FORM 6-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of March 2006
A/S STEAMSHIP COMPANY TORM
(Translation of registrant's name into English)
Tuborg Havnevej 18
DK-2900 Hellerup
Denmark
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [_]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [_] No [X]
INFORMATION CONTAINED IN THIS FORM 6-K REPORT
A/S STEAMSHIP COMPANY TORM (the "Company") is submitting this Amendment No.
1 to its Report on Form 6-K submitted on March 13, 2006 (the "Form 6-K") to
include certain financial data relating to the Company and the Company's
Financial Statements for the fiscal year 2005, as reported on the Company's
Annual Report - 2005 issued by the Company to the Copenhagen Stock Exchange on
March 8, 2006.
Exhibit 1
Table of Contents
Dear Shareholders 4
Group financial highlights 6
2005 highlights 7
Outlook for 2006 8
Tanker Division 10
Bulk Division 12
Business development 14
Trends in the product tanker and dry bulk segments 15
TORM 2008 - Greater Earning Power 22
Human Resources 24
Managing risk and exposure 26
Safety and quality awareness 28
Shareholder relations 30
Corporate Governance 32
Financial review 34
Income statement 39
Balance sheet 40
Statement of changes in shareholders' equity 42
Cash flow statement 43
Notes 44
Board of directors and Management 68
Management's and Auditors' report 70
Financial statements for the parent company 71
Glossary 85
Fleet information 86
Basic
Information
Name and address: A/S Dampskibsselskabet TORM
Tuborg Havnevej 18
DK-2900 Hellerup
Tel.: +45 3917 9200
www.torm.com
Founded: 1889
CVR: 22460218
Board of directors: N. E. Nielsen (Chairman)
Christian Frigast (Deputy Chairman)
Lennart Arrias (elected by the employees)
Ditlev Engel
Rex Harrington
Peder Mouridsen (elected by the employees)
Gabriel Panayotides
Management: Klaus Kjaerulff, CEO
Klaus Nyborg, CFO
Dear Shareholders
Continued profitable growth in 2005
2005 was once again a year in which TORM enjoyed favourable winds and during
which the Company's focus on tank and bulk led to highly satisfactory results.
In 2005, TORM once again saw growth both in terms of better net profit and in
the size of its fleet. Growth in the number of owned vessels combined with high,
though volatile, freight rates within both the tanker and bulk segments meant
that the net profit for 2005 of USD 299 mill. (DKK 1,795 mill.) was the best in
the Company's history. Earnings per share (EPS) rose to USD 8.6 (DKK 51.5) in
2005 from USD 5.4 (DKK 32.2) in 2004.
The expansion and renewal of TORM's fleet continued during 2005, the total owned
fleet increasing by 25% from 29.5 vessels to 37. The fleet owned by TORM has
grown by 26% annually in the past 5 years and has, thereby, more than tripled in
size since 2001. In addition, the Company has presently 9 vessels chartered -
redelivering beyond 31 December 2006. This development is set to continue
through an ongoing investment program and through the chartering in of
additional tonnage. As a result, the fleet, and thereby the number of earning
days, is set to increase by 61% - representing a total of 28 additional vessels
- by 2009 based on agreements entered into per 1 March 2006.
During 2005, the Company took delivery of 4 newbuildings:
2 LR1 and 2 MR product tankers. In line with TORM's strategy to grow the fleet,
the Company purchased a further 7 modern second-hand product tankers: 2 LR1 and
5 MR. The Company also sold 4.5 of the oldest product tankers in the fleet
during 2005. The product tanker fleet thereby totalled 27 vessels at year-end.
The dry bulk fleet consisted on 10 owned vessels at year-end, an increase of one
vessel brought about by the exercising of a purchase option on a vessel already
chartered-in at a favourable price. Out of a total investment program of app.
USD 625 mill. (DKK 3.9 bn.) the remaining investment program as of 1 March 2006
involves 13 vessels representing a total investment of approximately USD 500
mill. (app. DKK 3.1 bn.).
However, TORM is not just about ships. Far from it. TORM has
in recent years implemented organizational improvements aimed at optimizing and
documenting work processes to ensure improved efficiency and that the
organization is prepared for growth. Aside from this, the Company has also
expanded the activities in Singapore, Germany and the Philippines and continues
to be represented in Japan and Korea via pool partners. The Singapore office is
viewed as the Company's "second leg" to ensure an even closer relationship and
dialogue with our customers in the region.
Growth naturally creates challenges - for example, the number of seafarers and
shore-based staff has increased by 20% in 2005. TORM has, through focused
recruitment and training, ensured that we continue to provide a high level of
service and indeed that these standards are at similarly high levels
acrossthe-board. To ensure that this is so, the Company wishes to control
value-creating activities such as the recruitment and training of seafarers as
well as those employed in operations. The initiatives taken in this regard will
continue, because the Company strongly believes that these will, in future, be
key differentiators in a world where customers and regulatory bodies over a
number of years have tightened requirements considerably. To be closer to the
customers the Company plans to be represented in the US in 2006.
The start of 2006 has been good and better than expected. Inspite of the good
start freight rates are expected to be lower than in 2005. The decrease in
freight rates will to some extent be offset by the increase in TORM's fleet.
The profit before tax forecast for 2006 is in the region of USD 140-160 mill. As
at 1 March 2006, approximately 46% of TORM's earning days had been hedged.
This is more than usual.
Klaus Kjaerulff
CEO
The Board considers the result as highly satisfactory and recommends, subject to
the approval by the Annual General Meeting, that a dividend of DKK 23 (USD 3.6)
per share be paid, which means that the total dividend payment will be DKK 837
mill. (USD 132 mill.).
It is pleasing to note that our shareholders have been able to share in the
profitable times enjoyed by the Company. TORM's share price rose 35% (2004:
150%) in 2005, and when including the dividend of DKK 15 (USD 2.7) per share
paid in April 2005, the total return on the shareholders' investment in TORM was
42% in 2005 (2004: 157%).
With the proposed dividend for the financial year 2005, we will underline the
exceptionally good result obtained by TORM's main activities.
TORM's investment in Norden has also in 2005 developed positively, but the
transition to IFRS means that only the dividend received from Norden has
affected TORM's result. We still consider the investment interesting.
TORM's progress has in turn posed significant demands on the Company. With the
achievments in recent years, the Company has laid a strong foundation for the
future, and it is against this background that, at the end of 2005, the
Company's Board approved a new 3-year strategy named "Greater Earning Power".
The Strategy is ambitious and should ensure that TORM maintains its leading and
profitable position to the benefit of all stakeholders. The Strategy is an
extension of the previous strategy with continued focus on tank and bulk but
also with further focus on developing TORM to become a global operator. More
details about the Strategy on page 22.
The Danish Government commenced a work in 2005 to ensuring Denmark's position as
Europe's leading maritime nation. This initiative is needed in order to
continually maintain and further develop the industry's competitive edge given
that there are nations, which offer possibly an even more favourable environment
than Denmark. This initiative is considered to be of great importance for the
Danish shipping industry. Furthermore, the industry is working closely with the
vocational schools in an effort to further improve the education of shipping
trainees as well as to establish a Maritime Master Program to be run by the
University of Southern Denmark. Additionally, the raising of maritime
competences and standards will result from a more effective use of the maritime
educational system, thus ensuring the recruitment of officer cadets.
The European Union is currently reviewing competition rules governing the
maritime industry. The EU Commission has offered to issue guidelines for pooling
and tramp shipping. A good, open and constructive dialogue between the industry
and the EU Commission has been established as a result of which clear and
practical guidelines are expected to ultimately emerge.
The Board would like to thank all employees, both at sea and ashore, for the
efforts in 2005, which have created this historical result. Equally, the Board
would like to express its thanks to the shareholders for the backing received.
Our sincere thanks also go to our pool and other partners for the good
cooperation throughout the year.
N. E. Nielsen
Chairman
GROUP FINANCIAL HIGHLIGHTS
---------------------------------------------------------------------------------------------------------------------
DANISH GAAP
-----------
USD mill. 2005 2004 2003 *) 2002 *) 2001 *)
--------- ---- ---- ------- ------- -------
INCOME STATEMENTS
Net revenue 587 433 293 195 240
Time charter equivalent earnings (TCE) 464 350 198 125 190
Gross profit 315 240 98 38 90
EBITDA 351 215 87 35 95
Operating profit 303 179 60 14 74
Financial items (4) 26 100 1 (12)
Profit/(loss) before tax 299 205 160 15 62
Net profit for the year 299 187 160 70 44
BALANCE SHEET
Non-current assets 1,528 1,056 700 450 322
Total assets 1,810 1,240 821 567 481
Shareholders' equity 905 715 414 229 161
Total liabilities 905 524 408 337 278
Invested capital 1,176 618 535 402 273
Net interest bearing debt 632 272 285 213 117
Cash and bonds 157 124 80 74 98
CASH FLOW
From operating activities 261 228 75 33 82
From investing activities (473) (187) (153) (142) (6)
thereof investment in tangible fixed assets (636) (187) (170) (121) (67)
From financing activities 303 (3) 72 70 (62)
Cash etc. in companies acquired/divested 0 0 0 0 (1)
Net cash flow 91 38 (7) (39) 12
KEY FINANCIAL FIGURES **)
Gross margins:
TCE 79.0% 80.8% 67.8% 63.9% 79.2%
Gross profit 53.7% 55.4% 33.6% 19.6% 37.6%
EBITDA 59.8% 49.7% 29.7% 17.7% 39.5%
Operating profit 51.6% 41.3% 20.5% 7.4% 30.6%
Return on Equity (RoE) 36.9% 33.1% 49.6% 35.7% 30.2%
Return on Invested Capital (RoIC) ***) 33.8% 31.0% 12.8% 4.3% 25.4%
Equity ratio 50.0% 57.7% 50.3% 40.4% 33.5%
Exchange rate USD/DKK, end of period 6.32 5.47 5.96 7.08 8.41
Exchange rate USD/DKK, average 6.00 5.99 6.59 7.89 8.32
SHARE RELATED KEY FIGURES **)
Earnings per share, EPS (USD) 8.6 5.4 4.6 2.0 1.3
Diluted earnings per share, EPS (USD) 8.6 5.3 4.5 2.0 1.3
Cash flow per share, CFPS (USD) 7.5 6.6 2.2 1.0 2.3
Proposed dividend per share (USD) ****) 3.6 2.7 1.0 0.1 0.2
Proposed dividend per share (DKK) 23.0 15.0 6.0 1.0 2.0
Share price in DKK, end of period (per share of DKK 10 each) 305.1 225.8 90.3 28.2 23.0
Number of shares, end of period (mill.) 36.4 36.4 36.4 36.4 36.4
Number of shares (excl. treasury shares), average (mill.) 34.8 34.8 34.6 34.6 35.0
*) The Group Financial Highlight figures for 2004 and 2005 have been
prepared in accordance with IFRS. The comparative figures for 2001-2003
have not been restated in accordance with IFRS, but are prepared in
accordance with the previous GAAP based on the provisions of the Danish
Financial Statements Act applicable for listed companies in Accounting
Class D and the Danish accounting standards. The comparative figures for
2001-2003 have been translated to USD using the USD/DKK exchange rate at
year-end for the year in question for the Balance sheet items and the
average USD/DKK exchange rate for the year in question for the Income
Statements items and Cash Flow. Consequently, some of the Key Financial
Figures for 2001-2003 will be different compared to those presented in
the Annual Report for 2004.
**) Key figures are calculated in accordance with recommendations from the
Danish Society of Financial Analysts.
***) Return on Invested Capital. Defined as: Operating profit divided by
average Invested capital, defined as average of beginning and ending
balances of (Shareholders' equity plus Net interest bearing debt less
Non-operating assets).
****) Proposed dividend per share has been translated to USD using the USD/DKK
exchange rate at year-end for the year in question.
2005 highlights
o Net profit after tax for the year was USD 299 mill. (DKK 1,795 mill.). The
Board of directors considers the result to be highly satisfactory.
o EBITDA was USD 351 mill. (DKK 2,105 mill.).
o Cash flow before financial items was USD (212) mill. (DKK (1,272) mill.).
Cash flow from operating activities was USD 261 mill. (DKK 1,566 mill.),
whilst cash flow from investing activities was USD (473) mill. (DKK (2,873)
mill.).
o Shareholders' equity was USD 905 mill. (DKK 5,721 mill.) as at 31 December
2005 equivalent to USD 26.0 per share (DKK 164.2) excluding treasury
shares.
o The market value of the Company's fleet as at 31 December 2005 exceeded the
book value by USD 768 mill. (2004: USD 573 mill.) equating to USD 22.0 per
share (DKK 139,4) excluding treasury shares.
o Return on Invested Capital (RoIC) was 33.8% (2004: 31.0%), whilst Return on
Equity (RoE) was 36.9% (2004: 33.1%).
o The Company's owned fleet grew in net terms by 7.5 vessels (25%) equivalent
to 310,000 dwt (19%) during the year. The Company took delivery of 12
vessels during the year and contracted 7 newbuildings not yet delivered.
o By the end of 2005, TORM had 12 ships on order and declared 2 purchase
options. TORM had resold 1 of the ships from the order book for delivery in
2006. Additionally, the Company had entered into 14 T/C agreements. As
such, the Company's fleet of owned and chartered vessels will, by 2009,
consist of 74 vessels based on existing contracts assuming that no
disposals take place and that no new agreements are entered into in the
meantime.
o The profit before tax forecast for 2006 is USD 140-160 mill. In 2005,
profit before tax was USD 299 mill. including dividends (USD 12.8 mill.)
and gains from sales of vessels (USD 54.7 mill.).
o The Board of directors recommends, subject to approval by the Annual
General Meeting, that a dividend of DKK 23 (USD 3.6) per share be paid
corresponding to a total dividend payment of DKK 837 mill. (USD 132 mill.)
and equivalent to a return of 7.5 % in relation to the closing price of the
Company's shares on the last business day of 2005.
Outlook for 2006
The profit before tax forecast for 2006 is in the interval of USD 140-160 mill.
TORM's financial results primarily rely on the development in freight rate
levels and available earning days within the product tanker and dry bulk
segments. As per 1 March, 25% of the remaining earning days in the Tanker
Division had been hedged for 2006 via time charter agreements or other hedging
instruments. Similarly, 61% of the remaining earning days for the Bulk Division
had been hedged for 2006 as of 1 March.
The profit before tax forecast for 2006 is in the interval of
USD 140-160 mill. This forecast is, however, subject to a degree of uncertainty
in as much as a number of unpredictable factors could significantly impact
freight rates and thereby the earnings for both the product tankers and the bulk
carriers. Furthermore, it is difficult to predict the timing of additional
tonnage not yet contracted. For 2006 it is estimated that the following factors
would have the greatest influence on earnings:
o Worldwide economic growth
o Consumption of clean petroleum products, especially in the US
o The level of China's import of commodities, especially iron ore, coal and
grain
o The addition of product tankers and bulk carriers
o One-off events such as strikes, political instability in the oil exporting
countries, weather conditions, shut-down of refineries, etc.
The graph above shows the effect that variations in freight rates will have on
the full year pre-tax profit for 2006. The changes are based on the number of
earning days for 2006 not already hedged through existing charter agreements,
and the change in the result through a variation in freight rates of USD
1,000/day in all 5 segments amounts to USD 10 mill.
Tanker Division
The tanker market is expected to be positively affected by an accelerated
increase in worldwide demand for oil in 2006, negated by a relatively
substantial number of newbuilding product tanker deliveries.
The global product tanker fleet will, as it did in 2005, be affected by a
historically large newbuilding order book of ships due for delivery in 2006. As
in 2005, the anticipated net increase in 2006 in the fleet in the 3 segments
operated by TORM is approximately 17% (source: Fearnleys).
The net growth is expected to be reduced in the succeeding years and then
normalized - not least in light of what is expected to be a relatively
substantial phasing out of single-hulled product tankers in the run up to 2010.
Worldwide consumption of oil is expected to increase in 2006 by 2% according to
the Energy Information Administration - EIA - with China and the US being the
largest consumers. The figure compares with an increase in 2005 of 1.5%. The
long distances involved in the transportation of clean petroleum products -
attributable to the fact that additional refinery capacity is far away from the
main consuming countries - (see p. 16) will, when combined with growth in
consumption, continue to positively affect the product tanker market.
For commercial and competitive reasons TORM will not provide the Company's
specific rate expectations for 2006, unlike last year, when the Company did so.
TORM has instead chosen to give the market's expectations through a time charter
equivalent rate.
The decrease in freight rates will probably to some extent be offset by the
increase in TORM's fleet, which will increase the number of earning days in 2006
by 26% as against 2005. As at 1 March 2006, approximately 36% of TORM's product
tankers had been hedged for 2006 at satisfactory rates.
Bulk Division
The Bulk Division has for the past 2 years experienced very high, but also
highly volatile freight rates. It is TORM's expectation that freight rates will
continue to be volatile in 2006 and also somewhat lower than in 2004-2005.
The newbuilding order book for 2006 - and thereby deliveries of new vessels - is
significant although for the subsequent years, it is relatively modest
notwithstanding the very high freight rates experienced in recent years.
The demand and thereby the freight rates in the bulk market in 2006 will be
driven to a great extent by the development in the world economy, especially in
China. As a result of what TORM believes will be another period of great
volatility, the Company has decided to hedge a considerable part of its exposure
to the bulk market for 2006 in the same way as was done in 2005, in other words
by chartering out a number of vessels for periods of 1-2 years. As such, TORM
has hedged approximately 69% of the earning days for the Panamax vessels in 2006
at an average rate of USD 18,360/day as at 1 March 2006. This will serve as a
solid earnings base for the Bulk Division. The Company will continue to seek
period coverage for the remainder of the unhedged earning days.
SAFE HARBOUR STATEMENT - FORWARD LOOKING STATEMENTS
Matters discussed in this release may constitute forward-looking statements.
Forward-looking statements reflect our current views with respect to future
events and financial performance and may include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions and other statements, which are other than statements of historical
facts.
The forward-looking statements in this release are based upon various
assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, Management's examination of historical operating
trends, data contained in our records and other data available from third
parties. Although TORM believes that these assumptions were reasonable when
made, because these assumptions are inherently subject to significant
uncertainties and contingencies which are difficult or impossible to predict and
are beyond our control, TORM cannot assure you that it will achieve or
accomplish these expectations, beliefs or projections.
Important factors that, in our view, could cause actual results
to differ materially from those discussed in the forward-looking statements
include the strength of world economies and currencies, changes in charter hire
rates and vessel values, changes in demand for "tonne miles" of crude oil
carried by oil tankers, the effect of changes in OPEC's petroleum production
levels and worldwide oil consumption and storage, changes in demand that may
affect attitudes of time charterers to scheduled and unscheduled dry-docking,
changes in TORM's operating expenses, including bunker prices, dry-docking and
insurance costs, changes in governmental rules and regulations including
requirements for double hull tankers or actions taken by regulatory authorities,
potential liability from pending or future litigation, domestic and
international political conditions, potential disruption of shipping routes due
to accidents and political events or acts by terrorists.
Risks and uncertainties are further described in reports filed by TORM with the
US Securities and Exchange Commission, including the TORM Annual Report on Form
20-F and its reports on Form 6-K.
Tanker Division
The market for the Company's product tankers reached a historical peak in 2005,
characterized by high but volatile freight rates with strong earnings especially
during the first and fourth quarters.
An unusually high growth in oil consumption towards the end of 2004 ensured that
the product tanker market had a strong beginning in 2005.
During the second quarter of 2005, the product tanker market experienced a
normal seasonal decrease. However, the ongoing growth in demand in the US for
the import of gasoline and other oil products - especially up to the holiday
season - ensured a satisfactory product tanker market during mid-year. Towards
the end of the summer holiday period in the US, the market eased somewhat.
Hurricanes Katrina and Rita - that struck the southern US with such tragic
effect during the third quarter -- had a major and boosting effect on the
product tanker market in 2005. 95% of oil production in the Mexican Gulf was
interrupted, and 20% of local refining capacity was temporarily shut down. The
refining capacity in the US was restored to normal output levels during the
fourth quarter.
Demand for transportation capacity increased further as a result of low
inventory levels of refined products in the Western Hemisphere - the effect of
high oil prices and limited refining capacity. In the opinion of the Company
these low inventories, expressed in "days of consumption", combined with lack of
refinery capacity often result in wild swings in demand for product tankers -
something that also occurred in 2005.
Rates were once again on the rise towards year-end, reaching very attractive
levels despite a large number of product tanker newbuildings - 17% as against
20% in 2004 entering the market in 2005 (source: Fearnleys). Concurrently, oil
demand grew by 1.5% in 2005 (3.3% in 2004 - source: EIA), and on average freight
rates during the year were 5.0% higher than in 2004 (source: Clarksons). It is
considered very positive, and to some extent surprising, that the freight market
has remained so firm for most of the year.
Ton-miles, which indicates the total demand for capacity, rose by 7.1% in 2005
versus 6.2% in 2004 (source: Fearnleys). However, it should be noted that there
is great uncertainty when estimating this figure.
Operating profit totalled USD 216.9 mill. for the year. The Tanker Division had
36% more earning days in 2005 than in 2004.
TANKER DIVISION
(USD mill.) 2004 2005
Total Q1 Q2 Q3 Q4 Total
------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS
Net revenue 255.7 85.0 87.2 103.5 143.6 419.3
Port expenses, bunkers and commissions (68.8) (23.4) (24.5) (31.2) (32.3) (111.4)
------------------------------------------------------------------------------------------------------------------------
Time charter equivalent earnings 186.9 61.6 62.7 72.3 111.3 307.9
Charter hire (13.5) (5.5) (9.3) (10.9) (18.6) (44.3)
Operating expenses (39.5) (10.4) (12.4) (14.4) (14.2) (51.4)
------------------------------------------------------------------------------------------------------------------------
Gross profit/(loss)
(Net earnings from shipping activities) 133.9 45.7 41.0 47.0 78.5 212.2
Profit/(loss) from sale of vessels 0.0 19.4 21.0 14.4 (0.1) 54.7
Administrative expenses (28.5) (5.4) (5.4) (6.2) (8.4) (25.4)
Other operating income 12.9 3.5 2.7 2.6 3.6 12.4
Depreciation and impairment losses (28.6) (7.5) (8.7) (9.9) (10.9) (37.0)
------------------------------------------------------------------------------------------------------------------------
Operating profit 89.7 55.7 50.6 47.9 62.7 216.9
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TORM's position
TORM expanded and renewed its fleet of modern product tankers throughout 2005.
During the year, the Company took delivery of 4 newbuildings and purchased 7
modern second-hand vessels. At the end of 2005, TORM's product tanker fleet
consisted of 27 owned vessels and 6 chartered vessels, 2 of which included
purchase options, which were exercised during the fourth quarter of the year
with delivery scheduled to take place in the first quarter of 2006. Growth in
capacity measured in tons deadweight was 28%, whilst the growth in the number of
earning days totalled 36%. The average age of the fleet owned by TORM was 4
years, making it one of the world's youngest fleets of product tankers.
TORM has over an extended period of time gradually increased the number of
vessels it has taken on time charter from third party owners for delivery during
the period 2006-2009. The contracts are typically of 3-7 years' duration and
have been entered into at rate levels favourable in comparison to market levels
prevailing at the end of 2005. The gradual process of building this chartered
fleet has come about as part of the agreed strategy "Greater Earning Power",
where the objective for the product tanker fleet is to consist of approximately
70% owned and 30% chartered vessels.
Bulk Division
In 2005, freight rates prevailing in the dry bulk segment did not quite match
those of 2004, as the recovery in rates during the second half of the year did
not materialize.
The dry bulk market began the year strongly following the very firm tone reached
in the fourth quarter of 2004, but has again been extremely volatile throughout
2005.
At the outset of 2005, a large part of the world bulk fleet was idle in ports,
especially in Australia and China, awaiting loading or discharge due to lack of
port capacity. This contributed to maintaining the very high rates experienced
towards the end of 2004 and early into 2005. From mid 2005, however, port delays
were reduced to more normal levels in most ports.
A lower rate of growth in the import mainly of coal and iron ore primarily by
China during the third quarter, coupled with an increase in newbuilding
deliveries and limited scrapping, resulted in an across-the-board fall in
freight rates as the year progressed. Notwithstanding these trends, however,
rates ended the year considerably above the historical mean of 12,644 USD/day
for the period 1990-2005 (source: Clarksons).
Operating profit totalled USD 86.3 mill. for the year, which is a litlle lower
than in 2004. The Bulk Division had 11% fewer earning days in 2005 than in 2004.
Given the rise in freight levels in 2003 and 2004 to levels never seen before,
TORM elected to take advantage of these circumstances by chartering out a
substantial part of the dry bulk fleet on longer term time charter - often for
periods of about 1 year. These longer period charters have tended to reduce the
risk inherent in a market of such volatility. TORM has continued to pursue this
strategy successfully in 2005, which has meant that the Bulk Division's income
has not been significantly affected by the market's volatility.
At the end of 2005, TORM's Panamax dry bulk fleet consisted on 8 owned and 7
chartered-in bulk carriers, 3 of which include purchase options. Additionally,
the Company owns 2 Handysize vessels.
In continuation of the Strategy "Greater Earning Power" TORM has for some time
gradually increased the number of vessels on time charter from third party
owners with delivery during the period 2006 - 2009. The contracts are typically
of a duration ranging from 3 - 8 years and are at favourable rate levels
compared to market rates prevailing at the end of 2005.
BULK DIVISION
(USD mill.) 2004 2005
Total Q1 Q2 Q3 Q4 Total
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INCOME STATEMENTS
Net revenue 177.5 47.3 44.9 38.7 36.7 167.6
Port expenses, bunkers and commissions (15.0) (3.3) (3.9) (1.6) (2.9) (11.7)
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Time charter equivalent earnings 162.5 44.0 41.0 37.1 33.8 155.9
Charter hire (46.1) (11.0) (8.1) (8.2) (10.6) (37.9)
Operating expenses (11.6) (3.1) (3.9) (3.8) (4.5) (15.3)
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Gross profit/(loss)
(Net earnings from shipping activities) 104.8 29.9 29.0 25.1 18.7 102.7
Profit/(loss) from sale of vessels 0.0 0.0 0.0 0.0 0.0 0.0
Administrative expenses (9.5) (1.2) (1.3) (1.6) (1.7) (5.8)
Other operating income 0.3 0.0 0.1 0.0 0.1 0.2
Depreciation and impairment losses (6.5) (2.8) (2.5) (2.6) (2.9) (10.8)
------------------------------------------------------------------------------------------------------------------------
Operating profit 89.1 25.9 25.3 20.9 14.2 86.3
Business development
In 2005, a new division "Shipowning and Sale & Purchase Division" was
established with a brief to focus on investments in newbuildings, sale and
purchase of second-hand tonnage and the development of new projects on behalf of
TORM and, to a lesser extent, TORM's partners. The division was involved in a
considerable number of transactions in 2005 and is seen as a key element in the
implementation of the adopted Strategy "Greater Earning Power". The Division is
also involved in general business development working in close cooperation with
the Tanker and Bulk Divisions. As a natural link between investment and market
information, the division also incorporates research and analysis.
In 2005, the value of transactions - newbuildings and second- hand tonnage -
totalled approximately USD 1 bn. (approximately DKK 6 bn.). Furthermore, 10
charter partiers involving product tankers and bulk carriers were entered into.
Product tanker
Newbuilding prices were at a very high level throughout the entire year in 2005.
Demand for all types of product tankers was strong throughout 2005, but as a
result of yard capacity, yard asking prices for the 3 sizes of product tankers
operated by TORM differed somewhat:
o Prices for LR2 product tankers (the Aframax segment) were stable in 2005.
At the end of 2005, there was limited yard capacity available for this
segment up until and including the end of 2009.
o During 2005, some yards reduced prices for LR1 product tankers (the Panamax
segment) in response to a sudden drop in the contracting of container
vessels, which gave rise to yard capacity being freed up sufficiently to
offer LR1 berths.
o Demand for MR product tankers (Handymax segment) was strong in 2005, which
meant that no capacity was available until the end of 2009. A few owners -
especially in Japan - were understood to have made enquiries about 2010
deliveries.
Early in 2006, the company entered into a contract for the construction of a
further 2MR product tankers with "1A Super" Ice Class designation for delivery
in 2009. Price levels of second-hand product tankers increased overall in 2005,
particularly for MR vessels. The second-hand price of a 5 year-old MR product
tanker was approximately USD 46 mill. which was similar to the asking price of a
newbuilding. Throughout 2005, in general terms, price levels of all modern
tonnage were very firm.
Dry Bulk
Newbuilding activity within the bulk segment was generally very limited in as
much as the yards generally preferred to focus on much more lucrative ship types
such as LNG, container vessels and tankers. A few yards, primarily based in
Japan, were at year-end 2005 offering Panamax bulk carriers for 2008 delivery.
Prices of second-hand bulk carriers have doubled as a result of the firm rates
prevailing in the dry bulk market in recent years. At certain stages, a 5
year-old vessel has been more expensive than a newbuilding for later delivery.
During the early part of 2005, the price of a 5 year-old Panamax vessel reached
USD 45 mill. At year-end 2005, the price had fallen to app. USD 30 mill. - a
development which given the volatility of this market calls for caution.
Trends
Trends in the product tanker and dry bulk segments
This section describes significant trends and tendencies which TORM's Management
believes will have an effect on future operations.
16 Refineries are moving away from the Western Hemisphere
17 Shipping and derivatives
18 Service
19 The oil market
20 Order book - delivery of new tonnage
Refineries are moving away from the Western Hemisphere
In recent years, the clear trend has been for expansion of refinery capacity to
occur primarily in areas other than the Western Hemisphere, which in turn
remains the major consumer area.
From the present time through to 2012, additional refining capacity will
primarily be built in OPEC - especially in Saudi Arabia. In addition to this,
China and India are expected to increase capacity through to 2010 (source: PVM
Oil Associates). Refining capacity in Europe and the US will conversely only be
increased slightly and, as such, insufficiently to meet demand. This will result
in longer transportation distances given the resulting increase in demand for
clean petroleum products emanating from the Middle East and the Far East
destined for Europe and the US.
This trend is the result of increasingly stringent environmental focus in the
western part of the world coupled with the fact that the oil producing nations
wish to retain more of the value added by the refining process. This trend is
positive for the product tanker market.
Shipping and Derivatives
A "Forward Freight Agreement" (FFA) is a derivative product used in shipping. It
is a contract to buy or sell a volume on a particular route and at a
specifically agreed price to take place at some agreed future date.
The FFA market has in recent years experienced significant growth in terms of
volume and active market participants. The International Maritime Exchange
(IMAREX), which is an authorized and regulated market place for trading and
clearing of freight derivatives, consisted of 112 members at the end of 2005
(2004: 75 members). Volume in the global trading of FFAs rose 5,000% over the
last 5 years. Liquidity in the key FFA routes is growing, reflecting the
increasing level of trading. The volume in the paper market depends on the
volatility in the physical market and as such more trading takes place when
volatility is greater.
TORM was active in the FFA market during 2005 and expects to continue using the
derivatives market as a means of hedging freight rates. As a consequence of the
increased trading volume in the FFA market together with the expected influence
on the physical market the Company has decided to establish a separate FFA desk
in 2006.
Service
The ongoing and ever increasing safety and environmental requirements have
considerable consequences both ashore and at sea.
The International Maritime Organization (IMO), the individual flag states as
well as the classification societies issue requirements and regulations
governing ship design and the operation of vessels. The requirements represent a
wide spectrum of rules from the construction of vessels and its equipment to the
operation of the vessel as well as the qualifications for officers and ratings -
along with the Company's own qualifications in respect of vessel operations. On
top of this, customers have to an increasing extent begun to issue their own
environmental and safety requirements. The effect is increased demand for the
establishment and documentation of routines and procedures.
TORM expects that this development will over time mean that it will become
progressively difficult to identify differences in the way in which high quality
shipowners operate their tonnage. As such service will in the future become a
key differentiator.
TORM considers this to be a positive development which underpins the Company's
chosen strategy in this regard - namely to aim for the highest quality in terms
of education and training, design and shipbuilding thereby ensuring a very high
level of service.
The oil market
Inventories of clean petroleum products have been at very low levels since 2003.
This has been the result of significant consumption combined with a policy to
keep inventories deliberately low. At the same time the high and increasing oil
prices resulted in reluctance by many market participants to have too much
capital tied up in large inventories. The low inventories in turn result in
erratic deliveries, occasionally forcing market participants to pay very high
freight rates.
The graph below illustrates the historical highs and lows of inventories of
clean petroleum products in the OECD nations expressed in "days of consumption".
order book - delivery of new tonnage
Freight rates in both the product tanker and bulk segments are strongly
influenced by the number of vessels available and, as a consequence, the
delivery of new tonnage into the market and the scrapping of older vessels.
Product tank
The delivery of newbuilding product tankers during the period 2006 - 2009 will
be at historically high levels. The existing global order book of product
tankers due for delivery from the present time to 2009 represents approximately
40-45% of the existing world fleet in the 3 segments operated by TORM.
In 2003, the EU and the IMO adopted new and revised rules covering the phasing
out of single-hulled tankers. The rules will result in the phasing out of
single-hulled tankers, which have not been built since the beginning of the
1990s, up to 2010. It is anticipated that up to 25% of the world product tanker
fleet will be phased out or will operate in areas, where the IMO rules are not
observed.
Dry bulk
The net addition of Panamax bulk carriers to the existing fleet in 2006 will be
considerable, but in the subsequent years, the order book is modest seen in the
context of the very strong dry bulk market experienced in recent years. Freight
rates for the Panamax bulk carriers are affected not only by newbuilding
deliveries in the Panamax fleet, but also by the addition to the fleet of
Capesize vessels (addition of 19% of the total fleet up to 2009) and Handymax
vessels (addition of 15% of the total fleet up to 2008) (source: Fearnleys).
TORM 2008 - Greater Earning Power
Towards the end of 2005, TORM's Board approved a new 3-year strategy plan termed
"Greater Earning Power". This Strategy is ambitious and is aimed at ensuring
that TORM continues to be in a leading and profitable position.
The Strategy plan focuses on the following areas:
o Ensuring high long-term return on equity and the TORM share.
o Even greater focus on the development of the Company's organizational
structure and the employes' skills.
o Use of the Company's market position to achieve better market intelligence
and knowledge and thereby improve the basis on which decisions are made,
the speed of such decisions and thereby reducing uncertainty.
o Establish its own organization or work in cooperation with pool partners in
the key geographical centres woldwide in order to further improve customer
service.
o Secure significant growth in both the product tanker and dry bulk segments.
o Tank shall continue to be the most significant business area. Growth shall
in general come from within the existing business segments.
o Investments will primarily be in the product tanker segment, whereas growth
within the bulk segment shall principally be via chartering in of vessels
and/or the exercising of purchase options.
o The break down between owned and chartered-in vessels shall at the end of
the 3-year period be approximately 70% owned and 30% chartered-in tonnage
in order to reduce the capital tied up and with the aim of increasing
flexibility.
The Strategy is an extension of the recent years' strategy and has continued
focus on product tank and on a smaller scale dry bulk. However, TORM puts more
emphasis on setting up a globally operating organization and developing
employees and competences corresponding to these ambitions.
It is TORM's ambition to increase the number of earning days significantly,
subject to such growth being profitable for the Company and its shareholders.
Based on TORM's newbuilding order book and ships commitments for time charter as
of 1 March 2006, the number of earning days will already be increased by 43% by
year-end 2008 (2009: 61%).
Tanker Division
It is TORM's long-term goal to be a significant consolidator of the product
tanker market within the LR2, LR1 and MR segments and thereby become the
undisputed leading player in the product tanker market. This development should
come about through growth within each pool, but first and foremost through the
Company's own growth and development. This is expected to result in better
earnings against a background of an improved market position, improved vessel
utilization, offering customers more flexibility as well as the benefits
deriving from large-scale purchasing power including crewing.
TORM anticipates being able to expand its product tanker fleet by continuing its
ambitious newbuilding program, through the purchase of existing vessels or
fleets or through being open to a merger with other companies should this be
judged to be in the interest of TORM's shareholders and the Company's further
development. Additionally, TORM will increase the number of long-term chartered
product tankers, possibly inclusive of purchase options.
Bulk Division
The dry bulk market is highly fragmented, and TORM sees no possibility for this
market to be consolidated during the period in which the revised Strategy is
implemented, let alone in the years thereafter.
The Bulk Division is focused on the Panamax segment and currently has no
newbuildings on order. Growth will principally come about via chartering in
vessels, unless potentially interesting investment opportunities come about.
Chartering in is, according to the Company's assessment, the most cost effective
way in which to increase the market share. The Strategy for the Bulk Division is
based on chartering in tonnage for longer periods combined with purchase
options. Accordingly, it will continue to be the Company's policy to hedge a
significant portion of this forward exposure, so as to guard against volatile
trading conditions.
TORM expects to slowly increase its exposure to the dry bulk market by expanding
in the Panamax segment only, when the timing for doing so is considered optimal.
Financial strategy
The Company enjoys a very solid financial foundation, which ensures that there
is capacity available for further profitable expansion when the timing is
considered to be right. This is the key to the Company's Strategy.
In light of the currently very high freight levels and thereby vessel prices
combined with the Company's criteria for financial returns, prudence and caution
continue to be the order of the day. It is against this background that TORM
wishes to retain a significant financial capacity to undertake investments when
the timing is right.
The timing of investments and entering into commitments is absolutely crucial -
in shipowning as much as in any business. Therefore, favourable as well as
unfavourable market conditions mean that implementation of the Strategy within
the planned time horizon may in the event not prove to be possible.
Human resources
2005 has been a year of strong growth in TORM's fleet and corporate activity
generally as a result of which the number of employees ashore and at sea also
grew.
Ashore
At the end of 2005, 113 people were employed at TORM's office in Copenhagen
including personnel seconded to other offices and the site offices in Korea and
China. Added to this are local employees in Singapore and Germany. The total
number of shore-based personnel was 126. In the Copenhagen office alone, the
number of employees increased by nearly 20% in 2005 .
Most of the new employees have joined the Tanker Operations and the Technical
Division, and 4 trainees also joined the Company. TORM sees its ability to
attract and retain capable people as an important element of the Company's
development. The development and education of trainees and younger staff
continue to form a key element in TORM's expansion as well as paving the way for
tomorrow's leaders. In 2005, TORM together with other shipowners established a
new shipping education program due to commence in 2006. Whilst the principle
that shipping is best learnt `'on the job" is retained, more weight will be
placed on theory and the ongoing competence enhancing courses available at
Danish centres of learning and international management institutes.
Despite the ever increasing demand for shipping employees, it is with pleasure
that TORM can report only a slight increase in employee turnover to 8.0% (2004:
6.2%) and it has also proved possible to attract capable and competent new
employees when required. The considerable growth, which TORM has experienced in
recent years, and the resultant significant increase in the number of employees
has meant that TORM today employs a capable and dynamic group of young people.
The average age of all employees is 41 years with 7 years being the average
duration of employment in TORM. This will also help ensure energy and renewal
within the organization.
A comparatively low sickness absenteeism rate of 4 days per employee per annum
also underscores a willingness and enthusiasm for working for TORM.
It is also important for TORM to ensure that all employees can enjoy the
prospect of a life long, ongoing international training and education at
relevant Danish and international institutions of higher learning, enabling them
and the Company to compete in the market place and to help in the implementation
of TORM's Strategy in 2006 and beyond.
At sea
TORM's ongoing expansion has led to a considerable increase in the number of
seafarers. At the end of 2005, nearly 1,200 seafarers were associated as opposed
to nearly 1,000 at the end of 2004 - an increase of 20% in 2005. In order to
keep up with the expansion, the Company engaged a number of Croatian officers
early in 2005 as a result of which the Company today employs Danish,
Scandinavian, Filipino and Croatian seafarers. The turnover in seafarers is
considered acceptable with a figure of around 5% which is comparatively low.
In 2005, the Company employed 7 new trainee officers
whereby at year-end 2005 a total of 49 trainees were trained by the Company.
This is a significant contribution to "The Blue Denmark".
TORM's recruitment office in the Philippines made good progress during 2005 and
additional staff has been engaged in response to the increasing work load.
In order to maintain and increase knowledge, a number of
relevant courses in shipowning operations have been held both in Denmark and the
Philippines during which specific subjects relevant to ships' operations have
been covered in detail.
During the second half of 2005, the first steps were taken with regard to the
implementation of a TORM Training and Competence Platform (TTCP) - an internet
based tool which without doubt affords a greater overview and thereby a better
utilization of competences as well as optimizing educational and training
activities. TTCP ran as a pilot project towards the end of 2005 with the
intention of fully implementing the system during the first half of 2006.
MANAGING RISK AND EXPOSURE
TORM operates globally, and consequently the Company is exposed to changes in
economic, political and legal circumstances. Furthermore, shipowning and
operating is highly sensitive to macro economics resulting in a number of risks
for the industry's participants. These can be divided into commercial and
financial risks.
As commercial risks are considerable, it is the Company's policy to reduce the
financial risks to a considerable degree.
Political Risks
In shipping there are considerable political risks which can result in
significant variations in earnings.
Commercial risks
Earnings volatility
The Company's income is principally generated from individual voyages, fixed at
rates reflecting market conditions prevailing at the time and with an average
duration of 20-40 days. To a lesser extent, income is also generated from time
charter agreements typically of 6 to 12 months' duration. As such, TORM is
exposed to the considerable volatility inherent in the freight markets. By
participating in well-established pool arrangements risk is reduced to a degree,
primarily via a greater geographical spread and fewer waiting days which are the
direct results of the greater market presence offered by pooling.
Freight income is to a certain extent covered against volatility through the use
of cargo contracts, FFAs and time charters, and in 2005 above 1/3 of freight
earnings derived from the Company's tankers were secured in this way. Time
charter parties accounted for 75%, as this hedging instrument resulted in higher
rates than offered by the "paper market". TORM does not apply hedge accounting
to FFA contracts.
In order to achieve a greater degree of control over the Company's freight
positions, the Company will implement a Risk Management system based on the
Value-at-Risk method. Furthermore, as an integral part of the Company's
shipowning and Sale & Purchase Division, an analyst function was established in
2005 with a view to providing market research and trends for the product tanker
and bulk segments as well as trends and tendencies for the world economy, which
are deemed to have a significant influence on the Company's business areas. This
development is designed to ensure that the Company's Shipowning and strong
commercial expertise is complemented with analyses in order that the Company can
make decisions on the basis of more thorough analysis and evaluation, and
thereby reduce risks and utilise potential business opportunities.
Volatility in purchase and selling prices The fleet expansion taking place,
particularly in the Tanker Division and primarily through a substantial
newbuilding program, also encompasses a number of risk elements. These include
the timing for placing contracts and the value of the vessels - which can vary
considerably during their lifetime. The Company strategy is through an effective
overall portfolio management of the assets and a solid financial foundation, to
always be in a position to be able to purchase and sell tonnage when the timing
to do so is considered optimal.
With regard to TORM's newbuilding program, where at year-end there were 11
vessels on order at Chinese yards, guarantees for the Company's prepayments have
been put in place by the yards throughout the building period in accordance with
the relevant newbuilding contracts. All guarantees have been arranged via state
owned banks. At year-end 2005, the value of the total prepayments to the yards
concerned was USD 97 mill. excluding a newbuilding from a korean already sold
for delivery in 2006.
Fleet casualties and accidents
National and international rules, regulations and conventions mean that the
Company can incur considerable liabilities in the event that a vessel should be
involved in an oil spill or emission of other environmentally damaging agents.
In order to reduce or eliminate the likely effect this could have on the
Company's financial position, the fleet has been insured in internationally
renowned P&I clubs with the maximum coverage offered in the insurance market.
The total insurance package consists of a wide insurance cover of vessel and
cargo, including environmental damage, pollution and third party casualty and
liability, hull and machine damage, total loss and war cover. All owned vessels
are furthermore insured for loss of hire for a period of up to 90 days in the
event of a casualty. The Company's policy is to place insurances only with the
most highly rated insurers - presently some 8-10 companies - along with the use
of 2 P&I clubs in order to spread risk. Insurances are only arranged with
companies having a rating of BBB or better.
Movement in bunker prices
The Company's operating result is affected by movements in the price of fuel oil
consumed by the vessels - known in the industry as bunkers. To cover this risk,
the Company hedges the price of part of its bunker requirements for a period of
up to 12 months forward. In 2005, the Company hedged 25% of its bunker
requirements using hedging instruments. As at 31 December 2005, the Company had
hedged the price for 29% of its bunker requirements for 2006, and the market
value of these contracts as at year-end was USD 0.0 mill. (2004: (0.8) mill.).
TORM does not apply hedge accounting to bunker hedges. A hypothetical price
change of 1% point per ton of bunker oil would lead to a change in expenditure
in 2006 of USD 1.2 mill. based on the expected bunker consumption.
In light of the Company's pool structure, bunker hedging for tankers is not done
in respect of an individual vessel when it has been chartered out. Instead,
bunker hedging is planned taking into account the specific pool's total
estimated bunker requirements. Nonetheless, where a contract of affreightment
covering several voyages has been fixed, the pool may hedge bunker requirements
specifically for such a contract.
For the bulk carriers, the bunker requirements are similarly hedged to match
cargo contractual obligations, but the requirements are generally less given
that a larger part of earnings derive from vessels chartered out on time
charter, where the charterer is responsible for the payment of bunkers. All
bunker hedging and indeed any other form of hedging is carried out only based on
specific requirements.
Credit risk
For customers of long standing, it is normal practice that the payment of
freight takes place after a vessel has discharged her cargo. For newer, smaller
and less well known customers the Company's financial risk is limited by the
fact that it is a condition that freight is paid prior to the cargo's discharge
or, alternatively, that a suitable guarantee is placed in lieu thereof. The
Company's receivables, therefore, primarily consist of receivables from cross
over voyages, to a lesser extent, outstanding demurrage. For the past 5 years,
the Company has not experienced any losses in respect of charter payment or any
other freight agreements. With regard to the collection of demurrage, the
Company's average stands at 97-98% which is considered satisfactory given the
differences in interpretation of event. Demurrage represents approximately 5% of
total freight earnings.
FINANCIAL RISKS
Nearly all of the Company's income and charter obligations and by far the
largest portion of operating costs as well as assets and liabilities are in USD.
The Company is thus exposed to USD exchange rate swings and changes in interest
rates. In order to manage these risks, the Company utilises financial hedging
instruments.
Exchange rate risk
As TORM uses USD as measurement currency and most of the Company's transactions
are in USD, TORM only has limited transaction risk, which primarily relates to
costs in DKK.
Exchange rate risks are assessed in relation to the USD, and the Company's
policy is to limit the impact of exchange rate movements on the financial
statements and on the financial position of the Company.
In order to minimize the exchange rate risk on the year's estimated result, the
Company typically enters into forward contracts. The expected cash flow in
relation to the payment of technical expenses in non-USD related currencies,
salaries, wages and other administrative expenses and dividends are typically
covered for a period of up to 1 year ahead. All things being equal, a variation
of 1% in the USD/DKK exchange rate would result in a change in the net profit of
USD 0.8 mill. in 2006. Shareholders' equity as of 31 December 2005 would be
affected to the tune of USD 4 mill. should the USD exchange rate change by 1%.
At year-end 2004, the Company had no forward hedging contracts in respect of
operating costs for 2005. In 2005, the Company entered into exchange rate
contracts for the sale of USD 7 mill. against DKK and sold USD 43 mill. spot in
order to cover the DKK cash requirements for operating costs in 2005. As such,
in 2005 spot and term exchange contracts for a total of USD 50 mill. were
unwound at an average exchange rate of 6.17 as against the average exchange rate
for the year of USD against DKK of 6.00. Furthermore, the Company sold USD 8
mill. partly to fund the payment of dividends in 2006 at an exchange rate of
6.26 against DKK.The Company decided to sell its bond portfolio of USD 58 mill.
during 2005 in order to cover its DKK requirements. In addition, TORM entered
into an agreement to buy put-options in the amount of USD 16 mill. which leaves
28% coverage of the expected DKK cash flow - excluding the payment of dividends
- for 2005. With regard to the put-options, the counterpart must buy USD from
TORM at an exchange rate of 6.00 to the DKK. In case the USD/DKK exchange rate
exceeds 6.81, the counterpart can purchase USD from TORM at an exchange rate of
6.00 per USD. In 2005, the Company had entered into agreements to purchase
put-options in the amount of USD 35 mill. inclusive of a "knock-in" element
for the counterparty. None of these options were called neither by Torm nor by
the counterpart during the option period.
Interest rate risk
TORM's interest rate risks are in practical terms connected to the interest
bearing mortgage debt. All the Company's loans for financing vessels are based
on variable interest rate loans and are in USD. The Company's interest bearing
USD debt increased from year-end 2004 to year-end 2005 by USD 395 mill. to USD
791 mill. Of the Company's priority debt in USD with variable interest rates USD
60 mill. will be due within a 12 months period and USD 268 mill. after 1 - 5
years. The average effective interest rate is between 3.4% and 5.4%. Please
refer to note 13 for further details regarding our interest bearing debt.
In certain cases, the Company utilises financial instruments to control the
effects, which interest rate fluctuations can have on earnings and cash
resources. The Company typically makes use of interest rate swaps, which are
entered into for periods of up to 5 years, although generally of 2-4 years'
duration when acceptable interest rate levels can be achieved. For shorter
period interest rate coverage the Company from time to time makes use of FRAs.
The profile of the instruments always matches the loan profile of the particular
loan in question. When assessing interest rate risk hedging for its loan
portfolio, the Company takes into consideration expected interest rate
developments and future changes to the composition of the fleet in order to meet
ongoing and future market expectations and requirements.
The portion of the interest swaps hedging the USD mortgage debt with maturity
within 1 year was USD 31 mill. and USD 125 mill. after 1 - 5 years. The average
effective interest rates were between 2.6% and 4.5%. The market value of the
Company's interest rate swaps was USD 6.6 mill. at year-end 2005 (2004: USD 0.2
mill.).
At year-end, the Company had covered 77% of its total 2006 interest costs at an
average rate of 4.5% including margin. For the period 2007-2009, the coverage is
stable to falling at an average of 39%. The fixed interest debt has an average
period of 3 years remaining, expiring between 2007 and 2013. A change of 1%
point in unhedged variable interest debt will result in interest rate expenses
of USD 2.0 mill. in 2006.
REPORTING
The Board and Management continuously receive and evaluate information on the
above-mentioned risks.
Safety and quality awareness
TORM has a continuing focus on safety on board the vessels and through a
proactive approach to this area, incidents and accidents are being prevented.
Over the last 5 years a database of so-called near-accidents has been developed
within the Company. When a person onboard a vessel or ashore is involved in a
near-accident, the event is reported to the Safety Department where the details
of the report are then assessed and the lessons learned recorded.
The details of the reports and the lessons learned are then distributed
throughout the fleet. In order to further expand the experience TORM is
participating in a project where a database of near-accidents is being built up
with input from other Danish shipowners and ship managers. Consequently, any
shipowner will be able to receive experience transfer from other participants in
the scheme.
A program of Safety Awareness Training Courses has also been developed and
implemented in 2005. The aim of these courses is to anchor the TORM Safety
Culture and ensure that all persons on board are conscious of the high safety
standards required within the TORM fleet.
The Tanker Manager and Self Assessment Scheme (TMSA) issued by OCIMF (Oil
Companies International Marine Forum) is a voluntary self-assessment scheme
based on a detailed set of key performance indicators. These indicators are all
geared to the safe and environmentally responsible operation of tankers, and
they are a valuable tool to enhance the safety performance on board the vessels
as well as ashore.
During 2004 and 2005, all security procedures were reviewed and updated
according to the Green Award and TMSA requirements. As for all safety and
quality work, the TMSA and Green Award Scheme are a continuing process aimed at
improving the performance of the safety, quality and environmental protection
levels to the highest possible standards.
Apart from the above-mentioned value adding process the compliance itself with
the TMSA and Green Award Scheme requirements is expected to result in fewer
external vetting inspections by the Oil Majors given that the Company's current
status is always available for the Oil Majors via a web-based database.
Fewer external inspections are primarily in relation to office audits, but in
future they could also involve the vetting of the vessels. This would offer a
degree of relief to the officers and ratings and thereby save time in general.
Over the last 5 years the TORM fleet has tripled numerically. It has been a
challenging task to expand the fleet at such a pace while at the same time
maintaining or improving the skills and understanding of all the officers and
ratings in respect of the continuing safe operation of all the vessels. It is
considered that the expansion has gone well.
The Company has also succeeded in taking newbuildings straight from the shipyard
to sea without any significant problems with regard to pre-vettings, ISM
compliance, USCG requirements and the various statutory shipboard response
plans.
Over the past few years, the Lost Time Accident Frequency (LTAF), which is the
number of Lost Time Accidents per million exposure hours, has been between 1.5
and 2.2. This level is considered satisfactory. TORM's target for LTAF is 1.5.
The number of seafarers employed by TORM has increased significantly in recent
years, i.e. in 2004 by 40% and in 2005 by 20%, which has made the LTAF vary. All
newly employed seafarers are subject to a comprehensive training program where
TORM's strong safety culture is highlighted with the greatest emphasis. Despite
these efforts, however, some accidents, although not serious, can be attributed
to a lack of safety awareness. Therefore the safety awareness training is
currently being reviewed and improved taking into account the experiences
gained.
The International Ship and Port Facility Security Code, the ISPS Code, that
addresses the security of the vessels in port and at sea, preventing piracy and
terrorist attacks, smuggling, stowaways, etc., has now been in force for 1.5
year. Before the implementation on 1 July 2004, great concern was expressed
throughout the shipping industry including some scepticisme as to how these
rather stringent rules should be implemented on the world fleet as well as the
ports serving international trade.
TORM's experience in this field indicates that this concern has proved to be
unfounded. The Company has not had any significant problems during port calls or
at sea; only the fact that in some parts of the world, the seafarers'
opportunity for shore leave has been extremely restricted, which is an area of
concern to the Company given the importance that the Company attaches to the
well-being of its seafarers.
Collision
Late at night on the 28 June 2005 a Torm owned tanker was anchored off the port
of Ulsan. Dense fog enveloped the area when the vessel had to weigh anchor in
order to proceed into the port of Ulsan. The Master was assisted by 2 pilots
when the vessel departed from the anchorage with slow speed.
A cargo vessel had just left the port of Ulsan and was heading south, crossing
the anchorage area, without following the designated fairway. This vessel was
identified on the ARPA (Automatic Range and Plotting Aid) onboard the Torm
tanker. The ARPA indicated a possible collision, wherefore the Master tried to
contact the vessel by VHF without success.
The collision occurred 10 minutes after the Torm tanker had left the anchorage.
Luckily no one was hurt.
An investigation into the accident revealed several root causes, such as the
lack of proper communication between the bridge team and the pilot, and also
between the pilots and the port control.
The accident has lead to new safety precautions measures being implemented in
the Quality and Safety Management system.
Shareholder Relations
TORM wishes to provide relevant, accurate and timely information to all
investors and partners.
TORM has in recent years maintained a close contact with the financial markets
through roadshow presentations, telephone conferences and quarterly and full
year reports. In 2005, approximately 200 meetings were held with institutional
investors and analysts in Denmark, the Nordic countries, Europe and the US. This
active investor relations program increases awareness of the Company and ensures
a sounder basis upon which to evaluate TORM as a partner, an investment or a
borrower. During 2005, TORM was included in the Copenhagen Stock Exchange's
KFX/OMXC20 index.
TORM wishes to ensure that existing and potential investors are at all times
sufficiently informed about important developments and that the Company is
perceived to be professional, approachable and trustworthy.
The total daily turnover of the TORM share increased in 2005. The turnover of
the TORM share on the Copenhagen Stock Exchange increased considerably in 2005,
whilst turnover on NASDAQ fell during the year. On average, the daily turnover
was in the region of DKK 51.6 mill. (USD 8.6 mill.) in 2005.
TORM's share price increased by 35% in 2005. Taking into account the payment of
dividends of DKK 15 per share the total return for shareholders was 42% in 2005.
TORM's share capital consists of 36.4 mill. shares of DKK 10. The shares, which
are bearer shares, are listed on the Copenhagen Stock Exhange. In addition, TORM
is listed on NASDAQ in the form of American Depositary Receipt (ADR). TORM had
more than 9,000 registered shareholders as at 31 December 2005 representing 73%
of the share capital. At year-end 2005, approximately 11% of TORM's share
capital was converted to ADRs. The following shareholders have reported that
they own more than 5% of the share capital according to Section 29 of the Danish
Securities Trading Act covering share dealings:
Corporate Governance
Good corporate governance is a key element in the creation of shareholder value
and in gaining the trust of customers, partners and the financial markets.
It is TORM's policy to ensure that the Company is at all times managed in an
orderly and proper manner. The Board has laid down clear management guidelines
in order to ensure that the Company is managed in a manner in which
trustworthiness and ethics are at the core. These values are at the foundation
of the Company and contribute towards the creation of value for the Company and
its shareholders.
TORM's Board of directors and Management have an ongoing dialogue to continually
improve the management of the Company. The Board meets a minimum of 5 times per
annum according to the rules of procedures for the Board of directors and
Management. In 2005, 11 Board meetings where held. The Board lays out clear
policies and directives for Management's implementation. The Management in turn
implements these guidelines in their day-to-day management.
TORM's Board consists of 7 members of which 2 are elected by the employees in
accordance with Danish law. The 5 directors elected at the Annual General
Meeting and the 2 Board members elected by the employees are elected for a
4-year term, the next election being in 2007. The Board members elected by the
employees have the same rights, obligations and responsibilities as the
directors elected at the AGM.
The Board has formed an Audit Committee that meets at least twice per annum.
Additionally, the Board has formed a Remuneration Committee.
It is the Board's opinion that the payment to Management is in accordance with
market conditions.
The Board and Management own less than 0.1% of TORM's share capital.
In the annual report for 2006, TORM will implement the recommendations for good
corporate governance including the "comply-or-explain" principle from the
Copenhagen Stock Exchange. The "comply-or-explain" principle implies that the
companies are required to either comply with the recommendations for corporate
governance or explain why they do not comply with the recommendations.
Aside from complying with Danish rules, regulations and standards, TORM is also
obliged in connection with the NASDAQ listing to comply with a number of
requirements under the Sarbanes-Oxley Act, of which the most important are the
requirements listed in Section 404.
The Sarbanes-Oxley Act enacted a number of standards, rules and regulations
aimed at good management, covering American and foreign private issuers. One of
the requirements under the Sarbanes-Oxley Act is that Management shall provide
declarations in respect of the Company's internal controls, these being required
to be documented and kept up-to-date.
TORM is already well advanced with the work involved in ensuring compliance with
the Sarbanes-Oxley Act and will be in a position to document and to comply with
the rules in time for the release of the 2006 results. Aside from complying with
the relevant laws, TORM expects to increase the Company's focus on internal
controls and risk management, which will positively contribute to the Company's
business procedures and processes both in the short and long term. Total
expenditure in connection with complying with the Sarbanes-Oxley Act, including
IT costs, is expected to be less than USD 1 mill.
For an overview of Danish corporate governance and key differences between
corporate governance in Denmark and the Anglo-Saxon practices, please refer to
the Company's website www.torm.com.
FINANCIAL REVIEW
Net profit for the year increased by 60% to USD 299 million from USD 187 million
in 2004 corresponding to earnings per share (EPS) of USD 8.6 in 2005 against USD
5.4 in 2004. Excluding profit on sale of vessels of USD 55 million and dividend
from Dampskibsselskabet Norden A/S of USD 12 million the profit before tax for
the year was USD 232 million, which is considerably higher than expected as
reported at the beginning of the financial year in the announcement to the
Copenhagen Stock Exchange dated 8 March 2005.
The considerably higher profit is primarily due to the net addition of 9.5
vessels to TORM's fleet of owned and long-term chartered vessels, as the
announcement of expected profit made at the beginning of the year only included
the addition of 2 of these vessels. Freight rates in the tanker segments, which
during part of the year were significantly higher than expected, further
contributed to the reported profit.
TORM's total assets increased by USD 570 million to USD 1,810 million from USD
1,240 million in the previous year. The most significant developments behind
this increase are an increase in the carrying amount of vessels and vessels
under construction, including vessels held for sale, of USD 517 million mainly
due to fleet expansion, a decrease in the carrying amount of marketable
securities of USD 58 million due to divestment of bonds and an increase in cash
and cash equivalents of USD 91 million.
The shareholders' equity increased by USD 190 million to USD 905 million from
USD 715 million, whereas the solvency ratio decreased by 8 percentage points to
50% from 58% in 2004. The significant increase in shareholders' equity is mainly
due to the profit for the year less dividend paid out and value adjustment of
the Company's investment in Norden. TORM's total liabilities increased by USD
381 million to USD 905 million from USD 524 million in the previous year
primarily due to increases in mortgage debt and bank loans used to finance a
part of the expansion of the fleet.
NET EARNINGS FROM SHIPPING ACTIVITIES
TORM's total net revenue in 2005 was USD 587 million as compared to USD 433
million in the previous year. TORM's net revenue is derived from 2 segments: the
Tanker Division and the Bulk Division. In the markets in which these divisions
operate, the time charter equivalent (TCE) rates, defined as net revenue less
voyage expenses divided by the number of available earning days (days available
for service) is used to compare freight rates. Under time charter contracts the
charterer pays for the voyage expenses, whereas the shipowner pays for the
voyage expenses under voyage charter contracts. As a consequence, TORM primarily
bases economic decisions upon ex pected TCE rates rather than on expected net
revenues. The analysis of revenue is therefore primarily based on the
development in time charter equivalent earnings. TORM's time charter equivalent
earnings in 2005 were USD 464 million compared to USD 350 million in 2004. The
addition of tonnage, especially in the LR1 and MR tanker seg- ments, as well as
higher rates in the tanker segments during part of the year were the primary
reasons behind the increase in the TCE.
TANKER DIVISION
Net revenues in the Tanker Division increased by 64% to USD 419 million from USD
256 million in 2004, whereas the time charter equivalent earnings increased by
USD 121 million or 65% to USD 308 million from USD 187 million in the previous
year.
Freight rates prevailing in the market for TORM's Tanker Division in 2005 were
most of the year at levels comparable to 2004. However, during the period from
August to October freight rates were signifi- cantly higher than in the previous
year due to a surge in the US demand for oil products following the temporary
disruption of the production at US oil production facilities in the Mexican Gulf
caused by hurricanes.
Taking the year as a whole, the LR2 segment achieved freight rates that were on
average 6% higher than in the previous year. This increased earnings by USD 4
million. The number of available earning days increased by 165 days or 9%
resulting in an increase in earnings of USD 6 million.
In the LR1 segment TORM took delivery of 4 vessels and sold 2.5 vessels during
the year. 2 of the sold vessels were leased back on 5-year time charters. These
transactions were the primary reason for the increase in the number of available
earning days of 1,326 days or 93% from the previous year, resulting in an
increase in earnings of USD 33 million. The increase in average freight rates of
30% increased earnings by USD 21 million from the previous year.
In the MR segment, the Company took delivery of 7 vessels and sold 2 vessels
during the year. Also in this segment, the net addition of tonnage was the main
reason for the increase in the number of available earning days of 1,235 days or
28% which increased earnings by USD 26 million. The average freight rates were
24% higher than in the previous year, which affected earnings positively by USD
30 million.
The increase in the time charter equivalent earnings in the Tanker Division can
be summarized as illustrated in the table below.
Earnings for the Tanker Division
USD million MR LR1 LR2 Unallocated Total
--------------------------------------------------------------------------------------------------
Time charter equivalent earnings 2004 93 35 60 (1) 187
Change in number of earning days 26 33 6 65
Change in freight rates 30 21 4 55
Other 1 1
--------------------------------------------------
Time charter equivalent earnings 2005 149 89 70 0 308
--------------------------------------------------------------------------------------------------
The table below summarizes the earnings data per quarter for the Tanker
Division.
Earnings data for the Tanker Division
Change in %
USD/day 2004 2005 2005 2005 2005 2005 2004-
Full year Q1 Q2 Q3 Q4 Full year 2005
------------------------------------------------------------------------------------------------------------------------------------
LR2/Aframax vessels
Available earning days 1,824 450 442 548 550 1,989 9%
TCE per earning day *) 33,116 35,715 30,281 28,185 45,917 35,253 6%
OPEX per earning day **) (4,754) (5,526) (4,849) (5,899) (6,157) (5,612) 18%
Operating C/F per earning day ***) 22,701 27,570 18,726 14,172 30,316 22,468 (1%)
------------------------------------------------------------------------------------------------------------------------------------
LR1/Panamax vessels
Available earning days 1,425 498 652 774 827 2,751 93%
TCE per earning day *) 24,912 32,704 26,906 26,509 41,726 32,300 30%
OPEX per earning day **) (6,153) (4,991) (6,836) (6,074) (5,680) (5,903) (4%)
Operating C/F per earning day ***) 18,727 21,647 11,769 15,090 27,964 20,151 8%
------------------------------------------------------------------------------------------------------------------------------------
MR vessels
Available earning days 4,346 1,125 1,270 1,547 1,638 5,581 28%
TCE per earning day *) 21,381 27,465 26,079 23,499 29,373 26,613 24%
OPEX per earning day **) (5,936) (6,223) (6,594) (6,274) (6,505) (6,708) 13%
Operating C/F per earning day ***) 15,414 20,261 18,788 17,738 23,598 21,342 38%
------------------------------------------------------------------------------------------------------------------------------------
*) TCE = Time Charter Equivalent Earnings = Gross freight income less bunker,
commissions and port expenses.
**) Operating expenses for own vessels.
***) TCE earnings less operating expenses and charter hire.
BULK DIVISION
In the Bulk Division net revenue decreased by 6% to USD 168 million from USD 178
million in the previous year, whereas the time charter equivalent earnings
decreased by USD 7 million or 4% to USD 156 million from USD 163 million in
2004. The freight rates for bulk carriers reached historic high levels in 2004,
which were not sustained especially during the second half of 2005. However, due
to continued high coverage during the year, primarily through 1-year time
charter agreements, the adverse development in freight rates did not affect the
Company's earnings for 2005 compared to 2004.
Freight rates in the Panamax segment were on average 9% higher than in 2004,
increasing earnings by USD 12 million. In this segment, 1 vessel was added to
the fleet of owned vessels during the year which had previously been chartered
in. The decrease in the number of available earning days by 9% or 506 days from
the previous year was due to the net redelivery of tonnage chartered in. As a
result the time charter equivalent earnings in this segment decreased by USD 13
million.
In the Handysize segment earnings decreased by USD 5 million as a consequence of
a reduction in available earning days of 23% and in the average freight rates of
5% compared to the previous year.
The change in the time charter equivalent earnings in the Bulk Division can be
summarized as illustrated in the table below.
Earnings for the Bulk Division
------------------------------------------------------------------------------------------------------------------
USD million Handysize Panamax Unallocated Total
------------------------------------------------------------------------------------------------------------------
Time charter equivalent earnings 2004 18 144 1 163
Change in number of earning days (4) (13) (17)
Change in freight rates (1) 12 11
Other (1) (1)
------------------------------------------------------------------
Time charter equivalent earnings 2005 13 143 0 156
------------------------------------------------------------------------------------------------------------------
The table below summarizes the earnings data per quarter for the Bulk Division.
Earnings data for the Bulk Division
Charge in %
USD/day 2004 2005 2005 2005 2005 2005 2004-
Full year Q1 Q2 Q3 Q4 Full year 2005
----------------------------------------------------------------------------------------------------------------------------------
Panamax vessels
Available earning days 5,629 1,324 1,203 1,240 1,356 5,123 (9%)
TCE per earning day *) 25,534 30,641 30,962 27,523 22,585 27,897 9%
OPEX per earning day **) (5,022) (4,794) (4,607) (4,294) (5,017) (4,676) (7%)
Operating C/F per earning day ***) 16,125 20,495 21,792 12,241 12,136 17,487 8%
----------------------------------------------------------------------------------------------------------------------------------
Handysize vessels
Available earning days 1,056 199 206 215 197 816 (23%)
TCE per earning day *) 16,829 18,952 17,645 14,514 13,067 16,011 (5%)
OPEX per earning day **) (3,173) (2,916) (3,908) (3,690) (5,049) (3,919) 24%
Operating C/F per earning day ***) 12,316 15,306 13,172 9,150 7,745 11,588 (6%)
----------------------------------------------------------------------------------------------------------------------------------
*) TCE = Time Charter Equivalent Earnings = Gross freight income less bunker,
commissions and port expenses.
**) Operating expenses for own vessels.
***) TCE earnings less operating expenses and charter hire.
OPERATION OF VESSELS
Vessels chartered in on time charters do not give rise to operating expenses for
TORM but only to charter hire payments. As compared to 2004, charter hire in the
Tanker Division increased by USD 31 mil- lion to USD 44 million in 2005, whereas
charter hire paid in the Bulk Division dropped by USD 8 million to USD 38
million. The increase in the Tanker Division was primarily caused by the sale
and lease back of time charters of 2 vessels in the LR1 segment in the beginning
of 2005.
The operating expenses for the owned vessels increased by USD 17 million to USD
67 million in 2005. The most significant factor behind this development was the
increase in the number of operating days of 1,987 days or 21%, primarily due to
the addition of owned vessels in the LR1, MR and Panamax segments. The main
reasons for the operating expenses not increasing proportionately to the
increase in the number of operating days are one-off expenses relating to the
preparation of 2 vessels for sale and an unusually high number of drydockings
during 2005 totalling 277 days compared to 30 days in 2004. Days in dry-dock are
not included in the num- ber of operating days, whereas the vessels incur
operating expenses at similar levels as during operation. In addition, the
operating expenses for some of the vessels added this year are somewhat higher
than the average for the fleet as of the beginning of the year. The total fleet
of owned vessels incurred 31 off-hire days in 2005 corresponding to three per
thousand of the number of operating days compared to 15 off-hire days in 2004
corresponding to two per thousand of the number of operating days. The Company
regards this as a very satisfactory level.
Operating expenses are mainly incurred in USD and DKK. The average DKK/USD
exchange rate in 2005 was more or less unchanged from 2004 and did not affect
the development in operating expenses significantly.
ADMINISTRATIVE EXPENSES AND OTHER OPERATING INCOME
Total administrative expenses decreased from 2004 to 2005 by USD 8 million to
USD 31 million mainly due to a considerably lower effect from the share options
scheme, which is only partly offset by increased salary expenses due to the
addition of new staff and a general increase in salary levels.
Administrative expenses are primarily incurred in DKK. The average DKK/USD
exchange rate in 2005 was more or less unchanged from 2004 and did not affect
the development in administrative expenses significantly.
Other operating income primarily comprises chartering commissions received by
TORM as income from management of the 3 tanker pools. Other operating income
amounted to USD 13 million in 2005 as in 2004 despite an increase in commissions
from the tanker pools primarily due to one-off income of USD 2 million in the
previous year. The commissions are based on net revenues in the pools, and the
change is a direct result of the change in freight rates and the number of
vessels in the pools compared to the previous year.
VESSELS AND DRY-DOCKING
The increase in tangible fixed assets of USD 479 million to USD 1,167 million is
mainly attributable to the change in vessels and capitalized dry-docking. The
carrying value of vessels and capitalized dry-dock- ing increased by USD 419
million to USD 1,066 million. The increase relating to vessels amounted to USD
414 million. New tonnage was added at a total cost of USD 517 million resulting
from 2 LR1 tanker newbuildings and 2 LR1 tankers built in 2003 and 2004, 2 MR
tanker newbuildings and 5 MR tankers built in 2000 to 2003 as well as 1 Panamax
bulk vessel built in 2001. 2 MR tankers built in 1992 and 1994 and 2.5 LR1
tankers built in 1988 and 1990 at a total carrying amount of USD 63 million were
sold during the year and depreciation on the vessels amounted to USD 40 million.
Prepayment on vessels under construction increased by USD 60 million to USD 141
million due to additional costs relating to vessels under construction of USD
295 million less the above-mentioned newbuilding deliveries of USD 191 million
and the transfer of a vessel under construction to non- current assets held for
sale at a carrying amount of USD 44 million.
Depreciation amounted to USD 48 million in 2005 as compared to USD 35 million in
2004, an increase of USD 13 million. The increase is due to the expansion of the
fleet during 2005.
As at 31 December 2005 TORM's newbuilding program comprised 12 tanker vessels to
be delivered during 2006 to 2009, and the con- tractual liabilities under the
program amounted to USD 540 million. In addition the Company called options in
2005 to acquire 2 LR2 tankers on time charter built in 1999 and 2000, which were
deliv- ered in January 2006. The contractual liability relating to these vessels
amounted to USD 94 million as at 31 December 2005. In 2005, TORM contracted to
sell 1 of its LR1 vessels under construction subsequent to delivery in 2006
bringing the total net investment program to 13 vessels.
The market value of the fleet and investment program (7.5 LR2 tanker
newbuildings, net 1.5 LR1 tanker newbuildings, 2 MR tanker newbuildings and two
second-hand LR2 tankers) exceeded the carrying value of the fleet including
newbuilding contracts by USD 768 million at year-end. This valuation is based on
the average of 3 internationally acknowledged shipbrokers' valuations.
OTHER INVESTMENTS (Norden)
Other investments mainly comprise the investment of approximately 33% of the
shares in Norden with a carrying value of USD 352 mil- lion as at 31 December
2005 compared to USD 363 million in the previous year.
TORM continues not to consider Norden as an associated company, as the Company
does not have influence on decisions and is not represented on Norden's Board of
directors. The investment in Norden is valued on the basis of the closing price
on the Copenhagen Stock Exchange on 31 December 2005 of DKK 2,958.63 per share.
The positive effect from the increase in the share price from DKK 2,725.52 as at
31 December 2004 was more than offset by the adverse effect of the change in the
DKK/USD exchange rate of USD 49 million.
The Company holds investments in other entities with an aggregate carrying
amount of USD 9 million as at 31 December 2005, of which USD 2 million concerns
unlisted entities, compared to USD 5 million as at 31 December 2004. The
carrying amount of the unlisted shares constitutes the estimated fair value
based on available information.
FINANCING
Net financial items in 2005 were negative by USD 4 million compared to a net
income of USD 26 million in 2004. The most significant reason for the change is
the lower dividend from Norden of USD 12 million compared to USD 34 million in
2004 and an increase in inter- est expenses of USD 10 million to USD 26 million
in 2005 primarily due to the increase in net interest bearing debt of USD 360
million during the year to USD 632 million from USD 272 million in 2004.
The invested capital increased by USD 558 million to USD 1,176 million as at 31
December 2005 from USD 618 million in the previous year. The increase can
primarily be explained by the addition of tonnage and prepayments on
newbuildings during the year. Taking into account the development in net
interest bearing debt during 2005, it is evident that a significant part of the
expansion is net financed by cash flow from operations and from sale of vessels.
Shareholders' equity increased by USD 190 million to USD 905 million. The
considerable growth in shareholders' equity is mainly due to the net profit for
the year of USD 299 million less dividends paid out during the year of USD 90
million and value adjustment of the Company's investment in shares in other
companies, including Norden, of USD 23 million.
TAX
The tax expense for 2005 comprises current tax for the year of USD 9 million,
which is unchanged compared to the previous year, less a reduction of deferred
tax of USD 9 million compared to an increase in deferred tax of USD 8 in 2004.
Net tax for the year was USD 0 million compared to an expense of USD 19 million
in 2004. Of the reduction in deferred tax in 2005, USD 4 million was a result of
a change in the Danish corporation tax rate from 30% to 28%. The deferred tax
liability as at 31 December 2005 of USD 55 million compared to USD 73 million in
the previous year was furthermore affected by a currency exchange gain of USD 10
million which is recognized in the income statement under financial items.
All significant Danish entities in the TORM group entered into the tonnage
taxation scheme with effect from 2001 and have filed tax returns for 2001
through 2004. The assessment of the tax returns by the tax authorities has not
yet been completed, and the recognized current tax liabilities are therefore to
a great extent based on Management's judgement regarding the outcome of the
assessment. TORM paid USD 7 million in corporation tax on account in 2005
regarding these entities.
LIQUIDITY AND CAPITAL RESOURCES
Servicing of the Company's obligations under loan agreements, payment of charter
hire for chartered-in vessels and all other commitments that TORM has entered
into are paid out of the cash generated by the operating activities. Total cash
and cash equiva- lents amounted to USD 157 million at the end of the year
against USD 66 million at the beginning of the year, resulting in a net increase
in cash and cash equivalents from cash flows for the year of USD 91 million
compared to a net increase of USD 38 million in 2004. The primary sources of the
cash flow were profit from operating activities, additional borrowing and the
sale of vessels.
The cash flows were primarily used to finance the extensive expan- sion of the
fleet during the year.
The Company's operations generated a historically high cash inflow of USD 261
million compared to an inflow of USD 228 in 2004, which was also historically
high.
The cash flows were primarily used to finance the investing activities during
the year. USD 636 million was invested in tangible fixed assets during the year,
primarily comprising the extensive expansion of the fleet, compared to USD 187
million in 2004. The total cash inflow from the sale of vessels was USD 178
million in 2005, whereas the Company did not generate any cash flows from sale
of non-current assets in 2004.
Cash inflow from financing activities was USD 303 million compared to cash
outflow of USD 3 million in 2004. Additional borrowing generated inflow of USD
645 million for the financing of the newbuilding program and purchase of
second-hand vessels, while repayments on mortgage debt and bank loans amounted
to USD 252 million. Dividends paid to TORM's shareholders in the amount of USD
90 million also negatively affected cash flow from financing activities.
The Company has significant cash requirements associated with long- term debt
and time charters. These payments are influenced by changes in interest rates.
In order to manage interest rate risk, financial instruments are entered to swap
the variable interest rate on a portion of the borrowings for fixed rate debt.
To support the Strategy, TORM increased the financial flexibility during 2005 by
arranging 3 revolving facilities with leading banks. The facilities have a total
limit of USD 498 million, of which USD 256 million was drawn as at 31 December
2005. Part of the facilities is dedicated to the financing of new tonnage,
whereas the remaining part will go to the ongoing financing of some of the
existing vessels. As at 31 December 2005 the Company had addi- tional loans of
approximately USD 535 million bringing total credit agreements to USD 1,033
million bearing interest at a weighted average of LIBOR + 0.73% of which USD 242
million was unused.
When acquiring vessels, the first 20%-30% of the contract price is normally
financed by TORM, and the remaining 70%-80% is financed by mortgage debt. For
all 12 vessels in the newbuilding program payments corresponding to
approximately 26% of the aggregate contract price have been made, and TORM has
entered into an agreement for the remaining financing of 5 of the LR2 product
tanker vessels in the newbuilding program to be delivered during the period from
April 2006 to January 2008. The remaining financing for the other 7 vessels has
not yet been agreed but will be in place in due time to meet all payment
obligations. For all 12 vessels the total amount of self-financing is expected
to be USD 108 million, of which USD 20 million in 2006, and the total
outstanding contractual commitment amounts to USD 402 million.
TORM believes that based on available cash and planned invest- ments, projected
operating cash flows and financing capacity the Company has sufficient cash flow
to meet the operating require- ments, cash flow obligations and other strategic
initiatives. TORM also believes that the current fleet structure, based on time
charters and owned vessels, provides the Company with the flexibility to react
to changes in market conditions reducing the exposure to negative market
developments.
CONSOLIDATED INCOME STATEMENT
1 January - 31 December
USD '000 Note 2005 2004
--------------------------------------------------------------------------------------------------------------
Net revenue 586,975 433,320
Port expenses, bunkers and commissions (123,138) (83,769)
---------------------------------
Time charter equivalent earnings 463,837 349,551
---------------------------------
Charter hire (82,139) (59,592)
Operating expenses (66,744) (49,791)
Gross profit (Net earnings from shipping activities) 4,5 314,954 240,168
Profit from sale of vessels 54,731 0
Administrative expenses 5,6 (31,176) (38,637)
Other operating income 12,570 13,139
Depreciation and impairment losses 8 (47,894) (35,181)
---------------------------------
Operating profit 303,185 179,489
Financial items 9 (3,818) 25,839
---------------------------------
Profit before tax 299,367 205,328
Tax expenses 10 (4) (18,715)
---------------------------------
Net profit for the year 299,363 186,613
---------------------------------
Note 2005 2004
--------------------------------------------------------------------------------------------------------------
Earnings per share
Earnings per share (USD) 21 8.6 5.4
Earnings per share (DKK) *) 51.5 32.2
Diluted earnings per share (USD) 21 8.6 5.3
Diluted earnings per share (DKK) *) 51.4 32.0
---------------------------------
*) Calculated from USD to DKK at the average USD/DKK exchange rate for the
relevant period. The accompanying notes are an integrated part of these
financial statements.
CONSOLIDATED BALANCE SHEET
At 31 December
USD '000 Note 2005 2004
--------------------------------------------------------------------------------------------------------------
ASSETS
NON-CURRENT ASSETS
Tangible fixed assets
Land and buildings 883 395
Vessels and capitalized dry-docking 15 1,066,474 647,516
Vessels under construction and prepayments for vessels 97,397 37,311
Other plant and operating equipment 2,319 2,728
---------------------------------
8 1,167,073 687,950
---------------------------------
Financial fixed assets
Other investments 7 360,993 368,492
---------------------------------
360,993 368,492
---------------------------------
Total non-current assets 1,528,066 1,056,442
CURRENT ASSETS
Inventories of bunkers 10,869 5,824
Freight receivables, etc. 53,890 36,027
Other receivables 14,133 12,765
Accruals 2,853 4,912
Marketable securities 15 241 58,068
Cash and cash equivalents 156,728 65,524
---------------------------------
238,714 183,120
Non-current assets held for sale 20 43,358 0
---------------------------------
Total current assets 282,072 183,120
---------------------------------
TOTAL ASSETS 1,810,138 1,239,562
---------------------------------
The accompanying notes are an integrated part of these financial statements.
USD '000 Note 2005 2004
-----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Common shares 11 61,098 61,098
Treasury shares 11 (7,708) (7,748)
Revaluation reserves 296,448 319,354
Retained profit 415,306 238,439
Proposed dividend 132,382 99,861
Hedging reserves 3,258 454
Translation reserves 3,867 3,949
----------------------------
Total shareholders' equity 904,651 715,407
LIABILITIES
Non-current liabilities
Deferred tax 10 54,560 73,261
Mortgage debt and bank loans 13,15 729,088 333,284
----------------------------
Total non-current liabilities 783,648 406,545
----------------------------
Current liabilities
Mortgage debt and bank loans 13,15 59,926 62,141
Trade payables 22,918 15,668
Current tax liabilities 9,381 9,357
Other liabilities 14 23,592 23,060
Deferred income 12 6,022 7,384
----------------------------
Total current liabilities 121,839 117,610
----------------------------
TOTAL LIABILITIES 905,487 524,155
----------------------------
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 1,810,138 1,239,562
----------------------------
Accounting policies 1-3
Collateral security 15
Guarantee and contingent liabilities 16
Contractual liabilities 17
Fair value of derivative financial instruments 18
Related party transactions 19
Earnings per share 21
Appropriation on net profit for the year incl. proposed dividend 22
Reconciliation to United States Generally Accepted
Accounting Principles (US GAAP) 23
The accompanying notes are an integrated part of these financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
USD mill.
Gains/losses recongized in equity
-------------------------------------
Common Treasury Retained Proposed Revaluation Hedging Translation
shares shares profit dividends reserve reserves reserves Total
-----------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Balance at 1 January 2004 30.5 (8.7) 358.7 36.7 0.0 (3.6) 0.0 413.6
Change in accounting policies (184.4) 118.7 (65.7)
-----------------------------------------------------------------------------------------
Balance at 1 January 2004 as restated 30.5 (8.7) 174.3 36.7 118.7 (3.6) 0.0 347.9
Changes in shareholders' equity 2004:
Exchange rate adjustment arising on
translation of entities using a
measurement currency
different from USD 4.0 4.0
Reversal of deferred gain/loss on cash
flow hedges SHAREHOLDERS' at the
beginning of the year 3.6 3.6
Deferred gain/loss on cash flow hedges
at year-end 0.4 0.4
Reversal of fair value adjustment on
available for sale investments at
the beginning of the year (118.7) (118.7)
Fair value adjustment on available
for sale investments at year-end 319.3 319.3
-----------------------------------------------------------------------------------------
Net gains/losses recognized
directly in the equity 0.0 0.0 0.0 0.0 200.6 4.0 4.0 208.6
Profit for the year 186.6 186.6
-----------------------------------------------------------------------------------------
Total income/(expenses) for the year 0.0 0.0 186.6 0.0 200.6 4.0 4.0 395.2
Disposal of treasury shares, cost 1.0 1.0
Gain on disposal of treasury shares 0.1 0.1
Dividends paid (35.4) (35.4)
Dividends paid on own shares 1.5 1.5
Exchange rate adjustment on
dividends paid 1.3 (1.3) 0.0
Proposed dividend for the
financial year (99.9) 99.9 0.0
Exercise of share options 5.1 5.1
Bonus share issue 30.6 (30.6) 0.0
Cost of bonus share issue 0.0 0.0
-----------------------------------------------------------------------------------------
Total changes in shareholders'
equity 2004 30.6 1.0 64.1 63.2 200.6 4.0 4.0 367.5
-----------------------------------------------------------------------------------------
Shareholders' equity at
31 December 2004 61.1 (7.7) 238.4 99.9 319.3 0.4 4.0 715.4
Changes in shareholders' equity 2005:
Exchange rate adjustment arising on
translation of entities using
ameasurement currency
different from USD (0.1) (0.1)
Reversal of deferred gain/loss
on cash flow hedges at the
beginning of the year (0.4) (0.4)
Deferred gain/loss on cash flow hedges
at year-end 3.3 3.3
Reversal of fair value adjustment on
available for sale investments
at the beginning of the year (319.3) (319.3)
Fair value adjustment on available
for sale investments at year-end 296.4 296.4
-----------------------------------------------------------------------------------------
Net gains/losses recognized
directly in equity 0.0 0.0 0.0 0.0 (22.9) 2.9 (0.1) (20.1)
Profit for the year 299.4 299.4
-----------------------------------------------------------------------------------------
Total income/(expense) for the year 0.0 0.0 299.4 0.0 (22.9) 2.9 (0.1) 279.3
Disposal of treasury shares, cost 0.0 0.0
Dividends paid (94.5) (94.5)
Dividends paid on treasury shares 4.1 4.1
Exchange rate adjustment on
dividends paid 5.4 (5.4) 0.0
Exercise of share options 0.4 0.4
Proposed dividend for the financial year (132.4) 132.4 0.0
-----------------------------------------------------------------------------------------
Total changes in shareholders'
equity 2005 0.0 0.0 176.9 32.5 (22.9) 2.9 (0.1) 189.3
-----------------------------------------------------------------------------------------
Shareholders' equity at 31 December 2005 61.1 (7.7) 415.3 132.4 296.4 3.3 3.9 904.7
-----------------------------------------------------------------------------------------
The accompanying notes are an integrated part of these financial statements.
CONSOLIDATED CASH FLOW STATEMENT
USD '000 2005 2004
------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Operating profit 303,185 179,489
Adjustments:
Reversal of profit from sale of vessels (54,731) 0
Reversal of depreciation and impairment losses 47,894 35,181
Reversal of other non-cash movements (6,523) 4,112
Dividends received 12,825 34,157
Interest income and exchange rate gains 7,809 3,395
Interest expenses (26,045) (15,659)
Income taxes paid (7,505) (471)
Change in inventories, accounts receivables and payables (15,797) (12,178)
------------------------------------
Net cash inflow/(outflow) from operating activities 261,112 228,026
------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Investment in tangible fixed assets (635,877) (187,133)
Investment in equity interests and securities (15,415) 0
Sale of non-current assets 178,157 0
------------------------------------
Net cash inflow/(outflow) from investing activities (473,135) (187,133)
------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowing, mortgage debt and other financial liabilities 645,493 146,072
Repayment/redemption, mortgage debt (251,905) (85,688)
Repayment/redemption, lease liabilities 0 (30,348)
Dividends paid (90,401) (33,824)
Purchase/disposal of treasury shares 40 1,023
------------------------------------
Cash inflow/(outflow) from financing activities 303,227 (2,765)
------------------------------------
Net cash inflow/(outflow) from operating,
investing and financing activities 91,204 38,128
Cash and cash equivalents, at 1 January 65,524 27,396
------------------------------------
Cash and cash equivalents, at 31 December 156,728 65,524
Of which used as collateral 0 0
156,728 65,524
------------------------------------
The accompanying notes are an integrated part of these financial statements.
NOTES
NOTE 1
CHANGES IN ACCOUNTING POLICIES
ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
In the current year, the TORM Group has adopted all of the International
Financial Reporting Standards and the related interpretations adopted by the EU
as at 31 December 2005. The transition is accounted for in accordance with IFRS
1 First-time Adoption of International Financial Reporting Standards, and the
date of transition is 1 January 2004. The adoption of these standards and
interpretations has resulted in changes to the Group's accounting policies in
the following areas:
a) Unrealized gains or losses in respect of bonds and shares in other
companies were previously recognized in the income statement under
financial items. Shares are regarded as financial assets available for
sale. In accordance with IAS 39 "Financial Instruments: Recognition and
Measurement" unrealized gains or losses in respect of shares are recognized
directly in sharehold- ers' equity and released to the income statement
when the assets are derecognized. Bonds are classified as financial assets
at fair value through profit or loss. Therefore, unrealized gains or losses
in respect of bonds are still recognized in the income statement.
b) Deferred tax assets and liabilities under the tonnage tax scheme were
previously considered as contingent and were disclosed in the Notes. In
accordance with IAS 12 "Income Taxes" and the ongoing efforts to
convergence with US GAAP and in order to align the accounting under IFRS
and under US GAAP, deferred tax assets and liabilities are recognized in
the balance sheet and the change for the year is recognized in the income
statement.
c) TORM's share option scheme provides the employees with the choices of cash
settlement or receipt of TORM shares. The difference at the date the
options are granted between the exercise price and the market price of the
shares was previously recognized as a compensation expense in
administrative expenses in the income statement. Receipts and payments
relating to the exercise of the share options were recognized directly in
shareholders' equity. In accordance with IFRS 2 "Share-based Payment" the
scheme is treated as cash-settled share-based payment transactions. A
liability relating to share options not exercised is recognized in the
balance sheet. The change in the liability for the period and the value of
the share options exercised in the period are recognized in the income
statement. The liability is measured using the Black-Scholes model. In the
cash flow statement cash flows relating to the share option scheme are
reclassified from financing activities to operating activities.
d) The Group has chosen to apply the optional exemption in IFRS 1 "First-time
Adoption of International Financial Reporting Standards" relating to
cumulative translation differences. As a consequence, cumulative
translation differences are deemed to be zero at the date of transition to
IFRS, and gain or loss on a subsequent disposal of an operation applying a
functional cur- rency different from USD will exclude translation
differences that arose before the date of transition to IFRS.
e) Non-current assets held for sale were previously included in the respective
line in the balance sheet according to the type of asset. In accordance
with IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations"
non-current assets held for sale are presented in a separate line under
current assets in the balance sheet and measured at the lower of carrying
amount and fair value less costs to sell. Depreciation of an asset ceases
when it is classified as held for sale.
f) Highly liquid bonds were previously included in "Cash and cash equivalents"
in the cash flow statement. In accordance with IAS 7 "Cash Flow Statements"
an investment must be subject to an insignificant risk of changes in value
to qualify as a cash equiva- lent. Consequently, bonds with a term to
maturity exceeding 3 months are classified as investing activities.
g) Forward contracts regarding bunker purchases were previ- ously accounted
for as cash flow hedges. The current practices do not fulfill the
documentation requirements prescribed by IAS 39 "Financial Instruments:
Recognition and Measurement". Consequently, value adjustments of forward
contracts regarding bunker purchases are recognized in the income
statement.
CHANGES IN ACCOUNTING ESTIMATES AND JUDGEMENTS
The functional currency in the administrative entity is changed to USD from DKK
prospectively from 1 January 2005 in accordance with IAS 21 "The Effects of
Changes in Foreign Exchange Rates" as a significant part of the DKK assets have
been divested during 2005 and the activities of the administrative entity have
been further integrated with the operating entities.
The reporting currency is changed to USD from DKK, which will provide a more
true and fair view of the financial results, financial performance and cash
flows of the Group in accordance with IAS 1 "Presentation of Financial
Statements" and IAS 21 "The Effects of Changes in Foreign Exchange Rates." The
change in reporting currency is implemented retrospectively from 1 January 2004.
EFFECTS OF THE CHANGES IN ACCOUNTING POLICIES, ESTIMATES AND JUDGEMENTS
The effects of the changes in accounting policies, estimates and judgements on
the balance sheet as at 1 January 2005 and on the comparative figures for 2004
for the Group are illustrated in the statements presented on the following page.
The statements are presented in USD in accordance with the change in reporting
cur- rency. Compared to the expected effect of adopting IFRS disclosed in the
Annual Report for 2004, the only significant change is caused by the recognition
of deferred tax, which has reduced the net profit in 2004 by USD 9 million and
reduced the shareholders' equity as at 31 December 2004 by USD 73 million.
NOTES
USD mill.
1 January - 31 December 2004
-----------------------------
Reference to Previous Effect of
description GAAP transition to IFRS IFRS
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENTS
Net revenue 433.3 433.3
Port expenses, bunkers and commissions g (83.0) (0.8) (83.8)
---------------------------------------------
Time charter equivalent earnings 350.3 (0.8) 349.5
Charter hire (59.6) (59.6)
Operating expenses (49.8) (49.8)
---------------------------------------------
Gross profit/(loss) (Net earnings from shipping activities) 240.9 (0.8) 240.1
Profit/(loss) from sale of vessels 0.0 0.0
Administrative expenses c (28.8) (9.8) (38.6)
Other operating income 13.2 13.2
Depreciation and impairment losses (35.2) (35.2)
---------------------------------------------
Operating profit 190.1 (10.6) 179.5
Financial items a 199.2 (173.4) 25.8
---------------------------------------------
Profit/(loss) before tax 389.3 (184.0) 205.3
Tax expenses b (9.6) (9.1) (18.7)
---------------------------------------------
Net profit/(loss) for the year 379.7 (193.1) 186.6
---------------------------------------------
ASSETS
Tangible fixed assets 688.0 688.0
Financial fixed assets 368.5 368.5
---------------------------------------------
Total non-current assets 1.056.5 1.056.5
Total current assets 183.1 183.1
---------------------------------------------
Total assets 1.239.6 0.0 1.239.6
---------------------------------------------
SHAREHOLDERS' EQUITY AND LIABILITIES
Total shareholders' equity b, c 790.5 (75.1) 715.4
---------------------------------------------
Non-current liabilities b 333.3 73.3 406.6
Current liabilities c 115.8 1.8 117.6
---------------------------------------------
Total liabilities 449.1 75.1 524.2
Total shareholders' equity and liabilities 1.239.6 0.0 1.239.6
---------------------------------------------
SHAREHOLDERS' EQUITY
1 January 31 December
2004 2004
---------------------------------------------
Shareholders' equity, previous GAAP 413.6 790.5
Deferred tax b (58.8) (73.3)
Liability regarding outstanding share options c (6.9) (1.8)
---------------------------------------------
Shareholders' equity, IFRS 347.9 715.4
---------------------------------------------
ACCOUNTING PRINCIPLES NOT YET ADOPTED
The following standards have not yet been adopted:
IFRS 7 "Financial Instruments: Disclosures". The standard adds certain new
disclosures about financial instruments to those currently required by IAS 32,
replaces the disclosures now required by IAS 30 and compiles all of those
financial instruments disclosures together in a new standard. The standard is
effective for periods beginning on or after 1 January 2007.
Amendment to IAS 1 "Presentation of Financial Statements". The amendment
introduces disclosure requirements about the level of capital and how the
capital is managed. The amendment is effective for periods beginning on or after
1 January 2007.
TORM expects to implement these new disclosure requirements with effect from the
financial year 2006.
NOTE 2
ACCOUNTING POLICIES
The annual report has been prepared in accordance with the International
Financial Reporting Standards as adopted by the EU and the disclosure
requirements for Danish listed companies' financial reporting. The financial
statements are prepared in accordance with the historical cost convention except
where fair value accounting is specifically required by IFRS.
The functional currency in all major entities is USD, and the Group applies USD
as presentation currency in the preparation of financial statements.
KEY ACCOUNTING POLICIES
The Management considers the following to be the most important accounting
policies for the TORM Group.
Participation in pools
TORM generates its revenue from shipping activities, which to a large extent are
conducted through pools. Total pool revenue is generated from each vessel
participating in the pools in which the Group participates and is based on
either voyage or time charter parties. The pool measures net revenues based on
the contractual rates and the duration of each voyage, and net revenue is
recognized upon delivery of service in accordance with the terms and conditions
of the charter parties.
The pools are regarded as jointly controlled operations, and the Group's share
of the income statement and balance sheet in the respective pools is accounted
for by recognizing a proportional share, based on participation in the pool,
combining items of uniform nature. The Group's share of the revenues in the
pools is primarily dependent on the number of days the Group's vessels have been
available for the pools in relation to the total available pool earning days
during the period.
TORM acts as pool manager for 3 pools in which the Group is participating with a
significant number of vessels. As pool manager TORM receives a chartering
commission income to cover the expenses associated with this role. The charter
commission income is calculated as a fixed percentage of the freight income from
each charter agreement. If the pool does not earn any freight income, TORM will
not receive any commission income. The commission income is recognized in the
income statement under "Other operating income" simultaneously with the
recognition of the underlying freight income in the pool.
Cross over voyages
Revenue and the related expenses are recognized upon delivery of service in
accordance with the terms and conditions of the charter parties.
For cross over voyages (voyages in progress at the end of a reporting period)
the uncertainty and the dependence on estimates are greater than for concluded
voyages. The Group recognizes a percentage of the estimated revenue and voyage
expenses for the voyage equal to the percentage of the estimated duration of the
voyage completed on the balance sheet date. The estimate of revenue and voyage
expenses is based on the expected duration and destination of the voyage, vessel
statistics regarding bunker consumption, estimates of port expenses and previous
experience.
When recognizing net revenue, there is a risk that the actual number of days it
takes to complete the voyage will differ from the estimate, and for time charter
parties a lower day rate may have been agreed for additional days. The contract
for a single voyage may state several alternative destination ports. The
destination port may change during the voyage, and the rate may vary depending
on the destination port. Changes to the estimated duration of the voyage as well
as changing destinations and weather conditions will affect the voyage expenses.
Demurrage revenues
Freight contracts contain conditions regarding the amount of time available for
loading and discharging of the vessel. If these conditions are breached, TORM is
compensated for the additional time incurred in the form of a demurrage revenue.
Demurrage revenues are rec- ognized upon delivery of service in accordance with
the terms and conditions of the charter parties.
Upon completion of the voyage, the Group assesses the time spent in port, and a
demurrage claim based on the relevant contractual conditions is submitted to the
charterers. The claim will often be met by counter claims due to differences in
the interpretation of the agreement compared to the actual circumstances of the
additional time used. Based on previous experience, 95% of the demurrage claim
submitted is recognized as demurrage revenue. The Group receives the demurrage
payment upon reaching final agreement of the amount, which on average is
approximately 100 days after the original demurrage claim was submitted. If the
Group accepts a reduction of more than 5% of the original claim, or if the
charterer is not able to pay, demurrage revenue will be affected.
Vessels
Vessels are measured at cost less accumulated depreciation and accumulated
impairment losses. Cost comprises acquisition cost and costs directly related to
the acquisition up until the time when the asset is ready for use including
interest expenses incurred during the period of construction.
All major components of vessels except for dry-docking costs are depreciated on
a straight-line basis to the estimated residual value over their estimated
useful lives, which TORM estimates to be 25 years. The Group considers that a
25-year depreciable life is consistent with that used by other shipowners with
comparable tonnage. Depreciation is based on cost less the estimated residual
value. Residual value is estimated as the lightweight tonnage of each vessel
multiplied by scrap value per ton. The useful life and the residual value of the
vessels are reviewed at least at each financial year-end based on market
conditions, regulatory requirements and the Group's business plans. The Group
also evaluates the carrying amounts to determine if events have occurred that
indicate impairment and would require a modification of their carrying amounts.
Prepayment on vessels under construction is measured at costs incurred.
Dry-docking costs
The vessels are required to undergo planned dry-dockings for replacement of
certain components, major repairs and maintenance of other components, which
cannot be carried out while the vessels are operating, approximately every 30
and 60 months depending on the nature of work and external requirements. These
dry-docking costs are capitalized and depreciated on a straight-line basis over
the estimated period until the next dry-docking. The residual value of such
components is estimated at nil. The useful life of the dry- docking costs are
reviewed at least at each financial year-end based on market conditions,
regulatory requirements and TORM's business plans.
The cost of acquring a new vessel is divided into dry-docking costs and the
remaining cost of the vessel. The two elements are recognized and depreciated
separately. For newbuildings, the initial dry-docking asset is estimated based
on the expected costs related to the first-coming dry-docking, which is again
based on experience and past history of similar vessels. For second-hand
vessels, a dry- docking asset is also segregated and capitalized separately,
however, taking into account the normal docking intervals in TORM.
At subsequent dry-dockings the costs comprise the actual costs incurred at the
dry-docking yard. Dry docking costs may include the cost of hiring crews to
effect replacements and repairs and the cost of parts and materials used, cost
of travel, lodging and supervision of TORM personnel and the cost of hiring
third party personnel to oversee a dry-docking. Dry-docking activities include,
but are not limited to, the inspection, service on turbocharger, replacement of
shaft seals, service on boiler, replacement of hull anodes, applying of
antifouling and hull paint, steel repairs and refurbishment and replacement of
other parts of the vessel.
Deferred tax
All significant Danish entities within the Group entered the Danish tonnage
taxation scheme for a binding 10-year period with effect from 1 January 2001 and
have filed tax returns for the fiscal years 2001 to 2004. Under the Danish
tonnage taxation scheme, taxable income is not calculated on the basis of income
and expenses as under the normal corporate taxation. Instead, taxable income is
calculated with reference to the tonnage used during the year. The taxable
income for a Company for a given period is calculated as the sum of the taxable
income under the tonnage taxation scheme and the tax- able income from the
activities that are not covered by the tonnage taxation scheme made up in
accordance with the ordinary Danish corporate tax system.
If the entities' participation in the Danish tonnage taxation scheme is
abandoned or if the entities' level of investment and activity is sig-
nificantly reduced, a deferred tax liability will become payable. A deferred tax
liability is recognized in the balance sheet at each period end and is accounted
for using the balance sheet liability method. Currency exchange adjustments
relating to deferred tax are recognized under financial items in the income
statement. The deferred tax liability relating to the vessels is measured on the
basis of the difference between the tax value of the vessels at the date of
entry into the tonnage taxation scheme and the lower of the cost and the
realized or realizable sales value of the vessels.
OTHER ACCOUNTING POLICIES
Consolidation principles
The consolidated financial statements comprise the financial state- ments of the
Parent Company, A/S Dampskibsselskabet TORM and its subsidiaries, i.e. the
entities in which the Parent Company, directly or indirectly, holds the majority
of the votes or otherwise has a controlling interest.
Entities in which the Group holds between 20% and 50% of the votes and exercises
significant but not controlling influence are regarded as associated companies.
Associated companies which are by agreement managed jointly with one or more
other companies, and therefore subject to joint control (jointly controlled
entities), are accounted for using proportionate consolidation, whereby the
individual items in their financial state- ments are included in proportion to
the ownership share.
The consolidated financial statements are prepared on the basis of the financial
statements of the Parent Company, its subsidiaries and proportionately
consolidated companies by combining items of a uniform nature and eliminating
inter-company transactions, balances and shareholdings as well as realized and
unrealized gains and losses on transaction between the consolidated companies.
The financial statements used for consolidation purposes are prepared in
accordance with the Group's accounting policies. Entities are included in the
consolidated financial statements from the date of acquisition or founding until
the date of disposal or wounding up.
Foreign currencies
The functional currency of all significant entities including sub- sidiaries and
associated companies is USD, because the Group's vessels operate in
international shipping markets, in which revenues and expenses are settled in
USD, and the Group's most significant assets and liabilities in the form of
vessels and related mortgage debt are in USD. Transactions in currencies other
than the functional currency are translated into the functional currency at the
date of the transactions. Gains or losses arising between the exchange rate at
the transaction date and the exchange rate at the settlement date are recognized
in the income statement under financial items.
Cash, accounts receivable and payable and other monetary items denominated in
currencies other than the functional currency are translated into the functional
currency at the exchange rate prevailing at the balance sheet date. Differences
between the exchange rate at the transaction date and the exchange rate at the
balance sheet date are recognized in the income statement under financial items.
The reporting currency of the Group is USD. Upon recognition of entities with
functional currencies other than USD, the financial statements are translated
into USD. Items in the income statement are translated into USD at the average
exchange rates for the period, whereas balance sheet items are translated at the
exchange rates as at the balance sheet date. Exchange differences arising from
the translation of financial statements into USD are recognized as a separate
component of shareholders' equity. On the disposal of an entity, the cumulative
amount of the exchange differences deferred in the separate component of equity
relating to that entity shall be transferred to the income statement as part of
the gain or loss on disposal.
An exchange rate gain or loss relating to a non-monetary item carried at fair
value is recognized in the same line as the fair value adjustment.
Derivative financial instruments
Derivative financial instruments, primarily interest rate swaps, forward freight
agreements and forward contracts regarding bunker purchases, are entered to
hedge future committed or anticipated transactions. TORM applies hedge
accounting under the specific rules for cash flow hedges when allowed and
appropriate. In addition, TORM takes very limited positions in forward freight
agreements as a supplement to the Group's physical positions in vessels, which
are not entered for hedge purposes.
Derivative financial instruments are initially recognized in the balance sheet
at cost and are subsequently measured at their fair value as other receivables
or other liabilities respectively.
Changes in fair value of derivative financial instruments, which are designated
as cash flow hedges, are recognized directly in share- holders' equity under
"Hedging reserves". When the hedged trans- action is recognized in the income
statement, the cumulative value adjustment recognized in equity is transferred
to the income statement and included in the same line as the hedged transaction.
Changes in fair value of derivative financial instruments that are not
designated as hedges are recognized in the income statement. While effectively
reducing cash flow risk in accordance with the risk man- agement policy of the
Group, the current use of interest rate swaps with cap features, forward freight
agreements and forward contracts regarding bunker purchases does not qualify for
hedge accounting. Changes in fair value of interest rate swaps with caps
features, for- ward freight agreements and forward contracts regarding bunker
purchases are therefore recognized in the income statement under "Financial
items", "Net revenue" and "Port expenses, bunkers and commissions" respectively.
Changes in fair value of forward freight agreements, which are not entered for
hedge purposes, are recognized in "Net revenue".
All fair values are based on market-to-market prices or standard pricing models.
Segment information
TORM consists of two business segments: Tanker and Bulk. This segmentation is
based on the Group's internal management and reporting structure in addition to
evaluation of risk and earnings. Transactions between segments are based on
market-related prices and are eliminated at Group level.
The Group only has one geographical segment, because the Group considers the
global market as a whole, and as the individual vessels are not limited to
specific parts of the world.
The segment income statement comprises revenues directly attrib- utable to the
segment and expenses, which are directly or indirectly attributable to the
segment. Indirect allocation of expenses is based on distribution keys
reflecting the segment's use of shared resources.
The segment non-current assets consist of the non-current assets used directly
for segment operations.
Current assets are allocated to segments to the extent that they are directly
attributable to segment operations, including inventories, outstanding freight,
other receivables and prepayments.
Segment liabilities comprise segment-operating liabilities including trade
payables and other liabilities.
Not-allocated items primarily comprise assets and liabilities as well as
revenues and expenses relating to the Group's administrative functions and
investment activities, including cash and bank bal- ances, interest bearing
debt, taxes, etc.
Employee benefits
Wages, salaries, social security contributions, paid holiday and sick leave,
bonuses and other monetary and non-monetary benefits are accrued in the year in
which the employees render the associated services.
Pension plans
The Group has entered into defined contribution plans only. Pension costs
related to defined contribution plans are recorded in the income statement in
the year to which they relate.
Share based compensation
The Board of directors, the Management and a number of key employees participate
in a share option scheme. The scheme provides these persons with the choices of
cash settlement or receipt of TORM shares. At the balance sheet date a liability
relating to share options not exercised is recognized in the balance sheet under
other liabilities. The change in the liability for the period and the value of
the share options exercised in the period is recognized in the income statement.
The liability is measured using the Black-Scholes model.
Leases
Agreements to charter in vessels and to lease other property, plant and
equipment, where TORM has substantially all the risks and rewards of ownership,
are recognized in the balance sheet as finance leases. Lease assets are measured
at the lower of fair value and the present value of minimum lease payments
determined in the agreements.
For the purpose of calculating the present value, the interest rate implicit in
the lease or an approximate value is used as discount factor. The lease assets
are depreciated and written down under the same accounting policy as the vessels
owned by the Group or over the lease period depending on the lease terms.
The corresponding lease obligation is recognized as a liability in the balance
sheet, and the interest element of the lease payment is charged to the income
statement as incurred.
Other charter agreements concerning vessels and other leases are classified as
operating leases, and lease payments are charged to the income statement on a
straight-line basis over the lease term. The obligation for the remaining lease
period is disclosed in the notes to the financial statement.
Agreements to charter out vessels, where substantially all the risks and rewards
of ownership are transferred to the lessee, are classified as finance leases,
and an amount equal to the net investment in the lease is recognized and
presented in the balance sheet as a receivable. The carrying amount of the
vessel is derecognized and any gain or loss on disposal is recognized in the
income statement.
Other agreements to charter out vessels are classified as operating leases and
lease income is recognized in the income statement on a straight-line basis over
the lease term.
Sale and leaseback transactions
A gain or loss related to a sale and leaseback transaction resulting in a
finance lease is deferred and amortized in proportion to the gross rental on the
time charter over the lease term.
A gain related to a sale and leaseback transaction resulting in an operating
lease is recognized in the income statement immediately provided the transaction
is agreed on market terms or the sales price is lower than the fair value. If
the sales price exceeds the fair value, the difference between the sales price
and the fair value is deferred and amortized in proportion to the lease payments
over the life of the lease.
A loss related to a sale and leaseback transaction resulting in an operating
lease is recognized in the income statement at the date of transaction except if
the loss is reflected in future lease payments below fair value, it is deferred
and amortized in proportion to the lease payments over the life of the lease.
INCOME STATEMENT
Net revenue
Income, including net revenue, is recognized in the income statement when:
o the income creating activities have been carried out on the basis of a
binding agreement,
o the income can be measured reliably,
o it is probable that the economic benefits associated with the transaction
will flow to the Group, and
o costs relating to the transaction can be measured reliably.
Net revenue comprises freight, charter hire and demurrage revenues from the
vessels and gains and losses from forward freight agree- ments. Net revenue is
recognized when it meets the general criteria mentioned above and the stage of
completion can be measured reliably. Accordingly, freight, charter hire and
demurrage revenue is recognized at selling price upon delivery of service in
accordance with the charter parties concluded.
Port expenses, bunkers and commissions
Port expenses, bunker fuel consumption and commissions are recognized upon
delivery of service in accordance with the charter parties concluded.
Charter hire
Charter hire includes the expenses related to the chartering in of vessels
incurred in order to achieve the net revenues for the period.
Operating expenses
Operating expenses, which comprise crew expenses, repair and maintenance
expenses and tonnage duty, are expensed as incurred.
Profit from sale of vessels
Profit or loss from sale of vessels is recognized when the significant risks and
rewards of ownership have been transferred to the buyer, and it is measured as
the difference between the sales price less sales costs and the carrying amount
of the asset.
Administrative expenses
Administrative expenses, which comprise administrative staff costs, management
costs, office expenses and other expenses relating to administration, are
expensed as incurred.
Other operating income
Other operating income primarily comprises chartering commis- sions, management
fees and profits and losses deriving from the disposal of other plant and
operating equipment.
Depreciation and impairment losses
Depreciation and impairment losses comprise depreciation of fixed assets for the
period as well as the deduction in the value of vessels by the amount by which
the carrying amount of the asset exceeds its recoverable amount. In the event of
indication of impairment of value, the carrying amount is assessed and the value
of the asset is reduced to its recoverable amount equal to the higher of value
in use based on net present value of future earnings from the assets and its net
selling price.
Financial items
Financial items comprise interest income and interest expense, financing costs
of finance leases, realized and unrealized exchange rate gains or losses
relating to transactions in currencies other than the functional currency,
realized gains or losses from other invest- ments and securities, unrealized
gains or losses from securities, dividends received and other financial income
and expenses including value adjustments of certain financial instruments not
accounted for as hedging instruments. Interest is recognized in accordance with
the accrual basis of accounting taking into account the effective interest rate.
Dividends are recognized when the right to receive payment has been decided,
which is typically when the dividend has been declared and can be received
without conditions.
Tax
In Denmark, A/S Dampskibsselskabet TORM is jointly taxed with its Danish
subsidiaries. The Parent Company provides for and pays the aggregate Danish tax
of the taxable income of these companies but recovers the relevant portion of
the taxes paid from the subsidiaries based on each entity's portion of the
aggregate taxable income. Tax expenses include the expected tax including
tonnage tax of the taxable income for the year for the Group, adjustments
relating to previous years and the change in deferred tax for the year. However,
tax relating to items posted in shareholders' equity is posted directly in
shareholders' equity.
BALANCE SHEET
Other plant and equipment
Land is measured at cost.
Buildings are measured at cost less accumulated depreciation and accumulated
impairment losses. Buildings are depreciated on a straight-line basis over 50
years.
Operating equipment is measured at cost less accumulated depreci- ation.
Computer equipment is depreciated on a straight-line basis over 3 years, and
other operating equipment is depreciated on a straight-line basis over 5 years.
Leasehold improvements are measured at cost less accumulated amortization and
impairment losses, and leasehold improvements are amortized on a straight-line
basis over the shorter of the term of the lease and the estimated useful life.
Cost comprises acquisition cost and costs directly related to the acquisition up
until the time when the asset is ready for use.
Financial assets
Financial assets are initially recognized on settlement date at fair value plus
transaction costs, except for financial assets at fair value through profit or
loss, which are recognized at fair value. Financial assets are derecognized when
the rights to receive cash flows from the assets have expired or have been
transferred.
Financial assets are classified as:
o Financial assets at fair value through profit or loss
o Held-to-maturity investments o Loans and receivables or
o Available-for-sale financial assets.
Other investments
Other investments comprise shares in other companies and are classified as
available-for-sale. Listed shares are measured at the market value at the
balance sheet date, and unlisted shares are measured at estimated fair value.
Unrealized gains and losses resulting from changes in fair value of shares are
recognized in equity. Realized gains and losses resulting from sales of shares
are recognized as financial items in the income statement. The cumulative value
adjustment recognized in equity is transferred to the income statement when the
shares are sold.
Dividends on shares in other companies are recognized as income in the period in
which they are declared.
Other investments are presented as non-current unless Management intends to
dispose of the investments within 12 months of the balance sheet date.
Receivables
Outstanding freight receivables and other receivables that are of a current
nature, expected to be realized within 12 months from the balance sheet date,
are classified as loans and receivables and presented as current assets.
Receivables are measured at the lower of amortized cost and net realizable
values, which corresponds to nominal value less provision for bad debts.
Securities
Bonds are classified as financial assets at fair value through profit or loss
and are measured at market value at the balance sheet date. Realized and
unrealized gains and losses resulting from valuation or realization of bonds are
recognized as financial items in the income statement. Bonds are traded
frequently and therefore presented as current assets.
Impairment of assets
Non-current assets are reviewed to determine any indication of impairment. In
the case of such indication, the recoverable amount of the asset is estimated as
the higher of the asset's net selling price and it's value in use. If this
amount is less than the carrying amount of the asset, the carrying amount is
reduced to the recoverable amount. The impairment loss is recognized immediately
in the income statement.
For the purpose of assessing impairment, assets are grouped at the lowest levels
for which there are separately identifiable cash flows (cash-generating units).
For vessels, the cash-generating unit is the total fleet of the Group.
Inventories
Inventories consist of bunkers and lubricants and are stated at the lower of
cost and net realizable value. The cost is determined by the FIFO-method and
includes expenditures incurred in acquiring the inventories and delivery cost
less discounts.
Non-current assets held for sale
Non-current assets held for sale are presented in a separate line under current
assets in the balance sheet and measured at the lower of carrying amount and
fair value less costs to sell. Depreciation of an asset ceases when it is
classified as held for sale.
Treasury shares
Treasury shares are recognized as a separate component of share- holders' equity
at cost. Upon subsequent disposal of treasury shares, any consideration is also
recognized directly in shareholders' equity.
Dividend
Dividend is recognized as a liability at the time of declaration at the Annual
General Meeting. Dividend proposed for the year is moved from retained profit
and presented as a separate component of shareholders' equity.
Provisions
Provisions are recognized when the Group has a legal or constructive obligation
as a result of past events and it is probable that it will
lead to an outflow of resources that can be reliably estimated. Provisions are
measured at the estimated ultimate liability that is expected to arise taking
into account the time value of money.
Liabilities
Liabilities are generally measured at amortized cost.
Mortgage debt and bank loans relating to the financing of vessels are initially
measured at nominal amounts less premiums and costs incurred in the loan
arrangement and subsequently at amortized cost with the difference between the
loan proceeds and the nominal value being recognized in the income statement
over the term of the loan.
STATEMENT OF CASH FLOWS
The statement of cash flows shows the Group's cash flows and cash and cash
equivalents at the beginning and the end of the period.
Cash flow from operating activities is presented indirectly and is based on
profit before financial items for the year adjusted for profit from sale of
vessels, non-cash operating items, changes in working capital, income tax paid,
dividends received and interest paid/received.
Cash flow from investing activities comprises dividends received and the
purchase and sale of tangible fixed assets and financial fixed assets.
Cash flow from financing activities comprises changes in long-term debt, bank
loans, purchases or sales of treasury shares and dividend paid to shareholders.
Cash and cash equivalents comprise cash at bank and in hand and highly liquid
bonds with a term to maturity not exceeding 3 months. Other bonds and other
investments are classified as investment activities.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the consolidated profit or
loss available to common shareholders by the weighted average number of common
shares outstanding during the period. Treasury shares are not included in the
calculation. Purchases and sales of treasury shares during the period are
weighted based on the remaining period.
Diluted earnings per share is calculated by adjusting the consolidated profit or
loss available to common shareholders and the weighted average number of common
shares outstanding for the effects of all potentially dilutive shares. Such
potentially dilutive common shares are excluded when the effect would be to
increase earnings per share or reduce a loss per share.
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP)
As a consequence of the registration of American Depository Receipts (ADRs) with
the United States Securities and Exchange Commission (SEC), the Group has
prepared a summary of the effect on net income and shareholders' equity had the
financial statements been prepared in accordance with the accounting principles
generally accepted in the United States.
NOTE 3
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation of consolidated financial statements in conformity with IFRS and
accounting principles generally accepted in the United States requires
Management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclo- sure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. These estimates and assumptions are
affected by the way TORM applies its accounting policies. An accounting estimate
is considered critical if: the estimate requires Management to make assumptions
about matters that were highly uncertain at the time the estimate was made;
different estimates reasonably could have been used; or if changes in the
estimate that would have a material impact on the Group's financial condition or
results of operations are reasonably likely to occur from period to period.
Management believes that the accounting estimates employed are appropriate and
resulting balances are reasonable. However, actual results could differ from the
original estimates requiring adjustments to these balances in future periods.
Management believes that the following are the significant accounting estimates
and judgements used in the preparation of the consolidated financial statements
and the reconciliation to US GAAP.
Carrying amounts of vessels
The Group evaluates the carrying amounts of the vessels to deter- mine if events
have occurred that would require a modification of their carrying amounts. The
valuation of vessels is reviewed based on events and changes in circumstances
that would indicate that the carrying amount of the assets might not be
recovered. In assessing the recoverability of the vessels, the Group reviews
certain indica- tors of potential impairment such as reported sale and purchase
prices, market demand and general market conditions. Market valu- ations from
leading, independent and internationally recognized shipbroking companies are
obtained on a semi-annual basis as part of the review for potential impairment
indicatory. Under US GAAP, if an indication of impairment is identified, the
undiscounted future cash flows are compared to carrying amount of the assets. If
these are less than the carrying amount, an impairment loss is recorded based on
the difference between the fair value (generally based on discounted future cash
flows) and the carrying amount of the vessels. If, under IFRS, an indication of
impairment is identified, the need for recognizing an impairment loss is
assessed by comparing the carrying amount of the vessels to the higher of the
net selling price and the discounted future cash flows.
The review for potential impairment indicators and projection of future
undiscounted and discounted cash flows related to the vessels is complex and
requires the Group to make various estimates including future freight rates,
earnings from the vessels and discount rates. All of these items have been
historically volatile.
The carrying amounts of TORM's vessels may not represent their fair-market value
at any point in time as market prices of second- hand vessels to a degree tend
to fluctuate with changes in charter rates and the cost of newbuildings.
However, if the estimated future cash flow or related assumptions in the future
experience change, an impairment of vessels may be required.
There were no impairments of vessels recorded in 2004 or 2005.
Tax
All significant Danish entities within the Group entered the then newly enacted
Danish tonnage taxation scheme with effect from January 1, 2001 and have filed
tax returns for 2001 to 2004. The assessment of the tax returns by the tax
authorities has not yet been completed. The tax regulations are highly complex,
and while the Group aims to ensure the estimates of tax assets and liabilities
that it records are accurate, there may be instances where the process of
agreeing the tax liabilities with the tax authorities could require adjustments
to be made to estimates previously recorded.
It is the Group's assessment that there is material uncertainty as to the
estimate of taxes payable as of 31 December 2005 due to the lack of precedents
that have interpreted the tonnage tax regulation. The estimate is based on
scenario analyses and discussions with the tax authorities, tax advisors and
industry organizations, and the uncertainty primarily relates to the division of
the activities between income and expenses from shipping related activities,
which are taxed under the tonnage tax scheme, and income and expenses from other
activities, which are not taxed under the tonnage tax scheme.
The Group estimates that the tax returns filed for 2001 to 2004 will not trigger
taxes payable in excess of the amount, which has been recognized as per 31
December 2005, because estimated taxable income to a large extent is offset by
deductible losses from prior periods, and that the deferred tax liability
recorded is adequate.
NOTE 4
Not
USD mill. Tanker Bulk allocated Total 2005
------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED SEGMENT INFORMATION
INCOME STATEMENT
Net revenue 419.3 167.6 0.0 586.9
Port expenses, bunkers and commissions (111.4) (11.7) 0.0 (123.1)
---------------------------------------------------------
Time charter equivalent earnings 307.9 155.9 0.0 463.8
Charter hire (44.3) (37.9) 0.0 (82.2)
Operating expenses (51.4) (15.3) 0.0 (66.7)
---------------------------------------------------------
Gross profit/(loss) (Net earnings from shipping activities) 212.2 102.7 0.0 314.9
Profit/(loss) from sale of vessels 54.7 0.0 0.0 54.7
Administrative expenses (25.4) (5.8) 0.0 (31.2)
Other operating income 12.4 0.2 0.0 12.6
Depreciation and impairment losses (37.0) (10.8) 0.0 (47.8)
---------------------------------------------------------
Operating profit 216.9 86.3 0.0 303.2
---------------------------
Financial items (3.8) (3.8)
-------------------------
Profit/(loss) before tax (3.8) 299.4
Tax expenses 0.0 0.0
-------------------------
Net profit/(loss) for the year (3.8) 299.4
-------------------------
BALANCE SHEET
Total non-current assets 1,025.8 141.3 361.0 1,528.1
Total assets 1,139.2 145.5 525.4 1,810.1
Total liabilities 39.4 5.7 860.4 905.5
OTHER INFORMATION
Additions to tangible fixed assets 607.2 28.7 0.0 635.9
Reversal of impairment losses recognized in the income statement 0.4 0.1 0.0 0.5
Financial items and tax expenses are included in 'Not allocated'.
NOTE 4
Not
USD mill. Tanker Bulk allocated Total 2004
------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED SEGMENT INFORMATION
INCOME STATEMENT
Net revenue 255.7 177.5 0.1 433.3
Port expenses, bunkers and commissions (68.8) (15.0) 0.0 (83.8)
---------------------------------------------------------
Time charter equivalent earnings 186.9 162.5 0.1 349.5
Charter hire (13.5) (46.1) 0.0 (59.6)
Operating expenses (39.5) (11.6) 1.3 (49.8)
---------------------------------------------------------
Gross profit/(loss) (Net earnings from shipping activities) 133.9 104.8 1.4 240.1
Profit/(loss) from sale of vessels 0.0 0.0 0.0 0.0
Administrative expenses (28.5) (9.5) (0.6) (38.6)
Other operating income 12.9 0.3 0.0 13.2
---------------------------------------------------------
Depreciation and impairment losses (28.6) (6.5) (0.1) (35.2)
---------------------------
Operating profit 89.7 89.1 0.7 179.5
Financial items 25.8 25.8
-------------------------
Profit/(loss) before tax 26.5 205.3
Tax expenses (18.7) (18.7)
-------------------------
Net profit/(loss) for the year 7.8 186.6
-------------------------
BALANCE SHEET
Total non-current assets 565.6 122.3 368.5 1.056.4
Total assets 605.5 130.8 503.3 1.239.6
Total liabilities 29.5 8.0 486.7 524.2
OTHER INFORMATION
Additions to tangible fixed assets 126.4 60.9 0.0 187.3
Impairment losses recognized in the income statement 0.0 0.0 0.0 0.0
Financial items, tax expenses and the termination of the Company's Offshore and
Liner activity are included in 'Not allocated'.
The comparative figures on segment information have been changed as all
financial items are included in 'Not allocated', whereas previously certain
financial items, among others interest expenses from loans on vessels, were
allocated to segments. Furthermore, mortgage debt and bank loans are included in
'Not allocated', whereas previously allocated to segments.
NOTE 5
USD mill. 2005 2004
-----------------------------------------------------------------------------------------------------------------
STAFF COSTS
Total staff costs
Staff costs included in operating expenses 12.9 10.7
Staff costs included in administrative expenses 21.1 27.4
---------------------------------
Total 34.0 38.1
---------------------------------
Staff costs comprise the following
Wages and salaries 30.3 25.8
Share-based compensation 0.5 9.8
Pension costs 2.7 2.3
Other social security costs 0.5 0.2
---------------------------------
Total 34.0 38.1
---------------------------------
Hereof remuneration to the Board of directors and salaries to the Management
Wages and salaries 3.7 2.5
Share-based compensation 0.5 3.7
Pension and social security costs 0.1 0.1
---------------------------------
Total 4.3 6.3
---------------------------------
Hereof remuneration to the Board of directors 0.9 1.4
Hereof salaries to the Management 3.4 4.9
---------------------------------
Total 4.3 6.3
---------------------------------
Employee information
The average number of staff in TORM in the financial year was 339 (2004: 295).
The majority of the staff on vessels are not employed by TORM.
The members of Management are, in the event of termination by the Company,
entitled to a severance payment of up to 18 months' salary. The pension age for
members of Management is 62.
NOTE 5
Total options Options allocation per year
-----------------------------------------------------------
Number of share options 2005 2003 2002 2001
---------------------------------------------------------------------------------------------------------------
Share option program - 2001 to 2005*)
Board of directors
Allocated 105,820 40,700 40,700 24,420
Exercised in 2003 (24,420) 0 (16,280) (8,140)
Exercised in 2004 (36,560) (16,280) (4,000) (16,280)
Exercised in 2005 (20,420) 0 (20,420) 0
Forfeited/expired 0 0 0 0
---------------------------------------------------------
Not exercised at 31 December 2005 24,420 24,420 0 0
---------------------------------------------------------
Management
Allocated 463,420 178,240 178,240 106,940
Exercised in 2003 (285,180) 0 (178,240) (106,940)
Exercised in 2004 (178,240) (178,240) 0 0
Forfeited/expired 0 0 0 0
---------------------------------------------------------
Not exercised at 31 December 2005 0 0 0 0
---------------------------------------------------------
Key employees
Allocated 634,640 214,260 214,260 206,120
Exercised in 2003 (420,380) 0 (214,260) (206,120)
Exercised in 2004 (214,260) (214,260) 0 0
Forfeited/expired 0 0 0 0
---------------------------------------------------------
Not exercised at 31 December 2005 0 0 0 0
---------------------------------------------------------
Resigned persons
Allocated 402,760 123,400 131,540 147,820
Exercised in 2003 (232,240) 0 (93,400) (138,840)
Exercised in 2004 (162,380) (123,400) (30,000) (8,980)
Exercised in 2005 (8,140) 0 (8,140) 0
Forfeited/expired 0 0 0 0
Not exercised at 31 December 2005 0 0 0 0
Total number of not exercised at 31 December 2005 24,420 24,420 0 0
---------------------------------------------------------
Not exercised options in percentage of common shares 0.07% 0.07% 0.00% 0.00%
---------------------------------------------------------
*) The figures in the table above and the description below are adjusted to
reflect the issue of bonus shares in May 2004.
The classification has been adjusted to reflect the persons' association
with TORM as at 31 December 2005.
In 2001, a share option compensation plan for 20 of the Board members,
executives and key employees was introduced. The plan grants 1,606,640
options, which are priced at 3 different dates, 485,300 in 2001, 564,740 in
2002 and 556,600 in 2003. Option holders may exercise their options in
specified periods and choose to purchase the Company's shares at the strike
price or receive a cash payment equivalent to the difference between the
strike price and the share price.
The individual must be employed at the grant date to receive that year's
options.
The share options for 2001 were priced on 20 February 2001, the share
options for 2002 were priced on 20 March 2002 and the share options for
2003 were priced on 27 February 2003. The 2001 share options are
exercisable at a price of DKK 27 (USD 4.53) per share, the 2002 share
options at a price of DKK 29.25 (USD 4.91) and the 2003 share options at a
price of DKK 31.3 (USD 5.25). The share options can be exercised at the
earliest 1 year and at the latest 3 years and four weeks after the pricing,
observing the rules about insider trading.
In 2005, 28,560 options have been exercised (2004: 591,440). The weighted
average share price at the date of exercise is DKK 281.03 (USD 46.86) per
share for shares exercised in 2005 (2004: DKK 184.11 (USD 30.73)). The
total number of not exercised options at 31 December 2005 is 24,420 which
equates 0.07% of the common shares. The Company has acquired treasury
shares to cover the share option programme. The cost of the shares has been
recognized directly in Shareholders' equity.
According to the Black-Scholes model, the fair value of the not exercised
part of the share option program is estimated at USD 1.0 mill. (2004: USD
1.8 mill.) at the balance sheet date. The amount is recognized in the
balance sheet.
The key assumptions of the Black-Scholes model are :
- The average dividend equals 5.81% (2004: 3.48%) of the average share
price for the period.
- The volatility is estimated at 27.7% (2004: 93.76%).
- The risk free interest rate based upon expiry of the options applies
to 2.75% (2004: between 2.37% and 2.50%).
- The quoted share price as of 31 December 2005 is 305.12 DKK/share
(48.25 USD/share) (2004: 225.77 DKK/share (41.29 USD/share)).
NOTE 6
USD mill. 2005 2004
--------------------------------------------------------------------------
Remuneration to the auditors
appointed at the Annual General Meeting
Deloitte
Audit fees 0.5 0.3
Audit-related fees 0.0 0.0
Tax fees 0.1 0.1
Fees other services 0.0 0.1
--------------------------
Total fees 0.6 0.5
--------------------------
Ernst & Young
Audit fees 0.1 0.2
Audit-related fees 0.0 0.0
Tax fees 0.0 0.0
Fees other services 0.0 0.0
--------------------------
Total fees 0.1 0.2
--------------------------
NOTE 7
USD mill. 2005 2004
--------------------------------------------------------------------------
OTHER INVESTMENTS Cost:
Balance at 1 January 49.1 45.1
Exchange rate adjustment 0.0 4.0
Additions 15.4 0.0
Disposals 0.0 0.0
--------------------------
Balance at 31 December 64.5 49.1
--------------------------
Value adjustments:
Balance at 1 January 319.4 118.7
Exchange rate adjustment (50.5) 27.3
Value adjustment for the year 27.6 173.4
--------------------------
Balance at 31 December 296.5 319.4
--------------------------
Carrying amount at 31 December 361.0 368.5
--------------------------
Hereof listed 358.5 368.5
Hereof unlisted 2.5 0.0
--------------------------
Parent company:
A/S Dampskibsselskabet TORM Denmark
Investments in subsidiaries*)
Torm Shipware A/S 100% Denmark
Torm Singapore (Pte) Ltd. 100% Singapore
Torm Shipping Asia (Pte) Ltd. 100% Singapore
Torm Asia Limited 100% Hong Kong
Torm Asia Bulkers Limited 100% Hong Kong
Eastern Light Shipping Limited 100% Liberia
Southern Light Shipping Limited 100% Liberia
Hermia Shipping Corporation 100% Liberia
Hilde Shipping Corporation 100% Liberia
Torm Shipping (Germany) G.m.b.H. 100% Germany
Long Range 1 A/S 100% Denmark
Medium Range A/S 100% Denmark
LR1 Management K/S 100% Denmark
MR Management K/S 100% Denmark
TORM SHIPPING (PHILS.), INC. 25% Philippines
Investments in jointly controlled entities*):
HMSC Shipping Ltd. 50% Bahamas
Long Range 2 A/S 50% Denmark
LR2 Management K/S 50% Denmark
Furthermore, TORM is participating in a number of joint ventures, which are not
legal entities.
The investments in these joint ventures are included as investments in jointly
controlled operations.
The following represents the results reflected in the consolidated income
statement and the summarized balance sheet data that is reflected in the
consolidated balance sheet for the year ended 31 December 2004 and 2005 in
accordance with IFRS associated with jointly controlled entities:
USD mill. 2005 2004
------------------------------------------------------------------------------
Net revenue 0.0 12.5
Port expenses, bunkers and commissions 0.0 (5.5)
-----------------------
Time charter equivalent earnings 0.0 7.0
Charter hire and operating expenses 0.0 (0.9)
-----------------------
Gross profit (Net earnings from shipping activities) 0.0 6.1
Profit from sale of vessels 0.0 0.0
Administrative expenses (1.5) (1.1)
Other operating income 2.7 2.0
Depreciation and impairment losses 0.0 (2.9)
-----------------------
Operating profit 1.2 4.1
Financial items (0.1) (1.0)
-----------------------
Profit before tax 1.1 3.1
Tax expenses 0.0 (0.4)
-----------------------
Net profit for the year 1.1 2.7
-----------------------
Non-current assets 0.0 0.1
Current assets 2.1 3.4
Non-current liabilities 0.0 0.0
Current liabilities 1.0 1.4
Other investments:
Dampskibsselskabet "Norden" A/S 33%**) Denmark
The Norden shareholding is currently treated in TORM's accounts as 'Other
investments', given that TORM is deemed not to have significant influence on
Norden in the form of board seats or similar.
*) Companies with activity in the financial year.
**) Including Norden's treasury shares.
NOTE 8
USD mill.
Vessels and Prepayment on Other plant
Land and capitalized vessels under and operating
buildings dry-docking construction equipment Total
----------------------------------------------------------------------------------------------------------------------------
TANGIBLE
FIXED ASSETS
Cost:
Balance at 1 January 2004 1.3 651.0 38.5 6.7 697.5
Exchange rate adjustment 0.0 0.0 0.0 0.0 0.0
Additions 0.0 120.2 65.3 1.6 187.1
Disposals 0.0 (1.7) 0.0 (2.4) (4.1)
Transferred to/from other items 0.0 66.5 (66.5) 0.0 0.0
--------------------------------------------------------------------------
Balance at 31 December 2004 1.3 836.0 37.3 5.9 880.5
--------------------------------------------------------------------------
Depreciation and impairment losses:
Balance at 1 January 2004 0.9 156.8 0.0 3.7 161.4
Exchange rate adjustment 0.0 0.0 0.0 0.0 0.0
Additions 0.0 0.0 0.0 0.0 0.0
Disposals 0.0 (1.7) 0.0 (2.3) (4.0)
Reversal of impairment losses 0.0 0.0 0.0 0.0 0.0
Depreciation for the year 0.0 33.4 0.0 1.8 35.2
--------------------------------------------------------------------------
Balance at 31 December 2004 0.9 188.5 0.0 3.2 192.6
--------------------------------------------------------------------------
Carrying amount at 31 December 2004 0.4 647.5 37.3 2.7 687.9
--------------------------------------------------------------------------
Cost:
Balance at 1 January 2005 1.3 836.0 37.3 5.9 880.5
Exchange rate adjustment 0.0 0.0 0.0 0.0 0.0
Additions 0.0 340.1 294.7 1.1 635.9
Disposals 0.0 (137.3) 0.0 (0.9) (138.2)
Transferred to/from other items 0.0 191.2 (191.2) 0.0 0.0
Transferred to non-current assets held for sale 0.0 0.0 (43.4) 0.0 (43.4)
--------------------------------------------------------------------------
Balance at 31 December 2005 1.3 1,230.0 97.4 6.1 1,334.8
--------------------------------------------------------------------------
Depreciation and impairment losses:
Balance at 1 January 2005 0.9 188.5 0.0 3.2 192.6
Exchange rate adjustment 0.0 0.0 0.0 0.0 0.0
Additions 0.0 0.0 0.0 0.0 0.0
Disposals 0.0 (71.9) 0.0 (0.8) (72.7)
Reversal of impairment losses (0.5) 0.0 0.0 0.0 (0.5)
Depreciation for the year 0.0 47.0 0.0 1.4 48.4
--------------------------------------------------------------------------
Balance at 31 December 2005 0.4 163.6 0.0 3.8 167.8
--------------------------------------------------------------------------
Carrying amount at 31 December 2005 0.9 1,066.4 97.4 2.3 1,167.0
--------------------------------------------------------------------------
Hereof finance leases 0.0 0.0 0.0 0.0 0.0
--------------------------------------------------------------------------
Hereof financial expenses included in cost 0.0 1.3 0.2 0.0 1.5
--------------------------------------------------------------------------
At 1 October 2004 the value of land and buildings assessed for Danish tax
purposes amounted to USD 0.5 mill. (carrying amount at 31 December 2005 USD 0.4
mill.) compared with USD 0.5 mill. at 1 October 2003.
Included in the carrying amount for vessels and capitalized dry-docking are
capitalized dry-docking costs in the amount of USD 12.6 mill. (2004: USD 7.1
mill.).
Please refer to note 15 for information with relation to assets used for
collateral security.
NOTE 9
USD mill. 2005 2004
---------------------------------------------------------------------------------------------------------------
FINANCIAL ITEMS
Financial income
Interest income 3.3 3.4
Gain on other investments 0.1 0.0
Dividends*) 12.8 34.1
Gain on derivative financial instruments 0.2 5.2
Exchange rate adjustments 9.6 0.0
----------------------------
26.0 42.7
Financial expenses
----------------------------
Interest expense on mortgage and bank debt 25.6 14.8
Net losses on marketable securities at fair value through profit and loss 3.9 0.4
Exchange rate adjustments 0.0 0.8
Other interest expenses 0.5 0.9
Hereof included in the cost of tangible fixed assets (0.2) 0.0
----------------------------
29.8 16.9
----------------------------
Total financial items (3.8) 25.8
*) Includes dividend on the Norden shares of USD 12.6 mill. in 2005 (2004: USD
34.0 mill.).
NOTE 10
USD mill. 2005 2004
---------------------
TAX EXPENSES
Current tax for the year (8.8) (9.6)
Adjustment related to previous years 0.0 0.0
Adjustment of deferred tax 8.8 (9.1)
---------------------
Tax expenses 0.0 (18.7)
---------------------
Effective corporate tax rate 0.0% 9.1%
The Company participates in the tonnage tax scheme in Denmark. Participation in
the tonnage tax scheme is binding until 31 December 2010.
The Company expects to participate in the tonnage tax scheme after the binding
period and at a minimum to maintain its current investing and activity level. No
reconciliation of income tax is provided as it is not meaningful under the
tonnage tax scheme.
USD mill. 2005 2004
---------------------
DEFERRED TAX
Balance at 1 January 73.3 58.8
Exchange rate adjustment (9.9) 5.4
Reduction of Danish corporation tax from 30% to 28% (4.2) -
Deferred tax for the year (4.6) 9.1
---------------------
Balance at 31 December 54.6 73.3
Essentially all deferred tax relates to vessels included in the transition
account under the tonnage tax scheme.
NOTE 11
2005 2004 2005 2004
------------------------------------------------------
Number Number Nominal Nominal
of shares of shares value value
mill. mill. DKK mill. DKK mill.
------------------------------------------------------
COMMON SHARES
Balance at 1 January 36.4 18.2 364.0 182.0
Issue of bonus shares 0.0 18.2 0.0 182.0
------------------------------------------------------
Balance at 31 December 36.4 36.4 364.0 364.0
------------------------------------------------------
The common shares consist of 36.4 mill. shares at denomination DKK 10 per share.
No shares carry special rights. All issued shares are fully paid.
In May 2004 the Company increased the share capital from nominally DKK 182.0
mill. to nominally DKK 364.0 mill. through the issue of 18.2 mill. bonus shares
of DKK 10 each. The bonus shares were allotted to the Company's existing
shareholders at the ratio of 1:1. Beyond this no changes have been made to the
share capital within the last 5 years.
2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------------------------
Number Number Nominal Nominal % of % of
of shares of shares value value share share
(1,000) (1,000) DKK mill. DKK mill. capital capital
-------------------------------------------------------------------------------------------------------------------------
TREASURY SHARES*)
Balance at 1 January 1,566.6 1,762,7 15.7 17.6 4.3 4.8
Purchase 0.0 0.0 0.0 0.0 0.0 0.0
Sale 0.0 0.0 0.0 0.0 0.0 0.0
Share options exercised (8.1) (196.1) (0.1) (1.9) 0.0 (0.5)
-------------------------------------------------------------------------------------------------------------------------
Balance at 31 December 1,558.5 1,566.6 15.6 15.7 4.3 4.3
-------------------------------------------------------------------------------------------------------------------------
*) The figures in the table above and the description below are adjusted to
reflect the issue of bonus shares in May 2004.
At 31 December 2005, the Company's holding of treasury shares represented
1,558,472 shares (2004: 1,566,612 shares) at denomination DKK 10 per share, with
a total nominal value of USD 2.5 mill. (2004: USD 2.9 mill.) and a market value
of USD 75.2 mill. (2004: USD 64.7 mill.). The retained shares equate to 4.3%
(2004: 4.3%) of the Company's common shares.
Total consideration in respect of the purchase of treasury shares was USD 0.0
mill. (2004: USD 0.0 mill.), whereas for the sale of shares it was USD 0.0 mill.
(2004: USD 1.0 mill.). As the disposal of treasury shares is carried out in
connection with the exercise of share options, the consideration is based on
exercise prices in the share option program. Of the holding of treasury shares,
24,420 (2004: 52,980) shares are held as a hedge of the Company's share option
program. The remaining shares will be used for further development of the
capital structure, for financing or execution of acquisitions, for sale or for
other types of transfers.
NOTE 12
USD mill. 2005 2004
--------------------------------------------------------------------------------
DEFERRED INCOME
Deferred gain related to sale and lease back transactions 5.9 7.4
Other 0.1 0.0
-----------------
6.0 7.4
NOTE 13
USD mill. 2005 2004
--------------------------------------------------------------------------------
MORTGAGE DEBT AND BANK LOANS
To be repaid as follows:
Falling due within one year 59.9 62.1
Falling due between one and two years 59.9 47.4
Falling due between two and three years 90.0 57.0
Falling due between three and four years 57.5 27.8
Falling due between four and five years 57.5 39.6
Falling due after five years 464.2 161.5
-----------------
789.0 395.4
The presented amounts to be repaid are adjusted by directly related costs arised
from the issuing of the loans by USD 1.7 mill. (2004: USD 0 mill.), which are
amortized over the term of the loans.
2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------------------
Fixed/ Effective Effective Carrying Carrying
Maturity floating interest interest amount amount
---------------------------------------------------------------------------------------------
LOAN
USD 2005 Floating - 3.8% 0.0 26.2
USD 2006 Floating - 3.9% 0.0 16.5
USD 2007 Floating - 4.0% 0.0 37.6
USD 2008 Floating 5.4% 3.3% 37.6 17.0
USD 2009 Floating - 4.3% 0.0 31.3
USD 2011 Floating 5.4% 2.8% 22.0 11.4
USD 2012 Floating - 3.8% 0.0 76.7
USD 2013 Floating 5.4% 4.4% 14.2 97.7
USD 2014 Floating 4.9% 3.9% 490.7 81.0
USD 2015 Floating 5.2% - 226.2 0.0
Weighted average
effective interest rate 5.0% 3.9%
--------------------------
Carrying amount 790.7 395.4
------------------------
The Group has an early settlement option to repay the loans by paying a breakage
cost.
Part of the loans have been swapped to fixed interest rate. Please refer to the
section "Managing risk and exposure" for further information on financial risks.
NOTE 14
USD mill. 2005 2004
-------------------------------------------------------------------------------
OTHER LIABILITIES
Partners and commercial management 6.0 3.8
Accrued dry-docking costs 1.9 0.3
Accrued interests 3.2 3.2
Wages and social expenses 6.5 5.2
Derivative financial instruments 2.9 7.3
Miscellaneous, including items related
to shipping activities 3.1 3.3
---------------------
23.6 23.1
---------------------
NOTE 15
USD mill. 2005 2004
-------------------------------------------------------------------------------
COLLATERAL SECURITY
Collateral security for mortgage debt and bank loans:
Vessels 760.7 386.4
Marketable securities 0.0 9.9
---------------------
760.7 396.3
---------------------
The total carrying amount for vessels that have been provided as security
amounts to USD 766.5 mill. as at 31 December 2005.
NOTE 16
USD mill. 2005 2004
-------------------------------------------------------------------------------
GUARANTEE AND CONTINGENT LIABILITIES
Guarantee liabilities 0.0 0.7
The guarantee liabilities for the Group for 2004 are related to guarantee
liabilities to Danmarks Skibskredit A/S and the Danish Shipowners' Association.
In 2005, the guarantee liabilty to Danmarks Skibskredit A/S has been cancelled.
The Company has as at 31 December 2005 contracted 12 vessels (newbuildings)
(2004: 7 vessels), an investment totalling USD 540 mill. (2004: USD 283 mill.).
Furthermore, the Company has exercised the purchase options on 2 time chartered
vessels, an investment totalling USD 94 mill.
NOTE 17
USD mill. 2005 2004
--------------------------------------------------------------------------------
CONTRACTUAL LIABILITIES - AS LESSEE
(operating leases)
Charter hire for vessels on time charter:
Falling due within one year 61.3 45.0
Falling due between one and two years 34.2 35.3
Falling due between two and three years 40.7 31.2
Falling due between three and four years 37.8 30.7
Falling due between four and five years 23.1 25.2
Falling due after five years 56.2 35.8
---------------------
253.3 203.2
---------------------
Average period until redelivery (years) 3.1 2.7
---------------------
Newbuilding installments and exercised purchase options
(purchase obligations):
Falling due within one year 225.3 93.5
Falling due between one and two years 146.7 75.8
Falling due between two and three years 95.5 57.0
Falling due between three and four years 28.0 25.6
Falling due between four and five years 0.0 0.0
Falling due after five years 0.0 0.0
---------------------
495.5 251.9
---------------------
Other operating leases:
Falling due within one year 2.2 1.1
Falling due between one and two years 2.2 1.1
Falling due between two and three years 1.9 0.9
Falling due between three and four years 1.7 0.8
Falling due between four and five years 1.8 0.9
Falling due after five years 5.8 4.6
---------------------
15.6 9.4
---------------------
Other operating leases primarily consist of contracts regarding office spaces
and apartments as well as IT-related contracts.
During the year, charter hire expenses have been recognized in the income
statement by USD 82.1 mill. and other operating lease expenses have been
recognized by USD 1.5 mill.
USD mill. 2005 2004
--------------------------------------------------------------------------------
CONTRACTUAL LIABILITIES - AS LESSOR
(operating leases)
Charter hire income for vessels on time
charter and bareboat charter:
Falling due within one year 102.7 114.1
Falling due between one and two years 26.8 2.6
Falling due between two and three years 13.8 0.3
Falling due between three and four years 13.7 0.0
Falling due between four and five years 6.0 0.0
---------------------
Falling due after five years 0.0 0.0
---------------------
163.0 117.0
---------------------
Average period until redelivery (years) 0.9 0.5
Charter hire income for vessels on time charter and bareboat charter is
recognized under net revenue.
NOTE 18
USD mill. FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
Fair value adjustments
----------------------
Income statement
----------------
Shareholders'
Fair value Port expenses, equity Fair value
at 1 Jan. Net bunkers Financial Hedging at 31 Dec.
2004 revenue and comm. items reserves 2004
---------------------------------------------------------------------------------------------
Cross currency swaps 5.9 - - (5.8) - 0.1
Forward rate contracts 0.3 - - 3.9 (0.4) 3.8
Interest rate swaps (5.3) - - 1.1 4.4 0.2
Currency options (0.3) - - 3.9 - 3.6
Bunkerhedge 0.0 - (0.8) - - (0.8)
Forward Freight Agreement 0.2 (4.6) - - - (4.4)
---------------------------------------------------------------------------------------------
0.8 (4.6) (0.8) 3.1 4.0 2.5
---------------------------------------------------------------------------------------------
Fair value adjustments
----------------------
Income statement
----------------
Shareholders'
Fair value Port expenses, equity Fair value
at 1 Jan. Net bunkers Financial Hedging at 31 Dec.
2005 revenue and comm. items reserves 2005
---------------------------------------------------------------------------------------------
Cross currency swaps 0.1 - - (0.1) - 0.0
Forward rate contracts 3.8 - - (3.9) - (0.1)
Interest rate swaps *) 0.2 - - 3.5 2.9 6.6
Currency options 3.6 - - (3.6) - 0.0
Bunkerhedge (0.8) - 0.8 - - 0.0
Forward Freight Agreement (4.4) 2.5 - - - (1.9)
---------------------------------------------------------------------------------------------
2.5 2.5 0.8 (4.1) 2.9 4.6
---------------------------------------------------------------------------------------------
Please refer to the section 'Managing risk and exposure' for further information
on commercial and financial risks.
*) As at 31 December 2005 the Company had entered into interest rate swap
contracts with a fair value of USD 3.3 mill. designated as hedge of
interest payments during the period 2006 to 2008. The gains or losses on
these contracts will be recognized under financial items in the income
statement together with the interest payments.
NOTE 19
RELATED PARTY TRANSACTIONS
The members of the Company's Board of directors and Management, close members of
the family to these persons and companies where these persons have control or
exercise significant influence are considered as related parties with
significant influence.
There have not been any material transactions with such parties during the
financial year, except for a time charter agreement with an entity owned by
Beltest Shipping Company Limited under which TORM paid USD 7.2 mill. during
2005. The agreement was mentioned in the annual report for 2004.
Management remuneration is disclosed in note 5.
NOTE 20
NON-CURRENT ASSETS HELD FOR SALE
In 2005, the Company has entered into a contract concerning sale of one of the
vessels under construction for delivery in 2006. The result from the sale of the
vessel will be recognized in the income statement when the risks and rewards are
transferred upon delivery of the vessel to the buyer. The vessel has been
classified as held for sale and is presented separately in the balance sheet and
is included under Tanker in the segment information.
NOTE 21
2005 2004
--------------------------------------------------------------------------------
EARNINGS PER SHARE
Net profit for the year (USD mill.) 299.4 186.6
--------------------------
Mill. shares
Average number of shares 36.4 36.4
Average number of treasury shares (1.6) (1.6)
--------------------------
Average number of shares outstanding 34.8 34.8
Dilutive effect of outstanding share options 0.1 0.2
--------------------------
Average number of shares outstanding incl.
dilutive effect of share options 34.9 35.0
--------------------------
Earnings per share (USD) 8.6 5.4
--------------------------
Diluted earnings per share (USD) 8.6 5.3
--------------------------
The comparative figures for number of shares and earnings per share are restated
to reflect the issue of bonus shares in May 2004.
NOTE 22
USD mill. 2005 2004
--------------------------------------------------------------------------------
APPROPRIATION OF NET PROFIT FOR THE
YEAR INCL. PROPOSED DIVIDEND
Proposed appropriation of net profit for the year
in the Parent Company, A/S Dampskibsselskabet TORM:
Proposed dividend 132.4 99.9
Retained profit 103.3 105.9
--------------------------
Net profit for the year 235.7 205.8
--------------------------
Total shareholders' equity in the Parent
Company, A/S Dampskibsselskabet TORM:
Common shares 61.1 61.1
Treasury shares (7.7) (7.7)
Revaluation reserves 296.4 319.3
Retained profit 400.0 286.8
Proposed dividend 132.4 99.9
Hedging reserves 3.2 0.4
Translation reserves 6.0 6.0
--------------------------
Total shareholders' equity 891.4 765.8
--------------------------
Proposed dividend per share (USD) 3.6 2.7
--------------------------
NOTE 23
RECONCILIATION TO UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP)
The Company's Annual Report has been prepared in accordance with IFRS, which
differs in certain material respects from accounting principles generally
accepted in the United States (US GAAP).
The following is a summary of the adjustments to profit/(loss) for the years
ended 31 December 2005 and 2004 and shareholders' equity as of those dates,
necessary to reconcile those to net income/(loss) and shareholders' equity
determined in accordance with US GAAP.
NET INCOME SHAREHOLDERS' EQUITY
USD mill. 2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------------------------
AS REPORTED UNDER IFRS 299.4 186.6 904.7 715.4
a) Dry-docking costs 0.0 (1.5) 0.0 (8.3)
b) Write-down on assets 1.4 0.2 (0.5) (1.9)
c) Derivative Financial Instruments 0.0 2.6 0.0 0.0
d) Share options 0.0 (1.2) 0.0 (0.1)
e) Deferred gain related to sale and
lease back transactions (17.3) 0.0 (17.3) 0.0
f) Deferred taxation 4.3 1.0 4.8 0.2
---------------------------------------------------------
Net income/shareholders' equity in accordance
with US GAAP before change in accounting principles 287.8 187.7 891.7 705.3
Cumulative effect of change in accounting principles
as at 1 January 2005 8.7 0.0
---------------------------------------------------------
Net income/shareholders' equity in accordance with US GAAP
after change in accounting principles 296.5 187.7 891.7 705.3
---------------------------------------------------------
The Group's accounting policies under IFRS are described below where these
differ from the accounting treatment under US GAAP:
a) Dry-docking costs
As of 1 January 2005, TORM changed its method of accounting for vessel
dry-docking costs under US GAAP from the accrual method to the deferral method.
Under the accrual method, dry-docking costs had been accrued as a liability and
an expense on an estimated basis in advance of the next scheduled dry docking.
Subsequent payments for dry-docking were charged against the accrued liability.
Under the deferral method, costs incurred in replacing or renewing the separate
assets that constitute the dry-docking costs are capitalized and depreciated on
a straight-line basis over the estimated period until the next dry-docking.
Dry-docking activities include, but are not limited to, inspection, service on
turbocharger, replacement of shaft seals, service on boiler, replacement of hull
anodes, applying of antifouling and hull paint, steel repairs and refurbishment
and replacement of other parts of the vessel. This change was made to conform to
prevailing shipping industry accounting practices and the Group's accounting
under IFRS. On 1 January 2005, TORM recorded the effect of the change in
accounting principle on periods prior to 2005 as a cumulative effect of
accounting change of USD 8.7 mil- lion (net of income tax of USD 0.4 (income))
or USD 0.3 per basic share. The effect of this change in accounting method on
the US GAAP shareholders' equity was an increase of USD 8.7 million.
The pro forma effect of this change, as if it had been made for 2004, would be
to increase net income as follows:
2004
-------------------------------------------------------
Pro forma (USD million)
Net income as reported 187.7
Effect of accounting change 1.1
-------------------------------------------------------
Net income 188.8
-------------------------------------------------------
Per share (diluted)
As reported 5.4
Effect of accounting change 0.0
-------------------------------------------------------
Total 5.4
-------------------------------------------------------
b) Write-down on assets
In 1998, TORM recognized an impairment charge for certain vessels on capital
leases as the carrying value at the time exceeded the fair value of these
vessels. In 2000, TORM recognized an impairment charge for certain properties
for the same reason. Under IFRS, impairment losses are reversed in subsequent
periods if the fair value increases. The Company recorded a reversal of the
impairment loss of USD 1.7 million for the increase in fair value of these
vessels during 2002 and a reversal of the impairment loss of USD 0.5 million for
the increase in fair value of the properties during 2005.
Under US GAAP, impairment losses cannot be reversed. This results in a
difference in depreciation expense between US GAAP and IFRS. In February 2005,
the vessels were sold and the remaining impairment loss was added to the profit
on sale of vessels recognized under IFRS.
c) Derivative Financial Instruments
Both under IFRS and US GAAP, derivative financial instruments are recognized in
the balance sheet at fair value. For fair value hedges the change in fair value
is set off against the change in fair value of the hedged item. For cash flow
hedges the change in fair value on the contract is recorded as a component of
shareholders' equity and then transferred to the income statement when the
hedged item is realized. The change in fair value on contracts that does not
qualify for hedge accounting is recorded in the income statement at the end of
each period.
The TORM Group has entered into interest rate swaps to hedge the interest rate
risk on the long-term loans obtained to finance vessel purchases.
As part of the transition to IFRS the fair value of interest rate swaps
classified as cash flow hedges under previous GAAP has been recognized as a
separate component of shareholders' equity on 1 January 2004. The majority of
these interest rate swaps have either expired in 2004 or the forecast
transaction was no longer expected to occur because the long-term loans have
been repaid. Consequently, the fair value of these interest rate swaps has been
transferred to the income statement in 2004.
Under US GAAP, TORM elected to apply hedge accounting to interest rate swaps
designated as cash flow hedges beginning on 1 October 2003. For interest rate
swaps entered prior to 1 October 2003 TORM accounted for changes in fair value
as a component of income. As from 1 January 2005, TORM elected also to apply
hedge accounting under US GAAP for the remaining interest rate swaps entered
prior to 1 October 2003 in order to align the accounting under US GAAP and IFRS.
d) Share options
Under IFRS, TORM's share option scheme is treated as cash-settled share-based
payment transactions. A liability relating to share options not exercised is
recognized in the balance sheet. The change in the liability for the period and
the value of the share options exer- cised in the period are recognized in the
income statement. The liability is measured at fair value using the
Black-Scholes model.
Under US GAAP, stock-based compensation is accounted for in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." and related interpretations in accounting for stock based
compensation. Under APB No. 25, the Group recognizes compensation expense for
the difference between the exercise price and market price at the measurement
date. This compensation is amortized over the vesting period. TORM grants
options with cash settlement terms for which the measurement date is the date
that these options are exercised. Under APB 25, com- pensatory plans with cash
settlement terms qualify as variable plans, for which total compensation cost
must be recalculated each period based on the current share price, until the
options are exercised.
e) Deferred gain related to sale and lease back transactions
During 2005, TORM sold and leased back 2 vessels for 5 years. The leases are
regarded as operating leases under both IFRS and US GAAP.
Under IFRS, the profit on the sale of the vessels is recognized in the income
statement immediately in accordance with IAS 17.
Under US GAAP the profit on the sale shall be deferred and amor- tized in
proportion to the related gross rental charged to expense over the lease term in
accordance with FAS 28 as the criteria to deviate from this treatment (cf. FAS
28 a, b and c) were not met. The profit on the sale and lease back transaction
will be deferred and amortized on a straight-line basis from 1 February 2005 to
1 February 2010.
f) Deferred taxation
TORM applies the same treatment of deferred tax under IFRS and US GAAP. The
reconciliation item relates to the tax effect of the differences in accounting
treatment expressed by the items a) to e) above. The difference in deferred tax
liability as at 31 December 2005 only relates to the deferral under US GAAP of
the gain on sale of vessels in item e) above.
g) Investment in bonds
Under IFRS, bonds are classified as financial assets at fair value through
profit or loss and are measured at market value at the bal- ance sheet date.
Realized and unrealized gains and losses resulting from valuation or realization
of bonds are recognized as financial items in the income statement. Bonds are
traded frequently and therefore presented as current assets.
Under US GAAP, investments in bonds are classified as an available- for-sale,
cf. Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". Unrealized gains and losses are
recorded as a component of share- holders'equtiy unless there is an other than
temporary impairment of the securitites. There were no other than temporary
impairments in 2004 or 2005.
The effect of this difference on net income and shareholders' equity in 2004 and
2005 was USD 0.0 million.
SENIOR MANAGEMENT MANAGEMENT
Klaus Kj aerulff Mogens Fynbo
Born: 30-01-52 Executive Vice President,
Technical department
President and Chief Executive Officer since Mikael Skov
September 2000. Mr. Kjaerulff has worked for Executive Vice President,
TORM since 1976. From 1997 to 2000, he headed Tanker division
the Company's Tanker and Bulk Divisions as
Executive Vice President. From 1981 to 1997, Jan Mechlenburg
he was Vice President in charge of the Tanker Executive Vice President,
Division. He is a Board member of the following: Shipowning and Sale &
Purchase division
o Danish Shipowners' Association (Deputy Soren Christensen
Chairman) Senior Vice President,
Bulk division
o ICC Denmark
Kim Rasmussen
o Assuranceforeningen SKULD Senior Vice President,
Bulk division
o Norske Veritas Rad
Esben Poulsson
o The Trade Council of Denmark Executive Vice President,
TORM Singapore
Klaus Nyborg
Born: 16-11-63
Chief Financial Officer since March 2002.
Prior to this, Mr. Nyborg held a number of
senior positions with the A. P. Moller -
Maersk Group, most recently as CFO of
Maersk Logistics. Mr. Nyborg holds a Masters
degree in Law and Business Economics and a
Diploma (Econ) from the Copenhagen Business
School. He is a Board member of the following:
o The Danish Securities Council
From left to right: Klaus Nyborg, Klaus Kjaerulff, Mikael Skov, Jan Mechlenburg,
Mogens Fynbo, Kim Rasmussen, Esben Poulsson and Soren Christensen.
MANAGEMENT'S AND AUDITORS' REPORT
STATEMENT BY THE BOARD OF DIRECTORS AND MANAGEMENT ON THE ANNUAL REPORT
The Board of directors and Management have presented and adopted the Annual
Report of A/S Dampskibsselskabet TORM for the financial year ended 31 December
2005.
The Annual Report has been prepared in accordance with International Financial
Reporting Standards as adopted by the EU and additional Danish disclosure
requirements for annual reports of listed companies.
We consider the accounting policies applied to be appropriate for the Annual
Report to give a true and fair view of the Group's and the Parent Company's
assets, liabilities and financial position at 31 December 2005 and of the
results of the Group's and Parent Company's operations and cash flows for the
financial year then ended.
We recommend that the Annual Report is adopted at the Annual General Meeting.
Copenhagen, 7 March 2006
BOARD OF DIRECTORS: MANAGEMENT:
Niels Erik Nielsen, Klaus Kjaerulff
Chairman CEO
Christian Frigast, Klaus Nyborg
Deputy chairman CFO
Lennart Arris
Ditlev Engel
Rex Harrington
Peder Mouridsen
Gabriel Panayotides
AUDITORS' REPORT
TO THE SHAREHOLDERS OF A/S DAMPSKIBSSELSKABET TORM
We have audited the Annual Report of A/S Dampskibsselskabet TORM for the
financial year ended 31 December 2005, prepared in accordance with International
Financial Reporting Standards as adopted by the EU and additional Danish
disclosure requirements for annual reports of listed companies.
The Annual Report is the responsibility of the Company's Board of directors and
Management. Our responsibility is to express an opinion on the Annual Report.
BASIS OF OPINION
We conducted our audit in accordance with Danish Auditing Standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance that the Annual Report is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the Annual Report. An audit also includes assessing the
accounting policies used and significant estimates made by the Board of
directors and Management as well as evaluating the overall Annual Report
presentation. We believe that our audit provides a reasonable basis for our
opinion.
Our audit has not resulted in any qualification.
OPINION
In our opinion, the Annual Report gives a true and fair view of the Group's and
the Parent Company's assets, liabilities and financial position at 31 December
2005 and of the results of the Group's and the Parent Company's operations and
the cash flows for the financial year then ended in accordance with
International Financial Reporting Standards as adopted by EU and additional
Danish disclosure requirements for annual reports of listed companies.
Copenhagen, 7 March 2006
Deloitte Ernst & Young
Statsautoriseret Statsautoriseret
Revisionsaktieselskab Revisionsaktieselskab
Erik Holst Jorgensen Henrik Kofoed
Kirsten Aaskov Mikkelsen Benny Lynge Sorensen
FINANCIAL STATEMENTS FOR THE PARENT COMPANY
A/S DAMPSKIBSSELSKABET TORM FOR 2005
INCOME STATEMENT
1 January - 31 December
USD '000 Note 2005 2004
--------------------------------------------------------------------------------------------------------------
Net revenue 510,792 385,042
Port expenses, bunkers and commissions (119,052) (77,144)
---------------------------
Time charter equivalent earnings 391,740 307,898
Charter hire (100,340) (58,005)
Operating expenses (49,529) (45,926)
---------------------------
Gross profit (Net earnings from shipping activities) 2 241,871 203,967
Profit from sale of vessels 26,084 41,012
Administrative expenses 2,3 (34,363) (36,678)
Other operating income 22,684 12,800
Depreciation and impairment losses 5 (34,238) (29,507)
---------------------------
Operating profit 222,038 191,594
Financial items 6 11,974 32,449
---------------------------
Profit before tax 234,012 224,043
Tax expenses 7 1,674 (18,289)
---------------------------
Net profit for the year 235,686 205,754
---------------------------
Allocation of profit
The Board of directors recommends that the
year's result of USD 236 mill. be allocated
as follows:
Proposed dividend USD 3.6 per share of DKK 10 (2004: USD 2.7) 132,382
Retained profit 103,304
--------------
235,686
--------------
The accompanying notes are an integrated part of these financial statements.
BALANCE SHEET
At 31 December
USD '000 Note 2005 2004
--------------------------------------------------------------------------------------------------------------
ASSETS
NON-CURRENT
ASSETS
Tangible fixed assets
Land and buildings 883 395
Vessels and capitalized dry-docking 11 767,860 481,466
Vessels under construction and prepayments for vessels 97,397 37,311
Other plant and operating equipment 2,075 2,604
---------------------------
5 868,215 521,776
---------------------------
Financial fixed assets
Investment in subsidiaries 4 25,663 17,442
Loans to subsidiaries 43,922 120,891
Investment in jointly controlled entities 4 9 16
Loans to jointly controlled entities 0 966
Other investments 4 360,956 368,450
---------------------------
430,550 507,765
---------------------------
Total non-current assets 1,298,765 1,029,541
---------------------------
CURRENT ASSETS
Inventories of bunkers 9,900 5,437
Freight receivables, etc. 49,508 31,891
Other receivables 13,511 12,464
Prepayments 2,617 4,433
Marketable securities 11 241 58,068
Cash and cash equivalents 145,718 56,142
---------------------------
221,495 168,435
---------------------------
Non-current assets held for sale 0 0
---------------------------
Total current assets 221,495 168,435
---------------------------
TOTAL ASSETS 1,520,260 1,197,976
---------------------------
The accompanying notes are an integrated part of these financial statements.
USD '000 Note 2005 2004
--------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Common shares 61,098 61,098
Treasury shares (7,708) (7,748)
Revaluation reserves 296,448 319,354
Retained profit 400,048 286,857
Proposed dividend 132,382 99,861
Hedging reserves 3,258 454
Translation reserves 5,896 5,898
Total shareholders' equity 891,422 765,774
LIABILITIES
Non-current liabilities
Deferred tax 7 54,560 73,261
Mortgage debt and bank loans 9,11 477,681 262,894
Total non-current liabilities 532,241 336,155
Current liabilities
Mortgage debt and bank loans 9,11 40,015 47,572
Trade accounts payable 20,498 10,577
Current tax liabilities 9,075 9,145
Other liabilities 10 21,119 21,369
Deferred income 8 5,890 7,384
Total current liabilities 96,597 96,047
TOTAL LIABILITIES 628,838 432,202
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 1,520,260 1,197,976
Accounting policies 1
Collateral security 11
Guarantee and contingent liabilities 12
Contractual liabilities 13
Fair value of derivative financial instruments 14
Related party transactions 15
The accompanying notes are an integrated part of these financial statements.
USD mill.
Gains/losses recongized in equity
-------------------------------------
Common Treasury Retained Proposed Revaluation Hedging Translation
shares shares profit dividends reserve reserves reserves Total
-----------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Balance at 1 January 2004 30.5 (8.7) 358.7 36.7 0.0 (3.6) 0.0 413.6
Change in accounting policies (155.2) 118.7 (36.5)
-----------------------------------------------------------------------------------------
Balance at 1 January 2004 as restated 30.5 (8.7) 203.5 36.7 118.7 (3.6) 0.0 377.1
Changes in shareholders' equity
2004: Exchange rate adjustment
arising on translation of entities
using a measurement currency
different from USD 6.0 6.0
Reversal of deferred gain/loss on
cash flow hedges at the
beginning of the year 3.6 3.6
Deferred gain/loss on cash flow hedges
at year-end 0.4 0.4
Reversal of fair value adjustment on
available for sale investments at
the beginning of the year (118.7) (118.7)
Fair value adjustment on available
for sale investments at year-end 319.3 319.3
-----------------------------------------------------------------------------------------
Net gains/losses recognized directly
in equity 0.0 0.0 0.0 0.0 200.6 4.0 6.0 210.6
Profit for the year 205.8 205.8
-----------------------------------------------------------------------------------------
Total income/(expences) for the year 0.0 0.0 205.8 0.0 200.6 4.0 6.0 416.4
Disposal of treasury shares, cost 1.0 1.0
Gain on disposal of treasury shares 0.1 0.1
Dividends paid (35.4) (35.4)
Dividends paid on treasury shares 1.5 1.5
Exchange rate adjustment on dividends paid 1.3 (1.3) 0.0
Proposed dividend for the financial year (99.9) 99.9 0.0
Exercise of share options 5.1 5.1
Bonus share issue 30.6 (30.6) 0.0
Cost of bonus share issue 0.0 0.0
-----------------------------------------------------------------------------------------
Total changes in shareholders' equity 2004 30.6 1.0 83.3 63.2 200.6 4.0 6.0 388.7
-----------------------------------------------------------------------------------------
Shareholders' equity at 31 December 2004 61.1 (7.7) 286.8 99.9 319.3 0.4 6.0 765.8
Changes in shareholders' equity
2005: Exchange rate adjustment
arising on translation of entities
using a measurement currency
different from USD 0.0
Reversal of deferred gain/loss on cash
flow hedges at the beginning of the year (0.4) (0.4)
Deferred gain/loss on cash flow hedges
at year-end 3.2 3.2
Reversal of fair value adjustment on
available for sale investments at the
beginning of the year (319.3) (319.3)
Fair value adjustment on available
for sale investments at year-end 296.4 296.4
-----------------------------------------------------------------------------------------
Net gains/losses recognized directly
in equity 0.0 0.0 0.0 0.0 (22.9) 2.8 0.0 (20.1)
Profit for the year 235.7 235.7
-----------------------------------------------------------------------------------------
Total income/(expenses) for the year 0.0 0.0 235.7 0.0 (22.9) 2.8 0.0 215.6
-----------------------------------------------------------------------------------------
Disposal of treasury shares, cost 0.0 0.0
Dividends paid (94.5) (94.5)
Dividends paid on treasury shares 4.1 4.1
Exchange rate adjustment on dividends paid 5.4 (5.4) 0.0
Exercise of share options 0.4 0.4
Proposed dividend for the financial year (132.4) 132.4 0.0
-----------------------------------------------------------------------------------------
Total changes in shareholders' equity 2005 0.0 0.0 113.2 32.5 (22.9) 2.8 0.0 125.6
-----------------------------------------------------------------------------------------
Shareholders' equity at 31 December 2005 61.1 (7.7) 400.0 132.4 296.4 3.2 6.0 891.4
-----------------------------------------------------------------------------------------
The accompanying notes are an integrated part of these financial statements.
CASH FLOW STATEMENT
USD '000 2005 2004
--------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Operating profit 222,038 191,594
Adjustments:
Reversal of profit from sale of vessels (26,084) (41,012)
Reversal of depreciation and impairment losses 34,238 29,507
Reversal of other non-cash movements (6,451) 5,866
Dividends received 23,819 38,018
Interest income and exchange rate gains 13,333 4,556
Interest expenses (21,153) (13,939)
Income taxes paid (5,858) (44)
Change in inventories, accounts receivables and payables (13,220) (8,805)
------------------------------------
Net cash inflow/(outflow) from operating activities 220,662 205,741
------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Investment in tangible fixed assets (415,122) (134,723)
Investment in equity interests and securities (29,826) (16,664)
Loans and repayment of loans to subsidiaries and jointly controlled entities 77,935 (78,556)
Sale of non-current assets 119,057 96,936
------------------------------------
Net cash inflow/(outflow) from investing activities (247,956) (133,007)
------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowing, mortgage debt and other financial liabilities 331,668 122,697
Repayment/redemption, mortgage debt (124,437) (131,296)
Repayment/redemption, lease liabilities 0
Dividends paid (90,401) (33,824)
Purchase/disposal of treasury shares 40 1.023
------------------------------------
Cash inflow/(outflow) from financing activities 116,870 (41,400)
------------------------------------
Net cash inflow/(outflow) from operating, investing and financing activities 89,576 31,334
Cash and cash equivalents, at 1 January 56,142 24,808
------------------------------------
Cash and cash equivalents, at 31 December 145,718 56,142
Of which used as collateral 0 0
------------------------------------
145,718 56,142
------------------------------------
The accompanying notes are an integrated part of these financial statements.
NOTES
NOTE 1
ACCOUNTING POLICIES
ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
In the current year, A/S Dampskibsselskabet TORM has adopted all of the
International Financial Reporting Standards and the related interpretations
issued and effective as at 31 December 2005. The transition is accounted for in
accordance with IFRS 1 First-time Adoption of International Financial Reporting
Standards and the date of transition is 1 January 2004. The adoption of these
standards and interpretations has resulted in changes to the Company's
accounting policies. For details of the changes that are relevant to A/S
Dampskibsselskabet TORM as well as the TORM Group, please refer to note 1
Changes in accounting policies in the consolidated financial statements. In
addition:
h) A/S Dampskibsselskabet TORM previously measured investments in subsidiaries
and jointly controlled entities at equity value. In accordance with IAS 27
"Consolidated and Separate Financial Statements" these investments are
measured at cost. Dividends are recognized under financial income.
The effects of the changes in accounting policies for the Parent Company on the
balance sheet as at 1 January 2005 and on the comparative figures for 2004 are
illustrated in the statement below. The letters refer to the descriptions of the
changes presented in note 1 in the consolidated financial statements and above.
SUPPLEMENTARY ACCOUNTING POLICIES FOR THE PARENT COMPANY
Foreign currencies
Exchange rate gains or losses on intercompany balances with subsidiaries, which
are considered a part of the investment in the entity, are recognized directly
in shareholders' equity.
Investments in subsidiaries and jointly controlled entities Investment in
subsidiaries, associated companies and jointly controlled entities are
recognized and measured in the financial statements of the Parent Company at
cost and classified as non-current assets. Dividends are recognized under
financial income.
NOTE 2
USD mill. 2005 2004
--------------------------------------------------------------------------------
STAFF COSTS Total staff costs
Staff costs included in operating expenses 12.9 10.7
Staff costs included in administrative expenses 19.2 26.1
---------------------------
Total 32.1 36.8
---------------------------
Staff costs comprise the following
Wages and salaries 28.5 24.5
Share-based compensation 0.5 9.8
Pension costs 2.6 2.3
Other social security costs 0.5 0.2
---------------------------
Total 32.1 36.8
---------------------------
Employee information
The average number of staff in the Parent Company in the financial year was 319
(2004: 288).
Management remuneration is disclosed in note 5 in the consolidated financial
statements.
NOTE 3
USD mill. 2005 2004
--------------------------------------------------------------------------------
Remuneration to the auditors
appointed at the Annual General Meeting
Deloitte
Audit fees 0.4 0.3
Audit-related fees 0.0 0.0
Tax fees 0.1 0.1
Fees for other services 0.0 0.1
---------------------------
Total fees 0.5 0.5
---------------------------
Ernst & Young
Audit fees 0.1 0.2
Audit-related fees 0.0 0.0
Tax fees 0.0 0.0
Fees for other services 0.0 0.0
---------------------------
Total fees 0.1 0.2
---------------------------
NOTE 4
USD mill.
Investment
Investment in jointly Total Other
in subsidiaries controlled entities investments investments
--------------------------------------------------------------------------------------------------------------------------------
FINANCIAL FIXED ASSETS Cost:
Balance at 1 January 2004 0.8 0.0 0.8 45.1
Exchange rate adjustment 0.0 0.0 0.0 4.0
Additions 16.6 0.0 16.6 0.0
Disposals 0.0 0.0 0.0 0.0
----------------------------------------------------------------------------------
Balance at 31 December 2004 17.4 0.0 17.4 49.1
----------------------------------------------------------------------------------
Value adjustment:
Balance at 1 January 2004 0.0 0.0 0.0 118.7
Exchange rate adjustment 0.0 0.0 0.0 27.3
Value adjustment for the year 0.0 0.0 0.0 173.4
----------------------------------------------------------------------------------
Balance at 31 December 2004 0.0 0.0 0.0 319.4
----------------------------------------------------------------------------------
Carrying amount at 31 December 2004 17.4 0.0 17.4 368.5
----------------------------------------------------------------------------------
FINANCIAL FIXED ASSETS Cost:
Balance at 1 January 2005 17.4 0.0 17.4 49.1
Additions 14.4 0.0 14.4 15.4
Disposals (6.1) 0.0 (6.1) 0.0
----------------------------------------------------------------------------------
Balance at 31 December 2005 25.7 0.0 25.7 64.5
----------------------------------------------------------------------------------
Value adjustment:
Balance at 1 January 2005 0.0 0.0 0.0 319.4
Exchange rate adjustment 0.0 0.0 0.0 (50.5)
Value adjustment for the year 0.0 0.0 0.0 27.6
Balance at 31 December 2005 0.0 0.0 0.0 296.5
----------------------------------------------------------------------------------
Carrying amount at 31 December 2005 25.7 0.0 25.7 361.0
----------------------------------------------------------------------------------
Hereof listed 358.5
Hereof unlisted 2.5
----------------------------------------------------------------------------------
A list of companies in the Group is found in note 7 at page 57 in the
consolidated financial statements.
NOTE 5
USD mill.
-----------------------------------------------------------------------------------------------------------------------------------
Vessels and Prepayment on Other plant
Land and capitalized vessels under and operating
buildings dry-docking construction equipment Total
-----------------------------------------------------------------------------------------------------------------------------------
TANGIBLE FIXED ASSETS Cost:
Balance at 1 January 2004 1.3 549.0 38.5 6.6 595.4
Exchange rate adjustment 0.0 0.0 0.0 0.0 0.0
Additions 0.0 67.9 65.3 1.6 134.8
Disposals 0.0 (86.2) 0.0 (2.3) (88.5)
Transferred to/from other items 0.0 66.5 (66.5) 0.0 0.0
-------------------------------------------------------------------------------------
Balance at 31 December 2004 1.3 597.2 37.3 5.9 641.7
-------------------------------------------------------------------------------------
Depreciation and impairment losses:
Balance at 1 January 2004 0.9 118.3 0.0 3.7 122.9
Exchange rate adjustment 0.0 0.0 0.0 0.0 0.0
Additions 0.0 0.0 0.0 0.0 0.0
Disposals 0.0 (30.3) 0.0 (2.2) (32.5)
Reversal of impairment losses 0.0 0.0 0.0 0.0 0.0
Depreciation for the year 0.0 27.8 0.0 1.7 29.5
-------------------------------------------------------------------------------------
Balance at 31 December 2004 0.9 115.8 0.0 3.2 119.9
-------------------------------------------------------------------------------------
Carrying amount at 31 December 2004 0.4 481.4 37.3 2.7 521.8
TANGIBLE FIXED ASSETS Cost:
Balance at 1 January 2005 1.3 597.2 37.3 5.9 641.7
Exchange rate adjustment 0.0 0.0 0.0 0.0 0.0
Additions 0.0 263.9 150.3 0.9 415.1
Disposals 0.0 (74.7) 0.0 (0.9) (75.6)
Transferred to/from other items 0.0 90.2 (90.2) 0.0 0.0
-------------------------------------------------------------------------------------
Balance at 31 December 2005 1.3 876.6 97.4 5.9 981.2
-------------------------------------------------------------------------------------
Depreciation and impairment losses:
Balance at 1 January 2005 0.9 115.8 0.0 3.2 119.9
Exchange rate adjustment 0.0 0.0 0.0 0.0 0.0
Additions 0.0 0.0 0.0 0.0 0.0
Disposals 0.0 (40.3) 0.0 (0.8) (41.1)
Reversal of impairment losses (0.5) 0.0 0.0 0.0 (0.5)
Depreciation for the year 0.0 33.3 0.0 1.4 34.7
-------------------------------------------------------------------------------------
Balance at 31 December 2005 0.4 108.8 0.0 3.8 113.0
-------------------------------------------------------------------------------------
Carrying amount at 31 December 2005 0.9 767.8 97.4 2.1 868.2
-------------------------------------------------------------------------------------
Hereof finance leases 0.0 0.0 0.0 0.0 0.0
-------------------------------------------------------------------------------------
Hereof interest included in cost 0.0 1.0 0.2 0.0 1.2
-------------------------------------------------------------------------------------
At 1 October 2004, the value of land and buildings assessed for Danish tax
purposes amounted to USD 0.5 mill. (carrying amount at 31 December 2005 USD 0.4
mill.) compared with USD 0.5 mill. at 1 October 2003.
Included in the carrying amount for vessels and capitalized dry-docking are
capitalized dry-docking costs in the amount of USD 10.4 mill. (2004: USD 4.7
mill.).
Please refer to note 11 for information in relation to assets used for
collateral security.
NOTE 6
USD mill. 2005 2004
--------------------------------------------------------------------------------
FINANCIAL ITEMS Financial income
Interest income 8.9 4.5
Gain on other investments 0.1 0.0
Dividends from other investments*) 12.8 34.1
Dividends from subsidiaries 10.7 0.7
Dividends from jointly controlled entities 0.3 3.1
Gain on derivative financial instruments 0.2 5.2
Exchange rate adjustments 9.5 0.0
---------------------------
42.5 47.6
Financial expenses
Losses on subsidiaries and jointly
controlled entities 5.6 0.1
Interest expense on mortgage and bank debt 20.7 13.1
Net losses on marketable securities at fair
value through profit and loss 3.9 0.4
Exchange rate adjustments 0.0 0.8
Other interest expenses 0.5 0.9
Hereof included in the cost of tangible fixed assets (0.2) 0.0
---------------------------
30.5 15.3
---------------------------
Total financial items 12.0 32.3
---------------------------
*) Includes dividend on the Norden shares of USD 12.6 mill. in 2005 (2004: USD
34.0 mill.).
NOTE 7
USD mill. 2005 2004
--------------------------------------------------------------------------------
TAX EXPENSES
Current tax for the year (7.1) (9.2)
Adjustments related to previous years 0.0 0.0
Adjustment of deferred tax 8.8 (9.1)
---------------------------
Tax expenses 1.7 (18.3)
---------------------------
Effective corporate tax rate (0.7%) 8.2%
---------------------------
The Company participates in the tonnage tax scheme in Denmark. Participation in
the tonnage tax scheme is binding until 31 December 2010.
The Company expects to participate in the tonnage tax scheme after the binding
period and at a minimum to maintain its current investing and activity level. No
reconciliation of income tax is provided as it is not meaningful under the
tonnage tax scheme.
USD mill. 2005 2004
--------------------------------------------------------------------------------
DEFERRED TAX
Balance at 1 January 73.3 58.8
Exchange rate adjustment (9.9) 5.4
Reduction of Danish corporation tax from 30% to 28% (4.2) -
Deferred tax for the year (4.6) 9.1
---------------------------
Balance at 31 December 54.6 73.3
---------------------------
Essentially all deferred tax relates to vessels included in the transition
account under the tonnage tax scheme.
NOTE 8
USD mill. 2005 2004
--------------------------------------------------------------------------------
DEFERRED INCOME
Deferred gain related to sale and lease back transactions 5.9 7.4
---------------------------
5.9 7.4
---------------------------
NOTE 9
USD mill. 2005 2004
--------------------------------------------------------------------------------
MORTGAGE DEBT AND BANK LOANS
To be repaid as follows:
Falling due within one year 40.0 47.6
Falling due between one and two years 40.0 40.4
Falling due between two and three years 70.0 39.2
Falling due between three and four years 37.6 22.8
Falling due between four and five years 37.6 26.1
Falling due after five years 292.5 134.4
---------------------------
517.7 310.5
---------------------------
The presented amounts to be repaid are adjusted by directly related costs arised
from the issuing of the loans by USD 1.7 mill. (2004: USD 0 mill.), which are
amortized over the term of the loans.
USD mill. 2005 2004 2005 2004
Fixed/ Effective Effective Carrying Carrying
Maturity floating interest interest amount amount
-------------------------------------------------------------------------------
LOAN
USD 2005 Floating - 3.8% 0.0 18.7
USD 2006 Floating - 3.9% 0.0 16.5
USD 2007 Floating - 3.9% 0.0 20.5
USD 2008 Floating 5.4% 3.3% 37.6 17.0
USD 2009 Floating - 4.0% 0.0 14.2
USD 2011 Floating 5.4% 2.8% 22.0 11.4
USD 2012 Floating - 3.8% 0.0 76.7
USD 2013 Floating 5.4% 4.4% 14.2 83.5
USD 2014 Floating 4.8% 3.9% 445.6 52.0
Weighted average
effective
interest rate 4.9% 3.9%
----------------
Carrying amount 519.4 310.5
--------------------
The Parent Company has an early settlement option to repay the loans by paying
af breakage cost.
Part of the loans have been swapped to fixed interest rate. Please refer to the
section 'Managing risk and exposure' for further information on financial risks.
NOTE 10
USD mill. 2005 2004
--------------------------------------------------------------------------------
OTHER LIABILITIES
Partners and commercial managements 5.1 3.0
Accrued dry-docking costs 1.9 0.3
Accrued interests 2.9 2.5
Wages and social expenses 6.0 5.2
Derivative financial instruments 2.9 7.3
Miscellaneous, including items related
to shipping activities 2.3 3.1
---------------------
21.1 21.4
---------------------
NOTE 11
USD mill. 2005 2004
--------------------------------------------------------------------------------
COLLATERAL SECURITY
Collateral security for mortgage debt and bank loans
Vessels 489.4 301.5
Marketable securities 0.0 9.9
---------------------
489.4 311.4
---------------------
The total carrying amount for vessels that have been provided as security
amounts to USD 498.0 mill. as at 31 December 2005.
NOTE 12
USD mill. 2005 2004
--------------------------------------------------------------------------------
GUARANTEE AND CONTINGENT LIABILITIES
Guarantee liabilities 0.0 38.3
The guarantee liability for the Parent Company for 2004 only relates to
guarantee liabilities for the Company's subsidiaries other than a USD 0.7 mill.
guarantee to Danish Shipfinance and Danish Shipowners' Association.
The only remaining guarantee liability in 2005 which is under USD 0,1 mio.
relates to Danish Shipowners' Association.
The Parent Company has at 31 December 2005 contracted 11 vessels (2004: 7
vessels), an investment totalling USD 490 mill. (2004: USD 283 mill.).
NOTE 13
USD mill. 2005 2004
--------------------------------------------------------------------------------
CONTRACTUAL LIABILITIES - AS LESSEE
(operating leases) Charter hire for
vessels on time charter:
Falling due within one year 79.6 53.4
Falling due between one and two years 57.1 47.7
Falling due between two and three years 69.0 45.3
Falling due between three and four years 65.9 30.8
Falling due between four and five years 23.1 25.1
Falling due after five years 56.2 35.9
---------------------
350.9 238.2
---------------------
Average period until redelivery (years) 3.5 2.9
---------------------
Newbuilding installments and exercised
purchase options (purchase obligations):
Falling due within one year 217.9 93.5
Falling due between one and two years 146.7 75.8
Falling due between two and three years 95.5 57.0
Falling due between three and four years 28.0 25.6
Falling due between four and five years 0.0 0.0
Falling due after five years 0.0 0.0
---------------------
488.1 251.9
---------------------
Other operating leases:
Falling due within one year 1.8 1.0
Falling due between one and two years 1.9 1.1
Falling due between two and three years 1.8 0.9
Falling due between three and four years 1.8 0.8
Falling due between four and five years 1.8 0.9
Falling due after five years 5.8 4.6
---------------------
14.9 9.3
---------------------
Other operating leases primarily consist of contracts regarding office spaces
and apartments as well as IT-related contracts.
During the year, charter hire expenses have been recognized in the income
statement by USD 100.3 mill. and other operating lease expenses have been
recognized by USD 1.3 mill.
USD mill. 2005 2004
--------------------------------------------------------------------------------
CONTRACTUAL LIABILITIES - AS LESSOR
(operating leases)
Charter hire income for vessels on time
charter and bareboat charter:
Falling due within one year 75.4 76.2
Falling due between one and two years 9.6 2.6
Falling due between two and three years 0.0 0.3
Falling due between three and four years 0.0 0.0
Falling due between four and five years 0.0 0.0
Falling due after five years 0.0 0.0
---------------------
85.0 79.1
---------------------
Average period until redelivery (years) 0.6 0.5
---------------------
Charter hire income for vessels on time charter and bareboat charter are
recognized under net revenue.
NOTE 14
USD mill. FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
Fair value adjustments
----------------------
Income statement
----------------
Shareholders'
Fair value Port expenses, equity Fair value
at 1 Jan. Net bunkers Financial Hedging at 31 Dec.
2004 revenue and comm. items reserves 2004
---------------------------------------------------------------------------------------------
Cross currency swaps 5.9 - - (5.8) - 0.1
Forward rate contracts 0.3 - - 3.9 (0.4) 3.8
Interest rate swaps (5.3) - - 1.1 4.4 0.2
Currency options (0.3 - - 3.9 - 3.6
Bunker hedge 0.0 - (0.8) - - (0.8)
Forward Freight Agreement 0.2 (4.6) - - - (4.4)
---------------------------------------------------------------------------------------------
0.8 (4.6) (0.8) 3.1 4.0 2.5
---------------------------------------------------------------------------------------------
Fair value adjustments
----------------------
Income statement
----------------
Shareholders'
Fair value Port expenses, equity Fair value
at 1 Jan. Net bunkers Financial Hedging at 31 Dec.
2005 revenue and comm. items reserves 2005
---------------------------------------------------------------------------------------------
Cross currency swaps 0.1 - - (0.1) - 0.0
Forward rate contracts 3.8 - - (3.9) - (0.1)
Interest rate swaps *) 0.2 - - 3.5 2.9 6.6
Currency options 3.6 - - (3.6) - 0.0
Bunker hedge (0.8) - 0.8 - - 0.0
Forward Freight Agreement (4.4) 2.5 - - - (1.9)
---------------------------------------------------------------------------------------------
2.5 2.5 0.8 (4.1) 2.9 4.6
---------------------------------------------------------------------------------------------
Please refer to the section 'Managing risk and exposure' for further information
on commercial and financial risks.
*) As at 31 December 2005, the Company had entered into interest rate swap
contracts with a fair value of USD 3.3 mill. designated as hedge of
interest payments during the period 2006 to 2008. The gains or losses on
these contracts will be recognized under financial items in the income
statement together with the interest payments.
NOTE 15
RELATED PARTY TRANSACTIONS
Subsidiaries and jointly controlled entities are considered as related parties
in relation to the Parent Company A/S Dampskibsselskabet TORM in addition to the
related parties disclosed in note 19 to the consolidated financial statements.
The following transactions took place between
A/S Dampskibsselskabet TORM and subsidiaries and jointly controlled entities
during the year:
USD mill. 2005 2004
--------------------------------------------------------------------------------
Assets sold by A/S Dampskibsselskabet TORM 0.0 96.9
Services provided by A/S Dampskibsselskabet TORM 14.2 3.4
Services provided by subsidiaries and
jointly controlled entities 33.6 2.9
47.8 103.2
In 2004, assets were sold to a subsidiary on market terms as part of a strategic
effort to increase TORM's presence in the Far East. The services provided
between the parties are all directly related to the Group's shipping activities.
GLOSSARY
----------------------------------------------------------------------
20-F: Annual report filed with the US Securities and Exchange
Commission (SEC)
ADR: American Depository Receipt. Proof of ownership of (the
equivalent) of one share. ADRs are used by foreign
companies wishing to list on American stock exchanges.
ADS: American Depositary Shares. Shares registered with SEC,
kept in custody with a bank as security for the ADRs
issued.
Aframax: A vessel with a deadweight (cargo carrying capacity) of
80,000 - 100,000 tons.
Asset management: Acquisition and ownership of assets (ships), which
may be disposed of at an optimal time with a view
to generating a one-off profit - as opposed to
profits derived from operating the asset.
Bareboat: See B/B.
B/B: Bareboat. A form of charter arrangement whereby
the charterer is responsible for all costs and
risks in connection with the vessel's operation.
Bulk: Dry cargo (typically commodities such as grain, coal,
iron ore, etc.).
Bunker: Fuel with which to run a ship's engines.
Capesize: Bulk carrier with a deadweight capacity of
120,000-200,000 dwt.
Classification Independent organisation, which through
society: verification of design, construction, buil- ding
process and operation of vessels ensure that the
vessels at all times meet a long list of
requirements to seaworthi- ness, etc. If the
vessels do not meet these requirements, insurance
and mortgaging the vessel will typically not be
possible.
COA: Contract of affreightment. A contract that involves
a number of consecutive cargoes at previously agreed
freight rates.
Coating: The internal coatings applied to the tanks of a
product tanker. The coating enables it to load
refined oil products.
Demurrage: A charge against the charterer of a ship for
delaying the vessel beyond the allowed free time.
The demurrage rate will typically be at a level
equal to the earnings in USD/day for the voyage.
DKK: Danish Kroner.
Dry cargo: See bulk.
DWT: Deadweight tons. The cargo carrying capacity of
a ship.
EU: The European Union.
FFA: Freight Forward Agreement. A financial derivative
instrument enabling freight to be hedged forward
at a fixed price.
GAAP: Generally accepted accounting principles.
Handymax: Bulk carriers with a deadweight capacity
of 40-60,000 dwt.
Handymax: Bulk carriers with a deadweight capacity
of 40-60,000 dwt.
Handysize: Bulk carriers with a deadweight capacity
of 20-35,000 dwt.
IAS: International Accounting Standards. IFRS:
International Financial Reporting Standards.
IMO: International Maritime Organisation.
LR1: Long Range 1. A specific class of product tankers
in the 60,000 - 80,000 dwt size.
LR2: Long Range 2. A specific class of product tankers
in the 80,000 - 110,000 dwt size.
MR: Medium range. A specific class of product tankers
in the 35,000 - 50,000 dwt size.
OCIMF: Oil Companies Intenational Maritime Forum. A
voluntary association of oil companies having an
interest in the ship- ment and terminalling of
crude oil and oil products.
OPA-90: Oil Pollution Act 1990. US environmental law
implemented following the grounding of Exxon
Valdez in Alaska.
OPEC: Organization of the Petroleum Exporting
Countries.
Panamax: A vessel of 60,000 - 80,000 dwt with dimensions
which allow passage through the Panama Canal.
P&I clubs: Protection & Indemnity club.
Pool: A grouping of ships of similar size and
characteristics, owned by different owners, but
which are commercially operated jointly. The pool
manager is mandated to charter the ships out for
the maximum benefit of the pool as a whole.
Earnings are equalized taking account of
differences in ships' specifications, the number
of days the ships have been ready for charter,
etc.
Product tanker: A vessel suitable for trading clean petro- leum
products such as gasoline, jet fuel and naphtha.
SEC: US Securities and Exchange Commission.
T/C: Time Charter. An agreement covering the chartering
out of a vessel to an end user for a defined
period of time, where the owner is responsible for
crewing the ves- sel but the charterer must pay
port costs and bunker.
Timecharter: See T/C.
TCE: See T/C equivalent.
T/C equivalent: The freight receivable after deducting port
expenses, consumption of bunker and commissions.
UN: United Nations.
USD: US Dollars.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
A/S STEAMSHIP COMPANY TORM
(registrant)
Dated: March 23, 2006
By: /s/ Klaus Nyborg
--------------------------
Klaus Nyborg
Chief Financial Officer