-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AgiAnueFEiZ0+ZsxtGXr2yDBDh8pOuH4pwN4UfTIjqFCHFXGH74JRSL+BGsn8dEo 8gUa7vWUw7D7710v4xN14g== 0000891020-98-000872.txt : 19980521 0000891020-98-000872.hdr.sgml : 19980521 ACCESSION NUMBER: 0000891020-98-000872 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980520 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEEKAY SHIPPING CORP CENTRAL INDEX KEY: 0000911971 STANDARD INDUSTRIAL CLASSIFICATION: DEEP SEA FOREIGN TRANSPORTATION OF FREIGHT [4412] IRS NUMBER: 000000000 FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 001-12874 FILM NUMBER: 98629236 BUSINESS ADDRESS: STREET 1: TRADEWINDS BLDG SIXTH FLR STREET 2: BAY ST PO BOX SS-6293 CITY: NASSAU BAHAMAS STATE: C5 BUSINESS PHONE: 8093228020 MAIL ADDRESS: STREET 1: TRADEWINDS BLDG SIXTH FLOOR STREET 2: BAY STREET PO BOX 22-6293 CITY: NASSAU BAHAMAS STATE: C5 FORMER COMPANY: FORMER CONFORMED NAME: VIKING STAR SHIPPING INC DATE OF NAME CHANGE: 19930914 20-F 1 FORM 20-F 1 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 ........................... March 31, 1998 ........................... OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ............................... to ............................... Commission file number 1-12874 TEEKAY SHIPPING CORPORATION (Exact name of Registrant as specified in its charter) Not Applicable (Translation of Registrant's name into English) Republic of Liberia (Jurisdiction of incorporation or organization) 4th Floor, Euro Canadian Centre, Marlborough Street & Navy Lion Road, P.O. Box SS-6293, Nassau, Commonwealth of the Bahamas (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class Name of each exchange on which registered Common Stock, no par value per share New York Stock Exchange 8.32% First Preferred Ship Mortgage Notes due New York Stock Exchange 2008
Securities registered or to be registered pursuant to Section 12(g) of the Act. None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. 9 5/8% First Preferred Ship Mortgage Notes due 2003 (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. 28,832,765 shares of Common Stock, no par value 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] 2 TEEKAY SHIPPING CORPORATION INDEX TO REPORT ON FORM 20-F
PAGE PART I ---- Item 1. Description of Business..................................... 3 Item 2. Description of Property..................................... 10 Item 3. Legal Proceedings........................................... 12 Item 4. Control of Registrant....................................... 12 Item 5. Nature of Trading Market.................................... 13 Item 6. Exchange Controls and Other Limitations Affecting Security Holders................................................... 13 Item 7. Taxation.................................................... 14 Item 8. Selected Financial Data..................................... 15 Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 17 Item 10. Directors and Officers of the Registrant.................... 22 Item 11. Executive Compensation...................................... 24 Item 12. Options to Purchase Securities From Registrant or Subsidiaries.............................................. 24 Item 13. Interest of Management in Certain Transactions.............. 25 PART II. Item 14. Description of Securities to be Registered.................. Not applicable PART III. Item 15. Defaults Upon Senior Securities............................. Not applicable Item 16. Changes in Securities, Changes in Security for Registered Securities and Use of Proceeds............................ Not applicable PART IV. Item 17. Financial Statements........................................ Not applicable Item 18. Financial Statements........................................ 26 Item 19. Financial Statements and Exhibits........................... 26 Signature............................................................. 30
2 3 PART I ITEM 1. DESCRIPTION OF BUSINESS THE COMPANY Teekay Shipping Corporation ("Teekay"), together with its subsidiaries (the "Company"), is a leading provider of international crude oil and petroleum product transportation services through the world's largest fleet of medium size oil tankers. The Company's modern fleet of tankers provides transportation services to major oil companies, major oil traders and government agencies, principally in the region spanning from the Red Sea to the U.S. West Coast (the "Indo-Pacific Basin"). The Company pursues an intensively customer and operations-oriented business strategy, emphasizing market concentration and service quality to achieve superior operating results. The Company believes that it has five key competitive strengths: (i) market concentration in the Indo-Pacific Basin, which facilitates comprehensive coverage of charterer requirements and provides a base for efficient operation and a high degree of capacity utilization, (ii) full-service marine operations capabilities and experienced management in all functions critical to its operations, which affords a focused marketing effort, tight quality and cost controls, improved capacity utilization and effective operations and safety monitoring, (iii) a modern, high-quality fleet that operates with high fuel efficiency and low maintenance and operating costs and affords greater acceptance among charterers in an environment of increasingly stringent operating and safety standards, (iv) a large, uniform-size fleet of Aframax (75,000-115,000 dwt) tankers, many of which are in sister vessel series (substantially identical vessels), which facilitates scheduling flexibility due to vessel substitution opportunities, permitting greater responsiveness to customer demands and enhanced capacity utilization, and which results in lower operating costs than those experienced by smaller operators and (v) a strong network of customer relationships and a reputation for transportation excellence among quality-sensitive customers. As a result of its business strategy, the Company has achieved consistently higher operating cash flow per vessel as compared to an average of certain other publicly traded shipping companies. The Company's growth strategy is to leverage its existing competitive strengths to continue to expand its business. The Company anticipates that the continued upgrade and expansion of its Aframax tanker business in the Indo-Pacific Basin will continue to be a key component of its strategy. In addition, the Company believes that its full-service marine operations capabilities, reputation for safety and quality and strong customer orientation provide it with the opportunity to expand its business by providing additional value-added and innovative services, in many cases to existing customers. Finally, the Company intends to identify expansion opportunities in new tanker market segments, geographic areas and services to which the Company's competitive strengths are well suited. The Company may choose to pursue such opportunities through internal growth, joint ventures or business acquisitions. The Company's fleet consists of 46 vessels: 42 Aframax oil tankers (including three vessels time-chartered-in) and oil/bulk/ore carriers ("O/B/Os"), three smaller oil tankers, and one Very Large Crude Carrier ("VLCC"). The Company's vessels are all of Liberian, Singaporean, Australian or Bahamian registry. The Company's fleet has a total cargo capacity of approximately 4.6 million tonnes and its Aframax vessels represent approximately 7.8% of the total tonnage of the world Aframax fleet. The Company intends to continue to supplement its fleet by selective orders of newbuilding vessels and selective purchases of modern, second-hand, high-quality tankers. The Company's fleet is one of the most modern fleets in the world, with an average age of approximately 7.8 years, compared to an average age for the world oil tanker fleet of approximately 13.7 years and for the world Aframax tanker fleet of approximately 12.2 years. The Company has been recognized by customers and rating services for safety, quality and service. For example, in each of the last eight years, Tanker Advisory Center, Inc. (New York) has rated the Company's fleet a "meritorious tanker fleet," a designation which, in the latest publication (January 1998), placed it in the top 5% of all fleets containing five or more tankers. Given the age profile of the world tanker fleet, increasing emphasis by customers on quality as a result of stringent environmental regulations, and heightened concerns 3 4 about liability for oil pollution, the Company believes that its modern fleet and its emphasis on quality and safety provide it with a favorable competitive profile. Through wholly owned subsidiaries located worldwide, the Company provides substantially all of the operations, ship maintenance, crewing, technical support, shipyard supervision, insurance and financial management services necessary to support its fleet. The Company has a worldwide chartering staff located in Vancouver, Tokyo, London and Singapore. Each office serves the Company's clients headquartered in such office's region. Fleet operations, vessel positions and charter market rates are monitored around the clock. Management believes that monitoring such information is critical to making informed bids on competitive brokered business. During fiscal 1998, approximately 84% of the Company's net voyage revenues were derived from spot voyages or time charters and contracts of affreightment priced on a spot market basis. The Teekay organization was founded in 1973 to manage and operate oil tankers. Prior to 1985, the Company chartered-in most of the tonnage that it subsequently provided to its transportation customers. As the availability of acceptable chartered-in tonnage declined, management began an expansion of its owned fleet. Since 1985, the Company has significantly expanded and modernized its owned fleet by taking delivery of 40 new vessels and acquiring 31 vessels in the second-hand market, as well as disposing of 12 older tankers over the past four years. Teekay is incorporated under the laws of the Republic of Liberia and maintains its principal executive headquarters at the 4th Floor, Euro Canadian Centre, Marlborough Street & Navy Lion Road, P.O. Box SS 6293, Nassau, Commonwealth of the Bahamas. Its telephone number at such address is (242) 322-8020. The Company's principal operating offices are located at Suite 1400, One Bentall Centre, 505 Burrard Street, Vancouver, British Columbia, Canada, V7X 1M5. Its telephone number at such address is (604) 683-3529. COMPETITION International seaborne oil and other petroleum products transportation services are provided by two main types of operators: captive fleets of major oil companies (both private and state-owned) and independent ship owner 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 transport their own oil as well as oil for third party charterers in direct competition with independent owners and operators. Competition for charters is intense and is based upon price, location, the size, age, condition and acceptability of the vessel, and the vessel's manager. Competition in the Aframax segment is also affected by the availability of other size vessels that compete in the Company's markets. Suezmax (115,000 to 200,000 dwt) size vessels and Panamax (50,000 to 75,000) size vessels can compete for many of the same charters for which the Company competes. Because of their large size, Ultra Large Crude Carriers (320,000+ dwt) ("ULCCs") and VLCCs (200,000 to 320,000 dwt) rarely compete directly with Aframax tankers for specific charters; however, because ULCCs and VLCCs comprise a substantial portion of the total capacity of the market, movements by such vessels into Suezmax trades and of Suezmax vessels into Aframax trades would heighten the already intense competition. The Company competes principally with other Aframax owners through the global tanker charter market, comprised of tanker broker companies which represent both charterers and ship owners in chartering transactions. Within this market, some transactions, referred to as "market cargoes," are offered by charterers through two or more brokers simultaneously and shown to the widest possible range of owners; other transactions, referred to as "private cargoes," are given by the charterer to only one broker and shown selectively to a limited number of owners whose tankers are most likely to be acceptable to the charterer and are in position to undertake the voyage. Management estimates that the Company transacts approximately one-third of its spot voyages from market cargoes, the remainder being either private cargoes or direct cargoes transacted directly with charterers outside this market. 4 5 Other large operators of Aframax tonnage include Shell International Marine, a subsidiary of Royal Dutch/Shell Petroleum Corporation, with approximately 21 vessels trading globally (11 of which are on charter), Neptune Orient Lines Ltd. (owned partially by the Singapore government), with approximately 16 vessels, and Bona Shipholding Limited, which controls 15 vessels; each of the latter two fleets trade exclusively in the Atlantic Basin. Management believes that it has significant competitive advantages in the Aframax tanker market as a result of the age, quality, type and dimensions of its vessels and its large market share in the Indo-Pacific Basin. Some competitors of the Company, however, may have greater financial strength and capital resources than the Company. As part of its growth strategy, the Company will continue to consider strategic opportunities, including business acquisitions. To the extent the Company enters new geographic areas or tanker market segments, there can be no assurance that the Company will be able to compete successfully therein. New markets may involve competitive factors which differ from those of the Aframax market segment in the Indo-Pacific Basin and may include participants which have greater financial strength and capital resources than the Company. 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 or countries of their registration. Because such conventions, laws, and regulations are often revised, the Company cannot predict the ultimate cost of complying with such conventions, laws and regulations or the impact thereof on the resale price or useful life of its vessels. Additional conventions, laws and regulations may be adopted which could limit the ability of the Company to do business or increase the cost of its doing business and which may have a material adverse effect on the Company's operations. 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 operations 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. ENVIRONMENTAL REGULATION--INTERNATIONAL MARITIME ORGANIZATION ("IMO"). On March 6, 1992, the IMO adopted regulations which set forth new and upgraded requirements for pollution prevention for tankers. These regulations, which went into effect on July 6, 1995 in many jurisdictions in which the Company's tanker fleet operates, provide 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% 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 old or older must be of double-hull construction or mid-deck design with double-side construction, and (iii) all tankers will be subject to enhanced inspections. Also, under IMO regulations, a tanker must be of double-hull construction or a mid-deck design with double 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. Under the current regulations, the vessels of the Company's existing fleet will be able to operate for substantially all of their respective economic lives before being required to have double-hulls. Although three of the Company's vessels are 15 years or older, the oldest of such vessels is only 18 years old and, 5 6 therefore, the IMO requirements currently in effect regarding 25 and 30 year-old tankers will not affect the Company's fleet in the near future. However, compliance with the new regulations regarding inspections of all vessels may adversely affect the Company's operations. The Company cannot at the present time evaluate the likelihood or magnitude of any such adverse effect on the Company's operations due to uncertainty of interpretation of the IMO regulations. The operation of the Company's vessels is also affected by the recently adopted requirements set forth in the IMO's International Management Code for the Safe Operation of Ships and Pollution Prevention (the "ISM Code"). The ISM Code requires shipowners and bareboat charterers to develop and maintain an extensive "Safety Management System" that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. The failure of a shipowner or bareboat charterer to comply with the ISM Code may subject such party to increased liability, may decrease available insurance coverage for the affected vessels, and may result in a denial of access to, or detention in, certain ports. Currently, each of the Company's applicable vessels is ISM code-certified. However, there can be no assurance that such certification will be maintained indefinitely. ENVIRONMENTAL REGULATIONS--THE UNITED STATES OIL POLLUTION ACT OF 1990 ("OPA 90"). 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 its two hundred nautical mile exclusive economic zone. Under OPA 90, vessel owners, operators and bareboat (or "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, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels. These other damages are defined broadly to include (i) natural resources damages 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 ton or $10 million per tanker that is over 3,000 gross tons (subject to possible adjustment for inflation). These limits of liability would not apply if the incident was 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 the oil removal activities. The Company currently plans to continue to maintain for each of its vessels pollution liability coverage in the amount of $700 million per incident. A catastrophic spill could exceed the insurance coverage available, in which event there could be a material adverse effect on the Company. Under OPA 90, with certain limited exceptions, all newly built or converted tankers operating in United States waters must be built with double-hulls, and existing vessels which do not comply with the double-hull requirement must be phased out over a 25-year period (1990-2015) based on size, age and hull construction. Only three of the Company's vessels are over 15 years old, and the oldest of such vessels, the single-hulled Mendana Spirit, would not be phased-out under the double-hull regulations until 2003. Notwithstanding the phase-out period, OPA 90 currently permits existing single-hull tankers to operate until the year 2015 if their operations within United States waters are limited to discharging at the Louisiana Off-Shore Oil Platform, or off-loading by means of lightering activities within authorized lightering zones more than 60 miles off-shore. OPA 90 requires owners and operators of vessels to establish and maintain with the United States Coast Guard (the "Coast Guard") evidence of financial responsibility sufficient to meet their potential liabilities under OPA 90. In December 1994, the Coast Guard implemented regulations requiring evidence of financial responsibility in the amount of $1,500 per gross ton for tankers, coupling the OPA limitation on 6 7 liability of $1,200 per gross ton with the Comprehensive Environmental Response, Compensation, and Liability Act liability limit of $300 per gross ton. Under the regulations, such evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance, or guaranty. Under OPA 90, an owner or operator of a fleet of tankers is required only to demonstrate evidence of financial responsibility in an amount sufficient to cover the tanker in the fleet having the greatest maximum liability under OPA 90. The 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 contractual 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. Certain organizations, which had typically provided certificates of financial responsibility under pre-OPA 90 laws, including the major protection and indemnity organizations, declined to furnish evidence of insurance for vessel owners and operators if they are subject to direct actions or required to waive insurance policy defenses. The Coast Guard's financial responsibility regulations may also be satisfied by evidence of surety bond, guaranty or by self-insurance. Under the self-insurance provisions, the ship owner or operator must have a net worth and working capital, measured in assets located in the United States against liabilities located anywhere in the world, that exceeds the applicable amount of financial responsibility. The Company has complied with the Coast Guard regulations by providing a financial guaranty from a related company evidencing sufficient self-insurance. OPA 90 specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for 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 with all applicable state regulations in the ports where the Company's vessels call. Owners or operators of tankers operating in United States waters are required to file vessel response plans with the Coast Guard, and their tankers are required to operate in compliance with their Coast Guard approved plans. Such response plans must, among other things, (i) address a "worst case" scenario and identify and ensure, through contract or other approved means, the availability of necessary private response resources to respond to a "worst case discharge," (ii) describe crew training and drills, and (iii) identify a qualified individual with full authority to implement removal actions. The Company has filed vessel response plans with the Coast Guard for the tankers owned by the Company and has received approval of such plans for all vessels in its fleet to operate in United States waters. ENVIRONMENTAL REGULATION--OTHER ENVIRONMENTAL INITIATIVES. The European Union is considering legislation that will affect the operation of tankers and the liability of owners for oil pollution. It is impossible to predict what legislation, if any, may be promulgated by the European Union or any other country or authority. Although the United States is not a party thereto, many countries have ratified and follow the liability scheme adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage, 1969, as amended (the "CLC"), and the Convention for the Establishment of an International Fund for Oil Pollution of 1971, as amended. Under these conventions, a vessel's registered owner is strictly liable for pollution damage caused on the territorial waters of a contracting state by discharge of persistent oil, subject to certain complete defenses. Approximately one-quarter of the countries that have ratified the CLC have increased the liability limits through a 1992 Protocol to the CLC which has recently become effective. The liability limits in the countries that have ratified this Protocol are currently approximately $4.0 million plus approximately $566.0 per gross registered tonne above 5,000 gross tonnes with an approximate maximum of $80.5 million, with the exact amount tied to a unit of account 7 8 which varies according to a basket of currencies. The right to limit liability is forfeited under the CLC where the spill is caused by the owner's actual fault or privity and, under the 1992 Protocol, where the spill is caused by the owner's intentional or reckless conduct. Vessels trading to contracting states must provide evidence of insurance covering the limited liability of the owner. In jurisdictions where the CLC has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or in a manner similar to the CLC. RISK OF LOSS AND INSURANCE The operation of any ocean-going vessel carries an inherent risk of catastrophic marine disasters and property losses caused by adverse weather conditions, mechanical failures, human error, war, terrorism, piracy and other circumstances or events. In addition, the transportation of crude oil is subject to the risk of crude oil spills, and business interruptions due to political circumstances in foreign countries, hostilities, labor strikes, and boycotts. Any such event may result in loss of revenues or increased costs. The Company carries insurance to protect against most of the accident-related risks involved in the conduct of its business and it maintains environmental damage and pollution insurance coverage. The Company does not carry insurance covering the loss of revenue resulting from vessel off-hire time. There can be no assurance that all covered risks are adequately insured against, that any particular claim will be paid or that the Company will be able to procure adequate insurance coverage at commercially reasonable rates in the future. More stringent environmental regulations at times in the past have resulted in increased costs for, and may result in the lack of availability of, insurance against the risks of environmental damage or pollution. OPERATIONS OUTSIDE THE UNITED STATES The operations of the Company are primarily conducted outside of the United States and, therefore, may be affected by currency fluctuations and by changing economic, political and governmental conditions in the countries where the Company is engaged in business or where its vessels are registered. During the fiscal year ended March 31, 1998, the Company derived approximately 92% of its total revenues from its operations in the Indo-Pacific Basin. In the past, political conflicts in such regions, particularly in the Arabian Gulf, have included attacks on tankers, mining of waterways and other efforts to disrupt shipping in the area. Vessels trading in such regions have also been subject to, in limited instances, acts of terrorism and piracy. Future hostilities or other political instability in the region could affect the Company's trade patterns and adversely affect the Company's operations and performance. CREWING AND STAFF The Company employs approximately 300 captains, chief engineers, chief officers and first engineers, approximately 1,450 additional personnel at sea and approximately 200 personnel ashore. Management anticipates hiring additional senior management and staff personnel in connection with any further expansion of its operations. The Company places great emphasis on attracting, through its recruiting offices in Manila, Glasgow, Sydney and Mumbai, qualified crew members for employment on the Company's tankers. Recruiting has become an increasingly difficult task for operators in the tanker industry. The Company pays competitive salaries and provides competitive benefits to its personnel and tries to promote, when possible, from within their ranks. Management believes that the well maintained quarters and equipment on the Company's vessels help to attract and retain motivated and qualified seamen and officers. During fiscal 1996, the Company entered into a Collective Bargaining Agreement with the Philippine Seafarers' Union (PSU), an affiliate of the International Transport Workers' Federation (ITF), and a Special Agreement 8 9 with ITF London, which covers substantially all of the Company's junior officers and seamen. The Collective Bargaining Agreement and the Special Agreement did not result in any significant increase in the levels of wages paid or benefits provided to members of the vessel crews. The Company is also a party to Enterprise Bargaining Agreements with three Australian maritime unions, covering officers and seamen. The time charters covering the Australian vessels provide that increases in wages or benefits for the Company's Australian-crewed vessels will be passed on to the customer. The Company has a cadet training program, the purpose of which is to develop a cadre of future senior officers for the Company, with one specially equipped vessel staffed with an instructor and trainees. In addition to the basic training that all seamen are required to undergo to achieve certification, the Company provides additional training of as much as one month for all newly hired seamen and junior officers at training facilities in the Philippines. Safety procedures are a critical element of this training and continue to be emphasized through the Company's onboard training program. Management believes that high quality manning and training policies will play an increasingly important role in distinguishing larger independent tanker companies which have in-house (or affiliate) capabilities, from smaller companies that must rely on outside ship managers and crewing agents. CUSTOMERS Customers of the Company include major oil companies, major oil traders, large oil consumers and petroleum product producers, government agencies, and various other entities dependent upon the tanker transportation trade. During fiscal 1998, one customer (an international oil company) accounted for $56.5 million, or approximately 14%, of the Company's consolidated voyage revenues for such period. Another customer, also an international oil company, accounted for $48.7 million, or approximately 13%, of the Company's fiscal 1997 voyage revenues. No more than one customer has accounted for more than 10% of the Company's consolidated voyage revenues in any of the three fiscal years ended March 31, 1998. TAXATION OF THE COMPANY The legal jurisdictions of the countries in which the Company and the majority of its subsidiaries are incorporated do not impose income taxes upon shipping-related activities. 9 10 ITEM 2. DESCRIPTION OF PROPERTY THE COMPANY'S FLEET The following list provides information with respect to the Company's vessels as at April 30, 1998.
YEAR SERIES/YARD BUILT TYPE DWT-MT FLAG ----------- ----- ---- ------ ---- AFRAMAX TANKERS (42) HAMANE SPIRIT.............................. Onomichi 1997 DH 105,300 Bahamian POUL SPIRIT................................ Onomichi 1995 DH 105,300 Liberian TORBEN SPIRIT.............................. Onomichi 1994 DH 98,600 Bahamian SAMAR SPIRIT............................... Onomichi 1992 DH 98,600 Bahamian LEYTE SPIRIT............................... Onomichi 1992 DH 98,600 Bahamian LUZON SPIRIT............................... Onomichi 1992 DH 98,600 Bahamian MAYON SPIRIT............................... Onomichi 1992 DH 98,600 Bahamian TEEKAY SPIRIT.............................. Onomichi 1991 SH 100,200 Bahamian PALMSTAR LOTUS............................. Onomichi 1991 SH 100,200 Bahamian PALMSTAR THISTLE........................... Onomichi 1991 SH 100,200 Bahamian PALMSTAR ROSE.............................. Onomichi 1990 SH 100,200 Bahamian PALMSTAR POPPY............................. Onomichi 1990 SH 100,200 Bahamian ONOZO SPIRIT............................... Onomichi 1990 SH 100,200 Bahamian PALMSTAR CHERRY............................ Onomichi 1990 SH 100,200 Bahamian PALMSTAR ORCHID............................ Onomichi 1989 SH 100,200 Bahamian VICTORIA SPIRIT (OBO)...................... Hyundai 1993 DH 103,200 Bahamian VANCOUVER SPIRIT (OBO)..................... Hyundai 1992 DH 103,200 Bahamian SHILLA SPIRIT.............................. Hyundai 1990 SH 106,700 Liberian ULSAN SPIRIT............................... Hyundai 1990 SH 106,700 Liberian NAMSAN SPIRIT.............................. Hyundai 1988 SH 106,700 Liberian PACIFIC SPIRIT............................. Hyundai 1988 SH 106,700 Liberian PIONEER SPIRIT............................. Hyundai 1988 SH 106,700 Liberian DAMPIER SPIRIT (FSO)....................... Hyundai 1988 SH 106,700 Liberian NASSAU SPIRIT.............................. Imabari 1998 DH 107,000 Bahamian SENANG SPIRIT.............................. Imabari 1994 DH 95,700 Bahamian SEBAROK SPIRIT............................. Imabari 1993 DH 95,700 Liberian SELETAR SPIRIT............................. Imabari 1988 DS 97,300 Bahamian SERAYA SPIRIT.............................. Imabari 1992 DS 97,300 Bahamian SENTOSA SPIRIT............................. Imabari 1989 DS 97,300 Liberian ALLIANCE SPIRIT............................ Imabari 1989 DS 97,300 Bahamian SEMAKAU SPIRIT............................. Imabari 1988 DS 97,300 Liberian SINGAPORE SPIRIT........................... Imabari 1988 DS 97,300 Liberian SUDONG SPIRIT.............................. Imabari 1987 DS 97,300 Liberian KYUSHU SPIRIT.............................. Mitsubishi 1991 DS 95,600 Bahamian KOYAGI SPIRIT.............................. Mitsubishi 1989 SH 96,000 Liberian SEABRIDGE*................................. Namura 1996 DH 105,200 Liberian SEAMASTER*................................. Namura 1990 SH 101,000 Liberian TORRES SPIRIT.............................. Namura 1990 SH 96,000 Bahamian HAKUYOU MARU*.............................. Namura 1987 SH 93,000 Singaporean MENDANA SPIRIT............................. Namura 1980 SH 81,700 Bahamian MAGELLAN SPIRIT............................ Hitachi 1985 DS 95,000 Liberian PALM MONARCH............................... Mitsui 1981 SH 89,900 Liberian OTHER TANKERS (4) MUSASHI SPIRIT (VLCC)...................... Sasebo 1993 SH 280,700 Bahamian SCOTLAND................................... Mitsubishi 1982 DS 40,800 Bahamian BARRINGTON................................. Samsung 1989 DH 33,300 Australian PALMERSTON................................. Halla 1990 DB 36,700 Australian --------- 4,576,200 =========
- ------------ DH Double-hull tanker DS Double-sided tanker DB Double-bottom tanker FSO Floating storage and off-loading vessel OBO Oil/Bulk/Ore carrier SH Single-hull tanker VLCC Very Large Crude Carrier * Time-chartered-in 10 11 Many of the Company's vessels have been designed and constructed as substantially identical sister ships. Such vessels can, in many situations, be interchanged, providing scheduling flexibility and greater capacity utilization. In addition, spare parts and technical knowledge can be applied to all the vessels in the particular series, thereby generating operating efficiencies. The Company has disposed of several vessels as part of its ongoing fleet modernization program. The Company sold a total of three of its older Aframax tankers during the fiscal year ended March 31, 1998, and acquired a total of six newer Aframax tankers (including two time-chartered-in vessels) and two modern product tankers during the same period. As a result, the Company's average fleet size increased by two vessels, or 4.9%, in fiscal 1998 compared to fiscal 1997, following an earlier increase of two vessels, or 4.6%, in fiscal 1997 compared to fiscal 1996. The Company currently has two double-hull newbuildings on order (subject to certain conditions to be satisfied by the builder), with deliveries scheduled for July and September 1999. The estimated delivered price for each vessel, including all related charges, is approximately $38.0 million. The Company has the option to purchase further newbuildings under similar terms. See Note 5 of the Consolidated Financial Statements for information with respect to major encumbrances against vessels of the Company. CLASSIFICATION AND INSPECTION All of the Company's vessels have been certified as being "in class" by their respective classification societies: Nippon Kaiji Kyokai, Lloyds Register, Det Norske Veritas or American Bureau of Shipping. 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 of which that country is a member. Each vessel is inspected by a surveyor of the classification society every year ("Annual Survey"), every two to three years ("Intermediate Survey") and every four to five years ("Special Survey"). Vessels also may be required, as part of the Intermediate Survey process, to be dry-docked every 24 to 30 months for inspection of the underwater parts of the vessel and for necessary repair related to such inspection. Many of the Company's vessels have qualified with their respective classification societies for drydocking every five years in connection with the Special Survey and are no longer subject to the Intermediate Survey drydocking process. To so qualify, the Company was required to enhance the resiliency of the underwater coatings of each such vessel as well as to install apparatus on each vessel to accommodate thorough underwater inspection by divers. In addition to the classification inspections, many of the Company's customers, including the major oil companies, regularly inspect the Company's vessels as a precondition to chartering voyages on such vessels. In each of the last eight years, Tanker Advisory Center, Inc. (New York) has rated the Company's fleet a "meritorious tanker fleet," a designation which, in the latest publication (January 1998), placed it in the top 5% of all fleets containing five or more tankers. Management believes that the Company's well-maintained, high quality tonnage should provide it with a competitive advantage in the current environment of increasing regulation and customer emphasis on quality of service. Company employees perform much of the necessary ordinary course maintenance and regularly inspect all of the Company's vessels, both at sea and while the vessels are in port. The Company inspects its vessels two to four times per year using predetermined and rigorous criteria. Each vessel is examined and specific notations are made, and recommendations are given for improvements to the overall condition of the vessel, maintenance, safety and crew welfare. The Company has obtained through Det Norske Veritas, the Norwegian classification society, a document of compliance with the ISO 9000 standards of total quality management. ISO 9000 is a series of international standards for quality systems which includes ISO 9002, the standard most commonly used in the shipping industry. The Company has also completed the implementation of the International 11 12 Safety Management (ISM) code. The Company has obtained Documents of Compliance (DOC) for its offices and Safety Management Certificates (SMC) for its applicable vessels, as required by the IMO prior to July 1, 1998. ITEM 3. LEGAL PROCEEDINGS From time to time the Company has been, and expects to continue to be, subject to legal proceedings and claims in the ordinary course of its business, principally personal injury and property casualty claims. Such claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources. The Company is not aware of any legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on the Company or on its financial condition or results of operations. ITEM 4. CONTROL OF REGISTRANT PRINCIPAL SHAREHOLDERS (a) The Company is not directly or indirectly owned or controlled by another corporation or by any foreign government. (b) The following table sets forth certain information regarding ownership of Teekay's common stock, no par value (the "Common Stock"), as of March 31, 1998 by (i) each owner of 10% or more of the Common Stock and (ii) all officers and directors of Teekay as a group:
NUMBER OF PERCENTAGE OF IDENTITY OF PERSON OR GROUP SHARES OWNED CLASS OWNED --------------------------- ------------ ------------- Cirrus Trust................................................ 18,627,397 64.6% JTK Trust................................................... 2,888,293 10.0% All officers and directors as a group (19 persons).......... * *
- ------------ * Less than one percent of outstanding shares. (c) The Company is not aware of any arrangements, the operation of which may at a subsequent date result in a change in control of the Company. 12 13 ITEM 5. NATURE OF TRADING MARKET Since July 1995, the Company's Common Stock has been traded on The New York Stock Exchange under the symbol "TK". The following table sets forth the high and low closing sales prices for the Common Stock on The New York Stock Exchange for each of the fiscal quarters indicated.
HIGH LOW ----- ----- FISCAL 1996 Second quarter................................ $24 7/8 $23 3/8 Third quarter................................. 24 7/8 23 Fourth quarter................................ 27 23 1/4 FISCAL 1997 First quarter................................. $28 $25 Second quarter................................ 30 5/8 26 1/2 Third quarter................................. 33 1/8 28 7/8 Fourth quarter................................ 34 1/4 26 1/2 FISCAL 1998 First quarter................................. $34 5/8 $28 Second quarter................................ 36 30 15/16 Third quarter................................. 37 7/8 30 3/8 Fourth quarter................................ 33 9/16 27 7/8
Approximately 25% of all outstanding shares at March 31, 1998 were held in the United States. There is not an active public market within or outside the United States for Teekay's 9 5/8% First Preferred Ship Mortgage Notes due 2003. These Notes have not been registered under the Securities Exchange Act of 1934, as amended, and Teekay does not intend to list them on any securities exchange or to seek approval for quotation through any automated quotation system. Teekay's 8.32% First Preferred Ship Mortgage Notes due 2008 are listed for trading on the New York Stock Exchange. These Notes were first offered on the market January 19, 1996. As no active trading market exists for these Notes, no historical pricing information is included here. ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS (a) The Company is not aware of any governmental laws, decrees or regulations in the Company's country of organization that restrict the export or import of capital, including, but not limited to, foreign exchange controls, or that affect the remittance of dividends, interest or other payments to nonresident holders of the Company's securities. (b) The Company is not aware of any limitations on the right of nonresident or foreign owners to hold or vote securities of the Company imposed by foreign law or by the charter or other constituent document of the Company. 13 14 ITEM 7. TAXATION Since (i) Teekay Shipping Corporation is and intends to maintain its status as a "non-resident Liberian entity" under the Liberian Internal Revenue Code, (ii) the Company is not now carrying on, and in the future does not expect to carry on, any operations within the Republic of Liberia, and (iii) Teekay's 9 5/8% First Preferred Ship Mortgage Notes and 8.32% First Preferred Ship Mortgage Notes and all documentation related to these Notes and to the public offering of Teekay's common stock were executed outside of the Republic of Liberia, and assuming the holders of these Notes and the common stock neither reside in, maintain an office in, nor engage in business in, the Republic of Liberia, under current Liberian law, no taxes or withholdings are imposed by the Republic of Liberia on payments to be made in respect of the Notes or on distributions made in respect of the common stock. Furthermore, no stamp, capital gains or other taxes will be imposed by the Republic of Liberia on the ownership or disposition of the common stock by holders thereof. 14 15 ITEM 8. SELECTED FINANCIAL DATA Set forth below are selected consolidated financial and other data of the Company for the five fiscal periods ended March 31, 1998, which have been derived from the Company's Consolidated Financial Statements. The data below should be read in conjunction with the Consolidated Financial Statements and the notes thereto and the report of Ernst & Young, independent Chartered Accountants, with respect to the financial statements for the fiscal years ended March 31, 1998, 1997 and 1996, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company changed its fiscal year end from April 30 to March 31, effective March 31, 1994, in order to facilitate comparison of the Company's operating results to those of other companies within the transportation industry on a calendar quarter basis.
11 MONTH PERIOD YEAR ENDED MARCH 31, ENDED ------------------------------------------------------------- MARCH 31, 1998 1997 1996 1995 1994(1) ------------- ------------ ------------ ------------ ------------ (U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER DAY DATA AND RATIOS) INCOME STATEMENT DATA: Voyage revenues............................. $ 406,036 $ 382,249 $ 336,320 $ 319,966 $ 317,742 Voyage expenses............................. 100,776 102,037 90,575 84,957 81,052 Net voyage revenues......................... 305,260 280,212 245,745 235,009 236,690 Income from vessel operations............... 107,640 94,258 76,279 52,816 60,777 Interest expense............................ (56,269) (60,810) (62,910) (66,304) (49,713) Interest income............................. 7,897 6,358 6,471 5,904 2,904 Other income................................ 11,236 2,824 9,230 12,839 10,245 Net income from continuing operations....... 70,504 42,630 29,070 5,255 24,213 Net income from discontinued operations..... -- -- -- -- 5,945 Cumulative effect of change in accounting for marketable securities................. -- -- -- 1,113 -- Net income.................................. 70,504 42,630 29,070 6,368 30,158 PER SHARE DATA: Net income from continuing operations....... $ 2.46 $ 1.52 $ 1.17 $ 0.29 $ 1.35 Cumulative effect of change in accounting for marketable securities................. -- -- -- 0.06 -- Net income -- basic.................................. 2.46 1.52 1.17 0.35 1.68 -- diluted................................ 2.44 1.50 1.17 0.35 1.68 Cash earnings -- basic(2)................... 5.78 4.75 4.51 5.48 6.33 Cash dividends declared..................... 0.86 0.86 0.48 -- -- BALANCE SHEET DATA (AT END OF PERIOD): Cash and marketable securities.............. $ 115,254 $ 117,523 $ 101,780 $ 85,739 $ 107,246 Total assets................................ 1,460,183 1,372,838 1,355,301 1,306,474 1,405,147 Total debt.................................. 725,369 699,726 725,842 842,874 945,611 Total stockholders' equity.................. 689,455 629,815 599,395 439,066 433,180 OTHER FINANCIAL DATA: EBITDA(3)................................... $ 209,582 $ 191,632 $ 166,233 $ 146,756 $ 151,364 EBITDA to interest expense(3)(4)............ 3.80x 3.22x 2.69x 2.28x 3.04x Total debt to EBITDA(1)(3).................. 3.46 3.65 4.37 5.74 5.83 Total debt to total capitalization.......... 51.3% 52.6% 54.8% 65.7% 68.6% Net debt to capitalization(5)............... 46.9 48.0 51.0 63.3 65.9 Cash earnings(2)............................ 165,575 133,554 112,107 98,716 113,998 Capital expenditures: Vessel purchases, gross................... 197,199 65,104 123,843 7,465 163,509 Drydocking (accrual basis)................ 12,409 23,124 11,641 11,917 13,296 FLEET DATA: Average number of ships(6).................. 43 41 39 42 45 Average age of Company's Aframax fleet (in years)(7)................................. 7.6 7.9 6.8 7.3 7.5 TCE per ship per day(6)(8)(9)............... $ 21,373 $ 20,356 $ 18,438 $ 16,552 $ 17,431 Vessel operating expenses per ship per day(9)(10)................................ 4,554 4,922 4,787 4,748 4,879 Operating cash flow per ship per day(9)(11)................................ 12,664 11,819 10,613 8,944 9,133
(Footnotes on following page) 15 16 (Footnotes for previous page) (1) For the 12 months ended March 31, 1994, voyage revenues were $345.0 million; income from vessel operations was $64.4 million; net income was $32.0 million; cash earnings were $121.6 million; and EBITDA was $162.3 million. For the eleven-month period ended March 31, 1994, EBITDA for the 12 months ended March 31, 1994 was used for purposes of computing total debt to EBITDA, in order to facilitate comparisons to other periods. (2) Cash earnings represents income from continuing operations before foreign exchange gains (losses) and before depreciation and amortization expense. Cash earnings is included because it is used by certain investors to measure a company's financial performance as compared to other companies in the shipping industry. Cash earnings is not required by generally accepted accounting principles and should not be considered as an alternative to net income or any other indicator of the Company's performance required by generally accepted accounting principles. (3) EBITDA represents net income from continuing operations before interest expense, income tax expense, depreciation and amortization expense, minority interest, and gains or losses arising from prepayment of debt, foreign exchange translation and disposal of assets. EBITDA is included because such data is used by certain investors to measure a company's financial performance. EBITDA is not required by generally accepted accounting principles and should not be considered as an alternative to net income or any other indicator of the Company's performance required by generally accepted accounting principles. (4) For purposes of computing EBITDA to interest expense, interest expense includes capitalized interest but excludes amortization of loan costs. (5) Net debt represents total debt less cash, cash equivalents and marketable securities. (6) Includes vessels time-chartered-in, but excludes vessels of discontinued operations and a former joint venture. (7) Average age of Company's Aframax fleet is the average age, at the end of the relevant period, of all the vessels owned, leased or time-chartered-in by the Company, excluding vessels of discontinued operations and a former joint venture. (8) TCE (or "time charter equivalent") is a measure of the revenue performance of a vessel, which, on a per voyage basis, is generally determined by Clarkson Research Studies Inc.'s ("Clarkson") and other industry data sources by subtracting voyage expenses (except commissions) which are incurred in transporting cargo from gross revenue per voyage and dividing the remaining revenue by the total number of days required for the round-trip voyage. Voyage expenses comprise all expenses relating to particular voyages, including bunker fuel expense, port fees and canal tolls. For purposes of calculating the Company's average TCE for the year, TCE has been calculated consistent with Clarkson's method, by deducting total voyage expenses (except commissions) from total voyage revenues and dividing the remaining sum by the Company's total voyage days in the year. (9) To facilitate comparison to prior years' results, excludes the results from the Company's Australian-crewed vessels, which comprised four of the Company's vessels during the fourth quarter of fiscal 1998. Vessel operating expenses for the Australian-crewed vessels are substantially higher than those for the rest of the Company's fleet on a per ship basis, primarily as a result of higher crew costs, with correspondingly higher charter rates associated with the charter arrangements for those vessels. See "Item 9. Management's Discussion and Analysis of Results of Operations and Financial Condition--General." (10) Vessel operating expenses consist of all expenses relating to the operation of vessels (other than voyage expenses), including crewing, repairs and maintenance, insurance, stores and lubes, and miscellaneous expenses including communications. Ship days are calculated on the basis of a 365-day year multiplied by the average number of vessels in the Company's fleet for the respective year. Vessel operating expenses exclude vessels time-chartered-in. (11) Operating cash flow represents income from vessel operations plus depreciation and amortization expense (other than drydock amortization expense). Ship days are calculated on the basis of a 365-day fiscal year multiplied by the average number of vessels in the Company's fleet for the respective year. Operating cash flow is not required by generally accepted accounting principles and should not be considered as an alternative to net income or any other indicator of the Company's performance required by generally accepted accounting principles. 16 17 ITEM 9.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a leading provider of international crude oil and petroleum product transportation services to major oil companies, major oil traders and government agencies, principally in the region from the Red Sea to the U.S. West Coast. The Company's current operating fleet consists of 46 vessels, including 42 Aframax oil tankers (including three vessels time-chartered-in) and O/B/O carriers, three smaller oil tankers, and one VLCC, for a total cargo-carrying capacity of approximately 4.6 million tonnes. During fiscal 1998, approximately 66% of the Company's net voyage revenue was derived from spot voyages. The balance of the Company's revenue is generated primarily by two other modes of employment: time charters, whereby vessels are chartered to customers for a fixed period; and contracts of affreightment ("COAs"), whereby the Company carries an agreed quantity of cargo for a customer over a specified trade route over a given period of time. In fiscal 1998, 18% of net voyage revenues was generated by time charters and COAs priced on a spot market basis. In the aggregate, approximately 84% of the Company's net voyage revenue during fiscal 1998 was derived from spot voyages or time charters and COAs priced on a spot market basis, with the remaining 16% being derived from fixed-rate time-charters and COAs. This dependence on the spot market, which is within industry norms, contributes to the volatility of the Company's revenues, cash flow from operations, and net income. Historically, the tanker industry has been cyclical, experiencing volatility in profitability and asset values resulting from changes in the supply of, and demand for, vessel capacity. In addition, tanker markets have historically exhibited seasonal variations in charter rates. Tanker markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere and unpredictable weather patterns which tend to disrupt vessel scheduling. In December 1997, the Company acquired two vessels and related shore support services from an Australian affiliate of Caltex Petroleum. These two tankers, together with one of the Company's existing Aframax tankers, have been time chartered to the Caltex affiliate in connection with the Company's provision of Caltex's oil transportation requirements formerly provided by that affiliate. The Company has converted one of its existing vessels to a floating storage and off-loading vessel, which is sharing crews with the vessels employed in the Caltex arrangement (together with the other three vessels involved in this arrangement, the "Australian Vessels"). Vessel operating expenses for the Australian Vessels are substantially higher than those for the rest of the Company's fleet, primarily as a result of higher costs associated with employing an Australian crew. The time-charter rates for the Australian Vessels are correspondingly higher to compensate for these increased costs. During fiscal 1998, the Australian Vessels earned net voyage revenues and an average TCE rate of $8.4 million and $25,347, respectively, and incurred vessel operating expenses of $3.2 million, or $10,276 on a per ship per day basis. The results of the Australian Vessels are included in the Company's Consolidated Financial Statements included herein. RESULTS OF OPERATIONS Bulk shipping industry freight rates are commonly measured at the net voyage revenue level in terms of "time charter equivalent" (or "TCE") rates, defined as voyage revenues less voyage expenses (excluding commissions), divided by voyage ship-days for the round-trip voyage. Voyage revenues and voyage expenses are a function of the type of charter, either spot charter or time charter, and port, canal and fuel costs depending on the trade route upon which a vessel is sailing, in addition to being a function of the level of shipping freight rates. For this reason, shipowners base economic decisions regarding the deployment of their vessels upon anticipated TCE rates, and industry analysts typically measure bulk shipping freight rates in terms of TCE rates. Therefore, the discussion of revenue below focuses on net voyage revenue and TCE rates. 17 18 FISCAL 1998, FISCAL 1997, AND FISCAL 1996 Operating results for the past three years reflect the improvement in average TCE rates experienced by the Company's fleet during this period, as well as the increase in the size of the Company fleet. The Company sold a total of seven of its older Aframax tankers during the three fiscal years ended March 31, 1998, and acquired a total of twelve newer Aframax tankers (including two time-chartered-in vessels) and two modern product tankers during the same period. As a result, the Company's average fleet size increased by two vessels, or 4.9%, in fiscal 1998 compared to fiscal 1997, following an earlier increase of two vessels, or 4.6%, in fiscal 1997 compared to fiscal 1996. Net voyage revenues increased 8.9% to $305.3 million in fiscal 1998 from $280.2 million in fiscal 1997, and increased 14.0% in fiscal 1997 from $245.7 million in fiscal 1996, reflecting a combination of improvement in TCE rates and an increase in the Company's fleet size. The Company's average TCE rate in fiscal 1998, excluding the Australian Vessels, was up 5.0% to $21,373 from $20,356 in fiscal 1997, and up 10.4% in fiscal 1997 from $18,438 in fiscal 1996, in part due to lower bunker fuel prices. In spite of the increase in fleet size, vessel operating expenses decreased 2.9% to $70.5 million in fiscal 1998 from $72.6 million in fiscal 1997, primarily as a result of a reduction in insurance premiums as well as more favorable foreign exchange rates between the U.S. Dollar and certain Asian currencies, particularly the Japanese Yen and the Korean Won, for spare parts and supplies purchased during the latter half of fiscal 1998. In fiscal 1997, vessel operating expenses increased 7.0%, from $67.8 million in fiscal 1996, primarily as a result of the increase in the size of the Company's owned fleet. As a result of a more competitive market for qualified sea-going personnel, adjustments were made to crew wage rates and salaries effective April 1, 1998, which will increase vessel operating expenses by approximately $300 per ship per day, or $4.3 million per year in aggregate, commencing in fiscal 1999. Time-charter hire expense was $10.6 million in fiscal 1998, up from $3.5 million in fiscal 1997 and $2.5 million in fiscal 1996, as a result of two vessels time-chartered-in by the Company during fiscal 1998 as compared to only one vessel time-chartered-in during the latter part of fiscal 1996 and part of fiscal 1997. Depreciation and amortization expense increased by 4.6% to $94.9 million in fiscal 1998 from $90.7 million in fiscal 1997, and increased by 10.1% in fiscal 1997 from $82.4 million in fiscal 1996, as a result of the increase in the average size of the Company's owned fleet, an increase in the average cost base of the fleet resulting from the replacement of some of the Company's older vessels with newer vessels, and a larger than usual number of scheduled drydockings during the past two fiscal years. Depreciation and amortization expense included amortization of drydocking costs of $11.7 million, $10.9 million, and $8.6 million in fiscal years 1998, 1997, and 1996, respectively. General and administrative expenses rose 12.1% to $21.5 million in fiscal 1998 from $19.2 million in fiscal 1997, and increased 14.7% in fiscal 1997 from $16.8 million in fiscal 1996, primarily as a result of the cost of compliance with increasingly stringent tanker industry regulations, increases in senior management compensation, and the start-up cost and additional ongoing personnel and facility costs associated with expanding the Company's Australian office in December 1997. Management anticipates hiring additional senior management and staff personnel in connection with the further expansion of the Company's operations. Income from vessel operations increased 14.2% to $107.6 million in fiscal 1998 from $94.3 million in fiscal 1997, and increased 23.6% in fiscal 1997 from $76.3 million in fiscal 1996, due to improved TCE rates and relatively stable costs. Interest expense decreased by 7.4% to $56.3 million in fiscal 1998 from $60.8 million in fiscal 1997, following a 3.3% decrease in fiscal 1997 from $62.9 million in fiscal 1996, reflecting the reduction in the Company's average debt balance and a lower average interest rate on debt borrowings, in each case compared to the prior fiscal year. The Company anticipates using the net proceeds it receives from a proposed public offering of its Common Stock to redeem a portion of its 9 5/8% First Preferred Ship 18 19 Mortgage Notes due 2003. Interest income of $7.9 million in fiscal 1998, $6.4 million in fiscal 1997, and $6.5 million in fiscal 1996, largely reflected increasing cash balances, offset in fiscal 1997 by lower interest rates. Other income of $11.2 million in fiscal 1998 consisted primarily of $14.4 million in gains on the sale of three vessels, offset partially by $3.5 million in losses related to the prepayment of debt. Other income of $2.8 million in fiscal 1997 and $9.2 million in fiscal 1996 consisted primarily of gains on the sale of vessels. As a result of the foregoing factors, the Company's net income was $70.5 million in fiscal 1998, which included $14.4 million in gains on asset sales. In comparison, the Company's net income was $42.6 million in fiscal 1997, which included $2.7 million in gains on assets sales, and $29.1 million in fiscal 1996, which included $8.8 million in gains on asset sales. The following table illustrates the relationship between fleet size (measured in ship-days), TCE performance, and operating results per calendar ship-day. To facilitate comparison to the prior years' results, the figures in the table below exclude the results from the Company's Australian Vessels.
YEAR ENDED MARCH 31, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Average number of ships............................ 42 41 39 Total calendar ship-days........................... 15,341 14,937 14,310 -------- -------- -------- Voyage days (A).................................... 14,229 14,071 13,612 -------- -------- -------- Net voyage revenue before commissions (B) (000s)... $304,115 $286,429 $250,981 -------- -------- -------- TCE (B/A).......................................... $ 21,373 $ 20,356 $ 18,438 -------- -------- -------- Operating results per calendar ship-day: Net voyage revenue............................... $ 19,358 $ 18,760 $ 17,173 Vessel operating expense......................... 4,554 4,922 4,787 General and administrative expense............... 1,375 1,286 1,171 Drydocking expense............................... 765 733 602 -------- -------- -------- Operating cash flow per calendar ship-day.......... $ 12,664 $ 11,819 $ 10,613 ======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES The Company's total liquidity, including cash, marketable securities and undrawn long-term lines of credit, was $186.3 million as at March 31, 1998, down from $258.6 million as at March 31, 1997, and $197.3 million as at March 31, 1996. The Company's total liquidity had been increasing as a result of internally generated cash and debt refinancings, but declined during the fourth quarter of fiscal 1998 due to the purchase of two vessels which were paid for using existing cash balances and borrowings under the Revolver (as defined below). Net cash flow from operating activities was $161.1 million in fiscal 1998, compared to $139.2 million and $98.4 million in fiscal years 1997 and 1996, respectively, reflecting an improvement in tanker charter market conditions accompanied by a relatively stable cost environment, the increase in the size of the Company's fleet, and a reduction in interest expense. In January 1998, the Company replaced its existing revolving credit facility with a new revolving credit facility (the "Revolver") providing for borrowing of up to $200.0 million. The amount available under the Revolver reduces by $10.0 million semi-annually commencing in July 1999, with a final balloon reduction in January 2006. Interest payments are based on LIBOR plus a margin depending on the financial leverage of the Company; at March 31, 1998 the margin was +0.50%. Scheduled debt repayments were $33.9 million during fiscal 1998, compared to $16.0 million in fiscal 1997 and $57.9 million in fiscal 1996. In addition to scheduled debt repayments, the Company prepaid long-term debt of $150.7 million in fiscal 1998, primarily representing prepayments out of the 19 20 proceeds of the Revolver and repurchases of $26.3 million of its 9 5/8% First Preferred Ship Mortgage Notes due 2003. Dividends declared during fiscal 1998 were $24.6 million, or $0.86 per share, of which $16.0 million was paid in cash and $8.6 million was paid in the form of shares of Common Stock issued under the Company's dividend reinvestment plan. Three vessels were sold in fiscal 1998, resulting in net proceeds of $33.9 million. Subsequent to March 31, 1998, the Company sold an additional vessel for net proceeds of approximately $10.5 million. In fiscal 1997, the Company sold its remaining 50%-owned vessel, resulting in net proceeds of $6.4 million which the Company received in the early part of fiscal 1998. During fiscal 1998, the Company incurred capital expenditures for vessels and equipment of $197.2 million, primarily as a result of taking delivery of two newbuilding double-hull Aframax tankers, two modern second-hand Aframax tankers, and two modern second-hand product tankers. Capital expenditures for drydocking were $18.4 million in fiscal 1998, $16.6 million in fiscal 1997, and $7.4 million in fiscal 1996, reflecting a larger than usual number of scheduled drydockings during the last two fiscal years. Subsequent to March 31, 1998, the Company entered into an agreement for the construction of two newbuilding double-hull Aframax tankers, with deliveries scheduled for July and September 1999, with the option to purchase further newbuildings under similar terms. The agreement is subject to certain conditions that must be satisfied by the tankers' builder. The estimated delivered price for each vessel, including all related charges, is approximately $38.0 million. The Company intends to pay for these purchases by using existing cash balances, borrowings under the Revolver or other debt financing. As part of its growth strategy, the Company will continue to consider strategic opportunities, including the acquisition of additional vessels and the expansion into new markets. The Company may choose to pursue such opportunities through internal growth, joint ventures, or business acquisitions. The Company intends to finance any future acquisitions through various sources of capital, including internally generated cash flow, existing credit lines, additional debt borrowings, and the issuance of additional shares of capital stock. YEAR 2000 COMPLIANCE The Company relies on computer systems and software to operate its business, including applications used in chartering, shipping, communications, finance and various administrative functions. To the extent that the Company's software applications contain source code that is unable to appropriately interpret the calendar year 2000 and subsequent years, some level of modification or replacement of such applications will be necessary. The Company is reviewing all of its systems in order to verify that they are "Year 2000 compliant" and believes, with limited exceptions, that they will require only minor modification. Accordingly, management does not expect Year 2000 compliance costs to have a material adverse effect on the Company. No assurance can be given, however, that all of the Company's systems will be Year 2000 compliant or that compliance costs or the impact of the Company's failure to achieve full Year 2000 compliance will not have a material adverse effect on the Company. In addition, the Company could be adversely affected by the failure of one or more of its customers, lenders, suppliers or other organizations with which it conducts business to become fully Year 2000 compliant. 20 21 FORWARD-LOOKING STATEMENTS The Company's Annual Report to Shareholders for 1998 and this Annual Report on Form 20-F for the fiscal year ended March 31, 1998 contain certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) concerning future events and the Company's operations, performance and financial condition, including, in particular, statements regarding: tanker supply and demand; the Company's market share in the Indo-Pacific Basin; future capital expenditures, including expenditures for newbuilding vessels; the Company's growth strategy and measures to implement such strategy; the Company's competitive strengths; and future success of the Company. These statements involve known and unknown risks and are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the Company. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to: the cyclical nature of the tanker industry and its dependence on oil markets; the supply of tankers available to meet the demand for transportation of petroleum products; the Company's dependence on spot oil voyages; competitive factors in the markets in which the Company operates; environmental and other regulation; the Company's potential inability to achieve and manage growth; risks associated with operations outside the United States; and other factors detailed from time to time in the Company's periodic reports filed with the U.S. Securities and Exchange Commission. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with respect thereto or any change in events, conditions or circumstances on which any such statement is based. 21 22 ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT MANAGEMENT The directors, executive officers and senior management of the Company are listed below:
NAME AGE POSITION ---- --- -------- Karlshoej, Axel 57 Director and Chairman of the Board Moller, Bjorn 40 Director, President and Chief Executive Officer Coady, Arthur F. 64 Director, EVP and General Counsel Dingman, Michael D. 66 Director Feder, Morris L. 81 Director Hsu, Steve G. K. 64 Director Hsu, Thomas Kuo-Yuen 51 Director Adams, John 42 Managing Director (Glasgow) Alsleben, Veronica A. E. 47 Managing Director (London) Antturi, Peter S. 39 VP, Treasurer and Chief Financial Officer (Vancouver) Bendy, Paul 44 Managing Director (Australia) Blair, Esther E. 43 Secretary (Nassau) Chad, Greg 46 VP, Corporate Services (Vancouver) Glendinning, David 44 VP, Marine and Commercial Operations (Vancouver) Lok, Vincent C. 30 Controller (Vancouver) Meldgaard, Mads T. 33 VP, Chartering (Vancouver)* Murphy, Justin 37 Managing Director (Singapore)** Nagao, Yoshio 51 Managing Director (Tokyo) Patwardhan, Vinay S. 56 President, Marine Operations (Vancouver)
- ------------ * Promotion to indicated position to become effective July 1998. ** Promotion to indicated position to become effective August 1998. Certain biographical information about each of these individuals is set forth below: JOHN ADAMS joined the Company in April 1998 as Managing Director of the newly established Glasgow Office, where Mr. Adams heads the Company's crewing and crew training activities. Prior to joining Teekay, Mr. Adams served for nine years as Managing Director of Teekay Norbulk, a joint venture between the Company and Norbulk Agencies. Mr. Adams has over 22 years' experience in the crewing and ship management business. VERONICA A. E. ALSLEBEN has been employed in ship chartering since 1973. She joined the Company in 1989 as chartering manager and was subsequently promoted to her current position as Managing Director (London). Prior to joining the Company, Ms. Alsleben served as Vice President of a chartering office of an international tanker company in New York City for five years. PETER S. ANTTURI joined the Company in September 1991 as Manager, Accounting and was promoted to the position of Controller in March 1992, and to his current position of Vice President, Treasurer and Chief Financial Officer in October 1997. Prior to joining the Company, Mr. Antturi held various accounting and finance roles in the shipping industry since 1985. PAUL BENDY joined the Company in December 1997 as Managing Director of the Australia office in connection with the acquisition by the Company of an Australian affiliate of Caltex Petroleum. From 1993 to December 1997, Mr. Bendy held a variety of senior management positions within the Caltex Petroleum organization, including in shipping operations management. Prior to 1993, Mr. Bendy served for 13 years as a Marine Engineer for Caltex. 22 23 ESTHER E. BLAIR joined the Company in June 1988. In 1991, she was appointed to the position of Secretary. GREG CHAD joined the Company in August 1991 as Manager, Personnel. He was promoted in June 1993 to Director, Personnel and in March 1995 to his current position of Vice President, Corporate Services. Mr. Chad has held a number of senior human resources and administration roles in the transportation and communication industries since 1976. ARTHUR F. COADY is an Executive Vice President and the General Counsel of the Company. He has served as a Director of Teekay since 1989. He joined the Company after 30 years in private law practice in Canada, having specialized in corporate and commercial law. In July 1995, Mr. Coady was appointed as a Director of the Bahamas Maritime Authority. MICHAEL D. DINGMAN is a private investor, industrial company executive and corporate director. He has served as a Director of Teekay since May 1995. He is Chairman and Chief Executive Officer of The Shipston Group Limited, a diversified international holding company, and a Director of Fisher Scientific International Inc. and of Ford Motor Company. Mr. Dingman also serves as Director/Executive to a number of other industrial concerns. MORRIS L. FEDER is President of Worldwide Cargo Inc., a New York based chartering firm. Mr. Feder has been employed in the shipping industry in excess of 48 years, of which 43 were spent with Maritime Overseas Corporation, from which he retired as Executive Vice President and Director in December 1991. He has also served as Senior Vice President and Director of Overseas Shipholding Group Inc. and was a member of the Finance and Development Committee of the Board of Directors of such company. He has served as a Director of Teekay since June 1993. Mr. Feder is a member of the American Bureau of Shipping, the Connecticut Maritime Association and the Association of Shipbrokers and Agents USA Inc., as well as being a member of the Board of Directors of American Marine Advisors, Inc. CAPTAIN DAVID GLENDINNING joined the Chartering Department of the Company's London office in January 1987. Since then, he has worked in a number of senior positions within the organization, including Vice President, Commercial Operations, a position he held for two years prior to his January 1995 promotion to the position of Vice President, Marine and Commercial Operations. Captain Glendinning has 18 years' sea service on oil tankers of various types and sizes and is a Master Mariner with British Class 1 Foreign Going Certificate of Competency. STEVE G. K. HSU is Chairman of Oak Maritime (H.K.) Inc., Limited, a ship management company based in Hong Kong. Mr. Hsu is a Standing Supervisor of the National Association of Chinese Shipowners, Taiwan, a member of the American Bureau of Shipping, and a council member of the International General Committee of Bureau Veritas. He has served as a Director of Teekay since June 1993. THOMAS KUO-YUEN HSU has served 26 years with, and is presently Executive Director of, Expedo & Company (London) Ltd., which is part of the Expedo Group of Companies that manages a fleet of seven vessels, ranging in size from 30,000 dwt to 280,000 dwt. He has been a Committee Director of the Britannia Steam Ship Insurance Association Limited since 1988, and a Lloyd's Underwriting Member since 1983. He has served as a Director of Teekay since June 1993. AXEL KARLSHOEJ is President of Nordic Industries, a California general construction firm with whom he has served for the past 25 years. He is the older brother of the late J. Torben Karlshoej, the founder of the Company. He has served as a Director and Chairman of the Board of Teekay since June 1993. VINCENT C. LOK joined the Company in June 1993 as a financial analyst and was promoted to the position of Assistant Controller in July 1995, and to his current position of Controller in October 1997. Prior to joining the Company, Mr. Lok worked in the audit practice of Deloitte & Touche, Chartered Accountants, for four years. MADS T. MELDGAARD joined the Company's Chartering Department in January 1986 and served in the European and Singapore offices until December 1991, when he was appointed Chartering Manager in the 23 24 Vancouver office. In January 1994, he was promoted to the position of General Manager, Chartering, and then to Managing Director (Singapore) in September 1995. Effective July 1998, Mr. Meldgaard will become Vice President, Chartering, based in Vancouver. BJORN MOLLER succeeded Captain James Hood as President and Chief Executive Officer in April 1998. Mr. Moller has over 20 years experience in shipping and has served in senior management positions with the Company for more than 10 years. He has headed the Company's overall operations since January 1997, following his promotion to the position of Chief Operating Officer. Prior to this, Mr. Moller headed the Company's global chartering operations and business development activities. JUSTIN MURPHY joined the Company in October 1990 and has held various positions in the Company's operations and chartering departments. Mr. Murphy is currently serving as General Manager of Business Development at the Company's Vancouver office and, in August 1998, he will assume the position of Managing Director of the Company's Singapore office. Mr. Murphy has been employed in the chartering business for the past 20 years and is a Member of the Institute of Chartered Shipbrokers (MICS). YOSHIO NAGAO has been employed in the shipping industry for the past 31 years and is qualified as a Chief Engineer. He joined the Company from Sanko Steamship Co. Ltd., a Japanese ship owning company, where he served as Manager of their Technical Department. Mr. Nagao has served as Managing Director (Tokyo) since joining the Company in 1985. CAPTAIN VINAY S. PATWARDHAN has held senior positions with the Company since joining the organization in 1981, including Vice President, Ship Management, a position he held from January 1986 through January 1995, when he was promoted to his current position of President, Marine Operations. Captain Patwardhan has been employed in the shipping industry for the past 37 years, having experience in crude tanker, product carrier, O/B/O, ore oiler, container, general cargo and bulk carrier operations, with 11 years of command experience. Captain Patwardhan is a Master Mariner with Foreign Going Certificate of Competency. ITEM 11. EXECUTIVE COMPENSATION The aggregate annual compensation paid to the 14 executive officers and senior managers listed above was $2,428,797 for fiscal 1998, a portion of which was attributable to payments made pursuant to bonus plans of the Company, which consider both Company and individual performance for a given period. Currently, the non-employee directors of Teekay receive, in the aggregate, approximately $100,000 for their services and reimbursement of their out-of-pocket expenses in each fiscal year during which they are directors of Teekay. In fiscal 1998, the Company contributed an aggregate amount of $155,130 to provide pension and similar benefits for the 14 executive officers and senior managers listed above. ITEM 12.OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES Teekay's 1995 Stock Option Plan (the "Plan") entitles certain eligible officers, key employees (including senior sea staff), and directors of the Company to receive options to acquire Common Stock of Teekay. As of April 30, 1998, a total of 1,843,135 shares of Common Stock had been reserved for issuance under the Plan. As of such date, options to purchase a total of 1,160,251 shares of Common Stock were outstanding, with options to purchase a total of 564,267 shares then exercisable and with the directors and the 14 executive officers and senior managers listed above holding options to purchase a total of 554,375 shares, of which 325,375 are exercisable. The outstanding options are exercisable at prices ranging from $21.50 to $33.50 per share, with a weighted average exercise price of $26.67 per share, and expire between July 19, 2005 and June 13, 2007, ten years after the date of grant. 24 25 ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS As of March 31, 1998, Cirrus Trust and JTK Trust owned, in the aggregate, approximately 75% of the Company's outstanding Common Stock. The activities of Cirrus Trust and JTK Trust are under the common supervision of Messrs. Coady, Karlshoej and Thomas Hsu, directors of Teekay, and Mr. Shigeru Matsui, President of Matsui & Company, a Tokyo based ship brokerage firm. The beneficiaries of such trusts include charitable institutions and affiliated trusts. In April 1993, Teekay acquired all of the issued and outstanding shares of common stock of Palm Shipping Inc. from an affiliate of Teekay for a nominal purchase price, plus an amount to be paid at a later date (up to a maximum of $5.0 million plus accrued interest), contingent upon certain future events. The payment of such purchase price by Teekay shall not occur until after the 9 5/8% First Preferred Ship Mortgage Notes due 2003 have been paid in full. 25 26 PART II ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED Not applicable. PART III ITEM 15. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 16.CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS Not applicable. PART IV ITEM 17. FINANCIAL STATEMENTS Not applicable. ITEM 18. FINANCIAL STATEMENTS See item 19(a) below. ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS (a) The following financial statements and schedule, together with the report of Ernst & Young thereon, are filed as part of this Annual Report:
PAGE ---- Report of Independent Public Accountants.................... F-1 Consolidated Financial Statements Consolidated Statements of Income and Retained Earnings... F-2 Consolidated Balance Sheets............................... F-3 Consolidated Statements of Cash Flows..................... F-4 Notes to the Consolidated Financial Statements............ F-5 Schedule A to the Consolidated Financial Statements....... F-15
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required, are inapplicable or have been disclosed in the Notes to the Consolidated Financial Statements and therefore have been omitted. (b) The following exhibits are filed as part of this Annual Report: *2.1 Articles of Incorporation of Teekay, with all amendments thereto. **2.2 Bylaws of Teekay, with all amendments thereto. +2.3 Indenture dated as of July 15, 1993 among Teekay, VSSI Sun Inc., Diamond Spirit Inc., VSSI Deepsea Inc., VSSI Bulkers Inc., VSSI Star Inc., VSSI Ulsan Inc. and United States Trust Company of New York, as Trustee. +2.4 Registration Rights Agreement dated July 15, 1993 among Teekay, VSSI Sun Inc., Diamond Spirit Inc., VSSI Deepsea Inc., VSSI Bulkers Inc., VSSI Star Inc., VSSI Ulsan Inc., and Morgan Stanley & Co. Incorporated, as Placement Agent. +2.5 Specimen of Teekay's 9 5/8% First Preferred Ship Mortgage Note due 2003.
26 27 +++2.6 First Preferred Ship Mortgage dated July 15, 1993 by VSSI Sun Inc. to United States Trust Company of New York, as Trustee. +++2.7 Assignment of Time Charter dated as of July 15, 1993 from VSSI Sun Inc. to United States Trust Company of New York, as Trustee. +++2.8 Assignment of Insurance dated July 15, 1993 from VSSI Sun Inc. to United States Trust Company of New York, as Trustee. +2.9 Pledge Agreement and Irrevocable Proxy dated July 15, 1993 made by Teekay in favor of United States Trust Company of New York, as Trustee. +++2.10 Guarantee dated as of July 15, 1993 by VSSI Sun Inc. in favor of United States Trust Company of New York, as Trustee. +++2.11 Assignment of Freights and Hires dated July 15, 1993 from VSSI Sun Inc. to United States Trust Company of New York, as Trustee. +++2.12 Cash Collateral Account Agreement dated July 15, 1993 between VSSI Sun Inc. and United States Trust Company of New York, as Trustee. +2.13 Investment Account Agreement dated July 15, 1993 between Teekay and United States Trust Company of New York, as Trustee. +2.14 Assumption Agreement dated August 13, 1993 between United States Trust Company of New York, as Trustee, and Sebarok Spirit Inc. +2.15 Pledge Agreement and Irrevocable Proxy dated August 13, 1993 made by Teekay in favor of United States Trust Company of New York, as Trustee. **2.16 Registration Rights Agreement among Teekay, Tradewinds Trust Co. Ltd., as Trustee for the Cirrus Trust, and Worldwide Trust Services Ltd., as Trustee for the JTK Trust. **2.17 Specimen of Teekay Common Stock Certificate. ##2.18 Indenture dated January 29, 1996 among Teekay, VSSI Oceans Inc., VSSI Atlantic Inc., VSSI Appian Inc., Senang Spirit Inc., Exuma Spirit Inc., Nassau Spirit Inc., Andros Spirit Inc. and United States Trust Company of New York, as Trustee. ##2.19 Specimen of Teekay's First Preferred Ship Mortgage Notes Due 2008. ##++2.20 Bahamian Statutory Ship Mortgage dated January 29, 1996 by Nassau Spirit Inc. to United States Trust Company of New York. ##++2.21 Deed of Covenants dated January 29, 1996 by Nassau Spirit Inc. to United States Trust Company of New York. ##2.22 First Preferred Ship Mortgage dated January 29, 1996 by VSSI Oceans Inc. to United States Trust Company of New York, as Trustee. ##++2.23 Assignment of Time Charter dated January 29, 1996 by Nassau Spirit Inc. to United States Trust Company of New York, as Trustee. ##++2.24 Assignment of Insurance dated January 29, 1996 by Nassau Spirit Inc. to United States Trust Company of New York, as Trustee. ##2.25 Pledge Agreement and Irrevocable Proxy dated January 29, 1996 by Teekay in favor of United States Trust Company of New York, as Trustee. ##++2.26 Guarantee dated January 29, 1996 by Nassau Spirit Inc. in favor of United States Trust Company of New York, as Trustee. ##++2.27 Assignment of Freights and Hires dated January 29, 1996 by Nassau Spirit Inc. to United States Trust Company of New York, as Trustee. ##++2.28 Cash Collateral Account Agreement dated January 29, 1996 between Nassau Spirit Inc. and United States Trust Company of New York, as Trustee. ##2.29 Investment Account Agreement dated January 29, 1996 between Teekay and United States Trust Company of New York, as Trustee. **2.30 1995 Stock Option Plan. **2.31 Form of Indemnification Agreement between Teekay and each of its officers and directors.
27 28 **2.32 Reducing Revolving Credit Facility Agreement dated June 6, 1995 between Chiba Spirit Inc., VSSI Sun Inc., VSSI Gemini Inc., VSSI Carriers Inc., Mendana Spirit Inc., Musashi Spirit Inc., VSSI Condor Inc., Palm Monarch Inc., VSSI Drake Inc., VSSI Tokyo Inc., VSSI Marine Inc., Tasman Spirit Inc., Vancouver Spirit Inc. and Elcano Spirit Inc. and Den norske Bank AS, Christiania Bank og Kreditkasse, acting through its New York Branch, and Nederlandse Scheepshypotheskbank N.V. +2.33 Charter Party, as amended, dated September 21, 1989 between Palm Shipping Inc. and BP Shipping Limited. +2.34 Time Charter, as amended, dated August 14, 1986 between VSSI Sun Inc. and Palm Shipping Inc. +2.35 Time Charter, as amended, dated April 1, 1989 between Diamond Spirit Inc. and Palm Shipping Inc. +2.36 Time Charter, as amended, dated August 14, 1986 between VSSI Deepsea Inc. and Palm Shipping Inc. +2.37 Time Charter, as amended, dated August 14, 1986 between VSSI Bulkers Inc. and Palm Shipping Inc. +2.38 Time Charter, as amended, dated August 14, 1986 between VSSI Star Inc. and Palm Shipping Inc. +2.39 Time Charter, as amended, dated January 15, 1990 between VSSI Ulsan Inc. and Palm Shipping Inc. +2.40 Time Charter, as amended, dated June 1, 1993 between Sebarok Spirit Inc. and Palm Shipping Inc. #2.41 Time Charter, as amended, dated July 3, 1995 between VSSI Oceans Inc. and Palm Shipping Inc. #2.42 Time Charter, as amended, dated January 4, 1994 between VSSI Atlantic Inc. and Palm Shipping Inc. #2.43 Time Charter, as amended, dated February 1, 1992 between VSSI Appian Inc. and Palm Shipping Inc. #2.44 Time Charter, as amended, dated December 1, 1993 between Senang Spirit Inc. and Palm Shipping Inc. #2.45 Time Charter, as amended, dated August 1, 1992 between Exuma Spirit Inc. and Palm Shipping Inc. #2.46 Time Charter, as amended, dated May 1, 1992 between Nassau Spirit Inc. and Palm Shipping Inc. #2.47 Time Charter, as amended, dated November 1, 1992 between Andros Spirit Inc. and Palm Shipping Inc. #++2.48 Management Agreement, as amended, dated June 1, 1992 between Teekay Shipping Limited and Nassau Spirit Inc. @2.49 Amendment No. 1, dated October 7, 1996, to Reducing Revolving Credit Facility Agreement dated June 5, 1995 between Chiba Spirit Inc., VSSI Sun Inc., VSSI Gemini Inc., VSSI Carriers Inc., Mendana Spirit Inc., Musashi Spirit Inc., VSSI Condor Inc., Palm Monarch Inc., VSSI Drake Inc., VSSI Tokyo Inc., VSSI Marine Inc., Tasman Spirit Inc., Vancouver Spirit Inc. and Elcano Spirit Inc. and Den norske Bank AS, Christiania Bank og Kreditkasse, acting through its New York Branch, and Nederlandse Scheepshypotheskbank N.V. @2.50 Agreement, dated October 3, 1996, for a U.S. $90,000,000 Term Loan Facility to be made available to certain subsidiaries of Teekay Shipping Corporation by Christiania Bank og Kreditkasse, acting through its New York Branch, The Bank of Nova Scotia, and Banque Indosuez.
28 29 @2.51 Agreement, dated October 18, 1996, for a U.S. $120,000,000 Term Loan Facility to be made available to certain subsidiaries of Teekay Shipping Corporation by Den Norske Bank ASA, Nederlandse Scheepshypothesbank N.V., The Bank of New York, and Midland Bank PLC. 2.52 Agreement, dated January 26, 1998, a U.S. $200,000,000 Reducing Revolving Credit Facility to be made available to certain wholly-owned subsidiaries of Teekay Shipping Corporation by Den Norske Bank ASA, Christiania Bank Og Kreditkasse ASA, New York Branch, and the Bank of Nova Scotia. 27.1 Financial Data Schedule
- ------------ * Previously filed as an exhibit to the Company's Registration Statement on Form S-8, filed with the Securities and Exchange Commission (the "SEC") on October 27, 1995, and hereby incorporated by reference to such Registration Statement. ** Previously filed as an exhibit to the Company's Registration Statement on Form F-1 (Registration No. 33-7573-4), filed with the SEC on July 14, 1995, and hereby incorporated by reference to such Registration Statement. + Previously filed as an exhibit to the Company's Registration Statement on Form F-1 (Registration No. 33-68680), as declared effective by the SEC on November 29, 1993, and hereby incorporated by reference to such Registration Statement. ++ A schedule attached to this exhibit identifies all other documents not required to be filed as exhibits because such other documents are substantially identical to this exhibit. The schedule also sets forth material details by which the omitted documents differ from this exhibit. # Previously filed as an exhibit to the Company's Registration Statement on Form F-3 (Registration No. 33-65139), filed with the SEC on January 19, 1996, and hereby incorporated by reference to such Registration Statement. ## Previously filed as an exhibit to the Company's Annual Report on Form 20-F (File No. 1-12874), filed with the SEC on June 4, 1996, and hereby incorporated by reference to such Annual Report. @ Previously filed as an exhibit to the Company's Annual Report on Form 20-F (File No. 1-12874), filed with the SEC on June 11, 1997, and hereby incorporated by reference to such Annual Report. 29 30 SIGNATURE 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. TEEKAY SHIPPING CORPORATION By: /s/ Peter Antturi -------------------------------------- Peter Antturi Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Dated: May 20, 1998 30 31 AUDITORS' REPORT To the Shareholders of TEEKAY SHIPPING CORPORATION We have audited the accompanying consolidated balance sheets of TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES as of March 31, 1998 and 1997, and the related consolidated statements of income and retained earnings and cash flows for each of the three years in the period ended March 31, 1998. Our audits also included the financial schedule listed in the Index: Item 19(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Teekay Shipping Corporation and subsidiaries as at March 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 1998, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material aspects the information set forth therein. Nassau, Bahamas, May 11, 1998 /s/ ERNST & YOUNG Chartered Accountants F-1 32 TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31, -------------------------------- 1998 1997 1996 -------- -------- -------- NET VOYAGE REVENUES Voyage revenues...................................... $406,036 $382,249 $336,320 Voyage expenses...................................... 100,776 102,037 90,575 -------- -------- -------- Net voyage revenues 305,260 280,212 245,745 -------- -------- -------- OPERATING EXPENSES Vessel operating expenses............................ 70,510 72,586 67,841 Time charter hire expense............................ 10,627 3,461 2,503 Depreciation and amortization........................ 94,941 90,698 82,372 General and administrative........................... 21,542 19,209 16,750 -------- -------- -------- 197,620 185,954 169,466 -------- -------- -------- Income from vessel operations........................ 107,640 94,258 76,279 -------- -------- -------- Other items Interest expense..................................... (56,269) (60,810) (62,910) Interest income...................................... 7,897 6,358 6,471 Other income (note 10)............................... 11,236 2,824 9,230 -------- -------- -------- (37,136) (51,628) (47,209) -------- -------- -------- Net income........................................... 70,504 42,630 29,070 Retained earnings, beginning of the year............. 382,178 363,690 406,547 -------- -------- -------- 452,682 406,320 435,617 Exchange of redeemable preferred stock (note 8)...... (60,000) Dividends declared and paid.......................... (24,580) (24,142) (11,927) -------- -------- -------- Retained earnings, end of the year................... $428,102 $382,178 $363,690 ======== ======== ======== Earnings per common share (notes 1 and 8) - - basic.............................................. $ 2.46 $ 1.52 $ 1.17 - - diluted............................................ $ 2.44 $ 1.50 $ 1.17
The accompanying notes are an integral part of the consolidated financial statements. F-2 33 TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF U.S. DOLLARS)
AS AT MARCH 31, ------------------------ 1998 1997 ---------- ---------- ASSETS CURRENT Cash and cash equivalents................................... $ 87,953 $ 117,523 Marketable securities (notes 3)............................. 13,448 Accounts receivable - -- trade.................................................... 23,092 25,745 - -- other.................................................... 1,235 1,066 Prepaid expenses and other assets........................... 13,786 14,666 ---------- ---------- Total current assets................................. 139,514 159,000 ---------- ---------- Marketable securities (note 3).............................. 13,853 ---------- Vessels and equipment (notes 1,5 and 9) At cost, less accumulated depreciation of $500,779 (1997 -- $457,779)................................................. 1,297,883 1,187,399 Advances on vessels......................................... 8,938 ---------- ---------- Total vessels and equipment.......................... 1,297,883 1,196,337 ---------- ---------- Investment.................................................. 6,335 Other assets................................................ 8,933 11,166 ---------- ---------- $1,460,183 $1,372,838 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT Accounts payable............................................ $ 16,164 $ 16,315 Accrued liabilities (note 4)................................ 29,195 26,982 Current portion of long-term debt (note 5).................. 52,932 36,283 ---------- ---------- Total current liabilities............................ 98,291 79,580 ---------- ---------- Long-term debt (note 5)..................................... 672,437 663,443 ---------- ---------- Total liabilities.................................... 770,728 743,023 ---------- ---------- STOCKHOLDERS' EQUITY Capital stock (note 8)...................................... 261,353 247,637 Retained earnings........................................... 428,102 382,178 ---------- ---------- Total stockholders' equity........................... 689,455 629,815 ---------- ---------- $1,460,183 $1,372,838 ========== ==========
Commitments and contingencies (notes 5, 6, and 9) The accompanying notes are an integral part of the consolidated financial statements. F-3 34 TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 1998 1997 1996 ----------------- ----------------- ----------------- Cash and cash equivalents provided by (used for) OPERATING ACTIVITIES Net income.............................................. $ 70,504 $ 42,630 $ 29,070 Add (deduct) charges to operations not requiring a payment of cash and cash equivalents: Depreciation and amortization........................... 94,941 90,698 82,372 Gain on disposition of assets........................... (14,392) (8,784) Loss on repurchase of 9 5/8% Notes...................... 2,175 Equity income (net of dividend received: March 31, 1997--$282)........................................... (45) (2,414) (1,139) Other--net.............................................. 2,735 2,785 2,452 Change in non-cash working capital items related to operating activities (note 11)........................ 5,201 5,459 (5,556) ----------------- ----------------- ----------------- Net cash flow from operating activities................. 161,119 139,158 98,415 ----------------- ----------------- ----------------- FINANCING ACTIVITIES Proceeds from long-term debt............................ 208,600 240,000 448,000 Scheduled repayments of long-term debt.................. (33,876) (16,038) (57,850) Prepayments of long-term debt........................... (150,655) (250,078) (505,962) Scheduled payments on capital lease obligations......... (1,527) Prepayments of capital lease obligations................ (43,023) Net proceeds from issuance of Common Stock.............. 5,126 1,283 137,872 Cash dividends paid..................................... (15,990) (13,493) (7,094) Capitalized loan costs.................................. (994) (1,130) (5,965) ----------------- ----------------- ----------------- Net cash flow from financing activities................. 12,211 (39,456) (35,549) ----------------- ----------------- ----------------- INVESTING ACTIVITIES Expenditures for vessels and equipment (net of capital lease financing of: (1998--$NIL; 1997--$NIL; 1996--$44,550)............................ (197,199) (65,104) (79,293) Expenditures for drydocking............................. (18,376) (16,559) (7,405) Proceeds from disposition of assets..................... 33,863 28,428 Net cash flow from investment........................... 6,380 (2,296) 3,273 Proceeds on sale of available-for-sale securities....... 14,854 111,770 Purchases of available-for-sale securities.............. (42,154) (41,993) Other................................................... (268) ----------------- ----------------- ----------------- Net cash flow from investing activities................. (202,900) (83,959) 14,780 ----------------- ----------------- ----------------- (Decrease) increase in cash and cash equivalents........ (29,570) 15,743 77,646 Cash and cash equivalents, beginning of the year........ 117,523 101,780 24,134 ----------------- ----------------- ----------------- Cash and cash equivalents, end of the year.............. $ 87,953 $ 117,523 $ 101,780 ================= ================= =================
The accompanying notes are an integral part of the consolidated financial statements. F-4 35 TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (ALL TABULAR AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS, OTHER THAN SHARE OR PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. They include the accounts of Teekay Shipping Corporation ("Teekay"), which is incorporated under the laws of Liberia, and its wholly owned or controlled subsidiaries (the "Company"). Significant intercompany items and transactions have been eliminated upon consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain of the comparative figures have been reclassified to conform with the presentation adopted in the current period. Reporting currency The consolidated financial statements are stated in U.S. dollars because the Company operates in international shipping markets which utilize the U.S. dollar as the functional currency. Investment The Company's 50% interest in Viking Consolidated Shipping Corp. ("VCSC") is carried at the Company's original cost plus its proportionate share of the undistributed net income. On March 12, 1997, VCSC sold its one remaining vessel and it is not anticipated that the operating companies of VCSC will have active operations in the near future. The disposal of this vessel and the related gain on sale has been reflected in these consolidated financial statements (see Note 10 -- Other Income). Operating revenues and expenses Voyage revenues and expenses are recognized on the percentage of completion method of accounting. Estimated losses on voyages are provided for in full at the time such losses become evident. The consolidated balance sheets reflect the deferred portion of revenues and expenses applicable to subsequent periods. Voyage expenses comprise all expenses relating to particular voyages, including bunker fuel expenses, port fees, canal tolls, and brokerage commissions. Vessel operating expenses comprise all expenses relating to the operation of vessels, including crewing, repairs and maintenance, insurance, stores and lubes, and miscellaneous expenses including communications. Marketable securities The Company's investments in marketable securities are classified as available-for-sale securities and are carried at fair value. Net unrealized gains or losses on available-for-sale securities, if material, are reported as a separate component of stockholders' equity. Vessels and equipment All pre-delivery costs incurred during the construction of newbuildings, including interest costs, and supervision and technical costs are capitalized. The acquisition cost and all costs incurred to restore used F-5 36 TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONT'D) (ALL TABULAR AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS, OTHER THAN SHARE OR PER SHARE DATA) vessel purchases to the standard required to properly service the Company's customers are capitalized. Depreciation is calculated on a straight-line basis over a vessel's useful life, estimated by the Company to be twenty years from the date a vessel is initially placed in service. Interest costs capitalized to vessels and equipment for the years ended March 31, 1998, 1997 and 1996 aggregated $283,000, $232,000, and $106,000, respectively. Expenditures incurred during drydocking are capitalized and amortized on a straight-line basis over the period until the next anticipated drydocking. When significant drydocking expenditures recur prior to the expiry of this period, the remaining balance of the original drydocking is expensed in the month of the subsequent drydocking. Drydocking expenses amortized for the years ended March 31, 1998, 1997 and 1996 aggregated $11,737,000, $10,941,000, and $8,617,000 respectively. Vessels acquired pursuant to bareboat hire purchase agreements are capitalized as capital leases and are amortized over the estimated useful life of the acquired vessel. Other assets Loan costs, including fees, commissions and legal expenses, are capitalized and amortized over the term of the relevant loan. Amortization of loan costs is included in interest expense. Interest rate swap agreements The differential to be paid or received is accrued as interest rates change and is recognized as an adjustment to interest expenses. Premiums and receipts, if any, are recognized as adjustments to interest expense over the lives of the individual contracts. Forward contracts The Company enters into forward contracts as a hedge against changes in foreign exchange rates. Market value gains and losses are deferred and recognized during the period in which the hedged transaction is recorded in the accounts. Cash flows Cash interest paid during the years ended March 31, 1998, 1997 and 1996 totaled $55,141,000, $57,400,000, and $59,021,000, respectively. The Company classifies all highly liquid investments with a maturity date of three months or less when purchased as cash and cash equivalents. Income taxes The legal jurisdictions of the countries in which the Company and the majority of its subsidiaries are incorporated do not impose income taxes upon shipping-related activities. Earnings per share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per share". SFAS 128 requires dual presentation of basic earnings per share ("EPS") and diluted EPS on the face of all statements of F-6 37 TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONT'D) (ALL TABULAR AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS, OTHER THAN SHARE OR PER SHARE DATA) earnings ending after December 15, 1997 for all entities with complex capital structures. The Company's EPS for all periods presented herein are in conformity with SFAS 128 (see Note 8--Capital Stock). Accounting for Stock-Based Compensation Effective April 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) companies to record compensation costs associated with employee stock option awards, based on estimated fair values at the grant dates. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 (APB 25) "Accounting for Stock Issued to Employees" and has disclosed the required pro forma effect on net income and earning per share as if the fair value method of accounting as prescribed in SFAS 123 had been applied (see Note 8--Capital Stock). 2. BUSINESS OPERATIONS The Company is engaged in the ocean transportation of petroleum cargoes worldwide through the ownership and operation of a fleet of tankers. All of the Company's revenues are earned in international markets. A single customer, an international oil company, accounted for approximately 14% ($56,537,000) of the Company's consolidated voyage revenues for fiscal 1998. Another customer, also an international oil company, accounted for approximately 13% ($48,696,000), of consolidated voyage revenues for fiscal 1997. No more than one customer accounted for over 10% of the Company's consolidated voyage revenues in any of the last three fiscal years. 3. INVESTMENTS IN MARKETABLE SECURITIES
GROSS GROSS APPROXIMATE UNREALIZED UNREALIZED MARKET AND COST GAINS LOSSES CARRYING VALUE ------- ---------- ---------- -------------- March 31, 1998 Available-for-sale securities............... $27,304 $13 $(16) $27,301
The cost and approximate market value of available-for-sale securities by contractual maturity, as at March 31, 1998, are shown as follows:
APPROXIMATE MARKET AND COST CARRYING VALUE ------- -------------- Less than one year.......................................... $13,456 $13,448 Due after one year through five years....................... 13,848 13,853 ------- ------- $27,304 $27,301 ======= =======
F-7 38 TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONT'D) (ALL TABULAR AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS, OTHER THAN SHARE OR PER SHARE DATA) 4. ACCRUED LIABILITIES
MARCH 31, ------------------ 1998 1997 ------- ------- Voyage and vessel........................................... $15,845 $15,458 Interest.................................................... 9,272 9,294 Payroll and benefits........................................ 4,078 2,230 ------- ------- $29,195 $26,982 ======= =======
5. LONG-TERM DEBT
MARCH 31, -------------------- 1998 1997 -------- -------- Revolving Credit Facility................................... $129,000 First Preferred Ship Mortgage Notes (8.32%) U.S. dollar debt due through 2008......................... 225,000 $225,000 First Preferred Ship Mortgage Notes (9 5/8%) U.S. dollar debt due through 2003......................... 123,718 151,200 Floating rate (1998: LIBOR + 0.55% to 1%; 1997: LIBOR + 0.65% to 1 1/2%) U.S. dollar debt due through 2009...................................................... 247,651 323,526 -------- -------- 725,369 699,726 Less current portion........................................ 52,932 36,283 -------- -------- $672,437 $663,443 ======== ========
In January 1998, the Company refinanced approximately $105.0 million of its floating rate debt and replaced the previous corporate revolving credit facility with a new $200 million corporate revolving credit facility (the "Revolver") at improved rates and credit terms. The amount available under the Revolver reduces by $10.0 million semi-annually commencing in July 1999, with a final balloon reduction in January 2006. Interest payments are based on LIBOR plus a margin depending on the financial leverage of the Company; at March 31, 1998 the margin was +0.50%. As at March 31, 1998, the undrawn amount available under the Revolver was $71.0 million. The Revolver is collateralized by first priority mortgages granted on eight of the Company's Aframax tankers, together with certain other related collateral, and a guarantee from the Company for all amounts outstanding under the Revolver. The 8.32% First Preferred Ship Mortgage Notes due February 1, 2008 (the "8.32% Notes") are collateralized by first preferred mortgages on seven of the Company's Aframax tankers, together with certain other related collateral, and are guaranteed by seven subsidiaries of Teekay that own the mortgaged vessels (the "8.32% Notes Guarantor Subsidiaries") to a maximum of 95% of the fair value of their net assets. As at March 31, 1998, the fair value of these net assets approximated $252.0 million. The 8.32% Notes are also subject to a sinking fund, which will retire $45.0 million principal amount of the 8.32% Notes on each February 1, commencing 2004. Upon the 8.32% Notes achieving Investment Grade Status and subject to certain other conditions, the guarantees of the 8.32% Notes Guarantor Subsidiaries will terminate, all of the collateral securing the obligations of the Company and the 8.32% Notes Guarantor Subsidiaries under the Indenture and the Security Documents will be released (whereupon the Notes will become general unsecured obligations of the Company) and certain covenants under the Indenture will no longer be applicable to the Company. F-8 39 TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONT'D) (ALL TABULAR AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS, OTHER THAN SHARE OR PER SHARE DATA) The 9 5/8% First Preferred Ship Mortgage Notes due July 15, 2003 (the "9 5/8% Notes") are collateralized by first preferred mortgages on six of the Company's Aframax tankers, together with certain other related collateral, and are guaranteed by six subsidiaries of Teekay that own the mortgaged vessels (the "9 5/8% Notes Guarantor Subsidiaries") to a maximum of 95% of the fair value of their net assets. As at March 31, 1998, the fair value of these net assets approximated $186.0 million. The 9 5/8% Notes are also subject to a sinking fund, which will retire $25.0 million principal amount of the 9 5/8% Notes on each July 15, which commenced on July 15, 1997. During fiscal 1998, the Company repurchased a principal amount of $26.3 million of the 9 5/8% Notes. During fiscal 1996, the Company repurchased $23.8 million of these notes, which was applied to reduce the July 15, 1997 sinking fund requirement. The 9 5/8% Notes are redeemable at the option of the Company, in whole or in part, on or after July 15, 1998 at the following redemption prices expressed as a percentage of principal:
JULY 15 REDEMPTION PRICE ------- ---------------- 1998................................................ 104.813% 1999................................................ 102.406% 2000................................................ 100.000%
Upon a Change of Control, each 9 5/8% Note holder and 8.32% Note holder has the right, unless the Company elects to redeem these Notes, to require the Company to purchase these Notes at 101% of their principal amount plus accrued interest. Condensed financial information regarding the Company, the 9 5/8% Notes Guarantor Subsidiaries, the 8.32% Notes Guarantor Subsidiaries and non-guarantor subsidiaries of the Company is set out in Schedule A of these consolidated financial statements. All floating rate loans are collateralized by first preferred mortgages on the vessels to which the loans relate, together with certain other collateral, and guarantees from Teekay. Among other matters, the long-term debt agreements generally provide for such items as maintenance of certain vessel market value to loan ratios and minimum consolidated financial covenants, prepayment privileges (in some cases with penalties), and restrictions against the incurrence of additional debt and new investments by the individual subsidiaries without prior lender consent. The amount of Restricted Payments, as defined, that the Company can make, including dividends and purchases of its own capital stock, is limited as of March 31, 1998, to $74.0 million. As at March 31, 1998, the Company was committed to a series of interest rate swap agreements whereby $150 million of the Company's floating rate debt was swapped with fixed rate obligations having an average remaining term of 7.5 months. The swap agreements expire between October 1998 and December 1998. These arrangements effectively change the Company's interest rate exposure on $150 million of debt from a floating LIBOR rate to an average fixed rate 5.86%. The Company is exposed to credit loss in the event of non-performance by the counter parties to the interest rate swap agreements; however, the Company does not anticipate non-performance by any of the counter parties. The aggregate annual long-term debt principal repayments required to be made for the five fiscal years subsequent to March 31, 1998 are $52,932,000 (fiscal 1999), $53,058,000 (fiscal 2000), $53,191,000 (fiscal 2001), $62,332,000 (fiscal 2002), and $72,199,000 (fiscal 2003). F-9 40 TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONT'D) (ALL TABULAR AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS, OTHER THAN SHARE OR PER SHARE DATA) 6. LEASES Charters-out Time charters to third parties of the Company's vessels are accounted for as operating leases. The minimum future revenues to be received on time charters currently in place are $46,222,000 (fiscal 1999), $39,631,000 (fiscal 2000), $39,602,000 (fiscal 2001), $39,562,000 (fiscal 2002), $39,562,000 (fiscal 2003), and $215,533,000 thereafter. The minimum future revenues should not be construed to reflect total charter hire revenues for any of the years. Charters-in Minimum commitments under vessel operating leases are $19,681,000 (fiscal 1999), $9,445,000 (fiscal 2000), $6,844,000 (fiscal 2001), and $412,000 (fiscal 2002). 7. FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts of all financial instruments approximate fair market value except for the following: Long-term debt -- The fair values of the Company's fixed rate long-term debt are based on either quoted market prices or estimated using discounted cash flow analyses, based on rates currently available for debt with similar terms and remaining maturities. Interest rate swap agreements -- The fair value of interest rate swaps, used for hedging purposes, is the estimated amount that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current credit worthiness of the swap counter parties. The estimated fair value of the Company's financial instruments is as follows:
MARCH 31, 1998 MARCH 31, 1997 -------------------- -------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Cash, cash equivalents and marketable securities............................ $115,254 $115,254 $117,523 $117,523 Long-term debt.......................... 725,369 737,785 699,726 695,265 Interest rate swap agreements -- net receivable (payable) position......... (176) 1,154 Foreign currency contracts.............. 339 (181)
The Company transacts with investment grade rated financial institutions and requires no collateral from these institutions. F-10 41 TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONT'D) (ALL TABULAR AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS, OTHER THAN SHARE OR PER SHARE DATA) 8. CAPITAL STOCK
AUTHORIZED ---------- 25,000,000 Preferred Stock with a par value of $1 per share 125,000,000 Common Stock with no par value
COMMON THOUSANDS PREFERRED THOUSANDS STOCK OF SHARES STOCK OF SHARES -------- --------- --------- --------- Issued and outstanding Balance March 31, 1995.................... $ 33,000 36,000 $1 600 May 15, 1995 1-for-2 Reverse Common Stock Split................................... (18,000) July 19, 1995 Initial Public Offering 6,900,000 shares at $21.50 per share of Common Stock (net of share issue costs).................................. 137,613 6,900 July 19, 1995 Exchange of Redeemable Preferred Stock for 2,790,698 shares of Common Stock............................ 60,000 2,791 (1) (600) Reinvested Dividends...................... 4,833 201 Exercise of Stock Options................. 259 12 -------- ------- -- ---- Balance March 31, 1996.................... 235,705 27,904 0 0 Reinvested Dividends...................... 10,649 364 Exercise of Stock Options................. 1,283 60 -------- ------- -- ---- Balance March 31, 1997.................... 247,637 28,328 0 0 Reinvested Dividends...................... 8,590 273 Exercise of Stock Options................. 5,126 232 -------- ------- -- ---- Balance March 31, 1998.................... $261,353 28,833 $0 0 ======== ======= == ====
The Company has reserved 1,844,135 shares of Common Stock for issuance upon exercise of options granted pursuant to the Company's 1995 Stock Option Plan (the "Plan"). During fiscal 1998, 1997 and 1996, the Company granted options under the Plan to acquire up to 359,750, 343,250 and 796,750 shares of Common Stock (the "Grants"), respectively, to certain eligible officers, key employees (including senior sea staff), and directors of the Company. The options have a 10-year term and follow a graded-vesting schedule. The options granted during fiscal 1998 and 1997 vest equally over four years from the date of grant. At March 31, 1998, all options granted during fiscal 1996 have vested. F-11 42 TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONT'D) (ALL TABULAR AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS, OTHER THAN SHARE OR PER SHARE DATA) A summary of the Company's stock option activity, and related information for the years ended March 31, follows:
1998 1997 1996 -------------------------- -------------------------- -------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ------- ---------------- ------- ---------------- ------- ---------------- (000S) (000S) (000S) Outstanding-beginning of year....................... 1,056 $23.40 779 $21.50 0 $21.50 Granted...................... 360 33.50 343 27.38 797 21.50 Exercised.................... (232) 22.02 (60) 21.50 (12) 21.50 Forfeited.................... (23) 30.39 (6) 24.00 (6) 21.50 ----- ------ ----- ------ --- ------ Outstanding-end of year...... 1,161 $26.66 1,056 $23.40 779 $21.50 ===== ====== ===== ====== === ====== Exercisable at end of year... 565 $22.14 519 $21.50 383 $21.50 ===== ====== ===== ====== === ====== Weighted-average fair value of options granted during the year (per option)...... $8.13 $6.72 $5.16 ====== ====== ======
Exercise prices for the options outstanding as of March 31, 1998 ranged from $21.50 to $33.50 and have a weighted-average remaining contractual life of 8.10 years. The Company applies APB 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its employee stock options (see Note 1--Accounting for Stock-Based Compensation). Under APB 25, because the exercise price of the Company's employee stock options equals the market price of underlying stock on the date of grant, no compensation expense is recognized. Had the Company recognized compensation costs for the Grants consistent with the methods recommended by SFAS 123 (see Note 1--Accounting for Stock-Based Compensation), the Company's net income and earnings per share for those fiscal years would have been stated at the pro forma amounts as follows:
YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 1998 1997 1996 ---------- ---------- ---------- NET INCOME: As reported........................................ $70,504 $42,630 $29,070 Pro forma.......................................... 69,090 40,679 26,842 BASIC EARNINGS PER COMMON SHARE: As reported........................................ 2.46 1.52 1.17 Pro forma.......................................... 2.41 1.45 1.08 DILUTED EARNINGS PER COMMON SHARE: As reported........................................ 2.44 1.50 1.17 Pro forma.......................................... 2.39 1.44 1.08
F-12 43 TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONT'D) (ALL TABULAR AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS, OTHER THAN SHARE OR PER SHARE DATA) Basic earnings per share is based upon the following weighted average number of common shares outstanding: 28,655,000 shares at March 31, 1998; 28,138,000 shares at March 31, 1997; and 24,837,000 shares at March 31, 1996. Diluted earnings per share, which gives effect to the aforementioned stock options, is based upon the following weighted average number of common shares outstanding: 28,870,000 shares at March 31, 1998; 28,339,000 shares at March 31, 1997; and 24,902,000 shares at March 31, 1996. The fair values of the Grants were estimated on the dates of grant using the Black-Scholes option-pricing model with the following assumptions: risk-free average interest rates of 6.29%, 6.44%, and 6.14% for fiscal 1998, fiscal 1997 and fiscal 1996, respectively; dividend yield of 3.0%; expected volatility of 25%; and expected lives of 5 years. 9. COMMITMENTS AND CONTINGENCIES As at March 31, 1998, the Company was committed to foreign exchange contracts for the forward purchase of approximately Japanese Yen 100 million and Singapore dollars 15.9 million for U.S. dollars, at an average rate of Japanese Yen 128.3 per U.S. dollar and Singapore dollar 1.68 per U.S. dollar, respectively, for the purpose of hedging accounts payable and accrued liabilities. 10. OTHER INCOME
YEAR ENDED MARCH 31, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Gain on disposition of assets...................... $14,392 $8,784 Equity in results of 50% owned company............. 45 2,696 1,139 Write off of loan costs due to refinancing......... (1,308) Loss on extinguishment of debt..................... (2,175) Miscellaneous -- net............................... 282 128 (693) ------- ------ ------ $11,236 $2,824 $9,230 ======= ====== ======
For the year ended March 31, 1997, Equity in results of the 50% owned company included a $2,732,000 gain on a vessel sale. Gross realized gains and (losses) on sales of available-for-sale securities for the year ended March 31, 1996 aggregated $1,787,000 and ($1,732,000), respectively. 11. CHANGE IN NON-CASH WORKING CAPITAL ITEMS RELATED TO OPERATING ACTIVITIES
YEAR ENDED MARCH 31, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Accounts receivable................................ $ 2,484 $(1,873) $(4,792) Prepaid expenses and other assets.................. 880 665 (2,058) Accounts payable................................... 5,814 4,554 281 Accrued liabilities................................ (3,977) 2,113 1,013 ------- ------- ------- $ 5,201 $ 5,459 $(5,556) ======= ======= =======
12. SUBSEQUENT EVENTS In May 1998, the Company commenced an offering of up to 8,050,000 shares of Common Stock, of which 2,800,000 shares are being offered by the Company and up to 5,250,000 shares are being offered F-13 44 TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONT'D) (ALL TABULAR AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS, OTHER THAN SHARE OR PER SHARE DATA) by a selling shareholder. The net proceeds to the Company of the offering will be used to redeem a portion of the 9 5/8% Notes. Subsequent to March 31, 1998 the Company entered into an agreement (subject to certain conditions) for the construction of two Aframax vessels for a cost of $76.0 million, scheduled for delivery in July and September of 1999. F-14 45 SCHEDULE A TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS (IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED MARCH 31, 1998 -------------------------------------------------------------------------------------------- 9 5/8% NOTES 8.32% NOTES TEEKAY TEEKAY GUARANTOR GUARANTOR NON-GUARANTOR SHIPPING CORP. SHIPPING CORP. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS & SUBSIDIARIES -------------- ------------ ------------ ------------- ------------ -------------- Net voyage revenues............... $ $ 52,762 $ 36,443 $442,888 $(226,833) $305,260 Operating expenses................ 362 23,318 34,344 366,429 (226,833) 197,620 -------- -------- -------- -------- --------- -------- Income (loss) from vessel operations.................... (362) 29,444 2,099 76,459 107,640 Net interest income (expense)..... (33,011) 532 391 (16,284) (48,372) Equity in net income of subsidiaries.................... 105,936 (105,891) 45 Other income (loss)............... (2,059) 29,179 (15,929) 11,191 -------- -------- -------- -------- --------- -------- NET INCOME........................ 70,504 29,976 2,490 89,354 (121,820) 70,504 Retained earnings (deficit), beginning of the year........... 382,178 11,056 (18,124) 144,125 (137,057) 382,178 Dividends declared and paid....... (24,580) (15,600) (18,690) 34,290 (24,580) -------- -------- -------- -------- --------- -------- RETAINED EARNINGS (DEFICIT), END OF THE YEAR..................... $428,102 $ 25,432 $(34,324) $233,479 $(224,587) $428,102 ======== ======== ======== ======== ========= ========
YEAR ENDED MARCH 31, 1997 -------------------------------------------------------------------------------------------- 9 5/8% NOTES 8.32% NOTES TEEKAY TEEKAY GUARANTOR GUARANTOR NON-GUARANTOR SHIPPING CORP. SHIPPING CORP. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS & SUBSIDIARIES -------------- ------------ ------------ ------------- ------------ -------------- Net voyage revenues............... $ $ 30,553 $ 35,960 $411,216 $(197,517) $280,212 Operating expenses................ 494 22,588 34,254 326,135 (197,517) 185,954 -------- -------- -------- -------- --------- -------- Income (loss) from vessel operations.................... (494) 7,965 1,706 85,081 94,258 Net interest income (expense)..... (34,420) 114 210 (20,356) (54,452) Equity in net income of subsidiaries.................... 77,352 (74,656) 2,696 Other income...................... 192 12,707 (12,771) 128 -------- -------- -------- -------- --------- -------- NET INCOME........................ 42,630 8,079 1,916 77,432 (87,427) 42,630 Retained earnings (deficit), beginning of the year........... 363,690 17,377 (1,245) 66,693 (82,825) 363,690 Dividends declared and paid....... (24,142) (14,400) (18,795) 33,195 (24,142) -------- -------- -------- -------- --------- -------- RETAINED EARNINGS (DEFICIT), END OF THE YEAR..................... $382,178 $ 11,056 $(18,124) $144,125 $(137,057) $382,178 ======== ======== ======== ======== ========= ========
YEAR ENDED MARCH 31, 1996 -------------------------------------------------------------------------------------------- 9 5/8% NOTES 8.32% NOTES TEEKAY TEEKAY GUARANTOR GUARANTOR NON-GUARANTOR SHIPPING CORP. SHIPPING CORP. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS & SUBSIDIARIES -------------- ------------ ------------ ------------- ------------ -------------- Net voyage revenues............... $ $ 29,755 $ 49,402 $390,450 $(223,862) $245,745 Operating expenses................ 835 20,681 31,861 339,951 (223,862) 169,466 -------- -------- -------- -------- --------- -------- Income (loss) from vessel operations.................... (835) 9,074 17,541 50,499 76,279 Net interest income (expense)..... (18,397) 394 (13,759) (24,677) (56,439) Equity in net income of subsidiaries.................... 47,043 (45,904) 1,139 Other income...................... 1,259 15,940 (9,108) 8,091 -------- -------- -------- -------- --------- -------- NET INCOME........................ 29,070 9,468 3,782 41,762 (55,012) 29,070 Retained earnings (deficit), beginning of the year........... 406,547 22,309 (5,027) 89,301 (106,583) 406,547 Exchange of redeemable preferred stock........................... (60,000) (60,000) Dividends declared and paid....... (11,927) (14,400) (64,370) 78,770 (11,927) -------- -------- -------- -------- --------- -------- RETAINED EARNINGS (DEFICIT), END OF THE YEAR..................... $363,690 $ 17,377 $ (1,245) $ 66,693 $ (82,825) $363,690 ======== ======== ======== ======== ========= ========
- --------------- (See Note 5) F-15 46 SCHEDULE A TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES CONDENSED BALANCE SHEETS (IN THOUSANDS OF U.S. DOLLARS)
AS AT MARCH 31, 1998 -------------------------------------------------------------------------------------------- 9 5/8% NOTES 8.32% NOTES TEEKAY TEEKAY GUARANTOR GUARANTOR NON-GUARANTOR SHIPPING CORP. SHIPPING CORP. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS & SUBSIDIARIES -------------- ------------ ------------ ------------- ------------ -------------- ASSETS Cash and cash equivalents...... $ 22 $ 29,595 $ 10,687 $ 47,649 $ $ 87,953 Other current assets........... 13 710 722 165,006 (114,890) 51,561 ---------- -------- -------- ---------- ----------- ---------- Total current assets......... 35 30,305 11,409 212,655 (114,890) 139,514 Vessels and equipment (net).... 129,050 327,460 841,373 1,297,883 Advances due from subsidiaries................. 324,460 (324,460) Other assets (principally marketable securities, and investments in subsidiaries)................ 719,369 22,791 (719,374) 22,786 ---------- -------- -------- ---------- ----------- ---------- $1,043,864 $159,355 $338,869 $1,076,819 $(1,158,724) $1,460,183 ========== ======== ======== ========== =========== ========== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities............ $ 5,691 $ 2,113 $ 3,126 $ 184,840 $ (97,479) $ 98,291 Long-term debt................. 348,718 323,719 672,437 Due to (from) affiliates....... (18) 737 323,900 (324,619) ---------- -------- -------- ---------- ----------- ---------- Total liabilities............ 354,409 2,095 3,863 832,459 (422,098) 770,728 ---------- -------- -------- ---------- ----------- ---------- STOCKHOLDERS' EQUITY Capital stock.................. 261,353 10 23 5,933 (5,966) 261,353 Contributed capital............ 131,818 369,307 4,948 (506,073) Retained earnings (deficit).... 428,102 25,432 (34,324) 233,479 (224,587) 428,102 ---------- -------- -------- ---------- ----------- ---------- Total stockholders' equity... 689,455 157,260 335,006 244,360 (736,626) 689,455 ---------- -------- -------- ---------- ----------- ---------- $1,043,864 $159,355 $338,869 $1,076,819 $(1,158,724) $1,460,183 ========== ======== ======== ========== =========== ==========
AS AT MARCH 31, 1997 -------------------------------------------------------------------------------------------- 9 5/8% NOTES 8.32% NOTES TEEKAY TEEKAY GUARANTOR GUARANTOR NON-GUARANTOR SHIPPING CORP. SHIPPING CORP. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS & SUBSIDIARIES -------------- ------------ ------------ ------------- ------------ -------------- ASSETS Cash and cash equivalents...... $ 32 $ 9,248 $ 8,732 $ 99,511 $ $ 117,523 Other current assets........... 128 667 755 40,009 (82) 41,477 ---------- -------- -------- ---------- ----------- ---------- Total current assets......... 160 9,915 9,487 139,520 (82) 159,000 Vessels and equipment (net).... 137,486 344,315 714,536 1,196,337 Advances due from subsidiaries................. 362,704 (362,704) Other assets (principally investments in subsidiaries)................ 649,337 11,171 (643,007) 17,501 ---------- -------- -------- ---------- ----------- ---------- $1,012,201 $147,401 $353,802 $ 865,227 $(1,005,793) $1,372,838 ========== ======== ======== ========== =========== ========== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities............ $ 7,386 $ 4,573 $ 2,581 $ 65,122 $ (82) $ 79,580 Long-term debt................. 375,000 288,443 663,443 Due to (from) parent........... (56) 15 356,656 (356,615) ---------- -------- -------- ---------- ----------- ---------- Total liabilities............ 382,386 4,517 2,596 710,221 (356,697) 743,023 ---------- -------- -------- ---------- ----------- ---------- STOCKHOLDERS' EQUITY Capital stock.................. 247,637 10 23 5,933 (5,966) 247,637 Contributed capital............ 131,818 369,307 4,948 (506,073) Retained earnings (deficit).... 382,178 11,056 (18,124) 144,125 (137,057) 382,178 ---------- -------- -------- ---------- ----------- ---------- Total stockholders' equity... 629,815 142,884 351,206 155,006 (649,096) 629,815 ---------- -------- -------- ---------- ----------- ---------- $1,012,201 $147,401 $353,802 $ 865,227 $(1,005,793) $1,372,838 ========== ======== ======== ========== =========== ==========
- --------------- (See Note 5) F-16 47 SCHEDULE A TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED MARCH 31, 1998 -------------------------------------------------------------------------------------------- 9 5/8% NOTES 8.32% NOTES TEEKAY TEEKAY GUARANTOR GUARANTOR NON-GUARANTOR SHIPPING CORP. SHIPPING CORP. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS & SUBSIDIARIES -------------- ------------ ------------ ------------- ------------ -------------- Cash and cash equivalents provided by (used for) OPERATING ACTIVITIES Net cash flow from operating activities...................... $(32,624) $ 40,482 $ 23,489 $ 129,772 $ $ 161,119 -------- -------- -------- --------- --------- --------- FINANCING ACTIVITIES Proceeds from long-term debt....... 208,600 208,600 Repayments of long-term debt....... (29,056) (155,475) (184,531) Net proceeds from issuance of Common Stock...................... 5,126 5,126 Other.............................. 22,254 (15,562) (17,968) (5,708) (16,984) -------- -------- -------- --------- --------- --------- Net cash flow from financing activities...................... (1,676) (15,562) (17,968) 47,417 12,211 -------- -------- -------- --------- --------- --------- INVESTING ACTIVITIES Expenditures for vessels and equipment......................... (4,573) (3,566) (207,436) (215,575) Other.............................. 34,290 (21,615) 12,675 -------- -------- -------- --------- --------- --------- Net cash flow from investing activities...................... 34,290 (4,573) (3,566) (229,051) (202,900) -------- -------- -------- --------- --------- --------- (Decrease) increase in cash and cash equivalents.................. (10) 20,347 1,955 (51,862) (29,570) Cash and cash equivalents, beginning of the year............. 32 9,248 8,732 99,511 117,523 -------- -------- -------- --------- --------- --------- Cash and cash equivalents, end of the year.......................... $ 22 $ 29,595 $ 10,687 $ 47,649 $ $ 87,953 ======== ======== ======== ========= ========= =========
YEAR ENDED MARCH 31, 1997 -------------------------------------------------------------------------------------------- 9 5/8% NOTES 8.32% NOTES TEEKAY TEEKAY GUARANTOR GUARANTOR NON-GUARANTOR SHIPPING CORP. SHIPPING CORP. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS & SUBSIDIARIES -------------- ------------ ------------ ------------- ------------ -------------- Cash and cash equivalents provided by (used for) OPERATING ACTIVITIES Net cash flow from operating activities...................... $(30,553) $ 20,018 $ 23,161 $ 126,532 $ $ 139,158 -------- -------- -------- --------- --------- --------- FINANCING ACTIVITIES Proceeds from long-term debt....... 240,000 240,000 Repayments of long-term debt....... (266,116) (266,116) Net proceeds from issuance of Common Stock...................... 1,283 1,283 Other.............................. 29,003 (14,456) (18,780) (10,390) (14,623) -------- -------- -------- --------- --------- --------- Net cash flow from financing activities...................... 30,286 (14,456) (18,780) (36,506) (39,456) -------- -------- -------- --------- --------- --------- INVESTING ACTIVITIES Expenditures for vessels and equipment......................... (4,927) (859) (75,877) (81,663) Other.............................. 272 (2,568) (2,296) -------- -------- -------- --------- --------- --------- Net cash flow from investing activities...................... 272 (4,927) (859) (78,445) (83,959) -------- -------- -------- --------- --------- --------- Increase in cash and cash equivalents....................... 4 635 3,522 11,582 15,743 Cash and cash equivalents, beginning of the year............. 28 8,613 5,210 87,929 101,780 -------- -------- -------- --------- --------- --------- Cash and cash equivalents, end of the year.......................... $ 32 $ 9,248 $ 8,732 $ 99,511 $ $ 117,523 ======== ======== ======== ========= ========= =========
YEAR ENDED MARCH 31, 1996 -------------------------------------------------------------------------------------------- 9 5/8% NOTES 8.32% NOTES TEEKAY TEEKAY GUARANTOR GUARANTOR NON-GUARANTOR SHIPPING CORP. SHIPPING CORP. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS & SUBSIDIARIES -------------- ------------ ------------ ------------- ------------ -------------- Cash and cash equivalents provided by (used for) OPERATING ACTIVITIES Net cash flow from operating activities...................... $ (23,772) $ 17,284 $ 22,798 $ 82,105 $ $ 98,415 --------- -------- -------- --------- --------- --------- FINANCING ACTIVITIES Proceeds from long-term debt....... 225,000 223,000 448,000 Repayments of long-term debt....... (22,580) (208,964) (332,268) (563,812) Repayments of capital lease obligations....................... (44,550) (44,550) Net proceeds from issuance of Common Stock...................... 137,872 137,872 Other.............................. (29,879) (14,400) (133,234) 164,454 (13,059) --------- -------- -------- --------- --------- --------- Net cash flow from financing activities...................... 310,413 (14,400) (386,748) 55,186 (35,549) --------- -------- -------- --------- --------- --------- INVESTING ACTIVITIES Expenditures for vessels and equipment......................... (656) (3,223) (82,819) (86,698) Proceeds from disposition of assets............................ 28,428 28,428 Other.............................. (286,710) 499 369,307 (10,046) 73,050 --------- -------- -------- --------- --------- --------- Net cash flow from investing activities...................... (286,710) (157) 366,084 (64,437) 14,780 --------- -------- -------- --------- --------- --------- (Decrease) increase in cash and cash equivalents.................. (69) 2,727 2,134 72,854 77,646 Cash and cash equivalents, beginning of the year............. 97 5,886 3,076 15,075 24,134 --------- -------- -------- --------- --------- --------- Cash and cash equivalents, end of the year.......................... $ 28 $ 8,613 $ 5,210 $ 87,929 $ $ 101,780 ========= ======== ======== ========= ========= =========
- --------------- (See Note 5) F-17 EX-2.52 2 AGREEMENT DATED JANUARY 26, 1998 1 Exhibit 2.52 AGREEMENT FOR A U.S. $200,000,000 REDUCING REVOLVING CREDIT FACILITY TO BE MADE AVAILABLE TO CERTAIN WHOLLY-OWNED SUBSIDIARIES OF TEEKAY SHIPPING CORPORATION ARRANGED AND UNDERWRITTEN BY DEN NORSKE BANK ASA, CHRISTIANIA BANK OG KREDITKASSE ASA, NEW YORK BRANCH, and THE BANK OF NOVA SCOTIA as of January 26, 1998 1 2 INDEX
PAGE CLAUSE 1 DEFINITIONS.................................................. 1 1.1 Defined Terms................................... 1 1.2 Construction.................................... 17 1.3 Accounting Terms................................ 17 CLAUSE 2 REPRESENTATIONS AND WARRANTIES............................... 17 2.1(a) Due Organization and Power...................... 17 2.1(b) Authorization and Consents...................... 17 2.1(c) Binding Obligations............................. 18 2.1(d) No Violation.................................... 18 2.1(e) No Immunity .................................... 18 2.1(f) Litigation...................................... 18 2.1(g) No Default...................................... 18 2.1(h) Charters........................................ 18 2.1(i) Vessel Ownership, Classification, Seaworthiness and Insurance................... 19 2.1(j) Financial Statements............................ 19 2.1(k) Tax Returns and Payments........................ 20 2.1(l) Insurance....................................... 20 2.1(m) Offices......................................... 20 2.1(n) Foreign Trade Control Regulations............... 20 2.1(o) No Money Laundering............................. 21
3 2.1(p) Equity Ownership................................ 21 2.1(q) Environmental Matters........................... 21 2.1(r) Pending or Threatened Environmental Claims....................................... 22 2.1(s) Potential Environmental Claims.................. 22 2.1(t) Compliance with ISM Code......................... 22 2.1(u) Threatened Withdrawal of DOC or SMC.............. 22 2.1(v) Limited Purpose.................................. 22 2.1(w) Survival......................................... 22 CLAUSE 3 ADVANCES...................................................... 23 3.1(a) Purposes......................................... 23 3.1(b) Making of the Advances........................... 23 3.1(c) Maximum Number of Advances....................... 23 3.2 Drawdown Notice.................................. 23 3.3 Effect of Drawdown Notices....................... 23 3.4 Notation of Advances............................. 24 CLAUSE 4 CONDITIONS PRECEDENT.......................................... 24 4.1 Conditions Precedent to Drawdown of the Initial Advance............................ 24 4.2 Further Conditions Precedent..................... 27 4.3 Break Funding Costs.............................. 28 CLAUSE 5 REPAYMENT, REDUCTION AND PREPAYMENT .......................... 28 5.1 Repayment........................................ 28 5.2 Scheduled Reductions of the Credit Facility....................................... 28 5.3 Prepayment; Reborrowing.......................... 28 5.4 Optional Permanent Reduction of Credit Facility....................................... 28 5.5 Pro-rata Reduction of Commitments................ 29 CLAUSE 6 INTEREST AND RATE............................................. 29 6.1 Interest Rate; Default Rate...................... 29 6.2 Interest Periods................................. 29 6.3 Interest Payments................................ 29 6.4 Calculation of Interest.......................... 29 CLAUSE 7 PAYMENTS...................................................... 30 7.1 Place of Payments, No Set Off.................... 30 7.2 Tax Credits...................................... 31 CLAUSE 8 EVENTS OF DEFAULT.............................................. 32 8.1(a) Commitment Reduction, Commitment Commission and Interest................................... 32 8.1(b) Other Payments................................... 32 8.1(c) Representations, etc............................. 32 8.1(d) Impossibility, Illegality........................ 32 8.1(e) Covenants........................................ 32 8.1(f) Indebtedness..................................... 33
4 8.1(g) Stock Ownership.................................. 33 8.1(h) Default under the Security Documents............. 33 8.1(i) Bankruptcy....................................... 33 8.1(j) Sale of Assets................................... 33 8.1(k) Judgments........................................ 34 8.1(l) Inability to Pay Debts........................... 34 8.1(m) Financial Position............................... 34 8.1(n) Termination, Amendment or Assignment of Charters.................................... 34 8.2 Indemnification.................................. 35 8.3 Application of Moneys............................ 35 CLAUSE 9 COVENANTS...................................................... 36 9.1 ................................................. 36 9.1(A)(i) Performance of Agreements........................ 36 9.1(A)(ii) Notice of Default; Change in Classification of Vessel.......... 36 9.1(A)(iii) Obtain Consents.................................. 36 9.1(A)(iv) Financial Statements............................. 37 9.1(A)(v) Corporate Existence.............................. 37 9.1(A)(vi) Books, Records, etc.............................. 38 9.1(A)(vii) Inspection....................................... 38 9.1(A)(viii) Taxes............................... 38 9.1(A)(ix) Compliance with Statutes, etc.................... 38 9.1(A)(x) Environmental Matters............................ 39 9.1(A)(xi) ISM Code Matters................................. 39 9.1(A)(xii) Accountants...................................... 40 9.1(A)(xiii) Continue Charters................... 40 9.1(A)(xiv) Class Certificate................... 40 9.1(A)(xv) Maintenance of Properties........................ 40 9.1(A)(xvi) Vessel Management................... 41 9.1(A)(xvii) Limitation on Restricted Payments...................................... 41 9.1(B)(i) Liens .................................... 42 9.1(B)(ii) Loans and Advances............................... 43 9.1(B)(iii) Limitation on Indebtedness....................... 43 9.1(B)(iv) Guarantees, etc.................................. 45 9.1(B)(v) Changes in Business.............................. 45 9.1(B)(vi) Use of Corporate Funds........................... 45 9.1(B)(vii) Issuance of Shares............................... 45 9.1(B)(viii) Consolidation, Merger............... 46 9.1(B)(ix) Changes in Offices or Names...................... 46 9.1(B)(x) Limitation on Transactions with Shareholders and Affiliates.................... 46 9.1(B)(xi) Change of Flag................................... 47 9.1(B)(xii) Sale of Vessel................................... 47 9.2 Valuation of the Vessels......................... 47 9.3 Collateral Maintenance........................... 47 9.4 Reduction of Collateral.......................... 48 9.5 Inspection and Survey Reports.................... 49 CLAUSE 10 ASSIGNMENT................................................... 49 CLAUSE 11 ILLEGALITY, INCREASED COST, NON-AVAILABILITY, ETC........................... 49
5 11.1 Illegality .................................... 49 11.2 Increased Cost................................... 50 11.3 Non-Availability................................. 51 11.4 Determination of Losses.......................... 51 11.5 Compensation for Losses.......................... 51 CLAUSE 12 CURRENCY INDEMNITY........................................... 52 12.1 Currency Conversion.............................. 52 12.2 Change in Exchange Rate.......................... 52 12.3 Additional Debt Due.............................. 52 12.4 Rate of Exchange................................. 52 CLAUSE 13 FEES AND EXPENSES............................................ 52 13.1 Commitment Commission............................ 52 13.2 Agency Fee....................................... 53 13.3 Arrangement Fee.................................. 53 13.4 Underwriting Fee................................. 53 13.5 Expenses .................................... 53 CLAUSE 14 APPLICABLE LAW, JURISDICTION AND WAIVER...................... 54 14.1 Applicable Law................................... 54 14.2 Jurisdiction..................................... 54 14.3 WAIVER OF JURY TRIAL............................. 54 CLAUSE 15 THE ADMINISTRATIVE AGENT..................................... 54 15.1 Appointment of Administrative Agent.............. 54 15.2 Distribution of Payments......................... 55 15.3 Holder of Interest in Note....................... 55 15.4 No Duty to Examine, Etc.......................... 55 15.5 Administrative Agent as Lender................... 55 15.6(a) Obligations of Administrative Agent.............. 55 15.6(b) No Duty to Investigate........................... 55 15.7(a) Discretion of Administrative Agent............... 56 15.7(b) Instructions of Majority Lenders................. 56 15.8 Assumption re Event of Default................... 56 15.9 No Liability of Administrative Agent or Lenders.................................. 56 15.10 Indemnification of Administrative Agent.......... 57 15.11 Consultation with Counsel........................ 57 15.12 Resignation...................................... 57 15.13 Representations of Lenders....................... 58 15.14 Notification of Event of Default................. 58 15.15 Annual Bank Meeting.............................. 58 CLAUSE 16 APPOINTMENT OF SECURITY TRUSTEE.............................. 58 CLAUSE 17 NOTICES AND DEMANDS.......................................... 59 17.1 Notices.......................................... 59 CLAUSE 18 MISCELLANEOUS................................................ 59
6 18.1 Time of Essence.................................. 59 18.2 Unenforceable, etc., Provisions - Effect .................................... 60 18.3 References....................................... 60 18.4 Further Assurances............................... 60 18.5 Prior Agreements, Merger......................... 60 18.5 Joint and Several Obligations.................... 60 18.7 Limitation of Liability.......................... 61 18.8 Entire Agreement, Amendments..................... 62 18.9 Headings .................................... 62 18.10 Original Syndication............................. 62
i 7
SCHEDULE CONTENTS 1 The Borrowers 2 The Lenders and the Commitments 3 The Charters 4 The Vessels
EXHIBITS A Promissory Note B Guaranty C Form of Mortgage D Form of Earnings Assignment E Form of Insurances Assignment F Form of Consent and Agreement G Form of Share Pledge H Form of Accession Agreement I Form of Assignment and Assumption Agreement J Form of Drawdown Notice K Form of Compliance Certificate 8 REDUCING REVOLVING CREDIT FACILITY AGREEMENT 9 THIS REDUCING REVOLVING CREDIT FACILITY AGREEMENT is made the as of the 26th day of January, 1998, and is by and among: (1) Those certain Liberian corporations whose names and registered addresses are set forth in Schedule 1 hereto and which are signatories hereto, as joint and several borrowers, together with any additional such borrower(s) made party hereto pursuant to an Accession Agreement (as hereinafter defined) in accordance with the terms hereof (together, the "Borrowers", each a "Borrower"); (2) Den norske Bank ASA ("DnB"), Christiania Bank og Kreditkasse ASA, New York Branch ("CBK"), and The Bank of Nova Scotia ("BNS"), as joint arrangers and underwriters (together, the "Joint Arrangers and Underwriters", each a "Joint Arranger and Underwriter"); (3) The banks and financial institutions whose names and addresses are set out in Schedule 2 hereto (together, the "Lenders", each a "Lender"); (4) DNB, as agent (the "Administrative Agent") and security trustee for the Lenders; and (5) CBK and BNS, as joint syndication agents (together, the "Syndication Agents, each a "Syndication Agent"). WITNESSETH THAT: 1. DEFINITIONS 1.1 Defined Terms. In this Agreement the words and expressions specified below shall, except where the context otherwise requires, have the meanings attributed to them below: "Acceptable Accounting Ernst & Young, or such other recognized Firm" international accounting firm as shall be approved by the Majority Lenders, such approval not to be unreasonably withheld; "Accession Agreement" an agreement substantially in the form of Exhibit H hereto pursuant to which a wholly-owned subsidiary of the Guarantor is made a Borrower in accordance with the terms hereof; "Adjusted Consolidated means the aggregate net income (or loss) Net Income" of the Guarantor and its consolidated Subsidiaries determined in accordance with GAAP; provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the effects of foreign currency exchange adjustments under GAAP, (ii) any gains or losses 10 (on an after-tax basis) attributable to vessel sales or to prepayment of Indebtedness and (iii) any extraordinary gains (or losses). "Advance(s)" any amount advanced to the Borrowers with respect to the Credit Facility or (as the context may require) the aggregate amount of all such Advances for the time being outstanding; "Affiliate" means with respect to any Person, any other Person directly or indirectly controlled by or under common control with such Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as applied to any Person means the possession directly or indirectly of the power to direct or cause the direction of the management and policies of that Person whether through ownership of voting securities or by contract or otherwise; "Affiliate Vessel(s)" any vessel (other than the Vessels) owned by an Affiliate of the Guarantor; "Agents" the Administrative Agent and Syndication Agents; "Agreement" this Agreement as the same shall be amended, modified or supplemented from time to time; "Applicable Rate" any rate of interest on the Advances from time to time applicable pursuant to Clause 6.1 hereof; "Assignment and the Assignment and Assumption Assumption Agreement(s) "Agreement(s) executed pursuant to Clause 10 hereof substantially in the form of Exhibit I hereto; "Assignment Notices" a) the notices with respect to the Earnings Assignments substantially in the form set out in Exhibit 1 thereto or in such other form as the Majority Lenders may agree; b) the notices with respect to the Insurances Assignments substantially in the form set out in Exhibit 3 thereto or in such other form as the Majority Lenders 11 may agree; "Assignments" the Insurances Assignments and the Earnings Assignments; "Banking Day(s)" day(s) on which banks are open for the transaction of business of the nature required by this Agreement in Oslo, Norway, London, England, Frankfurt, Federal Republic of Germany, New York, New York and Vancouver, Canada; "Charter(s)" the charterparty agreements entered into by each of the Borrowers with Palm Shipping relating to such Borrower's Vessel, the date of each of which is set out in Schedule 3 hereto; or any substitute charter acceptable to the Majority Lenders in their sole discretion; "Code" the Internal Revenue Code of 1986, as amended, and any successor statute and regulations promulgated thereunder; "Commitment Commission" a non-refundable fee to be paid to the Administrative Agent, on behalf of the Lenders, which shall be equal to (1) if the Net Debt to Equity Ratio is greater than 1.5:1, .30% per annum; (2)if the Net Debt to Equity Ratio is equal to or less than 1.5:1 but greater than 1:1, .25% per annum; and (3) if the Net Debt to Equity Ratio is equal to or less than 1:1, .20% per annum, as calculated as provided in Clause 13.1 hereof; the foregoing rate to be determined on the date hereof, and be adjusted, if necessary, as of the first Banking Day following the receipt by the Administrative Agent of the most recent quarterly unaudited or annual audited financial statements, as the case may be, of the Guarantor together with the Compliance Certificate of the Guarantor (setting forth the Guarantor's calculation of the Net Debt to Equity Ratio); "Commitment Reduction" the portion of the Credit Facility which is to be reduced on the Reduction Dates pursuant to Clause 5.2; "Commitments" in relation to a Lender, the portion of the Credit Facility set out opposite its name in Schedule 2 hereto or, as the 12 case may be, in any relevant Assignment and Assumption Agreement, as reduced from time to time pursuant to the terms of this Agreement; "Compliance Certificate" has the meaning ascribed thereto in Clause 9.1(A)(iv)(a) hereof; "Consents" the Consent and Agreement to each of the Earnings Assignments executed by Palm Shipping, substantially in the form set out in Exhibit F hereto; "Consolidated EBITDA" means, with respect to any Person for any period, the sum of (i) Income from Vessel Operations, (ii) depreciation expense and (iii) amortization expense, as presented in the financial statements of such Person; "Consolidated Interest Expense" is defined to mean, with respect to any Person for any period, the aggregate amount of (i) interest expense and (ii) losses on marketable securities less (iii) interest income and (iv) gains on marketable securities as disclosed on the financial statements of such Person; - ---- "Credit Facility" an amount which on the Initial Drawdown Date shall equal the lesser of (1) Two Hundred Million United States Dollars (U.S. $200,000,000) and (2) Sixty-Five percent (65%) of the aggregate of the FMV of the Vessels, which may be advanced by the Lenders to the Borrowers pursuant to this Agreement, as such amount may be reduced from time to time pursuant to the terms of this Agreement; "Credit Facility Period" the period from the Drawdown Date of the first Advance made under the Credit Facility to the date upon which all amounts owing under the Credit Facility and all other amounts due to the Administrative Agent, Security Trustee and the Lenders pursuant to this Agreement, the Note and the Security Documents become repayable and are repaid in full or are prepaid in full; "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Guarantor or any of its 13 Subsidiaries against fluctuations in currency values to or under which the Guarantor or any of its Subsidiaries is a party or a beneficiary on the date of this Agreement or becomes a party or a beneficiary thereafter. "Default Rate" the rate per annum equal to the sum of the Applicable Rate and three percent (3%); "DOC" means a document of compliance issued to an Operator in accordance with rule 13 of the ISM Code; "Dollars" and the the legal currency, at any relevant time sign "$" hereunder, of the United States of America and, in relation to all payments hereunder, in same day funds settled through the New York Clearing House Interbank Payments System (or such other Dollar funds as may be determined by the Lenders to be customary for the settlement in New York City of banking transactions of the type herein involved); "Drawdown Date(s)" the dates, each being a Banking Day falling not later than the day immediately preceding the Maturity Date, upon which the Borrowers have requested that an Advance be made available as provided by Clause 3 hereof; "Drawdown Notice" shall have the meaning ascribed thereto in Clause 3.2 hereof; "Earnings Assignments" assignments in respect of the earnings of each Vessel from any and all sources, including, but not limited to, the respective Charter relating to such Vessel, to be executed by the relevant Borrower in favor of the Security Trustee pursuant to Clause 4.1(c)(iv) hereof, substantially in the form of Exhibit D hereto; "Environmental Approvals" shall have the meaning ascribed thereto in Clause 2.1(o) hereof; "Environmental Claim" shall have the meaning ascribed thereto in Clause 2.1(o) hereof; "Environmental Laws" shall have the meaning ascribed thereto in Clause 2.1(o) hereof; "Equity" for any Person, such Person's 14 shareholders' equity (inclusive of retained earnings) as reflected on such Person's most recent quarterly unaudited or annual audited financial statements, as the case may be, as prepared in accordance with GAAP; "Event(s) of Default" any of the events set out in Clause 8 hereof; "Fee Letter" the letter dated December 7, 1997 entered into by the Borrowers, the Guarantor and the Joint Arrangers and Underwriters in respect of the agency fees, the underwriting fees and arrangement fees referred to in Clause 13 hereof; "FMV" with respect to a Vessel, Fair Market Value as determined in accordance with Clause 9.2 hereof; "GAAP" shall have the meaning ascribed thereto in Clause 1.3 hereof; "Guarantor" Teekay Shipping Corporation, a corporation organized and existing under the laws of the Republic of Liberia; "Guaranty" the guaranty in respect of the joint and several obligations of the Borrowers under this Agreement to be executed by the Guarantor in favor of the Security Trustee pursuant to Clause 4.1(d)(i) hereof substantially in the form of Exhibit B hereto; "Income from Vessel Operations" shall have the meaning given thereto in the Guarantor's and Subsidiaries Consolidated Statements of Income and Retained Earnings; "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price 15 of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery thereof or the completion of such services, except trade payables, (v) all obligations on account of principal of such Person as lessee under capitalized leases, (vi) all indebtedness of other Persons secured by a lien on any asset of such Person, whether or not such indebtedness is assumed by such Person; provided that the amount of such indebtedness shall be the lesser of (a) the fair market value of such asset at such date of determination and (b) the amount of such indebtedness, (vii) all indebtedness of other Persons guaranteed by such Person to the extent such indebtedness is guaranteed by such Person, and (viii) to the extent not otherwise included in this definition, the net obligations under Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation, provided that the amount outstanding at any time of any indebtedness issued with original issue discount is the face amount of such indebtedness less the remaining unamortized portion of the original issue discount of such indebtedness at such time as determined in conformity with GAAP; and provided further that Indebtedness shall not include any liability for federal, state, local or other taxes; "Initial Advance" the first Advance made pursuant to the Agreement; "Initial Drawdown Date" the date of the Initial Advance; "Insurances Assignments" assignments in respect of the insurances of each Vessel, to be executed by the relevant Borrower in favor of the Security Trustee pursuant to Clause 4.1(c)(iii) hereof, substantially in the form of Exhibit E hereto; "Interest Coverage Ratio" means, with respect to any Person on any 16 date, the ratio of (i) the aggregate amount of Consolidated EBITDA of such Person for the four fiscal quarters for which financial information in respect thereof is available immediately prior to such date to (ii) the aggregate Consolidated Interest Expense of such Person during such four fiscal quarters. In making the foregoing calculation, (A) pro forma effect shall be given to (1) any Indebtedness incurred subsequent to the end of the four-fiscal-quarter period referred to in clause (i) and prior to such date (other than Indebtedness incurred under a revolving credit or similar arrangement to the extent of the commitment thereunder (or under any predecessor revolving credit or similar arrangement) in effect on the last day of such period), (2) any Indebtedness incurred during such period to the extent such Indebtedness is outstanding at such date and (3) any Indebtedness to be incurred on such date, in each case as if such Indebtedness had been incurred on the first day of such four-fiscal-quarter period and after giving pro forma effect to the application of the proceeds thereof as if such application had occurred on such first day; (B) Consolidated Interest Expense attributable to interest on any Indebtedness (whether existing or being incurred) computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on such date (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months) had been the applicable rate of the entire period; (C) there shall be excluded from Consolidated Interest Expense any Consolidated Interest Expense related to any amount of Indebtedness that was outstanding during such four-fiscal- quarter period or thereafter but that is not outstanding or is to be repaid on the date, except for Consolidated Interest Expense accrued (as adjusted pursuant to clause (B)) during such four-fiscal-quarter period under a revolving credit or similar arrangement to the extent of the commitment 17 thereunder (or under any successor revolving credit or similar arrangement) in effect on such date; and (D) pro forma effect shall be given to asset dispositions and asset acquisitions (including giving pro forma effect to the application of proceeds of any asset disposition) that occur during such four-fiscal-quarter period or thereafter and prior to such date as if they had occurred and such proceeds had been applied on the first day of such four-fiscal-quarter period; provided that to the extent that clause (D) of this sentence requires that pro forma effect be given to an asset acquisition or asset disposition, such pro forma calculation shall be based upon the four full fiscal quarters immediately preceding such date of the Person, or division or line of business of the Person, that is acquired or disposed for which financial information is available; and provided further that for purposes of determining the Interest Coverage Ratio with respect to the acquisition of a Vessel or the financing thereof, the Guarantor may apply Consolidated EBITDA for such Vessel based upon historical earnings of such Vessel or, if none, of its most comparable Vessel during the applicable four-fiscal-quarter period, or if, in the good faith determination of the Board of Directors, the Guarantor does not have a comparable Vessel, based upon industry average earnings for comparable vessels; "Interest Payment Date" the last day of each Interest Period and, for Interest Periods longer than three months, that day falling every three months after the commencement thereof until the end of such Interest Periods; should any such day not be a Banking Day the relevant Interest Payment Date shall be the next following Banking Day, unless such next following Banking Day falls in the following calendar month, in which case the relevant Interest Payment Date shall be the immediately preceding Banking Day; "Interest Period(s)" with respect to each Advance, any period by reference to which an interest rate is determined pursuant to Clause 6.2 18 hereof; "Interest Rate Agreements" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement designed to protect the Guarantor or any of its Subsidiaries against fluctuations in interest rates to or under which the Guarantor or any of its Subsidiaries is a party or a beneficiary on the date of this Agreement or becomes a party or a beneficiary hereafter; "ISM Code" means the International Safety Management Code for the Safe Operating of Ships and for Pollution Prevention constituted pursuant to Resolution A. 741(18) of the International Maritime Organization and incorporated into the Safety of Life at Sea Convention and includes any amendments or extensions thereto and any regulation issued pursuant thereto; "LIBOR" in relation to Interest Periods of one (1), three (3) or six (6) months, the rate (rounded upward to the nearest 1/16th of one percent) for deposits of Dollars for a period equivalent to such period at or about 11:00 a.m. (London time) on the second London Banking Day before the first day of such period as displayed on Telerate page 3750 (British Bankers' Association Interest Settlement Rates) (or such other page as may replace such page 3750 on such system or on any other system of the information vendor for the time being designated by the British Bankers' Association to calculate the BBA Interest Settlement Rate (as defined in the British Bankers' Association's Recommended Terms and Conditions ("BBAIRS" terms) dated August 1985)), provided that if on such date no such rate is so displayed or if the Interest Period is other than one (1), three (3) or six (6) months, LIBOR for such period shall be the arithmetic mean (rounded upward if necessary to four decimal places) of the rates respectively quoted to the 19 Administrative Agent by each of the Reference Banks at the request of the Administrative Agent as the offered rate for deposits of Dollars in an amount approximately equal to the amount in relation to which LIBOR is to be determined for a period equivalent to such period to prime banks in the London Interbank Market at or about 11:00 a.m. (London time) on the second Banking Day before the first day of such period; "Majority Lenders" Lenders whose Commitments exceed sixty-six and sixty seven hundredths percent (66.67%) of total Commitments; "Management Agreement(s)" The agreement(s) entered into between the Manager and each Borrower in respect of the commercial and technical management of the Borrowers' Vessels; "Manager" Teekay Shipping Limited, a Bahamian company and a Wholly Owned Subsidiary of the Guarantor; "Margin" (a) if the Net Debt to Equity Ratio is greater than 1.5:1, the Margin shall be .75% per annum; (b) if the Net Debt to Equity Ratio is equal to or less than 1.5:1 but greater than 1:1, the Margin shall be .60% per annum; and (c) if the Net Debt to Equity Ratio is 1:1 or less, the Margin shall be .50% per annum; the Margin to be determined as of the date hereof, and to be adjusted, if necessary, as of the first Banking Day following receipt by the Administrative Agent of the most recent quarterly unaudited or annual audited financial statements, as the case may be, of the Guarantor together with the Compliance Certificate of the Guarantor (setting forth the Guarantor's calculation of the Net Debt to Equity Ratio); "Materials of Environmental Concern" shall have the meaning ascribed in Clause 2.1(o) hereof; "Maturity Date" the day which falls eight years from the date on which the first Advance was drawn under the Credit Facility; if such day is not a Banking Day, the next following Banking Day, unless such next following Banking Day falls in the following calendar month, in which case 20 the Maturity Date shall be the immediately preceding Banking Day; "Mortgages" the first priority statutory mortgages and deeds of covenants collateral thereto with respect to each Vessel to be recorded on each Vessel and executed by the relevant Borrower in favor of the Security Trustee, pursuant to Clause 4.1(c)(ii) hereof, and to be substantially in the form of Exhibit C hereto; "Net Debt" means (x) the sum of long term debt and capital leases (including the current portions) less (y) to the extent positive, the sum of cash (including cash held in retention accounts for the payment of debt and cash pledged as collateral against balance sheet obligations) and marketable securities exceeding the sum of the current portion of long term debt and capital leases (excluding the current portion of Advances); "Net Debt to Equity means, the ratio of the Guarantor's Ratio" consolidated Net Debt to its consolidated Equity as reflected on the most recent quarterly unaudited or annual audited financial statements, as the case may be, as calculated by the Guarantor, which calculation shall be set forth in the Compliance Certificate accompanying such financial statements, and agreed by the Administrative Agent; "Note" the promissory note, to be executed by the Borrowers to the order of the Security Trustee, pursuant to Clause 4.1(c)(i) hereof, to evidence the Credit Facility substantially in the form of Exhibit A hereto; "Operator" means the Manager or such other Person approved by the Majority Lenders who is from time to time during the Credit Facility Period concerned with the operation of a Vessel and falls within the definition of "Company" set out in rule 1.1.2 of the ISM Code; "Palm Shipping" Palm Shipping Inc., a corporation organized and existing under the laws of the Republic of Liberia and an Affiliate of the Borrowers and a Wholly Owned Subsidiary of the Guarantor; 21 "Person" means any individual, sole proprietorship, corporation, partnership (general or limited), limited liability company, business trust, bank, trust company, joint venture, association, joint stock company, trust or other unincorporated organization, whether or not a legal entity, or any government or agency or political subdivision thereof; "Pledge(s)" the pledge(s) of the shares of the Borrowers to be executed by the Guarantor pursuant to Clause 4.1(d)(ii) hereof, substantially in the form of Exhibit G hereto; "Reduction Date" means each of the dates falling at intervals of six months after the first Drawdown Date; if such day is not a Banking Day, the next following Banking Day, unless such next following Banking Day falls in the following calendar month, in which case the relevant Reduction Date shall be the immediately preceding Banking Day; "Reference Banks" Christiania Bank og Kreditkasse ASA, Den norske Bank ASA and The Bank of Nova Scotia; "Security Documents" the Guaranty, the Pledge, the Mortgages, the Earnings Assignments, the Insurances Assignments, the Assignment Notices, the Consents, the Fee Letter and any other documents that may be executed as security for the Credit Facility and the Borrowers' obligations in connection therewith; "Security Trustee" Den norske Bank ASA, in its capacity as security trustee for each of the Joint Arrangers and Underwriters and the Lenders pursuant to Clause 16 hereof; "SMC" means a safety management certificate issued in respect of a Vessel in accordance with rule 13 of the ISM Code; "Subsidiary" means with respect to any Person, any business entity of which more than 50% (by number of votes of the voting stock or other ownership interest having voting power) is owned directly or indirectly by such Person; "Taxes" any present or future income or other 22 taxes, levies, duties, charges, fees, deductions or withholdings of any nature now or hereafter imposed, levied, collected, withheld or assessed by any taxing authority whatsoever; "Total Loss" means: (a) the actual, constructive, arranged, agreed, or compromised total loss of the Vessel; (b) the requisition for title or other compulsory acquisition or forfeiture of the Vessel otherwise than by requisition for hire; (c) the capture, seizure, arrest, detention or confiscation of the Vessel by any government or by persons acting or purporting to act on behalf of any government unless the Vessel be released from such capture, seizure, arrest or detention within two hundred ten (210) days after the occurrence thereof; "Transaction Documents" this Agreement, the Note and the Security Documents, any Accession Agreement and any Assignment and Assumption Agreement; "Vessels" Each of the Vessels listed in Schedule 4 hereto, registered in the name of the relevant Borrower as set forth in such schedule and any other vessel subject to a Mortgage granted by a Borrower which is added hereto pursuant to an Accession Agreement entered into in accordance with the terms hereof; "Wholly Owned" means, with respect to any Subsidiary of any Person, such Subsidiary of such Person if all of the outstanding common stock or other similar equity ownership interests (but not including preferred stock) in such Subsidiary (other than any director's qualifying share or investments by foreign nationals mandated by applicable law) is owned directly or indirectly by such Person. 1.2 Construction. Words importing the singular number only shall include the plural and vice versa. Words importing persons shall include companies, firms, corporations, partnerships, unincorporated associations and their respective successors and assigns. 23 - ---- ----- 1.3 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles as in effect from time to time in the United States of America consistently applied ("GAAP") and all financial statements submitted pursuant to this Agreement shall be prepared in accordance with, and all financial data submitted pursuant hereto shall be derived from financial statements prepared in accordance with, GAAP. 2 REPRESENTATIONS AND WARRANTIES 2.1 In order to induce the Lenders, the Joint Arrangers and Underwriters, the Agents and the Security Trustee to enter into this Agreement and to make the Credit Facility available, each of the Borrowers hereby represents and warrants (which representations and warranties shall survive the execution and delivery of this Agreement and the Note and the drawdown of the Advances hereunder) that: (a) Due Organization and Power. Each of the Borrowers, the Guarantor and Palm Shipping is duly formed and validly existing in good standing under the laws of its respective jurisdiction of incorporation, has duly qualified and, insofar as the Borrowers are aware, is authorized to do business as a foreign corporation in each jurisdiction wherein the nature of the business transacted thereby makes such qualification necessary, has full power to carry on its business as now being conducted and to enter into and perform its respective obligations under the Transaction Documents to which it is or is to be a party, and has complied with all statutory, regulatory and other requirements relative to such business and such agreements the noncompliance with which could reasonably be expected to have a material adverse effect on its business, assets or operations, financial or otherwise; (b) Authorization and Consents. All necessary corporate action has been taken to authorize, and all necessary consents and authorities have been obtained and remain in full force and effect to permit, each of the Borrowers, the Guarantor and Palm Shipping to enter into and perform its obligations under the Transaction Documents to which it is a party and, in the case of the Borrowers, to borrow, service and repay the Advances and, as of the date of this Agreement, no further consents or authorities are necessary for the service and repayment of the Advances or any part of any thereof; (c) Binding Obligations. The Transaction Documents constitute or, when executed and delivered, will constitute, legal, valid and binding obligations of each of the Borrowers, the Guarantor and Palm Shipping as is a party thereto enforceable against each thereof as is a party thereto in accordance with their terms, except to the extent that such enforcement may be limited by equitable principles, principles of public policy or applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting generally the enforcement of creditors' rights; (d) No Violation. The execution and delivery of, and the performance of the provisions of, the Transaction Documents by each of the Borrowers, the Guarantor and Palm Shipping as is a party thereto, do not, and will not during the term of this Agreement, contravene any applicable law or regulation existing at the date hereof or any contractual restriction binding on any thereof or the articles of incorporation or by-laws (or equivalent document) of any thereof; 24 (e) No immunity. None of the Borrowers nor the Guarantor nor any of their respective assets are entitled to immunity on the grounds of sovereignty or otherwise from any legal action or proceeding (which shall include, without limitation, suit, attachment prior to judgment, execution or other enforcement); (f) Litigation. Except as otherwise disclosed in writing to the Administrative Agent, on behalf of the Lenders, on or before the date hereof, no action, suit or proceeding is pending or threatened against any of the Borrowers, the Guarantor or Palm Shipping before or by any court, board of arbitration or administrative agency which has a reasonable likelihood of resulting in any material adverse change in the business or condition (financial or otherwise) of the Borrowers, the Guarantor or Palm Shipping; (g) No Default. None of the Borrowers nor the Guarantor nor Palm Shipping is in default under any agreement by which it is bound, nor is any thereof in default in respect of any financial commitment or obligation; (h) Charters. Each Vessel is subject to a Charter. The certified copies of the Charters delivered to the Administrative Agent on or prior to the date of this Agreement are true and complete copies thereof and constitute legal, valid and binding obligations of the parties thereto enforceable against such parties in accordance with their respective terms, except to the extent that such enforcement may be limited by equitable principles, principles of public policy or applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting generally the enforcement of creditors' rights, and no amendments thereof or variations thereto have been proposed or agreed prior to the date hereof other than immaterial changes, details of which shall have been forwarded to the Administrative Agent. The right of each Borrower to all moneys payable under its respective Charter is not subject to any right of set-off or counterclaim or any lien, charge, security interest, assignment or other encumbrance except in favor of the Administrative Agent, the Security Trustee or the Lenders. There are no material defaults on the part of any party to the Charters and there is no accrued right of any Borrower to terminate its respective Charter with Palm Shipping or of Palm Shipping to terminate any Charter with any Borrower; (i) Vessel Ownership, Classification, Seaworthiness and Insurance. During the Credit Facility Period: (i) each Vessel will be in the sole and absolute ownership of the respective Borrower, unencumbered, save and except for, the respective Mortgage and liens permitted thereby, and duly registered in the name of the respective Borrower under the laws and flag of the Commonwealth of the Bahamas, as set forth in Schedule 4 hereto; (ii) each Vessel will be classed in the highest classification and rating for vessels of the same age and type with the classification society set next to its name in Schedule 4 hereto or such other classification society which the Majority Lenders may consent to in writing, without any outstanding recommendations deemed material by the Majority Lenders, except in the case of any Vessel which has 25 been damaged, of which damage the Borrower owning such Vessel is diligently effecting repair, the nature, extent and estimated cost of which damage have been disclosed to the Lenders and found by the Lenders unlikely to have a material adverse impact on such Borrower's ability to perform its obligations hereunder; (iii) each Vessel will be operationally seaworthy and in every way fit for service; and (iv) each Vessel will be insured in accordance with the provisions of its respective Mortgage and the requirements thereof in respect of such insurances will have been complied with; (j) Financial Statements. Except as otherwise disclosed in writing to the Lenders on or prior to the date hereof, all information and other data furnished by the Borrowers and the Guarantor to the Lenders are complete and correct, and all financial statements furnished by the Borrowers and the Guarantor have been prepared in accordance with GAAP and accurately and fairly present the financial condition of the parties covered thereby as of the respective dates thereof and the results of the operations thereof for the period or respective periods covered by such financial statements. Since such date or dates there has been no material adverse change in the financial condition or results of the operations of any of such parties and none thereof has any contingent obligations, liabilities for taxes or other outstanding financial obligations which are material in the aggregate except as disclosed in such statements, information and data; (k) Tax Returns and Payments. Each of the Borrowers and the Guarantor has filed all tax returns required to be filed thereby and has paid all taxes payable thereby which have become due, other than those not yet delinquent or the nonpayment of which would not have a material adverse effect on any such party, as the case may be, and except for those taxes being contested in good faith and by appropriate proceedings or other acts and for which adequate reserves have been set aside on its books; (l) Insurance. Each of the Borrowers and the Guarantor has insured its properties and assets against such risks and in such amounts as are customary for companies engaged in similar businesses; (m) Offices. Each of the chief executive office and chief place of business of each of the Borrowers, the Guarantor and Palm Shipping and the office in which the records relating to the earnings and insurances of the Vessels are kept, is, and will continue to be, located at 4th Floor, Euro Canadian Centre, Marlborough Street and Navy Lion Road, Nassau, the Bahamas; none of the Borrowers maintains a place of business in Canada, the United States or the United Kingdom; (n) Foreign Trade Control Regulations. None of the transactions contemplated herein will violate any of the provisions of the Foreign Assets Control Regulations of the United States of America (Title 31, Code of Federal Regulations, Chapter V, Part 500, as amended), any of the provisions of the Cuban Assets Control Regulations of the United States of America (Title 31, Code of Federal Regulations, Chapter V, Part 515, as amended), any of the provisions of the Libyan Assets Control Regulations of the United States of 26 America (Title 31, Code of Federal Regulations, Chapter V, Part 550, as amended), any of the provisions of the Iraqi Sanctions Regulations (Title 31, Code of Federal Regulations, Chapter V, Part 575, as amended), any of the provisions of the Federal Republic of Yugoslavia (Serbia and Montenegro) Assets Control Regulations (Title 31, Code of Federal Regulations, Chapter V, Part 585 as amended) or any of the provisions of the Regulations of the United States of America Governing Transactions in Foreign Shipping of Merchandise (Title 31, Code of Federal Regulations, Chapter V, Part 505, as amended); (o) No Money Laundering. With respect to (i) any drawings on the Credit Facility under this Agreement, (ii) the performance and discharge of its obligations and liability under any of the Transaction Documents to which it is a party and (iii) any other arrangements effected or contemplated by the Transactions Documents to which any Borrower is a party, each of the Borrowers is acting for its own account and the foregoing will not involve or lead to a contravention of any law, official requirement or other regulatory measure or procedure which has been implemented to combat "money laundering" (as defined in Article 1 of the Directive (91/308/EEC) of the Council of the European Communities; (p) Equity Ownership. Each of the Borrowers and Palm Shipping is a Wholly Owned Subsidiary of the Guarantor. On the first Drawdown Date, none of the Borrowers nor Palm Shipping will own any shares of capital stock, partnership interest or any other direct or indirect equity interest in any corporation, partnership or other entity; (q) Environmental Matters. Except as heretofore disclosed in writing to the Lenders (i) each of the Borrowers will, when required, be in full compliance with all applicable United States federal and state, local, foreign and international laws, regulations, conventions and agreements relating to pollution prevention or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, navigable waters, waters of the contiguous zone, ocean waters and international waters), including, without limitation, laws, regulations, conventions and agreements relating to (1) emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous materials, oil, hazardous substances, petroleum and petroleum products and by-products ("Materials of Environmental Concern"), or (2) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern ("Environmental Laws"); (ii) each of the Borrowers will, when required, have all permits, licenses, approvals, rulings, variances, exemptions, clearances, consents or other authorizations required under applicable Environmental Laws ("Environmental Approvals") and will, when required, be in full compliance with all Environmental Approvals required to operate their business as then being conducted; (iii) none of the Borrowers has received any notice of any claim, action, cause of action, investigation or demand by any person, entity, enterprise or government, or any political subdivision, intergovernmental body or agency, department or instrumentality thereof, alleging potential liability for, or a requirement to incur, investigatory costs, cleanup costs, response and/or remedial costs (whether incurred by a governmental entity or otherwise), natural resources damages, property damages, personal injuries, attorneys' fees and expenses, or fines or penalties, in each case arising out of, based on or resulting from (1) the presence, or release or threat of release into the environment, of any Materials of Environmental Concern at any location, whether or not owned by such person, or (2) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law or Environmental Approval ("Environmental 27 Claim") (other than Environmental Claims that have been fully and finally adjudicated or otherwise determined and all fines, penalties and other costs, if any, payable by the Borrowers in respect thereof have been paid in full or which are fully covered by insurance (including permitted deductibles)); and (iv) there are no circumstances that may prevent or interfere with such full compliance in the future; (r) Pending or Threatened Environmental Claims. Except as heretofore disclosed in writing to the Lenders there is no Environmental Claim pending or threatened against any Borrower; (s) Potential Environmental Claims. Except as heretofore disclosed in writing to the Lenders there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge or disposal of any Materials of Environmental Concern, that could form the basis of any Environmental Claim against any Borrower; (t) Compliance with ISM Code. Each Vessel and any Operator thereof will, prior to March 31, 1998, comply with the requirements of the ISM Code, including (but not limited to) the maintenance and renewal of valid certificates pursuant thereto; (u) Threatened Withdrawal of DOC or SMC. There is no threatened or actual withdrawal of any Operator's DOC or the SMC in respect of any Vessel; (v) Limited Purpose. Each Borrower is a special purpose company whose sole capital asset is its Vessel; no Borrower engages in any business other than the owning of its Vessel and the chartering thereof to Palm Shipping; and (w) Survival. All representations and warranties made herein and in any certificate or other document delivered pursuant hereto or in connection herewith shall survive the making of the Advances and the issuance of the Note to be issued by the Borrowers hereunder. 3 ADVANCES 3.1 (a) Purposes. The Lenders shall make the Initial Advance available to the Borrowers for the purpose of repaying all existing Indebtedness in respect of the Vessels and for general corporate purposes. Advances subsequent to the Initial Advance made pursuant to this Agreement will be made available for general corporate purposes. (b) Making of the Advances. Each of the Lenders, relying upon each of the representations and warranties set out in Clause 2, hereby severally and not jointly agrees with the Borrowers that, subject to and upon the terms of this Agreement, it will on the Drawdown Dates, the first of which shall occur on or before February 6, 1998, make the Advances available through the Administrative Agent to the Borrowers in an aggregate amount not to exceed its Commitment ratably with the other Lenders according to their respective Commitments. The maximum aggregate amount of all Advances which may be outstanding at any time under the Agreement is the aggregate amount of the Credit Facility, as reduced pursuant to Clause 5.2 hereof. The Initial Advance shall be in the minimum amount of One Hundred Million Dollars ($100,000,000). All other Advances, subject to the other terms and conditions hereof, shall be 28 in a minimum amount of Five Million Dollars ($5,000,000) and in multiples of One Million Dollars ($1,000,000). (c) Maximum Number of Advances. The maximum number of Advances outstanding at any time under this Agreement shall be six (6). 3.2 Drawdown Notice. The Guarantor, on behalf of the Borrowers, shall, at least three (3) Banking Days before a Drawdown Date, serve a notice, such notice to be substantially in the form of Exhibit J hereto, (a "Drawdown Notice") on the Administrative Agent which notice shall (a) be in writing addressed to the Administrative Agent, (b) be effective on receipt by the Administrative Agent, (c) specify the amount of the Advance to be drawn, (d) specify the Banking Day on which the Advance is to be drawn, (e) identify the purpose(s) of each Advance and the Borrower(s) on whose behalf the Advance is requested, (f) specify the disbursement instructions and (g) be irrevocable. 3.3 Effect of Drawdown Notices. Each Drawdown Notice shall be deemed to constitute a warranty by the Borrowers (a) that the representations and warranties stated in Clause 2 (updated mutatis mutandis) are true and correct on the date of such Drawdown Notice and will be true and correct on the relevant Drawdown Date as if made on such date, and (b) that no Event of Default nor any event which with the giving of notice or lapse of time or both would constitute an Event of Default has occurred and is continuing. - ------- -------- 3.4 Notation of Advances. Each Advance made by the Lenders to the Borrowers may be evidenced by a notation of the same made by the Administrative Agent on the grid attached to the Note, which notation, absent manifest error, shall be prima facie evidence of the amount of the relevant Advance. - ----- ----- 4 CONDITIONS PRECEDENT 4.1 Conditions Precedent to Drawdown of the Initial Advance. The obligation of the Lenders to make the Initial Advance available to the Borrowers under this Agreement shall be expressly subject to the following conditions precedent: (a) the Administrative Agent shall have received the following documents in form and substance satisfactory to the Joint Arrangers and Underwriters and their legal advisers: (i) copies, certified as true and complete by an officer of each of the Borrowers, the Guarantor and Palm Shipping, of excerpts of resolutions of each such company's board of directors (and, if any necessary under appropriate law, shareholders) evidencing approval of the Transaction Documents to which such company is to be a party and authorizing an appropriate officer or officers or attorney-in-fact or attorneys-in-fact to execute the same on its behalf; 29 (ii) copies, certified as true and complete by an officer of each of the Borrowers, the Guarantor and Palm Shipping or other applicable party, of all documents evidencing any other necessary action (including actions by such parties thereto other than the Borrowers, the Guarantor or Palm Shipping as may be required by the Lenders), approvals or consents with respect to this Agreement, the Note, the Security Documents and the transactions contemplated hereby and thereby; (iii) copies, certified as true and complete by an officer of each of the Borrowers, the Guarantor and Palm Shipping, of the articles or certificate of incorporation and by-laws (or the equivalent thereof) of each thereof; (iv) good standing certificates or the equivalent thereof with respect to each of the Borrowers, the Guarantor and Palm Shipping issued by the appropriate authorities of the respective jurisdiction of incorporation of such parties; (v) copies, certified as true and complete by an officer of the relevant Borrower, of the Charter and Management Agreement relating to its Vessel; and (vi) a Valuation (as defined in Clause 9.2 hereof) of each Vessel for purposes of determining the amount available under the Credit Facility on the Initial Drawdown Date; (b) the Administrative Agent shall have received evidence satisfactory to the Joint Arrangers and Underwriters and their legal advisers that: (i) each of the Vessels is registered in the name of such Borrower listed opposite its name in Schedule 4 under Bahamian flag and that each such Vessel is free and clear of all liens and encumbrances of record except for the Mortgage thereon in favor of the Security Trustee; (ii) each Vessel is classed in the highest classification and rating for vessels of the same age and type with the classification society listed next to the Vessel in Schedule 4 or such other classification society acceptable to the Lenders without any material outstanding recommendations; (iii) each Vessel is operationally seaworthy and in every way fit for service; and (iv) each Vessel is insured in accordance with the provisions of its respective Mortgage (evidence of 30 which shall include, without limitation, cover notes, Certificates of Entry and brokers' letters of undertaking and an opinion of an independent insurance consultant retained by the Joint Arrangers and Underwriters or such other evidence as shall be reasonably satisfactory to the Joint Arrangers and Underwriters) and all requirements thereof in respect of such insurances have been fulfilled; (c) each Borrower shall have duly executed and delivered: (i) the Note, (ii) the Mortgage relating to its Vessel, (iii) the Insurances Assignment relating to its Vessel, (iv) the Earnings Assignment relating to its Vessel, and (v) the Assignment Notices relating to (c)(iii) and (c)(iv) above; (d) the Guarantor shall have duly executed and delivered: (i) the Guaranty, and (ii) the Pledge and related irrevocable proxies and stock powers shall have delivered to the Administrative Agent the undated resignations of officers and directors required to be so delivered pursuant to the Pledge; (e) Palm Shipping shall have duly executed and delivered the Consents; (f) each of the Charters shall be in form and substance satisfactory to the Joint Arrangers and Underwriters; (g) the Administrative Agent shall have received payment in full of all fees and expenses due to the Agents, the Joint Arrangers and Underwriters and the Lenders on the date thereof including, without limitation, all fees and expenses due under Clause 13 hereof; (h) the Joint Arrangers and Underwriters shall have received evidence satisfactory to it and its legal advisers that, save for the liens created by the respective Mortgage, Earnings Assignment and Insurances Assignment, there are no liens, charges or encumbrances of any kind whatsoever on any Vessel or its earnings or insurances except as permitted hereby or by any of the Security Documents; (i) the Joint Arrangers and Underwriters shall be satisfied that none of the Borrowers, the Guarantor, or Palm Shipping is subject to any Environmental Claim which could have a material adverse effect on the business, assets or results of operations of any thereof; (j) the Joint Arrangers and Underwriters shall have received a complete copy of (i) the consolidated audited financial report of the Guarantor for the year ending March 31, 1997, which shall include at least the balance sheet of such corporation as of the end of such year and the related statements of income, cash flow and retained earnings for such year all in reasonable 31 detail, certified by an Acceptable Accounting Firm, together with their opinion (containing no qualifications which the Lenders deem material) and (ii) the balance sheets of the Guarantor, on a consolidated basis, for the end of each quarter following March 31, 1997, and the related consolidated statements of income, cash flow and retained earnings for such quarter, all in reasonable detail, unaudited, but certified by the chief financial officer of the Guarantor; (k) the Borrowers shall have provided such evidence as the Joint Arrangers and Underwriters may require documenting the current legal and beneficial ownership of the shares of the Borrowers and Palm Shipping and the legal ownership of the shares of the Guarantor; and (l) the Joint Arrangers and Underwriters shall have received opinions from (i) Watson, Farley & Williams, counsel to the Borrowers, the Guarantor and Palm Shipping on matters of New York law, the Federal law of the United States and Liberian law, (ii) Graham, Thompson & Co., special counsel to the Joint Arrangers and Underwriters on Bahamian law, and (iii) Seward & Kissel, special counsel to the Joint Arrangers and Underwriters, in each case in such form as the Lenders may require, as well as such other legal opinions as the Lenders shall have required as to all or any matters under the laws of the United States of America, the State of New York and the Republic of Liberia covering the representations and conditions which are the subjects of Clauses 2 and 4. 4.2 Further Conditions Precedent. The obligation of the Lenders to make any Advance available to the Borrowers shall be expressly and separately from the foregoing conditional upon, on the relevant Drawdown Date: (a) the Administrative Agent having received a Drawdown Notice in accordance with the terms of Clause 3.2; (b) the representations stated in Clause 2 (updated mutatis mutandis to such date) being true and correct as if made on that date; (c) no Event of Default having occurred and being continuing and no event having occurred and being continuing which, with the giving of notice or lapse of time, or both, would constitute an Event of Default; (d) the Lenders being satisfied that no Event of Default will arise following the drawdown of the Advance in question by reason of the drawdown of the Advance and that no event or state of affairs exists which constitutes, in the reasonable opinion of the Lenders, a material risk that it will be unlawful or impossible for the Borrowers or the Guarantor, or any other of the parties thereto to make any payment or perform any material obligation as required under the terms of this Agreement, the Note and the Security Documents to which it is a party or any of them; and (e) there having been no material adverse change in the financial condition of the Guarantor since the date hereof. 4.3 Break Funding Costs. In the event that, on any date specified for the making of an Advance in any Drawdown Notice, the Lenders shall not be obliged under this Agreement to make such advance available under this Agreement, the 32 Borrowers shall indemnify and hold the Lenders, or any of them, fully harmless against any losses which the Lenders, or any of them, may sustain as a result of borrowing or agreeing to borrow funds to meet the drawdown requirement in respect thereof and the certificate of such Lender or Lenders shall, absent manifest error, be conclusive and binding on the Borrowers as to the extent of any such losses. 5 REPAYMENT, REDUCTION AND PREPAYMENT 5.1 Repayment. The Borrowers shall repay all outstanding Advances (subject to such reduction and prepayments as hereinafter set forth) on the Maturity Date and, to the extent required to comply with the limitations set forth in Clause 5.2 below, on each Reduction Date. 5.2 Scheduled Reductions of the Credit Facility. Subject to the following provisions of this Clause 5, the Credit Facility shall be reduced on each of the Reduction Dates by Ten Million Dollars ($10,000,000). On each Reduction Date, each Lender's Commitment shall be reduced by an amount equal to the proportion of the amount by which the total Credit Facility is to be so reduced on that date which its Commitment bears to the total Commitments on that date. Notwithstanding the foregoing, in the event the initial Advance under the Credit Facility is not made on or prior to February 6, 1998, the Credit Facility and Lenders' Commitments shall be reduced to zero. 5.3 Prepayment; Reborrowing. The Borrowers may prepay, upon five (5) day's written notice, any outstanding Advance or any portion thereof, without penalty, provided that such prepayment is made on the last day of the Interest Period of such Advance. Each prepayment shall be in a minimum amount of Five Million Dollars ($5,000,000) and shall be an integral multiple of One Million Dollar ($1,000,000). Subject to the limits and upon the conditions herein provided (including the reduction of Commitments provided in Clause 5.2), the Borrowers may from time to time prepay the Advances and thereafter re-borrow such Advances or a portion thereof. 5.4 Optional Permanent Reduction of Credit Facility. The Borrowers shall have the right, at any time and from time to time, to request, without penalty, a permanent reduction in the Credit Facility, in the case of (a) any undrawn portion of the Credit Facility at any time, provided that the Administrative Agent receives five (5) days prior written notice of such request and (b) any amounts outstanding under the Credit Facility, provided that (i) the Administrative Agent receives five (5) days written notice of such request and (ii) that such requested reduction occurs on the last day of the applicable Interest Period(s). Each such permanent reduction shall be equal to or shall exceed Five Million Dollars ($5,000,000) and shall be an integral multiple of One Million Dollars ($1,000,000.) 5.5 Pro-rata Reduction of Commitments. If the Commitments of the Lenders are reduced pursuant to Clauses 5.4 or 9.3 hereof or any other provision of this Agreement, the Commitments shall be reduced on the Reduction Dates falling on or after the date of such reduction by the same proportion as that by which the amount of the aggregate of the Commitments of the Lenders is so reduced and the remaining reductions pursuant to Clause 5.2 shall be adjusted proportionately to 33 reflect such reduction. 6 INTEREST AND RATE 6.1 Interest Rate; Default Rate. Each Advance shall bear interest at the Applicable Rate, which shall be the rate per annum equal to the aggregate of (a) LIBOR for applicable Interest Period and (b) the Margin. Any amounts due under this Agreement, including but not limited to, amounts payable at the time of a Commitment Reduction, not paid when due, whether on a Reduction Date, by acceleration or otherwise, shall bear interest thereafter at the Default Rate. 6.2 Interest Periods. With respect to each Advance, an Interest Period shall be a period of one (1), three (3) or six (6) months, or such other period as selected by the Guarantor on behalf of the Borrowers which is available to, and accepted by, the Lenders upon at least three (3) Banking Days written notice to the Administrative Agent prior to the drawdown thereof and the expiration of any applicable Interest Period; provided, however, that the Guarantor may select an Interest Period of one (1) month no more than three (3) times per annum and, provided, further, that if the Administrative Agent fails to receive the required notice as aforesaid, the duration of the applicable Interest Period shall be three (3) months. The Guarantor may not select an Interest Period which extends beyond the Maturity Date. 6.3 Interest Payments. The Borrowers agree to pay interest accrued on the Advances, in arrears, on the Interest Payment Dates. 6.4 Calculation of Interest. All interest shall accrue from day to day and be calculated on the actual number of days elapsed and on the basis of a three hundred sixty (360) day year. 7 PAYMENTS 7.1 Place of Payments, No Set Off. (a) All payments to be made hereunder by the Borrowers shall be made on the due dates of such payments to the Administrative Agent at the office of its New York branch located at 200 Park Avenue, New York, New York 10166-0396 or to such other branch of the Administrative Agent as the Administrative Agent may direct, for the account of the Lenders, without set-off or counterclaim and free from, clear of and without deduction for, any Taxes, provided, however, that if the Borrowers shall at any time be compelled by law to withhold or deduct any Taxes from any amounts payable to the Lenders hereunder, then, subject to Clause 7.2, the Borrowers shall pay such additional amounts in Dollars as may be necessary in order that the net amounts received after withholding or deduction shall equal the amounts which would have been received if such withholding or deduction were not required and, in the event any withholding or deduction is made, whether for Taxes or otherwise, the Borrowers shall promptly send to the Lenders such documentary evidence with respect to such withholding or deduction as may be required from time to time by the Lenders. Notwithstanding the preceding sentence, the Borrowers shall not be required to pay additional amounts or otherwise indemnify the Lenders for or on account of: (i) Taxes based on or measured by the overall net income of any 34 Lender or Taxes in the nature of franchise taxes or taxes for the privilege of doing business imposed by any jurisdiction or any political subdivision or taxing authority therein unless such are imposed as a result of the activities of the Borrowers within the relevant taxing jurisdiction; (ii) Taxes imposed by any jurisdiction or any political subdivision or taxing authority therein on any Lender that would not have been imposed but for such Lender's being organized in or conducting business in or maintaining a place of business in the relevant taxing jurisdiction, or engaging in activities or transactions in the relevant taxing jurisdiction that are unrelated to the transactions contemplated by the Transaction Documents, but only to the extent such Taxes are not imposed as a result of the activities of any of the Borrowers within the relevant taxing jurisdiction or the jurisdiction of any of the Borrowers under the laws of the taxing jurisdiction; (iii) Taxes imposed on or with respect to a Lender as a result of a transfer, sale, assignment, or other disposition by such Lender of any interest in any Transaction Document, any Note or any Vessel (other than a transfer pursuant to an exercise of remedies upon an Event of Default); (iv) Taxes imposed on, or with respect to, a transferee (or a subsequent transferee) of an original Lender (and including as such a transferee a Lender whose shares of stock have been transferred or the purchaser of a participation in any Advance) to the extent of the excess of such Tax over the amount of such Tax that would have been imposed on, or with respect to, such original Lender had there not been a transfer, sale, assignment or other disposition of the shares of such Lender or a transfer, sale, assignment or other disposition by such original Lender of any interest in any Vessel, any Note or any Transaction Document (in each case, other than any transfer pursuant to the exercise of remedies as a result of an Event of Default that shall have occurred and be continuing); or (v) Taxes imposed on any Lender that would not have been imposed but for any failure of such Lender to comply with any return filing requirement or any certification, information, documentation, reporting or other similar requirement known to such Lender, if such compliance is required to obtain or establish relief or exemption from or reduction in such Taxes; (b) In the event that any Borrower has actual knowledge that the Borrowers are required to, or there arises in any Borrower's reasonable opinion a substantial likelihood that the Borrowers will be required to, pay an additional amount or otherwise indemnify any Lender for or on account of any Tax pursuant to Clause 7.1(a), the Borrower will promptly notify the Administrative Agent and each relevant Lender of the nature of such Tax, and shall furnish such information to the Administrative Agent and such Lender with respect to such Tax, as the Administrative Agent or such Lender may reasonably request. In the event of any knowledge or opinion of a Borrower described in the preceding sentence, the Borrowers, the Administrative Agent and each relevant Lender shall consult in good faith to determine what may be required to avoid or reduce such Tax, and shall each use reasonable efforts to avoid or reduce such Tax (so long as such efforts do not, in the reasonable opinion of the relevant Lender, result in any cost to such Lender or any modification of the terms or repayment of any Advance). 7.2 Tax Credits. If any Lender obtains the benefit of a credit against 35 its liability for Taxes imposed by any taxing authority for all or part of the Taxes as to which the Borrowers have paid additional amounts as aforesaid then such Lender shall reimburse the Borrowers for the amount of the credit so obtained. Each Lender shall use reasonable efforts in filing such tax return as are necessary to obtain any such credit. In connection therewith, the Lenders may consult with their legal advisers, all fees and expenses of which shall be for the account of the Borrowers. 8 EVENTS OF DEFAULT 8.1 In the event that any of the following events shall occur and be continuing: (a) Commitment Reduction, Commitment Commission and Interest. Any payment due at the time of a Commitment Reduction or any interest or Commitment Commission due hereunder, or any payment or interest due under the Note or under the Security Documents, is not paid on the due date; or (b) Other Payments. Any fees or other amounts becoming payable to the Agents, the Security Trustee, the Joint Arrangers and Underwriters or the Lenders under this Agreement, under the Note, under the Security Documents or under any of them is not paid on the due date or within three (3) Banking Days after the date of demand (as the case may be); or (c) Representations, etc. Any representation, warranty or other statement made by the Borrower, the Guarantor or Palm Shipping in this Agreement or in any of the Security Documents to which it is a party or in any other instrument, document or other agreement delivered in connection herewith or therewith proves to have been untrue or misleading in any material respect as at the date as of which made; or (d) Impossibility, Illegality. It becomes impossible or unlawful for the Borrowers, the Guarantor, Palm Shipping or any of them to fulfill any of the covenants and obligations contained herein, in the Note or in any of the Security Documents to which it is a party or for the Agents, the Security Trustee or the Lenders to exercise any of the rights vested in any of them hereunder, under the Note or under any of the Security Documents and such impossibility or illegality, in the reasonable opinion of the Agents, the Security Trustee or the Majority Lenders, will have a material adverse effect on their rights hereunder, under the Note or under any of the Security Documents or on their right to enforce any thereof; or (e) Covenants. The Borrowers, the Guarantor or Palm Shipping or any of them defaults in the performance of any term, covenant or agreement contained in this Agreement, in the Note or in any of the Security Documents to which they are a party or in any of them, or in any other instrument, document or other agreement delivered in connection herewith or therewith, or there occurs any other event which constitutes a default under this Agreement, the Note or any of the Security Documents, in each case other than an Event of Default referred to elsewhere in this Clause 8.1, and such default, in the reasonable opinion of the Majority Lenders, could have a material adverse effect on their rights hereunder, under the Note or under any of the Security Documents or on their right to enforce any thereof and continues unremedied for a period of thirty (30) days; or (f) Indebtedness. The Borrowers, the Guarantor, Palm Shipping or any 36 Wholly Owned Subsidiary of the Guarantor shall default in the payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any Indebtedness having an outstanding principal amount of $5,000,000 or more or any party becomes entitled to enforce the security for any such Indebtedness and such party shall take steps to enforce the same, unless such default or enforcement is being contested in good faith and by appropriate proceedings or other acts and the relevant Borrowers, the Guarantor, Palm Shipping or such Wholly Owned Subsidiary of the Guarantor as the case may be, shall set aside on its books adequate reserves with respect thereto, and so long as such default or enforcement shall not subject any Vessel to material risk of forfeiture or loss; or (g) Stock Ownership. There is, without the prior written consent of the Majority Lenders (i) any change in the legal or beneficial stock ownership or the voting control of the Borrowers or (ii) any pledge of the shares of the Borrowers in favor of a party other than the Security Trustee or (iii) less than fifty-one percent (51%) of the issued and outstanding shares of the Guarantor is held beneficially and of record by the Persons holding such shares as of the date of this Agreement; or (h) Default under the Security Documents. There is an event of default under any of the Security Documents which shall have occurred and be continuing; or (i) Bankruptcy. The Borrowers, the Guarantor or Palm Shipping commences any proceeding relating to any substantial portion of its property under any reorganization, arrangement or readjustment of debt, dissolution, winding up, adjustment, composition, bankruptcy or liquidation law or statute of any jurisdiction, whether now or hereafter in effect ("Proceeding"), or there is commenced against the Borrowers, the Guarantor or Palm Shipping any Proceeding and such Proceeding remains undismissed or unstayed for a period of thirty (30) days; or any receiver, trustee, liquidator or sequestrator of, or for, the Borrowers, the Guarantor or Palm Shipping or any substantial portion of the property of any thereof is appointed and is not discharged within a period of thirty (30) days; or the Borrowers, the Guarantor or Palm Shipping by any act indicates consent to or approval of or acquiescence in any Proceeding or to the appointment of any receiver, trustee, liquidator or sequestrator of, or for, itself or any substantial portion of its property; or (j) Sale of Assets. The Borrowers, the Guarantor or Palm Shipping ceases, or threatens to cease, its operations or sells or otherwise disposes of, or threatens to sell or otherwise dispose of, all or substantially all of its assets or all or substantially all of its assets are seized or otherwise appropriated; or (k) Judgments. Any judgment or order is made the effect whereof would be to render ineffective or invalid this Agreement, the Note, the Security Documents or any of them; or (l) Inability to Pay Debts. Any of the Borrowers, the Guarantor or Palm Shipping is unable to pay or admits its inability to pay its debts as they fall due or if a moratorium shall be declared in respect of any Indebtedness thereof; or (m) Financial Position. Any change in the financial position of the Guarantor which, in the reasonable opinion of the Majority Lenders, is reasonably likely to have a material adverse effect on the ability of the 37 Borrowers, the Guarantor or Palm Shipping to perform its material obligations under this Agreement, the Note, the Security Documents or the Charters; or (n) Termination, Amendment or Assignment of Charters. Any of the Charters is terminated, materially amended or modified or assigned (other than pursuant to the Earnings Assignments) without the prior written consent of the Majority Lenders, or any party to any thereof defaults or ceases to perform thereunder for any reason whatsoever, then the Lenders' obligation to make the Credit Facility available shall cease and the Majority Lenders may, by notice to the Borrowers, declare the then outstanding Advances, accrued interest and any other sums payable by the Borrowers hereunder, under the Note and under the Security Documents immediately due and payable whereupon the same shall forthwith be due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived; provided that upon the happening of an event specified in subclauses (i) or (l) of this Clause 8.1, the Note shall be immediately due and payable without declaration or other notice to the Borrowers. In such event, the Lenders may proceed to protect and enforce their rights by action at law, suit in equity or in admiralty or other appropriate proceeding, whether for specific performance of any covenant contained in this Agreement, in the Note or in any of the Security Documents, or in aid of the exercise of any power granted herein or therein, or the Lenders may proceed to enforce the payment of the Note when due or to enforce any other legal or equitable right of the Lenders, or proceed to take any action authorized or permitted under the terms of any of the Security Documents or by applicable laws for the collection of all sums due, or so declared due, on the Note, including, without limitation, the right to appropriate and hold or apply (directly, by way of set-off or otherwise) to the payment of the obligations of the Borrowers to the Lenders hereunder, under the Note and/or under any of the Security Documents (whether or not then due) all moneys and other amounts of the Borrowers, then or thereafter in possession of the Lenders, the balance of any deposit account (demand or time, matured or unmatured) of the Borrowers, then or thereafter with the Lenders and every other claim of the Borrowers, then or thereafter against the Lenders. 8.2 Indemnification. The Borrowers agree to, and shall, indemnify and hold the Agents, the Security Trustee and the Lenders harmless against any loss or costs or expenses (including legal fees and expenses) which the Agents, the Security Trustee and the Lenders sustains or incurs as a consequence of any default in repayment of the principal amount of any of the Advances or interest accrued thereon or any other amount payable hereunder, under the Note or under the Security Documents (other than costs and expenses caused by the gross negligence or wilful misconduct of the Agents, the Security Trustee or any Lender) including, but not limited to, all actual losses incurred in liquidating or re-employing fixed deposits made by third parties or funds acquired to effect or maintain the Credit Facility or any part thereof. The Agents', Security Trustee's or Lenders' certification of such costs and expenses shall, absent any manifest error, be conclusive and binding on the Borrowers. 8.3 Application of Moneys. Except as otherwise provided in any Security Document, all moneys received by the Administrative Agent, Security Trustee or Lenders under or pursuant to this Agreement, the Note or any of the Security Documents after the happening of any Event of Default (unless cured to the satisfaction of the Majority Lenders) shall be applied by the Administrative Agent in the following manner: 38 (i) first, in or towards the payment or reimbursement of any expenses or liabilities incurred by the Agents, the Security Trustee or the Lenders in connection with the ascertainment, protection or enforcement of its rights and remedies hereunder, under the Note and under any of the Security Documents, (ii) secondly, in or towards payment of any interest owing in respect of the Advances or Commitment Commission, (iii) thirdly, in or towards repayment of principal owing in respect of the Advances, (iv) fourthly, in or towards payment of all other sums which may be owing to the Agents, the Security Trustee or the Lenders under this Agreement, under the Note, the Fee Letter or under any of the Security Documents, and (v) fifthly, the surplus (if any) shall be paid to the Borrowers or to whomsoever else may be entitled thereto. 9 COVENANTS 9.1 Each Borrower hereby covenants and undertakes with the Lenders that, from the date hereof and so long as any principal, interest or other monies are owing in respect of this Agreement, the Note, the Security Documents or any of them: A. The Borrowers will each: (i) Performance of Agreements. Duly perform and observe, and procure the observance and performance by all other parties thereto (other than the Agents, the Security Trustee and the Lenders) of, the terms of this Agreement, the Note and the Security Documents; (ii) Notice of Default; Change in Classification of Vessel. Promptly inform the Administrative Agent of the occurrence of (a) any Event of Default or of any event which with the giving of notice or lapse of time, or both, would constitute an Event of Default, (b) the withdrawal of any Vessel's rating by its Classification Society or the issuance by the Classification Society of any recommendation or notation affecting class, (c) any litigation or governmental proceeding pending or threatened against the Borrowers, Palm Shipping, the Guarantor which could reasonably be expected to have a material adverse effect on the business, assets, operations, property or financial condition of any such party and (d) any other event or condition of which it becomes aware which is reasonably likely to have a material adverse effect on its ability, or the ability of any other party thereto, to perform its obligations under this Agreement, the Note and the Security Documents or any of them; (iii) Obtain Consents. Without prejudice to Clause 2.1 and this 39 Clause 9.1, obtain every consent and do all other acts and things which may from time to time be necessary or advisable for the continued due performance of all its and any other party's (other than the Agents', the Security Trustee's or the Lenders') respective obligations under this Agreement, the Note and the Security Documents; (iv) Financial Statements. Deliver or cause to be delivered to the Administrative Agent (with sufficient copies for distribution to all of the Lenders): (a) as soon as available but not later than ninety (90) days after the end of each fiscal year of the Guarantor complete copies of the financial reports of the Guarantor (together with a Compliance Certificate substantially in the form of Exhibit K hereto, signed by the Chief Financial Officer of the Guarantor), on a consolidated basis, which shall include at least the consolidated balance sheet of the Guarantor as of the end of such year and the related consolidated statements of income, cash flow and retained earnings for such year, all in reasonable detail, certified by an Acceptable Accounting Firm, together with their opinion (without material qualifications) thereon; (b) as soon as available but not later than forty-five (45) days after the end of each of the first three quarters of each fiscal year of the Guarantor, balance sheets of the Guarantor, on a consolidated basis, as at the end of such quarter and the related consolidated statements of income, cash flow and retained earnings for such quarter, all in reasonable detail, unaudited, but certified by the chief financial officer of the Guarantor, together, in each instance, with a Compliance Certificate, signed by such chief financial officer of the Guarantor; (c) as soon as available, copies of all reports, statements or other instruments filed with the United States Securities and Exchange Commission; (d) such other statement or statements, lists of property and accounts, budgets, forecasts, reports and financial information with respect to the operation and management of the Vessels and any other vessels owned or operated directly or indirectly by or the Guarantor, as the Administrative Agent may from time to time reasonably request; (v) Corporate Existence. Do or cause to be done, and procure that the Guarantor and Palm Shipping shall do or cause to be done, all things necessary to preserve and keep in full force and effect their respective corporate existence, and all licenses, franchises, permits and assets necessary to the conduct of the business of each such corporation; (vi) Books, Records, etc. Keep, and procure that the Guarantor 40 and Palm Shipping shall keep, proper books of record and account into which full and correct entries shall be made, in accordance with GAAP throughout the Credit Facility Period; (vii) Inspection. Allow, and procure that the Guarantor and Palm Shipping shall allow, any representative or representatives designated by the Lenders, subject to applicable laws and regulations, to visit and inspect any of the properties of any such party, and, on request, to examine the books of account, records, reports and other papers (and to make copies thereof and to take extracts therefrom) of each such corporation and to discuss the affairs, finances and accounts of each such corporation, with the officers and executive employees of each such corporation all at such reasonable times and as often as such Lender reasonably requests; (viii) Taxes. Pay and discharge, and cause the Guarantor and Palm Shipping to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon each such corporation or upon such corporation's income or property prior to the date upon which penalties attach thereto; provided, however, that such corporations shall not be required to pay and discharge, or cause to be paid and discharged, any such tax, assessment, charge or levy so long as the legality or amount thereof shall be contested in good faith and by appropriate proceedings or other acts and it shall set aside on its books adequate reserves with respect thereto, and so long as such deferment in payment shall not subject any Vessel to material risk of forfeiture or loss; (ix) Compliance with Statutes, etc. Do or cause to be done, and procure that the Guarantor and Palm Shipping shall do or cause to be done, all things necessary to comply with all material laws, and the rules and regulations thereunder, applicable to the Borrowers, the Guarantor and Palm Shipping and including, without limitation, those laws, rules and regulations relating to employee benefit plans and environmental matters; (x) Environmental Matters. Promptly upon the occurrence of any of the following conditions, provide to the Administrative Agent a certificate of the chief executive officer thereof, specifying in detail the nature of such condition and the Borrowers', the Guarantor's or Palm Shipping's proposed response or the proposed response of any Environmental Affiliate (as such term is hereinafter defined) of any thereof, as the case may be: (a) the Borrowers', the Guarantor's or Palm Shipping's receipt or the receipt by any Environmental Affiliate of any thereof of any communication whatsoever that alleges that such person is not in compliance with any applicable environmental law or environmental approval, if such noncompliance could reasonably be expected to have a material adverse effect on the business, assets, operations, property or financial 41 condition of the Borrowers, the Guarantor or Palm Shipping, (b) knowledge by the Borrowers, the Guarantor or Palm Shipping or any Environmental Affiliate of any thereof that there exists any Environmental Claim pending or threatened against any such person which could reasonably be expected to have a material adverse effect on the business, assets, operations, property or financial condition of the Guarantor or (c) any release, emission, discharge or disposal of any material that could form the basis of any Environmental Claim against the Guarantor or any Environmental Affiliate of any thereof if such Environmental Claim could reasonably be expected to have a material adverse effec on the business, assets, operations, property or financial condition of the Guarantor. Upon the written request by the Administrative Agent, each Borrower will submit, and procure that the Guarantor and Palm Shipping shall submit, to the Administrative Agent at reasonable intervals, a report providing an update of the status of any issue or claim identified in any notice or certificate required pursuant to this subclause. For the purposes of this subclause, "Environmental Claim" shall mean any claim under federal, state and local environmental, health and safety laws, statutes or regulations. "Environmental Affiliate" shall mean any person or entity the liability of which for Environmental Claims the Borrowers, the Guarantor or Palm Shipping may have assumed by contract or operation of law; (xi) ISM Code Matters. (a) and will procure that the relevant Operator will, comply with, and ensure that (i) each Affiliate Vessel will comply with the requirements of the ISM Code by not later than July 1, 1998, and (ii) any newly-acquired Affiliate Vessel will comply with the requirements of the ISM Code within three months of its acquisition, including (but not limited to) the maintenance and renewal of valid certificates pursuant thereto throughout the Credit Facility Period; (b) and will procure that the Guarantor and any Operator will, immediately inform the Administrative Agent if there is any threatened or actual withdrawal of its, DOC or the SMC in respect of any Vessel or any Affiliate Vessel; and (c) and will procure that the Guarantor and relevant Operator will, promptly inform the Administrative Agent upon the issue to such Affiliate of the Guarantor or Operator of a DOC and to any Affiliate Vessel of an SMC. (xii) Accountants. Retain throughout the Credit Facility Period an Acceptable Accounting Firm as its independent certified accountants; (xiii) Continue Charters. Continue to charter the Vessels to Palm Shipping for the entire Credit Facility Period, and ensure that the terms of such Charters include, inter alia, that the payments of Palm Shipping to the Borrowers under the Charters will, in the aggregate, be sufficient to cover all payments of the Borrowers under this Agreement and any 42 operating and other expenses of such Borrower; - ----- ---- (xiv) Class Certificate. Furnish, or cause to be furnished, to the Administrative Agent, upon any change of a Vessel's classification status or the issuance of a recommendation affecting class by a Vessel's classification society or upon the Administrative Agent's reasonable request (to be made no more than once in any calendar year), a confirmation of class certificate covering each Vessel and evidencing compliance with the Mortgage; (xv) Maintenance of Properties. Maintain, or cause to be maintained, and keep, or cause to be kept, and procure that the Guarantor and Palm Shipping shall maintain, or cause to be maintained, and keep, or cause to be kept, all properties used or useful in the conduct of its business in good condition, repair and working order and supplied with all necessary equipment and will cause to be made necessary repairs, renewals and replacements thereof so that the business carried on and in connection therewith and every portion thereof may be properly and advantageously conducted at all times. In addition, each Borrower shall cause its Vessel to be drydocked as often as required by the Vessel's classification society and as a prudent shipowner would require; (xvi) Vessel Management. Cause its Vessel to be managed by the Manager or such ship manager selected by the Borrowers and satisfactory to the Majority Lenders pursuant to a written management agreement acceptable to the Majority Lenders; (xvii) Limitation on Restricted Payments. Procure that the Guarantor will not directly or indirectly declare or pay any dividend or make any distribution on its capital stock (such payments being defined as "Restricted Payments") if, at the time of, and after giving effect to, the proposed Restricted Payment: (A) a Default or Event of Default shall have occurred and be continuing or (B) the aggregate amount expended for all Restricted Payments (the amount so expended, if other than in cash, to be determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) after June 30, 1996 shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted Consolidated Net Income (or if Adjusted Consolidated Net Income is a loss one hundred percent (100%) of such amount) of the Guarantor accrued on a cumulative basis during the period (taken as one accounting period) beginning October 1, 1996 and ending on the last day of the last fiscal quarter preceding such date plus (2) the aggregate net proceeds (including the fair market value of non-cash proceeds as determined in good faith by the Board of Directors) received by the Guarantor (including the amount of any dividends re-invested in the capital stock of the Guarantor) from the issuance and sale of capital stock of the Guarantor (other than redeemable stock), including an issuance or sale for cash or other 43 property upon the conversion of any Indebtedness of the Guarantor subsequent to the date hereof, or from the issuance of any options, warrants or other rights to acquire capital stock of the Guarantor (in each case, exclusive of any redeemable stock or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the Maturity Date) plus (3) $50,000,000. The foregoing provision shall not take into account, and shall not be violated by reason of: (a) the payment of any dividend within 60 days after the date of declaration thereof if, at said date of declaration, such payment would comply with the foregoing paragraph; or (b) the repurchase, redemption or other acquisition by the Guarantor of capital stock of the Guarantor in exchange for, or out of the proceeds of a substantially concurrent offering of, shares of capital stock of the Guarantor (other than redeemable stock), provided that, no Event of Default shall have occurred and be continuing or occur as a consequence of the actions or payments set forth therein. B. None of the Borrowers, without the prior written consent of Majority Lenders, will: (i) Liens. Create, assume or permit to exist any mortgage, pledge, lien, charge, encumbrance or any security interest whatsoever upon any of such party's property or other assets, real or personal, tangible or intangible, whether now owned or hereafter acquired except: (a) liens for taxes not yet payable for which adequate reserves have been maintained; (b) the Mortgages, the Assignments and other liens in favor of the Security Trustee; (c) liens, charges and encumbrances against their respective Vessels permitted to exist under the terms of the Mortgages; (d) pledges of certificates of deposit or other cash collateral securing the Borrowers' reimbursement obligations in connection with letters of credit now or hereafter issued for the account of the Borrowers in connection with the establishment of the financial responsibility of the Borrowers under 33 C.F.R. Part 130 or 46 C.F.R. Part 540, as the case may be as the same may be amended or replaced; and (e) other liens, charges and encumbrances incidental to the conduct of the business of each such party or the ownership of any such party's property and assets and which do not in the aggregate materially detract from the value of each such party's property or assets or materially impair 44 the use thereof in the operation of its business; (ii) Loans and Advances. Make any loans or advances to, or any investments in any person, firm, corporation, joint venture or other entity (including, without limitation, any loan or advance to any officer, director, stockholder, employee or customer of any company affiliated with the Borrowers or the Guarantor) except for advances and investments in the normal course of its business and loans or advances to the Guarantor; (iii) Limitation on Indebtedness. (a) Incur, and shall procure neither the Guarantor nor Palm Shipping will, incur any Indebtedness excluding Indebtedness hereunder or in connection herewith to the Agents, the Security Trustee or the Lenders and Indebtedness existing on the date hereof; provided that the Guarantor or any of its Subsidiaries may incur Indebtedness if, after giving effect to the incurrence of such Indebtedness and the receipt and application of the proceeds therefrom, the Interest Coverage Ratio of the Guarantor would be greater than 2:1. Notwithstanding the foregoing, the Guarantor may incur each and all of the following: (I) Indebtedness in an aggregate principal amount such that the aggregate principal amount of the Indebtedness of the Guarantor outstanding immediately after such incurrence does not exceed the aggregate principal amount of Indebtedness existing on the date hereof; (II) Indebtedness of the Guarantor to any Wholly-Owned Subsidiary; (III) Indebtedness issued in exchange for, or the net proceeds of which are used to refinance or refund, outstanding Indebtedness of the Guarantor, other than Indebtedness incurred under clauses (I) or (V) of this paragraph and any refinancings thereof, in an amount not to exceed the principal amount so exchanged, refinanced or refunded (plus premiums, accrued and unpaid interest, fees and expenses thereon); (IV) Indebtedness (A) in respect of performance, surety or appeal bonds provided in the ordinary course of business, (B) under Currency Agreements and Interest Rate Agreements; provided that, in the case of Currency Agreements that relate to other Indebtedness, such Currency Agreements do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder, and (C) arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Guarantor pursuant to such agreements, in any case incurred in connection with the 45 disposition of any business, assets of the Guarantor and not exceeding the gross proceeds therefrom, other than Guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business or assets of the Guarantor for the purpose of financing such acquisition; (V) Indebtedness in connection with the acquisition of any new Wholly owned Subsidiary; provided that, with respect to this Clause 9.1(B)(iii)(a)(V), after giving effect to the Incurrence thereof, the Guarantor could incur at least $1.00 of Indebtedness pursuant to the first paragraph of this Clause 9.1(B)(iii)(a); and - -------- (VI) Indebtedness of Palm Shipping incurred in the ordinary course of the operation of vessels or Indebtedness of Palm Shipping to the Guarantor resulting from advances to Palm Shipping by the Guarantor made in the ordinary course of business; (b) For purposes of determining any particular amount of Indebtedness under this Clause 9.1(B)(iii), guarantees or obligations with respect to letters of credit supporting Indebtedness otherwise included in the determination of such particular amount shall not be included. For purposes of determining compliance with this Clause, (i) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described above in this Clause, the Guarantor, in its sole discretion, shall classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses and (ii) the amount of Indebtedness issued at a price that is less than the principal amount thereof shall be equal to the amount of the liability in respect thereof determined in conformity with GAAP. Notwithstanding any other provision of this Clause, the maximum amount of Indebtedness that the Guarantor may incur pursuant to this Clause shall not be deemed to be exceeded due solely to fluctuations in the exchange rates of currencies. (c) The Guarantor shall not incur any Indebtedness that is expressly subordinated to any other Indebtedness of the Guarantor unless such Indebtedness, by its terms or the terms of any agreement or instrument pursuant to which such Indebtedness is issued or remains outstanding, is also expressly made subordinate to the Indebtedness of the Guarantor under the Guaranty. (iv) Guarantees, etc. Assume, guarantee or (other than in the ordinary course of its business) endorse or otherwise become or remain liable, in connection with any obligation of any person, firm, company or other entity except for guaranties in favor of the Lenders or the Security Trustee on behalf of the Lenders; (v) Changes in Business. Change the nature of its business or commence any other business; (vi) Use of Corporate Funds. Pay out any funds to any company or person except (a) in the ordinary course of business in 46 connection with the management of the business of the Borrowers and the Guarantor, including the operation and/or repair of the Vessels and (b) the servicing of the indebtedness to the Lenders; (vii) Issuance of Shares. Issue or dispose of any shares of its own capital stock to any person; (viii) Consolidation, Merger. Consolidate with, or merge into any corporation; (ix) Changes in Offices or Names. Change the location of the chief executive office of the Borrowers or the Guarantor, the office of the chief place of business any such parties, the office of the Borrowers in which the records relating to the earnings or insurances of the Vessel are kept unless the Lenders shall have received thirty (30) days prior written notice of such change; (x) Limitation on Transactions with Shareholders and Affiliates. None of the Borrowers will and will procure that neither the Guarantor nor Palm Shipping will, directly or indirectly enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) or series of related transactions with any holder (or any Affiliate of such holder) of 5% or more of any class of capital stock of the Guarantor or with any Affiliate of the Guarantor, except upon fair and reasonable terms no less favorable to the Borrowers, the Guarantor or Palm Shipping, than could be obtained, at the time of such transaction or series of related transactions or at the time of the execution of the agreement providing therefor, in a comparable arm's-length transaction with a Person that is not such a holder or Affiliate. The foregoing limitation does not limit, and shall not apply to: (a) transactions or series of related transactions (I) approved by a majority of the disinterested members of the Board of Directors as fair to the Borrowers, the Guarantor or Palm Shipping, or (II) for which the Borrowers, the Guarantor or Palm Shipping, as the case may be, delivers to the Administrative Agent a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to the Borrowers, the Guarantor or Palm Shipping, as the case may be, from a financial point of view; (b) the payment of reasonable and customary regular fees to directors of the Borrowers, the Guarantor or Palm Shipping, who are not employees of the Borrowers, the Guarantor or Palm Shipping; or (c) any Restricted Payments not prohibited by Clause 9.1(A)(xvi); or (xi) Change of Flag. Change the flag of any Vessel or the management of such Vessel; or (xii) Sale of Vessel. Sell, transfer or otherwise dispose of a Vessel other than in accordance with Clause 9.4 hereof. 47 9.2 Valuation of the Vessels. The aggregate fair market value ("FMV") of the Vessels during the Credit Facility Period shall be greater than or equal to: (1) for the first two years of the Credit Facility Period, a minimum of 120% of the Credit Facility during such period, (2) for the third and fourth year of the Credit Facility Period, a minimum of 125% of the Credit Facility during such period and (3) for the fifth year of the Credit Facility Period and up to the Maturity Date, a minimum of 130% of the Credit Facility during such period (the "Relevant Percentages"). The FMV of each Vessel shall be determined at the Administrative Agent's discretion, but no less frequently than annually, on the basis of a valuation (the "Valuation") provided by the Administrative Agent. In the event the Majority Lenders or the Borrowers disagree with the Administrative Agent's Valuation, then the Borrowers and the Administrative Agent shall each obtain a separate valuation (the "Additional Valuations") from separate independent shipbrokers, and the FMV shall be determined to be the arithmetic average of the Additional Valuations. The cost of all Additional Valuations obtained hereunder shall be for the account of the Borrowers. 9.3 Collateral Maintenance. If the FMV of the Vessels, as determined pursuant to Clause 9.2 falls below the Relevant Percentages, within a period of ten (10) Banking Days following receipt by the Borrowers of written notice from the Administrative Agent notifying the Borrower of such shortfall and specifying the amount thereof (which amount shall, in the absence of manifest error, be deemed to be conclusive and binding on the Borrowers) (a) the Borrowers shall deliver to the Administrative Agent, upon its request, such additional collateral as may be satisfactory to the Lenders, in their sole discretion (including the deposit of cash in a cash collateral account maintained with the Administrative Agent), such that the sum of (i) the value of the Vessels, as determined in accordance with the latest Valuation delivered pursuant to Clause 9.2, and (ii) such additional collateral (other than cash collateral) shall be greater or equal to the Relevant Percentage of the Credit Facility less any cash collateral held by the Administrative Agent in a cash collateral account or (b) the Lenders shall reduce their Commitments hereunder and the Borrowers shall, if necessary, prepay such Advances or part thereof (together with interest thereon) as shall result in the FMV of the Vessels being not less than the Relevant Percentage of the Credit Facility. The Commitments of the Lenders shall be reduced accordingly and shall be adjusted proportionally to reflect such as required by Clause 5.5 hereof. 9.4 Reduction of Collateral. In the event of Total Loss of a Vessel or the sale by a Borrower of its Vessel or the release of its Vessel from the lien of the Mortgage thereon at the Borrower's request, upon such Total Loss or prior to or simultaneously with such sale or other disposition either: (a) the Credit Facility shall, on the date of Total Loss, sale or other disposition, be reduced by, in the case of the Vessel being sold, the net sales proceeds thereof and in the case of a Vessel suffering a Total Loss or being otherwise released from the security package, the FMV thereof, provided that, if the aggregate of the FMV of the remaining Vessels is more than 150% of the Credit Facility, after giving effect to the reduction by the net sales proceeds or FMV, as the case may be, the Credit Facility shall be reduced by only 50% of such net sales proceeds or FMV, as the case may be. The remaining reductions pursuant to Clause 5.2 shall be adjusted proportionately to reflect such reduction; or 48 (b) a Borrower, pursuant to an Accession Agreement or otherwise, substitutes a vessel approved by the Lenders or a vessel meeting all of the following characteristics and pursuant to the following conditions: (i) an Aframax tanker between 75,000 and 115,000 dead weight tons (ii) built in or after 1988 but in no event more than two years older than the Vessel sold or released; (iii) complies with requirements of Clause 4.1(b) hereof; (iv) has a FMV greater than or equal to the FMV of the Vessel sold or released; and (v) the relevant owner of the Vessel has, if relevant, executed an Accession Agreement and has executed a counterpart of the Note, a Mortgage, an Assignment of Earnings and an Assignment of Insurances and the Guarantor has pledged the shares of such owner in favor of the Security Trustee as provided with respect to each other Borrower hereunder and has met the conditions, updated mutadis mutandis, of Clauses 4.1(a), (b), (c), (d)(ii), (e), (f), (g), (h), (i), (k) and (l). Upon the satisfaction of the foregoing conditions of this Clause 9.4(b), the Lenders shall release the Mortgage covering the Vessel to be sold, disposed of or otherwise released and shall release the Borrower owning such Vessel from its obligations hereunder. (c) Notwithstanding the provisions of Clause 9.4(a) above, in the event that upon a Vessel sale or other disposition the Borrowers deposit with the Security Trustee cash collateral, on such terms as the Security Trustee may require, in an amount equal to the net sale proceeds or FMV of the released Vessel, as the case may be, on or prior to such sale or other disposition, the reduction of the Credit Facility required by such Clause shall be deferred for three (3) months. In the event that a Vessel suffers a Total Loss, the reduction of the Credit Facility required by Clause 9.4(a) shall be deferred for three (3) months without the deposit of cash collateral as required by the foregoing sentence (unless the insurers of the Vessel suffering a Total Loss have declined coverage for such Total Loss at any time prior to the expiration of such three (3) month period). In the event the Borrowers have procured a substitute Vessel as provided in Clause 9.4(b) above within said three (3) month period there shall be no reduction of Commitment. 9.5 Inspection and Survey Reports. If the Lenders shall so request, the Borrowers shall provide the Lenders with copies of all internally generated inspection or survey reports on the Vessels. 10 ASSIGNMENT This Agreement shall be binding upon, and inure to the benefit of, the Borrowers, the Agents, the Security Trustee and the Lenders and their respective successors and assigns, except that the Borrowers may not assign any of their rights or obligations hereunder except as specifically provided herein. The Lenders may, with the prior written consent of the Borrowers (such consent not to be unreasonably withheld) assign a portion of their rights and 49 obligations under this Agreement to any one or more commercial lenders (the expenses of the Lenders in connection with any such assignment shall be for their own account), provided, however, in the event of any such assignment, such assignment is to be made pursuant to an Assignment and Assumption Agreement substantially in the form of Exhibit I hereto. The Borrowers will take all reasonable actions requested by the Lenders to effect such assignment, including, without limitation, the execution of a written consent to such Assignment and Assumption Agreement. 11 ILLEGALITY, INCREASED COST, NON-AVAILABILITY, ETC. 11.1 Illegality. In the event that by reason of any change in any applicable law, regulation or regulatory requirement or in the interpretation thereof any of the Lenders reasonably concludes that it has become unlawful for such Lender to maintain or give effect to its obligations as contemplated by this Agreement, such Lender shall inform the Administrative Agent and the Borrowers to that effect, whereafter the liability of such Lender to make its Commitment available shall forthwith cease and the Borrowers shall be required to prepay the then outstanding portion of such Lender's Advances immediately in accordance with and subject to the provisions of Clause 11.4. In any such event, but without prejudice to the aforesaid obligations of the Borrowers to prepay the Advances, the Borrowers and such Lender shall negotiate in good faith with a view to agreeing on terms for making its Commitment available from another jurisdiction or otherwise restructuring the Credit Facility on a basis which is not unlawful with respect to such Lender and the Joint Arrangers and Underwriters shall use reasonable efforts to replace such Lender with a lender for which the making and performance of the Agreement would not be illegal. 11.2 Increased Cost. If any change in applicable law, regulation or regulatory requirement or in the interpretation or application thereof by any governmental or other authority, shall: (i) change the basis of taxation (excluding any change in the rate of any Tax) to any of the Lenders of payments of principal or interest or any other payment due or to become due pursuant to this Agreement (other than a change in taxation of the overall net income of such Lender effected by the jurisdiction of organization or the jurisdiction of the principal place of business of such Lender, the United States of America, the State or City of New York or any governmental subdivision or other taxing authority having jurisdiction over the Lender (unless such jurisdiction is asserted solely by reason of the activities of any of the Borrowers) or such other jurisdiction where the Advances may be repayable), or (ii) impose, modify or deem applicable any reserve requirements or require the making of any special deposits against or in respect of any assets or liabilities of, deposits with or for the account of, or loans by, the Lenders, or (iii) impose on the Lenders any other condition affecting the Credit Facility or any part thereof, and the result of the foregoing is either to increase the cost to the Lenders of making available or maintaining the Credit Facility or any part thereof or to reduce the amount of any payment received 50 by the Lenders, then and in any such case if such increase or reduction in the opinion of th Lenders materially affects the interests of the Lenders under or in connection with this Agreement, then: (a) the Administrative Agent shall notify the Borrowers of the happening of such event, (b) the Borrowers agree forthwith upon demand to pay to the Agents, Security Trustee or the Lenders such amount as the Administrative Agent certifies to be necessary to compensate the Agents, the Security Trustee or the Lenders for such additional cost or such reduction, and (c) any such demand as is referred to in sub-clause (b) of this Clause 11.2 may be made by the Administrative Agent at any time before or after any repayment of the Credit Facility. 11.3 Non-Availability. If the Administrative Agent shall determine that, by reason of circumstances affecting the London Interbank Market generally, adequate and reasonable means do not or will not exist for ascertaining the Applicable Rate for the Credit Facility or part thereof for any Interest Period, the Administrative Agent shall give notice of such determination to the Borrowers. The Borrowers and the Lenders shall then negotiate in good faith in order to agree upon a mutually satisfactory interest rate and/or Interest Period to be substituted for those which would otherwise have applied under this Agreement. If the Borrowers and the Lenders are unable to agree upon such a substituted interest rate and/or Interest Period within thirty (30) days of the giving of such determination notice, the Lenders shall set an interest rate and Interest Period to take effect from the expiration of the Interest Period in effect at the date of determination, which rate shall be equal to the Margin plus the cost to the Lenders of funding the Credit Facility. In the event the state of affairs referred to in this Clause 11.3 shall extend beyond the end of the Interest Period, the foregoing procedure shall continue to apply until circumstances are such that the Applicable Rate may be determined pursuant to Clause 6. 11.4 Determination of Losses. A certificate or determination notice of the Administrative Agent, as to any of the matters referred to in this Clause 11 shall, absent manifest error, be conclusive and binding on the Borrowers. 11.5 Compensation for Losses. Where the Advances or a portion thereof are to be prepaid by the Borrowers pursuant to Clause 11.1 the Borrowers agree simultaneously with such prepayment to pay to the Agents, the Security Trustee or the Lenders all accrued interest to the date of actual payment and all other sums payable by the Borrowers to the Agents, the Security Trustee or the Lenders pursuant to this Agreement without penalty or premium. 12 CURRENCY INDEMNITY 12.1 Currency Conversion. If for the purpose of obtaining or enforcing a 51 judgment in any court in any country it becomes necessary to convert into any other currency (the "judgment currency") an amount due in Dollars under this Agreement, the Note or any of the Security Documents then the conversion shall be made, in the discretion of the Lenders, at the rate of exchange prevailing either on the date of default or on the day before the day on which the judgment is given or the order for enforcement is made, as the case may be (the "conversion date"), provided that the Lenders shall not be entitled to recover under this clause any amount in the judgment currency which exceeds at the conversion date the amount in Dollars due under this Agreement, the Note and/or any of the Security Documents. 12.2 Change in Exchange Rate. If there is a change in the rate of exchange prevailing between the conversion date and the date of actual payment of the amount due, the Borrowers shall pay such additional amounts (if any, but in any event not a lesser amount) as may be necessary to ensure that the amount paid in the judgment currency when converted at the rate of exchange prevailing on the date of payment will produce the amount then due under this Agreement, the Note and/or any of the Security Documents in Dollars; any excess over the amount due received or collected by the Lenders shall be remitted to the Borrowers. 12.3 Additional Debt Due. Any amount due from the Borrowers under Clause 12.2 shall be due as a separate debt and shall not be affected by judgment being obtained for any other sums due under or in respect of this Agreement, the Note and/or any of the Security Documents. 12.4 Rate of Exchange. The term "rate of exchange" in this Clause 12 means the rate at which the Lenders in accordance with their normal practices are able on the relevant date to purchase Dollars with the judgment currency and includes any premium and costs of exchange payable in connection with such purchase. 13 FEES AND EXPENSES 13.1 Commitment Commission. The Borrowers will pay the Commitment Commission on the available but undrawn amount of the Credit Facility quarterly in arrears commencing three months from the date hereof. The Commitment Commission shall accrue from day to day and be calculated on the actual number of days elapsed and a three hundred sixty (360) day year. 13.2 Agency Fee. The Borrowers shall pay to the Administrative Agent the agency fee set forth in the Fee Letter. 13.3 Arrangement Fee. The Borrowers shall pay to the Joint Arrangers and Underwriters the arrangement fee as set forth in the Fee Letter. 13.4 Underwriting Fee. The Borrowers shall pay to the Joint Arrangers and Underwriters the underwriting fee as set forth in the Fee Letter. 13.5 Expenses. The Borrowers jointly and severally agree, whether or not the transactions hereby contemplated are consummated, on demand to pay, or reimburse 52 the Agents, the Security Trustee and the Lenders for their payment of, the reasonable expenses of the Agents, the Security Trustee and the Lenders incident to said transactions (and in connection with any supplements, amendments, waivers or consents relating thereto or incurred in connection with the enforcement or defense of any of the Agents', Security Trustee's and Lenders' rights or remedies with respect thereto or in the preservation of the Agents, the Security Trustee's and the Lenders' priorities under the documentation executed and delivered in connection therewith) including, without limitation, all reasonable costs and expenses of preparation, negotiation, execution and administration of this Agreement and the documents referred to herein, the reasonable fees and disbursements of the Lenders' counsel in connection therewith, including Seward & Kissel, as well as the reasonable fees and expenses of any independent appraisers, surveyors, engineers and other consultants retained by the Agents, the Security Trustee and the Lenders in connection with this transaction, all reasonable costs and expenses, if any, in connection with the enforcement of this Agreement, the Note and the Security Documents and stamp and other similar taxes, if any, incident to the execution and delivery of the documents (including, without limitation, the Note) herein contemplated and to hold the Lenders free and harmless in connection with any liability arising from the nonpayment of any such stamp or other similar taxes. Such taxes and, if any, interest and penalties related thereto as may become payable after the date hereof shall be paid immediately by the Borrowers to the Agents, the Security Trustee or the Lenders, as the case may be, when liability therefor is no longer contested by such party or parties or reimbursed immediately by the Borrowers to such party or parties after payment thereof (if the Agents, the Security Trustee or the Lenders, at their sole discretion, choose to make such payment). 14 APPLICABLE LAW, JURISDICTION AND WAIVER 14.1 Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 14.2 Jurisdiction. Each of the Borrowers hereby irrevocably submits to the jurisdiction of the courts of the State of New York and of the United States District Court for the Southern District of New York in any action or proceeding brought against it by the Lenders under this Agreement or under any document delivered hereunder and hereby irrevocably agrees that service of summons or other legal process on it may be served by registered mail addressed thereto, c/o Watson, Farley & Williams, 380 Madison Avenue, New York, New York 10017. The service, as herein provided, of such summons or other legal process in any such action or proceeding shall be deemed personal service and accepted by the Borrowers as such, and shall be legal and binding upon the Borrowers for all the purposes of any such action or proceeding. Final judgment (a certified or exemplified copy of which shall be conclusive evidence of the fact and of the amount of any indebtedness of the Borrowers to the Lenders) against the Borrowers in any such legal action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment. The Borrowers will advise the Lenders promptly of any change of address for the purpose of service of process. Notwithstanding anything herein to the contrary, the Lenders may bring any legal action or proceeding in any other appropriate jurisdiction. 14.3 WAIVER OF JURY TRIAL. IT IS MUTUALLY AGREED BY AND AMONG THE BORROWERS, THE GUARANTOR, THE CO-ARRANGERS, THE AGENTS, THE SECURITY TRUSTEE AND THE 53 LENDERS THAT EACH OF THEM HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY HERETO AGAINST ANY OTHER PARTY HERETO ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT, THE NOTE OR THE SECURITY DOCUMENTS. 15 THE ADMINISTRATIVE AGENT 15.1 Appointment of Administrative Agent. Each of the Lenders hereby irrevocably appoints and authorizes the Administrative Agent (which for purposes of this Clause 15 shall be deemed to include the Administrative Agent acting in its capacity as Security Trustee pursuant to Clause 16 hereof) to take such action as agent on its behalf and to exercise such powers under this Agreement, the Note, and the Security Documents as are delegated to the Administrative Agent by the terms hereof and thereof. Neither the Administrative Agent nor any of its directors, officers, employees or agents shall be liable for any action taken or omitted to be taken by it or them under this Agreement, the Notes, or the Security Documents or in connection therewith, except for its or their own gross negligence or wilful misconduct. 15.2 Distribution of Payments. Whenever any payment is received by the Administrative Agent from the Borrowers for the account of the Lenders, or any of them, whether of principal or interest on the Notes, commissions, fees under Clauses 13.1 and 13.5, or otherwise, it will thereafter cause to be distributed on the same day if received before 11 a.m. New York time, or on the next day if received thereafter, like funds relating to such payment ratably to the Lenders according to their respective Commitments , to be applied according to the terms of this Agreement. 15.3 Holder of Interest in Note. The Administrative Agent may treat each Lender as the holder of all of the interest of such Lender in the Note, as the case may be, until written notice of transfer, in form and substance satisfactory to the Administrative Agent, signed by such Lender shall have been filed with the Administrative Agent. 15.4 No Duty to Examine, Etc. The Administrative Agent shall not be under a duty to examine or pass upon the validity, effectiveness or genuineness of any of the Security Documents or any instrument, document or communication furnished pursuant to this Agreement or in connection therewith or in connection with any Security Document, and the Administrative Agent shall be entitled to assume that the same are valid, effective and genuine, have been signed or sent by the proper parties and are what they purport to be. 15.5 Administrative Agent as Lender. With respect to that portion of the Credit Facility made available by it, the Administrative Agent shall have the same rights and powers hereunder as any other Lenders and may exercise the same as though it were not the Administrative Agent, and the term "Lender" or "Lenders" shall include the Administrative Agent in its capacity as a Lender. The Administrative Agent and its affiliates may accept deposits from, lend money to and generally engage in any kind of business with, the Borrower, and the Guarantor as if it were not the Administrative Agent. 54 15.6 (a) Obligations of Administrative Agent. The obligations of the Administrative Agent under this Agreement, under the Notes, and under the Security Documents are only those expressly set forth herein and therein. (b) No Duty to Investigate. The Administrative Agent shall not at any time be under any duty to investigate whether an Event of Default, or an event which with the giving of notice or lapse of time, or both, would constitute an Event of Default, has occurred or to investigate the performance of this Agreement or any of the Security Documents by the Borrowers or the Guarantor. 15.7 (a) Discretion of Administrative Agent. The Administrative Agent shall be entitled to use its discretion with respect to exercising or refraining from exercising any rights which may be vested in it by, and with respect to taking or refraining from taking any action or actions which it may be able to take under or in respect of, this Agreement, the Note, and the Security Documents, unless the Administrative Agent shall have been instructed by the Majority Lenders to exercise such rights or to take or refrain from taking such action; provided, however, that the Administrative Agent shall not be required to take any action which exposes the Administrative Agent to personal liability or which is contrary to this Agreement or applicable law. (b) Instructions of Majority Lenders. The Administrative Agent shall in all cases be fully protected in acting or refraining from acting under this Agreement, under the Note, under the Guaranty or under any Security Document in accordance with the instructions of the Majority Lenders, and any action taken or failure to act pursuant to such instructions shall be binding on all of the Lenders. 15.8 Assumption re Event of Default. Except as otherwise provided in Clause 15.14 hereof, the Administrative Agent shall be entitled to assume that no Event of Default, or event which with the giving of notice or lapse of time, or both, would constitute an Event of Default, has occurred and is continuing, unless the Administrative Agent has been notified by the Borrowers or the Guarantor of such fact, or has been notified by a Lender that such Lender considers that an Event of Default or such an event (specifying in detail the nature thereof) has occurred and is continuing. In the event that the Administrative Agent shall have been notified by the Borrowers or any Lender in the manner set forth in the preceding sentence of any Event of Default or of an event which with the giving of notice or lapse of time, or both, would constitute an Event of Default, the Administrative Agent shall notify the Lenders and shall take action and assert such rights under this Agreement, under the Notes, and under Security Documents as the Majority Lenders shall request in writing. 15.9 No Liability of Administrative Agent or Lenders. Neither the Administrative Agent nor any of the Lenders shall be under any liability or responsibility whatsoever: (A) To the Borrowers or the Guarantor or any other person or entity as a consequence of any failure or delay in performance by, or any breach by, any other Lenders or any other person of any of its or their obligations under this Agreement or under any Security Document; (B) To any Lender or Lenders, as a consequence of any failure or delay in performance by, or any breach by, the Borrowers or the Guarantor of any of their 55 respective obligations under this Agreement, under the Notes, or under the Security Documents; or (C) To any Lender or Lenders, for any statements, representations or warranties contained in this Agreement, in any Security Document or any Document or instrument delivered in connection with the transaction hereby contemplated; or for the validity, effectiveness, enforceability or sufficiency of this Agreement, the Note, or any Security Document or any document or instrument delivered in connection with the transactions hereby contemplated. 15.10 Indemnification of Administrative Agent. The Lenders agree to indemnify the Administrative Agent (to the extent not reimbursed by the Borrowers or the Guarantor), pro rata according to the respective amounts of their Commitments, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including legal fees and expenses incurred in investigating claims and defending itself against such liabilities) which may be imposed on, incurred by or asserted against, the Administrative Agent in any way relating to or arising out of this Agreement, the Note, or any Security Document, any action taken or omitted by the Administrative Agent thereunder or the preparation, administration, amendment or enforcement of, or waiver of any provision of, this Agreement, the Note, or any Security Document, except that no Lenders shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or wilful misconduct. 15.11 Consultation with Counsel. The Administrative Agent may consult with legal counsel selected by it and shall not be liable for any action taken, permitted or omitted by it in good faith in accordance with the advice or opinion of such counsel. 15.12 Resignation. The Administrative Agent may resign at any time by giving 60 days' written notice thereof to the Lenders and the Borrowers. Upon any such resignation, the Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Lenders and shall have accepted such appointment within 60 days after the retiring Administrative Agent's giving notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank or trust company of recognized standing. The appointment of any successor Administrative Agent shall be subject to the prior written consent of the Borrowers (unless such successor Administrative Agent is a Joint Arranger and Underwriter), such consent not be unreasonably withheld. After any retiring Administrative Agent's resignation as Administrative Agent hereunder, the provisions of this Clause 15 shall continue in effect for its benefit with respect to any actions taken or omitted by it while acting as Administrative Agent. 15.13 Representations of Lenders. Each Lender represents and warrants to each other Lender and the Administrative Agent that: (i) In making its decision to enter into this Agreement and to make its 56 portion of the Credit Facility available hereunder, it has independently taken whatever steps it considers necessary to evaluate the financial condition and affairs of the Borrowers and the Guarantor, that it has made an independent credit judgment and that it has not relied upon any statement, representation or warranty by any other Lender or the Administrative Agent; and (ii) So long as any portion of its Commitments remain outstanding, it will continue to make its own independent evaluation of the financial condition and affairs of the Borrowers and the Guarantor. 15.14 Notification of Event of Default. The Administrative Agent hereby undertakes to promptly notify the Lenders, and the Lenders hereby promptly undertake to notify the Administrative Agent and the other Lenders, of the existence of any Event of Default which shall have occurred and be continuing of which the Administrative Agent or any Lender has actual knowledge. 15.15 Annual Bank Meeting. The Administrative Agent shall schedule an annual bank meeting each year during the Credit Facility Period and shall choose the location thereof. Each of the Lenders shall, at its own expense, use its reasonable efforts to attend such meeting. 16 APPOINTMENT OF SECURITY TRUSTEE Each of the Lenders irrevocably appoints the Security Trustee as security trustee on their respective behalf with regard to the (i) security, powers, rights, titles, benefits and interests (both present and future) constituted by and conferred on the Lenders or any of them or for the benefit thereof under or pursuant to this Agreement, the Note or any Security Documents (including, without limitation, the benefit of all covenants, undertakings, representations, warranties and obligations given, made or undertaken to any Lender in the Agreement or any Security Document, (ii) all moneys, property and other assets paid or transferred to or vested in any Lender or any agent of any Lender or received or recovered by any Lender or any agent of any Lender pursuant to, or in connection with, this Agreement, the Note or the Security Documents whether from any Borrower or the Guarantor or any other person and (iii) all money, investments, property and other assets at any time representing or deriving from any of the foregoing, including all interest, income and other sums at any time received or receivable by any Lender or any agent of any Lender in respect of the same (or any part thereof). The Security Trustee hereby accepts such appointment. 17 NOTICES AND DEMANDS 17.1 Notices. All notices, requests, demands and other communications to any party hereunder shall be in writing (including prepaid overnight courier, facsimile transmission or similar writing) and shall be given to the Borrowers at the address or telecopy number set forth below and to the Lenders, the Agents and the Security Trustee at their address and telecopy number set forth in Schedule 2 or at such other address or telecopy number as such party may hereafter specify for the purpose by notice to each other party hereto. Each such notice, request or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Clause and telephonic confirmation of receipt thereof is obtained or (ii) 57 if given by mail, prepaid overnight courier or any other means, when received at the address specified in this Clause or when delivery at such address is refused. If to the Borrowers: c/o Teekay Shipping Limited 4th Floor Euro Canadian Centre Marlborough Street and Navy Lion Road P.O. Box SS 6293 Nassau, Bahamas Fax: (809) 328-7330 Attention: President 18 MISCELLANEOUS 18.1 Time of Essence. Time is of the essence of this Agreement but no failure or delay on the part of the Lenders to exercise any power or right under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise by the Lenders of any power or right hereunder preclude any other or further exercise thereof or the exercise of any other power or right. The remedies provided herein are cumulative and are not exclusive of any remedies provided by law. 18.2 Unenforceable, etc., Provisions - Effect. In case any one or more of the provisions contained in this Agreement, in the Note or in any of the Security Documents would, if given effect, be invalid, illegal or unenforceable in any respect under any law applicable in any relevant jurisdiction, said provision shall not be enforceable against the Borrowers, but the validity, legality and enforceability of the remaining provisions herein or therein contained shall not in any way be affected or impaired thereby. 18.3 References. References herein to Clauses and Schedules are to be construed as references to clauses of, and schedules to, this Agreement. 18.4 Further Assurances. Each of the Borrowers agree that if this Agreement, the Note or any of the Security Documents shall, in the reasonable opinion of the Lenders, at any time be deemed by the Lenders for any reason insufficient in whole or in part to carry out the true intent and spirit hereof or thereof, it will execute or cause to be executed such other and further assurances and documents as in the opinion of the Lenders may be required in order more effectively to accomplish the purposes of this Agreement, the Note or any of the Security Documents. 18.5 Prior Agreements, Merger. Any and all prior understandings and agreements heretofore entered into between the Borrowers, the Guarantor and Palm Shipping on the one part, and the Agents, the Security Trustee, the Joint Arrangers and Underwriters or the Lenders, on the other part, in respect of the subject matter of this Agreement whether written or oral (other than the Fee Letter), are superseded by and merged into this Agreement and the other agreements (the forms of which are exhibited hereto) to be executed and delivered in connection 58 herewith to which the Borrowers, the Guarantor and Palm Shipping, the Security Trustee, the Joint Arrangers and Underwriters and/or the Agents and/or the Lenders are parties, which alone fully and completely express the agreements between the Borrowers, the Guarantor and Palm Shipping, the Security Trustee, the Joint Arrangers and Underwriters the Agents and the Lenders. 18.6 Joint and Several Obligations. The obligations of the Borrowers under this Agreement and under each provision hereof are joint and several whether or not so specified in any provision hereof. Each Borrower shall be entitled to rights of contribution as against the other Borrower, provided, however, that such rights of contribution shall (a) not in any way condition or lessen the liability of any Borrower as a joint and several borrower for the whole of the obligations owed to the Lenders hereunder, under the Note or under the Security Documents and (b) be fully subject and subordinate to the rights of the Lenders hereunder, under the Note and under the Security Documents. 18.7 Limitation of Liability. Notwithstanding anything to the contrary contained in this Agreement or any of the other Security Documents, in the event that any court or other judicial body of competent jurisdiction determines that legal principles of fraudulent conveyances, fraudulent transfers or similar concepts are applicable in evaluating the enforceability against any particular Borrower or its assets of this Agreement or any Security Document granted by such Borrower as security for its obligations hereunder and that under such principles, this Agreement or such Security Documents would not be enforceable against such Borrower or its asset unless the following provisions of this Clause 18.7 had effect, then, the maximum liability of each Borrower hereunder (the "Maximum Liability Amount") shall be limited so that in no event shall such amount exceed the lesser of (i) the Indebtedness and (ii)an amount equal to the aggregate, without double counting, of (a) ninety-five percent (95%) of the such Borrower's Adjusted Net Worth (as hereinafter defined) on the date hereof, or on the date enforcement of this Agreement is sought (the "Determination Date"), whichever is greater, (b) the aggregate fair value of such Borrower's Subrogation and Contribution Rights (as hereinafter defined) and (c) the amount of any Valuable Transfer (as hereinafter defined) to such Borrower, provided that such Borrower's liability under this Agreement shall be further limited to the extent, if any, required so that the obligations of such Borrower under this Agreement shall not be subject to being set aside or annulled under any applicable law relating to fraudulent transfers or fraudulent conveyances. In determining the limitations, if any, on the amount of any of such Borrower's obligations hereunder pursuant to the preceding sentence, any rights of subrogation or contribution (collectively the "Subrogation and Contribution Rights") which such Borrower may have on the Determination Date with respect to any other guarantor of the Indebtedness under applicable law shall be taken into account. As used in this Clause 18.7, "Indebtedness" of the Borrower shall mean, all of the Borrower's present or future indebtedness whether for principal, interest, fees, expenses or otherwise, to the Lenders under this Agreement and the Security Documents. As used herein "Adjusted Net Worth" of the respective Borrower shall mean, as of any date of determination thereof, an amount equal to the lesser of (a) an amount equal to the excess of (i) the amount of the present fair saleable value of the assets of such Borrower over (ii) the amount that will be required to pay such Borrower's probable liability on its then existing debts, including contingent liabilities, as they become absolute and matured, and (b) an amount equal to (i) the excess of the sum of such Borrower's property at a fair valuation over (ii) the amount of all liabilities of such Borrower, contingent or otherwise, as such terms are construed in accordance with 59 applicable laws governing determinations of the insolvency of debtors. In determining the Adjusted Net Worth of such Borrower for purposes of calculating the Maximum Liability Amount for such Borrower, the liabilities of such Borrower to be used in such determination pursuant to each clause (ii) of the preceding sentence shall in any event exclude (a) the liability of such Borrower under this Agreement and the Security Documents to which it is a party, (b) the liabilities of such Borrower subordinated in right of payment to this Agreement and (c) any liabilities of such Borrower for Subrogation and Contribution Rights to any of the other guarantors. As used herein "Valuable Transfer" shall mean, in respect of such Borrower, (a) all loans, advances or capital contributions made to such Borrower with proceeds of the Credit Facility, (b) all debt securities or other obligations of such Borrower acquired from such Borrower or retired by such Borrower with proceeds of the Credit Facility, (c) the fair market value of all property acquired with proceeds of the Credit Facility and transferred, absolutely and not as collateral, to such Borrower, (d) all equity securities of such Borrower acquired from such Borrower with proceeds of the Credit Facility, and (e) the value of any other economic benefits in accordance with applicable laws governing determinations of the insolvency of debtors, in each such case accruing to such Borrower as a result of the Credit Facility and this Agreement. 18.8 Entire Agreement; Amendments. This Agreement constitutes the entire agreement of the parties hereto including all parties added hereto pursuant to an Assignment and Assumption Agreement. This Agreement may be executed in any number of counterparts, each of will shall be deemed an original, but all such counterparts together shall constitute one and the same instrument. Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrowers and the Majority Lenders (and, if the rights or duties of the Agents. the Joint Arrangers and Underwriters, or the Security Trustee are affected thereby, by the Agent, the Joint Arrangers and Underwriters, or the Security Trustee, as applicable); provided that no amendment or waiver shall, unless signed by all the Lenders, (i) increase or decrease the Commitment of any Lender or subject any Lender to any additional obligation, (ii) reduce the principal of or rate of interest on the Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on the Loan or any fees hereunder or for any termination of any Commitment, (iv) amend Clause 10, (v) waive any condition precedent to the making of the Loan, (vi) release or modify any collateral or (vii) amend or modify this Clause 18.8 or otherwise change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loan, or the number or category of Lenders, which shall be required for the Lenders or any of them to take any action under this Clause or any other provision of this Agreement. 18.9 Headings. In this Agreement, Clause headings are inserted for convenience of reference only and shall not be taken into account in the interpretation of this Agreement. 18.10 Original Syndication. Neither the Guarantor nor any of the Subsidiaries of the Guarantor shall be involved in any other credit transactions involving syndication other than as herein provided and as advised to, and consented to by the Joint Arrangers and Underwriters prior to the date hereof, between the date hereof and (i) the closure of syndication of the Credit Facility or (ii) the Initial Drawdown Date, and those previously advised and agreed to by the Joint 60 Arrangers and Underwriters in writing. If during the period from the date hereof to the Initial Drawdown Date there is any material adverse change in the syndicated loans market which might prejudice the successful conclusion of the transaction contained herein, the Borrowers and the Guarantor will discuss alternative structures and/or pricing for the Credit Facility and, in the absence of any agreement, the Joint Co-Arrangers and Underwriters may terminate the availability of the Credit Facility. IN WITNESS whereof the parties hereto have caused this Agreement to be duly executed by their duly authorized representatives as of the day and year first above written. VANCOUVER SPIRIT INC. By /s/Amy J. Bokinsky Name: Amy J. Bokinsky Title: Attorney-in-Fact ELCANO SPIRIT INC. By /s/Amy J. Bokinsky Name: Amy J. Bokinsky Title: Attorney-in-Fact MUSASHI SPIRIT INC. By /s/Amy J. Bokinsky Name: Amy J. Bokinsky Title: Attorney-in-Fact VSSI APOLLO INC. By /s/Amy J. Bokinsky Name: Amy J. Bokinsky Title: Attorney-in-Fact VSSI SINGAPORE INC. By /s/Amy J. Bokinsky Name: Amy J. Bokinsky Title: Attorney-in-Fact VOLAR SPIRIT INC. By /s/Amy J. Bokinsky Name: Amy J. Bokinsky Title: Attorney-in-Fact VSSI CHALLENGER INC. By /s/Amy J. Bokinsky Name: Amy J. Bokinsky Title: Attorney-in-Fact SCHOUTEN SPIRIT INC. By /s/Amy J. Bokinsky Name: Amy J. Bokinsky Title: Attorney-in-Fact 61 DEN NORSKE BANK ASA, as Administrative Agent, Security Trustee, Joint Arranger and Underwriter and Lender By /s/Theodore S. Jadick, Jr. Name: Theodore S. Jadick, Jr. Title: Attorney-in-Fact CHRISTIANIA BANK OG KREDITKASSE ASA, New York Branch, as Joint Arranger and Underwriter, Syndication Agent and Lender By /s/Martin Lunder Name: Martin Lunder Title: First Vice-President By /s/ Hans Christian Kjelsrud Name: Hans Christian Kjelsrud Title: First Vice-President THE BANK OF NOVA SCOTIA, as Joint Arranger and Underwriter, Syndication Agent and Lender By /s/ Name: Title: Attorney-in-Fact LANDESBANK SCHLESWIG-HOLSTEIN GIROZENTRALE, as Lender By /s/Lawrence Rutkowski Name: Lawrence Rutkowski Title: Attorney-in-Fact HAMBURGISCHE LANDESBANK- GIROZENTRALE-, as Lender By /s/Lawrence Rutkowski Name: Lawrence Rutkowski Title: Attorney-in-Fact VEREINS- UND WESTBANK AG, as Lender By /s/Monica Treitmeier-McCarthy Name: Monica Treitmeier-McCarthy Title: Attorney-in-Fact SCHIFFSHYPOTHEKENBANK ZU LUBECK AG, as Lender By /s/Monica Treitmeier-McCarthy Name: Monica Treitmeier-McCarthy Title: Attorney-in-Fact 62 SKANDINAVISKA ENSKILDA BANKEN AB (PUBL), as Lender By /s/Amelia Sweetland Name: Amelia Sweetland Title: Attorney-in-Fact DEUTSCHE SCHIFFSBANK AG, as Lender By /s/Amelia Sweetland Name: Amelia Sweetland Title: Attorney-in-Fact 63 CONSENT AND AGREEMENT The undersigned, referred to in the foregoing Reducing Revolving Credit Facility Agreement as the "Guarantor", hereby consents and agrees to said Agreement and to the documents contemplated thereby and to the provisions contained therein relating to conditions to be fulfilled and obligations to be performed by the undersigned pursuant to or in connection with said Agreement and agree particularly to be bound by the representations, warranties and covenants relating to the undersigned contained in Clauses 2 and 9 of said Agreement to the same extent as if the undersigned were a party to said Agreement. TEEKAY SHIPPING CORPORATION By /s/ John S.Osborne, Jr. Name: John S.Osborne, Jr. Title: Attorney-in-Fact 64 SCHEDULE 1 The Borrowers
Jurisdiction Name of Incorporation Registered Address ---- ---------------- ------------------ VSSI Apollo Inc. The Republic of Liberia 80 Broad Street Monrovia, Liberia VSSI Singapore Inc. The Republic of Liberia 80 Broad Street Monrovia, Liberia VSSI Challenger Inc. The Republic of Liberia 80 Broad Street Monrovia, Liberia Elcano Spirit Inc. The Republic of Liberia 80 Broad Street Monrovia, Liberia Musashi Spirit Inc. The Republic of Liberia 80 Broad Street Monrovia, Liberia Schouten Spirit Inc. The Republic of Liberia 80 Broad Street Monrovia, Liberia Vancouver Spirit Inc. The Republic of Liberia 80 Broad Street Monrovia, Liberia Volar Spirit Inc. The Republic of Liberia 80 Broad Street
65 SCHEDULE 2
Lenders Facility Commitment - ------- ------------------- Den norske Bank ASA $35,000,000 Stranden 21 0250 Oslo 2 Norway Telecopy No.: 47-22-48-20-20 Christiania Bank og Kreditkasse ASA, $15,000,000 New York Branch 11 West 42nd Street, 7th Floor New York, New York 10036 Telecopy No.: 212-827-4888 The Bank of Nova Scotia $25,000,000 Scotia House 33 Finsbury Square London, EC2A 1BB England Telecopy No.: 44-171-454-9019 Deutsche Schiffsbank AG $25,000,000 Domshof 17 28195 Bremen Federal Republic of Germany Telecopy No.: 49-421-3235-39 Hamburgische Landesbank - Girozentrale $25,000,000 Gerhart - Hauptmann - Platz 50 20095 Hamburg Federal Republic of Germany Telecopy No.: 49-40-3333-3069
66 Landesbank Schleswig-Holstein Girozentrale $25,000,000 Martensdamm 6 24703 Kiel Schleswig - Holstein Federal Republic of Germany Telecopy No.: 49-43-1900-1130 Skandinaviska Enskilda Banken AB (Publ) $20,000,000 2 Cannon Street London EC4M 6XX England Telecopy No.: 44-171-329-4950 Schiffshypothekenbank zu Luebeck AG $20,000,000 Postfach 110311, D-20403 Hamburg Ost-West-Strasse 74-74, D-20457 Hamburg Federal Republic of Germany Telecopy No.: 49-40-3701-4649/4550 Vereins-und Westbank AG $10,000,000 Shipping Department Alter Wall 22 20457 Hamburg Federal Republic of Germany Telecopy No.: 49-40-3692-3696
67 SCHEDULE 3 The Charters
Vessel Owner Charterer Date of Charter - ------ ----- --------- --------------- M/T VANCOUVER SPIRIT Vancouver Spirit Inc. Palm Shipping Inc. July 1, 1992 M/T VICTORIA SPIRIT Elcano Spirit Inc. Palm Shipping Inc. January 5, 1993 M/T MUSASHI SPIRIT Musashi Spirit Inc. Palm Shipping Inc. January 5, 1993 M/T ONOZO SPIRIT VSSI Apollo Inc. Palm Shipping Inc. March 1, 1990 M/T PALMSTAR CHERRY VSSI Singapore Inc. Palm Shipping Inc. January 6, 1990 M/T PALMSTAR LOTUS Volar Spirit Inc. Palm Shipping Inc. August 1, 1991 M/T PALMSTAR POPPY VSSI Challenger Inc. Palm Shipping Inc. July 2, 1990 M/T TEEKAY SPIRIT Schouten Spirit Inc. Palm Shipping Inc. November 1, 1991
3. Amendment No. 1 to First Preferred Mortgage over MBC-1; 68 SCHEDULE 4 The Vessels
Place/Year Official Classification Classification Vessel Owner Flag Built Number Society Rating - ------ ----- ---- ----------- -------- ---------------- ----------- M/T VANCOUVER SPIRIT Vancouver Spirit Inc. Bahamian Korea/1992 720789 DNV +1A1 Bulk Carrier HC/E or Tanker for Oil EO M/T VICTORIA SPIRIT Elcano Spirit Inc. Bahamian Korea/1993 723135 DNV +1A1 Bulk Carrier HC/E or Tanker for Oil EO M/T MUSASHI SPIRIT Musashi Spirit Inc. Bahamian Japan/1993 723161 NKK NS*, MNS* (MO) ESP, IGS, COW M/T ONOZO SPIRIT VSSI Apollo Inc. Bahamian Japan/1990 716225 NKK NS*, MNS* (MO) ESP, IGS, COW M/T PALMSTAR CHERRY VSSI Singapore Inc. Bahamian Japan/1990 715518 NKK NS*, MNS* (MO) ESP, IGS, COW M/T PALMSTAR LOTUS Volar Spirit Inc. Bahamian Japan/1991 720456 NKK NS*, MNS* (MO) ESP, IGS, COW M/T PALMSTAR POPPY VSSI Challenger Inc. Bahamian Japan/1990 716266 NKK NS*, MNS* (MO) ESP, IGS, COW M/T TEEKAY SPIRIT Schouten Spirit Inc. Bahamian Japan/1991 720496 NKK NS*, MNS* (MO) ESP, IGS, COW
NKK = Nippon Kaiji Kyokai LR = Lloyd's Register ABS = American Bureau of Shipping DNV = Det Norske Veritas EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMETNS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS MAR-31-1998 APR-01-1997 MAR-31-1998 87,953 13,448 24,327 0 0 139,514 1,798,662 500,779 1,460,183 98,291 672,437 0 0 261,353 428,102 1,460,183 0 406,036 0 100,776 197,620 0 56,269 70,504 0 70,504 0 0 0 70,504 2.46 2.44
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