10-K 1 a08-2670_110k.htm 10-K

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2007

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

for the transition period from                  to

 

Commission file number 001-16531

 

GENERAL MARITIME CORPORATION

(Exact name of registrant as specified in its charter)

 

Republic of the Marshall Islands

 

06-1597083

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

299 Park Avenue, New York, New York

 

10171

(Address of principal executive office)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (212) 763-5600

 

Securities of the Registrant registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Common Stock, par value $.01 per share

 

Name of Each Exchange on Which Registered

 

New York Stock Exchange

 

Securities of the Registrant registered pursuant to Section 12(g) of the Act:

 

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes  x   No  o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

 

Yes  o   No  x

 

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  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

 

Large Accelerated Filer x Accelerated Filer o Non-Accelerated Filer o Smaller Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o No x

 

The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant as of June 30, 2007 was approximately $881.3 million, based on the closing price of $26.78 per share.

 

The number of shares outstanding of the registrant’s common stock as of February 22, 2008 was 31,318,240 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Proxy Statement for the 2008 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2007, is incorporated by reference in Part III herein.

 

 



 

PART I

 

ITEM 1. BUSINESS

 

OVERVIEW

 

We are a leading provider of international seaborne crude oil transportation services. Our current fleet consists of 21 wholly owned vessels, consisting of 10 Aframax and 11 Suezmax vessels.  The 21 vessels that we currently operate have a total of 2.7 million dwt, all of which is double-hulled. Many of the vessels in our fleet are “sister ships”, which provide us with operational and scheduling flexibility, as well as economies of scale in their operation and maintenance.

 

The majority of our vessels currently operate in the Atlantic, which includes ports in the Caribbean, South and Central America, the United States, Western Africa, the Mediterranean, Europe and the North Sea. Transportation of crude oil to the U.S. Gulf Coast and other refining centers in the United States requires vessel owners and operators to meet more stringent environmental regulations than in other regions of the world. We have focused our operations in the Atlantic because we believe that these stringent operating and safety standards give us a potential competitive advantage. We have established a niche in the region due to our high quality vessels, all of which are double-hulled, our commitment to safety and our many years of experience in the industry. Although the majority of our vessels operate in the Atlantic, we also currently operate vessels in the Black Sea and in other regions, which we believe enables us both to take advantage of market opportunities and to position our vessels in anticipation of drydockings. Our customers include most of the major international oil companies such as Chevron Corporation, CITGO Petroleum Corp., ConocoPhillips, Exxon Mobil Corporation, Hess Corporation, Lukoil Oil Company, and Sun International Ltd.

 

We actively manage the deployment of our vessels between spot market voyage charters, which generally last from several days to several weeks, and time charters, which can last up to several years. We continuously and actively monitor market conditions in an effort to take advantage of changes in charter rates and to maximize our long-term cash flow by changing this chartering deployment profile. We design our fleet deployment to provide greater cash flow stability through the use of time charters for part of our fleet, while maintaining the flexibility to benefit from improvements in market rates by deploying the balance of our vessels in the spot market.

 

Our net voyage revenues, which are voyage revenues minus voyage expenses, have grown from $12.0 million in 1997 to $216.9 million in 2007. Net voyage revenues decreased by $28.6 million, or 11.7%, to $216.9 million for the year ended December 31, 2007 compared to $245.6 million for the year ended December 31, 2006 primarily due to the smaller size of our fleet. Between October 2005 and May 2006, we sold 17 of our non-double hull vessels and nine of our Oil/Bulk/Ore (OBO) vessels, which we considered to be non-core assets, in four separate transactions.  Between March 2006 and February 2008 we took delivery of four newly constructed Suezmax vessels, giving us a current fleet size of 21 vessels (all of which are double-hull).  As a result, we believe that our fleet profile has become more attractive to our customers.  We have also generated additional capital which we have used to repay indebtedness and pay dividends and which we may use to support potential future growth or other transactions that we believe would create value for our shareholders.

 

AVAILABLE INFORMATION

 

We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission, or the SEC, under the Securities Exchange Act of 1934, or the Exchange Act. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov.

 

In addition, our company website can be found on the Internet at www.generalmaritimecorp.com. The website contains information about us and our operations. Copies of each of our filings with the SEC on Form 10-K, Form 10-Q and Form 8-K, and all amendments to those reports, can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. To view the reports, access www.generalmaritimecorp.com, click on Press Releases, and then SEC Filings.

 

Any of the above documents can also be obtained in print by any shareholder upon request to our Investor Relations

 

2



 

Department at the following address:

 

Corporate Investor Relations
General Maritime Corporation
299 Park Avenue
New York, NY 10171

 

BUSINESS STRATEGY

 

Our strategy is to employ our existing competitive strengths to enhance our position within the industry and maximize long-term cash flow. Our strategic initiatives include:

 

·              Managing Environmentally Safe, Yet Cost Efficient Operations. We aggressively manage our operating and maintenance costs. At the same time, our fleet has an excellent safety and environmental record that we maintain through acquisitions of high-quality vessels and regular maintenance and inspection of our fleet. We maintain operating standards for all of our vessels that emphasize operational safety, quality maintenance, continuous training of our officers and crews and compliance with U.S. and international environmental and safety regulations. Our in-house safety staff oversees many of these services. We believe the age and quality of the vessels in our fleet, coupled with our excellent safety and environmental record, position us favorably within the sector with our customers and for future business opportunities.

 

·              Balancing Vessel Deployment to Maximize Fleet Utilization and Cash Flows. We actively manage the deployment of our fleet between time charters and spot market voyage charters. Our vessel deployment strategy is designed to provide greater cash flow stability through the use of time charters for part of our fleet, while maintaining the flexibility to benefit from improvements in market rates by deploying the balance of our vessels in the spot market. Our goal is to be the first choice of our customers for crude oil transportation services. We constantly monitor the market and seek to anticipate our customers’ crude oil transportation needs and to respond quickly when we recognize attractive chartering opportunities.

 

·              Growing and Managing the Profile of Our Fleet. We have been an industry consolidator focused on opportunistically acquiring high-quality mid-sized vessels or newbuilding contracts for such vessels. We are continuously and actively monitoring the market in an effort to take advantage of expansion and growth opportunities. We also evaluate opportunities to monetize our investment in vessels by selling them when conditions are favorable to generate return on invested capital, to adjust the profile of our fleet to fit customer demands such as preference for double-hull vessels and to generate capital for potential value enhancing investments in the future. Between October 2005 and May 2006, we sold 17 non-double-hull vessels for approximately $432 million and nine OBO vessels for approximately $244 million.

 

·              Maintaining a Prudent Capital Structure. We are committed to maintaining prudent financial policies aimed at preserving financial stability and appropriate leverage and increasing long-term cash flow. As of December 31, 2006 our debt to capitalization ratio was 6.1%. As of December 31, 2007, our debt to capitalization ratio increased to 71.2%, which was attributable to our special dividend of $486.5 million paid in March 2007.  As of December 31, 2007 we had the ability to draw down an additional $327.5 million on our revolving credit facility.

 

3



 

OUR FLEET

 

Our current fleet consists of 21 vessels and is comprised of 10 Aframax vessels and 11 Suezmax vessels. The following chart provides information regarding our 21 vessels.

 

Vessel

 

Yard

 

Year Built

 

Year Aquired

 

DWT

 

Employment Status

 

Flag

 

Sister ships (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OUR CURRENT FLEET

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFRAMAX TANKERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Genmar Strength (1)

 

Sumitomo

 

2003

 

2004

 

105,674

 

Spot

 

Liberia

 

A

 

Genmar Defiance (1)

 

Sumitomo

 

2002

 

2004

 

105,538

 

TC

 

Liberia

 

A

 

Genmar Ajax (1)

 

Samsung

 

1996

 

1998

 

96,183

 

TC

 

Liberia

 

B

 

Genmar Agamemnon (1)

 

Samsung

 

1995

 

1998

 

96,214

 

Spot

 

Liberia

 

B

 

Genmar Minotaur (1)

 

Samsung

 

1995

 

1998

 

96,226

 

Spot

 

Liberia

 

B

 

Genmar Revenge (1)

 

Samsung

 

1994

 

2004

 

96,755

 

Spot

 

Liberia

 

 

 

Genmar Constantine (1)

 

S. Kurushima

 

1992

 

1998

 

102,335

 

Spot

 

Liberia

 

C

 

Genmar Alexandra (1)

 

S. Kurushima

 

1992

 

2001

 

102,262

 

Spot

 

Marshall Islands

 

C

 

Genmar Princess (1)

 

Sumitomo

 

1991

 

2003

 

96,648

 

TC

 

Liberia

 

D

 

Genmar Progress (1)

 

Sumitomo

 

1991

 

2003

 

96,765

 

Spot

 

Liberia

 

D

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

994,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUEZMAX TANKERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Genmar St. Nikolas (1)

 

TSU

 

2008

 

2008

 

149,876

 

TC

 

Marshall Islands

 

H

 

Genmar George T (1)

 

TSU

 

2007

 

2007

 

149,847

 

TC

 

Marshall Islands

 

H

 

Genmar Kara G (1)

 

TSU

 

2007

 

2007

 

150,296

 

TC

 

Liberia

 

E

 

Genmar Harriet G (1)

 

TSU

 

2006

 

2006

 

150,205

 

TC

 

Liberia

 

E

 

Genmar Orion (1)

 

Samsung

 

2002

 

2003

 

159,992

 

TC

 

Marshall Islands

 

 

 

Genmar Argus (1)

 

Hyundai

 

2000

 

2003

 

164,097

 

TC

 

Marshall Islands

 

F

 

Genmar Spyridon (1)

 

Hyundai

 

2000

 

2003

 

153,972

 

TC

 

Marshall Islands

 

F

 

Genmar Hope (1)

 

Daewoo

 

1999

 

2003

 

153,919

 

TC

 

Marshall Islands

 

G

 

Genmar Horn (1)

 

Daewoo

 

1999

 

2003

 

159,475

 

TC

 

Marshall Islands

 

G

 

Genmar Phoenix (1)

 

Halla

 

1999

 

2003

 

149,999

 

TC

 

Marshall Islands

 

 

 

Genmar Gulf (1)

 

Daewoo

 

1991

 

2003

 

149,803

 

Spot

 

Marshall Islands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,691,481

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FLEET TOTAL

 

2,686,081

 

 

 

 

 

 

 

 


TC = Long Term Time Chartered

 

(1)           Each vessel is collateral for our $900 million credit facility.

 

(2)           Each vessel with the same letter is a “sister ship” of each other vessel with the same letter.

 

During March 2003 and May 2003, we acquired 19 vessels from Metrostar Management Corporation, an unaffiliated entity, consisting of 14 Suezmax and five Aframax vessels for an aggregate purchase price in cash of $525 million. The acquisitions were financed through the use of cash and borrowings under our then existing revolving credit facilities together with the incurrence of additional debt. During April 2004 and July 2004, we acquired nine vessels, consisting of three Aframax vessels, two Suezmax vessels and four Suezmax newbuilding contracts, and a technical management company from Soponata SA, an unaffiliated entity, for an aggregate purchase price of $248.1 million in cash. These four newbuilding Suezmax vessels were delivered between March 2006 and February 2008. The acquisitions were financed through the use of cash and borrowings under our revolving credit facilities.

 

During March 2003 and December 2003 we sold the Kentucky and the West Virginia, respectively. During November 2003, December 2003 and February 2004, we sold three double-bottomed 1986-built Aframax vessels that we acquired during

 

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2003. During August 2004 and October 2004, we sold four single-hull Suezmax vessels. During 2005, we sold six Aframax and seven Suezmax vessels, all of which were either single-hull or double-sided. During January 2006, we sold one double-sided Aframax vessel and three single-hull Suezmax vessels. Between March 2006 and May 2006, we sold nine OBO Aframax vessels.  All of our vessels in our current fleet are double-hull, consisting of 10 Aframax vessels and 11 Suezmax vessels.

 

Commercial management for our vessels is provided through our wholly-owned subsidiary, General Maritime Management LLC, and was provided through March 2007 by our indirect wholly-owned subsidiary, General Maritime Management (UK) LLC, which was formed in March 2003.

 

FLEET DEPLOYMENT

 

We strive to optimize the financial performance of our fleet by deploying our vessels on time charters and in the spot market. We believe that our fleet deployment strategy provides us with the ability to benefit from increases in tanker rates while at the same time maintaining a measure of stability through cycles in the industry. The following table details the percentage of our fleet operating on time charters and in the spot market during the past three years.

 

 

 

TIME CHARTER VS.SPOT MIX (as % of operating days)

 

 

 

 

YEAR ENDED DECEMBER 31,

 

 

 

2007

 

2006

 

2005

 

Percent in Time Charter Days

 

70.3

%

32.3

%

28.3

%

Percent in Spot Days

 

29.7

%

67.7

%

71.7

%

Total Vessel Operating Days

 

6,599

 

7,121

 

14,073

 

 

Vessels operating on time charters may be chartered for several months or years whereas vessels operating in the spot market typically are chartered for a single voyage that may last up to several weeks. Vessels operating in the spot market may generate increased profit margins during improvements in tanker rates, while vessels operating on time charters generally provide more predictable cash flows. Accordingly, we actively monitor macroeconomic trends and governmental rules and regulations that may affect tanker rates in an attempt to optimize the deployment of our fleet. Our current fleet of 21 vessels has 13 vessels on time charter contracts expiring on dates between August 2009 and February 2011 shown as follows:

 

Vessel

 

Vessel Type

 

Expiration Date

 

Daily Rate (1)

 

Genmar Ajax

 

Aframax

 

November 30, 2009

 

$

29,500

(2)

Genmar Argus

 

Suezmax

 

November 5, 2009

 

$

38,500

 

Genmar Defiance

 

Aframax

 

December 24, 2009

 

$

29,500

 

Genmar George T.

 

Suezmax

 

August 27, 2010

 

$

39,000

 

Genmar Harriet G.

 

Suezmax

 

June 1, 2010

 

$

38,000

 

Genmar Hope

 

Suezmax

 

August 11, 2009

 

$

36,500

 

Genmar Horn

 

Suezmax

 

November 22, 2009

 

$

38,500

 

Genmar Kara G.

 

Suezmax

 

June 1, 2010

 

$

38,000

 

Genmar Orion

 

Suezmax

 

June 1, 2010

 

$

38,000

 

Genmar Phoenix

 

Suezmax

 

October 31, 2009

 

$

38,500

 

Genmar Princess

 

Aframax

 

October 23, 2009

 

$

27,750

 

Genmar Spyridon

 

Suezmax

 

October 12, 2009

 

$

38,500

 

Genmar St. Nikolas

 

Suezmax

 

February 6, 2011

 

$

39,000

 

 


(1)           Before brokers’ commissions.

 

(2)           Rate is reduced to $25,000 per day on December 1, 2008.

 

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OPERATIONS AND SHIP MANAGEMENT

 

We employ experienced management in all functions critical to our operations, aiming to provide a focused marketing effort, tight quality and cost controls and effective operations and safety monitoring. Through our wholly owned subsidiaries, General Maritime Management LLC and General Maritime Management (Portugal) Lda, we currently provide the commercial and technical management necessary for the operations of most of our vessels, which include ship maintenance, officer staffing, crewing, technical support, shipyard supervision, and risk management services through our wholly owned subsidiaries.

 

In February 2006, we determined one technical management office outside the U.S. would adequately service our current fleet and as such decided to close our office in Piraeus, Greece, operated by General Maritime Management (Hellas) Ltd.  This office ceased its technical management activities in May 2006 and we anticipate that this office will be closed during 2008. The cost of closing this office, which we have classified as a component of general and administrative expense, is approximately $1.3 million, substantially attributable to employee severance costs.  All of these costs have been paid as of December 31, 2006

 

During February 2007, we decided to close General Maritime Management (UK) LLC, which provided commercial management services for our vessels, due to the higher percentage of our fleet that is on long-term time charter.  This office ceased its commercial management activities by March 31, 2007.  The cost of closing this office, which we classified as a component of general and administrative expense in February 2007, was approximately $0.2 million, substantially attributable to employee severance costs.  All of these costs resulted in cash expenditures.

 

Our crews inspect our vessels and perform ordinary course maintenance, both at sea and in port. We regularly inspect our vessels. We examine each vessel and make specific notations and recommendations for improvements to the overall condition of the vessel, maintenance of the vessel and safety and welfare of the crew. We have an in-house safety staff to oversee these functions and retain Admiral Robert North (Ret.), formerly of the U.S. Coast Guard, as a safety and security consultant.

 

The following services are performed by General Maritime Management LLC and General Maritime Management (Portugal) Lda:

 

·              supervision of routine maintenance and repair of the vessel required to keep each vessel in good and efficient condition, including the preparation of comprehensive drydocking specifications and the supervision of each drydocking;

 

·              oversight of maritime and environmental compliance with applicable regulations, including licensing and certification requirements, and the required inspections of each vessel to ensure that it meets the standards set forth by classification societies and applicable legal jurisdictions as well as our internal corporate requirements and the standards required by our customers;

 

·              engagement and provision of qualified crews (masters, officers, cadets and ratings) and attendance to all matters regarding discipline, wages and labor relations;

 

·              arrangement to supply the necessary stores and equipment for each vessel; and

 

·              continual monitoring of fleet performance and the initiation of necessary remedial actions to ensure that financial and operating targets are met.

 

Our chartering staff, which is located in New York City, monitors fleet operations, vessel positions and spot market voyage charter rates worldwide. We believe that monitoring this information is critical to making informed bids on competitive brokered charters.

 

CREWING AND EMPLOYEES

 

As of December 31, 2007, we employed approximately 90 office personnel. Approximately 47 of these employees manage the commercial operations of our business, and are located in New York City. We have 32 employees located in Lisbon, Portugal, who manage the technical operations of our business, and are subject to a local company employment collective bargaining agreement which covers the main terms and conditions of their employment.  We have ten employees who

 

6



 

procure crews for our vessels, three of which are located in Novorossiysk, Russia and seven of which are located in Mumbai, India.  We also have one employee located in Piraeus, Greece who is subject to Greece’s national employment collective bargaining agreement which covers terms and conditions of her employment.

 

As of December 31, 2007, we employed approximately 483 seaborne personnel to crew our fleet of 20 vessels and our Suezmax tanker delivered in February 2008, who are  staffed by our offices in India, Russia and Portugal.

 

We place great emphasis on attracting qualified crew members for employment on our vessels. Recruiting qualified senior officers has become an increasingly difficult task for vessel operators. We pay competitive salaries and provide competitive benefits to our personnel. We believe that the well-maintained quarters and equipment on our vessels help to attract and retain motivated and qualified seamen and officers. Our crew management services contractors have collective bargaining agreements that cover all the junior officers and seamen whom they provide to us.

 

CUSTOMERS

 

Our customers include most oil companies, as well as oil producers, oil traders, vessel owners and others. During the year ended December 31, 2007, Lukoil Oil Company accounted for approximately 39.5% of our voyage revenues.  During the years ended December 31, 2006 and 2005, no single customer accounted for more than 10% of our voyage revenues.

 

COMPETITION

 

International seaborne transportation of crude oil and other petroleum products is provided by two main types of operators: fleets owned by independent companies and fleets operated by oil companies (both private and state-owned). Many oil companies and other oil trading companies, the primary charterers of the vessels we own, also operate their own vessels and transport oil for themselves and third party charterers in direct competition with independent owners and operators. Competition for charters is intense and is based upon price, vessel location, the size, age, condition and acceptability of the vessel, and the quality and reputation of the vessel’s operator.

 

We compete principally with other Aframax and Suezmax owners. However, competition in the Aframax and Suezmax markets is also affected by the availability of alternative size vessels. Panamax size vessels can compete for some of the same charters for which we compete. Because Ultra Large Crude Carriers (ULCCs) and Very Large Crude Carriers (VLCCs) cannot enter the ports we serve due to their large size, they rarely compete directly with our vessels for specific charters.

 

Other significant operators of multiple Aframax and Suezmax vessels in the Atlantic basin include American Eagle Tankers Inc. Limited, Frontline, Ltd., Overseas Shipholding Group, Inc., Teekay Shipping Corporation and Tsakos Energy Navigation. There are also numerous, smaller vessel operators in the Atlantic basin.

 

INSURANCE

 

The operation of any ocean-going vessel carries an inherent risk of catastrophic marine disasters and property losses caused by adverse weather conditions, mechanical failures, human error, war, terrorism and other circumstances or events. In addition, the transportation of crude oil is subject to the risk of spills, and business interruptions due to political circumstances in foreign countries, hostilities, labor strikes and boycotts. The U.S. Oil Pollution Act of 1990, or OPA has made liability insurance more expensive for ship owners and operators imposing potentially unlimited liability upon owners, operators and bareboat charterers for oil pollution incidents in the territorial waters of the United States. We believe that our current insurance coverage is adequate to protect us against the principal accident-related risks that we face in the conduct of our business.

 

Our protection and indemnity insurance, or P&I insurance, covers third-party liabilities and other related expenses from, among other things, injury or death of crew, passengers and other third parties, claims arising from collisions, damage to cargo and other third-party property and pollution arising from oil or other substances. Our current P&I insurance coverage for pollution is the maximum commercially available amount of $1.0 billion per tanker per incident and is provided by mutual protection and indemnity associations. Each of the vessels currently in our fleet is entered in a protection and indemnity association which is a member of the International Group of Protection and Indemnity Mutual Assurance Associations. The 13 protection and indemnity 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 protection and indemnity association has capped its exposure to this pooling agreement at $4.3 billion. As a member of protection and indemnity associations, which are, in turn, members 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 protection and indemnity associations comprising the International Group.

 

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Our hull and machinery insurance covers actual or constructive total loss from covered risks of collision, fire, heavy weather, grounding and engine failure or damages from same. Our war risk insurance covers risks of confiscation, seizure, capture, vandalism, sabotage and other war-related risks. Our loss-of-hire insurance covers loss of revenue for up to 90 days resulting from vessel off hire for each of our vessels, with a 20 day deductible.

 

ENVIRONMENTAL REGULATION AND OTHER REGULATIONS

 

Government regulations and laws significantly affect the ownership and operation of our tankers.  We are subject to various international conventions, laws and regulations in force in the countries in which our vessels may operate or are registered.

 

A variety of government, quasi-governmental and private organizations subject our tankers to both scheduled and unscheduled inspections.  These organizations include the local port authorities, national authorities, harbor masters or equivalent, classification societies, flag state and charterers, particularly terminal operators and oil companies.  Some of these entities require us to obtain permits, licenses and certificates for the operation of our tankers.  Our failure to maintain necessary permits or approvals could require us to incur substantial costs or temporarily suspend operation of one or more of the vessels in our fleet.

 

We believe that the heightened levels of environmental and quality concerns among insurance underwriters, regulators and charterers have led 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 tankers that conform to the stricter environmental standards.  We are required to maintain operating standards for all of our vessels that emphasize operational safety, quality maintenance, continuous training of our officers and crews and compliance with applicable local, national and international environmental laws and regulations.  We believe that the operation of our vessels is in substantial compliance with applicable environmental laws and regulations and that our vessels have all material permits, licenses, certificates or other authorizations necessary for the conduct of our operations; however, because such laws and regulations are frequently changed and may impose increasingly stricter requirements, 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 tankers.  In addition, a future serious marine incident that results in significant oil pollution or otherwise causes significant adverse environmental impact could result in additional legislation or regulation that could negatively affect our profitability.

 

International Maritime Organization

 

The International Maritime Organization, or IMO (the United Nations agency for maritime safety and the prevention of pollution by ships), has adopted the International Convention for the Prevention of Marine Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto, which has been updated through various amendments, or the MARPOL Convention. The MARPOL Convention implements environmental standards including oil leakage or spilling, garbage management, as well as the handling and disposal of noxious liquids, harmful substances in packaged forms, sewage and air emissions. These regulations, which have been implemented in many jurisdictions in which our vessels operate, provide, in part, that:

 

·      25-year old tankers must be of double hull construction or of a mid-deck design with double-sided construction, unless:

 

(1)          they have wing tanks or double-bottom spaces not used for the carriage of oil which cover at least 30% of the length of the cargo tank section of the hull or bottom; or

 

(2)          they are capable of hydrostatically balanced loading (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);

 

·      30-year old tankers must be of double hull construction or mid-deck design with double-sided construction; and

·      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:

 

·      is the subject of a contract for a major conversion or original construction on or after July 6, 1993;

·      commences a major conversion or has its keel laid on or after January 6, 1994; or

·      completes a major conversion or is a newbuilding delivered on or after July 6, 1996.

 

Our vessels are also subject to regulatory requirements, including the phase-out of single hull tankers, imposed by the IMO. Effective September 2002, the IMO accelerated its existing timetable for the phase-out of single hull oil tankers. At that time, these regulations required 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. We do not currently own any single hull vessels.

 

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Under the regulations, the flag state may allow for some newer single hull ships registered in its country that conform to certain technical specifications to continue operating until the 25th anniversary of their delivery. Any port state, however, may deny entry of those single hull tankers that are allowed to operate until their 25th anniversary to ports or offshore terminals. These regulations have been adopted by over 150 nations, including many of the jurisdictions in which our tankers operate.

 

As a result of the oil spill in November 2002 relating to the loss of the MT Prestige, which was owned by a company not affiliated with us, in December 2003, the Marine Environmental Protection Committee of the IMO, or MEPC, adopted an amendment to the MARPOL Convention, which became effective in April 2005. The amendment revised an existing regulation 13G accelerating the phase-out of single hull oil tankers and adopted a new regulation 13H on the prevention of oil pollution from oil tankers when carrying heavy grade oil. Under the revised regulation, single hull oil tankers were required to be phased out no later than April 5, 2005 or the anniversary of the date of delivery of the ship on the date or in the year specified in the following table:

 

Category of Oil Tankers

 

Date or Year for Phase Out

Category 1 oil tankers of 20,000 dwt and above carrying crude oil, fuel oil, heavy diesel oil or lubricating oil as cargo, and of 30,000 dwt and above carrying other oils, which do not comply with the requirements for protectively located segregated ballast tanks

 

 

 

April 5, 2005 for ships delivered on April 5, 1982 or earlier; or
2005 for ships delivered after April 5, 1982

 

Category 2 - oil tankers of 20,000 dwt and above carrying crude oil, fuel oil, heavy diesel oil or lubricating oil as cargo, and of 30,000 dwt and above carrying other oils, which do comply with the protectively located segregated ballast tank requirements

 

and

 

Category 3 - oil tankers of 5,000 dwt and above but less than the tonnage specified for Category 1 and 2 tankers.

 

 

 

 

April 5, 2005 for ships delivered on April 5, 1977 or
earlier

2005 for ships delivered after April 5, 1977 but before January 1, 1978
2006 for ships delivered in 1978 and 1979
2007 for ships delivered in 1980 and 1981
2008 for ships delivered in 1982
2009 for ships delivered in 1983
2010 for ships delivered in 1984 or later

 

Under the revised regulations, a flag state may permit continued operation of certain Category 2 or 3 tankers beyond the phase out date set forth in the above schedule.  Under regulation 13G, the flag state may allow for some newer single hull oil tankers registered in its country that conform to certain technical specifications to continue operating until the earlier of the anniversary of the date of delivery of the vessel in 2015 or the 25th anniversary of their delivery.  Under regulation 13G and 13H, as described below, certain Category 2 and 3 tankers fitted with double bottoms or double sides may be allowed by the flag state to continue operations until their 25th anniversary of delivery.  Any port state, however, may deny entry of those single hull oil tankers that are allowed to operate under any of the flag state exemptions.

 

In October 2004, the MEPC adopted a unified interpretation of regulation 13G that clarified the delivery date for converted tankers.  Under the interpretation, where an oil tanker has undergone a major conversion that has resulted in the replacement of the fore-body, including the entire cargo carrying section, the major conversion completion date shall be deemed to be the date of delivery of the ship, provided that:

 

·      the oil tanker conversion was completed before July 6, 1996;

·      the conversion included the replacement of the entire cargo section and fore-body and the tanker complies with all the relevant provisions of MARPOL Convention applicable at the date of completion of the major conversion; and

·      the original delivery date of the oil tanker will apply when considering the 15 years of age threshold relating to the first technical specifications survey to be completed in accordance with MARPOL Convention.

 

In December 2003, the MEPC adopted a new regulation 13H on the prevention of oil pollution from oil tankers when carrying heavy grade oil, or HGO, which includes most of the grades of marine fuel.  The new regulation bans the carriage of HGO in single hull oil tankers of 5,000 dwt and above after April 5, 2005, and in single hull oil tankers of 600 dwt and above but less than 5,000 dwt, no later than the anniversary of their delivery in 2008.

 

Under regulation 13H, HGO means any of the following:

 

·      crude oils having a density at 15ºC higher than 900 kg/m3;

 

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·      fuel oils having either a density at 15ºC higher than 900 kg/m3 or a kinematic viscosity at 50ºC higher than 180 mm2/s; or

·      bitumen, tar and their emulsions.

 

Under the regulation 13H, the flag state may allow continued operation of oil tankers of 5,000 dwt and above, carrying crude oil with a density at 15ºC higher than 900 kg/m3 but lower than 945 kg/m3, that conform to certain technical specifications and, in the opinion of the such flag state, the ship is fit to continue such operation, having regard to the size, age, operational area and structural conditions of the ship and provided that the continued operation shall not go beyond the date on which the ship reaches 25 years after the date of its delivery.  The flag state may also allow continued operation of a single hull oil tanker of 600 dwt and above but less than 5,000 dwt, carrying HGO as cargo, if, in the opinion of the such flag state, the ship is fit to continue such operation, having regard to the size, age, operational area and structural conditions of the ship, provided that the operation shall not go beyond the date on which the ship reaches 25 years after the date of its delivery.

 

The flag state may also exempt an oil tanker of 600 dwt and above carrying HGO as cargo if the ship is either engaged in voyages exclusively within an area under the its jurisdiction, or is engaged in voyages exclusively within an area under the jurisdiction of another party, provided the party within whose jurisdiction the ship will be operating agrees.  The same applies to vessels operating as floating storage units of HGO.

 

Any port state, however, can deny entry of single hull tankers carrying HGO which have been allowed to continue operation under the exemptions mentioned above, into the ports or offshore terminals under its jurisdiction, or deny ship-to-ship transfer of HGO in areas under its jurisdiction except when this is necessary for the purpose of securing the safety of a ship or saving life at sea.

 

Revised Annex I to the MARPOL Convention entered into force in January 2007.  Revised Annex I incorporates various amendments adopted since the MARPOL Convention entered into force in 1983, including the amendments to regulation 13G (regulation 20 in the revised Annex) and regulation 13H (regulation 21 in the revised Annex).  Revised Annex I also imposes construction requirements for oil tankers delivered on or after January 1, 2010.  A further amendment to revised Annex I includes an amendment to the definition of heavy grade oil that will broaden the scope of regulation 21.  On August 1, 2007, regulation 12A (an amendment to Annex I) came into force requiring oil fuel tanks to be located inside the double hull in all ships with an aggregate oil fuel capacity of 600 m3 and above, which are delivered on or after August 1, 2010 including ships for which the building contract is entered into on or after August 1, 2007 or, in the absence of a contract, which keel is laid on or after February 1, 2008.

 

Air Emissions

 

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 May 19, 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. We believe that all our vessels are currently compliant in all material respects with these regulations. Additional or new conventions, laws and regulations may be adopted that could adversely affect our business, cash flows, results of operations and financial condition.

 

In February 2007, the United States proposed a series of amendments to Annex VI regarding particulate matter, NOx and SOx emission standards.  The proposed emission program would reduce air pollution from ships by establishing a new tier of performance-based standards for diesel engines on all vessels and stringent emission requirements for ships that operate in coastal areas with air-quality problems.  On June 28, 2007, the World Shipping Council announced its support for these amendments.  If these amendments are implemented, we may incur costs to comply with the proposed standards.

 

Safety Requirements

 

The IMO has also adopted the International Convention for the Safety of Life at Sea, or SOLAS Convention, and the International Convention on Load Lines, 1966, or LL Convention, which impose a variety of standards to regulate design and operational features of ships. SOLAS Convention and LL Convention standards are revised periodically. We believe that all our vessels are in substantial compliance with SOLAS Convention and LL Convention standards.

 

Under Chapter IX of SOLAS, the requirements contained in the International Safety Management Code for the Safe Operation of Ships and for Pollution Prevention, 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 intend to rely upon the safety management system that we have developed.

 

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The ISM Code requires that vessel operators obtain a safety management certificate for each vessel they operate. This certificate evidences compliance by a vessel’s management with code requirements for a safety management system. No vessel can obtain a certificate unless its manager has been awarded a document of compliance, issued by each flag state, under the ISM Code. We have obtained documents of compliance for our offices and safety management certificates for all of our vessels for which the certificates are required by the IMO. As required, we renew these documents of compliance and safety management certificates annually.

 

Noncompliance with the ISM Code and other IMO regulations may subject the shipowner or bareboat charterer to increased liability, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports. The U.S. Coast Guard and European Union authorities have indicated that vessels not in compliance with the ISM Code by the applicable deadlines will be prohibited from trading in U.S. and European Union ports, as the case may be.

 

The IMO 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.

 

Ballast Water Requirements

 

The IMO adopted an International Convention for the Control and Management of Ships’ Ballast Water and Sediments, or the BWM Convention, in February 2004. The BWM Convention’s implementing regulations call for a phased introduction of mandatory ballast water exchange requirements (beginning in 2009), to be replaced in time with mandatory concentration limits. The BWM Convention will not enter into force until 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the world’s merchant shipping.

 

The flag state, as defined by the United Nations Convention on Law of the Sea, has overall responsibility for the implementation and enforcement of international maritime regulations for all ships granted the right to fly its flag. The “Shipping Industry Guidelines on Flag State Performance” evaluates flag states based on factors such as sufficiency of infrastructure, ratification of international maritime treaties, implementation and enforcement of international maritime regulations, supervision of surveys, casualty investigations and participation at IMO meetings.

 

Oil Pollution Liability

 

Although the United States is not a party to these conventions, many countries have ratified and follow the liability plan adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage of 1969, as amended in 2000, or the CLC. Under this convention and depending on whether the country in which the damage results is a party to the 1992 Protocol to the CLC, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain complete defenses.  The limits on liability outlined in the 1992 Protocol use the International Monetary Fund currency unit of Special Drawing Rights, or SDR. Under an amendment to the 1992 Protocol that became effective on November 1, 2003, for vessels of 5,000 to 140,000 gross tons (a unit of measurement for the total enclosed spaces within a vessel), liability will be limited to approximately 4.51 million SDR plus 631 SDR for each additional gross ton over 5,000. For vessels of over 140,000 gross tons, liability will be limited to 89.77 million SDR.  The exchange rate between SDRs and U.S. dollars was 0.632251 SDR per U.S. dollar on January 17, 2008. The right to limit liability is forfeited under the International Convention on Civil Liability for Oil Pollution Damage where the spill is caused by the owner’s actual fault and under the 1992 Protocol where the spill is caused by the owner’s intentional or reckless conduct. Vessels trading to states that are parties to these conventions must provide evidence of insurance covering the liability of the owner. In jurisdictions where the International Convention on Civil Liability for Oil Pollution Damage has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or in a manner similar to that convention. We believe that our P&I insurance will cover the liability under the plan adopted by the IMO.

 

In 2005, the European Union adopted a directive on ship-source pollution, imposing criminal sanctions for intentional, reckless or negligent pollution discharges by ships.  The directive could result in criminal liability for pollution from vessels in waters of European countries that adopt implementing legislation.  Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims.

 

United States Requirements

 

In 1990, the United States Congress enacted OPA to establish 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 United States or its territories or possessions, or whose vessels operate in the waters of the United States, which include the U.S. territorial sea and the 200 nautical mile exclusive economic zone around the United States. The Comprehensive Environmental Response,

 

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Compensation and Liability Act, or CERCLA, imposes liability for cleanup and natural resource damage from the release of hazardous substances (other than oil) whether on land or at sea. Both OPA and CERCLA impact our operations.

 

Under OPA, vessel owners, operators and bareboat charterers are responsible parties who are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from oil spills from their vessels. These other damages are defined broadly to include:

 

·                  natural resource damages and related assessment costs;

·                  real and personal property damages;

·                  net loss of taxes, royalties, rents, profits or earnings capacity;

·                  net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards; and loss of subsistence use of natural resources.

 

OPA previously limited the liability of responsible parties to the greater of $1,200 per gross ton or $10.0 million per tanker that is over 3,000 gross tons (subject to possible adjustment for inflation). Amendments to OPA signed into law in July 2006 increased these limits on the liability of responsible parties to the greater of $1,900 per gross ton or $16.0 million per double hull tanker that is over 3,000 gross tons.  The act specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for discharge of pollutants within their waters. In some cases, states which have enacted this type of legislation have not yet issued implementing regulations defining tanker owners’ responsibilities under these laws. CERCLA, which applies to owners and operators of vessels, contains a similar liability regime and provides for cleanup, removal and natural resource damages. Liability under CERCLA is limited to the greater of $300 per gross ton or $5.0 million.

 

These limits of liability do not apply, however, where the incident is caused by violation of applicable U.S. federal safety, construction or operating regulations, or by the responsible party’s gross negligence or willful misconduct. These limits do not apply if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with the substance removal activities. OPA and CERCLA each preserve the right to recover damages under existing law, including maritime tort law. We believe that we are in substantial compliance with OPA, CERCLA and all applicable state regulations in the ports where our vessels 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 the act. The U.S. Coast Guard has enacted regulations requiring evidence of financial responsibility in the amount of $1,500 per gross ton for tankers, coupling the former OPA limitation on liability of $1,200 per gross ton with the CERCLA liability limit of $300 per gross ton. The U.S. Coast Guard has indicated that it expects to adopt regulations requiring evidence of financial responsibility in amounts that reflect the higher limits of liability imposed by the July 2006 amendments to OPA, as described above.  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 is 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 strict liability under OPA and CERCLA. We have provided such evidence and received certificates of financial responsibility from the U.S. Coast Guard for each of our vessels required to have one.

 

We insure each of our vessels with pollution liability insurance in the maximum commercially available amount of $1.0 billion. A catastrophic spill could exceed the insurance coverage available, which could have a material adverse effect on our business.

 

Under OPA, with certain limited exceptions, all newly-built or converted vessels operating in U.S. waters must be built with double hulls, and existing vessels that do not comply with the double hull requirement will be prohibited from trading in U.S. waters over a 20-year period (1995-2015) based on size, age and place of discharge, unless retrofitted with double hulls. Our current fleet of 21 vessels are all of double hull construction.

 

Owners or operators of tankers operating in the waters of the United States must file vessel response plans with the U.S. Coast Guard, and their tankers are required to operate in compliance with their U.S. Coast Guard approved plans.  These response plans must, among other things:

 

·                  address a worst case scenario and identify and ensure, through contract or other approved means, the availability of necessary private response resources to respond to a worst case discharge;

·                  describe crew training and drills; and

·                  identify a qualified individual with full authority to implement removal actions.

 

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We have obtained vessel response plans approved by the U.S. Coast Guard for our vessels operating in the waters of the United States. In addition, the U.S. Coast Guard has announced it intends to propose similar regulations requiring certain vessels to prepare response plans for the release of hazardous substances.

 

In addition, the United States Clean Water Act prohibits the discharge of oil or hazardous substances in United States navigable waters and imposes strict liability in the form of penalties for unauthorized discharges.  The Clean Water Act also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA and CERCLA, discussed above.  The United States Environmental Protection Agency, or EPA, has exempted the discharge of ballast water and other substances incidental to the normal operation of vessels in U.S. ports from Clean Water Act permitting requirements.  However, on March 31, 2005, a U.S. District Court ruled that the EPA exceeded its authority in creating an exemption for ballast water.  On September 18, 2006, the court issued an order invalidating the exemption in EPA’s regulations for all discharges incidental to the normal operation of a vessel as of September 30, 2008, and directing the EPA to develop a system for regulating all discharges from vessels by that date.  The EPA filed a notice of appeal of this decision and, if the EPA’s appeals are unsuccessful and the exemption is repealed, our vessels may be subject to Clean Water Act permit requirements that could include ballast water treatment obligations that could increase the cost of operating in the United States.  For example, this could require the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost, and/or otherwise restrict our vessels from entering U.S. waters.  On June 21, 2007, the EPA provided notice of its intention to develop a permit program for discharge of ballast water incidental to the normal operations of vessels and solicited comments.

 

Other Regulations

 

In July 2003, in response to the MT Prestige oil spill in November 2002, the European Union adopted legislation that prohibits all single hull tankers from entering into its ports or offshore terminals by 2010. The European Union has also banned all single hull tankers carrying heavy grades of oil from entering or leaving its ports or offshore terminals or anchoring in areas under its jurisdiction. Commencing in 2005, certain single hull tankers above 15 years of age will also be restricted from entering or leaving European Union ports or offshore terminals and anchoring in areas under European Union jurisdiction. The European Union has also adopted legislation that would: (1) ban manifestly sub-standard vessels (defined as those over 15 years old that have been detained by port authorities at least twice in a six month period) from European waters and create an obligation of port states to inspect vessels posing a high risk to maritime safety or the marine environment; and (2) provide the European Union with greater authority and control over classification societies, including the ability to seek to suspend or revoke the authority of negligent societies. The sinking of the MT Prestige and resulting oil spill in November 2002 has led to the adoption of other environmental regulations by certain European Union nations, which could adversely affect the remaining useful lives of all of our vessels and our ability to generate income from them. It is impossible to predict what legislation or additional regulations, if any, may be promulgated by the European Union or any other country or authority.

 

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.

 

The U.S. Clean Air Act of 1970, as amended by the Clean Air Act Amendments of 1977 and 1990, or the CAA, requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Our vessels are subject to vapor control and recovery requirements for certain cargoes when loading, unloading, ballasting, cleaning and conducting other operations in regulated port areas.  Our vessels that operate in such port areas with restricted cargoes are equipped with vapor recovery systems that satisfy these requirements.  The CAA also requires states to draft State Implementation Plans, or SIPs, designed to attain national health-based air quality standards in primarily major metropolitan and/or industrial areas. Several SIPs regulate emissions resulting from vessel loading and unloading operations by requiring the installation of vapor control equipment. As indicated above, our vessels operating in covered port areas are already equipped with vapor recovery systems that satisfy these requirements. Although a risk exists that new regulations could require significant capital expenditures and otherwise increase our costs, based on the regulations that have been proposed to date, we believe that no material capital expenditures beyond those currently contemplated and no material increase in costs are likely to be required.

 

The U.S. National Invasive Species Act, or NISA, was enacted in 1996 in response to growing reports of harmful organisms being released into U.S. ports through ballast water taken on by ships in foreign ports.  The United States Coast Guard adopted regulations under NISA in July 2004 that impose mandatory ballast water management practices for all vessels equipped with ballast water tanks entering U.S. waters.  These requirements can be met by performing mid-ocean ballast exchange, by retaining ballast water on board the ship, or by using environmentally sound alternative ballast water management methods approved by the United States Coast Guard.  (However, mid-ocean ballast exchange is mandatory for

 

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ships heading to the Great Lakes or Hudson Bay, or vessels engaged in the foreign export of Alaskan North Slope crude oil.) Mid-ocean ballast exchange is the primary method for compliance with the United States Coast Guard regulations, since holding ballast water can prevent ships from performing cargo operations upon arrival in the United States, and alternative methods are still under development. Vessels that are unable to conduct mid-ocean ballast exchange due to voyage or safety concerns may discharge minimum amounts of ballast water (in areas other than the Great Lakes and the Hudson River), provided that they comply with recordkeeping requirements and document the reasons they could not follow the required ballast water management requirements. The United States Coast Guard is developing a proposal to establish ballast water discharge standards, which could set maximum acceptable discharge limits for various invasive species, and/or lead to requirements for active treatment of ballast water.

 

Our operations occasionally generate and require the transportation, treatment and disposal of both hazardous and non-hazardous solid wastes that are subject to the requirements of the U.S. Resource Conservation and Recovery Act, or RCRA, or comparable state, local or foreign requirements. In addition, from time to time we arrange for the disposal of hazardous waste or hazardous substances at offsite disposal facilities. If such materials are improperly disposed of by third parties, we may still be held liable for clean up costs under applicable laws.

 

Recent scientific studies have suggested that emissions of certain gasses, commonly referred to as “greenhouse gasses,” may be contributing to warming of the Earth’s atmosphere.  According to the IMO’s study of greenhouse gasses emissions from the global shipping fleet, greenhouse emissions from ships are predicted to rise by 38% to 72% due to increased bunker consumption by 2020 if corrective measures are not implemented.  Any passage of climate control legislation or other regulatory initiatives by the IMO or individual countries were we operate that restrict emissions of greenhouse gases could require us to make significant financial expenditures we cannot predict with certainty at this time.

 

Vessel Security Regulations

 

Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002, the U.S. Maritime Transportation Security Act of 2002, or MTSA, came into effect. To implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. Similarly, in December 2002, amendments to SOLAS created a new chapter of the convention dealing specifically with maritime security. The new chapter became effective in July 2004 and imposes various detailed security obligations on vessels and port authorities, most of which are contained in the International Ship and Port Facilities Security Code, or the ISPS Code. The ISPS Code is designed to protect ports and international shipping against terrorism. After July 1, 2004, to trade internationally, a vessel must attain an International Ship Security Certificate from a recognized security organization approved by the vessel’s flag state. Among the various requirements are:

 

·                  on-board installation of automatic identification systems to provide a means for the automatic transmission of safety-related information from among similarly equipped ships and shore stations, including information on a ship’s identity, position, course, speed and navigational status;

·                  on-board installation of ship security alert systems, which do not sound on the vessel but only alerts the authorities on shore;

·                  the development of vessel security plans;

·                  ship identification number to be permanently marked on a vessel’s hull;

·                  a continuous synopsis record kept onboard showing a vessel’s history including, name of the ship and of the state whose flag the ship is entitled to fly, the date on which the ship was registered with that state, the ship’s identification number, the port at which the ship is registered and the name of the registered owner(s) and their registered address; and

·                  compliance with flag state security certification requirements.

 

The U.S. Coast Guard regulations, intended to align with international maritime security standards, exempt from MTSA vessel security measures non-U.S. vessels that have on board, as of July 1, 2004, a valid ISSC attesting to the vessel’s compliance with SOLAS security requirements and the ISPS Code. We have implemented the various security measures addressed by MTSA, SOLAS and the ISPS Code, and our fleet is in compliance with applicable security requirements.

 

Inspection by Classification Societies

 

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.

 

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The classification society also undertakes on request other surveys and checks that are required by regulations and requirements of the flag state. These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned.

 

For maintenance of the class, regular and extraordinary surveys of hull, machinery, including the electrical plant, and any special equipment classed are required to be performed as follows:

 

·                  Annual Surveys. For seagoing ships, annual surveys are conducted for the hull and the machinery, including the electrical plant and where applicable for special equipment classed, at intervals of 12 months from the date of commencement of the class period indicated in the certificate.

 

·                  Intermediate Surveys. Extended annual surveys are referred to as intermediate surveys and typically are conducted two and one-half years after commissioning and each class renewal. Intermediate surveys may be carried out on the occasion of the second or third annual survey.

 

·                  Class Renewal Surveys. Class renewal surveys, also known as special surveys, are carried out for the ship’s hull, machinery, including the electrical plant and for any special equipment classed, at the intervals indicated by the character of classification for the hull. At the special survey the vessel is thoroughly examined, including audio-gauging to determine the thickness of the steel structures. Should the thickness be found to be less than class requirements, the classification society would prescribe steel renewals. The classification society may grant a one year grace period for completion of the special survey. Substantial amounts of money may have to be spent for steel renewals to pass a special survey if the vessel experiences excessive wear and tear. In lieu of the special survey every four or five years, depending on whether a grace period was granted, a ship owner 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 drydocked every 30 to 36 months for inspection of the underwater parts and for repairs related to inspections. If any defects are found, the classification surveyor will issue a recommendation which must be rectified by the ship owner within prescribed time limits.

 

Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as “in-class” by a classification society which is a member of the International Association of Classification Societies. All our vessels are certified as being “in-class” by Det Norske Veritas. All new and secondhand vessels that we purchase must be certified prior to their delivery under our standard purchase contracts and memoranda of agreement. If the vessel is not certified on the scheduled date of closing, we have no obligation to take delivery of the vessel.

 

In addition to the classification inspections, many of our customers regularly inspect our vessels as a precondition to chartering them for voyages. We believe that our well-maintained, high-quality vessels provide us with a competitive advantage in the current environment of increasing regulation and customer emphasis on quality.

 

ITEM 1A. RISK FACTORS

 

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

 

This annual report on Form 10-K contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and observations. Included among the factors that, in our view, could cause actual results to differ materially from the forward looking statements contained in this annual report on Form 10-K are the following: (i) loss or reduction in business from our significant customers; (ii) the failure of our significant customers to perform their obligations owed to us; (iii) changes in demand; (iv) a material decline or prolonged weakness in rates in the tanker market; (v) changes in production of or demand for oil and petroleum products, generally or in particular regions; (vi) greater than anticipated levels of tanker newbuilding orders or lower than anticipated rates of tanker scrapping; (vii) changes in rules and regulations applicable to the tanker industry, including, without limitation, legislation adopted by international organizations such as the International Maritime Organization and the European Union or by individual countries; (viii) actions taken by regulatory

 

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authorities; (ix) changes in trading patterns significantly impacting overall tanker tonnage requirements; (x) changes in the typical seasonal variations in tanker charter rates; (xi) changes in the cost of other modes of oil transportation; (xii) changes in oil transportation technology; (xii) increases in costs including without limitation: crew wages, insurance, provisions, repairs and maintenance; (xiv) changes in general domestic and international political conditions; (xv) changes in the condition of our vessels or applicable maintenance or regulatory standards (which may affect, among other things, our anticipated drydocking or maintenance and repair costs); (xvi) changes in the itineraries of the Company’s vessels; (xvii) adverse changes in foreign currency exchange rates affecting our expenses; and other factors listed from time to time in our filings with the Securities and Exchange Commission.

 

Our ability to pay dividends in any period will depend upon factors including applicable provisions of Marshall Islands law and the final determination by the Board of Directors each quarter after its review of our financial performance. The timing and amount of dividends, if any, could also be affected by factors affecting cash flows, results of operations, required capital expenditures, or reserves. As a result, the amount of dividends actually paid may vary from the amounts currently estimated.

 

We face a variety of risks that are substantial and inherent in our business, including market, financial, operational, legal and regulatory risks.  Below, we have described certain important risks that could affect our business.  These risks and other information included in this report should be carefully considered.  If any of these risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected and the trading price of our common stock could decline.

 

RISK FACTORS RELATED TO OUR BUSINESS & OPERATIONS

 

The cyclical nature of the tanker industry may lead to volatility in charter rates and vessel values which may adversely affect our earnings.

 

If the tanker market, which has been cyclical, is depressed in the future, our earnings and available cash flow may decrease. Our ability to employ our vessels profitably will depend upon, among other things, economic conditions in the tanker market. Fluctuations in charter rates and tanker values result from changes in the supply and demand for tanker capacity and changes in the supply and demand for petroleum and petroleum products.

 

The factors affecting the supply and demand for tankers are outside of our control, and the nature, timing and degree of changes in industry conditions are unpredictable.

 

The factors that influence demand for tanker capacity include:

 

·                  demand for and supply of petroleum and petroleum products,

 

·                  regional availability of refining capacity,

 

·                  environmental and other regulatory developments,

 

·                  global and regional economic conditions,

 

·                  the distance petroleum and petroleum products are to be moved by sea, and

 

·                  changes in seaborne and other transportation patterns.

 

The factors that influence the supply of tanker capacity include:

 

·                  the number of newbuilding deliveries,

 

·                  the scrapping rate of older vessels,

 

·                  conversion of tankers to other uses,

 

·                  the number of vessels that are out of service, and

 

·                  environmental concerns and regulations.

 

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Historically, the tanker markets have been volatile as a result of the many conditions and factors that can affect the price, supply and demand for tanker capacity. Changes in demand for transportation of oil over longer distances and supply of tankers to carry that oil may materially affect our revenues, profitability and cash flows.

 

Charter rates for vessels are at levels that remain high relative to historic levels and may decrease in the future, which may adversely affect our earnings and ability to pay dividends.

 

Charter rates in the tanker industry recently have been near historically high levels.  We anticipate that future demand for our vessels, and in turn our future charter rates, will be affected by the rate of economic growth in the world’s economy as well as seasonal and regional changes in demand and changes in the capacity of the world’s fleet.  If the tanker industry, which has been highly cyclical, is depressed in the future when our charters expire or at a time when we may want to sell a vessel, our earnings and available cash flow may be adversely affected. We cannot assure you that we will be able to successfully charter our vessels in the future or renew our existing charters at rates sufficient to allow us to operate our business profitably, meet our obligations including payment of debt service to our lenders or to pay dividends to our shareholders. Our ability to renew the charters on our vessels on the expiration or termination of our current charters, the charter rates payable under any replacement charters and vessel values will depend upon, among other things, economic conditions in the tanker industry at that time, changes in the supply and demand for vessel capacity and changes in the supply and demand for the seaborne transportation of crude oil.

 

An over supply of new vessels may adversely affect charter rates and vessel values.

 

If the number of new ships delivered exceeds the number of tankers being scrapped and lost, tanker capacity will increase.  In addition, according to Clarkson Research Studies Ltd., the total newbuilding order books for Suezmax vessels and Aframax vessels scheduled to enter the fleet through 2012 currently equals 40.4% and 41.2%, respectively, of the existing fleets and we cannot assure you that the order books will not increase further in proportion to the existing fleets.  If the supply of tanker capacity increases and the demand for tanker capacity does not increase correspondingly, charter rates could materially decline and the value of our vessels could be adversely affected.

 

Our revenues may be adversely affected if we do not successfully employ our vessels.

 

We seek to deploy our vessels between spot market voyage charters and time charters in a manner that maximizes long-term cash flow. Currently, 13 of our vessels are contractually committed to time charters, with the remaining terms of these charters expiring on dates between August 2009 and August 2010. Although these time charters generally provide stable revenues, they also limit the portion of our fleet available for spot market voyages during an upswing in the tanker industry cycle, when spot market voyages might be more profitable.

 

We earned approximately 27% of our net voyage revenue from spot charters for the year ended December 31, 2007.  The spot charter market is highly competitive, and spot market voyage charter rates may fluctuate dramatically based primarily on the worldwide supply of tankers available in the market for the transportation of oil and the worldwide demand for the transportation of oil by tanker. Factors affecting the volatility of spot market voyage charter rates include the quantity of oil produced globally, shifts in locations where oil is produced or consumed, actions by OPEC, the general level of worldwide economic activity and the development and use of alternative energy sources. We cannot assure you that future spot market voyage charters will be available at rates that will allow us to operate our vessels profitably.

 

We receive a significant portion of our revenues from a single customer, and any decrease in the amount of business it or any other significant customer transacts with us could materially and adversely affect our cash flows and profitability.

 

We derive a significant portion of our voyage revenues from time charters by a our single largest customer, Lukoil Oil Company, or Lukoil.  During the year ended December 31, 2007, Lukoil accounted for 39.5% of our voyage revenues and we expect Lukoil to account for a significant portion of our voyage revenues in the future. Nine of our 13 time charters are with Lukoil.  Our revenues other than Lukoil revenues are also derived from a limited number of customers.  If Lukoil breaches or teminates these time charters or renegotiates or renews them on terms less favorable than those currently in effect, or if any significant customer decreases the amount of business it transacts with us or if we lose any of our customers or a significant portion of our revenues, our operating results, cash flows and profitability could be materially adversely affected.

 

During the years ended December 31, 2006 and 2005 no single customer accounted for more than 10% of our voyage

 

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revenues.

 

A decline in demand for crude oil or a shift in oil transport patterns could materially and adversely affect our revenues.

 

The demand for tanker capacity to transport crude oil depends upon world and regional oil markets. A number of factors influence these markets, including:

 

·                  global and regional economic conditions;

 

·                  increases and decreases in production of and demand for crude oil;

 

·                  developments in international trade;

 

·                  changes in seaborne and other transportation patterns;

 

·                  environmental concerns and regulations; and

 

·                  weather.

 

Historically, the crude oil markets have been volatile as a result of the many conditions and events that can affect the price, demand, production and transport of oil, including competition from alternative energy sources. Decreased demand for oil transportation may have a material adverse effect on our revenues, cash flows and profitability.

 

The market for crude oil transportation services is highly competitive and we may not be able to effectively compete.

 

Our vessels are employed in a highly competitive market. Our competitors include the owners of other Aframax and Suezmax tankers and, to a lesser degree, owners of other size tankers. Both groups include independent oil tanker companies as well as oil companies. We do not control a sufficiently large share of the market to influence the market price charged for crude oil transportation services.

 

Our market share may decrease in the future. We may not be able to compete profitably as we expand our business into new geographic regions or provide new services. New markets may require different skills, knowledge or strategies than we use in our current markets, and the competitors in those new markets may have greater financial strength and capital resources than we do.

 

The market value of our vessels may fluctuate significantly, and we may incur losses when we sell vessels following a decline in their market value.

 

The fair market value of our vessels may increase and decrease depending on a number of factors including:

 

·                  general economic and market conditions affecting the shipping industry;

 

·                  competition from other shipping companies;

 

·                  supply and demand for tankers and the types and sizes of tankers we own;

 

·                  alternative modes of transportation;

 

·                  cost of newbuildings;

 

·                  governmental or other regulations;

 

·                  prevailing level of charter rates; and

 

·                  technological advances.

 

If the fair market value of our vessels declines below their carrying values and such decline is other than temporary, we may be required to take an impairment charge or may incur losses if we were to sell one or more of our vessels at such time, which would adversely affect our business and financial condition as well as our earnings.

 

We may not be able to grow or to effectively manage our growth.

 

A principal focus of our strategy is to continue to grow by taking advantage of changing market conditions, which may

 

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include expanding our business in the Atlantic basin, the primary geographic area and market where we operate, by expanding into other regions, or by increasing the number of vessels in our fleet. Our future growth will depend upon a number of factors, some of which we can control and some of which we cannot. These factors include our ability to:

 

·                                          identify businesses engaged in managing, operating or owning vessels for acquisitions or joint ventures;

 

·                                          identify vessels and/or shipping companies for acquisitions;

 

·                                          integrate any acquired businesses or vessels successfully with our existing operations;

 

·                                          hire, train and retain qualified personnel to manage and operate our growing business and fleet;

 

·                                          identify additional new markets outside of the Atlantic basin;

 

·                                          improve our operating and financial systems and controls; and

 

·                                          obtain required financing for our existing and new operations.

 

Our ability to grow is in part dependent on our ability to expand our fleet through acquisitions of suitable double-hull vessels. We may not be able to acquire newbuildings or secondhand double-hull tankers on favorable terms, which could impede our growth and negatively impact our financial condition and ability to pay dividends. We may not be able to contract for newbuildings or locate suitable secondhand double-hull vessels or negotiate acceptable construction or purchase contracts with shipyards and owners, or obtain financing for such acquisitions on economically acceptable terms.

 

The failure to effectively identify, purchase, develop and integrate any vessels or businesses could adversely affect our business, financial condition and results of operations.

 

Our operating results may fluctuate seasonally.

 

We operate our vessels in markets that have historically exhibited seasonal variations in tanker demand and, as a result, in charter rates. Tanker markets are typically stronger in the fall and winter months (the fourth and first quarters of the calendar year) in anticipation of increased oil consumption in the Northern Hemisphere during the winter months. Unpredictable weather patterns and variations in oil reserves disrupt vessel scheduling.

 

Because we generate all of our revenues in U.S. Dollars but incur a significant portion of our expenses in other currencies, exchange rate fluctuations could have an adverse impact on our results of operations.

 

We generate all of our revenues in U.S. Dollars but we incur a significant portion of our expenses, particularly crew and maintenance costs, in currencies other than the U.S. Dollar.  This difference could lead to fluctuations in net income due to changes in the value of the U.S. Dollars relative to the other currencies, in particular the Euro. A decline in the value of the U.S. Dollar could lead to higher expenses payable by us.

 

There may be risks associated with the purchase and operation of secondhand vessels.

 

Our current business strategy may include additional growth through the acquisition of additional secondhand vessels. Although we inspect secondhand vessels prior to purchase, this does not normally provide us with the same knowledge about their condition that we would have had if such vessels had been built for and operated exclusively by us. Therefore, our future operating results could be negatively affected if some of the vessels do not perform as we expect. Also, we do not receive the benefit of warranties from the builders if the vessels we buy are older than one year.

 

Delays or defaults by the shipyards in the construction of any new vessels that we may order could increase our expenses and diminish our net income and cash flows.

 

Our current business strategy may include additional growth through constructing new vessels or acquiring newbuilding contracts.  Any such projects would be subject to the risk of delay or defaults by shipyards caused by, among other things, unforeseen quality or engineering problems, work stoppages, weather interference, unanticipated cost increases, delays in receipt of necessary equipment, and inability to obtain the requisite permits or approvals.  In accordance with industry practice, in the event any such shipyards are unable or unwilling to deliver the vessels ordered, we may not have substantial remedies.  Failure to construct or deliver vessels by the shipyards or any significant delays could increase our expenses and diminish our net income and cash flows.

 

An increase in costs could materially and adversely affect our financial performance.

 

Our vessel operating expenses are comprised of a variety of costs including crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs, many of which are beyond our control and affect the entire shipping industry.  Also, costs such as insurance and security are still increasing. If costs continue to rise, that could materially and adversely affect our cash flows and profitability.

 

We may face unexpected repair costs for our vessels.

 

Repairs and maintenance costs are difficult to predict with certainty and may be substantial. Many of these expenses are not

 

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covered by our insurance. Large repair expenses could decrease our cash flow and profitability and reduce our liquidity.

 

Compliance with safety and other vessel requirements imposed by classification societies may be very costly and may adversely affect our business.

 

The hull and machinery of every commercial tanker must be classed by a classification society authorized by its country of registry. The classification society certifies that a tanker is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the tanker and the Safety of Life at Sea Convention. All of our vessels are certified as being “in-class” by Det Norske Veritas. This classification society is a member of the International Association of Classification Societies.

 

A vessel must undergo annual surveys, intermediate surveys and special surveys. In lieu of a special survey, a vessel’s machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Our vessels are on special survey cycles for hull inspection and on special survey or continuous survey cycles for machinery inspection. Every vessel is also required to be drydocked every two to five years for inspection of the underwater parts of such vessel.

 

If a vessel in our fleet does not maintain its class and/or fails any annual survey, intermediate survey or special survey, it will be unemployable and unable to trade between ports. This would negatively impact our results of operations.

 

We depend on our key personnel and may have difficulty attracting and retaining skilled employees.

 

The loss of the services of any of our key personnel or our inability to successfully attract and retain qualified personnel, including ships’ officers, in the future could have a material adverse effect on our business, financial condition and operating results. Our future success depends particularly on the continued service of Peter C. Georgiopoulos, our Chairman, President and Chief Executive Officer.

 

We may be unable to attract and retain qualified, skilled employees or crew necessary to operate our business.

 

Our success depends in large part on our ability to attract and retain highly skilled and qualified personnel.  In crewing our vessels, we require technically skilled employees with specialized training who can perform physically demanding work.  Competition to attract and retain qualified crew members is intense.  We expect crew costs to increase in 2008.  If we are not able to increase our rates to compensate for any crew cost increases, our financial condition and results of operations may be adversely affected.  Any inability we experience in the future to hire, train and retain a sufficient number of qualified employees could impair our ability to manage, maintain and grow our business.

 

Shipping is an inherently risky business and our insurance may not be adequate.

 

Our vessels and their cargoes are at risk of being damaged or lost because of events such as marine disasters, bad weather, mechanical failures, human error, war, terrorism, piracy and other circumstances or events. In addition, transporting crude oil creates a risk of business interruptions due to political circumstances in foreign countries, hostilities, labor strikes and boycotts. Any of these events may result in loss of revenues, increased costs and decreased cash flows. Future hostilities or other political instability could affect our trade patterns and adversely affect our operations and our revenues, cash flows and profitability.

 

We carry insurance to protect against most of the accident-related risks involved in the conduct of our business. We currently maintain $1 billion in coverage for each of our vessels for liability for spillage or leakage of oil or pollution. We also carry insurance covering lost revenue resulting from vessel off-hire for all of our vessels. Nonetheless, risks may arise against which we are not adequately insured. For example, a catastrophic spill could exceed our insurance coverage and have a material adverse effect on our financial condition. In addition, we may not be able to procure adequate insurance coverage at commercially reasonable rates in the future and we cannot guarantee that any particular claim will be paid. In the past, new and stricter environmental regulations have led to higher costs for insurance covering environmental damage or pollution, and new regulations could lead to similar increases or even make this type of insurance unavailable.  Furthermore, even if insurance coverage is adequate to cover our losses, we may not be able to timely obtain a replacement ship in the event of a loss. We may also be subject to calls, or premiums, in amounts based not only on our own claim records but also the claim records of all other members of the protection and indemnity associations through which we receive indemnity insurance coverage for tort liability. Our payment of these calls could result in significant expenses to us which could reduce our cash flows and place strains on our liquidity and capital resources.

 

The risks associated with older vessels could adversely affect our operations.

 

In general, the costs to maintain a vessel in good operating condition increase as the vessel ages. As of December 31, 2007, the average age of the 20 vessels in our fleet was 9.6 years compared to an average age of 9.6 years as of December 31, 2006.  Due to improvements in engine technology, older vessels typically are less fuel-efficient than more recently constructed vessels.  Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers.

 

Governmental regulations, safety or other equipment standards related to the age of tankers may require expenditures for

 

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alterations or the addition of new equipment to our vessels, and may restrict the type of activities in which our vessels may engage. We cannot assure you that, as our vessels age, market conditions will justify any required expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.

 

Compliance with safety, environmental and other governmental requirements and related costs may adversely affect our operations.

 

The shipping industry in general, our business and the operation of our vessels in particular, are affected by a variety of governmental regulations in the form of numerous international conventions, national, state and local laws and national and international regulations in force in the jurisdictions in which such tankers operate, as well as in the country or countries in which such tankers are registered. These regulations include:

 

·                                          the U.S. Oil Pollution Act of 1990, or OPA, which imposes strict liability for the discharge of oil into the 200-mile United States exclusive economic zone, the obligation to obtain certificates of financial responsibility for vessels trading in United States waters and the requirement that newly constructed tankers that trade in United States waters be constructed with double-hulls;

 

·                                          the International Convention on Civil Liability for Oil Pollution Damage of 1969 entered into by many countries (other than the United States) which imposes strict liability for pollution damage caused by the discharge of oil;

 

·                                          the International Convention for the Prevention of Pollution from Ships adopted and implemented under the auspices of the International Maritime Organization, or IMO, with respect to strict technical and operational requirements for tankers;

 

·                                          the IMO International Convention for the Safety of Life at Sea of 1974, or SOLAS, which imposes crew and passenger safety requirements;

 

·                                          the International Ship and Port Facilities Securities Code, or the ISPS Code, which became effective in 2004;

 

·                                          the International Convention on Load Lines of 1966 which imposes requirements relating to the safeguarding of life and property through limitations on load capability for vessels on international voyages; and

 

·                                          the U.S. Maritime Transportation Security Act of 2002 which imposes security requirements for tankers entering U.S. ports.

 

More stringent maritime safety rules are also likely to be imposed worldwide as a result of the oil spill in November 2002 relating to the loss of the M.T. Prestige, a 26-year old single-hull tanker owned by a company not affiliated with us. 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 adverse effect on our operations. In addition, we are required by various governmental and quasi-governmental agencies to obtain certain permits, licenses and certificates with respect to our operations. We believe our vessels are maintained in good condition in compliance with present regulatory requirements, are operated in compliance with applicable safety/environmental laws and regulations and are insured against usual risks for such amounts as our management deems appropriate. The vessels’ operating certificates and licenses are renewed periodically during each vessel’s required annual survey. However, 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 expenditures with respect to our ships to keep them in compliance.

 

Increased inspection procedures and tighter import and export controls could increase costs and disrupt our business.

 

International shipping is subject to various security and customs inspections and related procedures in countries of origin and destination. Inspection procedures can result in the seizure of contents of our vessels, delays in the loading, offloading or delivery and the levying of customs, duties, fines and other penalties against us.

 

It is possible that changes to inspection procedures could impose additional financial and legal obligations on us. Furthermore, changes to inspection procedures could also impose additional costs and obligations on our customers and may,

 

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in certain cases, render the shipment of certain types of cargo impractical. Any such changes or developments may have a material adverse effect on our business, financial condition, results of operations and our ability to pay dividends.

 

Our vessels may be requisitioned by governments without adequate compensation.

 

A government could requisition for title or seize our vessels. In the case of a requisition for title, a government takes control of a vessel and becomes its owner. Also, a government could requisition our vessels for hire. Under requisition for hire, a government takes control of a vessel and effectively becomes its charterer at dictated charter rates. Generally, requisitions occur during a period of war or emergency. Although we, as owner, would be entitled to compensation in the event of a requisition, the amount and timing of payment would be uncertain.

 

Increases in tonnage taxes on our vessels would increase the costs of our operations.

 

Our vessels are currently registered under the flags of the Republic of Liberia and the Republic of the Marshall Islands. These jurisdictions impose taxes based on the tonnage capacity of each of the vessels registered under their flag. The tonnage taxes imposed by these countries could increase, which would cause the costs of our operations to increase.

 

Arrests of our vessels by maritime claimants could cause a significant loss of earnings for the related off hire period.

 

Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lienholder may enforce its lien by “arresting” or “attaching” a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could result in a significant loss of earnings for the related off-hire period.

 

In addition, in jurisdictions where the “sister ship” theory of liability applies, 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. In countries with “sister ship” liability laws, claims might be asserted against us, any of our subsidiaries or our vessels for liabilities of other vessels that we own.

 

Portions of our income may be subject to U.S. tax.

 

If we do not qualify for an exemption pursuant to Section 883 of the U.S. Internal Revenue Code of 1986, or the Code, then we will be subject to U.S. federal income tax on our shipping income that is derived from U.S. sources. If we are subject to such tax, our net income and cash flow would be reduced by the amount of such tax.

 

We will qualify for exemption under Section 883 if, among other things, our stock is treated as primarily and regularly traded on an established securities market in the United States. Under the final Section 883 regulations, we might not satisfy this publicly-traded requirement in any taxable year in which 50% or more of our stock is owned for more than half the days in such year by persons who actually or constructively own 5% or more of our stock, or 5% shareholders.

 

We believe that based on the ownership of our stock in 2007, we satisfied the publicly-traded requirement under the final Section 883 regulations. However, we can give no assurance that future changes and shifts in the ownership of our stock by 5% shareholders would permit us to qualify for the Section 883 exemption in the future.

 

If we do not qualify for the Section 883 exemption, our shipping income derived from U.S. sources, or 50% of our gross shipping income attributable to transportation beginning or ending in the United States, would be subject to a 4% tax imposed without allowance for deductions.

 

U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S. holders.

 

A foreign corporation will be treated as a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive income” or (2) at least 50% of the average value of the corporation’s assets produce or are held for the production of those types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business, as defined in the Treasury Regulations.  For purposes of these tests, income derived from the performance of services does not constitute “passive income.” U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.

 

We do not believe that our existing operations would cause us to be deemed to be a PFIC with respect to any taxable year.  In this regard, we treat the gross income we derive or are deemed to derive from our time chartering activities as services income, rather than rental income.  Accordingly, we believe that (1) our income from our time chartering activities does not constitute “passive income” and (2) the assets that we own and operate in connection with the production of that income do not constitute passive assets.

 

There is, however, no direct legal authority under the PFIC rules addressing our operations.  Accordingly, no assurance can be given that the U.S. Internal Revenue Service, or IRS, or a court of law will accept our position, and there is a risk that the IRS or a court of law could determine that we are a PFIC.  Moreover, no assurance can be given that we would not be a PFIC for any future taxable year if there were to be changes in the nature and extent of our operations.

 

If the IRS were to find that we are or have been a PFIC for any taxable year, our U.S. shareholders will face adverse U.S. tax consequences.  Under the PFIC rules, unless a shareholder makes an election available under the Code (which election could itself have adverse consequences for such shareholder), such shareholder would be liable to pay U.S. federal income tax at the highest applicable income tax rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of our common stock, as if the excess distribution or gain had been recognized ratably over the shareholder's holding period of our common stock.

 

RISK FACTORS RELATED TO OUR FINANCINGS

 

Our 2005 Credit Facility imposes, and it is possible that any indenture for debt securities we may issue will impose, significant operating and financial restrictions that may limit our ability to operate our business.

 

Our 2005 Credit Facility currently imposes, and it is possible that any indenture for debt securities that we may issue will impose, significant operating and financial restrictions on us. These restrictions will limit our ability to, among other things:

 

·                  incur additional debt;

 

·                  pay dividends or make other restricted payments;

 

·                  create or permit certain liens;

 

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·                  sell vessels or other assets;

 

·                  create or permit restrictions on the ability of our subsidiaries to pay dividends or make other distributions to us;

 

·                  engage in transactions with affiliates; and

 

·                  consolidate or merge with or into other companies or sell all or substantially all of our assets.

 

On February 16, 2007, we entered into an agreement to amend our 2005 Credit Facility.  Under this amendment, we are permitted to (1) pay quarterly cash dividends with respect to fiscal quarters on or after March 31, 2007, limited to $0.50 per share and (2) pay additional dividends, including stock buy-backs, in an aggregate amount not to exceed $50 million plus 50% of cumulative net excess cash flow after February 16, 2007.  In addition, this amendment permitted us to declare a one-time special dividend of up to $15 per share (up to an aggregate amount not to exceed $500 million) at any time prior to December 31, 2007.

 

These restrictions could limit our ability to finance our future operations or capital needs, make acquisitions or pursue available business opportunities.

 

In addition, our 2005 Credit Facility requires us to maintain specified financial ratios and satisfy financial covenants. We may be required to take action to reduce our debt or to act in a manner contrary to our business objectives to meet these ratios and satisfy these covenants. Events beyond our control, including changes in the economic and business conditions in the markets in which we operate, may affect our ability to comply with these covenants. We cannot assure you that we will meet these ratios or satisfy these covenants or that our lenders will waive any failure to do so. A breach of any of the covenants in, or our inability to maintain the required financial ratios under, our 2005 Credit Facility would prevent us from borrowing additional money under the facility and could result in a default under them. If a default occurs under our 2005 Credit Facility, the lenders could elect to declare that debt, together with accrued interest and other fees, to be immediately due and payable and proceed against the collateral securing that debt, which constitutes all or substantially all of our assets. Moreover, if the lenders under the 2005 Credit Facility or other agreement in default were to accelerate the debt outstanding under that facility, it could result in a default under our other debt obligations that may exist at such time, including our debt securities.

 

We have incurred significant indebtedness which could affect our ability to finance our operations, pursue desirable business opportunities or successfully run our business in the future.

 

We have borrowed approximately $565 million under our 2005 credit facility.  Our leverage and debt service obligations could have significant consequences, including the following:

 

·                  If future cash flows are insufficient, we may need to incur further indebtedness in order to make the capital expenditures and other expenses or investments planned by us.

 

·                  Our indebtedness will have the general effect of reducing our flexibility to react to changing business and economic conditions insofar as they affect our financial condition and, therefore, may pose substantial risk to our stockholders.

 

·                  In the event that we are liquidated, any of our senior or subordinated creditors and any senior or subordinated creditors of our subsidiaries will be entitled to payment in full prior to any distributions to the holders of our shares of common stock.

 

·                  Our credit facilities begin to mature in 2012, and our ability to secure additional financing prior to or after that time, if needed, may be substantially restricted by the existing level of our indebtedness and the restrictions contained in our debt instruments. When our credit facilities mature in 2012, we will be required to dedicate a substantial portion of our cash flow to the payment of such debt, which will reduce the amount of funds available for operations, capital expenditures and future business opportunities.

 

The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations under our 2005 Credit Facility and debt securities.

 

Fluctuations in the market value of our fleet may adversely affect our liquidity and may result in breaches under our financing arrangements and sales of vessels at a loss.

 

The market value of vessels fluctuates depending upon general economic and market conditions affecting the tanker industry, the number of tankers in the world fleet, the price of constructing new tankers, or newbuildings, types and sizes of tankers,

 

23



 

and the cost of other modes of transportation. The market value of our fleet may decline as a result of a downswing in the historically cyclical shipping industry or as a result of the aging of our fleet. Declining tanker values could affect our ability to raise cash by limiting our ability to refinance vessels and thereby adversely impact our liquidity. In addition, declining vessel values could result in a breach of loan covenants, which could give rise to events of default under our 2005 Credit Facility. Due to the cyclical nature of the tanker market, the market value of one or more of our vessels may at various times be lower than their book value, and sales of those vessels during those times would result in losses. If we determine at any time that a vessel’s future limited useful life and earnings require us to impair its value on our financial statements, that could result in a charge against our earnings and the reduction of our shareholders’ equity. If for any reason we sell vessels at a time when vessel prices have fallen, the sale may be at less than the vessel’s carrying amount on our financial statements, with the result that we would also incur a loss and a reduction in earnings.

 

If we default under our 2005 Credit Facility, we could forfeit our rights in certain of our vessels and their charters.

 

We have pledged our 21 vessels as security to the lenders under our 2005 Credit Facility. Default under this loan agreement, if not waived or modified, would permit the lenders to foreclose on the mortgages over the vessels and the related collateral, and we could lose our rights in the vessels and their charters.

 

When final payment is due under our loan agreement, we must repay any borrowings outstanding, including balloon payments. To the extent that our cash flows are insufficient to repay any of these borrowings, we will need to refinance some or all of our loan agreements or replace them with an alternate credit arrangement. We may not be able to refinance or replace our loan agreements at the time they become due. In addition, the terms of any refinancing or alternate credit arrangement may restrict our financial and operating flexibility.

 

We are a holding company, and we depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial and other obligations.

 

We are a holding company, and our subsidiaries conduct all of our operations and own all of our vessels. We have no significant assets other than the equity interests of our subsidiaries. As a result, our ability to pay dividends depends on the performance of our subsidiaries and their ability to distribute funds to us. The ability of our subsidiaries to make distributions to us may be restricted by, among other things, restrictions under our credit facility, applicable corporate and limited liability company laws of the jurisdictions of their incorporation or organization and other laws and regulations. If we are unable to obtain funds from our subsidiaries, we will not be able to pay dividends or make payment on our credit facility unless we obtain funds from other sources. We cannot assure you that we will be able to obtain the necessary funds from other sources.

 

RISK FACTORS RELATED TO OUR COMMON STOCK

 

Anti-takeover provisions in our financing agreements and organizational documents, as well as our shareholder rights plan, could have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market price of our common stock.

 

Our existing financing agreement imposes restrictions on changes of control of our company and our ship-owning subsidiaries. These include requirements that we obtain the lenders’ consent prior to any change of control and that we make an offer to redeem certain indebtedness before a change of control can take place.

 

Several provisions of our amended and restated articles of incorporation and our by-laws could discourage, delay or prevent a merger or acquisition that shareholders may consider favorable. These provisions include:

 

·                                          authorizing our board of directors to issue “blank check” preferred stock without shareholder approval;

 

·                                          providing for a classified board of directors with staggered, three-year terms;

 

·                                          prohibiting us from engaging in a “business combination” with an “interested shareholder” for a period of three years after the date of the transaction in which the person became an interested shareholder unless certain provisions are met;

 

·                                          prohibiting cumulative voting in the election of directors;

 

24



 

·                                          authorizing the removal of directors only for cause and only upon the affirmative vote of the holders of at least 80% of the outstanding shares of our common stock entitled to vote for the directors;

 

·                                          prohibiting shareholder action by written consent unless the written consent is signed by all shareholders entitled to vote on the action;

 

·                                          limiting the persons who may call special meetings of shareholders; and

 

·                                          establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by shareholders at shareholder meetings.

 

In addition to the provision described above, on December 2, 2005, our board of directors adopted a shareholder rights plan and declared a dividend distribution of one Right for each outstanding share of our common stock to shareholders of record on the close of business on December 7, 2005. Each Right is nominally exercisable, upon the occurrence of certain events, for one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share, at a purchase price of $175.00 per unit, subject to adjustment. The Rights may further discourage a third party from making an unsolicited proposal to acquire us, as exercise of the Rights would cause substantial dilution to such third party attempting to acquire us.

 

We cannot assure you that we will pay any dividends.

 

On January 26, 2005 our board of directors initiated a cash dividend policy. The actual declaration of future cash dividends, and the establishment of record and payment dates, is subject to final determination by our board of directors each quarter after its review of our financial performance. Our ability to pay dividends in any period will depend upon factors including satisfying the requirements under our 2005 Credit Facility and applicable provisions of Marshall Islands law.

 

The timing and amount of dividends, if any, could be affected by factors affecting cash flows, results of operations, required capital expenditures, or reserves. Maintaining the dividend policy will depend on our cash earnings, financial condition and cash requirements and could be affected by factors, including the loss of a vessel, required capital expenditures, reserves established by the board of directors, increased or unanticipated expenses, additional borrowings or future issuances of securities, which may be beyond our control. The declaration and payment of dividends is subject to certain conditions and limitations under our 2005 Credit Facility.

 

Under Marshall Islands law, a company may not declare or pay dividends if it is currently insolvent or would thereby be made insolvent. Marshall Islands law also provides that a company may declare dividends only to the extent of its surplus, or if there is no surplus, out of its net profits for the then current and/or immediately preceding fiscal years.

 

Our dividend policy may be changed at any time, and from time to time, by our board of directors.

 

Future sales of our common stock could cause the market price of our common stock to decline.

 

The market price of our common stock could decline due to sales of a large number of shares in the market, including sales of shares by our large shareholders, or the perception that these sales could occur. These sales could also make it more difficult or impossible for us to sell equity securities in the future at a time and price that we deem appropriate to raise funds through future offerings of common stock. We have entered into registration rights agreements with the securityholders who received shares in our recapitalization transactions that entitle them to have an aggregate of 2,192,793 shares registered for sale in the public market. In addition, those shares became eligible for sale in the public markets beginning on June 12, 2002, pursuant to Rule 144 under the Securities Act. We also registered on Form S-8 an aggregate of 4,400,000 shares issuable upon exercise of options we have granted to purchase common stock or reserved for issuance under our equity compensation plans.

 

Our incorporation under the laws of the Republic of the Marshall Islands may limit the ability of our shareholders to protect their interests.

 

Our corporate affairs are governed by our amended and restated articles of incorporation and by-laws and by the Republic of the Marshall Islands Business Corporations Act. The provisions of the Republic of the Marshall Islands Business Corporations Act resemble provisions of the corporation laws of a number of states in the United States. However, there have been few judicial cases in the Republic of the Marshall Islands interpreting the Republic of the Marshall Islands Business Corporations Act. For example, the rights and fiduciary responsibilities of directors under the laws of the Republic of the

 

25



 

Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain U.S. jurisdictions. Although the Republic of the Marshall Islands Business Corporations Act does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, our public shareholders may have more difficulty in protecting their interests in the face of actions by management, directors or controlling shareholders than would shareholders of a corporation incorporated in a U.S. jurisdiction.

 

It may not be possible for our investors to enforce U.S. judgments against us.

 

We are incorporated in the Republic of the Marshall Islands and most of our subsidiaries are organized in the Republic of Liberia and the Republic of the Marshall Islands. Substantially all of our assets and those of our subsidiaries are located outside the United States. As a result, it may be difficult or impossible for U.S. investors to serve process within the United States upon us or to enforce judgment upon us for civil liabilities in U.S. courts. In addition, you should not assume that courts in the countries in which we or our subsidiaries are incorporated or where our assets or the assets of our subsidiaries are located (1) would enforce judgments of U.S. courts obtained in actions against us or our subsidiaries based upon the civil liability provisions of applicable U.S. federal and state securities laws or (2) would enforce, in original actions, liabilities against us or our subsidiaries based upon these laws.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2. PROPERTIES

 

We lease six properties, all of which house offices used in the administration of our operations: a property of approximately 24,000 square feet in New York, New York, a property of approximately 12,500 square feet in Lisbon, Portugal, a property of approximately 2,000 square feet in Piraeus, Greece, a property of approximately 2,000 square feet in London, England, a property of approximately 3,400 square feet in Mumbai, India and a property of approximately 750 square feet in Novorossiysk, Russia. We do not own or lease any production facilities, plants, mines or similar real properties.

 

ITEM 3. LEGAL PROCEEDINGS

 

LEGAL PROCEEDINGS

 

The Company has been cooperating in a criminal investigation being conducted by the U.S. Department of Justice relating to the alleged failure by the Genmar Ajax to record certain alleged illegal discharges of oily waste between October 2004 and December 2004.  On December 15, 2004, following a routine Coast Guard inspection, U.S. Coast Guard officials took various documents, logs and records from the vessel for further review and analysis. During 2005, the custodian of records for the Genmar Ajax received four subpoenas duces tecum requesting supplemental documentation pertaining to the vessel in connection with a pending grand jury investigation, all of which have been complied with.  The Company has denied any wrongdoing in this matter by it or any of its employees but has been unable to negotiate an acceptable settlement.  On September 26, 2006, the Company received a letter from the U.S. Department of Justice stating that it may seek an indictment against the Company’s General Maritime Management LLC subsidiary in connection with its investigation.  The Company intends to defend any charges vigorously.  However, there can be no assurance that the Company will be able to obtain a favorable resolution or satisfactory settlement.

 

This matter has been reported to the Company’s protection and indemnity insurance underwriters.  Through December 31, 2007, the Company has paid $420,000 of legal fees incurred by such underwriters and has delivered to such underwriters a letter of credit in the amount of $1 million for additional costs that may be incurred in connection with this matter. These amounts are subject to reimbursement by the underwriters to the extent that the proceedings result in an outcome covered by insurance.

 

On or about August 29, 2007, an oil sheen was discovered by shipboard personnel of the Genmar Progress in Guayanilla Bay, Puerto Rico in the vicinity of the vessel.  The vessel crew took prompt action pursuant to the vessel response plan.  Our subsidiary which operates the vessel promptly reported this incident to the U.S. Coast Guard and has subsequently accepted responsibility for an accidental discharge of bunker fuel from the vessel.  The Company understands the federal and Puerto Rico authorities are conducting civil and criminal investigations into an oil pollution incident which occurred during this time period on the southwest coast of Puerto Rico including Guayanilla Bay.  The extent to which oil discharged from the Genmar Progress is responsible for this incident is currently the subject of investigation.  The U.S. Coast Guard has designated the Genmar Progress as a potential source of discharged oil.  Under the Oil Pollution Act of 1990, the source of the discharge is liable, regardless of fault, for damages and oil spill remediation as a result of the discharge.

 

This matter has been reported to the Company’s protection and indemnity insurance underwriters, and the Company believes that any such liabilities will be covered by its insurance, less a deductible.  The Company has not accrued reserves for this

 

26



 

incident other than the deductible because the amount of any additional costs that may be incurred by the Company is not estimable at this time.

 

The Company been cooperating in these investigations and has posted a surety bond to cover potential fines or penalties that may be imposed in connection with the matter.

 

The Company has also been cooperating in an investigation being conducted by the U.S. Coast Guard and the U.S. Department of Justice which we believe relates to possible alleged violations of the Act to Prevent Pollution from Ships (33 USC 1908, et. seq.) occurring on board the Genmar Defiance arising from potential failures by shipboard staff to properly record discharges of bilge waste during the period of November 24, 2007 through November 26, 2007.  During a U.S. Coast Guard Port State Control Inspection conducted on or about November 28, 2007 at Corpus Christi, Texas, U.S. Coast Guard officials took various documents, logs and equipment from the vessel for further review and analysis.  A report of their inspection asserted that unauthorized discharge by-pass piping was identified during the inspection.  The Company has posted a bond for potential fines or penalties, which may be sought in connection with this matter.  Currently, no charges have been made and no fines or penalties have been levied against the Company.

 

From time to time in the future, we may be subject to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty claims. Those claims, even if lacking merit, could result in the expenditure by us of significant financial and managerial resources.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended December 31, 2007.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

MARKET INFORMATION, HOLDERS AND DIVIDENDS

 

Our common stock has traded on the New York Stock Exchange under the symbol “GMR” since our initial public offering on June 12, 2001. The following table sets forth for the periods indicated the high and low trading prices for the common stock as of the close of trading as reported on the New York Stock Exchange:

 

FISCAL YEAR ENDED DECEMBER 31, 2007

 

HIGH

 

LOW

 

1st Quarter

 

$

45.33

 

$

27.73

 

2nd Quarter

 

$

33.82

 

$

26.40

 

3rd Quarter

 

$

29.77

 

$

22.24

 

4th Quarter

 

$

28.87

 

$

22.59

 

 

FISCAL YEAR ENDED DECEMBER 31, 2006

 

HIGH

 

LOW

 

1st Quarter

 

$

38.97

 

$

32.81

 

2nd Quarter

 

$

37.14

 

$

30.34

 

3rd Quarter

 

$

40.46

 

$

34.02

 

4th Quarter

 

$

38.07

 

$

34.28

 

 

As of February 19, 2008, there were approximately 148 holders of record of our common stock.

 

27



 

We announced on February 21, 2007 that our Board of Directors changed our quarterly dividend policy by adopting a fixed target amount of $0.50 per share per quarter or $2.00 per share each year, starting with the first quarter of 2007. We intend to declare dividends in April, July, October and February of each year.

 

On February 21, 2007, we also announced that our Board of Directors declared a special, one-time cash dividend of $15.00 per share. The dividend was paid on or about March 23, 2007 to shareholders of record as of March 9, 2007.

 

During the year ended December 31, 2007, we repurchased 1,351,600 shares of our common stock for $32.7 million (average per share purchase price of $24.16) pursuant to our share repurchase program described in “Share Repurchase Program” under the heading “LIQUIDITY AND CAPITAL RESOURCES” in ITEM 7.

 

28



 

ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

Set forth below are selected historical consolidated and other data of General Maritime Corporation at the dates and for the fiscal years shown.

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

INCOME STATEMENT DATA

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Voyage revenues

 

$

255,015

 

$

325,984

 

$

567,901

 

$

701,291

 

$

454,456

 

Voyage expenses

 

38,069

 

80,400

 

137,203

 

117,955

 

117,810

 

Direct vessel operating expenses

 

48,213

 

47,472

 

86,681

 

96,818

 

91,981

 

Other expense

 

 

2,430

 

 

 

 

General and administrative expenses

 

46,920

 

44,787

 

43,989

 

31,420

 

22,866

 

Loss (gain) on sale of vessels and equipment

 

417

 

(46,022

)

(91,235

)

(6,570

)

(1,490

)

Impairment charge

 

 

 

 

 

18,803

 

Depreciation and amortization

 

49,671

 

42,395

 

97,320

 

100,806

 

84,925

 

Operating income

 

71,725

 

154,522

 

293,943

 

360,862

 

119,561

 

Net interest (income) expense

 

23,059

 

(1,455

)

28,918

 

37,852

 

35,043

 

Other (income) expense

 

4,127

 

(854

)

52,668

 

7,901

 

 

Net income (loss)

 

$

44,539

 

$

156,831

 

$

212,357

 

$

315,109

 

$

84,518

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.46

 

$

4.98

 

$

5.71

 

$

8.51

 

$

2.29

 

Diluted

 

$

1.43

 

$

4.87

 

$

5.61

 

$

8.33

 

$

2.26

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

17.12

 

$

4.80

 

$

2.86

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic shares outstanding, thousands:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

30,403

 

31,472

 

37,164

 

37,049

 

36,967

 

Diluted

 

31,212

 

32,217

 

37,874

 

37,814

 

37,356

 

BALANCE SHEET DATA, at end of period
(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

44,526

 

$

107,460

 

$

96,976

 

$

46,921

 

$

38,905

 

Current assets, including cash

 

82,494

 

137,865

 

471,324

 

152,145

 

102,473

 

Total assets

 

835,035

 

843,690

 

1,146,126

 

1,427,261

 

1,263,578

 

Current liabilities, including current portion of long-term debt

 

35,502

 

27,147

 

32,906

 

84,120

 

89,771

 

Current portion of long-term debt

 

 

 

 

40,000

 

59,553

 

Total long-term debt, including current portion

 

565,000

 

50,000

 

135,020

 

486,597

 

655,670

 

Shareholders' equity

 

228,657

 

763,913

 

976,125

 

890,426

 

568,880

 

OTHER FINANCIAL DATA

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

95,833

 

$

189,717

 

$

249,614

 

$

363,238

 

$

178,112

 

Net cash provided (used) by investing activities

 

(84,516

)

285,264

 

318,169

 

(168,477

)

(502,919

)

Net cash (used) provided by financing activities

 

(74,251

)

(464,497

)

(517,728

)

(186,745

)

361,031

 

Capital expenditures

 

 

 

 

 

 

 

 

 

 

 

Vessel sales (purchases), gross including deposits

 

(80,061

)

290,299

 

324,087

 

(165,796

)

(501,242

)

Drydocking or capitalized survey or improvement costs

 

(11,815

)

(11,929

)

(38,039

)

(17,050

)

(14,137

)

Weighted average long-term debt, including current portion

 

414,137

 

93,085

 

410,794

 

650,196

 

601,086

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER DATA

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

EBITDA (1)

 

$

117,269

 

$

197,771

 

$

338,595

 

$

453,767

 

$

204,486

 

 

 

 

 

 

 

 

 

 

 

 

 

FLEET DATA

 

 

 

 

 

 

 

 

 

 

 

Total number of vessels at end of period

 

20.0

 

18.0

 

30.0

 

43.0

 

43.0

 

Average number of vessels (2)

 

19.3

 

20.6

 

41.9

 

44.0

 

40.6

 

Total voyage days for fleet (3)

 

6,599

 

7,121

 

14,073

 

15,482

 

14,267

 

Total time charter days for fleet

 

4,641

 

2,300

 

3,983

 

4,371

 

2,804

 

Total spot market days for fleet

 

1,958

 

4,821

 

10,090

 

11,111

 

11,463

 

Total calendar days for fleet (4)

 

7,045

 

7,534

 

15,311

 

16,123

 

14,818

 

Fleet utilization (5)

 

93.7

%

94.5

%

91.9

%

96.0

%

96.3

%

AVERAGE DAILY RESULTS

 

 

 

 

 

 

 

 

 

 

 

Time charter equivalent (6)

 

$

32,876

 

$

34,487

 

$

30,605

 

$

37,676

 

$

23,596

 

Direct vessel operating expenses (7)

 

6,844

 

6,301

 

5,661

 

6,005

 

6,207

 

General and administrative expenses (8)

 

6,660

 

5,945

 

2,873

 

1,949

 

1,543

 

Total vessel operating expenses (9)

 

13,504

 

12,246

 

8,534

 

7,954

 

7,750

 

 

29



 

 

 

Year Ended December 31,

 

EBITDA Reconciliation

 

2007

 

2006

 

2005

 

2004

 

2003

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

44,539

 

$

156,831

 

$

212,357

 

$

315,109

 

$

84,518

 

+ Net interest expense

 

23,059

 

(1,455

)

28,918

 

37,852

 

35,043

 

+ Depreciation and amortization

 

49,671

 

42,395

 

97,320

 

100,806

 

84,925

 

EBITDA

 

$

117,269

 

$

197,771

 

$

338,595

 

$

453,767

 

$

204,486

 

 


(1)

EBITDA represents net income plus net interest expense and depreciation and amortization. EBITDA is included because it is used by management and certain investors as a measure of operating performance. EBITDA is used by analysts in the shipping industry as a common performance measure to compare results across peers. Management of the Company uses EBITDA as a performance measure in consolidating quarterly internal financial statements and is presented for review at our board meetings. The Company believes that EBITDA is useful to investors as the shipping industry is capital intensive which often brings significant cost of financing. EBITDA is not an item recognized by accounting principles generally accepted in the United States of America (GAAP), and should not be considered as an alternative to net income, operating income or any other indicator of a company’s operating performance required by GAAP. The definition of EBITDA used here may not be comparable to that used by other companies.

 

 

(2)

Average number of vessels is the number of vessels that constituted our fleet for the relevant period, as measured by the sum of the number of days each vessel was part of our fleet during the period divided by the number of calendar days in that period.

 

 

(3)

Voyage days for fleet are the total days our vessels were in our possession for the relevant period net of off hire days associated with major repairs, drydockings or special or intermediate surveys.

 

 

(4)

Calendar days are the total days the vessels were in our possession for the relevant period including off hire days associated with major repairs, drydockings or special or intermediate surveys.

 

 

(5)

Fleet utilization is the percentage of time that our vessels were available for revenue generating voyage days, and is determined by dividing voyage days by calendar days for the relevant period.

 

 

(6)

Time Charter Equivalent, or TCE, is a measure of the average daily revenue performance of a vessel on a per voyage basis. Our method of calculating TCE is consistent with industry standards and is determined by dividing net voyage revenue by voyage days for the relevant time period. Net voyage revenues are voyage revenues minus voyage expenses. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage, which would otherwise be paid by the charterer under a time charter contract.

 

 

(7)

Daily direct vessel operating expenses, or DVOE, is calculated by dividing DVOE, which includes crew costs, provisions, deck and engine stores, lubricating oil, insurance and maintenance and repairs, by calendar days for the relevant time period.

 

 

(8)

Daily general and administrative expense is calculated by dividing general and administrative expenses by calendar days for the relevant time period.

 

 

(9)

Total Vessel Operating Expenses, or TVOE, is a measurement of our total expenses associated with operating our vessels. Daily TVOE is the sum of daily direct vessel operating expenses, or DVOE, and daily general and administrative expenses.

 

30



 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

The following is a discussion of our financial condition at December 31, 2007 and 2006 and our results of operations comparing the years ended December 31, 2007 and 2006 and the years ended December 31, 2006 and 2005. You should read this section together with the consolidated financial statements including the notes to those financial statements for the years mentioned above.

 

We are a leading provider of international seaborne crude oil transportation services with a large mid-sized vessel fleet. As of December 31, 2007 our fleet consisted of 20 vessels (10 Aframax and 10 Suezmax vessels) with a total cargo carrying capacity of 2.5 million deadweight tons.  In addition, we have one Suezmax vessel, which was delivered in February 2008 comprising an additional 0.2 million deadweight tons in the aggregate.

 

Spot and Time Charter Deployment

 

We actively manage the deployment of our fleet between spot market voyage charters, which generally last from several days to several weeks, and time charters, which can last up to several years. A spot market voyage charter is generally a contract to carry a specific cargo from a load port to a discharge port for an agreed upon total amount. Under spot market voyage charters, we pay voyage expenses such as port, canal and fuel costs. A time charter is generally a contract to charter a vessel for a fixed period of time at a set daily rate. Under time charters, the charterer pays voyage expenses such as port, canal and fuel costs.

 

Vessels operating on time charters provide more predictable cash flows, but can yield lower profit margins than vessels operating in the spot market during periods characterized by favorable market conditions. Vessels operating in the spot market generate revenues that are less predictable but may enable us to capture increased profit margins during periods of improvements in tanker rates although we are exposed to the risk of declining tanker rates. We are constantly evaluating opportunities to increase the number of our vessels deployed on time charters, but only expect to enter into additional time charters if we can obtain contract terms that satisfy our criteria.

 

Net Voyage Revenues as Performance Measure

 

For discussion and analysis purposes only, we evaluate performance using net voyage revenues. Net voyage revenues are voyage revenues minus voyage expenses. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage, which would otherwise be paid by a charterer under a time charter. We believe that presenting voyage revenues, net of voyage expenses, neutralizes the variability created by unique costs associated with particular voyages or the deployment of vessels on time charter or on the spot market and presents a more accurate representation of the revenues generated by our vessels.

 

Our voyage revenues are recognized ratably over the duration of the spot market voyages and the lives of the charters, while direct vessel expenses are recognized when incurred. We recognize the revenues of time charters that contain rate escalation schedules at the average rate during the life of the contract. We calculate time charter equivalent, or TCE, rates by dividing net voyage revenue by voyage days for the relevant time period. We also generate demurrage revenue, which represents fees charged to charterers associated with our spot market voyages when the charterer exceeds the agreed upon time required to load or discharge a cargo. We calculate daily direct vessel operating expenses and daily general and administrative expenses for the relevant period by dividing the total expenses by the aggregate number of calendar days that we owned each vessel for the period.

 

RESULTS OF OPERATIONS

 

Margin analysis for the indicated items as a percentage of net voyage revenues for the years ended December 31, 2007, 2006 and 2005 are set forth in the table below.

 

31



 

INCOME STATEMENT MARGIN ANALYSIS
(% OF NET VOYAGE REVENUES)

 

 

 

YEAR ENDED DECEMBER 31,

 

 

 

2007

 

2006

 

2005

 

INCOME STATEMENT DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net voyage revenues (1)

 

100.0

%

100.0

%

100.0

%

Direct vessel expenses

 

22.2

%

19.3

%

20.1

%

Other expense

 

0.0

%

1.0

%

0.0

%

General and administrative expenses

 

21.6

%

18.2

%

10.2

%

Depreciation and amortization

 

22.9

%

17.3

%

22.6

%

Loss (gain) on sale of vessels and equipment

 

0.2

%

-18.7

%

-21.2

%

Operating income

 

33.1

%

62.9

%

68.2

%

Net interest expense (income)

 

10.6

%

-0.6

%

6.7

%

Other expense (income)

 

1.9

%

-0.3

%

12.2

%

Net income

 

20.6

%

63.8

%

49.3

%

 


(1)  INCOME STATEMENT DATA

 

 

 

YEAR ENDED DECEMBER 31,

 

(Dollars in thousands, except share data)

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Voyage revenues

 

$

255,015

 

$

325,984

 

$

567,901

 

Voyage expenses

 

(38,069

)

(80,400

)

(137,203

)

Net voyage revenues

 

$

216,946

 

$

245,584

 

$

430,698

 

 

YEAR ENDED DECEMBER 31, 2007 COMPARED TO THE YEAR ENDED DECEMBER 31, 2006

 

VOYAGE REVENUES- Voyage revenues decreased by $71.0 million, or 21.8%, to $255.0 million for the year ended December 31, 2007 compared to $326.0 million for the prior year.  This decrease reflects a 7.3% decrease in vessel operating days as well as a decrease in the proportion of our vessel operating days relating to spot charters; spot charter rates are generally higher than time charter rates to allow the vessel owner to recoup voyage expenses which are paid for by the charterer under time charters.

 

VOYAGE EXPENSES- Voyage expenses decreased $42.3 million, or 52.7%, to $38.1 million for the year ended December 31, 2007 compared to $80.4 million for the prior year. This decrease in voyage expenses is primarily due to a decrease in the number of days our vessels operated under spot charters. Substantially all of our voyage expenses relate to spot charter voyages, under which the vessel owner is responsible for voyage expenses such as fuel and port costs.  During the year ended December 31, 2007, the number of days our vessels operated under spot charters decreased by 2,863, or 59.4%, to 1,958 days (1,386 days Aframax, 572 days Suezmax) from 4,821 days (2,467 days Aframax, 2,354 days Suezmax) during the prior year.  Although port costs, which can vary depending on the geographic regions in which the vessels operate and their trading patterns, decreased by 51% during 2007 to $9.9 million from $20.2 million during the prior year, port costs per spot charter day increased by approximately 20% associated with the increase in 2007 in the proportion of such spot days associated with Aframax tankers.  Aframax spot market voyages are generally of shorter durations than Suezmax spot market voyages, resulting in more port calls during the year and consequently higher port costs.  Fuel costs decreased by approximately 59% during 2007 to $23.9 million from $58.9 million during the prior year. Although fuel prices were higher in 2007 as compared to 2006, fuel cost per spot days remained relatively unchanged.  This is due to the increase in 2007 in the proportion of spot market voyage days associated with Aframax tankers, which consume significantly less fuel than do Suezmax vessels.

 

NET VOYAGE REVENUES- Net voyage revenues, which are voyage revenues minus voyage expenses, decreased by $28.7 million, or 11.7%, to $216.9 million for the year ended December 31, 2007 compared to $245.6 million for the prior year. Of this total decrease, approximately $18 million is attributable to the decrease in the average size of our fleet which decreased 6.3% to 19.3 vessels (10.0 Aframax, 9.3 Suezmax) for the year ended December 31, 2007 compared to 20.6 vessels (12.7 Aframax, 7.9 Suezmax) for the prior year. Approximately $11 million of the decrease in net voyage revenue is associated with weaker overall daily rates for Suezmax and Aframax vessels during the year ended December 31, 2007 compared to the

 

32



 

prior year. Our average TCE rates decreased 4.7% to $32,876 during the year ended December 31, 2007 compared to $34,487 during the year ended December 31, 2006.

 

The following is additional data pertaining to net voyage revenues:

 

 

 

Year ended December 31,

 

Increase

 

 

 

 

 

2007

 

2006

 

(Decrease)

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Net voyage revenue (in thousands):

 

 

 

 

 

 

 

 

 

Time charter:

 

 

 

 

 

 

 

 

 

Aframax

 

$

55,496

 

$

46,327

 

$

9,169

 

19.8

%

Suezmax

 

102,023

 

13,929

 

88,094

 

632.5

%

Total

 

157,519

 

60,256

 

97,263

 

161.4

%

 

 

 

 

 

 

 

 

 

 

Spot charter:

 

 

 

 

 

 

 

 

 

Aframax

 

42,453

 

78,791

 

(36,338

)

-46.1

%

Suezmax

 

16,974

 

106,537

 

(89,563

)

-84.1

%

Total

 

59,427

 

185,328

 

(125,901

)

-67.9

%

 

 

 

 

 

 

 

 

 

 

TOTAL NET VOYAGE REVENUE

 

$

216,946

 

$

245,584

 

$

(28,638

)

-11.7

%

 

 

 

 

 

 

 

 

 

 

Vessel operating days:

 

 

 

 

 

 

 

 

 

Time charter:

 

 

 

 

 

 

 

 

 

Aframax

 

1,894

 

1,935

 

(41

)

-2.1

%

Suezmax

 

2,747

 

365

 

2,382

 

652.6

%

Total

 

4,641

 

2,300

 

2,341

 

101.8

%

 

 

 

 

 

 

 

 

 

 

Spot charter:

 

 

 

 

 

 

 

 

 

Aframax

 

1,386

 

2,467

 

(1,081

)

-43.8

%

Suezmax

 

572

 

2,354

 

(1,782

)

-75.7

%

Total

 

1,958

 

4,821

 

(2,863

)

-59.4

%

TOTAL VESSEL OPERATING DAYS

 

6,599

 

7,121

 

(522

)

-7.3

%

AVERAGE NUMBER OF VESSELS

 

19.3

 

20.6

 

(1.3

)

-6.3

%

 

 

 

 

 

 

 

 

 

 

Time Charter Equivalent (TCE):

 

 

 

 

 

 

 

 

 

Time charter:

 

 

 

 

 

 

 

 

 

Aframax

 

$

29,301

 

$

23,941

 

$

5,359

 

22.4

%

Suezmax

 

$

37,140

 

$

38,163

 

$

(1,023

)

-2.7

%

Combined

 

$

33,941

 

$

26,198

 

$

7,742

 

29.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Spot charter:

 

 

 

 

 

 

 

 

 

Aframax

 

$

30,630

 

$

31,938

 

$

(1,308

)

-4.1

%

Suezmax

 

$

29,674

 

$

45,258

 

$

(15,584

)

-34.4

%

Combined

 

$

30,351

 

$

38,442

 

$

(8,091

)

-21.0

%

TOTAL TCE

 

$

32,876

 

$

34,487

 

$

(1,611

)

-4.7

%

 

As of December 31, 2007, 12 of our vessels are on time charters expiring between August 2009 and August 2010.

 

DIRECT VESSEL EXPENSES- Direct vessel expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs increased by $0.7 million, or 1.6%, to $48.2 million for the year ended December 31, 2007 compared to $47.5 million for the prior year. This increase is primarily due to higher daily direct vessel expenses per vessel which increased by $543, or 8.6%, to $6,844 ($6,965 Aframax, $6,713 Suezmax) for the year ended December 31, 2007 compared to $6,301 ($6,051 Aframax, $6,705 Suezmax) for the prior year. This increase is partially

 

33



 

offset by a 6.3% decrease in the size of our fleet during 2007 as compared to 2006.  This increase in daily cost during the year ended December 31, 2007 as compared to the prior year is primarily attributable to certain expenses reflecting expensing of insurance claim deductibles, increased insurance premiums associated with the increased value of our fleet, higher crewing costs associated with bringing the technical management of two of our Aframax vessels in-house, higher maintenance and repairs associated with three Aframax tankers, and higher costs of lubricating oils associated with higher pricing in the areas where our vessels under time charters trade  during the year ended December 31, 2007 as compared to the prior year.

 

We anticipate that direct vessel expenses will increase during 2008 as compared to 2007 due to the increase in the average size of our fleet during 2008 as compared to 2007 and higher expected daily direct vessel expenses.  We expect daily direct vessel operating expenses to increase during 2008 due to higher crew and lubricating oils costs.

 

OTHER EXPENSE—Other expense for the year ended December 31, 2006 is comprised of a $2.4 million settlement of a claim by a subsidiary of the Exxon Mobil Corporation arising from the February 4, 2005 collision of the Genmar Kestrel.

 

GENERAL AND ADMINISTRATIVE EXPENSES—General and administrative expenses increased by $2.1 million, or 4.8%, to $46.9 million for the year ended December 31, 2007 compared to $44.8 million for the prior year. Significant factors contributing to this increase for the year ended December 31, 2007 compared to the prior year are:

 

(a) A $2.0 million increase in financial advisory fees during the year ended December 31, 2007 compared to the prior year associated with financial advisory services received pursuant to our determination to pay a special dividend.

 

 (b) A $0.9 million increase in severance costs for the year ended December 31, 2007 compared to the prior year.

 

  (c) A $0.9 million increase in restricted stock amortization during the year ended December 31, 2007 as compared to the prior year associated with amortization of restricted shares granted during 2007 as well as a full year amortization on restricted stock awards granted in December 2006, partially offset by lower restricted stock amortization associated with restricted shares granted prior to December 2006.

 

(d) A $1.1 million net decrease in costs associated with operating our foreign offices in Greece and Portugal during the year ended December 31, 2007 compared to the prior year period.  This net decrease includes a $2.7 million decrease in operating our office in Greece during the year ended December 31, 2007 as compared to the prior year.  This office ceased vessel operations during May 2006, and during the year ended December 31, 2006, we incurred the cost of operating this office as well as severance costs relating to the closing of this office, compared to significantly lower costs incurred during the year ended December 31, 2007.  This decrease is partially offset by a $1.6 million increase in costs of operating our office in Portugal during the year ended December 31, 2007 as compared to the prior year, associated with increased staffing levels and infrastructure in that office.

 

 (e) A $0.4 million decrease during the year ended December 31, 2007 as compared to the prior year relating to the costs of operating our foreign office in London associated with that office ceasing commercial operations activity during March 2007.

 

General and administrative expenses as a percentage of net voyage revenues increased to 21.6% for the year ended December 31, 2007 from 18.2% for the prior year. Daily general and administrative expenses per vessel increased $715, or 12.0%, to $6,660 for the year ended December 31, 2007 compared to $5,945 for the prior year.

 

For 2008, we have budgeted estimated general and administrative expenses to be approximately $42.8 million.

 

DEPRECIATION AND AMORTIZATION—Depreciation and amortization, which include depreciation of vessels as well as amortization of drydocking and special surveys, increased by $7.3 million, or 17.2%, to $49.7 million for the year ended December 31, 2007 compared to $42.4 million for the prior year. Vessel depreciation increased by $3.4 million to $37.3 million during year ended December 31, 2007 compared to $33.9 million during the prior year period.  This increase is due to more depreciation during 2007 relating to the additions to our fleet of the Harriet G in March 2006, the Kara G in January 2007 and the George T  in August 2007.

 

Amortization of drydocking increased by $4.0 million, or  65.6%, to $10.1 million for the year ended December 31, 2007 compared to $6.1 million for the prior year. Drydocks are typically amortized over periods from 30 months to 60 months.  This increase reflects amortization during 2007 of a portion of the $11.8 million of drydock costs capitalized during the year

 

34



 

ended December 31, 2007 and amortization for the full year of the $11.9 million of drydock costs capitalized during the year ended December 31, 2006, as well as acceleration of amortization of two drydocks that had been rescheduled to earlier dates.

 

LOSS (GAIN) ON SALE OF VESSELS AND EQUIPMENT— During the year ended December 31, 2007, we incurred a $0.4 million loss associated with the disposal of certain vessel equipment.  During 2006, we sold 13 vessels for aggregate net proceeds of $340.9 million, for a net gain on sale of vessels of $46.0 million.

 

INTEREST INCOME—Interest income decreased by $3.1 million, or 55.8%, to $2.5 million during the year ended December 31, 2007 compared to $5.6 million during the prior year.  This decrease is the result of lower average cash balances during 2007 compared to 2006.

 

INTEREST EXPENSE—Interest expense increased by $21.3 million, or  513%, to $25.5 million for the year ended December 31, 2007 compared to $4.2 million for the prior year. This increase is attributable to the increase in outstanding borrowings under our 2005 Credit Facility during 2007.  During the year ended December 31, 2007, our weighted average outstanding debt increased by 345% to $414.1 million compared to $93.1 during the prior year.

 

During March 2007 we paid a $15.00 per share dividend on our common stock through borrowings under our 2005 Credit Facility which increased our outstanding borrowings under our 2005 Credit Facility to $565 million as of December 30, 2007 compared to $50 million outstanding as of December 31, 2006.  We expect our long-term debt during 2008 to approximate the debt level at December 31, 2007.  Because this amount is greater than our weighted average debt for the year ended December 31, 2007,  we expect our interest expense to be higher during 2008 as compared to 2007.

 

OTHER INCOME (EXPENSE)— Other expense for the year ended December 31, 2007 was $4.1 million of which the main components were an aggregate realized loss on our freight derivatives of $2.0 million and an unrealized loss on our freight derivatives of $2.3 million.  Other income for the year ended December 31, 2006 was $0.9 million and consisted primarily of a $0.6 million gain on Euros held by the Company and an unrealized gain on our freight derivative of $2.2 million offset by a realized loss on our freight derivative of $2.1 million.

 

NET INCOME—Net income was $44.5 million for the year ended December 31, 2007 compared to net income of $156.8 million for the prior year.

 

YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR ENDED DECEMBER 31, 2005

 

VOYAGE REVENUES- Voyage revenues decreased by $241.9 million, or 42.6%, to $326.0 million for the year ended December 31, 2006 compared to $567.9 million for the prior year.   This decrease is primarily due to a 49.4% decrease in the number of vessel operating days to 7,121 days in 2006 from 14,073 days in the prior year, which is primarily attributable to a decrease in the size of our fleet. The average size of our fleet decreased to 20.6 (12.7 Aframax, 7.9 Suezmax) vessels during the year ended December 31, 2006 compared to 41.9 vessels (25.5 Aframax, 16.4 Suezmax) during the prior year. This decrease is partially offset by stronger spot and time charter rates during 2006 as compared to the prior year.  This overall decrease is consistent with our strategy to selectively sell older vessels when and if appropriate opportunities are identified in order to adjust our fleet characteristics and profile to suit customer preferences and to monetize investments in vessels to generate capital for potential future growth.

 

VOYAGE EXPENSES- Voyage expenses decreased $56.8 million, or 41.4%, to $80.4 million for the year ended December 31, 2006 compared to $137.2 million for the prior year. Substantially all of our voyage expenses relate to spot charter voyages, under which the vessel owner is responsible for voyage expenses such as fuel and port costs. This decrease in voyage expenses is primarily due to a decrease in the number of days our vessels operated under spot charters. During the year ended December 31, 2006, the number of days our vessels operated under spot charters decreased by 5,269, or 52.2%, to 4,821 days (2,467 days Aframax, 2,354 days Suezmax) from 10,090 days (4,529 days Aframax, 5,561 days Suezmax) during the prior year. This decrease was partially offset by fuel costs which were 38% higher per spot vessel day during the year ended December 31, 2006 compared to the prior year period. Fuel cost decreased by $30.6 million, or 34.2%, to $58.9 million during the year ended December 31, 2006 compared to $89.5 million during the prior year. Port costs, which can vary depending on the geographic regions in which the vessels operate and their trading patterns, decreased by $25.9 million, or 56.2%, to $20.2 million during the year ended December 31, 2006 compared to $46.2 million during the prior year. Included in these port costs are Suez Canal transit costs of approximately $0.8 million during the year ended December 31, 2006 compared to $7.8 million during the prior year.

 

35



 

NET VOYAGE REVENUES- Net voyage revenues, which are voyage revenues minus voyage expenses, decreased by $185.1 million, or 43.0%, to $245.6 million for the year ended December 31, 2006 compared to $430.7 million for the prior year. Of this total decrease, approximately $213 million is attributable to the decrease in the average size of our fleet which decreased 50.8% to 20.6 vessels (12.7 Aframax, 7.9 Suezmax) for the year ended December 31, 2006 compared to 41.9 vessels (25.5 Aframax, 16.4 Suezmax) for the prior year. This decrease is partially offset by approximately $ 28 million of additional net voyage revenue associated with stronger daily rates for time charters and spot charters for Suezmax and Aframax vessels during the year ended December 31, 2006 compared to the prior year. Our average TCE rates increased 12.7% to $34,487 during the year ended December 31, 2006 compared to $30,605 during the year ended December 31, 2005.

 

The following is additional data pertaining to net voyage revenues:

 

 

 

Year ended December 31,

 

Increase

 

 

 

 

 

2006

 

2005

 

(Decrease)

 

% Change

 

Net voyage revenue (in thousands):

 

 

 

 

 

 

 

 

 

Time charter:

 

 

 

 

 

 

 

 

 

Aframax

 

$

46,327

 

$

83,658

 

$

(37,331

)

-44.6

%

Suezmax

 

13,929

 

1,469

 

12,460

 

848.2

%

Total

 

60,256

 

85,127

 

(24,871

)

-29.2

%

 

 

 

 

 

 

 

 

 

 

Spot charter:

 

 

 

 

 

 

 

 

 

Aframax

 

78,791

 

125,146

 

(46,355

)

-37.0

%

Suezmax

 

106,537

 

220,425

 

(113,888

)

-51.7

%

Total

 

185,328

 

345,571

 

(160,243

)

-46.4

%

 

 

 

 

 

 

 

 

 

 

TOTAL NET VOYAGE REVENUE

 

$

245,584

 

$

430,698

 

$

(185,114

)

-43.0

%

 

 

 

 

 

 

 

 

 

 

Vessel operating days:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time charter:

 

 

 

 

 

 

 

 

 

Aframax

 

1,935

 

3,936

 

(2,001

)

-50.8

%

Suezmax

 

365

 

47

 

318

 

676.6

%

Total

 

2,300

 

3,983

 

(1,683

)

-42.3

%

 

 

 

 

 

 

 

 

 

 

Spot charter:

 

 

 

 

 

 

 

 

 

Aframax

 

2,467

 

4,529

 

(2,062

)

-45.5

%

Suezmax

 

2,354

 

5,561

 

(3,207

)

-57.7

%

Total

 

4,821

 

10,090

 

(5,269

)

-52.2

%

 

 

 

 

 

 

 

 

 

 

TOTAL VESSEL OPERATING DAYS

 

7,121

 

14,073

 

(6,952

)

-49.4

%

AVERAGE NUMBER OF VESSELS

 

20.6

 

41.9

 

(21.3

)

-50.8

%

 

 

 

 

 

 

 

 

 

 

Time Charter Equivalent(TCE):

 

 

 

 

 

 

 

 

 

Time charter:

 

 

 

 

 

 

 

 

 

Aframax

 

$

23,941

 

$

21,255

 

$

2,686

 

12.6

%

Suezmax

 

$

38,163

 

$

31,260

 

$

6,903

 

22.1

%

Combined

 

$

26,198

 

$

21,373

 

$

4,825

 

22.6

%

 

 

 

 

 

 

 

 

 

 

Spot charter:

 

 

 

 

 

 

 

 

 

Aframax

 

$

31,938

 

$

27,632

 

$

4,306

 

15.6

%

Suezmax

 

$

45,258

 

$

39,638

 

$

5,620

 

14.2

%

Combined

 

$

38,442

 

$

34,249

 

$

4,193

 

12.2

%

 

 

 

 

 

 

 

 

 

 

TOTAL TCE

 

$

34,487

 

$

30,605

 

$

3,882

 

12.7

%

 

DIRECT VESSEL EXPENSES- Direct vessel expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs decreased by $39.2 million, or 45.2%, to $47.5 million for the year ended

 

36



 

December 31, 2006 compared to $86.7 million for the prior year. This decrease is primarily due to a 50.8% decrease in the size of our fleet during the year ended December 31, 2006 as compared to the prior year. This decrease is partially offset by higher daily direct vessel expenses per vessel which increased by $640, or 11.3%, to $6,301 ($6,048 Aframax, $6,710 Suezmax) for the year ended December 31, 2006 compared to $5,661 ($5,493 Aframax, $5,922 Suezmax) for the prior year. This increase in daily direct vessel expenses is primarily attributed to higher crew costs associated with enhanced crew training, changes in crew complements and repatriating crews of vessels that we sold during 2006; higher costs of lubricating oils and higher insurance costs.

 

OTHER EXPENSE—Other expense for the year ended December 31, 2006 is comprised of a $2.4 million settlement of a claim by a subsidiary of the Exxon Mobil Corporation arising from the February 4, 2005 collision of the Genmar Kestrel.

 

GENERAL AND ADMINISTRATIVE EXPENSES—General and administrative expenses increased by $0.8 million, or 1.8%, to $44.8 million for the year ended December 31, 2006 compared to $44.0 million for the prior year. The primary components of this increase for the year ended December 31, 2006 compared to the prior year are:

 

(a) a $4.0 million increase in compensation to our U.S.-based personnel, principally consisting of a $3.2 million non-cash increase in restricted stock amortization, which included higher amortization in 2006 as compared to 2005 of restricted stock grants made in April 2005, December 2005, May 2006, October 2006 and December 2006; and a $0.7 million increase in salaries and bonuses during 2006 as compared to 2005.

 

(b) a $0.7 million increase in 2006 as compared to 2005 relating to operating our foreign subsidiary in Portugal, which increase is primarily attributable to greater headcount in 2006 associated with the transfer to Portugal of the technical management of vessels that our office in Greece had handled through May 2006;

 

(c) a $2.0 million decrease in 2006 as compared to 2005 relating to our decision to close our foreign subsidiary in Greece, which ceased technical management of vessels in May 2006 and is currently being wound down.

 

(d) a $1.0 million decrease  in 2006 as compared to 2005 relating to professional fees incurred during 2005 such as strategic advisory services associated with an unsolicited acquisition proposal and senior executive employment agreements that did not recur in 2006 as well as lower costs in 2006 as compared to 2005 relating to Sarbanes-Oxley 404 compliance; and

 

(e) a $0.8 million decrease in 2006 as compared to 2005 relating to our lease of an aircraft.

 

General and administrative expenses as a percentage of net voyage revenues increased to 18.2% for the year ended December 31, 2006 from 10.2% for the prior year. Daily general and administrative expenses per vessel increased $3,072, or 107%, to $5,945 for the year ended December 31, 2006 compared to $2,873 for the prior year.

 

DEPRECIATION AND AMORTIZATION—Depreciation and amortization, which include depreciation of vessels as well as amortization of drydocking, special survey and loan fees, decreased by $54.9 million, or 56.4%, to $42.4 million for the year ended December 31, 2006 compared to $97.3 million for the prior year. This decrease is primarily due to the 50.8% reduction in the size of our fleet during 2006, which decreased vessel depreciation by $41.7 million, or 55.2%, to $33.9 million during the year ended December 31, 2006 compared to $75.6 million during the prior year.

 

Amortization of drydocking decreased by $11.9 million, or  66.1%, to $6.1 million for the year ended December 31, 2006 compared to $18.0 million for the prior year. This decrease is primarily attributable to the 50.8% reduction in the size of our fleet during 2006.

 

GAIN ON SALE OF VESSELS—During 2005, we agreed to sell 17 vessels comprised of : (a) our four single-hull Suezmax vessels, (b) our six double-sided Suezmax vessels, (c) our one single-hull Aframax vessel and (d) our six double-sided Aframax vessels in order to transform our fleet to exclusively double-hull vessels. Through December 31, 2005, 13 of these vessels were delivered to their new owners for aggregate net proceeds of $334.7 million, for a net gain on sale of vessels of $91.2 million.

 

During 2006, we sold the four remaining vessels described above as well as our nine Aframax OBO vessels, which we decided to sell to reduce the average age of our fleet.  These 13 vessels were delivered to their new owners for aggregate net proceeds of $340.9 million, for a net gain on sale of vessels of $46.0 million.

 

37



 

INTEREST INCOME—Interest income increased by $2.1 million, or 61.4%, to $5.6 million during the year ended December 31, 2006 compared to $3.5 million during the prior year.  This increase is the result of higher average cash balances and higher interest rates on deposits earned during 2006 compared to 2005.

 

INTEREST EXPENSE—Interest expense decreased by $28.2 million, or  87.0%, to $4.2 million for the year ended December 31, 2006 compared to $32.4 million for the prior year. $24.7 million of this decrease resulted from a decrease in interest expense relating to our Senior Notes, substantially all of which we retired in December 2005.  An additional $3.1 million  decrease pertains to lower interest expense on our revolving credit facilities due to lower average borrowing levels during 2006 as compared to 2005, partially offset by higher floating borrowing rates during 2006 compared to 2005.  During the year ended December 31, 2006, our weighted average indebtedness on our credit facilities decreased by 48.6% to $93.1 million from $181.0 million during the prior year.

 

OTHER INCOME (EXPENSE)—During 2005, Other income (expense) consisted primarily of a $45.8 million loss relating to our repurchase of $250.0 million of our Senior Notes, which includes a $5.7 million write-off of deferred financing costs. Also, in October 2005, we entered into an $800 million credit facility, refinancing our $825 million credit facility, at which time we wrote off as a non-cash charge $5.0 million associated with the unamortized deferred financing costs associated with the $825 million credit facility.

 

NET INCOME—Net income was $156.8 million for the year ended December 31, 2006 compared to net income of $212.4 million for the prior year.

 

Effects of Inflation

 

The Company does not consider inflation to be a significant risk to the cost of doing business in the current or foreseeable future. Inflation has a moderate impact on operating expenses, drydocking expenses and corporate overhead.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Sources and Uses of Funds; Cash Management

 

Since our formation, our principal sources of funds have been equity financings, issuance of long-term debt securities, operating cash flows, long-term bank borrowings and opportunistic sales of our older vessels. Our principal use of funds has been capital expenditures to establish and grow our fleet, maintain the quality of our vessels, comply with international shipping standards and environmental laws and regulations, fund working capital requirements and repayments on outstanding loan facilities. Beginning in 2005, we also adopted policies to use funds to pay dividends and, from time to time, to repurchase our common stock. See below for descriptions of our Dividend Policy and our Share Repurchase Program.

 

Our practice has been to acquire vessels or newbuilding contracts using a combination of funds received from equity investors, bank debt secured by mortgages on our vessels and shares of the common stock of our shipowning subsidiaries, and long-term debt securities. Because our payment of dividends is expected to decrease our available cash, while we expect to use our operating cash flows and borrowings to fund acquisitions, if any, on a short-term basis, we also intend to review debt and equity financing alternatives to fund such acquisitions. Our business is capital intensive and its future success will depend on our ability to maintain a high-quality fleet through the acquisition of newer vessels and the selective sale of older vessels. These acquisitions will be principally subject to management’s expectation of future market conditions as well as our ability to acquire vessels on favorable terms.

 

We expect to rely on operating cash flows as well as long-term borrowings and future equity offerings to implement our growth plan, dividend policy, and share repurchase. We believe that our current cash balance as well as operating cash flows and available borrowings under our credit facilities will be sufficient to meet our liquidity needs for the next year.

 

Our operation of ocean-going vessels carries an inherent risk of catastrophic marine disasters and property losses caused by adverse severe weather conditions, mechanical failures, human error, war, terrorism and other circumstances or events. In addition, the transportation of crude oil is subject to business interruptions due to political circumstances, hostilities among nations, labor strikes and boycotts. Our current insurance coverage includes (1) protection and indemnity insurance coverage for tort liability, which is provided by mutual protection and indemnity associations, (2) hull and machinery insurance for actual or constructive loss from collision, fire, grounding and engine breakdown, (3) war risk insurance for confiscation, seizure, capture, vandalism, sabotage and other war-related risks and (4) loss of hire insurance for loss of revenue for up to 90 days resulting from a vessel being off hire for all of our vessels.

 

38



 

Dividend Policy

 

On February 21, 2007, we announced that our Board of Directors declared a special, one-time cash dividend of $15.00 per share. The dividend was paid on March 23, 2007 to shareholders of record as of March 9, 2007. We funded substantially the entire amount of the special dividend payment through new borrowings under our 2005 Credit Facility. Inclusive of this special dividend, our history of dividend payments is as follows:

 

Quarter ended

 

Paid date

 

Amount

 

 

 

 

 

(million)

 

March 31, 2005

 

June 13, 2005

 

$

68.4

 

June 30, 2005

 

September 7, 2005

 

$

32.5

 

September 30, 2005

 

December 13, 2005

 

$

9.5

 

December 31, 2005

 

March 17, 2006

 

$

68.0

 

March 31, 2006

 

June 5, 2006

 

$

47.7

 

June 30, 2006

 

September 8, 2006

 

$

21.7

 

September 30, 2006

 

December 14, 2006

 

$

23.0

 

December 31, 2006

 

March 23, 2007

 

$

506.8

 

March 31, 2007

 

May 31, 2007

 

$

16.4

 

June 30, 2007

 

August 31, 2007

 

$

16.4

 

September 30, 2007

 

November 30, 2007

 

$

15.9

 

 

We also announced on February 21, 2007 that our Board of Directors changed our quarterly dividend policy by adopting a fixed target amount of $0.50 per share per quarter or $2.00 per share each year, starting with the first quarter of 2007. We intend to declare dividends in April, July, October and February of each year. On October 31, 2007, our Board of Directors declared a $0.50 per share dividend that was paid on November 30, 2007.

 

The declaration of dividends and their amount, if any, will depend upon the results of the Company and the determination of our Board of Directors. Any dividends paid will be subject to the terms and conditions of our 2005 Credit Facility and applicable provisions of Marshall Islands law.

 

Share Repurchase Program

 

In October 2005 and February 2006, the Company’s Board of Directors approved repurchases by the Company of its common stock under a share repurchase program for up to an aggregate total of $400 million, of which $123.5 million was available as of December 31, 2007. The Board will periodically review the program. Share repurchases will be made from time to time for cash in open market transactions at prevailing market prices or in privately negotiated transactions. The timing and amount of purchases under the program will be determined by management based upon market conditions and other factors. Purchases may be made pursuant to a program adopted under Rule 10b5-1 under the Securities Exchange Act. The program does not require the Company to purchase any specific number or amount of shares and may be suspended or reinstated at any time in the Company’s discretion and without notice. Repurchases will be subject to the terms of our 2005 Credit Facility, which are described in further detail below.

 

Through December 31, 2007, the Company has acquired 8,117,513 shares of its common stock for $276.5 million using borrowings under its credit facility and funds from operations. All of these shares have been retired.

 

39



 

 

 

 

 

 

 

 

 

Maximum Dollar

 

 

 

 

 

 

 

Total Dollar

 

Amount that May

 

 

 

Total Number

 

Average

 

Amount as Part of

 

Yet Be Purchased

 

 

 

of Shares

 

Price Paid

 

Publicly Announced

 

Under the Plans or

 

Period

 

Purchased

 

Per Share

 

Plans or Programs

 

Programs

 

Jan. 1, 2007 - Jan. 31, 2007

 

 

$

 

$

 

$

156,155,360

 

Feb. 1, 2007 - Feb. 28, 2007

 

 

$

 

$

 

156,155,360

 

Mar. 1, 2007 - Mar. 31, 2007

 

 

$

 

$

 

156,155,360

 

Apr. 1, 2007- Apr. 30, 2007

 

 

$

 

$

 

156,155,360

 

May 1, 2007- May 31, 2007

 

 

$

 

$

 

156,155,360

 

Jun. 1, 2007- Jun. 30, 2007

 

</