UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F/A
(Mark One)
[_] REPORT 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, 2004
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 000-50859
----------------------------------------------------------
TOP TANKERS INC.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
--------------------------------------------------------------------------------
(Translation of Registrant's name into English)
Republic of The Marshall Islands
--------------------------------------------------------------------------------
(Jurisdiction of incorporation or organization)
109-111 Messogion Avenue, Politia Centre, Athens 11526 Greece
--------------------------------------------------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to section 12(b) of the Act.
NONE
--------------------------------------------------------------------------------
Securities registered or to be registered pursuant to section 12(g) of the Act.
Name of each exchange
Title of each class on which registered
Common Stock, par value of $0.01 per share Nasdaq National Market
--------------------------------------------------------------------------------
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
--------------------------------------------------------------------------------
(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.
27,830,990 shares of Common Stock, par value $0.01 per share.
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]
TABLE OF CONTENTS
Page
Item 1. Identity of directors, senior management and advisers................................1
Item 2. Offer statistics and expected timetable..............................................1
Item 3. Key information......................................................................1
Item 4. Information on the company..........................................................17
Item 5. Operating and financial review and prospects........................................28
Item 6. Directors, senior management and employees..........................................42
Item 7. Major shareholders and related party transactions...................................46
Item 8. Financial information...............................................................47
Item 9. The offer and listing...............................................................47
Item 10. Additional information..............................................................48
Item 11. Quantitative and qualitative disclosures about market risk..........................59
Item 12. Description of securities other than equity securities..............................59
Item 13. Defaults, dividend arrearages and delinquencies.....................................60
Item 14. Material modifications to the rights of security holders and use of proceeds........60
Item 15. Controls and procedures.............................................................60
Item 16a. Audit committee financial expert....................................................60
Item 16b Code of ethics......................................................................60
Item 16c. Principal accountant fees and services..............................................61
Item 16d. Exemptions from the listing standards for audit committees..........................61
Item 16e. Purchases of equity securities by the issuer and affiliated purchases...............61
Item 17 Financial statements................................................................62
Item 18. Financial statements................................................................62
Item 19. Exhibits..............................................................................
Cautionary Statement Regarding Forward-Looking Statements
This report includes assumptions, expectations, projections, intentions and
beliefs about future events. These statements are intended as "forward-looking
statements". We caution that assumptions, expectations, projections, intentions
and beliefs about future events may and often do vary from actual results and
the differences can be material.
All statements in this document that are not statements of historical fact
are forward-looking statements. Forward-looking statements include, but are not
limited to, such matters as:
o future operating or financial results;
o statements about planned, pending or recent acquisitions, business
strategy and expected capital spending or operating expenses,
including drydocking and insurance costs;
o statements about crude oil and refined petroleum products tanker
shipping market trends, including charter rates and factors affecting
supply and demand;
o our ability to obtain additional financing;
o expectations regarding the availability of vessel acquisitions; and
o anticipated developments with respect to pending litigation.
The forward-looking statements in this report are based upon various
assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, management's examination of historical operating
trends, data contained in our records and other data available from third
parties. Although TOP Tankers Inc. believes that these assumptions were
reasonable when made, because these assumptions are inherently subject to
significant uncertainties and contingencies which are difficult or impossible to
predict and are beyond our control, TOP Tankers Inc. cannot assure you that it
will achieve or accomplish these expectations, beliefs or projections described
in the forward looking statements contained in this report.
Important factors that, in our view, could cause actual results to differ
materially from those discussed in the forward-looking statements include the
strength of world economies and currencies, general market conditions, including
changes in charter rates and vessel values, failure of a seller to deliver one
or more vessels, failure of a buyer to accept delivery of a vessel, inability to
procure acquisition financing, default by one or more charterers of our ships,
changes in demand for crude oil, refined petroleum products, the effect of
changes in OPEC's petroleum production levels, worldwide crude oil consumption
and storage, changes in demand that may affect attitudes of time charterers,
scheduled and unscheduled drydocking, changes in TOP Tankers Inc.'s voyage and
operating expenses, including bunker prices, dry-docking and insurance costs,
changes in governmental rules and regulations including requirements for
double-hull tankers or actions taken by regulatory authorities, potential
liability from pending or future litigation, domestic and international
political conditions, potential disruption of shipping routes due to accidents,
international hostilities and political events or acts by terrorists.
When used in this document, the words "anticipate," "estimate," "project,"
"forecast," "plan," "potential," "will," "may," "should," and "expect" reflect
forward-looking statements.
PART I
ITEM 1. Identity Of Directors, Senior Management and Advisers
Not Applicable.
ITEM 2. Offer Statistics and Expected Timetable
Not Applicable.
ITEM 3. Key Information
Unless the context otherwise requires, as used in this report, the terms
"Company," "we," "us," and "our" refer to TOP Tankers Inc. and all of its
subsidiaries, and "TOP Tankers Inc." refers only to TOP Tankers Inc. and not to
its subsidiaries. We use the term deadweight, or dwt, in describing the size of
vessels. Dwt, expressed in metric tons each of which is equivalent to 1,000
kilograms, refers to the maximum weight of cargo and supplies that a vessel can
carry.
Selected Financial Data
The following table sets forth the selected historical consolidated
financial data and other operating data of TOP Tankers Inc. as of December 31,
2001, 2002, 2003 and 2004 and for the four years ended December 31, 2004. The
following information should be read in conjunction with Item 5 "Operating and
Financial Review and Prospects" and the consolidated financial statements and
related notes included herein. The following selected consolidated financial
data of TOP Tankers Inc. in the table are derived from our consolidated
financial statements and notes thereto which have been prepared in accordance
with U.S. generally accepted accounting principles ("US GAAP") and have been
audited for the years ended December 31, 2001, 2002, 2003 and 2004 by Ernst &
Young (Hellas) Certified Auditors Accountants S.A ("Ernst & Young"), independent
registered public accounting firm. We have not included selected financial
information as of and for the year ended December 31, 2000, due to the
unreasonable effort and expense of preparing such information.
Year Ended December 31,
Dollars in thousands, except per share data and 2001 2002 2003 2004
average daily results ---- ---- ---- ----
INCOME STATEMENT DATA
Voyage revenues.................................. $13,344 $11,426 $23,085 $93,829
Voyage expenses.................................. 4,413 3,311 5,937 16,898
Vessel operating expenses........................ 3,345 4,553 8,420 16,859
General and administrative expenses(1)........... 455 816 1,815 8,579
Foreign currency (gains) losses, net............. (3) 62 105 75
Gain on sale of vessels.......................... - - - 638
Depreciation and amortization.................... 1,337 2,390 4,203 14,622
Total operating expenses......................... 9,547 11,132 20,480 56,395
Operating income................................. 3,797 294 2,605 37,434
Net interest expense............................. 749 987 1,335 4,720
Other income (expense), net...................... (1,271) 894 364 80
Net income....................................... $1,777 $201 $1,634 $32,794
Basic and diluted earnings per share(2).......... $0.30 $0.03 $0.27 $2.54
Weighted average basic and diluted shares outstanding(2) 6,000,000 6,000,000 6,000,000 12,922,449
Dividends paid per share(2)...................... $0.08 $0.14 $0.10 $0.39
BALANCE SHEET DATA, at end of period
Current assets, including cash and cash equivalents..... $2,778 $845 $4,862 $141,051
Total assets..................................... 18,573 33,474 55,703 539,886
Current liabilities, including current portion of long-term debt 3,387 4,390 9,008 42,811
Total long-term debt, including current portion.. 9,914 22,875 34,403 194,806
Stockholders' equity............................. 7,136 8,772 16,319 321,809
OTHER FINANCIAL DATA
EBITDA(3)........................................ $3,863 $3,578 $7,172 $52,136
FLEET DATA
Total number of vessels at end of period......... 2.0 3.0 5.0 15.0
Average number of vessels(4)..................... 2.0 2.9 4.4 9.6
Total voyage days for fleet(5)................... 730 961 1,517 3,215
Total time charter days for fleet................ - 160 543 1,780
Total spot market days for fleet................. 730 801 974 1,435
Total calendar days for fleet(6)................. 730 1,042 1,609 3,517
Fleet utilization(7)............................. 100.0% 92.2% 94.3% 91.4%
AVERAGE DAILY RESULTS
Time charter equivalent(8)....................... $12,234 $8,444 $11,304 $23,929
Vessel operating expenses(9)..................... 4,582 4,369 5,233 4,794
General and administrative expenses(10).......... 623 783 1,128 2,439
Total vessel operating expenses(11).............. 5,205 5,152 6,361 7,233
(1) We did not pay any compensation to members of our senior management or our
directors in the years ended December 31, 2002 and December 31, 2003.
During 2004, we paid to the members of our senior management and to our
directors aggregate compensation of approximately $4.4 million.
(2) After giving effect to a stock dividend effected in May 2004 and our
initial public offering in July 2004. All share and per share amounts have
been restated to reflect the retroactive effect of the stock dividend.
(3) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA does not represent and should not be considered as an
alternative to net income or cash flow from operations, as determined by
GAAP, and our calculation of EBITDA may not be comparable to that reported
by other companies. EBITDA is included in this report because it is a basis
upon which we assess our liquidity position and because we believe that it
presents useful information to investors regarding our ability to service
and/or incur indebtedness.
The following table reconciles net cash from operating activities, as
reflected in the consolidated statements of cash flows, to EBITDA:
Year Ended December 31,
-----------------------
2001 2002 2003 2004
---- ---- ---- ----
Dollars in thousands
Net Cash from Operating Activities............................. $5,201 $2,409 $4,930 $28,601
Net increase (decrease) in current assets...................... (569) 214 1,768 23,764
Net increase in current liabilities, excluding
current portion of long-term debt............................. (199) (381) (3,154) (12,197)
Gain on sale of vessels........................................ - - - 638
Payments for drydocking costs.................................. - 510 2,414 7,365
Write-off of a related party receivable........................ (1,288) - - -
Net interest expense........................................... 749 987 1,335 4,720
Amortization and write-off of deferred financing costs......... (31) (161) (121) (755)
---- ----- ----- -----
EBITDA......................................................... $3,863 $3,578 $7,172 $52,136
====== ====== ====== =======
(4) Average number of vessels is the number of vessels that constituted our
fleet for the relevant period, as measured by the sum of the number of days
each vessel was a part of our fleet during the period divided by the number
of calendar days in that period.
(5) Total voyage days for fleet are the total days the vessels were in our
possession for the relevant period net of off hire days associated with
major repairs, drydockings or special or intermediate surveys.
(6) Calendar days are the total days the vessels were in our possession for the
relevant period including off hire days associated with major repairs,
drydockings or special or intermediate surveys.
(7) Fleet utilization is the percentage of time that our vessels were available
for revenue generating voyage days, and is determined by dividing voyage
days by fleet calendar days for the relevant period.
(8) Time charter equivalent, or TCE, is a measure of the average daily revenue
performance of a vessel on a per voyage basis. Our method of calculating
TCE is consistent with industry standards and is determined by dividing net
voyage revenue by voyage days for the relevant time period. Net voyage
revenues are voyage revenues minus voyage expenses. Voyage expenses
primarily consist of port, canal and fuel costs that are unique to a
particular voyage, which would otherwise be paid by the charterer under a
time charter contract, as well as commissions. The following table reflects
calculation of the TCE (all amounts are expressed in thousands of U.S.
dollars, except for Average Daily Time Charter Equivalent amounts and Total
Voyage Days):
Year Ended December 31,
-----------------------
2001 2002 2003 2004
---- ---- ---- ----
Dollars in thousands, except average daily results
Voyage revenues................................................. $13,344 $11,426 $23,085 $93,829
Less:
Voyage expenses.......................................... (4,413) (3,311) (5,937) (16,898)
------- ------- ------- --------
Time charter equivalent revenue.......................... $8,931 $8,115 $17,148 $76,931
====== ====== ======= =======
Total voyage days........................................ 730 961 1,517 3,215
Average Daily Time Charter Equivalent.................... $12,234 $8,444 $11,304 $23,929
(9) Daily vessel operating expenses, which includes crew costs, provisions,
deck and engine stores, lubricating oil, insurance, maintenance and
repairs is calculated by dividing vessel operating expenses by fleet
calendar days for the relevant time period.
(10) Daily general and administrative expenses are calculated by dividing
general and administrative expenses by fleet calendar days for the
relevant time period.
(11) Total vessel operating expenses, or TVOE, is a measurement of our total
expenses associated with operating our vessels. TVOE is the sum of vessel
operating expenses and general and administrative expenses. Daily TVOE is
calculated by dividing TVOE by fleet calendar days for the relevant time
period.
Capitalization and Indebtedness
Not Applicable.
Reasons for the Offer and Use of Proceeds
Not Applicable.
Risk Factors
The following risks relate principally to the industry in which we
operate and our business in general. Any of the risk factors could materially
and adversely affect our business, financial condition or operating results and
the trading price of our common stock.
Additional risks and uncertainties that we are not aware of or that we
currently believe are immaterial may also adversely affect our business,
financial condition, liquidity or results of operation.
Risks Related to Our Industry
The volatile nature of the international tanker industry, which reached
historic high levels over the past two years, may lead to significant changes in
charter rates and vessel values that may adversely affect our earnings
The international tanker industry is volatile with significant changes
in profitability, charter rates and vessel values. Recent fluctuations attest to
this volatility in this industry. Over the past two years, charter rates
fluctuated while reaching an all-time high. Because many factors that may
influence the supply of, and demand for, vessel capacity are unpredictable, the
timing, direction and degree of changes in the international tanker industry is
also not predictable.
The degree of charter rate volatility among different types of tankers
has varied widely. Although our fleet deployment strategy may limit our
exposure, we are nonetheless exposed to changes in spot rates for tankers and
such changes may affect our earnings and the value of our vessels at any given
time.
The international tanker industry has experienced historically high
charter rates and vessel values in the recent past and there can be no assurance
that these historically high charter rates and vessel values will be sustained
During the past two years, charter rates and vessel values for tankers
reached all-time highs. There can be no assurance that these high charter rates
and vessel values will be sustained.
The factors affecting the supply and demand for tankers, charter rates
and vessel values are outside of our control, and the nature, timing and degree
of changes in the conditions of the industry are unpredictable. Factors that
influence demand for tanker capacity include:
o demand for refined petroleum products and crude oil;
o changes in crude oil production and refining capacity;
o the location of regional and global crude oil refining facilities
that affect the distance that refined petroleum products and crude
oil are to be moved by sea;
o global and regional economic and political conditions;
o developments in international trade;
o changes in seaborne and other transportation patterns, including
changes in the distances over which cargoes are transported;
o environmental and other regulatory developments;
o currency exchange rates; and
o weather.
The factors that influence the supply of oceangoing vessel capacity
include:
o the number of newbuilding deliveries;
o the scrapping rate of older vessels;
o the price of steel;
o changes in environmental and other regulations that may limit the
useful lives of vessels;
o port or canal congestion;
o the number of vessels that are out of service; and
o changes in global crude oil production.
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 proposed
similar phase-out periods. Under OPA, all oil tankers that do not have double
hulls will be phased out by 2015 and will not be permitted to come to United
States ports or trade in United States waters.
In December 2003, the IMO adopted a proposed amendment to the
International Convention for the Prevention of Pollution from Ships to
accelerate the phase out of single-hull tankers from 2015 to 2010 unless the
relevant flag states extend the date to 2015. This proposed amendment took
effect in April 2005. Moreover, the IMO or other regulatory bodies may adopt
further regulations in the future that could adversely affect the useful lives
of our tankers as well as our inability to generate income from them.
These requirements can affect the resale value or useful lives of our
vessels. As a result of accidents such as the recent oil spill relating to the
loss of the M/T Prestige, a 26-year old single-hull tanker, we believe that
regulation of the tanker industry will continue to become more stringent and
more expensive for us and our competitors. Substantial violations of applicable
requirements or a catastrophic release from one of our vessels could have a
material adverse impact on our financial condition and results of operations as
well as our reputation in the crude oil and refined petroleum products sectors.
Because the market value of our vessels may fluctuate significantly, we
may incur losses when we sell vessels or we may be required to write down their
carrying value, which will adversely affect our earnings
The fair market value of our vessels may increase and decrease
depending on the following factors:
o general economic and market conditions affecting the international
tanker industry;
o competition from other shipping companies;
o types and sizes of vessels;
o other modes of transportation;
o cost of newbuildings;
o governmental or other regulations;
o prevailing level of charter rates; and
o technological advances.
If we sell vessels at a time when vessel prices have fallen and before
an impairment adjustment is made to our financial statements, the sale may be at
less than the vessel's carrying amount in our financial statements or if vessel
prices have fallen below the carrying amount in our financial statements we may
be required to write down the carrying amount, with the result that we shall
incur a loss and a reduction in earnings.
An increase in the supply of vessel capacity without an increase in
demand for vessel capacity would likely cause charter rates and vessel values to
decline, which could have a material adverse effect on our revenues and
profitability
The supply of vessels generally increases with deliveries of new
vessels and decreases with the scrapping of older vessels, conversion of vessels
to other uses, such as floating production and storage facilities, and loss of
tonnage as a result of casualties. Currently there is significant new building
activity with respect to virtually all sizes and classes of vessels. If the
amount of tonnage delivered exceeds the number of vessels being scrapped, vessel
capacity will increase. If the supply of vessel capacity increases and the
demand for vessel capacity does not, the charter rates paid for our vessels as
well as the value of our vessels could materially decline. Such a decline in
charter rates and vessel values would likely have a material adverse effect on
our revenues and profitability.
Our operating results from our tankers are subject to seasonal
fluctuations, which may adversely affect our operating results and ability to
pay dividends
We operate our tankers in markets that have historically exhibited
seasonal variations in demand and, therefore, spot rates. Tanker markets are
typically stronger in the winter months as a result of increased oil consumption
in the northern hemisphere, unpredictable weather patterns and other seasonal
factors affecting supply which tend to disrupt vessel scheduling. The oil price
volatility resulting from these factors has historically led to increased oil
trading activities. As a result, our revenues and profitability have
historically been weakest during the second quarter and early part of our third
quarter. This seasonality could materially affect our operating results and cash
available for dividends in the future.
Increased inspection procedures and tighter import and export controls
could increase costs and disrupt our business
International shipping is subject to various security and customs
inspection and related procedures in countries of origin and destination.
Inspection procedures can result in the seizure of contents of our vessels,
delays in the loading, offloading or delivery and the levying of customs duties,
fines or other penalties against us.
It is possible that changes to inspection procedures could impose
additional financial and legal obligations on us. Furthermore, changes to
inspection procedures could also impose additional costs and obligations on our
customers and may, in certain cases, render the shipment of certain types of
cargo uneconomical or impractical. Any such changes or developments may have a
material adverse effect on our business, financial condition, results of
operations and ability to pay dividends.
Compliance with safety and other vessel requirements imposed by
classification societies may be very costly and may adversely affect our
business
The hull and machinery of every commercial vessel must be classed by a
classification society authorized by its country of registry. The classification
society certifies that a vessel is safe and seaworthy in accordance with the
applicable rules and regulations of the country of registry of the vessel and
the Safety of Life at Sea Convention. Our vessels are currently enrolled with
the American Bureau of Shipping, Lloyd's Register of Shipping or Det Norske
Veritas, each of which is a member of the International Association of
Classification Societies.
A vessel must undergo annual surveys, intermediate surveys and special
surveys. In lieu of a special survey, a vessel's machinery may be placed on a
continuous survey cycle, under which the machinery would be surveyed
periodically over a five-year period. Our vessels are on special survey cycles
for hull inspection and continuous survey cycles for machinery inspection. Every
vessel is also required to be dry docked every two to three years for inspection
of the underwater parts of such vessel.
If any vessel does not maintain its class and/or fails any annual
survey, intermediate survey or special survey, the vessel will be unable to
trade between ports and will be unemployable, which would negatively impact our
revenues.
Risks Related to Our Business
If we fail to manage our planned growth properly, we may not be able to
successfully expand our market share
We intend to continue to grow our fleet. Our growth will depend on:
o locating and acquiring suitable vessels;
o identifying and consummating acquisitions or joint ventures;
o integrating any acquired business successfully with our existing
operations;
o enhancing our customer base;
o managing expansion; and
o obtaining required financing.
Growing any business by acquisition presents numerous risks such as
undisclosed liabilities and obligations, difficulty in obtaining additional
qualified personnel, managing relationships with customers and suppliers and
integrating newly acquired operations into existing infrastructures. We cannot
give any assurance that we will be successful in executing our growth plans or
that we will not incur significant expenses and losses in connection therewith.
A decline in the market value of our vessels could lead to a default
under our loan agreements and the loss of our vessels
The loan agreements under our credit facilities contain a covenant that
requires the aggregate market value of the mortgaged vessels to at all times
exceed 130% of the aggregate outstanding principal amount of the loan. If the
market value of our fleet declines, we may be in default of this loan covenant
and we may not be able to refinance our debt or obtain additional financing.
Also, declining vessel values could cause us to breach some of the covenants
under the financing agreements relating to our indebtedness. If we are unable to
pledge additional collateral, our lenders could accelerate our debt and
foreclose on our fleet.
Servicing future debt would limit funds available for other purposes
such as the payment of dividends
To finance our fleet expansion program, we incurred secured
indebtedness. We must dedicate a portion of our cash flow from operations to pay
the principal and interest on our indebtedness. These payments limit funds
otherwise available for working capital, capital expenditures and other
purposes. We will need to take on additional indebtedness as we expand our
fleet, which could increase our ratio of debt to equity. The need to service our
debt may limit funds available for other purposes, including the payment of
dividends, and our inability to service debt could lead to acceleration of our
debt and foreclosure on our fleet.
Our loan agreements contain restrictive covenants that may limit our
liquidity and corporate activities
Our loan agreements impose operating and financial restrictions on us.
These restrictions may limit our ability to:
o incur additional indebtedness;
o create liens on our assets;
o sell capital stock of our subsidiaries;
o make investments;
o engage in mergers or acquisitions;
o pay dividends;
o make capital expenditures;
o change the management of our vessels or terminate or materially
amend the management agreement relating to each vessel; and
o sell our vessels.
Therefore, we may need to seek permission from our lenders in order to
engage in some corporate actions. Our lenders' interests may be different from
ours, and we cannot guarantee that we will be able to obtain our lenders'
permission when needed. This may prevent us from taking actions that are in our
best interest.
We depend on third party managers to manage our fleet
As of December 31, 2004, we have subcontracted the day to day technical
management, crewing and certain purchasing functions of all vessels in our fleet
to third party managers. Further, we may subcontract the technical management of
vessels acquired in the future to other third party technical management
companies. While our wholly-owned subsidiary, TOP Tanker Management, has direct
oversight responsibility for these third party managers, the loss of their
services or their failure to perform their obligations could materially and
adversely affect the results of our operations. Although we may have rights
against these managers if they default on their obligations, you will have no
recourse against these parties. Further, we expect that we will need to seek
approval from our lenders to change these third party managers.
Our ability to obtain additional debt financing may be dependent on the
performance of our then existing charters and the creditworthiness of our
charterers
The actual or perceived credit quality of our charterers, and any
defaults by them, may materially affect our ability to obtain the additional
capital resources that we will require to purchase additional vessels or may
significantly increase our costs of obtaining such capital. Our inability to
obtain additional financing at all or at a higher than anticipated cost may
materially affect our results of operation and our ability to implement our
business strategy.
As we expand our business, we will need to improve our operations and
financial systems and staff; if we cannot improve these systems or recruit
suitable employees, our performance may be adversely affected
Our current operating and financial systems may not be adequate as we
implement our plan to expand the size of our fleet, and our attempts to improve
those systems may be ineffective. While we have not experienced any difficulty
in recruiting to date, we cannot guarantee that we will be able to continue to
hire suitable employees as we expand our fleet. If we are unable to operate our
financial and operations systems effectively or to recruit suitable employees as
we expand our fleet, our performance may be adversely affected.
Our earnings may be adversely affected if we do not successfully employ
our vessels
We seek to deploy our vessels both on time charters and in the spot
market in a manner that will optimize our earnings. As of December 31, 2004, 10
of our vessels were contractually committed to time charters. Although these
time charters provide relatively steady streams of revenue as well as a portion
of the revenues generated by the charterer's deployment of the vessels in the
spot market or otherwise, our tankers committed to time charters may not be
available for spot voyages during an upturn in the tanker industry cycle, when
spot voyages might be more profitable. The spot market is highly competitive,
and spot market charter rates may fluctuate dramatically based on the supply and
demand for the major commodities internationally carried by water and other
factors. We cannot assure you that future spot market voyage charters will be
available at rates that will allow us to operate our vessels profitably. As of
December 31, 2004, the remainders of our vessels were trading in the spot
market. If we cannot continue to employ these vessels on time charters or trade
them in the spot market profitably, our results of operations and operating cash
flow may suffer.
In the highly competitive international tanker market, we may not be
able to compete for charters with new entrants or established companies with
greater resources
We employ our vessels in a highly competitive market that is capital
intensive and highly fragmented. Competition arises primarily from other vessel
owners, including major oil companies as well as independent tanker companies,
some of whom have substantially greater resources than we do. Competition for
the transportation of oil and refined petroleum products can be intense and
depends on price, location, size, age, condition and the acceptability of the
vessel and its operators to the charterers. Due in part to the highly fragmented
market, competitors with greater resources could enter and operate larger fleets
through consolidations or acquisitions that may be able to offer better prices
and fleets.
We depend upon a few significant customers for a large part of our
revenues. The loss of one or more of these customers could adversely affect our
financial performance
We have historically derived a significant part of our revenue from a
small number of charterers. In 2004, approximately 44% of our revenue was
derived from 2 charterers; in 2003, approximately 47% of our revenue was derived
from 2 charterers and, in 2002, approximately 65% of our revenue was derived
from 3 charterers. During 2004, under time charter contracts, Vitol and Glencore
provided 29% and 15% of our revenues, respectively. The occurrence of any
problems with these charterers may adversely affect our revenues.
We may be unable to attract and retain key management personnel and
other employees in the international tanker industry, which may negatively
affect the effectiveness of our management and our results of operations
Our success depends to a significant extent upon the abilities and
efforts of our management team. We have entered into employment contracts with
our President, Chief Executive Officer and Director, Evangelos Pistiolis, our
Chief Financial Officer and Director, Stamatios Tsantanis and our Executive Vice
President and Director, Vangelis Ikonomou. Our success will depend upon our
ability to hire and retain key members of our management team. The loss of any
of these individuals could adversely affect our business prospects and financial
condition. Difficulty in hiring and retaining personnel could adversely affect
our results of operations. We do not intend to maintain "key man" life insurance
on any of our officers.
Risks involved with operating ocean going vessels could affect our
business and reputation, which would adversely affect our revenues and stock
price
The operation of an ocean-going vessel carries inherent risks. These
risks include the possibility of:
o marine disaster
o piracy;
o environmental accidents;
o cargo and property losses or damage; and
o mechanical failure, human error, war, terrorism, political action in
various countries, labor strikes or adverse weather conditions.
Any of these circumstances or events could result in death or injury to
persons, loss of revenues or property, environmental damage, higher insurance
rates, damage to our customer relationships, delay or rerouting, and could
increase our costs or lower our revenues. The involvement of our vessels in an
oil spill or other environmental disaster may harm our reputation as a safe and
reliable vessel operator. If one of our vessels were involved in an accident
with the potential risk of environmental contamination, the resulting media
coverage could have a material adverse effect on our business, results of
operations, cash flows, financial condition and ability to pay dividends.
Rising fuel prices may adversely affect our profits
Fuel is a significant, if not the largest, operating expense for many
of our shipping operations when our vessels are not under period charter. The
price and supply of fuel is unpredictable and fluctuates based on events outside
our control, including geopolitical developments, supply and demand for oil and
gas, actions by OPEC and other oil and gas producers, war and unrest in oil
producing countries and regions, regional production patterns and environmental
concerns. As a result, an increase in the price of fuel may adversely affect our
profitability. Further, fuel may become much more expensive in future, which may
reduce the profitability and competitiveness of our business versus other forms
of transportation, such as truck or rail.
Our vessels may suffer damage and we may face unexpected drydocking
costs, which could affect our cash flow and financial condition
If our vessels suffer damage, they may need to be repaired at a
drydocking facility. The costs of drydock repairs are unpredictable and can be
substantial. We may have to pay drydocking costs that our insurance does not
cover. The inactivity of these vessels while they are being repaired and
repositioned, as well as the actual cost of these repairs, would decrease our
earnings. In addition, space at drydocking facilities is sometimes limited and
not all drydocking facilities are conveniently located. We may be unable to find
space at a suitable drydocking facility or we may be forced to move to a
drydocking facility that is not conveniently located to our vessels' positions.
The loss of earnings while our vessels are forced to wait for space or to
relocate to drydocking facilities that are farther away from the routes on which
our vessels trade would decrease our earnings.
Purchasing and operating previously owned, or secondhand, vessels may
result in increased operating costs and vessels off-hire, which could adversely
affect our earnings
While we inspect previously owned, or secondhand, vessels prior to
purchase, this does not normally provide us with the same knowledge about their
condition and cost of any required (or anticipated) repairs that we would have
had if these vessels had been built for and operated exclusively by us. Also, we
do not receive the benefit of warranties from the builders if the vessels we buy
are older than one year.
In general, the costs to maintain a vessel in good operating condition
increase with the age of the vessel. Older vessels are typically less fuel
efficient and more costly to maintain than more recently constructed vessels due
to improvements in engine technology. Cargo insurance rates increase with the
age of a vessel, making older vessels less desirable to charterers.
Governmental regulations, safety or other equipment standards related
to the age of vessels may require expenditures for alterations, or the addition
of new equipment, to our vessels and may restrict the type of activities in
which the vessels may engage. We cannot assure you that, as our vessels age,
market conditions will justify those expenditures or enable us to operate our
vessels profitably during the remainder of their useful lives. If we sell
vessels, we are not certain that the price for which we sell them will equal at
least their carrying amount at that time.
We may not have adequate insurance to compensate us if we lose our
vessels
We procure insurance for our fleet against those types of risks
commonly insured against by vessel owners and operators. These insurances
include hull and machinery insurance, protection and indemnity insurance, which
includes environmental damage and pollution insurance coverage, war risk
insurance and insurance against loss of hire, which covers business
interruptions that result in the loss of use of a vessel. While we currently
have loss of hire insurance that covers, subject to annual coverage limits, all
of the vessels in our fleet, we may not purchase loss of hire insurance to cover
newly acquired vessels. We can give no assurance that we are adequately insured
against all risks. We may not be able to obtain adequate insurance coverage at
reasonable rates for our fleet in the future. The insurers may not pay
particular claims. Our insurance policies contain deductibles for which we will
be responsible, limitations and exclusions which, although we believe are
standard in the shipping industry, may nevertheless increase our costs or lower
our revenue.
Our operations outside the United States expose us to global risks that
may interfere with the operation of our vessels
We are an international company and primarily conduct our operations
outside the United States. Changing economic, political and governmental
conditions in the countries where we are engaged in business or where our
vessels are registered affect us. In the past, political conflicts, particularly
in the Arabian Gulf, resulted in attacks on tankers, mining of waterways and
other efforts to disrupt shipping in the area. Terrorist attacks such as the
attacks on the United States on September 11, 2001 and the United States'
continuing response to these attacks, as well as the threat of future terrorist
attacks, continues to cause uncertainty in the world commercial markets,
including the energy markets. The recent conflict in Iraq may lead to additional
acts of terrorism, armed conflict and civil disturbance around the world, which
may contribute to further, instability, including in the oil markets. Terrorist
attacks, such as the attack on the M/T Limburg in October 2002, may also
negatively affect our operations and directly impact our vessels or our
customers. Future terrorist attacks could result in increased volatility of the
financial markets in the United States and globally and could result in an
economic recession in the United States or the world. Any of these occurrences
could have a material adverse impact on our operating results, revenue and
costs.
Maritime claimants could arrest our vessels, which could interrupt our
cash flow
Crew members, suppliers of goods and services to a vessel, shippers of
cargo and other parties may be entitled to a maritime lien against that vessel
for unsatisfied debts, claims or damages. In many jurisdictions, a maritime
lienholder may enforce its lien by arresting a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our vessels could
interrupt our cash flow and require us to pay large sums of money to have the
arrest lifted.
In addition, in some jurisdictions, such as South Africa, under the
"sister ship" theory of liability, a claimant may arrest both the vessel which
is subject to the claimant's maritime lien and any "associated" vessel, which is
any vessel owned or controlled by the same owner. Claimants could try to assert
"sister ship" liability against one vessel in our fleet for claims relating to
another of our ships.
Governments could requisition our vessels during a period of war or
emergency, resulting in loss of earnings
A government could requisition for title or seize our vessels.
Requisition for title occurs when a government takes control of a vessel and
becomes her owner. Also, a government could requisition our vessels for hire.
Requisition for hire occurs when a government takes control of a vessel and
effectively becomes her charterer at dictated charter rates. Generally,
requisitions occur during a period of war or emergency. Government requisition
of one or more of our vessels would negatively impact our revenues.
Certain existing stockholders, who hold approximately 18.8% of our
common stock, may have the power to exert control over us, which may limit your
ability to influence our actions
Sovereign Holdings Inc., or Sovereign Holdings, a company that is
wholly owned by our President, Chief Executive Officer and Director, Evangelos
J. Pistiolis, and Kingdom Holdings Inc., or Kingdom Holdings, a company owned
primarily by another adult member of the Pistiolis family and to a limited
extent by a third party, own, directly or indirectly, approximately 18.8% of the
outstanding shares of our common stock. While these shareholders have no
agreement, arrangement or understanding relating to the voting of their shares
of common stock, due to the number of shares of our common stock they own, they
have the power to exert considerable influence over our actions.
We may have to pay tax on United States source income, which would
reduce our earnings
Under the United States Internal Revenue Code of 1986, or the Code, 50%
of the gross shipping income of a vessel owning or chartering corporation, such
as ourselves and our subsidiaries, that is attributable to transportation that
begins or ends, but that does not begin and end, in the United States is
characterized as United States source shipping income and such income is subject
to a 4% United States federal income tax without allowance for deduction, unless
that corporation qualifies for exemption from tax under Section 883 of the Code.
We expect that we and each of our subsidiaries will qualify for this
statutory tax exemption and we will take this position for United States federal
income tax return reporting purposes. However, there are factual circumstances
beyond our control that could cause us to lose the benefit of this tax exemption
and thereby become subject to United States federal income tax on our United
States source income. Therefore, we can give no assurances on our tax-exempt
status or that of any of our subsidiaries.
If we or our subsidiaries are not entitled to this exemption under
Section 883 for any taxable year, we or our subsidiaries would be subject for
those years to a 4% United States federal income tax on our U.S. source shipping
income. The imposition of this taxation could have a negative effect on our
business.
U.S. tax authorities could treat us as a "passive foreign investment
company," which could have adverse U.S. federal income tax consequences to U.S.
holders
A foreign corporation will be treated as a "passive foreign investment
company," or PFIC, for U.S. federal income tax purposes if either (1) at least
75% of its gross income for any taxable year consists of certain types of
"passive income" or (2) at least 50% of the average value of the corporation's
assets produce or are held for the production of those types of "passive
income." For purposes of these tests, "passive income" includes dividends,
interest, and gains from the sale or exchange of investment property and rents
and royalties other than rents and royalties which are received from unrelated
parties in connection with the active conduct of a trade or business. For
purposes of these tests, income derived from the performance of services does
not constitute "passive income." U.S. shareholders of a PFIC are subject to a
disadvantageous U.S. federal income tax regime with respect to the income
derived by the PFIC, the distributions they receive from the PFIC and the gain,
if any, they derive from the sale or other disposition of their shares in the
PFIC.
Based on our proposed method of operation, we do not believe that we
will be a PFIC with respect to any taxable year. In this regard, we intend to
treat the gross income we derive or are deemed to derive from our time
chartering activities as services income, rather than rental income.
Accordingly, we believe that our income from our time chartering activities does
not constitute "passive income," and the assets that we own and operate in
connection with the production of that income do not constitute passive assets.
There is, however, no direct legal authority under the PFIC rules
addressing our proposed method of operation. Accordingly, no assurance can be
given that the U.S. Internal Revenue Service, or IRS, or a court of law will
accept our position, and there is a risk that the IRS or a court of law could
determine that we are a PFIC. Moreover, no assurance can be given that we would
not constitute a PFIC for any future taxable year if there were to be changes in
the nature and extent of our operations.
If the IRS were to find that we are or have been a PFIC for any taxable
year, our U.S. shareholders will face adverse U.S. tax consequences. Under the
PFIC rules, unless those shareholders make an election available under the Code
(which election could itself have adverse consequences for such shareholders, as
discussed below under "Tax Considerations--U.S. Federal Income Taxation of U.S.
Holders"), such shareholders would be liable to pay U.S. federal income tax at
the then prevailing income tax rates on ordinary income plus interest upon
excess distributions and upon any gain from the disposition of our common stock,
as if the excess distribution or gain had been recognized ratably over the
shareholder's holding period of our common stock. See "Tax Considerations--U.S.
Federal Income Taxation of U.S. Holders" for a more comprehensive discussion of
the U.S. federal income tax consequences to U.S. shareholders if we are treated
as a PFIC.
Because we generate all of our revenues in U.S. dollars but incur a
portion of our expenses in other currencies, exchange rate fluctuations could
hurt our results of operations
We generate all of our revenues in U.S. dollars but incur approximately
14% of our expenses in currencies other than U.S. dollars. This difference could
lead to fluctuations in net income due to changes in the value of the U.S.
dollar relative to the other currencies, in particular the Euro. Expenses
incurred in foreign currencies against which the U.S. dollar falls in value can
increase, decreasing our revenues. For example, in the 12 months ended December
31, 2004, the value of the U.S. dollar declined by 9.95% as compared to the
Euro. We have not hedged these risks. Our operating results could suffer as a
result.
We are incorporated in the Republic of the Marshall Islands, which does
not have a well-developed body of corporate law
Our corporate affairs are governed by our Articles of Incorporation and
Bylaws and by the Marshall Islands Business Corporations Act, or BCA. The
provisions of the BCA resemble provisions of the corporation laws of a number of
states in the United States. However, there have been few judicial cases in the
Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary
responsibilities of directors under the law of the Republic of the Marshall
Islands are not as clearly established as the rights and fiduciary
responsibilities of directors under statutes or judicial precedent in existence
in certain United States jurisdictions. Security holder rights may differ as
well. While the BCA does specifically incorporate the non-statutory law, or
judicial case law, of the State of Delaware and other states with substantially
similar legislative provisions, our security holders may have more difficulty in
protecting their interests in the face of actions by the management, directors
or controlling shareholders than would security holders of a corporation
incorporated in a United States jurisdiction.
ITEM 4. Information On The Company
History and Development of the Company
Ocean Holdings Inc. was formed in January 2000, under the laws of
Marshall Islands and renamed to TOP Tankers Inc. in May 2004. On July 23, 2004,
our common stock was listed on the Nasdaq National Market, under the symbol
"TOPT", in connection with our initial public offering. The net proceeds of our
initial public offering, approximately $124.4 million, were primarily used to
finance the acquisition of 10 vessels, comprised of 8 ice-class double-hull
Handymax tankers and 2 double-hull Suezmax tankers. The total cost of the
acquisition was approximately $251.3 million.
On November 5, 2004, we completed a follow-on offering of our common
stock. The net proceeds of our follow-on offering, approximately $139.4 million,
were used primarily to finance the acquisition of 5 double-hull Suezmax tankers.
The total cost of the acquisition was approximately $257.0 million.
We are a provider of international seaborne transportation services,
carrying refined petroleum products and crude oil. As of December 31, 2004, our
fleet consisted of 15 vessels, comprised of 10 double-hull Handymax product
tankers, one single-hull Handysize product tanker and 4 double-hull Suezmax
tankers, with a total cargo carrying capacity of approximately 1.1 million
deadweight tons, or dwt. We actively manage the deployment of our fleet between
spot market voyage charters, which generally last from several days to several
weeks, and time charters, which can last up to several years.
Following the agreement to sell our final remaining single-hull vessel,
we currently own and operate a fleet of 23 vessels, consisting of 14 double-hull
Handymax tankers and 9 double-hull Suezmax tankers. Four of our Handymax tankers
were delivered in March and April 2005 and 5 of our Suezmax tankers were
purchased in connection with the proceeds of the following-on offering of our
common stock in November 2004.
Business Overview
Business Strategy
Our business strategy is focused on building and maintaining enduring
relationships with participants in the international tanker industry, including
leading charterers, oil companies, oil traders, brokers, suppliers,
classification societies, insurers and others. We seek to continue to create
long-term value principally by acquiring and operating high quality double-hull,
refined petroleum products and crude oil tankers.
We believe we have established a reputation in the international ocean
transport industry for operating and maintaining our fleet with high standards
of performance, reliability and safety. We have assembled a management team
comprised of executives who have extensive experience operating large and
diversified fleets of tankers and who have strong ties to a number of national,
regional and international oil companies, charterers and traders.
Fleet Characteristics
As of December 31, 2004, the vessels in our fleet have a total cargo
capacity of approximately 1.1 million dwt. Over 88% of our fleet by dwt were
sister ships, which enhances the revenue generating potential of our fleet by
providing us with operational and scheduling flexibility. Sister ships also
increase our operating efficiencies because technical knowledge can be applied
to all vessels in a series and creates cost efficiencies and economies of scale
when ordering spare parts, supplying and crewing these vessels.
Chartering of the Fleet
As of December 31, 2004 all 10 of our Handymax tankers operated under
time charter contracts expiring in 2006 or 2007. Four of our Handymax tankers
were deployed under 24 month time charter contracts that have a base rate of
$14,500 per day. Should the vessels generate revenues in excess of the base rate
over the duration of the time charter contact, we will receive 100% of the first
$500 per day in excess of the base rate. Thereafter we will receive 50% of the
excess. Six of our Handymax tankers were deployed under 30 month time charter
contracts that have a base rate of $14,250 per day until December 31, 2005 and
$13,250 per day until expiration of the contract. Should the vessels generate
revenues in excess of the base rate over the duration of the time charter
contact, we will receive 100% of the first $250 per day in excess of the base
rate until December 31, 2005 and $1,250 per day until expiration of the
contract. Thereafter we will receive 50% of the excess. Our Suezmax tankers and
our Handysize tanker operated on the spot market.
Management of the Fleet
Since July 1, 2004, TOP Tanker Management, our wholly-owned subsidiary,
has been responsible for all of the chartering, operational and technical
management of our fleet, including crewing, maintenance, repair, capital
expenditures, drydocking, vessel taxes, maintaining insurance and other vessel
operating expenses under management agreements with our vessel owning
subsidiaries. Prior to July 1, 2004, the operations of our fleet were managed by
Primal Tankers Inc., which was wholly-owned by the father of our Chief Executive
Officer.
As of December 31, 2004, TOP Tanker Management has subcontracted the
day to day technical management, crewing and certain purchasing functions of the
8 Handymax tankers and the 2 Suezmax tankers acquired since our initial public
offering to Unicom Management, a ship management company operating in Cyprus,
and has subcontracted the day to day technical management and crewing of the
remaining vessels in our fleet to V.Ships Management Limited, a ship management
company operating in Glasgow, Scotland. TOP Tanker Management pays a monthly fee
of $14,000 per vessel under its agreements with Unicom Management and a monthly
fee of $10,000 per vessel under its agreements with V.Ships Management.
Crewing and Employees
As of December 31, 2004, we had 3 employees, while our wholly-owned
subsidiary, TOP Tanker Management, employed approximately 35 employees, all of
whom are shore-based. As of December 31, 2003, we had no employees. TOP Tanker
Management ensures that all seamen have the qualifications and licenses required
to comply with international regulations and shipping conventions, and that our
vessels employ experienced and competent personnel.
Unicom Management and V.Ships Management are responsible for the
crewing of the fleet. Such responsibilities include training, transportation,
compensation and insurance of the crew.
All of the employees of TOP Tanker Management are subject to a general
collective bargaining agreement covering employees of shipping agents. These
agreements set industry-wide minimum standards. We have not had any labor
problems with our employees under this collective bargaining agreement and
consider our workplace and labor union relations to be good.
Environmental and Other Regulation
Government regulation significantly affects the ownership and operation
of our tankers. They are subject to international conventions, national, state
and local laws and regulations in force in the countries in which our vessels
may operate or are registered.
A variety of governmental and private entities subject our vessels to
both scheduled and unscheduled inspections. These entities include the local
port authorities (U.S. Coast Guard, harbor master or equivalent), classification
societies, flag state administration (country of registry) and charterers,
particularly terminal operators and oil companies. Certain of these entities
require us to obtain permits, licenses and certificates for the operation of our
tankers. Failure to maintain necessary permits or approvals could require us to
incur substantial costs or temporarily suspend operation of one or more of our
vessels.
We believe that the heightened level of environmental and quality
concerns among insurance underwriters, regulators and charterers is leading to
greater inspection and safety requirements on all vessels and may accelerate the
scrapping of older vessels throughout the industry. Increasing environmental
concerns have created a demand for vessels that conform to the stricter
environmental standards. We are required to maintain operating standards for all
of our vessels that will emphasize operational safety, quality maintenance,
continuous training of our officers and crews and compliance with U.S. and
international regulations. We believe that the operation of our vessels is in
substantial compliance with applicable environmental laws and regulations;
however, because such laws and regulations are frequently changed and may impose
increasingly stricter requirements, such future requirements may limit our
ability to do business, increase our operating costs, force the early retirement
of our vessels, and/or affect their resale value, all of which could have a
material adverse effect on our financial condition and results of operations.
Environmental Regulation--IMO
In 1992, the International Maritime Organization, or IMO (the United
Nations agency for maritime safety and the prevention of marine pollution by
ships), adopted regulations that set forth pollution prevention requirements
applicable to tankers. These regulations, which have been adopted by more than
150 nations, including many of the jurisdictions in which our tankers operate,
provide, in part, that:
o tankers between 25 and 30 years old must be of double-hull
construction or of a mid-deck design with double sided construction,
unless (1) they have wing tanks or double-bottom spaces not used for
the carriage of oil, which cover at least 30% of the length of the
cargo tank section of the hull or bottom; or (2) they are capable of
hydrostatically balanced loading (loading less cargo into a tanker
so that in the event of a breach of the hull, water flows into the
tanker, displacing oil upwards instead of into the sea);
o tankers 30 years old or older must be of double-hull construction or
mid-deck design with double sided construction; and
o all tankers are subject to enhanced inspections.
Also, under IMO regulations, a tanker must be of double-hull
construction or a mid-deck design with double sided construction or be of
another approved design ensuring the same level of protection against oil
pollution if the tanker:
o is the subject of a contract for a major conversion or original
construction on or after July 6, 1993;
o commences a major conversion or has its keel laid on or after
January 6, 1994; or
o completes a major conversion or is a newbuilding delivered on or
after July 6, 1996.
Effective September 2002, the IMO accelerated its existing timetable
for the phase-out of single-hull oil tankers. These regulations require the
phase-out of most single-hull oil tankers by 2015 or earlier, depending on the
age of the tanker and whether it has segregated ballast tanks. After 2007, the
maximum permissible age for single-hull tankers will be 26 years. Compliance
with the new regulations regarding inspections of all tankers, however, could
adversely affect our operations. Under current regulations, retrofitting will
enable a tanker to operate until the earlier of 25 years of age and the
anniversary date of its delivery in 2017. However, as a result of the oil spill
in November 2002 relating to the loss of the M/T Prestige, which was owned by a
company not affiliated with us, in December 2003 the Marine Environmental
Protection Committee of the IMO adopted a proposed amendment to the
International Convention for the Prevention of Pollution from Ships to
accelerate the phase out of single-hull tankers from 2015 to 2010 unless the
relevant flag state, in a particular case, extends the date to 2015. This
amendment came into effect in April 2005.
The IMO has also negotiated international conventions that impose
liability for oil pollution in international waters and a signatory's
territorial waters. In September 1997, the IMO adopted Annex VI to the
International Convention for the Prevention of Pollution from Ships to address
air pollution from ships. Annex VI was ratified in May 2004 and became effective
in May 2005. Annex VI sets limits on sulfur oxide and nitrogen oxide emissions
from ship exhausts and prohibit deliberate emissions of ozone depleting
substances, such as chlorofluorocarbons. Annex VI also includes a global cap on
the sulfur content of fuel oil and allows for special areas to be established
with more stringent controls on sulfur emissions. We are formulating a plan to
comply with the Annex VI regulations once they come into effect. Compliance with
these regulations could require the installation of expensive emission control
systems and could have an adverse financial impact on the operation of our
vessels. Additional or new conventions, laws and regulations may be adopted that
could adversely affect our ability to manage our ships.
Under the International Safety Management Code, or ISM Code,
promulgated by the IMO, the party with operational control of a vessel is
required to develop an extensive safety management system that includes, among
other things, the adoption of a safety and environmental protection policy
setting forth instructions and procedures for operating its vessels safely and
describing procedures for responding to emergencies. We will rely upon the
safety management system that we and our third party technical managers have
developed.
The ISM Code requires that vessel operators obtain a safety management
certificate for each vessel they operate. This certificate evidences compliance
by a vessel's management with code requirements for a safety management system.
No vessel can obtain a certificate unless its manager has been awarded a
document of compliance, issued by each flag state, under the ISM Code. We have
the requisite documents of compliance for our offices and safety management
certificates for all of our tankers for which the certificates are required by
the IMO. We are required to renew these documents of compliance and safety
management certificates annually.
Noncompliance with the ISM Code and other IMO regulations may subject
the shipowner or bareboat charterer to increased liability, may lead to
decreases in available insurance coverage for affected vessels and may result in
the denial of access to, or detention in, some ports. For example, the U.S.
Coast Guard and European Union authorities have indicated that vessels not in
compliance with the ISM Code will be prohibited from trading in U.S. and
European Union ports.
Although the United States is not a party to these conventions, many
countries have ratified and follow the liability plan adopted by the IMO and set
out in the International Convention on Civil Liability for Oil Pollution Damage
of 1969. Under this convention, if the country in which the damage results is a
party to the 1992 Protocol to the International Convention on Civil Liability
for Oil Pollution Damage, a vessel's registered owner is strictly liable for
pollution damage caused in the territorial waters of a contracting state by
discharge of persistent oil, subject to certain complete defenses. Under an
amendment to the Protocol that became effective on November 1, 2003, for vessels
of 5,000 to 140,000 gross tons (a unit of measurement for the total enclosed
spaces within a vessel), liability is limited to approximately $6.5 million plus
$909 for each additional gross ton over 5,000. For vessels of over 140,000 gross
tons, liability is limited to approximately $129.3 million. As the convention
calculates liability in terms of a basket of currencies, these figures are based
on currency exchange rates on May 10, 2004. The right to limit liability is
forfeited under the International Convention on Civil Liability for Oil
Pollution Damage where the spill is caused by the owner's actual fault and under
the 1992 Protocol where the spill is caused by the owner's intentional or
reckless conduct. Vessels trading to states that are parties to these
conventions must provide evidence of insurance covering the liability of the
owner. In jurisdictions where the International Convention on Civil Liability
for Oil Pollution Damage has not been adopted, various legislative schemes or
common law govern, and liability is imposed either on the basis of fault or in a
manner similar to that convention. We believe that our P&I insurance will cover
the liability under the plan adopted by the IMO.
U.S. Oil Pollution Act of 1990 and Comprehensive Environmental
Response, Compensation and Liability Act
The United States regulates the tanker industry with an extensive
regulatory and liability regime for environmental protection and cleanup of oil
spills, consisting primarily of the U.S. Oil Pollution Act of 1990, or OPA, and
the Comprehensive Environmental Response, Compensation and Liability Act, or
CERCLA. OPA affects all owners and operators whose vessels trade with the United
States or its territories or possessions, or whose vessels operate in the waters
of the United States, which include the U.S. territorial sea and the 200
nautical mile exclusive economic zone around the United States. CERCLA applies
to the discharge of hazardous substances (other than oil) whether on land or at
sea. Both OPA and CERCLA impact our operations.
Under OPA, vessel owners, operators and bareboat charterers are
"responsible parties" who are jointly, severally and strictly liable (unless the
spill results solely from the act or omission of a third party, an act of God or
an act of war) for all containment and clean-up costs and other damages arising
from oil spills from their vessels. These other damages are defined broadly to
include:
o natural resource damages and related assessment costs;
o real and personal property damages;
o net loss of taxes, royalties, rents, profits or earnings capacity;
o net cost of public services necessitated by a spill response, such
as protection from fire, safety or health hazards; and
o 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 that is over 3,000 gross tons
(subject to possible adjustment for inflation). The act specifically permits
individual states to impose their own liability regimes with regard to oil
pollution incidents occurring within their boundaries, and some states have
enacted legislation providing for unlimited liability for discharge of
pollutants within their waters. In some cases, states that have enacted this
type of legislation have not yet issued implementing regulations defining tanker
owners' responsibilities under these laws. CERCLA, which applies to owners and
operators of tankers, contains a similar liability regime and provides for
cleanup and removal of hazardous substances and for 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.
OPA also requires owners and operators of vessels to establish and
maintain with the U.S. Coast Guard evidence of financial responsibility
sufficient to meet the limit of their potential strict liability under the act.
The U.S. Coast Guard has enacted regulations requiring evidence of financial
responsibility 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 these regulations, an owner or operator of
more than one tanker is required to obtain a certificate of responsibility for
each vessel in the fleet in an amount equal only to the financial responsibility
requirement of the tanker having the greatest maximum strict liability under OPA
and CERCLA. We have provided evidence of financial responsibility in the form of
guarantees issued by a guarantor approved by the U.S. Coast Guard and received
certificates of financial responsibility from the U.S. Coast Guard for each of
our vessels that calls in U.S. waters.
We insure each of our vessels with pollution liability insurance in the
maximum commercially available amount of $1.0 billion per incident per vessel. A
catastrophic spill could exceed the insurance coverage available, in which event
there could be a material adverse effect on our business.
OPA also amended the Federal Water Pollution Control Act to require
owners or operators of tankers operating in the waters of the United States to
file vessel response plans with the U.S. Coast Guard, and their tankers are
required to operate in compliance with their U.S. Coast Guard approved plans.
These response plans must, among other things:
o address a "worst case" scenario and identify and ensure, through
contract or other approved means, the availability of necessary
private response resources to respond to a "worst case discharge";
o describe crew training and drills; and
o identify a qualified individual with full authority to implement
removal actions.
Vessel response plans for our tankers operating in the waters of the
United States have been approved by the U.S. Coast Guard. In addition, the U.S.
Coast Guard has announced it intends to propose similar regulations requiring
certain vessels to prepare response plans for the release of hazardous
substances. We are responsible for ensuring our vessels comply with any
additional regulations.
OPA does not prevent individual states from imposing their own
liability regimes with respect to oil pollution incidents occurring within their
boundaries. In fact, most U.S. states that border a navigable waterway have
enacted environmental pollution laws that impose strict liability on a person
for removal costs and damages resulting from a discharge of oil or a release of
a hazardous substance. These laws may be more stringent than U.S. federal law.
European Union Tanker Restrictions
In July 2003, in response to the M/T Prestige oil spill in November
2002, the European Union adopted legislation that prohibits all single-hull
tankers from entering into its ports or offshore terminals by 2010. The European
Union has also banned all single-hull tankers carrying heavy grades of oil from
entering or leaving its ports or offshore terminals or anchoring in areas under
its jurisdiction. Commencing in 2005, certain single-hull tankers above 15 years
of age will also be restricted from entering or leaving European Union ports or
offshore terminals and anchoring in areas under European Union jurisdiction. The
European Union is also considering legislation that would: (1) ban manifestly
sub-standard vessels (defined as those more than 15 years old that have been
detained by port authorities at least twice in a six month period) from European
waters and create an obligation of port states to inspect vessels posing a high
risk to maritime safety or the marine environment; and (2) provide the European
Union with greater authority and control over classification societies,
including the ability to seek to suspend or revoke the authority of negligent
societies. The sinking of the M/T Prestige and resulting oil spill in November
2002 has led to the adoption of other environmental regulations by certain
European Union nations, which could adversely affect the remaining useful lives
of all of our tankers and our ability to generate income from them. For example,
Italy announced a ban of single-hull crude oil tankers over 5,000 dwt from most
Italian ports, effective April 2001. Spain has announced a similar prohibition.
It is impossible to predict what legislation or additional regulations, if any,
may be promulgated by the European Union or any other country or authority.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a
variety of initiatives intended to enhance vessel security. On November 25,
2002, the Maritime Transportation Security Act of 2002 (MTSA) came into effect.
To implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard
issued regulations requiring the implementation of certain security requirements
aboard vessels operating in waters subject to the jurisdiction of the United
States. Similarly, in December 2002, amendments to the International Convention
for the Safety of Life at Sea (SOLAS) created a new chapter of the convention
dealing specifically with maritime security. The new chapter went into effect in
July 2004 and imposes various detailed security obligations on vessels and port
authorities, most of which are contained in the newly created International Ship
and Port Facilities Security (ISPS) Code. We are in compliance with the ISPS
Code. Among the various requirements are:
o on-board installation of automatic information systems, or AIS, to
enhance vessel-to-vessel and vessel-to-shore communications;
o on-board installation of ship security alert systems;
o the development of vessel security plans; and
o compliance with flag state security certification requirements.
The U.S. Coast Guard regulations, intended to align with international
maritime security standards, exempt non-U.S. tankers from MTSA vessel security
measures provided such vessels have on board, by July 1, 2004, a valid
International Ship Security Certificate (ISSC) that attests to the vessel's
compliance with SOLAS security requirements and the ISPS Code. We will implement
the various security measures addressed by the MTSA, SOLAS and the ISPS Code and
ensure that our tankers attain compliance with all applicable security
requirements within the prescribed time periods. We do not believe these
additional requirements will have a material financial impact on our operations.
Inspection by Classification Societies
Every seagoing vessel must be "classed" by a classification society.
The classification society certifies that the vessel is "in class," signifying
that the vessel has been built and maintained in accordance with the rules of
the classification society and complies with applicable rules and regulations of
the vessel's country of registry and the international conventions of which that
country is a member. In addition, where surveys are required by international
conventions and corresponding laws and ordinances of a flag state, the
classification society will undertake them on application or by official order,
acting on behalf of the authorities concerned.
The classification society also undertakes on request other surveys and
checks that are required by regulations and requirements of the flag state.
These surveys are subject to agreements made in each individual case and/or to
the regulations of the country concerned.
For maintenance of the class, regular and extraordinary surveys of
hull, machinery, including the electrical plant, and any special equipment
classed are required to be performed as follows:
Annual Surveys: For seagoing ships, annual surveys are conducted for
the hull and the machinery, including the electrical plant, and where applicable
for special equipment classed, at intervals of 12 months from the date of
commencement of the class period indicated in the certificate.
Intermediate Surveys: Extended annual surveys are referred to as
intermediate surveys and typically are conducted two and one-half years after
commissioning and each class renewal. Intermediate surveys may be carried out on
the occasion of the second or third annual survey.
Class Renewal Surveys: Class renewal surveys, also known as special
surveys, are carried out for the ship's hull, machinery, including the
electrical plant, and for any special equipment classed, at the intervals
indicated by the character of classification for the hull. At the special
survey, the vessel is thoroughly examined, including audio-gauging to determine
the thickness of the steel structures. Should the thickness be found to be less
than class requirements, the classification society would prescribe steel
renewals. The classification society may grant a one-year grace period for
completion of the special survey. Substantial amounts of money may have to be
spent for steel renewals to pass a special survey if the vessel experiences
excessive wear and tear. In lieu of the special survey every four or five years,
depending on whether a grace period was granted, a shipowner has the option of
arranging with the classification society for the vessel's hull or machinery to
be on a continuous survey cycle, in which every part of the vessel would be
surveyed within a five-year cycle.
At an owner's application, the surveys required for class renewal may
be split according to an agreed schedule to extend over the entire period of
class. This process is referred to as continuous class renewal.
All areas subject to survey as defined by the classification society
are required to be surveyed at least once per class period, unless shorter
intervals between surveys are prescribed elsewhere. The period between two
subsequent surveys of each area must not exceed five years.
Most vessels are also dry-docked every 30 to 36 months for inspection
of the underwater parts and for repairs related to inspections. If any defects
are found, the classification surveyor will issue a "recommendation" which must
be rectified by the ship owner within prescribed time limits.
Most insurance underwriters make it a condition for insurance coverage
that a vessel be certified as "in class" by a classification society which is a
member of the International Association of Classification Societies. All our
vessels are certified as being "in class" by the American Bureau of Shipping,
Lloyd's Register of Shipping or Det Norske Veritas. All new and secondhand
vessels that we purchase must be certified prior to their delivery under our
standard contracts and memorandum of agreement. If the vessel is not certified
on the date of closing, we have no obligation to take delivery of the vessel.
Risk of Loss and Liability Insurance General
The operation of any cargo vessel includes risks such as mechanical
failure, collision, property loss, cargo loss or damage and business
interruption due to political circumstances in foreign countries, hostilities
and labor strikes. In addition, there is always an inherent possibility of
marine disaster, including oil spills and other environmental mishaps, and the
liabilities arising from owning and operating vessels in international trade.
OPA, which imposes virtually unlimited liability upon owners, operators and
demise charterers of any vessel trading in the United States exclusive economic
zone for certain oil pollution accidents in the United States, has made
liability insurance more expensive for ship owners and operators trading in the
United States market. While we carry loss of hire insurance to cover 100% of our
fleet, we may not be able to maintain this level of coverage. Furthermore, while
we believe that our present insurance coverage is adequate, not all risks can be
insured, and there can be no guarantee that any specific claim will be paid, or
that we will always be able to obtain adequate insurance coverage at reasonable
rates.
Hull and Machinery Insurance
We have obtained marine hull and machinery and war risk insurance,
which includes the risk of actual or constructive total loss, for all of the
vessels in our fleet. The vessels in our fleet are each covered up to at least
fair market value, with deductibles of $100,000 per vessel per incident, except
for 4 of our Suezmax tankers, which have deductibles of $200,000 per vessel per
incident. We also arranged increased value coverage for each vessel. Under this
increased value coverage, in the event of total loss of a vessel, we will be
able recover for amounts not recoverable under the hull and machinery policy by
reason of any under-insurance.
Protection and Indemnity Insurance
Protection and indemnity insurance is provided by mutual protection and
indemnity associations, or P&I Associations, which covers our third party
liabilities in connection with our shipping activities. This includes third
party liability and other related expenses of injury or death of crew,
passengers and other third parties, loss or damage to cargo, claims arising from
collisions with other vessels, damage to other third party property, pollution
arising from oil or other substances, and salvage, towing and other related
costs, including wreck removal. Protection and indemnity insurance is a form of
mutual indemnity insurance, extended by protection and indemnity mutual
associations, or "clubs." Subject to the "capping" discussed below, our
coverage, except for pollution, is unlimited.
Our current protection and indemnity insurance coverage for pollution
is $1 billion per vessel per incident. The fourteen P&I Associations that
comprise the International Group insure approximately 90% of the world's
commercial tonnage and have entered into a pooling agreement to reinsure each
association's liabilities. Each P&I Association has capped its exposure to this
pooling agreement at $4.25 billion. As a member of a P&I Association, which is a
member of the International Group, we are subject to calls payable to the
associations based on its claim records as well as the claim records of all
other members of the individual associations, and members of the pool of P&I
Associations comprising the International Group.
Competition
We operate in markets that are highly competitive and based primarily
on supply and demand. We compete for charters on the basis of price, vessel
location, size, age and condition of the vessel, as well as on our reputation as
an operator. We arrange our time charters and voyage charters in the spot market
through the use of brokers, who negotiate the terms of the charters based on
market conditions. We compete primarily with owners of tankers in the Suezmax
and Handymax class sizes. Ownership of tankers is highly fragmented and is
divided among major oil companies and independent vessel owners.
Legal Proceedings Against Us
We are party, as plaintiff or defendant, to a variety of lawsuits for
damages arising principally from personal injury and property casualty claims.
Most claims are covered by insurance, subject to customary deductibles. We
believe that these claims will not, either individually or in the aggregate,
have a material adverse effect on us, our financial condition or results of
operations. From time to time in the future we may be subject to legal
proceedings and claims in the ordinary course of business, principally personal
injury and property casualty claims. Those claims, even if lacking merit, could
result in the expenditure of significant financial and managerial resources. We
have not been involved in any legal proceedings which may have, or have had a
significant effect on our financial position, nor are we aware of any
proceedings that are pending or threatened which may have a significant effect
on our financial position.
Organizational Structure
Top Tankers Inc. is the sole owner of all outstanding shares of the
subsidiaries listed in Notes 1 and 18 of our Consolidated Financial Statements
under Item 18. See also Exhibit 8.1.
Properties
We have no freehold or leasehold interest in any real property. We
lease office space in Athens, Greece, from Pyramis Technical Co., SA which is
wholly-owned by John Pistiolis, the father of our Chief Executive Officer. In
addition, our newly established subsidiary TOP TANKERS (UK) LIMITED, engaged in
chartering activities involving the Company's vessels, leases office space in
London, from an unrelated third party.
ITEM 5. Operating and financial review and prospects
The following is a discussion of our financial condition and results of
operations for the years ended December 31, 2004, 2003 and 2002. You should read
this section together with the consolidated financial statements including the
notes to those financial statements for the periods mentioned above.
We are a provider of international seaborne transportation services,
carrying refined petroleum products and crude oil. As of December 31, 2004, our
fleet consisted of 15 vessels, comprised of 11 Product tankers and 4 Suezmax
tankers, with a total cargo carrying capacity of approximately 1.1 million
deadweight tons, or dwt.
We actively manage the deployment of our fleet between spot market
voyage charters, which generally last from several days to several weeks, and
time charters, which can last up to several years. A spot market voyage charter
is generally a contract to carry a specific cargo from a load port to a
discharge port for an agreed upon total amount. Under spot market voyage
charters, we pay voyage expenses such as port, canal and fuel costs. A time
charter is generally a contract to charter a vessel for a fixed period of time
at a specified daily rate. Under time charters, the charterer pays voyage
expenses such as port, canal and fuel costs. Under both types of charters, we
pay for vessel operating expenses, which include crew costs, provisions, deck
and engine stores, lubricating oil, insurance, maintenance and repairs, as well
as for commissions on gross charter rates. We are also responsible for the
vessel's intermediate and special survey costs.
Vessels operating on time charters provide more predictable cash flows,
but can yield lower profit margins than vessels operating in the spot market
during periods characterized by favorable market conditions. Vessels operating
in the spot market generate revenues that are less predictable but may enable us
to capture increased profit margins during periods of improvements in vessel
rates although we are exposed to the risk of declining vessel rates, which may
have a materially adverse impact on our financial performance. We are constantly
evaluating opportunities to increase the number of our vessels deployed on time
charters, but only expect to enter into additional time charters if we can
obtain contract terms that satisfy our criteria.
On July 23, 2004, our common stock was listed on the Nasdaq National
Market, under the symbol "TOPT", in connection with our initial public offering.
The net proceeds of our initial public offering, approximately $124.4 million,
were primarily used to finance the acquisition of 10 vessels, comprised of 8
ice-class double-hull Handymax tankers and 2 double-hull Suezmax tankers. The
total cost of the acquisition was approximately $251.3 million. TOP Tanker
Management, our wholly-owned subsidiary, has subcontracted the day to day
technical management, crewing and certain purchasing functions of these 10
tankers to Unicom Management, an unaffiliated ship management company operating
in Cyprus.
On November 5, 2004 we completed a follow-on offering of our common
stock. The net proceeds of our follow-on offering, approximately $139.4 million,
were used primarily to finance the acquisition of 5 double-hull Suezmax tankers.
The total cost of the acquisition was approximately $257.0 million. TOP Tanker
Management, our wholly-owned subsidiary, has subcontracted the day to day
technical management and crewing of four of these vessels to V.Ships, an
unaffiliated ship management company operating in Glasgow, Scotland and the day
to day technical management, crewing and certain purchasing functions of the
remaining vessel to Unicom Management, an unaffiliated ship management company
operating in Cyprus.
Results of Operations
For discussion and analysis purposes only, we evaluate performance
using time charter equivalent, or TCE, revenues. TCE revenues are voyage
revenues minus voyage expenses. Voyage expenses primarily consist of port, canal
and fuel costs that are unique to a particular voyage, which would otherwise be
paid by a charterer under a time charter, as well as commissions. We believe
that presenting voyage revenues, net of voyage expenses, neutralizes the
variability created by unique costs associated with particular voyages or the
deployment of vessels on time charter or on the spot market and presents a more
accurate representation of the revenues generated by our vessels.
We calculate daily TCE rates by dividing TCE revenues by voyage days
for the relevant time period. We also generate demurrage revenue, which
represents fees charged to charterers associated with our spot market voyages
when the charterer exceeds the agreed upon time required to load or discharge a
cargo. We calculate daily direct vessel operating expenses and daily general and
administrative expenses for the relevant period by dividing the total expenses
by the aggregate number of calendar days that we owned each tanker for the
period.
We depreciate our tankers on a straight-line basis over their estimated
useful lives determined to be 25 years from the date of their initial delivery
from the shipyard. Depreciation is based on cost less the estimated residual
value. We capitalize the total costs associated with a drydocking and amortize
these costs on a straight-line basis over the period when the next drydocking
becomes due, which is typically 30 to 60 months. Regulations and/or incidents
may change the estimated dates of next drydockings.
Year ended December 31, 2004 compared to the year ended December 31, 2003
VOYAGE REVENUES--Voyage revenues increased by $70.7 million, or 306.1%,
to $93.8 million for 2004 compared to $23.1 million for the prior year. This
increase is due to the acquisition of 2 tankers and 10 tankers during the first
and third quarter of 2004, respectively, which contributed $66.7 million in
voyage revenues and the overall stronger spot market during 2004 which increased
the voyage revenues generated by the remaining vessels to $27.1 million in 2004
from $23.1 million in 2003.
VOYAGE EXPENSES--Voyage expenses primarily consist of port, canal and
fuel costs that are unique to a particular voyage. These expenses, which are
paid by the charterer under a time charter contract, as well as commissions,
increased $11.0 million, or 186.4%, to $16.9 million for 2004 compared to $5.9
million for the prior year. This increase is primarily due to the increase in
the average number of tankers in our fleet during 2004 compared to the prior
year, as well as the increase in the cost of fuel to operate the tankers.
NET VOYAGE REVENUES--Net voyage revenues, which are voyage revenues
minus voyage expenses, increased by $59.8 million, or 349.7%, to $76.9 million
for 2004 compared to $17.1 million for the prior year. This increase is the
result of the increase in the average number of tankers in our fleet and the
overall stronger spot market during 2004 compared to the prior year. The average
number of tankers in our fleet increased 118.2% to 9.6 tankers during 2004
compared to 4.4 tankers during the prior year.
2003 2004
---- ----
Dollars in thousands
Voyage revenues................................... $23,085 $93,829
Less Voyage expenses.............................. (5,937) (16,898)
Net voyage revenues............................... $17,148 $76,931
======== =======
The following describes our charter revenues for 2004 as compared to
the prior year:
o Average daily TCE rate increased by $12,625, or 111.7%, to $23,929
for 2004 compared to $11,304 for the prior year.
o $32,138,000, or 41.7%, of net voyage revenue was generated by time
charter contracts and $44,793,000, or 58.3%, of net voyage revenue
was generated in the spot market during 2004, compared to
$7,506,000, or 43.9%, of net voyage revenue generated by time
charter contracts, and $9,642,000, or 56.1%, of net voyage revenue
generated in the spot market during the prior year.
o Tankers operated an aggregate of 1,780 days, or 55.4%, on time
charter contracts and 1,435 days, or 44.6%, in the spot market
during 2004, compared to 543 days, or 35.8%, on time charter
contracts and 974 days, or 64.2%, in the spot market during the
prior year.
o Average daily time charter rate was $18,055 for 2004 compared to
average daily time charter rate of $13,824 for the prior year.
o Average daily spot rate was $31,215 for 2004 compared to average
daily spot rate of $9,899 for the prior year.
VESSEL OPERATING EXPENSES -- Vessel operating expenses, which include
crew costs, provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs, increased by $8.5 million, or 101.2%, to $16.9 million
for 2004 compared to $8.4 million for the prior year. This increase is primarily
due to the increase in the average number of tankers in our fleet, which
increased 118.2% between the periods. Daily vessel operating expenses per tanker
decreased by $439, or 8.4%, to $4,794 for 2004 compared to $5,233 for the prior
year. This decrease is the result of lower crewing and insurance expenses
associated with the economies of scale of operating a larger fleet during the
year, compared to the previous year and the subcontracting of the day to day
technical management, crewing and certain purchasing functions of our vessels to
V.Ships Management Limited and Unicom Management during the third quarter of
2004. Our vessel operating expenses depend on a variety of factors, many of
which are beyond our control and affect the entire shipping industry.
MANAGEMENT FEES, SUB-MANAGER FEES AND GENERAL AND ADMINISTRATIVE
EXPENSES--General and administrative expenses, which include all of our onshore
expenses, the fees that Primal Tankers Inc., our former management company,
charged to manage our vessels, and the fees paid to V.Ships Management Limited
and Unicom Management, increased by $6.8 million, or 377.8%, to $8.6 million for
2004 compared to $1.8 million for the prior year. This increase is due to
increased staff and additional administrative costs in connection with the
operation of our larger fleet, and the duties typically associated with public
companies and to the compensation of our senior management and directors, which
was in the aggregate amount of $4.4 million. Daily general and administrative
expenses per tanker increased $1,311, or 116.2%, to $2,439 for 2004 compared to
$1,128 for the prior year.
FOREIGN CURRENCY GAINS OR LOSSES--We incurred a $75,000 foreign
currency loss for 2004 compared to a loss of $105,000 for the prior year.
GAIN ON SALE OF VESSELS--During the last quarter of 2004 we sold the
vessels M/T Tireless and M/T Med Prologue and we realized a total gain of
$638,000.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization, which
include depreciation of tankers, office furniture and equipment as well as
amortization of drydockings, increased by $10.4 million, or 247.6%, to $14.6
million for 2004 compared to $4.2 million for the prior year. This increase is
primarily due to the increase in the average number of tankers in our fleet, the
increase in the book value of our fleet as a result of our acquisitions of
tankers during 2004, and the amortization of capitalized expenses associated
with drydockings that occurred for the first time to vessels that are part of
our fleet.
2003 2004
---- ----
Dollars in thousands
Vessels depreciation expense............................... $3,604 $13,073
Office furniture and equipment depreciation expense........ 0 35
Amortization of drydockings................................ $599 1,514
------- -------
$4,203 $14,622
Depreciation of vessels increased by $9.5 million, or 263.9%, to $13.1
million for 2004 compared to $3.6 million for the prior period. This increase is
due to the increase in the book value of our fleet as a result of our
acquisitions of tankers during 2004 compared to the prior year.
Amortization of drydockings increased by $0.9 million, or 150.0%, to
$1.5 million for 2004 compared to $0.6 million for the prior year. This increase
includes amortization associated with $7.4 million of capitalized expenditures
relating to our tankers during 2004 compared to $2.4 million of capitalized
expenditures during the prior year. This increase is the result of the
amortization of capitalized expenses associated mainly with drydockings which
took place after September 30, 2004, all of which relate to tankers which have
capitalized drydocking expenditures for the first time since we acquired them.
We anticipate that the amortization associated with drydockings will continue to
increase in 2005 due to the increase in the average number of tankers in our
fleet, the increase in costs associated with drydockings, and that we are
currently drydocking vessels for the first time since these vessels became part
of our fleet.
NET INTEREST EXPENSE--Net interest expense increased by $3.4 million,
or 261.5%, to $4.7 million for 2004 compared to $1.3 million for the prior year.
This increase is the result of the increase in our weighted average outstanding
debt as a result of our acquisitions of tankers. Net interest expense is
anticipated to continue to increase in 2005 as a result of the debt that we
incurred in connection with our acquisition of additional tankers.
OTHER NET--We recognized a gain of $0.1 million during 2004 compared to
a gain of $0.4 million during the prior year. The amount relating to 2003
relates to the excess amount the Company received in connection with a claim for
damages to its vessels compared to the actual costs associated with the repairs.
NET INCOME--Net income was $32.8 million for 2004 compared to net
income of $1.6 million for the prior year.
Year ended December 31, 2003 compared to the year ended December 31, 2002
VOYAGE REVENUES--Voyage revenues increased by $11.7 million, or 102.6%,
to $23.1 million for 2003 compared to $11.4 million for the prior year. This
increase is due to the acquisition of M/T Fearless and M/T Tireless in February
and June 2003, respectively, which contributed $7.6 million in voyage revenues
and the overall stronger spot market during 2003 which increased the voyage
revenues generated by the remaining vessels to $15.5 million in 2003 from $11.4
million in 2002.
VOYAGE EXPENSES--Voyage expenses primarily consist of port, canal and
fuel costs that are unique to a particular voyage. These expenses, which are
paid by the charterer under a time charter contract, as well as commissions,
increased $2.6 million, or 78.8%, to $5.9 million for 2003 compared to $3.3
million for the prior year. This increase is primarily due to the increase in
the average number of tankers in our fleet during 2003 compared to the prior
year, as well as the increase in the cost of fuel to operate the tankers.
NET VOYAGE REVENUES--Net voyage revenues, which are voyage revenues
minus voyage expenses, increased by $9.0 million, or 111.1%, to $17.1 million
for 2003 compared to $8.1 million for the prior year. This increase is the
result of the increase in the average number of tankers in our fleet and the
overall stronger spot market during 2003 compared to the prior year. The average
number of tankers in our fleet increased 51.7%, to 4.4 tankers compared to 2.9
tankers for 2003 compared the prior year.
2002 2003
---- ----
Dollars in thousands
Voyage revenues................................... $11,426 $23,085
Less Voyage expenses.............................. (3,311) (5,937)
-------- -------
Net voyage revenues............................... $8,115 $17,148
======== =======
The following describes our charter revenues for 2003 as compared to
the prior year:
o Average daily TCE rate increased by $2,860, or 33.9%, to $11,304 for
2003 compared to $8,444 for the prior year.
o $7,506,000, or 43.9%, of net voyage revenue was generated by time
charter contracts and $9,642,000, or 56.1%, of net voyage revenue
was generated in the spot market during 2003, compared to
$1,977,000, or 24.7%, of net voyage revenue generated by time
charter contracts, and $6,137,000, or 75.3%, of net voyage revenue
generated in the spot market during the prior year.
o Tankers operated an aggregate of 543 days, or 35.8%, on time charter
contracts and 974 days, or 64.2%, in the spot market during 2003,
compared to 160 days, or 16.6%, on time charter contracts and 801
days, or 83.4%, in the spot market during the prior year.
o Average daily time charter rate was $13,824 for 2003 compared to
average daily time charter rate of $12,359 for the prior year.
o Average daily spot rate was $9,899 for 2003 compared to average
daily spot rate of $7,662 for the prior year.
VESSEL OPERATING EXPENSES -- Vessel operating expenses, which include
crew costs, provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs, increased by $3.9 million, or 86.7%, to $8.4 million
for 2003 compared to $4.5 million for the prior year. This increase is primarily
due to the increase in the average number of tankers in our fleet, which
increased 51.7% between the periods. The lower rate of increase in vessel
operating expenses relative to the increase in the average number of tankers in
our fleet and the growth in the average size of the tankers that comprised our
fleet during 2003 compared to 2002 is primarily due to the lower maintenance and
repair expenses during 2002. Daily vessel operating expenses per tanker
increased by $864, or 19.8%, to $5,233 for 2003 compared to $4,369 for the prior
year. This increase is the result of the growth in the average size of the
tankers in our fleet, as larger tankers are inherently more expensive to
operate, and as a result of the low vessel operating expenses incurred during
2002 described above. The increase in daily vessel operating expenses was the
result of the growth in the average size of the tankers in our fleet and the
percentage of Suezmax tankers that comprise our fleet. Suezmax tankers are
larger and inherently more expensive to operate than product tankers. Our vessel
operating expenses depend on a variety of factors, many of which are beyond our
control and affect the entire shipping industry.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative
expenses, which is primarily the fees that Primal Tankers Inc. charged to manage
our vessels, increased by $1.0 million, or 125.0%, to $1.8 million for 2003
compared to $0.8 million for the prior year. This increase is due to an increase
in the management fee charged by Primal Tankers Inc. as a result of the increase
in the payroll expenses including the increase in the number of its personnel
arising from the increase in the average number of tankers in our fleet, which
increased 51.7%, during 2003 compared to the prior year. Daily general and
administrative expenses per tanker increased $345, or 44.1%, to $1,128 for 2003
compared to $783 for the prior year, this increase is due to an increase in the
management fee charged by Primal Tankers Inc. as a result of the increase in the
payroll expenses including the increase in the number of personnel arising from
the increase in the average number of tankers in our fleet, which increased
51.7%, during 2003 compared to the prior year. We did not pay any compensation
to the members of our senior management or our directors during the year ended
December 31, 2003.
FOREIGN CURRENCY GAINS OR LOSSES--We incurred a $105,000 foreign
currency loss for 2003 compared to a loss of $62,000 for the prior year.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization, which
include depreciation of tankers as well as amortization of drydockings,
increased by $1.8 million, or 75.0%, to $4.2 million for 2003 compared to $2.4
million for the prior year. This increase is primarily due to the increase in
the average book value of our fleet as a result of our acquisitions of tankers
during 2003, and the amortization of capitalized expenses associated with
drydockings that occurred for the first time to vessels that are part of our
fleet.
2002 2003
---- ----
Dollars in thousands
Vessels depreciation expense............................ $2,213 $3,604
Amortization of drydockings............................. $177 $599
---- ----
$2,390 $4,203
Depreciation of vessels increased by $1.4 million, or 63.6%, to $3.6
million for 2003 compared to $2.2 million for the prior period. This increase is
due to the increase in the book value of our fleet as a result of our
acquisitions of tankers during 2003 compared to the prior year.
Amortization of drydockings increased by $0.4 million, or 200.0%, to
$0.6 million for 2003 compared to $0.2 million for the prior year. This increase
includes amortization associated with $2.4 million of capitalized expenditures
relating to our tankers during 2003 compared to $0.5 million of capitalized
expenditures during the prior year.
NET INTEREST EXPENSE--Net interest expense increased by $0.3 million,
or 30.0%, to $1.3 million for 2003 compared to $1.0 million for the prior year.
This increase is the result of the increase in our weighted average outstanding
debt as a result of our acquisitions of tankers during 2003. The magnitude of
the increase in net interest expense relative to the increase in our weighted
average outstanding debt was mitigated by the overall lower interest rate
environment during 2003 compared to the prior year.
OTHER NET--We recognized a gain of $0.4 million during 2003 compared to
a gain of $0.9 million during the prior year. These gains relate to the excess
amount the Company received in connection with a claim for damages to its
vessels compared to the actual costs associated with the repairs.
NET INCOME--Net income was $1.6 million for 2003 compared to net income
of $0.2 million for the prior year.
Liquidity and capital resources
Since our formation, our sources of funds have been equity provided by
our shareholders, long-term borrowings and operating cash flows. Our principal
use of funds has been capital expenditures to establish and grow our fleet,
maintain the quality of our vessels, comply with international shipping
standards and environmental laws and regulations, fund working capital
requirements, make principal repayments on outstanding loan facilities, and pay
dividends. We expect to rely upon operating cash flows, long-term borrowings and
equity financings to implement our growth plan. We believe that our current cash
balance as well as operating cash flows will be sufficient to meet our liquidity
needs for the next year.
Our practice has been to acquire vessels using a combination of funds
received from equity investors and bank debt secured by mortgages on our
vessels. Our business is capital intensive and its future success will depend on
our ability to maintain a high-quality fleet through the acquisition of newer
vessels and the selective sale of older vessels. These acquisitions will be
principally subject to management's expectation of future market conditions as
well as our ability to acquire vessels on favorable terms.
On July 23, 2004, the Company completed its initial public offering on
the Nasdaq National Market. In this respect, 12,258,570 shares of common stock
were issued at $11.00 per share. The net proceeds of the initial public offering
totaled $124.4 million of which approximately $112.1 million were used to
acquire 10 double-hull tankers, consisting of 8 Handymax and 2 Suezmax product
tankers, and approximately $12.3 million for general corporate purposes. In
addition, 20,000 shares of common stock were sold in a private transaction to
Sovereign Holdings, a company owned by our Chief Executive Officer, at the same
price as those sold to the public.
On November 5, 2004, the Company completed a follow-on offering of its
common stock on the Nasdaq National Market. In this respect, 9,552,420 shares of
common stock were issued at $15.50 per share. 822,581 of these shares of our
common stock were issued to Kingdom Holdings. The net proceeds of the follow-on
offering totaled $139.4 million of which approximately $116.7 million were used
for the acquisition of 5 double-hull Suezmax tankers, and approximately $22.7
million were used to repay a portion of our debt.
Cash and cash equivalents increased $112.5 million to $114.8 million as
of December 31, 2004 compared to $2.3 million as of December 31, 2003. That
increase includes a portion of the proceeds of our follow-on offering on
November 5, 2004, which have been used, prior and subsequent to December 31,
2004, to finance the acquisition of 5 Suezmax tankers. Working capital is
current assets minus current liabilities, including the current portion of
long-term debt. Working capital surplus was $98.2 million as of December 31,
2004, compared to a working capital deficit of $4.1 million as of December 31,
2003. The current portion of long-term debt, net of unamortized deferred
financing costs, included in our current liabilities was $19.5 million and $4.0
million as of December 31, 2004 and December 31, 2003, respectively.
EBITDA, as defined in Footnote 3 to the "Selected Financial Data" in
Item 3 above, increased by $44.9 million, or 623.6%, to $52.1 million for 2004
compared to $7.2 million for the prior year. This increase is due to the growth
of our fleet and the overall stronger tanker market during 2004 compared to the
prior year.
EBITDA, increased by $3.6 million, or 100.0%, to $7.2 million for 2003
compared to $3.6 million for the prior year. This increase is due to the growth
of our fleet and the overall stronger tanker market during 2003 compared to the
prior year.
NET CASH FROM OPERATING ACTIVITIES--increased 483.7% to $28.6 million
during 2004, compared to $4.9 million during the prior year. This increase is
primarily attributable to net income of $32.8 million and depreciation and
amortization, which includes depreciation for vessels, depreciation for office
furniture and equipment, amortization of deferred drydocking costs and
amortization of deferred financing fees, of $15.4 million for 2004, compared to
net income of $1.6 million and depreciation and amortization of $4.3 million
during the prior year.
NET CASH USED IN INVESTING ACTIVITIES--was $344.9 million during 2004
compared to net cash used in investing activities of $19.7 million during the
prior year. During 2004, we expended $327.6 million for the acquisition of 12
tankers, compared to expending $19.6 million for the acquisition of 2 tankers
during the prior year.
NET CASH FROM FINANCING ACTIVITIES--was $428.7 million during 2004
compared to net cash from financing activities of $17.0 million during the prior
year. The change in cash provided by financing activities relates to the
following:
o Net proceeds from borrowing under long-term debt were $281.9 million
in connection with the acquisition of 4 Suezmax tankers and 8
product tankers during 2004 compared to $25.9 million in connection
with our acquisition of 2 product tankers during the prior year.
o Principal repayments of long-term debt were $119.5 million during
2004 compared to $14.3 million during the prior year.
o Net issuance of common stock and capital contributions to additional
paid in capital were $281.1 million during 2004 compared to $6.5
million during the prior year as a result of our initial public
offering on July 23, 2004 and our follow-on offering on November 5,
2004.
o Dividends of $2.3 million paid during 2004 compared to $0.6 million
paid during the prior year.
NET CASH FROM OPERATING ACTIVITIES--increased 104.2% to $4.9 million
during 2003, compared to $2.4 million during the prior year. This increase is
primarily attributable to net income of $1.6 million and depreciation and
amortization of $4.3 million for 2003 compared to net income of $0.2 million and
depreciation and amortization of $2.5 million during the prior year.
NET CASH USED IN INVESTING ACTIVITIES--was $19.7 million during 2003
compared to net cash used in investing activities of $18.3 million during the
prior year. During 2003, we expended $19.6 million for the acquisition of two
tankers, compared to expending $18.5 million for the acquisition of one tanker
during the prior year.
NET CASH FROM FINANCING ACTIVITIES--was $17.0 million during 2003
compared to net cash from financing activities of $14.2 million during the prior
year. The change in cash provided by financing activities relates to the
following:
o Net proceeds from borrowing under long-term debt were $25.9 million
in connection with the acquisition of 2 product tankers during 2003
compared to $15.6 million in connection with our acquisition of 1
product tanker during the prior year.
o Principal repayments of long-term debt were $14.3 million during
2003 compared to $2.6 million during the prior year.
o Capital contributions to additional paid in capital was $6.5 million
during 2003 compared to $2.3 million during the prior year.
Summary of Contractual Obligations
The following table sets forth our contractual obligations and their
maturity dates as of December 31, 2004.
Payments due by period
2-3 4-5 More than
Contractual Obligations: Total 1 year years years 5 years
----------------------- ----- ------ ----- ----- -------
(in thousands of $)
Long term debt 197,000 20,000 40,000 40,000 97,000
Operating leases 3,438 622 1,244 1,244 328
Vessel Acquisitions 230,850 230,850 - - -
Total 431,288 251,472 41,244 41,244 97,328
----- ------- ------- ------ ------ ------
As of December 31, 2004, the outstanding balance of our credit facility
with the Royal Bank of Scotland, which we refer to as the initial credit
facility, was $197.0 million, maturing in 2012. The interest rate for the first
$98.5 million is LIBOR, whereas with respect to the remaining $98.5 million, we
have entered into a four year swap agreement with the Royal Bank of Scotland for
a fixed interest rate of 3.61%. In addition to these interest rates, the
outstanding amount is subject to a bank spread, which will be adjusted quarterly
to 100 basis points if the ratio of the outstanding loan balance to the
aggregate market value of our vessels securing the loan is less than or equal to
60%; 112.5 basis points if this ratio is greater than 60% but less than 70%; or
125 basis points if this ratio is greater than 70%. The initial credit facility
is collateralized by mortgages on 15 of the vessels in our fleet.
The initial credit facility contains, among other things, financial
covenants requiring us to ensure that the aggregate market value of the
mortgaged vessels at all times exceeds 130% of the aggregate outstanding
principal amount under the loan and to maintain minimum liquid funds with the
lender of not less than the greater of $10.0 million or $0.5 million per vessel
in our fleet. We are permitted to pay dividends under the loan so long as we are
not in default of a loan covenant.
We are obligated to repay the principal amount in 16 consecutive
semi-annual installments of $10.0 million, each commencing on March 31, 2005,
together with a balloon payment of $37.0 million payable with the final
installment. Our initial credit facility allows us, subject to certain
conditions, to defer up to two non-consecutive payments of the first ten
scheduled principal payments of $10.0 million each, provided that a fee of 1%
shall be payable on any deferred installment and a maximum of $20.0 million may
be deferred at any time.
TOP Tanker Management, our wholly-owned subsidiary, is responsible for
the chartering, operational and technical management of our tanker fleet,
including crewing, maintenance, repair, capital expenditures, drydocking, vessel
taxes, maintaining insurance and other vessel operating expenses under
management agreements with our vessel owning subsidiaries. As of December 31,
2004, TOP Tanker Management has subcontracted the day to day technical
management, crewing and certain purchasing functions of 10 of the vessels in our
tanker fleet to Unicom Management, a ship management company operating in
Cyprus, and has subcontracted the day to day technical management and crewing of
5 of the vessels in our tanker fleet to V.Ships Management Limited, a ship
management company operating in Glasgow, Scotland. TOP Tanker Management pays a
monthly fee of $14,000 per vessel under its agreements with Unicom Management
and a monthly fee of $10,000 per vessel under its agreements with V.Ships
Management. Under the terms of these agreements, Unicom Management and V.Ships
Management agreements may be terminated at any time upon 3 months notice.
In July 2004, we entered into an agreement to lease office space in
Athens, Greece from Pyramis Technical Co. SA, which is wholly owned by the
father of our Chief Executive Officer. The agreement is for a duration of six
years initially, with an option for an extension of four years. The monthly
rental is Euro 39,000 adjusted annually for inflation effective January 1, 2006.
The total minimum rental payable under this lease for the six years ending
December 31, 2010, before any adjustment for inflation and translated using the
exchange rate of US$/Euro on December 31, 2004, is approximately $3.4 million.
Other major capital expenditures include funding our maintenance
program of regularly scheduled intermediate survey or special survey drydocking
necessary to preserve the quality of our vessels as well as to comply with
international shipping standards and environmental laws and regulations.
Although we have some flexibility regarding the timing of this maintenance, the
costs are relatively predictable. Management anticipates that these vessels
which are younger than 15 years are required to undergo in-water intermediate
surveys 2.5 years after a special survey drydocking and that vessels are to be
drydocked every five years, while vessels 15 years or older are to be drydocked
for an intermediate survey every 2.5 years in which case the additional
intermediate survey drydockings take the place of in-water surveys.
During 2004, we had 250 off hire days associated with 5 drydockings.
During 2003 we had 83 off hire days associated with 2 drydockings. Each
intermediate survey drydocking is estimated to require approximately 25 days and
each special survey drydocking is estimated to require approximately 35 days. In
addition to the costs described above, drydockings result in off hire time for a
vessel, during which the vessel is unable to generate revenue. Off hire time
includes the actual time the vessel is in the shipyard as well as ballast time
to the shipyard from the port of last discharge. The ability to meet this
maintenance schedule will depend on our ability to generate sufficient cash
flows from operations or to secure additional financing.
Recent developments
New Credit Facilities:
Royal Bank of Scotland Facility:
In February 2005, we entered into a financing agreement with the Royal
Bank of Scotland, to which we refer as the new credit facility, to partially
finance the acquisition of 3 of the 5 additional Suezmax tankers acquired in
connection with the follow-on offering of our common shares (the M/T Priceless,
the M/T Noiseless and the M/T Faultless), 4 Handymax tankers (the M/T Taintless,
the M/T Dauntless, the M/T Soundless and the M/T Topless) and to refinance the
then outstanding balance of our initial credit facility. The new credit facility
was for the amount of $424.8 million divided into three tranches of $197.0
million, $83.8 million and $144.0 million (Tranches A, B and C, respectively).
The $197.0 million tranche is payable in 16 equal consecutive semi-annual
installments of $10.0 million each, beginning on March 31, 2005, together with a
balloon payment of $37.0 million payable with the final installment. The $83.8
million tranche is payable in 14 varying semi-annual installments beginning on
July 31, 2005, together with a balloon payment of $17.0 million payable with the
final installment. The $144.0 million tranche is payable in 17 semi-annual
installments of $6.3 million, beginning on November 30, 2005, together with a
balloon payment of $36.9 million payable with the final installment. Additional
terms and conditions of the new credit facility are as follows:
The initial interest rate on the new credit facility is 100 basis
points over LIBOR. The interest rate will be adjusted quarterly to 112.5 basis
points over LIBOR if the Security Value (as defined in the new credit facility)
is less than 167% of the loan but greater than or equal to 143% of the loan; or
125 basis points over LIBOR if the Security Value (as defined in the new credit
facility) is less than 143% of the loan. The new credit facility is
collateralized by a first priority mortgage on each of the 15 vessels we owned
as of December 31, 2004, and on each of the 4 Handymax tankers and 3 Suezmax
tankers mentioned above.
The new credit facility contains, among other things, financial
covenants requiring us to: ensure that the aggregate market value of our fleet
at all times exceeds 130% of the aggregate outstanding principal amount under
the new credit facility; maintain minimum liquid funds with the lender of not
less than the greater of $10.0 million or $0.5 million per vessel in our fleet;
ensure that our total assets minus our debt will not at any time be less than
$200.0 million and at all times exceed 35% of our total assets; ensure that
EBITDA (as defined in the new credit facility) will at all times exceed 120% of
the aggregate of interest expenses and debt due at a particular period; and meet
minimum working capital requirements. The new credit facility also contains
general covenants that require us to maintain adequate insurance coverage and
obtain the bank's consent before we incur new indebtedness that is secured by
the vessels mortgaged thereunder. In addition, the new credit facility prohibits
us, without the lender's consent, from appointing a chief executive officer
other than Evangelos Pistiolis and requires that the vessels mortgaged
thereunder be managed by TOP Tanker Management, which will subcontract the
technical management of the mortgaged vessels to V.Ships Management Limited,
Unicom Management and any other company acceptable to the lender. We will be
permitted to pay dividends under the new credit facility so long as we are not
in default of a loan covenant.
We paid a fee of 1.0%, 1.0% and 0.75% of the amount of Tranche A, B and
C, respectively of the loan on the date that we signed the loan agreement, and a
commitment fee of 0.25% per annum shall accrue on the amount of the undrawn
balance from the date that we signed the offer letter which shall be payable one
month in arrears and on the date of the drawdown.
DVB Facility:
In March 2005, we entered into a credit facility with DVB Bank, to
which we refer as the DVB credit facility, for a total of $56.5 million, to
finance the purchase of 2 Suezmax tankers, the M/T Stopless and the M/T
Stainless. The loan is payable in 28 varying quarterly installments beginning on
July 29, 2005 and a balloon payment of $10.2 million, payable together with the
last installment. The interest rate on the DVB credit facility is 125 basis
points over LIBOR. Beginning on the date of the credit facility and ending on
the final drawdown date, we will pay the lender a quarterly fee of 0.25% of the
average undrawn amount of the loan for the quarter. The DVB credit facility is
collateralized by a first priority mortgage on the M/T Stopless and the M/T
Stainless. A fee of 1% was paid upon drawdown of the loan.
The DVB credit facility contains, among other things, financial
covenants requiring us to: ensure that the aggregate market value of the
mortgaged vessels is equal to at least 130% of the outstanding principal amount
under the loan, ensure that our total assets minus our debt will not at any time
be less than $200.0 million or 35% of our total assets, to ensure that our
EBITDA (as defined in the DVB credit facility agreement) will not at any time be
less than 120% of the aggregate of interest expenses and debt due at a
particular period, and maintain certain minimum liquid funds of not less than
the greater of $10.0 million or $0.5 million per vessel in our fleet. In
addition, the DVB credit facility prohibits us, without the lender's consent,
from appointing a chief executive officer other than Evangelos Pistiolis and
requires that the mortgaged vessels are managed by TOP Tanker Management, which
may subcontract the technical management of the mortgaged vessels to V.Ships
Management Limited, Unicom Management or any other company acceptable to the
lender.
Interest Rate Swaps
In connection with the new credit facility discussed above, we entered
into interest rate swap agreements, effective on March 31, 2005: (i) for the
initial amount of $93.5 million and for a period of five years, with a fixed
interest rate of 4.72% plus the applicable bank margin; (ii) for the initial
amount of $27.9 million and for a period of four years, with a fixed interest
rate of 4.58% plus the applicable bank margin; and (iii) for the initial amount
of $36.5 million and for a period of four years, with a fixed interest rate of
4.66% plus the applicable bank margin.
Vessels'Acquisitions and Vessel's Sale
On February 23, 2005, we entered into an agreement for the acquisition
of the M/T Topless for $39.0 million, a 47,262 Dwt, double-hull Handymax tanker,
built in 1998 by Onomichi Dockyard Co., Ltd., of Japan. TOP Tanker Management
has undertaken the technical management of this vessel. The M/T Topless was
delivered on April 26, 2005.
On March 4, 2005 we entered into an agreement for the acquisition of 3
double-hull Handymax tankers, the 46,217 dwt M/T Taintless, the 46,168 dwt M/T
Dauntless and the 46,185 dwt M/T Soundless for the total amount of $124.5
million. The vessels are sisterships, built in 1999, by Hyundai Heavy Industries
Co., Ltd., of the Republic of Korea. TOP Tanker Management has undertaken the
management of the M/T Soundless and has subcontracted the day to day technical
management and crewing of the remaining two vessels to V.Ships. The M/T
Taintless, the M/T Dauntless and the M/T Soundless were delivered on March 21,
March 24 and and April 19, 2005, respectively.
On March 16, 2005, we agreed to sell our final remaining single-hull
vessel, the M/T Yapi, for $8.6 million. On March 29, 2005, we also entered the
vessel into a bareboat charter with the purchasers until August 31, 2005, the
vessel's delivery date (originally scheduled July 31, 2005). We received an
advance payment of $1.0 million from the purchasers as a security of their
obligation to purchase the vessel and we will also be paid a daily bareboat hire
of $6,000 under the charter.
Following the agreement to sell our final remaining single-hull vessel,
we currently own and operate a fleet of 23 vessels, consisting of 14 double-hull
Handymax tankers and 9 double-hull Suezmax tankers. Four of our Handymax tankers
were delivered in March and April 2005 and 5 of our Suezmax tankers were
purchased in connection with the proceeds of the following-on offering of our
common stock in November 2004.
Fleet Management
TOP Tanker Management is responsible for the chartering, operational
and technical management of our tanker fleet under management agreements with
us. TOP Tanker Management has undertaken the technical management of 2 of the
vessels in our current fleet and has subcontracted the day to day technical
management, crewing and certain purchasing functions of 11 of the vessels in our
tanker fleet to Unicom Management, an unaffiliated ship management company
operating in Cyprus, and has subcontracted the day to day technical management
and crewing of 10 of the vessels in our current fleet to V.Ships Management
Limited, an unaffiliated ship management company operating in Glasgow, Scotland.
TOP Tanker Management may subcontract the technical management of vessels
acquired in the future to other third party technical management companies.
London Office
On February 2, 2005, TOP TANKERS (UK) LIMITED, a newly established
wholly-owned subsidiary to be engaged in the chartering of our vessels, entered
into a lease for office space in London for Pounds Sterling 10,000 per month,
from an unrelated third party. The lease will end on December 31, 2005.
Dividends
On January 12, 2005, we paid the first dividend on our common shares of
$0.21 per share to shareholders of record as of December 22, 2004. On March 16,
2005, we declared a dividend on our common shares of $0.21 per share that was
paid on April 12, 2005, to shareholders of record of our common shares as of
March 31, 2005. On June 22, 2005, we declared a dividend on our common shares of
$0.21 per share that will be paid on July 20, 2005, to shareholders of record of
our common shares as of July 7, 2005.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles, or
U.S. GAAP. The preparation of those financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are those that reflect significant
judgments or uncertainties, and potentially result in materially different
results under different assumptions and conditions. We have described below what
we believe are our most critical accounting policies that involve a higher
degree of judgment and the methods of their application. For a description of
all of our significant accounting policies, see Note 2 to our consolidated
financial statements included herein.
Depreciation. We record the value of our vessels at their cost (which
includes acquisition costs directly attributable to the vessel and expenditures
made to prepare the vessel for its initial voyage) less accumulated
depreciation. We depreciate our vessels on a straight-line basis over their
estimated useful lives, estimated to be 25 years from the date of initial
delivery from the shipyard. We believe that a 25-year depreciable life is
consistent with that of other shipowners. Depreciation is based on cost of the
vessel less its residual value which is estimated to be $160 per light-weight
ton. A decrease in the useful life of the vessel or in the residual value would
have the effect of increasing the annual depreciation charge. When regulations
place limitations over the ability of a vessel to trade on a worldwide basis,
the vessel's useful life is adjusted at the date such regulations become
effective.
Deferred drydock costs. Our vessels are required to be drydocked for
major repairs and maintenance that cannot be performed while the vessels are
operating approximately every 30 to 60 months. We capitalize the costs
associated with the drydocks as they occur and amortize these costs on a
straight line basis over the period between drydocks. Costs capitalized as part
of the drydock include actual costs incurred at the drydock yard; cost of fuel
consumed between the vessel's last discharge port prior to the drydock and the
time the vessel leaves the drydock yard; cost of hiring riding crews to effect
repairs on a ship and parts used in making such repairs that are reasonably made
in anticipation of reducing the duration or cost of the drydock; cost of travel,
lodging and subsistence of our personnel sent to the drydock site to supervise;
and the cost of hiring a third party to oversee a drydock. We believe that these
criteria are consistent with industry practice, and that our policy of
capitalization reflects the economics and market values of the vessels.
Impairment of long-lived assets. We evaluate the carrying amounts
(primarily for vessels and related drydock costs) and periods over which
long-lived assets are depreciated to determine if events have occurred which
would require modification to their carrying values or useful lives. In
evaluating useful lives and carrying values of long-lived assets, we review
certain indicators of potential impairment, such as undiscounted projected
operating cash flows, vessel sales and purchases, business plans and overall
market conditions. We determine undiscounted projected net operating cash flows
for each vessel and compare it to the vessel carrying value including
unamortized drydock costs. If our estimate of undiscounted future cash flows for
any vessel is lower than the vessel's carrying value plus any unamortized
drydock costs, the carrying value is written down, by recording a charge to
operations, to the fair market value if the fair market value is lower than the
vessel's carrying value. We estimate fair market value primarily through the use
of third party valuations performed on an individual vessel basis. As vessel
values are volatile, the actual fair market value of a vessel may differ
significantly from estimated fair market values within a short period of time.
Allowance for doubtful accounts. Revenue is based on contracted voyage
and time charter parties and, although our business is with customers who we
believe to be of the highest standard, there is always the possibility of
dispute, mainly over terms, calculation and payment of demurrages. In such
circumstances, we assess the recoverability of amounts outstanding and we
estimate a provision if there is a possibility of non-recoverability. Although
we believe our provisions to be based on fair judgment at the time of their
creation, it is possible that an amount under dispute is not recovered and the
estimated provision for doubtful recoverability is inadequate.
Off Balance Sheet Arrangements
We did not have any off-balance sheet arrangements, as of December 31,
2004.
ITEM 6. Directors, senior management and employees
Directors and Executive Officers
Set forth below are the names, ages and positions of our directors,
executive officers and key employees. Our board of directors is elected annually
on a staggered basis, and each director elected holds office for a three-year
term. Officers are elected from time to time by vote of our board of directors
and hold office until a successor is elected.
Name Age Position
---- --- --------
Thomas F. Jackson .............56 Director and Chairman of the Board
Evangelos J. Pistiolis ........32 Director, President and Chief Executive
Officer
Stamatios N. Tsantanis ........33 Director and Chief Financial Officer
Vangelis G. Ikonomou ..........40 Director and Executive Vice President
Michael G. Docherty ...........46 Director
Christopher J. Thomas .........44 Director
Roy Gibbs .....................56 Director
Stavros Emmanuel...............63 Chief Operating Officer of TOP Tanker
Management
George Goumopoulos.............56 Chief Technical Officer of TOP Tanker
Management
Eirini Alexandropoulou ........33 Secretary
Biographical information with respect to each of our directors and executives is
set forth below.
Thomas F. Jackson is the Chairman of our board of directors. In 2000,
Mr. Jackson established Paralos Finance Corporation as a provider of financial
consultancy services to select shipping companies. From 1967 to 1999, Mr.
Jackson served in a number of capacities with National Westminster Bank,
including head of shipping in Greece. Mr. Jackson is an Associate of the
Chartered Institute of Bankers (ACIB).
Evangelos J. Pistiolis founded our company in 2000, is our President
and Chief Executive Officer and serves on our board of directors. Mr. Pistiolis
graduated from Southampton Institute of Higher Education in 1999 where he
studied shipping operations and from Technical University of Munich in 1994 with
a bachelor's degree in mechanical engineering. His career in shipping started in
1992 when he was involved with the day to day operations of a small fleet of
drybulk carriers. From 1994 through 1995 he worked at Howe Robinson & Co. Ltd.,
a London shipbroker specializing in container vessels. While studying at the
Southampton Institute of Higher Education, Mr. Pistiolis oversaw the daily
operations of Compass United Maritime Container Vessels, a ship management
company located in Greece.
Stamatios N. Tsantanis is our Chief Financial Officer and serves on our
board of directors. Mr. Tsantanis was employed by Alpha Finance, a member of the
Alpha Bank group, a leading Greek financial institution, from 1999 to 2004. In
his capacity as a senior investment banker he participated in a number of
equity, debt and convertible securities offerings in Europe and the United
States in the transportation sector and shipping in particular. Prior to that,
Mr. Tsantanis worked in the operations department of Athlomar Shipping and
Trading. Mr. Tsantanis holds a Masters degree in Shipping Trade and Finance from
the City University Business School in London, and a Bachelors degree in
Shipping Economics from the University of Piraeus.
Vangelis G. Ikonomou is our Executive Vice President and serves on our
board of directors. Prior to joining the Company, Mr. Ikonomou was the
Commercial Director of Primal Tankers Inc. From 2000 to 2002, Mr. Ikonomou
worked with George Moundreas & Company S.A. where he was responsible for the
purchase and sale of second-hand vessels and initiated and developed a shipping
industry research department. Mr. Ikonomou worked, from 1993 to 2000, for
Eastern Mediterranean Maritime Ltd., a ship management company in Greece, in the
commercial as well as the safety and quality departments. Mr. Ikonomou holds a
Masters degree in Shipping Trade and Finance from the City University Business
School in London, a Bachelors degree in Business Administration from the
University of Athens in Greece and a Navigation Officer Degree from the Higher
State Merchant Marine Academy in Greece.
Michael G. Docherty serves on our board of directors. Mr. Docherty is a
founding partner of Independent Average Adjusters Ltd., an insurance claims
adjusting firm located in Athens, Greece, which he co-founded in 1997. Mr.
Docherty has 23 years of international experience handling maritime insurance
claims.
Christopher J. Thomas serves on our board of directors. Since November
2001, Mr. Thomas has been an independent financial consultant to numerous
international shipowning and operating companies. Mr. Thomas is also the Chief
Financial Officer of Dryships Inc. and serves on the board of directors of
Omninet International Limited, each of which is a publicly traded company with
shares registered under the Securities Exchange Act of 1934, as amended. From
1999 to 2004, Mr. Thomas was the Chief Financial Officer and a director of Excel
Maritime Carriers Ltd., which is also a publicly traded company with securities
registered under the Securities Exchange Act of 1934. Prior to joining Excel,
Mr. Thomas was the Chief Financial Officer of Cardiff Marine Inc. Mr. Thomas
holds a degree in Business Administration from Crawley University, England.
Roy Gibbs serves on our board of directors. Mr. Gibbs has been the
chief executive officer of Standard Chartered Grindlays Bank, Greece, formerly
ANZ Grindlays, since 1992. From 1988 to 1992, Mr. Gibbs was the chief manager of
domestic banking at ANZ Grindlays, London. Prior to that he was assistant
director for property, construction and shipping at ANZ London. Mr. Gibbs joined
National and Grindlays Bank in 1965.
Captain Stavros Emmanuel is the Chief Operating Officer of TOP Tanker
Management. Prior to joining TOP Tanker Management, Captain Emmanuel served as
General Manager of Primal Tankers Inc., where his responsibilities included
chartering, operations and technical management. Prior to joining Primal Tankers
in 2000, Captain Emmanuel worked in various management capacities for Compass
United Maritime Container Vessels. Captain Emmanuel obtained a Naval Officers
degree from ASDEN Nautical Academy of Aspropirgos, Greece and earned a Master
Mariners degree in 1971.
George Goumopoulos is the Chief Technical Officer of TOP Tanker
Management. Prior to joining TOP Tanker Management, Mr. Goumopoulos served as
Technical Manager of Primal Tankers Inc. From 1981 to 2003. Mr. Goumopoulos
worked for Athenian Sea Carriers as Fleet Manager, Deputy Technical Manager and
finally as Technical Manager. Mr. Goumopoulos holds a Bachelor degree from the
University of Michigan, USA in Marine Engineering and Naval Architecture, where
he also completed his postgraduate studies in the same fields. He holds a
Diploma from NTUA (EMA Athens) in Marine Engineering and Electrical Engineering.
Eirini Alexandropoulou is our Secretary. Ms. Alexandropoulou's
principal occupation for the past 5 years is as a legal advisor providing legal
services to ship management companies with respect to corporate and commercial
as well as shipping and finance law issues in Greece. From 2001 to 2004, Ms.
Alexandropoulou served as a legal advisor to Eurocarriers SA, a ship manager.
Most recently, from 2000 to 2001, Ms. Alexandropoulou served as a legal advisor
to Belize's ship registry office in Piraeus. Ms. Alexandropoulou has been a
member of the Athens Bar Association since 1997 and has a law degree from the
Law Faculty of the University of Athens.
Committees of the Board of Directors
We have established an audit committee comprised of three members,
which pursuant to a written audit committee charter, is responsible for
reviewing our accounting controls and recommending to the board of directors the
engagement of our outside auditors. Each member is an independent director under
the corporate governance rules of the Nasdaq National Market. The members of the
audit committee are Messrs. Docherty, Gibbs and Thomas. While the Company is
exempt from the requirement to have an audit committee financial expert, both
Mr. Thomas and Mr. Gibbs meet the qualifications of an audit committee financial
expert.
Compensation of Directors and Senior Management
We did not pay any compensation to members of senior management or our
directors for the fiscal year ended December 31, 2002 or for the fiscal year
ended December 31, 2003. We did not pay any benefits in 2002 or 2003. During the
fiscal year ended December 31, 2004, we paid to the members of our senior
management and to our directors aggregate compensation of $4.4 million. We do
not have a retirement plan for our officers or directors.
Equity Incentive Plan
In April 2005 our board of directors has adopted the TOP Tankers Inc.
2005 Stock Incentive Plan, or the Plan, under which our officers, key employees
and directors may be granted options to acquire common stock. A total of
1,000,000 shares of common stock were reserved for issuance under the Plan,
which is administered by our board of directors. The Plan also provides for the
issuance of stock appreciation rights, dividend equivalent rights, restricted
stock, unrestricted stock, restricted stock units, and performance shares at the
discretion of our board of directors. The Plan will expire 10 years from the
date of its adoption.
Employees
As of December 31, 2004, we had 3 employees, while our wholly-owned
subsidiary, TOP Tanker Management, employed approximately 35 employees, all of
whom are shore-based. As of December 31, 2004 we employed also 357 sea going
employees, indirectly through our sub-managers.
Share ownership
The common shares beneficially owned by our directors and senior
managers and/or companies affiliated with these individuals are disclosed in
"Item 7. Major Shareholders and Related Party Transactions" below.
Board practices and exemptions from Nasdaq corporate governance rules
The Company has certified to Nasdaq that its corporate governance
practices are in compliance with, and are not prohibited by, the laws of the
Republic of the Marshall Islands. Therefore, the Company is exempt from all of
Nasdaq's corporate governance practices other than the requirements regarding
the disclosure of a going concern audit opinion, notification of material
non-compliance with Nasdaq corporate governance practices, and the establishment
and composition of an audit committee that complies with SEC Rule 10A-3 and a
formal written audit committee charter. The practices followed by the Company in
lieu of Nasdaq's corporate governance rules are described below.
o In lieu of a compensation committee comprised of independent
directors, the full Board of Directors determines compensation.
o In lieu of a nomination committee comprised of independent directors
and a formal written charter addressing the nominations process, the
full Board of Directors, as set forth in the Company's by-laws,
regulates nominations.
o The Company holds annual meetings of shareholders under the BCA,
similar to Nasdaq requirements.
o In lieu of obtaining an independent review of related party
transactions for conflicts of interests, the disinterested members
of the Board of Directors approve related party transactions under
the BCA.
o In lieu of obtaining shareholder approval prior to the issuance of
designated securities, the Company complies with provisions of the
BCA providing that the Board of Directors approves share issuances.
o In lieu of holding regularly scheduled meetings at which only
independent directors are present, the Company's Board does not hold
regularly scheduled meetings at which only independent directors are
present.
The Company complies with the Nasdaq corporate governance requirements
pertaining to the board of directors, a majority of which must be independent,
the disclosure of a going concern audit opinion, the distribution of annual and
interim reports; shareholder meetings, quorum, peer review, and direct
registration program and the disclosure of a notification of material
non-compliance.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
Major shareholders.
The following table sets forth information regarding (i) the owners of
more than five percent of our common stock that we are aware of and (ii) the
total amount of capital stock owned by our officers and directors as of March
31, 2005. All of the shareholders, including the shareholders listed in this
table, are entitled to one vote for each share of common stock held.
Amount Percent
Title of Class Identity of Person or Group Owned of Class
-------------- --------------------------- ----- --------
Common Stock, par value $.01 per share Kingdom Holdings Inc.* 4,007,357 14.4%
FMR Corp. 3,297,400 11.8%
Evangelos Pistiolis** 1,236,130 4.4%
Officers and directors other than
25,000 0.0009% 25,000 0.1%
Evangelos Pistiolis
All officers and directors as a group 1,261,130 4.5%
* A company owned primarily by adult relatives of our President, Chief Executive
Officer and Director, Evangelos Pistiolis.
** By virtue of the shares owned indirectly through Sovereign Holdings Inc., a
company wholly-owned by Evangelos Pistiolis.
Related party transactions.
In July 2004, we entered into an agreement to lease office space in
Athens, Greece, from Pyramis Technical Co. SA, which is wholly owned by the
father of our Chief Executive Officer. The agreement is for a duration of six
years initially, with an option for an extension of four years. The monthly
rental is Euro 39,000 adjusted annually for inflation effective January 1, 2006.
The total minimum rental payable under this lease for the six years ending
December 31, 2010, before any adjustment for inflation and translated using the
exchange rate of US$/Euro on December 31, 2004, are approximately $3.4 million.
Up to June 30, 2004, the ship-owning companies had a management
agreement with Primal Tankers Inc., which was wholly owned by the father of the
Company's Chief Executive Officer, under which management services were provided
in exchange for a fixed monthly fee per vessel, which was renewed annually. The
fees charged by Primal Tankers Inc. during 2002, 2003 and 2004 amounted to $0.7
million, $1.7 million and $1.1 million, respectively. During 2004, Top Tanker
Management Inc. acquired from Primal Tankers Inc. office furniture and equipment
for a consideration of $0.5 million.
Interests of experts and counsel.
Not applicable.
ITEM 8. Financial Information.
Consolidated Statements and Other Financial Information.
See Item 18.
Dividend Policy
While we cannot assure you that we will continue to do so, and subject
to the limitations discussed below, we currently intend to pay regular cash
dividends on a quarterly basis.
Declaration and payment of any dividend is subject to the discretion of
our Board of Directors. The timing and amount of dividend payments will be
dependent upon our earnings, financial condition, cash requirements and
availability, restrictions in our loan agreements, the provisions of applicable
law affecting the payment of distributions to shareholders and other factors.
Because we are a holding company with no material assets other than the stock of
our subsidiaries, our ability to pay dividends will depend on the earnings and
cash flow of our subsidiaries and their ability to pay dividends to us. The laws
governing us and our subsidiaries generally prohibit the payment of dividends
other than from surplus or while a company is insolvent or would be rendered
insolvent.
Significant Changes.
Not Applicable.
ITEM 9. The Offer and Listing.
Price Range of Common Stock
The trading market for our common stock is the Nasdaq National Market,
on which the shares are listed under the symbol "TOPT." The following table sets
forth the high and low closing prices for our common stock since our initial
public offering of common stock at $11.00 per share on July 23, 2004, as
reported by the Nasdaq National Market. The high and low closing prices for our
common stock for the periods indicated were as follows:
For the Fiscal Year Ended December 31, 2004
(beginning July 23, 2004)
HIGH LOW
---- ---
$24.14 $10.51
For the Quarter Ended
September 30, 2004 (beginning July 23, 2004) ......... 16.55 10.51
December 31, 2004..................................... 24.14 14.70
For the Month: HIGH LOW
---- ---
October 2004.......................................... $19.40 $14.70
November 2004......................................... 24.14 15.29
December 2004......................................... 22.88 15.60
January 2005.......................................... 17.15 14.25
February 2005......................................... 22.00 16.95
March 2005............................................ 21.67 17.10
April 2005............................................ 19.38 14.86
ITEM 10. Additional Information
Articles of Incorporation and Bylaws. Our purpose, as stated in Section
B of our Articles of Incorporation, is to engage in any lawful act or activity
for which corporations may now or hereafter be organized under the Marshall
Islands Business Corporations Act. Our articles of incorporation and bylaws do
not impose any limitations on the ownership rights of our shareholders.
Under our bylaws, annual shareholder meetings will be held at a time
and place selected by our board of directors. The meetings may be held in or
outside of the Marshall Islands. Special meetings may be called by shareholders
holding not less than one-tenth of all the outstanding shares entitled to vote
at such meeting. Our board of directors may set a record date between 15 and 60
days before the date of any meeting to determine the shareholders that will be
eligible to receive notice and vote at the meeting.
Directors. Our directors are elected by a majority of the votes cast by
shareholders entitled to vote. There is no provision for cumulative voting.
The board of directors must consist of at least one member.
Shareholders may change the number of directors only by the affirmative vote of
holders of a majority of the outstanding common stock. The board of directors
may change the number of directors only by a majority vote of the entire board.
Each director shall be elected to serve until the next annual meeting of
shareholders and until his successor shall have been duly elected and qualified,
except in the event of his death, resignation, removal, or the earlier
termination of his term of office. The board of directors has the authority to
fix the amounts which shall be payable to the members of our board of directors
for attendance at any meeting or for services rendered to us.
Dissenters' Rights of Appraisal and Payment. Under the Business
Corporation Act of the Republic of the Marshall Islands, or BCA, our
shareholders have the right to dissent from various corporate actions, including
any merger or sale of all or substantially all of our assets not made in the
usual course of our business, and receive payment of the fair value of their
shares. In the event of any further amendment of the articles, a shareholder
also has the right to dissent and receive payment for his or her shares if the
amendment alters certain rights in respect of those shares. The dissenting
shareholder must follow the procedures set forth in the BCA to receive payment.
In the event that, among other things, the institution of proceedings in the
circuit court in the judicial circuit in the Marshall Islands in which our
Marshall Islands office is situated. The value of the shares of the dissenting
we and any dissenting shareholder fail to agree on a price for the shares, the
BCA procedures involve shareholder is fixed by the court after reference, if the
court so elects, to the recommendations of a court-appointed appraiser.
Shareholders' Derivative Actions. Under the BCA, any of our
shareholders may bring an action in our name to procure a judgment in our favor,
also known as a derivative action, provided that the shareholder bringing the
action is a holder of common stock both at the time the derivative action is
commenced and at the time of the transaction to which the action relates.
Anti-takeover Provisions of our Charter Documents. Several provisions
of our articles of incorporation and by-laws may have anti-takeover effects.
These provisions are intended to avoid costly takeover battles, lessen our
vulnerability to a hostile change of control and enhance the ability of our
board of directors to maximize shareholder value in connection with any
unsolicited offer to acquire us. However, these anti-takeover provisions, which
are summarized below, could also discourage, delay or prevent (1) the merger or
acquisition of our company by means of a tender offer, a proxy contest or
otherwise, that a shareholder may consider in its best interest and (2) the
removal of incumbent officers and directors.
Blank Check Preferred Stock
Under the terms of our articles of incorporation, our board of
directors has authority, without any further vote or action by our shareholders,
to issue up to 20,000,000 shares of blank check preferred stock. Our board of
directors may issue shares of preferred stock on terms calculated to discourage,
delay or prevent a change of control of our company or the removal of our
management.
Classified Board of Directors
Our articles of incorporation provide for the division of our board of
directors into three classes of directors, with each class as nearly equal in
number as possible, serving staggered, three-year terms. Approximately one-third
of our board of directors will be elected each year. This classified board
provision could discourage a third party from making a tender offer for our
shares or attempting to obtain control of our company. It could also delay
shareholders who do not agree with the policies of the board of directors from
removing a majority of the board of directors for two years.
Election and Removal of Directors
Our articles of incorporation prohibit cumulative voting in the
election of directors. Our by-laws require parties other than the board of
directors to give advance written notice of nominations for the election of
directors. Our articles of incorporation also provide that our directors may be
removed only for cause and only upon the affirmative vote of the holders of at
least 80% of the outstanding shares of our capital stock entitled to vote for
those directors. These provisions may discourage, delay or prevent the removal
of incumbent officers and directors.
Limited Actions by Shareholders
Our articles of incorporation and our by-laws provide that any action
required or permitted to be taken by our shareholders must be effected at an
annual or special meeting of shareholders or by the unanimous written consent of
our shareholders. Our articles of incorporation and our by-laws provide that,
subject to certain exceptions, only our board of directors may call special
meetings of our shareholders and the business transacted at the special meeting
is limited to the purposes stated in the notice. Accordingly, a shareholder may
be prevented from calling a special meeting for shareholder consideration of a
proposal over the opposition of our board of directors and shareholder
consideration of a proposal may be delayed until the next annual meeting.
Material Contracts
There were no material contracts that we entered into outside the
ordinary course of business during the two year period immediately preceding the
date of this annual report.
Exchange controls
The Marshall Islands imposes no exchange controls on non-resident
corporations.
Tax Considerations
The following is a discussion of the material Marshall Islands and
United States federal income tax considerations relevant to an investment
decision by a U.S. Holder, as defined below, with respect to the common stock.
This discussion does not purport to deal with the tax consequences of owning
common stock to all categories of investors, some of which, such as dealers in
securities and investors whose functional currency is not the United States
dollar, may be subject to special rules. You should consult your own tax
advisors concerning the overall tax consequences arising in your own particular
situation under United States federal, state, local or foreign law of the
ownership of common stock.
Marshall Islands Tax Considerations
In the opinion of Seward & Kissel LLP, the following are the material
Marshall Islands tax consequences of our activities to us and shareholders of
our common stock. We are incorporated in the Marshall Islands. Under current
Marshall Islands law, we are not subject to tax on income or capital gains, and
no Marshall Islands withholding tax will be imposed upon payments of dividends
by us to our shareholders.
United States Federal Income Tax Considerations
In the opinion of Seward & Kissel LLP, our United States counsel, the
following are the material United States federal income tax consequences to us
of our activities and to U.S. Holders, as defined below, of our common stock.
The following discussion of United States federal income tax matters is based on
the Internal Revenue Code of 1986, or the Code, judicial decisions,
administrative pronouncements, and existing and proposed regulations issued by
the United States Department of the Treasury, all of which are subject to
change, possibly with retroactive effect. The discussion below treats the
Treasury Regulations promulgated in August of 2003 interpreting Code Section
883, which we refer to as the regulations, as being currently in effect even
though the American Jobs Creation Act signed into law by President Bush in
October 2004, postpones the effective date thereof until January 1, 2005 for
calendar year taxpayers such as ourselves and our subsidiaries. The Company
believes that notwithstanding such postponement, the discussion below accurately
reflects our tax treatment for the current tax year since the regulations
represent the IRS position on how Section 883 should be interpreted and applied.
In addition, the discussion below is based, in part, on the description of our
business as described in "Business" above and assumes that we conduct our
business as described in that section. Except as otherwise noted, this
discussion is based on the assumption that we will not maintain an office or
other fixed place of business within the United States. References in the
following discussion to "we" and "us" are to TOP Tankers Inc. and its
subsidiaries on a consolidated basis.
United States Federal Income Taxation of Our Company
Taxation of Operating Income: In General
Unless exempt from United States federal income taxation under the
rules discussed below, a foreign corporation is subject to United States federal
income taxation in respect of any income that is derived from the use of
vessels, from the hiring or leasing of vessels for use on a time, voyage or
bareboat charter basis, from the participation in a pool, partnership, strategic
alliance, joint operating agreement, code sharing arrangements or other joint
venture it directly or indirectly owns or participates in that generates such
income, or from the performance of services directly related to those uses,
which we refer to as "shipping income," to the extent that the shipping income
is derived from sources within the United States. For these purposes, 50% of
shipping income that is attributable to transportation that begins or ends, but
that does not both begin and end, in the United States constitutes income from
sources within the United States, which we refer to as "U.S.-source shipping
income."
Shipping income attributable to transportation that both begins and
ends in the United States is considered to be 100% from sources within the
United States. We do not expect to engage in transportation that produces income
which is considered to be 100% from sources within the United States.
Shipping income attributable to transportation exclusively between
non-U.S. ports will be considered to be 100% derived from sources outside the
United States. Shipping income derived from sources outside the United States
will not be subject to any United States Federal income tax.
In the absence of exemption from tax under Section 883, our gross U.S.
source shipping income would be subject to a 4% tax imposed without allowance
for deductions as described below.
Exemption of Operating Income from United States Federal Income Taxation
Under Section 883 of the Code and the regulations thereunder, we will
be exempt from United States federal income taxation on our U.S.-source shipping
income if:
(1) we are organized in a foreign country (our "country of organization")
that grants an "equivalent exemption" to corporations organized in the
United States; and
(2) either
(A) more than 50% of the value of our stock is owned, directly or
indirectly, by individuals who are "residents" of our country of
organization or of another foreign country that grants an
"equivalent exemption" to corporations organized in the United
States, which we refer to as the "50% Ownership Test," or
(B) our stock is "primarily and regularly traded on an established
securities market" in our country of organization, in another
country that grants an "equivalent exemption" to United States
corporations, or in the United States, which we refer to as the
"Publicly-Traded Test".
The Marshall Islands, Cyprus and Liberia, the jurisdictions where our
ship-owning subsidiaries are incorporated, grant an "equivalent exemption" to
United States corporations. Therefore, we will be exempt from United States
federal income taxation with respect to our U.S.-source shipping income if
either the 50% Ownership Test or the Publicly-Traded Test is met.
The regulations provide, in pertinent part, that stock of a foreign
corporation will be considered to be "primarily traded" on an established
securities market if the number of shares of each class of stock that are traded
during any taxable year on all established securities markets in that country
exceeds the number of shares in each such class that are traded during that year
on established securities markets in any other single country. Our common stock,
which is our sole class of issued and outstanding stock, is and we anticipate
will continue to be "primarily traded" on the Nasdaq National Market.
Under the regulations, our common stock will be considered to be
"regularly traded" on an established securities market if one or more classes of
our stock representing 50% or more of our outstanding shares, by total combined
voting power of all classes of stock entitled to vote and total value, is listed
on the market which we refer to as the listing threshold. Since our common stock
will be the sole class of stock listed on the Nasdaq National Market, we will
satisfy the listing requirement.
It is further required that with respect to each class of stock relied
upon to meet the listing threshold, (i) such class of stock be traded on the
market, other than in minimal quantities, on at least 60 days during the taxable
year or one-sixth of the days in a short taxable year; and (ii) the aggregate
number of shares of such class of stock traded on such market is at least 10% of
the average number of shares of such class of stock outstanding during such year
or as appropriately adjusted in the case of a short taxable year. We believe we
will satisfy the trading frequency and trading volume tests. Even if this were
not the case, the regulations provide that the trading frequency and trading
volume tests will be deemed satisfied if, as we expect to be the case with our
common stock, such class of stock is traded on an established market in the
United States and such stock is regularly quoted by dealers making a market in
such stock.
Notwithstanding the foregoing, the regulations provide, in pertinent
part, that each class of our stock will not be considered to be "regularly
traded" on an established securities market for any taxable year in which 50% or
more of each class of our outstanding shares of the stock are owned, actually or
constructively under specified stock attribution rules, on more than half the
days during the taxable year by persons who each own 5% or more of the value of
each class of our outstanding stock, which we refer to as the "5 Percent
Override Rule."
For purposes of being able to determine the persons who own 5% or more
of our stock, or "5% Shareholders," the regulations permit us to rely on those
persons that are identified on Schedule 13G and Schedule 13D filings with the
United States Securities and Exchange Commission, or the "SEC," as having a 5%
or more beneficial interest in our common stock. The regulations further provide
that an investment company identified on a SEC Schedule 13G or Schedule 13D
filing which is registered under the Investment Company Act of 1940, as amended,
will not be treated as a 5% shareholder for such purposes.
In the event the 5 Percent Override Rule is triggered, the regulations
provide that the 5 Percent Override Rule will not apply if we can establish that
among the closely-held group of 5% Shareholders, there are sufficient 5%
Shareholders that are considered to be qualified shareholders for purposes of
Section 883 to preclude non-qualified 5% Shareholders in the closely-held group
from owning 50% or more of each class of our stock for more than half the number
of days during such year.
Under the regulations, if we do not satisfy the Publicly-Traded Test
and therefore are subject to the 5 Percent Override Rule or the 50% Ownership
Test, we would have to satisfy certain substantiation requirements regarding the
identity of our shareholders in order to qualify for the Code Section 883
exemption. These requirements are onerous and there is no assurance that we
would be able to satisfy them.
To the extent the benefits of Code Section 883 are unavailable, our
U.S. source shipping income, to the extent not considered to be "effectively
connected" with the conduct of a U.S. trade or business, as described below,
would be subject to a 4% tax imposed by Section 887 of the Code on a gross
basis, without the benefit of deductions. Since under the sourcing rules
described above, no more than 50% of our shipping income would be treated as
being derived from U.S. sources, the maximum effective rate of U.S. federal
income tax on our shipping income would never exceed 2% under the 4% gross basis
tax regime.
To the extent the benefits of the Code Section 883 exemption are
unavailable and our U.S. source shipping income is considered to be "effectively
connected" with the conduct of a U.S. trade or business, as described below, any
such "effectively connected" U.S. source shipping income, net of applicable
deductions, would be subject to the U.S. federal corporate income tax currently
imposed at rates of up to 35%. In addition, we may be subject to the 30% "branch
profits" taxes on earnings effectively connected with the conduct of such trade
or business, as determined after allowance for certain adjustments, and on
certain interest paid or deemed paid attributable to the conduct of its U.S.
trade or business.
Our U.S. source shipping income would be considered "effectively
connected" with the conduct of a U.S. trade or business only if:
o We have, or are considered to have, a fixed place of business in the
United States involved in the earning of shipping income; and
o substantially all of our U.S. source shipping income is attributable
to regularly scheduled transportation, such as the operation of a
vessel that follows a published schedule with repeated sailings at
regular intervals between the same points for voyages that begin or
end in the United States.
We do not have currently or intend to have, or permit circumstances
that would result in having any vessel operating to the United States on a
regularly scheduled basis. Based on the foregoing and on the expected mode of
our shipping operations and other activities, we believe that none of our U.S.
source shipping income will be "effectively connected" with the conduct of a
U.S. trade or business.
United States Taxation of Gain on Sale of Vessels
Regardless of whether we qualify for exemption under Code Section 883,
we will not be subject to United States federal income taxation with respect to
gain realized on a sale of a vessel, provided the sale is considered to occur
outside of the United States under United States federal income tax principles.
In general, a sale of a vessel will be considered to occur outside of the United
States for this purpose if title to the vessel, and risk of loss with respect to
the vessel, pass to the buyer outside of the United States. It is expected that
any sale of a vessel by us will be considered to occur outside of the United
States.
United States Federal Income Taxation of U.S. Holders
As used herein, the term "U.S. Holder" means a beneficial owner of common stock
that
o is a United States citizen or resident, United States corporation or
other United States entity taxable as a corporation, an estate the
income of which is subject to United States federal income taxation
regardless of its source, or a trust if a court within the United
States is able to exercise primary jurisdiction over the
administration of the trust and one or more United States persons
have the authority to control all substantial decisions of the
trust,
o owns the common stock as a capital asset, generally, for investment
purposes, and
o owns less than 10% of our common stock for United States federal
income tax purposes.
If a partnership holds our common stock, the tax treatment of a partner
will generally depend upon the status of the partner and upon the activities of
the partnership. If you are a partner in a partnership holding our common stock,
you should consult your tax advisor.
Distributions
Subject to the discussion of passive foreign investment companies
below, any distributions made by us with respect to our common stock to a U.S.
Holder will generally constitute dividends, which may be taxable as ordinary
income or "qualified dividend income" as described in more detail below, to the
extent of our current or accumulated earnings and profits, as determined under
United States federal income tax principles. Distributions in excess of our
earnings and profits will be treated first as a nontaxable return of capital to
the extent of the U.S. Holder's tax basis in his common stock on a dollar for
dollar basis and thereafter as capital gain. Because we are not a United States
corporation, U.S. Holders that are corporations will not be entitled to claim a
dividends received deduction with respect to any distributions they receive from
us. Dividends paid with respect to our common stock will generally be treated as
"passive income" or, in the case of certain types of U.S. Holders, "financial
services income," for purposes of computing allowable foreign tax credits for
United States foreign tax credit purposes.
Dividends paid on our common stock to a U.S. Holder who is an
individual, trust or estate (a "U.S. Individual Holder") should be treated as
"qualified dividend income" that is taxable to such U.S. Individual Holders at
preferential tax rates (through 2008) provided that (1) the common stock is
readily tradable on an established securities market in the United States (such
as the Nasdaq National Market); (2) we are not a passive foreign investment
company, a foreign personal holding company or a foreign investment company for
the taxable year during which the dividend is paid or the immediately preceding
taxable year (which we do not believe we are or will be); and (3) the U.S.
Individual Holder has owned the common stock for more than 60 days in the
121-day period beginning 60 days before the date on which the common stock
becomes ex-dividend. Special rules may apply to any "extraordinary dividend"
generally, a dividend in an amount which is equal to or in excess of ten percent
of a shareholder's adjusted basis (or, at the election of the U.S. Individual
Holder, the stock's then fair market value) in a share of common stock paid by
us. If we pay an "extraordinary dividend" on our common stock that is treated as
"qualified dividend income," then any loss derived by a U.S. Individual Holder
from the sale or exchange of such common stock will be treated as long-term
capital loss to the extent of such dividend. Therefore, there is no assurance
that any dividends paid on our common stock will be eligible for these
preferential rates in the hands of a U.S. Individual Holder. Any dividends paid
by the Company which are not eligible for these preferential rates will be taxed
as ordinary income to a U.S. Individual Holder.
Sale, Exchange or other Disposition of Common Stock
Assuming we do not constitute a passive foreign investment company for
any taxable year, a U.S. Holder generally will recognize taxable gain or loss
upon a sale, exchange or other disposition of our common stock in an amount
equal to the difference between the amount realized by the U.S. Holder from such
sale, exchange or other disposition and the U.S. Holder's tax basis in such
stock. Such gain or loss will be treated as long-term capital gain or loss if
the U.S. Holder's holding period is greater than one year at the time of the
sale, exchange or other disposition. Such capital gain or loss will generally be
treated as U.S.-source income or loss, as applicable, for U.S. foreign tax
credit purposes. A U.S. Holder's ability to deduct capital losses is subject to
certain limitations.
Passive Foreign Investment Company Status and Significant Tax Consequences
Special United States federal income tax rules apply to a U.S. Holder
that holds stock in a foreign corporation classified as a passive foreign
investment company for United States federal income tax purposes. In general, we
will be treated as a passive foreign investment company with respect to a U.S.
Holder if, for any taxable year in which such holder held our common stock,
either
o at least 75% of our gross income for such taxable year consists of
passive income (e.g., dividends, interest, capital gains and rents
derived other than in the active conduct of a rental business), or
o at least 50% of the average value of the assets held by the
corporation during such taxable year produce, or are held for the
production of, passive income.
For purposes of determining whether we are a passive foreign investment
company, we will be treated as earning and owning our proportionate share of the
income and assets, respectively, of any of our subsidiary corporations in which
we own at least 25 percent of the value of the subsidiary's stock. Income
earned, or deemed earned, by us in connection with the performance of services
would not constitute passive income. By contrast, rental income would generally
constitute "passive income" unless we were treated under specific rules as
deriving our rental income in the active conduct of a trade or business.
Based on our current operations and future projections, we do not
believe that we are, nor do we expect to become, a passive foreign investment
company with respect to any taxable year. Although there is no legal authority
directly on point, and we are not relying upon an opinion of counsel on this
issue, our belief is based principally on the position that, for purposes of
determining whether we are a passive foreign investment company, the gross
income we derive or are deemed to derive from the time chartering and voyage
chartering activities of our wholly-owned subsidiaries should constitute
services income, rather than rental income. Correspondingly, such income should
not constitute passive income, and the assets that we or our wholly-owned
subsidiaries own and operate in connection with the production of such income,
in particular, the vessels, should not constitute passive assets for purposes of
determining whether we were a passive foreign investment company. We believe
there is substantial legal authority supporting our position consisting of case
law and Internal Revenue Service pronouncements concerning the characterization
of income derived from time charters and voyage charters as services income for
other tax purposes. However, in the absence of any legal authority specifically
relating to the statutory provisions governing passive foreign investment
companies, the Internal Revenue Service or a court could disagree with our
position. In addition, although we intend to conduct our affairs in a manner to
avoid being classified as a passive foreign investment company with respect to
any taxable year, we cannot assure you that the nature of our operations will
not change in the future.
As discussed more fully below, if we were to be treated as a passive
foreign investment company for any taxable year, a U.S. Holder would be subject
to different taxation rules depending on whether the U.S. Holder makes an
election to treat us as a "Qualified Electing Fund," which election we refer to
as a "QEF election." As an alternative to making a QEF election, a U.S. Holder
should be able to make a "mark-to-market" election with respect to our common
stock, as discussed below.
Taxation of U.S. Holders Making a Timely QEF Election
If a U.S. Holder makes a timely QEF election, which U.S. Holder we
refer to as an "Electing Holder," the Electing Holder must report each year for
United States federal income tax purposes his pro rata share of our ordinary
earnings and our net capital gain, if any, for our taxable year that ends with
or within the taxable year of the Electing Holder, regardless of whether or not
distributions were received from us by the Electing Holder. The Electing
Holder's adjusted tax basis in the common stock will be increased to reflect
taxed but undistributed earnings and profits. Distributions of earnings and
profits that had been previously taxed will result in a corresponding reduction
in the adjusted tax basis in the common stock and will not be taxed again once
distributed. An Electing Holder would generally recognize capital gain or loss
on the sale, exchange or other disposition of our common stock. A U.S. Holder
would make a QEF election with respect to any year that our company is a passive
foreign investment company by filing one copy of IRS Form 8621 with his United
States federal income tax return and a second copy in accordance with the
instructions to such form. If we were to be treated as a passive foreign
investment company for any taxable year, we would provide each U.S. Holder with
all necessary information in order to make the qualified electing fund election
described below.
Taxation of U.S. Holders Making a "Mark-to-Market" Election
Alternatively, if we were to be treated as a passive foreign investment
company for any taxable year and, as we anticipate, our stock is treated as
"marketable stock," a U.S. Holder would be allowed to make a "mark-to-market"
election with respect to our common stock, provided the U.S. Holder completes
and files IRS Form 8621 in accordance with the relevant instructions and related
Treasury Regulations. If that election is made, the U.S. Holder generally would
include as ordinary income in each taxable year the excess, if any, of the fair
market value of the common stock at the end of the taxable year over such
holder's adjusted tax basis in the common stock. The U.S. Holder would also be
permitted an ordinary loss in respect of the excess, if any, of the U.S.
Holder's adjusted tax basis in the common stock over its fair market value at
the end of the taxable year, but only to the extent of the net amount previously
included in income as a result of the mark-to-market election. A U.S. Holder's
tax basis in his common stock would be adjusted to reflect any such income or
loss amount. Gain realized on the sale, exchange or other disposition of our
common stock would be treated as ordinary income, and any loss realized on the
sale, exchange or other disposition of the common stock would be treated as
ordinary loss to the extent that such loss does not exceed the net
mark-to-market gains previously included by the U.S. Holder.
Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election
Finally, if we were to be treated as a passive foreign investment
company for any taxable year, a U.S. Holder who does not make either a QEF
election or a "mark-to-market" election for that year, whom we refer to as a
"Non-Electing Holder," would be subject to special rules with respect to (1) any
excess distribution (i.e., the portion of any distributions received by the
Non-Electing Holder on our common stock in a taxable year in excess of 125
percent of the average annual distributions received by the Non-Electing Holder
in the three preceding taxable years, or, if shorter, the Non-Electing Holder's
holding period for the common stock), and (2) any gain realized on the sale,
exchange or other disposition of our common stock. Under these special rules:
o the excess distribution or gain would be allocated ratably over the
Non-Electing Holders aggregate holding period for the common stock;
o the amount allocated to the current taxable year would be taxed as
ordinary income; and
o the amount allocated to each of the other taxable years would be
subject to tax at the highest rate of tax in effect for the
applicable class of taxpayer for that year, and an interest charge
for the deemed deferral benefit would be imposed with respect to the
resulting tax attributable to each such other taxable year.
These penalties would not apply to a qualified pension, profit sharing
or other retirement trust or other tax-exempt organization that did not borrow
money or otherwise utilize leverage in connection with its acquisition of our
common stock. If a Non-Electing Holder who is an individual dies while owning
our common stock, such holders successor generally would not receive a step-up
in tax basis with respect to such stock.
United States Federal Income Taxation of "Non-U.S. Holders"
A beneficial owner of common stock that is not a U.S. Holder is
referred to herein as a "Non-U.S. Holder."
Dividends on Common Stock
Non-U.S. Holders generally will not be subject to United States federal
income tax or withholding tax on dividends received from us with respect to our
common stock, unless that income is effectively connected with the Non-U.S.
Holder's conduct of a trade or business in the United States. If the Non-U.S.
Holder is entitled to the benefits of a United States income tax treaty with
respect to those dividends, that income is taxable only if it is attributable to
a permanent establishment maintained by the Non-U.S. Holder in the United
States.
Sale, Exchange or Other Disposition of Common Stock
Non-U.S. Holders generally will not be subject to United States federal
income tax or withholding tax on any gain realized upon the sale, exchange or
other disposition of our common stock, unless:
o the gain is effectively connected with the Non-U.S. Holder's conduct
of a trade or business in the United States. If the Non-U.S. Holder
is entitled to the benefits of an income tax treaty with respect to
that gain, that gain is taxable only if it is attributable to a
permanent establishment maintained by the Non-U.S. Holder in the
United States; or
o the Non-U.S. Holder is an individual who is present in the United
States for 183 days or more during the taxable year of disposition
and other conditions are met.
If the Non-U.S. Holder is engaged in a United States trade or business
for United States federal income tax purposes, the income from the common stock,
including dividends and the gain from the sale, exchange or other disposition of
the stock that is effectively connected with the conduct of that trade or
business will generally be subject to regular United States federal income tax
in the same manner as discussed in the previous section relating to the taxation
of U.S. Holders. In addition, if you are a corporate Non-U.S. Holder, your
earnings and profits that are attributable to the effectively connected income,
which are subject to certain adjustments, may be subject to an additional branch
profits tax at a rate of 30%, or at a lower rate as may be specified by an
applicable income tax treaty.
Backup Withholding and Information Reporting
In general, dividend payments, or other taxable distributions, made
within the United States to you will be subject to information reporting
requirements and backup withholding tax if you are a non-corporate U.S. Holder
and you:
o fail to provide an accurate taxpayer identification number;
o are notified by the Internal Revenue Service that you have failed to
report all interest or dividends required to be shown on your
federal income tax returns; or
o in certain circumstances, fail to comply with applicable
certification requirements.
Non-U.S. Holders may be required to establish their exemption from
information reporting and backup withholding by certifying their status on IRS
Form W-8BEN, W-8ECI or W-8IMY, as applicable.
If you sell your common stock to or through a United States office or
broker, the payment of the proceeds is subject to both United States backup
withholding and information reporting unless you certify that you are a non-U.S.
person, under penalties of perjury, or you otherwise establish an exemption. If
you sell your common stock through a non-United States office of a non-United
States broker and the sales proceeds are paid to you outside the United States
then information reporting and backup withholding generally will not apply to
that payment. However, United States information reporting requirements, but not
backup withholding, will apply to a payment of sales proceeds, even if that
payment is made to you outside the United States, if you sell your common stock
through a non-United States office of a broker that is a United States person or
has some other contacts with the United States.
Backup withholding tax is not an additional tax. Rather, you generally
may obtain a refund of any amounts withheld under backup withholding rules that
exceed your income tax liability by filing a refund claim with the Internal
Revenue Service.
Documents on display.
We file annual reports and other information with the SEC. You may read
and copy any document we file with the SEC at its public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. You may also obtain copies of this
information by mail from the public reference section of the SEC, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference room. Our SEC filings are also available to the public at the
web site maintained by the SEC at http://www.sec.gov, as well as on our website
at http://www.toptankers.com.
ITEM 11. Quantitative and qualitative Disclosures about market risk
Interest Rate Fluctuation. The international tanker shipping industry
is capital intensive, requiring significant amounts of investment. Much of this
investment is provided in the form of long-term debt. Our debt usually contains
interest rates that fluctuate with LIBOR. Increasing interest rates could
adversely impact future earnings.
Our interest expense is affected by changes in the general level of
interest rates. As an indication of the extent of our sensitivity to interest
rate changes, the following table sets forth the sensitivity of the initial
credit facility in U.S. dollars to a 100 basis points increase in LIBOR on
December 31 of each repayment year. The following table takes into account the
four year interest rate swap agreement under the initial credit facility.
Interest Expense Sensitivity to 100 Basis Point Change in LIBOR
December 31, 2004......................... 985,000
December 31, 2005......................... 2,066,847
December 31, 2006......................... 1,804,289
December 31, 2007......................... 1,558,584
December 31, 2008......................... 1,927,598
December 31, 2009......................... 1,968,619
December 31, 2010......................... 1,992,217
December 31, 2011......................... 1,530,815
December 31, 2012......................... 495,000
Foreign Exchange Rate Risk. We generate all of our revenues in U.S.
dollars but incur approximately 14% of our expenses in currencies other than
U.S. dollars. For accounting purposes, expenses incurred in Euros are translated
into U.S. dollars at the exchange rate prevailing on the date of each
transaction. We constantly monitor the U.S Dollar exchange rate and we try to
achieve more favorable exchange rates from the financial institutions we work
with.
Inflation. Although inflation has had a moderate impact on our trading
fleet's operating and voyage expenses in recent years, management does not
consider inflation to be a significant risk to operating or voyage costs in the
current economic environment. However, in the event that inflation becomes a
significant factor in the global economy, inflationary pressures would result in
increased operating, voyage and financing costs.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
Part II
ITEM 13. Defaults, Dividend Arrearages and delinquencies
Neither we nor any of our subsidiaries have been subject to a material
default in the payment of principal, interest, a sinking fund or purchase fund
installment or any other material default that was not cured within 30 days. In
addition, the payment of our dividends are not, and have not been in arrears or
have not been subject to a material delinquency that was not cured within 30
days.
ITEM 14. Material modifications to the Rights of Security holders and use of
proceeds.
None.
ITEM 15. Controls and procedures
Evaluation of disclosure controls and procedures.
On the date of this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in alerting them timely to material information
relating to the Company required to be included in the Company's periodic
Securities and Exchange Commission filings.
Changes in internal controls.
There have been no significant changes in our internal controls or in
other factors that could have significantly affected those controls subsequent
to the date of the Company's most recent evaluation of internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
We have established an audit committee comprised of three members which
is responsible for reviewing our accounting controls and recommending to the
board of directors the engagement of our outside auditors. Each member is an
independent director under the corporate governance rules of the Nasdaq National
Market. The members of the audit committee are Messrs. Docherty, Gibbs and
Thomas. While the Company is exempt from the requirement to have an audit
committee financial expert, both Mr. Thomas and Mr. Gibbs meet the
qualifications of an audit committee financial expert.
ITEM 16B. CODE OF ETHICS
As a foreign private issuer, we are exempt from the rules of the Nasdaq
National Market that require the adoption of a code of ethics. However, we have
voluntarily adopted a code of ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer and persons
performing similar functions. We will also provide a hard copy of our code of
ethics free of charge upon written request of a shareholder. Shareholders may
direct their requests to the attention of Mr. Evangelos Pistiolis.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our principal accountants for the years ended December 31, 2003 and
2004 were Ernst and Young (Hellas), Certified Auditors Accountants S.A. For the
2004 year audit they billed us Euro 168,000. There were no tax and audit related
fees billed in 2004. The audit for the year ended December 31, 2003, was
conducted in conjunction with the audits for the years ended December 31, 2001
and 2002, as part of our initial public offering and our follow-on offering in
July 2004 and November 2004, respectively and their billing consists part of our
offering expenses. For their services in connection with our initial public
offering and follow-on offering Ernst and Young (Hellas), Certified Auditors
Accountants S.A. billed us Euro 489,501.
Our audit committee pre-approves all audit, audit-related and non-audit
services not prohibited by law to be performed by our independent auditors and
associated fees prior to the engagement of the independent auditor with respect
to such services.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES
None.
Part III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements, together with the report of Ernst &
Young (Hellas) Certified Auditors Accountants S.A. thereon, are filed as part of
this report:
TOP TANKERS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
--------
Report of Ernst & Young, Independent Registered
Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2003 and 2004 F-2
Consolidated Statements of Income for the years
ended December 31, 2002, 2003 and 2004 F-3
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2002, 2003 and 2004 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2003 and 2004 F-5
Notes to Consolidated Financial Statements F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
TOP Tankers Inc.
We have audited the accompanying consolidated balance sheets of TOP Tankers Inc.
as of December 31, 2003 and 2004 and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TOP Tankers Inc.
at December 31, 2003 and 2004 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young (Hellas) Certified Auditors Accountants S.A.
Athens, Greece
March 30, 2005
TOP TANKERS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2004
(Expressed in thousands of U.S. Dollars - except share and per share data)
ASSETS
2003 2004
------ ------
CURRENT ASSETS:
Cash and cash equivalents 2,343 114,768
Accounts receivable trade, net 818 19,971
Insurance claims 1,065 98
Inventories (Note 4) 509 3,221
Due from related parties (Note 3) - 219
Prepayments and other 127 2,774
----------------- ----------------
Total current assets 4,862 141,051
----------------- ----------------
FIXED ASSETS:
Advances for vessel acquisitions (Notes 5 and 18) - 25,650
Vessels, net (Notes 6 and 8) 48,074 355,997
Office furniture and equipment, net (Note 3) - 440
----------------- ----------------
Total fixed assets 48,074 382,087
----------------- ----------------
OTHER NON CURRENT ASSETS:
Deferred charges, net (Note 7) 2,148 6,748
Due from related parties (Note 3) 319 -
Restricted cash (Note 8) 300 10,000
----------------- ----------------
Total assets 55,703 539,886
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 8) 4,027 19,540
Dividends payable - 5,845
Accounts payable 3,027 10,358
Due to related parties (Note 3) 105 -
Accrued liabilities (Note 9) 694 3,766
Unearned revenue 1,155 3,054
Financial instruments (Note 8) - 248
----------------- ----------------
Total current liabilities 9,008 42,811
----------------- ----------------
LONG-TERM DEBT, net of current portion (Note 8) 30,376 175,266
----------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 20,000,000 shares
authorized; none issued (Note 11) - -
Common stock, $0.01 par value; 50,000,000 shares authorized;
6,000,000 and 27,830,990 shares issued and outstanding at
December 31, 2003 and 2004, respectively (Note 11)
60 278
Additional paid-in capital (Note 11) 13,351 294,240
Accumulated other comprehensive loss (Note 8) - (248)
Retained earnings 2,908 27,539
----------------- ----------------
Total stockholders' equity 16,319 321,809
----------------- ----------------
Total liabilities and stockholders' equity 55,703 539,886
================= ================
The accompanying notes are an integral part of these consolidated statements.
TOP TANKERS INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(Expressed in thousands of U.S. Dollars - except share and per share data)
2002 2003 2004
--------------- ---------------- ---------------
REVENUES:
Voyage revenues (Note 1) 11,426 23,085 93,829
--------------- ---------------- ---------------
EXPENSES:
Voyage expenses (Note 13) 3,311 5,937 16,898
Vessel operating expenses (Note 13) 4,553 8,420 16,859
Depreciation (Note 6) 2,213 3,604 13,108
Amortization of deferred charges (Note 7) 177 599 1,514
Management fees charged by a related party (Note 3) 673 1,686 1,120
Sub-Manager fees (Note 1) - - 803
General and administrative expenses 143 129 6,656
Foreign currency losses, net 62 105 75
Gain on sale of vessels (Note 6) - - (638)
--------------- ---------------- ---------------
Operating income 294 2,605 37,434
--------------- ---------------- ---------------
OTHER INCOME (EXPENSES):
Interest and finance costs (Notes 8 and 14) (993) (1,336) (5,201)
Interest income 6 1 481
Other, net (Note 15) 894 364 80
--------------- ---------------- ---------------
Total other income (expenses), net (93) (971) (4,640)
--------------- ---------------- ---------------
Net Income 201 1,634 32,794
=============== ================ ===============
Earnings per share, basic and diluted (Notes 11 and 12) 0.03 0.27 2.54
=============== ================ ===============
Weighted average number of shares, basic and diluted 6,000,000 6,000,000 12,922,449
=============== ================ ===============
The accompanying notes are an integral part of these consolidated statements.
TOP TANKERS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(Expressed in thousands of U.S. Dollars - except share and per share data)
Accumulated
Capital Stock Additional Other
Comprehensive -------------------- Paid-in Comprehensive Retained
Income # of Shares Par Value Capital Loss Earnings Total
------ ----------- --------- ------- ---- -------- -----
BALANCE, December 31, 2001 6,000,000 60 4,588 - 2,488 7,136
Net income 201 - - - - 201 201
Contributions to additional
paid-in capital - - - 2,279 - - 2,279
Dividends paid ($0.14 per share) - - - - - (844) (844)
-----------
Comprehensive income 201
=========== ----------- --------- ----------- ---------- --------- ---------
BALANCE, December 31, 2002 6,000,000 60 6,867 - 1,845 8,772
Net income 1,634 - - - - 1,634 1,634
Contributions to additional
paid-in capital - - - 6,484 - - 6,484
Dividends paid ($0.10 per share) - - - - - (571) (571)
-----------
Comprehensive income 1,634
=========== ----------- --------- ----------- ---------- --------- ---------
BALANCE, December 31, 2003 6,000,000 60 13,351 - 2,908 16,319
Net income 32,794 - - - - 32,794 32,794
Dividends paid ($0.39 per share) - - - - - (2,318) (2,318)
Contributions to additional paid-in
capital - - - 17,077 - - 17,077
Issuance of common stock - 21,830,990 218 263,812 - - 264,030
Dividends declared ($0.21 per share) - - - - - (5,845) (5,845)
Other comprehensive income
- Unrealized loss on cash flow hedges (248) - - - (248) - (248)
-----------
Comprehensive income 32,546
=========== ----------- --------- ----------- ---------- --------- ---------
BALANCE, December 31, 2004 27,830,990 278 294,240 (248) 27,539 321,809
========== ========= =========== ========== ========= =========
The accompanying notes are an integral part of these consolidated statements.
TOP TANKERS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(Expressed in thousands of U.S. Dollars)
2002 2003 2004
-------------- ------------- -------------
Cash Flows from Operating Activities:
Net income 201 1,634 32,794
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,213 3,604 13,108
Amortization of dry-docking costs 177 599 1,514
Amortization and write off of
deferred financing costs 161 121 755
Gain on sale of vessels - - (638)
(Increase) Decrease in:
Accounts receivable 87 (689) (19,153)
Insurance claims (278) (787) 967
Inventories (48) (220) (2,712)
Due from related parties - - (219)
Prepayments and other 25 (72) (2,647)
Increase (Decrease) in:
Accounts payable 497 1,883 7,331
Due to related parties 385 (204) (105)
Accrued liabilities 228 320 3,072
Unearned revenue (729) 1,155 1,899
Payments for dry-docking (510) (2,414) (7,365)
-------------- ------------- -------------
Net Cash from Operating Activities
2,409 4,930 28,601
-------------- ------------- -------------
Cash Flows from (used in) Investing Activities:
Advances for vessel acquisitions - - (25,650)
Vessel acquisitions and improvements (18,547) (19,550) (327,629)
Advances to related parties 251 (151) 319
Net proceeds from sale of vessels - - 8,536
Expenditures for property and equipment - - (475)
-------------- ------------- -------------
Net Cash used in Investing Activities (18,296) (19,701) (344,899)
-------------- ------------- -------------
Cash Flows from (used in) Financing Activities:
Proceeds from long-term debt 15,550 25,850 281,900
Principal payments of long-term debt (2,550) (3,059) (4,251)
Repayment of long-term debt - (11,230) (115,260)
Increase in restricted cash - (300) (9,700)
Contributions to additional paid-in capital 2,279 6,484 17,077
Issuance of common stock - - 264,030
Payment of financing costs (200) (154) (2,755)
Dividends paid (844) (571) (2,318)
-------------- ------------- -------------
Net Cash from Financing Activities 14,235 17,020 428,723
-------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (1,652) 2,249 112,425
Cash and cash equivalents at beginning of year 1,746 94 2,343
-------------- ------------- -------------
Cash and cash equivalents at end of year 94 2,343 114,768
============== ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 727 1,045 3,157
============== ============= =============
The accompanying notes are an integral part of these consolidated statements.
TOP TANKERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2004
(Expressed in thousands of United States Dollars - except share and per share
data, unless otherwise stated)
1. Basis of Presentation and General Information:
The accompanying consolidated financial statements include the accounts of
TOP Tankers Inc. (formerly Ocean Holdings Inc.) ("TOP") and its wholly-owned
subsidiaries (collectively the "Company"). Ocean Holdings Inc. was formed on
January 10, 2000, under the laws of Marshall Islands, was renamed to TOP
Tankers Inc. in May 2004 and is the sole owner of all outstanding shares of
the following subsidiaries:
(a) TOP Tanker Management Inc., (the "Manager") established on May 24, 2004,
under the laws of Marshall Islands, is responsible for all of the
chartering, operational and technical management of the Company's fleet.
Up to June 30, 2004 the operations of the vessels were managed by Primal
Tankers Inc., a related Liberian corporation which is wholly owned by
the father of the Company's Chief Executive Officer (Note 3). Since July
1, 2004 the ship-owning companies have a management agreement with the
Manager, under which management services are provided in exchange for a
fixed monthly fee per vessel. The Manager has an office in Greece
located at 109-111, Messogion Avenue 115 26 Athens Greece. The Manager
subcontracted the technical management of the vessels to two
unaffiliated ship management companies, Unicom Management Services Ltd
and VShips Management Limited (collectively the "Sub-Manager"). The
Sub-Manager provides operational and technical services to Company's
vessels at a fixed monthly fee per vessel. Such fees for the year ended
December 31, 2004 totaled $ 803 and are separately reflected in the
accompanying 2004 consolidated statement of income. At December 31, 2004
the amount due to the Sub-Manager totaled $ 2,139 and is included in
Accounts Payable in the accompanying 2004 consolidated balance sheet.
(b) Helidona Shipping Company Limited ("Helidona"), incorporated in the
Marshall Islands in May 2003, owner of the 29,998 DWT, (built in 1989),
tanker vessel "Yapi" and Helidona Shipping Company Limited, incorporated
in British Cayman Islands in August 2000, former owner of vessel "Yapi",
which was acquired in August 2000.
(c) Gramos Shipping Company Inc. ("Gramos"), incorporated in the Marshall
Islands in January 2003, owner of the 45,720 DWT (built in 1992), tanker
vessel "Faithful", which was acquired in July 2003 and Vermio Shipping
Company Limited, incorporated in the Marshall Islands in December 2001,
owner of vessel "Faithful" for the period from February 2002 to July
2003.
(d) Rupel Shipping Company Inc. ("Rupel"), incorporated in the Marshall
Islands in January 2003, owner of the 44,646 DWT (built in 1992) tanker
vessel "Fearless", which was acquired in February 2003.
(e) Mytikas Shipping Company Ltd. ("Mytikas"), incorporated in the Marshall
Islands in February 2004, owner of the 136,055 DWT (built in 1993)
tanker vessel "Limitless", which was acquired in March 2004.
(f) Litochoro Shipping Company Ltd. ("Litochoro"), incorporated in the
Marshall Islands in March 2004, owner of the 135,915 DWT (built in 1992)
tanker vessel "Endless", which was acquired in March 2004.
(g) Falakro Shipping Company Ltd. ("Falakro"), incorporated in Liberia in
July 2004, owner of the 47,076 DWT (built in 1991) tanker vessel
"Doubtless", which was acquired in August 2004.
(h) Pageon Shipping Company Ltd. ("Pageon"), incorporated in Cyprus in July
2004, owner of the 47,084 DWT (built in 1992) tanker vessel "Vanguard",
which was acquired in August 2004.
(i) Vardousia Shipping Company Ltd. ("Vardousia"), incorporated in Cyprus in
July 2004, owner of the 47,084 DWT (built in 1992) tanker vessel
"Invincible", which was acquired in August 2004.
(j) Psiloritis Shipping Company Ltd. ("Psiloritis"), incorporated in Liberia
in July 2004, owner of the 47,084 DWT (built in 1991) tanker vessel
"Victorious", which was acquired in August 2004.
(k) Parnon Shipping Company Ltd. ("Parnon"), incorporated in Cyprus in July
2004, owner of the 47,084 DWT (built in 1992) tanker vessel
"Relentless", which was acquired in August 2004.
(l) Menalo Shipping Company Ltd. ("Menalo"), incorporated in Cyprus in July
2004, owner of the 47,084 DWT (built in 1991) tanker vessel "Restless",
which was acquired in August 2004.
(m) Pintos Shipping Company Ltd. ("Pintos"), incorporated in Cyprus in July
2004, owner of the 47,084 DWT (built in 1992) tanker vessel "Sovereign",
which was acquired in August 2004.
(n) Pylio Shipping Company Ltd. ("Pylio"), incorporated in Liberia in 2004,
owner of the 154,970 DWT (built in 1991) tanker vessel "Flawless", which
was acquired in September 2004.
(o) Idi Shipping Company Ltd. ("Idi"), incorporated in Liberia in July 2004,
owner of the 47,094 DWT (built in 1991) tanker vessel "Spotless", which
was acquired in September 2004.
(p) Taygetus Shipping Company Ltd. ("Taygetus"), incorporated in Liberia in
July 2004, owner of the 154,970 DWT (built in 1991) tanker vessel
"Timeless", which was acquired in September 2004.
(q) Kalidromo Shipping Company Limited ("Kalidromo"), incorporated in the
Marshall Islands in May 2003, owner of the 31,766 DWT (built in 1980)
tanker vessel "Tireless", which was sold in September 2004.
(r) Olympos Shipping Company Limited ("Olympos"), incorporated in the
Marshall Islands in May 2003, owner of the 29,990 DWT (built in 1985),
tanker vessel "Med Prologue" which was sold on December 6, 2004 and
Olympos Shipping Company Limited, incorporated in British Cayman Islands
in December 1999, former owner of the vessel.
(s) Kisavos Shipping Company Limited ("Kisavos"), incorporated in the
Marshall Islands in November 2004, to be the owner of the 154,970 DWT
(built in 1991) tanker vessel "Priceless" (Notes 5 and 18).
(t) Imitos Shipping Company Limited ("Imitos"), incorporated in the Marshall
Islands in November 2004, to be the owner of the 149,554 DWT (built in
1992) tanker vessel "Noiseless" (Notes 5 and 18).
(u) Parnis Shipping Company Limited ("Parnis"), incorporated in the Marshall
Islands in November 2004, to be the owner of the 149,599 DWT (built in
1992) tanker vessel "Stainless" (Notes 5 and 18).
(v) Parnasos Shipping Company Limited ("Parnasos"), incorporated in Liberia
in November 2004, to be the owner of the 154,970 DWT (built in 1992)
tanker vessel "Faultless" (Notes 5 and 18).
(w) Vitsi Shipping Company Limited ("Vitsi"), incorporated in Liberia in
November 2004, to be the owner of the 154,970 DWT (built in 1991) tanker
vessel "Stopless" (Notes 5 and 18).
The Company is engaged in the ocean transportation of crude oil and refined
petroleum cargoes worldwide through the ownership and operation of the
tanker vessels mentioned above.
At December 31, 2004, five vessels were operating under voyage charters and
ten vessels under long-term time charters, with an estimated duration of 24
months, including a profit sharing agreement, which is settled on a calendar
quarter basis. During 2004, 44% of the Company's voyage revenues were
derived from these time charter agreements. During 2002, 2003 and 2004 four
charterers individually accounted for more than 10% of the Company's voyage
revenues as follows:
Charterer 2002 2003 2004
--------- ---- ---- ----
A - 31% 29%
B 20% 16% -
C 21% - -
D 24% - 15%
2. Significant Accounting Policies:
(a) Principles of Consolidation: The accompanying consolidated financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles ("US GAAP") and include the accounts and operating
results of Top Tankers Inc. and its wholly-owned subsidiaries referred
to in Note 1. All significant intercompany balances and transactions
have been eliminated in consolidation.
(b) Use of Estimates: The preparation of consolidated financial statements
in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Other Comprehensive Income (Loss): The Company follows the provisions of
Statement of Financial Accounting Standards "Statement of Comprehensive
Income" (SFAS 130), which requires separate presentation of certain
transactions, which are recorded directly as components of stockholders'
equity.
(d) Foreign Currency Translation: The functional currency of the Company is
the U.S. Dollar because the Company's vessels operate in international
shipping markets, and therefore primarily transact business in U.S.
Dollars. The Company's books of accounts are maintained in U.S. Dollars.
Transactions involving other currencies during the year are converted
into U.S. Dollars using the exchange rates in effect at the time of the
transactions. At the balance sheet dates, monetary assets and
liabilities, which are denominated in other currencies, are translated
to reflect the year-end exchange rates. Resulting gains or losses are
reflected separately in the accompanying consolidated statements of
income.
(e) Cash and Cash Equivalents: The Company considers highly liquid
investments such as time deposits and certificates of deposit with an
original maturity of three months or less to be cash equivalents.
(f) Accounts Receivable--Trade: The amount shown as Accounts
Receivable--Trade at each balance sheet date, includes estimated
recoveries from charterers for hire, freight and demurrage billings, net
of a provision for doubtful accounts. At each balance sheet date, all
potentially uncollectible accounts are assessed individually for
purposes of determining the appropriate provision for doubtful accounts.
Provision for doubtful accounts at December 31, 2003 and 2004 totaled to
$0 and $132, respectively.
(g) Insurance Claims: Insurance claims are recorded on the accrual basis and
represent the claimable expenses, net of deductibles, incurred through
December 31 of each year, which are expected to be recovered from
insurance companies.
(h) Inventories: Inventories consist of bunkers, lubricants and consumable
stores which are stated at the lower of cost or market. Cost is
determined by the first in, first out method.
(i) Vessel Cost: Vessels are stated at cost, which consists of the contract
price and any material expenses incurred upon acquisition (initial
repairs, improvements and delivery expenses). Subsequent expenditures
for conversions and major improvements are also capitalized when they
appreciably extend the life, increase the earning capacity or improve
the efficiency or safety of the vessels otherwise these amounts are
charged to expense as incurred.
(j) Impairment of Long-Lived Assets: The Company applies SFAS 144
"Accounting for the Impairment or Disposal of Long-lived Assets", which
addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The standard requires that, long-lived
assets and certain identifiable intangibles held and used or disposed of
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. When the estimate of undiscounted cash flows, excluding
interest charges, expected to be generated by the use of the asset is
less than its carrying amount, the Company should evaluate the asset for
an impairment loss. Measurement of the impairment loss is based on the
fair value of the asset as provided by third parties. In this respect,
management regularly reviews the carrying amount of the vessels in
connection with the estimated recoverable amount for each of the
Company's vessels. The review for impairment of each vessel's carrying
amount as of December 31, 2002, 2003 and 2004, did not result in an
indication of an impairment loss.
(k) Vessel Depreciation: Depreciation is computed using the straight-line
method over the estimated useful life of the vessels, after considering
the estimated salvage value. Each vessel's salvage value is equal to the
product of its lightweight tonnage and estimated scrap rate. With the
exception of the vessel Tireless, Management estimates the useful life
of the Company's vessels to be 25 years from the date of initial
delivery from the shipyard. Second hand vessels are depreciated from the
date of their acquisition through their remaining estimated useful life.
The useful life of the vessel Tireless was estimated to 28 years, which
coincided with the validity of the class certificate. When regulations
place limitations over the ability of a vessel to trade on a worldwide
basis, its useful life is adjusted at the date such regulations become
effective.
(l) Accounting for Dry-Docking Costs: The Company follows the deferral
method of accounting for dry-docking costs whereby actual costs incurred
are deferred and are amortized on a straight-line basis over the period
through the date the next dry-docking becomes due. Unamortized
dry-docking costs of vessels that are sold are written off and included
in the calculation of the resulting gain or loss in the year of the
vessel's sale.
(m) Financing Costs: Fees incurred for obtaining new loans or refinancing
existing ones are recorded as a contra to debt. Such fees are amortized
to interest expense over the life of the related debt using the
effective interest method. Unamortized fees relating to loans repaid or
refinanced are expensed in the period the repayment or refinancing is
made.
(n) Pension and Retirement Benefit Obligations -Crew: The ship-owning
companies included in the consolidation, employ the crew on board, under
short-term contracts (usually up to nine months) and accordingly, they
are not liable for any pension or post retirement benefits.
(o) Staff leaving Indemnities - Administrative personnel: The Company's
employees are entitled to termination payments in the event of dismissal
or retirement with the amount of payment varying in relation to the
employee's compensation, length of service and manner of termination
(dismissed or retired). Employees who resign, or are dismissed with
cause are not entitled to termination payments. The Company's liability
on an actuarially determined basis, at December 31, 2003 and 2004
amounted to $0 and $77, respectively.
(p) Accounting for Revenue and Expenses: Revenues are generated from voyage
and time charter agreements. Time charter revenues are recorded over the
term of the charter as service is provided. Under a voyage charter the
revenues and associated voyage costs are recognized on a pro-rata basis
over the duration of the voyage. A voyage is deemed to commence upon the
completion of discharge of the vessel's previous cargo and is deemed to
end upon the completion of discharge of the current cargo. Demurrage
income represents payments by the charterer to the vessel owner when
loading or discharging time exceeded the stipulated time in the voyage
charter. Vessel operating expenses are accounted for on the accrual
basis. Unearned revenue represents cash received prior to year-end
related to revenue applicable to periods after December 31 of each year.
(q) Repairs and Maintenance: All repair and maintenance expenses and
underwater inspection expenses are expensed in the year incurred. Such
costs are included in vessel operating expenses in the accompanying
consolidated statements of income.
(r) Earnings per Share: Basic earnings per share are computed by dividing
net income by the weighted average number of common shares deemed
outstanding during the year. Diluted earnings per share, reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised. The Company had no dilutive
securities outstanding during the three year period ended December 31,
2004.
(s) Segment Reporting: The Company reports financial information and
evaluates its operations by charter revenues and not by the length of
ship employment for its customers, i.e., spot or time charters. The
Company does not have discrete financial information to evaluate the
operating results for each such type of charter. Although revenue can be
identified for these types of charters, management cannot and does not
identify expenses, profitability or other financial information for
these charters. As a result, management, including the chief operating
decision maker, reviews operating results solely by revenue per day and
operating results of the fleet and thus the Company has determined that
it operates under one reportable segment. Furthermore, when the Company
charters a vessel to a charterer, the charterer is free to trade the
vessel worldwide and, as a result, the disclosure of geographic
information is impracticable.
(t) Derivatives: SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (as amended) establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair
value, with changes in the derivatives' fair value recognized currently
in earnings unless specific hedge accounting criteria are met.
During 2004, the Company engaged in an interest rate swap agreement in
order to hedge the exposure of interest rate fluctuations associated
with the cash flows on a portion of the Company's variable rate
borrowings (Note 8). This swap agreement is designated and qualifies as
a cash flow hedge. Its fair value is included in financial instruments
in the accompanying 2004 consolidated balance sheet with changes in the
effective portion of the instrument's fair value recorded in accumulated
other comprehensive loss. The ineffective portion of the change in fair
value of the derivative financial instrument is immediately recognized
in the income statement as a component of interest and finance cost. If
the hedged item is a forecasted transaction that later is not expected
to or will not occur, then the derivative financial instrument no longer
qualifies as a cash flow hedge. As a result, fair value changes that
were previously recorded in accumulated other comprehensive loss are
immediately recognized in earnings as a component of financial
income/expense. In all other instances, when a derivative financial
instrument ceases to be designated or to qualify as a cash flow hedge,
the previously recorded changes in fair value remain in accumulated
other comprehensive income until the hedged item affects earnings. It is
the Company's intention to hold this swap agreement to maturity.
The off-balance sheet risk in outstanding option agreements involves the
risk of a counter party not performing under the terms of the contract .
The Company monitors its positions, the credit ratings of counterparties
and the level of contracts it enters into with any one party. The
Company has a policy of entering into contracts with parties that meet
stringent qualifications and, given the high level of credit quality of
its derivative counterparty, the Company does not believe it is
necessary to obtain collateral arrangements.
(u) Recent Accounting Pronouncements:
FASB Interpretation No. 46R: In December 2003, the FASB issued
Interpretation No. 46R, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (the "Interpretation"), which revised
Interpretation No. 46, issued in January 2003. The Interpretation
addresses the consolidation of business enterprises (variable interest
entities) to which the usual condition (ownership of a majority voting
interest) of consolidation does not apply. The Interpretation focuses on
financial interests that indicate control. It concludes that in the
absence of clear control through voting interests, a company's exposure
(variable interest) to the economic risks and potential rewards from the
variable interest entity's assets and activities are the best evidence
of control. Variable interests are rights and obligations that convey
economic gains or losses from changes in the value of the variable
interest entity's assets and liabilities. Variable interests may arise
from financial instruments, service contracts, and other arrangements.
If an enterprise holds a majority of the variable interests of an
entity, it would be considered the primary beneficiary. The primary
beneficiary would be required to include assets, liabilities, and the
results of operations of the variable interest's entity in its financial
statements. The Company was required to adopt the provisions of FIN 46R
for entities created prior to February 2003, in 2004. The adoption of
FIN 46R in 2004 did not have any impact on the Company's consolidated
financial position, results of operations or cash flows.
(v) Reclassifications of Prior Year Balances: A reclassification has been
made to the 2003 consolidated financial statements to conform to the
presentation in the 2004 consolidated financial statements. An amount of
$208, concerning unamortized deferred financing fees, which is now
presented as a contra to current portion of long-term debt ($57) and as
a contra to long-term debt, net of current portion ($151) at December
31, 2003, was previously classified in deferred charges, net.
3. Transactions with Related Parties:
(a) Primal Tankers Inc.: As discussed in Note 1, up to June 30, 2004, the
ship-owning companies had a management agreement with Primal Tankers
Inc., under which management services were provided in exchange for a
fixed monthly fee per vessel, which was renewed annually. The fees
charged by Primal Tankers Inc. during 2002, 2003 and 2004 amounted to
$673, $1,686 and $1,120, respectively, and they are separately reflected
in the accompanying consolidated statements of income. At December 31,
2003 and 2004 the amounts due to and from Primal Tankers Inc. totalled
$105 and $219, respectively and are separately reflected in the
accompanying consolidated balance sheets. As of December 31, 2003, the
Company had advanced to Primal Tankers Inc. $319 of deposits as a
security for the performance by the ship-owning companies of their
obligations under the management agreements. Such deposits, following
the termination of the management agreements, were refunded to the
Company free of interest. The amount of $319 is separately reflected
under Other Non-Current Assets in the accompanying 2003 consolidated
balance sheet. During 2004 the Manager acquired from Primal Tankers Inc.
office furniture and equipment for a consideration of $475. Depreciation
expense for 2004 amounted to $35 and is included in depreciation in the
accompanying 2004 consolidated statement of income.
(b) Pyramis Technical Co. S.A.: On July 9, 2004 the Company concluded an
agreement to lease office space in Athens, Greece from Pyramis Technical
Co. SA, which is wholly owned by the father of the Company's Chief
Executive Officer. The agreement is for duration of six years beginning
July 2004 with an option for an extension of four years. The monthly
rental is Euro 39,000 adjusted annually for inflation increase effective
January 1, 2006. General and administrative expenses for the year ended
December 31, 2004 include $281 of rentals paid to Pyramis Technical Co.
S.A. The minimum rentals payable under operating leases for each of the
years ending December 31, 2005 through December 31, 2010 before any
adjustment for inflation and translated using the exchange rate of
$/Euro at December 31, 2004 are:
Year Amount
---- ------
2005 622
2006 622
2007 622
2008 622
2009 and thereafter 950
-----------
3,438
===========
4. Inventories:
The amounts shown in the accompanying consolidated balance sheets are
analyzed as follows:
2003 2004
---- ----
Bunkers 242 2,096
Lubricants 147 805
Consumable stores 120 320
-------- ---------
509 3,221
======== =========
5. Advances for Vessel Acquisitions:
In November 2004, Kisavos, Imitos, Parnis, Parnasos and Vitsi entered into
memoranda of agreement to acquire the vessels Priceless, Noiseless,
Stainless, Faultless and Stopless, respectively, for a total amount of $
256,500. Under the terms of the agreements, the Company, as of December 31,
2004, paid $25,650 representing a 10% deposit on the purchase price of each
vessel. The acquisitions will be financed from the proceeds of the Company's
follow-on public offering discussed in Note 11 and from long-term bank
financing. As of December 31, 2004, remaining contracted payments for
vessels acquisitions, all due in 2005, amounted to $230,850. The expected
delivery date of the Priceless is February 2005. The expected delivery date
of the Noiseless, Stainless, Faultless and Stopless is April 2005.
6. Vessels, net:
The amounts in the accompanying consolidated balance sheets are analyzed as
follows:
Accumulated Net
Vessel Cost Depreciation Book Value
----------- ------------ ----------
Balance, December 31, 2002 36,396 (4,268) 32,128
- Acquisitions 19,550 - 19,550
- Depreciation - (3,604) (3,604)
-------- -------- ---------
Balance, December 31, 2003 55,946 (7,872) 48,074
- Acquisitions 327,629 - 327,629
- Disposals (Tireless and
Med Prologue) (10,024) 3,391 (6,633)
- Depreciation - (13,073) (13,073)
-------- -------- ---------
Balance, December 31, 2004 373,551 (17,554) 355,997
Acquisitions during the year ended December 31, 2004 represent (a) the
acquisition cost of the vessels Limitless and Endless for a total amount of
$75,846, (b) the acquisition cost of the ten vessels discussed in Note 1(g)
through Note 1(p) for a total amount of $251,257 and (c) improvements of
$526 on the vessel Yapi.
In September and December 2004 vessels Tireless and Med Prologue,
respectively, were sold for $8,900. These sales, after the related sales
expenses of $364 and the unamortized, as of each vessel's sale date,
dry-docking and financing costs written off of $1,265, resulted in a gain of
$638, which is separately reflected in the accompanying 2004 consolidated
statement of income.
All Company's vessels, having a total carrying value of $355,997 at December
31, 2004, have been provided as collateral to secure the loans discussed in
Note 8.
7. Deferred Charges, net:
The unamortized amounts included in the accompanying consolidated balance
sheets represent dry-docking costs and are analyzed as follows:
Balance, December 31, 2002 333
- Additions 2,414
- Amortization (599)
--------------
Balance, December 31, 2003 2,148
- Additions 7,365
- Write-off due to sale of vessels (Note 6) (1,251)
- Amortization (1,514)
--------------
Balance, December 31, 2004 6,748
==============
Write-off of deferred charges due to vessels sale is included in gain from
vessels sale in the accompanying 2004 consolidated statement of income.
8. Long-term Debt:
The amounts in the accompanying consolidated balance sheets are analyzed as
follows:
Borrower(s) 2003 2004
----------- ---- ----
(a) The Company - 194,806
(b) Mytikas - -
(c) Litochoro - -
(d) Helidona and Olympos 10,148 -
(e) Gramos 11,403 -
(f) Kalidromo 1,800 -
(g) Rupel 11,052 -
Total 34,403 194,806
Less - current portion (4,027) (19,540)
---------- ----------
Long - term portion 30,376 175,266
(a) The Company: In late July 2004 the Company concluded a bank loan to
partially finance the acquisition cost of the ten tanker vessels
discussed in Note 6 and to refinance the Company's existing loans, with
the exception of the Kalidromo loan discussed in (f) below. The bank
loan was for the amount of $222,000 divided into 2 tranches of $197,000
and $25,000, respectively. The $197,000 tranche is payable in 16
consecutive semi-annual installments of $10,000 each, from March 31,
2005 to September 2012, plus a balloon payment of $ 37,000 payable
together with the last installment. The $25,000 tranche, which was
partially repaid ($2,310) from the sale proceeds of the vessel Tireless,
was repaid in full, on November 15, 2004, from the proceeds of the
Company's follow-on offering (Note 11). The loan bears interest at LIBOR
plus a margin. At December 31, 2004 the interest rate (including the
margin) was 4.60%.
(b) Mytikas: Loan for an amount of $30,400, obtained in March 2004, to
partially finance the acquisition cost of vessel Limitless. On August
17, 2004, the outstanding balance of the loan as of that date was
refinanced from the proceeds of the loan discussed in (a) above.
(c) Litochoro: Loan for an amount of $29,500, obtained in March 2004, to
partially finance the acquisition cost of vessel Endless. On August 17,
2004, the outstanding balance of the loan as of that date was refinanced
from the proceeds of the loan discussed in (a) above.
(d) Helidona and Olympos: Loan for an amount of $10,520, obtained in
September 2003, to refinance their then outstanding loan balances. On
August 12, 2004, the outstanding balance of the loan as of that date was
refinanced from the proceeds of the loan discussed in (a) above.
(e) Gramos: Loan for an amount of $11,750, obtained in July 2003, to assist
Gramos in financing the acquisition cost of vessel Faithful from Vermio.
On October 15, 2004, the outstanding balance of the loan as of that date
was refinanced from the proceeds of the loan discussed in (a) above.
(f) Kalidromo: Loan for an amount of $2,100, obtained in June 2003, to
partially finance the acquisition cost of the vessel Tireless. Upon the
sale of the vessel Tireless on September 24, 2004, the outstanding
balance of the loan ($1,413) was fully repaid.
(g) Rupel: Loan for an amount of $12,000, obtained in February 2003, to
partially finance the acquisition cost of the vessel Fearless. On
October 15, 2004, the outstanding balance of the loan as of that date
was refinanced from the proceeds of the loan discussed in (a) above.
The loan is secured as follows:
o First priority mortgages over the Company's vessels;
o Assignments of insurance and earnings of the mortgaged vessels;
o Corporate guarantee of the TOP Tankers Inc;
o Pledge over the earnings accounts of the vessels.
The loan, among others, contains financial covenants requiring the Company
to ensure that the aggregate market value of the mortgaged vessels at all
times exceed 130% of the aggregate outstanding principal amount under the
loan, to ensure that total assets minus total debt will not at any time be
less than $150,000 and to maintain liquid funds which at any time be not
less than the higher of $10,000 or $500 per vessel. As a result, the minimum
liquid funds required under the loan covenants of $10,000 have been
classified as restricted cash. The Company is permitted to pay dividends
under the loan so long as it is not in default of a loan covenant or if such
dividend payment would not result in a default of a loan covenant.
Interest expense for the years ended December 31, 2002, 2003 and 2004,
amounted to $797, $1,128 and $4,161 respectively and is included in interest
and finance costs in the accompanying consolidated statements of income
(Note 14). The weighted average interest rate of the above loans during the
years 2002, 2003 and 2004, was 3.11%, 3.28% and 3.19%, respectively.
The annual principal payments required to be made after December 31, 2004,
are as follows:
Year Amount
---- ------
2005 20,000
2006 20,000
2007 20,000
2008 20,000
2009 20,000
2010 and thereafter 97,000
----------
197,000
Less unamortized financing fees (2,194)
----------
194,806
==========
In connection with the loan discussed under (a) above, on August 26, 2004,
the Company entered into an interest rate swap agreement in order to hedge
the Company's variable interest rate exposure. As of December 31, 2004, the
swap agreement had a notional amount of $98,500 and its fair value is in a
loss position of ($248). The 2004 change in fair value on the swap agreement
is recorded entirely as a component of other comprehensive loss as there is
no hedge ineffectiveness. The swap agreement will expire in September 2008.
9. Accrued Liabilities:
The amounts in the accompanying consolidated balance sheets are analyzed as
follows:
2003 2004
--------- ----------
Interest on long-term debt 165 1,170
Vessels' operating and voyage expenses 524 2,019
General and administrative expenses 5 577
--------- ----------
Total 694 3,766
========= ==========
10. Contingencies:
Various claims, suits, and complaints, including those involving government
regulations and product liability, arise in the ordinary course of the
shipping business. In addition, losses may arise from disputes with
charterers, agents, insurance and other claims with suppliers relating to
the operations of the Company's vessels. Currently, management is not aware
of any such claims or contingent liabilities, which should be disclosed, or
for which a provision should be established in the accompanying consolidated
financial statements.
The Company accrues for the cost of environmental liabilities when
management becomes aware that a liability is probable and is able to
reasonably estimate the probable exposure. Currently, management is not
aware of any such claims or contingent liabilities, which should be
disclosed, or for which a provision should be established in the
accompanying consolidated financial statements. A minimum of up to $1
billion of the liabilities associated with the individual vessels actions,
mainly for sea pollution, are covered by the Protection and Indemnity (P&I)
Club insurance.
11. Common Stock and Additional Paid-In Capital:
The Company's common stock since inception and prior to the amendment of its
articles of incorporation in May 2004 consisted of 500 shares authorized,
issued and outstanding, of no par value. The holders of the shares are
entitled to one vote on all matters submitted to a vote of stockholders and
to receive all dividends, if any.
On May 10 and May 27, 2004 the Company's Articles of Incorporation were
amended. Under the amended articles of incorporation the Company was renamed
to TOP Tankers Inc. and currently, its authorized capital stock consists of
50,000,000 registered and/or bearer shares of common stock, par value $0.01
per share and 20,000,000 registered preferred shares with par value of
$0.01. The Board of Directors shall have the authority to establish such
series of preferred stock and with such designations, preferences and
relative, participating, optional or special rights and qualifications,
limitations or restrictions as shall be stated in the resolutions providing
for the issue of such preferred stock. In addition the Company within the
context of its initial public offering discussed below, on May 21, 2004,
cancelled the 500 shares of Ocean and issued 6,000,000 shares at par value
of $0.01 each. The share and per share data included in the accompanying
consolidated financial statements have been restated to reflect the issuance
of the 6,000,000 shares outstanding for all periods presented.
On July 23, 2004 the Company completed its initial public offering in the
United States under the United States Securities Act of 1933, as amended. In
this respect 12,278,570 shares of common stock at par value of $0.01 were
issued for $11.00 per share. The net proceeds to the Company totaled
$124,440.
On November 5, 2004 the Company completed a follow on public offering in the
United States under the United States Securities Act of 1933, as amended. In
this respect 9,552,420 shares of common stock at par value of $0.01 were
issued for $15.50 per share. The net proceeds to the Company totaled
$139,372.
The amounts shown in the accompanying consolidated statements of
stockholders' equity, as contributions to additional paid-in capital,
represent (a) payments made by the stockholders ($2,279, $6,484 and $17,077
in 2002, 2003 and 2004, respectively), prior to the Company's initial public
offering discussed above, at various dates to finance vessel acquisitions in
excess of the amounts of bank loans obtained and advances for working
capital purposes and (b) the consideration received for the issuance of the
shares in July and November 2004, discussed above, in excess of their par
value.
The Company paid dividends of $844, $571 and $2,318 during the years ended
December 31, 2002, 2003 and 2004, respectively. In December 2004, the
Company declared dividends of $0.21 per share, amounted to $5,845, which
were paid in January 2005.
12. Earnings Per Common Share:
The components of the calculation of basic earnings per share and diluted
earnings per share are as follows:
2002 2003 2004
---- ---- ----
Net Income:
Income available to common shareholders $ 201 $ 1,634 $ 32,794
Basic earnings per share:
Weighted average common shares outstanding 6,000,000 6,000,000 12,922,449
Diluted earnings per share:
Weighted average common shares--diluted 6,000,000 6,000,000 12,922,449
Basic earnings per common share $ 0.03 $ 0.27 $ 2.54
Diluted earnings per common share $ 0.03 $ 0.27 $ 2.54
13. Voyage and Vessel Operating Expenses:
The amounts in the accompanying consolidated statements of income are
analyzed as follows:
Voyage Expenses 2002 2003 2004
--------------- ---- ---- ----
Port charges 1,197 1,824 5,181
Bunkers 1,667 3,367 8,588
Commissions 447 746 3,129
--------- --------- -----------
Total 3,311 5,937 16,898
========= ========= ===========
Vessel Operating Expenses
-------------------------
Crew wages and related costs 2,145 3,638 7,285
Insurance 695 1,323 2,873
Repairs and maintenance 883 1,874 2,842
Spares and consumable stores 818 1,559 3,804
Taxes (Note 16) 12 26 55
--------- --------- -----------
Total 4,553 8,420 16,859
========= ========= ===========
14. Interest and Finance Costs:
The amounts in the accompanying consolidated statements of income are
analyzed as follows:
2002 2003 2004
---- ---- ----
Interest on long-term debt (Note 8) 797 1,128 4,161
Bank charges 35 87 285
Amortization and write-off of
financing fees 161 121 755
-------- --------- ---------
Total 993 1,336 5,201
======== ========= =========
15. Other, net:
The amounts in the accompanying consolidated statements of income are
analyzed as follows:
2002 2003 2004
------- -------- -------
Insurance claims recoveries 886 364 -
Miscellaneous 8 - 80
------- -------- -------
Total 894 364 80
======= ======== =======
Insurance claim recoveries represent the excess amount the Company received
in connection with claims for damages to its vessels compared to actual
costs associated with the repairs.
16. Income Taxes:
Marshall Islands, Cyprus and Liberia do not impose a tax on international
shipping income. Under the laws of Marshall Islands, Cyprus and Liberia, the
countries of the companies' incorporation and vessels' registration, the
companies are subject to registration and tonnage taxes which have been
included in vessels' operating expenses in the accompanying consolidated
statements of income.
Pursuant to the Internal Revenue Code of the United States (the "Code"),
U.S. source income from the international operations of ships is generally
exempt from U.S. tax if the company operating the ships meets both of the
following requirements, (a) the Company is organized in a foreign country
that grants an equivalent exception to corporations organized in the United
States and (b) either (i) more than 50% of the value of the Company's stock
is owned, directly or indirectly, by individuals who are "residents" of the
Company's country of organization or of another foreign country that grants
an "equivalent exemption" to corporations organized in the United States
(50% Ownership Test) or (ii) the Company's stock is "primarily and regularly
traded on an established securities market" in its country of organization,
in another country that grants an "equivalent exemption" to United States
corporations, or in the United States (Publicly-Traded Test). Under the
regulations, a Company's stock will be considered to be "regularly traded"
on an established securities market if (i) one or more classes of the its
stock representing 50 percent or more of its outstanding shares, by voting
power and value, is listed on the market and is traded on the market, other
than in minimal quantities, on at least 60 days during the taxable year; and
(ii) the aggregate number of shares of stock traded during the taxable year
is at least 10% of the average number of shares of the stock outstanding
during the taxable year.
Treasury regulations under the Code were promulgated in final form in August
2003. These regulations apply to taxable years beginning after September 24,
2004. As a result, such regulations will be effective for calendar year
taxpayers, like the Company, beginning with the calendar year 2005. The
Marshall Islands, Cyprus and Liberia, the jurisdictions where the Company
and its ship-owning subsidiaries are incorporated, grant an "equivalent
exemption" to United States corporations. Therefore, the Company is exempt
from United States federal income taxation with respect to our U.S.-source
shipping income if either the 50% Ownership Test or the Publicly-Traded Test
is met. The Company believes that for periods prior to its initial public
offering in July 2004, the 50% Ownership Test is satisfied. The Company also
believes that for periods subsequent to its initial public offering, it
satisfies the publicly traded requirements of the statute on the basis that
more than 50% of the value of its stock is primarily and regularly traded on
the Nasdaq National Market and, therefore, the Company and its subsidiaries
are entitled to exemption from U.S. federal income tax, in respect of their
U.S. source shipping income.
17. Financial Instruments:
The principal financial assets of the Company consist of cash on hand and at
banks and accounts receivable due from charterers. The principal financial
liabilities of the Company consist of long-term bank loans and accounts
payable due to suppliers.
(a) Interest rate risk: The Company's interest rates and long-term loan
repayment terms are described in Note 8.
(b) Concentration of Credit risk: Financial instruments, which potentially
subject the Company to significant concentrations of credit risk,
consist principally of cash and trade accounts receivable. The Company
places its temporary cash investments, consisting mostly of deposits,
with high credit qualified financial institutions. The Company performs
periodic evaluations of the relative credit standing of those financial
institutions with which it places its temporary cash investments. The
Company limits its credit risk with accounts receivable by performing
ongoing credit evaluations of its customers' financial condition and
generally does not require collateral for its accounts receivable.
(c) Fair value: The carrying values of cash and cash equivalents, accounts
receivable and accounts payable are reasonable estimates of their fair
value due to the short-term nature of these financial instruments. The
fair value of the long-term bank loan discussed in Note 8 bearing
interest at variable interest rates approximates the recorded value. The
carrying value of the liability for the interest rate swap agreement
approximates its fair value as the fair value estimates the amount the
Company would have paid had the interest rate swap agreement been
terminated on the balance sheet date.
18. Subsequent Events:
(a) New Credit Facilities: In February and March 2005, the Company concluded
three bank loans bearing interest at LIBOR plus a margin as follows: (i)
in February 2005, a bank loan to partially finance the acquisition cost
of vessels Priceless, Noiseless and Faultless (Note 1) and to refinance
the loan discussed in Note 8(a). The loan is for the amount of $280,794
divided into two tranches of $197,000 and $83,794, respectively. The
$197,000 tranche is payable in 16 equal consecutive semi-annual
instalments of $10,000 each, from March 31, 2005 to September 2012, plus
a balloon payment of $37,000 payable together with the last instalment.
The $83,794 tranche is subject to a fee of 1% payable on draw down and
the tranche is payable in 14 varying semi-annual instalments starting
July 31, 2005, plus a balloon payment of $17,041 payable together with
the last instalment; (ii) in March 2005, a bank loan to partially
finance the acquisition cost of vessels Stainless and Stopless (Note 1).
The loan is for the amount of $56,500 divided into two tranches and is
payable in 28 varying quarterly instalments starting July 29, 2005, plus
a balloon payment of $10,170 payable together with the last instalment.
The loan is subject to a fee of 1% payable on draw down. On March 30,
2005 Parnis and Vitsi drew down $56,500 of the bank loan; and (iii) in
March 2005, a bank loan to partially finance the acquisition cost of the
vessels Topless, Dauntless, Soundless and Taintless, discussed in (c)
below. The loan, which is for the amount of $144,000 and will be
provided as Tranche C of the loan discussed under (i) above, is subject
to fee of 0.75% payable on draw down and is payable in 17 equal
consecutive semi-annual instalments of $6,300 each, starting November
30, 2005, plus a balloon payment of $36,900 payable together with the
last instalment. The total loan discussed under (i) and (iii) above is
$424,794.
(b) Vessel's Delivery: On February 3, 2005, Kisavos took delivery of the
154,970 DWT (built in 1991), tanker vessel "Priceless" for $49,450. On
February 2, 2005, Kisavos drew down $27,931 as a portion of the bank
loan discussed in (a)(i) above and the then outstanding balance of the
vessel's purchase price of $44,505 ($49,450 less the 10% advance payment
made in November 2004) was paid to the seller.
(c) Newly Established Wholly Owned Subsidiaries and Vessels Acquisitions: In
February and March 2005 the Company established Agion Oros Shipping
Company Limited ("Agion Oros"), Lefka Shipping Company Limited
("Lefka"), Agrafa Shipping Company Limited ("Agrafa") and Giona Shipping
Company Limited ("Giona"), all incorporated in the Marshall Islands. In
late February and early March 2005, Agion Oros, Lefka, Agrafa and Giona
entered into memoranda of agreement to acquire the vessels Topless,
Dauntless, Soundless and Taintless, respectively, at a total cost of
$163,500. Vessels Taintless and Dauntless were delivered to the Company
on March 21 and March 24, 2005, respectively. Vessels Soundless and
Topless are expected to be delivered on or about April 18 and April 25,
2005, respectively. On March 21 and March 24, 2005 Giona and Lefka
collectively drew down $73,100 of the bank loan discussed in (a)(iii)
above and the vessels' purchase price of $83,000 was paid to the seller.
(d) Dividends: On March 16, 2005, the Company declared dividends of $0.21
per share to be paid in April 2005.
(e) London Office: On February 2, 2005, TOP TANKERS (UK) LIMITED, a newly
established subsidiary to be engaged in chartering activities involving
the Company's vessels, entered into a rent agreement for office space in
London. The agreement is for duration of one year ending December 31,
2005.
(f) Sale of Vessel: Based on the Memorandum of Agreement dated March 16,
2005, the Company agreed to sell vessel Yapi for a consideration of
$8,550. On March 29, 2005 the vessel entered into a bareboat charter
with the buyers until July 31, 2005 (the vessel's delivery date), at a
daily bareboat hire of $6. According to the terms of the bareboat
charter the Company collected in advance an amount of $1,000 from the
buyers as a security of their obligation to purchase the vessel.
(g) Interest Rate Swaps: In connection with the loans discussed under (a)(i)
and (a)(iii) above, the Company entered into the following interest rate
swap agreements with declining notional balances in order to hedge its
variable interest rate exposure, with effective date March 31, 2005; (i)
for an initial notional amount of $93,500 and for a period of five
years, with a fixed interest rate of 4.72% plus the applicable bank
margin; (ii) for an initial notional amount of $27,931 and for a period
of four years, with a fixed interest rate of 4.5775% plus the applicable
bank margin; and (iii) for an initial notional amount of $36,550 and for
a period of four years, with a fixed interest rate of 4.66% plus the
applicable bank margin. TOP TANKERS INC. NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 2003 AND 2004 (Expressed in thousands of United
States Dollars - except share and per share data, unless otherwise
stated)
(h) Vessels' Delivery (Unaudited): On April 1, 2005, Parnis and Vitsi took
delivery of the vessels Stainless and Stopless. On March 30, 2005 Parnis
and Vitsi drew down $56,500 of the bank loan discussed in (a)(ii) above
and the then outstanding balance of the vessels' purchase price of
$92,677 ($102,975 less the 10% advance payment made in November 2004)
was paid to the sellers on March 31, 2005. On April 11, 2005, Parnasos
took delivery of the vessel Faultless. On April 8, 2005, Parnasos drew
down $27,931 of the $83,794 tranche of the bank loan discussed in (a)(i)
and the then outstanding balance of the vessel's purchase price of
$46,485 ( $51,650 less the 10% advance payment made in November 2004)
was paid to the seller.
ITEM 19. EXHIBITS.
Number Description of Exhibits
------ -----------------------
1.1 ____ Amended and Restated Articles of Incorporation of TOP Tankers Inc. (1)
1.2 ____ By-Laws of the Company (2)
4.1 ____ TOP Tankers Inc. 2005 Stock Option Plan
4.2 ____ Loan Agreement between the Company and the Royal Bank of Scotland plc dated August 10, 2004
and supplemented September 30, 2004 (3)
4.3 ____ Loan Agreement between the Company and DVB Bank dated March 10, 2005.
4.4 ____ Form of Memorandum of Agreement relating to Timeless (4)
4.5 ____ Form of Memorandum of Agreement relating to Flawless (5)
4.6 ____ Form of Memorandum of Agreement relating to Restless (6)
4.7 ____ Form of Memorandum of Agreement relating to Spotless (7)
4.8 ____ Form of Memorandum of Agreement relating to Doubtless (8)
4.9 ____ Form of Memorandum of Agreement relating to Victorious (9)
4.10 ____ Form of Memorandum of Agreement relating to Relentless (10)
4.11 ____ Form of Memorandum of Agreement relating to Sovereign (11)
4.12 ____ Form of Memorandum of Agreement relating to Invincible (12)
4.13 ____ Form of Memorandum of Agreement relating to Vanguard (13)
4.14 ____ Memorandum of Agreement relating to Priceless (14)
4.15 ____ Memorandum of Agreement relating to Stopless (15)
4.16 ____ Memorandum of Agreement relating to Faultless (16)
4.17 ____ Memorandum of Agreement relating to Noiseless (17)
4.18 ____ Memorandum of Agreement relating to Stainless (18)
8.1 ____ List of the Company's subsidiaries
12.1 ____ Rule 13a-14(a)/15d-14(a) Certification of the Company's Chief Executive Officer.
12.2 ____ Rule 13a-14(a)/15d-14(a) Certification of the Company's Chief Financial Officer.
13.1 ____ Certification of the Company's Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2 ____ Certification of the Company's Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference from Exhibit 3.1 to the company's Registration
Statement on Form F-1, filed on October 18, 2004 (File No. 333-119806)
(2) Incorporated by reference from Exhibit 3.4 to the Company's Registration
Statement on Form F-1, filed on July 7, 2004 (Filed No. 333-117213).
(3) Incorporated by reference from Exhibit 10.1 to the Company's
Registration Statement on Form F-1, filed on November 12, 2004 (Filed
No. 333-119806).
(4) Incorporated by reference from Exhibit 10.1 to the Company's
Registration Statement on Form F-1, filed on July 15, 2004 (Filed No.
333-117213).
(5) Incorporated by reference from Exhibit 10.2 to the Company's
Registration Statement on Form F-1, filed on July 15, 2004 (Filed No.
333-117213).
(6) Incorporated by reference from Exhibit 10.3 to the Company's
Registration Statement on Form F-1, filed on July 15, 2004 (Filed No.
333-117213).
(7) Incorporated by reference from Exhibit 10.4 to the Company's
Registration Statement on Form F-1, filed on July 15, 2004 (Filed No.
333-117213).
(8) Incorporated by reference from Exhibit 10.5 to the Company's
Registration Statement on Form F-1, filed on July 15, 2004 (Filed No.
333-117213).
(9) Incorporated by reference from Exhibit 10.6 to the Company's
Registration Statement on Form F-1, filed on July 15, 2004 (Filed No.
333-117213).
(10)Incorporated by reference from Exhibit 10.7 to the Company's
Registration Statement on Form F-1, filed on July 15, 2004 (Filed No.
333-117213).
(11)Incorporated by reference from Exhibit 10.8 to the Company's
Registration Statement on Form F-1, filed on July 15, 2004 (Filed No.
333-117213).
(12)Incorporated by reference from Exhibit 10.9 to the Company's
Registration Statement on Form F-1, filed on July 15, 2004 (Filed No.
333-117213).
(13)Incorporated by reference from Exhibit 10.10 to the Company's
Registration Statement on Form F-1, filed on July 15, 2004 (Filed No.
333-117213).
(14)Incorporated by reference from Exhibit 10.1 to the Company's
Registration Statement on Form F-1, filed on November 12, 2004 (Filed
No. 333-119806).
(15)Incorporated by reference from Exhibit 10.2 to the Company's
Registration Statement on Form F-1, filed on November 12, 2004 (Filed
No. 333-119806).
(16)Incorporated by reference from Exhibit 10.3 to the Company's
Registration Statement on Form F-1, filed on November 12, 2004 (Filed
No. 333-119806).
(17)Incorporated by reference from Exhibit 10.4 to the Company's
Registration Statement on Form F-1, filed on November 12, 2004 (Filed
No. 333-119806).
(18)Incorporated by reference from Exhibit 10.5 to the Company's
Registration Statement on Form F-1, filed on November 12, 2004 (Filed
No. 333-119806).
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this registration statement on its behalf.
TOP Tankers Inc.
By: /s/ Evangelos Pistiolis
--------------------------
Name: Evangelos Pistiolis
Title: Chief Executive Officer
Date: June 29, 2005
23116.0001 #582823