UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[_] REPORT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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Commission file number 000-49650
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AKTIESELSKABET DAMPSKIBSSELSKABET TORM
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(Exact name of Registrant as specified in its charter)
A/S STEAMSHIP COMPANY TORM
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(Translation of Registrant's name into English)
Kingdom of Denmark
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(Jurisdiction of incorporation or organization)
Tuborg Havnevej 18, DK-2900 Hellerup, Denmark
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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
NONE
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Securities registered or to be registered pursuant to section 12(g) of the Act.
Common Shares, par value 10 Danish Kroner per share,*
American Depositary Shares (as evidenced
by American Depositary Receipts),
each representing one (1) common share.
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(Title of class)
* Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and
Exchange Commission.
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
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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.
36,400,000 common shares, par value 10 Danish Kroner per share.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 |X| Item 18 |_|
The Company "Aktieselskabet Dampskibsselskabet Torm" is referred to as "TORM" in
this Annual Report.
TABLE OF CONTENTS
Page
----
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
AND ADVISERS......................................................1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE...........................1
ITEM 3. KEY INFORMATION...................................................1
ITEM 4. INFORMATION ON THE COMPANY.......................................13
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.....................32
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.......................60
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS.....................................................64
ITEM 8. FINANCIAL INFORMATION............................................65
ITEM 9. THE OFFER AND LISTING............................................65
ITEM 10. ADDITIONAL INFORMATION...........................................66
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK................................................78
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES................................................81
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES..................81
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF
SECURITY HOLDERS AND USE OF PROCEEDS.............................81
ITEM 15. CONTROLS AND PROCEDURES..........................................81
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.................................81
ITEM 16B. CODE OF ETHICS...................................................81
ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES...........................81
ITEM 16D. PURCHASES OF EQUITY SECURITIES BY THE
ISSUER AND AFFILIATED PURCHASES..................................82
ITEM 17. FINANCIAL STATEMENTS.............................................82
ITEM 18. FINANCIAL STATEMENTS.............................................84
ITEM 19. EXHIBITS.........................................................88
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Matters discussed in this report 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.
TORM 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 report 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. When used in this report, the words
"anticipate," "believe," "expect," "intend," "estimate," "forecast," "project,"
"plan," "potential," "will," "may," "should," and similar expressions identify
forward-looking statements.
The forward-looking statements in this report are based upon various
assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, management's examination of historical operating
trends, data contained in our records and other data available from third
parties. Although 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 assumptions and matters discussed elsewhere herein and
in the documents incorporated by reference herein, important factors that, in
our view, could cause actual results to differ materially from those discussed
in the forward-looking statements include the strength of world economies and
currencies, general market conditions, including fluctuations in charterhire
rates and vessel values, changes in demand in the shipping market, including the
effect of changes in OPEC's petroleum production levels and worldwide oil
consumption and storage, changes in regulatory requirements affecting vessel
operating including requirements for double hull tankers, changes in TORM's
operating expenses, including bunker prices, dry-docking and insurance costs,
changes in governmental rules and regulations or actions taken by regulatory
authorities, changes in the price of our capital investments, such as the NORDEN
shares, potential liability from pending or future litigation, general domestic
and international political conditions, potential disruption of shipping routes
due to accidents, political events or acts by terrorists, and other important
factors described from time to time in the reports filed by us with the
Securities and Exchange Commission, or SEC.
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
Please note: Throughout this report, the "Company", "we", "us" and "our"
all refer to TORM and its subsidiaries. We use the term deadweight ton, or dwt,
in describing the size of vessels. Dwt, expressed in metric tons, each of which
is equivalent to 1000 kilograms, refers to the maximum weight of cargo and
supplies that a vessel can carry.
A. Selected Financial Data
The following table sets forth our selected consolidated financial data for
each of the periods indicated. The selected consolidated financial data should
be read in conjunction with "Operating and Financial Review and Prospects" and
the consolidated financial statements and notes thereto, all included elsewhere
within this document. The selected consolidated financial data includes the
Liner activities, which were sold to A.P. M0ller-Maersk A/S on September 16,
2002. The results of the operations attributable to the Liner activities, which
represent a discontinued operation, are presented in two separate lines in the
income statement after net income from continuing operations. The impact of the
sale of the Liner activities is included herein.
The consolidated financial statements have been prepared in accordance with
Danish generally accepted accounting principles, or Danish GAAP, which differs
in certain respects from United States generally accepted accounting principles,
or U.S. GAAP. The differences between Danish GAAP and U.S. GAAP as applicable to
the historical financial statements are summarized in Note 17 to the
consolidated financial statements included herein.
For the year ended December 31
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2000 2001 2002 2003 2004
---- ---- ---- ---- ----
(in thousands of DKK)
Statement Data:
Net revenue 1,597,221 2,000,713 1,538,618 1,927,996 2,596,410
Port expenses, bunkers, charter hire and
technical running costs (1,012,683) (1,247,245) (1,236,612) (1,280,827) (1,152,673)
---------- ---------- ---------- ---------- ----------
Gross profit (Net earnings from shipping
activities) 584,538 753,468 302,006 647,169 1,443,737
Profit from sale of vessels and interests 11,334 91,790 16,965 (464) 0
Administrative expenses (67,275) (113,404) (101,342) (126,119) (171,656)
Other operating income 45,350 58,689 55,227 51,368 78,732
Depreciation (249,038) (177,993) (158,400) (176,872) (210,746)
---------- ---------- ---------- ---------- ----------
Profit before financial items 324,909 612,550 114,456 395,082 1,140,067
Financial items (2) (168,820) (96,519) 5,988 656,637 1,193,704
---------- ---------- ---------- ---------- ----------
Profit before tax 156,089 516,031 120,444 1,051,719 2,333,771
Tax on profit on ordinary activities (53,298) (166,018) 360,190 (692) (52,556)
---------- ---------- ---------- ---------- ----------
Profit from continuing operations 102,791 350,013 480,634 1,051,027 2,281,215
Profit before tax from discontinued 5,540 17,417 69,818 0 0
operations (6)
Tax on discontinued operations 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
Net profit for the year 108,331 367,430 550,452 1,051,027 2,281,215
Balance sheet data (as of end of period):
Total assets (3) 4,040,007 4,049,353 4,013,588 4,893,657 6,778,899
Long term liabilities 1,951,288 1,519,743 1,735,464 1,700,704 1,822,264
Shareholders' equity 1,051,147 1,354,741 1,623,391 2,464,306 4,323,682
Common shares 182,000 182,000 182,000 182,000 364,000
No. of shares outstanding (1) (4) 36,400,000 36,400,000 36,400,000 36,400,000 36,400,000
Other financial data (1)
Dividends declared per share 1.0 2.0 1.0 6.0 15.0
Dividends declared per share-USD (5) 0.2 0.3 0.2 1.0 2.6
Earnings per share - basic 3.0 10.5 15.9 30.3 65.6
Earnings per share - diluted 3.0 10.5 15.9 29.7 65.1
U.S. GAAP financial data (1)
Profit from continuing operations before 139,013 518,079 50,628 338,350 1,230,728
income taxes and discontinued operations
Tax benefit (expense) on profit (34,821) (160,650) (34,874) 11,361 (96,911)
---------- ---------- ---------- ---------- ----------
Profit from continuing operations 104,192 357,429 15,754 349,711 1,133,817
Profit from discontinued operations (6) 5,540 17,417 69,818 0 0
---------- ---------- ---------- ---------- ----------
Profit 109,732 374,846 85,572 349,711 1,133,817
Earnings per share - basic:
Profit from continuing operations (1) 2.8 10.2 0.5 10.1 32.6
Profit from discontinuing operations (1) 0.2 0.5 2.0 0.0 0.0
Profit (1) 3.0 10.7 2.5 10.1 32.6
Earnings per share - diluted:
Profit from continued operations (1) 2.8 10.2 0.5 10.0 32.4
Profit from discontinued operations (1) 0.2 0.5 2.0 0.0 0.0
Profit (1) 3.0 10.7 2.5 10.0 32.4
Total assets 4,030,941 4,067,887 3,985,551 4,865,250 6,761,154
Long term debt (including capital lease 1,951,288 1,519,743 1,735,464 1,700,704 1,822,264
obligations)
Shareholders' equity 1,032,118 1,351,725 1,196,372 2,024,025 3,857,893
No. of shares outstanding (1) 36,400,000 36,400,000 36,400,000 36,400,000 36,400,000
----------
(1) We increased the share capital in May 2004 from nominal DKK 182.0 million
to nominal DKK 364.0 million through the issue of 18.2 million bonus shares
of DKK 10 each. The bonus shares were allotted to our existing shareholders
at the ratio of 1:1. The comparative figures are restated to reflect the
issue of bonus shares.
(2) Financial items include in 2004 an unrealized gain on our holding of shares
in Dampskibsselskabet "NORDEN" A/S of DKK 1,034 million compared to DKK 681
million in 2003 and DKK 8 million in 2002.
(3) Total assets for each period includes cash and bonds that serve as
collateral for certain of our borrowings. This amount was DKK 54 million as
of December 2004, DKK 52 million as of December 31, 2003, DKK 186 million
as of December 31, 2002, DKK 184 million as of December 31, 2001 and DKK
207 million as of December 31, 2000. See "Operating and Financial Review
and Prospects" for further discussion.
(4) Shares outstanding as of December 31, 2004 includes 1,566,612 shares that
we purchased and hold as own shares, reflected in shareholders' equity. As
of December 31, 2003 and December 31, 2002 we held 1,762,736 own shares,
and as of December 31, 2001 we held 1,742,936 own shares whereas no own
shares were held in 2000. The comparative figures are restated to reflect
the issue of bonus shares in May 2004.
(5) Dividends are converted to U.S. dollars based on the exchange rate in place
at the date of payment.
(6) Profit (loss) from discontinued operations for 2002 includes the gain of
DKK 60 million on disposal of the Company's liner activities.
EXCHANGE RATE INFORMATION
The following tables show, for the five most recent financial years,
certain information regarding the exchange rate between the Danish Kroner and
the U.S. dollar, based on the noon buying rate in New York City for cable
transfers of DKK as certified for customs purposes by the Federal Reserve Bank
of New York, expressed in DKK per U.S. dollar. These rates may differ from the
actual rates used in the preparation of our financial statements and other
financial information appearing in this report.
DKK per U.S. dollar
High Low Average (1) Period End
Year ended December 31,
2000 .................... 9.0050 7.2080 8.0953 7.9442
2001 .................... 8.8900 7.8260 8.3710 8.3529
2002 .................... 8.6470 7.0850 7.8862 7.0850
2003 .................... 7.1684 5.9150 6.5774 5.9150
2004 .................... 6.3115 5.4596 5.9891 5.4940
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(1): The average of the exchange rates on the last business day of each
month during the relevant period.
DKK per U.S. dollar
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High Low
----------------- ------------------
Month ended
November 2004 ............ 5.8523 5.5899
December 2005 ............ 5.6178 5.4596
January 2005 ............. 5.7442 5.5161
February 2005 ............ 5.8263 5.6095
March 2005 ............... 5.7818 5.5286
April 2005 ............... 5.8109 5.6894
On May 27, 2005, the exchange rate between the Danish Kroner and the U.S. dollar
was 5.9203.
B. Capitalization and Indebtedness
Not Applicable.
C. Reason for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Some of the following risks relate principally to the industry in which we
operate and our business in general. Other risks relate principally to the
securities market and ownership of our American Depositary Shares or ADSs. Any
of the risk factors could materially and adversely affect our business,
financial condition or operating results and the trading price of our ADSs.
Additional risks and uncertainties that we are not aware of or that we
currently believe are immaterial may also adversely affect our business,
financial condition, liquidity or results of operation.
INDUSTRY SPECIFIC RISK FACTORS
The cyclical nature of the shipping industry, which are at historic high
levels, may lead to volatile changes in charter rates and vessel values, which
may adversely affect our earnings
Charter rates and vessel values in the tanker market are at historic high
levels. We can give you no assurances that this will continue. If the shipping
industry, which has been and should remain cyclical, is depressed when our
charters or vessel leases expire, or when we want to sell a vessel, our earnings
and available cash flow may decrease. Our ability to re-charter our vessels on
the expiration or termination of their current charters and the charter rates
payable under any renewal or replacement charters will depend upon, among other
things, economic conditions in the tanker and bulk markets. Fluctuations in
charter rates and vessel values result from changes in the supply and demand for
vessel capacity and changes in the supply and demand for the cargo that we
carry, including refined oil products such as naphtha and gas oil and dry bulk
products such as grain and coal.
In addition, our ability to sell a vessel and the amount of the proceeds
from such a sale will depend on economic conditions in the shipping industry.
The shipping industry has experienced fluctuations in charter rates and vessel
values resulting from changes in the demand for cargoes and in vessel capacity.
The factors affecting the supply and demand for vessels are beyond our
control, and the nature, timing and degree of changes in industry conditions are
unpredictable. The factors that influence demand for tanker and bulk capacity
include:
o demand for the products that our vessels carry;
o global and regional economic conditions;
o global supply of oil and oil products;
o the distance oil and oil products are to be moved by sea;
o changes in seaborne and other transportation patterns;
o efficiency of the world fleet;
o government and industry regulation;
o alternative energy sources; and
o environmental concerns.
The factors that influence the supply of tanker and bulk capacity include:
o the number of newbuilding deliveries;
o the scrapping rate of older vessels and single-hull vessels;
o government and industry regulation;
o the number of vessels that are out of service;
o the demand for oil and oil products;
o political changes and armed conflicts;
o developments in international trade;
o changes in seaborne and other transportation patterns; and
o market expectations.
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 but
not limited to 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 shipyard capacity;
o governmental or other regulations;
o age of vessels;
o prevailing level of charter rates; and
o technological advances.
If we sell tankers at a time when tanker prices have fallen and before an
impairment adjustment is made to our financial statements, the sale may be at
less than the vessel's carrying amount on our financial statements, with the
result that we shall incur a loss and a reduction in earnings.
Our revenues experience seasonal variations that may affect our earnings
and financial performance
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. Demand for
bulk carriers is not as volatile as that for tankers, but demand does generally
increase in the spring months in North America as demand for grain increases and
generally falls back during the winter months. More consistent commodities such
as coal, however, provide some stability to the bulk vessel trade.
Terrorist attacks 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 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.
If we violate environmental laws or regulations, the resulting liability
may significantly and adversely affect our earnings and financial condition
Our operations are subject to extensive regulation designed to promote
tanker safety, prevent cargo and bunker 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 our
vessels release oil and oil products or other hazardous substances. 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 each coast of the U.S.
OPA provides for unlimited liability in some circumstances, such as a vessel
operator's gross negligence or willful misconduct or failure to report an
incident or cooperate in oil removal activities. However, in other
circumstances, OPA limits liability to the greater of USD 1,200 per gross ton or
USD 10 million per vessel. OPA also permits states to set their own penalty
limits. Most U.S. 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 may impose
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 our vessels and substantially
increase our operating costs.
Under OPA, all oil tankers that do not have double hulls will be phased out
by 2015 and will not be permitted to come to United States ports or trade in
United States waters. In addition, OPA specifies annual inspections, vessel
manning, equipment and other construction requirements that are in various
stages of development by the U.S. Coast Guard, or USCG, applicable to new and to
existing vessels.
In December 2003, the IMO adopted a proposed amendment to the International
Convention for the Prevention of Pollution from Ships to accelerate the phase
out of single-hull tankers from 2015 to 2010 unless the relevant flag states
extend the date to 2015. Moreover, the IMO or other regulatory bodies may adopt
further regulations in the future that could adversely affect the useful lives
of our tankers as well as our inability to generate income from them.
These requirements can affect the resale value or useful lives of our
vessels. As a result of accidents such as the oil spill in November 2002
relating to the loss of the M/T Prestige, a 26-year old single-hull tanker, not
connected with us. While all of our tankers are double-hull, we believe that
regulation of the tanker industry will continue to become more stringent and
more expensive for us and for our competitors. Substantial violations of
applicable requirements or a catastrophic release from one of our vessels could
have a material adverse impact on our financial condition and results of
operations. Additional laws and regulations may also be adopted that could limit
our ability to do business or increase the cost of our doing business and that
could have a material effect on our operations. Government regulation of
tankers, particularly in the areas of safety and environmental impact may change
in the future and require us to incur significant capital expenditure on our
vessels to keep them in compliance.
COMPANY SPECIFIC RISK FACTORS
Servicing our debt limits funds available for other purposes and if we
cannot service our debt, we may lose some or all of our vessels
We must dedicate a large part of our cash flow from operations to paying
principal and interest on our indebtedness. These payments limit funds available
for working capital, capital expenditures and other purposes. Our debt level
also makes us vulnerable to economic downturns and adverse developments in our
business. If we expand our fleet, we will need to take on additional debt, which
would increase our ratio of debt to equity. Our inability to service debt could
also lead to acceleration of our debt and the foreclosure of all or a portion of
our fleet.
Certain of our loan agreements contain restrictive covenants, which may
limit our liquidity and corporate activities and prevent proper service of debt,
which could result in the loss of our vessels
Some loan agreements impose operating and financial restrictions upon us.
These restrictions may limit our ability to:
o incur additional indebtedness;
o create liens on our assets;
o sell our subsidiaries;
o make investments;
o engage in mergers or acquisitions;
o pay dividends and make capital expenditures;
o change the management of our vessels or terminate or materially amend
the management agreement relating to each vessel; and
o sell our vessels.
We may need permission from our lenders in order for us to engage in some
corporate actions. Our lenders' interests may be different from ours and we
cannot guarantee that we will be able to obtain our lenders' permission when
needed. This may prevent us from taking actions that are in our best interest.
Our earnings may be adversely affected if we do not successfully employ our
vessels on time charters, in pools or take advantage of the current spot market
We employ the majority of our vessels on spot voyage charters or short term
time charters. Our operating results will therefore depend on the prevailing
charter rates in a given time period. Charter rates are based in part on supply
and demand and are extremely competitive. Significant fluctuations in charter
rates will result in significant fluctuations in the utilization of our vessels
and our profitability. Although we charter out some of our vessels on long term
time charters when we want to lock in favorable charter rates and generate
predictable revenue streams, our vessels that are committed to time charters may
not be available for spot voyages during an upswing in the shipping industry,
when spot voyages might be more profitable. We are impacted by any increase or
decrease in market rates. If rates were to decrease significantly, we may not
utilize our fleet fully and our earnings could be adversely impacted.
We may be unable to attract and retain key management personnel and other
employees in the bulk and tanker industries, which may negatively affect the
effectiveness of our management and our results of operations.
Our management personnel make key decisions to maximize our revenue and
earnings in this highly volatile and cyclical industry. Our success will depend,
in part, on our ability to hire and retain key members of our management team.
The loss of any of these individuals could adversely affect our business
prospects and financial condition. Difficulty in hiring and retaining qualified
personnel could adversely affect our results of operations. We do not maintain
"key man" life insurance on any of our officers.
Our vessels may suffer damage and we may face unexpected dry-dock repairs
that could affect our cash flow and financial condition
If our owned vessels suffer damage, they may need to be repaired at a
dry-docking facility or other type of ship repair facility. The costs of
dry-dock repairs are unpredictable and can be substantial. We may have to pay
dry-docking costs that are not covered by our insurance, which would decrease
earnings. Repairs may involve long periods of inactivity, which may have a
negative effect on earnings and our ability to service our debt.
Purchasing and operating previously owned, or secondhand, vessels may
result in increased operating costs and vessels off-hire, which could adversely
affect our earnings
We own both vessels constructed for us directly by builders and previously
owned, or secondhand, vessels purchased from other owners. While we inspect
secondhand vessels prior to purchase, this does not normally provide us with the
same knowledge about their condition and cost of any required (or anticipated)
repairs that we would have had if these vessels had been built for and operated
exclusively by us. Generally, we do not receive the benefit of warranties from
the builders if we buy vessels older than one year.
In general, the costs to maintain a vessel in good operating condition
increase with the age of the vessel. As of December 31, 2004, our fleet of owned
and long term chartered vessels included five tankers and three bulk vessels
more than 10 years of age. Older vessels are typically less fuel efficient than
more recently constructed vessels due to improvements in engine and hull
technology. After vessels reach 15 years of age, the majority of charterers and
oil companies may impose restrictions on vessels that make it more difficult to
trade the vessels with optimal flexibility. In addition, these older vessels
must meet certain hull thickness tests. Furthermore, cargo insurance rates
increase for vessels over 15 years of age, making them less desirable to
charterers. We, however, consider a useful lifetime of 25 years to be the best
estimate of the economic lifetime of a vessel.
Governmental regulations, safety or other equipment standards related to
the age of a vessel may require expenditures for alterations, or the addition of
new equipment, to our vessels and may restrict the type of activities in which
the vessels may engage. We cannot assure you that, as our vessels age, market
conditions will justify such expenditures or enable us to operate them
profitably for the remainder of their useful life.
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, labor
strikes, or adverse weather conditions.
Any of these circumstances or events could increase our costs or lower our
revenues. The involvement of one or more of our vessels in an oil spill or other
environmental disaster may harm our reputation as a safe and reliable vessel
operator which would adversely affect our revenues.
We may not have adequate insurance to compensate us if one of our vessels
is involved in an accident
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, including environmental
damage and pollution insurance coverage, and war risk insurance. We carry
insurance against loss of hire as well. We can give no assurance that we are
adequately insured against all risks. We may not be able to obtain adequate
insurance coverage at reasonable rates for our fleet in the future. The insurers
may not pay particular claims. Our insurance policies contain deductibles for
which we will be responsible, limitations and exclusions, which although we
believe are standard in the shipping industry, may nevertheless increase our
costs or lower our revenue.
Maritime claimants could arrest our vessels, which could interrupt our cash
flow
Crew members, suppliers of goods and services to a vessel, shippers of
cargo and other parties may be entitled to a maritime lien against that vessel
for unsatisfied debts, claims or damages. In many jurisdictions a maritime lien
holder may enforce its lien by arresting a vessel and commencing foreclosure
proceedings. The arrest or attachment of one or more of our vessels could
interrupt our cash flow and require us to pay a substantial sum 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 vessels.
Governments could requisition one or more of 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 one or more of 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 could negatively impact our revenues.
Our operations expose us to global risks that may interfere with the
operation of our vessels
We are an international company and conduct our operations globally.
Changing economic, political and governmental conditions in the countries where
we are engaged in business or where our vessels are registered affect us. In the
past, political conflicts, particularly in the Arabian Gulf, resulted in attacks
on vessels, mining of waterways and other efforts to disrupt shipping in the
area. Acts of terrorism and piracy have also affected vessels trading in regions
such as the South China Sea and West Africa. Terrorist attacks such as the
attacks on the United States on September 11, 2001 and the United States'
continuing response to these attacks, as well as the threat of future terrorist
attacks, continues to cause uncertainty in the world commercial markets,
including the energy markets. The recent conflict in Iraq may lead to additional
acts of terrorism, armed conflict and civil disturbance around the world, which
may contribute to further instability, including in the oil markets. The
likelihood of acts of terrorism in the Middle East region and Southeast Asia may
increase as shown by the attempted attacks on the Basra Oil Terminal in April
2004 and the attacks on employees of Exxon in Yanbu, Saudi Arabia in early May
2004, and our vessels trading in those areas may face a higher risk of being
attacked. Future hostilities or other political instability in regions where our
vessels trade could affect our trade patterns and adversely affect our
operations and performance.
Because we generate nearly all of our revenues in U.S. dollars, but incur
some of our expenses in Danish Kroner and other currencies, exchange rate
fluctuations could hurt our results of operations.
In 2004, we generated nearly all of our revenues in U.S. dollars but
incurred approximately 83% of our expenses in U.S dollars and 15% was incurred
in Danish Kroner. A change in exchange rates could lead to fluctuations in our
reported net income.
Interest rate fluctuations may significantly affect our loan payments,
which could adversely affect our financial condition
As of December 31, 2004, all of our loans bore interest at floating rates.
Increases in prevailing rates could increase the amounts that we would have to
pay to our lenders. As of December 31, 2004, we had entered into interest swap
agreements expiring between 2006 and 2009 for approximately 58% of the then
outstanding principal amounts of our loans that may mitigate some of our
exposure to the risk of rising interest rates. However, increases in interest
rates will increase our payments under loans not covered by caps of the interest
rates of our loans and swap agreements and may negatively affect our earnings.
Because we are a non-U.S. corporation, you may not have the same rights
that a creditor of a U.S. corporation may have
Our investors may have more difficulty in protecting their interests in the
face of actions by the management, directors or controlling stockholders than
would stockholders of a corporation incorporated in a United States
jurisdiction. In addition, the executive officers and administrative activities
and assets of the Company 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 the Company, or to enforce both in the United States and
outside the United States judgments against the Company in any action, including
actions predicated upon the civil liability provisions of the federal securities
laws of the United States.
It may be difficult to serve process on or enforce a United States judgment
against our officers, our directors and us
We are a Danish company and our executive offices are located outside of
the United States. Our officers and directors and some of the experts named in
this registration statement reside outside of the United States. In addition,
substantially all of our assets and the assets of our officers, directors and
experts are located outside of the United States. As a result, you may have
difficulty serving legal process within the United States upon us or any of
these persons or enforcing any judgments obtained in U.S. courts to the extent
assets located in the United States are insufficient to satisfy the judgments.
In addition, there is uncertainty as to whether the courts of Denmark would (1)
enforce judgments of United States courts obtained against us or our officers
and directors predicated on the civil liability provisions of the United States
federal or state securities laws, or (2) entertain original actions brought in
Danish courts against us or our officers and directors predicated on United
States federal or state securities laws. As a result, it may be difficult for
you to enforce judgments obtained in United States courts against our directors,
officers and non-U.S. experts.
There may be no active public market for you to resell our ADSs
The price of our ADSs may be volatile, and may fluctuate due to factors
such as:
o actual or anticipated fluctuations in our financial results;
o mergers and strategic alliances in the shipping industry;
o market conditions in the industry;
o changes in government regulation;
o fluctuations in our quarterly revenues and earnings and those of our
publicly held competitors;
o shortfalls in our operating results from levels forecast by securities
analysts;
o announcements concerning us or our competitors; and
o the general state of the securities market.
Historically, the shipping industry has been highly unpredictable and
volatile. The market for ADSs in the shipping industry may be equally volatile.
The Copenhagen Stock Exchange is smaller and less liquid than the major
securities exchanges or markets in the United States. The trading volume of our
shares on the Copenhagen Stock Exchange has been volatile. ADSs representing our
common shares have been traded in the United States only since April 16, 2002,
and it may be hard to predict future trading levels or volatility. Consequently,
you may not be able to sell ADSs at the time and at the price you desire.
Holders of ADSs may experience delays in receiving information and
materials that holders of our common shares may not
The ADSs are securities that have been issued by a depositary with whom we
have deposited our common shares. The depositary is responsible for distributing
notices and voting materials to holders of the ADSs. If there is any delay in
such distributions on the part of the depositary, you may not receive such
dividends or materials concurrently with holders of our common shares in
Denmark, and may not receive such materials in time for you to instruct the
depositary to vote.
You may receive a smaller dividend than what you expected to receive when
the dividend was approved
Under Danish law, the board of directors proposes dividends and the
shareholders vote whether to accept the proposal or to lower the dividend. We
will pay any dividends in Danish Kroner to our depository agent for the ADSs,
and our depository agent will convert the amounts into U.S. dollars at the
relevant exchange rate and distribute the dividend to you. If the Danish Kroner
depreciates against the U.S. dollar before our depository agent distributes the
dividend, you may receive a smaller dividend than what you expected to receive
at the time the dividend was approved by shareholders.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We are Aktieselskabet Dampskibsselskabet Torm, or TORM, a Danish shipping
company founded in 1889 under the Danish Companies Act that is engaged primarily
in the ownership and operation of product tankers and bulk carriers. We have
also provided offshore marine service vessels, but ceased this service in
December 2003. Our product tankers primarily carry refined products such as
naphtha, gasoline, gas oil, jet fuel, and diesel oil. Our dry bulk vessels carry
commodities such as coal, iron ore and grain. Our vessels trade worldwide. Our
registered office and principal place of business is at Tuborg Havnevej 18,
DK-2900 Hellerup, Denmark. Our telephone number is +45 39179200. All the
financial information presented in Item 4 is in accordance with Danish GAAP.
We provide transportation services by utilizing a fleet of vessels that we
own, charter in on short and long term time charters, or commercially manage as
the manager of a pool or through contracts with third party owners. We charter
in tankers and bulk vessels as are needed by the pools we manage.
Our primary capital expenditures are in connection with the acquisitions of
vessels. For the past several years, we have been acquiring new vessels and
disposing of older vessels in our fleet to ensure compliance with the safety
requirements of the International Maritime Organization, or the IMO. During the
past three years, we have entered into contracts to purchase thirteen additional
vessels under construction, or newbuildings, and secondhand vessels, for a total
cost of 520 million U.S. dollars or approximately DKK 3.1 billion and have sold
one vessel for aggregate proceeds of approximately 17 million U.S. dollars or
approximately DKK 0.1 billion.
B. Business Overview
THE FLEET
Our fleet of owned, long term chartered and partially owned vessels
consists of 22 product tankers, a 50% interest in an additional product tanker
and nine dry bulk carriers. The total tonnage of those vessels is approximately
2,042,563 dwt, of which one vessel of approximately 84,000 dwt is owned jointly
with a partner. In addition, as of December 31, 2004, we commercially managed
approximately 53 vessels for third party owners and charterers.
In 2002, we placed orders for two LR1 75,000 dwt tankers, both of which we
took delivery in 2004. In 2003, we placed orders for the building of four new
100,000 dwt product tankers, of which we expect to take delivery in 2006 and
2007. In January 2004, we placed an order for the building of one new 100,000
dwt product tanker, which we expect to take delivery of in early 2008. In
October 2004, we acquired two 46,000 dwt product tanker newbuildings, both of
which we expect will be delivered in 2005.
For an overview of our fleet please refer to Item 4D.
Our product tanker division is engaged in the transportation of refined oil
products such as gasoline, jet fuel, naphtha and gas oil. We own and operate
three sizes of product carriers. The largest vessels are Aframax tankers of
approximately 100,000 to 105,000 dwt, that primarily transport naphtha between
the Arabian Gulf and Japan and other East Asiatic countries. The other two sizes
of product tankers, Panamax, which are tankers of approximately 80,000 to 85,000
dwt, and Handymax, which are tankers of approximately 40,000 to 50,000 dwt,
operate in the above mentioned areas and in the U.S., Africa, Europe and the
Caribbean. One of these vessels is owned in joint venture with a partner.
Our dry bulk vessels transport products such as grain, coal and iron ore.
We operate dry bulk vessels of two sizes: Panamax and Handysize. The Panamax dry
bulk vessels, which range between 60,000 and 80,000 dwt, carry iron ore and coal
as well as commodities such as grain, bauxite and fertilizer. The Handysize dry
bulk vessels are approximately 20,000 to 30,000 dwt and are fitted to carry
logs, but can also carry commodities such as grain, fertilizer and steel.
In 1997, we diversified into the operation of anchor-handling tug/supply
vessels and other similar offshore craft that service oil rigs but ceased this
activity in December 2003.
Each of our vessel categories generates gross profits (net earnings from
shipping activities) by operating owned and chartered in vessels. Gross profits
(net earnings from shipping activities) generated by the Liner service is
included in the item "Profit before tax from discontinued operations" in the
Income Statement. Over the last three financial years the contribution to net
earnings from shipping activities per division has been as follows:
Division 2002 2003 2004
-------- ---- ---- ----
Product Tankers 98% 80% 56%
Dry Bulk Vessels -5% 20% 44%
Liner Service 6% 0% 0%
Offshore Craft 1% 0% 0%
Please refer to Item 5A for a description of revenue and gross profit per
division.
PRODUCT TANKER POOLING ARRANGEMENTS
We employ all of our owned and long term chartered product tankers in three
pooling arrangements, the LR2 Pool, the LR1 Pool and the MR Pool, along with
vessels from several other shipping companies. The manager of each pool has the
responsibility for the commercial management of the participating vessels,
including the marketing, chartering, operation and bunker (fuel oil) purchase of
the vessels. Each pool is administered by a pool board, which is comprised of
representatives of each pool participant. The pool boards set the pools'
policies and issue directives to the pool managers. The pool participants remain
responsible for all other costs including the financing, insurance, manning and
technical management of their vessels. The earnings of all of the vessels are
aggregated and divided according to the relative performance capabilities of the
vessel and the actual earning days each vessel is available.
The LR2 Pool
As of December 31, 2004, the LR2 Pool was comprised of 18 Aframax tankers
that are all double-hull and mainly trade clean petroleum products. We formed
LR2 Management A/S, a Danish corporation, to serve as the commercial manager of
the LR2 Pool. During 2004, the role of commercial manager was transferred to a
limited partnership: LR 2 Management K/S. LR2 Management A/S, which was renamed
Longe Range 2 A/S, is the general partner of the partnership. We own 50% of all
issued and outstanding voting stock of Longe Range 2 A/S and a 50% interest in
LR 2 Management K/S. Maersk Tankers, one of the pool participants, also owns a
50% interest in both entities. The other participants in this pool are Primorsk
Shipping Corporation and Reederei "Nord" Klaus E. Oldendorff Ltd. Three of our
owned vessels TORM Valborg, TORM Ingeborg and TORM Helene and two of our
chartered in vessels, TORM Kristina and TORM Gudrun, currently participate in
this pool and we have contracted to add five newbuildings to the pool between
2006 and 2008 when the vessels are delivered from the shipbuilding yard. The LR2
pool has also time chartered in one vessel, the charter of which is expected to
end in January 2006. If a participant wants to sell one of its vessels in the
pool, it must give notice to the pool board two months in advance of such sale,
and six months notice is required for a participant to withdraw all of its
vessels from the pool. No such notice has been given from January 1, 2004 to
April 30, 2005.
The LR1 Pool
As of December 31, 2004, the LR1 Pool consisted of 32 Panamax tankers, and
we serve as the sole manager of the pool. The other participants in this pool
are Difko, Marinvest Shipping AB, Waterfront Shipping AS, Mitsui OSK Lines Ltd.,
Reederei "Nord" Klaus E. Oldendorff Ltd., LGR di Navigazione S.P.A., Great Basic
Limited and Great Global (Asia) Limited. As of December 31, 2004, five of our
vessels, TORM Estrid, TORM Hilde, TORM Margrethe, TORM Ismini and Kirsten,
participated in this pool, and we had contracted to add two newbuildings to the
pool in 2005 when the vessels are delivered from the shipbuilding yard. If a
participant wants to sell one of its vessels or withdraw all of them from the
pool, it must give three months advance notice to the pool board. No such notice
has been given from January 1, 2004 to April 30, 2005.
The MR Pool
The MR Pool is a pooling arrangement we have entered into with Prisco
Singapore Pte Ltd., Sanmar Shipping and LGR Di Navigazione S.P. for the pooling
of 25 Handymax product tankers as of December 31, 2004. We serve as the sole
manager of the MR Pool. As of December 31, 2004, 13 of our vessels, TORM Mary,
TORM Vita, TORM Gertrud, TORM Gerd, TORM Gunhild, TORM Asia, TORM Gotland, TORM
Anne, TORM Olga, TORM Thyra, TORM Freya, TORM Alice and TORM Agnete participated
in this pool. If a participant wants to sell one of its vessels in the pool, it
must give notice to the pool board three months in advance of such sale, and six
months notice is required for a participant to withdraw all of its vessels from
the pool. No such notice has been given from January 1, 2004 to April 30, 2005.
DRY BULK VESSEL OPERATION
We operate both Panamax and Handysize vessels in our Bulk Division. We
operate our Panamax vessels ourselves while our Handysize vessels are operated
through our participation in the IHC Pool. Similar to the pooling arrangement
for our product tankers, the earnings from the Handysize vessels are aggregated
and divided according to the relative performance capabilities of the vessel and
the actual earning days per vessel. The pool is administered by a pool board,
which is comprised of representatives of each pool participant. The pool board
sets the pools' policies and issues directives to the pool manager. The pool
participants remain responsible for the financing, insurance, manning and
technical management of their individually owned vessels.
Handysize Pool
We established a pool called the International Handybulk Carriers, or IHC
Pool, on October 1, 2001, together with Pacific Basin Shipping Investments
Limited and Wah Kwong Shipping Holdings Limited. This pool is comprised of
approximately 40 vessels as at December 31, 2004. Pacific Basin serves as
commercial manager for the pool. We have entered two of our owned vessels into
the pool, TORM Arawa and TORM Pacific.
OUR INVESTMENT IN DAMPSKIBSSELSKABET "NORDEN" A/S
In the summer of 2002, TORM acquired a share holding in NORDEN and
subseqently launched a public offer on the Copenhagen Stock Exchange for the
remainder of NORDEN's shares. After the offer, TORM owned 727,803 shares
representing 33% - excluding NORDEN's own shares - acquired at a price of DKK
361 per share for a total investment of DKK 263 million. As of December 31,
2004, we were NORDEN's single largest shareholder with 33.07% of NORDEN's
outstanding shares, excluding own shares.
NORDEN, founded in 1871, is a Danish based shipping company listed on the
Copenhagen Stock Exchange. NORDEN's focus is on tankers and bulk carriers. As of
December 31, 2004, NORDEN operated approximately 123 vessels through a mix of
owned and chartered tonnage.
Despite the fact that the goal of acquiring NORDEN - to create one shipping
company combining TORM's tanker activities with NORDEN's strength in bulk
markets - was not realized in 2002, we nonetheless retained the shareholding in
NORDEN. This was done not only with the aim of making a merger possible in the
longer term, but also in view of the investment potential.
In the autumn of 2004, two of NORDEN's shareholders decided to sell a total
of 20% of the shares in NORDEN to Rasmussengruppen AS. At the same time
Rasmussengruppen reached an agreement with A/S Motortramp, which owns 25.7% of
the share capital, whereby the two parties have granted one another first
refusal on each other's shares in NORDEN, and at the same time committed
themselves not to sell their shares to a third party for a period of two
years.We currently have no intention to sell the shareholding in NORDEN.
We had an unrealized gain of DKK 1,034 million related to the increase in
the value of the NORDEN shares in 2004.
THE INDUSTRY - TANKERS
The international product tanker industry provides seaborne transportation
of refined petroleum products for the oil market. According to industry sources,
tankers transported refined oil products corresponding to approximately 653
million tons annually in the fourth quarter of 2004 showing a 6.7% increase as
compared to fourth quarter 2003. For 2004 as a whole, industry sources estimate
that products trade increased by 3.9%. The two main types of operators that
provide transportation services in the tanker market are:
o major oil companies; and
o independent ship owners.
They provide transportation services for end users such as:
o oil companies;
o oil traders;
o petrochemical companies;
o government agencies; and
o power plants.
According to industry sources, the world tanker fleet above 10,000 dwt
consists of approximately 3,119 vessels totaling 308 million dwt or 5.7% higher
as of January 1, 2005 as compared to the year before. Oil companies own, or
control through long-term time charters, approximately one third of the current
world tanker capacity. Independent ship owners own or control the other two
thirds. Oil companies use their fleets not only to transport their own oil
products, but also to compete with the independent ship owners to transport oil
products for others.
We believe the quality of tanker vessels and operations has improved over
the past several years, as charterers and regulators increasingly focus on
safety and protection of the environment. National authorities and international
conventions have historically regulated the oil transportation industry. Since
1990, the emphasis on environmental protection has increased. Legislation,
regulations and regulatory organizations such as the OPA, the IMO, protocols and
classification society procedures demand higher-quality tanker construction,
maintenance, repair and operations. Charterers of all types, including oil
companies, terminal operators, shippers and receivers are becoming increasingly
selective in their acceptance of tankers and are inspecting and vetting both
vessels and companies on a periodic basis. As these changes have imposed costs
and potential liabilities on tanker owners and operators, they have also raised
barriers to entry and favored ship owners with quality fleets and operations.
Limitations imposed by port states and the IMO on trading of older single-hull
vessels should accelerate the commercial obsolescence of older, poor-quality
tankers.
The industry identifies tankers as either product tankers or crude oil
tankers on the basis of various factors including technical specifications and
trading histories. Crude oil tankers carry crude oil and so-called "dirty"
products such as fuel oils. Product tankers carry refined petroleum products
such as gasoline, jet fuel, kerosene, naphtha and gas oil, which are often
referred to as "clean" products.
Product tankers are tankers that typically have cargo handling systems that
are designed to transport several different refined products simultaneously,
such as gasoline, jet fuel, kerosene, naphtha and heating oil, from refineries
to the ultimate consumer. Product tankers generally have coated cargo tanks that
make it easier to clean the tanks between voyages involving different cargoes.
This coating also protects the steel in the tanks from corrosive cargoes.
Product tankers generally range in size from 10,000 dwt to 110,000 dwt.
Although product tankers are designed to carry dirty as well as clean
products, they generally do not switch between clean and dirty cargoes. A vessel
carrying dirty cargo must undergo a cleaning process prior to loading clean
cargo and many charterers want to eliminate any risk of contamination. In
addition, specified design, outfitting and technical factors tend to make some
vessels better suited to handling the physical properties of distinct cargoes.
Our vessels primarily transport clean products. Our product tankers are all
double-hull and range in size from 44,000 dwt to 105,000 dwt. They compete with
tankers of similar size and quality. The rates that we are able to obtain for
our vessels are subject to the supply and demand dynamics described below.
Supply and Demand for Tankers
The supply of, and demand for, tanker capacity strongly influences tanker
charter rates and vessel values for all tankers. Supply and demand has
historically caused fluctuations in tanker charter rates and secondhand values.
Demand for oil tankers is related to the demand for oil and oil products
and the distance between points of production and points of consumption. Demand
for refined petroleum products is, in turn, affected by, among other things:
o general economic conditions, which include increases and decreases in
industrial production and transportation;
o oil prices;
o environmental issues or concerns;
o climate;
o competition from alternative energy sources; and
o regulatory environment.
The supply of tanker capacity is a function of the number of tankers
delivered to the fleet relative to the number of tankers permanently taken from
service when they become technically or economically obsolete. Currently, it
takes approximately 36 to 48 months from the time a building contract is entered
into before a newbuilding is delivered. The average age of tankers removed from
service currently ranges between 21 and 25 years. Other factors affecting the
supply of tankers include:
o the number of combined carriers, or vessels capable of carrying oil or dry
bulk cargoes, carrying oil cargoes;
o the number of newbuildings on order and being delivered;
o the number of tankers in lay-up, which refers to vessels that are in
storage, dry-docked, awaiting repairs or otherwise not available or out of
commission; and
o the number of tankers scrapped for obsolescence or subject to casualties;
o prevailing and expected future charterhire rates;
o costs of bunkers, fuel oil, and other operating costs;
o the efficiency and age of the world tanker fleet;
o current shipyard capacity; and
o government and industry regulation of maritime transportation practices,
particularly environmental protection laws and regulations.
Environmental laws and regulations are imposing requirements on vessels
when they reach 25 years of age that reduce the amount of cargo they can carry
or require that the vessel be configured in a different way. These requirements
tend to impose costs on those older vessels and make operating them less
economical.
THE INDUSTRY - DRY BULK FLEET
Overview
The dry bulk carrier industry is highly fragmented with many owners and
operators of vessels, including proprietary owners who are large shippers of dry
bulk cargo, state-controlled shipping companies and independent operators.
Dry bulk cargo consists of the major bulk commodities, which are coal, iron
ore and grain and the minor bulk commodities which include steel products,
forest products, agricultural products, bauxite and alumina, phosphates,
petcoke, cement, sugar, salt, minerals, scrap metal and pig iron. Dry bulk
carriers are generally single deck ships, which transport unpacked cargo, which
is poured, tipped or placed through hatchways into the hold of the ships.
Historically, charter rates for dry bulk carriers have been influenced by
the demand for, and the supply of, vessel tonnage. The demand for vessel tonnage
is largely a function of the level of worldwide economic activity and the
distance between major trade areas. Supply is primarily driven by the size of
the existing worldwide dry bulk carrier fleet, scrapping and newbuilding
activity. Charter rates and vessel values are determined in a highly competitive
global market and have been characterized by fluctuations since the mid-1980s.
Vessel Types
Vessels utilized in the carriage of major bulk cargoes are generally
classified into three categories, based on carrying capacity:
o Handysize dry bulk carriers (20,000 to 30,000 dwt). Unlike most larger dry
bulk carriers, Handysize dry bulk carriers are equipped with cargo gear
such as cranes. This type of vessel is well suited for transporting both
major and minor bulk commodities to ports around the world that may have
draft restrictions or are not equipped with gear for loading or discharging
of cargo.
o Panamax dry bulk carriers (60,000 to 80,000 dwt). Panamax dry bulk carriers
are designed with the maximum width, length and draft that will allow them
to transit fully laden through the Panama Canal. Panamax vessels are
primarily used in the transport of major bulks such as grain and coal,
along with some minor bulks like phosphate, petcoke and salt.
o Capesize dry bulk carriers (100,000 dwt or above). Capesize dry bulk
carriers primarily transit from the Atlantic to the Pacific Ocean via Cape
Horn or the Cape of Good Hope, hence their name. Capesize vessels are
typically used for long voyages in the coal and iron ore trades.
In addition to the three standard vessel types, the world bulk carrier
fleet also includes combination carriers. These vessels are typically large,
capable of carrying either crude oil or dry bulk cargoes and compete with both
Capesize and Panamax bulk carriers. The role of combination carriers has been
decreasing since 1990 because such vessels, which were not built primarily for
the dry cargo market but rather for the oil tanker market, have come to be
considered less desirable by charterers of oil tankers, since their oil carrying
capacity may be limited and they are not strictly specialized for the carriage
of oil.
Set forth below are some of the characteristics of the principal cargoes
carried by dry bulk carriers.
o Coal. The two categories comprising this segment are steam (or thermal)
coal, which is used by power utilities, and coking (or metallurgical) coal,
which is used by steelmakers. Steam coal is primarily transported from
Australia, South Africa and the United States to Europe and Japan. Coking
coal is primarily transported from Australia, the United States and Canada
to Europe and Japan.
o Iron Ore. Iron ore is primarily transported from Brazil and Australia to
China, Europe and Japan. The majority of iron ore shipments is carried by
Capesize dry bulk carriers.
o Grain. The grain trade includes wheat, wheat flour, coarse grains (corn and
barley), soybeans and soybean meal. Although the annual volume of the grain
trade is subject to political factors and weather conditions, shipments
have remained relatively stable over the past five years. Grain is
primarily transported from the United States, Canada, Europe, Australia and
Argentina to the Far East, Latin America and Africa. Handymax and Panamax
vessels carry approximately 90% of the international seaborne bulktrade
while Capesize vessels transport the remainder.
Our dry bulk vessels transport cargoes such as grain, coal and iron ore. We
operate both Handysize and Panamax dry bulk vessels. Most of the coal and iron
ore we transport are carried on our Panamax vessels, while both types of vessels
carry grain and fertilizer. The rates that we can achieve for our vessels depend
on the supply and demand dynamics described below.
Demand for Dry Bulk Vessels
Due to the variety of cargo carried by dry bulk carriers, demand for such
vessels is dependent on a number of factors, including world and regional
economic and political conditions, developments in international trade, changes
in seaborne and other transportation patterns, weather patterns, crop yields,
armed conflicts, port congestion, canal closures and other diversions of trade.
Generally, since larger ships carry fewer types of cargoes, demand for larger
vessels is affected by trade patterns in a small number of commodities. Demand
for smaller vessels is more diversified and is determined by trade in a larger
number of commodities. As a result, charter rates for smaller dry bulk carriers,
such as Handysize dry bulk carriers, have tended to be relatively more stable
than charter rates for larger dry bulk carriers.
Supply of Dry Bulk Carriers
The size of the world's dry bulk carrier fleet changes as a result of
newbuildings and scrapping or loss of vessels. The general trend in the
development of the bulk market has always been closely linked to the state of
the world economy. The economic downturn in Asia in the late 1990's led to sharp
falls in cargo volumes, and therefore rates, whereas the subsequent recovery has
likewise acted to boost the sector with rates recovering to above those
prevailing prior to the crisis. In the middle of the third quarter 2003 the dry
bulk market reached historically high levels and rates have remained high
compared to the previous years due to a strong demand from China for iron ore,
coupled with a very low level of newbuilding deliveries and a low global
newbuilding order book in the bulk market. The level of expected newbuildings in
the dry bulk sector in the forthcoming years remains at a low level due to the
preference by the major shipyards for building container and tanker vessels that
in recent years have been more profitable to the shipyards.
CHARTERING OF THE FLEET
Vessels can be chartered by customers in a variety of ways.
The spot market provides the most frequent source of employment for our
vessels. In the spot market, the charterer hires the vessel to carry cargo on a
specific voyage. The owner provides the crew and bears all vessel operating
costs and voyage costs, including fuel and port costs.
A charterer and owner can also enter into a time charter for a vessel. Time
charters involve a charterer hiring a vessel for a fixed period, which may range
from a short number of days to several years. Typical time charters are for
periods of between six to 36 months. In a time charter, the owner bears
operating costs, while the charterer is responsible for the voyage costs,
including fuel oil.
A demise charter, also referred to as a bareboat charter, involves the
chartering of a vessel for a fixed period of time. However, unlike a time
charter, a bareboat charter requires the user to pay for all operating expenses,
maintenance of the vessel and voyage costs.
All of our tanker vessels and Handysize dry bulk vessels operate in pools.
Within each pool, a vessel may be time chartered out by the pool manager, but
the charterhire is divided among all of the vessels in the pool and therefore
does not provide us with the steady income normally associated with time
charters. Each pool manager will determine the number of vessels to be time
chartered depending on charterhire rates and pool board strategy. Vessels in our
pools that are not time chartered generally trade in the spot market. However,
the pools do enter into contracts of affreightment, which provide a guaranteed
fixed income over a period of time.
MANAGEMENT OF THE FLEET
We provide the operations, chartering, technical support, shipyard
supervision, insurance and financing management services necessary to support
our fleet. Our chartering staff, as well as our fleet's management personnel, is
mainly located in our head office in Copenhagen and in our office in Singapore.
Our staff makes recommendations to our senior management regarding the
chartering of our vessels, as well as identifying when opportunities arise to
buy or sell a vessel. We also have offices in Manila, Hamburg and Tokyo, but all
decisions relating to the vessels we manage are made or approved in our offices
in Copenhagen and Singapore.
SEASONALITY
The demand for product tankers and bulk carriers has historically
fluctuated depending on the time of year. Demand for product tankers is
influenced by many factors, including general economic conditions, but it is
primarily related to demand for petroleum products in the areas of greatest
consumption. Accordingly, demand for product tankers generally rises during the
winter months and falls during the summer months in the Northern hemisphere.
Demand for bulk carriers is not as volatile as that for tankers, but demand does
generally increase in the spring months in North America as demand for grain
increases and generally falls back during the winter months. More consistent
commodities such as coal, however, provide some stability to the bulk vessel
trade. Moreover, these are generalized trading patterns that vary from year to
year and there is no guarantee that similar patterns will continue in the
future.
ENVIRONMENTAL AND OTHER REGULATIONS
Government regulation significantly affects the ownership and operation of
our vessels. The various types of governmental regulation that affect our
vessels include international conventions, national, state and local laws and
regulations in force in the countries in which our vessels may operate or where
our vessels are registered. We cannot predict the ultimate cost of complying
with these requirements, or the impact of these requirements on the resale value
or useful lives of our vessels. Various governmental and quasi-governmental
agencies require us to obtain permits, licenses and certificates for the
operation of our vessels. Although we believe that we are substantially in
compliance with applicable environmental and regulatory laws and have all
permits, licenses and certificates necessary for the conduct of our operations,
future non-compliance or failure to maintain necessary permits or approvals
could require us to incur substantial costs or temporarily suspend operation of
one or more of our vessels.
We believe that the heightened environmental and quality concerns of
insurance underwriters, regulators and charterers are leading to greater
inspection and safety requirements on all vessels and may accelerate the
scrapping of older vessels throughout the industry. Increasing environmental
concerns have created a demand for modern vessels that are able to conform to
the stricter environmental standards. We maintain high operating standards for
all of our vessels that emphasize operational safety, quality maintenance,
continuous training of our crews and officers and compliance with U.S. and
international and other national regulations.
Our vessels are subject to both scheduled and unscheduled inspections by a
variety of governmental and private entities, each of which may have unique
requirements. These entities include the local port authorities such as the U.S.
Coast Guard, harbor master or equivalent, classification societies, flag state
administration or country of registry, and charterers, particularly terminal
operators and major oil companies which conduct frequent vessel inspections.
Environmental Regulation -- IMO
The IMO, an agency organized in 1959 by the United Nations, has adopted
regulations, which set forth pollution prevention requirements applicable to
tankers. These regulations, which have been implemented in many jurisdictions in
which our vessels operate, provide, in part, that:
o tankers between 25 and 30 years old must be of double-hull construction or
of a mid-deck design with double sided construction, unless (1) they have
wing tanks or double-bottom spaces not used for the carriage of oil, which
cover at least 30% of the length of the cargo tank section of the hull or
bottom; or (2) they are capable of hydrostatically balanced loading
(loading less cargo into a tanker so that in the event of a breach of the
hull, water flows into the tanker, displacing oil upwards instead of into
the sea);
o tankers 30 years old or older must be of double-hull construction or
mid-deck design with double sided construction; and
o all tankers will be subject to enhanced inspections.
Also, under IMO regulations, a tanker must be of double-hull construction
or a mid-deck design with double-sided construction or be of another approved
design ensuring the same level of protection against oil pollution if the
tanker:
o is the subject of a contract for a major conversion or original
construction on or after July 6, 1993;
o commences a major conversion or has its keel, which is a continuous plate
running the length of the vessel at the middle part of the bottom plating,
attached on or after January 6, 1994; or
o completes a major conversion or is a newbuilding delivered on or after July
6, 1996.
Under the current regulations, starting in 2004, and thereafter, such
vessels will not be in compliance with the configuration requirements of the
IMO. As of December 31, 2004, we did not own any single-hull tankers.
Effective September 2002, the IMO accelerated its existing timetable for
the phase-out of single-hull oil tankers. These regulations require the
phase-out of most single-hull oil tankers by 2015 or earlier, depending on the
age of the tanker and whether it has segregated ballast tanks. After 2007, the
maximum permissible age for single-hull tankers will be 26 years. Under current
regulations, retrofitting will enable a vessel to operate until the earlier of
25 years of age and the anniversary date of its delivery in 2017. However, as a
result of the oil spill in November 2002 relating to the loss of the M/T
Prestige, which was owned by a company not affiliated with us, in December 2003
the Marine Environmental Protection Committee of the IMO adopted a proposed
amendment to the International Convention for the Prevention of Pollution from
Ships to accelerate the phase out of single-hull tankers from 2015 to 2010
unless the relevant flag states extend the date to 2015. This proposed amendment
came into effect in April 2005. Moreover, the IMO may still adopt regulations in
the future that could adversely affect the remaining useful lives of single-hull
tankers.
The IMO has also negotiated international conventions that impose liability
for oil pollution in international waters and a signatory's territorial waters.
In September 1997, the IMO adopted Annex VI to the International Convention for
the Prevention of Pollution from Ships to address air pollution from ships.
Annex VI was ratified in May 2004 and became effective in May 2005. Annex VI
sets limits on sulfur oxide and nitrogen oxide emissions from ship exhausts and
prohibits deliberate emissions of ozone depleting substances, such as
chlorofluorocarbons. Annex VI also includes a global cap on the sulfur content
of fuel oil and allows for special areas to be established with more stringent
controls on sulfur emissions. Compliance with these regulations could require
the installation of expensive emission control systems and could have an adverse
financial impact on the operation of our vessels. Additional or new conventions,
laws and regulations may be adopted that could adversely affect our ability to
manage our ships.
The requirements contained in the International Safety Management Code, or
ISM Code, promulgated by the IMO, also affect our operations. The ISM Code
requires the party with operational control of a vessel to develop an extensive
safety management system that includes, among other things, the adoption of a
safety and environmental protection policy setting forth instructions and
procedures for operating its vessels safely and describing procedures for
responding to emergencies. We are certified as an approved ship manager under
the ISM Code.
The ISM Code requires that vessel operators obtain a safety management
certificate for each vessel they operate. This certificate evidences compliance
by a vessel's management with code requirements for a safety management system.
No vessel can obtain a certificate unless its manager has been awarded a
document of compliance, issued by each flag state or by an appointed
classification society, under the ISM Code. All of our vessels have obtained
safety management certificates.
Noncompliance with the ISM Code and other IMO regulations may subject the
ship owner or a bareboat charterer to increased liability, may lead to decreases
in available insurance coverage for affected vessels and may result in the
denial of access to, or detention in, some ports. Both the U.S. Coast Guard and
EU authorities have indicated that vessels not in compliance with the ISM Code
will be prohibited from trading in U.S. and European Union ports, as the case
may be.
The IMO has negotiated international conventions that impose liability for
oil pollution in international waters and a signatory's territorial waters.
Additional or new conventions, laws and regulations may be adopted which could
limit our ability to do business and which could have a material adverse effect
on our business and results of operations.
Environmental Regulation--OPA/CERCLA
The OPA established an extensive regulatory and liability regime for
environmental protection and cleanup of oil spills. OPA affects all owners and
operators whose vessels trade with the U.S. or its territories or possessions,
or whose vessels operate in the waters of the U.S., which include the U.S.
territorial waters and the two hundred nautical mile exclusive economic zone of
the U.S. The Comprehensive Environmental Response, Compensation and Liability
Act, or CERCLA, applies to the discharge of hazardous substances (other than
oil) whether on land or at sea. Both OPA and CERCLA impact our operations.
Under OPA, vessel owners, operators and bareboat or "demise" charterers are
"responsible parties" who are all liable regardless of fault, individually and
as a group, for all containment and clean-up costs and other damages arising
from oil spills from their vessels. These responsible parties would not be
liable if the spill results solely from the act or omission of a third party, an
act of God or an act of war. The other damages aside from cleanup and
containment costs are defined broadly to include:
o natural resource damages and related assessment costs;
o real and personal property damages;
o net loss of taxes, royalties, rents, profits or earnings capacity;
o net cost of public services necessitated by a spill response, such as
protection from fire, safety or health hazards; and
o loss of subsistence use of natural resources.
OPA limits the liability of responsible parties to the greater of USD 1,200
per gross ton or USD 10 million per tanker that is over 3,000 gross tons. This
is subject to possible adjustment for inflation. OPA specifically permits
individual states to impose their own liability regimes with regard to oil
pollution incidents occurring within their boundaries, and some states have
enacted legislation providing for unlimited liability for discharge of
pollutants within their waters. In some cases, states that have enacted their
own legislation have not yet issued implementing regulations defining tanker
owners' responsibilities under these laws. CERCLA, which applies to owners and
operators of vessels, contains a similar liability regime and provides for
cleanup, removal and natural resource damages. Liability under CERCLA is limited
to the greater of USD 300 per gross ton or USD 5 million unless the incident is
caused by gross negligence, willful misconduct, or a violation of certain
regulations, in which case liability is unlimited. 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 tankers call.
OPA requires owners and operators of vessels to establish and maintain with
the U.S. Coast Guard evidence of financial responsibility sufficient to meet the
limit of their potential strict liability under OPA. The U.S. Coast Guard has
enacted regulations requiring evidence of financial responsibility in the amount
of USD 1,500 per gross ton for tankers, coupling the OPA limitation on liability
of USD 1,200 per gross ton with the CERCLA liability limit of USD 300 per gross
ton. Under the regulations, evidence of financial responsibility may be
demonstrated by insurance, surety bond, self-insurance or guaranty. Under OPA
regulations, an owner or operator of more than one tanker will be required to
demonstrate evidence of financial responsibility for the entire fleet in an
amount equal only to the financial responsibility requirement of the tanker
having the greatest maximum liability under OPA and CERCLA. We have provided
requisite guarantees and received certificates of financial responsibility from
the U.S. Coast Guard for each of our vessels required to have one.
We insure each of our vessels with pollution liability insurance in the
maximum commercially available amount of USD 1 billion per vessel per incident.
A catastrophic spill could exceed the insurance coverage available, in which
event there could be a material adverse effect on our business.
Under OPA, with certain limited exceptions, all newly built or converted
tankers operating in U.S. waters must be built with double-hulls. Existing
vessels that do not comply with the double-hull requirement must be phased out
over a 20-year period, from 1995 to 2015, based on size, age and place of
discharge, unless retrofitted with double-hulls. Notwithstanding the phase-out
period, OPA currently permits existing single-hull tankers to operate until the
year 2015 if their operations within U.S. waters are limited to:
o discharging at the Louisiana Offshore Oil Port, also known as the LOOP; or
o unloading with the aid of another vessel, a process referred to in the
industry as lightering, within authorized lightering zones more than 60
miles off-shore.
Owners or operators of tankers operating in the waters of the U.S. must
file vessel response plans with the U.S. Coast Guard, and their tankers are
required to operate in compliance with their U.S. Coast Guard approved plans.
These response plans must, among other things:
o address a "worst case" scenario and identify and ensure, through contract
or other approved means, the availability of necessary private response
resources to respond to a "worst case discharge";
o describe crew training and drills; and
o identify a qualified individual with full authority to implement cleanup
actions.
We have obtained vessel response plans approved by the U.S. Coast Guard for
our vessels operating in U.S. waters. In addition, the U.S. Coast Guard has
announced it intends to propose similar regulations requiring certain tanker
vessels to prepare response plans for the release of hazardous substances.
Environmental Regulation--Other
Although the U.S. is not a party to these conventions, many countries have
ratified and follow the liability scheme adopted by the IMO and set out in the
International Convention on Civil Liability for Oil Pollution Damage of 1969, or
CLC. Under this convention, a vessel's registered owner is strictly liable for
pollution damage caused in the territorial waters of a contracting state by
discharge of oil, subject to some complete defenses. Liability is limited to
approximately USD 183 per gross registered ton or approximately USD 19.3
million, whichever is less. If, however, the country in which the damage results
is a party to the 1992 Protocol to the CLC, the maximum liability rises to
approximately USD 82.7 million. The limit of liability is tied to a unit of
account, which varies according to a basket of currencies. The right to limit
liability is forfeited under the CLC where the spill is caused by the owner's
actual fault and under the 1992 Protocol, where the spill is caused by the
owner's intentional or reckless conduct. Vessels trading to states, which are
party to this convention must provide evidence of insurance covering the limited
liability of the owner. In jurisdictions where the CLC has not been adopted,
various legislative schemes or common law govern, and liability is imposed
either on the basis of fault or in a manner similar to the CLC.
In addition, most U.S. states that border a navigable waterway have enacted
environmental pollution laws that impose strict liability on a person for
removal costs and damages resulting from a discharge of oil or a release of a
hazardous substance. These laws may be more stringent than U.S. federal law.
Several of our vessels currently carry cargoes to U.S. waters regularly and
we believe that all of our vessels are suitable to meet OPA requirements and
that they would also qualify for trade if chartered to serve U.S. ports.
European Union and IMO Regulations
The IMO has approved a timetable for the accelerated phasing-out of
single-hull oil tankers. Oil tankers delivered in 1976 and 1977 and which do not
comply with the requirements for protectively located segregated ballast tanks
were phased out by January 1, 2005.
The total loss of the oil tanker M/T Erika off the coast of France on
December 12, 1999 polluted more than 250 miles of French coastline with heavy
oil. Following the spill, the European Commission adopted a "communication on
the safety of oil transport by sea," also named the Erika Communication.
As a part of this, the European Commission has adopted a proposal for a
general ban on single-hull oil tankers. The timetable for the ban is similar to
that set by the United States under OPA in order to prevent oil tankers banned
from U.S. waters from shifting their trades to Europe. The ban plans for a
gradual phase-out of tankers depending on vessel type:
o Single-hull oil tankers larger than 20,000 dwt without protective ballast
tanks around the cargo tanks. This category is proposed to be phased out by
2005.
o Single-hull oil tankers larger than 20,000 dwt in which the cargo tank area
is partly protected by segregated ballast tank. This category is proposed
to be phased out by 2010.
o Single-hull tankers below 20,000 dwt. This category is proposed to be
phased out by 2015.
Partly in response to the oil spill caused by the sinking of the tanker M/T
Prestige, a single-hull tanker owned by an entity that is not affiliated with
us, in November 2002, the EU proposed new regulations in March of 2003 that,
among other things, places a ban on the transportation of heavy oil grades in
all single-hull tankers loading or discharging at EU ports. These regulations
also accelerate the phase-out schedule of all single-hull tankers. The European
Union Parliament ratified these new regulations in July 2003 and the IMO joined
the phase-out of single hull tankers later in 2003. The details of the
regulations are as follows:
o Single hull tankers built on or before 1980 are immediately barred from
entering into ports, offshore terminals, or anchor in an area under the
jurisdiction of an EU member state.
o Heavy crude oils (API grade <25.7, heavy fuel oils (viscosity> 180 mm2/s),
bitumen and tar and their emulsion may be carried in double hull tankers
only.
o Single-hull non-segregated ballast tankers built on or before 1981 were
phased out in 2004.
o Single-hull non-segregated ballast tankers built on or before 1982 will be
phased out in 2005.
o All other single-hull tankers will be phased out in 2010.
Several EU 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 carrying such cargo from entering her ports as of January
1, 2003. Italy has implemented similar measures applicable to single-hull
tankers over 15 years of age in the summer 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.
INSPECTION BY CLASSIFICATION SOCIETIES
Every seagoing vessel must be "classed" by a classification society. The
classification society certifies that the vessel is "in class," signifying that
the vessel has been built and maintained in accordance with the rules of the
classification society and complies with applicable rules and regulations of the
vessel's country of registry and the international conventions of which that
country is a member. In addition, where surveys are required by international
conventions and corresponding laws and ordinances of a flag state, the
classification society will undertake them on application or by official order,
acting on behalf of the authorities concerned.
The classification society also undertakes on request other surveys and
checks that are required by regulations and requirements of the flag state.
These surveys are subject to agreements made between the vessels' class and the
flag state concerned.
For maintenance of the class, regular and extraordinary surveys of hull,
machinery, including the electrical plant, and any special equipment classed are
required to be performed as follows:
Annual Surveys: For seagoing ships, annual surveys are conducted for the
hull and the machinery, including the electrical plant, and where applicable for
special equipment classed, at intervals of 12 months from the date of
commencement of the class period indicated in the certificate.
Intermediate Surveys: Extended annual surveys are referred to as
intermediate surveys and typically are conducted two and one-half years after
commissioning and each class renewal. Intermediate surveys may be carried out on
the occasion of the second or third annual survey.
Class Renewal Surveys: Class renewal surveys, also known as special
surveys, are carried out for the ship's hull, machinery, including the
electrical plant, and for any special equipment classed, at the intervals
indicated by the character of classification for the hull. At the special
survey, the vessel is thoroughly examined, including audio-gauging to determine
the thickness of the steel structures. Should the thickness be found to be less
than class requirements, the classification society would prescribe steel
renewals. The classification society may grant a one-year grace period for
completion of the special survey. Substantial amounts of money may have to be
spent for steel renewals to pass a special survey if the vessel experiences
excessive wear and tear. In lieu of the special survey every four or five years,
depending on whether a grace period was granted, a shipowner has the option of
arranging with the classification society for the vessel's hull or machinery to
be on a continuous survey cycle, in which every part of the vessel would be
surveyed within a five-year cycle.
At an owner's application, the surveys required for class renewal may be
split according to an agreed schedule to extend over the entire period of class.
This process is referred to as continuous class renewal.
All areas subject to survey as defined by the classification society are
required to be surveyed at least once per class period, unless shorter intervals
between surveys are prescribed elsewhere. The period between two subsequent
surveys of each area must not exceed five years.
Most vessels are also dry-docked every 30 to 36 months for inspection of
the underwater parts and for repairs related to inspections. If any defects are
found, the classification surveyor will issue a condition of class, known as a
"recommendation" which must be rectified by the shipowner within prescribed time
limits.
Most insurance underwriters make it a condition for insurance coverage that
a vessel be certified as "in class" by a classification society, which is a
member of the International Association of Classification Societies. All our
vessels are certified as being "in class" by Lloyd's Register or Det Norske
Veritas. All new and secondhand vessels that we purchase must be certified prior
to their delivery under our standard contracts and memorandum of agreement. If
the vessel is not certified on the date of closing, we have no obligation to
take delivery of the vessel.
RISK OF LOSS AND LIABILITY INSURANCE
General
The operation of any cargo vessel includes risks such as mechanical
failure, collision, personal injuries, property loss, cargo loss or damage and
business interruption due to political circumstances in foreign countries,
hostilities and labor strikes. In addition, there is always an inherent
possibility of marine disaster, including oil spills and other environmental
mishaps, and the liabilities arising from owning and operating vessels in
international trade. OPA, which imposes virtually unlimited liability upon
owners, operators and demise charterers of any vessel trading in the United
States exclusive economic zone for certain oil pollution accidents in the United
States, has made liability insurance more expensive for ship owners and
operators trading in the U.S. market. We carry insurance against loss of hire,
which protects against business interruption following a loss under our hull and
machinery policy. This policy does not protect us from business interruptions
caused by any other losses. While we believe that our present insurance coverage
is adequate, not all risks can be insured, and there can be no guarantee that
any specific claim will be paid, or that we will always be able to obtain
adequate insurance coverage at reasonable rates.
Hull and Machinery Insurance
We have obtained marine hull and machinery and war risk insurance, which
include damage to a vessel's hull and machinery, collisions and the risk of
actual or constructive total loss, for all of our vessels. The vessels are each
covered up to at least fair market value. Under some circumstances, salvage and
towing expenses may be covered. We also arranged increased value coverage for
each vessel. Under this increased value coverage, in the event of total loss of
a vessel, we will be able to recover for amounts not recoverable under the hull
and machinery policy by reason of any under-insurance.
Protection and Indemnity Insurance
Protection and Indemnity insurance is provided by mutual protection and
indemnity associations, or P&I Associations, which cover our third party
liabilities in connection with our shipping activities including other related
expenses of injury or death of crew, passengers and other third parties, loss or
damage to cargo, damage to other third-party property, pollution arising from
oil or other substances, and in some circumstances, salvage, towing and other
related costs, including wreck removal. Protection and indemnity insurance is a
form of mutual indemnity insurance, extended by protection and indemnity mutual
associations, or "clubs." Subject to the "capping" discussed below, our
coverage, except for pollution, is unlimited.
Our current protection and indemnity insurance coverage for pollution is
USD 1 billion per vessel per incident. The fourteen P&I Associations that
comprise the International Group insure approximately 90% of the world's
commercial tonnage and have entered into a pooling agreement to reinsure each
association's liabilities. Each P&I Association has capped its exposure to this
pooling agreement at USD 4.25 billion. As a member of a P&I Association, which
is a member of the International Group, we are subject to calls payable to the
associations based on its claim records as well as the claim records of all
other members of the individual associations, and members of the pool of P&I
Associations comprising the International Group.
COMPETITION
We operate in markets that are highly competitive and based primarily on
supply and demand. We compete for charters on the basis of price, vessel
location, size, age and condition of the vessel, as well as on our reputation as
an operator. We conclude our time charters and voyage charters in the spot
market through the use of brokers, through whom we negotiate the terms of the
charters based on market conditions and experience. We compete primarily with
owners of tankers in the Handymax, Panamax and Aframax class sizes in our tanker
division. Ownership of tankers is highly fragmented and is divided among major
oil companies and independent tanker owners. Our bulk vessels also compete with
other vessels of the same type and size.
LEGAL PROCEEDINGS
We are party, as plaintiff or defendant, to a variety of lawsuits for
damages arising principally from personal injury and property casualty claims.
Most claims are covered by insurance, subject to customary deductibles. We
believe that these claims will not, either individually or in the aggregate,
have a material adverse effect on us, our financial condition or results of
operations. From time to time in the future we may be subject to legal
proceedings and claims in the ordinary course of business, principally personal
injury, property casualty claims and contract disputes. Those claims, even if
lacking merit, could result in the expenditure of significant financial and
managerial resources. We have not been involved in any legal proceedings, which
may have, or have had a significant effect on our financial position, nor are we
aware of any proceedings that are pending or threatened which may have a
significant effect on our financial position, results of operations or cash
flows.
C. Organizational Structure
The following table set forth our significant entities as of December 31,
2004.
Entity Activities
A/S Dampskibsselskabet TORM This is the parent company. The company
owns 16 product tankers, a 50% interest
in an additional product tanker and 4
bulk carriers. This company employs
most of the employees providing
commercial and technical management for
TORM vessels and pool vessels.
Torm Singapore (Pte) Ltd. 100% owned subsidiary. The company owns
4 product tankers and 3 bulk carriers.
The company also provides some
commercial and technical management.
Southern Light Shipping Limited 100% owned subsidiary. The company owns
the bulk carrier TORM Arawa.
Eastern Light Shipping Limited 100% owned subsidiary. The company owns
the bulk carrier TORM Pacific.
LR2 Management K/S 50% owned limited partnership. Maersk
Tankers ownes the other 50%. The
partnership acts as pool manager for
the LR2 pool.
LR1 Management K/S 100% owned limited partnership. The
partnership acts as pool manager for
the LR1 pool.
MR Management K/S 100% owned limited partnership. The
partnership acts as pool manager for
the MR pool.
During 2004, we restructured the activities of the Group with the primary
aim of transferring ownership of vessels from single-vessel entities to A/S
Dampskibsselskabet TORM and Torm Singapore (Pte) Ltd. thereby reducing the
number of significant entities compared to 2003.
D. Property, Plant and Equipment
We do not own any real property other than three small residential
properties. We lease office space in Copenhagen and Singapore. The Copenhagen
office comprises approximately 2,283 square meters and is leased until September
2014 from an unaffiliated third party at a rate of DKK 3.8 million, or
approximately USD 689,000 per year, increasing to approximately DKK 5.6 million,
or approximately USD 1.0 million per year in 2014. The Singapore office
comprises approximately 120 square meters and is leased until May 31, 2005 at a
rate of SGD 97,970, or approximately USD 60,000 or DKK 327,000, per year from an
unaffiliated third party. Furthermore, we have leased three apartments in
Singapore. One is leased until February 2006 at a rate of SGD 44,400, or
approximately USD 27,000 or DKK 148,000, per year from an unaffiliated third
party. One is leased until May 2006 at a rate of SGD 60,000, or approximately
USD 37,000 or DKK 200,000, per year from an unaffiliated third party. One is
leased until October 2006 at a rate of SGD 46,200, or approximately USD 28,000
or DKK 154,000, per year from an unaffiliated third party.
The following table lists our entire fleet of owned and long term chartered
in vessels as of December 31, 2004:
Product Tankers Year Built Dwt Ownership Flag (1)
--------------- ---------- --- --------- --------
Wholly Owned
TORM Helene 1997 99,999 D/S TORM DIS
TORM Valborg 2003 99,999 D/S TORM NIS
TORM Ingeborg 2003 99,999 D/S TORM NIS
TORM Hilde(3) 1990 84,040 D/S TORM NIS
TORM Margrethe(3) 1988 84,040 D/S TORM DIS
TORM Estrid 2004 74,999 D/S TORM DIS
TORM Ismini 2004 74,999 D/S TORM DIS
TORM Agnete 1999 47,165 Torm Singapore Singapore
TORM Freya 2003 45,990 D/S TORM DIS
TORM Thyra 2003 45,990 D/S TORM DIS
TORM Mary 2002 45,990 D/S TORM DIS
TORM Vita 2002 45,940 D/S TORM DIS
TORM Gertrud 2002 45,940 D/S TORM DIS
TORM Gerd 2002 45,940 D/S TORM DIS
TORM Gotland 1995 44,999 D/S TORM DIS
TORM Alice 1995 44,999 D/S TORM DIS
TORM Gunhild 1999 44,999 D/S TORM DIS
TORM Anne 1999 44,990 Torm Singapore Singapore
TORM Olga(4) 1992 44,646 Torm Singapore Singapore
TORM Asia(4) 1994 44,367 Torm Singapore Singapore
Partially Owned
Kirsten (50%) 1988 83,651 D/S TORM NIS
Chartered In
TORM Kristina(2) 1999 99,999 Liberia
TORM Gudrun(2) 2000 99,965 Liberia
Bulk Carriers Year Built Dwt Flag
------------- ---------- --- ----
Wholly Owned
TORM Tina 2001 75,966 Torm Singapore Singapore
TORM Marta 1997 69,638 D/S TORM NIS
TORM Marina 1990 69,637 D/S TORM DIS
TORM Herdis 1992 69,618 D/S TORM NIS
TORM Baltic 1997 69,614 Torm Singapore Singapore
TORM Marlene 1997 69,548 Torm Singapore Singapore
TORM Tekla 1993 69,268 D/S TORM DIS
TORM Arawa 1997 27,827 Southern Light Shipping Liberia
TORM Pacific 1997 27,802 Eastern Light Shipping Liberia
(1): DIS stands for the Danish International Shipping Registry and NIS
stands for the Norwegian International Shipping Registry.
(2): On ten-year time charter to TORM expiring in 2010.
(3): Sold and delivered in January/February 2005 with five-year time
charter back to TORM.
(4): Sold in 2005. Torm Olga was delivered in April 2005 and Torm Asia is
expected to be delivered in the third quarter of 2005.
Please refer to Item 5B for information regarding planned investments.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
2004 SUMMARY
2004 was an outstanding year for TORM. Historically high freight rates and
high earnings for both the Tanker and Bulk divisions resulted in net earnings
from shipping activities of DKK 1,444 million (as compared to DKK 647 million in
2003). Coupled with a significant increase in the value of the investment in
Dampskibsselskabet "NORDEN" A/S of DKK 1,034 million (as compared to DKK 681
million in 2003) the Company achieved its best financial performance to date in
2004. Net profit for the year was DKK 2,281 million (as compared to DKK 1,051
million in 2003) and our shareholders approved a dividend payment of DKK 15 per
share (as compared to DKK 6 in 2003) at the Annual General Meeting,
corresponding to a total dividend payment by the Company of DKK 546 million.
Rates in the product tanker market were at high levels throughout the year
and increased further toward year-end. As a result of a greater demand for
heating oils, product tanker market rates are generally at their highest during
the winter period (i.e. during the fourth and first quarters of the year), after
which rates are somewhat lower during the summer. In 2004, however, rates
remained at very high levels throughout the summer period and then increased
further in the fourth quarter - a situation only seen previously in the product
tanker market in 2001.
The basis for these high rate levels and substantial increases was a solid
growth in worldwide demand, low inventories of refined products especially in
the western world - in part due to high oil prices - combined with the fact that
for many years, this part of the world has not increased refinery capacity,
causing increased distances over which refined petroleum products have to be
carried. This led to a very high utilization rate of 91.5% for the world fleet
and consequently very high freight rates. Furthermore, an increasing number of
market participants without owned tonnage or cargoes have added further
volatility to the market in recent years.
With a young and modern fleet, which mainly operates in the spot market
globally, TORM has been well positioned to take advantage of the very firm
tanker market.
The rates in the bulk market sustained the very firm levels seen at the end
of 2003. During the first quarter of 2004, bulk freight rates reached historic
high levels. The background for these booming rates was the significantly
increased import of raw materials, especially in China, but also the result of
growth in other regions of the world, including India, and an increase in
waiting days due to limited port capacity thereby tying up a portion of the
world fleet.
In the second quarter of 2004, the Chinese government adopted a number of
measures aimed at minimizing the risk of overheating the economy, which resulted
in a substantial drop in bulk freight rates. In the third and fourth quarters,
however, rates began to increase as stocks reached more normal levels, and
imports of raw materials to China began to rise again.
In order to cover earnings at the historically high levels in a market with
significant volatility we began towards the end of 2003 to charter out a
significant part of the bulk fleet on time charter, typically for periods of
about one year. This coverage was gradually renewed in the final quarter of 2004
and early 2005, and at higher rates, thereby securing approximately 65% of the
Bulk division's earnings as of March 1, 2005.
We continued our fleet renewal and expansion during 2004. We took delivery
of two LR1 product tankers from the Hyundai yard in Korea and also purchased two
second hand MR product tankers. In accordance with our strategy to own a young,
modern fleet of product tankers, at the end of 2004, we purchased two MR product
tanker newbuildings to be delivered in 2005. Our owned bulk fleet was expanded
during the year through the exercise of existing purchase options held on a
number of chartered-in vessels, resulting in three Panamax bulk carriers being
added to the owned fleet at favourable prices.
The three product tanker pools experienced further growth throughout the
year. Despite an unchanged number of pool partners the three pools grew by 23%
from 61 vessels to 75 vessels during 2004.
The increasing importance of the markets east of the Suez Canal combined
with the fact that many of our customers have representation in Singapore led us
to strengthen our office in Singapore in 2004. The new office undertakes
numerous functions and charters and operates our own and pool partners' vessels.
In October 2004, we opened our own recruitment office in the Philippines,
which will help ensure our ability to further strengthen and retain the staff of
seagoing personnel with the competencies crucial to maintaining the highest
possible standards. We believe that a strong staff of seagoing personnel is
important as demand for highly qualified naval officers is increasing strongly.
The value of TORM's investment in NORDEN increased significantly during
2004 and NORDEN paid a dividend of DKK 200 million to TORM in 2004.
The price of TORM's common shares and ADSs reached new highs on both the
Copenhagen Stock Exchange and the Nasdaq National Market during the year and we
paid a higher dividend in 2004 than any previous year. The share price on the
Copenhagen Stock Exchange increased by more than 150% in 2004.
TRENDS WITHIN THE PRODUCT TANKER AND BULK SEGMENTS
Some of the current key trends affecting the two segments in which we
operate are:
1 Relocation of refineries farther away from areas of consumption in the
western world
2 Lower inventories
3 Obtaining capital from the financial markets
4 The influence of new markets
Relocation of refineries farther away from areas of consumption in the western
world
There has for a number of years been a clear trend that refining capacity
has grown mainly in areas other than the western world, while the most
substantial consumers of clean petroleum products have remained in the western
world.
This trend is the result of increasingly stringent environmental focus in
the western part of the world coupled with the fact that the oil producing
nations wish to retain more of the value added by the refining process. The
effect of this trend is to increase the distances involved in the transportation
of refined oil products, which in turn positively affects the product tanker
market. Consequently, the trend is for the increase in consumption of refined
petroleum products in the western world to be mainly supplied by imports, which
is beneficial to TORM.
Lower inventories
Inventories of clean petroleum products were at very low levels during
2004. This was the result of increased consumption combined with the rising
price of crude oil resulting in a number of market participants not wishing to
hold excessive inventories.
Low inventories mean that if, for example, longer periods of poor weather,
strikes or other events disrupt supply, market participants will be prepared to
pay very high freight rates.
Obtaining capital from the financial markets
During the last 5-10 years it has become increasingly common among shipping
companies to raise capital in the financial markets through the sale of shares
or corporate bonds, offering new opportunities for financing purchases of fleets
or companies.
The relatively large risk appetite from financial investors has furthermore
opened a window of opportunity for comparative newcomers to shipping with a view
to raising capital in the financial market for the acquisition of vessels or
companies.
Furthermore, the increasing focus among financial investors on shipping
companies has resulted in interest from private equity funds who in the past
showed little or no interest in shipping companies as an investment opportunity.
The fact that capital can be raised in the financial markets with relative
ease, taken together with very strong freight rates and the fact that the
shipyards' order books for the sizes of vessels operated by TORM are largely
filled until 2008, which is a historically long period, has resulted in a
significant increase in investor interest, which when combined with high steel
prices and a worsening currency situation has led to large increases in
newbuilding prices and the prices of second-hand vessels.
The influence of new markets
"New" markets such as China and India account for a continually increasing
percentage of the world's consumption of raw materials - for example coal and
oil. This means that freight rates affecting product tankers as well as bulk
carriers are to an increasing extent dependent on the developments in these
countries.
As an example, there has traditionally been greater demand for oil products
during the first and fourth quarters of the year, on the back of demand for
heating oil in the western world. However, the growing importance of markets
outside the western world has lessened these seasonal variations in recent
years.
In the bulk market, the effect particularly of China has been very
pronounced. China's increasing import of raw materials from far-away producer
nations has absorbed significant capacity. At the same time, the increase in
demand during specific periods of the year has placed heavier demand on certain
load and discharge ports, which do not have the capacity to handle the large
number of additional vessels arriving to load or discharge. This has resulted in
an increasing number of waiting days, thereby reducing world fleet capacity.
This development is expected to continue for some time.
TORM'S STRATEGY
Tanker division
In the Tanker division we have specialized in product tankers. This focus
is due to the continued expectation that this segment of the tanker market over
a longer period of time will grow faster than the tanker market in general. This
expectation is based on the growth of refining capacity increasingly taking
place outside the key consuming areas - the western world - resulting in larger
transportation distances.
We have for a number of years focused on the ownership and operation of
quality tonnage and as early as 1988 the Company took delivery of its first
double-hulled product tanker. The average age of the Company's tanker fleet as
at March 1, 2005, was 5.0 years - to our knowledge one of the lowest among the
major tanker owning companies. With an increasing focus from the IMO, the EU and
individual countries and customers, it is our view that in the future it will be
very important to have a double-hull quality fleet to retain a competitive edge.
TORM's strategy in the product tanker segment has, since 1989, been to
focus on the development of the pool concept together with other ship owners who
share our philosophy with regards to quality and service. The Tanker division's
customers - mainly the large oil companies and oil traders - have over the past
10-15 years become fewer, but significantly larger, partly the result of mergers
and acquisitions. Pooling gives TORM and its partners critical mass - and
thereby the possibility to offer our increasingly larger customers the delivery,
capacity and reliability they require in the future. Furthermore, pooling helps
to reduce the number of waiting days and to even out regional differences in
freight levels by giving us a presence in several markets at the same time.
Through the three pools (MR, LR1, and LR2), we believe that we and our
partners have achieved a leading position in the world market. In as much as we
wish to be in a position to offer delivery reliability and at the same time
retain our leading market position, the strategy is naturally focused on the
spot market. Nonetheless, we will to a lesser extent cover a part of our freight
and bunkers price risk as described in item 11.
Bulk division
In the Bulk division, TORM has chosen to focus on Panamax vessels and, to a
lesser extent, Handysize vessels. The Panamaxes are operated by TORM, whereas
the Handysize vessels are operated within the IHC pool in Hong Kong.
Our investments in the Bulk division is relatively limited, although it
increased in 2004 as a result of a strategy partly based on the chartering in of
tonnage for longer periods. When it is considered commercially advantageous, a
purchase option will be negotiated as part of the charter party terms. This
gives us a significantly higher degree of flexibility from an investment and
business perspective as well as hedging of freight rates. Purchase options are
significant in the segments of the bulk market within which we operate in that
the market offers good opportunities for asset management.
Since the bulk market is in general much more fragmented than the product
tanker market, pooling has far less commercial relevance in this market.
Insofar as market conditions allow, we will generally seek to cover forward
a portion of the volatility by chartering vessels out on period charter. Should
the spot market fall drastically - precisely the situation we wish to protect
ourselves against - smaller market players may face the problem of survival. We
believe that the hedging that has taken place has been ineffective, since a
market risk is merely replaced by a credit risk.
A. Operating Results
The financial information included in the discussion below is derived from
our consolidated financial statements. The results of our Liner activities,
which were disposed of during 2002, are included under profit before tax from
discontinued operations. The consolidated financial statements have been
prepared in accordance with Danish GAAP, which differs in certain significant
respects from U.S. GAAP. For a discussion of the primary differences between
Danish GAAP and U.S. GAAP and a reconciliation of profit and stockholders'
equity to U.S. GAAP, please see note 17 to our consolidated financial
statements.
TORM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(in thousands of DKK)
2002 2003 2004
---- ---- ----
Net revenue 1,538,618 1,927,996 2,596,410
Port expenses and bunkers (555,700) (621,087) (497,258)
--------- ---------- ----------
Time Charter Equivalent Earnings 982,918 1,306,909 2,099,152
Charter hire (463,510) (404,960) (357,069)
Technical running costs (217,402) (254,780) (298,346)
--------- ---------- ----------
Gross profit (Net earnings from
shipping activities) 302,006 647,169 1,443,737
Profit on sale of vessels and interests 16,965 (464) 0
Administrative expenses (101,342) (126,119) (171,656)
Other operating income 55,227 51,368 78,732
--------- ---------- ----------
Profit before depreciation 272,856 571,954 1,350,813
Depreciation (158,400) (176,872) (210,746)
--------- ---------- ----------
Profit before financial items 114,456 395,082 1,140,067
Financial items 5,988 656,637 1,193,704
--------- ---------- ----------
Profit before tax 120,444 1,051,719 2,333,771
Tax on profit on ordinary activities 360,190 (692) (52,556)
--------- ---------- ----------
Profit from continuing operations 480,634 1,051,027 2,281,215
--------- ---------- ----------
Profit before tax from discontinued
operations 69,818 0 0
Tax on discontinued operations 0 0 0
--------- ---------- ----------
Net profit for the year 550,452 1,051,027 2,281,215
--------- ---------- ----------
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2004 AND THE YEAR ENDED DECEMBER 31,
2003
Net profit for the year increased by 117% to DKK 2,281 million from DKK
1,051 million in 2003, corresponding to earnings per share (EPS) of DKK 65.6 in
2004 against DKK 30.3 in 2003. Excluding an unrealized gain on the shares in
Dampskibsselskabet "NORDEN" A/S of DKK 1,034 million the profit before tax for
the year was DKK 1,300 million, which is considerably higher than expected as
reported at the beginning of the financial year in our Form 6-K dated March 30,
2004.
The considerably higher profit is primarily the result of freight rates,
which during most of the year were higher than expected. The addition of seven
vessels to TORM's fleet of owned vessels, of which three vessels had previously
been chartered by the Company, further contributed to the reported profit since
the addition of these vessels was not included in the announcement of expected
profit made at the beginning of the year.
TORM's total assets increased by DKK 1,885 million to DKK 6,779 million
from DKK 4,894 million in the previous year. The most significant developments
behind this increase are an increase in the book value of vessels in 2004 of DKK
600 million due to fleet expansion, and DKK 1,034 million relating to a value
adjustment of the Company's investment in Dampskibsselskabet "NORDEN" A/S,
whereas cash at bank and in hand increased by DKK 195 million.
The shareholders' equity increased by DKK 1,860 million to DKK 4,324
million from DKK 2,464 million corresponding to an increase in the solvency
ratio (refer to item 17 for definition) of 14 percentage points to 64% from 50%
in 2003. The significant increase in shareholders' equity is due mainly to the
profit for the year less dividend paid out and exchange rate adjustment from
translation of financial statements in USD to DKK. TORM's total debt increased
by DKK 25 million to DKK 2,455 million from DKK 2,430 million in the previous
year.
Net earnings from shipping activities
Below net earnings from shipping activities are presented on segment level:
DKK million Not Not
Tanker Bulk Allocated*) Total 2003 Tanker Bulk Allocated*) Total 2004
-------------------------------------------------------------------- -----------------------------------------
Net revenue 1,115 793 20 1,928 1,532 1,064 0 2,596
Port expenses and bunkers -319 -308 6 -621 -407 -90 0 -497
---------------------------------------- -----------------------------------------
Time charter equivalent
earnings 796 485 26 1,307 1,125 974 0 2,099
Charter hire -84 -310 -12 -405 -81 -276 0 -357
Technical running costs -195 -43 -17 -255 -237 -70 9 -298
---------------------------------------- -----------------------------------------
Gross profit/(loss)
(Net earnings from
shipping activities) 518 133 -3 647 807 628 9 1,444
*) Primarily offshore vessels. The offshore activities ceased in 2003.
TORM's total net revenue in 2004 was DKK 2,596 million as compared to DKK
1,928 million in the previous year. TORM's revenue is derived from two segments,
the Tanker division and the Bulk division. In the markets in which these
divisions operate, the time charter equivalent (TCE) rates, defined as net
revenue less voyage expenses divided by the number of available earning days
(days available for service) is used to compare freight rates. Under time
charter contracts the charterer pays for the voyage expenses whereas the ship
owner pays for the voyage expenses under voyage charter contracts. As a
consequence, TORM primarily bases economic decisions upon expected TCE rates
rather than on expected net revenues. The analysis of our revenue is therefore
primarily based on the development in time charter equivalent earnings. TORM's
time charter equivalent earnings in 2004 were DKK 2,099 million as compared to
DKK 1,307 million in 2003. Generally higher rates in all segments as well as the
addition of tonnage especially in the tanker segments LR1 and MR were the
primary reasons behind the increase in TCE rates.
The increase in the time charter equivalent earnings should be viewed
against the background of the continued decrease in the USD/DKK exchange rate.
The average USD/DKK exchange rate in 2004 decreased by more than 9% compared to
2003. Without this decrease, the Company's increase in earnings would have been
approximately DKK 1,001 million as compared to the actual DKK 792 million.
Tanker division
Net revenues in the Tanker division increased by 37% to DKK 1,532 million
from DKK 1,115 million in 2003, whereas the time charter equivalent earnings
increased by DKK 329 million or 41% to DKK 1,125 million from DKK 796 million in
the previous year.
Freight rates prevailing in the market for TORM's Tanker division in 2004
were generally at very high levels largely throughout the year. In normal
circumstances, the tanker market is strongest during the first and fourth
quarters of the year as a result of demand for oil products for heating during
the winter period. After a short period during the start of the second quarter
of 2004 when rates fell as expected, rates firmed again over the summer period
and further increased towards year-end with a weakening tendency in December
influenced by a warmer than usual winter in the U.S., which slowed market demand
for crude oil and product tanker vessels. These developments took place against
the background of a market facing a tight tonnage balance due to a strong demand
for crude oil and clean petroleum products. Ton-miles (the weight of the cargo
multiplied by the distance that the cargo is carried) for the tanker market as a
whole, which indicates the total capacity demand in the market increased 10.4%
in 2004, whereas the capacity of the world's fleet increased by only 4.2%.
Demand for transport capacity increased further as a result of historically
low inventories of clean petroleum products in countries in the Western
hemisphere. This increase was partly due to the higher oil price, increasing
demand and limited refinery capacity in these countries.
According to industry sources, utilization of the active tanker fleet
reached 91.5%, which when combined with the periods of off-hire due to bad
weather, maintenance, waiting time in ports, etc. is nearly full capacity. This
is the highest utilization rate registered since measurements started in 1986.
The high utilization rates led to high volatility in the different segments
during the year.
Taking the year as a whole, the LR2 segment achieved freight rates that
were on average 22% higher than in the previous year. This increased earnings by
DKK 71 million. The number of available earning days increased by 593 days or
48% from the previous year, as the delivery of two newbuildings in the second
half of 2003 took full effect in 2004. This resulted in an increase in earnings
of DKK 106 million.
In the LR1 segment TORM took delivery of two newbuildings during the year.
The newbuildings were the primary reason for the increase in the number of
available earning days of 578 days or 68% from the previous year, resulting in
an increase in earnings of DKK 86 million. The increase in average freight rates
of 11% increased earnings by DKK 23 million from the previous year.
In the MR segment, we took delivery of two vessels. Moreover, the addition
of tonnage was the main reason for the increase in the number of available
earning days of 331 days or 8% from the previous year, which increased earnings
by DKK 38 million. The average freight rates were 24% higher than in the
previous year, which affected earnings positively by DKK 117 million.
The continued decrease in the USD/DKK exhange rate resulted in lower
time charter equivalent earnings for the year in the Tanker division by DKK 112
million. The increase in the time charter equivalent earnings in the Tanker
division can be summarized as illustrated in the table below.
Earnings for the Tanker division
--------------------------------------------------------------------------------
A.DKK million MR LR1 LR2 Unallocated Total
Time charter equivalent earnings 2003 458 125 220 (7) 796
Change in number of earning days 38 86 106 -- 230
Change in freight rates 117 23 71 -- 211
--- --- --- ---- -----
613 234 397 (7) 1,237
Change in USD/DKK exchange rate (112)
-----
Time charter equivalent earnings 2004 1,125
--------------------------------------------------------------------------------
Contained in time charter equivalent earnings, port and bunker expenses -
or voyage expenses - rose in 2004 by almost 28% or DKK 88 million to DKK 407
million from the previous year primarily as a consequence of the increased
activity in the form of more vessels, leading to more available earning days and
more port calls. The average bunker price for purchases in 2004 was 6% higher
than in 2003, which corresponds to an increase in bunker expenses of DKK 15
million.
The table below summarizes the earnings data per quarter for the Tanker
division.
Earnings data for the Tanker division
USD/Day 2003 2004 2004 % Change
Full year q1 q2 q3 q4 Full year 2003-2004
------------------------------------------------------------------------------------------------------------
LR2/Aframax vessels
Available earning days for:*)
- Owned vessels 510 273 273 276 276 1,098 115%
- Time chartered vessels 721 182 177 184 184 726 0.7%
TCE per earning days**) 27,185 32,012 27,896 28,389 47,626 33,116 22%
TRC per earning days***) (5,799) (4,453) (4,898) (4,148) (5,285) (4,754) (18%)
------------------------------------------------------------------------------------------------------------
LR1/Panamax vessels
------------------------------------------------------------------------------------------------------------
Available earning days for:*)
- Owned vessels 847 288 319 406 413 1,425 68%
- Time chartered vessels 0 0 0 0 0 0 0%
TCE per earning days**) 22,429 28,270 23,028 22,998 30,253 24,912 11%
TRC per earning days***) (6,458) (6,141) (5,267) (5,742) (7,259) (6,153) (5%)
------------------------------------------------------------------------------------------------------------
MR vessels
------------------------------------------------------------------------------------------------------------
Available earning days for:*)
- Owned vessels 4,015 1,047 1,067 1,054 1,178 4,346 8%
- Time chartered vessels 0 0 0 0 0 0 0%
TCE per earning days**) 17,307 21,491 20,288 19,890 24,541 21,381 24%
TRC per earning days***) (5,257) (5,927) (5,367) (5,581) (6,790) (5,936) 13%
------------------------------------------------------------------------------------------------------------
*) Earning days are the total number of days in the period, where the vessel
is ready and available to perform a voyage, i.e. is not in dry-dock etc.
**) TCE = Time Charter Equivalent Earnings = Gross freight income less bunker
and port expenses.
***) TRC = Technical Running Costs for our owned vessels.
Bulk division
In the Bulk division net revenue increased by 34% to DKK 1,064 million from
DKK 793 million in the previous year, whereas the time charter equivalent
earnings increased by DKK 489 million or 101% to DKK 974 million from DKK 485
million in 2003. The increase can almost solely be explained by higher freight
rates.
The market for our bulk carriers reached historic high levels in 2004,
while rates fluctuated significantly during the year. This occurred against a
background of increases in the import of raw materials, especially to China,
increasing worldwide economic growth plus an increase in the number of waiting
days in various ports brought about by increased market activity, affecting a
large part of the world's fleet. Concurrently, the increase in the world bulk
fleet has been relatively modest for some years, despite the very strong freight
rate levels.
As freight rates in the fourth quarter of 2003 and first quarter of 2004
increased to levels not seen before, we considered it advantageous to charter
out a substantial part (50%-70%) of the fleet for longer periods - generally for
a period of about 12 months - thereby reducing the risk inherent in a bulk
market experiencing such volatility. As a result, our quarterly results achieved
in the Bulk division showed considerably less volatility than the bulk market in
general.
Freight rates in the Panamax segment were on average 118% higher than in
2003, increasing earnings by DKK 513 million. In this segment, we added three
vessels to our fleet of owned vessels during the year. However, we had
previously chartered in all three vessels, but two additional vessels were
chartered in starting July and November 2004, respectively, which led to the
increase in the number of available earning days by 9% or 482 days from the
previous year. The time charter equivalent earnings in this segment increased by
DKK 37 million as a result.
In the Handysize segment earnings increased by DKK 57 million as a
consequence of average freight rates being 93% higher than in the previous year.
This increase was partly offset by a decrease in the number of available earning
days of 202 days, or 16%, as tonnage redelivered in 2003 took full effect in
2004, thereby reducing earnings, and an additional chartered-in vessel was
redelivered in July 2004. The time charter equivalent earnings in this segment
were reduced by DKK 12 million as a result.
The increase of DKK 489 million in the bulk vessels' earnings, which
adjusted for the lower USD/DKK exchange rate would have been DKK 585 million, is
a clear indication of the continued, very positive bulker market, although the
sharp increases in 2003 were followed by higher but more volatile freight rates
in 2004. The increase in the time charter equivalent earnings in the Bulk
division can be summarized as illustrated in the table below.
Earnings for the Bulk division
--------------------------------------------------------------------------------
B. DKK million Handysize Panamax Unallocated Total
Time charter equivalent earnings 2003 72 397 16 485
Change in number of earning days (12) 37 - 25
Change in freight rates 57 513 - 570
Other - - (10) (10)
---- ---- ---- ----
117 947 6 1,070
Change in USD/DKK exchange rate (96)
-----
Time charter equivalent earnings 2004 974
--------------------------------------------------------------------------------
Port and bunker expenses - or voyage expenses - which are contained in time
charter equivalent earnings, dropped by 71% or DKK 218 million to DKK 90 million
in 2004 primarily due to the redelivery of several chartered-in vessels in the
Panamax segment in 2004 and our bulk vessels being chartered out to a greater
extent on time charters rather than on voyage charters compared to 2003.
The table below summarizes the earnings data per quarter for the Bulk
division.
Earnings data for the Bulk division
-----------------------------------
2004
USD/Day 2003 ------------------------------------------ 2004 % Change
Full year q1 q2 q3 q4 Full year 2003-2004
------------------------------------------------------------------------------------------------------------------
Panamax vessels
Available earning days for:*)
- Owned vessels 841 364 401 540 548 1,853 120%
- Time chartered vessels 4,287 1,004 950 881 940 3,776 (12%)
TCE per earning days**) 11,695 23,219 26,501 25,562 26,260 25,534 118%
TRC per earning days***) (5,109) (5,501) (5,810) (4,818) (4,502) (5,022) (2%)
------------------------------------------------------------------------------------------------------------------
Handysize vessels
------------------------------------------------------------------------------------------------------------------
Available earning days for:*)
- Owned vessels 729 182 182 184 184 732 0%
- Time chartered vessels 529 121 120 52 32 324 (39%)
TCE per earning days**) 8,706 15,963 16,320 14,806 19,189 16,829 93%
TRC per earning days***) (3,058) (3,112) (3,302) (3,556) (2,651) (3,173) 4%
------------------------------------------------------------------------------------------------------------------
*) Earning days are the total number of days in the period, where the vessel
is ready and available to perform a voyage, i.e. is not in dry-dock etc.
**) TCE = Time Charter Equivalent Earnings = Gross freight income less bunker
and port expenses.
***) TRC = Technical Running Costs for own vessels.
Operation of vessels
Vessels chartered in by us do not give rise to technical running costs for
TORM but only to charter hire payments. As compared to 2003, charter hire in the
Tanker division decreased by DKK 3 million to DKK 81 million in 2004, whereas
charter hire paid in the Bulk division dropped by DKK 34 million to DKK 276
million. The drop in the Bulk division after adjustment for the development in
the USD/DKK exchange rate was DKK 6 million and was primarily caused by the
delivery of three vessels purchased in 2004 that were previously chartered in.
The technical running costs for our owned vessels increased by DKK 43
million to DKK 298 million in 2004. The most significant factor behind this
development was the increase in the number of operating days of 2,530 days or
36%, primarily due to the addition of owned vessels in the LR1, MR and Panamax
segments. The crew costs for the added vessels are somewhat lower than the
average for the fleet as of the beginning of the year which is the main reason
for the technical costs not increasing proportionately to the increase in the
number of operating days. Our total fleet of owned vessels incurred 15 off-hire
days in 2004 corresponding to two per thousand of the number of operating days
compared to 21 off-hire days in 2003 corresponding to three per thousand of the
number of operating days. We regard this as a very positive development.
Technical running costs are mainly incurred in USD (approximately 50%) and
DKK (approximately 39%). The lower USD/DKK exchange rate offset the increase in
our technical running costs by approximately DKK 14.8 million for our total
fleet.
Administrative expenses and other operating income
Our total administrative expenses increased from 2003 to 2004 by DKK 46
million to DKK 172 million mainly due to higher staff costs including bonuses
due to a greater number of positions in the Company and a general increase in
salary levels, and expenses relating to our Parent Company moving to new
offices, increased expenses to Directors' and Officers' Liability and Company
Reimbursement Insurance and increased travel activities compared to the previous
year.
Other operating income primarily comprises income from chartering
commissions received by TORM in connection with the management of the three
tanker pools. Other operating income increased in 2004 by DKK 28 million to DKK
79 million from DKK 51 million in the previous year. As adjusted for the effects
of the lower USD/DKK exchange rate, the increase was DKK 35 million. This
increase is primarily due to increased commissions from the three tanker pools.
These commissions are based on net revenues in the pools and the increase is a
direct result of the higher freight rates compared to 2003 and the greater
number of vessels in the pools.
Vessels and dry-docking
The increase in tangible fixed assets of DKK 570 million to DKK 3,763
million is mainly attributable to the change in vessels and capitalized
dry-docking. The carrying value of vessels and capitalized dry-docking increased
by DKK 596 million to DKK 3,540 million. The increase relating to vessels
amounted to DKK 600 million. The addition of new tonnage amounted to a total
acquisition cost of DKK 1,021 million resulting from two LR1 tanker
newbuildings, two MR tankers built in 1999 and 1995 as well as three Panamax
bulk vessels, of which one was built in 2001 and two in 1997. The drop in the
USD against the DKK caused a negative translation adjustment of DKK 225 million
for the total fleet, and depreciation on the vessels amounted to DKK 200
million. Prepayment on vessels under construction decreased by DKK 25 million
among other things due to the abovementioned deliveries and the decrease in the
USD/DKK exchange rate. During the year additional prepayments on already agreed
newbuildings were made.
Depreciation amounted to DKK 211 million in 2004 as compared to DKK 177
million in 2003, an increase of DKK 34 million. The increase, of which DKK 17
million can be allocated to each of the two divisions, is due solely to the
expansion of the fleet during 2004. The lower USD/DKK exchange rate reduced the
total depreciation by DKK 21 million compared to 2003.
During the fourth quarter of 2004, we added to our newbuilding program by
acquiring two MR newbuildings from the STX yard in South Korea for delivery in
first or second quarter of 2005. By the end of the year, the first two
installments corresponding to 20% of the total purchase price had been paid.
The market value of our fleet and newbuilding program (five LR2
newbuildings and two MR newbuildings) exceeded the carrying value of the fleet
including newbuilding contracts by DKK 3.1 billion at year-end. This valuation
is based on the average of three internationally acknowledged shipbrokers'
valuations.
Other investments (NORDEN)
Other investments mainly comprise our investment of 31.6% of the shares in
NORDEN with a carrying value of DKK 1,984 million as at December 31, 2004 as
compared to DKK 950 million in the previous year.
We continue not to consider NORDEN as an associated company, as we do not
have influence on decisions and are not represented on NORDEN's board of
directors. Our investment in NORDEN is valued on the basis of the closing price
on the Copenhagen Stock Exchange on December 31, 2004, of DKK 2,725.52 per
share.
Our investment in NORDEN has proved to be extremely satisfactory. Against
an initial investment of DKK 263 million, we have as of December 31, 2004
received dividends from NORDEN in the amount of DKK 207 million, of which DKK
200 million was received in 2004. The accumulated unrealized gain on the
investment as of December 31, 2004 totals DKK 1,721 million, of which DKK 1,034
million represents the gain in 2004.
Our gain on a potential sale of the NORDEN shares will be tax free after 3
years of ownership, or as of August 2005. This does not necessarily mean,
however, that we have decided to dispose of the investment after this date.
Financing
Net financial items in 2004 were positive by DKK 1,194 million as compared
to DKK 657 million in 2003. The most significant reason for the difference is
the large unrealized gain on the NORDEN shares of DKK 1,034 million as compared
to DKK 681 million in the previous year. Dividends received amounted to DKK 201
million in 2004, of which DKK 200 million was paid on the NORDEN shares. In
2003, dividends received amounted to DKK 8 million, of which DKK 7 million was
from NORDEN.
Net interest expenses amounted to DKK 68 million in 2004 as compared to DKK
55 million in 2003. The increase relates to interest expenses, which amounted to
DKK 89 million as compared to DKK 74 million in the previous year. Net interest
bearing debt (refer to item 17 for definition) was reduced by DKK 212 million
during the year to DKK 1,486 million from 1,698 million in 2003. However,
mortgage debt is denominated in USD and amounted to DKK 2,162 million as at
December 31, 2004 as compared to DKK 2,177 million including capitalized lease
obligations in the previous year. Adjusted for the lower USD/DKK exchange rate,
mortgage debt increased by DKK 179 million to DKK 2,356 million, which is the
main factor behind the increase in interest expenses. Please refer to note 7 to
our consolidated financial statements for a breakdown of financial items in the
income statement and to note 11 for an overview of mortgage debt and bank loans.
Invested capital (refer to item 17 for definition) increased by DKK 609
million to DKK 3,795 million from DKK 3,186 million at the beginning of the
year. The increase can primarily be explained by the addition of tonnage during
the year. Taking into account the development in net interest bearing debt
during 2004, it is evident that the additions are net financed by cash flow from
operations.
Shareholders' equity increased by DKK 1,860 million to DKK 4,324 million. The
considerable growth in shareholders' equity is mainly due to our net profit for
the year of DKK 2,281 million less dividends paid out during the year of DKK 209
million excluding dividends on own shares, and the adjustment from the
translation from USD to DKK of DKK 179 million.
Tax on profit for the year
Tax for the year was an expense of DKK 53 million as compared to an expense
of DKK 1 million in 2003. TORM entered into the tonnage taxation scheme with
effect from 2001 and has filed tax returns for 2001 through 2003. The assessment
of the tax returns by the tax authorities has not yet been completed and the tax
provision for the year is therefore to a great extent based on management's
judgment regarding the outcome of the assessment. Please refer to the section
below regarding tax under the heading "Critical accounting policies", Item 10E
and note 8 to our consolidated financial statements for further information.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2003 AND THE YEAR ENDED DECEMBER 31,
2002
Below net earnings from shipping activities are presented on segment level:
DKK million Not Not
Tanker Bulk Allocated*) Total 2002 Tanker Bulk Allocated*) Total 2003
-------------------------------------------------------------------- -----------------------------------------
Net revenue 904 592 43 1,539 1,115 793 20 1,928
Port expenses and bunkers -229 -322 -5 -556 -319 -308 6 -621
---------------------------------------- -----------------------------------------
Time charter equivalent
earnings 675 270 38 983 796 485 26 1,307
Charter hire -200 -242 -21 -464 -84 -310 -12 -405
Technical running costs -159 -44 -14 -217 -195 -43 -17 -255
---------------------------------------- -----------------------------------------
Gross profit/(loss)
(Net earnings from
shipping activities) 315 -17 4 302 518 133 -3 647
*) Primarily offshore vessels
The lines listed above are further discussed below.
Net revenue
TORM's net revenue was DKK 1,928 million in 2003 as compared to DKK 1,539
million in 2002. Of the DKK 389 million increase in net revenue, DKK 211 million
is attributable to the Tanker division, while DKK 201 million is related to the
Bulk division. Our gradual withdrawal from offshore activities during 2003 and
2002 led to a decrease in net revenue of DKK 23 million compared to 2002.
The increase in the Tanker division's net revenue should be seen against
the background of the substantial drop in the USD/DKK exchange rate during 2003.
The annual average USD/DKK exchange rate for 2003 decreased by more than 16%
from 2002. Without this decrease in the USD/DKK exchange rate, the increase in
the Tanker division's net revenue in 2003 would have been approximately DKK 432
million. Generally higher freight rates, which on average were 22% higher in
2003 than in 2002, and a 29% increase in ship earning days were the reasons for
the increase in tanker revenue. Increased focus on quality tonnage following the
sinking of the single-hull crude oil tanker "Prestige" in November 2002, a
general strike in Venezuela, which resulted in longer 'ton-mile' voyages for
cargoes to the North American market, and the war in Iraq combined with
generally low inventories of clean petroleum products resulted in an increase in
freight rates and hence in the increased earnings in the Tanker division. For
the year as a whole, tanker freight rates peaked in March and April and
thereafter continued to weaken until the end of the fourth quarter, when freight
rates, influenced by demand from Asia, increased again. Towards the end of the
fourth quarter, import of crude oil and refined products to the U.S. increased
due to the arrival of the winter season, which further increased the market
demand for crude oil and product tanker vessels. The 29% increase in earning
days is due to the delivery during 2002 and 2003 of six MR-newbuildings and two
LR2-newbuildings to our fleet.
Increased Tanker net revenue
----------------------------
DKK mill. USD mill.
22% increase in charter rates 213 28
29% increase in earning days 153 19
Other 66 8
----- -----
Increased earnings 432 55
USD/DKK exch. rate adjustments (221)
-----
211
The DKK 201 million increase in the Bulk division's net revenue, which
adjusting for the lower USD/DKK exchange rate would have been approximately DKK
358 million, is a clear indication of the strengthening in the Panamax market.
An increase in market demand leading to higher freight rates in the Panamax
segment was the primary reason for the increase in revenue from Bulk vessels.
Generally, 2003 was a positive year for bulk vessels, with freight rates peaking
in the fourth quarter. Driven by strong increases in Chinese imports of bulk
products, especially for iron ore, combined with limited growth in the number of
newbuildings entering the market, freight rates, were on average 61% higher in
2003 than in 2002 and ship earning days increased by 29% due to the addition of
four chartered-in vessels during the year due to our positive expectations for
the bulk market.
Increased Bulk net revenue
--------------------------
DKK mill. USD mill.
61% increase in charter rates 206 26
29% increase in earning days 86 11
Other 66 8
----- -----
Increased earnings 358 45
USD/DKK exch. rate adjustments (157)
-----
201
Port Expenses, Bunkers, Charter Hire and Technical Running costs (Operating
costs)
Charter hire and port expenses each represented 30 to 40% of our total
operating costs in 2003, while technical running costs and bunker consumption
each represented 10 to 20% of our operating costs for the year. All items
included in operating costs are directly influenced by changes in the USD/DKK
exchange rate, although technical running costs, or TRC, only account for
approximately 2/3 of the total costs influenced by the USD.
Our total port expenses and bunkers, or voyage expenses, increased in 2003
by approximately 12% or DKK 65 million to DKK 621 million (or by DKK 188 million
when adjusted for the decrease in the USD/DKK exchange rate). Of the DKK 65
million increase the Tanker division's voyage expenses increased by DKK 90
million whereas the Bulk division's voyage expenses decreased by DKK 14 million
and voyage expenses on our offshore vessels decreased by DKK 11 million. Due to
a drop in the time charter out activity of our tanker vessels, voyage expenses
increased more than net revenue in the Tanker division, while the opposite was
the case for our bulk vessels. The share of bunker (fuel and oil) expenses
increased slightly in 2003 compared to 2002, mainly due to increasing bunker
prices in 2002 and the first quarter of 2003, after which the prices leveled
out.
Total charter hire for vessels on charter to us decreased in 2003 by DKK 59
million to DKK 405 million. The change consists of a DKK 117 million decrease in
charter hire in our Tanker division and a DKK 67 million increase in charter
hire in our Bulk division. Charter hire for our offshore vessels fell by DKK 9
million.
The DKK 117 million decrease in charter hire for the Tanker division from
DKK 200 million to DKK 83 million is primarily attributable to the redelivery of
the two chartered-in LR1 vessels and the lower USD/DKK exchange rate, which
accounted for approximately DKK 17 million of the decrease. After the redelivery
of the two LR1 vessels at year-end 2002 we only had two LR2 long-term chartered
vessels on charter. Both vessels were on charter throughout 2003.
The increase in the Bulk division's charter hire was DKK 67 million, from
DKK 243 million to DKK 310 million, which when adjusted for the lower USD/DKK
exchange rate was approximately DKK 129 million. This increase is especially
attributable to an increase in chartering-in of vessels in the Panamax segment.
The average rate paid on chartered-in vessels increased by 7% due to improved
market conditions resulting in an increase in charter rate expenses of DKK 28
million, while the increase in chartered-in days by 43% resulted in an increase
in charter rate expenses by DKK 101 million.
Technical running costs comprise the costs we incur in connection with
crewing and maintaining our own vessels. The costs are mainly incurred in USD
(approximately 66%) and DKK (approximately 26%). Technical running costs for our
vessels increased by DKK 37 million to DKK 255 million. The lower USD/DKK
exchange rate offset the increase in our technical running costs by
approximately DKK 34 million for our total fleet.
For the tanker vessels, the increase in technical running costs was DKK 36
million, which adjusted for the lower USD/DKK exchange rate, was DKK 63 million,
mainly as an effect of the net addition of six vessels to the MR segment and two
vessels to the LR2 segment during 2002 and 2003. Average daily running cost of
our tanker vessels increased by 2.4% in 2003 from 2002 to USD 5,513 per/day due
to the weakening of the USD. The addition of new vessels increased operating
days by 1,408 days in the MR segment and 157 days in the LR2 segment.
The addition of two owned Panamax vessels to the Bulk division in the
second half of 2003 increased technical running costs by DKK 5 million, as
compared to 2002, but due to a lower USD/DKK exchange rate, the Bulk division's
total technical running costs for 2003 were DKK 43 million, or only DKK 1
million lower than in 2002. Average daily running cost increased by 6.5% in 2003
from 2002 to USD 4,156 per/day due to the weakening of the USD. The addition of
Panamax vessels increased operating days by 113.
We do not incur technical running costs for vessels that we charter, but
only charter hire payments.
Gross Profit
Gross profit is net revenue minus the sum of port expenses, bunker costs,
charter hire payments for chartered-in vessels and technical running costs for
owned vessels.
Our LR2 tanker vessels achieved freight rates that were 23% higher in 2003
than in 2002. The addition of two newbuildings in the third and fourth quarter
of 2003, which increased operating days in the tanker segment by 15%, led to an
increase in the gross profit. In the LR1 segment there was only a marginal
increase in earnings compared to 2002, despite freight rates that on average
were 34% higher than in 2002, because the number of operating days decreased by
255 or 23% following the redelivery of two chartered-in vessels towards the end
of 2002. In the MR segment, we had 57% more operating days in 2003 compared to
2002, as the delivery of four newbuildings in 2002 took full effect in 2003 as
well as the impact of two newbuildings delivered in January 2003. The
significant increase in the number of operating days combined with freight rates
that were 24% higher in 2003 than in 2002 were the primary reasons for the
increase in total net revenue for the Tanker division.
Earnings data for the Tanker division
-------------------------------------
USD/Day 2002 2003
-------------------------------------------- 2003 % Change
Full year q1 q2 q3 q4 Full year 2002-2003
--------- ------- ------- ------- ------- --------- ---------
LR2/Aframax vessels
----------------------------------------------------------------------------------------------------------
Available earning days for:*)
- Owned vessels 357 90 90 97 233 510 43%
- Time chartered vessels 718 180 182 184 175 721 0%
TCE per earning days**) 22,021 31,237 32,804 27,008 19,559 27,185 23%
TRC per earning days***) (5,466) (5,651) (5,816) (5,660) (5,769) (5,799) 6%
----------------------------------------------------------------------------------------------------------
LR1/Panamax vessels
----------------------------------------------------------------------------------------------------------
Available earning days for:*)
- Owned vessels 846 210 194 220 223 847 0%
- Time chartered vessels 166 0 0 0 0 0 (100%)
TCE per earning days**) 16,738 23,630 26,507 19,670 18,616 22,429 34%
TRC per earning days***) (6,398) (5,691) (7,070) (4,966) (6,646) (6,458) 1%
----------------------------------------------------------------------------------------------------------
MR vessels
----------------------------------------------------------------------------------------------------------
Available earning days for:*)
- Owned vessels 2,550 1,004 1,000 1,001 1,011 4,015 57%
- Time chartered vessels 8 0 0 0 0 0 (100%)
TCE per earning days**) 13,920 18,355 19,369 15,523 15,188 17,307 24%
TRC per earning days***) (5,036) (5,701) (4,575) (5,030) (5,450) (5,257) 4%
----------------------------------------------------------------------------------------------------------
*) Earning days are the total number of days in the period, where the vessel
is ready and available to perform a voyage, i.e. is not in dry-dock etc.
**) TCE = Time Charter Equivalent Earnings = Gross freight income less bunker
and port expenses.
***) TRC = Technical Running Costs for our owned vessels.
Our Panamax bulk vessels saw a 60% increase in freight rates in 2003 as
compared to 2002, after taking into account the effect of hedging transactions
where we incurred a total expense of USD 13.6 million or DKK 89.6 million. When
combined with a 48% increase in the number of available operating days, or 1,672
days, our Panamax vessels comprised by far the largest part of the Bulk
division's increase in gross profit. The hedging transactions referred to above
refer to forward freight agreements that we entered into in 2002 and 2003. The
increase in the number of available operating days in 2003 was mainly
attributable to an increase in the chartered-in tonnage of our Bulk division, as
the purchase of two additional vessels only took place towards the end of the
year. In our Handysize segment the total increase in net turnover was limited,
as the effect of the improved market was approximately offset by a decrease in
the number of operating days, which fell by 15% due to the redelivery of
tonnage.
Earnings data for the Bulk division
-----------------------------------
USD/Day 2002 2003
-------------------------------------------- 2003 % Change
Full year q1 q2 q3 q4 Full year 2002-2003
--------- ------- ------- ------- ------- --------- ---------
Panamax vessels
----------------------------------------------------------------------------------------------------------
Available earning days for:*)
- Owned vessels 727 180 170 184 307 841 16%
- Time chartered vessels 2,748 981 1,116 1,191 1,019 4,287 56%
TCE per earning days**) 7,318 9,166 11,905 12,965 14,789 11,695 60%
TRC per earning days***) (4,766) (5,208) (4,592) (5,496) (4,388) (5,109) 7%
----------------------------------------------------------------------------------------------------------
Handysize vessels
----------------------------------------------------------------------------------------------------------
Available earning days for:*)
- Owned vessels 707 180 182 184 184 729 3%
- Time chartered vessels 768 176 169 92 92 529 (31%)
TCE per earning days**) 5,875 7,526 7,781 8,419 11,424 8,706 48%
TRC per earning days***) (3,010) (3,442) (3,180) (2,811) (2,871) (3,058) 2%
----------------------------------------------------------------------------------------------------------
*) Earning days are the total number of days in the period, where the vessel
is ready and available to perform a voyage, i.e. is not in dry-dock etc.
**) TCE = Time Charter Equivalent Earnings = Gross freight income less bunker
and port expenses.
***) TRC = Technical Running Costs for own vessels.
Profit on sale of vessels/interests
Our profit from sale of vessels and interests comprises the profits from
the sale of vessels, companies, assets and activities as well as the recognition
of deferred profits from sale/leaseback transactions. Profit from sales of
vessels and interests were a loss of DKK 0.5 million in 2003 related to the sale
of the MR product tanker TORM GYDA, as compared to a profit of DKK 17 million in
2002 from the recognition of deferred profits on certain sale/leaseback
transactions.
Administrative expenses
The Company's total administration expenses increased from 2002 to 2003 by
DKK 25 million to DKK 126 million. Staff costs, including bonuses, increased by
DKK 15 million, partly due to an increased number of positions in the Company
and a general increase in salary levels, and partly due to a bonus paid to the
Company's employees and Management. Salary and wage increases and additional
positions comprised DKK 5 million, while bonus to employees and Management
increased by DKK 10 million compared to 2002. Additionally, office costs
increased by DKK 2 million, including establishing offices in Singapore and
Germany, which had full effect in 2003. Furthermore, the figure for 2002
contained non-recurring income of DKK 8 million related to the reversal of
unused provisions.
Other operating income
Other operating income primarily comprises income from chartering
commissions we received in connection with our management of the three tanker
pools. This income is to a large extent offset by the increased costs we incur
from running the pools, which are recognized as administrative expenses.
Other operating income
DKK million
Other operating income 2002 55
Asset impairment in 2002 (12)
22% increase in freight rates 12
12% increase in pool earning days 6
USD/DKK exchange rate adjustment (10)
----
51
Other operating income fell from DKK 55 million in 2002 to DKK 51 million
in 2003, as this item in 2002 included DKK 12 million that was attributable to
the reversal of asset impairment in 2002. In addition, the lower average USD/DKK
exchange rate in 2003 as compared to 2002 caused a DKK 10 million decrease in
operating income. Adjusting for the drop in the USD/DKK exchange rate, the
increase in other operating income in 2003 as compared to 2002 was DKK 18
million or 35%. This increase is primarily attributable to increased commissions
from our three tanker pools and the effect of a 22% increase in freight rates as
compared to 2002 corresponding to DKK 12 million. An increase of 12% in the
number of earning days in the pools due to an increase in the number of pool
vessels accounted for DKK 6 million.
Depreciation and Write-Downs
Depreciation mainly consists of depreciation on vessels, which takes place
over 25 years. Depreciation was DKK 177 million in 2003 as compared to DKK 158
million in 2002, or an increase of DKK 19 million.
In our Tanker division, depreciation increased by DKK 19 million in 2003
compared to 2002, which reflects the additions to the fleet that took place in
2002 and 2003. Compared to 2002 the MR segment had a net addition corresponding
to four vessels operating during the entire year whereas the LR2 segment added
what corresponded to 0.4 vessels that operated during the entire year. The Bulk
division had additions to the Panamax segment in the second half of 2003 adding
0.3 vessels that operated over the entire year, which increased depreciation by
DKK 2 million as compared to 2002.
Depreciation is translated from USD to DKK, and the fall in the average
USD/DKK exchange rate from 2002 to 2003 led to reduced depreciation of DKK 35
million.
Financial Items
Financial items consist of interest receivables, exchange gains and
dividends, interest expenses on mortgage and bank debt and realized and
unrealized value adjustments.
Financial items 2002 2003
DKK million
Unrealized gain on NORDEN shares 8 681
Gains on other securities 7 5
Dividends 1 8
Interest income 30 19
Derivatives 43 23
Interest expenses -76 -74
Other financial expenses -7 -5
-- --
6 657
Financial items in 2003 totalled DKK 657 million as compared to DKK 6
million in 2002. The most important reason for this increase is the strong share
price development in 2003 of the Company's holding of NORDEN shares. The
unrealized gain on the NORDEN shares was DKK 681 million in 2003 as compared to
DKK 8 million in 2002, while other gains on securities were DKK 5 million in
2003 as compared to DKK 7 million in 2002. Dividends received increased from DKK
7 million in 2002 to DKK 8 million in 2003. All of our financial items were
earned in DKK.
Our interest income was DKK 19 million in 2003 as compared to DKK 30
million in 2002 as a result of a decrease in the amount of cash and bonds held
and reduced yields on our bond holdings.
Our derivative financial instruments generated a positive value adjustment
of DKK 23 million in 2003 as compared to DKK 43 million in 2002 primarily due to
adjustments on our cross currency swaps to fair value.
Our overall financial expenses were DKK 79 million in 2003 compared to DKK
83 million in 2002 primarily due to a DKK 4 million loss in our bond portfolio,
which was offset by a DKK 6 million lower exchange rate adjustment on our
accounts payable/receivable.
Our Tanker division had increased interest expenses of DKK 4 million in
2003 due to an increased fleet, including interest expenses of DKK 11 million
due to the falling USD/DKK exchange rates as compared to 2002. Our Bulk
division's interest expenses were reduced by DKK 4 million, including a DKK 3
million decrease in vessel mortgage debt and a DKK 1 million decrease due to the
lower average USD/DKK exchange rate as compared to 2002.
Tax on Profit on Ordinary Activities
Our tax expense for 2003 was DKK 1 million as compared to a tax income of
DKK 360 million in 2002. Our 2002 tax income was specifically due to the
inclusion of a reversal of deferred tax liability of DKK 360 million in
connection with the introduction of the tonnage tax scheme in Denmark. We
entered the tonnage tax scheme with effect from 2001.
Profit after Tax from Discontinued Operations
Profit after tax from discontinued operations was DKK 0 million in 2003 as
compared to DKK 70 million in 2002, which was related to the Liner activities
that were sold in September 2002.
Vessels and capitalized dry-docking
The book value of our vessels and dry-docking assets increased by DKK 401
million in 2003 to DKK 2,944 million. The increase was attributable to the
addition of two Panamax bulk vessels, two MR tanker newbuildings and two LR2
tanker newbuildings to our fleet and the sale of an 11-year-old MR tanker. Based
on purchase prices, the net increase in the book value of our vessels and
dry-docking was DKK 960 million, but the decline in the USD/DKK exchange rate
produced a negative valuation adjustment of DKK 393 million, and depreciation on
the vessels of DKK 166 million.
Vessels under construction
Vessels under construction decreased by DKK 101 million to DKK 229 million
in 2003. This decrease resulted from the net effect of the above mentioned
vessel deliveries, the falling USD/DKK exchange rate and additional prepayments
on existing newbuildings as well as newbuildings added in 2003.
During the second and third quarters of 2003, we increased our newbuilding
program through orders for the construction of four LR2 product tankers for
delivery in 2006 and 2007 from a Chinese yard. The first payment of the purchase
price was made in connection with the closing of the contracts. At year-end 2003
we had a total of 6 vessels under construction.
Other investments
Other investments, which increased from DKK 290 million to DKK 976 million
in 2003, mainly consisted of our investment in approximately 33% of the shares
of NORDEN.
In June 2002, we purchased 30.8% of NORDEN's share capital excluding own
shares, which was followed by a public tender offer to NORDEN's shareholders at
DKK 360 per share. Upon the expiration of our tender offer on July 29, 2002, the
offer was neither extended nor increased. As of April 30, 2004, we were NORDEN's
single largest shareholder, with 32.96% of NORDEN's outstanding shares,
excluding own shares. It is our goal to achieve a successful combination of the
two companies, which would provide a platform for further growth, and give us a
genuine competitive advantage in the international shipping market place.
Our shares of NORDEN are currently treated in our accounts as other
investments and are not accounted on an equity basis, as we are not represented
on NORDEN's board of directors, do not have any influence on significant
decisions of NORDEN and have access only to financial information available to
all other investors. Our investment in NORDEN is valued on the basis of the
closing price on the Copenhagen Stock Exchange, which was DKK 1,305.15 per share
as of December 30, 2003. Our total gross investment in the NORDEN shares
reflects an unrealized accumulated gain of DKK 689 million from the original
investment, which is included in our consolidated financial statements herein as
a financial item.
Mortgage debt and bank loans
Mortgage debt, bank loans, repayments on mortgage debt and capitalized
lease obligations increased by DKK 143 million to DKK 2,177 million in 2003. Our
mortgage and leasing debt declined during the year by DKK 35 million to DKK
1,701 million. Short-term mortgage and leasing debt, increased by DKK 178
million, to DKK 476 million, mainly as a result of including the obligations
regarding financially leased vessels being included in this item rather than
primarily in long-term debt. The same applies to another of our vessels, which
was previously financed with traditional mortgage debt. Ordinary debt repayments
were DKK 262 million in 2003 as compared to DKK 220 million in 2002. In 2003,
borrowings for the new vessels delivered to us during this year and our
newbuilding program were DKK 778 million. Additionally, exchange rate
adjustments reduced mortgage debt by DKK 373 million in total.
B. Liquidity and capital resources
Servicing of our obligations under loan agreements, payment of charter hire
for chartered-in vessels and all other commitments that we have entered into are
paid out of the cash generated by our operating activities. Our total cash and
cash equivalents including bonds amounted to DKK 676 million at the end of the
year against DKK 479 million at the beginning of the year, resulting in a net
increase in cash and cash equivalents from cash flows for the year of DKK 197
million compared to net decreases of DKK 43 million in 2003 and DKK 305 million
in 2002.
Despite this relatively modest development, our operations generated a
historically high cash flow of DKK 1,397 million in 2004 as compared to DKK 494
million in 2003 and DKK 261 million in 2002. The primary source of the cash flow
was profit from operating activities. Our investment in NORDEN also contributed
with DKK 200 million in dividends received.
Cash flow from operating activities was for the most part used to finance
the investing activities during the year as DKK 1,117 million net was invested
in tangible fixed assets, primarily comprising our extensive expansion of the
fleet, compared to DKK 1,007 million in 2003 and DKK 934 million in 2002.
Cash outflow from financing activities was DKK 83 million compared to cash
inflow of DKK 471 million in 2003 and DKK 552 million in 2002. Borrowing
amounted to DKK 875 million for the financing of our newbuilding program and
purchase of second hand vessels, while scheduled repayments on mortgage debt and
finance lease obligations amounted to DKK 695 million. Dividends paid to our
shareholders in the amount of DKK 209 million and settlement of share options
relating to our share option program including DKK 54 million in shares
transferred also negatively affected cash flow from financing activities.
Of our cash and cash equivalents as at December 31, 2004 of DKK 676
million, DKK 54 million were held as collateral for a USD loan. Thus, our
unencumbered cash and cash equivalents were DKK 622 million at year-end compared
to DKK 427 million in 2003 and DKK 336 million in 2002. Please refer to note 17,
paragraph i), to our consolidated financial statements for a summarized
statement of cash flow in accordance with U.S. GAAP.
We have significant cash requirements associated with our long term debt
and time charters. These payments are influenced by changes in interest rates.
In order to manage interest rate risk, we enter into financial instruments to
swap the variable interest rate on a portion of our borrowings for fixed rate
debt.
To support our strategy, we increased our financial flexibility in the
fourth quarter of 2004, as we agreed to a revolving facility with leading banks.
The facility has a total limit of USD 570 million, of which USD 299 million was
drawn as at December 31, 2004. Part of the facility is dedicated to the
financing of new tonnage, whereas the remaining part will go to the ongoing
financing of some of our existing vessels. As at December 31, 2004 we had
additional loans of approximately DKK 779 million bringing total credit
agreements to DKK 3,895 million bearing interest at LIBOR + .75% of which
slightly more than DKK 1.5 billion was unused.
As of the end of April 2005, TORM's newbuilding program and contracted
second-hand vessels comprised 17 vessels, of which one vessel is owned through a
50/50 joint venture with J. B. Ugland Shipping A/S. When acquiring vessels, the
first 20%-30% of the contract price is normally financed by TORM, and the
remaining 70%-80% is financed by mortgage debt. TORM has entered into an
agreement for the financing of the five LR2 product tanker vessels to be
delivered during the period from April 2006 to January 2008. Payments
corresponding to 10% of the contract price have been made on all five vessels.
The remaining 10% installments are to be paid by TORM between March 2005 and
January 2007. The financing for the remaining vessels has not yet been agreed.
For all 17 vessels, the total amount of our self-financing is expected to be DKK
768 million, of which DKK 588 million in 2005, and the total outstanding
contractual commitment amounts to DKK 2,854 million.
We believe that based on our available cash and planned investments,
projected operating cash flows and financing capacity, we have sufficient cash
flow to meet our operating requirements, cash flow obligations and other
strategic initiatives. We also believe that our current fleet structure, based
on time charters and owned vessels, provides us with the flexibility to react to
change in market conditions reducing the exposure to negative market
developments.
For further disclosure and discussion of our contractual obligations please
refer to the table included in Item 5F and to Item 10C.
FOREIGN CURRENCY EFFECTS
We are exposed to market risk from changes in foreign exchange rates, which
can affect results from operations and financial condition. To minimize the
risk, we manage our exposure to changes in foreign currency rates through our
regular operating and financing activities and, when deemed appropriate, through
the use of derivative financial instruments, primarily cross currency contracts
and forward exchange contracts.
Please refer to Item 11 for information regarding our hedging strategy.
EFFECTS OF INFLATION
Inflation generally affects us by increasing the interest expense of
floating rate indebtedness and by increasing the cost of labor, dry-docking
costs and other operating expenses. We do not believe inflation has had or will
have a material impact on our operations. Inflationary pressures on bunker costs
are not expected to have a material effect on our future operations because
freight rates for voyage charters are generally sensitive to the price of a
ship's fuel. A sharp rise in bunker prices tend to have only a temporary
negative effect on results since freights generally adjust after prices settle
at a higher level.
C. Research and development, patents and licenses, etc.
Not applicable.
D. Trend information.
EXPECTATIONS FOR 2005
Tanker division
In 2005, the tanker market will be affected by the relatively large order
book of vessels for delivery in 2005 and an expected slightly lower world
economic growth. The revised IMO rules for phase-out of older single-hulled
vessels came into force from April 2005. There is, however, some uncertainty
regarding the impact of the revised IMO rules on freight rates for our Tanker
division.
With an expected growth in GDP of 3.5% for USA, 1.6% for Europe, 1.6% for
Japan, and 9.3% for China, the International Energy Agency (IEA) expects a
growth in world oil demand in 2005 of 1.5%, corresponding to a growth of 1.4
million barrels per day. This will lead to an additional growth in the
transportation of oil. For the product tanker market tonmiles is expected to
increase by 4.7% in 2005 and 3.5% in 2006.
If these growth figures are compared with the net growth in tonnage,
utilization of the active tanker fleet is expected to fall from 91.5% in 2004 to
86.5% in 2005 - corresponding to the level in 2001, which was also considered a
high level.
In total, we expect that for 2005 the Tanker division will experience lower
rates than in 2004. Seasonal patterns mean that the first and fourth quarters
traditionally are the strongest due to the winter season in the western world.
The risk factors, which are judged to have the largest effect on the
product tanker market in 2005 are:
o Lower economic growth in the world and thereby decreased consumption
of refined products,
o Lower imports of refined products, in particular to USA and China.
Bulk division
We expect that Bulk markets in 2005 will again be at historically high
levels but exhibit considerable volatility.
The order book for bulk vessels is relatively modest, despite the very high
rate levels, and the demand in the bulk market is highly dependent on the
development of a few markets, particularly China.
We have therefore - as was the case in 2004 - decided to secure a
significant part of our earnings for 2005 through time charters. Consequently,
65% of the earning days for 2005 for our Panamax bulk vessels were covered on
longer term contracts as at March 1, 2005, thereby securing a historically high
income of 30,800 USD/day for these earning days.
The risk factors which are judged to have the largest effect on the bulk
markets in 2005 are:
o China's import of raw materials are lower than expected,
o Waiting days in ports are reduced,
o A generally lower global economic growth.
E. Off-balance sheet arrangements.
We do not have any off-balance sheet arrangements.
F. Tabular disclosure of contractual obligations.
We have various contractual obligations and commercial commitments to make
future payments including debt agreements, lease obligations and purchase
commitments. The following table summarizes our future obligations under these
contracts due by period as of December 31, 2004 (in DKK million):
2005 2006 2007 2008 2009 There- Total
after
------- ------- ------- ------- ------- ------- -------
Long-Term Debt (1) 339.8 259.5 311.5 151.9 216.4 882.9 2,162.0
Chartered-in Vessels
(Operating leases) 245.8 192.8 170.6 168.2 137.6 196.3 1,111.3
Newbuilding installments
(Purchase Obligations) (2) 511.2 414.6 311.8 139.9 -- -- 1,377.5
Other operating leases 6.0 6.0 5.1 4.5 4.8 25.3 51.7
------- ------- ------- ------- ------- ------- -------
Total 1,102.8 872.9 799.0 464.5 358.8 1,104.5 4,702.5
======= ======= ======= ======= ======= ======= =======
(1) Debt payments could be accelerated upon violation of debt covenants. We
believe the likelihood of a debt covenant violation is remote.
(2) Debt financing will provide an estimated 80% of the newbuilding
installments.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in Denmark and in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the 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. These estimates and
assumptions are affected by the way we apply our accounting policies. An
accounting estimate is considered critical if: the estimate requires management
to make assumptions about matters that were highly uncertain at the time the
estimate was made; different estimates reasonably could have been used; or if
changes in the estimate that would have a material impact on the Company's
financial condition or results of operations are reasonably likely to occur from
period to period. Management believes that the accounting estimates employed are
appropriate and resulting balances are reasonable; however, actual results could
differ from the original estimates, requiring adjustments to these balances in
future periods.
We believe these are our critical accounting policies:
Carrying amounts and useful life of Vessels
We evaluate the carrying amounts and period over which the vessels are
depreciated to determine if events have occurred that would require a
modification of their carrying amounts or useful lives. The valuation of vessels
is reviewed based on events and changes in circumstances that would indicate
that the carrying amount of the assets might not be recovered. In assessing the
recoverability of the vessels, we review certain indicators of potential
impairment, such as reported sale and purchase prices, market demand and general
market conditions. Market valuations from independent internationally recognized
ship broking companies are obtained on a semi-annual basis as part of our review
for potential impairment indicatory. Under U.S. GAAP, if an indication of
impairment is identified, the undiscounted future cash flows are compared to
carrying amount of the assets. If these are less than the carrying amount, an
impairment loss is recorded based on the difference between the fair value
(generally based on discounted future cash flows) and the carrying amount of the
vessels. If, under Danish GAAP, an indication of impairment is identified the
need for recognizing an impairment loss is assessed by comparing the carrying
amount of the vessels to the higher of the net selling price and the discounted
future cash flows.
The review for potential impairment indicators and projection of future
undiscounted and discounted cash flows related to the vessels is complex and
require us to make various estimates including future freight rates, earnings
from the vessels and discount rates. All of these items have been historically
volatile.
The carrying amounts of our vessels may not represent their fair market
value at any point in time since market prices of secondhand vessels to a degree
tend to fluctuate with changes in charter rates and the cost of newbuildings.
However, if the estimated future cash flow or related assumptions in the future
experience changes, an impairment of vessels may be required.
Under Danish GAAP, in 2002 we reversed a previously recorded impairment
amount resulting in an income of DKK 12 million. There were no impairments of
vessels recorded from 2002 to 2004.
Tax
We entered the then newly enacted Danish tonnage taxation scheme with
effect from January 1, 2001 and have filed tax returns for 2001, 2002 and 2003.
The assessment of the tax returns by the tax authorities has not yet been
completed. The tax regulations are highly complex and while we aim to ensure the
estimates of tax assets and liabilities that we record are accurate, there may
be instances where the process of agreeing our tax liabilities with the tax
authorities could require adjustments to be made to estimates previously
recorded. It is our assessment that there is material uncertainty as to our
estimate of taxes payable as of December 31, 2004 due to the lack of precedents
that have interpreted the tonnage tax regulation. The estimate is based on
scenario analysis and discussions with the tax authorities, tax advisors and
industry organizations, and the uncertainty primarily relates to the division of
the income and expense items of our activities between income and expenses from
shipping related activities, which are taxed under the tonnage tax scheme and
income and expenses from other activities, which are not taxed under the tonnage
tax scheme. Please refer to Item 10 E for a description of the Danish tonnage
tax scheme.
Since entering the Danish tonnage taxation scheme the Company has not
accrued for deferred tax in the balance sheet in the financial statements
prepared in conformity with Danish GAAP as the deferred tax status only will
become payable if the Company's participation in the Danish tonnage taxation
scheme is abandoned or if the Company's level of investment and activity is
significantly reduced. Tax liabilities relating to the vessels are considered as
contingent liabilities. Please refer to Item 10e and note 8 for further
information.
Under U.S. GAAP, the provision for deferred tax is still carried in the
balance sheet, as the recognition of a provision for deferred tax does not
depend on the likelihood of the provision resulting in taxable amounts.
Therefore, under U.S. GAAP the uncertainty applies to both the estimate of tax
payable and the provision for deferred tax.
We estimate that the tax returns filed for 2001, 2002 and 2003 and the
Company's activities in 2004 will not trigger taxes payable in excess of the
amount, which has been recognized as per December 31, 2004, because estimated
taxable income to a large extent is offset by deductible losses from prior
periods, and that the deferred tax liability recorded under U.S. GAAP is
adequate.
Our investment in NORDEN is regarded as a strategic investment. At a sale
of this investment after three years of ownership, no tax liability is connected
to the gain on this asset. If this shareholding is sold entirely or in part
before August 2005, any gain will be taxed at 30%. To determine our deferred tax
liability we are therefore required to estimate when this timing difference will
crystallize. We currently have no intention to sell the shareholding in NORDEN
and have therefore not recognized a deferred tax liability related to the
cumulated unrealized gain on the investment of DKK 1,721 million recognized as
of December 31, 2004. If this intention changes, it could result in a
significant tax liability.
CHANGE IN ACCOUNTING Policies
The accounting policies are unchanged from last year except that Danish
accounting standard 21 "Leasing" and Danish accounting standard 22 "Income" have
become effective and have been applied in this financial year.
The effect of implementing Danish accounting standard 21 is that a gain
relating to a sale and leaseback transaction under certain circumstances is
recognized in the income statement immediately. Previously, a gain was always
recognized on the balance sheet and amortized over the life of the charter
party. In connection with a sale and leaseback transaction in the financial year
2000 resulting in an operating lease, we recognized a gain on the balance sheet
which has since been amortized in proportion to the gross rental on the time
charter over the life of the charter party. The fair value at the transaction
date was essentially equal to the book value, and the accounting treatment
applied is consequently considered to be in accordance with Danish accounting
standard 21.
The effect of implementing Danish accounting standard 22 is that the stated
criteria for recognizing income have become more explicit in accordance with the
standard. The methods applied by us to recognize income are in accordance with
Danish accounting standard 22.
The adoption of these accounting standards has thus not resulted in any
changes in the reported amounts.
ACCOUNTING PRINCIPLES NOT YET ADOPTED
Danish GAAP
The Danish Financial Statements Act was amended in February 2004. Under
Danish GAAP, financial statements may now be prepared in accordance with
International Financial Reporting Standards, or IFRS, which is required pursuant
to EU regulation no. 1606/2002/EF for all publicly listed companies in the EU
for fiscal years beginning on or after January 1, 2005.
Accordingly, we will produce Annual Reports for TORM and for our Parent
Company in accordance with IFRS beginning on January 1, 2005.
Based on the IFRS standards currently applicable, the changes to the
accounting policies will result in the following changes as at January 1, 2005
and in the comparative figures for 2004 for TORM and for our Parent Company:
a) Unrealized gains or losses in respect of bonds and shares in other
companies are currently recognized in the income statement under
financial items. Shares are treated as financial assets available for
sale. In accordance with IAS 39 "Financial Instruments: Recognition
and Measurement" unrealized gains or losses in respect of shares will
be recognized directly in shareholders' equity and released to the
income statement when the assets are derecognized. Bonds are
classified as financial assets at fair value through profit or loss.
Therefore, unrealized gains or losses in respect of bonds are still
recognized in the income statement.
b) Our share option scheme provides our employees with the choices of
cash settlement or receipt of TORM shares. The difference on the date
the options are granted between the exercise price and the market
price of the shares is currently recognized as a compensation expense
in administrative expenses in the income statement. Receipts and
payments relating to the exercise of the share options are recognized
directly in shareholders' equity. In accordance with IFRS 2
"Share-based Payment" a liability relating to share options not
exercised will be recognized in the balance sheet. The change in the
liability for the period and the value of the share options exercised
in the period will be recognized in the income statement. The
liability is measured using the Black-Scholes model.
c) We have chosen to apply the optional exemption in IFRS 1 "First-time
Adoption of International Financial Reporting Standards" relating to
cumulative translation differences. As a consequence, cumulative
translation differences are deemed to be zero at the date of
transition to IFRS and gain or loss on a subsequent disposal of an
operation applying a measurement currency different from USD will
exclude translation differences that arose before the date of
transition to IFRS.
We will change the reporting currency for the TORM Group as well as the
measurement currency in the administrative entity to USD beginning on January 1,
2005.
The effects of these changes as at January 1, 2005 and to the comparative
figures for 2004 for TORM are illustrated below with reference to the bullets
listed above. The statements are presented in USD since the Annual Report will
be presented in USD from now on.
Shareholders' equity, USD million Reference January 1, January 1,
2004 2005
Shareholders' equity, current GAAP(1) 413.6 790.8
Exchange rate adjustment regarding change of
measurement currency in the administrative entity
to USD from DKK 0.0 (0.3)
Liability regarding outstanding share options b (6.9) (1.8)
Shareholders' equity, IFRS 406.7 788.7
Income statement, USD million Reference January 1 to
December 31, 2004
Net profit for the year, current GAAP(2) 415.8
Expense relating to the share option program b (9.8)
Unrealized gains/losses on shares recognized in equity a (204.7)
Net profit, IFRS 201.3
(1): Translated into USD using the exchange rate on the balance sheet date.
(2): After change of measurement currency to USD from DKK in the administrative
entity in accordance with the IFRS transition provisions.
The annual report for 2005 must be based on the IFRS standards applicable
on December 31, 2005 and the presented figures may change if IFRS standards are
revised during 2005.
It is our view, that the accounting legislation relating to income taxes
for publicly listed Danish companies is in accordance with IAS 12 "Income Taxes"
and the transition to IFRS is not expected to give rise to any changes in the
accounting treatment of income taxes. We expect to participate in the tonnage
tax scheme after the binding period of 10 years and at a minimum to maintain an
investing and activity level corresponding to the level at the time of entering
the tonnage tax scheme. Accounting for income taxes is one of the areas being
discussed as part of the short-term convergence project being undertaken by IASB
and the FASB with a view to eliminating many of the differences between US GAAP
and IFRS. However, a new draft IFRS standard on income taxes is not expected to
be released until the second half of 2005 at which point we will reconsider the
accounting treatment of income taxes.
In addition, IFRS disclosure requirements are in a number of areas somewhat
in excess of those governing publicly listed Danish companies. We will evaluate
the need for adjustments to the current notes and the possible addition of
further notes and disclosures.
Beginning in the first quarter 2005 we will prepare the quarterly reports
to the Copenhagen Stock Exchange in accordance with the criteria for recognition
and measurement in IAS/IFRS. We will not apply IAS 34, "Interim Financial
Reporting".
U.S. GAAP
In December 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payments" or SFAS 123R.
This statement eliminates the option to apply the intrinsic value measurement
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" to stock compensation awards issued to employees.
Rather, SFAS 123R requires companies to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. That cost will be recognized over the period during
which an employee is required to provide services in exchange for the award--the
requisite service period (usually the vesting period). SFAS 123R applies to all
awards granted after the required effective date and to awards modified,
repurchased, or cancelled after that date. SFAS 123R will be effective for our
fiscal year ending December 31, 2006. We have not yet quantified the effect of
the future adoption of SFAS 123R on a going forward basis.
In December 2004, the FASB SFAS No. 153, "Exchanges of Nonmonetary Assets -
an amendment of APB Opinion No. 29" ("SFAS 153"), which amends Accounting
Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions" to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS 153 is effective for nonmonetary
assets exchanges occurring in fiscal periods beginning after June 15, 2005. We
do not anticipate that the adoption of this statement will have a material
effect on our financial position or results of operations.
In November 2004, the EITF reached a consensus on EITF Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments" ("EITF 03-1"). EITF 03-1 provides guidance on determining
other-than-temporary impairments and its application to marketable equity and
debt securities accounted for under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," as well as investments accounted for
under the cost method of accounting. In September 2004, the FASB issued FASB
Staff Position ("FSP") EITF Issue 03-1-1 which delayed the effective date for
the measurement and recognition guidance contained in EITF 03-1 pending
finalization of the draft FSP EITF Issue 03-1-a, "Implementation Guidance for
the Application of Paragraph 16 of EITF 03-1." The disclosure requirements of
EITF 03-1 remain in effect. The adoption of the recognition and measurement
provisions of EITF 03-1 when finalized are not expected to have a material
impact on our results of operations or financial position.
In October 2004, the FASB issued EITF 04-10, "Determining Whether to
Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds." The
consensus addresses the issue of how an enterprise should evaluate the
aggregation criteria in paragraph 17 of SFAS 131, "Disclosures about Segments of
an Enterprise and Related information," when determining whether operating
segments that do not meet the quantitative thresholds may be aggregated. The
effective date of this issue has been delayed and is anticipated to occur in
2005 to coincide with the final issuance of the FSP (FASB Staff Position), which
will provide guidance in determining whether two or more operating segments have
similar economic characteristics. However, earlier adoption is permitted. The
application of this guidance is not expected to have a material effect on our
financial position or results of operations.
ACCOUNTING POLICIES ADOPTED DURING 2004
FIN 46(R) "Consolidation of Variable Interest Entities"
-------------------------------------------------------
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, and revised it in December 2003 ("FIN 46(R)").
FIN 46(R) clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated support. An enterprise shall consolidate a variable
interest entity if that enterprise is the primary beneficiary. An enterprise is
considered the primary beneficiary if it has a variable interest that will
absorb a majority of the entity's expected losses, receive a majority of the
entity's expected residual returns, or both.
The provisions of FIN 46(R) are required to be applied immediately to all
variable interest entities created after December 31, 2003. For variable
interest entities that were created prior to December 31, 2003, FIN 46(R) is
required to be applied beginning with the first annual period beginning after
December 15, 2004. We have assessed the potential impact of the adoption of
FIN46(R), and we concluded that it has no material impact on consolidated net
income or shareholders' equity.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and senior management.
Set forth below are the names, ages and positions of our directors and
executive officers.
Name Age Position
---- --- --------
Board of Directors:
Niels Erik Nielsen 57 Chairman of the Board
Christian Frigast 53 Deputy Chairman of the Board
Lennart Arnold Johan Arrias 56 Director
Ditlev Engel 41 Director
Rex Harrington 71 Director
Peder Mouridsen 55 Director
Gabriel Panayotides 50 Director
Management:
Klaus Kjaerulff 53 Chief Executive Officer
Klaus Nyborg 41 Chief Financial Officer
Biographical information with respect to each of our directors and
executives is set forth below.
Niels Erik Nielsen was Deputy Chairman of our Board of Directors from
September 26, 2000 and has been Chairman of our Board of Directors since April
25, 2002. Mr. Nielsen is also a partner with the Danish law firm, Bech-Bruun
Dragsted, which provides certain legal services to us. He is a member of the
board of directors of several Danish companies, including the following:
Amagerbanken Aktieselskab, Ambu A/S, Charles Christensen A/S, Cimber Air A/S,
Danica-Elektronik A/S, Danish Supply Corporation A/S, Gammelrand Skaervefabrik
A/S, GPV Industri A/S, InterMail A/S, Kongskilde Industries A/S, Mezzanin
Kapital A/S, Preben Olsen Automobiler A/S, Satair A/S, SCF-Technologies A/S and
Weibel Scientific A/S. He holds a Masters of Law degree from the University of
Copenhagen.
Christian Frigast has been a director of the Company since September 26,
2000 and Deputy Chairman since April 25, 2002. He is the managing director of
Axcel A/S, a Danish investment company, and holds an M.Sc(Econ) from the
University of Copenhagen. He also serves as a member of the Board for numerous
companies including Britannia Invest A/S, Holdingselskabet af 1. august 1997 A/S
and several companies related to Axcel A/S.
Lennart Arnold Johan Arrias has been a director of the Company since 2003.
Mr. Arrias is employed by TORM as a Captain and has been with the Company since
1992. He is elected by the employees of TORM to the Board.
Ditlev Engel has been a director of the Company since April 25, 2002. Mr.
Engel is Group President and CEO of Vestas Wind Systems A/S and has a B(Comm)
degree from the Copenhagen Business School.
Rex Harrington, a director of the Company since April 2003, is the former
Director of Shipping at The Royal Bank of Scotland (RBS) where he had
responsibility for its extensive shipping portfolio. He has wide experience in
the shipping industry and in marine finance, starting his career at the Bank of
England after graduating from Oxford University with a Masters degree. He is now
an independent shipping advisor. Mr. Harrington is the Chairman of the Advisory
Board of the Liberian International Ship and Corporate Registry and a
non-executive director of General Maritime Corporation (NYSE listed), and the
International Chamber of Commerce Commercial Crime Services, which incorporates
the International Maritime Bureau. In addition he is a Deputy Chairman of the
International Maritime Industries Forum and a member of the following
organizations: InterCargo London Advisory Panel, Lloyds Register of Shipping
General Committee, London Shipping Law Centre Steering Committee and The Baltic
Exchange. He was a Director of Clarksons (international shipbrokers) from 1995
to 1998 and Lloyds Register of Shipping from 1994 to 1999.
Peder Mouridsen has been a director of the Company since 2003. Mr.
Mouridsen is employed by TORM as a Chief Engineer and has been with the Company
since 1970. He is elected by the employees of TORM to the Board.
Gabriel Panayotides has been a director of the Company since September 26,
2000. He is Chairman (since 1998) of Excel Maritime Carriers Ltd., listed on the
American Stock Exchange since October 1997. Mr. Panayotides has been engaged in
the ownership and operation of ships since 1978 and sits on the Greek Committee
of the classification societies, Bureau Veritas and Lloyds Register of Shipping.
He has a Bachelors degree from the Pireaus University of Economics.
Klaus Kjaerulff has been our Chief Executive Officer and Managing Director
since September 2000. Mr. Kjaerulff has worked for TORM since 1976. From 1997 to
2000, he served as Executive Vice President responsible for our tanker and bulk
divisions. From 1981 to 1997, Mr. Kjaerulff was Vice President of our tanker
division. He is a member of the board of gram-agentur A/S, a Danish listed
public limited company.
Klaus Nyborg has been our Chief Financial Officer since February 2002.
Prior to working for us, Mr. Nyborg was employed in various capacities at the
A.P. M0ller Group, most recently as Chief Financial Officer (CFO) of the Maersk
Logistics division. From 1998 to 2001, he served as Vice President and Regional
CFO at Maersk for the Asia-Mid-East Region. From 1997 to 1998, he was the
Regional CFO for the Europe-Africa Region. From 1992 to 1997, Mr. Nyborg served
as General Manager and Corporate Secretary in the A.P. M0ller Group. Mr. Nyborg
holds a masters degree in Law and Business Economics from the Copenhagen
Business School.
B. Compensation.
In 2004, we paid a total of DKK 1.5 million in cash to the Board of
Directors and DKK 13.9 million in cash to our executives excluding exercised
stock options. We have not set aside any amounts to provide pension, retirement
or similar benefits to our directors and executive officers. For a description
of our stock option plan please refer to "Option Plan" below. As of December 31,
2004, members of our Board of Directors had exercised 60,980 options.
C. Board Practices.
The members of our Board of Directors are elected for four-year terms. At
the end of each term, they are eligible for re-election. All current Board
members were elected at the annual general meeting in 2003 and will be eligible
for re-election in 2007. There are no service contracts between us and any of
our directors providing for benefits upon termination of a director's election.
D. Employees.
The numbers of employees we employed, on average, for the previous three
financial years, are as follows:
2002 2003 2004
---- ---- ----
Land-based employees
Denmark 90 92 93
Other 1 3 7
Total 91 95 100
Seafarers (officers) 160 185 195
--- --- ---
Total employees 251 280 295
In 2002, 2003 and 2004, approximately 30 of our employees were employed in
administrative positions. The majority of the staff on vessels owned by our
subsidiaries and associated companies are not employed by us.
E. Share ownership.
The following table sets forth information as of April 30, 2004, regarding
the total amount of capital stock owned by our officers and directors on an
individual basis:
Shares
Name Position (Nom. Hold.)
---- -------- ------------
Niels Erik Nielsen Chairman of the Board *
Christian Frigast Deputy Chairman of the Board *
Lennart Arnold Johan Arrias Director *
Ditlev Engel Director *
Rex Harrington Director *
Peder Mouridsen Director *
Gabriel Panayotides Director *
Klaus Kjaerulff Chief Executive Officer *
Klaus Nyborg Chief Financial Officer *
* The person beneficially owns less than one percent of our common shares.
Option plan
In 2001, we created a share option based incentive program for Management,
key employees and the Board members. The program currently includes 23
participants who from 2001-2003 have been granted options to purchase shares in
the Company, where the option holder can buy the shares at a specified exercise
price or where the differential between the share price as of the day of
exercising the options and the option price may be settled in cash.
In this respect we acquired 4.39% of our share capital for DKK 47 million
to cover the risk of share price movements in connection with the share option
incentive program. As of December 31, 2004 52,980 own shares were held to cover
this risk. The value of these shares was DKK 12 million as of December 31, 2004,
whereas the value of the exercised options was DKK 53.5 million, which was
primarily settled in cash. As of December 31, 2004, 97% of the options were
exercised.
Please refer to Note 3 to the consolidated Financial Statements for further
information.
Employee shares
During April 2001, the Board of Directors also decided to offer our
employees 200,000 common shares for the price of DKK 10.5 per share. In October
2001, employees exercised the right to purchase 194,235 of these shares. The
market price at the date of the grant was DKK 54.3 per share. The remaining
stock purchase rights expired.
Exemptions from Nasdaq corporate governance rules
At the time TORM listed its ADRs with the Nasdaq National Market, TORM was
granted an exemption from Nasdaq's requirement for an audit committee and an
audit committee charter. Our full Board of Directors currently fulfills the
function of an audit committee. Our management is responsible for the proper and
timely preparation of the Company's annual reports. Once the annual reports have
been completed and approved by management and our Board of Directors, the
reports are delivered to two independent auditors, one of whom must be a
state-authorized public accountant. The audited annual reports are then
presented for shareholder approval at the general meeting, and once approved,
the reports are sent to Denmark's Commerce and Companies Agency. TORM will adopt
an audit committee and audit committee charter in compliance with Nasdaq's
corporate governance rules by July 31, 2005.
The Company complies with the Nasdaq corporate governance requirements
pertaining to the disclosure of a going concern audit opinion, the distribution
of annual and interim reports; shareholder meetings, quorum, peer review, and
direct registration program and the disclosure of a notification of material
non-compliance.
The Company believes that its corporate governance practices are in
compliance with, and are not prohibited by, the laws of Denmark. Accordingly,
the Company expects to apply for an exemption from all of Nasdaq's corporate
governance practices other than the requirements regarding the disclosure of a
going concern audit opinion, notification of material non-compliance with Nasdaq
corporate governance practices, and the establishment and composition of an
audit committee that complies with SEC Rule 10A-3 and a formal written audit
committee charter.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
A. Major shareholders.
Our capital stock is comprised of common shares, par value DKK 10 per
share. We increased the share capital in May 2004 from nominally DKK 182.0
million to nominally DKK 364.0 million through the issue of 18.2 million bonus
shares increasing the number of shares to 36.4 million shares. The bonus shares
were allotted to our existing shareholders at the ratio 1:1. The following table
sets forth information regarding the owners of five (5) percent or more of our
common shares as of April 30, 2005. None of the shareholders have any special
voting rights.
Name Number of Shares Percentage of Class
---- ---------------- -------------------
Beltest Shipping Company Ltd. 11,698,050 32%
Menfield Navigation Company Limited 7,282,352 20%
A/S Dampskibsselskabet TORM's
Underst0ttelsesfond, Denmark 2,278,440 6%
Each of the shareholders above holds 5% or more of the total number of our
outstanding shares, which requires that shareholder to file information with the
Copenhagen Stock Exchange.
Beltest and its parent company, Ryder Holdings Inc., have filed a Schedule
13D with the Securities and Exchange Commission, or the SEC. Menfield Navigation
Company Limited acquired 7,282,352 shares, or 20.0% of our outstanding shares
during 2003, 2004 and 2005. A/S Dampskibsselskabet TORM's Underst0ttelsesfond's
shareholding in TORM is unchanged over the last three years.
Beltest Shipping Company Ltd., Pacific International Investments Inc. and
Menfield Navigation Company Limited have given notices of their shareholdings to
the Copenhagen Stock Exchange.
B. Related party transactions.
Please refer to note 16 in the consolidated financial statements.
C. Interests of experts and counsel.
Not applicable.
ITEM 8. FINANCIAL INFORMATION.
A. Consolidated Statements and Other Financial Information.
See Item 17.
DIVIDEND DISTRIBUTION POLICY
Under Danish law, we are permitted to distribute dividends from our surplus
capital. Any decision to distribute dividends will be at the discretion of the
Board of Directors and must be approved by the shareholders at our annual
general meeting. Our shareholders approved a dividend of DKK 15 for every DKK 10
share at the annual general meeting in 2005.
There are no restrictions in our existing financing arrangements on our
ability to pay dividends to our shareholders.
B. Significant Changes.
Not Applicable.
ITEM 9. THE OFFER AND LISTING.
A. Listing Details.
Our common shares currently trade on the Copenhagen Stock Exchange. The
tables below sets forth, for the periods indicated, the high and low closing
sale price in Danish Kroner and the average daily trading volume for our shares
on the Copenhagen Stock Exchange. Although we have provided the average daily
trading volume of our shares for the periods indicated, the trading volume of
our shares on the Copenhagen Stock Exchange is extremely volatile and daily
trading ranges from none to several thousand shares.
The average daily trading volume may not be indicative of actual trading
volumes and liquidity. Please also refer to "Risk Factors - There may be no
active public market for you to resell our ADSs." For the previous five full
years:
2000 2001 2002 2003 2004
(restated)(*) (restated)(*) (restated)(*) (restated)(*)
Low 11.24 22.00 23.07 28.66 96.89
High 30.14 31.25 30.21 91.44 249.11
Average Daily
Volume 20,372 18,908 22,350 50,416 81,351
(*): Adjusted for the issue of bonus shares in May 2004.
For the previous two full years and subsequent periods, by quarter:
2003 1st quarter 2nd quarter 3rd quarter 4th quarter
(restated)(*)
Low 28.66 32.97 42.60 64.33
High 33.48 45.39 70.58 91.44
Average Daily
Volume 42,804 85,686 40,460 35,512
2004 1st quarter 2nd quarter 3rd quarter 4th quarter
------- ------ ------ -------
Low 96.89 136.54 139.72 171.12
High 198.99 175.74 172.76 249.11
Average Daily
Volume 106,556 41,774 72,080 102,191
(*): Adjusted for the issue of bonus shares in May 2004.
For the previous six months:
November December January February March April
2004 2004 2005 2005 2005 2005
------- ------ ------ ------- ------- -------
Low 189.05 220.66 221.99 265.95 286.04 286.71
High 249.11 248.57 254.10 324.85 312.31 334.97
Average Daily
Volume 101,629 84,572 64,367 135,969 151,390 110,672
B. Markets.
Our common shares are currently trading on the Copenhagen Stock Exchange.
Our ADSs, each representing one common share, are listed on the Nasdaq National
Market under the abbreviation "TRMD".
In 2004, the average daily trading volume of our ADSs on the Nasdaq
National Market was 14,839 ADSs adjusted for the issue of bonus shares in May
2004, and from January 1, 2005 through April 30, 2005, the average daily trading
volume was 30,034 ADSs.
ITEM 10. ADDITIONAL INFORMATION
This section summarizes our share capital and the material provisions of
our Articles of Association, including rights of holders of our shares. The
description is only a summary and does not describe everything that our Articles
of Association contain. A copy of our Articles of Association was filed with the
Securities and Exchange Commission on June 28, 2002, as Exhibit 1.1 to our
annual report on Form 20-F for the year ended December 31, 2001. As a foreign
private issuer, we are not subject to the proxy rules applicable to issuers
under Section 14 of the Exchange Act of 1934, as amended, and our officers,
directors and principal shareholders are not subject to the short-swing profit
disclosure and recovery provisions of Section 16 of that act. We intend to
provide quarterly reports for the first three quarters of each fiscal year to
the Securities and Exchange Commission on Form 6-K containing unaudited
financial and other information that we file with the Copenhagen Stock Exchange.
A. Share capital.
Not Applicable.
B. Memorandum and articles of association.
Our Articles of Association provide that our principal objectives are:
o to carry out business within shipping, chartering and other transport
services;
o to make investments, including in real estate; and
o to carry on such other business as determined by the Board of Directors to
be consistent with such objectives.
The Rules of Procedure that govern our Board of Directors prohibit a
director from participating in the consideration of business regarding
agreements in which the director is a participant or in which the director has a
material interest. Any agreements between us and a director or between us and a
third party in which a director has an interest must be approved by the Board of
Directors. The Rules of Procedure also provide that a director shall retire at
the first general meeting following the director's 70th birthday.
Our Articles of Association also contain the following provisions:
o our Board of Directors shall receive a fixed stipend, which shall be set by
the Board of Directors and approved by the shareholders during the annual
general meeting;
o any dividend payable to a shareholder which remains unclaimed after five
years shall accrue to us;
o each common share shall have the right to one vote;
o directors are elected for four year terms, after which they are entitled to
be re-elected;
o there are no redemption rights; and
o generally, proposals to amend our Articles of Association or to dissolve or
merge with another company require the approval of at least 2/3 of all
votes cast at a meeting at which 3/5 of the outstanding share capital is
present, unless the resolution was proposed by the Board of Directors, in
which case a simple majority of the votes cast at a meeting at which a
quorum consisting of 1/3 of the outstanding shares is present is required.
With regard to general and special meetings, the Articles of Association
provide that:
o special meetings can be convened by the Board of Directors and the auditors
at any time on at least eight days notice but cannot be more than four
weeks in advance;
o holders of at least 10% of our share capital can request special meetings
by submitting a written request to the Board of Directors, which then has
14 days to convene a meeting;
o shareholders desiring to attend the general meeting must obtain an
admission card from us at least four days prior to the meeting;
o admission cards will be issued to registered holders, and holders of
unregistered shares who have obtained a deposit receipt issued by the
depositary bank (or Danish Securities Center) and a written declaration
that the shares will not be transferred until after the general meeting;
o shares acquired from another shareholder will not have any voting rights
unless the shares are registered or unless the holder has filed and
provided proof of ownership at least one day prior to the announcement of
the general meeting; and
o proposals by shareholders must be submitted in writing to the Board of
Directors before February 15th in order to be considered at the annual
general meeting.
DANISH LAW CONSIDERATIONS
Under Danish law, shareholders are not permitted to approve corporate
matters by written consent in lieu of general or special meetings. All
shareholders have access to corporate records filed by each company with the
Danish Commerce and Companies Agency. These corporate records include the
articles of association and the annual accounts/financial statements. Each
company is also required to keep a share register, but shareholders do not have
access to it.
Danish law permits companies to adopt cumulative voting provisions and
staggered terms for our board of directors, but we have not adopted such
provisions. Danish law also prohibits companies from adopting "poison pill"
measures that could prevent a takeover attempt by discriminating against a
shareholder or a group of shareholders.
C. Material contracts.
The following is a summary of our material contracts. This summary is
qualified in its entirety by reference to the full text of the actual documents,
which govern the transactions we describe.
NEWBUILDING CONTRACTS
We entered into five contracts with Dalian New Shipbuilding Heavy Industry
Co. Ltd., each for the construction of a 110,000 dwt product tanker. These
contracts were executed on June 20, 2003, October 22, 2003 and January 20, 2004,
respectively. The contracts provide for stage payments of 10% upon signing of
the contracts, 30% during construction, and 60% upon delivery of the vessel.
Delivery of the tankers is scheduled between April 2006 and January 2008.
LOAN AGREEMENTS AND CREDIT FACILITIES
A/S D/S TORM entered into a USD 95 million loan agreement with Nordea Bank
Danmark A/S on January 15, 2004 to assist in the financing of the 5 newbuildings
mentioned above. The interest rate is a variable rate based upon LIBOR. As
security for our obligations under the debt instrument, we have granted to
Nordea Bank a first priority mortgage, registered over and against the 5
vessels. The loan is due to be repaid in 2014.
A/S D/S TORM also entered into a USD 570 million revolving credit facility
with Danske Bank A/S and Danish Ship Finance on December 10, 2004 to assist in
the financing of 20 vessels in the TORM fleet. The interest rate is a variable
rate based upon LIBOR. As security for our obligations under the debt
instrument, we have granted to Danske Bank and Danish Ship Finance a first
priority mortgage, registered over and against the 20 vessels. The loan is due
to be repaid in 2014.
D. Exchange controls.
None.
E. Taxation.
The following discussion is a summary of the material Danish and U.S.
federal income tax considerations relevant to an investment decision by a U.S.
Holder and a Non-U.S. Holder, as defined below, in our American Depositary
Shares, or ADSs, as evidenced by American Depositary Receipts, or ADRs. This
discussion does not purport to deal with the tax consequences of owning ADSs to
all categories of investors, some of which, such as dealers in securities and
investors whose functional currency is not the U.S. dollar, may be subject to
special rules. You should consult your own tax advisors concerning the overall
tax consequences arising in your own particular situation under U.S. federal,
state, local or foreign law of the ownership of ADSs.
DANISH TAX CONSIDERATIONS
Under Danish law, dividends paid in respect of shares are subject to Danish
withholding tax at the rate of 28%, without regard to the residency of the
shareholders. Non-residents of Denmark do not have to pay additional Danish
income tax on the dividends, unless their shares are held in connection with a
trade or business conducted from a permanent establishment in Denmark.
Non-resident shareholders may be eligible for a refund of part of the
withholding tax where the shareholders are entitled to, and comply with
procedures for claiming benefits under an income tax convention. Eligible
shareholders who comply with certain certification procedures may claim a refund
from the Danish tax authorities, which will reduce the effective withholding tax
rate, normally to 15%. The claim for a refund must be certified by the holder's
local tax authorities on forms prepared by the Danish tax authorities, which are
then submitted to the Danish tax authorities.
No withholding tax is levied on dividends paid to a corporation which holds
at least 20% of a company's shares, provided that the shareholder company (i)
has held those shares for a minimum of one year during the time in which the
dividends were paid and (ii) is a resident in another European Union country or
in a country with which Denmark has entered into a taxation treaty which
eliminates or reduces the withholding tax on dividends.
Under the current income tax convention between Denmark and the United
States, dividends on shares beneficially-owned by U.S. holders who are eligible
for treaty benefits are subject to an effective Danish withholding tax at the
rate of 15%. The withholding tax rate is reduced to 5% if the beneficial owner
of the dividends is a U.S. company, which holds directly at least 10% of the
share capital of the company paying the dividends.
Denmark has entered into tax conventions reducing the withholding tax to
the applicable convention rate for individual residents of the United States,
Canada, Germany, Belgium, Luxembourg, Norway, Sweden, Ireland, Switzerland,
Greece and the United Kingdom. The regime does not entitle the investor to a
lower withholding tax rate than the rate applicable according to the double
taxation treaty, but reduces the withholding tax rate from the normal rate of
28% to the withholding tax rate that applies according to the relevant double
taxation treaty.
In order to receive benefits under the regime mentioned in the preceding
paragraph, a U.S. investor must deposit his shares with a Danish bank. An
agreement on the deposit of shares must be made with the Danish bank in
question.
Further, the U.S. investor must obtain a certificate of residential address
and tax liability from the tax authorities in the U.S. and file it with the
Danish account holding bank through which the U.S. investor holds his shares.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Seward & Kissel LLP, our U.S. counsel, the following are
the material U.S. federal income tax consequences to us and to U.S. Holders and
Non-U.S. Holders, as defined below, regarding our ADSs. The following discussion
of U.S. federal income tax matters is based on the Internal Revenue Code of
1986, as amended, which we refer to as the "Code", judicial decisions,
administrative pronouncements, and existing and proposed regulations issued by
the U.S. Department of the Treasury, all as they exist on the date hereof and
all of which are subject to change, possibly with retroactive effect. In
addition, the discussion is based, in part, on the description of our business
as described above and assumes that we conduct our business as described in that
section.
References in the following discussion to "we", "us" and "our" are to A/S
Dampskibsselskabet Torm ("TORM") and its subsidiaries on a consolidated basis.
For purposes of the discussion below, the U.S. Holders and Non-U.S. Holders of
ADSs generally will be treated as the owners of the common stock of TORM
represented by the ADSs. In the following discussion, the United States Internal
Revenue Service is referred to as the "IRS".
United States Taxation Of Our Company
We anticipate that substantially all of our gross income will be derived
from the use and operation of vessels in international commerce and that this
income will principally consist of freights from the transportation of cargoes,
hire or lease income from voyage, time or bareboat charters and the performance
of services directly related thereto, which we refer to as "shipping income".
Unless exempt from U.S. taxation under Section 883 of the Code or under Article
8 of the United States-Denmark Income Tax Treaty, we will be subject to U.S.
federal income taxation, in the manner discussed below, to the extent our
shipping income is considered for U.S. federal income tax purposes to be derived
from sources within the United States.
Shipping income that is attributable to transportation that begins or ends,
but that does not both begin and end, in the United States will be considered
for such tax purposes to be 50% derived from sources within the United States.
Shipping income attributable to transportation that both begins and ends in the
United States will be considered to be 100% derived from sources within the
United States. We do not engage in transportation that gives rise to 100% U.S.
source income.
Shipping income attributable to transportation exclusively between non-U.S.
ports will be considered to be 100% derived from sources outside the United
States. Shipping income derived from sources outside the United States will not
be subject to any U.S. federal income tax.
Code Section 883 Exemption
TORM and each subsidiary that derives U.S. source shipping income will
qualify for exemption from U.S. federal income tax under Section 883 in respect
of such shipping income if, in relevant part:
o TORM and each subsidiary is organized in a qualified foreign country which
is one that grants an equivalent exemption from tax to corporations
organized in the United States in respect of the shipping income for which
exemption is being claimed under Section 883, which we refer to as the
"country of organization requirement"; and
o more than 50% of the value of the stock of TORM and each subsidiary is
treated as owned, directly or indirectly, by individuals who are
"residents" of qualified foreign countries, which we refer to as the
"ownership requirement".
Since the U.S. Treasury Department has recognized Denmark, the country of
incorporation of TORM, and each of the countries of incorporation of TORM's
subsidiaries as a qualified foreign country in respect of the shipping income
for which exemption is being claimed under Section 883, TORM and each subsidiary
satisfy the country of organization requirement.
In respect of the ownership requirement, Section 883 provides a special
publicly-traded rule applicable to both TORM and its subsidiaries. In the case
of TORM, it will be exempted from having to satisfy the ownership requirement if
its stock is considered to be "primarily and regularly traded on an established
securities market" located in its country of organization, Denmark, in another
qualified foreign country or in the United States, which we refer to as the
"publicly-traded test". Furthermore, if TORM satisfies the publicly-traded test,
the stock of TORM's subsidiaries will be deemed to be owned by individual
residents of Denmark and each of the subsidiaries will satisfy the ownership
requirement.
Final regulations interpreting Section 883 were promulgated by the U.S.
Treasury Department in August of 2003, which we refer to as the "final
regulations."
Under the American Jobs Creation Act of 2004, the final regulations apply
to taxable years beginning on or after September 24, 2004. As a result, such
regulations will only be effective for calendar year taxpayers like ourselves
for the calendar year 2005.
The final regulations provide, in pertinent part, that stock of a foreign
corporation will be considered to be "primarily traded" on an established
securities market if the number of shares that are traded during any taxable
year on that market exceeds the number of shares traded during that year on any
other established securities market.
At present, the sole class of TORM's stock that is issued and outstanding
is its common stock, which is listed on the Copenhagen Stock Exchange, an
established securities market in Denmark. TORM's common stock as represented by
its ADSs (each representing one share of common stock) is also listed on the
NASDAQ National Market (NASDAQ), which is an established securities market in
the United States. However, since TORM's common stock as represented by ADSs
began trading on the NASDAQ on April 17, 2002, the trading activity has
represented less than 10% of the common shares traded on the Copenhagen Stock
Exchange. For the foreseeable future, TORM has no reason to expect that more
common shares will not continue to be traded on the Copenhagen Stock Exchange
than on the NASDAQ and therefore, the analysis below proceeds on the premise
that its common shares are "primarily traded" on the Copenhagen Stock Exchange.
Under the final regulations, TORM's common stock further provide that stock
will be considered to be "regularly traded" on an established securities market
if (i) more than 50% of the common stock is listed on such market and is traded
on such market, other than in de minimis quantities, on at least 60 days during
the taxable year and (ii) the aggregate number of shares of such stock traded on
such market is at least 10% of the average number of shares of such stock
outstanding during such year.
For 2004, TORM's common stock satisfied these "regularly-traded" tests.
Furthermore, TORM has no reason to believe that this will not continue to be the
case notwithstanding the ADS listing on the NASDAQ.
Notwithstanding the foregoing, the final regulations provide, in pertinent
part, that TORM's common stock will not be considered to be regularly traded on
an established securities market for any taxable year in which 50% or more of
the outstanding shares of such stock are owned, within the meaning of the
regulations, on more than half the days during such taxable year by persons who
each own 5% or more of the value of the outstanding shares of such stock, which
we refer to as the "5% override rule".
In the event the 5% override rule is triggered based on its "more than half
the days" standard, the final regulations provide that the 5% override rule will
not apply for such year if we can establish that among the closely-held group of
5% shareholders, which we refer to as the "5% closely-held group", there are
sufficient 5% shareholders that are considered to be qualified shareholders for
purposes of Section 883 to preclude non-qualified 5% shareholders in the 5%
closely-held group from owning 50% or more of our stock for more than half the
number of days during such year, which we refer to as the "5% closely-held group
exception".
Based on its shareholdings during 2004, TORM would be subject to the 5%
override rule of the final regulations and TORM's ability to satisfy the 5%
closely-held group exception could prove to be problematic. If TORM were denied
the benefit of the special publicly traded rule, we believe that TORM and its
subsidiaries may not be able to satisfy the ownership requirement in accordance
with the final regulations.
Since the final regulations were not effective until the calendar year
2005, however, we intend to take the position that TORM satisfied the
publicly-traded test for taxable years prior to calendar year 2005 and as such,
we and our subsidiaries were entitled to exemption from U.S. federal income tax
under Section 883 in respect of our U.S. source shipping income for such taxable
years. For the 2005 taxable year and taxable years thereafter, we do not believe
we are entitled to exemption from U.S. federal income tax under Section 883 in
respect of our U.S. source shipping income.
The United States-Denmark Income Tax Treaty Exemption
Without regard to Section 883, we believe that TORM and each of its
subsidiaries would qualify for exemption from U.S. federal income tax under
Article 8 of the United States-Denmark Income Tax Treaty, which we refer to as
the "Treaty".
Article 8 exempts from U.S. federal income tax the profits of TORM and each
of its Danish subsidiaries and each of its non-Danish subsidiaries, all of which
are treated as "residents" of Denmark within the meaning of the Treaty
(collectively, "Danish subsidiaries") derived from the operation of ships in
international traffic. As defined, profits from the "operation of ships" include
profits derived from (i) time or voyage charters, (ii) the inland transport of
property within the United States undertaken as part of international traffic,
(iii) bareboat charters if the lessee operates the vessel in international
traffic and (iv) the use, maintenance or rental of containers used in
international traffic. All of the U.S. source shipping income of TORM and its
Danish subsidiaries falls within the scope of the exemption provided by Article
8.
The Treaty conditions the eligibility of TORM and its Danish subsidiaries
to claim exemption under Article 8 upon, among other things, TORM satisfying the
publicly-traded rule of the "treaty shopping" provisions of Article 22
(Limitation Of Benefits) of the Treaty.
The publicly-traded rule provides that a Danish corporation such as TORM,
as well as its Danish subsidiaries, will be entitled to the benefits of the
Treaty if all of TORM's shares in the class or classes of stock representing
more than 50 percent of the vote and value of its stock, which we refer to as
the "50% vote/value test", are listed on a "recognized stock exchange" and are
"substantially and regularly traded" on one or more recognized stock exchanges,
which we refer to as the "substantially and regularly traded test". The term
"recognized stock exchange" includes the Copenhagen Stock Exchange and the
NASDAQ. The shares in a class of stock are considered to be "substantially and
regularly traded" if (i) trades in such class are effected on one or more
recognized stock exchanges other than in de minimis quantities during every
quarter, and (ii) the aggregate number of shares of that class traded during the
previous taxable year is at least six (6) percent of the average number of
shares outstanding in that class during that taxable year.
TORM's common stock is currently listed on a recognized stock exchange
within the meaning of the Treaty (the Copenhagen Stock Exchange). Since the
common stock is TORM's sole class of stock, the 50% vote/value test is
satisfied. Based on their recent trading history on the Copenhagen Stock
Exchange over the past two years, the common shares of TORM also satisfy the
substantially and regularly traded test of the Treaty and therefore TORM
currently satisfies the publicly traded rule of Article 22 of the Treaty.
Although we cannot give any assurances, we have every expectation that the
trading volume and trading frequency of TORM's common shares on the Copenhagen
Stock Exchange will continue to match or exceed the recent trading history of
TORM's common shares on the Copenhagen Stock Exchange.
Taxation in Absence of Internal Revenue Code Section 883 Exemption or Treaty
Exemption
4% Gross Basis Tax Regime. To the extent the benefits of Section 883 or the
Treaty are unavailable, the U.S. source shipping income of TORM and its
subsidiaries which is not considered to be "effectively connected" with the
conduct of a U.S. trade or business as discussed below, would be subject to a 4%
tax imposed by Section 887 of the Code on a gross basis, without benefit of
deductions. Since under the sourcing rules described above, no more than 50% of
our shipping income would be treated as derived from U.S. sources, the maximum
effective rate of U.S. federal income tax on our shipping income would never
exceed 2% under the 4% gross basis tax regime.
Net Basis and Branch Tax Regime. To the extent the benefits of the Section
883 exemption or the Treaty are unavailable and the U.S. source shipping income
of TORM and its subsidiaries is considered to be "effectively connected" with
the conduct of a U.S. trade or business, as discussed below, any such
"effectively connected" U.S. source shipping income, net of applicable
deductions, would be subject to the U.S. federal corporate income tax currently
imposed at graduated rates of up to 35%. In addition, TORM and its subsidiaries
may be subject to the 30% "branch-level" taxes (or such lesser tax as provided
by an applicable income tax treaty) on earnings effectively connected with the
conduct of such trade or business, as determined after allowance for certain
adjustments, and on certain interest paid or deemed paid attributable to the
conduct of their U.S. trade or business.
The U.S. source shipping income of TORM or any subsidiary will be
considered "effectively connected" with the conduct of a U.S. trade or business
only if:
o TORM or such subsidiary has, or is considered to have, a fixed place of
business in the United States involved in the earning of shipping income;
and
o substantially all of the U.S. source shipping income of TORM or such
subsidiary is attributable to regularly scheduled transportation, such as
the operation of a vessel that follows a published schedule with repeated
sailings at regular intervals between the same points for voyages that
begin or end in the United States.
We do not intend to have, or permit circumstances that would result in
having, substantially all of the U.S. source shipping income of TORM or its
subsidiaries attributable to regularly scheduled transportation. Based on the
foregoing and on the expected mode of our shipping operations, we believe that
none of the U.S. source shipping income of TORM or any subsidiary will be
"effectively connected" with the conduct of a U.S. trade or business.
Gain on Sale of Vessels. To the extent any of our vessels makes more than
an occasional voyage to U.S. ports, TORM or its subsidiaries may be considered
for United States federal income tax purposes to be engaged in the conduct of a
United States trade or business. As a result, except to the extent the gain on
the sale of a vessel is incidental to the Shipping Income of TORM or its
subsidiaries that is exempt under either Section 883 or the Treaty, any U.S.
source gain derived by TORM or its subsidiaries on the sale of a vessel may be
partly or wholly subject to United States federal income tax as "effectively
connected" income (determined under rules different from those discussed above)
under the net basis and branch tax regime described above. However, we intend to
structure sales of our vessels in such a manner, including effecting the sale
and delivery of vessels outside of the United States, as to not give rise to
U.S. source gain.
Taxation of U.S. Holders
As used herein, the term "U.S. Holder" means a beneficial owner of an ADS
that (i) is a U.S. citizen or resident, a United States corporation or other
United States entity taxable as a corporation, an estate, the income of which is
subject to United States federal income taxation regardless of its source, or a
trust if a court within the United States is able to exercise primary
jurisdiction over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust and (ii)
owns the ADSs as a capital asset, generally, for investment purposes.
If a partnership holds our ADSs, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner in a partnership holding our ADSs, you should
consult your own tax advisor on this issue.
Distributions. Any distributions made by the ADS depositary agent, or
depositary, with respect to our ADSs to a U.S. Holder will generally constitute
dividends to the extent of our current or accumulated earnings and profits, as
determined under U.S. federal income tax principles.
Dividends paid with respect to our ADSs to a non-corporate U.S. Holder (a
"U.S. Individual Holder") may be eligible for preferential U.S. federal income
tax rates (through 2008) provided that (1) we are a "qualified foreign
corporation", (2) the U.S. Individual Holder has owned our stock for more than
60 days in the 121-day period beginning 60 days before the date on which our
stock becomes ex-dividend and (3) we are not a passive foreign investment
company for the taxable year of the dividend or the immediately preceding
taxable year (which we do not believe we are, have been or will be). The
preferential tax rates do not apply to U.S. Holders that are not individuals,
trusts or estates.
We will be treated as a "qualified foreign corporation" if either (1) our
ADSs are readily tradable on an established securities market in the United
States or (2) we are eligible for the benefits of a satisfactory (in the
judgment of the U.S. Treasury Secretary) comprehensive income tax treaty between
the United States and a foreign country which includes an exchange of
information program.
Our ADSs will qualify as readily tradable or an established securities
market because they are listed on the NASDAQ national market, which has been
designated by the IRS as so qualifying. Alternatively, as discussed above, we
are eligible for the benefits of the Treaty and the IRS has issued guidance that
the Treaty is satisfactory for this purpose. Therefore, we believe that any
dividends paid by us on our ADSs should be eligible for these preferential rates
in the hands of a U.S. Individual Holder. However, certain limitations may apply
to any "extraordinary dividends" paid by us. Any dividends paid by us which are
not eligible for these preferential rates will be taxed as ordinary income to a
U.S. Holder.
Distributions in excess of our earnings and profits will be treated first
as a non-taxable return of capital to the extent of the U.S. Holder's tax basis
in his ADSs on a dollar-for-dollar basis and thereafter as capital gain. Because
we are not a U.S. corporation, U.S. Holders that are corporations will not be
entitled to claim a dividend received deduction with respect to any
distributions they receive from us. Dividends paid with respect to the
underlying common stock of each ADS will generally be treated as "passive
income" (or "passive category income" for taxable years beginning after December
31, 2006) or, in the case of certain types of U.S. Holders, "financial services
income", (which will be treated as "general category income" for taxable years
beginning after December 31, 2006) for purposes of computing allowable foreign
tax credits for U.S. foreign tax credit purposes.
Sale, Exchange or other Disposition of ADSs. A U.S. Holder generally will
recognize taxable gain or loss upon a sale, exchange or other disposition of our
ADSs in an amount equal to the difference between the amount realized by the
U.S. Holder from such sale, exchange or other disposition and the U.S. Holder's
adjusted tax basis in the ADSs. Such gain or loss will be treated as long-term
capital gain or loss if the U.S. Holder's holding period in the ADSs is greater
than one year at the time of the sale, exchange or other disposition. Such
capital gain or loss will generally be treated as U.S.-source income or loss, as
applicable, for U.S. foreign tax credit purposes. A U.S. Holder's ability to
deduct capital losses is subject to certain limitations.
U.S. Taxation of "Non-U.S. Holders"
A beneficial owner of an ADS that is not a U.S. Holder is referred to
herein as a "Non-U.S. Holder."
Distributions. Non-U.S. Holders generally will not be subject to U.S.
federal income tax or withholding tax on dividends received from us with respect
to our common stock, unless the dividends are effectively connected with the
Non-U.S. Holder's conduct of a trade or business in the United States or, if the
Non-U.S. Holder is entitled to the benefits of an income tax treaty with respect
to those dividends, those dividends are attributable to a permanent
establishment maintained by the Non-U.S. Holder in the United States.
Sale, Exchange or Other Disposition of ADSs. Non-U.S. Holders generally
will not be subject to U.S. federal income tax or withholding tax on any gain
realized upon the sale, exchange or other disposition of our ADSs unless: (i)
the gain is effectively connected with the Non-U.S. Holder's conduct of a trade
or business in the United States or, if the Non-U.S. Holder is entitled to the
benefits of an income tax treaty with respect to that gain, that gain is
attributable to a permanent establishment maintained by the Non-U.S. Holder in
the United States; or (ii) the Non-U.S. Holder is an individual who is present
in the United States for 183 days or more during the taxable year of disposition
and other conditions are met.
If the Non-U.S. Holder is engaged in a U.S. trade or business for U.S.
federal income tax purposes, the income from the ADSs, including dividends on
the underlying common stock and the gain from the sale, exchange or other
disposition of such stock that is effectively connected with the conduct of that
trade or business, will generally be subject to regular U.S. federal income tax
in the same manner as discussed in the previous section relating to the taxation
of U.S. Holders. In addition, if you are a corporate Non-U.S. Holder, your
earnings and profits that are attributable to the effectively connected income,
which are subject to certain adjustments, may be subject to an additional branch
profits tax at a rate of 30%, or at a lower rate specified by an applicable
income tax treaty.
Backup Withholding and Information Reporting
In general, dividend payments, or other taxable distributions, made within
the United States to you will be subject to information reporting requirements
and "backup withholding" if you are a non-corporate U.S. Holder and you:
o fail to provide an accurate taxpayer identification number;
o are notified by the IRS that you have failed to report all interest or
dividends required to be shown on your federal income tax returns; or
o in certain circumstances, fail to comply with applicable certification
requirements.
Non-U.S. Holders may be required to establish their exemption from
information reporting and backup withholding by certifying their status on IRS
Form W-8BEN, W-8ECI or W-8IMY, as applicable.
If you sell your ADSs to or through a U.S. office or broker, the payment of
the proceeds is subject to both U.S. backup withholding and information
reporting unless you certify that you are a non-U.S. person, under penalties of
perjury, or you otherwise establish an exemption. If you sell your ADSs through
a non-U.S. office of a non-U.S. broker and the sales proceeds are paid to you
outside the United States then information reporting and backup withholding
generally will not apply to that payment. However, U.S. information reporting
requirements, but not backup withholding, will apply to a payment of sales
proceeds, including a payment made to you outside the United States, if you sell
your ADSs through a non-U.S. office of a broker that is a U.S. person or has
some other contacts with the United States.
Backup withholding is not an additional tax. Rather, you generally may
obtain a refund of any amounts withheld under backup withholding rules that
exceed your income tax liability by filing a refund claim with the IRS.
Danish Tonnage Taxation Scheme
On February 6, 2002, the Danish Government proposed a bill regarding
Tonnage Taxation, which was enacted on April 18, 2002. According to the new
Tonnage Taxation Act, taxable income will no longer be calculated as the
difference between taxable income and deductible expenses as under the normal
corporate taxation. Instead, taxable income is calculated with reference to the
tonnage used by the Company during the year. The legislation was implemented
retroactively from January 1, 2001 and in connection with the submission of tax
return for 2001 the Company decided to enter the tonnage taxation scheme with
effect from January 1, 2001.
The election is binding for a ten-year period and, accordingly, we will be
covered by the tonnage tax system until 2010.
Taxable income under the tonnage tax system is calculated using fixed rates
per 100 net tons per day for the vessels. When calculating taxable income
according to the tonnage tax system, no deductions or depreciation charges are
allowed.
It is as yet uncertain whether activities in relation to management of
pools of vessels owned by other shipping companies can or cannot be taxed
according to the tonnage tax system, but will be taxed in accordance with the
ordinary Danish corporate tax legislation. Special rules apply in relation to
the treatment of financial income/expenses.
The taxable income for a Company for a given period is calculated as the
sum of the taxable income under the tonnage tax system and the taxable income
made up in accordance with to the ordinary Danish corporate tax system. The
taxable income is taxed at the normal corporate tax rate (presently 30%). The
taxable income may be offset by tax losses carried forward following the normal
Danish Tax rules.
Capital gains in connection with the sale of vessels - calculated for each
vessel as the difference between the sales price and the acquisition price plus
expenses incurred for improvement of the vessel - are taxed in accordance with
the normal tax legislation.
Generally, recaptured depreciation should be taken into income. However,
such taxation may be deferred if new vessels are contracted within certain time
limits.
In this respect, when converting to the tonnage tax system, the existing
vessels are transferred to a transition account at their tax value. Any costs
relating to improvements of these vessels are added to this account. Vessels
acquired after transferring (January 1, 2001) to the tonnage tax system are
booked on a special netting account. Costs relating to improvement of these
vessels are added to the netting account. If a vessel is sold, the smaller
amount of the sales price and the actual acquisition price plus expenses for
improvements shall reduce the transition account (if the ships were acquired
prior to entering the tonnage tax system) or netting account (if the ships were
acquired after entering the tonnage tax system).
The transition and netting accounts are reduced annually by a depreciation
rate of 12%. If the transition account is negative and at the same time the
netting account is positive, the reduction is made on the basis of the net
amount.
If the shipping company's transition account becomes negative, the negative
amount shall be included in the taxable income unless the negative amount is
fully or partially neutralized by a positive amount on the netting account plus
contracted newbuild tonnage which shall be delivered within maximum three years.
In accordance with Danish accounting principles, the provision for deferred
tax that existed at the date of enactment, DKK 360 million, has been released to
income in 2002, which is in accordance with shipping industry practice in
Denmark. The Company has paid no tonnage tax in 2001, 2002 and 2003 due to tax
losses carried forward.
The tonnage tax legislation is new, and the guidance from the authorities
is not detailed in every aspect. Accordingly, in connection with the preparation
of our tax returns for 2001, 2002 and 2003, we made interpretations of the new
tonnage tax legislation some of which have been challenged by the tax
authorities. We agree in part to some of the alternative interpretations
presented by the tax authorities whereas we do not agree to other of the
alternative interpretations presented. The differences in interpretation
primarily relate to whether certain income and expense items are taxable under
the tonnage taxation scheme or the ordinary Danish corporate tax legislation.
The correspondence with the tax authorities regarding these issues is still
ongoing.
F. Dividends and paying agents.
Not Applicable.
G. Statement by experts.
Not Applicable.
H. Documents on display.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended. In accordance with these requirements we file and
submit 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 Securities and Exchange 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 Securities
and Exchange Commission at its principal office in Washington, D.C. 20549. The
Securities and Exchange Commission maintains a website (http://www.sec.gov) that
contains reports, proxy and information statements and other information that we
and other registrants have filed electronically with the Securities and Exchange
Commission. In addition, documents referred to in this annual report may be
inspected at our headquarters at 18 Tuborg Havnevej, DK-2900 Hellerup, Denmark.
I. Subsidiary Information.
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from foreign currency fluctuations, changes
in interest rates and changes in the prices of fuel oil. We enter into financial
instruments to manage these risks, but do not use financial instruments for
trading or speculative purposes. The sensitivity analyses presented do not
consider the effects that such adverse change may have on overall economic
activity, nor do they consider additional actions management may take to
mitigate its exposure to such changes. Actual results may differ. For an
overview of the fair value of the derivative financial instruments please refer
to note 15.
Foreign Exchange Rate Risk
Our operations are primarily denominated in U.S. dollars while our
reporting currency is the Danish Kroner. Virtually all of our revenues and most
of our operating costs are denominated in U.S. dollars. A hypothetical 1%
weakening of the U.S. dollar would have resulted in a decrease in Gross Profit
(Net earnings from shipping activities) of DKK 15 million for the year ended
December 31, 2004 as compared to DKK 8 million as of December 31, 2003. We have
DKK 2,333 million of outstanding indebtedness as of December 31, 2004 that is
repayable in U.S. dollars as compared to DKK 2,346 million as of December 31,
2003. A hypothetical 1% uniform weakening of the U.S. dollar would have resulted
in a reporting currency translation adjustment of DKK 16 million recorded as a
reduction in shareholders' equity as compared to DKK 23 million as of December
31, 2003. Such a change in exchange rates would not have impacted our cash
flows. We maintain the necessary U.S. dollar balances to repay our outstanding
U.S. dollar obligations and these borrowings are directly related to U.S. dollar
based assets.
In order to manage this risk, we enter into forward contracts, cross
currency contracts and currency options.
Cross currency contracts
As of December 31, 2004, we had the following cross currency contract in
place:
Nominal Value at the date of Date of Maturity Fair Value
entering into the Contract
USD DKK
5 million 37.0 million January 2005 DKK 10.0 million
As of December 31, 2003, the fair value of our currency contracts was DKK
34.9 million.
Forward Currency Contracts
In 2004 we entered into forward contracts agreeing to sell a total of USD
38 million against DKK at an average exchange rate of DKK 6.02 for the purpose
of servicing our Danish cash flow requirements. As of December 31, 2004, the
fair value of our forward currency contracts was DKK 20.7 million as compared to
DKK 2.0 million as of December 31, 2003. The contracts expire between January
and April of 2005 with the majority at the end of the period.
Currency Options
We have entered into an agreement to buy put options for USD 35 million in
April 2005. The counterparty must buy USD from us at exchange rates between 5.85
and 6.06 to the DKK. In case the USD/DKK exchange rate exceeds various agreed
levels between 6.10 and 6.50, the counterparty can purchase USD from us at
exchange rates between DKK 5.85 and 6.06 per USD. The average rate for these
transactions is DKK 6.03 for the put options.
As of December 31, 2004, the fair value of our currency options was DKK
19.8 million as compared to DKK -1.5 million as of December 31, 2003.
Interest Rate Risk
As of December 31, 2004, all of our debts have variable interest rates
based on LIBOR plus a margin.
In certain cases, we utilize derivative financial instruments to avoid
interest rate fluctuations on earnings and cash resources. Typically, we use
interest rate swaps for periods up to 5 years. The instrument's profile always
matches the loan profile of the particular loan in question. The differential to
be paid or received under the swap agreements is accrued as interest rates
change and is recognized as an adjustment to interest expense.
As of December 31, 2004, we were committed to a series of interest rate
swap agreements whereby 27% of our total floating rate debt was swapped with
fixed rate obligations having an average remaining term of 2.9 years, expiring
between 2006 and 2008. These arrangements effectively change our interest rate
exposure on the hedged debt from a floating LIBOR rate to an average fixed rate
of 3.3%. An additional 32% of our floating rate debt was swapped with fixed rate
obligations using interest swaps containing an option element having an average
remaining term of 3.1 years and expiring between 2007 and 2009. An interest rate
swap containing an option element is an agreement where the seller has an option
to ask the buyer to pay actual LIBOR rate if this is above a certain threshold
on the fixing day. On three of our interest rate swaps with an option element
this threshold is 7%. Below this level, the swaps act as normal interest rate
swaps and thereby change our interest rate exposure on the hedged debt from a
floating LIBOR rate to an average fixed rate of 3.6%. If market interest rates
were to decrease approximately 1% the interest rate swap agreements in place at
the end of the year would require us to pay DKK 12.6 million of interest in
excess of market rates. The fair value of these interest rate swaps at December
31, 2004 was DKK 1.3 million as compared to (DKK 31.4 million) as of December
31, 2003.
A 1% increase in interest rates on the remaining variable rate debt would
result in DKK 6.6 million of additional interest expense for the year ended
December 31, 2004 as compared to DKK 7.1 million as of December 31, 2003. We
assess each debt instrument, the level of debt to fix and the timing of entering
into such agreements based on the market conditions.
Additionally, as of December 31, 2004, we have investments in certain fixed
interest rate bonds with a carrying amount of DKK 317 million as compared to DKK
316 million as of December 31, 2003. The fair values of these investments could
be negatively impacted by increases in interest rates. If the average interest
rate for 2005 is 1 percentage point greater than the rate as of December 31,
2004, the fair values of these investments would decrease by DKK 8.6 million as
compared to DKK 9.5 million as of December 31, 2003.
Bunker Price Risk
Our results of operations could be negatively impacted by increases in the
price of fuel oil. To cover this risk, we hedge the price of part of its
bunkers' requirements for up to 12 months forward at a fixed price. In 2004, the
Company hedged twenty two per cent of its bunker requirements, and at year end
it had hedged about fifteen per cent of the 2005 requirement. The market value
of these contracts was DKK (4.3) million at year end as compared to DKK 0
million in 2003. A hypothetical change of 1 percentage point in the price per
ton of bunker oil would result in a change in cost in 2005 of DKK 2 million
based on the expected consumption of bunkers, where the Company, not the
charterer, takes the risk.
In light of the Company's pool structure, bunker hedging for tankers is not
done in respect of an individual vessel when it has been chartered out. Instead,
bunker hedging is planned in connection with the specific pool's total estimated
bunker requirements. Nonetheless, where a contract of affreightment covering
several voyages has been fixed, the pool may hedge bunker requirements
specifically for such a contract.
For the bulk carriers, bunkers are similarly hedged to match cargo
contractual obligations but the requirements are generally less, given that a
larger part of earnings are derived from vessels chartered out on time charter,
where the charterer is responsible for the payment of bunkers.
All bunker hedgings and indeed any other form of hedging are carried out
only based on specific requirements and not for the purpose of any form of
speculation.
Freight Rate Risk
The majority of our tanker vessels are operated on spot voyage charters
through our pools. To hedge our exposure to fluctuations in the freight rates we
may place certain of the pool's vessels on time charter or enter into Contracts
of Affreightment (COA) or freight derivatives (FFA, synthetic T/C, profit split
etc.). Our bulk vessels are primarily placed on time charters.
The COA's would meet the definition of a derivative financial instrument
according to SFAS 133, but since we in nearly all instances take physical
delivery, our COA's qualify for the normal sales and purchase exemption and are
therefore not accounted for as derivative financial instruments. The freight
derivatives are purely paper deals that require no physical delivery of either a
vessel or a cargo and as such are treated as a derivative financial instrument.
As of December 31, 2004, the fair values of the freight derivatives were
DKK -24.2 million as compared to DKK 1.3 million as of December 31, 2003.
Part II
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Neither we nor any of our subsidiaries have been subject to a material
default in the payment of principal, interest, a sinking fund or purchase fund
installment or any other material default that was not cured within 30 days. In
addition, the payment of our dividends are not, and have not been in arrears or
have not been subject to a material delinquency that was not cured within 30
days.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
None.
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
On the date of this report, the Company carried out an evaluation, under
the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in alerting them timely to material information
relating to the Company required to be included in the Company's periodic
Securities and Exchange Commission filings.
Changes in internal controls.
There have been no significant changes in our internal controls or in other
factors that could have significantly affected those controls subsequent to the
date of the Company's most recent evaluation of internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Company will be required to establish an audit committee by July 31,
2005. At that time the Company will make the determination whether to include a
financial expert on that committee.
ITEM 16B. CODE OF ETHICS
The Company does not presently have a code of ethics.
ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES
Deloitte Statsautoriseret Revisionsaktieselskab, Copenhagen, Denmark is the
independent accounting firm that audits the financial statements of the Company
and its subsidiaries and is the principal accountant for the audit of the
Company.
The aggregate fee for audit and audit services provided by Deloitte to the
Company in 2004 and 2003 were:
--------------------------------------------------------------------------------
(in DKK million) 2004 2003(1)
--------------------------------------------------------------------------------
Audit Fees 2.3 5.4
--------------------------------------------------------------------------------
Audit-Related Fees 0.0 0.8
--------------------------------------------------------------------------------
Tax Fees 0.3 0.4
--------------------------------------------------------------------------------
All Other Fees 0.5 0.0
--------------------------------------------------------------------------------
Total 3.1 6.6
--------------------------------------------------------------------------------
(1) We have restated the fees paid to Deloitte for 2003 in accordance with SEC
requirements.
The Danish Annual Report is audited by Deloitte and Ernst & Young. The
aggregate fee for audit and audit services provided by Ernst & Young to the
Company in 2004 is disclosed in note 4 to the consolidated financial statements.
Audit Fees consist of fees for the audit of our financial statements,
consents, and review of documents in connection with filings with the SEC and
other statutory or regulatory filings. Audit-Related Fees consist of fees, other
than Audit Fees, for assurances and related services that are reasonably related
to the performance of the audit and review of our financial statements. Tax Fees
consist of fees for services rendered for tax compliance, tax advice and tax
planning. All Other Fees consist of fees for all services other than audit,
audit related or tax related services.
Our Board of Directors pre-approves all audit, audit-related and non-audit
services not prohibited by law to be performed by our independent auditors and
associated fees prior to the engagement of the independent auditor with respect
to such services.
ITEM 16D. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES
None.
Part III
ITEM 17. FINANCIAL STATEMENTS
We specifically incorporate by reference in response to this item the
report of the independent auditors, the consolidated audited financial
statements and the accompanying notes, appearing on pages F-1 through F-47.
Non-GAAP measures
In this document we use the measures: solvency ratio, net interest bearing
debt and invested capital. Although not GAAP measures they are all commonly used
financial measures.
Solvency ratio
Solvency ratio measures the proportion of the total assets, which is
financed by shareholders' equity. We believe that it is a relevant measure,
which management uses to measure the overall development in our financial
position. Solvency ratio is calculated as follows:
(in DKK million) 2003 2004
Shareholders' equity 2,464.3 4,323.7
Divided by Total assets 4,893.7 6,778.9
Equals Solvency ratio 50.4% 63.8%
Net interest bearing debt
Net interest bearing debt measures the net capital resources, which cause
net interest expenditure and interest rate risk and which together with the
shareholders' equity are used to finance our investments. As such we believe
that net interest bearing debt is a relevant measure, which management uses to
measure the overall development of our use of financing other than shareholders'
equity. Net interest bearing debt is calculated as follows:
(in DKK million) 2003 2004
Mortgage debt and bank loans 1,996.0 2,162.0
Plus Capitalized lease obligations 180.8 0.0
Less Cash at bank and in hand (163.2) (358.3)
Less Bonds (315.9) (317.5)
------- -------
Equals Net interest bearing debt 1,697.7 1,486.2
Invested capital
Invested capital measures the net investments used to achieve our profit
before financial items. We believe that invested capital is a relevant measure
that management uses to measure the overall development of the assets and
liabilities generating our net profit. Invested capital is calculated as
follows:
(in DKK million) 2003 2004
Tangible fixed assets 3,193.3 3,762.9
Plus Inventories 26.1 31.8
Plus accounts receivable 219.2 293.6
Less Trade accounts payable (96.1) (85.7)
Less Corporate tax (0.0) (51.2)
Less Other liabilities (101.8) (116.0)
Less Accruals (54.7) (40.4)
------- -------
Equals Invested capital 3,186.0 3,795.0
ITEM 18. FINANCIAL STATEMENTS
Not Applicable.
TORM AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors ..............................................F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, 2003 and 2004 ............................................F-3
Consolidated Balance Sheets as of December 31, 2003 and 2004 ................F-4
Consolidated Statements of Total Gains and Losses for the
years ended December 31, 2002, 2003 and 2004 ................................F-6
Consolidated Statements of Cash Flow for the years ended
December 31, 2002, 2003 and 2004 ............................................F-8
Notes to Consolidated Financial Statements ..................................F-9
INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS OF AKTIESELSKABET
DAMPSKIBSSELSKABET TORM
We have audited the accompanying consolidated balance sheets of
Aktieselskabet Dampskibsselskabet TORM and subsidiaries as of December 31, 2004
and 2003, and the related consolidated statements of operations, total gains and
losses, statement of changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Aktieselskabet
Dampskibsselskabet TORM and subsidiaries as of December 31, 2004 and 2003 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004 in conformity with the accounting
provisions of Danish legislation applied on a consistent basis.
Accounting principles used by Aktieselskabet Dampskibsselskabet TORM and
subsidiaries vary in certain respects from accounting principles generally
accepted in the United States of America. Information relating to the nature and
effect of such differences is presented in Note 17 to the consolidated financial
statements.
Deloitte Statsautoriseret Revisionsaktieselskab
Copenhagen, Denmark
June 14, 2005
TORM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(EXPRESSED IN THOUSANDS OF DKK)
Note 2002 2003 2004
Net revenue 1,538,618 1,927,996 2,596,410
Port expenses and bunkers (555,700) (621,087) (497,258)
---------- ---------- ----------
982,918 1,306,909 2,099,152
Charter hire (463,510) (404,960) (357,069)
Technical running costs (217,402) (254,780) (298,346)
---------- ---------- ----------
Gross profit (Net earnings from shipping 2,3 302,006 647,169 1,443,737
activities)
Profit on sale of vessels and interests 16,965 (464) 0
Administrative expenses 3,4 (101,342) (126,119) (171,656)
Other operating income 55,227 51,368 78,732
---------- ---------- ----------
Profit before depreciation 272,856 571,954 1,350,813
Depreciation 6 (158,400) (176,872) (210,746)
---------- ---------- ----------
Profit before financial items 114,456 395,082 1,140,067
Financial items 7 5,988 656,637 1,193,704
---------- ---------- ----------
Profit before tax 120,444 1,051,719 2,333,771
Tax on profit on ordinary activities 8 360,190 (692) (52,556)
---------- ---------- ----------
Profit from continuing operations 480,634 1,051,027 2,281,215
---------- ---------- ----------
Profit before tax from discontinued operations 69,818 0 0
Tax on discontinued operations 0 0 0
---------- ---------- ----------
Net profit for the year 550,452 1,051,027 2,281,215
---------- ---------- ----------
Allocation of profit
The Board of Directors recommends that the
year's result of DKK 2,281 million be
allocated as follows:
Proposed dividend DKK 15 per share of DKK 10
(2003: DKK 6) 546,000
Retained profit 1,735,215
----------
2,281,215
----------
The accompanying notes are an integrated part of these financial statements.
TORM AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2004
(EXPRESSED IN THOUSANDS OF DKK)
Note 2003 2004
---- ---- ----
ASSETS
FIXED ASSETS
Tangible fixed assets
Leasehold improvements 2,233 153
Land and buildings 2,420 2,353
Vessels and capitalized dry-docking 13 2,944,164 3,540,359
Prepayment on vessels under construction 229,303 204,003
Other plant and operating equipment 15,148 16,037
--------- ---------
6 3,193,268 3,762,905
--------- ---------
Financial fixed assets
Other investments 5 975,988 2,014,765
--------- ---------
975,988 2,014,765
--------- ---------
Total fixed assets 4,169,256 5,777,670
--------- ---------
CURRENT ASSETS
Inventories
Inventory of bunkers 26,075 31,841
--------- ---------
Accounts receivable
Freight receivables, etc. 147,277 196,979
Other receivables 50,295 69,795
Prepayments 21,609 26,859
--------- ---------
219,181 293,633
--------- ---------
Securities
Bonds 13 315,934 317,494
--------- ---------
Cash at bank and in hand 13 163,211 358,261
--------- ---------
Total current assets 724,401 1,001,229
--------- ---------
Total assets 4,893,657 6,778,899
--------- ---------
The accompanying notes are an integrated part of these financial statements.
TORM AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 2003 AND 2004
(EXPRESSED IN THOUSANDS OF DKK)
Note 2003 2004
---- ---- ----
LIABILITIES
SHAREHOLDERS' EQUITY
Common shares 9 182,000 364,000
Own shares 9 (51,962) (46,163)
Retained Profit 2,115,868 3,459,845
Proposed dividend 218,400 546,000
---------- ----------
Total shareholders' equity 2,464,306 4,323,682
---------- ----------
LIABILITIES
Long-term liabilities
Mortgage debt and bank loans 11,13 1,700,704 1,822,264
---------- ----------
1,700,704 1,822,264
---------- ----------
Current liabilities
Next year's repayments on mortgage
debt and bank loans 11,13 295,343 339,764
Capitalized lease obligations 11 180,801 0
Trade accounts payable 96,094 85,666
Corporate tax 0 51,161
Other liabilities 12 101,758 115,988
Accruals 10 54,651 40,374
---------- ----------
728,647 632,953
---------- ----------
Total liabilities 2,429,351 2,455,217
---------- ----------
Total liabilities and shareholders' equity 4,893,657 6,778,899
---------- ----------
Accounting policies 1
Collateral security 13
Guarantees, contingent and contractual liabilities 14
Fair value of derivative financial instruments 15
Related party transactions 16
Reconciliation to United States Generally
Accepted Accounting Principles (U.S. GAAP) 17
The accompanying notes are an integrated part of these financial statements.
TORM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF TOTAL GAINS AND LOSSES
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(EXPRESSED IN THOUSANDS OF DKK)
2002 2003 2004
---- ---- ----
Net profit for the year 550,452 1,051,027 2,281,215
Change in fair value of derivatives (43,078) 14,876 19,466
Foreign currency translation (168,608) (180,257) (178,575)
---------- ---------- ----------
Total gains and losses 338,766 885,646 2,122,106
---------- ---------- ----------
The accompanying notes are an integrated part of these financial statements.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
AS OF DECEMBER 31, 2002, 2003 AND 2004
(EXPRESSED IN MILLIONS OF DKK)
Common Revaluation Own Retained Proposed Total
shares reserves shares profit dividend
SHAREHOLDERS' EQUITY
Balance at 1 January 2002 182.0 22.1 (51.5) 1,129.3 72.8 1,354.7
Exchange rate adjustment arose upon
translation from measurement currency to
presentation currency (168.6) (168.6)
Fair value adjustment of derivative
financial instruments (43.1) (43.1)
Reversal of revaluation of shares (19.5) 19.5 0.0
Reversal of revaluation of bonds (2.6) 2.6 0.0
Purchase of own shares (7.6) (7.6)
Disposal of own shares 7.1 7.1
Proceeds from sale of own shares (0.3) (0.3)
Dividends paid (72.8) (72.8)
Dividends paid on own shares 3.5 3.5
Profit for the year 550.5 550.5
Dividend for the financial year (36.4) 36.4 0.0
------------------------------------------------------------------
Balance as of 31 December 2002 182.0 0.0 (52.0) 1,457.0 36.4 1,623.4
Exchange rate adjustment arose upon
translation from measurement currency to
presentation currency (180.3) (180.3)
Fair value adjustment of derivative
financial instruments 14.9 14.9
Exercised share options (10.1) (10.1)
Dividends paid (36.4) (36.4)
Dividends paid on own shares 1.8 1.8
Profit for the year 1,051.0 1,051.0
Dividend for the financial year (218.4) 218.4 0.0
------------------------------------------------------------------
Balance as of 31 December 2003 182.0 0.0 (52.0) 2,115.9 218.4 2,464.3
Exchange rate adjustment arose upon
translation from measurement currency to
presentation currency (178.5) (178.5)
Fair value adjustment of derivative
financial instruments 19.4 19.4
Bonus share issue 182.0 (182.0) 0.0
Cost of bonus share issue (0.1) (0.1)
Exercised share options 5.8 (59.3) (53.5)
Dividends paid (218.4) (218.4)
Dividends paid on own shares 9.3 9.3
Profit for the year 2,281.2 2,281.2
Dividend for the financial year (546.0) 546.0 0.0
------------------------------------------------------------------
Balance as of 31 December 2004 364.0 0.0 (46.2) 3,459.9 546.0 4,323.7
==================================================================
The accompanying notes are an integrated part of these financial statements.
TORM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(EXPRESSED IN THOUSANDS OF DKK)
2002 2003 2004
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES
Profit before financial items 114,456 395,082 1,140,067
Profit before financial items in discontinuing
operations 61,408 0 0
Interest income, exchange rate gains and
dividends received 69,747 27,246 237,774
Interest expenses (76,540) (73,692) (93,652)
---------- ---------- ----------
169,071 348,636 1,284,189
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and impairment losses 158,400 176,872 210,746
Depreciation in discontinuing operations 5,172 0 0
Gain from sale of discontinuing operations (63,007) 0 0
Other non-cash movements (47,750) 6,096 (57,360)
Taxes paid (29) 0 (1,395)
Change in inventories, accounts receivables
and payables 39,430 (37,844) (39,533)
---------- ---------- ----------
Net cash inflow from operating activities 261,287 493,760 1,396,647
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Investment in tangible fixed assets (954,262) (1,121,612) (1,118,715)
Investment in equity interests and securities (247,983) (228) 0
Sale of fixed assets 20,549 113,928 1,308
including profit on sale of vessels 0 478 0
(included in operating activities)
Sale of discontinuing operations 63,007 0 0
---------- ---------- ----------
Net cash inflow/(outflow) from investing activities (1,118,689) (1,007,434) (1,117,407)
---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowing, mortgage debt 842,472 777,922 875,246
Repayment/redemption, mortgage debt (156,709) (224,005) (514,466)
Repayment/redemption, lease liabilities (63,449) (38,416) (180,810)
Increase/(decrease) in bank debt 0 0 0
Dividends paid (69,309) (34,637) (209,071)
Purchase/disposal of own shares (807) (0) 0
Net settlement share options 0 (10,094) (53,529)
---------- ---------- ----------
Cash inflow/(outflow) from financing activities 552,198 470,770 (82,630)
---------- ---------- ----------
Net cash inflow/(outflow) from operating,
investing and financing activities (305,204) (42,904) 196,610
Cash and cash equivalents including bonds,
in companies acquired/divested 0 0 0
---------- ---------- ----------
Increase/(decrease) in cash and cash equivalents (305,204) (42,904) 196,610
---------- ---------- ----------
Cash and cash equivalents,
including bonds, at 1 January 827,253 522,049 479,145
---------- ---------- ----------
Cash and cash equivalents,
including bonds, at 31 December 522,049 479,145 675,755
Of which used as collateral (186,056) (51,647) (53,872)
---------- ---------- ----------
335,993 427,498 621,883
---------- ---------- ----------
The accompanying notes are an integrated part of these financial statements.
TORM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
NOTE 1 - ACCOUNTING POLICIES
Accounting Policies
The Annual Report of TORM has been prepared in accordance with the
provisions of the Danish Financial Statements Act applicable for listed
companies in Accounting Class D, Danish accounting standards and the
requirements of the Copenhagen Stock Exchange relating to the presentation of
financial statements by listed companies.
Change in accounting standards
The accounting policies are unchanged from last year except that Danish
accounting standard 21 "Leasing" and Danish accounting standard 22 "Income" have
become effective and are applied as from this financial year.
The effect of implementing Danish accounting standard 21 is that a gain
relating to a sale and leaseback transaction under certain circumstances is
recognized in the income statement immediately. Previously, a gain was always
recognized in the balance sheet and amortized over the life of the charter
party. In connection with a sale and leaseback transaction in the financial year
2000 resulting in an operating lease, TORM recognized a gain in the balance
sheet which has since been amortized in proportion to the gross rental on the
time charter over the life of the charter party. The fair value at the
transaction date essentially equalled the book value, and the accounting
treatment applied is consequently considered to be in accordance with Danish
accounting standard 21.
The effect of implementing Danish accounting standard 22 is that the stated
criteria for recognizing income have become more explicit in accordance with the
standard. The methods applied by TORM to recognize income are in accordance with
Danish accounting standard 22.
The changes in accounting standards have thus not resulted in any changes
in the reported amounts.
General recognition and measurement criteria
Income, including net revenue, is recognized in the income statement when:
o the income creating activities have been carried out,
o the income can be measured reliably,
o it is probable that payment will occur,
o costs relating to the transaction can be measured reliably, and
o documentation of the income exists.
Costs incurred in order to achieve the earnings for the period, including
depreciation and provisions, are also recognized in the income statement.
Furthermore, value adjustments of financial assets and liabilities, which are
measured at fair value or amortized cost, as well as the effects of changes to
accounting estimates made in prior periods are recognized in the income
statement.
Assets are recognized in the balance sheet when it is probable that the
future economic benefits attributable to the asset will flow to the Group, and
the value of the asset can be measured reliably.
Liabilities are recognized in the balance sheet, when it is probable that
there will be an outflow of future economic benefits from the Group, and the
value of the liability can be measured reliably.
Upon initial recognition, assets and liabilities are measured at cost.
Subsequently, assets and liabilities are measured as described in accounting
policies related to the balance sheet.
Certain financial assets and liabilities are measured at amortized cost,
whereby a constant effective yield to maturity is recognized. Amortized cost is
calculated as original cost less repayment and with addition/deduction of the
accumulated amortization of the difference between the cost and the nominal
amount.
Recognition and measurement take into account all circumstances, including
predictable risks and losses occurring before the preparation of the Annual
Report, which confirm or disconfirm circumstances existing at the balance sheet
date.
Consolidation principles
The Annual Report comprises the Parent Company, TORM and its subsidiaries,
i.e. the entities in which the Parent Company, directly or indirectly, holds the
majority of the votes or otherwise has a controlling interest.
Entities in which the Group holds between 20% and 50% of the votes and
exercises significant but not controlling influence are regarded as associated
companies.
Associated companies which are by agreement managed jointly with one or
more other companies (joint ventures), and therefore subject to joint control,
are consolidated on a pro rata basis, whereby the individual items are included
in proportion to the ownership share.
The Consolidated Financial Statements are prepared on the basis of the
financial statements of the Parent Company, its subsidiaries and pro rata
consolidated companies by combining items of a uniform nature and eliminating
inter-company transactions, balances and shareholdings as well as realized and
unrealized gains and losses on transactions between the consolidated companies.
Foreign currencies
The measurement currency of the operating entities including subsidiaries
and associated companies is USD, because the Group's vessels operate in
international shipping markets, in which revenues and expenses are settled in
USD and the Company's most significant assets and liabilities in the form of
vessels and related mortgage debt are in USD. The books for these operating
entities are maintained in USD. The measurement currency of the administrative
entity is DKK.
Transactions in currencies other than the measurement currency are
translated into the measurement currency at the date of the transactions. Gains
or losses arising between the exchange rate at the transaction date and the
exchange rate at the settlement date are recognized in the income statement.
Cash, accounts receivable and payable and other monetary items denominated
in currencies other than the measurement currency are translated into the
measurement currency at the exchange rate prevailing at the balance sheet date.
Differences between the exchange rate at the transaction date and the exchange
rate at the balance sheet date are recognized in the income statement under
financial items.
The reporting currency of the Company is DKK. Upon recognition of the
operating entities, the financial statements are translated from USD into DKK.
Items in the income statement are translated into DKK at the average exchange
rates for the period, whereas balance sheet items are translated at the exchange
rates as at the balance sheet date. Exchange gains and losses arising upon the
translation of the income statements and balance sheets of operating entities
are recognized directly in shareholders' equity. Exchange gains and losses
arising upon the translation of shareholders' equity at the beginning of the
year into DKK at the exchange rate at the balance sheet date are recognized
directly to shareholders' equity.
Foreign exchange rate gains or losses of intercompany balances with
subsidiaries, which are considered a part of the investment in the entity, are
recognized directly in shareholders' equity.
Derivative financial instruments
Derivative financial instruments are entered into to hedge future committed
or anticipated transactions.
Derivative financial instruments are initially recognized in the balance
sheet at cost and are subsequently measured at their fair value. The instruments
are recognized as other receivables or other liabilities, respectively.
Changes in fair value of derivative financial instruments which are used to
hedge the fair value of a recognized asset or a recognized liability are
recognized in the income statement under the same item as changes to the
carrying amount of the hedged item, except for currency translation gains or
losses arising from the hedging of exposures relating to long-term intercompany
receivables in subsidiaries. Currency translation gains or losses related to
such exposure are recognized directly in shareholders' equity.
Changes in fair value of derivative financial instruments, which are used
to hedge the expected future transactions, are recognized directly in
shareholders' equity under retained profit. When the expected future transaction
results in an income or a cost, amounts deferred under retained profit are
transferred to the income statement and included in the same line as the hedged
item.
Changes in fair value of derivative financial instruments that do not
qualify for hedge accounting are recognized in the income statement at the end
of each period.
Segment information
The Group consists of two business segments: Tanker and Bulk. This
segmentation is based on the Company's internal management and reporting
structure in addition to evaluation of risk and earnings. Transactions between
segments are based on market-related prices and are eliminated at Group level.
The Group only has one geographical segment, because the Group considers
the global market as a whole, and the individual vessels are not limited to
specific parts of the world.
The segment non-current assets consists of the non-current assets used
directly for segment operations.
Current assets are allocated to segments to the extent that they are
directly attributable to segment operations, including inventories, outstanding
freight, other receivables and prepayments.
Segment liabilities comprise segment-operating liabilities including
mortgage debt attached to the vessels, trade payables and other liabilities.
Not allocated items primarily comprise assets and liabilities as well as
revenues and expenses relating to the Group's administrative functions, offshore
activities, termination of Liner activity and investment activities, including
cash and bank balances, interest bearing debt except mortgage debt attached to
the vessels, taxes, etc.
Participation in pools
TORM acts as pool manager for a number of pools, and the Group is
participating with a significant number of vessels in these. The Group's share
of the income statement and balance sheet in the respective pools is accounted
for by entering a proportional share, based on participation in the pool, by
combining items of uniform nature. The Group's share of the revenues in the
pools is primarily dependent on the number of days the Group's vessels have been
available for the pools during the period.
Accounting for pension plans
The Company has entered into defined contribution plans only. Pension costs
related to defined contribution plans are recorded in the income statement in
the year to which they relate.
Stock based compensation
The Board of directors, the Management and a number of key employees
participate in a share option program. Option commitments under this program are
hedged through holdings of own shares and are not recognized in the balance
sheet or the income statement.
The difference between the exercise price and the market price of the
shares at the date the options are granted is recognized as a compensation
expense in administrative expenses in the income statement.
At the time of exercise the payments received for the sale of own shares
are recognized directly in shareholders' equity.
If payment is made as net settlement, the amount payable by the Company is
recognized in shareholders' equity under retained profit at the time of
settlement.
Leases
Agreements to charter vessels and to lease other property, plant and
equipment where TORM has substantially all the risks and rewards of ownership
are recognized in the balance sheet as finance leases. Lease assets are measured
at the lower of fair value and the present value of future leasing payments
determined in the agreements including any purchase options.
For the purpose of calculating the present value, the interest rate
implicit in the lease or an approximate value is used as discount factor. The
lease assets are depreciated and written down under the same accounting policy
as the vessels owned by the Group or over the lease period depending on the
lease terms.
The capitalized lease obligation is recognized as a liability in the
balance sheet, and the interest element of the lease payment is charged to the
income statement as incurred.
Other charter agreements concerning vessels and other leases are classified
as operating leases, and lease payments are charged to the income statement on a
straight-line basis over the lease term. The obligation for the remaining lease
period is disclosed in the notes to the financial statement.
Sale and leaseback transactions
A gain or loss related to a sale and leaseback transaction resulting in a
finance lease is deferred and amortized in proportion to the gross rental on the
time charter over the life of the charter party.
A gain related to a sale and leaseback transaction resulting in an
operating lease is recognized in the income statement immediately provided the
transaction is agreed on market terms. If the sales price is lower than the fair
value and this is reflected in future lease payments below fair value, the
difference between the fair value and the sales price is deferred and amortized
in proportion to the lease payments over the life of the lease. If the sales
price exceeds the fair value, the difference between the sales price and the
fair value is deferred and amortized in proportion to the lease payments over
the life of the lease.
A loss related to a sale and leaseback transaction resulting in an
operating lease is recognized in the income statement at the date of
transaction.
Swap agreements
Gains or losses on swap of ownership in vessels are recognized in the
income statement at the date of the swap transaction, except when the acquired
vessels are similar to the vessels exchanged. If the swap is an exchange of
similar vessels, the vessels are accounted for based on carryover value and no
gain is recognized.
Income statement
Net revenues
Net revenues comprise freight and demurrage revenues from the vessels. Net
revenues are recognized when they meet the general criteria mentioned above and
the stage of completion can be measured reliably. Accordingly, freight and
demurrage revenues are recognized at selling price upon delivery of service in
accordance with the charter parties concluded.
Port expenses and bunkers
Port expenses and bunkers, which comprise port expenses and bunker fuel
consumption, are recognized upon delivery of service in accordance with the
charter parties concluded.
Charter hire
Charter hire includes the expenses related to the chartering in of vessels
incurred in order to achieve the net revenues for the period.
Technical running costs
Technical running costs, which comprise crew expenses, repair and
maintenance expenses and tonnage duty, are expensed as incurred.
Profit on sale of vessels and interests
Profit or loss from sale of vessels and interests are stated as the
difference between the sales price less sales costs and the carrying amount of
the asset at the time of the sale. Furthermore, any gains or losses upon
repayment of related loans are included in the gain or loss on disposal.
Administrative expenses
Administrative expenses, which comprise administrative staff costs,
management costs, office expenses and other expenses relating to administration,
are expensed as incurred.
Other operating income
Other operating income comprises chartering commissions and profits and
losses deriving from the disposal of other plant and operating equipment.
Equity income from investments in subsidiaries and associated companies
Equity income from investments in subsidiaries and associated companies
include the Parent Company's proportional share of the net income of the
individual subsidiary less the proportional share of unrealized internal gains.
Depreciation and impairment losses
Depreciation and impairment losses comprise depreciation of fixed assets
for the period as well as the deduction in the value of vessels by the amount by
which the carrying amount of the asset exceeds its recoverable amount. In the
event of indication of impairment of value, the carrying amount is assessed and
the value of the asset is reduced to its recoverable amount equal to the higher
of value in use based on net present value of future earnings from the assets
and its net selling price.
Financial items
Financial items comprise interest income and interest expense, financing
costs of finance leases, realized and unrealized exchange rate gains or losses
relating to transactions in currencies other than the measurement currency,
realized and unrealized gains or losses from other investments and securities,
dividends received on shares and other financial income and expenses including
value adjustments of certain financial instruments not accounted for as hedging
instruments. Interest is recognized in accordance with the accrual basis of
accounting taking into account the effective interest rate, and dividends are
recognized when the right to receive payment has been decided, which is
typically when the dividend has been declared and can be received without
conditions.
Tax
In Denmark, A/S Dampskibsselskabet TORM is jointly taxed with certain
wholly owned Danish and non-Danish subsidiaries. The Parent Company provides for
and pays the aggregate Danish tax of the taxable income of these companies. The
expected tax of the taxable income for the year and adjustments relating to
previous years are recognized in the income statement. However, tax relating to
items posted in shareholders' equity is posted directly in shareholders' equity.
Balance sheet
Tangible fixed assets
Land is measured at cost.
Buildings are measured at cost less accumulated depreciation and
accumulated impairment losses. Buildings are depreciated on a straight-line
basis over 50 years.
Vessels are measured at cost less accumulated depreciation and accumulated
impairment losses. All major components of vessels less salvage value are
depreciated on a straight-line basis based on an anticipated useful life of 25
years. Costs incurred in replacing or renewing the separate assets (dry-docking
costs) are capitalized and depreciated on a straight-line basis over the
estimated period until the next dry-docking.
Prepayment on vessels under construction is measured at costs incurred.
Operating equipment is measured at cost less accumulated depreciation.
Computer equipment is depreciated on a straight-line basis over three years, and
other operating equipment is depreciated on a straight-line basis over five
years. Operating equipment with a cost price of less than DKK 25,000 is fully
depreciated in the year of acquisition.
Leasehold improvements are measured at cost less accumulated amortization
and impairment losses, and leasehold improvements are amortized on a
straight-line basis over the shorter of the term of the lease and the estimated
useful life.
Cost comprises acquisition cost and costs directly related to the
acquisition up until the time when the asset is ready for use. The cost of
vessels and vessels under construction also includes interest expenses incurred
during the period of construction.
Financial fixed assets
Investment in subsidiaries and associated companies are recognized and
measured in the Annual Report of the Parent Company according to the equity
method, which requires that a proportionate share of their annual net income or
loss is reflected in the income statement of the Parent Company. Unrealized
intercompany profits are eliminated when calculating the proportionate share of
income and equity.
The share of the net income of the subsidiaries and associated companies
that has not been distributed as dividends to the Parent Company is transferred
to a restricted reserve under shareholders' equity in the Parent Company's
balance sheet.
Other investments comprise shares in other companies. Listed shares are
measured at the market value at the balance sheet date. Unlisted shares are
measured at estimated market value.
Realized and unrealized gains and losses resulting from valuation or sales
of shares are recognized as financial items in the income statement.
Dividends on shares in other companies are recognized as income in the
period in which they are declared.
Joint ventures
Participation in joint ventures is recorded using the proportional
consolidation method in the Group accounts. The consolidated income statement
includes the Group's share of income and losses of joint ventures and the
consolidated balance sheet includes the Groups' share of assets and liabilities
in joint ventures.
Inventories
Inventories consist of bunkers, lubricants and spare parts and are stated
at the lower of cost and net realizable value. The cost is determined by the
FIFO-method.
Receivables
Outstanding freight receivables and other receivables which are of a
current nature (expected to be realized within 12 months from the balance sheet
date) are measured at the lower of amortized cost and net realizable values,
which corresponds to nominal value less provisions for bad debts.
Prepayments
Prepayments comprise expenses paid relating to subsequent periods.
Securities
Bonds are measured at market value at the balance sheet date.
Realized and unrealized gains and losses resulting from valuation or
realization of bonds are recognized as financial items in the income statement.
Own shares
Own shares are recognized directly as part of shareholders' equity at cost.
Upon subsequent disposal of own shares, any consideration is also recognized
directly in shareholders' equity.
Dividend
Dividend is recognized as a liability at the time of declaration at the
Annual General Meeting. Dividend proposed for the year is moved from retained
profit and presented as a separate item in shareholders' equity.
Financial liabilities
Mortgage debt and bank loans relating to the financing of vessels are
initially measured at nominal amounts less premiums and costs incurred in the
loan arrangement and subsequently at amortized cost with the difference between
the loan proceeds and the nominal value being recognized in the income statement
over the term of the loan.
Financial liabilities also include the capitalised remaining lease
obligation on finance leases.
Other liabilities
Other liabilities comprising trade payables and other liabilities are
measured at amortized cost corresponding substantially to nominal value.
Accruals
Accruals comprise receipts relating to revenue in subsequent periods.
Statement of cash flows
The statement of cash flows shows the Group's cash flows and cash and cash
equivalents at the beginning and the end of the period.
Cash flow from operating activities is presented indirectly and is based on
profit before financial items for the year adjusted for non-cash operating
items, changes in working capital, income tax paid, dividends received and
interest paid/received.
Cash flow from investing activities comprises the purchase and sale of
tangible fixed assets and financial fixed assets except for profit/loss on sale
of vessels, which is included in the cash flows from operating activities.
Cash flow from financing activities comprises changes in long-term debt,
bank loans, purchases or sales of own shares and dividend paid to shareholders.
Cash and cash equivalents comprise cash at bank and in hand and highly
liquid bonds. Shares are not included.
Earnings per share
Basic earnings per share is computed by dividing consolidated profit or
loss available to common shareholders by the weighted average number of common
shares outstanding during the period. Own shares are not included in the
calculation. Purchases and sales of own shares during the periods are weighted
based on the remaining period.
Diluted earnings per share is computed by dividing consolidated profit or
loss available to common shareholders by the sum of weighted average number of
common shares outstanding and the weighted average number of all potentially
dilutive shares. Such potentially dilutive common shares are excluded when the
effect would be to increase earnings per share or reduce a loss per share.
United States generally accepted accounting principles
As a consequence of the registration of American Depository Receipts (ADRS)
with the United States Securities and Exchange Commission (SEC), the Company has
prepared a summary of the effect on net income and shareholders' equity had the
Financial Statements been prepared in accordance with the accounting principles
generally accepted in the United States.
NOTE 2 - NET EARNINGS FROM SHIPPING ACTIVITIES (in DKK million)
For the year ended December 31, 2003
Tank Bulk Not Total
(restated) (restated) allocated
(restated)
-----------------------------------------------
SEGMENT INFORMATION
INCOME STATEMENTS
Net revenue 1,115.1 793.3 19.6 1,928.0
Port expenses and bunkers (319.0) (308.0) 5.9 (621.1)
------- ------- ------- -------
Time Charter Equivalent Earnings 796.1 485.3 25.5 1,306.9
Charter hire (83.5) (309.6) (11.8) (404.9)
Technical running costs (195.1) (43.0) (16.7) (254.8)
------- ------- ------- -------
Gross profit (Net earnings from
shipping activities) 517.5 132.7 (3.0) 647.2
Profit from sale of vessels and
interests (0.5) 0.0 0.0 (0.5)
Administrative expenses (88.8) (30.1) (7.2) (126.1)
Other operating income 50.9 0.4 0.1 51.4
------- ------- ------- -------
Profit before depreciation 479.1 103.0 (10.1) 572.0
Depreciation (154.6) (21.7) (0.6) (176.9)
------- ------- ------- -------
Profit before financial items 324.5 81.3 (10.7) 395.1
Financial items (52.3) (2.5) 711.4 656.6
------- ------- ------- -------
Profit before tax 272.2 78.8 700.7 1,051.7
Tax on profit on ordinary activities 0.0 0.0 (0.7) (0.7)
------- ------- ------- -------
Net profit for the year 272.2 78.8 700.0 1,051.0
BALANCE As of December 31, 2003
Fixed assets 2,774.0 400.1 995.2 4,169.3
Total assets 2,894.9 467.3 1,531.5 4,893.7
Total liabilities 1,982.6 382.6 64.1 2,429.3
With reference to the Departmental order about exemption to the Danish
Financial Statements Act section 5, no. 4, item 1, no segment information for
the Parent Company is provided.
The gain on NORDEN shares, received dividend on shares, interest income,
tax on profit on ordinary activities, the Company's Offshore activities and the
termination of the Liner activity are included in 'Not allocated'.
The comparative figures on segment information have been changed as cash
and bank balances as well as interest income and dividends received are included
in 'Not allocated', whereas previously allocated to segments.
For the year ended December 31, 2004
Tank Bulk Not Total
allocated
------- ------- ------- -------
SEGMENT INFORMATION
INCOME STATEMENTS
Net revenue 1,532.1 1,063.9 0.4 2,596.4
Port expenses and bunkers (407.4) (90.2) 0.3 (497.3)
------- ------- ------- -------
Time Charter Equivalent Earnings 1,124.7 973.7 0.7 2,099.1
Charter hire (80.9) (276.2) 0.0 (357.1)
Technical running costs (236.7) (69.7) 8.1 (298.3)
------- ------- ------- -------
Gross Profit (Net earnings from
shipping activities) 807.1 627.8 8.8 1,443.7
Profit from sale of vessels and interest 0.0 0.0 0.0 0.0
Administrative expenses (126.6) (42.1) (2.9) (171.6)
Other operating income 76.8 1.9 0.0 78.7
------- ------- ------- -------
Profit before depreciation 757.3 587.6 5.9 1,350.8
Depreciation (171.4) (39.1) (0.2) (210.7)
------- ------- ------- -------
Profit before financial items 585.9 548.5 5.7 1,140.1
Financial items (61.3) (3.1) 1,258.1 1,193.7
------- ------- ------- -------
Profit before tax 524.6 545.4 1,263.8 2,333.8
Tax on profit on ordinary activities 0.0 0.0 (52.6) (52.6)
------- ------- ------- -------
Net profit for the year 524.6 545.4 1,211.2 2,281.2
BALANCE As of December 31, 2004
Fixed assets 3,080.2 664.6 2,032.9 5,777.7
Total assets 3,298.6 710.7 2,769.6 6,778.9
Total liabilities 1,893.8 472.8 88.6 2,455.2
With reference to the Departmental order about exemption to the Danish
Financial Statements Act section 5, no. 4, item 1, no segment information for
the Parent Company is provided.
The gain on NORDEN shares, received dividend on shares, interest income,
tax on profit on ordinary activities, the termination of the Company's Offshore
and Liner activity are included in 'Not allocated'.
NOTE 3 - STAFF COSTS (in DKK million)
For the years ended December 31
-------------------------------
2002 2003 2004
----- ----- -----
Total staff costs
Staff costs included in technical 33.2 52.8 61.5
running costs
Staff costs included in 67.4 71.6 105.6
administrative expenses and profit
before tax from discontinued
operations
----- ----- -----
Total 100.6 124.4 167.1
----- ----- -----
Staff costs comprise the following
Wages and salaries 90.5 112.4 152.2
Pension costs 9.7 11.2 13.9
Other social security costs 0.4 0.8 1.0
----- ----- -----
Total 100.6 124.4 167.1
----- ----- -----
Hereof remuneration to the Board
of Directors and salaries to the
Management
Board of Directors 1.4 1.4 1.5
Management 5.2 10.8 13.9
----- ----- -----
Total 6.6 12.2 15.4
----- ----- -----
Number of employees
The average number of staff in the Parent Company in the financial year was
288 (the Group 295). The equivalent figure for 2003 was 277 (the Group 280).
Total options Option allocation per year
2004 2001 2002 2003
---- ---- ---- ----
Share option program - 2001 to 2004*
Board of Directors
Allocated 105,820 24,420 40,700 40,700
Exercised in 2003 (24,420) (8,140) (16,280) 0
Exercised in 2004 (36,560) (16,280) (4,000) (16,280)
-------- -------- -------- --------
Not exercised at 31 December 2004 44,840 0 20,420 24,420
-------- -------- -------- --------
Management
Allocated 463,420 106,940 178,240 178,240
Exercised in 2003 (285,180) (106,940) (178,240) 0
Exercised in 2004 (178,240) 0 0 (178,240)
-------- -------- -------- --------
Not exercised at 31 December 2004 0 0 0 0
-------- -------- -------- --------
Key Employees
Allocated 634,640 206,120 214,260 214,260
Exercised in 2003 (420,380) (206,120) (214,260) 0
Exercised in 2004 (214,260) 0 0 (214,260)
-------- -------- -------- --------
Not exercised at 31 December 2004 0 0 0 0
-------- -------- -------- --------
Resigned persons
Allocated 402,760 147,820 131,540 123,400
Exercised in 2003 (232,240) (138,840) (93,400) 0
Exercised in 2004 (162,380) (8,980) (30,000) (123,400)
-------- -------- -------- --------
Not exercised at 31 December 2004 8,140 0 8,140 0
-------- -------- -------- --------
Total number of not exercised
options at 31 December 2004 52,980 0 28,560 24,420
-------- -------- -------- --------
Not exercised in per cent of
common shares 0.15% 0.00% 0.08% 0.07%
* The figures in the table above and the description below are adjusted to
reflect the issue of bonus shares in May 2004.
The classification has been adjusted to reflect the persons association
with TORM at December 31, 2004.
In 2001, a share option compensation plan for 20 of TORM's Board members,
executives and key employees was introduced. The plan grants 1,606,640 options,
which are priced at 3 different dates, 485,300 in 2001, 564,740 in 2002 and
556,600 in 2003. Option holders may exercise their options in specified periods
and choose to purchase the Company's shares at the strike price or receive a
cash payment equivalent to the difference between the strike price and the share
price.
The individual must be employed at the grant date to receive that year's
options. In 2004, the interpretation of the share option compensation plan has
been changed, increasing the number of options granted in 2002 by 8,140.
The share options for 2001 were priced on February 20, 2001, the share
options for 2002 were priced on March 20, 2002 and the share options for 2003
were priced on February 27, 2003. The 2001 share options are exercisable at a
price of DKK 27 per share, the 2002 share options at a price of DKK 29.25 per
share and the 2003 share options at a price of DKK 31.3 per share. The share
options can be exercised at the earliest 1 year and at the latest 3 years and
four weeks after the allocation, observing the rules concerning insider trading.
In 2004, 591,440 options have been exercised (2003: 962,220), and the
related cost amounting to DKK 53.5 mill. (2003: DKK 10.1 mill.) has been
recognized directly in shareholders' equity. The total number of unexercised
options at December 31, 2004 is 52,980 which equates 0.15% of the common shares.
The Company has acquired own shares to cover the share option program. The cost
of the shares has been recognized directly in shareholders' equity.
According to the Black-Scholes model, the theoretical market value of the
unexercised part of the share option program is estimated at DKK 10.1 mill.
(2003: DKK 41.1 mill.) at the balance sheet date.
The key assumptions of the Black-Scholes model are:
o The average dividend equals 3.48% (2003: 3.75%) of the average share price
for the period.
o The volatility is estimated at 93.76% (2003: 112.89%).
o The risk free interest rate based upon expiry of the options applies to
between 2.37 % and 2.50% (2003: 2.24% and 2.99%).
o The quoted share price as of December 31, 2004 is 225.77 DKK/share (2003:
90.25 DKK/share).
NOTE 4 - ADMINISTRATIVE EXPENSES (in DKK million)
For the year ended December 31
------------------------------
2002 2003 2004
----- ----- -----
Parent company 93.7 121.9 159.9
Subsidiaries and associated companies 7.6 4.2 11.8
----- ----- -----
101.3 126.1 171.7
----- ----- -----
Remuneration to the auditors appointed
at the annual general meeting 2002 2003 2004
---- ---- ----
Ernst & Young
Audit fees 0.6 0.8
Fees for other services 1.0 0.3
--- --- ---
Total fees, Ernst & Young 3.4 1.6 1.1
--- --- ---
Deloitte
Audit fees 1.3 1.6
Fees for other services 3.7 1.5
--- --- ---
Total fees, Deloitte 6.1 5.0 3.1
--- --- ---
NOTE 5 - FINANCIAL FIXED ASSETS (in DKK million)
2003 2004
---- ----
Cost:
Balance as of January 1 271.3 268.6
Additions 0.2 0.0
Disposals (2.9) 0.0
------- -------
Cost as of December 31 268.6 268.6
------- -------
Value adjustment:
Balance as of January 1 19.8 707.9
Other value adjustment 688.1 1,038.8
------- -------
Balance as of December 31 707.9 1,746.7
------- -------
Write downs:
Balance as of January 1 (1.0) (0.5)
Write downs for the year 0.5 0.0
------- -------
Write downs as of December 31 (0.5) (0.5)
------- -------
Book value as of December 31 976.0 2,014.8
------- -------
NOTE 6 - TANGIBLE FIXED ASSETS (in DKK million)
Other
Vessels and Prepayment on plant and
Leasehold Land and capitalized vessels under operating
improvements buildings dry-docking construction equipment Total
------------------------------------------------------------------------------------
Cost:
Balance as of January 1, 2004 9.9 7.2 3,878.1 229.3 29.7 4,154.2
Exchange rate adjustment (0.2) 0.0 (319.0) (18.9) 0.0 (338.1)
Additions 0.2 0.0 1,021.0 357.3 9.4 1,387.9
Disposals (7.1) 0.0 (9.1) (363.7) (7.0) (386.9)
------- ------- ------- ------- ------- -------
Cost as of December 31, 2004 2.8 7.2 4,571.0 (204.0) (32.1) (4,817.1)
------- ------- ------- ------- ------- -------
Depreciation and impairment losses:
Balance as of January 1, 2004 7.6 4.8 933.9 0.0 14.6 960.9
Exchange rate adjustment (0.3) 0.0 (94.4) 0.0 0.0 (94.7)
Additions 0.0 0.0 0.0 0.0 0.0 0.0
Disposals (7.1) 0.0 (9.1) 0.0 (6.5) (22.7)
Depreciation for the year 2.4 0.1 200.2 0.0 8.0 210.7
------- ------- ------- ------- ------- -------
Balance as of December 31, 2004 2.6 4.9 1,030.6 0.0 16.1 1,054.2
------- ------- ------- ------- ------- -------
Book value as of December 31, 2004 0.2 2.3 3,540.4 204.0 16.0 3,762.9
------- ------- ------- ------- ------- -------
Hereof finance leases 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- -------
Hereof interest included in cost 0.0 0.0 7.8 0.0 0.0 7.8
------- ------- ------- ------- ------- -------
Book value as of December 31, 2003 2.3 2.4 2,944.2 229.3 15.1 3,193.3
------- ------- ------- ------- ------- -------
As of October 1, 2003 the value of land and buildings assessed for Danish
tax purposes amounted to DKK 3.0 million (book value DKK 2.3 million) as
compared to DKK 2.9 million as of January 1, 2003.
Included in the book value for vessels are capitalized dry-docking costs in
the amount of DKK 39.1 million as compared to DKK 42.6 million in 2003 in the
Group.
NOTE 7 - FINANCIAL ITEMS (in DKK million)
For the years ended December 31
-------------------------------
2002 2003 2004
---- ---- ----
Financial income
Interest income 30.2 19.2 20.3
Gain on other investments and securities* 14.5 685.7 1,038.8
Dividends ** 1.3 8.0 201.4
Fair value adjustment of derivative
financial instruments 42.9 23.3 30.4
------- ------- -------
88.9 736.2 1,290.9
------- ------- -------
Financial expenses
Interest expense on mortgage and bank debt 75.7 73.7 88.5
Loss on other investments and securities 0.0 4.0 2.8
Exchange rate adjustments 6.9 1.3 0.8
Fair value adjustment of derivative
financial instruments 0.0 0.0 0.0
Other interest expenses 0.3 0.6 5.1
------- ------- -------
82.9 79.6 97.2
------- ------- -------
Total financial items 6.0 656.6 1,193.7
------- ------- -------
* Includes unrealized gain on the NORDEN shares of DKK 1,034 million (DKK 681
million in 2003 and DKK 8 million in 2002).
** Includes dividend on the NORDEN shares of DKK 200 million in 2004 (2003:
DKK 7 million).
NOTE 8 - TAXES (in DKK million)
For the years ended December 31
-------------------------------
2002 2003 2004
----- ----- -----
TAX ON PROFIT FOR THE YEAR AND DEFERRED TAX
Tax on profit for the year 0.0 (0.7) (52.6)
Adjustment of deferred tax 360.1 0.0 0.0
----- ----- -----
Tax on profit for the year 360.1 (0.7) (52.6)
----- ----- -----
Changes in deferred tax
Balance as of 1 January 360.1 0.0 0.0
----- ----- -----
Tax on:
Profit for the year 0.0 0.0 0.0
Adjustment deferred tax due to tonnage tax (360.1) 0.0 0.0
----- ----- -----
Provision for the year (360.1) 0.0 0.0
----- ----- -----
Balance as of December 31 0.0 0.0 0.0
----- ----- -----
Effective corporate tax rate 0.0% 0.0% 2.3%
The Parent Company paid no tax in 2003 and 2004.
The Company participates in the tonnage tax scheme in Denmark.
Participation in the tonnage tax scheme is binding until December 31, 2010.
The deferred tax status as of December 31, 2004 related to the assets and
liabilities as of the date for entering the tonnage tax scheme equals DKK 403
mill. (2003: DKK 318 mill.). The Company has not accrued for the deferred tax
status as of December 31, 2004, as the deferred tax status will only become
payable, if the Company's participation in the tonnage tax scheme is abandoned,
or if the Company's level of investment and activity is significantly reduced.
The Company expects to participate in the tonnage tax scheme after the
binding period and at a minimum to maintain an investing and activity level
corresponding to the level at the time of entering the tonnage tax scheme.
NOTE 9 - COMMON SHARES (in DKK million)
As of December 31
-----------------
2003 2004 2003 2004
---- ---- ---- ----
Number of Number of Nominal Nominal
shares mill. shares mill. value DKK value DKK
mill. mill.
Balance at January, 1 18.2 18.2 182.0 182.0
Issue of bonus shares 0.0 18.2 0.0 182.0
Balance at December, 31 18.2 36.4 182.0 364.0
In May 2004 the Company increased the share capital from nominally DKK
182.0 mill. to nominally DKK 364.0 mill. through the issue of 18.2 mill. bonus
shares of DKK 10 each. The bonus shares were allotted to the Company's existing
shareholders at the ratio of 1:1.
OWN SHARES*
2003 2004 2003 2004 2003 2004
Nominal Nominal % of % of
Thousands Thousands value value share share
of shares of shares DKK million DKK million capital capital
------- ------- ------- ------- ------- -------
OWN SHARES
Balance as of January, 1 1,762.7 1,762.7 17.6 17.6 4.8 4.8
Purchase 0.0 0.0 0.0 0.0 0.0 0.0
Sale 0.0 0.0 0.0 0.0 0.0 0.0
Share options exercised 0.0 (196.1) 0.0 (1.9) 0.0 (0.5)
------- ------- ------- ------- ------- -------
Balance as of December, 31 1,762.7 1,566.6 17.6 15.7 4.8 4.3
------- ------- ------- ------- ------- -------
*The figures in the table above and the description below are adjusted to
reflect the issue of bonus shares in May 2004.
At December 31, 2004 the Company's holding of own shares represented
1,566,612 shares (2003: 1,762,736 shares) at denomination DKK 10 per share, with
a total nominal value of DKK 15.7 mill. (2003: DKK 17.6 mill.) and a market
value of DKK 353.7 million (2003: DKK 159.1 mill.) The retained shares equate to
4.3% (2003: 4.8%) of the Company's common shares.
Total consideration in respect of the purchase of own shares was DKK 0
(2003: DKK 0) whereas for the sale of shares it was DKK 6.1 mill. (2003: DKK 0).
As the disposal of own shares is carried out in connection with the exercise of
share options, the consideration is based on exercise prices in the share option
program. Of the holding of own shares, 52,980 shares (2003: 636,280 shares) are
held as a hedge of the Company's share option program. The remaining shares will
be used for further development of the capital structure, for financing or
execution of acquisitions, for sale or for other types of transfers.
NOTE 10 - (in DKK million)
As of December 31
-----------------
ACCRUALS 2003 2004
------ ------
Deferred gain related to sale and lease back transactions 52.9 40.4
Other 1.8 0.0
------ ------
54.7 40.4
------ ------
NOTE 11 - MORTGAGE DEBT, BANK LOANS AND CAPITALIZED LEASE OBLIGATIONS
(in DKK million)
As of December 31
-----------------
To be repaid as follows: 2003 2004
---- ----
Next year's repayments 476.1 339.8
Falling due within 5 years 846.9 939.3
Falling due after 5 years 853.8 882.9
------- -------
2,176.8 2,162.0
------- -------
Effective Effective Book Book
Fixed/ interest interest value value
Maturity floating 2003 2004 2003 2004
-------- -------- ---- ---- ---- ----
LOAN
USD 2004 Floating 3.1% -- 299.9 0.0
USD 2005 Floating 2.2% 3.8% 132.2 143.1
USD 2006 Floating 2.0% 3.9% 77.4 90.2
USD 2007 Floating 4.3% 4.0% 252.2 205.8
USD 2008 Floating 2.7% 3.3% 52.5 92.9
USD 2009 Floating 2.9% 4.3% 200.4 171.1
USD 2011 Floating - 2.8% 0.0 62.3
USD 2012 Floating 4.1% 3.8% 742.8 419.3
USD 2013 Floating 2.4% 4.4% 419.4 534.4
USD 2014 Floating 3.9% 0.0 442.9
Weighted average
effective interest rate 3.3% 3.9%
Book value 2,176.8 2,162.0
------- -------
NOTE 12 - OTHER LIABILITIES (in DKK million)
As of December 31
-----------------
2003 2004
---- ----
Partners and commercial managements 12.4 20.6
Accrued interests 12.3 17.3
Wages and social expenses 17.7 18.4
Derivative financial instruments 32.9 39.7
Miscellaneous, including items related to shipping activities 26.5 20.0
------ ------
101.8 116.0
------ ------
NOTE 13 - COLLATERAL SECURITY (in DKK million)
Collateral security for mortgage debt, bank loans and bareboat charters:
As of December 31
-----------------
2003 2004
------- -------
Vessels 1,942.4 2,112.8
Bonds 51.2 53.9
Cash and cash equivalents 0.4 0.2
------- -------
1,994.0 2,166.9
------- -------
NOTE 14 - GUARANTEE AND CONTINGENT LIABILITIES (in DKK million)
As of December 31
-----------------
2003 2004
---- ----
Guarantee liabilities 3.9 3.9
---- ----
The guarantee liabilities relate to guarantees to the Danish Ship Finance
and Danish Shipowners' Association.
The Company has contracted 7 vessels (2003: 6 vessels), an investment
totaling DKK 1,545 million as compared to DKK 1,310 million in 2003.
The Company is jointly and severally liable with its jointly taxed
subsidiaries for tax on income subject to consolidated taxation.
CONTRACTUAL LIABILITIES
Charterhire for vessels on time charter:
2003 2004
---- ----
Next year's payments 323.1 245.9
Falling due within 5 years 772.9 669.3
Falling due after 5 years 208.2 196.1
------- -------
1,304.2 1,111.3
------- -------
Average period until redelivery (years) 2.3 2.7
Newbuilding installments (purchse obligations):
Next year's payments 253.4 511.2
Falling due within 5 years 825.7 866.3
Falling due after 5 years 0.0 0.0
------- -------
1,079.1 1,377.5
In addition to the above-mentioned contractual liabilities for vessels on
time charter and newbuilding installments, the Company has entered into lease
contracts regarding office space in Copenhagen and Singapore. The Copenhagen
office comprises approximately 2,283 square meters and is leased until July 2014
at a rate of DKK 3.8 million per year in 2005 increasing to approximately DKK
5.6 million per year in 2014. The Singapore office comprises approximately 120
square meters and is leased until May 31, 2005 at a rate of DKK 0.3 million per
year. Furthermore, the Company has leased three apartments in Singapore. One is
leased until February 6, 2006 at a rate of DKK 0.1 million per year. Two are
leased at a yearly rate of DKK 0.2 million each and expire on May 6, 2006 and
October 6, 2006 respectively.
Furthermore the Company has entered into various IT-related contracts at a
total yearly rate amounting DKK 1.8 million. The greater part of these contracts
typically expires after 0.5 - 2.5 years.
NOTE 15 - FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS (in DKK million)
Fair value adjustments
----------------------
Fair value Income Income Shareholders' Fair value
as of statement statement equity as of
January 1, Net Financial Retained December
2004 revenue items profit 31, 2004
---- ------- ----- ------ --------
Cross currency swaps 34.9 -- (34.5) -- 0.4
Forward rate contracts 2.0 -- 20.9 (2.3) 20.6
Interest rate swaps (31.4) -- 6.7 26.0 1.3
Currency options (1.5) -- 21.3 -- 19.8
Bunker hedge 0.0 -- -- (4.3) (4.3)
Forward Freight Agreement 1.3 (25.5) -- -- (24.2)
---- ---- ---- ---- ----
5.3 (25.5) 14.4 19.4 13.6
---- ---- ---- ---- ----
NOTE 16 - RELATED PARTY TRANSACTIONS
The members of the Company's Board of Directors and Senior Management, near
relatives to these persons, and companies where these persons have control or
exercise significant influence are considered as related parties with
significant influence.
Mr. Niels Erik Nielsen, Chairman of the Board of Directors, is a partner in
the law firm Bech-Bruun Dragsted. Bech-Bruun Dragsted has rendered legal
assistance during the financial year. The firm's fee of DKK 1.6 mill. (2003: DKK
0.4 mill.) is based upon the amount of time spent by the firm.
Mr. Ditlev Engel, a member of the Board of Directors, was Managing Director
of Hempel A/S until December 31, 2004. In the financial year the Company bought
products on market terms from Hempel amounting to DKK 3.4 mill. (2003: DKK 2.4
mill.).
Mr. Rex Harrington, a member of the Board of Directors, has provided
consulting services to the Board of Directors amounting to DKK 0.6 mill. (2003:
DKK 0.0 mill.).
There were no further transactions in the financial year with members of
the Board of Directors and the senior Management.
Management remuneration is disclosed in note 3.
It is considered that no single person has control over the Company.
NOTE 17 - RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (U.S. GAAP)
The Company's Annual Report has been prepared in accordance with accounting
principles generally accepted in Denmark (Danish GAAP), which differs in certain
respects from U.S. GAAP.
The following is a summary of the adjustments to net income for the years
ended December 31, 2002, 2003 and 2004 and shareholders' equity as of those
dates, necessary to reconcile those to net income and shareholders' equity
determined in accordance with U.S. GAAP.
Reconciliation of Net income for the year to U.S. GAAP Net income (in DKK
million)
Notes 2002 2003 2004
----- ---- ---- ----
Net income as reported under Danish GAAP 550.5 1,051.0 2,281.2
Dry-docking costs a) (21.9) (0.4) (9.3)
Write-down on vessels b) (12.3) 1.0 0.9
Marketable securities c) (4.4) (685.5) (1038.4)
Sale/leaseback transactions d) 1.2 0.0 0.0
Derivative financial instruments e) (32.4) 15.1 10.8
Stock options f) 0.0 (43.6) (67.0)
Tonnage Taxation (deferred tax) g) (395.1) 12.1 (44.4)
------ ------- -------
Net income in accordance with U.S. GAAP 85.6 349.7 1,133.8
====== ======= =======
Reconciliation of Shareholders' equity to U.S. GAAP Shareholders' Equity (in DKK
million)
Notes 2002 2003 2004
----- ---- ---- ----
Shareholders' equity as reported under Danish GAAP 1,623.4 2,464.3 4,323.7
Dry-docking costs a) (47.4) (40.2) (45.4)
Write-down on vessels b) (12.3) (11.3) (10.4)
Marketable securities c) 0.0 0.0 0.0
Sale/leaseback transactions d) 0.0 0.0 0.0
Derivative financial instruments e) 0.0 0.0 0.0
Stock options f) 0.0 (33.5) (10.4)
Tonnage Taxation (deferred tax) g) (367.3) (355.3) (399.6)
------- ------- -------
Shareholders' equity in accordance with U.S. GAAP 1,196.4 2,024.0 3,857.9
======= ======= =======
The Group's accounting policies under Danish GAAP are described below where
these differ from U.S. GAAP:
a) Dry-docking costs
Under Danish GAAP, when a vessel is delivered major components which are
usually replaced or renewed in connection with a docking are depreciated over
the estimated period to the first docking. The Company subsequently capitalizes
dry-docking costs as they are incurred and depreciates these over the period
until the next docking.
Under U.S. GAAP, the Company accounts for the docking costs (provision for
repairs) by accruing for the estimated dry dock costs involved in the next
docking over the period to the next docking. Subsequent payments for dry-docking
are charged against the accrued liability. The following represents the movement
in the provision for repairs during the year ended December 31, 2002, 2003 and
2004:
(in thousands of DKK)
2002 2003 2004
---- ---- ----
Beginning Balance 41,294 31,663 23,135
Charged to expenses 29,889 23,807 32,133
Utilization (33,357) (27,677) (13,692)
Exchange rate conversion (6,163) (4,658) (3,516)
------- ------- -------
Ending Balance 31,663 23,135 38,060
======= ======= =======
b) Write-down on vessels
In 1998 the Company recognized an impairment charge of DKK 80 million for
certain vessels on capital leases as the carrying value at the time exceeded the
fair value of these vessels. Under Danish GAAP, impairment losses are reversed
in subsequent periods if the fair value increases. During 2002, the Company
recorded a reversal of the impairment loss of DKK 12.3 million for the increase
in fair value of these assets.
Under U.S. GAAP, impairment losses cannot be reversed. This results in a
difference in depreciation expense between U.S. GAAP and Danish GAAP.
c) Marketable securities
Under Danish GAAP, the Company's marketable securities are classified as
available-for-sale, which under Danish GAAP means that unrealized gains and
losses on these are recorded in the income statement.
Under U.S. GAAP, the Company must classify its investments in marketable
securities as either trading, available-for-sale or held to maturity, as
required by Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." In 2002, the Company
classified its investments in equity securities as available-for-sale and its
investments in bonds as trading. From January 1, 2003 the bonds have been
classified as available-for-sale due to a decrease in the trading activities.
Unrealized gains and losses on available-for-sale investments are recorded as a
component of shareholder's equity unless there is an other-than temporary
impairment of the securities. There were no other-than temporary impairments in
any period presented.
d) Sale/leaseback transactions
During the year ended December 31, 2000, the Company sold five of its
vessels and chartered (leased) them back under time charter agreements.
Under Danish GAAP, the Company has calculated a gain of DKK 147.1 million,
which has been deferred and amortized in proportion to the gross rental on the
time charters over the life of the related agreements.
Under U.S. GAAP, the gain has been deferred and amortized in a similar way,
but the gain on disposal is different under U.S. GAAP due to the treatment of
dry-docking costs as described under item a) above. The initial difference
between the gain under Danish GAAP and U.S. GAAP was DKK 14.8 million, which
through amortization in 2000, 2001 and 2002 has been reduced to DKK 0 at the end
of 2002.
e) Derivative Financial Instruments
The U.S. GAAP reconciling items regarding derivatives for the years 2002,
2003 and 2004 have been summarized below.
(in thousands of DKK) 2002 2003 2004
Share- Share- Share-
Income holders' Income holders' Income holders'
statement equity statement equity statement equity
Foreign currency contracts (3,951) 0 0 0 0 0
Interest rate swaps (31,526) 0 16,209 0 15,067 0
Fuel price agreements 3,056 0 (1,121) 0 (4,319) 0
---------------------------------------------------------------------
Total U.S. GAAP adjustment (32,421) 0 15,088 0 10,748 0
---------------------------------------------------------------------
Under Danish GAAP, derivative financial instruments are recognized in the
balance sheet at fair value. For fair value hedges the change in fair value is
set-off against the change in fair value of the hedged balance item. For
cash-flow hedges the change in fair value on the contract is recorded as a
component of shareholders' equity and then transferred to the income statement
when the hedged item is realized. The change in fair value on contracts that do
not qualify for hedge accounting is recorded in the income statement at the end
of each period.
Under U.S. GAAP, the Company accounts for its derivative financial
instruments at fair value with changes reflected in the income statement except
where the Company designates derivative financial instruments as hedges. For
derivatives treated as hedges under US GAAP, the treatment is consistent with
that under Danish GAAP.
Foreign currency contracts
The Company entered into a variety of contracts to manage its foreign
currency exposure. During the year ended December 31, 1999, the Company settled
an open currency contract associated with a purchase option included in a lease
agreement. Under Danish GAAP, the gain of DKK 19.4 million on this transaction
was deferred and amortized into income over the life of the associated lease
agreement. An amount of DKK 3.9 million of gain was recognized during the year
ended December 31, 2002.
Under U.S. GAAP, the gain on this transaction was recorded at the time the
contract was settled.
Interest rate swaps
The Company has entered into interest rate swaps to hedge the interest rate
risk on the long-term loans obtained to finance vessel purchases.
Under Danish GAAP, the interest rate swaps qualify as cash flow hedges and
are recorded at fair value in the balance sheet and as a component of
shareholders' equity. The fair values of the hedges are released from
shareholders' equity when interest is paid on the loans.
Under U.S. GAAP, the Company adopted the provisions for SFAS No. 133
`Accounting for Derivative Instruments and Hedging Activities' with effect from
January 1, 2001. This resulted in the Company recording a transition adjustment
for the fair value of all material derivatives of DKK 6.9 million as a
derivative asset and as a component of other comprehensive income of which DKK
6.4 million was charged to US GAAP net income in 2001, and DKK 0.5 million in
2002.
Under US GAAP, subsequent to the adoption of SFAS No. 133, the Company has
accounted for changes in fair value of the interest rate swaps as a component of
income. However, beginning on October 1, 2003 the Company elected to apply hedge
accounting to some interest rate swaps designated as cash flow hedges. During
the year ended December 31, 2002, the Company recorded a loss on interest rate
swaps of DKK 32.1 million. During the year ended December 31, 2003 the Company
recorded a gain on interest rate swaps of DKK 16.2 million in the income
statement and a loss on interest rate swaps designated as cash flow hedges of
DKK 2.4 million was recorded as a component of shareholders' equity. During the
year ended December 31, 2004 the Company recorded a gain on interest rate swaps
of DKK 15.1 million in the income statement and a loss on interest rate swaps
designated as cash flow hedges of DKK 2.3 million was recorded as a component of
shareholders' equity.
Fuel price agreements
The Company has entered into fuel price agreements to hedge the price of
fuel bunkers for the Company's vessels.
Under Danish GAAP, the fuel price agreements qualify as cash flow hedges
and are recorded at fair value in the balance sheet and as a component of
shareholders' equity. The fair values of the hedges are released from
shareholders' equity when the fuel bunkers are purchased.
Under U.S. GAAP, the Company accounts for changes in fair value of the fuel
price agreements as a component of income. During the year ended December 31,
2002, the Company recorded a gain on fuel price agreements of DKK 3.1 million,
during the year ended December 31, 2003 the Company recorded a loss on fuel
price agreements of DKK 1.1 million, and during the year ended December 31, 2004
the Company recorded a loss on fuel price agreements of DKK 4.3 million.
f) Stock options
In accordance with the Company's Danish accounting principles, the
difference between the exercise price and the market price of the shares at the
date the options are granted is recognized as a compensation expense in the
income statement. At the time of exercise, the amounts paid to the employees for
options that are cash settled are recognized directly in shareholders' equity.
Under U.S. GAAP, stock-based compensation is accounted for in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." and related interpretations in accounting for stock based
compensation. Under APB No. 25, the Company recognizes compensation expense for
the difference between the exercise price and market price at the measurement
date. This compensation is amortized over the vesting period. The Company grants
options with cash settlement terms for which the measurement date is the date
that these options are exercised. Under APB 25, compensatory plans with cash
settlement terms qualify as variable plans, for which total compensation cost
must be recalculated each period based on the current share price, until the
options are exercised.
g) Tonnage taxation
On February 6, 2002, the Danish government proposed a bill regarding
tonnage taxation, which was enacted on April 17, 2002. According to the new
Danish Tonnage Taxation Act, tax payments in the future will not be based on a
taxable income, but rather a calculated income based on the tonnage of the
Company and taxable income from activities outside the tonnage tax scheme. The
legislation has been implemented with retroactive date effective from January 1,
2001 and the Company has chosen to enter the tonnage taxation scheme for a
10-year period with effect from January 1, 2001. Income taxation of reversed
depreciation will only occur if the total fleet of the Company at the time of
entering the tonnage taxation scheme is reduced in size.
Under Danish GAAP, the provision for deferred tax that existed at the date
of enactment has been released to income.
Under U.S. GAAP, the provision for deferred tax is still carried in the
balance sheet, as the recognition of a provision for deferred tax does not
depend on the likelihood of the provision resulting in taxable amounts. At the
end of each period, the provision for deferred tax is calculated based on the
carrying values and tax values of the shipping related assets and liabilities
that were owned by the company at the date for entering the tonnage taxation
scheme. This adjustment includes the tax consequences of certain U.S. GAAP
adjustments under the Danish Tonnage Taxation Act.
h) Joint Venture Agreements
The Company has investments in entities that are jointly owned and operated
together with third parties, and in which the parties have joint dominant
influence. Under Danish GAAP, the Company accounts for these investments under
the proportional consolidation method.
Under U.S. GAAP, these entities would be accounted for using the equity
method, which will not result in a difference in net income between Danish GAAP
and U.S. GAAP.
The following represents the results reflected in the consolidated income
statement for the year ended December 31, 2002, 2003 and 2004 in accordance with
Danish GAAP associated with these joint ventures:
(in thousands of DKK) 2002 2003 2004
---- ---- ----
Net turnover 393,052 260,067 74,966
Operating costs 327,098 235,521 38,195
-------- -------- --------
Net earning from shipping activities 65,954 24,546 36,771
Gain on sale of vessels/interests -- -- --
Administrative expenses 7,483 7,017 6,648
Other operating income 6,889 8,464 11,901
Depreciation 39,728 19,823 17,203
-------- -------- --------
Profit before financial items 25,632 6,170 24,821
Financial items 68,281 8,373 (6,191)
-------- -------- --------
Profit before tax (42,649) (2,203) 18,630
Tax -- -- (2,234)
-------- -------- --------
Net profit (42,649) (2,203) 16,396
======== ======== ========
The following represents summarized balance sheet data that is reflected in
the consolidated balance sheet associated with these joint ventures as of
December 31, 2003 and 2004 in accordance with Danish GAAP:
(in thousands of DKK) 2003 2004
---- ----
Fixed assets 194,736 597
Current assets 31,799 18,353
Provisions -- --
Long term liabilities 122,012 --
Current liabilities 85,437 7,633
i) Statement of cash flows
The cash flow statement prepared in accordance with Danish GAAP presents
substantially the same information as required under U.S. GAAP. Under U.S. GAAP,
however, there are certain differences with regard to the classification of
items within the cash flow statement and with regard to the definition of cash
and cash equivalents.
Under Danish GAAP, the Company's cash is comprised of cash at bank and in
hand and bonds. For U.S. GAAP purposes, the Company classified only cash at bank
and in hand, as cash and cash equivalents. Therefore under U.S. GAAP,
investments in and sales of bonds, treated as available for sale securities
(2002: trading securities) under SFAS 115, would be classified in the statement
of cash flows as operating activities and investments and sales of equity
securities classified as available for sale would be classified as investing
activities. Additionally, the unrealized gain and loss on the bonds would be
reflected as a component of operating activities.
Under Danish GAAP, the profit on the sale of fixed assets is reflected as a
component of investing activities, whereas under U.S. GAAP this amount is
reflected as a component of operating activities.
The presentation of cash flows provided by (used in) operating, investing
and financing activities, classified in accordance with U.S. GAAP, utilizing the
amounts shown in the Company's Danish GAAP cash flow statement are as follows
for the years ended December 31, 2002, 2003 and 2004 (in thousands of DKK):
2002 2003 2004
---- ---- ----
Net cash provided by operating activities 478,303 531,593 1,395,087
Net cash provided by (used in) investment activities (1,118,689) (1,007,434) (1,117,407)
Net cash provided by (used in) financing activities 552,198 470,770 (82,630)
Net increase in cash and cash equivalents (88,188) (5,071) 195,050
Cash as defined under U.S. GAAP, beginning of year 256,470 168,282 163,211
--------------------------------------
Cash as defined under U.S. GAAP, end of year 168,282 163,211 358,261
--------------------------------------
j) Earnings Per Share
Earnings per share is computed consistent with Danish GAAP.
The following table sets forth the computation of basic and diluted U.S.
GAAP net income per share (in thousands except share and per share data):
2002 2003 2004
Numerator for basic and diluted Earnings
Per Share (in thousands of DKK)
Profit from continuing operations 15,754 349,711 1,133,817
---------------------------------
Profit from discontinuing operations 69,818 0 0
---------------------------------
Profit for the year 85,572 349,711 1,133,817
---------------------------------
No. of No. of No. of
shares shares shares
---------- ---------- ----------
Weighted average number of shares:
Basic 34,635,818 34,637,264 34,784,357
Effect of dilutive shares and
share options
20,898 434,220 260,613
---------- ---------- ----------
Diluted 34,656,716 35,071,484 35,044,970
---------- ---------- ----------
Basic earnings per share
Profit from continuing operations 0.5 10.1 32.6
Profit from discontinued operations 2.0 0.0 0.0
---------- ---------- ----------
Profit for the year 2.5 10.1 32.6
---------- ---------- ----------
Diluted earnings per share
Profit from continuing operations 0.5 10.0 32.4
Profit from discontinued operations 2.0 0.0 0.0
---------- ---------- ----------
Profit for the year 2.5 10.0 32.4
---------- ---------- ----------
The weighted average number of shares excludes the shares reacquired from
the date of repurchase. The comparative figures for number of shares and
earnings per share are restated to reflect the issue of bonus shares in May
2004.
l) New accounting requirements not yet adopted
In December 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payments" or SFAS 123R.
This statement eliminates the option to apply the intrinsic value measurement
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" to stock compensation awards issued to employees.
Rather, SFAS 123R requires companies to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. That cost will be recognized over the period during
which an employee is required to provide services in exchange for the award--the
requisite service period (usually the vesting period). SFAS 123R applies to all
awards granted after the required effective date and to awards modified,
repurchased, or cancelled after that date. SFAS 123R will be effective for our
fiscal year ending December 31, 2006. We have not yet quantified the effect of
the future adoption of SFAS 123R on a going forward basis.
In December 2004, the FASB SFAS No. 153, "Exchanges of Nonmonetary Assets -
an amendment of APB Opinion No. 29" ("SFAS 153"), which amends Accounting
Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions" to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS 153 is effective for nonmonetary
assets exchanges occurring in fiscal periods beginning after June 15, 2005. We
do not anticipate that the adoption of this statement will have a material
effect on our financial position or results of operations.
In November 2004, the EITF reached a consensus on EITF Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments" ("EITF 03-1"). EITF 03-1 provides guidance on determining
other-than-temporary impairments and its application to marketable equity and
debt securities accounted for under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," as well as investments accounted for
under the cost method of accounting. In September 2004, the FASB issued FASB
Staff Position ("FSP") EITF Issue 03-1-1 which delayed the effective date for
the measurement and recognition guidance contained in EITF 03-1 pending
finalization of the draft FSP EITF Issue 03-1-a, "Implementation Guidance for
the Application of Paragraph 16 of EITF 03-1." The disclosure requirements of
EITF 03-1 remain in effect. The adoption of the recognition and measurement
provisions of EITF 03-1 when finalized are not expected to have a material
impact on the Company's results of operations, financial position or cash flows.
In October 2004, the FASB issued EITF 04-10, "Determining Whether to
Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds." The
consensus addresses the issue of how an enterprise should evaluate the
aggregation criteria in paragraph 17 of SFAS 131, "Disclosures about Segments of
an Enterprise and Related information," when determining whether operating
segments that do not meet the quantitative thresholds may be aggregated. The
effective date of this issue has been delayed and is anticipated to occur in
2005 to coincide with the final issuance of the FSP (FASB Staff Position), which
will provide guidance in determining whether two or more operating segments have
similar economic characteristics. However, earlier adoption is permitted. The
application of this guidance is not expected to have a material effect on our
financial position or results of operations.
ITEM 19. EXHIBITS.
Number Description of Exhibits
------ -----------------------
1.1 ____ Articles of Association for A/S Dampskibsselskabet TORM
and English Translation (the "Company") (1)
1.2 ____ Rules of Procedure for the Board of Directors of the
Company and English Translation (1)
2.2 ____ Form of Depositary Agreement between Deutsche Bank and
the Company (1)
4.1 ____ The Company's Employee Stock Purchase Plan (1)
4.2 ____ Office lease between PFA Pension II and the Company and
English Translation (1)
4.3 ____ Engagement letter of Bech-Bruun Dragsted and English
Translation (1)
4.4 ____ DKK 42 million revolving credit facility letter from
Danske Bank to the Company dated December 11, 1998 and
English translation (1)
4.5 ____ Debt Instrument from Agnete Shipping Corporation to
Danske Bank Aktieselskab, Singapore Branch, dated August
9, 1995 (1)
4.6 ____ Debt Instrument from Eastern Light Shipping Limited to
Danske Bank Aktieselskab, Hong Kong Branch, dated
November 17, 1995 (1)
4.7 ____ Debt Instrument from Southern Light Shipping Limited to
Danske Bank Aktieselskab, Hong Kong Branch (1)
4.8 ____ Debt Instrument from Hermia Shipping Corporation to
Danske Bank Aktieselskab, Singapore Branch, dated June,
14, 1996 and to Danske Bank A/S dated August 29, 2001
(1)
4.9 ____ Debt Instrument from Hilde Shipping Corp. to Danske Bank
Aktieselskab, dated July 3, 2000 (1)
4.10 ____ Debt Instrument from Skagerak Tankers Limited to Danske
Bank Aktieselskab, Singapore Branch, dated May 9, 1996
(1)
4.11 ____ Debt Instrument from Anne Product Carriers (PTE) Ltd. To
Danske Bank Aktieselskab, Singapore Branch, August 28,
1998 (1)
4.12 ____ Debt Instrument from Gunhild Shipping Corporation to
Danske Bank Aktieselskab, Singapore Branch, dated
November 6, 1998 (1)
4.13 ____ Debt Instrument from Tekla Shipping Co. Ltd to Danske
Bank, Singapore Branch, dated March 23, 1992 (1)
4.14 ____ Debt Instrument from Alice Product Tanker Corporation to
Danske Bank Aktieselskab, Singapore Branch, dated
November 8, 1994 (1)
4.15 ____ Debt Instrument from Bothnia Shipping Corporation to
Danske Bank, Singapore Branch, dated September 20, 1989
(1)
4.16 ____ Debt Instrument from Olga Shipping Corporation to Danske
Bank Aktieselskab, Singapore Branch, dated October 27,
1995 (1)
4.17 ____ Secured Loan Agreement, between Caseros Shipping Limited
and Nordea Bank, dated June 15, 1994 (1)
4.18 ____ Loan Agreement between Estrid Shipping Corporation and
Danmarks Skibskreditfond, dated November 6, 2001 (1)
4.19 ____ Loan Agreement between Ragnhild Shipping Corporation and
Danmarks Skibskreditfond, dated November 6, 2001 (1)
4.20 ____ Shipbuilding Contract for the Construction of Hull No.
S161, between the Company and Samho Heavy Industries
Co., Ltd. and Hyundai Heavy Industries Co., Ltd., dated
November 24, 2000 (1)
4.21 ____ Shipbuilding Contract for the Construction of Hull No.
S162, between the Company and Samho Heavy Industries
Co., Ltd. and Hyundai Heavy Industries Co., Ltd., dated
November 24, 2000 (1)
4.22 ____ Contract for Construction and Sale of Hull No. S-1089,
between Thyra Shipping Corporation and Daedong
Shipbuilding Co., Ltd., dated March 2, 2001 (1)
4.23 ____ Contract for Construction and Sale of Hull No. S-1090,
between Freya Shipping Corporation and Daedong
Shipbuilding Co., Ltd., dated March 2, 2001 (1)
4.24 ____ Contract for Construction and Sale of Hull No. S-1086,
between Gertrud Shipping Corporation and Daedong
Shipbuilding Co., Ltd., dated November 3, 2000 (1)
4.25 ____ Contract for Construction and Sale of Hull No. S-1087,
between Gerd Shipping Corporation and Daedong
Shipbuilding Co., Ltd., dated November 3, 2000 (1)
4.26 ____ Contract for Construction and Sale of Hull No. S-1079,
between the Company and Daedong Shipbuilding Co., Ltd.,
dated August 25, 2000 (1)
4.27 ____ Contract for Construction and Sale of Hull No. S-1080,
between the Company and Daedong Shipbuilding Co., Ltd.,
dated August 25, 2000 (1)
8.1 ____ List of the Company's subsidiaries (1)
31.1 ____ Rule 13a-14(a)/15d-14(a) Certification of the Company's
Chief Executive Officer.
31.2 ____ Rule 13a-14(a)/15d-14(a) Certification of the Company's
Chief Financial Officer.
32.1 ____ Certification of the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 ____ Certification of the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
----------
(1) Incorporated by reference from exhibit of same number to Registration
Statement on Form 20-F, filed February 27, 2002 (File No. 000-49650)
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this registration statement on its behalf.
Aktieselskabet Dampskibsselskabet Torm
By: /s/ Klaus Kjaerulff
----------------------------------
Name: Klaus Kjaerulff
Title: Chief Executive Officer
Date: June 15, 2005
23116.0001 #578380v2