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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
_____________________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________________________
Commission file number 0-22704
_________________________________________
Frontline Ltd.
________________________________________________________________
(Exact name of Registrant as specified in its charter)
Frontline Ltd.
________________________________________________________________
(Translation of Registrant's name into English)
Bermuda
________________________________________________________________
(Jurisdiction of incorporation or organization)
Mercury House, 101 Front Street, Hamilton, HM 12, Bermuda
________________________________________________________________
(Address of principal executive offices)
Securities registered or to be registered pursuant to section
12(b) of the Act.
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
None
___________________ _____________________
Securities registered or to be registered pursuant to section
12(g) of the Act.
American Depositary Shares each representing one Ordinary Share,
$2.50 Par Value
________________________________________________________________
(Title of class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
Ordinary Shares, $2.50 Par Value
________________________________________________________________
(Title of class)
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period
covered by the annual report.
46,106,860 Ordinary Shares, $2.50 Par Value of which 825,756
Ordinary Shares are held in the form of 825,756 American
Depositary Shares
________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark which financial statement item the
registrant has elected to follow.
Item 17 Item 18 X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
THE COMPANY
Frontline Ltd. (formerly London & Overseas Freighters Limited
("LOF")) (the "Company") originally commenced operations in 1948
as a U.K. company ("LOF plc") and was listed on the London Stock
Exchange in 1950. The Company was incorporated under the laws of
Bermuda on June 12, 1992 for the purpose of succeeding to the
business of LOF plc. In November 1993, the shares of LOF were
listed on the NASDAQ National Market in the form of American
Depositary Shares ("ADSs"), each ADS representing ten LOF shares.
On May 11, 1998, LOF completed a business combination, as
described below, with another Bermuda company, Frontline Ltd.
("Frontline"). LOF, the surviving entity, was renamed Frontline
Ltd. effective from that date. Frontline commenced operations in
1985 as a Swedish company listed on the Stockholm Stock Exchange
in 1989 ("Frontline AB"). Frontline was incorporated under the
laws of Bermuda on April 29, 1997 for the purpose of succeeding
to the business of Frontline AB and, commencing in June 1997, the
shares in Frontline AB were exchanged for shares in Frontline.
The ordinary shares of Frontline were thereafter listed on the
Oslo Stock Exchange and delisted from the Stockholm Stock
Exchange.
On September 22, 1997, LOF and Frontline announced that they had
entered into an Agreement and Plan of Amalgamation (the
"Amalgamation Agreement"), providing for a business combination
in a three-step transaction. On September 29, 1997, pursuant to
the Amalgamation Agreement, Frontline commenced a cash tender
offer (the "Offer") for at least 50.1 per cent and up to 90 per
cent of the outstanding LOF Ordinary Shares and ADSs for a price
of $1.591 (restated to $15.91) per Ordinary Share ($15.91 per
ADS). The Offer expired on October 28, 1997, and effective
November 1, 1997 Frontline acquired approximately 79.74 per cent
of the outstanding LOF Ordinary Shares.
In the second step, which was completed on May 11, 1998,
Frontline amalgamated (the "Amalgamation") with Dolphin Limited,
a Bermuda subsidiary of LOF. Each ordinary share of Frontline was
canceled in consideration for which the stockholders of Frontline
received (i) 3.2635 (restated to 0.32635) Ordinary Shares of LOF
and (ii) 0.1902 (restated to 0.01902) of a newly issued warrant
("Frontline Warrants") to purchase one LOF Ordinary Share.
In the third step of the combination, in order to combine the
assets and liabilities, LOF purchased the assets and liabilities
of Frontline which were vested in the amalgamated company at fair
market value in exchange for a promissory note. This note will be
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transferred by way of distribution from the amalgamated company
to the Company which will in turn cancel the note. LOF is the
legally surviving entity in this business combination and has
been renamed Frontline Ltd. with effect from May 11, 1998.
Frontline is treated as the accounting acquiror and the
transaction treated as a reverse acquisition. The share capital
of the Company has been restated accordingly to reflect the
transaction. For periods on or after May 11, 1998, the term
"Company" refers to Frontline Ltd. (formerly London & Overseas
Freighters Limited).
The Company, which combines the business of LOF and Frontline, is
a holding company for investments in a number of subsidiaries
engaged primarily in the ownership and operation of oil tankers
and oil/bulk/ore ("OBO") carriers. The Company operates through
subsidiaries and partnerships located in Sweden, Norway,
Singapore, Liberia and Panama. The Company is also involved in
the charter, purchase and sale of vessels.
The Company is a world leader in the international seaborne
transportation of crude oil, operating one of the world's largest
modern fleets of very large crude carriers ("VLCCs"), Suezmax
tankers and Suezmax OBO carriers. In 1998, the Company took
delivery of three Suezmax tankers and two VLCC newbuildings. In
January 1999, the Company took delivery of a third VLCC
newbuilding and is scheduled to take delivery of two additional
Suezmax tankers in 2000 and two VLCCs in 1999. The Company also
owns one wood-chip carrier and has a minority interest in two
older Suezmax tankers built in 1978 and 1979, and charters in one
Suezmax OBO carrier and one modern Suezmax tanker. The two VLCC
newbuildings acquired by the Company in 1998 were subsequently
sold and leased back on bareboat charters for periods of eight
years with the option on the buyer's side to extend the charter
for 2+1+1 years. The fleet operated by the Company has a total
tonnage of approximately 5.5 million deadweight tonnes ("dwt"),
which, based on current orders and assuming no dispositions, is
anticipated to grow to 6.0 million dwt by the end of 1999. Based
on the same assumptions, by the end of 1999, the Company
estimates that it will own and operate one of the most modern
fleets of tankers and Suezmax OBO carriers in the world,
comprised of vessels with an average age of 5.6 years versus an
estimated industry average of over 14.0 years. By such time, the
Company's fleet is, and at such time, will be comprised of
vessels that the Company believes will comply with the most
stringent generally applicable environmental regulations for
tankers.
The Company is committed to providing quality transportation
services to all of its customers and to developing and
maintaining long term relationships with the major charterers of
tankers. The Company believes that its Suezmax OBO carriers offer
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a competitive advantage in contrast to the fleets of other large
tanker owning companies, since they are able to carry different
types of cargo and can minimize the number of days at sea in
ballast (without cargo). The Company believes that its Suezmax
OBO carriers are a source of added strength and security to the
Company since the vessels have two markets in which to operate.
Increasing global environmental concerns have created a demand in
the petroleum products/crude oil seaborne transportation industry
for vessels that are able to conform to the stringent
environmental standards currently being imposed throughout the
world. All of the Company's Suezmax OBO carriers built since
1991, and all of its vessels on order, are constructed with
double hulls. The Company's fleet of modern single hull VLCCs may
discharge crude oil at the Louisiana Offshore Oil Port ("LOOP")
until the year 2015, and its three modern single hull Suezmax
tankers may call at US ports until the year 2010 under the phase-
in schedule for double hull tankers presently prescribed under
the Oil Pollution Act of 1990 ("OPA 90"). See "Regulation".
The Company's plan is to create one of the world's largest
publicly traded shipping companies, with a modern, high quality
VLCC, Suezmax and Suezmax OBO fleet. The Company's business
strategy is primarily based upon the following principles:
(i) emphasizing operational safety and quality maintenance for
all of its vessels; (ii) complying with all current and proposed
environmental regulations; (iii) outsourcing technical operations
and crewing; (iv) containing operational costs of vessels; (v)
owning one of the most modern and homogeneous fleets of tankers
in the world; (vi) achieving high utilization of its vessels;
(vii) reducing financing and insurance costs and (viii)
developing and maintaining relationships with major oil companies
and industrial charterers. After having delivered their cargo,
spot market vessels typically operate in ballast until being
rechartered. It is the time element associated with these ballast
legs which the Company seeks to minimize by efficiently
chartering its OBO carriers and tankers. The Company seeks to
maximize earnings in employing vessels in the spot market, under
time charters or under contracts of affreightment.
The Company is registered in Bermuda (No. EC-17460). Its
registered and principal executive offices are located at Mercury
House, 101 Front Street, Hamilton, HM 12, Bermuda, and its
telephone number is +1 (441) 295-6935.
THE ICB TRANSACTION
On September 1, 1997, Frontline announced its intention to submit
an offer to acquire all of the shares in ICB Shipping Aktiebolag
(publ) ("ICB"), a publicly traded Swedish company whose principal
assets consist of modern tanker vessels (the "ICB Transaction").
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ICB owns and/or operates a fleet of twelve vessels consisting of
six VLCCs and six Suezmax tankers. The final form of the offer
was an offer to acquire all of the shares of ICB in exchange for
SEK 130 in cash for each of the A-shares and SEK 115 in cash for
each of the B-shares. The total acquisition price was estimated
to be $423 million, financed primarily by a US $300 million loan
facility ("ICB facility") with Chase Manhattan Bank ("Chase").
During September and October 1997, Frontline acquired ICB shares
for an approximate purchase price of $215 million. Through the
tender offer, Frontline acquired 51.7 per cent of the outstanding
shares of ICB. However, the shares purchased, 14,428,078 Class B
shares and 148,663 Class A shares, provided Frontline with only
31.4 per cent of the ICB voting power. On January 8, 1998,
Frontline withdrew its bid for the remaining outstanding shares
of ICB. The Company has made further share purchases in the
market during 1998, and at December 31, 1998 had 34.2 per cent of
the voting power.
The Company has not been able to control, or exercise significant
influence over, ICB. Accordingly, the Company is accounting for
its investment in ICB as an available-for-sale security in
accordance with SFAS 115. The Company has reclassified the ICB
investment from current to non-current, due to its ability and
intent to retain its investment for an undefined period of time
sufficient to allow for any anticipated recovery in ICB's market
value.
During 1998 and the first half of 1999, a delegation of the
Company's Board has, on different occasions, met with a
delegation of ICB's Board in order to try to find a mutually
acceptable solution to the ownership situation. The Company's
strategy is unchanged and is concentrated around a potential
consolidation of the two companies. The Board remains cautiously
optimistic about the likelihood of finding a solution to the on-
going deadlock, which will soon have lasted for two years.
As of June 30, 1999, the Company owns shares representing
approximately 68 per cent of the equity of ICB and approximately
44 per cent of the voting power of ICB.
INDEPENDENT TANKERS CORPORATION TRANSACTION
In May 1998, the Company acquired control of three shipowning
and/or leasing structures which are organized in a non-recourse
holding company, Independent Tankers Corporation ("ITC"). The
Company acquired ITC for $9.5 million. The Company's investment
in ITC was subsequently sold to Hemen Holding Ltd. ("Hemen"), the
principal shareholder in the Company, for $9.5 million with
effect from July 1, 1998. The acquisition and sale of ITC are
treated as occurring on the same date for accounting purposes as
a result of the common control relationship between the Company
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and Hemen. The results of ITC are therefore not consolidated in
the Company's financial statements for any period in 1998. The
Company is the manager of the underlying operating companies and
has received a five year fair value call option from Hemen to buy
back ITC.
SIGNIFICANT RECENT DEVELOPMENTS
On October 20, 1998 the Company announced that at its Annual
General Meeting held on October 19, 1998, shareholders had voted
to approve a one-for-ten reverse stock split (share
consolidation). As a result of the reverse stock split, the
Company's share capital has been consolidated into one new
Ordinary Share of $2.50 par value each (the "New Shares") for
every ten Ordinary Shares of $0.25 par value each (the "Old
Shares"). The ratio of the Company's American Depositary Receipts
("ADRs") which are traded on Nasdaq National Market, has also
changed from one ADR representing ten Old Shares to one ADR
representing one New Share.
OPERATIONS
Similar to structures commonly used by other shipping companies,
the Company's vessels are all owned by, or chartered to, separate
subsidiaries. Frontline Management AS ("Frontline Management"), a
wholly-owned subsidiary of the Company, supports the Company in
the implementation of its decisions. Frontline Management is
responsible for the commercial management of the Company's
shipowning subsidiaries, including chartering and insurance. Each
vessel owned by the Company is registered under Liberian,
Singaporean, Norwegian or Panamanian flag. The Company's vessels
are managed by the independent ship management companies Acomarit
Shipmanagement Ltd. ("Acomarit"), International Tanker
Management, V Ships Norway and affiliates (together the
"Managers"). Pursuant to management agreements, each Manager
provides operations, ship maintenance, crewing, technical
support, shipyard supervision and related services to the
Company. The accounting management services for each of the
shipowning subsidiaries of the Company are provided by the
Managers.
FURTHER EXPANSION OF FLEET
The shipping industry is highly cyclical, experiencing volatility
in profitability, vessel values and charter rates. In particular,
freight and charterhire rates are strongly influenced by the
supply and demand for shipping capacity. The tanker market in
general has been depressed for a number of years, largely as a
result of an excess of tonnage supply over demand. In 1994, the
VLCC sector of the tanker market appeared to be at or near a
cyclical low. Although subject to continuing volatility and
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cyclicality, these markets have generally improved since that
time. The charter rates that the Company is able to obtain for
its vessels are determined in a highly competitive market. The
industry is cyclical, experiencing significant swings in
profitability and asset values resulting from changes in the
supply of and demand for vessels. The rates obtained in both the
VLCC and Suezmax sectors remained relatively strong in the first
half of 1998, following steady improvement since 1995. The rate
gains in the past few years have been the result of growth in the
world oil demand which, together with a modest increase in the
supply of tankers, created a better supply/demand balance.
Freight rates weakened in the second half of 1998 and the tanker
market is expected to continue to be weak in the foreseeable
future as a result of OPEC oil production cuts to support oil
prices, relatively high world oil inventories, weakness in oil
demand due to the continued Southeast Asian economic crisis as
well as the onset of a recession in Latin America and the
relatively large tanker newbuilding delivery schedule.
In addition, the Company believes that fleet size in the
industrial shipping sector is increasingly important in
negotiating terms with major clients and charterers. The Company
believes that a large, high-quality VLCC, Suezmax and Suezmax OBO
fleet will enhance its ability to obtain flexible terms from
suppliers and shipbuilders and to produce cost savings in
chartering and operations.
Based on these considerations, the Company intends to look for
further opportunities to expand its fleet and acquire additional
VLCCs and Suezmax tankers. Frontline believes that VLCC and
Suezmax freight rates and market values will support such
expansion. Due to the aging profile of the existing world fleet,
enforcement of environmental regulations and customer demand, the
Company believes that there will be increased demand for modern
VLCCs and Suezmax tankers needed to carry the world oil trade
during the early 2000s. As a result, opportunities exist for
selective investment in VLCC and Suezmax tankers built in the
1990s which are in good operating condition, with prospects to
yield operating profits and capital gains over the next several
years. Although VLCC freight rates and market values are
volatile, the Company believes that investment in such VLCC and
Suezmax tankers in today's market carries a limited amount of
downside risk while offering the prospect of significant upside
potential.
As part of its vessel acquisition policy, the Company conducts a
physical inspection of each tanker and examines its construction,
prior ownership, operating history and classification records.
Among the secondhand VLCC and Suezmax tankers which the Company
may purchase are tankers subject to existing bareboat charters or
leases with major oil companies such as in the case of the ITC's
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subsidiaries. The Company may also purchase options to acquire
such tankers at the expiration of such bareboat charters or
leases. The Company cannot guarantee that its policy will be
successful.
INSPECTION BY A CLASSIFICATION SOCIETY
Every commercial vessel's hull and machinery is "classed" by a
classification society authorized by its country of registry. The
classification society certifies that the vessel has been built
and maintained in accordance with the rules of such
classification society and complies with applicable rules and
regulations of the country of registry of the vessel and the
international conventions to which that country is a member. The
Company's vessels have all been certified as "in class."
Each vessel is inspected by a surveyor of the classification
society every year, every two and a half years and every four to
five years. Should any defects be found, the classification
surveyor will issue a "recommendation" for appropriate repairs
which have to be made by the shipowner within the time limit
prescribed.
CUSTOMERS
Customers of the Company include major oil companies, petroleum
products traders, government agencies and various other entities.
During the year ended December 31, 1998 no customer accounted for
10 per cent or more of consolidated freight revenues. In the
years ended December 31, 1997 and 1996, Valero Refining and
Marketing accounted for 10 per cent or more of consolidated
freight revenues.
COMPETITION
The market for international seaborne crude oil transportation
services is highly fragmented and competitive. Seaborne crude oil
transportation services generally are provided by two main types
of operators: major oil company captive fleets (both private and
state-owned) and independent shipowner fleets. In addition,
several owners and operators pool their vessels together on an
ongoing basis, and such pools are available to customers to the
same extent as independently owned and operated fleets. Many
major oil companies and other oil trading companies, the primary
charterers of the vessels owned or controlled by the Company,
also operate their own vessels and use such vessels not only to
transport their own crude oil but also to transport crude oil for
third party charterers in direct competition with independent
owners and operators in the tanker charter market. Competition
for charters is intense and is based upon price, location, size,
age, condition and acceptability of the vessel and its manager.
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Competition is also affected by the availability of other size
vessels to compete in the trades in which the Company engages.
EMPLOYEES
As of May 31, 1999, the Company and its subsidiaries employ 26
people in their respective offices in Bermuda, London, Oslo,
Stockholm and Korea. The Company contracts with the Managers to
manage and operate its vessels. See "Operations" above.
RISK OF LOSS AND INSURANCE
The business of the Company is affected by a number of risks,
including mechanical failure of the vessels, collisions, property
loss to the vessels, cargo loss or damage and business
interruption due to political circumstances in foreign countries,
hostilities and labor strikes. In addition, the operation of any
ocean-going vessel is subject to the inherent possibility of
catastrophic marine disaster, including oil spills and other
environmental mishaps, and the liabilities arising from owning
and operating vessels in international trade.
Frontline Management is responsible for arranging for the
insurance of the Company's vessels in line with standard industry
practice. In accordance with that practice, the Company maintains
marine hull and machinery and war risks insurance, which includes
the risk of actual or constructive total loss, and protection and
indemnity insurance with mutual assurance associations. The
Company from time to time carries insurance covering the loss of
hire resulting from marine casualties in respect of some of its
vessels. Currently, the amount of coverage for liability for
pollution, spillage and leakage available to the Company on
commercially reasonable terms through protection and indemnity
clubs and providers of excess coverage is $700 million per vessel
per occurrence and $750 million per vessel per occurrence in
California. Protection and indemnity clubs are mutual marine
indemnity associations formed by shipowners to provide protection
from large financial loss to one member by contribution towards
that loss by all members.
The Company believes that its current insurance coverage is
adequate to protect against the accident-related risks involved
in the conduct of its business and that it maintains appropriate
levels of environmental damage and pollution insurance coverage,
consistent with standard industry practice. However, there is no
assurance that all risks are adequately insured against, that any
particular claims will be paid or that the Company will be able
to procure adequate insurance coverage at commercially reasonable
rates in the future.
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REGULATION
The business of the Company and the operation of its vessels are
materially affected by government regulation in the form of
international conventions, national, state and local laws and
regulations in force in the jurisdictions in which the vessels
operate, as well as in the country of their registration. Because
such conventions, laws and regulations are often revised, the
Company cannot predict the ultimate cost of complying with such
requirements or the impact of such requirements on the resale
price or useful life of its vessels. The Company is required by
various governmental and quasi-governmental agencies to obtain
certain permits, licenses and certificates with respect to its
operations. Subject to the discussion below and to the fact that
the kinds of permits, licenses and certificates required for the
operation of the vessels owned by the Company will depend upon a
number of factors, the Company believes that it has been and will
be able to obtain all permits, licenses and certificates material
to the conduct of its operations.
The Company believes that the heightened environmental and
quality concerns of insurance underwriters, regulators and
charterers will impose greater inspection and safety requirements
on all vessels in the tanker market and will accelerate the
scrapping of older vessels throughout the industry. Increasing
environmental concerns have created a demand in the seaborne
refined petroleum products transportation industry for vessels
that are able to conform to the stricter environmental standards
currently being imposed throughout the world. All of the
Company's vessels built since 1991 and all of the vessels the
Company has on order comply with the requirements of OPA 90 for
trading in the United States and with the rules and regulations
of the International Maritime Organization ("IMO"). In addition,
the Company maintains operating standards for all of its vessels
that emphasize operational safety, quality maintenance,
continuous training of its crews and officers and compliance with
United States and international regulations.
On March 6, 1992, the IMO adopted regulations which set forth new
and upgraded requirements for pollution prevention for tankers.
These regulations apply to owners and operators of vessels, the
country under whose flag the Company's vessels are registered and
provide, in part, that (i) tankers between 25 and 30 years old
must be of double hull construction or of a mid-deck design with
double side construction, unless they have wing tanks or double
bottom spaces, not used for the carriage of oil, which cover at
least 30 per cent of the length of the cargo tank section of the
hull or are capable of hydrostatically balanced loading which
ensures at least the same level of protection against oil spills
in the event of collision or stranding, (ii) tankers 30 years or
older must be of double hull construction or mid-deck design with
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double side construction, and (iii) all tankers will be subject
to enhanced inspections. Some classification societies, the
certificates of which evidence compliance with the IMO
regulations, may implement these enhanced inspection requirements
prior to the effective date of such regulations. Also, under the
IMO regulations, a tanker must be of double hull construction or
a mid-deck design with double-side construction or be of another
approved design ensuring the same level of protection against oil
pollution in the event that such tanker (i) is the subject of a
contract for a major conversion or original construction on or
after July 6, 1993, (ii) commences a major conversion or has its
keel laid on or after January 6, 1994, or (iii) completes a major
conversion or is a newbuilding delivered on or after July 6,
1996.
In addition, many countries have adopted the International
Convention on Civil Liability for Oil Pollution Damage 1969
("CLC"), as amended by a 1976 protocol, a 1984 protocol and a
1992 protocol. Under 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. Liability is currently
limited to certain US dollar amounts based on the size of the
vessel. The limit of liability is tied to a unit of account which
varies according to a basket of currencies. At December 31, 1998,
that limit was approximately $82.7 million if the country in
which the damage results is a party to the 1992 protocol, which
raised the maximum limit to that level. The right to limit
liability is forfeited where the spill is caused by the owner's
actual fault or privity and, under the 1992 protocol, where the
spill is caused by the owner's intentional or reckless conduct.
In jurisdictions where the CLC has not been adopted, various
legislative schemes or common law govern and liability is imposed
either on the basis of fault or in a manner similar to the CLC.
All of the Company's newbuildings delivered during 1998 and 1999
and the vessels on order are of double hull construction and will
comply with the IMO regulations upon their effective date. The
Company cannot at the present time evaluate the likelihood of
whether compliance with the new regulations regarding inspections
of all vessels will adversely affect the Company's operations, or
the magnitude of any such adverse effect, due to uncertainty of
interpretation of the IMO regulations.
OPA 90 established an extensive regulatory and liability regime
for the protection and cleanup of the environment from oil
spills. OPA 90 affects all owners and operators whose vessels
trade to the United States or its territories or possessions or
whose vessels operate in United States waters, which include the
United States territorial sea and the two hundred nautical mile
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exclusive economic zone of the United States.
Under OPA 90, vessel owners, operators and demise charterers are
"responsible parties" and are jointly, severally and strictly
liable (unless the spill results solely from the act or omission
of a third party (subject to certain statutory qualifications the
effects of which have not been determined by any judicial
interpretation), an act of God or an act of war) for all oil
spill containment and clean-up costs and other damages arising
from oil spills pertaining to their vessels. These other damages
are defined broadly to include (i) natural resources damage and
the costs of assessment thereof, (ii) real and personal property
damages, (iii) net loss of taxes, royalties, rents, fees and
other lost revenues, (iv) lost profits or impairment of earning
capacity due to property or natural resources damage, (v) net
cost of public services necessitated by a spill response, such as
protection from fire, safety or health hazards, and (vi) loss of
subsistence use of natural resources. OPA 90 limits the liability
of responsible parties to the greater of $1,200 per gross tonne
or $10 million per tanker (subject to possible adjustment for
inflation). These limits of strict liability would not apply if
the incident were proximately caused by violation of applicable
United States federal safety, construction or operating
regulations or by the responsible party's gross negligence or
willful misconduct, or if the responsible party fails or refuses
to report the incident or to cooperate and assist in connection
with oil removal activities. The Company currently insures and,
provided such insurance remains available at a commercially
reasonable cost, plans to insure each of its vessels with
pollution, spillage and leakage liability insurance in the amount
of $700 million per vessel per occurrence. This is the amount
currently available to the Company in the insurance market on
commercially reasonable terms. The liability resulting from a
catastrophic spill could exceed the insurance coverage available,
in which event there could be a material adverse effect on the
Company. See "Risk of Loss and Insurance." Additionally, under
OPA 90, the liability of responsible parties, United States or
foreign, with regard to oil pollution damage in the United States
is not preempted by any international convention.
Under OPA 90, with certain limited exceptions, all newly built or
converted tankers operating in United States waters must be built
with double hulls conforming to particular specifications.
Existing vessels which do not comply with the double hull
requirement must be phased out over a 20-year period (1995-2015)
based on size, age and place of off-loading, unless retrofitted
with double hulls.
Notwithstanding the phase-in period, OPA 90 currently permits
existing single hull tankers to operate until the year 2015 if
(i) their operations within United States waters are limited to
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discharging at LOOP or off-loading by means of lightering
activities within authorized lightering zones more than 60 miles
off-shore and (ii) they are otherwise in compliance with
applicable laws and regulations.
OPA 90 expands the pre-existing financial responsibility
requirements for vessels operating in United States waters and
requires owners and operators of vessels to establish and
maintain with the US Coast Guard evidence of insurance or of
qualification as a self-insurer or other evidence of financial
responsibility sufficient to meet their potential strict
liability limit under OPA 90. The US Coast Guard has adopted
regulations which require evidence of financial responsibility
equal to the strict liability limit demonstrated by insurance,
surety bond, self-insurance or guaranty. Under OPA 90, an owner
or operator of more than one tanker is required only to
demonstrate evidence of financial responsibility for the tanker
having the greatest maximum strict liability limit under OPA 90.
The US Coast Guard's regulations concerning certificates of
financial responsibility provide, in accordance with OPA 90, that
claimants may bring suit directly against an insurer or guarantor
that furnishes certificates of financial responsibility; and, in
the event that such insurer or guarantor is sued directly, it is
prohibited from asserting any defense that it may have had
against the responsible party and is limited to asserting those
defenses available to the responsible party and the defense that
the incident was caused by the willful misconduct of the
responsible party. The Company currently maintains evidence of
financial responsibility through Shoreline Mutual (Bermuda) Ltd.
and The Shipowners Insurance and Guaranty Company Ltd. (SIGCO),
commercial providers of such evidence.
Owners or operators of tankers operating in United States waters
must file vessel response plans with the US Coast Guard and their
tankers must operate in compliance with their US Coast Guard
approved plans. Such response plans must, among other things,
(i) identify and ensure, through contract or other approved
means, the availability of necessary private response resources
to respond to a "worst case" discharge, (ii) describe crew
training and drills, and (iii) identify a qualified individual
with full authority to implement removal actions.
OPA 90 specifically permits individual states to impose their own
liability regimes with regard to oil pollution incidents
occurring within their boundaries, and many states have enacted
legislation providing for unlimited liability for oil spills. In
some cases, states which have enacted such legislation have not
yet issued implementing regulations defining tanker owners'
responsibilities under these laws. The Company intends to comply
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with all applicable state regulations in ports where the
Company's vessels call.
The European Community ("EC") is considering legislation that
will affect the operation of oil tankers. It is impossible to
predict what legislation, if any, may be promulgated by the EC or
any other country or authority.
The operation of the Company's vessels is also affected by the
International Ship Management Code ("ISM Code"), which as of July
1, 1998, requires shipowners and bareboat charterers to develop
an extensive "Safety Management System," which includes policy
statements, manuals, standard procedures and lines of
communication. Noncompliance with the ISM Code may subject the
shipowner or bareboat charterer to increased liability and may
lead to decreases in available insurance coverage for affected
vessels, denial of permission to enter ports or detention by port
authorities. Although compliance with the ISM Code is the
responsibility of a bareboat charterer where its vessels are
subject to such charters, the Company may become primarily
responsible for compliance with the ISM Code if a bareboat
charterer were to default in its obligations under its charters.
All of the Company's vessels and their operators have received
ISM certification.
THE COMPANY'S VESSELS
The Company operates a substantially modern fleet of 29 vessels
consisting of nine Suezmax OBO carriers, eight VLCCs, eleven
Suezmax tankers and one wood chip carrier. The Company owns 24 of
such vessels through indirect wholly-owned subsidiaries and two
of such vessels through limited partnerships. The Company also
has two Suezmax tankers and two VLCCs on order. The following
table sets forth the fleet operated by the Company as of June 30,
1999:
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OWNED TONNAGE
APPROXIMATE TYPE OF
VESSEL BUILT DWT. CONSTRUCTION FLAG1 EMPLOYMENT
VLCCs
Front Highness 1991 284,000 Single-hull SG Spot market
Front Lady 1991 284,000 Single-hull SG Spot market
Front Lord 1991 284,000 Single-hull SG Spot market
Front Duke 1992 284,000 Single-hull SG Time charter
Front Duchess 1993 284,000 Single-hull SG Spot market
Front Chief 1999 311,000 Double-hull LR Time charter
Front Commander2 1999 311,000 Double-hull BA
Front Crown2 1999 311,000 Double-hull BA
Suezmax OBO Carriers
Front Breaker 1991 169,000 Double-hull LR Spot market
Front Climber 1991 169,000 Double-hull SG Spot market
Front Driver 1991 169,000 Double-hull LR Spot market
Front Guider 1991 169,000 Double-hull SG Spot market
Front Leader 1991 169,000 Double-hull SG Spot market
Front Rider 1992 169,000 Double-hull SG Spot market
Front Striver 1992 169,000 Double-hull SG Spot market
Front Viewer 1994 169,000 Double-hull SG Spot market
Suezmaxes
Lillo 1991 141,000 Single-hull LR Time charter
Front Emperor 1992 147,000 Single-hull SG Spot market
Front Spirit 1993 147,000 Single-hull LR Spot market
Front Pride 1993 150,000 Double-hull LR Time charter
Front Glory 1995 150,000 Double-hull NIS Spot market
Front Splendour 1995 150,000 Double-hull NIS Spot market
Front Fighter 1998 153,000 Double-hull LR Spot market
Front Hunter 1998 153,000 Double-hull LR Spot market
Front Warrior 1998 153,000 Double-hull LR Spot market
Polytrader(40%) 1978 126,000 Single-hull NO Time charter
Polytraveller(35%) 1979 126,000 Single-hull NO Time charter
Front Sun2 2000 153,000 Double-hull
Front Sky2 2000 153,000 Double-hull
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Wood Chip Carriers
World Wood 1974 57,000 Single-hull LR Spot market
CHARTERED IN TONNAGE
APPROXIMATE TYPE OF
VESSEL BUILT DWT CONSTRUCTION FLAG EMPLOYMENT
VLCCs
Front Century 1998 311,000 Double-hull LR Spot market
Front Champion 1998 311,000 Double-hull LR Spot market
OBO Carrier
Algarrobo 1984 156,000 Single-hull NIS Spot market
1. BA - Bahamas, LR - Liberia, NO - Norway, NIS - Norwegian
International Ship Register,
PA - Panama, SG - Singapore
2. Vessel under construction
ITEM 2. DESCRIPTION OF PROPERTY.
Other than its interests in the vessels described in Item 1, the
Company owns no materially important physical properties. The
Company leases office space in Hamilton, Bermuda. Frontline
Management leases office space, at market rates, in Oslo, Norway
from Sea Shipping AS, a company indirectly affiliated with Hemen,
the Company's principal shareholder. Certain of the Company's
subsidiaries lease office space in Stockholm, Sweden and London,
England.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party, as plaintiff or defendant, to several
lawsuits in various jurisdictions for demurrage, damages, off-
hire and other claims arising from the operation of its vessels
or in the ordinary course of business. The Company's management
believes that the resolution of such claims will not have a
material adverse effect on the Company's operations or financial
condition.
ITEM 4. CONTROL OF REGISTRANT.
The Company is indirectly controlled by another corporation (see
below). The following table presents certain information
regarding the current ownership of the Ordinary Shares with
respect to (i) each person who is known by the Company to own
more than 10 per cent of the Company's outstanding Ordinary
Shares; and (ii) all directors and officers as a group as of June
30, 1999.
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ORDINARY SHARES
OWNER AMOUNT PER CENT
Hemen Holding Ltd. (1) 24,446,940 53.02%
All Directors and Officers
as a group (6 persons) (2) 26,120,722 56.65%
(1) Hemen Holding Ltd. is a Cyprus holding company indirectly
controlled by Mr. John Fredriksen, Chairman and Chief Executive
Officer of the Company.
(2) Includes Ordinary Shares held by Hemen Holding Ltd.
ITEM 5. NATURE OF TRADING MARKET.
The Company's Ordinary Shares are traded on the Oslo Stock
Exchange ("OSE") under the Symbol "FRO" and on the London Stock
Exchange ("LSE") under the symbol "FRO" ("LOFS" prior to May 13,
1998). The listing on the OSE was as a result of the Amalgamation
and was with effect from May 12, 1998. The Company's ADSs, each
of which represents one Ordinary Share, are traded on the Nasdaq
National Market under the symbol "FRONY" ("LOFSY" prior to May
12, 1998). The ADSs are evidenced by American Depositary Receipts
("ADRs"). The ADRs are issued by The Bank of New York as
Depositary. Prior to the transfer of Frontline to Bermuda and
subsequent listing of its ordinary shares on the OSE, Frontline
AB's shares were listed on the Stockholm Stock Exchange ("SSE").
See Item 1 "Description of Business - The Company".
The NASDAQ National Market is the Company's "primary listing". As
an overseas company with a secondary listing on the LSE, the
Company is not required to comply with certain listing rules
applicable to companies with a primary listing on the LSE. The
listing on the OSE is also considered to be a secondary listing.
The following table sets forth, for the two most recent fiscal
years, the high and low closing prices for the Ordinary Shares on
the OSE, the high and low closing prices for the ADSs as reported
by the Nasdaq National Market and the high and low closing middle
market quotations for the Ordinary Shares on the LSE as derived
from its Daily Official List. In addition the table shows the
high and low closing prices for Frontline AB's shares as reported
on the SSE.
SSE OSE NASDAQ/NM LSE (1)
HIGH LOW HIGH LOW HIGH LOW
(in pounds
FISCAL YEAR ENDED sterling)
DECEMBER 31, 1997
First quarter SEK85 SEK70 $14.50 $11.75 8.80 6.60
Second quarter SEK89 SEK70 $14.50 $13.50 9.30 8.00
Third quarter NOK120 NOK88 $15.50 $12.63 9.70 8.10
Fourth quarter NOK121 NOK86 $16.50 $13.50 9.40 8.60
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FISCAL YEAR ENDED
DECEMBER 31, 1998
First quarter NOK92 NOK65 $14.50 $12.00 9.20 6.50
Second quarter NOK82 NOK45 $13.00 $6.50 7.25 6.75
Third quarter NOK54 NOK19 $8.75 $4.25 7.25 5.25
Fourth quarter NOK21 NOK8 $5.00 $3.13 6.25 3.00
(1) The middle market quotations are computed from the daily official prices
as derived from the "Daily Official List" of the LSE as of the close of such
exchange on the relevant dates and do not necessarily reflect the actual price
of the last transaction on the relevant dates.
As of May 31, 1999, the number of record holders of Ordinary
Shares and ADSs in the United States was 21 and 4, respectively,
excluding the Bank of New York as Depositary. At that date, an
aggregate of 970,485 Ordinary Shares and 399,356 ADSs were held
of record in the United States, excluding the Bank of New York as
Depositary. Such holdings represent 2.97 per cent of the Ordinary
Shares outstanding on that date.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING
SECURITY
HOLDERS.
The Company is classified by the Bermuda Monetary Authority as a
non-resident of Bermuda for exchange control purposes.
The transfer of ADSs or Ordinary Shares between persons regarded
as resident outside Bermuda for exchange control purposes may be
effected without specific consent under the Exchange Control Act
of 1972 and regulations thereunder and the issuance of Ordinary
Shares (including shares to be represented by ADSs) to persons
regarded as resident outside Bermuda for exchange control
purposes may be effected without specific consent under the
Exchange Control Act of 1972 and regulations thereunder. Issues
and transfers of ADSs or Ordinary Shares involving any person
regarded as resident in Bermuda for exchange control purposes
require specific prior approval under the Exchange Control Act of
1972.
The owners of ADSs or Ordinary Shares who are ordinarily resident
outside Bermuda are not subject to any restrictions on their
rights to hold or vote their shares. Because the Company has been
designated as a non-resident for Bermuda exchange control
purposes, there are no restrictions on its ability to transfer
funds in and out of Bermuda or to pay dividends to US residents
who are holders of ADSs, other than in respect of local Bermuda
currency.
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As an "exempted company", the Company is exempt from Bermuda laws
which restrict the percentage of share capital that may be held
by non-Bermudians.
As of May 31, 1999, 124,558 of the authorized and unissued
Ordinary Shares were reserved for issue pursuant to subscription
under existing warrants which can be exercised at any time up to
December 31, 2003. As of May 31, 1999, 2,600,000 of the
authorized and unissued Ordinary Shares were reserved for issue
pursuant to subscription under Frontline Warrants which can be
exercised at any time up to May 11, 2001. See Item 12 "Options to
Purchase Securities from Registrant or Subsidiaries". Under the
conditions upon which the warrants were issued, certain
restrictions and conditions apply to the Company for so long as
the subscription rights under the warrants remain exercisable.
In connection with the Amalgamation, on May 11, 1998, the Company
adopted revised Bye-laws. These Bye-laws contain certain
restrictions with respect to the registration of shares which are
summarized below:
(i) The Board may decline to register the transfer of any share held
through the Verdipapirsentralen ("VPS"), the computerized central
share registry maintained in Oslo, Norway, for bodies corporate
whose shares are listed for trading on the OSE, if the
registration of such transfer would be likely, in the opinion of
the Board, to result in fifty per cent or more of the aggregate
issued share capital of the Company or shares of the Company to
which are attached fifty per cent or more of the votes attached
to all outstanding shares of the Company being held or owned
directly or indirectly, (including, without limitation, through
the VPS) by a person or persons resident for tax purposes in
Norway (or such other jurisdiction as the Board may nominate from
time to time).
(ii) If fifty per cent or more of the aggregate issued share capital
of the Company or shares to which are attached fifty per cent or
more of the votes attached to all outstanding shares of the
Company are found to be held or owned directly or indirectly
(including, without limitation, through the VPS) by a person or
persons resident for tax purposes in Norway (or such other
jurisdiction as the Board may nominate from time to time), other
than the Registrar in respect of those shares registered in its
name in the Register as nominee of persons whose interests in
such shares are reflected in the VPS, the Board shall make an
announcement to such effect through the OSE, and the Board and
the Registrar shall thereafter be entitled and required to
dispose of such number of shares of the Company or interests
therein held or owned by such persons as will result in the
percentage of the aggregate issued share capital of the Company
held or owned as aforesaid being less than fifty per cent.
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ITEM 7. TAXATION.
BERMUDA TAX CONSIDERATIONS
Bermuda currently imposes no tax (including a tax in the nature of an
income, estate duty, inheritance, capital transfer or withholding tax)
on profits, income, capital gains or appreciations derived by, or
dividends or other distributions paid to US Shareholders of ADSs or
Ordinary Shares. Bermuda has undertaken not to impose any such Bermuda
taxes on US Shareholders of ADSs or Ordinary Shares prior to the year
2016 except in so far as such tax applies to persons ordinarily
resident in Bermuda.
There is no income tax treaty between the United States and Bermuda
pertaining to the taxation of income except in the case of insurance
enterprises. There also is no estate tax treaty between the United
States and Bermuda.
ITEM 8. SELECTED FINANCIAL DATA.
The selected income statement data of the Company with respect to the
fiscal years ended December 31, 1998, 1997 and 1996 and the selected
balance sheet data of the Company with respect to the fiscal years
ended December 31, 1998 and 1997 have been derived from the Company's
Consolidated Financial Statements included herein and should be read
in conjunction with such statements and the notes thereto. The
selected financial data with respect to the fiscal years ended
December 31, 1995 and 1994 and the selected balance sheet data with
respect to the fiscal year ended December 31, 1996 has been derived
from consolidated financial statements of the Company not included
herein. Selected income statement data with respect to the year ended
December 31, 1994, has not been provided since such financial
information has not been prepared in accordance with US GAAP and
expressed in US dollars. The following table should also be read in
conjunction with Item 9 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and Notes thereto included herein.
FISCAL YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
(in thousands, except per Ordinary Share data)
INCOME STATEMENT DATA:
Net operating revenues $203,860 $197,197 $110,471 $134,953
Net operating income
after depreciation $72,455 $ 55,476 $ 5,127 $22,164
Net income (loss) $26,999 $ 17,395 $(13,981) $ 2,574
Earnings per Ordinary Share
- basic and diluted $ 0.59 $ 0.48 $ (0.92) $ 0.20
Cash dividends per
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Ordinary Share $ - $ - $ - $ -
BALANCE SHEET DATA (AT END OF PERIOD):
Newbuildings under
construction $75,681 $48,474 $ - $ - $ -
Vessels and equipment,
net $1,078,956 $ 970,590 $831,981 $450,398 $427,818
Total assets $1,379,521 $1,333,124 $921,113 $549,879 $523,122
Long-term debt
(including
current portion) $883,021 $773,150 $561,942 $358,579 $330,039
Stockholders' equity $457,681 $519,284 $327,700 $165,723 $163,149
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The following discussion should be read in conjunction with
Item 8 "Selected Financial Data" and the Company's audited
Consolidated Financial Statements and Notes thereto included
herein.
The Company's principal focus and expertise are to serve major
integrated oil companies and other customers that require
transportation of crude oil and oil products cargoes. The Company
owns and operates 24 vessels and operates a further three
vessels. In mid 1998, the Company took delivery of three Suezmax
newbuildings and in each of July and December 1998, the Company
took delivery of a VLCC newbuilding. The VLCC newbuildings were
subsequently sold to German KG Structures and leased back on
bareboat charters for a period of eight years with the option on
the buyer's side to extend the charter for 2+1+1 years. The
Company has the right to extend the charter for 2 years,
provided the buyer's options are exercised. In January 1999, the
Company took delivery of a third VLCC newbuilding. As at June 30,
1999, the Company has on order two newbuilding VLCCs scheduled
for delivery in 1999 and two newbuilding Suezmax tankers
scheduled for delivery in 2000.
The Company's vessels are operated under either time charters,
voyage charters or contracts of affreightment ("COAs"). The
Company's strategy of seeking medium-term time charters, ranging
from 1 year to 5 years, for a portion of its fleet is designed to
provide a steady and reliable stream of revenues in order to
mitigate the inherently cyclical nature of the tanker industry.
Any downturn in the voyage charter market will affect those
vessels not under time charter and may have a material adverse
effect on the Company's operating results, cash flow from
operations and liquidity.
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A time charter is a contract for the use of a vessel for a
specific period of time. A voyage charter is a contract for the
use of a vessel for a specific voyage. Under a time charter, the
charterer pays substantially all of the vessel voyage costs.
Under a voyage charter, the vessel owner pays such costs. Vessel
voyage costs are primarily fuel and port charges. Accordingly,
for equivalent profitability, charter income under a voyage
charter would be greater than that under a time charter to take
account of the owner's payment of the vessel voyage costs.
However, net operating revenues would be equal. It is standard
industry practice to measure the revenue performance of a vessel
in terms of average daily time charter equivalent earnings
("TCEs"). For voyage charters, this is calculated by dividing net
operating revenues by the number of days on charter. Days spent
offhire are excluded from this calculation.
In 1998, in order to increase the Company's market share in the
Suezmax trades and increase the trading flexibility, the Company
and OMI Corporation, a major international shipping company,
combined Suezmax tanker fleets for commercial purposes and
created Alliance Chartering LLC ("Alliance"). Alliance currently
markets 27 Suezmax tankers, of which 24 tankers are employed in
the Atlantic market, comprising approximately 20 per cent of the
total Suezmaxes trading in the Atlantic basin. Alliance's control
of the largest modern fleet of Suezmaxes has enabled it to
strengthen relationships and obtain contracts with a number of
customers. These contracts may allow Alliance the opportunity to
increase its Suezmax fleet utilization through backhauls when
cargo is available (that is, transporting cargo on the return
trip when a ship would normally be empty) which will improve
vessel earnings.
The charter rates that the Company is able to obtain for its
vessels are determined in a highly competitive market. The
industry is cyclical, experiencing significant swings in
profitability and asset values resulting from changes in the
supply of and demand for vessels. The rates obtained in both the
VLCC and Suezmax sectors remained relatively strong in the first
half of 1998, following steady improvement since 1995. The rate
gains in the past few years have been the result of growth in the
world oil demand which, together with a modest increase in the
supply of tankers, created a better supply/demand balance.
Freight rates weakened in the second half of 1998 and the tanker
market is expected to continue to be weak in the foreseeable
future as a result of OPEC oil production cuts to support oil
prices, relatively high world oil inventories, weakness in oil
demand due to the continued Southeast Asian economic crisis as
well as the onset of a recession in Latin America and the
relatively large tanker newbuilding delivery schedule.
The following table sets out the daily TCEs earned by the
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Company's fleet over the last three years:
1998 1997 1996
(in $ per day)
VLCC 31,800 32,700 27,700
Suezmax 22,400 24,800 26,800
Suezmax OBO 21,800 25,500 23,000
Any improvement in freight rates in the crude oil market will be
largely dependent upon improvement in the Far East and Latin
American economic conditions as well as an increase in the rate
of tanker scrappings in view of the relatively high tanker
orderbook for delivery in the foreseeable future.
In the fourth quarter of 1997, management determined that the
useful life of its vessels was 25 years rather than 20 years as
previously estimated. A change in accounting estimate was
recognized to reflect this decision, resulting in an increase in
net income of approximately $3,600,000 in the fourth quarter.
SIGNIFICANT RECENT DEVELOPMENTS
See Item 1 - "Description of Business - Significant Recent
Developments".
RESULTS OF OPERATIONS
Year ended December 31, 1998, compared with the year ended
December 31, 1997
Total net operating revenues increased by 3 per cent in 1998 from
$197.2 million to $203.9 million. This increase reflects the
increase in the size of the fleet, offset by lower trading
results in all sectors in which the Company operates, due
presently to the state of the tanker market. The average daily
TCEs earned by the VLCCs, Suezmax tankers, and Suezmax OBO
carriers were $31,800, $22,400 and $21,800 compared with $32,700,
$24,800 and $25,500 for 1997. The total days technical offhire,
including drydockings, were 135 compared with 122 in 1997.
In 1998, the Company sold two VLCCs and one woodchip carrier,
thereby recording a net loss on the sales of $1.5 million.
For 1998, earnings before interest, tax, depreciation and
amortization, including earnings from associated companies were
$126.9 million, compared with $116.8 million for the comparable
period. This result reflects the contribution of the expanded
fleet and reduced administrative expenses, offset by lower
trading results in all sectors in which the Company operates and
a loss on the sale of the two VLCCs to German KGs.
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Average daily operating costs, including provisions for
drydockings, decreased for the Suezmax and Suezmax OBO fleets in
1998 as the benefits of a new ship management and cost reduction
program were realized. The average daily operating costs of the
VLCCs, Suezmax tankers, and OBOs, including dry-docking and
insurance costs, were $7,600, $6,400 and $6,700 in 1998 compared
with $6,700, $7,500 and $7,000 for 1997. The increase in the
average daily operating costs of the VLCCs reflects expenditure
on structural maintenance for two of the older vessels.
Administrative expenses decreased by 31 per cent, primarily due
to a non-recurring charge for re-domiciling costs in 1997. In
1998, the Company has undertaken a further cost reduction program
and aims to reduce operating costs by an additional $500 to $750
per vessel per day.
Depreciation decreased by nine per cent in 1998 due to the change
in the depreciation schedule for the fleet from 20 to 25 years in
the fourth quarter of 1997.
Net other expenses for 1998 were $48.2 million (1997 - $42.6
million). This increase reflects the increased average level of
debt associated with the fleet expansion, offset by a dividend
received from ICB in the second quarter of 1998.
YEAR ENDED DECEMBER 31, 1997, COMPARED WITH YEAR ENDED DECEMBER
31, 1996
In late 1996, Frontline acquired all of its VLCC tankers, two
Suezmax OBOs and one Suezmax tanker. In the Fall of 1997,
Frontline acquired a further four Suezmax tankers. This fleet
expansion, combined with improved rates for the VLCCs and Suezmax
OBOs, had a significant effect on the 1997 results.
Total net operating revenues increased by 79 per cent from $110.5
million in 1996 to $197.2 million in 1997. This increase reflects
the increase in the size of the fleet and the improved rates for
the VLCCs and Suezmax OBOs as shown in the table above. The
average daily TCEs earned by the VLCCs, Suezmax tankers, and
Suezmax OBO carriers were $32,700, $24,800 and $25,500 compared
with $27,700, $26,800 and $23,000 for 1996. The total days
technical offhire, including drydockings, were 122 compared with
60 in 1996.
For 1997, earnings before interest, tax, depreciation and
amortization, including earnings from associated companies were
$112.2 million, compared with $38.9 million in 1996. This result
reflects the contribution of the expanded fleet, offset by a one
off charge for redomiciling.
A cost reduction program initiated in late 1996/early 1997
reduced the operating costs for the fleet. The average daily
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operating costs of the VLCCs, Suezmax tankers, and OBOs,
including dry-docking and insurance costs, were $6,700, $7,500
and $7,000, respectively for 1997 and $5,800, $10,400 and
$7,900, respectively for 1996.
In the fourth quarter of 1997, management determined that the
useful life of its vessels was 25 years rather than 20 years as
previously estimated. A change in accounting estimate was
recognized to reflect this decision, resulting in an increase in
net income of approximately $3.6 million in the fourth quarter.
Net other expenses for 1997 were $42.6 million (1996 - $22.6
million). This increase reflects the increased average level of
debt associated with the fleet expansion.
LIQUIDITY AND CAPITAL RESOURCES
The Company operates in a capital intensive industry and has
historically financed its purchase of tankers and other capital
expenditures through a combination of cash generated from
operations, equity capital and borrowings from commercial banks.
The liquidity requirements of the Company relate to servicing its
debt, finding the equity portion of investments in vessels,
funding working capital and maintaining cash reserves against
fluctuations in operating cash flows.
Revenues from time charters are received monthly in advance while
revenues from voyage charters are received upon completion of the
voyage. Accounts receivable are generally collected on a timely
basis. Inventory requirements, consisting primarily of fuel,
lubricating oil and spare parts, are higher for voyage charters,
due to the majority of these items being paid for by the
charterer under a time charter. The expansion of the fleet in
fiscal year 1998 has resulted in increased working capital
requirements.
As of December 31, 1998 and 1997, the Company has cash and cash
equivalents of $74.0 million and $86.9 million, respectively. The
Company generated cash from operations of $74.9 million in 1998,
compared with $67.4 million in 1997. Net cash used in investing
activities decreased from $283.3 million in 1997 to $149.3
million. In 1998, investing activities consisted primarily of
payments for vessel acquisitions, totaling $352 million compared
with $51.8 in 1997. However, the sale of the two VLCCs generated
cash of approximately $165 million in 1998 compared with $50.6
million on the sale of the three Panamaxes in 1997. In 1997,
Frontline paid a net amount of $69.7 million for the acquisition
of LOF and $220.6 million for shares in ICB. A further $10.4
million was invested in ICB in 1998.
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The Company generated net cash from financing activities of $61.5
million in 1998, compared with $244.7 million in 1997. In 1998,
proceeds from long-term debt were $327.8 million of which $230.2
million related to traditional bank type financing of vessels and
$97.6 million was in the form of loans from Metrogas Holdings and
an affiliated company, see below. See Item 13. " Interest of
Management in Certain Transactions". Repayments were $265.2
million in 1998. In 1997, Frontline generated cash of $165.5
million from two issues of equity.
The Company had total interest bearing debt as of December 31,
1998, in the amount of $883.0 million. Of this debt, $66.5
million was related to a loan made by The Chase Manhattan Bank to
the Company to partially finance the ICB Transaction. This ICB
facility was extended for another twelve months until September
1999, and has since been reduced to $56.5 million.
On June 16, 1999, Skandinaviska Enskilda Banken ("SEB") , the
Company's largest bank syndicate, agreed to change the loan
profile on the facility provided to the Company. Present
quarterly installments will be reduced to $8.4 million from $10.5
million with a resultant increase in the final installment due on
November 28, 2003 from $136.5 million to $174.3 million. This
reduction in quarterly installments will boost the Company's
liquidity by $37.8 million during the remaining period of the
loan, equivalent to $8.4 million per annum.
On June 29, 1999, the Company signed a loan agreement for
refinancing the vessel "Lillo". The loan was drawndown on June
30, 1999, and partly used to repay the portion relating to Lillo
under the SEB facility discussed above. The net effect of the
refinancing was to improve the Company's liquidity by $9.2
million.
In December 1997, the three Suezmaxes owned originally by LOF
were refinanced. The last and major part of this loan was drawn
down at the time of the Amalgamation in May, 1998. At the same
time, Frontline repaid the related $75 million share acquisition
loan. The first two Suezmax newbuildings delivered in 1998 were
financed by a facility established in December 1997; the third
Suezmax and the first VLCC new building were financed by
facilities signed in May and July 1998. The aforementioned VLCC
was subsequently sold to a German KG along with the second
delivered VLCC, and leased back. By converting the financing of
these two VLCCs from traditional bank financing to sale and lease
back, Frontline was able to free a substantial amount of cash and
thereby improve its liquidity position.
In December 1998 and March 1999, the third and fourth VLCCs were
financed through traditional bank financing. A commitment has
been received for the financing of the final VLCC newbuilding. It
27
<PAGE>
is the management's intention to secure financing on the two
remaining Suezmax newbuildings to be delivered in 2000 as soon as
the VLCC program is finalized.
Metrogas Holdings ("Metrogas"), a company related to the
Company's Chairman, had outstanding as of December 31, 1998 a
specific loan of $89.0 million provided to the Company. This loan
has since been converted to a separate long-term financing
facility as described below.
As of December 31, 1998, the Company did not comply with the
equity ratio covenants in a number of the loan agreements. During
1999, management initiated discussions with the Company's lending
banks with the purpose of lowering the breached covenant
requirements in such loan agreements at least until January 1,
2001. The requested changes were made with the intention of
making the Company's financing arrangements more flexible in the
event of a prolonged negative market scenario, including falling
second-hand prices. Included in the request for changes was a
proposal to subordinate the $89.0 million loan given by Metrogas
(the "Subordinated Loan") to loans given by the Company's lending
banks. In addition, the proposal included reclassifying the
Subordinated Loan as equity for the purposes of calculating the
Company's equity ratio.
As of July 13, 1999, the discussions with Metrogas and the
Company's lending banks have been finalized and the Company and
Metrogas have signed a Subordinated Convertible Loan Facility
Agreement. Accordingly, the Company has received acceptance of
reduced covenant levels from all but one of the Company's 19
lending banks. This one bank, however, is subject to the
authority of the majority lenders, who have agreed to accept
lower covenant levels until January 1, 2001.
SEASONALITY
Historically, oil trade and therefore charter rates increased in
the winter months and eased in the summer months as demand for
oil in the Northern Hemisphere rose in colder weather and fell in
warmer weather. Seasonal variations in the Company's revenues
still exist but are much less pronounced than they once were due
to a number of factors. The tanker industry in general is less
dependent on the seasonal transport of heating oil than a decade
ago as new uses for oil and oil products have developed,
spreading consumption more evenly over the year.
INFLATION
Although inflation has had a moderate impact on operating
expenses, drydocking expenses and corporate overheads, management
does not consider inflation to be a significant risk to direct
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<PAGE>
costs in the current and foreseeable economic environment. In
addition, in a shipping downturn, costs subject to inflation can
usually be controlled because shipping companies typically
monitor costs to preserve liquidity and encourage suppliers and
service providers to lower rates and prices. However, in the
event that inflation becomes a significant factor in the world
economy, inflationary pressures could result in increased
operating and financing costs.
RECENTLY ISSUED ACCOUNTING STANDARDS AND SECURITIES AND EXCHANGE
COMMISSION RULES
In 1998, the Company has adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". The adoption
of this standard has not had a material impact on the Company's
consolidated financial statements since management considers the
Company to currently only operate in one market segment.
SFAS No. 133, "Accounting for Derivatives and Hedging
Activities", is effective January 1, 2001 for the Company and
requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company has not completed its
assessment of the impact that the adoption of SFAS No. 133 will
have on the Company's consolidated financial statements.
THE YEAR 2000 PROBLEM
The common practice of using 2 digits to represent the year in
computer databases, software applications and microprocessors,
which may cause such computer systems to either shut down
completely or provide incorrect calculations by the year 2000, is
known as the Year 2000 Problem. This problem will affect the
shipping industry since most ship management companies and
shipowning companies, such as the Company, rely on date dependent
computer systems. Computer systems on board vessels which are
likely to be affected or even disabled, include satellite
position control systems, radar mapping, ballast monitoring
systems, engine vibration monitors, cargo loading software,
global maritime distress and safety system equipment. The Company
maintains manual back-up systems, procedures and equipment on its
vessels to navigate, position and ensure the safety of its
vessels in the event of computer systems failure or malfunction.
Onshore systems that may be affected include computer dependent
vessel maintenance and payroll systems. Port authorities,
communication networks, customers and creditors also rely on
computer-generated information which is date reliant.
29
<PAGE>
State of Readiness
The Company has taken steps to evaluate the action required, and
likely costs, to ensure that its systems will be year 2000
compliant ("Y2K") including its own internal systems, the systems
of its independent Managers and the systems on board the
Company's vessels. As a result of this action, the Company
believes the Year 2000 Problem will not pose significant
operational problems for these computer systems. However, the
Year 2000 readiness of the Company's customers, suppliers and
business partners may vary. All newbuildings delivered in 1998
and 1999, and the remaining vessels in the current newbuilding
program, scheduled to be delivered later in 1999 and in 2000, are
guaranteed by the shipyard to be Y2K compliant.
The Company has, through its Managers, developed plans that
outline the Company's procedures to become Y2K compliant. The
Managers are required to report quarterly to the Company on
implementation of the plans to become Y2K compliant. The Y2K
compliance procedures for V Ships Norway and International
Tanker Management have been certified by the classification
society, Det Norske Veritas. The third manager, Acomarit, is
making use of Real Time Engineering in its efforts to ensure Y2K
compliance. Internal office systems have also been reviewed by an
individual appointed by management. The procedures to be
performed by the individuals appointed responsible for Y2K
compliance include the following: identification of equipment and
assessment as to its Y2K readiness, remediation strategies and
remediation costs. The Company has initiated formal
communications with suppliers and other customers which the
Company does business with, to determine the extent to which the
Company is vulnerable to those third parties failure to remedy
their own Y2K issue. Based on responses received from vendors, to
date, the Company is not aware of any significant investments in
assets that are not Y2K compliant. The Company cannot predict the
outcome of other companies' remediation efforts.
The Company expects all critical systems and products to be Y2K
compliant as of November 1999. As of May 31, 1999, an estimated
95 per cent of the accounting systems and 75 per cent of the ship
hardware is Y2K compliant.
Costs
Based on the Company's evaluation of Y2K compliance to date there
is no reason to believe that any required modifications will
subject the Company to substantial expenditure. The Company has
already paid $0.11 million relating to Y2K compliance and
estimates further expenditure of approximately $0.13 million.
Based on its current estimates and information currently
available, the Company does not anticipate that costs associated
with Y2K will have a material adverse effect on the Company's
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<PAGE>
consolidated financial position, results of operations or cash
flows in future periods.
Risk Assessment
At this time, until the process is tested, the Company cannot
fully estimate the risks of its Y2K issue. To date, the Company
has not identified any material risks of not being year 2000
ready. However, if a risk should subsequently arise, the Company
would identify its effects and remedy by the contingency plan,
see below.
Contingency Plan
The Company relies on vendor guarantees that critical systems are
Y2K compliant. Therefore, the Company anticipates that those
critical systems will function properly.
The Company does not anticipate that any of their critical and
non-critical systems will not be Y2K compliant by the required
completion dates. There are no critical and unique high volume
systems for which a contingency plan may not be possible.
Further, if the computer system would go down, the Company plans
to revert to manual procedures, which will be reviewed and tested
during 1999.
The foregoing disclosure is based on the Company's current
expectations, estimates and projections, which could ultimately
prove to be inaccurate. Because of uncertainties, the actual
effects of the Year 2000 issues on the Company may be different
from the Company's current assessment. Factors, many of which are
outside the control of the company and that could affect the
Company's ability to be Year 2000 compliant by the end of 1999,
include: the failure of customers, suppliers, governmental
entities and others to achieve compliance, and the inability or
failure to identify all critical Year 2000 issues, or to develop
appropriate contingency plans for all Year 2000 issues that
ultimately may arise.
ITEM 9A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
MARKET RISK
The Company is exposed to various market risks, including
interest rates. The exposure to interest rate risk relates
primarily to its debt and related interest rate swaps. The
majority of this exposure is the floating rate debt, which
totaled $840.7 million at December 31, 1998. The Company has
entered into interest rate swap agreements to manage its exposure
with interest rates by locking in fixed interest rates from
floating rates. At December 31, 1998, there were eleven swaps
with a total notional principal of $441.2 million. The swap
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<PAGE>
agreements have various maturity dates from February 1999 to
August 2003, and the Company would have had to pay $7.1 million
to terminate the agreements as of December 31, 1998. The maximum
exposure to the interest rate swaps is $386.7 million. A one per
cent change in interest rates would increase / decrease the
interest expense by $4.5 million per year as of December 31,
1998.
The fixed rate debt on the balance sheet and the fair market
value were $18.8 million as of December 31, 1998. If the interest
rate was to increase (decrease) by one per cent with all other
variables remaining constant, the market value of the fixed rate
debt would decrease (increase) by approximately $0.3 million.
Marketable equity securities held by the Company are considered
to be available-for-sale securities and as such are carried at
fair value with resulting unrealized gains and losses, net of
deferred taxes if any, recorded as a separate component of other
comprehensive income in stockholders' equity. As a result, the
Company's equity is exposed to fluctuations in the share price of
marketable securities considered to be available-for-sale. A ten
per cent change in the market value of such securities would
increase (decrease) equity by $11.0 million as of December 31,
1998.
The majority of the Company's transactions, assets and
liabilities are denominated in U.S. dollars, the functional
currency of the Company. Certain of the Company's subsidiaries
report in Sterling, Swedish kronor or Norwegian kroner and risks
of two kinds arise as a result: a transaction risk, that is, the
risk that currency fluctuations will have a negative effect on
the value of the Company's cash flows; and a translation risk,
the impact of adverse currency fluctuations in the translation of
foreign operations and foreign assets and liabilities into U.S.
dollars for the Company's consolidated financial statements. The
Company has not entered into forward contracts for either
transaction or translation risk, which may have an adverse effect
on the Company's financial condition and results of operations.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
Information concerning each director and executive officer of the
Company is set forth below.
NAME AGE POSITION
John Fredriksen 55 Chairman, Chief Executive
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<PAGE>
Officer,
President and Director
Tor Olav Troim 36 Vice-President and Director
A. Shaun Morris 39 Director
Timothy J. Bridges 35 Director
Tom E. Jebsen 41 Chief Financial Officer
of Frontline Management
Kate Blankenship 34 Chief Accounting Officer
and Company Secretary
Certain biographical information about each of the directors and
executive officers of the Company is set forth below.
John Fredriksen has been the Chairman of the Board, Chief
Executive Officer, President and a director of the Company since
November 3, 1997. He was previously the Chairman and Chief
Executive Officer of Frontline. Mr. Fredriksen has served for
over six years as a director of Sea Tankers Management Co. Ltd.
("Sea Tankers"), a ship operating company and an affiliate of the
Company's principal shareholder. Mr. Fredriksen indirectly
controls Hemen.
Tor Olav Troim has been Vice-President and a director of the
Company since November 3, 1997. He previously served as Deputy
Chairman of Frontline from July 4, 1997, and was a director of
Frontline from July 1, 1996. Mr. Troim also serves as a director
of Frontline AB, a wholly-owned subsidiary of the Company, and is
the Chief Executive Officer of Frontline Management, which
company supports the Company in the implementation of decisions
made by the Board of Directors. Mr. Troim also serves as a
consultant to Sea Tankers. He is a director of Aktiv Inkasso ASA
and Northern Offshore ASA, both Norwegian publicly listed
companies. Prior to his service with Frontline, from January
1992, Mr. Troim served as Managing Director and a member of the
Board of Directors of DNO AS, a Norwegian oil company.
A. Shaun Morris has been a non-executive director of the Company
since November 3, 1997. Mr. Morris has been a Partner at Appleby,
Spurling & Kempe since April 1995, after joining the firm in 1988
as an associate, where he specializes in corporate/commercial
law.
Timothy J. Bridges has been a non-executive director of the
Company since June 11, 1999. He has been an attorney at Appleby,
Spurling & Kempe since April 1996. During the period May 1993
through March 1996, Mr. Bridges was an attorney at Wilde Sapte, a
United Kingdom law firm, and for approximately four years prior
thereto, he was an attorney with the United Kingdom law firm of
Norton Rose.
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<PAGE>
Tom E. Jebsen has served as Chief Financial Officer of Frontline
Management since June 1997. From December 1995 until June 1997,
Mr. Jebsen served as Chief Financial Officer of Tschudi & Eitzen
Shipping ASA, a publicly traded Norwegian shipowning company.
Prior to December 1995, Mr. Jebsen served as Vice President of
Dyno Industrier ASA, a publicly traded Norwegian explosives
producer from 1991.
Kate Blankenship is Chief Accounting Officer and Secretary of the
Company. Mrs. Blankenship joined the Company in 1994. Prior to
joining the Company, she was a Manager with KPMG Peat Marwick in
Bermuda. She is a member of the Institute of Chartered
Accountants in England and Wales.
In accordance with the Bye-laws of the Company the number of
Directors shall be such number not less than two as the Company
by Ordinary Resolution may from time to time determine and each
Director shall hold office until the next annual general meeting
following his election or until his successor is elected.
On May 11, 1998, in connection with the Amalgamation, Dr. Ian
McGrath and Mr. Miles Kulukundis resigned as directors of the
Company. On June 11, 1999, Mr. Kenneth Douglas resigned as
director of the Company.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
During the year ended December 31, 1998, the Company paid to its
directors and officers of the Company (eight persons) aggregate
cash compensation of $576,175 and an aggregate amount of $23,630
for pension and retirement benefits.
Directors and officers of the Company have been granted options
to purchase Ordinary Shares. See Item 12 "Options to Purchase
Securities from Registrant or Subsidiaries".
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR
SUBSIDIARIES.
WARRANTS
As of June 30, 1999, 124,588 of the authorized and unissued
Ordinary Shares were reserved for issue pursuant to subscription
under the existing warrants (the "Old Warrants") which can be
exercised at any time up to December 31, 2003 and 2,600,000
Ordinary Shares are reserved for issue pursuant to subscription
under the Frontline Warrants which can be exercised at any time
up to May 11, 2001.
Each Old Warrant entitles the holder to subscribe in cash for one
Ordinary Share in the Company at a price of 4.00 pounds sterling,
34
<PAGE>
payable in full upon subscription, subject to adjustment in the
event of any subdivision or consolidation of Ordinary Shares or
similar event. As of June 30, 1999, of the 220,588 Old Warrants
originally issued, 60,000 Old Warrants have been exercised and
36,030 Old Warrants have been repurchased by the Company.
Each Frontline Warrant entitles the holder to subscribe in cash
for one Ordinary Share in the Company at a price of $15.91,
payable in full upon subscription, subject to adjustment in the
event of any subdivision or consolidation of Ordinary Shares or
similar event. As of May 31, 1999, no Frontline Warrants have
been exercised.
OPTIONS
As of June 30, 1999, 138,000 of the authorized and unissued
Ordinary Shares were reserved for issue pursuant to subscription
under options granted under the Company's share option plans.
The Company maintains a Bermuda Employee Share Option Plan (the
"Bermuda Plan") and a United Kingdom Employee Share Option Plan
(the "U.K. Plan"). Under the terms of the plans, the exercise
price for the options may not be less than the average of the
fair market value of the underlying shares for the three dealing
days before the date of grant. The number of shares granted under
the plans may not exceed 7 per cent of the issued share capital
of the Company. No consideration is payable for the grant of an
option.
Under the Bermuda Plan, options may be granted to any director or
employee of the Company or any subsidiary. Options are only
exercisable during the period of nine years following the first
anniversary date of the grant or upon the termination of the
option holder from employment with the Company.
The following summarizes the share option transactions under the
Bermuda Plan:
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Shares Option
price
(in thousands, except per share data) per share
Granted December 13, 1993 108 $15.00
Granted November 8, 1994 4 13.82
Granted October 31, 1995 3 13.48
Granted February 5, 1997 19 11.73
Exercised - -
Canceled (5) -
---- ------
Options outstanding at June 30, 1999 129 $11.73
to 15.00
===== ========
Options exercisable at June 30, 1999 129 $11.73
to 15.00
===== ========
Under the U.K. Plan, options may be granted to any full-time
director or employee of the Company or any subsidiary. Options
are only exercisable during the period of seven years following
the third anniversary date of the grant or upon the termination
of the option holder from employment with the Company.
The following summarizes the share option transactions under the
U.K. Plan:
Shares Option
(price per share in pounds sterling) price
(in thousands, except per share data) per share
Granted January 5, 1994 46 9.85
Granted November 8, 1994 50 8.55
Granted October 31, 1995 51 8.55
Granted February 5, 1997 33 7.28
Exercised (1) -
Canceled (170) -
----- ------
Options outstanding at June 30, 1999 9 7.28
to 9.85
===== ======
Options exercisable at June 30, 1999 7 7.25
to 9.85
===== ======
As of June 30, 1999, the number of shares over which directors and officers
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<PAGE>
have options is as follows:
DIRECTOR OR OFFICER OPTIONS
John Fredriksen -
Tor Olav Troim -
Timothy J. Bridges -
A. Shaun Morris -
Tom E. Jebsen -
Kate Blankenship 4,000
------
4,000
======
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
In June 1998, the Company obtained a loan of $87.5 million from Metrogas to
finance the acquisition of the five VLCC newbuilding contracts described
below. This loan bears interest at the rate of 6.75 per cent per annum. At
December 31, 1998, an amount of $89 million was outstanding in respect of
this loan, including interest accrued thereon. Interest expense recorded by
the Company in 1998 in respect of this loan was $3,780,772.
In addition to the lending arrangement described above, Hemen affiliated
parties have, during 1998, provided additional short term financing to the
Company. Interest accrued at a rate of 6.75 per cent per annum. Interest
expense recorded by the Company in 1998 in respect of such financing was
$550,803.
In May 1999, Greenwich Holdings Ltd. ("Greenwich" - a company indirectly
controlled by the Company's Chairman) extended a loan in the amount of
$15,739,173 to the Company. The proceeds from the loan were used to finance
the acquisition of shares in ICB Shipping AB. A loan agreement has been
entered into in order to document the terms of this loan, such terms
including the Company pledging the relevant shares in ICB Shipping AB to
Greenwich's lender. Through this acquisition, the Company increased its
holding in ICB to 64 per cent of the capital and 38 per cent of the votes.
In May 1998, the Company acquired control of three shipowning and/or
leasing structures which are organized in a non-recourse holding company,
ITC. The Company acquired ITC for $9.5 million. The Company's investment in
ITC was subsequently sold to Hemen, the principal shareholder in the
Company, for $9.5 million with effect from July 1, 1998. The acquisition
and sale of ITC are treated as occurring on the same date for accounting
purposes as a result of the common control relationship between the Company
and Hemen. The results of ITC are therefore not consolidated in the
Company's financial statements for any period in 1998. The Company is the
manager of the underlying operating companies and has received a five year
call option from Hemen to buy back ITC.
In September 1997, Frontline entered into an agreement with a company
indirectly controlled by its Chairman, Mr. Fredriksen, to acquire the
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shares of Fourways Marine Limited, the owner of the 1993 built Suezmax
tanker Sea Spirit (renamed Front Spirit), in exchange for 979,050 shares of
Frontline at NOK 107.25 per share plus assumption of the company's debt.
Operational control of the vessel was assumed on September 25, 1997. The
share issuance to purchase Sea Spirit was valued and recorded at $41.7
million, which was $1 million less than three independent appraisals of the
vessel's fair market value.
In connection with the formation of Frontline in April 1997, Frontline
Management has leased office space in Oslo, Norway at market rates from Sea
Shipping AS, a company indirectly affiliated with Hemen.
During 1996, 1997 and January 1998, Frontline acquired contracts for the
construction and purchase of five Suezmax tankers at the Hyundai Heavy
Industries Co. Ltd. shipyard in South Korea for delivery in 1998 and 2000
from single-ship owning companies affiliated with Hemen (the "Suezmax
Newbuilding Companies"). Frontline acquired the contracts in consideration
of the progress payments paid to that date by the Suezmax Newbuilding
Companies. The first three of the Suezmax tankers were delivered during
1998. The remaining two vessels are scheduled to be delivered in 2000.
During 1997, Frontline received options from companies affiliated with
Hemen to assume five contracts for the construction and purchase of five
VLCCs to be built by Hyundai Heavy Industries Co. Ltd. in South Korea at a
price of $81.5 million per vessel. These options were exercised in March
1998. No additional consideration in excess of the newbuilding contract
prices was payable by Frontline upon exercise of such options. The first
two VLCC newbuildings were delivered in 1998, the third in January 1999 and
the remaining two are scheduled to be delivered in mid 1999.
During 1997, a company indirectly controlled by Frontline's Chairman
purchased six Ultra Large Crude Carriers (ULCCs) from third parties.
Subsequently, two of these vessels were sold. Frontline Management has
entered into technical supervision agreements and commercial management
agreements in respect of the remaining four vessels at market rates.
In addition, Frontline Management has entered into agreements for the
technical management of the gas carriers Northern Snow, Northern Ice and
Northern Lights I, and the woodchip carrier Sea Prince, and for the
commercial management of Sea Prince, each owned by companies indirectly
controlled by the Company's Chairman.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
Inapplicable.
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<PAGE>
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
Inapplicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.
On December 6, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Plan"). The Company adopted the Plan to protect
shareholders against unsolicited attempts to acquire control of the Company
that do not offer an adequate price to all shareholders or are otherwise
not in the best interests of the Company and its shareholders. Under the
Plan, each shareholder of record on December 20, 1996 received one right
for each Ordinary Share held, and each registered holder of outstanding
warrants received one right for each Ordinary Share for which they are
entitled to subscribe. In addition, in connection with the Amalgamation,
the Company issued in the aggregate 47,212,536 rights to Frontline's
shareholders (44,612,536 of which rights were attached to the Ordinary
Shares issued and 2,600,000 of which rights were attached to the Ordinary
Shares underlying the New Warrants issued). The rights generally may not
detach from the related Ordinary Shares. Each right entitles the holder to
purchase from the Company one-quarter of an Ordinary Share at an initial
purchase price of $1.50. The rights will become exercisable and will detach
from the Ordinary Shares a specified period of time after any person has
become the beneficial owner of 20 per cent or more of the Company's
Ordinary Shares. The Plan was amended as of October 29, 1997 to provide
that Frontline's purchase of Ordinary Shares pursuant to its tender offer
in connection with its acquisition of LOF, would not result in the rights
becoming exercisable.
If any person becomes the beneficial owner of 20 per cent or more of the
Company's Ordinary Shares, each right will entitle the holder, other than
the acquiring person, to purchase for the purchase price, that number of
Ordinary Shares having a market value of eight times the purchase price.
If, following an acquisition of 20 per cent or more of the Company's
Ordinary Shares, the Company is involved in certain amalgamations or other
business combinations or sells or transfers more than 50% of its assets or
earning power, each right will entitle the holder to purchase for the
purchase price ordinary shares of the other party to the transaction having
a market value of up to eight times the purchase price.
The Company may redeem the rights at a price of $0.001 per right at any
time prior to a specified period of time after a person has become the
beneficial owner of 20 per cent or more of its Ordinary Shares. The rights
will expire on December 31, 2006, unless earlier exchanged or redeemed.
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<PAGE>
In connection with the Company's one-for-ten reverse stock split, the
rights were adjusted pursuant to the Plan, so that there are currently ten
rights attached to each outstanding Ordinary Share.
PART IV
ITEM 17. FINANCIAL STATEMENTS.
Inapplicable.
ITEM 18. FINANCIAL STATEMENTS.
See the financial statements listed in Item 19 below and set forth in pages
F-1 through F-20.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
The following documents are filed as a part of this Annual Report:
a) Financial Statements
PAGE
Index to Consolidated Financial Statements F-1
Report of PricewaterhouseCoopers DA,
Independent Accountants F-2
Consolidated Statements of Operations for the
years ended December 31, 1998, 1997 and 1996 F-3
Consolidated Balance Sheets as of
December 31, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996 F-6
Consolidated Statements Changes in Stockholders'
Equity for the years ended December 31, 1998,
1997 and 1996 F-8
Notes to Consolidated Financial Statements F-10
All financial statement schedules are omitted because of the absence of
conditions under which they are required or because the required
information is set forth in the Consolidated Financial Statements and Notes
thereto included herein.
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b) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
1.1 The Subregistrar Agreement related to the registration of certain
securities issued by Frontline Ltd. in the Norwegian Registry of
Securities Between Frontline Ltd. and Christiania Bank og
Kreditkasse ASA together with the Form of Warrant Certificate and
Conditions Attaching Thereto.
2.1 The Subordinated Convertible Loan Facility Agreement USD
89,000,000 dated July 13, 1999, Between Frontline Ltd. as Borrower
and Metrogas Holdings Inc. as Lender.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Frontline Ltd.
---------------
(Registrant)
Date July 15,1999 By /s/ Kate Blankenship
------------------ --------------------
Kate Blankenship
Chief Accounting Officer
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Index to Consolidated Financial Statements
Index to Consolidated Financial Statements F-1
Report of PricewaterhouseCoopers DA,
Independent Accountants F-2
Consolidated Statements of Operations
for the years ended December 31, 1998,
1997 and 1996 F-3
Consolidated Balance Sheets as of
December 31, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996 F-6
Consolidated Statements Changes in Stockholders'
Equity for the years ended December 31, 1998,
1997 and 1996 F-8
Notes to Consolidated Financial Statements F-10
F-1
<PAGE>
Report of Independent Accountants
TO THE BOARD OF DIRECTORS
AND STOCKHOLDERS OF FRONTLINE LTD.
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of
Frontline Ltd. and subsidiaries (the "Company") at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles in the United States. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements
in accordance with generally accepted auditing standards in the United
States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers DA
Oslo, Norway
July 14, 1999
F-2
<PAGE>
Frontline Ltd.
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
(in thousands of $, except per share data)
Notes 1998 1997 1996
Operating revenues
Freight revenues 270,405 259,695 178,179
Voyage expenses (66,545) (62,498) (67,708)
- ----------------------------------------------------------------
Net operating revenues 203,860 197,197 110,471
- ----------------------------------------------------------------
(Loss) gain on sale of vessels (1,514) - 6,188
Operating expenses
Ship operating expenses 55,586 48,076 34,926
Charterhire expenses 14,889 25,734 34,670
Administrative expenses 7,757 11,190 8,184
- ----------------------------------------------------------------
Total operating expenses 78,232 85,000 77,780
- ----------------------------------------------------------------
Net operating income before
depreciation 124,114 112,197 38,879
- ----------------------------------------------------------------
Depreciation 51,659 56,721 33,752
- ----------------------------------------------------------------
Net operating income after
depreciation 72,455 55,476 5,127
- ----------------------------------------------------------------
Other income (expenses)
Interest income 2,998 3,126 3,314
Interest expense (59,320) (45,945) (26,207)
Dividends 5,324 - -
Results from associated
companies 2,807 4,598 3,471
Other financial items 2,765 183 329
- ----------------------------------------------------------------
Net other expenses (45,426) (38,038) (19,093)
- ----------------------------------------------------------------
Net income (loss) before income taxes 27,029 17,438 (13,966)
Income taxes 5 30 43 15
- ----------------------------------------------------------------
Net income (loss) 26,999 17,395 (13,981)
================================================================
Earnings per share
Basic and diluted 6 $ 0.59 $ 0.48 $ (0.92)
================================================================
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
Frontline Ltd.
Consolidated Balance Sheets as of December 31, 1998 and 1997
(in thousands of $)
Notes 1998 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents 74,034 86,870
Restricted cash 1,916 -
Marketable securities 8 - 165
Trade accounts receivable 9 7,683 4,973
Other receivables 10 5,545 6,489
Inventories 6,813 5,462
Voyages in progress 8,844 9,916
Prepaid expenses and accrued income 1,554 6,762
- ----------------------------------------------------------------
TOTAL CURRENT ASSETS 106,389 120,637
Newbuildings 75,681 48,474
Vessels and equipment, net 11 1,078,956 970,590
Marketable securities 8 110,157 187,066
Investment in associated
companies 12 3,837 3,754
Deferred charges 13 4,501 2,603
- ----------------------------------------------------------------
TOTAL ASSETS 1,379,521 1,333,124
================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current
portion of long-term debt 15 170,551 247,072
Trade accounts payable 7,724 6,211
Accrued expenses 14 18,414 23,282
Deferred charter revenue 81 1,109
Provisions for drydocking 1,733 5,155
- ----------------------------------------------------------------
TOTAL CURRENT LIABILITIES 198,503 282,829
LONG-TERM LIABILITIES
Long-term debt 15 712,470 526,078
Provisions for drydocking 9,615 3,785
Other long-term liabilities 1,252 1,148
- ----------------------------------------------------------------
TOTAL LIABILITIES 921,840 813,840
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Share capital 16 115,267 115,265
Additional paid in capital 435,932 435,932
Warrants and options 17 9,333 9,333
Accumulated other
comprehensive income (119,185) (30,581)
Retained earnings
F-4
<PAGE>
(accumulated deficit) 16,334 (10,665)
- ----------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 457,681 519,284
- ----------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 1,379,521 1,333,124
================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
Frontline Ltd.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
(in thousands of $)
1998 1997 1996
Operating activities
Net income (loss) 26,999 17,395 (13,981)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation 51,659 56,721 33,752
Amortization of deferred
charges 3,021 247 -
Loss (gain) from sale of
vessels 1,514 (985) (6,188)
Gain on sale of marketable
securities (389) (894) -
Loss on repurchase of outstanding
debentures - 723 -
Results from associated
companies (2,807) (4,598) (3,471)
Other, net (2,532) 972 30
Changes in operating assets
and liabilities:
Trade accounts receivable (2,710) 2,235 (4,117)
Other receivables 1,089 (1,829) 5,629
Inventories (1,351) 1,228 (2,142)
Voyages in progress 1,072 (115) (4,955)
Prepaid expenses and accrued
income 5,208 (3,094) 1,032
Trade accounts payable 1,513 1,458 3,332
Accrued expenses (5,001) (1,383) 120
Provisions for drydocking 2,408 (1,835) 2,442
Other, net (4,777) 1,203 -
- -----------------------------------------------------------------
Net cash provided by operating
activities 74,916 67,449 11,483
- -----------------------------------------------------------------
Investing activities
Placement of restricted cash (1,916) - -
Additions to newbuildings,
vessels and equipment (352,003) (51,772) (65)
Acquisition of businesses
(net of cash acquired) - (69,646) -
Purchase of marketable
securities (10,430) (220,592) -
Dividends received from
associated companies 2,724 4,424 3,920
Proceeds from sale of vessels
and equipment 211,954 50,610 36,212
Proceeds from sales of
F-6
<PAGE>
marketable securities 392 3,677 5,298
- -----------------------------------------------------------------
Net cash (used in) provided
by investing activities (149,279) (283,299) 45,365
- -----------------------------------------------------------------
Financing activities
Proceeds from long-term debt 327,849 257,784 24,645
Repayments of long-term debt (265,211) (152,499) (90,642)
Repurchase of outstanding
debentures - (24,201) -
Debt fees paid (1,113) (1,862) (1,000)
Proceeds from issuance of equity 2 165,495 -
- ---------------------------------------------------------------
Net cash provided by (used in)
financing activities 61,527 244,717 (66,997)
- ---------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents (12,836) 28,867 (10,149)
Cash and cash equivalents at
beginning of year 86,870 58,003 68,152
Cash and cash equivalents at
end of year 74,034 86,870 58,003
================================================================
Supplemental disclosure of cash
flow information:
Interest paid, net of
capitalized interest 60,944 40,834 35,740
Income taxes paid 31 15 6
================================================================
See accompanying Notes to Consolidated Financial Statements
F-7
<PAGE>
Frontline Ltd.
Consolidated Statements of Changes in Stockholders' Equity as of
December 31, 1998, 1997 and 1996
(in thousands of $, except number of shares)
1998 1997 1996
NUMBER OF SHARES OUTSTANDING
Balance at beginning of year 46,105,860 32,161,955 14,114,637
Conversion of debenture loan - - 163
Shares in Frontline AB not
exchanged - (113,894) -
LOF minority shares - 1,493,324 -
Shares issued and options/warrants
exercised 1,000 12,564,475 18,047,155
- ----------------------------------------------------------------
Balance at end of year 46,106,860 46,105,860 32,161,955
- ----------------------------------------------------------------
SHARE CAPITAL
Balance at beginning of year 115,265 80,405 35,287
Shares in Frontline AB not
exchanged - (285) -
LOF minority shares - 3,734 -
Shares issued and options/warrants
exercised 2 31,411 45,118
- ----------------------------------------------------------------
Balance at end of year 115,267 115,265 80,405
- ----------------------------------------------------------------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of year 435,932 275,331 144,515
Shares issued and options/warrants
exercised - 148,262 130,816
LOF minority shares - 20,025 -
Warrants issued on Amalgamation - (7,686) -
- ----------------------------------------------------------------
Balance at end of year 435,932 435,932 275,331
- ----------------------------------------------------------------
WARRANTS AND OPTIONS
Balance at beginning of year 9,333 - -
Options and warrants assumed on
Amalgamation - 1,647 -
Warrants issued on Amalgamation - 7,686 -
- ----------------------------------------------------------------
Balance at end of year 9,333 9,333 -
- ----------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year (30,581) 24 -
Other comprehensive income (88,604) (30,605) 24
F-8
<PAGE>
- ----------------------------------------------------------------
Balance at end of year (119,185) (30,581) 24
- ----------------------------------------------------------------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance at beginning of year (10,665) (28,060) (14,079)
Net income 26,999 17,395 (13,981)
- ----------------------------------------------------------------
Balance at end of year 16,334 (10,665) (28,060)
- ----------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 457,681 519,284 327,700
- ----------------------------------------------------------------
COMPREHENSIVE INCOME
Net income (loss) 26,999 17,395 (13,981)
Unrealized holding (losses)
gains (83,347) (23,173) 24
Foreign currency translation (5,257) (7,432) -
- ----------------------------------------------------------------
Other comprehensive income (88,604) (30,605) 24
- ----------------------------------------------------------------
Comprehensive income (61,605) (13,210) (13,957)
- ----------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
F-9
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
1. GENERAL
Frontline Ltd. (formerly London & Overseas Freighters Limited
("LOF") (the "Company") originally commenced operations in
1948 as a U.K. company ("LOF plc") and was listed on the
London Stock Exchange in 1950. The Company was incorporated
under the laws of Bermuda on June 12, 1992 for the purpose of
succeeding to the business of LOF plc. In November 1993, the
shares of LOF were listed on the NASDAQ National Market in
the form of American Depositary Shares ("ADSs"), each ADS
representing ten LOF shares. On May 11, 1998, LOF completed a
business combination, as described below, with another
Bermuda company, Frontline Ltd. ("Frontline"). LOF, the
surviving entity, was renamed Frontline Ltd. effective from
that date. Frontline commenced operations in 1985 as a
Swedish company listed on the Stockholm Stock Exchange in
1989 ("Frontline AB"). Frontline was incorporated under the
laws of Bermuda on April 29, 1997 for the purpose of
succeeding to the business of Frontline AB and, commencing in
June 1997, the shares in Frontline AB were exchanged for
shares in Frontline. The ordinary shares of Frontline were
thereafter listed on the Oslo Stock Exchange and delisted
from the Stockholm Stock Exchange.
The Company, which combines the business of LOF and
Frontline, is a holding company for investments in a number
of subsidiaries engaged primarily in the ownership and
operation of oil tankers and oil/bulk/ore ("OBO") carriers.
The Company operates through subsidiaries and partnerships
located in Sweden, Norway, Singapore, Liberia and Panama. The
Company is also involved in the charter, purchase and sale of
vessels.
BUSINESS COMBINATION
On September 22, 1997, LOF announced that it had entered into
an Agreement and Plan of Amalgamation (the "Amalgamation
Agreement") with Frontline, providing for a business
combination in a three-step transaction. On September 29,
1997, pursuant to the Amalgamation Agreement, Frontline
commenced a cash tender offer (the "Offer") for at least 50.1
per cent and up to 90 per cent of the outstanding LOF
ordinary shares and ADSs for a price of $1.591 per ordinary
share (or $15.91 per ADS). The Offer expired on October 28,
1997 and effective November 1, 1997 Frontline had acquired
F-10
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
approximately 79.74 per cent of the outstanding LOF ordinary
shares. (see Note 20).
In the second step, which was completed on May 11, 1998,
Frontline amalgamated (the "Amalgamation") with Dolphin
Limited, a Bermuda subsidiary of LOF. Each ordinary share of
Frontline was canceled in consideration for which the
stockholders of Frontline received (i) 3.2635 (restated to
0.32635) ordinary shares of LOF and (ii) 0.1902 (restated to
0.01902) of a newly issued warrant ("Frontline Warrants") to
purchase one LOF ordinary share.
In the third step of the combination, in order to combine the
assets and liabilities, LOF purchased the assets and
liabilities of Frontline which were vested in the amalgamated
company at fair market value in exchange for a promissory
note. This note will be transferred by way of distribution
from the amalgamated company to the Company which will in
turn cancel the note. LOF is the legally surviving entity in
this business combination and has been renamed Frontline Ltd.
with effect from May 11, 1998. Frontline is treated as the
accounting acquiror and the transaction treated as a reverse
acquisition. For the purposes of these financial statements,
the Amalgamation has been recorded with effect from November
1, 1997 and the results of LOF have been consolidated from
that date. The share capital of the Company has been restated
accordingly to reflect the transaction. For periods on or
after May 11, 1998, the term Company refers to Frontline Ltd.
(formerly London & Overseas Freighters Limited).
INVESTMENT IN ICB SHIPPING AB
On September 1, 1997, Frontline announced its intention to
submit an offer to acquire all of the shares of ICB Shipping
AB (publ) ("ICB"). The final form of the offer was an offer
to acquire all of the shares of ICB in exchange for SEK 130
in cash for each of the A-shares and SEK 115 in cash for each
of the B-shares. The total acquisition price was estimated to
be $423 million, financed primarily by a US $300 million loan
facility ("ICB facility") with Chase Manhattan Bank
("Chase"). During September and October 1997, Frontline
acquired ICB shares for an approximate purchase price of $215
million. Through the tender offer, Frontline acquired 51.7
per cent of the outstanding shares of ICB. However, the
shares purchased, 14,428,078 Class B shares and 148,663 Class
A shares, provide Frontline with only 31.4 per cent of the
ICB voting power. On January 8, 1998, Frontline withdrew its
F-11
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
bid for the remaining outstanding shares of ICB. The Company
has made further share purchases in the market during 1998,
and at December 31, 1998 had 34.2 per cent of the voting
power.
In connection with the ICB transaction, actions taken by ICB
management subsequent to the announcement of the Frontline
tender offer clearly reflect strong opposition to Frontline's
ability to exercise significant influence.
The Company has not been able to control, or exercise
significant influence over, ICB. Accordingly, the Company is
accounting for its investment in ICB as an available-for-sale
security in accordance with SFAS 115. The Company has
reclassified the ICB investment from current to non-current,
due to its ability and intent to retain its investment for an
undefined period of time sufficient to allow for any
anticipated recovery in ICB's market value.
2. ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in
the United States. The consolidated financial statements
include the assets and liabilities of the Company and its
subsidiaries. All intercompany balances and transactions have
been eliminated on consolidation.
Investments in companies in which the Company directly or
indirectly holds more than 50 per cent of the voting control
are consolidated. Investments in partnerships are accounted
for using the equity method. The Company's investment in ICB
is accounted for as an available-for-sale security in
accordance with SFAS 115 (see Note 1).
The preparation of financial statements in accordance with
generally accepted accounting principles requires that
management make estimates and assumptions affecting the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
F-12
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
Certain of the comparative figures have been reclassified to
conform with the presentation adopted in the current period.
CASH AND CASH EQUIVALENTS
For the purposes of the consolidated statements of cash
flows, all demand and time deposits and highly liquid, low
risk investments with original maturities of three months or
less are considered equivalent to cash.
MARKETABLE SECURITIES
Marketable equity securities held by the Company are
considered to be available-for-sale securities and as such
are carried at fair value with resulting unrealized gains and
losses, net of deferred taxes if any, recorded as a separate
component of other comprehensive income in stockholders'
equity.
INVENTORIES
Inventories, which comprise principally of fuel and
lubricating oils, are stated at the lower of cost or market
value. Cost is determined on a first-in, first-out basis.
VESSELS AND EQUIPMENT
The cost of the vessels less estimated residual value is
depreciated on a straight-line basis over the vessels'
remaining economic useful lives. In the fourth quarter of
1997, management determined that the useful life of its
vessels was 25 years rather than 20 years from date of
construction, as previously estimated. A change in accounting
estimate was recognized to reflect this decision, resulting
in a decrease in depreciation expense and consequently
increasing net income by $3.6 million and basic and diluted
earnings per share by $0.01, for 1997. Other equipment is
depreciated over its estimated residual life, which
approximates five years.
The carrying value of the vessels under construction
represents the accumulated costs to the balance sheet date
which the Company has had to pay by way of purchase
installments and other capital expenditures together with
capitalized loan interest and associated finance costs. No
charge for depreciation is made until the vessel is put into
operation.
F-13
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets that are held and used by the Company are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. In addition, long-lived assets to be
disposed of are reported at the lower of carrying amount or
fair value less estimated costs to sell.
DEFERRED CHARGES
Loan costs, including debt arrangement fees, are deferred and
amortized on a straight-line basis over the term of the
relevant loan. The straight line basis of amortization
approximates the effective interest method in the Company's
statement of operations. Amortization of loan costs is
included in interest expense.
REVENUE AND EXPENSE RECOGNITION
Revenues and expenses are recognized on the accrual basis.
Revenues are generated from freight billings and time charter
hires. The operating results of voyages in progress are
estimated and recorded pro-rata on a per day basis in the
consolidated statements of operations. Probable losses on
voyages are provided for in full at the time such losses can
be estimated. Time charter revenues are recorded over the
term of the time charter as service is provided.
DRYDOCKING PROVISIONS
Normal vessel repair and maintenance costs are charged to
expense when incurred. Provisions for future drydocking costs
are accrued and charged to expense on a pro-rata basis over
the period to the next drydocking. Such provisions are based
on estimates made by management of expected cost and length
of time between drydockings.
DERIVATIVES
The Company enters into interest rate swap transactions from
time to time to hedge a portion of its exposure to floating
interest rates. These transactions involve the conversion of
floating rates into fixed rates over the life of the
transactions without an exchange of underlying principal.
F-14
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
Hedge accounting is used to account for these swaps provided
certain hedging criteria are met. The differential is accrued
as interest rates change and recognized as an adjustment to
interest expense. The related amount receivable from or
payable to counterparties is included in accrued interest
income or expense, respectively. The fair values of the
interest rate swaps are not recognized in the financial
statements.
Hedge accounting is applied where the derivative reduces the
risk of the underlying hedged item and is designated at
inception as a hedge with respect to the hedged item.
Additionally, the derivative must result in payoffs that are
expected to be inversely correlated to those of the hedged
item. Derivatives are measured for effectiveness both at
inception and on an ongoing basis.
If a derivative ceases to meet the criteria for hedge
accounting, any subsequent gains and losses are currently
recognized in income. If a hedging instrument is sold or
terminated prior to maturity, gains and losses continue to be
deferred until the hedged instrument is recognized in income.
Should a swap be terminated while the underlying debt remains
outstanding, the gain or loss is adjusted to the basis of the
underlying debt and amortized over its remaining useful life.
The Company has not entered into any derivative contracts for
speculative or trading purposes.
FOREIGN CURRENCIES
The Company's functional currency is the U.S. dollar as all
revenues are received in U.S. dollars and a majority of the
Company's expenditures are made in U.S. dollars. The Company
reports in U.S. dollars. Most of the Company's subsidiaries
report in U.S. dollars. For subsidiaries that maintain their
accounts in currencies other than U.S. dollars, the Company
uses the current method of translation whereby the statements
of operations are translated using the average exchange rate
and the assets and liabilities are translated using the year
end exchange rate. Foreign currency translation gains or
losses are recorded as a separate component of other
comprehensive income in stockholders' equity.
F-15
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
Transactions in foreign currencies during the year are
translated into U.S. dollars at the rates of exchange in
effect at the date of the transaction. Foreign currency
monetary assets and liabilities are translated using rates of
exchange at the balance sheet date. Foreign currency non-
monetary assets and liabilities are translated using
historical rates of exchange. Foreign currency translation
gains or losses are included in the consolidated statements
of operations.
STOCK-BASED COMPENSATION
The Company has elected to account for its stock-based
compensation arrangements under APB 25.
EARNINGS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per
Share" ("SFAS 128"), which requires dual presentation of
basic and diluted earnings per share ("EPS") for all entities
with complex capital structures. Basic EPS is computed based
on the income (loss) available to common stockholders and the
weighted average number of shares outstanding for basic EPS.
Diluted EPS includes the effect of the assumed conversion of
potentially dilutive instruments (see Note 6).
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income"("SFAS 130"). Comprehensive income is
defined as the change in equity of a business enterprise
during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes
in equity during a period except those resulting from
investments by owners and distributions to owners. (See
Statement of Changes in Stockholders' Equity).
F-16
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
3. ADOPTION OF NEW ACCOUNTING STANDARDS
In 1998, the Company has adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". The
adoption of this standard has not had a material impact on
the Company's consolidated financial statements since
management considers the Company to currently operate in one
market segment.
SFAS No. 133, "Accounting for Derivatives and Hedging
Activities", is effective from January 1, 2001 for the
Company and requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The
Company has not completed its assessment of the impact that
the adoption of SFAS No. 133 will have on the Company's
consolidated financial statements.
4. PENSIONS
In Frontline's Norwegian subsidiary, Frontline Management AS,
the employees' pension arrangements are provided by defined
benefit plans. The pension entitlements are normally based on
years of service and final salary. Pension liabilities have
been valued at the present value of future pension payments
at the year-end. Future pension payments are calculated on
the basis of the expected salary at the time of retirement.
Pension plan assets are valued at market values as of
December 31, 1998. Net pension liabilities (pension
liabilities less pension plan assets) are accounted for as
long-term liabilities after adjustment for net actuarial
gains or losses. Net value of surpluses is accounted for
under long-term receivables. Net pension costs (gross pension
costs less estimated return on pension plan assets) for the
period are included under administrative expenses. Gross
pension costs include the present value of benefits earned by
employees in the period, interest cost of pension obligations
and the effect of changes in estimates.
The most recent actuarial valuation disclosed a deficit of
NOK 0.37 million as at December 31, 1998 (1997 - deficit of
NOK 0.12 million). The valuation is based on the following
financial assumptions: discount rate 6 per cent, rate of
F-17
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
return 7 per cent, salary increase 3.5 per cent, pension
increase 3 per cent.
Pension obligations for the Swedish employees are covered
through the ITP-plan, which is a fully insured pension scheme
for salaried employees. Pension premiums are estimated
through actuarial valuations, which are invoiced in full to
the Company.
For employees in England and Bermuda, the Company contributes
to defined contribution plans, the cost of which is expensed
as incurred.
The total pension charge for the Company for 1998 was
$187,000 (1997 - $580,000, 1996 - $370,000).
Compliance with Statement of Financial Accounting Standards
No. 87, "Employers' Accounting for Pensions" would produce
results not materially different from those presented.
5. TAXATION
BERMUDA
Under current Bermuda law, the Company is not required to pay
taxes in Bermuda on either income or capital gains. The
Company has received written assurance from the Minister of
Finance in Bermuda that, in the event of any such taxes being
imposed, the Company will be exempted from taxation until the
year 2016.
UNITED STATES
The Company does not accrue U.S. income taxes as, in the
opinion of U.S. counsel, the Company is not engaged in a U.S.
trade or business and is exempted from a gross basis tax
under Section 883 of the U.S. Internal Revenue Code.
A reconciliation between the income tax expense resulting
from applying the U.S. Federal statutory income tax rate and
the reported income tax expense has not been presented herein
as it would not provide additional useful information to
users of the financial statements as the Company's net income
is subject to neither Bermuda nor U.S. tax.
F-18
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
OTHER JURISDICTIONS
Certain of the Company's subsidiaries in Norway, Singapore
and Sweden are subject to taxation in their respective
jurisdictions.
The tax charge for the year comprises:
(in thousands of $) 1998 1997 1996
Current tax 30 43 15
Deferred tax - - -
- -------------------------------------------------------------
30 43 15
=============================================================
Temporary differences and carryforwards which give rise to
deferred tax assets, liabilities and related valuation
allowances are as follows:
(in thousands of $) 1998 1997
Deferred tax liability - current
Prepaid expenses - -
Deferred tax liability - non current
Vessels - -
Deferred tax asset - current
Accrued liabilities - 755
ICB and convertible debenture 30,365 8,765
Deferred tax asset - non current
Pension liabilities 13 5
Tax loss carryforwards 4,352 13,158
Valuation allowance (34,730) (22,683)
- ----------------------------------------------------------
Net deferred tax asset (liability) - -
==========================================================
As of December 31, 1998 and 1997, the Company had $15,431,000 and
$46,993,000 of net operating loss carryforwards, respectively.
The loss carryforward can be utilized only against future taxable
income for the respective subsidiary. Frontline AB accounts for a
total of $15,431,000 as of December 31, 1998. These net operating
losses do not have an expiration date. The Company's deferred tax
assets in its Swedish subsidiary are reduced by a valuation
allowance as it is more likely than not in the opinion of
management, that deferred tax assets will not be realized in the
future.
F-19
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
6. EARNINGS PER SHARE
The computation of basic EPS is based on the weighted average
number of shares outstanding during the year. The computation of
diluted EPS assumes the foregoing and the exercise of stock
options and warrants using the treasury stock method (see Note
18). Earnings per share, for all periods presented, have been
restated to reflect (i) the issue of 3.2635 ordinary shares of
LOF and 0.1902 of a Frontline Warrant to purchase one LOF
ordinary share in exchange for one ordinary share of Frontline
effective November 1, 1997 (see Note 1) and (ii) the one-for-ten
reverse stock split (see Note 16).
The components of the numerator for the calculation of basic EPS
and diluted EPS are as follows:
(in thousands of $) 1998 1997 1996
Net income (loss) available to
stockholders 26,999 17,395 (13,981)
================================================================
The components of the denominator for the calculation of basic
EPS and diluted EPS are as follows:
(in thousands ) 1998 1997 1996
Basic earnings per share:
Weighted average number of
ordinary shares outstanding 46,107 36,189 15,274
================================================================
Diluted earnings per share:
Weighted average number of
ordinary shares outstanding 46,107 36,189 15,274
Warrants and stock options 30 84 -
- ----------------------------------------------------------------
46,137 36,273 15,274
================================================================
F-20
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
7. LEASES
RENTAL EXPENSE
Charter hire payments to third parties for contracted in vessels
are accounted for as operating leases. The Company is also
committed to make rental payments under operating leases for
office premises. The future minimum rental payments under the
Company's non-cancelable operating leases, are as follows:
Year ending December 31,
(in thousands of $)
1999 23,447
2000 18,178
2001 18,128
2002 18,480
2003 18,262
2004 and later 116,684
- ------------------------------------------------
Total minimum lease payments 213,179
================================================
Total rental expense for operating leases was $15,403,000,
$26,323,000 and $35,131,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
Rental income
The minimum future revenues to be received on time charters and
other contractually committed income as of December 31, 1998 are
as follows:
Year ending December 31,
(in thousands of $)
1999 18,395
2000 18,573
2001 8,798
2002 -
2003 -
2004 and later -
- ---------------------------------------------
Total minimum lease revenues 45,766
=============================================
F-21
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
The cost and accumulated depreciation of the vessels leased to a
third party at December 31, 1998 were approximately $54.3 million
and $18.7 million, respectively, and at December 31, 1997 were
approximately $103.0 million and $17.3 million, respectively.
In addition to the minimum lease revenues disclosed above, the
Company has entered into one year plus option one year market
related timecharters with British Petroleum for three of the
Company's VLCCs.
8. MARKETABLE SECURITIES
Marketable securities held by the Company are equity securities
considered to be available-for-sale securities. With the
exception of shares in Stockholms Fondsbors which are included as
at December 31, 1997, (book value $3,000, gross unrealized gain
$162,000), all equity securities are ICB Shipping AB A-and B-
shares. The shares in Stockholms Fondsbors were sold during 1998.
(in thousands of $) 1998 1997
Cost 228,239 217,812
Gross unrealized gain - 162
Gross unrealized loss (118,082) (30,743)
- -----------------------------------------------------------
Fair value 110,157 187,231
===========================================================
The unrealized loss on marketable securities, including a
component of foreign currency translation, included in
comprehensive income increased by $87,501,000 for the year ended
December 31, 1998 (1997 - $30,743,000).
9. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are presented net of allowances for
doubtful accounts amounting to $500,000 and $300,000 for the
years ended December 31, 1998 and 1997, respectively.
F-22
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
10. OTHER RECEIVABLES
(in thousands of $) 1998 1997
Agent receivables 3,661 3,816
Other receivables 1,884 2,673
- --------------------------------------------------------
5,545 6,489
========================================================
Other receivables are presented net of allowances for doubtful
accounts amounting to $nil and $314,000 for the years ended
December 31, 1998 and 1997 respectively.
11. VESSELS AND EQUIPMENT
(in thousands of $) 1998 1997
Cost 1,336,307 1,181,282
Accumulated depreciation (257,351) (210,692)
- ------------------------------------------------------------
Net book value at end of year 1,078,956 970,590
============================================================
Included in the above amounts as at December 31, 1998 and 1997 is
equipment with a net book value of $594,000 and $477,000,
respectively. Interest capitalized in the cost of newbuildings
amounted to $8,332,000 and $173,000 in 1998 and 1997,
respectively.
12. INVESTMENT IN ASSOCIATED COMPANIES
The Company has the following participation in partnerships which
are recorded using the equity method:
Percentage
K/S Rasmussen Teamship A/S II 40%
K/S Rasmussen Teamship A/S III 35%
F-23
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
13. DEFERRED CHARGES
Deferred charges represent debt arrangement fees that are
capitalized and amortized on a straight-line basis to interest
expense over the life of the debt instrument The deferred
charges are comprised of the following amounts:
(in thousands of $) 1998 1997
Debt arrangement fees 7,781 2,862
Accumulated amortization (3,280) (259)
- ---------------------------------------------------------
4,501 2,603
=========================================================
14. ACCRUED EXPENSES
(in thousands of $) 1998 1997
Voyage expenses 4,232 7,127
Ship operating expenses 6,679 2,630
Deferred revenue - 455
Administrative expenses 685 1,986
Interest expense 5,298 6,922
Income taxes 15 16
Other 1,505 4,146
- ----------------------------------------------------------
18,414 23,282
==========================================================
F-24
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
15. DEBT
(in thousands of $) 1998 1997
Floating rate debt
(LIBOR + 0.70% to 3.50%)
due through 2008 840,658 755,170
Fixed rate debt 8.00% due
through 2001 18,833 -
--------------------
859,491 755,170
Convertible debenture loan and
credit facilities 23,530 17,980
- -----------------------------------------------------------
Total debt 883,021 773,150
Less: short-term and current
portion of long-term debt (170,551) (247,072)
- -----------------------------------------------------------
712,470 526,078
===========================================================
The weighted average interest rate for short-term debt as of
December 31, 1998 was 8.2 per cent. The weighted average
interest rate for long-term debt for 1998 was 6.7 per cent.
The fixed rate debt and certain of the floating rate debt are
secured by ship mortgages and, in the case of some debt, pledges
of shares by each guarantor subsidiary. Various debt agreements
of the Company contain certain covenants, which among other
things limit the payment of dividend and require compliance with
certain financial ratios. Such ratios include equity ratio
covenants, minimum value clauses, and minimum free cash
restrictions.
F-25
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
Metrogas Holdings ("Metrogas"), a company related to the
Company's Chairman, had outstanding as of December 31, 1998 a
specific loan of $89.0 million provided to the Company. This loan
has since been converted to a separate long-term financing
facility as described below.
As of December 31, 1998, the Company did not comply with the
equity ratio covenants in a number of the loan agreements. During
1999, management initiated discussions with the Company's lending
banks with the purpose of lowering the breached covenant
requirements in such loan agreements at least until January 1,
2001. The requested changes were made with the intention of
making the Company's financing arrangements more flexible in the
event of a prolonged negative market scenario, including falling
second-hand prices. Included in the request for changes was a
proposal to subordinate the $89.0 million loan given by Metrogas
(the "Subordinated Loan") to loans given by the Company's lending
banks. In addition, the proposal included reclassifying the
Subordinated Loan as equity for the purposes of calculating the
Company's equity ratio.
As of July 13, 1999, the discussions with Metrogas and the
Company's lending banks have been finalized and the Company and
Metrogas have signed a Subordinated Convertible Loan Facility
Agreement. Accordingly, the Company has received acceptance of
reduced covenant levels from all but one of the Company's 19
lending banks. This one bank, however, is subject to the
authority of the majority lenders, who have agreed to accept
lower covenant levels until January 1, 2001.
F-26
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
The number of outstanding convertible debenture share
certificates ("Debentures") in the Company's subsidiary,
Frontline AB, amounted to 2,654,540 and 21,100,753 as of December
31, 1998 and 1997, respectively. The face value of each
certificate is SEK 10. The conversion period is from June 25,
1992 to July 30, 1999 and loan maturity is August 24, 1999. The
Debentures may be converted into a maximum of 6,028,786 shares at
a conversion price of SEK 35 per share. Annual interest of 9 per
cent is payable annually on June 24 and on the maturity date.
During 1997, Frontline acquired Debentures with a face value of
SEK 182,655,574, and at December 31, 1997 held Debentures with a
face value of SEK 183,810,574. Frontline paid approximately $24
million for the repurchase of Debentures and recorded a loss of
approximately $0.7 million. Frontline acquired further Debentures
with face value SEK 666,048 in 1998 and recorded a gain (loss) of
$nil. In June 1998, convertible debentures held by the Company
with face value SEK 184,462,124 were cancelled. The face value of
Debentures held by the Company at December 31, 1998 was SEK
14,498.
The outstanding debt as of December 31, 1998 is repayable as
follows:
Year ending December 31,
(in thousands of $)
1999 170,551
2000 170,060
2001 86,459
2002 64,534
2003 190,533
2004 and later 200,884
- -----------------------------------------------
Total debt 883,021
===============================================
16. SHARE CAPITAL
The issued and fully paid share capital of the Company has been
restated for all periods presented to reflect the Amalgamation as
described in Note 1 and the reverse stock split described below.
F-27
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
Authorized share capital:
(in thousands of $) 1998 1997
100,000,000 ordinary share of
$2.50 each (1997 - 220,000,000
ordinary shares of $1.00 each) 250,000 220,000
===============================================================
Issued and fully paid share capital:
(in thousands of $, except share numbers) 1998 1997
46,106,860 ordinary shares of $2.50 each
(1997 - 46,105,860) 115,267 115,265
===============================================================
The Company's ordinary shares are listed on the Oslo Stock
Exchange and the London Stock Exchange. The Company's ordinary
shares are listed on the NASDAQ National Market in the form of
ADSs. Each ADS represents one ordinary share.
Of the authorized and unissued ordinary shares, 124,558 are
reserved for issue pursuant to subscription under warrants which
can be exercised at any time up to December 31, 2003, 2,600,000
are reserved for issue pursuant to subscription under warrants
which can be exercised at any time up to May 11, 2001 and 143,000
are reserved for issue pursuant to subscription under options
granted under the Company's share option plans. As at December
31, 1998, except for the shares which would be issued on the
exercise of the warrants and the options, no unissued share
capital of the Company is under option or is conditionally or
unconditionally to be put under option.
On October 19, 1998, at the Annual General Meeting of the
Company, the stockholders approved a share consolidation of ten
shares of $0.25 par value each to one share of $2.50 par value
each. This reverse stock split was effective October 26, 1998.
The number of shares authorized, issued and outstanding, earnings
per share and share options and warrants disclosed have been
restated for all periods presented accordingly.
F-28
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
In connection with the Amalgamation, at a shareholder meeting
on May 11, 1998 an increase in the authorized share capital
of the Company to $250,000,000, divided into 100,000,000
ordinary shares of $2.50 each, was approved. On May 11, 1998,
the Company issued 44,612,536 shares pursuant to the
Amalgamation described in Note 1.
In 1997, Frontline exercised its outstanding ship purchase
options on three Suezmax tankers and issued 3,263,500 shares
to four large institutional investors at NOK 86.26 per share
in order to finance the exercise of these options.
In September 1997, Frontline entered into an agreement with a
party indirectly controlled by its Chairman to acquire the
shares of Fourways Marine Limited (the "Fourways
Transaction"), the owner of the Suezmax Sea Spirit (built in
1993), in exchange for 979,050 Frontline shares at NOK 107.25
per share plus assumption of the company's debt. Operational
control of the vessel was assumed on September 25, 1997. The
share issuance to purchase Sea Spirit was valued and recorded
at $41.7 million, which was $1 million less than three
independent appraisals of the vessel's fair market value.
In September 1997, Frontline completed a share issuance of
6,853,350 shares at NOK 107.25 per share (gross proceeds of
NOK 735 million) to a syndicate led by two Scandinavian
financial institutions. The number of outstanding shares of
Frontline was thereby increased from 10,820,151 to
12,920,151. The proceeds of this transaction constituted the
equity financing for Frontline's offer for the shares of ICB.
On September 25, 1997, Frontline issued 1,468,575 shares in a
private placement at NOK 117.21 per share to strengthen the
equity base of the company in light of the ICB and LOF share
acquisitions.
Frontline had entered into call option agreements with two of
its shareholders, BTL and Goldtech, whereby until October 31,
1997, Frontline could order the sale of up to 726,129 of its
shares each from BTL and Goldtech to any buyer that Frontline
may advise. In addition, BTL and Goldtech entered into put
option agreements with Frontline to each sell 363,064 shares
of Frontline at the same exercise price as in the call
agreements. In July 1997, BTL and Goldtech exercised their
put options. Frontline placed the 363,064 shares each from
F-29
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
BTL and Goldtech in the market at an average price of NOK
87.33 and NOK 89.78, respectively, resulting in additional
cash to Frontline of approximately $2.1 million. In August
1997, Frontline exercised its remaining call agreement with
BTL on 363,064 shares and subsequently placed these shares in
the market, which resulted in additional cash of
approximately $1.8 million. In September 1997, Frontline
exercised its remaining call agreement with Goldtech on
363,064 shares and subsequently placed these shares in the
market, which resulted in additional cash of approximately
$2.6 million.
On December 6, 1996, the Company's Board of Directors adopted
a Shareholder Rights Plan (the "Plan"). The Company adopted
the Plan to protect shareholders against unsolicited attempts
to acquire control of the Company that do not offer an
adequate price to all shareholders or are otherwise not in
the best interests of the Company and its shareholders. Under
the Plan, each shareholder of record on December 20, 1996
received one right for each ordinary share held, and each
registered holder of outstanding warrants received one right
for each ordinary share for which they are entitled to
subscribe. Each right entitles the holder to purchase from
the Company one-quarter of an ordinary share at an initial
purchase price of $1.50. The rights will become exercisable
and will detach from the ordinary shares a specified period
of time after any person has become the beneficial owner of
20 per cent or more of the Company's ordinary shares.
F-30
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
If any person becomes the beneficial owner of 20 per cent or
more of the Company's ordinary shares, each right will
entitle the holder, other than the acquiring person, to
purchase for the purchase price, that number of ordinary
shares having a market value of eight times the purchase
price.
If, following an acquisition of 20 per cent or more of the
Company's ordinary shares, the Company is involved in certain
amalgamations or other business combinations or sells or
transfers more than 50 per cent of its assets or earning
power, each right will entitle the holder to purchase for the
purchase price ordinary shares of the other party to the
transaction having a market value of up to eight times the
purchase price.
The Company may redeem the rights at a price of $0.001 per
right at any time prior to a specified period of time after a
person has become the beneficial owner of 20 per cent or more
of its ordinary shares. The rights will expire on December
31, 2006, unless earlier exchanged or redeemed.
A number of the Company's bank loans contain a clause which
prohibits dividend payments without the approval from the
lending banks.
17. WARRANTS AND SHARE OPTION PLANS
At the effective date of the Amalgamation, Frontline recorded
warrants to purchase 124,558 shares (restated from 1,245,588)
of LOF and options to purchase 288,000 shares (restated from
2,880,000). These warrants and share options have been
recorded at fair value, calculated using the Black-Scholes
option pricing model, as an adjustment to the purchase price
on the acquisition of LOF. These warrants entitle the holder
to subscribe for one ordinary share in the Company at a price
of 4.00 pounds sterling and are exercisable at any time up to
December 31, 2003.
F-31
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
Pursuant to the terms of the Amalgamation Agreement, warrants
to purchase 2,600,000 shares (restated from 26,000,000) in
the Company were granted on the date of Amalgamation. These
warrants have been recorded at an estimated fair value at
November 1, 1997 using the Black-Scholes option pricing
model. These warrants entitle the holder to subscribe for one
ordinary share in the Company at a price of $15.91 and are
exercisable at any time up to May 11, 2001.
The following summarizes the warrant transactions:
(in thousands) No.
Warrants assumed on Amalgamation 124,558
Warrants issued on Amalgamation 2,600,000
Exercised -
Warrants outstanding at December 31, 1997 2,724,558
Exercised -
- -----------------------------------------------------------
Warrants outstanding at December 31, 1998 2,724,558
===========================================================
The Company has in place a Bermuda Share Option Plan (the
"Bermuda Plan") and a United Kingdom Share Option Plan (the
"U.K. Plan"). Under the terms of the plans, the exercise
price for the share options may not be less than the average
of the fair market value of the underlying shares for the
three dealing days before the date of grant. The number of
shares granted under the plans may not in any ten year period
exceed 7 per cent of the issued share capital of the Company.
No consideration is payable for the grant of an option.
The Company has recorded no compensation expense for the
issuance of share options. The share options assumed in
connection with the Amalgamation with LOF have been treated
as an adjustment to the purchase price.
Under the Bermuda Plan, options may be granted to any
director or employee of the Company or subsidiary. Options
are only exercisable during the period of nine years
following the first anniversary date of the grant.
F-32
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
The following summarizes the share options transactions
relating to the Bermuda Plan:
(in thousands, except per share data) Shares Weighted
average
exercise price
Assumed on Amalgamation 129 $ 14.45
Exercised - -
Canceled - -
Options outstanding at
December 31, 1997 129 $ 14.45
Exercised - -
Canceled - -
- ---------------------------------------------------------------
Options outstanding at
December 31, 1998 129 $ 14.45
===============================================================
Options exercisable at:
December 31, 1997 121 $ 14.63
===============================================================
December 31, 1998 129 $ 14.45
===============================================================
Under the U.K. Plan, options may be granted to any full-time
director or employee of the Company or subsidiary. Options are
only exercisable during the period of seven years following the
third anniversary date of the grant.
F-33
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
The following summarizes the share options transactions relating
to the U.K. Plan:
(price per share in pounds sterling)
(in thousands, except per share data) Shares Weighted
average
exercise price
Assumed on Amalgamation 159 8.61
Exercised - -
Canceled - -
Options outstanding at December 31, 1997 159 8.61
Exercised (1) 7.28
Canceled (144) 8.57
- --------------------------------------------------------------
Options outstanding at
December 31, 1998 14 9.11
==============================================================
Options exercisable at:
December 31, 1997 135 8.73
==============================================================
December 31, 1998 12 9.42
==============================================================
The options outstanding under the Bermuda Plan as at December
31, 1998 and December 31, 1997 have exercise prices between
$11.73 and $15.00.
The options outstanding under the U.K. Plan at December 31, 1997
have exercise prices between 7.28 and 9.85 pounds sterling. The
options that are not presently exercisable vest three years from
the date of grant.
F-34
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
18. FINANCIAL INSTRUMENTS
Interest rate risk management
In certain situations, the Company may enter into financial
instruments to reduce the risk associated with fluctuations in
interest rates. The Company does not hold or issue instruments
for speculative or trading purposes. The counterparties to such
contracts are Chase, Christiania Bank og Kreditkasse, Midland
Bank and Skandinaviska Enskilda Banken. Credit risk exists to the
extent that the counterparties are unable to perform under the
contracts.
The Company manages its debt portfolio with interest rate swap
agreements in U.S. dollars to achieve an overall desired position
of fixed and floating interest rates. The Company has entered
into the following interest rate swap transactions involving the
payment of fixed rates in exchange for LIBOR:
Principal Inception Maturity Fixed
Date Date Interest
Rate
(in thousands
of $)
$10,000 May 1996 May 2000 5.56%
$50,000 February 1998 February 2003 5.685%
$25,000 August 1998 August 2003 5.755%
$25,000 August 1998 August 2003 5.756%
$50,000 February 1998 February 2003 5.775%
$50,000 March 1998 February 2003 5.885%
$20,000 May 1998 May 2000 5.90%
$111,384 reducing
quarterly to
$91,392 February 1997 February 1999 5.99%
$56,259 reducing
quarterly to
$34,051 May 1997 May 2001 6.84%
$43,580 reducing
quarterly to
$15,248 May 1992 November 1999 6.93%
As at December 31, 1998, the notional principal amounts
subject to such swap agreements was $441,223,000.
F-35
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
Foreign currency risk
The majority of the Company's transactions, assets and
liabilities are denominated in U.S. dollars, the functional
currency of the Company. Certain of the Company's
subsidiaries report in Sterling, Swedish kronor or Norwegian
kroner and risks of two kinds arise as a result: a
transaction risk, that is, the risk that currency
fluctuations will have a negative effect on the value of the
Company's cash flows; and a translation risk, the impact of
adverse currency fluctuations in the translation of foreign
operations and foreign assets and liabilities into U.S.
dollars for the Company's consolidated financial statements.
The Company has not entered into forward contracts for either
transaction or translation risk, which may have an adverse
effect on the Company's financial condition and results of
operations.
Fair Values
The carrying value and estimated fair value of the Company's
financial instruments at December 31, 1998 and 1997 are as
follows:
1998 1998 1997 1997
(in thousands of $) Carrying Value Fair Value Carrying Value Fair Value
Non-Derivatives:
Cash and cash
equivalents 74,034 74,034 86,870 86,870
Marketable securities 110,157 110,157 187,231 187,231
Short-term debt 170,551 170,551 247,072 247,072
Long-term debt,
including
convertible debt 712,470 712,470 526,078 526,078
Derivatives:
Interest rate swap
transactions - (7,136) - (1,781)
The carrying value of cash and cash equivalents, which are
highly liquid, is a reasonable estimate of fair value.
The estimated fair value of marketable securities and the
convertible debt were based on the quoted market price of
these or similar instruments when available. The estimated
fair value for long-term debt was considered to be equal to
the carrying value since it bears variable interest rates
F-36
<PAGE>
which are reset on a quarterly basis.
Fair value of interest rate swaps is estimated by taking into
account the cost of entering into interest rate swaps to
offset the swaps outstanding.
F-37
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
Concentrations of risk
There is a concentration of credit risk with respect to cash
and cash equivalents to the extent that substantially all of
the amounts are carried with Nordlandsbanken and Christiania
Bank og Kreditkasse. However, the Company believes this risk
is remote and that these banks are high credit quality
financial institutions.
The majority of the vessels' gross earnings are receivable in
U.S. dollars. In 1997 and 1996 one customer accounted for 10
per cent or more of freight revenues. In 1998, no customer
accounted for more than 10 per cent or more of freight
revenues.
19. RELATED PARTY TRANSACTIONS
Management believes transactions with related parties are
under terms similar to those that would be arranged with
other parties.
During 1996, 1997 and January 1998, Frontline received
options to assume newbuilding contracts for the construction
and purchase of five Suezmax tankers at the Hyundai Heavy
Industries Co. Ltd. shipyard in South Korea for delivery in
1998 and 2000 from single-ship owning companies (the "Suezmax
Newbuilding Companies") affiliated with Hemen Holding Ltd.
("Hemen"). Hemen is the Company's largest shareholder and is
indirectly controlled by Mr. John Fredriksen, Chairman and
Chief Executive Officer of the Company. The first three of
the Suezmax tankers were delivered during 1998. The remaining
two vessels are scheduled to be delivered in 1999.
During 1997, Frontline received options to assume from other
Hemen affiliated parties, five newbuilding contracts for the
construction and purchase of five VLCC tankers. These options
were exercised in March 1998. The first two VLCC newbuildings
were delivered in 1998, the third in January 1999 and the
remaining two are scheduled to be delivered in mid 1999.
F-38
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
In May 1998, the Company acquired control of three shipowning
and/or leasing structures which are organized in a non-
recourse entity, Independent Tankers Corporation ("ITC"). The
Company acquired ITC for $9.5 million. The Company's
investment in ITC was subsequently sold to Hemen for $9.5
million with effect from July 1, 1998. The acquisition and
sale of ITC are treated as occurring on the same date for
accounting purposes as a result of the common control
relationship between the Company and Hemen. The results of
ITC are therefore not consolidated in the Company's financial
statements for any period in 1998. The Company has remained
as the manager of the underlying assets and has received a
five year fair value call option to buy back ITC.
In June 1998, the Company obtained a loan of $87.5 million
from Metrogas to finance the acquisition of the five VLCC
newbuilding contracts described above. This loan bears
interest at the rate of 6.75 per cent per annum. At December
31, 1998, an amount of $89 million was outstanding in respect
of this loan, including interest accrued thereon. Interest
expense recorded by the Company in 1998 in respect of this
loan was $3,780,772.
In addition to the lending arrangement described above, Hemen
affiliated parties have, during 1998, provided additional
short term financing to the Company. Interest accrued at a
rate of 6.75 per cent per annum. Interest expense recorded by
the Company in 1998 in respect of such financing was
$550,803.
20. ACQUISITIONS
Effective November 1, 1997, Frontline acquired 79.74 per cent
of the outstanding Ordinary Shares of LOF for approximately
$93.5 million in cash (see Note 1). The acquisition was
primarily funded by a loan from Chase. In 1997, the results
of LOF were consolidated with effect from the date of
acquisition.
The acquisition has been accounted for using the purchase
method of accounting. Accordingly, the total purchase price
has been allocated to the net assets acquired based on their
estimated fair values. The difference between the total
purchase price and net assets acquired was deducted from the
assigned value of the three Suezmax vessels which comprise
the identifiable long-term assets of LOF. The subsequent gain
F-39
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
realized on the sale of LOF's Panamax tankers was reflected
as an adjustment to the purchase price.
The following table reflects unaudited pro-forma combined
results of operations of the Company and LOF on the basis
that the acquisition had taken place at the beginning of the
fiscal year for each of the periods presented:
(in thousands of $, except per share data) 1997 1996
Net operating revenues 234,585 150,972
Net income 19,734 (13,772)
Basic and diluted earnings per share 0.43 (0.30)
In management's opinion, the unaudited pro-forma combined results
of operations are not indicative of the actual results that would
have occurred had the acquisition been consummated at the
beginning of 1996 or at the beginning of 1997 or of future
operations of the combined companies.
21. COMMITMENTS AND CONTINGENCIES
Assets Pledged
(in thousands of $) 1998 1997
Ship mortgages 691,859 572,382
Chattel mortgages and other assets pledged 80,152 182,788
Restricted bank deposits 1,916 -
- ---------------------------------------------------------------
773,927 755,170
===============================================================
Other Contractual Commitments
When newbuilding contracts were executed for the tankers
Front Melody, which was sold in 1992, and Front Rhapsody,
which was sold in 1993, Frontline also signed an agreement to
finance a peseta denominated loan in a foreign bank. Under
the agreements, Frontline was required to make a peseta
denominated deposit in the same bank. The deposits are being
used to fulfill the payment commitments on the loan
agreements. The deposits carry a higher interest rate than
the loans. The balance was $0.7 million and $1.6 million as
of December 31, 1998 and 1997 respectively. These balances
F-40
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
are contractual commitments, since the Company's only risk is
the interest rate gap between loans and deposits. The loan
agreements specify assignment of future operating revenue of
vessels for the benefit of the lender. The assignment applies
only in case of default under the loan agreements.
The Company insures the legal liability risks for its
shipping activities with Assuranceforeningen SKULD, a mutual
protection and indemnity association. As a member of a mutual
association, the Company is subject to calls payable to the
association based on the Company's claims record in addition
to the claims records of all other members of the
association. A contingent liability exists to the extent that
the claims records of the members of the association in the
aggregate show significant deterioration, which result in
additional calls on the members.
22. SUPPLEMENTAL INFORMATION
Non-cash investing and financing activities included the
following:
(in thousands of $) 1998 1997 1996
Unrealized appreciation
(depreciation) on investments
Recorded directly to equity (87,501) (30,605) 24
In connection with purchase of
fixed assets:
Long-term debt issued - - 269,360
Shares issued - - 175,934
Acquisition of businesses:
Assets acquired - 248,407 -
Liabilities assumed and incurred - 139,177 -
Shares issued - 37,937 -
Options and warrants assumed - 1,647 -
Cash paid - 69,646 -
F-41
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
23. SUBSEQUENT EVENTS
On December 29,1998, the Company signed a loan agreement to
finance the third VLCC newbuilding. The loan is in the amount of
$47.5 million and is secured by a first preferred ship mortgage.
At the same time, the Company signed (i) a loan agreement for
$14.5 million, such loan being secured by a second priority ship
mortgage and (ii) a further loan agreement for $11.6 million
secured by cross collateralized second priority mortgages on
three of the Company's Suezmax vessels. These three loans were
drawndown on January 5, 1999, concurrent with the delivery of the
VLCC newbuilding, the Front Chief.
In March 1999, the Company signed a loan agreement to finance the
fourth VLCC newbuilding, the Front Commander. The loan is in the
amount of $40.0 million and is secured by a first preferred ship
mortgage. At the same time the Company signed (i) a loan
agreement for $14.5 million, such loan being secured by a second
priority ship mortgage and (ii) a further loan agreement for
$11.6 million secured by cross collateralized second priority
mortgages on three of the Company's Suezmax vessels. These three
loans were drawndown on July 1, 1999, concurrent with the
delivery of the Front Commander.
In May 1999, Greenwich Holdings Ltd. ("Greenwich" - a company
indirectly controlled by the Company's Chairman) extended a loan
in the amount of $15,739,173 to the Company. The proceeds from
the loan were used to finance the acquisition of shares in ICB
Shipping AB. A loan agreement has been entered into in order to
document the terms of this loan, such terms including the Company
pledging the relevant shares in ICB Shipping AB to Greenwich's
lender. Through this acquisition the Company increased its
holding in ICB to 64 per cent of the capital and 38 per cent of
the votes.
On June 16, 1999, Skandinaviska Enskilda Banken ("SEB"), the
Company's largest bank syndicate, agreed to change the loan
profile on the facility provided to the Company. Present
quarterly installments will be reduced to $8.4 million from $10.5
million with a resultant increase in the final installment due on
November 28, 2003 from $136.5 million to $174.3 million. This
reduction in quarterly installments will boost the Company's
liquidity by $37.8 million during the remaining period of the
loan.
F-42
<PAGE>
Frontline Ltd.
Notes to Consolidated Financial Statements
On June 23, 1999, the Company accepted the terms offered for the
financing of the fifth VLCC newbuilding, the Front Crown. The
loan is in the amount of $40.0 million and is secured by a first
preferred ship mortgage.
On June 23, 1999, the Company announced that it had increased its
holding in ICB to 68 per cent of the share capital and 44 per
cent of the votes.
On June 29, 1999, the Company signed a loan agreement for
refinancing the vessel "Lillo". The loan was drawndown on June
30, 1999, and partly used to repay the portion relating to Lillo
under the SEB facility discussed above. The net effect of the
refinancing was to improve the Company's liquidity by $9.2
million.
As of December 31, 1998, the Company did not comply with the
equity ratio covenants in a number of the loan agreements. During
1999, management initiated discussions with the Company's lending
banks with the purpose of lowering the breached covenant
requirements in such loan agreements at least until January 1,
2001. The requested changes were made with the intention of
making the Company's financing arrangements more flexible in the
event of a prolonged negative market scenario, including falling
second-hand prices. Included in the request for changes was a
proposal to subordinate the $89.0 million loan given by Metrogas
(the "Subordinated Loan") to loans given by the Company's lending
banks. In addition, the proposal included reclassifying the
Subordinated Loan as equity for the purposes of calculating the
Company's equity ratio.
As of July 13, 1999, the discussions with Metrogas and the
Company's lending banks have been finalized and the Company and
Metrogas have signed a Subordinated Convertible Loan Facility
Agreement. Accordingly, the Company has received acceptance of
reduced covenant levels from all but one of the Company's 19
lending banks. This one bank, however, is subject to the
authority of the majority lenders, who have agreed to accept
lower covenant levels until January 1, 2001.
F-43
02089006.AB1
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER
1.1 The Subregistrar Agreement related to the registration of certain
securities issued by Frontline Ltd. in the Norwegian Registry of
Securities Between Frontline Ltd. and Christiania Bank og
Kreditkasse ASA together with the Form of Warrant Certificate and
Conditions Attaching Thereto.
2.1 The Subordinated Convertible Loan Facility Agreement USD
89,000,000 dated July 13, 1999 Between Frontline Ltd. as Borrower
and Metrogas Holdings Inc. as Lender.
02089006.AB1
<PAGE>
EXHIBIT 1.1
SUBREGISTRAR AGREEMENT
Related to the registration of
certain securities issued by Frontline Ltd.
in the Norwegian Registry of Securities
("Verdipapirsentralen")
BETWEEN
FRONTLINE LTD.
(a company incorporated under the laws of Bermuda)
and
CHRISTIANIA BANK OG KREDITKASSE ASA
Registrar Department
("Verdipapirservice")
<PAGE>
This subregistration agreement (the "Agreement") is entered into
on this 18th day of June, 1999 by and between:
(1) FRONTLINE LTD., Mercury House, 101 Front Street, Hamilton HM
GX, Bermuda (the "Company")
and
(2) CHRISTIANIA BANK OG KREDITKASSE ASA, acting through its
registrar department ("Verdipapirservice") at P.O.Box 1166 -
Sentrum, 0107 Oslo, Norway (the "Registrar")
(the Company and the Registrar hereinafter jointly referred
to as the "Parties" or, individually, a "Party")
WHEREAS:
(A) The Registrar was, on June (1), the nominee owner of
44.612.536 ordinary, fully paid shares in the Company.
(B) The number of ordinary shares in the Company nominally owned
by the Registrar may change in the future as a consequence
of:
(i) further shares being issued to the shareholders on
whose behalf the Registrar acts as nominee;
(ii) existing share evidenced by physical share
certificates being transferred to the nominal
ownership of the Registrar by the owner(s) thereof;
and
(iii) the beneficial owner(s) of shares nominally held by
the Registrar withdrawing such shares from the
Registrar's ownership in exchange for physical share
certificates;
(the ordinary shares in the Company from time to time
nominally owned by the Registrar hereinafter referred to as
the "Shares").
(C) The beneficial owners of the Shares (the "VPS Shareholders")
are recorded in a subregister (the "Share Subregister") in
the Norwegian paperless securities recordation system
("Verdipapirsentralen") ("VPS").
(D) The Registrar has, pursuant to the terms of a certain
registration agreement dated 1 July 1997 with the Company
(the "Existing Agreement"), acted as registrar for the
Company in matters relating to the Shares, the VPS
Shareholders, the Share Subregister and the VPS.
2
<PAGE>
(E) The Parties have agreed that the Registrar shall continue to
act as registrar for the Company as aforesaid.
(F) The Registrar is, at the date hereof, the nominee owner of
26.000.000 warrants to subscribe for ordinary shares in the
Company.
(G) The number of warrants nominally owned by the Registrar may
be reduced in the future as a consequence of the exercise by
the warrant holders on whose behalf the Registrar acts as
nominee exercising their rights thereunder (the warrants
issued by the Company from time to time nominally owned by
the Registrar hereinafter referred to as the "Warrants").
(H) The beneficial owners of the Warrants (the "Warrant
Holders") are recorded in a subregister (the "Warrant
Subregister") in the VPS.
(I) The Registrar has agreed to act as registrar for the Company
in matters relating to the Warrants, the Warrant Holders,
the Warrant Subregister and the VPS.
(J) The Parties have agreed to document the terms upon and
subject to which the Registrar shall perform its duties as
registrar as aforesaid in one agreement, thus substituting
the Existing Agreement.
NOW THEREFORE, the Parties have agreed as follows:
1. APPOINTMENT
1.1 The Company hereby confirms the appointment of the Registrar
as registrar in respect of the Shares, the Warrants, the VPS
Shareholders, the Warrant Holders, the Share Subregister,
the Warrant Subregister and the VPS on the terms set forth
in this Agreement. The terms set forth herein shall be
effective from the date hereof.
This Agreement shall substitute and render invalid all other
agreements, whether written or oral, between the Parties
(including, but not limited to the Existing Agreement) in
respect of the matters regulated herein.
1.2 The Registrar agrees to provide the services set forth
herein and all such other things and steps as may be
required or requested by the Company in order to enable:
(i) the VPS Shareholders to benefit from and enjoy all
such rights and privileges as members of the Company
have; and
3
<PAGE>
(ii) the Warrant Holders to benefit from and enjoy all such
rights and privileges as a holder of the Warrants
has;
(iii) the Company to enforce the provisions of its bye-laws
as if the VPS Shareholders and the Warrant Holders
were registered in the Company's register of members
and register of holders of warrants;
(iv) shares in the Company evidenced by physical share
certificates being converted to Shares if so requested
by the registered owner thereof and Shares being
converted to shares in the Company evidenced by
physical share certificate if so requested by the
relevant VPS Shareholder.
1.3 The Registrar further agrees to act as nominee owner of the
Shares and the Warrants and will be registered as such in
the Company's register of members and register of holders
of the Company's warrants.
2. UNDERTAKINGS BY THE REGISTRAR
2.1 The Registrar undertakes:
a) to have copies of the Memorandum of Association and
Bye-laws of the Company and the conditions for the
Warrants available for inspection by the VPS
Shareholders and the Warrant Holders in its office.
b) that, if any share, debenture, security or other
right, asset or benefit other than a cash dividend
(hereinafter a "Security") shall accrue to the
Registrar as a consequence of its nominee ownership of
the Shares or the Warrants, it shall ensure that the
legal or registered title to such Security is held for
the benefit of the VPS Shareholders or, as the case
may be, the Warrant Holders until such time as
transfers of such Security are executed in favour of
the VPS Shareholders or, as the case may be, the
Warrant Holders pro rata to their entitlement to such
Security.
c) to ensure that, at all times, there is registered in
the Share Subregister and the Warrant Subregister
accurate and complete information with respect to each
person or entity who is or becomes a VPS Shareholder
or, as the case may be, a Warrant Holder including:
(i) the name and address of such person or entity;
4
<PAGE>
(ii) the number of the Shares and/or the Warrants
held by such person or entity;
(iii) the date each such person or entity was entered
into the Share Subregister as a VPS Shareholder
or, as the case may be, in the Warrant
Subregister as a Warrant Holder; and
(iv) the date such person or entity ceased to be a
VPS Shareholder or, as the case may be, a
Warrant Holder.
(Information concerning (iii) and (iv) to be safely
retained for 10 years following the date referred to
in (iv)).
and all such other information as may be required in
order to comply with any applicable Norwegian
legislation and the terms of the Company's listing
agreement with the Oslo Stock Exchange ("OSE") from
time to time.
d) to promptly distribute all dividends declared by the
Company to the VPS Shareholders based upon the number
of the Shares which were registered in each of their
names in the Share Subregister on the date of
declaration in accordance with the terms of Clause 4
below.
e) to assist the Company in despatching each and every
notice of a meeting of the Company's shareholders or a
meeting of the Company's holders of the Warrants to
each VPS Shareholder and/or Warrant Holder at the
address recorded in the VPS at such time.
f) not to attend any shareholders and/or meeting of the
holders of the Warrants, nor to vote any of the Shares
or the Warrants in such meeting other than in
accordance with proxies received for this purpose from
VPS Shareholders or, as the case may be, Warrant
Holders.
g) to assist the Company in despatching all reports,
accounts, financial statements, circulars or other
similar documents (each a "Document") relating to the
affairs of the Company to the VPS Shareholders and/or
the Warrant Holders at such person or entity's
registered address in the VPS.
5
<PAGE>
h) upon:
(i) any change in or alteration of the Company's
issued share capital or the par value of the
Shares, to make or cause to be made, without
delay, all necessary amendments reflecting such
change or alteration in the Share Subregister;
(ii) the occurrence of an event which leads to the
adjustment of the subscription rights of the
Warrant Holders as per the terms of the
Warrants, promptly, upon receipt of such
information from the Company, make or cause to
be made (a) such adjustment known to the Warrant
Holders and (b) all necessary amendments
reflecting such adjustment in the Warrant
Subregister;
provided, however, that any instructions from the
Company as per the above shall be accompanied by a
certificate of either a firm of independent public
accountants of recognised standing (who may be the
regular auditors of the Company) or an internationally
recognised investment bank to be selected by the
Company's board of directors in respect of such change
or alteration in the issued share capital or such
adjustment in the subscription price for the Warrants
setting out the effect the same shall have for the VPS
Shareholders and/or the Warrant Holders.
i) to do all such acts and things as are within its
powers to (a) enforce the provisions of the Memorandum
of Association and Bye-laws of the Company in order to
confer upon the VPS Shareholders all such rights and
obligations as are attributable to the Company's
members and (b) the provisions of the Memorandum of
Association and Bye-laws of the Company and the
conditions for the Warrants in order to confer upon
the Warrant Holders all such rights and obligations as
are attributable to the holders of the Warrants from
time to time.
j) to assist the Company in discharging all such
obligations as it will be obliged to do vis-a-vis the
VPS Shareholders and, if the Warrants are listed
thereon, the Warrant Holders under the listing
agreement between the Company and the OSE.
6
<PAGE>
3. UNDERTAKINGS OF THE COMPANY
3.1 The Company undertakes to inform the Registrar of any
decision made by the Company's governing bodies relevant to
the continued subregistration of the Shares and the Warrants
in the VPS and of such other information which is relevant
to the Registrar in order for the Registrar to comply with
the terms of this Agreement and its obligations to the VPS.
3.2 The Company specifically undertakes to comply with the terms
of its listing agreement with OSE in respect of the Shares
and, if the Warrants are listed thereon, the Warrants, and
such laws and regulations of Norway as may be applicable
thereto.
3.3 The Company shall provide the Registrar with a copy of its
Memorandum of Association and Bye-laws in force at the date
of this Agreement and undertakes to immediately inform the
Registrar of any subsequent change in or amendment to the
same.
3.4 The Company shall provide the Registrar with the original
certificates evidencing the Shares and the Warrants
nominally issued to the Registrar on the date of this
Agreement at the latest.
4. DIVIDEND PAYMENTS
4.1 The Company shall provide the Registrar with details of any
dividend declared by the Company to its members before any
payment thereof is made to the Registrar (in its capacity as
nominee owner of the Shares).
4.2 The Company shall transfer such amount as shall represent
the aggregate dividends due to the VPS Shareholders on the
record date for such payment to an account of the Registrar
nominated for this purpose.
The Registrar shall, upon receipt of such dividend payment,
forward, to each VPS Shareholder recorded as such on the
date of declaration of such dividend (the "Record Date"),
such VPS Shareholder's proportionate part thereof without
undue delay.
4.3 VPS Shareholders who maintain a Norwegian address in the VPS
or have supplied the VPS with details of a NOK account in
their name shall receive their dividend payment in NOK in
accordance with and through the VPS computer system for
dividend payments.
7
<PAGE>
VPS Shareholders without a Norwegian address or NOK account
recorded in the VPS shall receive dividend payments in a
manner agreed between the Company and the Registrar prior to
such payment being effectuated.
4.4 Any dividend payment shall be effectuated by the Registrar
in a manner which ensures that the VPS Shareholders have
such payment available in their respective accounts no later
than 12 Business Days from the Record Date subject to the
Registrar having received such amount no later than 6
Business Days before the payment date in USD or, if the
Company takes responsibility for the exchange of any amounts
payable in currencies other than USD, on the date payment is
to be effected.
Payments to be made to VPS Shareholders without a Norwegian
address or NOK account recorded in the VPS shall be made as
soon as possible with a view to reducing the costs involved
with such transfer.
5. STATISTICS
5.1 The Registrar shall, at the request of the Company, produce
and send to the Company statistical material relevant to the
Share Subregister and/or the Warrant Subregister.
The following statistical material will be made available
immediately upon receipt of such request:
(i) up to date list of the VPS Shareholders and/or the
Warrant Holders together with the number of Shares
and/or Warrants owned by each person/entity among them
at such date;
(ii) the percentage of the total shares outstanding in the
Company which the Shares represent at the date of such
request;
(iii) a transcript listing the 20 VPS Shareholders with the
largest ownership of the Shares and/or the 20 Warrant
Holders with the largest ownership of the Warrants;
(iv) a report identifying the VPS Shareholders and/or
Warrant Holders who, according to the VPS, are
resident in Norway or such other jurisdiction as may
be identified by the Company in such request; and
(v) the Share Subregister and/or the Warrant Subregister
in a label format, ready for postage.
8
<PAGE>
Other reports and statistical material may furthermore be
prepared by the Registrar subject to agreement with the
Company.
5.2 All reports and statistical material provided by the
Registrar will be made available on paper, computer disc
and/or by E-mail.
5.3 If a stockbroker, newspaper or any other person requests a
transcript of the 20 largest VPS Shareholders or Warrant
Holders, the Register is authorised by the Company to
release the same.
The Company shall, however, be notified of such request
without undue delay.
If any other person or entity than the Company requests a
full transcript (whether as a list or in label format) of
the Share Subregister and/or the Warrant Subregister) the
Registrar shall obtain the Company's explicit permission
before releasing the same.
5.4 An updated version of the Share Subregister and the Warrant
Subregister shall be available at the Registrar's office for
public inspection in accordance with Norwegian law during
the Registrar's normal office hours.
6. CONVERSIONS
6.1 Each VPS Shareholder has the right to demand that the
recordation of those of the Shares that are beneficially
owned by him is transferred from the Share Subregister (and
thus the nominal ownership of the Registrar) to the
Company's official register of members (and thus to his
beneficial ownership).
6.2 A demand as referred to in 6.1 shall be effectuated as
follows:
(i) Such demand shall always be directed to the Registrar,
who shall note the same and inform the relevant VPS
Shareholder that the recordation of his ownership of
those of the Shares as he is the beneficial owner of
will be transferred to the main register of members of
the Company no later than 3 months from the date his
demand was received by the Registrar and that he
cannot, unless his demand is formally withdrawn,
transport or encumber those of the Shares as he is
recorded as being the beneficial owner of in the Share
Subregister in the said period. The Registrar shall
furthermore record a lien against those of the Shares
9
<PAGE>
which are registered on his VPS account for this
purpose.
(ii) Every second month, the Registrar shall, if demands
for transfers of the recordation of shareholdings in
the Company from the Share Subregister to the main
register of members have been received in the
preceding two months, send a request to the Company to
split the share certificate evidencing the Shares into
a number of new certificates, all in the Registrar's
name, consistent with such demands. The original
certificate evidencing the Shares shall always
accompany such request.
(iii) Upon the return of such new certificates to the
Registrar, the Registrar shall endorse the
certificate(s) to be delivered to the relevant VPS
Shareholder(s) for transport and send it/them to the
same by registered mail. Simultaneously, the
shareholding of such VPS Shareholder shall be deleted
from the Share Subregister and notice of the transfer
sent to the Company.
All costs relevant to the transfer of the shareholdings of a
VPS Shareholder from the Share Subregister to the main
register shall be for the account of the relevant VPS
Shareholder.
6.3 The Company may, following a request from a shareholder
whose ownership of shares in the Company is documented by
way of physical share certificates, demand that such shares
are included in the VPS Subregister.
6.4 A demand as referred to in 6.1 shall be effectuated as
follows:
(i) Such demand shall be accomplished by confirmation from
the Company that the Company has the relevant share
certificate(s) in hand duly endorsed for transfer to
the Registrar and such information as will be
necessary to establish a VPS account in the name of
the relevant shareholder or, if such shareholder
already has a VPS account, the account number;
(ii) The Registrar shall, thereafter, establish a VPS
account in the name of such shareholder or confirm
that the VPS account nominated exists in the name of
such shareholder and confirm the same to the Company.
At the same time, the Registrar shall arrange for the
share certificate evidencing the Shares to be
delivered to the Company;
10
<PAGE>
(iii) Upon receipt of such confirmation as aforesaid and the
share certificate evidencing the Shares from the
Registrar, the Company will cancel the share
certificate representing the shares to be included in
the VPS Subregister and the certificate evidencing the
Shares and issue a new share certificate in the name
of the Registrar representing all such shares;
(iv) The Company shall notify the Registrar of the issuing
of the new share certificate in the Registrar's name
immediately after the issue thereof, whereafter the
Registrar shall record the shares transferred to the
VPS Subregister pursuant to the original demand on
such shareholder's VPS account;
(v) The new certificate representing the Shares shall,
thereafter, be returned to the Registrar.
All costs relevant to the transfer of the shareholdings of a
shareholder outside the VPS Subregister to the VPS
Subregister shall be for the account of the relevant
shareholder.
7. TRANSFER AND EXERCISE OF WARRANTS
7.1 Evidence of the ownership of the Warrants cannot be
transferred from the Warrant Subregister to the Company's
general register of holders of warrants.
7.2 If a Warrant Holder wishes to exercise the right of his
Warrants, notice thereof shall be given to the Registrar in
writing.
The Registrar shall, upon receipt of such notice, inform the
Warrant Holder that:
(i) shares corresponding to the number of Warrants
exercised will be allotted by the Company no later
than 30 banking days in Oslo (a "Banking Day")
following receipt of such notice subject to the
subscription price for such shares being paid and the
terms of the Warrants otherwise being complied with.
(ii) the subscription price for such shares must be paid to
the Company (to an account with the Registrar
identified to the Warrant Holder) correspondingly with
the submittal of such notice.
(iii) the Warrants so exercised no longer can be traded and
that a lien will be placed on those of the Warrants
11
<PAGE>
that are beneficially owned by such Warrant Holder on
his VPS account in order to ensure this.
The Registrar shall then complete a notice as required in
the terms for the Warrants and, within 3 days, submit this
to the Company together with (a) the certificate evidencing
the Warrants, (b) the share certificate evidencing the
Shares and (c) confirmation that the subscription price has
been paid by the Warrant Holder.
The Company shall, not later than 20 Banking Days from
receipt of such notice, reissue the certificates evidencing
the Shares and the Warrants in numbers corresponding to the
exercise of the Warrants having taken place.
The Registrar shall be informed immediately after the
allotment of the shares as per (i) above and shall, upon
receipt of such information, delete the relevant number of
Warrants from the VPS account of the relevant Warrant Holder
and record the number of Shares corresponding to the said
exercise of Warrants on such person/company's VPS account.
The Warrant Holder shall furthermore be informed thereof
without delay.
8. PAYMENTS
8.1 The Company shall pay for the services of the Registrar
pursuant hereto in accordance with the standard charges of
the Registrar for such services. The standard charges
effective as of the date hereof are set out in Schedule 1
hereto.
The Registrar shall be entitled to change such charges
subject to 2 weeks written notice to the Company having been
given.
8.2 In addition to the charges referred to in Clause 8.1, the
Company shall reimburse the Registrar for all out-of-pocket
costs (including, but not limited to reasonable external
legal fees) incurred by the Registrar in performing its
duties hereunder, provided, however that all the Registrar's
costs in respect of the entering into of this Agreement
shall be for the Registrar's own account.
8.3 The Registrar shall render monthly invoices to the Company
detailing the charges, fees and costs payable by the Company
to the Registrar hereunder.
12
<PAGE>
9. CONFIDENTIALITY
Any information regarding the Company or otherwise relating
to its affairs which may be obtained by the Registrar or its
employees in connection with the performance of the duties
of the Registrar hereunder shall be treated by the Registrar
and its employees as private and confidential and shall not
be disclosed to any third person unless required by
applicable law.
10. LIABILITY
The Registrar is not responsible for any loss or losses
incurred by the Company as a result of insufficient,
misleading or wrongful information or instruction(s) given
to the Registrar by the Company, a person or entity
representing or acting on behalf of the Company, or the VPS.
11. TERMINATION
11.1 This Agreement may be terminated by either Party upon a
minimum of two months prior written notice.
11.2 Each of the Parties may terminate this Agreement upon 10
days prior written notice in the event of any material
breach by the other Party of its duties hereunder.
11.3 Upon receipt or submittal of notice of termination of this
Agreement for any reason whatsoever, the Company shall,
without delay, appoint a new registrar in place of the
Registrar.
The Company shall thereafter, forthwith and in writing,
notify the VPS, each VPS Shareholder and Warrant Holder of
the name and address of the new registrar and the date on
which the new registrar has been or will be entered in the
Company's register of members and register of holders of
warrants as nominee owner of the Shares and the Warrants in
place of the Registrar. The Registrar shall, immediately
following the appointment of a new registrar, transfer all
information concerning the VPS Shareholders and the Warrant
Holders and the primary insiders of the Company to the new
registrar. Such transfer shall be free of charge if the
termination is a result of the Registrar's material breach
of its duties hereunder. Otherwise only administrative costs
shall be charged.
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<PAGE>
12. GOVERNING LAW - JURISDICTION
12.1 This Agreement shall be governed by and construed in
accordance with the laws of the Kingdom of Norway.
12.2 Any dispute between the Parties relating to this Agreement
which cannot be amicably settled, shall be submitted to
arbitration before a panel of three arbitrators in Oslo
according to the provisions of the Norwegian Civil Procedure
Act, Chapter 32.
The Party demanding the initiation of arbitration
proceedings shall, correspondingly with such demand, appoint
one of the arbitrators. The other Party shall, within 21
days from receipt of such demand appoint another of the
arbitrators. No later than 21 days from the appointment of
the second arbitrator, the two arbitrators so appointed
shall jointly appoint the third arbitrator who shall be the
chairman of the panel.
If either of the Parties fails to appoint an arbitrator or
the two arbitrators appointed by the Parties fail to agree
on the appointment of the third arbitrator within 2 weeks
from the date on which such appointment should have been
made at the latest, such appointment shall be referred to
the chairman of the Oslo division of the Norwegian Bar
Association.
The arbitration shall be conducted in the English language
or accompanied by qualified English translation.
This Agreement has been executed in two copies, one for each of
the parties.
For and on behalf of
FRONTLINE LTD.
/s/ Tor Olav Troim
___________________________________________
Tor Olav Troim
Director
For and on behalf of
CHRISTIANIA BANK OG KREDITKASSE
Verdipapirservice
/s/ Anette Syverud
___________________________________________
/s/ Oda Myklebust
___________________________________________
14
<PAGE>
WARRANTS
Certificate No. [ ] Warrants to subscribe
for
[ ] Ordinary Shares
FRONTLINE LTD.
(Incorporated in Bermuda with limited liability)
Subscription Warrant entitling the Holder to subscribe
for [ ] Ordinary Shares of US$ 2.50 par value
each with associated rights in Frontline Ltd. at a
subscription price of US$ [ ] per share
This is to certify that [ ] is the registered holder of the
right to subscribe for [ ] Ordinary Shares of US$ 2.50 par
value each with associated rights in Frontline Ltd. subject to
the conditions of the Memorandum of Association and Bye-Laws of
Frontline Ltd. and to the conditions attached hereto.
Given under the Seal of Frontline Ltd.
On [ ] (date)
___________________________
Name:
Title: Director
___________________________
Name:
Title: Secretary/Director (delete as appropriate)
Note: This certificate is non-transferable other than as set
forth in Clause 5 in the attached conditions.
15
<PAGE>
CONDITIONS ATTACHING TO THE WARRANTS TO SUBSCRIBE
FOR ORDINARY SHARES IN FRONTLINE LTD.
On May 11, 1998 Frontline Ltd. issued 26,000,000 warrants (a
"Warrant" or the "Warrants") to subscribe for 26,000,000 ordinary
shares with associated rights in Frontline Ltd. of US$ 0.25 par
value each at a subscription price of US$ 1.591 per share.
On October 19, 1998, the Annual General Meeting of Frontline Ltd.
resolved to effectuate a consolidation of its shares whereby one
new ordinary share of US$ 2.50 par value (an "Ordinary Share" or
the "Ordinary Shares") replaced 10 previous ordinary shares of
US$ 0.25 par value. The share consolidation became effective as
from October 26, 1998.
As a consequence thereof, the number of Ordinary Shares the
Warrants gave its holders the right to subscribe for was adjusted
to 2,600,000 (two million six hundred thousand) and the
subscription price for each Ordinary Share was adjusted to US$
15.91, as per the terms of Clause 2.a.1 and 2.c below.
The following conditions apply to the Warrants:
1. SUBSCRIPTION RIGHTS
a. The registered holder for the time being of a warrant (the
"Warrant Holder") shall have the right (a "Subscription
Right") to purchase, from Frontline Ltd., at any time until
the 11th of May 2001 (the "Final Subscription Date"), one
tenth of an Ordinary Share for each Warrant of which he is
the holder as specified on the face of the warrant
certificate evidencing the Subscription Right (the "Warrant
Certificate") at a price of US$ 15.91 per Ordinary Share of
US$ 2.50 par value (the "Exercise Price"), payable in full
in immediate available funds on subscription.
The number and/or nominal value of Ordinary Shares to be
subscribed and the Exercise Price are subject to adjustments
as provided in Clause 2 below.
b. In order to exercise his Subscription Right, the Warrant
Holder must lodge, at the office of Frontline Ltd., at any
time prior to the Final Subscription Date, (i) the Warrant
Certificate evidencing his Warrants, (ii) a duly completed
notice of exercise of Subscription Rights in the form
attached thereto (the "Notice") and (iii) a remittance for
the Exercise Price of the Ordinary Shares in respect of
which his Subscription Rights are being exercised.
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<PAGE>
Once lodged, a Notice shall be irrevocable save for
revocation with the consent of Frontline Ltd. Compliance
must also be made with any statutory requirements for the
time being applicable.
c. Ordinary Shares issued pursuant to the exercise by a Warrant
Holder of his Subscription Rights, whether in full or in
part, will be allotted no later than three banking days in
Oslo, Norway (a "Banking Day") after, and with effect from,
the date of receipt by Frontline Ltd. of a duly completed
Notice accompanied by confirmation that the Exercise Price
in respect of which the Subscription Rights are being
exercised has been received by Frontline Ltd. (the
"Subscription Date").
Certificates in respect of such Ordinary Shares will be
issued free of charge not later than three Banking Days
after the Subscription Date to the Warrant Holder. In the
event of partial exercise by the Warrant Holder of his
Subscription Rights, Frontline Ltd. shall, at the same time,
issue, free of charge, a fresh Warrant Certificate in the
name of the Warrant Holder for any balance of his Warrants.
d. All Ordinary Shares issued upon the exercise of any Warrants
shall be validly authorized and issued, fully paid and non-
assessable, and free from all taxes, liens and charges
created by Frontline Ltd. in respect of the issue thereof.
Each person in whose name any such certificate for Ordinary
Shares is issued shall, for all purposes, be deemed to have
become the holder of record of the Ordinary Shares
represented thereby on the Subscription Date resulting in
the issuance of such Ordinary Shares (so long as the
Exercise Price then in effect has been paid as required
hereby), irrespective of the date of issuance or delivery of
such certificate for Ordinary Shares.
2. ADJUSTMENTS AND NOTICE PROVISIONS
a. Adjustment of the Exercise Price
1. In case Frontline Ltd. shall (i) declare a dividend or make
a distribution on its outstanding Ordinary Shares in
additional shares, (ii) subdivide or reclassify its
outstanding Ordinary Shares into a greater number of shares,
or (iii) combine or reclassify its outstanding Ordinary
Shares into a smaller number of shares, the Exercise Price
in effect immediately after the record date for such
dividend or distribution or the effective date of such
subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by
multiplying the Exercise Price in effect immediately prior
17
<PAGE>
thereto by a fraction, the numerator of which shall be the
number of Ordinary Shares outstanding immediately before
such dividend, distribution, subdivision, combination or
reclassification, and the denominator of which shall be the
number of Ordinary Shares outstanding immediately after such
dividend, distribution, subdivision, combination or
reclassification. Such adjustment shall be made successively
whenever any event specified above shall occur.
2. If Frontline Ltd. or any other person or entity shall issue
to holders of its outstanding Ordinary Shares generally any
rights, options or warrants (or modify any of their existing
rights, options or warrants) entitling them to subscribe for
or purchase (i) Ordinary Shares, (ii) any assets of
Frontline Ltd., (iii) any securities of Frontline Ltd.
(other than its Ordinary Shares) or of any entity other than
Frontline Ltd. or (iv) any rights, options or warrants
entitling them to subscribe for or to purchase any of the
foregoing securities, whether or not such rights, options or
warrants are immediately exercisable (hereinafter
collectively called "Distribution on Ordinary Shares"),
Frontline Ltd. shall issue to the Warrant Holders the
Distribution on Ordinary Shares to which they would have
been entitled if they had exercised their Warrants
immediately prior to the record date for the purpose of
determining the shareholders entitled to receive such
Distribution on Ordinary Shares.
3. No adjustment of the Exercise Price shall be made as a
result of or in connection with:
(i) the issuance of Ordinary Shares pursuant to options,
warrants or stock purchase agreements entered into
prior to the date hereof, or pursuant to options for
Ordinary Shares issued pursuant to Frontline Ltd.'s
Bermuda Share Option Plan or Frontline Ltd.'s United
Kingdom Share Option Plan or otherwise subsequent to
the date hereof to officers, directors, employees or
consultants of Frontline Ltd. or of a subsidiary in
connection with their services to Frontline Ltd.;
(ii) the issuance of Ordinary Shares in connection with
Distributions on Ordinary Shares pursuant to
Subsection 2. a. 2.; or
(iii) the issuance or exercise of the Warrants.
4. All calculations under this Section 2. a. shall be made to
the nearest one-tenth of a cent.
18
<PAGE>
b. No Adjustments to Exercise Price
No adjustment in the Exercise Price in accordance with the
provisions of Section 2.a. hereof need be made if such
adjustment would (i) lower the Exercise Price below the par
value of an Ordinary Share or (ii) amount to a change in
such Exercise Price of less than USD 0.05; provided,
however, that the amount by which any adjustment is not made
by reason of the provision of this section 2.b. (ii) shall
be carried forward and taken into account at the time of any
subsequent adjustment in the Exercise Price.
c. Adjustment to Number of Shares
Upon each adjustment of the Exercise Price pursuant to
Section 2.a., each Warrant shall thereupon be deemed to
evidence the right to purchase that number of Ordinary
Shares (calculated to the nearest hundredth of a share)
obtained by multiplying the number of Ordinary Shares
purchasable immediately prior to such adjustment by the
Exercise Price in effect immediately prior to such
adjustment and dividing the product so obtained by the
Exercise Price in effect immediately after such adjustment.
d. Reorganisations
In case of any capital reorganisation (other than in the
cases referred to in Section 2.a. hereof) or the
amalgamation, consolidation or merger of Frontline Ltd. with
or into any other entity (other than an amalgamation, merger
or consolidation in which Frontline Ltd. is the continuing
parent and which does not result in any reclassification of
the outstanding Ordinary Shares or the conversion of such
outstanding Ordinary Shares into other shares, securities or
property), or the sale of the property of Frontline Ltd. as
an entirety or substantially as an entirety (collectively
each such action being hereinafter referred to as a
"Reorganisation"), there shall thereafter be deliverable
upon the exercise of any Subscription Right (in lieu of the
number of Ordinary Shares theretofore deliverable) the
number of Ordinary Shares or other securities or property to
which a holder of Ordinary Shares would have been entitled
upon such Reorganisation if such Subscription Right had been
exercised in full immediately prior to such Reorganisation.
In case of any Reorganisation, appropriate adjustment, as
determined in good faith by the Board of Directors of
Frontline Ltd., shall be made in the application of the
provisions herein set forth with respect to the rights and
interests of the Warrant Holders so that the provisions set
forth herein shall thereafter be applicable, as nearly as
19
<PAGE>
possible, in relation to any shares or other property
thereafter deliverable upon the exercise of any Subscription
Right.
Any such adjustment shall be made by and set forth in an
addendum hereto and shall, for all purposes hereof,
conclusively be deemed to be an appropriate adjustment.
Frontline Ltd. shall not effect any Reorganisation unless
upon or prior to the consummation thereof, the successor
parent, or, if Frontline Ltd. shall be the surviving parent
and is not the issuer of the shares or other securities or
property to be delivered to holders of Ordinary Shares
outstanding at the effective time thereof, Frontline Ltd.,
shall assume, by written instrument, the obligation to
deliver to each Warrant Holder such shares of stock,
securities, cash or other property as such Warrant Holder
shall be entitled to purchase in accordance with the
foregoing provisions. In the event of the sale or conveyance
or other transfer of all or substantially all of the assets
of Frontline Ltd. as a part of a plan for liquidation of
Frontline Ltd., the Subscription Rights shall terminate
thirty (30) days after Frontline Ltd. gives written notice
to each Warrant Holder that such sale or conveyance or other
transfer has been consummated.
e. Ordinary Share Buy Backs
If at any time Frontline Ltd. offers to purchase any
Ordinary Shares from the holders of Ordinary Shares,
Frontline Ltd. shall, simultaneously, give notice thereof to
the Warrant Holders and each Warrant Holder shall be
entitled to exercise his Subscription Right effective
immediately prior to the date of Frontline Ltd.'s offer.
f. Verification of Computations
Whenever the Exercise Price is adjusted as provided in
Section 2, Frontline Ltd. will promptly obtain a certificate
of either a firm of independent public accountants of
recognised standing who may be the regular auditors of
Frontline Ltd. or an internationally recognised investment
bank to be selected by the Board of Directors setting forth
the Exercise Price as so adjusted and a brief statement of
the facts accounting for such adjustment, and will make
available a brief summary thereof to the Warrant Holders at
their addresses listed on the register maintained for that
purpose by Frontline Ltd.
20
<PAGE>
g. Notice of Adjustments
Whenever an adjustment is made pursuant to this Section 2,
Frontline Ltd. shall cause notice of such adjustment to be
mailed to the Warrant Holders within fifteen (15) days
thereafter, such notice to include in reasonable detail (i)
the events precipitating the adjustment, (ii) the
computation of any adjustments, and (iii) the Exercise Price
and the number of Ordinary Shares or securities or other
property purchasable upon exercise of the Subscription
Rights after giving effect to such adjustment.
h. Warrant Certificate Amendments
Irrespective of any adjustments pursuant to this Section 2,
Warrant Certificates theretofore issued need not be amended
or replaced, but Warrant Certificates thereafter issued
shall bear an appropriate legend or other notice of any
adjustments.
i. Fractional Shares
Frontline Ltd. shall not, upon the exercise of any
Subscription Right, issue fractional Ordinary Shares which
may result pursuant to Section 1, or from adjustments in
accordance with this Section 2 to the number of Ordinary
Shares purchasable under the Warrants. If a number of
Warrants are exercised at one time by the same Warrant
Holder which is not dividable by 10, the number of whole
Ordinary Shares which shall be deliverable shall be computed
based on the number of Ordinary Shares deliverable in
exchange for the aggregate number of Warrants exercised.
With respect to any final fraction of an Ordinary Share
called for upon the exercise of any Warrants, Frontline Ltd.
shall round up such fraction to the nearest whole number in
cases of fractions greater than or equal to one-half and
round down (and cancel) such fraction in cases of fractions
less than one-half. The Warrant Holder for such a fractional
Ordinary Share shall receive no consideration for such
fractional Ordinary Share upon its rounding down and
cancellation.
3. OTHER PROVISIONS
Frontline Ltd. shall keep available for issue sufficient
authorised but un-issued share capital to satisfy in full
all Subscription Rights remaining exercisable.
21
<PAGE>
4. PURCHASE
Frontline Ltd. shall have the right to purchase Warrants at
such price and for such consideration as its Board of
Directors shall deem appropriate in the circumstances.
5. SUB-REGISTRATION - LISTING - TRANSFERS
a. Frontline Ltd. has entered into an agreement with
Christiania Bank og Kreditkasse of Oslo, Norway (the
"Registrar") pursuant to which the Registrar has established
a sub-register for the Warrants in the Norwegian paperless
securities recordation system ("VPS").
The Registrar will, as a consequence thereof, act as nominee
owner of the Warrants (and one Warrant Certificate will be
issued in the name of the Registrar representing all of the
Warrants as a consequence thereof) on behalf of the
beneficial Warrant Holders. Each beneficial Warrant Holder's
interest will be documented in an account in his name in the
VPS.
b. A beneficial Warrant Holder cannot demand that his interest
in the Warrants are evidenced in any other way (such as a
physical Warrant Certificate issued in his own name) than
through the sub-register in the VPS.
c. These conditions are subject to the agreement between the
Registrar and Frontline Ltd.
d. Frontline Ltd. will endeavour to arrange for a listing of
the Warrants on the Oslo Stock Exchange.
e. Any transfers of beneficial ownership to the Warrants shall
be evidenced by appropriate transfers in the sub-register in
the VPS in accordance with market practice and applicable
laws in Norway.
f. If, for any reason, the agreement with the Registrar is
terminated, Frontline Ltd. shall, without delay, appoint a
new registrar in place of the Registrar.
Following such appointment (which shall be on comparable
terms and with comparable duties and obligations vis-a-vis
the beneficial Warrant Holders as the agreement with the
Registrar), the Warrant Certificate shall be delivered by
the Registrar to Frontline Ltd. Frontline Ltd. shall then
cancel such Warrant Certificate and issue a new Warrant
Certificate on identical terms to the new registrar.
22
<PAGE>
6. DOCUMENTS AND MEETINGS
a. No Warrant Certificate shall entitle the registered holder
thereof to any of the rights of a shareholder of Frontline
Ltd., including, without limitation, the right to vote, to
receive dividends and other distributions, to receive any
notice of, or to attend, meetings of shareholders or any
other proceedings of Frontline Ltd.
b. Frontline Ltd. will, concurrently, with the issue of the
same to its equity shareholders and registered Warrant
Holders, send copies of its Annual Report and Accounts
together with all documents required by law to be annexed
thereto and copies of every statement, notice or circular
otherwise issued to its shareholders to the beneficial
Warrant Holders recorded in the VPS at such time.
c. If, at any time, an offer is made to all holders of Ordinary
Shares (or all such holders except the offeror, any entity
controlled by the offeror and/or any person acting in
concert with the offeror) to acquire any or all of the
outstanding Ordinary Shares and Frontline Ltd. becomes aware
that, as a result of such offer, the right to cast a
majority of the votes which may ordinarily be cast at a
general meeting of the holders of Ordinary Shares has or may
become vested in the offeror and/or such entities or
persons, Frontline Ltd. shall give notice of such offer to
each registered Warrant Holder within seven (7) days of its
becoming so aware. For the purpose of this condition, the
publication of a scheme or arrangement under The Companies
Act of 1981 of Bermuda providing for the acquisition by any
person or persons of the whole or any part of the share
capital of Frontline Ltd. shall be deemed to be the making
of an offer.
d. If any Warrant Certificate shall be mutilated, lost, stolen
or destroyed, Frontline Ltd., in its discretion, may execute
and deliver, in exchange and substitution for and upon
cancellation of such mutilated Warrant Certificate, or, in
lieu of or in substitution for a lost, stolen or destroyed
Warrant Certificate, a new Warrant Certificate for the
number of Warrants represented by the Warrant Certificate so
mutilated, lost, stolen or destroyed but only upon receipt
of evidence of such loss, theft or destruction of such
Warrant Certificate and of the ownership thereof, and an
indemnity, if requested, all satisfactory to Frontline Ltd.
Applicants for such substitute Warrant Certificate shall
also comply with such other reasonable requirements and pay
such other reasonable charges incidental thereto as
Frontline Ltd. may prescribe. Any such new Warrant
Certificate shall constitute an original contractual
23
<PAGE>
obligation of Frontline Ltd., whether or not the allegedly
lost, stolen, mutilated or destroyed Warrant Certificate
shall be at any time enforceable by anyone.
e. For the purpose of these conditions, "extraordinary
resolution" means a resolution proposed at a meeting of the
beneficial Warrant Holders duly convened and held and passed
by a majority consisting of not less than three-fourths of
the votes cast whether on a show of hands or on a poll.
f. All the provisions of the Bye-laws for the time being of
Frontline Ltd. as to instruments of transfer, transfer book,
the share register and general meeting shall, mutatis
mutandis, apply as though the Warrants were a class of
shares forming part of the capital of Frontline Ltd., but so
that in any meeting of the beneficial Warrant Holders:
(i) the necessary quorum shall be the beneficial Warrant
Holders (present in person or by proxy) entitled to
acquire one-third in nominal amount of the Ordinary
Shares in respect of which Subscription Rights remain
exercisable;
(ii) every beneficial Warrant Holder present in person or
by proxy at any such meeting shall be entitled, on a
show of hands to one vote and every such beneficial
Warrant Holder present in person or by proxy shall be
entitled, on a poll, to one vote for every Ordinary
Share for which he is entitled to subscribe;
(iii) any beneficial Warrant Holder present in person or by
proxy may demand or join in demanding a poll; and
(iv) if, at any time, at any adjourned meeting a quorum as
above defined is not present, those beneficial Warrant
Holders who are then present in person or by proxy
shall be a quorum.
24
<PAGE>
NOTICE OF EXERCISE OF SUBSCRIPTION RIGHTS
To: Frontline Ltd.
We, Christiania Bank og Kreditkasse, being the registered holder
of the Warrants evidenced by the Warrant Certificate overleaf,
hereby exercise our subscription rights in respect of *..........
of the Ordinary Shares referred to in such Warrant Certificate in
accordance with the conditions applicable thereto.
We send herewith a remittance for the subscription monies
payable/documentation for our payment of the Exercise Price for
the Ordinary Shares for which we hereby subscribe in accordance
with the above conditions.
We agree to accept the Ordinary Share(s) to be allotted pursuant
to this notice subject to the Memorandum of Association and Bye-
laws of the Company and the conditions applicable to our Warrants
and request you to despatch the certificate for such Ordinary
Share(s) by registered mail at our risk to ourselves at the
following address:
Address .........................................................
.................................................................
..............................................
*Note: Complete as appropriate, Subscription Right(s) may only
be exercised in respect of a whole number of Ordinary
Share(s)
25
02089006.AB2
<PAGE>
EXHIBIT 2.1
SUBORDINATED CONVERTIBLE LOAN FACILITY AGREEMENT
USD 89,000,000
DATED July 13, 1999
Frontline Ltd.
as Borrower
Metrogas Holdings Inc.
as Lender
<PAGE>
I N D E X
1. LOAN FACILITY 3
2. STATUS OF THE LOAN 3
3. INTEREST 3
4. DEFAULT INTEREST 4
5. REPAYMENT 4
6. CONVERSION 4
7. CONDITIONS FOR PAYMENT 5
8. COVENANTS 5
9. EVENTS OF DEFAULT 5
10. PAYMENTS - SET-OFF 6
11. ASSIGNMENT 6
12. NOTICES AND CORRESPONDENCE 7
13. GOVERNING LAW AND JURISDICTION 7
Schedules
1. LIST OF CREDITORS
2. FORM OF LETTER TO AGENTS FOR CREDITORS
2
<PAGE>
This Subordinated Convertible Loan Facility Agreement (the
"Agreement") is entered into on July 13, 1999 between:
(1) FRONTLINE LTD., a company organised and existing pursuant
to the laws of Bermuda (the "Borrower");
and
(2) METROGAS HOLDINGS INC., a company organised and existing
pursuant to the laws of the Republic of Liberia (the
"Lender").
W H E R E A S:
(A) The Borrower is indebted in the principal amount of USD
89,000,000 (the "Loan") to the Lender;
(B) The Borrower and the Lender wish to record the terms and
conditions of the indebtedness described in (A) above.
THE PARTIES HAVE AGREED as follows:
1. LOAN FACILITY
1.1 The Lender will continue to make the Loan available to the
Borrower on the terms and conditions set out herein.
2. STATUS OF THE LOAN
2.1 The Loan and interest thereon shall be subordinated in
right of payment at all times (including but not limited to
the event of bankruptcy, liquidation, winding-up,
dissolution or other similar proceedings in respect of the
Borrower) to the claims of those creditors of the Borrower
whose claims are set out in Schedule 1 hereto (the
"Creditors").
3. INTEREST
3.1 The Loan shall carry interest at a rate of 8% p.a. Interest
shall be calculated based on the actual days elapsed and a
360-day year.
3.2 Interest shall be added to the Loan every 12 months,
commencing on the date occurring 12 months after the date
hereof.
3.3 Interest added to the Loan as described in Clause 3.2 above
shall carry interest as if it were part of the Loan.
Interest accrued on such interest amounts shall carry
interest and be added to the Loan in the same manner.
3
<PAGE>
3.4 Interest shall not be paid other than as expressly
stipulated in this Agreement.
4. DEFAULT INTEREST
In the event of any payments hereunder not being received
on the due date therefor (each such amount being a
"Defaulted Amount"), interest will be payable by the
Borrower from the due date until the date that payment is
received, at a rate of 9% p.a. (for such periods as the
Lender in its sole discretion shall decide). Interest
charged under this Clause 4 shall be added to the Defaulted
Amount on the last day of the period decided by the Lender
until the Defaulted Amount has been repaid in full.
5. REPAYMENT
5.1 The Loan or part thereof shall only be repaid under the
following circumstances:
5.1.1 Should the Borrower prior to or in connection with its
annual shareholders' meeting to be held in 2002 increase
its share capital through an issue of shares against cash,
an amount equal to the net cash amount paid for such shares
shall promptly upon receipt thereof by the Borrower be
applied against payments of amounts outstanding hereunder.
5.1.2 If the Borrower sells part or all of its shares in ICB
Shipping AB, an amount equal to 50% of the net sales
proceeds obtained for such shares less any debt secured
thereby shall be applied against payment of amounts
outstanding hereunder.
5.2 Any amounts received by the Lender pursuant to Clauses
5.1.1 or 5.1.2 above shall firstly be applied against the
Loan, thereafter against interest accrued on the Loan.
6. CONVERSION
6.1 To the extent amounts outstanding hereunder have not been
repaid pursuant to Clause 5 above prior to the Borrower's
annual shareholders' meeting in 2002, the Borrower shall as
soon as practicable following such date repay the Loan by
issuing to the Lender shares in the Borrower in an amount
equal to the Loan as full settlement of the Loan. The issue
price of each such share shall be the average trading price
of the shares during the 15 trading days immediately prior
to such issue.
6.2 The Lender hereby agrees to accept the shares described in
Clause 6.1 above as full settlement of the Loan.
4
<PAGE>
6.3 Simultaneously with the issue of the shares described in
Clause 6.1 above the Borrower shall make a cash payment to
the Lender of any and all interest accrued on the Loan.
7. CONDITIONS FOR PAYMENT
7.1 The parties agree that, unless the Creditors have given
their prior written consent, the payments described in
Clauses 5.1.1, 5.1.2 and 6.3 above may only be made to the
extent the Borrower, immediately following such payments,
is in compliance with all covenants set out in the loan
agreements governing the claims of the Creditors, such
compliance to be evidenced in form and substance to the
reasonable satisfaction of the Creditors prior to any
payment.
7.2 Should any amount be outstanding hereunder after the
Borrower's annual shareholders' meeting in 2002 due to the
circumstances described in Clause 7.1 above, such amount
shall promptly become due and payable when the Borrower,
after having made the relevant payment, will be in
compliance with the covenants described above.
8. COVENANTS
8.1 The Borrower undertakes with the Lender that, unless the
Lender has given its prior written consent to the contrary,
it will, in the loan period:
8.1.1 Promptly inform the Lender about any event which
constitutes or may constitute an event of default, or which
may adversely affect the Borrower's ability fully to
perform its obligations hereunder.
8.1.2 Deliver to the Lender the Borrower's annual audited
accounts as soon as practicable after the same have been
issued and in any event not later than 150 days after the
end of the relevant financial year, (b) a quarterly
financial report in a form satisfactory to the Lender no
later than 60 days after expiry of the relevant quarter and
(c) such other information about the Borrower's business
and financial condition as the Lender may reasonably
require.
9. EVENTS OF DEFAULT
9.1 Each of the following events shall, subject to Clause 7.1
above, constitute an Event of Default:
9.1.1 The Borrower fails to pay any amount payable by it pursuant
to the provisions of this Agreement when due, unless such
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failure is due to technical breakdown or communication
error, in which case the Borrower shall be granted 3
Banking Days to remedy such default.
9.1.2 If the Borrower is unable or admits in writing its
inability to pay its lawful debts as they mature, or makes
a general assignment to the benefit of its creditors.
9.1.3 If the Borrower enters into composition proceedings,
bankruptcy, insolvency or similar proceedings or any order
shall be made by any competent court or resolution passed
by the Borrower for the appointment of a receiver or a
similar authority.
9.1.4 Any other material loan, guarantee or other obligation of
the Borrower is declared, or is capable of being declared
due prematurely by reason of default, or the Borrower fails
to make payment in respect thereof on the due date for such
payment, or security for any such other loan, guarantee or
indebtedness becomes enforceable.
9.2 Acceleration. Upon the occurrence of any Event of Default,
the Lender may, subject to compliance with the provision of
Clauses 2.1 and 7.1 hereof, forthwith notify the Borrower
in writing whereupon all amounts outstanding hereunder
shall become immediately due and payable.
10. PAYMENTS - SET-OFF
10.1 Taxes. All payments to be made by the Borrower under this
Agreement shall be made in USD to the Lender as directed by
the Lender and shall be made without set-off or
counterclaim of any kind and without any deductions for,
and free and clear of any taxes. In the event that the
Borrower is required by law or regulation to deduct or
withhold any taxes the sum to be paid shall be increased by
such amount as shall be necessary to ensure that the amount
received by the Lender after such deduction or withholding,
is equal to the amount which would have been received under
this Agreement had no such deduction or withholding been
required.
11. ASSIGNMENT
11.1 Borrower. The Borrower may not assign any of its rights or
obligations hereunder to others.
11.2 Lender to other financial institutions. The Lender may,
subject to the prior written approval of the Borrower (such
approval not to be unreasonably withheld), assign all or a
part of its rights and obligations hereunder to any third
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party. The Lender will give the Creditors 7 days' prior
written notice of any such assignment.
11.3 Subsequent payments. In the event of a transfer of all or a
part of the Lender's rights hereunder, the Borrower shall
subsequently make all payments under this Agreement ratably
to the Lender and the assignee(s).
12. NOTICES AND CORRESPONDENCE
Every notice or demand under this Agreement shall be in
writing, but may be given or made by fax which shall be
sent to the Lender and the Borrower at their respective
addresses, being in respect of the Lender at:
Metrogas Holdings Inc.
c/o Seatankers Management Co. Ltd
Att.: Dimitris Hannas
Fax No.: + 357 33 23 770
and in respect of the Borrower at:
Frontline Ltd
c/o Frontline Management AS
Att.: Chief Financial Officer
Fax No.: + 47 23 11 40 44
or to such other address or fax number as may from time to
time be notified by the relevant party.
13. GOVERNING LAW AND JURISDICTION
This Agreement shall be governed by and construed in
accordance with Norwegian law, and the parties hereby
irrevocably submit to the non-exclusive jurisdiction of the
Norwegian courts, the venue to be Oslo City Court.
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THIS AGREEMENT has been entered into on the date stated on the
first page hereof.
For and on behalf of
Frontline Ltd.
Signature: /s/ Tor Olav Troim
_____________________________
Name in
block letters: TOR OLAV TROIM
Title: Director
For and on behalf of
Metrogas Holdings Inc.
Signature: /s/ Erling Lind
_____________________________
Name in
block letters: ERLING LIND
Title:As per special authority
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SCHEDULE 1
LIST OF CREDITORS
LOANS FOR WHICH GREENWICH / METROGAS'S LOAN IS TO BE SUBORDINATED
Org.amount Agent Signed Due
420m USD Skandinaviska Enskilda Banken
AB 20.11.96 28.11.03
217.5m SEK Christiania Bank og Kreditkasse
ASA 01.07.97 06.07.01
35m USD The Bank of Nova Scotia 13.07.98 13.07.07
47.5m USD Hamburgische Landesbank
Girozentrale 29.12.98 04.01.09
105m USD Midland Bank plc 01.12.97 29.05.08
100m USD Midland Bank plc 01.07.97 07.07.07
100m USD Chase Manhattan International
Limited 17.12.97 22.12.07
27.5m USD Nederlandse
Scheepshypotheekbank N.V.
acting through its Norwegian
Branch Nedship Bank (Nordic) as
agent 17.12.97 19.12.04
40m USD De Nationale Investeringsbank
N.V. 30.03.99 30.06.06
40m USD De Nationale Investeringsbank
N.V. Expected Seven years
to be from
signed in drawdown:
July 1999 ca 07-2006
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SCHEDULE 2
FORM OF
LETTER TO AGENTS FOR CREDITORS
[Letterhead of Frontline]
To: [Name of Agent Bank]
July 13, 1999
Dear Sirs
LETTER OF UNDERTAKING
We have made on July 13, 1999 a Subordinated Convertible Loan
Facility Agreement for USD 89,000,000 (the "Subordinated
Agreement") with Metrogas Holdings Inc. as lender. The terms of
the Subordinated Agreement have been agreed by you as agent for
the account of the lenders under the loan agreement dated [
] and made between [ ] the ("Loan
Agreement").
We hereby undertake with you that we will not without your prior
written consent (such consent not to be unreasonably withheld)
either make any amendment to the terms of the Subordinated
Agreement or cancel the Subordinated Agreement and that we will
notify you of the occurrence of an Event of Default (as defined
in the Subordinated Agreement) as soon as we become aware
thereof.
We confirm that a breach of this undertaking will constitute an
Event of Default under the Loan Agreement.
This Letter of Undertaking shall be governed by Norwegian law.
Yours faithfully
Frontline Ltd.
By: _____________________
Tor Olav Troim
Director
We confirm our agreement to the issuance by Frontline Ltd. of the
above Letter of Undertaking.
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Date: July 13, 1999
Metrogas Holdings Inc.
By: ________________________
Erling Lind
As per special authority
11
02089006.AB3
