UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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Commission file number 0-22704
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Frontline Ltd
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(Exact name of Registrant as specified in its charter)
Frontline Ltd.
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(Translation of Registrant's name into English)
Bermuda
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(Jurisdiction of incorporation or organisation)
Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda
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(Address of principal executive offices)
Securities registered or to be registered pursuant to section 12(b) of the Act.
Title of each class Name of each exchange
on which registered
Ordinary Shares, $2.50 Par Value New York Stock Exchange
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Securities registered or to be registered pursuant to section 12(g) of the Act.
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(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
Ordinary Shares, $2.50 Par Value
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(Title of class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the
annual report.
76,466,566 Ordinary Shares, $2.50 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [_] Item 18 [X]
INDEX TO REPORT ON FORM 20-F
PART I PAGE
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.................4
ITEM 2. OFFER STATISTICS AND EXPECTED
TIMETABLE.............................................................4
ITEM 3. KEY INFORMATION.......................................................4
ITEM 4. INFORMATION ON THE COMPANY...........................................11
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.........................28
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES...........................36
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS.........................................................39
ITEM 8. FINANCIAL INFORMATION................................................41
ITEM 9. THE OFFER AND LISTING................................................41
ITEM 10. ADDITIONAL INFORMATION...............................................43
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK....................................................45
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES....................................................46
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES......................47
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS..................................................47
ITEM 15. CONTROLS AND PROCEDURES..............................................47
ITEM 16. RESERVED
PART III
ITEM 17. FINANCIAL STATEMENTS.................................................48
ITEM 18. FINANCIAL STATEMENTS.................................................48
ITEM 19. EXHIBITS ............................................................49
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Matters discussed in this document may constitute forward-looking statements.
The Private Securities Litigation Reform Act of 1995 provides safe harbor
protections for forward-looking statements in order to encourage companies to
provide prospective information about their business. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements, which
are other than statements of historical facts.
Frontline Ltd., or the Company, desires to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this cautionary statement in connection with this safe harbor
legislation. This document and any other written or oral statements made by us
or on our behalf may include forward-looking statements, which reflect our
current views with respect to future events and financial performance. The words
"believe," "anticipate," "intends," "estimate," "forecast," "project," "plan,"
"potential," "will," "may," "should," "expect" and similar expressions identify
forward-looking statements.
The forward-looking statements in this document are based upon various
assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, management's examination of historical operating
trends, data contained in our records and other data available from third
parties. Although we believe that these assumptions were reasonable when made,
because these assumptions are inherently subject to significant uncertainties
and contingencies which are difficult or impossible to predict and are beyond
our control, we cannot assure you that we will achieve or accomplish these
expectations, beliefs or projections.
In addition to these important factors and matters discussed elsewhere herein,
important factors that, in our view, could cause actual results to differ
materially from those discussed in the forward-looking statements include the
strength of world economies, fluctuations in currencies and interest rates,
general market conditions, including fluctuations in charterhire rates and
vessel values, changes in demand in the tanker market, including changes in
demand resulting from changes in OPEC's petroleum production levels and world
wide oil consumption and storage, changes in the Company's operating expenses,
including bunker prices, drydocking and insurance costs, changes in governmental
rules and regulations or actions taken by regulatory authorities, potential
liability from pending or future litigation, general domestic and international
political conditions, potential disruption of shipping routes due to accidents
or political events, and other important factors described from time to time in
the reports filed by the Company with the Securities and Exchange Commission.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The selected income statement data of the Company with respect to the fiscal
years ended December 31, 2002, 2001 and 2000 and the selected balance sheet data
of the Company with respect to the fiscal years ended December 31, 2002 and 2001
have been derived from the Company's Consolidated Financial Statements included
herein and should be read in conjunction with such statements and the notes
thereto. The selected income statement data with respect to the fiscal years
ended December 31, 1999 and 1998 and the selected balance sheet data with
respect to the fiscal years ended December 31, 2000, 1999 and 1998 has been
derived from consolidated financial statements of the Company not included
herein. The selected financial data with respect to the fiscal years ended
December 31, 2001 and 2000 has been restated to reflect the adoption of
Financial Accounting Standard 144 by the Company on January 1, 2002. The
selected financial data with respect to the fiscal years ended December 31, 1998
has been restated to reflect the treatment of ICB Aktiebolag (publ), or ICB, as
an investment accounted for in accordance with the equity method. Our treatment
of ICB is discussed in more detail in Item 4.A of this Annual Report. The
following table should also be read in conjunction with Item 5. "Operating and
Financial Review and Prospects" and the Company's Consolidated Financial
Statements and Notes thereto included herein.
Fiscal Year Ended December 31,
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2002 2001 2000 1999 1998
(restated) (restated) (restated)
(in thousand of $, except Ordinary Shares, per Ordinary Share data and ratios)
Income Statement Data:
Net operating revenues $ 416,521 $ 628,186 $ 595,401 $ 253,214 $ 203,860
Net operating income (loss) $ 95,676 $ 375,420 $ 374,269 $ (12,210) $ 72,455
Net income (loss) from continuing operations before
income taxes and minority interest $ 7,150 $ 330,551 $ 305,951 $ (91,150) $ 31,883
Net income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 7,172 $ 330,107 $ 305,910 $ (86,896) $ 31,853
Discontinued operations $ (1,929) $ 21,076 $ 7,957 $ -- $ --
Cumulative effect of change in accounting principle $ (14,142) $ 31,545 $ -- $ -- $ --
Net (loss) income $ (8,899) $ 382,728 $ 313,867 $ (86,896) $ 31,853
Earnings (loss) from continuing operations before
cumulative effect of change in accounting principle
per Ordinary Share
- basic $ 0.09 $ 4.30 $ 4.17 $ (1.76) $ 0.69
- diluted $ 0.09 $ 4.29 $ 4.16 $ (1.76) $ 0.69
Earnings (loss) per Ordinary Share
- basic $ (0.12) $ 4.99 $ 4.28 $ (1.76) $ 0.69
- diluted $ (0.12) $ 4.98 $ 4.27 $ (1.76) $ 0.69
Cash dividends paid per Ordinary Share $ 0.25 $ 1.50 $ -- $ -- $ --
Balance Sheet Data (at end of year):
Cash and cash equivalents $ 92,078 $ 178,176 $ 103,514 $ 65,467 $ 74,034
Newbuildings and vessel purchase options $ 27,405 $ 102,781 $ 36,326 $ 32,777 $ 75,681
Vessels and equipment, net $ 2,373,329 $ 2,196,959 $ 2,254,921 $ 1,523,112 $ 1,078,956
Vessels under capital lease, net $ 264,902 $ 317,208 $ 108,387 $ -- $ --
Investments in associated companies $ 119,329 $ 109,898 $ 27,361 $ 16,274 $ 239,887
Total assets $ 3,034,743 $ 3,033,774 $ 2,780,988 $ 1,726,793 $ 1,505,414
Short-term debt and current portion of long-term debt $ 167,807 $ 227,597 $ 212,767 $ 116,814 $ 170,551
Current portion of obligations under capital lease $ 13,164 $ 17,127 $ 7,888 $ -- $ --
Long-term debt $ 1,277,665 $ 1,164,354 $ 1,331,372 $ 962,880 $ 712,470
Obligations under capital lease $ 259,527 $ 283,663 $ 101,875 $ -- $ --
Share capital $ 191,166 $ 191,019 $ 195,172 $ 152,405 $ 115,267
Stockholders' equity $ 1,226,973 $ 1,252,401 $ 1,029,490 $ 557,300 $ 583,574
Ordinary Shares outstanding 76,466,566 76,407,566 78,068,811 60,961,860 46,106,860
Cash Flow Data
Cash provided by operating activities $ 142,025 $ 477,607 $ 271,582 $ 46,486 $ 69,592
Cash provided by (used in) investing activities $ (222,893) $ (103,782) $ (508,938) $ 175,532 $ (143,955)
Cash provided by (used in) financing activities $ (5,230) $ (299,163) $ 275,403 $ (230,585) $ 61,527
Other Financial Data
Return on capital employed (percentage) (1) 2.9% 14.7% 18.2% 0.1% 6.5%
Equity to assets ratio (percentage) (2) 40.5% 41.3% 37.0% 32.3% 38.8%
Debt to equity ratio (3) 1.4 1.4 1.6 1.9 1.5
Price earnings ratio (4) neg. 2.1 3.3 neg. 2.8
Footnotes
(1) Return on capital employed is calculated as net income (loss) before
cumulative effect of change in accounting principle, interest expense and
foreign exchange gains (losses), as a percentage of average capital
employed.
(2) Equity to assets ratio is calculated as total stockholders' equity divided
by total assets.
(3) Debt to equity ratio is calculated as total interest bearing current and
long-term liabilities, including obligations under capital leases, divided
by stockholders' equity.
(4) Price earnings ratio is calculated using the closing year end share price
divided by basic Earnings per Share.
B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable
D. RISK FACTORS
We are engaged primarily in transporting crude oil and oil products. The
following summarises some of the risks that may materially affect our business,
financial condition or results of operations. Please note, in this section,
"we", "us" and "our" all refer to the Company and its subsidiaries.
The cyclical nature of the tanker industry may lead to volatile changes in
charter rates and vessel values which may adversely affect our earnings
Historically, the tanker industry has been highly cyclical, with volatility in
profitability and asset values resulting from changes in the supply of and
demand for tanker capacity. If the tanker market is depressed in the future our
earnings and available cash flow may decrease. Our ability to recharter our
vessels on the expiration or termination of their current spot and time charters
and the charter rates payable under any renewal or replacement charters will
depend upon, among other things, economic conditions in the tanker market.
Fluctuations in charter rates and vessel values result from changes in the
supply and demand for tanker capacity and changes in the supply and demand for
oil and oil products.
The factors affecting the supply and demand for oil tankers are outside of our
control, and the nature, timing and degree of changes in industry conditions are
unpredictable. The factors that influence demand for tanker capacity include:
o demand for oil and oil products;
o global and regional economic conditions;
o the distance oil and oil products are to be moved by sea; and
o changes in seaborne and other transportation patterns.
The factors that influence the supply of tanker capacity include:
o the number of newbuilding deliveries;
o the scrapping rate of older vessels;
o the number of vessels that are out of service; and
o national or international regulations that may effectively cause reductions
in the carrying capacity of vessels or early obsolescence of tonnage.
We are highly dependent on spot oil voyage charters. Any decrease in spot
charter rates in the future may adversely affect our earnings
The majority of our vessels currently operate on a spot charter basis or under
contracts of affreightment under which we carry an agreed upon quantity of cargo
over a specified route and time period. Although spot chartering is common in
the tanker industry, the spot charter market is highly competitive and spot
charter rates may fluctuate significantly based upon tanker and oil supply and
demand. The successful operation of our vessels in the spot charter market
depends upon, among other things, obtaining profitable spot charters and
minimising, to the extent possible, time spent waiting for charters and time
spent travelling unladen to pick up cargo. We cannot assure you that future spot
charters will be available at rates sufficient to enable our vessels trading in
the spot market to operate profitably. In addition, bunkering, or fuel, charges
that account for a substantial portion of the operating costs, and generally
reflect prevailing oil prices, are subject to sharp fluctuations.
Our revenues experience seasonal variations that may affect our income
We operate our tankers in markets that have historically exhibited seasonal
variations in demand and, therefore, charter rates. Tanker markets are typically
stronger in the winter months in the northern hemisphere due to increased oil
consumption. In addition, unpredictable weather patterns in the winter months
tend to disrupt vessel scheduling. The oil price volatility resulting from these
factors has historically led to increased oil trading activities and demand for
vessels. The change in demand for vessels may affect the charter rates that we
receive.
Because the market value of our vessels may fluctuate significantly, we may
incur losses when we sell vessels which may adversely affect our earnings
The fair market value of vessels may increase and decrease depending on the
following factors:
o general economic and market conditions affecting the shipping industry;
o competition from other shipping companies;
o types and sizes of vessels;
o other modes of transportation;
o cost of newbuildings;
o governmental or other regulations;
o prevailing level of charter rates; and
o technological advances.
If we sell a vessel at a time when ship prices have fallen, the sale may be at
less than the vessel's carrying amount on our financial statements, with the
result that we could incur a loss and a reduction in earnings. In addition, if
we determine at any time that a vessel's future limited useful life and earnings
require us to impair its value on our financial statements, that could result in
a charge against our earnings and the reduction of our shareholder's equity. It
is possible that the market value of our vessels will decline in the future.
If we violate environmental laws or regulations, the resulting liability may
adversely affect our earnings and financial condition
Our operations are subject to extensive regulation designed to promote tanker
safety, prevent oil spills and generally protect the environment. Local,
national and foreign laws, as well as international treaties and conventions,
can subject us to material liabilities in the event that there is a release of
petroleum or other hazardous substances from our vessels.
For example, the United States Oil Pollution Act of 1990, or OPA, provides that
owners, operators and bareboat charterers are strictly liable for the discharge
of oil in U.S. waters, including the 200 nautical mile zone off the U.S. coasts.
OPA provides for unlimited liability in some circumstances, such as a vessel
operator's gross negligence or willful misconduct. However, in most cases OPA
limits liability to the greater of $1,200 per gross ton or $10 million per
vessel. OPA also permits states to set their own penalty limits. Most states
bordering navigable waterways impose unlimited liability for discharges of oil
in their waters. The International Maritime Organization, or IMO, has adopted a
similar liability scheme that imposes strict liability for oil spills, subject
to limits that do not apply if the release is caused by the vessel owner's
intentional or reckless conduct.
U.S. law, the law in many of the nations in which we operate, and international
treaties and conventions that impact our operations, also establish strict rules
governing vessel safety and structure, training, inspections, financial
assurance for potential cleanup liability and other matters. These requirements
can limit our ability to operate, and substantially increase our operating
costs. The U.S. has established strict deadlines for phasing-out single-hull oil
tankers, and both the IMO and the European Union have adopted similar phase-out
periods.
Under OPA, with certain limited exceptions, all newly built or converted tankers
operating in United States waters must be built with double hulls conforming to
particular specifications. Tankers that do not have double hulls are subject to
structural and operational measures to reduce oil spills and the ability to
operate these vessels in United States waters will be phased out between 1995
and 2015 according to size, age, hull configuration and place of discharge
unless retrofitted with double hulls. In addition, OPA specifies annual
inspections, vessel manning, equipment and other construction requirements that
are in various stages of development, applicable to new and to existing vessels.
The IMO has approved an accelerated time-table for the phase-out of single-hull
oil tankers. The new regulations, which took effect in September 2002, require
the phase-out of most single-hull oil tankers by 2015 or earlier, depending on
the age of the tanker and whether it has segregated ballast tanks. Under the new
regulations, the maximum permissible age for single-hull tankers after 2007 will
be 26 years, as opposed to 30 years under current regulations. Also, more
stringent maritime safety rules are also more likely to be imposed world-wide as
a result of the oil spill in November 2002 relating to the loss of the m.t.
Prestige. The m.t. Prestige was a 26-year old single-hull tanker owned by a
company not affiliated with us. The m.t. Prestige disaster could lead to
proposals to accelerate the phasing out of single-hull tankers.
These requirements can affect the resale value or useful lives of our vessels.
In addition, violations of applicable requirements or a catastrophic release
from one of our vessels could have a material adverse impact on our financial
condition and results of operations.
Competition
The operation of tankers and transportation of crude and petroleum products and
the other businesses in which we operate are extremely competitive. Through our
operating subsidiaries we compete with other oil tanker and dry bulk carrier
owners (including major oil companies as well as independent companies), and, to
a lesser extent, owners of other size vessels. Our market share currently is
insufficient to enforce any degree of pricing discipline in the markets in which
we compete. It is possible that our competitive position will erode in the
future.
Our debt service obligations could affect our ability to incur additional
indebtedness or engage in certain transactions
Our existing financing agreements impose operational and financing restrictions
on us which may significantly limit or prohibit, among other things, our ability
to incur additional indebtedness, create liens, sell capital shares of
subsidiaries, make certain investments, engage in mergers and acquisitions,
purchase and sell vessels, enter into time or consecutive voyage charters or pay
dividends without the consent of our lenders. In addition, our lenders may
accelerate the maturity of indebtedness under our financing agreements and
foreclose on the collateral securing the indebtedness upon the occurrence of
certain events of default, including our failure to comply with any of the
covenants contained in our financing agreements, not rectified within the
permitted time. For instance, declining vessel values could lead to a breach of
covenants under our financing agreements. If we are unable to pledge additional
collateral or obtain waivers from our lenders, our lenders could accelerate our
debt and foreclose on our vessels.
An increase in interest rates could materially and adversely affect our
financial performance
At December 31, 2002 we had total long-term debt outstanding of $1,445.5
million, of which $1,424.9 million is floating rate debt. The Company uses
interest rate swaps to manage interest rate risk. As at December 31, 2002 the
Company's interest rate swap arrangements effectively fix the Company's interest
rate exposure on $352.7 million of floating rate debt. The maximum exposure to
the interest rate fluctuations is $1,072.2 million at December 31, 2002. If
interest rates rise significantly, that could materially and adversely affect
our results of operations.
Fluctuations in the yen could affect our earnings
Certain of our vessels obtained through our acquisition of Golden Ocean Group
Limited in 2000, have charters and financing arrangements that require payments
of principal and interest or charter hire in Yen. While many of the charters for
the dry bulk vessels that we acquired through Golden Ocean require the
charterers to pay in Yen so as to cover related Yen denominated debt service,
the charterers may also pay a significant part of the charter hire in Dollars.
As we have not hedged our Yen exposure against the Dollar, a rise in the Yen
could have an adverse impact on our financial condition and results of
operations.
We may be unable to attract and retain key management personnel in the tanker
industry, which may negatively impact the effectiveness of our management and
our results of operation
Our success depends to a significant extent upon the abilities and efforts of
our senior executives, and particularly John Fredriksen, our Chairman and Chief
Executive Officer, and Tor Olav Troim, our Vice-President, for the management of
our activities and strategic guidance. While we believe that we have an
experienced management team, the loss or unavailability of one or more of our
senior executives, and particularly Mr. Fredriksen or Mr. Troim, for any
extended period of time could have an adverse effect on our business and results
of operations.
Risks involved with operating ocean-going vessels could affect our business and
reputation, which would adversely affect our revenues
The operation of an ocean-going vessel carries inherent risks. These risks
include the possibility of:
o marine disaster;
o piracy;
o environmental accidents;
o cargo and property losses or damage; and
o business interruptions caused by mechanical failure, human error, war,
terrorism, piracy, political action in various countries, labour strikes,
or adverse weather conditions.
Any of these circumstances or events could increase our costs or lower our
revenues. The involvement of our vessels in an oil spill or other environmental
disaster may harm our reputation as a safe and reliable tanker operator.
We may not have adequate insurance to compensate us if our vessels are damaged
or lost
We procure insurance for our fleet against those risks that we believe the
shipping industry commonly insures against. These insurances include hull and
machinery insurance, protection and indemnity insurance, which includes
environmental damage and pollution insurance coverage, and war risk insurance.
We can give no assurance that we are adequately insured against all risks. We
may not be able to obtain adequate insurance coverage at reasonable rates for
our fleet in the future. Additionally, our insurers may not pay particular
claims. Our insurance policies contain deductibles for which we will be
responsible, limitations and exclusions which, although we believe are standard
in the shipping industry, may nevertheless increase our costs or lower our
revenue.
An increase in costs could materially and adversely affect our financial
performance
Our vessel operating expenses depend on a variety of factors including crew
costs, provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs, many of which are beyond our control and affect the
entire shipping industry. Some of these costs, primarily insurance and enhance
security measures implemented after September 11, 2001, are increasing. The
terrorist attack of the VLCC Limburg in Yemen during October 2002 has resulted
in even more emphasis on security and pressure on insurance rates. If costs
continue to rise, that could materially and adversely affect our results of
operations.
Maritime claimants could arrest our tankers, which could interrupt our cash flow
Crew members, suppliers of goods and services to a vessel, shippers of cargo and
other parties may be entitled to a maritime lien against that vessel for
unsatisfied debts, claims or damages. In many jurisdictions a maritime
lienholder may enforce its lien by arresting a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our vessels could
interrupt our cash flow and require us to pay a significant amount of money to
have the arrest lifted.
In addition, in some jurisdictions, such as South Africa, under the "sister
ship" theory of liability, a claimant may arrest both the vessel which is
subject to the claimant's maritime lien and any "associated" vessel, which is
any vessel owned or controlled by the same owner. Claimants could try to assert
"sister ship" liability against one vessel in our fleet for claims relating to
another of our ships.
Governments could requisition our vessels during a period of war or emergency,
resulting in loss of earnings
A government could requisition for title or seize our vessels. Requisition for
title occurs when a government takes control of a vessel and becomes her owner.
Also, a government could requisition our vessels for hire. Requisition for hire
occurs when a government takes control of a vessel and effectively becomes her
charterer at dictated charter rates. Generally, requisitions occur during a
period of war or emergency. Government requisition of one or more of our vessels
would negatively impact our revenues.
Our operations outside the United States expose us to global risks that may
interfere with the operation of our vessels
We are an international company and primarily conduct our operations outside of
the United States. Changing economic, regulatory, political and governmental
conditions in the countries where we are engaged in business or where our
vessels are registered affect us. Hostilities or other political instability in
regions where our vessels trade could affect our trade patterns and adversely
affect our operations and performance. The terrorist attacks against targets in
the United States on September 11, 2001 and the military response by the United
States may increase the likelihood of acts of terrorism worldwide. Acts of
terrorism, regional hostilities or other political instability, as shown by the
attack on the Limburg in Yemen in October 2002, could adversely affect the oil
trade and reduce our revenue or increase our expenses.
Terrorist attacks, such as the attacks on the United States on September 11,
2001, and other acts of violence or war may affect the financial markets and our
business, results of operations and financial condition.
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
financial markets. The recent conflict in Iraq may lead to additional acts of
terrorism and armed conflict around the world, which may contribute to further
economic instability in the global financial markets, including the energy
markets. These uncertainties could also adversely affect our ability to obtain
additional financing on terms acceptable to us or at all.
Future terrorist attacks, such as the attack on the m.t. Limburg in October
2002, may also negatively affect our operations and financial condition and
directly impact our vessels or our customers. Future terrorist attacks could
result in increased volatility of the financial markets in the United States and
globally and could result in an economic recession in the United States or the
world. Any of these occurrences could have a material adverse impact on our
operating results, revenue, and costs.
Because we are a foreign corporation, you may not have the same rights that a
shareholder in a U.S. corporation may have
We are a Bermuda corporation. Our memorandum of association and bye-laws and the
Bermuda Companies Act 1981, as amended, govern our affairs. Investors may have
more difficulty in protecting their interests in the face of actions by
management, directors or controlling shareholders than would shareholders of a
corporation incorporated in a United States jurisdiction. In addition, our
executive officers, administrative activities and assets are located outside the
United States. As a result, it may be more difficult for investors to effect
service of process within the United States upon us, or to enforce both in the
United States and outside the United States judgments against us in any action,
including actions predicated upon the civil liability provisions of the federal
securities laws of the United States.
We may have to pay tax on United States source income, which would reduce our
earnings
Under the United States Internal Revenue Code of 1986, or the Code, a portion of
the gross shipping income of a vessel owning or chartering corporation, such as
ourselves and our subsidiaries, may be subject to a 4% United States federal
income tax on 50% of the gross shipping income that is attributable to
transportation that begins or ends, but that does not both begin and end, in the
U.S., unless that corporation is entitled to a special tax exemption under the
Code which applies to the international shipping income derived by some
non-United States corporations. We believe that we and each of our subsidiaries
qualify for this statutory tax exemption for the year ended December 31, 2002.
However, due to the absence of final Treasury regulations or other definitive
authority concerning some aspects of this tax exemption under the relevant
provisions of the Code and to the factual nature of the issues involved, we can
give no assurances on our tax-exempt status or that of any of our subsidiaries.
If we or our subsidiaries are not entitled to this statutory tax exemption for
any taxable year, we or our subsidiaries could be subject for those years to an
effective 4% United States federal income tax on the portion of the income we or
our subsidiaries derive during the year from United States sources. The
imposition of this taxation could have an adverse effect on our profitability.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The Company
We are Frontline Ltd., a Bermuda based shipping company that is engaged
primarily in the ownership and operation of oil tankers. We were incorporated in
Bermuda on June 12, 1992 (Company No. EC-17460). Our registered and principal
executive offices are located at Par-la-Ville Place, 14 Par-la-Ville Road,
Hamilton, HM 08, Bermuda, and our telephone number is +1 (441) 295-6935.
We are engaged primarily in the ownership and operation of oil tankers,
including oil/bulk/ore, or OBO carriers. We operate tankers of two sizes: very
large crude carriers, or VLCCs, which are between 200,000 and 320,000 deadweight
tons, or dwt, and Suezmaxes, which are vessels between 120,000 and 170,000 dwt.
In addition, through a corporate acquisition completed in October 2000, we
acquired a fleet of ten dry bulk carriers that included Capesize, Panamax and
Handymax size bulkers. We operate through subsidiaries and partnerships located
in Bermuda, Liberia, Norway, Panama, Singapore and Sweden. We are also involved
in the charter, purchase and sale of vessels. Since 1996, we have emerged as a
leading tanker company within the VLCC and Suezmax size sectors of the market.
We have our origin in Frontline AB, which was founded in 1985, and which was
listed on the Stockholm Stock Exchange from 1989 to 1997. In May 1997, Frontline
AB was redomiciled from Sweden to Bermuda and its shares were listed on the Oslo
Stock Exchange. The change of domicile was executed through a share for share
exchange offer from the then newly formed Frontline Ltd., or Old Frontline, in
Bermuda. Old Frontline was incorporated under the laws of Bermuda on April 29,
1997 for the purpose of succeeding to the business of Frontline AB and,
commencing in June 1997, the shares in Frontline AB were exchanged for shares in
Old Frontline. The ordinary shares of Old Frontline were thereafter listed on
the Oslo Stock Exchange and delisted from the Stockholm Stock Exchange.
In September 1997, Old Frontline initiated an amalgamation with London &
Overseas Freighters Limited ("LOF"), also a Bermuda company. This process was
completed in May 1998. In the business combination (discussed below), which left
LOF as the surviving company, Old Frontline's shareholders exchanged Old
Frontline shares for LOF shares and LOF was subsequently renamed Frontline Ltd.
As a result of this transaction, Frontline became listed on the London Stock
Exchange and on the NASDAQ National Market (in the form of American Depositary
Shares, or ADSs, represented by American Depositary Receipts, or ADRs) in
addition to its listing on the Oslo Stock Exchange.
In July 2001 the Company gave notice of termination of the ADR program to the
Bank of New York as Depositary. The ADR program was terminated on October 5,
2001 and the ADSs were delisted from the Nasdaq National Market on August 3,
2001. The Company's Ordinary Shares began trading on the NYSE on August 6,
2001. With this listing, Frontline became one of the few companies to list its
shares directly on three international securities exchanges.
Business Acquisitions and Combinations
Amalgamation with London & Overseas Freighters Limited
On September 22, 1997, LOF and Frontline announced that they had entered into an
Agreement and Plan of Amalgamation, that we refer to as the Amalgamation
Agreement, providing for a business combination in a three-step transaction. On
September 29, 1997, pursuant to the Amalgamation Agreement, Frontline commenced
a cash tender offer for at least 50.1 per cent and up to 90 per cent of the
outstanding LOF Ordinary Shares and ADSs for a price of $15.91 per Ordinary
Share. The tender offer expired on October 28, 1997, and effective November 1,
1997 Frontline acquired approximately 79.74 per cent of the outstanding LOF
Ordinary Shares.
In the second step, Frontline amalgamated with Dolphin Limited, a Bermuda
subsidiary of LOF. Each ordinary share of Frontline was cancelled in
consideration for which the stockholders of Frontline received (i) 0.32635
Ordinary Shares of LOF and (ii) 0.01902 of a newly issued warrant to purchase
one LOF Ordinary Share. In the third step of the combination, in order to
combine the assets and liabilities, LOF purchased the assets and liabilities of
Frontline which were vested in the amalgamated company at fair market value in
exchange for a promissory note. LOF is the legally surviving entity in this
business combination and has been renamed Frontline Ltd. with effect from May
11, 1998. Frontline is treated as the accounting acquirer and the transaction
treated as a reverse acquisition. The stockholders' equity of the Company has
been restated accordingly to reflect the transaction.
Acquisition of ICB
In September 1997, Frontline made a public offer to acquire all of the shares of
ICB Shipping AB (publ), or ICB. Through a tender offer, by October 1997
Frontline acquired 51.7 per cent of the outstanding shares of ICB at a purchase
price of approximately $215 million. The shares purchased provided Frontline
with only 31.4 per cent of the ICB voting rights. On January 8, 1998, Frontline
withdrew its bid for the remaining outstanding shares of ICB. During 1998,
Frontline made further purchases of ICB Shares in the market and at December 31,
1998 had 34.2 per cent of the voting power.
In September 1999, pursuant to an agreement, that we refer to as the ICB
Agreement, Frontline acquired ICB Shares previously owned by the so-called "A
group" consortium including those controlled by board members of ICB and ICB
shares controlled by the Angelicoussis family. In connection with the ICB
Agreement, four of the VLCCs owned by ICB, were sold to companies controlled by
the Angelicoussis family. As a result of the acquisitions, Frontline increased
its shareholding in ICB to approximately 90 per cent of the capital and 93 per
cent of the voting rights. In October 1999, a new Board of Directors was
appointed in ICB and is consequently controlled by Frontline. In December 1999,
Frontline commenced a compulsory acquisition for the remaining shares in ICB and
ICB was delisted from the Stockholm Stock Exchange.
In the two year period prior to September 1999, Frontline was unable to control,
or exercise significant influence over, ICB. Accordingly, the Company previously
accounted for its investment in ICB as an available-for-sale security in
accordance with SFAS 115. As a result of Frontline acquiring control over ICB,
the Company's financial statements have been restated. For the years ended
December 31, 1997 and 1998, the investment in ICB is accounted for in accordance
with the equity method.
Through the acquisition of ICB, Frontline, through an indirect subsidiary, has
taken over responsibility for the management of Knightsbridge Tankers Limited,
or Knightsbridge, a company whose shares are listed on the Nasdaq National
Market under the symbol "VLCCF". Knightsbridge owns five VLCCs (built 1995-96)
which are chartered to Shell International Petroleum Company Limited.
Knightsbridge reports to the US Securities and Exchange Commission pursuant to
Section 13 of the Securities Exchange Act of 1934. The Company has an ownership
interest of less than half of one per cent in Knightsbridge as of April 30,
2003.
Acquisition of Golden Ocean Group Limited
In October 2000, Frontline took control of Golden Ocean Group Limited, or Golden
Ocean, a shipping group which then held interests in 14 VLCCs and 10 bulk
carriers. On the same date Golden Ocean emerged from bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy Code.
In January 2000, Golden Ocean and its fellow subsidiaries, Golden Ocean Tankers
Limited and Channel Rose Holdings Inc., which we refer to collectively as the
Debtors, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy
Code with the Clerk of the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). In July 2000, Frontline filed a proposed plan
of reorganisation (the "Plan of Reorganisation") and disclosure statement (the
"Disclosure Statement") with the Bankruptcy Court which set forth the manner in
which claims against and equity interests in the Debtors would be treated. On
August 4, 2000 the Bankruptcy Court approved Frontline's Disclosure Statement
and on August 14, 2000 approved the appointment of Frontline as manager of
Golden Ocean's operations with immediate effect. The Plan of Reorganisation was
approved by an overwhelming majority of holders of claims entitled to vote and
was confirmed at a hearing on September 15, 2000.
On October 10, 2000 the Plan of Reorganisation became effective and Frontline
acquired the entire share capital of Golden Ocean. The total acquisition price
paid, including amounts paid to settle allowed claims, was approximately $63.0
million, including 1,245,998 Frontline ordinary shares issued at a price of
$15.65 per share. The acquisition of Golden Ocean has been accounted for using
the purchase method.
Acquisition of Mosvold Shipping Limited
In April 2001, the Company announced an offer for all of the shares of Mosvold
Shipping Limited, or Mosvold, a Bermuda company whose shares were listed on the
Oslo Stock Exchange. Through a combination of shares acquired and acceptances of
the offer, Frontline acquired 97 per cent of the shares of Mosvold. The
remaining three per cent of the shares of Mosvold were acquired during 2001
through a compulsory acquisition. Through the purchase of Mosvold the Company
acquired two mid-70s built VLCCs and three newbuilding contracts for VLCCs. The
two mid-70s built VLCCs have subsequently been sold by the Company. The first
two of the newbuildings were delivered in 2002 and the third is due for delivery
in July 2003.
B. BUSINESS OVERVIEW
We are a world leader in the international seaborne transportation of crude oil.
Our tanker fleet, which is one of the largest and most modern in the world,
consists of 32 owned, part-owned or controlled VLCCs and 28 owned, part-owned or
controlled Suezmax tankers, of which 8 are Suezmax OBOs. In addition, we have
three wholly owned dry bulk carriers, being two Capesize and one Handymax size
carriers. We also charter in eleven modern VLCCs and one modern Suezmax tanker.
At May 31, 2003 we also have one newbuilding VLCC on order and have a purchase
option to acquire a further VLCC.
In 2002, we took delivery of five wholly-owned double-hulled VLCC newbuildings,
and two new double-hulled VLCCs in which we have a 33.33 per cent interest. We
also acquired five dry bulk carriers that we had previously chartered in under
capital leases. These five dry bulk carriers were subsequently sold in 2002. We
also sold our 50 per cent interest in two joint ventures that each owned a dry
bulk carrier. In addition, in 2002 we sold and leased back one of the 2002 built
VLCCs that we took delivery of earlier in the year.
In 2003 to date, we have acquired two Suezmax tankers, built in 1979 and 1978,
respectively, in which we previously held 40 per cent and 35 per cent interests,
respectively. These vessels have subsequently been sold.
The fleet that we operate has a total tonnage of approximately 17 million dwt,
and our tanker vessels have an average age of 7 years compared with an estimated
industry average of over 10 years. We believe that our vessels comply with the
most stringent of generally applicable environmental regulations for tankers.
We own various vessel owning and operating subsidiaries. Our operations take
place substantially outside of the United States. Our subsidiaries, therefore,
own and operate vessels which may be affected by changes in foreign governments
and other economic and political conditions. We are engaged primarily in
transporting crude oil products and, in addition, raw materials like coal and
iron ore. Our VLCCs are specifically designed for the transportation of crude
oil and, due to their size, are primarily used to transport crude oil from the
Middle East Gulf to the Far East, Northern Europe, the Caribbean and the
Louisiana Offshore Oil Port, or LOOP. Our Suezmax tankers are similarly designed
for worldwide trading, but the trade for these vessels is mainly in the Atlantic
Basin. Historically, the tanker industry has been highly cyclical, with
attendant volatility in profitability and asset values resulting from changes in
the supply of and demand for tanker capacity. Our OBO carriers are specifically
designed to carry oil or dry cargo and may be used to transport either oil or
dry cargo on any voyage. When freight rates in both the oil and dry cargo
markets are equivalent OBO carriers are operated most profitably transporting
oil on one leg of the voyage and dry cargo on the other leg of a voyage. The
supply of tanker and OBO capacity is influenced by the number of new vessels
built, the number of older vessels scrapped, converted, laid up and lost, the
efficiency of the world tanker or OBO fleet and government and industry
regulation of maritime transportation practices. The demand for tanker and OBO
capacity is influenced by global and regional economic conditions, increases and
decreases in industrial production and demand for crude oil and petroleum
products, the proportion of world oil output supplied by middle eastern and
other producers, political changes and armed conflicts (including wars in the
Middle East) and changes in seaborne and other transportation patterns. The
demand for OBO capacity is, in addition, influenced by increases and decreases
in the production and demand for raw materials such as iron ore and coal. In
particular, demand for our tankers and our services in transporting crude oil
and petroleum products and dry cargoes has been dependent upon world and
regional markets. Any decrease in shipments of crude oil or raw materials in
world markets could have a material adverse effect on our earnings.
Historically, these markets have been volatile as a result of, among other
things, general economic conditions, prices, environmental concerns, weather and
competition from alternative energy sources. Because many factors influencing
the supply of and demand for tankers and OBO carriers are unpredictable, the
nature, timing and degree of changes in industry conditions are also
unpredictable.
We are committed to providing quality transportation services to all of our
customers and to developing and maintaining long term relationships with the
major charterers of tankers. Increasing global environmental concerns have
created a demand in the petroleum products/crude oil seaborne transportation
industry for vessels that are able to conform to the stringent environmental
standards currently being imposed throughout the world. Our fleet of modern
single hull VLCCs may discharge crude oil at LOOP until the year 2015, and our
modern single hull Suezmax tankers may call at U.S. ports until the year 2010
under the phase-in schedule for double hull tankers presently prescribed under
OPA.
The tanker industry is highly cyclical, experiencing volatility in
profitability, vessel values and freight rates. Freight rates are strongly
influenced by the supply of tanker vessels and the demand for oil
transportation.
The charter rates for tankers started to decline in the second half of 2001 as a
result of a general slowdown in the global economy and as a result of OPEC's
decision to cut production levels in order to maintain oil prices in the OPEC
band of $22 to $28 per barrel. The negative trend continued into 2002 and rates
remained low through a large part of the year. The tanker market showed no
improvement in 2002 until the beginning of fourth quarter when a seasonal
increase in demand and a requirement for restocking enticed OPEC countries to
increase production. The strike in Venezuela in December 2002, resulted in the
loss of short-haul oil to the United States and this lost production needed to
be replaced from more distant suppliers. Rates ended the year at above $50,000
per day for Suezmaxes and approximately $100,000 per day for VLCCs. Despite the
rate improvement in the last quarter, average time charter equivalent spot
earnings in the market for the entire year for Suezmaxes were approximately
$20,000 per day compared with just over $30,000 per day in 2001 and for VLCCs
were approximately $22,000 per day compared with $34,000 per day in 2001. The
weak market in 2001 and 2002 resulted in the scrapping, conversion or total loss
of 48 elderly Suezmaxes and 78 VLCCs in that two year period.
The Company's three remaining dry bulk vessels are fixed on medium to long-term
bareboat or time charters, which expire in 2003, 2005 and 2014.
Our business strategy is primarily based upon the following principles:
o emphasising operational safety and quality maintenance for all of our
vessels;
o complying with all current and proposed environmental regulations;
o outsourcing technical operations and crewing;
o controlling operational costs of vessels;
o owning one of the most modern and homogeneous fleets of tankers in the
world;
o achieving high utilisation of our vessels;
o achieving competitive financing arrangements; and
o developing and maintaining relationships with major oil companies and
industrial charterers.
After having delivered their cargo, spot market vessels typically operate in
ballast, meaning that they are not carrying cargo until they are rechartered. It
is the time element associated with these ballast legs that we seek to minimise
by efficiently chartering our OBO carriers and tankers. We seek to maximise
earnings in employing vessels in the spot market, under time charters or under
Contracts of Affreightment, or COAs.
In December 1999, the Company, together with A.P. Moller, Euronav Luxembourg SA,
Osprey Maritime Ltd., Overseas Shipholding Group, Inc and Reederei "Nord" Klaus
E. Oldendorff agreed to form Tankers International LLC, or Tankers to pool the
commercial operation of the participating companies' modern VLCC fleets. Tankers
mainly employs vessels in the spot market, although it also from time to time
enters into COAs and time charters. Revenues to each shipowner who participates
in Tankers are calculated on the basis of the pool's total earnings and the
tonnage committed into Tankers by the shipowner. In July 2002 we withdrew from
Tankers and only the VLCCs in certain of the joint ventures to which the Company
is a party, remain in the pool. The commercial operations of our other VLCCs has
been brought back in-house under our direct management.
Since 1998 Frontline and OMI Corporation, a major international shipping
company, have combined Suezmax tanker fleets for commercial purposes and created
Alliance Chartering LLC, or Alliance. Alliance currently markets 41 Suezmax
tankers, the majority of which are employed in the Atlantic Basin. Alliance's
control of this large modern fleet of Suezmaxes has enabled it to strengthen
relationships with a number of customers. These arrangements may allow Alliance
the opportunity to increase its Suezmax fleet utilisation through backhauls when
cargo is available (that is, transporting cargo on the return trip when a ship
would normally be empty) which would improve vessel earnings. Alliance mainly
employs vessels in the spot market, although it also from time to time enters
into COAs and time charters. Revenues to each shipowner who participates in
Alliance are based on the actual earnings from the vessels contributed to
Alliance by the shipowner.
Similar to structures commonly used by other shipping companies, our vessels are
all owned by, or chartered to, separate subsidiaries or associated companies.
Frontline Management AS, or Frontline Management, and Frontline Management
(Bermuda) Limited, both wholly-owned subsidiaries of the Company, support us in
the implementation of our decisions. Frontline Management is responsible for the
commercial management of our shipowning subsidiaries, including chartering and
insurance. Each vessel owned by the Company is registered under the Bahamas,
French, Hong Kong, Liberian, Philippines, Singaporean, Norwegian, Isle of Man or
Panamanian flag.
Frontline has a strategy of extensive outsourcing. Ship management, crewing and
accounting services are provided by a number of independent and competing
suppliers.
o Our vessels are managed by independent ship management companies. Pursuant
to management agreements, each of the independent ship management companies
provides operations, ship maintenance, crewing, technical support, shipyard
supervision and related services to Frontline. A central part of our
strategy is to benchmark operational performance and cost level amongst our
ship managers.
o Independent ship managers provide crewing for our vessels. Currently, our
vessels are crewed with Russian, Ukranian, Baltic, Indian and Filipino
officers and crews, or combinations of these nationalities.
o The accounting management services for each of our shipowning subsidiaries
are provided by the ship managers.
Importance of Fleet Size
We believe that fleet size in the industrial shipping sector is important in
negotiating terms with major clients and charterers. We believe that a large,
high-quality VLCC and Suezmax fleet will enhance our ability to obtain
competitive terms from suppliers and shipbuilders and to produce cost savings in
chartering and operations.
Seasonality
Historically, oil trade and therefore charter rates increased in the winter
months and eased in the summer months as demand for oil in the Northern
Hemisphere rose in colder weather and fell in warmer weather. The tanker
industry in general is less dependent on the seasonal transport of heating oil
than a decade ago as new uses for oil and oil products have developed, spreading
consumption more evenly over the year.
Customers
Our customers include major oil companies, petroleum products traders,
government agencies and various other entities. During each of the years ended
December 31, 2002, 2001 and 2000, no single customer accounted for 10 per cent
or more of our consolidated freight revenues.
Competition
The market for international seaborne crude oil transportation services is
highly fragmented and competitive. Seaborne crude oil transportation services
generally are provided by two main types of operators: major oil company captive
fleets (both private and state-owned) and independent shipowner fleets. In
addition, several owners and operators pool their vessels together on an ongoing
basis, and such pools are available to customers to the same extent as
independently owned and operated fleets. Many major oil companies and other oil
trading companies, the primary charterers of the vessels owned or controlled by
the Company, also operate their own vessels and use such vessels not only to
transport their own crude oil but also to transport crude oil for third party
charterers in direct competition with independent owners and operators in the
tanker charter market. Competition for charters is intense and is based upon
price, location, size, age, condition and acceptability of the vessel and its
manager. Competition is also affected by the availability of other size vessels
to compete in the trades in which the Company engages.
Risk of Loss and Insurance
Our business is affected by a number of risks, including mechanical failure of
the vessels, collisions, property loss to the vessels, cargo loss or damage and
business interruption due to political circumstances in foreign countries,
hostilities and labour strikes. In addition, the operation of any ocean-going
vessel is subject to the inherent possibility of catastrophic marine disaster,
including oil spills and other environmental mishaps, and the liabilities
arising from owning and operating vessels in international trade.
Frontline Management is responsible for arranging for the insurance of our
vessels in line with standard industry practice. In accordance with that
practice, we maintain marine hull and machinery and war risks insurance, which
includes the risk of actual or constructive total loss, and protection and
indemnity insurance with mutual assurance associations. From time to time we
carry insurance covering the loss of hire resulting from marine casualties in
respect of some of our vessels. Currently, the amount of coverage for liability
for pollution, spillage and leakage available to us on commercially reasonable
terms through protection and indemnity associations and providers of excess
coverage is $1 billion per vessel per occurrence. Protection and indemnity
associations are mutual marine indemnity associations formed by shipowners to
provide protection from large financial loss to one member by contribution
towards that loss by all members.
We believe that our current insurance coverage is adequate to protect us against
the accident-related risks involved in the conduct of our business and that we
maintain appropriate levels of environmental damage and pollution insurance
coverage, consistent with standard industry practice. However, there is no
assurance that all risks are adequately insured against, that any particular
claims will be paid or that we will be able to procure adequate insurance
coverage at commercially reasonable rates in the future.
Inspection by a Classification Society
Every commercial vessel's hull and machinery is "classed" by a classification
society authorised by its country of registry. The classification society
certifies that the vessel has been built and maintained in accordance with the
rules of such classification society and complies with applicable rules and
regulations of the country of registry of the vessel and the international
conventions to which that country is a member. Our vessels have all been
certified as "in class."
Each vessel is inspected by a surveyor of the classification society every year,
every two and a half years and every four to five years. Should any defects be
found, the classification surveyor will issue a "recommendation" for appropriate
repairs which have to be made by the shipowner within the time limit prescribed.
Environmental and Other Regulations
International conventions and national, state and local laws and regulations of
the jurisdictions where our fleet operates or is registered significantly affect
the ownership and operation of our vessels. We believe we are currently in
substantial compliance with applicable environmental and regulatory laws
regarding the ownership and operation of our vessels. However, because existing
laws may change or new laws may be implemented, we cannot predict the ultimate
cost of complying with all applicable requirements or the impact they will have
on the resale value or useful lives of our vessels. Future non-compliance could
require us to incur substantial costs or to temporarily suspend operation of our
vessels.
We believe the heightened environmental and quality concerns of insurance
underwriters, regulators and charterers are leading to greater inspection and
safety requirements on all vessels and creating an increasing demand for modern
vessels that are able to conform to the stricter environmental standards. We
maintain high operating standards for our vessels that emphasizes operational
safety, quality maintenance, continuous training of our crews and officers and
compliance with United States and international regulations. Our vessels are
subject to both scheduled and unscheduled inspections by a variety of
governmental and private entities, each of which may have unique requirements.
These entities include the local port authorities such as the Coast Guard,
harbour master or equivalent, classification societies, flag state
administration or country of registry, and charterers, particularly terminal
operators and major oil companies which conduct frequent vessel inspections.
Each of these entities may have unique requirements that we must comply with.
Environmental Regulation--IMO
The United Nation's International Maritime Organization, or IMO, has adopted
regulations that set forth pollution prevention requirements for tankers. These
regulations, which have been implemented in many jurisdictions in which our
tankers operate, provide, in part, that:
o 25-year old tankers must be of double-hull construction or of a
mid-deck design with double-sided construction unless:
(1) they have wing tanks or double-bottom spaces not used for the
carriage of oil which cover at least 30% of the length of the cargo
tank section of the hull or bottom; or
(2) they are capable of hydrostatically balanced loading, which
means that they are loaded in such a way that if the hull is
breached, water flows into the tanker, displacing oil upwards
instead of into the sea
o 30-year old tankers must be of double-hull construction or mid-deck
design with double-sided construction.
Also under IMO regulations, a tanker must be of double-hull construction or a
mid-deck design with double-sided construction, or be of another approved design
ensuring the same level of protection against oil pollution, if the tanker:
o is the subject of a contract for a major conversion or original
construction on or after July 6, 1993;
o commences a major conversion or has its keel laid on or after January
6, 1994; or
o completes a major conversion or is a newbuilding delivered on or after
July 6, 1996.
The IMO recently adopted regulations that require the phase-out of most single
hull tankers by 2015 or earlier, depending on the age of the vessel and whether
or not it complies with requirements for protectively located segregated ballast
tanks. Under these new regulations, which became effective in September 2002,
the maximum permissible age for single hull tankers after 2007 will be 26 years.
The new regulations also provide for increased inspection and verification
requirements.
The IMO's International Safety Management Code, or ISM Code, also affects our
operations. The ISM Code requires the party with operational control of a vessel
to develop a safety management system that includes, among other things, the
adoption of a safety and environmental protection policy setting forth
instructions and procedures for operating its vessels safely and describing
procedures for responding to emergencies. All of our vessel managers are
certified as approved ship managers under the ISM Code.
The ISM Code requires that vessel operators obtain a safety management
certificate for each vessel they operate. This certificate evidences compliance
by a vessel's management with ISM Code requirements for a safety management
system. No vessel can obtain a certificate unless its manager has been awarded a
Document of Compliance, issued by each flag state, under the ISM Code. All of
our vessels and their operators have received ISM certification.
Non-compliance with the ISM Code and other IMO regulations may subject the
vessel owner or a bareboat charterer to increased liability, may lead to
decreases in available insurance coverage for affected vessels and may result in
a tankers denial of access to, or detention in, some ports. Both the U.S. Coast
Guard and European Union authorities have indicated that vessels not in
compliance with the ISM Code by the applicable deadlines will be prohibited from
trading in U.S. and European Union ports, as the case may be.
The IMO continues to review and introduce new regulations. It is impossible to
predict what additional regulations, if any, may be passed by the IMO and what
effect, if any, such regulations might have on the operation of oil tankers. As
a result of the oil spill in November 2002 from the loss of the m.t. Prestige,
it is likely that more stringent maritime safety rules will be imposed by the
IMO and other regulatory agencies in the future. The m.t. Prestige was a 26 year
old single hulled tanker owned and operated by a company that is not affiliated
with us.
Environmental Regulation--OPA/CERCLA
The U.S. Oil Pollution Act of 1990, or OPA, established an extensive regulatory
and liability regime for environmental protection and cleanup of oil spills. OPA
affects all owners and operators whose vessels trade with the U.S. or its
territories or possessions, or whose vessels operate in the waters of the U.S.,
which include the U.S. territorial waters and the two hundred nautical mile
exclusive economic zone of the U.S. The Comprehensive Environmental Response,
Compensation and Liability Act, or CERCLA, which also impacts our operations,
applies to the discharge of hazardous substances whether on land or at sea.
Under OPA, vessel owners, operators and bareboat or "demise" charterers are
"responsible parties" who are liable regardless of fault, individually and as a
group, for all containment costs, clean-up costs and for other damages arising
from oil spills from their vessels. These other damages may include injury to
natural resources and real and personal property, loss of subsistence use of
natural resources, the loss of taxes, rents, royalties, profits and earnings
capacity resulting from an oil spill and the cost of public services
necessitated by an oil spill. These "responsible parties" are not liable under
OPA if the spill results solely from the act or omission of a third party, an
act of God or an act of war. OPA limits a responsible party's liability to the
greater of $1,200 per gross ton or $10 million per vessel over 3,000 gross tons,
subject to adjustment for inflation.
CERCLA, which applies to owners and operators of vessels, contains a liability
regime similar to OPA and provides for cleanup, removal and natural resource
damages. Liability under CERCLA is limited to the greater of $300 per gross ton
or $5 million. These limits of liability do not apply, however, where the
incident is caused by violation of applicable U.S. federal safety, construction
or operating regulations, or by the responsible party's gross negligence or
wilful misconduct. These limits do not apply if the responsible party fails or
refuses to report the incident or to co-operate and assist in connection with
the substance removal activities. OPA and CERCLA each preserve the right to
recover damages under existing law, including maritime tort law. We believe that
we are in substantial compliance with OPA, CERCLA and all applicable state
regulations in the ports where our vessels will call.
OPA requires owners and operators of vessels to establish and maintain with the
Coast Guard evidence of financial responsibility sufficient to meet the limit of
their aggregate potential strict liability under OPA and CERCLA. Under the
regulations, evidence of financial responsibility may be demonstrated by
insurance, surety bond, self-insurance or guaranty. Under OPA regulations, an
owner or operator of more than one tanker must demonstrate evidence of financial
responsibility for the entire fleet in an amount equal only to the financial
responsibility requirement of the tanker having the greatest maximum liability
under OPA/CERCLA. Owners or operators of tankers operating in the waters of the
U.S. must also file vessel response plans with the Coast Guard, and their
tankers are required to operate in compliance with their Coast Guard approved
plans.
Under OPA, with limited exceptions, all newly built or converted tankers
operating in U.S. waters must be built with double-hulls. Existing vessels that
do not comply with the double-hull requirement must be phased out over a 20-year
period beginning in 1995 based on size, age and place of discharge, unless
retrofitted with double-hulls. Notwithstanding the phase-out period, OPA
currently permits existing single-hull tankers to operate until the year 2015 if
their operations within U.S. waters are limited to discharging at the Louisiana
Offshore Oil Port or unloading with the aid of another vessel, a process
referred to as lightering, within authorized lightering zones more than 60 miles
off-shore.
Environmental Regulation--Other
Although the United States is not a party to these conventions, many countries
have ratified and follow the liability plan adopted by the IMO and set out in
the International Convention on Civil Liability for Oil Pollution Damage of 1969
and the Convention for the Establishment of an International Fund for Oil
Pollution of 1971. Under these conventions, and depending on whether the country
in which the damage results is a party to the 1992 Protocol to the International
Convention on Civil Liability for Oil Pollution Damage, a vessel's registered
owner is strictly liable for pollution damage caused in the territorial waters
of a contracting state by discharge of persistent oil, subject to certain
complete defenses. Under an amendment that will come into effect November 1,
2003 for vessels of 5,000 to 140,000 gross tons (a unit of measurement for the
total enclosed spaces within a vessel), liability will be limited to
approximately $6.1 million plus $858 for each additional gross ton over 5,000.
For vessels of over 140,000 gross tons, liability will be limited to
approximately $122.1 million. The current maximum amount is approximately $81.2
million. 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. In jurisdictions where
the International Convention on Civil Liability for Oil Pollution Damage has not
been adopted, various legislative schemes or common law governs, and liability
is imposed either on the basis of fault or in a manner similar to that
convention. We believe that our P&I insurance covers the liability under the
plan adopted by the IMO.
Partly in response to the oil spill caused by the sinking of the tanker
Prestige, a single hulled tanker owned by an entity that is not affiliated with
us, in November 2002, the European Union proposed new regulations in March of
2003 that would, among other things, place a ban on the transportation of heavy
oil grades in all single-hull tankers loading or discharging at European Union
ports. These regulations also accelerate the phase-out schedule of all single
hull vessels. The European Union Parliament is scheduled to meet in July 2003,
to ratify these new regulations. Several European Union nations have already
implemented an absolute ban on single hull tankers carrying fuel oil and heavy
oil grades. Spain has banned single hull tankers over 5,000 dwt and carrying
such cargo from entering her ports as of January 1, 2003. Italy has announced
that similar measures applicable to single hull tankers over 15 years of age
will be implemented during the first half of 2003, and Spain, France and
Portugal have prohibited single hull tankers carrying such cargoes from passing
through their 200-mile economic exclusion zones since December, 2002.
In addition, most U.S. states that border a navigable waterway have enacted laws
that impose strict liability for clean-up costs and damages resulting from a
discharge of oil or a release of a hazardous substance. As permitted by OPA,
these state laws may provide for unlimited liability for oil spills occurring
within their boundaries.
C. ORGANIZATIONAL STRUCTURE
Our vessels are all owned by, or chartered to, separate subsidiaries, associated
companies or joint ventures. The following table sets out the details of our
significant subsidiaries and equity interests as of May 31, 2003:
Country of Ownership
Name Vessel/Activity Incorporation Percentage
Granite Shipping Co. Ltd. Front Granite Bahamas 100%
Frontline Management (Bermuda) Ltd Management company Bermuda 100%
ICB Shipping (Bermuda) Limited Management company Bermuda 100%
Mosvold Shipping Limited Holding company Bermuda 100%
Golden Current Limited Opalia Isle of Man 100%
Ariake Transport Corporation Ariake Liberia 33.33%
Bonfield Shipping Ltd. Front Driver Liberia 100%
Dundee Navigation SA Dundee Liberia 50.1%
Edinburgh Navigation SA Edinburgh Liberia 50.1%
Fourways Marine Limited Front Spirit Liberia 100%
Front Ardenne Inc. Front Ardenne Liberia 100%
Front Brabant Inc. Front Brabant Liberia 100%
Front Eagle Corporation Front Eagle Liberia 100%
Front Falcon Inc Front Falcon Liberia 100%
Front Glory Shipping Inc. Front Glory Liberia 100%
Front Pride Shipping Inc. Front Pride Liberia 100%
Front Saga Inc Front Page Liberia 100%
Front Serenade Inc. Front Serenade Liberia 100%
Front Splendour Shipping Inc. Front Splendour Liberia 100%
Front Stratus Inc. Front Stratus Liberia 33.33%
Front Tobago Inc. Front Tobago Liberia 40%
Golden Aquarian Corporation Cos Hero Liberia 100%
Golden Bayshore Shipping Corporation Navix Astral Liberia 100%
Golden Channel Corporation Front Commodore Liberia 100%
Golden Estuary Corporation Front Comanche Liberia 100%
Golden Fjord Corporation Front Commerce Liberia 100%
Golden Fountain Corporation Golden Fountain Liberia 50%
Golden Hilton Shipping Corporation Channel Navigator Liberia 100%
Golden Lagoon Corporation Pacific Lagoon Liberia 50%
Golden Ocean Tankers Limited Holding Company Liberia 100%
Golden President Shipping Corporation Channel Alliance Liberia 100%
Golden Seaway Corporation New Vanguard Liberia 100%
Golden Sound Corporation New Vista Liberia 100%
Golden Strait Corporation Golden Victory Liberia 100%
Golden Stream Corporation Golden Stream Liberia 100%
Golden Tide Corporation New Circassia Liberia 50%
Hitachi Hull # 4983 Corporation Hakata Liberia 33.33%
Ichiban Transport Corporation Ichiban Liberia 33.33%
Katong Investments Ltd. Front Breaker Liberia 100%
Kea Navigation Ltd Front Melody Liberia 100%
Langkawi Shipping Ltd. Front Birch Liberia 100%
Millcroft Maritime SA Front Champion Liberia 100%
Neon Shipping SA Front Sun Liberia 100%
Otina Inc. Front Tina Liberia 100%
Optimal Shipping SA Front Symphony Liberia 100%
Pablo Navigation SA Front Chief Liberia 100%
Patrio Shipping Ltd. Front Hunter Liberia 100%
Quadrant Marine Inc. Front Sky Liberia 100%
Rakis Maritime SA Front Fighter Liberia 100%
Ryan Shipping Corporation Front Warrior Liberia 100%
Saffron Rose Shipping Limited Front Crown Liberia 100%
Sakura Transport Corporation Sakura I Liberia 33.33%
Sea Ace Corporation Front Ace Liberia 100%
Sibu Shipping Ltd. Front Maple Liberia 100%
South West Tankers Inc Front Sunda Liberia 100%
Tokyo Transport Corporation Tanabe Liberia 33.33%
Tidebrook Maritime Corporation Front Commander Liberia 100%
Ultimate Shipping Ltd. Front Century Liberia 100%
West Tankers Inc. Front Comor Liberia 100%
Frontline Management AS Management company Norway 100%
Puerto Reinosa Shipping Co SA Front Lillo Panama 100%
Aspinall Pte Ltd. Front Viewer Singapore 100%
Blizana Pte Ltd. Front Rider Singapore 100%
Bolzano Pte Ltd. Mindanao Singapore 100%
Cirebon Shipping Pte Ltd. Front Vanadis Singapore 100%
Fox Maritime Pte Ltd. Front Sabang Singapore 100%
Front Dua Pte Ltd. Front Duchess Singapore 100%
Front Empat Pte Ltd. Front Highness Singapore 100%
Front Enam Pte Ltd. Front Lord Singapore 100%
Front Lapan Pte Ltd. Front Climber Singapore 100%
Front Lima Pte Ltd. Front Lady Singapore 100%
Front Tiga Pte Ltd. Front Duke Singapore 100%
Front Tujuh Pte Ltd. Front Emperor Singapore 100%
Front Sembilan Pte Ltd. Front Leader Singapore 100%
Rettie Pte Ltd. Front Striver Singapore 100%
Transcorp Pte Ltd. Front Guider Singapore 100%
D. PROPERTY, PLANT AND EQUIPMENT
The Company's Vessels
We operate a substantially modern fleet of tankers consisting of 43 VLCCs, 21
Suezmax tankers and eight Suezmax OBO carriers. In addition, we have one
newbuilding contract and a purchase option to acquire one VLCC tanker. We also
have three dry bulk carriers. The following table sets forth the fleet that we
operate:
TANKER FLEET
Owned Tonnage
Approximate Type of
Vessel Built Dwt. Construction Flag Employment
------ ----- ----------- ------------ ---- ----------
VLCCs
-----
Front Sabang 1990 286,000 Single-hull SG Spot market
Front Vanadis 1990 286,000 Single-hull SG Spot market
Front Highness 1991 284,000 Single-hull SG Spot market
Front Lady 1991 284,000 Single-hull SG Spot market
Front Lord 1991 284,000 Single-hull SG Spot market
Front Duke 1992 284,000 Single-hull SG Spot market
Front Duchess 1993 284,000 Single-hull SG Spot market
Front Tobago (40%) 1993 261,000 Single-hull LIB Tankers Pool
Front Edinburgh (50.1%) 1993 302,000 Double-side LIB Tankers Pool
Front Dundee (50.1%) 1993 302,000 Double-side LIB Tankers Pool
Front Ace 1993 275,000 Single-hull LIB Spot market
Golden Fountain (50%) 1995 302,000 Single-hull PAN Spot market
Golden Stream 1995 276,000 Single-hull PAN Spot market
Navix Astral 1996 276,000 Single-hull PAN Bareboat Charter
New Vanguard 1998 300,000 Double-hull HK Bareboat Charter
New Vista 1998 300,000 Double-hull HK Bareboat Charter
New Circassia (50%) 1999 306,000 Double-hull PAN Spot market
Opalia 1999 302,000 Double-hull IoM Bareboat Charter
Pacific Lagoon (50%) 1999 306,000 Double-hull PAN Spot market
Front Comanche 1999 300,000 Double-hull FRA Time Charter
Front Commerce 1999 300,000 Double-hull LIB Time Charter
Front Tina 2000 298,000 Double-hull LIB Spot market
Front Commodore 2000 299,000 Double-hull LIB Spot market
Ichiban (33.33%) 2000 299,000 Double-hull BA Tankers Pool
Ariake (33.33%) 2001 299,000 Double-hull BA Tankers Pool
Sakura I (33.33%) 2001 299,000 Double-hull BA Tankers Pool
Front Serenade 2002 299,000 Double-hull LIB Spot market
Tanabe (33.33%) 2002 296,000 Double-hull BA Tankers Pool
Hakata (33.33%) 2002 296,000 Double-hull BA Tankers Pool
Front Stratus 2002 299,000 Double-hull LIB Spot market
Front Falcon 2002 308,000 Double-hull BA Spot market
Front Page 2002 299,000 Double-hull LIB Spot market
Hull No. 1412 2003 308,000 Double-hull BA
Suezmax OBO Carriers
--------------------
Front Breaker 1991 169,000 Double-hull NIS Spot market
Front Climber 1991 169,000 Double-hull SG Spot market
Front Driver 1991 169,000 Double-hull NIS Spot market
Front Guider 1991 169,000 Double-hull SG Spot market
Front Leader 1991 169,000 Double-hull SG Spot market
Front Rider 1992 169,000 Double-hull SG Spot market
Front Striver 1992 169,000 Double-hull SG Spot market
Front Viewer 1992 169,000 Double-hull SG Spot market
Suezmaxes
---------
Front Lillo 1991 147,000 Single-hull NIS Spot market
Front Birch 1991 152,000 Double-side NIS Spot market
Front Maple 1991 152,000 Double-side NIS Spot market
Front Granite 1991 142,000 Single-hull NIS Spot market
Front Emperor 1992 147,000 Single-hull SG Spot market
Front Sunda 1992 142,000 Single-hull NIS Spot market
Front Spirit 1993 147,000 Single-hull NIS Spot market
Front Comor 1993 142,000 Single-hull NIS Spot market
Front Pride 1993 150,000 Double-hull NIS Spot market
Front Glory 1995 150,000 Double-hull NIS Spot market
Front Splendour 1995 150,000 Double-hull NIS Spot market
Front Ardenne 1997 153,000 Double-hull NIS Spot market
Front Brabant 1998 153,000 Double-hull NIS Time charter
Mindanao 1998 158,000 Double-hull SG Spot market
Front Fighter 1998 153,000 Double-hull NIS Spot market
Front Hunter 1998 153,000 Double-hull NIS Spot market
Front Sun 2000 160,000 Double-hull NIS Spot market
Front Sky 2000 160,000 Double-hull NIS Spot market
Front Melody 2001 150,000 Double-hull NIS Spot market
Front Symphony 2001 150,000 Double-hull NIS Spot market
Chartered In Tonnage
Approximate Type of
Vessel Built Dwt Construction Flag Employment
------ ----- ----------- ------------ ---- ----------
VLCCs
-----
Front Century 1998 311,000 Double-hull BA Spot market
Front Champion 1998 311,000 Double-hull BA Spot market
Front Chief 1999 311,000 Double-hull BA Time charter
Front Commander 1999 311,000 Double-hull BA Spot market
Front Crown 1999 311,000 Double-hull BA Spot market
Golden Victory 1999 305,000 Double-hull PAN Spot market
British Pioneer 1999 307,000 Double-hull IoM Spot market
British Pride 2000 307,000 Double-hull IoM Spot market
British Progress 2000 307,000 Double-hull IoM Spot market
British Purpose 2000 307,000 Double-hull IoM Spot market
Front Eagle 2002 309,000 Double-hull LIB Spot market
Suezmax
-------
Front Warrior 1998 153,000 Double-hull BA Spot market
DRY BULK FLEET
Owned Tonnage
Approximate Type of
Vessel Built Dwt. Construction Flag Employment
------ ----- ----------- ------------ ---- ----------
Capesize
Channel Alliance 1996 172,000 Single-hull PHI Time Charter
Channel Navigator 1997 172,000 Single-hull PHI Time Charter
Handymax
Cos Hero 1999 46,000 Single-hull PAN Bareboat Charter
Key to Flags:
BA - Bahamas, HK - Hong Kong, IoM - Isle of Man, LIB - Liberia, NIS - Norwegian
International Ship Register, PAN - Panama, PHI - Philippines, SG - Singapore,
FRA - France.
Other than its interests in the vessels described above, we do not own any
material physical properties. We lease office space in Hamilton, Bermuda from an
unaffiliated third party. Frontline Management leases office space, at market
rates, in Oslo, Norway from Sea Shipping AS, a company indirectly affiliated
with Hemen Holding Ltd, or Hemen, our principal shareholder. One of our
subsidiaries leases office space in London, England from an unaffiliated third
party.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
The following discussion should be read in conjunction with Item 3 "Selected
Financial Data" and the Company's audited Consolidated Financial Statements and
Notes thereto included herein.
The Company's principal focus and expertise are to serve major integrated oil
companies and other customers that require transportation of crude oil and oil
products cargoes. The Company's tanker fleet, which is one of the largest and
most modern in the world, consists of 32 owned, part-owned or controlled VLCCs
and 28 owned, part-owned or controlled Suezmax tankers, of which 8 are Suezmax
OBOs. In addition, the Company has three wholly owned dry bulk carriers. The
Company also charters in seven modern VLCCs and one modern Suezmax tanker on
medium-term charters and four modern VLCCs on short-term charters. At May 31,
2003, the Company also has one newbuilding contract and has a purchase option to
acquire one VLCC tanker.
In 2002, the Company took delivery of five wholly-owned newbuilding double-hull
VLCCs and two newbuilding double-hulled VLCCs in which the Company has a 33.33
per cent interest. In addition, the Company acquired five dry bulk carriers that
it had previously chartered in under capital leases; these dry bulk carriers
were subsequently sold in 2002. In 2002 the Company sold a portion of its dry
bulk operations. These disposals have been recorded as discontinued operations
in 2002 and the consolidated statements of operations for the years ended
December 31, 2001 and 2000 have been restated in accordance with the
requirements of Statement of Financial Accounting Standard No. 144.
In 2002, the Company also sold one VLCC to a German KG structure and leased this
vessel back on a charter for a period of eight years with the option on the
buyer's side to extend the charter for a further three years followed by a
further two years. The charter provides that the Company has the option to
acquire the relevant vessel at certain dates in the future and gives the buyer
the option to sell the vessel to the Company in 2014. This sale and leaseback
transaction has been accounted for as a capital lease and the vessel and
associated lease liability has been recognised on the Company's balance sheet.
In 2001, the Company took delivery of two wholly-owned Suezmax newbuildings, and
three new double-hulled VLCCs in which the Company has a 33.33 per cent
interest. In 2001, the Company also took delivery of four 1999 and 2000 built
VLCCs on which had it had purchase options. In addition, through its acquisition
of Mosvold, it acquired two mid 1970s built VLCCs and three newbuilding
contracts for VLCCs. The two mid-1970s built VLCCs have subsequently been sold
by the Company. The first two newbuildings were delivered in January and October
2002, respectively and the third is due for delivery in July 2003.
In 2001, the Company sold two 1993-built VLCCs and a 2000 built Suezmax tanker.
The Company also sold three VLCCs to German KG structures and leased these
vessels back on charters each for a period of eight years with the option on the
buyer's side to extend the charter for a further three years followed by a
further two years. Each charter provides that the Company has the option to
acquire the relevant vessels at certain dates in the future and gives the buyer
the option to sell the vessel to the Company in 2014. These sale and leaseback
transactions have been accounted for as capital leases and the vessels and
associated lease liabilities have been recognised on the Company's balance
sheet.
The Company's vessels are operated under either time charters, bareboat
charters, voyage charters or COAs. A time charter is a contract for the use of a
vessel for a specific period of time. A voyage charter is a contract for the use
of a vessel for a specific voyage. Under a time charter, the charterer pays
substantially all of the vessel voyage costs. Under a bareboat charter the
charterer pays substantially all of the vessel voyage and operating costs. Under
a voyage charter, the vessel owner pays such costs. Vessel voyage costs are
primarily fuel and port charges. Accordingly, for equivalent profitability,
charter income under a voyage charter would be greater than that under a time
charter to take account of the owner's payment of the vessel voyage costs.
However, net operating revenues would be equal. In order to compare vessels
trading under different types of charters, it is standard industry practice to
measure the revenue performance of a vessel in terms of average daily time
charter equivalent earnings, or TCEs. For voyage charters, this is calculated by
dividing net operating revenues by the number of days on charter. Days spent
offhire are excluded from this calculation.
In December 1999, Frontline entered into an agreement with five other
shipowners, A.P. Moller, Euronav Luxembourg SA, Osprey Maritime Ltd., Overseas
Shipholding Group Inc. and Reederei "Nord" Klaus E. Oldendorff to establish a
Marshall Islands corporation, Tankers International LLC ("Tankers"), to operate
a pool of their respective VLCC fleets. Tankers mainly employs ships in the spot
market, although it also from time to time enters into COAs and time charters.
Revenues to each shipowner who participates in Tankers are calculated on the
basis of the pool's total earnings and the tonnage committed to Tankers by the
shipowner. In July 2002, the Company withdrew from Tankers and only the VLCCs in
certain of the joint ventures to which the Company is a party, remain in the
pool.
In 1998, in order to increase the Company's market share in the Suezmax trades
and increase trading flexibility, the Company and OMI Corporation, a major
international shipping company, combined Suezmax tanker fleets for commercial
purposes and created Alliance Chartering LLC, or Alliance. Alliance currently
markets 41 Suezmax tankers. Alliance mainly employs ships in the spot market,
although it also from time to time enters into COAs and time charters. Revenues
to each shipowner who participates in Alliance are based on the actual earnings
from the ships contributed into Alliance by the shipowner.
Market Overview
The tanker industry is highly cyclical, experiencing volatility in
profitability, vessel values and freight rates. In particular, freight and
charter rates are strongly influenced by the supply of tanker vessels and the
demand for oil transportation.
The charter rates for tankers started to decline in the second half of 2001 as a
result of a general slowdown in the global economy and as a result of OPEC's
decision to cut production levels in order to maintain oil prices in the OPEC
band of $22 to $28 per barrel. The negative trend continued into 2002 and rates
remained low through a large part of the year. The tanker market showed no
improvement in 2002 until the beginning of fourth quarter when a seasonal
increase in demand and a requirement for restocking enticed OPEC countries to
increase production. The strike in Venezuela in December 2002, resulted in the
loss of short-haul oil to the United States and this lost production needed to
be replaced from more distant suppliers. Rates ended the year at above $50,000
per day for Suezmaxes and approximately $100,000 per day for VLCCs. Despite the
rate improvement in the last quarter, average time charter equivalent spot
earnings in the general tanker market for the entire year for Suezmaxes were
approximately $20,000 per day compared with just over $30,000 per day in 2001
and for VLCCs were approximately $22,000 per day compared with $34,000 per day
in 2001. The weak market in 2001 and 2002 resulted in the scrapping, conversion
or total loss of 48 elderly Suezmaxes and 78 VLCCs in that two year period.
The following table sets out the daily TCEs earned by the Company's tanker fleet
over the last five years:
2002 2001 2000 1999 1998
(in $ per day)
VLCC 22,500 40,800 46,300 20,000 31,800
Suezmax 18,400 30,700 35,500 16,700 22,400
Suezmax OBO 17,700 28,900 33,300 16,800 21,800
The Company's fleet of dry bulk carriers are all fixed on medium to long-term
bareboat or time charters. These arrangements provide sufficient cash flows to
cover the debt service on this fleet.
Inflation
Although inflation has had a moderate impact on operating expenses, drydocking
expenses and corporate overheads, management does not consider inflation to be a
significant risk to direct costs in the current and foreseeable economic
environment. In addition, in a shipping downturn, costs subject to inflation can
usually be controlled because shipping companies typically monitor costs to
preserve liquidity and encourage suppliers and service providers to lower rates
and prices. It is expected that insurance costs, which have risen considerably
in 2002, will continue to increase in the next few years. However, the Company
expects to be protected against the full impact of such increases due to the
fact that it has fixed certain parts of its premium for multiple years. In the
event that inflation becomes a significant factor in the world economy,
inflationary pressures could result in increased operating and financing costs.
Change in Accounting Policies
In 2001, the Company changed its accounting policy for drydockings. Prior to
2001, provisions for future drydockings were accrued and charged to expense on a
pro-rata basis over the period to the next scheduled drydockings. Since January
1, 2001 the Company has recognised the cost of a drydocking at the time the
drydocking takes place, that is it applies the "expense as incurred" method. The
expense as incurred method is considered by management to be a more reliable
method of recognising drydocking costs as it eliminates the uncertainty
associated with estimating the cost and timing of future drydockings. The
cumulative effect of this change in accounting principle is shown separately in
the consolidated statements of operations for the year ended December 31, 2001
and resulted in a credit to income of $31.5 million in 2001. The cumulative
effect of this change as of January 1, 2001 on the Company's consolidated
balance sheet was to reduce total liabilities by $32.3 million. Assuming the
"expense as incurred" method had been applied retroactively, the pro forma
income before cumulative effect of change in accounting principle for 2000 and
1999 would have been increased by $6.3 million and $7.0 million, or $0.09 and
$0.14 per basic and diluted share, respectively.
In June 2001, the FASB approved SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS No. 142 applies to all acquired intangible assets
whether acquired singly, as part of a group, or in a business combination. SFAS
No. 142 superseded APB Opinion No. 17, "Intangible Assets". This statement is
effective for fiscal years beginning after December 15, 2001. SFAS No. 142
requires that goodwill and indefinite lived intangible assets will no longer be
amortized but will be reviewed annually for impairment. Intangible assets that
are not deemed to have an indefinite life will continue to be amortised over
their useful lives. At December 31, 2001, the Company had unamortised goodwill
of $14.1 million. The Company adopted SFAS 142 effective January 1, 2002 and
recorded an impairment charge of $14.1 million for the unamortised goodwill on
that date that is shown separately in the consolidated statement of operations
as a cumulative effect of change in accounting principle. The valuation of the
fair value of the reporting unit used to assess the recoverability of goodwill
was a combination of independent third party valuations and the quoted market
price.
As of January 1, 2001, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 133, "Accounting for Derivatives and Hedging Activities"
("SFAS 133"). Certain hedge relationships met the hedge criteria prior to SFAS
133, but do not meet the criteria for hedge accounting under SFAS 133. The
Company adopted SFAS 133 in the first quarter of fiscal year 2001 and upon
initial adoption recognised the fair value of its derivatives as assets of $0.4
million and liabilities of $0.6 million. A gain of $0.3 million was recognised
in income and a charge of $0.5 million made to other comprehensive income. On
January 1, 2002, the Company discontinued hedge accounting for two interest rate
swaps previously accounted for as cash flow hedges. This resulted in a balance
of $4.1 million being frozen in accumulated other comprehensive income as at
that date and this will be reclassified to the income statement over the life of
the underlying instrument.
Recently Issued Accounting Standards
In August 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS No. 143 requires the fair value of a legal
liability related to an asset retirement be recognized in the period in which it
is incurred. The associated asset retirement costs must be capitalized as part
of the carrying amount of the related long-lived asset and subsequently
amortized to expense. Subsequent changes in the liability will result from the
passage of time (interest cost) and revision to cash flow estimates. SFAS No.
143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002, effective January 1, 2003 for the Company. Management does
not expect that the adoption of SFAS No. 143 will have a material effect on the
Company's results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task
Force Issue No. 94-3 and requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. This
statement also establishes that fair value is the objective for initial
measurement of the liability. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. Management does not
expect that the adoption of SFAS No. 146 will have a material effect on the
Company's results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure an amendment of FASB Statement No.
123". This Statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. This Statement also amends the disclosure provisions of
FASB Statement No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. This Statement also amends APB Opinion No.
28, "Interim Financial Reporting", to require disclosure about those effects in
interim financial statements. This statement is effective for fiscal years
ending after December 15, 2002 and interim periods beginning after December 15,
2002. The Company does not expect the adoption of SFAS No. 148 to have a
material effect on the Company's results of operations or financial position.
In November 2002, the FASB issued Interpretation 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The Interpretation elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under the guarantee and must
disclose that information in its interim and annual financial statements. The
provisions related to recognizing a liability at inception of the guarantee for
the fair value of the guarantor's obligations does not apply to product
warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company is currently
evaluating the impact of Interpretation 45 on the Company's results of
operations and financial position.
In January 2003, the FASB issued Interpretation 46, Consolidation of Variable
Interest Entities. In general, a variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes
that either (a) does not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. Interpretation 46 requires a variable
interest entity to be consolidated by a company if that company is subject to
a majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both.
The consolidation requirements of Interpretation 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure requirements
apply in all financial statements issued after January 31, 2003, regardless of
when the variable interest entity was established. The Company has a number of
arrangements which may be variable interest entities under the provisions of
FIN 46. The company has entered into agreements to lease certain vessels.
These five VLCCs are held by special purpose entities, which were established
and are owned by independent third parties who provide financing through debt
and equity participation. These leases are accounted for as operating leases,
and the lease payments are charged to operating income. Under current
accounting principles generally accepted in the United States, the assets and
the related obligations are excluded from the consolidated balance sheet,
and the special purpose entities are not consolidated. At December 31, 2002,
the original cost to the lessor of the assets under such arrangements was
approximately $360 million. Certain of these leases contain residual value
guarantees that give the third party owners the option to put the vessel to
the company. The price of these put options are significantly lower than the
expected market value of the vessels on the exercise date however under FIN
46, certain conditions exist which may indicate these entities are variable
interest entities. At December 31, 2002, the company's residual value
guarantees associated with these leases, which represent the maximum exposure
to loss, are $56.8 million. The Company has both an obligation and an option
to purchase the VLCC Oscilla on expiry of a five-year time charter, which
commenced in March 2000. Oscilla is owned and operated by an unrelated entity.
If the Company has exercised its option at December 31, 2002, the cost to the
Company of the Oscilla would have been approximately $57 million and the
maximum exposure to loss is $18.6 million. On July 1, 2003, the Company's
subsidiary Golden Ocean Group Limited, purchased a call option to acquire all
of the shares of Independent Tankers Corporation ("ITC") from Hemen Holding
Ltd, a related party, for a total consideration of $4.0 million plus 4 per
cent interest per year. ITC operates a total of six VLCCs and four Suezmax
tankers, which are on long-term charters to BP and Chevron. Golden Ocean paid
$10.0 million for the option, which expires on July 1, 2010. The total book
value of ITC's consolidated assets at December 31, 2002 was approximately $960
million and the Company's maximum exposure to loss is $10 million. The Company
is in the process of making the determination as to whether the aforementioned
arrangements are variable interest entities.
Critical Accounting Policies
The preparation of the Company's financial statements in accordance with
accounting principles generally accepted in the United States requires that
management make estimates and assumptions affecting the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following is a discussion of the
accounting policies applied by the Company that are considered to involve a
higher degree of judgement in their application. See Note 2 to the Company's
audited Consolidated Financial Statements included herein for details of all of
the Company's material accounting policies.
Revenue Recognition
Revenues are generated from freight billings, time charter and bareboat charter
hires. Time charter and bareboat charter revenues are recorded over the term of
the charter as service is provided. Under a voyage charter the revenues and
associated voyage costs are recognised rateably over the estimated duration of
the voyage. The operating results of voyages in progress at a reporting date are
estimated and recognised pro-rata on a per day basis. Probable losses on voyages
are provided for in full at the time such losses can be estimated. Amounts
receivable or payable arising from profit sharing arrangements are accrued based
on the estimated results of the voyage recorded as at the reporting date.
The operating revenues and voyage expenses of the vessels operating in the
Tankers pool, and certain other pool arrangements, are pooled and net operating
revenues, calculated on a time charter equivalent basis, are allocated to the
pool participants according to an agreed formula. The same revenue and expenses
principles stated above are applied in determining the pool's net operating
revenues.
Vessels and Depreciation
The cost of the Company's vessels is depreciated on a straight-line basis over
the vessels' remaining economic useful lives. Management estimates the useful
life of the Company's vessels to be 25 years. This is a common life expectancy
applied in the shipping industry. With effect from April 2001, the IMO
implemented new regulations that result in the accelerated phase-out of single
hull vessels. As a result of this, the Company has re-evaluated the estimated
useful life of its single hull vessels and determined this to be either 25 years
or the vessel's anniversary date in 2017, whichever comes first. As a result,
the estimated useful lives of six of the Company's vessels were reduced in the
fourth quarter of 2001. If the estimated economic useful life is incorrect, or
circumstances change such that the estimated economic useful life has to be
revised, an impairment loss could result in future periods.
The vessels held and used by the Company are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In assessing the recoverability of the vessels' carrying
amounts, the Company must make assumptions regarding estimated future cash
flows. These assumptions include assumptions about the spot market rates for
vessels, the operating costs of our vessels and the estimated economic useful
life of our vessels. In making these assumptions the Company refers to
historical trends and performance as well as any known future factors. Factors
we consider important which could effect recoverability and trigger impairment
include significant underperformance relative to expected operating results, new
regulations that change the estimated useful economic lives of our vessels and
significant negative industry or economic trends.
Results of Operations
Year ended December 31, 2002 compared with the year ended December 31, 2001
Total net operating revenues decreased by 34 per cent to $416.5 million in 2002
compared with $628.2 million in 2001. In 2002, the Company took delivery of five
wholly-owned double-hulled VLCCs and two double-hulled VLCCs in which the
Company has a 33.33 per cent interest. In addition, the Company sold five dry
bulk carriers and sold its 50 per cent interest in two joint ventures, each
owning a dry bulk carrier. However, the decrease in net operating revenues
primarily reflects the significantly weaker tanker market experienced in 2002.
The annual average daily TCEs earned by the Company's VLCCs, Suezmax tankers,
and Suezmax OBO carriers for 2002 year were $22,500, $18,400 and $17,700,
respectively, compared with $40,800, $30,700 and $28,900, respectively in 2001.
Vessel operating expenses, which include drydocking costs, decreased six per
cent to $109.3 million from $116.3 million in 2001. This decrease is a result of
a cost saving exercise in 2002. The average daily operating costs, including
drydockings, of the Company's VLCCs, Suezmax tankers and Suezmax OBO carriers
was $6,300, $5,600 and $5,700 respectively compared with $6,300, $5,700 and
$9,000 in 2001. In 2001, 12 of our vessels drydocked compared with 15 in 2002.
Charterhire expenses increased to $60.6 million in 2002 from $41.9 million in
2001, principally due to the inclusion in the second half of the year of four
additional vessels on short-term charters from BP Shipping Ltd., the shipping
arm of BP Plc.
Administrative expenses decreased two per cent to $12.8 million in 2002 from
$13.0 million in 2001. Administrative expenses are reported net of fee income of
$3.6 million and $3.2 million for 2002 and 2001, respectively. Included in fee
income was $0.8 million and $0.5 million received from related parties for 2002
and 2001, respectively. In 2001, the Company recorded a non-cash charge of $1.2
million in connection with employee stock options. In 2002, this charge was
reduced to $0.5 million. Offsetting this reduction were increased administrative
expenses due to an increase in the number of employees.
Depreciation and amortisation increased 17 per cent from $117.2 million in 2001
to $136.9 million in 2002. The increase relates to the acquisition of five new
vessels in 2002 and the impact for a full year of the reduced expected useful
life for six of the Company's vessels following the implementation of IMO
regulations in 2001.
Net interest expense for 2002 was $58.3 million, a decrease of 24 per cent
compared with $77.0 million in 2001. Interest income was unchanged at $13.0
million for both 2001and 2002. Interest expense decreased from $90.0 million in
2001 to $71.3 million in 2002. At December 31, 2002 the Company had $1,424.9
million of floating rate debt and the decrease in the interest expense reflects
the benefit of lower interest rates throughout 2002.
The share in result of associated companies decreased from earnings of $22.3
million in 2001 to a loss of $10.7 million in 2002. Certain of the associated
companies in which the Company has investments, have Yen denominated long-term
debt. In 2002 the loss is due to a combination of lower revenues and the Yen
strengthened against the U.S. Dollar with the resulting unrealised foreign
exchange loss included within the share in results of associated companies.
The Company incurred a foreign currency exchange loss of $10.9 million in 2002
compared with a gain of $15.5 million in 2001, as a result of the strengthening
of the Yen against the US Dollar from 131.14 at December 31, 2001 to 118.54 at
December 31, 2002. At December 31, 2002, the Company has Yen debt (including Yen
denominated capital leases) of Yen 13.1 billion, compared with Yen 25.7 billion
at December 31, 2001.
The charge for other financial items increased from $5.7 million in 2001 to $8.6
million in 2002. In both years, other financial items consists primarily of
market value adjustment on derivatives following the adoption of SFAS No. 133 on
January 1, 2001. In September 2001 the Company established a twelve month
facility for a Stock Indexed Total Return Swap Programme or Equity Swap Line
with the Bank of Nova Scotia, or BNS, whereby the latter acquires shares in the
Company, and the Company carries the risk of fluctuations in the share price of
those acquired shares. In 2001 the mark to market valuation of the Equity Swap
Line resulted in a credit to income of $4.4 million. This was offset by a charge
of $9.8 million in connection with the market value adjustments on interest
rates swaps. In 2002 the Company incurred a $4.0 million charge relating to the
market value adjustment on the Company's Equity Swap Line and a $3.0 million
charge relating to the market value adjustments for interest rate swaps.
Net income from continuing operations before income taxes and before the
cumulative effect of change in accounting principle was $7.2 million in 2002
compared with $330.6 million in 2001. In 2002, the Company sold a portion of its
dry bulk operations and these disposals have been recorded as a charge of $1.9
million for discontinued operations.
The Company adopted FAS 142 effective January 1, 2002 and recognised an
impairment loss on goodwill of $14.1 million that is shown separately in the
consolidated statement of operations as a cumulative effect of change in
accounting principle. Net income for 2002 before the cumulative effect of change
in accounting principle was $5.2 million and earnings per share were $0.07.
Year ended December 31, 2001 compared with the year ended December 31, 2000
Total net operating revenues increased by five per cent to $628.2 million in
2001 compared with $595.4 million 2000. This reflects an increase due to a full
years contribution in 2001 from the vessels acquired through the purchase of
Golden Ocean. In 2000, Golden Ocean was only consolidated with effect from
October 2000. Offsetting the increase due to the expanded fleet, was a decrease
due to lower average earnings in the tanker market. The annual average daily
TCEs earned by the VLCCs, Suezmax tankers, and Suexmaz OBO carriers trading in
the spot market were $40,800, $30,700 and $28,900 in 2001 respectively, compared
with $46,300, $35,500 and $33,300 in 2000.
Vessel operating expenses, which include drydocking costs, increased 34 per cent
to $116.3 million from $86.8 million in 2000. This increase is explained by the
inclusion of Golden Ocean for the full year in 2001. The average daily operating
costs, including drydockings, of the Company's VLCCs, Suezmax tankers and
Suezmax OBO carriers was $6,300, $5,700 and $9,000 respectively compared with
$6,900, $5,500 and $6,200 in 2000. The increase in daily operating costs for the
Suezmax OBO carriers in 2001 is due to seven of the eight vessels being dry
docked during 2001. Fluctuations in the other vessel size operating expenses are
within expected ranges.
Charterhire expenses increased to $41.9 million in 2001 from $34.4 million in
2000, again due to the inclusion of vessels acquired through the purchase of
Golden Ocean for the full year in 2001.
Administrative expenses have increased 39 per cent to $13.0 million in 2001 from
$9.3 million in 2000. This reflects an increase in the number of employees,
general corporate activity and also a $1.2 million non-cash charge in connection
with employee stock options.
Depreciation and amortisation increased 28 per cent from $91.8 million in 2000
to $117.2 million in 2001. The increase relates to the acquisition of new
vessels and the inclusion of Golden Ocean for the full year in 2001. The
implementation of IMO regulations reduced the expected useful life for six of
the Company's vessels, which resulted in increased depreciation of $0.5 million
in 2001 for those vessels.
Net interest expense for 2001 was $77.0 million compared with $88.8 million in
2000, a decrease of 13 per cent. This decrease reflects the benefit of lower
interest expense on debt as interest rates fell during 2001 and increased
interest income arising from higher average cash balance. The Company had total
long-term debt outstanding of $1,391.2 million at December 31, 2001, compared
with $1,544.1 million at December 31, 2000. In addition the Company had a total
amount of $300.8 million of obligations under capital leases at December 31,
2001, compared with $109.8 million at December 31, 2000.
The share in result of associated companies increased 74 per cent from $12.8
million in 2000 to $22.3 million due to the inclusion of the associated
companies acquired as part of Golden Ocean for the full year in 2001. Certain of
the associated companies in which the Company has investments, have Yen
denominated long-term debt. In 2001, the Yen weakened against the U.S. Dollar
and the resulting unrealised foreign exchange gain is included within the share
in results of associated companies.
The increase in the foreign exchange gain from $7.9 million in 2000 to $15.5
million in 2001 also reflects the weakening of the Yen and the $15.5 million
represents the unrealised gain in subsidiaries that have Yen denominated
long-term debt.
The charge for other financial items increased from $0.2 million in 2000 to $5.7
million in 2001 that is attributable to the market value adjustment on
derivatives following the adoption of SFAS No. 133 on January 1, 2001. In 2001
the Company has incurred a charge of $9.8 million in connection with the market
value adjustments on interest rates swaps and a credit to income of $4.4 million
for the mark to market valuation of the Equity Swap Line.
Net income from continuing operations before income taxes and before the
cumulative effect of change in accounting principle was $330.6 million in 2001
compared with $306.0 million in 2000. The net result of discontinued operations
was net income of $21.1 million in 2001 compared with $8.0 million in 2000.
In 2001, the Company changed its accounting policy for drydockings. Prior to
2001, provisions for future drydockings have been accrued and charged to expense
on a pro-rata basis over the period to the next scheduled drydockings. Effective
January 1, 2001 the Company recognised the cost of a drydocking at the time the
drydocking takes place, that is, we apply the "expense as incurred" method. The
expense as incurred method is considered by management to be a more reliable
method of recognising drydocking costs as it eliminates the uncertainty
associated with estimating the cost and timing of future drydockings. The
cumulative effect of this change in accounting principle resulted in a credit to
income of $31.5 million in 2001. The cumulative effect of this change as of
January 1, 2001 on the Company's consolidated balance sheet was to reduce total
liabilities by $32.3 million.
Liquidity and Capital Resources
The Company operates in a capital intensive industry and has historically
financed its purchase of tankers and other capital expenditures through a
combination of cash generated from operations, equity capital and borrowings
from commercial banks. The liquidity requirements of the Company relate to
servicing its debt, funding the equity portion of investments in vessels,
funding working capital requirements and maintaining cash reserves against
fluctuations in operating cash flows. Revenues from time charters and bareboat
charters are received monthly or fortnightly in advance while revenues from
voyage charters are received upon completion of the voyage.
The Company's funding and treasury activities are conducted within corporate
policies to maximise investment returns while maintaining appropriate liquidity
for the Company's requirements. Cash and cash equivalents are held primarily in
U.S. dollars with some balances held in Japanese Yen, British Pound and
Norwegian Kroner.
As of December 31, 2002, 2001 and 2000, the Company had cash and cash
equivalents of $92.1 million, $178.2 million and $103.5 million, respectively.
The Company generated cash from operations of $142.0 million in 2002, compared
with $477.6 million in 2001 and $271.6 million in 2000. Net cash used in
investing activities in 2002 was $222.9 million compared with $103.8 million in
2001. In 2000 the Company used net cash in investing activities of $509.0
million. In 2002 investing activities consisted primarily of $376.8 million paid
for vessel acquisitions and $21.8 million investment in associated companies.
The latter related principally to joint ventures through which the Company
acquired one third interests in two vessels. Offsetting these invested amounts
was proceeds of $177.9 million arising on the sale of assets. In 2002 the
Company sold five 1997-1999 built dry bulk carriers and its 50 per cent
interests in two joint ventures, each owning a 1998-built dry bulk carrier. The
Company also sold one VLCC to a German KG structure and leased the vessel back
on charter for a period of eight years with the option on the buyer's side to
extend the charter for a further three years followed by a further two years. In
2001, investing activities consisted primarily of payments for vessel
acquisitions, totalling $386.1 million, $64.7 million to acquire Mosvold and
$60.0 million investment in associated companies. The latter related principally
to joint ventures through which the Company acquired one-third interests in five
vessels and 50.1 per cent interest in two vessels. Offsetting these invested
amounts was proceeds of $400.1 million arising on the sale of assets. In 2001
the Company sold two 1993-built VLCCs and a 2000 built Suezmax tanker. In 2001,
the Company sold three VLCCs to German KG structures and leased these vessels
back on charters each for a period of eight years with the option on the buyer's
side to extend the charter for a further three years followed by a further two
years. In 2000, investing activities consisted primarily of payments for vessel
acquisitions, totalling $436.0 million, the investment in Golden Ocean and the
investment of $38.6 million in debt of companies connected with Golden Ocean.
In the Company's opinion, working capital is sufficient for the Company's
present requirements.
Cash used in financing activities was $5.2 million in 2002 compared with cash
used in financing activities of $299.2 million in 2001 and cash provided by
financing activities of $275.4 million in 2000. In 2002 there was $341.9 million
in principal repayments, $24.7 million payment for capital lease obligations,
$19.1 million paid as dividends and $383.8 million proceeds from long-term debt.
In 2001 there was $460.7 million in principal repayments, $10.3 million payment
for capital lease obligations, $115.2 million paid as dividends, $44.8 million
for the repurchase of the Company's shares, $8.5 million from the issuance of
new equity and $324.9 million proceeds from long-term debt. At December 31, 1999
the Company had outstanding a specific loan of $54.0 million from Metrogas
Holdings, or Metrogas, a company related to the Company's Chairman. In 2000
proceeds from long-term debt were $384.7 million, repayments of debt were $209.7
million, of which $24 million related to repayment of the amount outstanding on
the Metrogas Loan and the balance related to traditional bank financing of
vessels. The Company generated $104.6 million in 2000 through private placements
of its equity and through the exercise of warrants.
The Company had total long-term debt outstanding of $1,445.5 million at December
31, 2002 compared with $1,392.0 million at December 31, 2001. At December 31,
2002 $11.5 million of this debt was at a fixed rate of 8 per cent (2001 - $31.5
million). The Company is exposed to various market risks, including interest
rates and foreign currency fluctuations. The Company uses interest rate swaps to
manage interest rate risk. As at December 31, 2002 the Company's interest rate
swap arrangements effectively fix the Company's interest rate exposure on $352.7
million of floating rate debt (2001 - $362.8 million). The interest rate swap
agreements expire between February 2003 and August 2008.
The Company has entered into forward freight agreements for trading purposes in
order to manage its exposure to the risk of movements in the spot market for
certain trade routes and, to some extent, speculative purposes. Market risk
exists to the extent that spot market fluctuations may have a negative effect on
the Company's cash flows and consolidated statements of operations. See Item 11.
"Quantitative and Qualitative Disclosures about Market Risk".
In February 2002 and July 2002 the Company acquired a 33 per cent interest in
each of two joint ventures, each of which acquired a 2002-built VLCC for
approximately $78.5 million. At the same time, $52.5 million bank financing was
secured for each of the joint ventures.
In 2002 the Company took delivery of five vessels, Front Eagle, Front Serenade,
Front Stratus, Front Page and Front Falcon. In January 2002, the Company
obtained bank financing for Front Eagle, for a total amount of $50 million. In
March 2002 the Company obtained bank financing for a total sum of $170 million
for the Front Serenade, Front Straus and Front Falcon. In August 2002 the
Company obtained bank financing for a total sum of $50 million for Front Page.
In February 2001 the Company acquired a 50.1 per cent interest in each of two
joint ventures, each of which acquired a 1993-built VLCC for approximately $53.0
million. At the same time, $70 million financing was secured for these joint
ventures.
In 2001 the Company took delivery of four vessels that it had acquired through
the exercise of purchase options; Front Commerce, Front Commodore, Front
Comanche and Opalia. In April 2001, the Company obtained bank financing for
Front Commerce and Front Commodore, for a total amount of $110 million. In May
2001 the Company obtained bank financing for a total sum of $59 million for the
Front Comanche and in July 2001 obtained bank financing for a total sum of $50
million for Opalia.
In August 2001, bank financing of $75.0 million was secured for the delivery of
the two newbuilding Suezmax tankers, Front Melody and Front Symphony.
During 2000, 2001 and 2002, the Company issued equity in a number of
transactions. In February 2000, the Company issued 3,500,000 ordinary shares in
a private placement at NOK 57.50 per share to raise approximately $24 million in
equity. At the same time $30 million of the Metrogas Loan was converted to
equity through the issuance of 4,350,000 ordinary shares at NOK 57.50 per share,
leaving $24 million plus interest outstanding. The outstanding balance on the
Metrogas Loan was repaid in full in August 2000.
In March 2000, the Company issued 2,957,500 ordinary shares at NOK 90.00 per
share to finance part of the acquisition of two VLCCs from Wilh. Wilhelmsen ASA.
In May 2000, the Company issued 3,000,000 ordinary shares at $10.15 per share in
a private placement to raise approximately $30 million in equity. The proceeds
of the issue were used to part finance the acquisition of a newbuilding VLCC,
Front Tina. In June, 2000, the Company raised approximately $46.8 million
through the issuance of 4,000,000 ordinary shares at a price of NOK 104.50 per
share in a private placement to a group of international institutional
investors. The proceeds from these equity issues have been used for specific
vessel acquisitions and general corporate working capital requirements.
In 2000, the Company issued 124,558 ordinary shares pursuant to subscriptions
under warrants that could be exercised at any time up to December 31, 2003 and
issued a total of 8,211 ordinary shares pursuant to subscriptions under warrants
that could be exercised at any time up to May 11, 2001. During 2001, the Company
issued 129,500 shares in connection with the exercise of employee share options
and issued 416,555 ordinary shares pursuant to subscriptions under warrants that
could be exercised at any time up to May 11, 2001. During 2002, the Company
issued 59,000 shares in connection with the exercise of employee share options.
In September 2000, the Company bought back and cancelled 430,000 of its ordinary
shares at NOK 39.45 per share. These shares were related to an option the
Company secured in connection with issuing 1,910,000 shares as part
consideration for a Suezmax newbuilding contract. Further, in 2000 and 2001, the
Company bought back and cancelled a total of another 1,719,845 and 2,207,300 of
its ordinary shares, respectively, in a number of separate market transactions.
The total consideration paid was NOK 200 million and NOK 295 million in 2000 and
2001, respectively (equivalent to $21.9 million and $32.8 million converted at
the rates on the transaction dates).
As of December 31, 2002, 2001 and 2000, the Company complied with the debt
covenants of its various debt agreements. The acquisition of Golden Ocean was
conducted so that the loans held by Golden Ocean's subsidiaries were
non-recourse to Frontline. This implies that any guarantees on behalf of a
Golden Ocean subsidiary were issued only by either Golden Ocean and or other
Golden Ocean subsidiaries. Frontline's exposure to Golden Ocean is therefore
limited to $15 million injected as equity, a $50 million term loan and a $10
million revolving credit facility provided by Frontline to Golden Ocean. As of
December 31, 2002 the amounts outstanding under the term loan and revolving
credit facility were $nil and $nil, respectively.
At December 31, 2001, a 100 per cent owned subsidiary of Golden Ocean, Golden
Stream Corporation, was party to a loan agreement with Griffin Shipping Inc., or
Griffin. The amount outstanding under this loan agreement was $48.1 million,
which was fully repayable on March 30, 2002. Golden Stream Corporation failed to
repay the loan on the due date. This situation gave rise to substantial doubt as
to the ability of Golden Ocean to continue to operate as a going concern as at
December 31, 2001. Griffin did not declare a default under the loan agreement
and in the fourth quarter of 2002, a satisfactory agreement was reached with
Griffin, Golden Stream Corporation was restructured and the vessel was
refinanced. As a result of the restructuring and refinancing, Golden Stream
Corporation is owned in a non-recourse subsidiary where Frontline has
guaranteed, and partly provided, the first $28 million of debt.
The Company has guaranteed the yen and dollar long-term borrowings of associated
companies for amounts of $176.4 million, including (Y)14.3 billion, which is
equivalent to $121.0 million at December 31, 2002.
In 2001, the Company received an adverse decision from the Swedish
Administrative Court of Appeal with respect to a tax dispute with the Swedish
tax authorities relating to ICB. The dispute arises from a limited partnership
in which ICB invested, and which sold a vessel on the exercise of a purchase
option by a third party in 1990. The Swedish tax authorities assessed an "exit"
tax on ICB and the other members of the limited partnership and also sought to
tax ICB and the other members for income earned by the partnership. ICB has
contested these assessments. The Swedish Administrative Court of Appeal upheld a
decision by a County Administrative Court finding ICB liable for these
assessments. Including accrued interest, the taxes found due by the court total
approximately SEK 93 million, or $10.6 million at the exchange rate prevailing
at December 31, 2002. ICB is appealing this judgement.
Contractual Commitments
Through the purchase of Mosvold Shipping Limited in May 2001, the Company
acquired three VLCC newbuilding contracts. The first two of the newbuildings
were delivered in 2002 and at December 31, 2002 the Company had a
non-cancellable contract for the construction of the remaining one newbuilding
tanker, scheduled for delivery in July 2003. The total contract price for this
newbuilding is $74.2 million. At December 31, 2002, the Company had paid
contractual instalments of $14.8 million and is committed to make further
instalments of $59.4 million, of which it is estimated approximately $12 million
will be financed from working capital. Bank financing has been arranged for this
vessel.
At December 31 2002, the Company had outstanding debt of $1,445.5 million which
is repayable as follows:
Year ending December 31,
(in thousands of $)
2003 167,807
2004 169,529
2005 266,080
2006 312,142
2007 134,871
2008 and later 395,043
----------------------------------------------------------------------
Total debt 1,445,472
======================================================================
At December 31 2002, the Company had eight vessels that were sold by the Company
at various times during the period from November 1999 to December 31, 2002, and
leased back on charters that range for periods of eight to ten years with
options on the lessors' side to extend the charters for periods that range up to
five years. Four of these vessels are accounted for as operating leases and four
as capital leases a discussed below. The Company has purchase options at certain
specified dates and the lessor has options to put the vessels to the Company at
the end of the lease terms for all of these eight vessels. The total amount that
the Company would be required to pay under these put options with respect to the
operating leases is $56.8 million.
At December 31 2002, the outstanding obligations for the four vessels under
capital leases are payable as follows:
Year ending December 31,
(in thousands of $)
2003 33,359
2004 33,576
2005 34,479
2006 35,078
2007 35,077
2008 and later 248,150
---------------------------------------------------------------------
Minimum lease payments 419,719
---------------------------------------------------------------------
Less imputed interest (147,028)
---------------------------------------------------------------------
Present value of obligations under capital leases 272,691
=====================================================================
Off-Balance Sheet Financing
In 1998 and 1999, the Company entered into a total of three sale and leaseback
transactions with German KG structures. In addition, one of the vessels
obtained through the acquisition of Golden Ocean was also sold and leased back
prior to the Company's acquisition of Golden Ocean. The minimum terms of these
leases range up to eight years. The leases of these vessels are being
accounted for as operating leases. The Company has also entered into
short-term charters for four VLCCs, each for a period of approximately one
year. The future minimum rental payments under the Company's non-cancellable
operating leases, are as follows:
Year ending December 31,
(in thousands of $)
2003 66,639
2004 36,400
2005 36,958
2006 37,058
2007 18,551
2008 and later --
--------------------------------------------------------------------
Total minimum lease payments 195,606
====================================================================
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Information concerning each director and executive officer of the Company is set
forth below.
Name Age Position
John Fredriksen 59 Chairman, Chief Executive Officer, President and
Director
Tor Olav Troim 40 Vice-President and Director
A. Shaun Morris 43 Director
Tammy Richardson 31 Director
Kate Blankenship 38 Chief Accounting Officer and Company Secretary
Ola Lorentzon 53 Managing Director of Frontline Management
Tom E. Jebsen 45 Chief Financial Officer of Frontline Management
Jon Christian Syvertsen 41 Deputy Managing Director of Frontline Management
Oscar Spieler 42 Technical Director of Frontline Management
Certain biographical information about each of the directors and executive
officers of the Company is set forth below.
John Fredriksen has been the Chairman of the Board, Chief Executive Officer,
President and a director of the Company since November 3, 1997. He was
previously the Chairman and Chief Executive Officer of Old Frontline. Mr.
Fredriksen has served for over eight years as a director of Seatankers
Management Co. Ltd. ("Seatankers"), a ship operating company and an affiliate of
the Company's principal shareholder. Mr. Fredriksen indirectly controls Hemen.
Mr. Fredriksen is a director of Golar LNG Limited, a Bermuda company listed on
the Oslo Stock Exchange and the NASDAQ National Market, which is indirectly
controlled by Mr. Fredriksen.
Tor Olav Troim has been Vice-President and a director of the Company since
November 3, 1997. He previously served as Deputy Chairman of Frontline from July
4, 1997, and was a director of Old Frontline from July 1, 1996. Until April,
2000 Mr. Troim was the Chief Executive Officer of Frontline Management, a
company which supports the Company in the implementation of decisions made by
the Board of Directors. Mr. Troim also serves as a consultant to Seatankers and
since May 2000, has been a director and Vice-Chairman of Knightsbridge. He is a
director of Aktiv Inkasso ASA and Northern Oil ASA, both Norwegian Oslo Stock
Exchange listed companies and Northern Offshore Ltd., a Bermuda company listed
on the Oslo Stock Exchange. Prior to his service with Frontline, from January
1992, Mr. Troim served as Managing Director and a member of the Board of
Directors of DNO AS, a Norwegian oil company. Mr. Troim has served as a director
of Golar LNG Limited since May 2001.
A. Shaun Morris has been a non-executive director of the Company since November
3, 1997. Mr. Morris has been a Partner at Appleby, Spurling & Kempe since April
1995, after joining the firm in 1988 as an associate, where he specialises in
corporate/commercial law.
Tammy Richardson has been a non-executive director of the Company since June 21,
2002. Ms. Richardson has been an attorney at Appleby Spurling & Kempe since 1998
where she specialises in corporate/commercial law.
Kate Blankenship is Chief Accounting Officer and Secretary of the Company. Mrs.
Blankenship joined the Company in 1994. Prior to joining the Company, she was a
Manager with KPMG Peat Marwick in Bermuda. She is a member of the Institute of
Chartered Accountants in England and Wales. Mrs. Blankenship has been Chief
Financial Officer of Knightsbridge since April 2000 and Secretary of
Knightsbridge since December 2000.
Ola Lorentzon has been Managing Director of Frontline Management since April
2000. Mr. Lorentzon has also been a director of Knightsbridge since September
18, 1996. He was Vice Chairman of Knightsbridge from September 18, 1996 until
May 2000 when he took over as Chairman. Until 2000, Mr. Lorentzon was a director
of The Swedish Protection and Indemnity Club (SAAF), Swedish Ships Mortgage Bank
and The Swedish Shipowners' Association, Deputy Chairman of the Liberian
Shipowners Council and a member of the International Association of Tanker
Owners (Intertanko) Council.
Tom E. Jebsen has served as Chief Financial Officer of Frontline Management
since June 1997. From December 1995 until June 1997, Mr. Jebsen served as Chief
Financial Officer of Tschudi & Eitzen Shipping ASA, a publicly traded Norwegian
shipowning company. From 1991 to December 1995, Mr. Jebsen served as Vice
President of Dyno Industrier ASA, a publicly traded Norwegian explosives
producer. Mr. Jebsen is also a director of Assuranceforeningen Skuld and Hugin
ASA, an internet company.
Jon Syvertsen has served as Deputy Managing Director and head of commercial
activities of Frontline Management AS since August 2001. From July 2000 until
July 2001, Mr. Syvertsen served as Chief Investment Officer of Ulltveit-Moe
Gruppen AS, a Norwegian based shipowning and marine equipment producer. From
August 1997 until June 2001, Mr. Syvertsen served as Managing director of Umoe
Technology Services. Mr Syvertsen has served as Chairman of the Board of Umoe
Schat Harding AS , world leader in life boats and cruise tender boats.
Oscar Spieler has served as Technical Director of Frontline Management AS since
November 1999. From 1995 until 1999, Mr. Spieler served as Fleet Manager for
Bergesen, a major Norwegian gas tanker and VLCC owner. From 1986 to 1995, Mr.
Spieler worked with the Norwegian classification society DNV, working both with
shipping and offshore assets.
B. COMPENSATION
During the year ended December 31, 2002, the Company paid to its directors and
executive officers (nine persons) aggregate cash compensation of $1,362,655 and
an aggregate amount of $163,889 for pension and retirement benefits.
During the year ended December 31, 2002, the Company granted to the Directors
and officers options to acquire, in the aggregate 80,000 Ordinary Shares of the
Company. These options have an exercise price of $11.75 at March 31, 2003 and
expire on June 3, 2007. These options were granted under the Bermuda Employee
Share Option Plan described below.
C. BOARD PRACTICES
In accordance with the Bye-laws of the Company the number of Directors shall be
such number not less than two as the Company by Ordinary Resolution may from
time to time determine and each Director shall hold office until the next annual
general meeting following his election or until his successor is elected. The
Company has four Directors. The Board does not have any committees.
The officers of the Company are elected by the Board of Directors as soon as
possible following each Annual General Meeting and shall hold office for such
period and on such terms as the Board may determine.
There are no service contracts between the Company and any of our Directors
providing for benefits upon termination of their employment or service.
D. EMPLOYEES
As of December 31, 2002, the Company and its subsidiaries employed approximately
40 people in their respective offices in Bermuda and Oslo. The Company contracts
with independent ship managers to manage and operate its vessels.
E. SHARE OWNERSHIP
The beneficial interests of our Directors and officers in the Ordinary Shares of
the Company as of June 30, 2003, were as follows:
Percentage of
Ordinary Shares of Ordinary Shares
Director or Officer $2.50 each Outstanding
------------------- -------------------- -------------------
John Fredriksen* 35,079,053 45.87%
Tor Olav Troim 194,934 **
Tammy Richardson -- --
A. Shaun Morris -- --
Kate Blankenship 14,000 **
Ola Lorentzon -- --
Tom E. Jebsen 22,057 **
Jon Christian Syvertsen -- --
Oscar Spieler 14,000 **
* Includes Ordinary Shares held by Hemen Holding Ltd. and other companies
indirectly controlled by Mr. John Fredriksen.
** Less than one per cent
Details of share options held by the Company's Directors and officers at June
30, 2003 are set out in the following table:
Number of Ordinary Exercise Price per
Director or Officer Shares Subject to Option Ordinary Share Expiration Date
------------------- ------------------------ ------------------ ---------------
John Fredriksen -- -- --
Tor Olav Troim -- -- --
Tammy Richardson -- -- --
A. Shaun Morris -- -- --
Kate Blankenship 2,000 $10.92 November 8, 2004
1,000 $10.58 October 31, 2005
1,000 $8.83 February 5, 2007
9,000 NOK 96.33 January 22, 2006
15,000 $10.70 June 3, 2007
Ola Lorentzon 40,000 NOK 35.33 March 15, 2004
18,000 NOK 96.33 January 22, 2006
20,000 $10.70 June 3, 2007
Tom E. Jebsen 7,500 NOK 96.33 January 22, 2006
15,000 $10.70 June 3, 2007
Jon Syvertsen 15,000 $10.70 June 3, 2007
Oscar Spieler 9,000 NOK 96.33 January 22, 2006
15,000 $10.70 June 3, 2007
At June 30, 2003 the Norwegian Kroner:US Dollar exchange rate was NOK
7.2537:$1.00
The options held by the directors and officers have all been granted under the
Bermuda Employee Share Option Plan discussed below.
As of June 30, 2003, 470,300 of the authorised and unissued Ordinary Shares were
reserved for issue pursuant to subscription under options granted under the
Company's share option plans.
The Company maintains a Bermuda Employee Share Option Plan, the Bermuda Plan and
a United Kingdom Employee Share Option Plan, the U.K. Plan. Under the terms of
the plans, the exercise price for the options may not be less than the average
of the fair market value of the underlying shares for the three dealing days
before the date of grant. The number of shares granted under the plans may not
exceed seven per cent of the issued share capital of the Company. No
consideration is payable for the grant of an option. The exercise prices for the
options are reduced by any dividends declared after the date of grant.
Under the Bermuda Plan, options may be granted to any director or employee of
the Company or any subsidiary. Options are only exercisable during a maximum
period of nine years following the first anniversary date of the grant or upon
the termination of the option holder from employment with the Company.
Under the U.K. Plan, options may be granted to any full-time director or
employee of the Company or any subsidiary. Options are only exercisable during
the period of seven years following the third anniversary date of the grant or
upon the termination of the option holder from employment with the Company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The Company is indirectly controlled by another corporation (see below). The
following table presents certain information regarding the current ownership of
the Ordinary Shares with respect to (i) each person who is known by the Company
to own more than five per cent of the Company's outstanding Ordinary Shares; and
(ii) all directors and officers as a group as of June 30, 2003.
Ordinary Shares
Owner Amount Per cent
Hemen Holding Ltd. and associated companies (1) 35,079,053 47.74%
All Directors and Officers as a group (nine persons) (2) 35,324,044 48.08%
(1) Hemen Holding Ltd. is a Cyprus holding company indirectly controlled by Mr.
John Fredriksen, who is the Chairman and Chief Executive Officer of the
Company.
(2) Includes Ordinary Shares held by Hemen Holding Ltd. and associated
companies indirectly controlled by Mr. John Fredriksen.
At both June 2002 and June 2001 Hemen Holding Ltd. and associated companies held
45.22% of the Company's Ordinary Shares.
The Company's major shareholders have the same voting rights as other
shareholders of the Company.
As at April 30, 2003, 3,406,409 of the Company's Ordinary Shares were held by 36
holders of record in the United States.
No corporation or foreign government owns more than 50% of the Company's
outstanding Ordinary Shares.
The Company is not aware of any arrangements, the operation of which may at a
subsequent date result in a change in control of the Company.
B. RELATED PARTY TRANSACTIONS
Management believes transactions with related parties are under terms similar to
those that would be arranged with other parties.
In February 2001, the Company acquired newbuilding contracts for the
construction and purchase of three VLCC tankers at the Hitachi shipyard in Japan
for delivery in 2002 from Seatankers, a company affiliated with Hemen. These
contracts were acquired for the original contract price of $72 million each plus
$0.5 million per contract. The first two of the newbuildings were delivered in
2002.
In the years ended December 31, 2002 and 2001, Frontline provided services to
Seatankers. These services include management support and administrative
services including services to a newbuilding project known as the Uljanik
Project. In the years ended December 31, 2002 and 2001, the Company has earned
management fee income from Seatankers of $253,762 and $277,855, respectively. As
at December 31, 2002 and 2001 amounts of $141,359 and $314,923, respectively
were due from Seatankers in respect of these fees and for the reimbursement of
costs incurred on behalf of Seatankers.
In the year ended December 31, 2002, Frontline has provided management support
and administrative services to Osprey. In the year ended 31 December 2002
management fees of $42,000 have been earned from Osprey and as at December 31,
2002 an amount of $18,000 was due from Osprey in respect of these fees and for
the reimbursement of costs incurred on the Company's behalf by Osprey. At
December 31, 2002, an amount of $103,838 was due to Osprey in respect of
Tankers pool distributions due to Osprey that were received by the Company.
In the years ended December 31, 2002 and 2001, Frontline has provided services
to Golar LNG Limited. Osprey, which is controlled by World Shipholding, holds
50.01 per cent of Golar LNG. The services provided include management support,
corporate services and administrative services. In the years ended 31 December
2002 and 2001, management fees from Golar LNG of $391,153 and $258,960,
respectively have been earned by the Company. As at December 31 2002 and 2001,
an amount of $86,343 and $547,966, respectively were due from Golar LNG in
respect of these fees and for the reimbursement of costs incurred on behalf of
Golar LNG.
In the year ended December 31, 2002, Frontline has provided management support
and administrative services to Northern Offshore Limited, Northern Offshore is
controlled by Osprey. In the year ended 31 December 2002 management fees of
$173,724 have been earned from Northern Offshore and as at December 31, 2002
an amount of $31,071 was due from Northern Offshore.
C. INTERESTS OF EXPERTS AND COUNSEL
Not Applicable
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18.
Legal Proceedings
The Company is a party, as plaintiff or defendant, to several lawsuits in
various jurisdictions for demurrage, damages, off-hire and other claims and
commercial disputes arising from the operation of its vessels, in the ordinary
course of business or in connection with its acquisition activities. The
Company's management believes that the resolution of such claims will not have a
material adverse effect on the Company's operations or financial condition.
Dividend Policy
Prior to May 2001, the Company had not paid regular quarterly or annual
dividends since 1997 and it had been the Company's policy since that time to pay
dividends only when considered appropriate by the Company's Board of Directors.
On May 8, 2001, the Company announced a dividend of $1.00 per share, payable to
holders of record as of May 21, 2001 and has paid the following dividends in
2001, 2002 and 2003.
Record Date Payment Date Amount per Share
May 21, 2001 June 7, 2001 $1.00
August 23, 2001 September 5, 2001 $0.40
November 22, 2001 December 5, 2001 $0.10
March 13, 2002 March 20, 2002 $0.20
May 31, 2002 June 12, 2002 $0.05
March 10, 2003 March 24, 2003 $0.15
May 20, 2003 June 6, 2003 $1.00
On May 8, 2003, the Company announced that it was seeking to adopt a policy that
provided a more predictable minimum dividend stream and has consequently adopted
a dividend policy whereby the Company will seek to have a future quarterly
dividend of $0.25 per share, equivalent to $1.00 per share per annum. On May 8,
2003 the Company also announced a dividend of $1.00 per share, representing a
$0.25 ordinary dividend and a $0.75 special dividend, payable June 6, 2003. On
June 9, 2003 the Company announced a special dividend of $1.00 per share,
payable July 7, 2003.
The timing and amount of dividends, if any, is at the discretion of the
Company's Board of Directors and will depend upon the Company's results of
operations, financial condition, cash requirements, restrictions in financing
arrangements and other relevant factors.
B. SIGNIFICANT CHANGES
Not Applicable
ITEM 9. THE OFFER AND LISTING
Not applicable except for Item 9.A. 4. and Item 9. C.
The Company's Ordinary Shares are traded on the New York Stock Exchange
("NYSE"), the Oslo Stock Exchange ("OSE") and on the London Stock Exchange
("LSE") under the symbol "FRO".
The Company's ADSs, each of which represents one Ordinary Share, were traded on
the Nasdaq National Market under the symbol "FRONY" until August 3, 2001 when
the ADSs were delisted. In March 2001 the Company announced its intention to
list the Ordinary Shares on the New York Stock Exchange and in July 2001 gave
notice of termination of the ADR program to the Bank of New York as Depositary.
The ADR program was terminated on October 5, 2001. The Company's Ordinary Shares
began trading on the NYSE on August 6, 2001.
The New York Stock Exchange is the Company's "primary listing". As an overseas
company with a secondary listing on the LSE, the Company is not required to
comply with certain listing rules applicable to companies with a primary listing
on the LSE. The listing on the OSE is also a secondary listing. The Company's
Ordinary Shares have been thinly traded on the London Stock Exchange since 1999.
The following table sets forth, for the five most recent fiscal years, the high
and low prices for the Ordinary Shares on the NYSE and OSE and the high and low
prices for the ADSs as reported by the Nasdaq National Market.
NYSE OSE NASDAQ
High Low High Low High Low
Fiscal year ended December 31
2002 $13.05 $3.19 NOK 108.50 NOK 25.90 -- --
2001 $15.45 $6.55 NOK 215.50 NOK 59.50 $24.50 $11.563
2000 -- -- NOK 164.00 NOK 37.00 $18.250 $3.938
1999 -- -- NOK 45.00 NOK 16.00 $4.250 $3.000
1998 -- -- NOK 92.00 NOK 8.00 $14.500 $3.125
The following table sets forth, for each full financial quarter for the two most
recent fiscal years, the high and low prices of the Ordinary Shares on the NYSE
and the OSE, and the high and low prices for the ADSs as reported by the Nasdaq
National Market.
NYSE OSE NASDAQ
High Low High Low High Low
Fiscal year ended December 31, 2002
First quarter $12.50 $9.05 NOK 108.50 NOK 81.50 -- --
Second quarter $13.05 $8.79 NOK 108.50 NOK 64.00 -- --
Third quarter $9.76 $3.19 NOK 73.50 NOK 25.90 -- --
Fourth quarter $9.41 $4.06 NOK 69.00 NOK 28.50 -- --
Fiscal year ended December 31, 2001
First quarter -- -- NOK 159.50 NOK 104.00 $18.188 $11.563
Second quarter -- -- NOK 215.50 NOK 157.00 $24.50 $17.00
Third quarter $15.45 $8.85 NOK 176.00 NOK 78.50 $19.05 $14.35
Fourth quarter $10.50 $6.55 NOK 93.00 NOK 59.50 -- --
The following table sets forth, for the most recent six months, the high and low
prices for the Ordinary Shares on the NYSE and OSE.
NYSE OSE
High Low High Low
May 2003 $14.80 $10.00 NOK 100.00 NOK 69.50
April 2003 $12.51 $10.50 NOK 93.00 NOK 73.50
March 2003 $11.70 $9.75 NOK 86.00 NOK 71.50
February 2003 $10.89 $8.93 NOK 76.00 NOK 61.50
January 2003 $12.54 $9.14 NOK 87.50 NOK 61.00
December 2002 $9.41 $6.90 NOK 69.00 NOK 49.60
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not Applicable
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The Memorandum of Association of the Company has previously been filed as
Exhibit 3.1 to the Company's Registration Statement on Form F-1, (Registration
No. 33-70158) filed with the Securities and Exchange Commission on October 13,
1993, and is hereby incorporated by reference into this Annual Report.
On October 26, 2001, the Company adopted revised Bye-laws. These Amended and
Restated Bye-Laws of the Company as adopted by shareholders on October 26, 2001
are filed as Exhibit 1.4 to the Company's Annual Report on Form 20-F for the
year ended December 31, 2001.
The action necessary to change the rights of holders of the stock and the
conditions governing the manner in which annual general meetings and
extraordinary meetings if shareholders are invoked, including the conditions of
admission, are described in the Company's Bye-laws.
The Company's Bye-laws contain certain restrictions with respect to the
registration of shares which are summarised below:
(i) The Board may decline to register the transfer of any share held through
the Verdipapirsentralen, or VPS, the computerised central share registry
maintained in Oslo, Norway, for bodies corporate whose shares are listed
for trading on the OSE, if the registration of such transfer would be
likely, in the opinion of the Board, to result in fifty per cent or more of
the aggregate issued share capital of the Company or shares of the Company
to which are attached fifty per cent or more of the votes attached to all
outstanding shares of the Company being held or owned directly or
indirectly, (including, without limitation, through the VPS) by a person or
persons resident for tax purposes in Norway (or such other jurisdiction as
the Board may nominate from time to time).
(ii) If fifty per cent or more of the aggregate issued share capital of the
Company or shares to which are attached fifty per cent or more of the votes
attached to all outstanding shares of the Company are found to be held or
owned directly or indirectly (including, without limitation, through the
VPS) by a person or persons resident for tax purposes in Norway (or such
other jurisdiction as the Board may nominate from time to time), other than
the Registrar in respect of those shares registered in its name in the
Register as nominee of persons whose interests in such shares are reflected
in the VPS, the Board shall make an announcement to such effect through the
OSE, and the Board and the Registrar shall thereafter be entitled and
required to dispose of such number of shares of the Company or interests
therein held or owned by such persons as will result in the percentage of
the aggregate issued share capital of the Company held or owned as
aforesaid being less than fifty per cent.
The Company has in place a Shareholders Rights Plan that would have the effect
of delaying, deferring, preventing a change in control of the Company. The
Shareholders Rights Plan has been filed as part of the Form 8-A filed with the
Securities and Exchange Commission on December 9, 1996, and is hereby
incorporated by reference into this Annual Report.
C. MATERIAL CONTRACTS
None
D. EXCHANGE CONTROLS
The Company is classified by the Bermuda Monetary Authority as a non-resident of
Bermuda for exchange control purposes.
The transfer of Ordinary Shares between persons regarded as resident outside
Bermuda for exchange control purposes may be effected without specific consent
under the Exchange Control Act of 1972 and regulations thereunder and the
issuance of Ordinary Shares to persons regarded as resident outside Bermuda for
exchange control purposes may be effected without specific consent under the
Exchange Control Act of 1972 and regulations thereunder. Issues and transfers of
Ordinary Shares involving any person regarded as resident in Bermuda for
exchange control purposes require specific prior approval under the Exchange
Control Act of 1972.
The owners of Ordinary Shares who are ordinarily resident outside Bermuda are
not subject to any restrictions on their rights to hold or vote their shares.
Because the Company has been designated as a non-resident for Bermuda exchange
control purposes, there are no restrictions on its ability to transfer funds in
and out of Bermuda or to pay dividends to U.S. residents who are holders of
Ordinary Shares, other than in respect of local Bermuda currency.
As an "exempted company", the Company is exempt from Bermuda laws which restrict
the percentage of share capital that may be held by non-Bermudians.
E. TAXATION
Bermuda currently imposes no tax (including a tax in the nature of an income,
estate duty, inheritance, capital transfer or withholding tax) on profits,
income, capital gains or appreciations derived by, or dividends or other
distributions paid to U.S. Shareholders of Ordinary Shares. Bermuda has
undertaken not to impose any such Bermuda taxes on U.S. Shareholders of Ordinary
Shares prior to the year 2016 except in so far as such tax applies to persons
ordinarily resident in Bermuda.
There is no income tax treaty between the United States and Bermuda pertaining
to the taxation of income except in the case of insurance enterprises. There
also is no estate tax treaty between the United States and Bermuda.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable
G. STATEMENT BY EXPERTS
Not Applicable
H. DOCUMENTS ON DISPLAY
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements the
Company files reports and other information with the Securities and Exchange
Commission. These materials, including this annual report and the accompanying
exhibits, may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549. You may obtain information on the operation of the public reference
room by calling 1 (800) SEC-0330, and you may obtain copies at prescribed rates
from the Public Reference Section of the Commission at its principal office in
Washington, D.C. 20549. The SEC maintains a website (http://www.sec.gov.) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. In addition,
documents referred to in this annual report may be inspected at the Company's
headquarters at Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, Bermuda.
I. SUBSIDIARY INFORMATION
Not Applicable
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including interest rates, spot
market rates for vessels and foreign currency fluctuations. The Company uses
interest rate swaps to manage interest rate risk. The Company has entered into
forward freight agreements and futures for trading purposes in order to manage
its exposure to the risk of movements in the spot market for certain trade
routes and, to some extent, for speculative purposes. The Company has not
entered into any other derivative instruments for speculative purposes.
The exposure to interest rate risk relates primarily to its debt and related
interest rate swaps. The majority of this exposure is the floating rate debt,
which totalled $1,424.9 million at December 31, 2002 (2001: $1,348.6 million).
The Company has entered into interest rate swap agreements to manage its
exposure with interest rates by locking in fixed interest rates from floating
rates. At December 31, 2002, there were eight swaps with a total notional
principal of $352.7 million (2001 - eight swaps with notional principal of
$362.8 million). The swap agreements have various maturity dates from February
2003 to August 2008, and the Company would have an expense of $4.1 million if it
were to terminate the agreements as of December 31, 2002 (2001 - expense of $4.9
million). The maximum exposure to the interest rate fluctuations is $1,072.2
million at December 31, 2002 (2001: $985.8 million). A one per cent change in
interest rates would increase (decrease) the interest expense by $10.7 million
per year as of December 31, 2002 (2001: $9.8 million).
The fair market value of the fixed rate debt on the balance sheet was $13.3
million as of December 31, 2002 (2001: $33.5 million). If the interest rate was
to increase (decrease) by one per cent with all other variables remaining
constant, the market value of the fixed rate debt would decrease (increase) by
approximately $0.1million (2001: $0.6 million).
In September 2001 the Company established a facility for a Stock Indexed Total
Return Swap Programme or Equity Swap Line with BNS, whereby the latter acquires
shares in the Company and the Company carries the risk of fluctuations in the
share price of those acquired shares. BNS is compensated at their cost of
funding plus a margin. At December 31, 2002 BNS had acquired a total of
2,695,000 shares under the Programme. A ten per cent change in the Company's
share price would increase (decrease) the other financial items expense by $2.4
million as of December 31, 2002 (2001: $2.5 million).
Market risk in relation to forward freight agreements and futures exists to the
extent that spot market fluctuations have a negative effect on the Company's
cash flows and consolidated statements of operations. As at December 31, 2002,
the notional principal amounts subject to such forward freight contracts and
futures contracts was $31.3 million. A ten per cent change in the market rate
would increase (decrease) other financial items expense by $3.4 million as of
December 31, 2002.
The majority of the Company's transactions, assets and liabilities are
denominated in U.S. dollars, the functional currency of the Company. Certain of
the Company's subsidiaries report in Sterling, Swedish kronor or Norwegian
kroner and risks of two kinds arise as a result: a transaction risk, that is,
the risk that currency fluctuations will have a negative effect on the value of
the Company's cash flows; and a translation risk, which is the impact of adverse
currency fluctuations in the translation of foreign operations and foreign
assets and liabilities into U.S. dollars for the Company's consolidated
financial statements. Certain of the Company's subsidiaries, and associated
companies in which the Company has investments, have Yen denominated long-term
debt and charter contracts denominated in Yen. There is a risk that currency
fluctuations will have a negative effect on the value of the Company's
cashflows. At December 31, 2002, the Company had Yen denominated long-term debt,
including capital leases, of (Y)13.1 billion and its share of Yen denominated
long-term debt in associate companies was (Y)7.2 billion (2001 - (Y)25.7 billion
and (Y)9.8 billion, respectively). The Company has not entered into forward
contracts for either transaction or translation risk, which may have an adverse
effect on the Company's financial condition and results of operations.
ITEM 12. DESCRIPTION OF SECURITIES
Not Applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
On December 6, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Plan"). The Company adopted the Plan to protect shareholders
against unsolicited attempts to acquire control of the Company that do not offer
an adequate price to all shareholders or are otherwise not in the best interests
of the Company and its shareholders. Under the Plan, each shareholder of record
on December 20, 1996 received one right for each Ordinary Share held, and each
registered holder of outstanding warrants received one right for each Ordinary
Share for which they are entitled to subscribe. In addition, in connection with
the Amalgamation, the Company issued in the aggregate 47,212,536 rights to
Frontline's shareholders (44,612,536 of which were attached to the Ordinary
Shares issued and 2,600,000 of which were attached to the Ordinary Shares
underlying the New Warrants issued). The rights generally may not detach from
the related Ordinary Shares. Each right entitles the holder to purchase from the
Company one-quarter of an Ordinary Share at an initial purchase price of $1.50.
The rights will become exercisable and will detach from the Ordinary Shares a
specified period of time after any person has become the beneficial owner of 20
per cent or more of the Company's Ordinary Shares. The Plan was amended as of
October 29, 1997 to provide that Frontline's purchase of Ordinary Shares
pursuant to its tender offer in connection with its acquisition of LOF would not
result in the rights becoming exercisable.
If any person becomes the beneficial owner of 20 per cent or more of the
Company's Ordinary Shares, each right will entitle the holder, other than the
acquiring person, to purchase for the purchase price, that number of Ordinary
Shares having a market value of eight times the purchase price.
If, following an acquisition of 20 per cent or more of the Company's Ordinary
Shares, the Company is involved in certain amalgamations or other business
combinations or sells or transfers more than 50% of its assets or earning power,
each right will entitle the holder to purchase for the purchase price ordinary
shares of the other party to the transaction having a market value of up to
eight times the purchase price.
The Company may redeem the rights at a price of $0.001 per right at any time
prior to a specified period of time after a person has become the beneficial
owner of 20 per cent or more of its Ordinary Shares. The rights will expire on
December 31, 2006, unless earlier exchanged or redeemed.
In connection with the Company's one-for-ten reverse stock split in October
1998, the rights were adjusted pursuant to the Plan, so that there are currently
ten rights attached to each outstanding Ordinary Share.
ITEM 15. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the principal executive officers and
principal financial officers concluded that the Company's disclosure
controls and procedures are effective in alerting them timely to material
information relating to the Company required to be included in the
Company's periodic SEC filings.
(b) 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 our most recent evaluation of internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
ITEM 16. RESERVED
PART III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
The following financial statements listed below and set forth on pages F-1
through F-35 are filed as part of this annual report:
Financial Statements for Frontline Ltd.
Index to Consolidated Financial Statements F-1
Report of Independent Auditors F-2
Report of Independent Accountants F-3
Report of Independent Accountants F-4
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 F-5
Consolidated Balance Sheets as of
December 31, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-7
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2002, 2001 and 2000 F-8
Notes to Consolidated Financial Statements F-9
Report of Independent Auditors
To the Board of Directors
and Stockholders of Frontline Ltd.
In our opinion, based on our audit and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of operations, cash flows and changes in stockholders' equity present fairly, in
all material respects, the financial position of Frontline Ltd. and its
subsidiaries at December 31, 2002 and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We did not
audit the financial statements of Golden Ocean Group Limited, a wholly-owned
subsidiary, which statements reflect total assets of $87.9 million at December
31, 2002 and total revenues of approximately $22.3, million for the year ended
December 31, 2002. The financial statements of Golden Ocean Group Limited were
audited by other auditors whose report thereon has been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for
Golden Ocean Group Limited, is based solely on the report of the other auditors.
We conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
As discussed in Note 2 to the financial statements the company adopted
Statement of Financial Accounting Standard No. 142 on January 1, 2002. As
discussed in Note 27 to the financial statements, the Company adopted
Statement of Financial Accounting Standard No. 144 on January 1, 2002.
PricewaterhouseCoopers
Hamilton, Bermuda
June 24, 2003, except for Notes 3, 27 and 28 for which the date is July 14,
2003
Report of Independent Accountants
To the Board of Directors
and Stockholders of Frontline Ltd.
In our opinion, based on our audits and the reports of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, cash flows and changes in stockholders' equity present fairly, in
all material respects, the financial position of Frontline Ltd. and its
subsidiaries at December 31, 2001 and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Golden Ocean Group Limited, a wholly-owned subsidiary, which statements reflect
total assets of approximately $283.9 and $535.1 million at December 31, 2001 and
2000 and total revenues of approximately $82.1 and $23.1 million for the period
ended December 31, 2001 and for the period from October 10, 2000 (date of
acquisition) to December 31, 2000. The financial statements of Golden Ocean
Group Limited were audited by other auditors whose report thereon have been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Golden Ocean Group Limited, is based solely on the report
of the other auditors. The report of the auditors of Golden Ocean Group Limited
includes an explanatory paragraph regarding substantial doubt about Golden Ocean
Group Limited's ability to continue as a going concern. We conducted our audits
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for drydocking costs in 2001.
PricewaterhouseCoopers DA
Oslo, Norway
June 28, 2002, except for Note 27 for which the date is July 14, 2003
Golden Ocean Group Limited
Report of Independent Accountants
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF GOLDEN OCEAN GROUP LIMITED
We have audited the accompanying consolidated balance sheets of Golden Ocean
Group Limited and subsidiaries as of December 31, 2002 and 2001 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 2002 and 2001 and the period from October
10, 2000 to December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Golden
Ocean Group Limited and subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2002 and 2001 and the period from October 10, 2000 to
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in note 20 to the financial statements, the Company ceased accruing
drydock costs with effect from January 1, 2001
Moore Stephens
Chartered Accountants
London, England
February 19, 2003
Frontline Ltd.
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000
(in thousands of $, except per share data)
2002 2001 2000
(restated) (restated)
Operating revenues
Time charter revenues 30,385 44,655 27,047
Bareboat charter revenues 31,924 32,016 8,753
Voyage charter revenues 489,286 639,807 656,917
Voyage expenses and commission (135,074) (88,292) (97,316)
---------------------------------------------------------------------------------------------------
Net operating revenues 416,521 628,186 595,401
---------------------------------------------------------------------------------------------------
Gain (loss) on sale of assets (1,228) 35,620 1,160
Operating expenses
Ship operating expenses 109,286 116,291 86,848
Charterhire expenses 60,634 41,858 34,351
Administrative expenses 12,806 13,012 9,326
---------------------------------------------------------------------------------------------------
Total operating expenses 182,726 171,161 130,525
---------------------------------------------------------------------------------------------------
Net operating income before depreciation and amortisation 232,567 492,645 466,036
---------------------------------------------------------------------------------------------------
Depreciation and amortisation 136,891 117,225 91,767
---------------------------------------------------------------------------------------------------
Net operating income after depreciation and amortisation 95,676 375,420 374,269
---------------------------------------------------------------------------------------------------
Other income (expenses)
Interest income 13,042 12,951 6,857
Interest expense (71,311) (89,952) (95,631)
Share in results from associated companies (10,711) 22,317 12,817
Foreign currency exchange gain (loss) (10,932) 15,524 7,887
Other financial items, net (8,614) (5,709) (248)
---------------------------------------------------------------------------------------------------
Net other expenses (88,526) (44,869) (68,318)
---------------------------------------------------------------------------------------------------
Net income from continuing operations before income taxes 7,150 330,551 305,951
Income taxes (22) 444 41
---------------------------------------------------------------------------------------------------
Net income from continuing operations before cumulative 7,172 330,107 305,910
effect of change in accounting principle
---------------------------------------------------------------------------------------------------
Discontinued operations (1,929) 21,076 7,957
---------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle (14,142) 31,545 --
---------------------------------------------------------------------------------------------------
Net (loss) income (8,899) 382,728 313,867
===================================================================================================
Earnings (loss) per share:
Basic earnings per share from continuing operations before $0.09 $4.30 $4.17
cumulative effect of change in accounting principle
Diluted earnings per share from continuing operations before $0.09 $4.29 $4.16
cumulative effect of change in accounting principle
Basic earnings per share before cumulative effect of change $0.07 $4.57 $4.28
in accounting principle
Diluted earnings per share before cumulative effect of $0.07 $4.56 $4.27
change in accounting principle
Basic earnings per share $(0.12) $4.99 $4.28
Diluted earnings per share $(0.12) $4.98 $4.27
===================================================================================================
See accompanying Notes that are an integral part of these Consolidated Financial
Statements
Frontline Ltd.
Consolidated Balance Sheets as of December 31, 2002 and 2001
(in thousands of $)
2002 2001
ASSETS
Current Assets
Cash and cash equivalents 92,078 178,176
Restricted cash 8,220 11,101
Marketable securities 42 1,159
Trade accounts receivable 37,091 55,157
Other receivables 10,898 4,920
Inventories 28,723 11,310
Voyages in progress 49,221 8,293
Prepaid expenses and accrued income 6,342 3,391
Derivative instruments receivable amounts 390 4,411
----------------------------------------------------------------------------------------
Total current assets 233,005 277,918
Newbuildings and vessel purchase options 27,405 102,781
Vessels and equipment, net 2,373,239 2,196,959
Vessels and equipment under capital lease, net 264,902 317,208
Investment in associated companies 119,329 109,898
Deferred charges 5,659 5,061
Other long-term assets 11,204 9,900
Goodwill -- 14,049
----------------------------------------------------------------------------------------
Total assets 3,034,743 3,033,774
========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of long-term debt 167,807 227,597
Current portion of obligations under capital leases 13,164 17,127
Trade accounts payable 7,717 6,994
Accrued expenses 40,324 35,543
Deferred charter revenue 1,067 1,567
Mark to market valuation of derivatives 17,442 14,723
Other current liabilities 12,300 11,505
----------------------------------------------------------------------------------------
Total current liabilities 259,821 315,056
Long-term liabilities
Long-term debt 1,277,665 1,164,354
Obligations under capital leases 259,527 283,663
Other long-term liabilities 10,757 11,478
----------------------------------------------------------------------------------------
Total liabilities 1,807,770 1,774,551
Commitments and contingencies
Minority interest -- 6,822
Stockholders' equity
Share capital 191,166 191,019
Additional paid in capital 552,241 552,166
Accumulated other comprehensive loss (9,498) (11,864)
Retained earnings 493,064 521,080
----------------------------------------------------------------------------------------
Total stockholders' equity 1,226,973 1,252,401
----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 3,034,743 3,033,774
========================================================================================
See accompanying Notes that are an integral part of these Consolidated Financial
Statements
Frontline Ltd.
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
(in thousands of $)
2002 2001 2000
Operating activities
Net income (loss) (8,899) 382,728 313,867
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortisation 139,855 121,725 92,880
Amortisation of deferred charges 2,299 2,233 1,005
(Gain) loss from sale of assets 4,337 (35,620) (1,160)
Share in results from associated companies 10,711 (22,321) (12,817)
Unrealised foreign exchange gain 14,176 (29,148) (14,794)
Change in accounting principle 14,142 (32,339) --
Adjustment of derivatives to market value 7,495 5,404 --
Other, net 1,968 (2,297) (1,552)
Changes in operating assets and liabilities, net of effect
of acquisitions:
Trade accounts receivable 18,066 40,612 (80,758)
Other receivables (6,118) 25,921 (19,489)
Inventories (17,413) (120) 3,560
Voyages in progress (40,928) 13,966 (7,847)
Prepaid expenses and accrued income (2,951) 4,979 (1,903)
Trade accounts payable 723 1,290 (7,866)
Accrued expenses 4,781 (5,234) 2,972
Deferred charter revenue (500) (1,010) (2,019)
Provisions for drydocking -- -- 6,858
Other, net 281 6,838 645
-----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 142,025 477,607 271,582
-----------------------------------------------------------------------------------------------------
Investing activities
Maturity (placement) of restricted cash 2,881 1,479 (4,648)
Additions to newbuildings, vessels and equipment (376,844) (386,130) (435,980)
Proceeds from sale of vessels and equipment 177,902 400,111 1,315
Acquisition of businesses (net of cash acquired) -- (64,656) (41,912)
Investment in associated companies (21,790) (60,003) (3,993)
Investment in marketable securities -- -- (983)
Investment in debt -- -- (38,553)
Dividends received from associated companies 1,780 2,314 2,346
Purchase of minority interest (6,822) -- (12,020)
Proceeds from sales of other assets -- 3,103 25,490
-----------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (222,893) (103,782) (508,938)
-----------------------------------------------------------------------------------------------------
Financing activities
Proceeds from long-term debt 383,828 324,890 384,690
Repayments of long-term debt and debentures (341,959) (460,725) (209,711)
Payment of obligations under capital leases (24,671) (10,337) (1,990)
Debt fees paid (3,534) (1,459) (2,161)
Cash dividends paid (19,117) (115,206) --
Repurchase of shares and warrants -- (44,814) --
Proceeds from issuance of equity 223 8,488 104,575
-----------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (5,230) (299,163) 275,403
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (86,098) 74,662 38,047
Cash and cash equivalents at beginning of year 178,176 103,514 65,467
Cash and cash equivalents at end of year 92,078 178,176 103,514
=====================================================================================================
Supplemental disclosure of cash flow information:
Interest paid, net of capitalised interest 73,161 96,202 92,954
Income taxes paid 2,203 11 26
=====================================================================================================
See accompanying Notes that are an integral part of these Consolidated Financial
Statements
Frontline Ltd.
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000
(in thousands of $, except number of shares)
2002 2001 2000
NUMBER OF SHARES OUTSTANDING
Balance at beginning of year 76,407,566 78,068,811 60,961,860
Shares issued 59,000 546,055 19,256,967
Shares bought back -- (2,207,300) (2,150,016)
------------------------------------------------------------------------------------------------
Balance at end of year 76,466,566 76,407,566 78,068,811
------------------------------------------------------------------------------------------------
SHARE CAPITAL
Balance at beginning of year 191,019 195,172 152,405
Shares issued 147 1,365 48,142
Shares bought back -- (5,518) (5,375)
------------------------------------------------------------------------------------------------
Balance at end of year 191,166 191,019 195,172
------------------------------------------------------------------------------------------------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of year 552,166 576,677 462,474
Shares issued 75 7,123 134,005
Shares bought back and warrants exercised or expired -- (31,634) (19,802)
------------------------------------------------------------------------------------------------
Balance at end of year 552,241 552,166 576,677
------------------------------------------------------------------------------------------------
WARRANTS AND OPTIONS
Balance at beginning of year -- 7,662 9,333
Options and warrants exercised or expired -- (7,662) (1,671)
------------------------------------------------------------------------------------------------
Balance at end of year -- -- 7,662
------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year (11,864) (3,579) (6,603)
Other comprehensive income (loss) 2,366 (8,285) 3,024
------------------------------------------------------------------------------------------------
Balance at end of year (9,498) (11,864) (3,579)
------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 521,080 253,558 (60,309)
Net income (loss) (8,899) 382,728 313,867
Dividends paid (19,117) (115,206) --
------------------------------------------------------------------------------------------------
Balance at end of year 493,064 521,080 253,558
------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,226,973 1,252,401 1,029,490
------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)
Net income (loss) (8,899) 382,728 313,867
Unrealised holding gains (losses) 1,553 (8,255) 3,138
Foreign currency translation and other 813 (30) (114)
------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 2,366 (8,285) 3,024
------------------------------------------------------------------------------------------------
Comprehensive income (loss) (6,533) 374,443 316,891
------------------------------------------------------------------------------------------------
See accompanying Notes that are an integral part of these Consolidated Financial
Statements
1. GENERAL
Frontline Ltd. (the "Company" or "Frontline") is a Bermuda based shipping
company engaged primarily in the ownership and operation of oil tankers,
including oil/bulk/ore ("OBO") carriers. The Company operates tankers of
two sizes: very large crude carriers ("VLCCs") which are between 200,000
and 320,000 deadweight tons ("dwt"), and Suezmaxes, which are vessels
between 120,000 and 170,000 dwt. In addition, through a corporate
acquisition completed in October 2000, the Company acquired a fleet of dry
bulk carriers that included Capesize, Panamax and Handymax bulkers as well
as interests in 14 VLCCs. The Company operates through subsidiaries and
partnerships located in Bermuda, Isle of Man, Liberia, Norway, Panama,
Singapore and Sweden. The Company is also involved in the charter, purchase
and sale of vessels.
The Company has its origin in Frontline AB, which was founded in 1985, and
which was listed on the Stockholm Stock Exchange from 1989 to 1997. In May
1997, a decision was made to redomicile Frontline AB from Sweden to Bermuda
and to list its shares on the Oslo Stock Exchange. The change of domicile
was executed through a share for share exchange offer from the then newly
formed Frontline Ltd. in Bermuda. Frontline Ltd. was incorporated under the
laws of Bermuda on April 29, 1997 for the purpose of succeeding to the
business of Frontline AB and, commencing in June 1997, the shares in
Frontline AB were exchanged for shares in Frontline. The ordinary shares of
Frontline were thereafter listed on the Oslo Stock Exchange and delisted
from the Stockholm Stock Exchange.
In September 1997, Frontline initiated an amalgamation (the "Amalgamation")
with London & Overseas Freighters Limited ("LOF"). This process was
completed in May 1998. In the business combination, which left LOF as the
surviving company, Frontline's shareholders exchanged Frontline shares for
LOF shares and LOF was subsequently renamed Frontline Ltd. As a result of
this transaction, Frontline became listed on the London Stock Exchange and
on the NASDAQ National Market in addition to its listing on the Oslo Stock
Exchange. LOF originally commenced operations in 1948 as a U.K. company
("LOF plc") and was listed on the London Stock Exchange in 1950. LOF was
incorporated under the laws of Bermuda on June 12, 1992 for the purpose of
succeeding to the business of LOF plc. On August 3, 2001 the Company
delisted its ADSs from the Nasdaq National Market and the ADR program was
terminated on October 5, 2001. The Company's ordinary shares were listed on
the New York Stock Exchange on August 6, 2001.
In December 1999, Frontline entered into an agreement with five other
shipowners, A.P. Moller, Euronav Luxembourg SA, Osprey Maritime Ltd.,
Overseas Shipholding Group Inc. and Reederei "Nord" Klaus E. Oldendorff to
establish a Marshall Islands corporation, Tankers International LLC
("Tankers"), to operate a pool of their respective VLCC fleets. Tankers
commenced operations on February 1, 2000 with an initial fleet of 39 modern
VLCCs. In July 2002, the Company withdrew from Tankers and only the VLCCs
in certain of the joint ventures to which the Company is a party, remain in
the pool.
Business combinations and Acquisitions
ICB Shipping AB (publ)
In September 1997, Frontline made a public offer to acquire all of the
shares of ICB Shipping AB (publ) ("ICB"). Through the tender offer, by
October 1997 Frontline acquired 51.7 per cent of the outstanding shares of
ICB at a purchase price of approximately $215 million. The shares purchased
provided Frontline with only 31.4 per cent of the ICB voting rights. On
January 8, 1998, Frontline withdrew its bid for the remaining outstanding
shares of ICB. During 1998, Frontline made further purchases of ICB Shares
in the market and at December 31, 1998 had 34.2 per cent of the voting
power. In the latter half of 1999 Frontline increased its shareholding in
ICB to approximately 90 per cent of the capital and 93 per cent of the
voting rights. In October 1999, a new Board of Directors was appointed in
ICB and ICB consequently was controlled by Frontline. In December 1999,
Frontline commenced a compulsory acquisition for the remaining shares in
ICB and ICB was delisted from the Stockholm Stock Exchange.
Golden Ocean Group Limited
In October 2000, Frontline took control of Golden Ocean Group Limited
("Golden Ocean"), a shipping group which held interests in 14 VLCCs and 10
bulk carriers. On the same date Golden Ocean emerged from bankruptcy
protection under Chapter 11 of the U.S. Bankruptcy Code.
In January 2000, Golden Ocean and its fellow subsidiaries, Golden Ocean
Tankers Limited and Channel Rose Holdings Inc. (together the "Debtors")
filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy
Code with the Clerk of the United States Bankruptcy Court for the District
of Delaware (the "Bankruptcy Court"). In July 2000, Frontline filed a
proposed plan of reorganisation (the "Plan of Reorganisation") and
disclosure statement (the "Disclosure Statement") with the Bankruptcy Court
which set forth the manner in which claims against and equity interests in
the Debtors would be treated. On August 4, 2000 the Bankruptcy Court
approved Frontline's Disclosure Statement and on August 14, 2000 approved
the appointment of Frontline as manager of Golden Ocean's operations with
immediate effect. The Plan of Reorganisation was approved by an
overwhelming majority of holders of claims entitled to vote and was
confirmed at a hearing on September 15, 2000.
On October 10, 2000 the Plan of Reorganisation became effective and
Frontline acquired the entire share capital of Golden Ocean. The total
acquisition price paid, including amounts paid to settle allowed claims,
was approximately $63.0 million, including 1,245,998 shares issued at a
price of $15.65 per share. The acquisition of Golden Ocean was accounted
for using the purchase method. (See Note 11 and Note 24). Eighteen
employees of Golden Ocean were made redundant as the result of the
acquisition by Frontline and severance costs of approximately $2.1 million
were incurred by Golden Ocean in the year ended December 31, 2000. These
costs were included in the determination of the reorganised balance sheet
and not in the determination of the purchase price.
Mosvold Shipping Limited
In April 2001, the Company announced an offer for all of the shares of
Mosvold Shipping Limited ("Mosvold"), a Bermuda company whose shares were
listed on the Oslo Stock Exchange. Through a combination of shares acquired
and acceptances of the offer, Frontline acquired 97 per cent of the shares
of Mosvold. The remaining 3 per cent of the shares of Mosvold were acquired
during 2001 through a compulsory acquisition. Through the purchase of
Mosvold the Company acquired two mid-70s built VLCCs and three newbuilding
contracts for VLCCs. The two mid-70s built VLCCs have subsequently been
sold by the Company. The first two of the newbuildings were delivered in
2002 and third is due for delivery in July 2003.
The total acquisition price paid for Mosvold was approximately $70.0
million and the acquisition has been accounted for using the purchase
method. (See Note 24). Thirty employees of Mosvold were made redundant as
the result of the acquisition by Frontline and severance costs of
approximately $0.3 million were incurred by Mosvold in the year ended
December 31, 2001. These severance costs are included in the statement of
operations and not in the determination of the purchase price of Mosvold.
2. ACCOUNTING POLICIES
Basis of accounting
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The
consolidated financial statements include the assets and liabilities of the
Company and its subsidiaries. Investments in companies in which the Company
directly or indirectly holds more than 50 per cent of the voting control
are consolidated, unless the Company is unable to control the investee. For
the year ended December 31, 2000, Golden Ocean has been consolidated with
effect from October 10, 2000. For the year ended December 31 2001, Mosvold
has been consolidated with effect from May 15, 2001. All intercompany
balances and transactions have been eliminated on consolidation.
Investments in companies in which the Company holds between 20 per cent and
50 per cent of an ownership interest, and over which the Company exercises
significant influence, are accounted for using the equity method. The
Company records its investments in equity-method investees on the
consolidated balance sheets as "Investment in associated companies" and its
share of the investees' earnings or losses in the consolidated statements
of operations as "Share in results from associated companies". The excess,
if any, of the purchase price over the book value basis of the Company's
investment in an equity method investee is included in the accompanying
consolidated balance sheets in "Investment in associated companies". Two
companies in which the Company owns 50.1 per cent have been accounted for
using the equity method as the Company is not able to exercise control.
The preparation of financial statements in accordance with generally
accepted accounting principles requires that management make estimates and
assumptions affecting the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain of the comparative figures have been reclassified to conform with
the presentation adopted in the current period.
Cash and cash equivalents
For the purposes of the consolidated statements of cash flows, all demand
and time deposits and highly liquid, low risk investments with original
maturities of three months or less are considered equivalent to cash.
Marketable Securities
Marketable equity securities held by the Company are considered to be
available-for-sale securities and as such are carried at fair value with
resulting unrealised gains and losses, net of deferred taxes if any,
recorded as a separate component of other comprehensive income in
stockholders' equity.
Inventories
Inventories, which comprise principally of fuel and lubricating oils, are
stated at the lower of cost and market value. Cost is determined on a
first-in, first-out basis.
Vessels and equipment
The cost of the vessels less estimated residual value is depreciated on a
straight-line basis over the vessels' estimated remaining economic useful
lives. The estimated economic useful life of the Company's double hull
vessels is 25 years and for single hull vessels is either 25 years or the
vessel's anniversary date in 2017, whichever comes first. Other equipment
is depreciated over its estimated remaining useful life, which approximates
five years.
With effect from April 2001, the International Maritime Organisation
implemented new regulations that result in the accelerated phase-out of
single hull vessels. As a result of this, the Company has re-evaluated the
estimated useful life of its single hull vessels and determined this to be
either 25 years or the vessel's anniversary date in 2017 whichever comes
first. As a result, the estimated useful lives of six of the Company's
vessels were reduced in the fourth quarter of 2001. A change in accounting
estimate was recognised to reflect this decision, resulting in an increase
in depreciation expense and consequently decreasing net income by $0.5
million and basic and diluted earnings per share by $0.01, for 2001.
Vessels and equipment under capital lease
The Company bareboat charters in certain vessels under agreements that are
classified as capital leases. Depreciation of vessels under capital lease
is included within depreciation and amortisation expense in the Statement
of Operations. Vessels under capital lease are depreciated on a
straight-line basis over the vessels' remaining economic useful lives,
based on a 25 year useful life, or on a straight-line basis over the term
of the lease. The method applied is determined by the criteria by which the
lease has been assessed to be a capital lease.
Newbuildings and vessel purchase options
The carrying value of the vessels under construction ("Newbuildings")
represents the accumulated costs to the balance sheet date which the
Company has had to pay by way of purchase instalments and other capital
expenditures together with capitalised loan interest and associated finance
costs. No charge for depreciation is made until the vessel is put into
operation.
Vessel purchase options are capitalised at the time option contracts are
acquired or entered into. The Company reviews expected future cash flows,
which would result from exercise of each option contract on a contract by
contract basis to determine whether the carrying value of the option is
recoverable. If the expected future cash flows are less than the carrying
value of the option plus further costs to delivery, provision is made to
write down the carrying value of the option to the recoverable amount. The
carrying value of each option payment is written off as and when the
Company adopts a formal plan not to exercise the option. Purchase price
payments are capitalised and the total of the option payment, if any, and
purchase price payment is transferred to cost of vessels, upon exercise of
the option and delivery of the vessel to the Company.
Impairment of long-lived assets
The carrying value of long-lived assets that are held and used by the
Company are reviewed whenever events or changes in circumstances indicate
that the carrying amount of an asset may no longer be appropriate. We
assess recoverability of the carrying value of the asset by estimating the
future net cash flows expected to result from the asset, including eventual
disposition. If the future net cash flows are less than the carrying value
of the asset, an impairment loss is recorded equal to the difference
between the asset's carrying value and fair value. In addition, long-lived
assets to be disposed of are reported at the lower of carrying amount and
fair value less estimated costs to sell.
Deferred charges
Loan costs, including debt arrangement fees, are capitalised and amortised
on a straight-line basis over the term of the relevant loan. The straight
line basis of amortisation approximates the effective interest method in
the Company's statement of operations. Amortisation of loan costs is
included in interest expense.
Revenue and expense recognition
Revenues and expenses are recognised on the accrual basis. Revenues are
generated from freight billings, time charter and bareboat charter hires.
The operating results of voyages in progress are estimated and recorded
pro-rata on a per day basis in the consolidated statements of operations.
Probable losses on voyages are provided for in full at the time such losses
can be estimated. Time charter and bareboat charter revenues are recorded
over the term of the charter as service is provided. Amounts receivable or
payable arising from profit sharing arrangements are accrued based on the
estimated results of the voyage recorded as at the reporting date.
The operating revenues and voyage expenses of the vessels operating in the
Tankers pool, and certain other pool arrangements, are pooled and net
operating revenues, calculated on a time charter equivalent basis, are
allocated to the pool participants according to an agreed formula. The same
revenue and expenses principles stated above are applied in determining the
pool net operating revenues.
Drydocking provisions
Normal vessel repair and maintenance costs are charged to expense when
incurred.
In 2001, the Company changed its accounting policy for drydockings. Prior
to 2001, provisions for future drydockings were accrued and charged to
expense on a pro-rata basis over the period to the next scheduled
drydockings. Effective January 1, 2001 the Company recognises the cost of a
drydocking at the time the drydocking takes place, that is it applies the
"expense as incurred" method. The expense as incurred method is considered
by management to be a more reliable method of recognising drydocking costs
as it eliminates the uncertainty associated with estimating the cost and
timing of future drydockings. The cumulative effect of this change in
accounting principle is shown separately in the consolidated statements of
operations for the year ended December 31, 2001 and resulted in a credit to
income of $31.5 million in 2001. The cumulative effect of this change as of
January 1, 2001 on the Company's consolidated balance sheet was to reduce
total liabilities by $32.3 million.
Assuming the "expense as incurred" method had been applied retroactively,
the pro forma income and earnings per share before cumulative effect of
change in accounting principle for 2000 would have been as follows:
---------------------------------------------------------------------------
(in thousands of $) 2000
---------------------------------------------------------------------------
Net income (loss) as previously reported 313,867
---------------------------------------------------------------------------
Pro forma effect of retroactive application of
change in accounting principle 6,281
---------------------------------------------------------------------------
Pro forma net income (loss) 320,148
---------------------------------------------------------------------------
Basic earnings per share as previously reported $4.28
Diluted earnings per share as previously reported $4.27
Pro forma effect of retroactive application of change
in accounting principle $0.09
Pro forma basic earnings per share $4.37
Pro forma diluted earnings per share $4.36
===========================================================================
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
assets acquired in business acquisitions accounted for under the purchase
method. Goodwill is presented net of accumulated amortisation and until
December 31, 2001 was being amortised over a period of approximately 17
years. As of January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142") and recorded an impairment charge
of $14.1 million for the unamortised goodwill on that date that is shown
separately in the consolidated statement of operations as a cumulative
effect of change in accounting principle. The valuation of the fair value
of the reporting unit used to assess the recoverability of goodwill, was a
combination of independent third party valuations and the quoted market
price of the Company's shares. Supplemental comparative disclosure as if
this accounting change had been retroactively applied is as follows:
---------------------------------------------------------------------------
(in thousands of $, except per share data) 2002 2001 2000
---------------------------------------------------------------------------
Net income (loss)
As reported (8,899) 382,728 313,867
Goodwill amortisation -- 764 1,090
Adjusted net income (loss) (8,899) 383,492 314,957
Basic earnings (loss) per share
As reported $(0.12) $4.99 $4.28
Goodwill amortisation $ -- $0.01 $0.01
Adjusted basic earnings (loss) per share $(0.12) $5.00 $4.29
Diluted earnings (loss) per share
As reported $(0.12) $4.98 $4.27
Goodwill amortisation $ -- $0.01 $0.01
Adjusted diluted earnings (loss) per share $(0.12) $4.99 $4.28
Derivatives
The Company enters into interest rate swap transactions from time to time
to hedge a portion of its exposure to floating interest rates. These
transactions involve the conversion of floating rates into fixed rates over
the life of the transactions without an exchange of underlying principal.
Hedge accounting is used to account for these swaps provided certain
hedging criteria are met. As of January 1, 2001, the Company adopted
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting
for Derivatives and Hedging Activities" ("SFAS 133"). Certain hedge
relationships met the hedge criteria prior to SFAS 133, but do not meet the
criteria for hedge accounting under SFAS 133. The Company adopted SFAS 133
in the first quarter of fiscal year 2001 and upon initial adoption recorded
certain transition adjustments resulting in recognising the fair value of
its derivatives as assets of $0.4 million and liabilities of $0.6 million.
A gain of $0.3 million was recognised in income and a charge of $0.5
million made to other comprehensive income. On January 1, 2002, the Company
discontinued hedge accounting for two interest rate swaps previously
counted for as cash flow hedges. This resulted in a balance of $4.1 million
being frozen in accumulated other comprehensive income as at that date and
this will be reclassified to the income statement over the life of the
underlying hedged instrument.
Pre-SFAS 133 Adoption
Hedge accounting is applied where the derivative reduces the risk of the
underlying hedged item and is designated at inception as a hedge with
respect to the hedged item. Additionally, the derivative must result in
payoffs that are expected to be inversely correlated to those of the hedged
item. Derivatives are measured for effectiveness both at inception and on
an ongoing basis. When hedge accounting is applied, the differential
between the derivative and the underlying hedged item is accrued as
interest rates change and recognized as an adjustment to interest expense.
The related amount receivable from or payable to counterparties is included
in accrued interest income or expense, respectively. Prior to January 1,
2001, the fair values of the interest rate swaps are not recognized in the
financial statements.
If a derivative ceases to meet the criteria for hedge accounting, any
subsequent gains and losses are currently recognized in income. If a
hedging instrument is sold or terminated prior to maturity, gains and
losses continue to be deferred until the hedged instrument is recognized in
income. Accordingly, should a swap be terminated while the underlying debt
remains outstanding, the gain or loss is adjusted to the basis of the
underlying debt and amortized over its remaining useful life.
Post-SFAS 133 Adoption
SFAS 133, as amended by SFAS 137 "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No.133"
and SFAS 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities an amendment of FASB Statement No. 133", requires an
entity to recognize all derivatives as either assets or liabilities on the
balance sheet and measure these instruments at fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and, if it is, the type of hedge
transaction. In order to qualify for hedge accounting under SFAS 133,
certain criteria and detailed documentation requirements must be met.
The Company has from time to time entered into forward freight contracts in
order to hedge exposure to the spot market for certain trade routes and in
some cases, for speculative purposes. These transactions involve entering
into a contract to provide a theoretical voyage at an agreed rate. The fair
values of the forward freight contracts are recognised as assets or
liabilities with the change in fair values recognised in the consolidated
statements of operations.
The Company has established a facility for a Stock Indexed Total Return
Swap Programme or Equity Swap Line (See Note 20) whereby the conterparty
acquires shares in the Company, and the Company carries the risk of
fluctuations in the share price of those acquired shares. The fair value of
the Equity Swap is recognised as an asset or liability with the change in
fair values recognised in the consolidated statements of operations.
Other than the forward freight contracts discussed above, the Company has
not entered into any derivative contracts for speculative or trading
purposes.
Financial Instruments
In determining fair value of its financial instruments, the company uses a
variety of methods and assumptions that are based on market conditions and
risks existing at each balance sheet date. For the majority of financial
instruments including most derivatives and long-term debt, standard market
conventions and techniques such as options pricing models are used to
determine fair value. All methods of assessing fair value result in a
general approximation of value, and such value may never actually be
realised.
Foreign currencies
The Company's functional currency is the U.S. dollar as the majority of
revenues are received in U.S. dollars and a majority of the Company's
expenditures are made in U.S. dollars. The Company's reporting currency is
U.S. dollars. Most of the Company's subsidiaries report in U.S. dollars.
For subsidiaries that maintain their accounts in currencies other than U.S.
dollars, the Company uses the current method of translation whereby the
statements of operations are translated using the average exchange rate and
the assets and liabilities are translated using the year end exchange rate.
Foreign currency translation gains or losses are recorded as a separate
component of other comprehensive income in stockholders' equity.
Transactions in foreign currencies during the year are translated into U.S.
dollars at the rates of exchange in effect at the date of the transaction.
Foreign currency monetary assets and liabilities are translated using rates
of exchange at the balance sheet date. Foreign currency non-monetary assets
and liabilities are translated using historical rates of exchange. Foreign
currency transaction gains or losses are included in the consolidated
statements of operations.
Stock-based compensation
In accordance with Accounting Principles Board Opinion No. 25 ("APB 25")
"Accounting for Stock Issued to Employees" the compensation cost for stock
options is recognised as an expense over the service period based on the
excess, if any, of the quoted market price of the stock at the grant date
of the award or other measurement date, over the exercise price to be paid
to acquire the stock.
In 2002 and 2001, the Company has recorded compensation expense of $0.5
million and $1.2 million, respectively in connection with share options
issued in 2002 and prior years. The Company had previously recorded no
compensation expense for the issuance of share options in 2000. Had the
compensation costs for these plans been determined consistent with the fair
value method recommended in SFAS 123, the Company's net income and earnings
per share would have been reduced to the following pro forma amounts in
2002, 2001 and 2000:
--------------------------------------------------------------------------
(in thousands, except per share data) 2002 2001 2000
--------------------------------------------------------------------------
Net income (loss)
As reported (8,899) 382,728 313,867
Add: Compensation expenses as reported 481 1,184 --
Compensation expense determined under (1,711) (1,314) (49)
fair value based method for all awards
Adjusted net income (loss), fair value (10,129) 382,598 313,818
based method for all awards
Basic earnings (loss) per share
As reported $(0.12) $4.99 $4.28
SFAS 123 adjusted $(0.13) $4.99 $4.28
Diluted earnings (loss) per share
As reported $(0.12) $4.98 $4.27
SFAS 123 adjusted $(0.13) $4.98 $4.27
Earnings per share
Basic EPS is computed based on the income (loss) available to common
stockholders and the weighted average number of shares outstanding for
basic EPS. Diluted EPS includes the effect of the assumed conversion of
potentially dilutive instruments (see Note 6).
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the FASB approved SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS No. 143 requires the fair value
of a legal liability related to an asset retirement be recognized in the
period in which it is incurred. The associated asset retirement costs must
be capitalized as part of the carrying amount of the related long-lived
asset and subsequently amortized to expense. Subsequent changes in the
liability will result from the passage of time (interest cost) and revision
to cash flow estimates. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002, effective January 1,
2003 for the Company. Management does not expect that the adoption of SFAS
No. 143 will have a material effect on the Company's results of operations
or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies
Emerging Issues Task Force Issue No. 94-3 and requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. This statement also establishes that fair value is
the objective for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December
31, 2002. Management does not expect that the adoption of SFAS No. 146 will
have a material effect on the Company's results of operations or financial
position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure an amendment of FASB Statement No.
123". This Statement amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for
an entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. This Statement also
amends the disclosure provisions of FASB Statement No. 123 to require
prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. This Statement also amends APB Opinion No. 28, "Interim
Financial Reporting", to require disclosure about those effects in interim
financial statements. This statement is effective for fiscal years ending
after December 15, 2002 and interim periods beginning after December 15,
2002. The Company does not expect the adoption of SFAS No. 148 to have a
material effect on the Company's results of operations or financial
position.
In November 2002, the FASB issued Interpretation 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others. The Interpretation elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees such
as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the
fair value, or market value, of the obligations it assumes under the
guarantee and must disclose that information in its interim and annual
financial statements. The provisions related to recognizing a liability at
inception of the guarantee for the fair value of the guarantor's
obligations does not apply to product warranties or to guarantees accounted
for as derivatives. The initial recognition and initial measurement
provisions apply on a prospective basis to guarantees issued or modified
after December 31, 2002. The Company's disclosure of guarantees is included
in Note 25 of the Notes to Financial Statements. The Company is currently
evaluating the impact of Interpretation 45 on the Company's results of
operations and financial position.
In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities. In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity investors with
voting rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities.
Interpretation 46 requires a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of loss
from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements of Interpretation 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements
apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The
Company has a number of arrangements which may be variable interest
entities under the provisions of FIN 46. The company has entered into
agreements to lease certain vessels. These five VLCCs are held by special
purpose entities, which were established and are owned by independent
third parties who provide financing through debt and equity
participation. These leases are accounted for as operating leases, and
the lease payments are charged to operating income. Under current
accounting principles generally accepted in the United States, the assets
and the related obligations are excluded from the consolidated balance
sheet, and the special purpose entities are not consolidated. At December
31, 2002, the original cost to the lessor of the assets under such
arrangements was approximately $360 million. Certain of these leases
contain residual value guarantees that give the third party owners the
option to put the vessel to the company. The price of these put options
are significantly lower than the expected market value of the vessels on
the exercise date however under FIN 46, certain conditions exist which
may indicate these entities are variable interest entities. At December
31, 2002, the company's residual value guarantees associated with these
leases, which represent the maximum exposure to loss, are $56.8 million.
The Company has both an obligation and an option to purchase the VLCC
Oscilla on expiry of a five-year time charter, which commenced in March
2000. Oscilla is owned and operated by an unrelated entity. If the
Company has exercised its option at December 31, 2002, the cost to the
Company of the Oscilla would have been approximately $57 million and the
maximum exposure to loss is $18.6 million. On July 1, 2003, the Company's
subsidiary Golden Ocean Group Limited, purchased a call option to acquire
all of the shares of Independent Tankers Corporation ("ITC") from Hemen
Holding Ltd, a related party, for a total consideration of $4.0 million
plus 4 per cent interest per year. ITC operates a total of six VLCCs and
four Suezmax tankers, which are on long-term charters to BP and Chevron.
Golden Ocean paid $10.0 million for the option, which expires on July 1,
2010. The total book value of ITC's consolidated assets at December 31,
2002 was approximately $960 million and the Company's maximum exposure to
loss is $10 million. The Company is in the process of making the
determination as to whether the aforementioned arrangements are variable
interest entities.
4. SEGMENT INFORMATION
The Company has two reportable segments: tankers, including oil bulk ore
carriers, and dry bulk carriers. Prior to the acquisition of Golden Ocean
in 2000, the Company had one reportable segment. Segment results are
evaluated based on income from vessel operations before general and
administrative expenses. The accounting policies used in the reportable
segments are the same as those followed in the preparation of the Company's
consolidated financial statements.
Information about the Company's reportable segments as of and for each of
the years ended December 31, 2002, 2001 and 2000 follows:
(in thousands of $ ) Dry Bulk
Tankers Carriers Total
2002
Net operating revenues 405,668 10,597 416,265
Ship operating expenses 106,255 3,031 109,286
Depreciation and amortisation 133,486 3,331 136,817
Share in results from associated companies 9,855 856 10,711
Discontinued operations -- 1,929 1,929
Vessels and equipment, net 2,300,875 71,065 2,371,940
Vessels under capital lease 264,902 -- 264,902
Investment in associated companies 119,328 -- 119,328
Total assets 2,852,029 73,975 2,926,004
Expenditure for vessels 376,844 -- 376,844
(in thousands of $ ) Dry Bulk
Tankers Carriers Total
2001
Net operating revenues 614,961 13,225 628,186
Ship operating expenses 113,812 2,477 116,289
Depreciation and amortisation 112,200 3,331 115,5311
Share in results from associated companies 17,494 3,519 21,013
Discontinued operations -- 21,074 21,074
Vessels and equipment, net 2,121,356 74,396 2,195,752
Vessels under capital lease 213,320 103,887 317,207
Investment in associated companies 102,683 4,459 107,142
Total assets 2,776,814 185,751 2,962,565
Expenditure for vessels 396,841 -- 396,841
(in thousands of $ ) Dry Bulk
Tankers Carriers Total
2000
Net operating revenues 591,805 3,522 595,327
Ship operating expenses 85,868 522 83,390
Depreciation and amortisation 90,297 839 91,136
Share in results from associated companies 11,273 1,544 12,817
Discontinued operations -- 7,956 7,956
Vessels and equipment, net 2,176,303 77,727 2,254,030
Vessels under capital lease -- 108,387 108,387
Investment in associated companies 26,420 941 27,361
Total assets 2,451,589 192,808 2,644,397
Expenditure for vessels 468,575 -- 468,575
Reconciliations of reportable segments information to the Company's
consolidated totals follows:
(in thousands of $) 2002 2001 2000
Net operating revenues
Total net operating revenues for reportable segments 416,265 628,186 595,327
Other net operating revenues 256 -- 74
Total consolidated net operating revenues 416,521 628,186 595,401
Assets
Total assets for reportable segments 2,926,004 2,962,565 2,644,397
Assets not attributed to segments 108,739 71,209 136,591
Total consolidated assets 3,034,743 3,033,774 2,780,988
================================================================================
5. TAXATION
Bermuda
Under current Bermuda law, the Company is not required to pay taxes in
Bermuda on either income or capital gains. The Company has received written
assurance from the Minister of Finance in Bermuda that, in the event of any
such taxes being imposed, the Company will be exempted from taxation until
the year 2016.
United States
The Company does not accrue U.S. income taxes as, in the opinion of U.S.
counsel, the Company is not engaged in a U.S. trade or business and is
exempted from a gross basis tax under Section 883 of the U.S. Internal
Revenue Code.
A reconciliation between the income tax expense resulting from applying the
U.S. Federal statutory income tax rate and the reported income tax expense
has not been presented herein as it would not provide additional useful
information to users of the financial statements as the Company's net
income is subject to neither Bermuda nor U.S. tax.
Other Jurisdictions
Certain of the Company's subsidiaries in other jurisdictions including
Norway, Singapore, Sweden and the United Kingdom are subject to taxation in
their respective jurisdictions. The tax paid by subsidiaries of the Company
which are subject to taxation is not material.
The tax charge for the year comprises:
(in thousands of $) 2002 2001 2000
Current tax (22) 444 41
Deferred tax -- -- --
---------------------------------------------------------------------------
(22) 444 41
===========================================================================
Temporary differences and carryforwards which give rise to deferred tax
assets, liabilities and related valuation allowances are as follows:
(in thousands of $) 2002 2001
Deferred tax asset - non current 156 116
Pension liabilities -- --
Tax loss carryforwards 5,828 11,207
Valuation allowance (5,672) (11,091)
--------------------------------------------------------------------------
Net deferred tax asset (liability) -- --
==========================================================================
As of December 31, 2002, 2001 and 2000, the Company had $20,815,000,
$39,610,000 and $68,875,000 of net operating loss carryforwards,
respectively. In 2002 and 2001, the tax loss carryforwards have been
utilised to offset taxable income in Sweden. The loss carryforward can be
utilised only against future taxable income for the respective subsidiary.
Frontline AB accounts for a total of $19,385,000 as at December 31, 2002
and ICB Shipping AB accounts for a total of $1,212,000 as of December 31,
2002. These net operating losses do not have an expiration date. The
Company's deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realised in the future.
6. EARNINGS PER SHARE
The computation of basic EPS is based on the weighted average number of
shares outstanding during the year. The computation of diluted EPS assumes
the foregoing and the exercise of stock options and warrants using the
treasury stock method (see Note 21).
The components of the numerator for the calculation of basic EPS and
diluted EPS for net income from continuing operations and net income are as
follows:
(in thousands of $) 2002 2001 2000
Net income from continuing operations after tax before 7,172 330,107 305,910
cumulative effect of change in accounting principle
Discontinued operations (1,929) 21,076 7,957
Cumulative effect of change in accounting principle (14,142) 31,545 --
--------------------------------------------------------------------------------------------
Net income (loss) available to stockholders (8,899) 382,728 313,867
============================================================================================
The components of the denominator for the calculation of basic EPS and
diluted EPS are as follows:
(in thousands ) 2002 2001 2000
Basic earnings per share:
Weighted average number of ordinary shares outstanding 76,456 76,714 73,391
============================================================================================
Diluted earnings per share:
Weighted average number of ordinary shares outstanding 76,456 76,714 73,391
Warrants and stock options 52 181 173
--------------------------------------------------------------------------------------------
76,508 76,895 73,564
============================================================================================
Basic EPS and diluted EPS for discontinued operations and basic EPS for
the cumulative effect of change in accounting principle are as follows:
Basic and diluted earnings per share for
discontinued operations $(0.02) $0.27 $0.11
Basic earnings per share for cumulative effect
of change in accounting principle $(0.19) $0.42 $ -
7. LEASES
Rental expense
Charter hire payments to third parties for certain contracted-in vessels
are accounted for as operating leases. The Company is also committed to
make rental payments under operating leases for office premises. The future
minimum rental payments under the Company's non-cancellable operating
leases, are as follows:
---------------------------------------------------------------------------
Year ending December 31,
(in thousands of $)
---------------------------------------------------------------------------
2003 66,639
2004 36,400
2005 36,958
2006 37,058
2007 18,551
2008 and later --
---------------------------------------------------------------------------
Total minimum lease payments 195,606
===========================================================================
Total rental expense for operating leases was $61,429,000, $42,376,000 and
$34,823,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
Rental income
The minimum future revenues to be received on time charters, bareboat
charters and other contractually committed income as of December 31, 2002
are as follows:
--------------------------------------------------------------------------------------------
Year ending December 31, Yen revenues Dollar revenues Total
--------------------------------------------------------------------------------------------
(in thousands of(Y)and $) (in(Y)) ($ equivalent)
--------------------------------------------------------------------------------------------
2003 992,800 8,375 41,923 50,298
2004 995,520 8,398 35,741 44,139
2005 992,800 8,375 34,313 42,688
2006 992,800 8,375 31,003 39,378
2007 992,800 8,375 19,790 28,165
2008 and later 3,829,780 32,308 8,300 40,608
--------------------------------------------------------------------------------------------
Total minimum lease revenues 8,796,500 74,206 171,070 245,276
============================================================================================
The cost and accumulated depreciation of the vessels leased to a third
party at December 31, 2002 were approximately $432.7 million and $37.2
million, respectively, and at December 31, 2001 were approximately $354.2
million and $14.6 million, respectively.
8. MARKETABLE SECURITIES
Marketable securities held by the Company are equity securities considered
to be available-for-sale securities.
--------------------------------------------------------------------------
(in thousands of $) 2002 2001
--------------------------------------------------------------------------
Cost 51 1,874
Gross unrealised gain -- 2
Gross unrealised loss (9) (717)
--------------------------------------------------------------------------
Fair value 42 1,159
==========================================================================
The net unrealised loss on marketable securities, including a component of
foreign currency translation, included in comprehensive income increased by
$6,000 for the year ended December 31, 2002 (2001 - increase in net
unrealised loss of $1,010,000).
--------------------------------------------------------------------------
(in thousands of $ ) 2002 2001 2000
--------------------------------------------------------------------------
Proceeds from sale of available-for-sale
securities -- 3,101 10,089
Realised gain (loss) (984) 717 (1,186)
==========================================================================
The cost of sale of available-for-sale marketable securities is calculated
on an average costs basis.
9. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are presented net of allowances for doubtful
accounts amounting to $800,000 for each of the years ended December 31,
2002 and 2001, respectively.
10. OTHER RECEIVABLES
---------------------------------------------------------------------------
(in thousands of $) 2002 2001
---------------------------------------------------------------------------
Agent receivables 5,773 1,973
Due from related parties 179 --
Other receivables 4,946 2,947
---------------------------------------------------------------------------
10,898 4,920
===========================================================================
Other receivables are presented net of allowances for doubtful accounts
amounting to $nil for each of the years ended December 31, 2002 and 2001.
11. NEWBUILDINGS AND VESSEL PURCHASE OPTIONS
---------------------------------------------------------------------------
(in thousands of $) 2002 2001
---------------------------------------------------------------------------
Newbuildings 19,035 94,411
Vessel purchase options 8,370 8,370
---------------------------------------------------------------------------
27,405 102,781
===========================================================================
The carrying value of newbuildings represents the accumulated costs to the
balance sheet date, which the Company has paid by way of purchase
installments, and other capital expenditures together with capitalised loan
interest. Interest capitalised in the cost of newbuildings amounted to
$1,902,000 and $3,035,000 in 2002 and 2001, respectively. The Company took
delivery of five newbuildings during 2002.
The Company has both an obligation and an option to purchase the VLCC
Oscilla on expiry of a five-year time charter, which commenced in March
2000. The purchase price is equal to the outstanding mortgage debt under
four loan agreements between lenders and the vessel's owning company. As at
December 31, 2002 the outstanding mortgage debt of the Oscilla's owning
company amounted to $43,013,215 plus (Y)759,454,316 (equivalent to
$6,406,735). (2001 - $44,372,526 plus (Y)763,259,970 (equivalent to
$5,820,192). Included in this amount at December 31, 2002 is debt of
$10,191,000 due to the Company (2001 - $9,103,000). The fair value assigned
to this option and obligation in the purchase accounting for Golden Ocean
was $8,370,000. The fair value was calculated at the time of purchase as
the difference between the fair value of the vessel and the mortgage debt
outstanding.
12. VESSELS AND EQUIPMENT, NET
--------------------------------------------------------------------------
(in thousands of $) 2002 2001
--------------------------------------------------------------------------
Cost 3,117,687 2,692,512
Accumulated depreciation 744,448 (495,553)
--------------------------------------------------------------------------
Net book value at end of year 2,373,239 2,196,959
==========================================================================
Included in the above amounts as at December 31, 2002 and 2001 is equipment
with a net book value of $1,459,000 and $836,000, respectively.
Depreciation expense for vessels and equipment was $139.9 million, $115.6
million and $90.7 million for the years ended December 31, 2002, 2001 and
2000, respectively, including amounts recorded in discontinued operations.
13. VESSELS UNDER CAPITAL LEASE, NET
At December 31 2002, the Company had four vessels under capital leases
(2001 - eight vessels under capital lease, of which four were acquired by
the Company and subsequently sold in 2002). These leases are for terms that
range from eight to ten years. One of these vessels was sold by the Company
in 2002 and leased back on a charter for a period of eight years with the
option on the lessor's side to extend the charter for a further three years
followed by a further two years. Three of the vessels under capital leases
were sold by the Company in 2001 and leased back on charters each for a
period of eight years with the option on the lessor's side to extend the
charter for a further three years followed by a further two years. The
Company has purchase options at certain specified dates and the lessor has
options to put the vessels on the Company at the end of the lease terms for
all of the four vessels under capital lease.
--------------------------------------------------------------------------
(in thousands of $) 2002 2001
--------------------------------------------------------------------------
Cost 282,325 323,659
Accumulated depreciation (17,423) (6,451)
--------------------------------------------------------------------------
Net book value at end of year 264,902 317,208
==========================================================================
Depreciation expense for vessels under capital lease was $16.6 million,
$5.3 million and $1.1 for the years ended December 31, 2002, 2001 and 2000,
respectively.
The outstanding obligations under capital leases are payable as follows:
--------------------------------------------------------------------------
Year ending December 31,
(in thousands of $)
--------------------------------------------------------------------------
2003 33,359
2004 33,576
2005 34,479
2006 35,078
2007 35,077
2008 and later 248,150
--------------------------------------------------------------------------
Minimum lease payments 419,719
--------------------------------------------------------------------------
Less imputed interest (147,028)
--------------------------------------------------------------------------
Present value of obligations under capital leases 272,691
==========================================================================
14. INVESTMENT IN ASSOCIATED COMPANIES
At December 31, 2002, the Company has the following participation in
investments that are recorded using the equity method:
Percentage
K/S Rasmussen Teamship A/S III 35.00%
K/S Rasmussen Teamship A/S II 40.00%
Front Tobago Inc 40.00%
Golden Lagoon Corporation 50.00%
Golden Fountain Corporation 50.00%
Golden Tide Corporation 50.00%
Alliance Chartering LLC 50.00%
Dundee Navigation SA 50.10%
Edinburgh Navigation SA 50.10%
Ariake Transport Corporation 33.33%
Sakura Transport Corporation 33.33%
Ichiban Transport Corporation 33.33%
Tokyo Transport Corporation 33.33%
Hitachi Hull No 4983 Ltd. 33.33%
With the exception of Alliance Chartering LLC, the equity method investees
are engaged in the ownership and operation of oil tankers or dry bulk
carriers.
Summarised balance sheet information of the Company's equity method
investees is as follows:
---------------------------------------------------------------------------
(in thousands of $) 2002 2001
---------------------------------------------------------------------------
Current assets 54,347 40,242
Noncurrent assets 637,543 546,868
Current liabilities 67,158 45,855
Non current liabilities 602,807 491,396
Summarised statement of operations information of the Company's equity
method investees is as follows:
---------------------------------------------------------------------------
(in thousands of $ ) 2002 2001 2000
---------------------------------------------------------------------------
Net operating revenues 68,694 62,338 54,722
Net operating income 22,481 32,050 32,093
Net income (loss) (14,250) 40,004 43,843
Summarised balance sheet information of the Company's subsidiaries
accounted for using the equity method is as follows:
---------------------------------------------------------------------------
(in thousands of $) 2002 2001
---------------------------------------------------------------------------
Current assets 8,377 6,557
Noncurrent assets 93,397 99,341
Current liabilities 53,296 12,475
Non current liabilities 44,948 87,996
Summarised statement of operations information of the Company's
subsidiaries accounted for using the equity method is as follows:
---------------------------------------------------------------------------
(in thousands of $) 2002 2001 2000
---------------------------------------------------------------------------
Net operating revenues 13,947 19,948 --
Net operating income 3,259 10,587 --
Net income (loss) (1,899) 5,428 --
15. DEFERRED CHARGES
Deferred charges represent debt arrangement fees that are capitalised and
amortised on a straight-line basis to interest expense over the life of the
debt instrument. The deferred charges are comprised of the following
amounts:
--------------------------------------------------------------------------
(in thousands of $) 2002 2001
--------------------------------------------------------------------------
Debt arrangement fees 17,436 14,190
Accumulated amortisation (11,777) (9,129)
--------------------------------------------------------------------------
5,659 5,061
==========================================================================
16. OTHER LONG-TERM ASSETS
---------------------------------------------------------------------------
(in thousands of $) 2002 2001
---------------------------------------------------------------------------
Long-term debt receivable 10,191 9,025
Other 1,013 875
---------------------------------------------------------------------------
11,204 9,900
===========================================================================
Included in long-term debt receivable are amounts due to the Company from
third party entities that own vessels over which the Company has purchase
options or obligations (see Note 11).
17. GOODWILL
Goodwill is stated net of related accumulated amortisation as follows:
--------------------------------------------------------------------------
(in thousands of $) 2002 2001
--------------------------------------------------------------------------
Goodwill 14,142 17,561
Accumulated amortisation (14,142) (3,512)
--------------------------------------------------------------------------
-- 14,049
==========================================================================
The Company adopted SFAS 142 effective January 1, 2002 and recorded an
impairment charge of $14.1 million for the unamortised goodwill on that
date (see Note 2).
18. ACCRUED EXPENSES
---------------------------------------------------------------------------
(in thousands of $) 2002 2001
---------------------------------------------------------------------------
Voyage expenses 3,258 3,667
Ship operating expenses 27,501 18,591
Administrative expenses 3,948 1,979
Interest expense 5,483 6,044
Taxes 134 2,233
Other -- 3,029
---------------------------------------------------------------------------
40,324 35,543
===========================================================================
19. DEBT
--------------------------------------------------------------------------
(in thousands of $) 2002 2001
--------------------------------------------------------------------------
US Dollar denominated floating rate debt 1,314,183 1,238,952
(LIBOR + 0.485% to 2.75%) due through 2011
Yen denominated floating rate debt (LIBOR + 110,718 109,640
1.125% to 1.313%) due through 2011
Fixed rate debt 0% due through 2005 2,000 2,000
Fixed rate debt 8.00% due through 2005 11,250 31,500
-----------------------
1,438,151 1,382,092
Credit facilities 7,321 9,859
--------------------------------------------------------------------------
Total debt 1,445,472 1,391,951
Less: short-term and current portion of
long-term debt (167,807) (227,597)
--------------------------------------------------------------------------
1,277,665 1,164,354
==========================================================================
The outstanding debt as of December 31, 2002 is repayable as follows:
Year ending December 31,
(in thousands of $)
2003 167,807
2004 169,529
2005 266,080
2006 312,142
2007 134,871
2008 and later 395,043
---------------------------------------------------------------------------
Total debt 1,445,472
===========================================================================
The weighted average interest rate for the floating rate debt denominated
in US dollars was 3.93 per cent as of December 31, 2002 (2001 - 4.41 per
cent). The weighted average interest rate for the floating rate debt
denominated in Yen was 1.27 per cent as of December 31, 2002 (2001 - 1.37
per cent). These rates take into consideration related interest rate swaps.
Certain of the fixed rate debt and the floating rate debt are
collateralised by ship mortgages and, in the case of some debt, pledges of
shares by each guarantor subsidiary. The Company's existing financing
agreements impose operation and financing restrictions on the Company which
may significantly limit or prohibit, among other things, the Company's
ability to incur additional indebtedness, create liens, sell capital shares
of subsidiaries, make certain investments, engage in mergers and
acquisitions, purchase and sell vessels, enter into time or consecutive
voyage charters or pay dividends without the consent of our lenders. In
addition, our lenders may accelerate the maturity of indebtedness under our
financing agreements and foreclose upon the collateral securing the
indebtedness upon the occurrence of certain events of default, including
our failure to comply with any of the covenants contained in our financing
agreements. Various debt agreements of the Company contain certain
covenants which require compliance with certain financial ratios. Such
ratios include equity ratio covenants, minimum value clauses, and minimum
free cash restrictions. As of December 31, 2002 and 2001, the Company
complied with all the debt covenants of its various debt agreements.
The acquisition of Golden Ocean was conducted so that the loans held by
Golden Ocean's subsidiaries are non-recourse to Frontline. This implies
that any guarantees on behalf of a Golden Ocean subsidiary are issued only
by either Golden Ocean and or other Golden Ocean subsidiaries. Frontline's
exposure to Golden Ocean is therefore limited to $15 million injected as
equity, a $50 million term loan and a $10 million revolving credit facility
provided by Frontline to Golden Ocean. As of December 31, 2002 the amounts
outstanding under the term loan and revolving credit facility was $nil and
$nil, respectively (2001 - $2.49 million and $nil, respectively).
At December 31, 2001, a 100 per cent owned subsidiary of Golden Ocean,
Golden Stream Corporation was party to a loan agreement with Griffin
Shipping Inc. ("Griffin"). The amount outstanding under this loan agreement
was $48,068,000, which was fully repayable on March 30, 2002. Golden Stream
Corporation failed to repay the loan on the due date. This situation gave
rise to substantial doubt as to the ability of Golden Ocean to continue to
operate as a going concern as at December 31, 2001. Griffin did not declare
a default under the loan agreement and in the fourth quarter of 2002, a
satisfactory agreement was reached with Griffin, Golden Stream Corporation
was restructured and the vessel was refinanced. As a result of the
restructuring and refinancing in 2002, Golden Stream Corporation is owned
in a non-recourse subsidiary of Frontline where Frontline has guaranteed,
and partly provided, the first $28 million of debt.
20. SHARE CAPITAL
Authorised share capital:
---------------------------------------------------------------------------
(in thousands of $) 2002 2001
---------------------------------------------------------------------------
125,000,000 ordinary shares of $2.50 each 312,500 312,500
===========================================================================
Issued and fully paid share capital:
---------------------------------------------------------------------------
(in thousands of $, except share numbers) 2002 2001
---------------------------------------------------------------------------
76,466,566 ordinary shares of $2.50 each 191,166 191,019
(2001 - 76,407,566)
===========================================================================
The Company's ordinary shares are listed on the New York Stock Exchange,
the Oslo Stock Exchange and the London Stock Exchange. The Company's
ordinary shares traded on the Nasdaq National Market in the form of ADSs
until August 3, 2001. Each ADS represented one ordinary share. On August 3,
2001 the Company delisted its ADSs from the Nasdaq National Market and the
ADR program was terminated on October 5, 2001. The Company's ordinary
shares were listed on the New York Stock Exchange on August 6, 2001.
Of the authorised and unissued ordinary shares at December 31, 2002,
546,800 are reserved for issue pursuant to subscription under options
granted under the Company's share option plans. As at December 31, 2002,
except for the shares which would be issued on the exercise of the options,
no unissued share capital of the Company is under option or is
conditionally or unconditionally to be put under option.
On August 21, 2000, at the Annual General Meeting of the Company, the
stockholders approved an increase in the Company's authorised share capital
from 100,000,000 Ordinary Shares of $2.50 par value each to 125,000,000
Ordinary Shares of $2.50 par value each.
In 2002 the Company issued 59,000 shares in connection with the exercise of
employee share options. During 2001 the Company issued 129,500 shares in
connection with the exercise of employee share options and issued 416,555
ordinary shares pursuant to subscriptions under warrants that could be
exercised at any time up to May 11, 2001 (see Note 21).
In 2000 and 2001, the Company bought back and cancelled a total of
1,719,845 and 2,207,300 of its Ordinary Shares, respectively, in a number
of separate market transactions. These share buybacks were made within a
Board of Directors authority to buy back up to 7,500,000 ordinary shares.
In 2000 the Company also acquired 430,000 of its Ordinary Shares over which
it held a call option acquired in 1999.
In September 2001 the Company established a twelve month facility for a
Stock Indexed Total Return Swap Programme or Equity Swap Line with the Bank
of Nova Scotia ("BNS"), whereby the latter acquires shares in the Company,
and the Company carries the risk of fluctuations in the share price of
those acquired shares. BNS is compensated at their cost of funding plus a
margin. In 2002, the term of the Equity Swap Line was extended until
February 2004. At December 31, 2002 and 2001, BNS had acquired a total of
2,695,000 and 2,100,000 Frontline shares under the Programme, respectively.
A number of the Company's bank loans contain a clause that permit dividend
payments subject to the Company meeting certain equity ratio and cash
covenants immediately after such dividends being paid.
On December 6, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Plan"). The Company adopted the Plan to protect
shareholders against unsolicited attempts to acquire control of the Company
that do not offer an adequate price to all shareholders or are otherwise
not in the best interests of the Company and its shareholders. Under the
Plan, each shareholder of record on December 20, 1996 received one right
for each Ordinary Share held, and each registered holder of outstanding
warrants received one right for each Ordinary Share for which they are
entitled to subscribe. Each right entitles the holder to purchase from the
Company one-quarter of an Ordinary Share at an initial purchase price of
$1.50. The rights will become exercisable and will detach from the Ordinary
Shares a specified period of time after any person has become the
beneficial owner of 20 per cent or more of the Company's Ordinary Shares.
If any person becomes the beneficial owner of 20 per cent or more of the
Company's Ordinary Shares, each right will entitle the holder, other than
the acquiring person, to purchase for the purchase price, that number of
Ordinary Shares having a market value of eight times the purchase price.
If, following an acquisition of 20 per cent or more of the Company's
Ordinary Shares, the Company is involved in certain amalgamations or other
business combinations or sells or transfers more than 50% of its assets or
earning power, each right will entitle the holder to purchase for the
purchase price ordinary shares of the other party to the transaction having
a market value of up to eight times the purchase price.
The Company may redeem the rights at a price of $0.001 per right at any
time prior to a specified period of time after a person has become the
beneficial owner of 20 per cent or more of its Ordinary Shares. The rights
will expire on December 31, 2006, unless earlier exchanged or redeemed.
In connection with the Company's one-for-ten reverse stock split, the
rights were adjusted pursuant to the Plan, so that there are currently ten
rights attached to each outstanding Ordinary Share.
21. WARRANTS AND SHARE OPTION PLANS
Pursuant to the terms of the Amalgamation Agreement, warrants to purchase
2,600,000 shares (restated from 26,000,000) in the Company were granted on
the date of Amalgamation. These warrants were recorded at an estimated fair
value at November 1, 1997 using the Black-Scholes option pricing model.
These warrants entitled the holder to subscribe for one ordinary share in
the Company at a price of $15.91 and were exercisable at any time up to May
11, 2001. On May 11, 2001 any warrants that had not been exercised expired.
The following summarises the warrant transactions:
--------------------------------------------------------------------------
Number
of Shares
--------------------------------------------------------------------------
Warrants outstanding at December 31, 2000 2,591,732
Exercised or cancelled (2,591,732)
Warrants outstanding at December 31, 2001 --
Exercised or cancelled --
--------------------------------------------------------------------------
Warrants outstanding at December 31, 2002 --
==========================================================================
The Company has in place a Bermuda Share Option Plan (the "Bermuda Plan")
and a United Kingdom Share Option Plan (the "U.K. Plan"). Under the terms
of the plans, the exercise price set on the grant of share options may not
be less than the average of the fair market value of the underlying shares
for the three dealing days before the date of grant. The number of shares
granted under the plans may not in any ten year period exceed 7 per cent of
the issued share capital of the Company. No consideration is payable for
the grant of an option. In 2001, the Bermuda Plan was amended to provide
that the exercise price set on the grant can subsequently be adjusted so
that dividends paid after the date of grant will be deducted from the
exercise price.
Under the Bermuda Plan, options may be granted to any director or eligible
employee of the Company or subsidiary. Options are exercisable for a
maximum period of nine years following the first anniversary date of the
grant.
The following summarises the share options transactions relating to the
Bermuda Plan:
---------------------------------------------------------------------------
(in thousands, except per share data) Shares Weighted
average
exercise
price
---------------------------------------------------------------------------
Options outstanding at December 31, 1999 413 $7.89
Granted 15 $6.92
Cancelled (109) $14.77
Options outstanding at December 31, 2000 319 $5.50
Granted 194 $11.76
Exercised (130) $3.49
Cancelled (23) $11.76
Options outstanding at December 31, 2001 360 $7.71
Granted 252 $11.90
Exercised (59) $4.47
Cancelled (6) $11.90
---------------------------------------------------------------------------
Options outstanding at December 31, 2002 547 $11.24
===========================================================================
Options exercisable at:
December 31, 2000 4 $13.21
===========================================================================
December 31, 2001 190 $4.07
===========================================================================
December 31, 2002 187 $8.09
===========================================================================
Under the U.K. Plan, options may be granted to any full-time director or
employee of the Company or subsidiary. Options are only exercisable during
the period of seven years following the third anniversary date of the
grant.
At December 31, 2002 and 2001 there were no options remaining outstanding
under the U.K. Plan.
The weighted average fair value of options granted under the Bermuda Plan
in the year ended December 31, 2002, 2001 and 2000 was $6.80, $6.79 and
$3.27, respectively. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model using the
following weighted average assumptions:
2002 2001 2000
Risk free interest rate 2.8% 4.9% 6.6%
Expected life 5 years 5 years 3 years
Expected volatility 64% 60% 63%
Expected dividend yield 0% 0% 0%
The options outstanding under the Bermuda Plan as at December 31, 2002 have
exercise prices between $4.12 and $14.97. The exercise prices are reduced
by any dividends declared after the date of grant. The options that were
not exercisable at December 31, 2002, vest over a period from January 2003
to June 2005. The options outstanding under the Bermuda Plan as at December
31, 2002 have a weighted average contractual life of 4.85 years.
22. FINANCIAL INSTRUMENTS
Interest rate risk management
In certain situations, the Company may enter into financial instruments to
reduce the risk associated with fluctuations in interest rates. The Company
has a portfolio of swaps that swap floating rate interest to fixed rate,
which from a financial perspective hedge interest rate exposure. The
Company does not hold or issue instruments for speculative or trading
purposes. The counterparties to such contracts are J.P. Morgan Chase,
Nordea Bank Norge, Credit Agricole Indosuez, Deutsche Schiffsbank, Midland
Bank (HSBC), Den norske Bank and Skandinaviska Enskilda Banken. Credit risk
exists to the extent that the counterparties are unable to perform under
the contracts.
The Company manages its debt portfolio with interest rate swap agreements
in U.S. dollars to achieve an overall desired position of fixed and
floating interest rates. The Company has entered into the following
interest rate swap transactions involving the payment of fixed rates in
exchange for LIBOR:
Principal Inception Maturity Fixed
Date Date Interest
Rate
(in thousands of $)
$50,000 January 2001 January 2006 5.635%
$50,000 February 1998 February 2003 5.685%
$25,000 August 1998 August 2003 5.755%
$25,000 August 1998 August 2003 5.756%
$50,000 February 1998 February 2003 5.775%
$50,000 March 1998 March 2003 5.885%
$49,338 reducing monthly to $29,793 March 1998 March 2006 7.288%
$53,352 reducing monthly to $17,527 September 1998 August 2008 7.490%
As at December 31, 2002, the notional principal amounts subject to such
swap agreements was $352,690,000 (2001 - $362,828,000).
Foreign currency risk
The majority of the Company's transactions, assets and liabilities are
denominated in U.S. dollars, the functional currency of the Company.
Certain of the Company's subsidiaries report in Sterling, Swedish kronor or
Norwegian kroner and risks of two kinds arise as a result: a transaction
risk, that is, the risk that currency fluctuations will have a negative
effect on the value of the Company's cash flows; and a translation risk,
the impact of adverse currency fluctuations in the translation of foreign
operations and foreign assets and liabilities into U.S. dollars for the
Company's consolidated financial statements. Certain of the Company's
subsidiaries have Yen denominated long-term debt which as of December 31,
2002 stood at Yen 8,026,764,056 and charter contracts denominated in Yen
with contracted payments as set forth in Note 7. Certain associated
companies also have Yen denominated debt, the Company's share of this debt
amounted to Yen 7,172,940,136 as December 31, 2002. There is a risk that
currency fluctuations will have a negative effect on the value of the
Company's cashflows. The Company has not entered into derivative contracts
for either transaction or translation risk. Accordingly, such risk may have
an adverse effect on the Company's financial condition and results of
operations.
Forward freight contracts
The Company may enter into forward freight contracts and futures contracts
in order to manage its exposure to the risk of movements in the spot market
for certain trade routes. Market risk exists to the extent that spot market
fluctuations have a negative effect on the Company's cash flows and
consolidated statements of operations.
As at December 31, 2002, the notional principal amounts subject to such
forward freight contracts and futures contracts was $31,264,000.
Fair Values
The carrying value and estimated fair value of the Company's financial
instruments at December 31, 2002 and 2001 are as follows:
2002 2002 2001 2001
(in thousands of $) Carrying Fair Value Carrying Fair Value
Value Value
Non-Derivatives:
Cash and cash equivalents 92,078 92,078 178,176 178,176
Restricted cash 8,220 8,220 11,101 11,101
Marketable securities 262 262 1,159 1,159
Short-term debt and current portion of 167,807 167,807 227,597 227,597
long-term debt
Long-term debt 1,277,665 1,277,665 1,164,354 1,164,354
Derivatives:
Interest rate swap transactions (16,894) (16,894) (14,723) (14,723)
Equity swap Line 390 390 4,412 4,412
Forward freight contracts (548) (548) - -
The carrying value of cash and cash equivalents, which are highly liquid,
is a reasonable estimate of fair value.
The estimated fair value of marketable securities is based on the quoted
market price of these or similar instruments when available.
The estimated fair value for floating rate long-term debt is considered to
be equal to the carrying value since it bears variable interest rates,
which are reset on a quarterly basis. The estimated fair value for fixed
rate long-term debt is considered to be equal to the carrying value due to
its company specific nature and the lack of a market in such debt.
The fair value of interest rate swaps is estimated by taking into account
the cost of entering into interest rate swaps to offset the Company's
outstanding swaps.
The fair value of the Equity Swap Line (see Note 20) is based on the quoted
market price of the Company's shares held by the Bank of Nova Scotia minus
the acquisition cost of those shares.
The fair value of forward freight contracts is estimated by taking into
account the cost of entering into forward freight contracts to offset the
Company's outstanding contracts.
Concentrations of risk
There is a concentration of credit risk with respect to cash and cash
equivalents to the extent that substantially all of the amounts are carried
with the Bank of America N.A., Skandinaviska Enskilda Banken, BNP Paribas,
Den norske Bank and Nordea Bank Norge. However, the Company believes this
risk is remote as these banks are high credit quality financial
institutions.
The majority of the vessels' gross earnings are receivable in U.S. dollars.
In 2002, 2001 and 2000, no customer accounted for 10 per cent or more of
freight revenues.
23. RELATED PARTY TRANSACTIONS
During 1996, 1997 and January 1998, Frontline received options to assume
newbuilding contracts for the construction and purchase of five Suezmax
tankers at the Hyundai Heavy Industries Co. Ltd. shipyard in South Korea
for delivery in 1998 and 2000 from single-ship owning companies affiliated
with Hemen Holding Ltd. ("Hemen"). Hemen is the Company's largest
shareholder and is indirectly controlled by Mr. John Fredriksen, Chairman
and Chief Executive Officer of the Company. The first three of the Suezmax
tankers were delivered during 1998. The remaining two vessels were
delivered in February and April, 2000.
In June 1998, the Company obtained a loan of $87.5 million from Metrogas,
the Metrogas Loan, to finance the acquisition of five VLCC newbuilding
contracts. At December 31, 1998, an amount of $89 million was outstanding
in respect of the Metrogas Loan, including interest accrued thereon. On
September 30, 1999, $35 million of the $89 million Metrogas Loan was
converted to equity by the issuance of 8,230,000 shares at an issue price
of NOK 33.00 per share. In connection with this conversion, Metrogas
offered $15 million of the resulting ordinary shares to existing Frontline
shareholders and warrant holders, excluding US persons. In connection with
this secondary offering by Metrogas, Frontline bore costs of the offering
of $15,000. At December 31, 1999, an amount of $56.7 million was
outstanding in respect of the Metrogas Loan, including interest accrued
thereon. On February 25, 2000, $30 million of the Metrogas Loan was
converted to equity, resulting in the issuance of 4,350,000 ordinary shares
at an issue price of NOK 57.50 per share. In connection with this
conversion, Metrogas offered 2,000,000 of the resulting ordinary shares to
existing Frontline shareholders and warrant holders, excluding US persons.
In August 2000, the outstanding principal amount of $24.0 on the Metrogas
Loan was repaid in full, together with $4.3 million interest accrued
thereon. In the year ended December 31, 2000, the Metrogas Loan bore
interest at the rate of 8.0 per cent and the Company incurred an interest
cost of $1.6 million.
In addition to the lending arrangement described above, Hemen affiliated
parties have, during 1998 and 1999, provided additional short term
financing to the Company. Such financing bore interest at a rate of between
6.75 and 8.8 per cent per annum in 2000. Interest expense recorded by the
Company in 2000 in respect of such financing was $1,095,380.
In September 2000 Frontline acquired a 1993-built VLCC, which was named
Front Ace from a company affiliated with Hemen. This vessel was acquired
for a price of $53 million which was based on three independent valuations
less a $1 million discount compared to appraised market value.
On December 5, 2000, a subsidiary of Frontline made a short-term loan of
$20 million to World Shipholding Ltd., a company affiliated with Hemen.
This loan was repaid in full on February 6, 2001 together with fees and
interest of $349,680, of which $115,000 was recorded by the Company in 2000
and $234,680 was recorded in 2001.
On December 28, 2000, the Company and Overseas Shipholding Group Inc. (OSG)
entered into an agreement with Osprey Maritime Limited. ("Osprey") to
acquire the two VLCCs Golar Edinburgh and Golar Dundee. The agreement was
signed on behalf of a joint venture company to be owned 50.1 per cent by
the Company and 49.9 per cent by OSG. The purchase price for the vessels,
which were delivered in the first quarter of 2001 was $53 million each. At
December 31, 2000, World Shipholding Ltd. held more than 50 per cent of the
shares in Osprey. In February 2001, World Shipholding Ltd. took control of
Osprey.
In February 2001, the Company acquired newbuilding contracts for the
construction and purchase of three VLCC tankers at the Hitachi shipyard in
Japan for delivery in 2002 from Seatankers Management Co. Ltd, a company
affiliated with Hemen. These contracts were acquired for the original
contract price of $72 million each plus $0.5 million per contract. These
three newbuildings were delivered in 2002.
In the years ended December 31, 2002 and 2001, Frontline provided services
to Seatankers. These services include management support and administrative
services including services to a newbuilding project known as the Uljanik
Project. In the years ended December 31, 2002 and 2001, the Company has
earned management fee income from Seatankers Ltd of $253,762 and $277,855,
respectively. As at December 31, 2002 and 2001 an amount of $141,359 and
$314,923, respectively were due from Seatankers Ltd in respect of these
fees and for the reimbursement of costs incurred on behalf of Seatankers
Ltd.
In the year ended December 31, 2002, Frontline has provided management
support and administrative services to Osprey. In the year ended 31
December 2002 management fees of $42,000 have been earned from Osprey and
as at December 31, 2002 an amount of $18,000 was due from Osprey in respect
of these fees and for the reimbursement of costs incurred on the Company's
behalf by Osprey. At December 31, 2002, an amount of $103,838 was due to
Osprey in respect of Tankers pool distributions due to Osprey that were
received by the Company.
In the years ended December 31, 2002 and 2001, Frontline has provided
services to Golar LNG Limited. Osprey, which is controlled by World
Shipholding, holds 50.01 per cent of Golar LNG. The services provided
include management support, corporate services and administrative services.
In the years ended 31 December 2002 and 2001, management fees from Golar
LNG of $391,153 and $258,960, respectively have been earned by the Company.
As at December 31 2002 and 2001, an amount of $86,343 and $547,966,
respectively were due from Golar LNG in respect of these fees and for the
reimbursement of costs incurred on behalf of Golar LNG.
In the year ended December 31, 2002, Frontline has provided management
support and administrative services to Northern Offshore Limited, Northern
Offshore is controlled by Osprey. In the year ended 31 December 2002
management fees of $173,724 have been earned from Northern Offshore and as
at December 31, 2002 an amount of $31,071 was due from Northern Offshore.
24. ACQUISITIONS
In April 2001, the Company announced an offer for all of the shares of
Mosvold Shipping Limited ("Mosvold"), a Bermuda company whose shares were
listed on the Oslo Stock Exchange. Through a combination of shares acquired
and acceptances of the offer, as at May 31 2001, Frontline controlled 97
per cent of the shares of Mosvold. The remaining 3 per cent of the shares
of Mosvold were acquired during 2001 through a compulsory acquisition. The
total acquisition price paid was approximately $70.0 million. The
difference between the purchase price and the net assets acquired, has been
assigned to the identifiable long-term assets of Mosvold.
On October 10, 2000, Frontline took control of Golden Ocean pursuant to a
Plan of Reorganisation (See Note 1). The total acquisition price paid,
including amounts paid to settle allowed claims, was approximately $63.0
million, including 1,245,998 shares issued at a price of $15.65 per share.
The cash component of the acquisition was funded primarily from working
capital. The acquisition of Golden Ocean has been accounted for using the
purchase method. Prior to the effective date of acquisition, Golden Ocean
adopted fresh-start reporting in accordance with the provisions of
Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The application of
the provisions of SOP 90-7 resulted in the preparation of a reorganised
balance sheet at October 10, 2000, concurrent with the emergence from
bankruptcy protection. The difference between the purchase price and the
net assets acquired, has been recorded as goodwill.
The following table reflects unaudited pro-forma combined results of
operations of the Company on the basis that the acquisition of Mosvold had
taken place at January 1, 2000:
(in thousands of $, except per share data) 2001 2000
(unaudited) (unaudited)
Net operating revenues 655,527 616,367
Net income 384,453 319,883
Basic earnings per share $5.01 $4.36
Diluted earnings per share $5.00 $4.35
In management's opinion, the adoption of fresh-start accounting in the
financial statements of Golden Ocean means that the presentation of
unaudited pro-forma combined results of operations would not provide
meaningful information to the readers of these financial statements and no
presentation has been made accordingly.
25. COMMITMENTS AND CONTINGENCIES
Assets Pledged
(in thousands of $) 2002 2001
Ship mortgages 2,238,905 2,195,752
Restricted bank deposits 8,220 11,101
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2,247,125 2,206,853
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Other Contractual Commitments
The Company insures the legal liability risks for its shipping activities
with Assuranceforeningen SKULD, Assuranceforeningen Gard Gjensidig,
Britannia Steam Ship Insurance Association Limited, and the United
Kingdom Mutual Steamship Assurance Association (Bermuda), all mutual
protection and indemnity associations. As a member of these mutual
associations, the Company is subject to calls payable to the associations
based on the Company's claims record in addition to the claims records of
all other members of the associations. A contingent liability exists to
the extent that the claims records of the members of the associations in
the aggregate show significant deterioration, which result in additional
calls on the members.
The Company has guaranteed the yen and dollar long-term borrowings of
associated companies for amounts of $176.4 million, including (Y)14.3
billion, which is equivalent to $121.0 million at December 31, 2002.
Certain of the Company's subsidiaries have contractual rights to
participate in the profits of the vessels New Vanguard, New Vista and
Channel Alliance. Revenues arising from these arrangements have been
accrued to the balance sheet date.
The charterers of three of the Company's vessels have contractual rights to
participate in the profits on sale of those vessels. In the case of the Cos
Hero, the charterer is entitled to 50 per cent of the profit realised on
any qualifying sale. The Cos Hero may only be sold if the profit from sale
will exceed $3.0 million. Profit is defined as sale proceeds less debt
outstanding in the relevant profit share agreements. If the New Vanguard or
New Vista are sold, the charterer is entitled to claim up to $1 million to
cover losses incurred on subcharters of the vessel. Any remaining profit is
to be split 60:40 in favour of the owner.
The charterer of the Company's vessel, Navix Astral, holds a purchase
option denominated in yen to purchase the vessel. The purchase option
reduces on a sliding scale over the term of the related charter and is at a
strike price that is in excess of the related debt on the vessel. The
option is exercisable at any time after the end of the seventh year of the
charter.
At December 31, 2002, the Company had eight vessels that were sold by the
Company at various times during the period from November 1999 to December
31, 2002, and leased back on charters that range for periods of eight to
ten years with options on the lessors' side to extend the charters for
periods that range up to five years. Four of these charters are accounted
for as capital leases and four are accounted for as operating leases. The
Company has purchase options at certain specified dates and the lessor has
options to put the vessels on the Company at the end of the lease terms for
all of these eight vessels. The total amount that the Company would be
required to pay under these put options with respect to the operating
leases is $56.8 million.
At December 31, 2002 the Company had a non-cancellable contract for the
construction of one newbuilding tanker, scheduled for delivery in July
2003. At December 31, 2002, the Company is committed to make further
instalments of $59.4 million under this contract, of which it is estimated
approximately $12 million will be financed from working capital. Bank
financing has been arranged for this vessel.
In 2001, the Company received an adverse decision from the Swedish
Administrative Court of Appeal with respect to a tax dispute with the
Swedish tax authorities relating to ICB. The dispute arises from a limited
partnership in which ICB invested, and which sold a vessel on the exercise
of a purchase option by a third party in 1990. The Swedish tax authorities
assessed an "exit" tax on ICB and the other members of the limited
partnership and also sought to tax ICB and the other members for income
earned by the partnership. ICB has contested these assessments. The Swedish
Administrative Court of Appeal upheld a decision by a County Administrative
Court finding ICB liable for these assessments. Including accrued interest,
the taxes found due by the court total approximately SEK 90 million, or
$10.6 million at the exchange rate prevailing at December 31, 2002 ($8.5
million at the exchange rate prevailing at December 31, 2001). ICB is
appealing this judgement. In the event that the appeal is not successful,
the tax will be accounted for as an adjustment to the purchase price of
ICB.
26. SUPPLEMENTAL INFORMATION
Non-cash investing and financing activities included the following:
(in thousands of $) 2002 2001 2000
Unrealised appreciation (depreciation)
on investments
Recorded directly to equity (54) (7,960) 295
In connection with purchase of fixed
assets:
Shares issued -- -- 28,000
Acquisition of businesses:
Assets acquired, including goodwill -- 83,403 533,685
Liabilities assumed and incurred -- 14,033 470,674
Minority interest recorded -- 1,152 --
Shares issued -- -- 20,350
27. DISCONTINUED OPERATIONS
During the year ended December 31, 2002, the Company sold a portion of its
dry bulk operations which has been recorded as discontinued operations.
These activities have been previously been reported in the dry bulk
carriers segment (See Note 4).
The following table presents the information required by FAS 144 in respect
of discontinued operations:
(in thousands of $) 2002 2001 2000
Carrying amount of assets disposed of 95,548 -- --
Carrying amount of debt or lease retired 70,215 -- --
Amounts recorded in discontinued operations
Net operating revenues 12,505 19,159 4,543
Net income (loss) before cumulative effect (1,929) 20,280 7,957
of change in accounting principle
Gain (loss) on disposal (3,109) -- --
===========================================================================
28. SUBSEQUENT EVENTS
On February 24, 2003, the Board declared a dividend of $0.15 per share, to
be paid on or about March 24, 2003.
In January 2003, the Company acquired the Suezmax tankers, Polytrader and
Polytraveller. These vessels were owned by K/S Rasmussen Teamship A/S II
and K/S Rasmussen Teamship A/S III in which the Company has a 40 percent
and 35 per cent interest, respectively. The Company subsequently sold the
two vessels at the end of March 2003.
On May 8, 2003, the Company declared a dividend of $1.00 per share to be
paid on or about June 6, 2003.
On June 9, 2003, the Company announced that it had agreed to sell two 2000
built Suezmax tankers, the Front Sun and the Front Sky to OMI Corporation
("OMI"), for $49.25 million per vessel, consisting of $43.25 million cash
and one million shares of OMI common stock valued at $6.00 per share, with
a share price guarantee from OMI at $5.70 over a six month period.
Frontline will pay to OMI any shortfall of time charter equivalent earnings
per vessel below an average of $20,000 per day for one year from delivery.
Delivery of the vessels to OMI is expected to occur in the third quarter of
2003.
On June 9, 2003, the Company announced that it had agreed to sell two of
the Company's 2001 built Suezmax tankers, the Front Melody and Front
Symphony, to two German K/Gs promoted by Dr. Peters GmbH. The vessels are
expected delivered to their new owners in June 2003. The vessels will be
chartered back on 12.5 years time charter arrangement, including options
for the Company to buy back the vessels at the end of the charter period.
On June 9, 2003, the Company announced that it had agreed with partners
Euronav Luxembourg SA (Euronav) and Overseas Shipholding Group, Inc.
("OSG") to swap interests in six joint venture companies, which each own a
VLCC. The agreements will result in the Company selling its interest in the
vessel Pacific Lagoon to Euronav; acquiring, jointly with OSG, Euronav's
interest in the Ariake and Sakura I increasing its share in such vessels to
50.1 per cent each; and exchanging its interest in the Ichiban (33.33 per
cent) with Euronav for a portion of Euronav's interest in the Tanabe and
Hakata increasing its interest in these vessels to 50.1 per cent each.
On June 9, 2003, the Company announced that it had decided to exercise the
Company's call option on the Frontline shares held by the Bank of Nova
Scotia (see Note 20). The transaction involves 3,070,000 shares, which will
be acquired at a cost of $8.97 per share. The shares acquired as a result
will immediately be cancelled, bringing the number of issued and
outstanding ordinary shares of the Company to 73,473,066. The transaction
effectively terminates the current BNS facility.
On June 9, 2003, the Company declared a dividend of $1.00 per share to be
paid on or about July 7, 2003.
On July 1, 2003 the Company's subsidiary Golden Ocean Group Limited,
entered into an option agreement with Hemen. The option agreement gives
Golden Ocean the right to acquire all of the shares of Independent Tankers
Corporation ("ITC") from Hemen for a total consideration of $4.0 million
plus 4 per cent interest per year. ITC owns a total of six VLCCs and four
Suezmax tankers, which are on long-term charters to BP and Chevron. Golden
Ocean paid $10.0 million for the option, which expires on July 1, 2010. The
total book value of ITC's consolidated assets at December 31, 2002 was
approximately $960 million.
ITEM 19. EXHIBITS
Number Description of Exhibit
1.1* Memorandum of Association of the Company, incorporated by
reference to Exhibit 3.1 of the Company's Registration
Statement on Form F-1, Registration No. 33-70158 filed on
October 12, 1993 (the "Original Registration Statement").
1.4* Amended and Restated Bye-Laws of the Company as adopted by
shareholders on October 26, 2001, incorporated by reference
to the Company's Annual Report on Form 20-F for the year
ended December 31, 2001, filed on July 1, 2002.
2.1* Form of Ordinary Share Certificate, incorporated by
reference to Exhibit 4.1 of the Original Registration
Statement.
2.2* Form of Deposit Agreement dated as of November 24, 1993,
among Frontline Ltd. (F/K/A London & Overseas Freighters
Limited), The Bank of New York as Depositary, and all
Holders from time to time of American Depositary Receipts
issued thereunder, including form of ADR, incorporated by
reference to Exhibit 4.2 of the Original Registration
Statement.
2.3* Form of Deposit Agreement dated as of November 24, 1993, as
amended and restated as of May 29, 2001, among Frontline
Ltd. (F/K/A London & Overseas Freighters Limited), The Bank
of New York as Depositary, and all Holders from time to time
of American Depositary Receipts issued thereunder, including
form of ADR, incorporated by reference to Exhibit 2 of the
Company's Annual Report on Form 20-F, filed on June 13, 2001
for the fiscal year ended December 31, 2000.
2.4* Rights Agreement (the "Rights Agreement") between the
Company and the Bank of New York incorporated by reference
to Exhibit 1.3 of the Company's Registration Statement on
Form 8-A, File No.0-22704 filed on December 9, 1996.
2.5* Amendment No. 1 to the Rights Agreement incorporated by
reference to Exhibit 4.3 of the Amalgamation Registration
Statement.
2.6* The Subregistrar Agreement related to the registration of
certain securities issued by Frontline Ltd. in the Norwegian
Registry of Securities between Frontline Ltd. and
Christiania Bank og Kreditkasse ASA together with the Form
of Warrant Certificate and Conditions attaching thereto,
incorporated by reference to Exhibit 1.1 of the Company's
Annual Report on Form 20-F for the fiscal year ended
December 31, 1998.
4.1* Form of United Kingdom Share Option Plan, incorporated by
reference to Exhibit 10.1 of the Original Registration
Statement.
4.2* Form of Bermuda Share Option Plan, incorporated by reference
to Exhibit 10.2 of the Original Registration Statement.
4.3* The Subordinated Convertible Loan Facility Agreement USD
89,000,000 dated July 13, 1999, between Frontline Ltd. as
Borrower and Metrogas Holdings Inc. as Lender, incorporated
by reference to Exhibit 2.1 of the Company's Annual Report
on Form 20-F for the fiscal year ended December 31, 1998.
4.4* Master Agreement, dated September 22, 1999, among Frontline
AB and Frontline Ltd (collectively "FL"), Acol Tankers Ltd.
("Tankers"), ICB Shipping AB ("ICB"), and Ola Lorentzon (the
"Agent"), incorporated by reference to Exhibit 3.1 of the
Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 1999.
8.1 Subsidiaries of the Company.
99.1 Certification of the Principal Executive Officer
99.2 Certification of the Principal Financial Officer
99.3 Certification of the Principal Accounting Officer
99.4 Certifications under Section 906 of the Sarbanes-Oxley act of
2002
* Incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorised.
Frontline Ltd.
-------------------------------------------------
(Registrant)
Date July 15, 2003 By /s/ Kate Blankenship
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Kate Blankenship
Company Secretary and Chief Accounting Officer
02089.0009 #416646