court of Appeal upheld a
decision by a County Administrative Court finding ICB liable for these
assessments. Including accrued interest, the taxes found due by the
court total approximately $SEK90 million, or $8.5 million at the
exchange rate prevailing at December 31, 2001 ($ at the at the exchange
rate prevailing at June 30, 2002). ICB is appealing this judgement. In
the event that the appeal is not successful, the tax and accrued
interest will be accounted for as an adjustment to the purchase price of
ICB.
26. SUPPLEMENTAL INFORMATION
Non-cash investing and financing activities included the following:
(in thousands of $) 2001 2000 1999
(restated)
--------------------------------------------------------------------------------------------
Unrealised appreciation (depreciation) on investments
Recorded directly to equity (7,960) 295 (2,843)
In connection with purchase of fixed assets:
Shares issued - 28,000 9,000
Acquisition of businesses:
Assets acquired, including goodwill 83,403 533,685 652,008
Liabilities assumed and incurred 14,033 470,674 391,257
Conversion of equity method investment in ICB - - 236,051
Minority interest recorded 1,152 - 150,700
Shares issued - 20,350 -
27. SUBSEQUENT EVENTS
In the first quarter of 2002, Frontline acquired from a third party, two
companies that owned four drybulk carriers that were chartered in by the
Company under capital leases. These drybulk carriers were refinanced by
traditional bank financing.
In the first quarter of 2002, the Company took delivery of two VLCC
newbuildings, Front Eagle and Front Serenade. These vessels were
financed by traditional bank financing.
In the first quarter of 2002, the Company together with joint venture
partners, took delivery of one VLCC newbuilding, Tanabe, in which the
Company's has a 33.33 per cent interest.
In May 2002, it was announced that the Company would leave the Tankers
Pool. The commercial operations of the Company's VLCCs will be brought
back in-house under the Company's direct management.
In June 2002, the Company issued a total of 260,000 stock options under
the Bermuda Plan to employees at an exercise price of $11.90.
ITEM 19. EXHIBITS
Number Description of Exhibit
------ ----------------------
1.1* Memorandum of Association of the Company, incorporated by
reference to Exhibit 3.1 of the Company's Registration
Statement on Form F-1, Registration No. 33-70158 filed on
October 12, 1993 (the "Original Registration Statement").
1.2 Amended and Restated Bye-Laws of the Company as adopted by
shareholders on October 26, 2001.
2.1* Form of Ordinary Share Certificate, incorporated by reference
to Exhibit 4.1 of the Original Registration Statement.
2.2* Form of Deposit Agreement dated as of November 24, 1993, among
Frontline Ltd. (F/K/A London & Overseas Freighters Limited),
The Bank of New York as Depositary, and all Holders from time
to time of American Depositary Receipts issued thereunder,
including form of ADR, incorporated by reference to Exhibit 4.2
of the Original Registration Statement.
2.3* Form of Deposit Agreement dated as of November 24, 1993, as
amended and restated as of May 29, 2001, among Frontline Ltd.
(F/K/A London & Overseas Freighters Limited), The Bank of New
York as Depositary, and all Holders from time to time of
American Depositary Receipts issued thereunder, including form
of ADR, incorporated by reference to Exhibit 2 of the Company's
Annual Report on Form 20-F, filed on June 13, 2001 for the
fiscal year ended December 31, 2000.
2.4* Rights Agreement (the "Rights Agreement") between the Company
and the Bank of New York incorporated by reference to Exhibit
1.3 of the Company's Registration Statement on Form 8-A, File
No.0-22704 filed on December 9, 1996.
2.5* Amendment No. 1 to the Rights Agreement incorporated by
reference to Exhibit 4.3 of the Amalgamation Registration
Statement.
2.6* The Subregistrar Agreement related to the registration of
certain securities issued by Frontline Ltd. in the Norwegian
Registry of Securities between Frontline Ltd. and Christiania
Bank og Kreditkasse ASA together with the Form of Warrant
Certificate and Conditions attaching thereto, incorporated by
reference to Exhibit 1.1 of the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 1998.
4.1* Form of United Kingdom Share Option Plan, incorporated by
reference to Exhibit 10.1 of the Original Registration
Statement.
4.2* Form of Bermuda Share Option Plan, incorporated by reference to
Exhibit 10.2 of the Original Registration Statement.
4.3* The Subordinated Convertible Loan Facility Agreement USD
89,000,000 dated July 13, 1999, between Frontline Ltd. as
Borrower and Metrogas Holdings Inc. as Lender, incorporated by
reference to Exhibit 2.1 of the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 1998.
4.4* Master Agreement, dated September 22, 1999, among Frontline AB
and Frontline Ltd (collectively "FL"), Acol Tankers Ltd.
("Tankers"), ICB Shipping AB ("ICB"), and Ola Lorentzon (the
"Agent"), incorporated by reference to Exhibit 3.1 of the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 1999.
8.1 Subsidiaries of the Company.
10.1* The Company's Plan of Reorganization for Golden Ocean Group
Limited, Golden Ocean Tankers Limited and Channel Rose Holdings
Inc. under Chapter 11 of the United States Bankruptcy Code
dated as of July 7, 2000, as amended.
* Incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorised.
Frontline Ltd.
(Registrant)
Date June 28, 2002 By /s/ Kate Blankenship
Kate Blankenship
Company Secretary
02089.0009 #334399