Teekay Corporation
Annual Report 1999

Plain-text annual report

ON COURSE Teekay Shipping Corporation Annual Report December 31, 1999 C O N T E N T S 01 03 06 10 15 18 24 25 28 36 37 38 Financial Highlights Chairman’s Message to Shareholders President’s Report to Shareholders Market Review Fleet Profile Management’s Discussion & Analysis Auditors’ Report Consolidated Financial Statements Notes to Consolidated Financial Statements Five Year Financial Summary Board of Directors Corporate Information C O R P O R AT E P R O F I L E Teekay Shipping Corporation is a leading provider of international crude oil and petroleum product transportation services through the world’s largest fleet of medium-sized (Aframax) oil tankers. Headquartered in Nassau, Bahamas, with offices in 11 other countries, Teekay employs nearly 300 on-shore and more than 2,700 seagoing staff around the world. The Company has earned a reputation for safety and excellence in providing transportation services to major international oil companies, traders and government agencies worldwide. The Company’s common stock is listed on the New York Stock Exchange and trades under the symbol "TK". Leverage(2) % 90 75 60 45 30 15 0 Revenue $ Millions Capital Expenditures $ Millions 450 375 300 225 150 75 0 400 240 200 160 120 80 40 0 96 97 98 99 99 As at March 31 (1) (1) As at December 31, 1999 (2) Net debt/capitalization 96 97 98 99 99 Fiscal Year Ended March 31 (1) (1) 9 months ended December 31, 1999 96 97 98 99 99 Fiscal Year Ended March 31 (1) (1) 9 months ended December 31, 1999 Vessels and equipment, gross Drydocking Teekay Shipping Annual Repor t December 31, 1999 1 FINANCIAL HIGHLIGHTS F I N A N C I A L H I G H L I G H T S (In thousands of U.S. dollars, except as otherwise indicated) Income Statement Data Net voyage revenues Net income (loss) Balance Sheet Data Total assets Total stockholders’ equity Per Share Data 9 Months Ended December 31, * 1999 Year Ended March 31, 1999 $ 248,350 $ 318,411 (19,595) 45,406 1,982,684 1,452,220 832,067 777,390 Net income (loss) per share (0.54) Weighted average shares outstanding (thousands) 36,384 1.46 31,063 Other Financial Data EBITDA Net debt to capitalization (%) Capital expenditures: Vessel purchases, gross Drydocking Operating cash flow per ship per day 89,839 50.8 186,069 39.6 452,584 4,971 5,177 85,445 7,213 11,171 *(Teekay has changed its fiscal year end from March 31 to December 31, effective December 31, 1999) Cash Flow (2) $ Millions Earnings Per Share $ US Net Income $ Millions 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 240 200 160 120 80 40 0 96 97 98 99 99 Fiscal Year Ended March 31 (1) (1) 9 months ended December 31, 1999 (2) Earnings before interest, taxes, depreciation and amortization (EBITDA) 70 60 50 40 30 20 10 0 -10 -20 96 97 98 99 99 Fiscal Year Ended March 31 (1) 96 97 98 99 99 Fiscal Year Ended March 31 (1) (1) 9 months ended December 31, 1999 (1) 9 months ended December 31, 1999 ON COURSE 2 Teekay Shipping Annual Report December 31, 1999 GROWTH WITH THE SUCCESSFUL ACQUISITION of Bona Shipholding, Teekay now possesses a truly global reach with offices and service routes throughout the world. Commercial activity is conducted from offices in London, Houston, Singapore, Tokyo and Oslo providing 24 hour coverage to customers. c r e a t i n g a w o r l d w i d e t r a n s p o r t a t i o n n e t w o r k Teekay Shipping Annual Report December 31, 1999 3 CHAIRMAN’S MESSAGE C H A I R M A N ’ S M E S S A G E T O S H A R E H O L D E R S By continuing to position ourselves as a leading consolidator in a fragmented industry, by maintaining our financial strength and preserving our commitment to the highest standards of professionalism, we believe that we are the shipping company of the future. Sean Day Chairman of the Board of Directors 1999 was a year in which we laid a solid foundation for our future success. Nevertheless, I am disappointed that we report poor earnings in my first year as your Chairman. This was a year in which rates plummeted in the face of weak demand, and our fleet encountered the most difficult trading conditions since the early 1990s. However, it appears we have passed the bottom of this cycle and I am confident that the resources that we have committed to acquiring and merging with Bona Shipholding, as well as the time and effort we have spent on our internal reorganization and streamlining this past year, will reap rewards in the future. We cannot escape the cyclical nature of our industry, much as we would wish otherwise. As demand for oil around the world fluctuates, and as ship owners collectively decide to build or scrap vessels, the demand for our services will vary. Our challenge is to ensure that we achieve superior returns on our capital employed and increase our share- holders’ value in our stock over the course of each cycle, measured from beginning to end. How will we achieve this goal? We continue to position ourselves to do so. Today we are a leading consolidator in a fragmented industry. We are a transparent public company in an industry dominated by small private operators. We adhere to the very highest standards of safety in an industry that, lamentably, still tolerates sub-standard CHAIRMAN’S MESSAGE 4 Teekay Shipping Annual Report December 31, 1999 Oil companies and other charterers will be looking to professionally managed, well-capitalized companies like Teekay as their carriers of the future. vessels. We are financially strong and are committed to serve our customers with professionalism. We believe that we are the shipping company of the future. Recently a 25 year old tanker in poor condition split in half in bad weather and spilled its cargo, causing extensive damage to much of the French Atlantic coastline; the owner of the vessel could not even be identified for many weeks after the accident. This environmental disaster is having an impact on Europe and the public is demanding that our industry be accountable for this catastrophe. In the face of this tragedy, oil companies and other charterers will be looking to professionally managed, well-capitalized companies like Teekay as their carriers of choice in the future. We are ready to meet that challenge! I am proud to be a member of the Teekay team. I would like to pay tribute to my predecessor, Axel Karlshoej. Axel did an extraordinary job of maintaining the vision of his late brother, Torben Karlshoej, the founder of our company. Axel led our company with style and enthusiasm and we are very glad that he continues on our Board as Chairman Emeritus. Thanks, too, to our customers for their steady support, to the 3,000 Teekay employees worldwide whose teamwork is critical to our success, and to our shareholders who share our vision! Sean Day Chairman of the Board of Directors Teekay Shipping Annual Report December 31, 1999 5 ON COURSE CONTROL FROM SHIP TO SHORE, every area of Teekay is committed to minimizing operating expenses without compromising the Company’s reputation for excellence. The Company’s large, uniform fleet of modern ships means greater efficiency and lower costs, while participation in MARCAS, a marine purchasing co-operative, creates further cost savings for commonly purchased services and materials. m a n a g i n g c o s t – e f f e c t i v e o p e r a t i o n s PRESIDENT’S REPORT 6 Teekay Shipping Annual Report December 31, 1999 P R E S I D E N T ’ S R E P O RT T O S H A R E H O L D E R S Careful planning and a long-term vision have allowed us to successfully manage a severe market downturn and lay the groundwork for improved profitability. This past shortened nine month fiscal year was I am pleased to report that the Bona acquisition a dynamic period in the tanker market, in the was concluded on schedule and without any oil industry and in Teekay alike. We believe disruption to operations. Our customers report the tanker market cycle bottomed out with that they continue to enjoy the high quality very weak rates, then turned a corner in the latter of service they expect from Teekay, confirming part of the year, moving towards improved that the substantial effort that went into tanker supply and demand fundamentals. The transitional planning was time well spent. consolidation among the world’s oil companies changed our customer landscape, providing One of the effects of integrating Bona was a tremendous opportunities for Teekay in the change in fiscal year-end. Accordingly, this process. Within Teekay itself, we focused on Annual Report covers the nine month period three critical areas affecting shareholder from April 1, 1999 to December 31, 1999. returns: revenue enhancement; cost manage- ment; and reduction of the average invested The impact of the cyclical downturn in the tanker capital per ship. market is reflected in the weak results for the nine months ending December 31, 1999. During Teekay’s most visible highlights of 1999 this period, the Company recorded a net loss included our $450 million acquisition of of $19.6 million compared to net income of Bona Shipholding, a series of advances in $45.4 million for the 12 month period to major customer relationships and our key role March 31, 1999. in helping establish MARCAS, an innovative purchasing co-operative. Behind the scenes Tight cost controls and effective voyage there were significant changes too. We com- management have traditionally enabled us pletely restructured our marine operations to outperform the market and consistently into ship teams for improved efficiency. We realize a higher average cash flow per ship day launched a visionary new long term strategy in relative to our industry. We have maintained the critical area of seastaff manning and training; our cash flow premium in this year, where the we initiated a major upgrade of information significant decline in the market saw the systems; and we instigated a drive to cut Company’s operating cash flow per ship day costs beyond those already identified from fall from $11,171 in the 12 month period the Bona transaction. ending March 31, 1999 to $5,177 for the nine month period ending December 31, 1999. Bjorn Moller President and CEO Teekay Shipping Annual Report December 31, 1999 7 PRESIDENT’S REPORT Throughout the current downturn, our Australian fleet reaching 25 years of age in the next two operations have continued to generate a steady years, particularly at a time when international cash flow of $14,643 per day. Similar perfor- regulations continue to place increased pressure mance levels are expected to continue for the on companies to retire older tonnage. Shipyard duration of these long-term contracts. orderbooks are full for the next two years or more, capping the number of new tankers that Despite the results of the past nine months, we will enter the market in the next two years. are pleased to note some encouraging indications that the tanker market is poised for an upturn. Teekay is in an excellent position to take Commencing in 1998 and continuing through- advantage of a tanker market recovery. We out the first half of 1999, a slowdown in world have a large uniform Aframax fleet with an oil consumption brought about by the Asian average age of only 8.6 years, a streamlined economic crisis, coupled with OPEC produc- operation able to react quickly to customer tion cuts, sharply reduced tanker demand. requirements and a culture that encourages Simultaneously, tanker supply increased as a cost efficiency and continuous improvement. large number of newbuildings, ordered at the last market peak in 1997, entered the market. We have capitalized on the current lull in the The resultant effect was downward pressure tanker market to increase operating leverage, on tanker freight rates. cut costs and strengthen our management and technology infrastructure. These strategies are Industry statistics now clearly show that world consistent with our philosophy of stimulating GDP and oil consumption have returned to growth while preserving our core strengths, strong growth rates. OPEC, however, has main- and will serve to enhance our financial returns tained its oil production cuts in order to draw and earnings power as the market recovers. down oil inventories and drive up oil prices. As an example of the impact of this policy, The Bona transaction immediately increased U.S. oil inventories in early February 2000 our presence in the Atlantic basin from six to reached a 20 year low. In order to avert a 32 ships and increased Teekay’s overall size global shortfall of oil products, production by approximately 50%. With the successful will need to increase in the coming months, integration of the two companies to date, we something which would have an immediate enjoy a significant and far-reaching competitive As the pace of change in our industry accelerates, our focus on continuous improvement sees us positive impact on tanker demand. advantage in being able to offer our customers well positioned to capitalize on the next upturn in the tanker cycle. Our industry is also experiencing its highest oil transportation. The timing of the Bona scrap rate of old tankers in 14 years. This is acquisition at the bottom half of the cycle has likely to continue with 15% of the world tanker resulted in a significant reduction in the net a single and flexible source of global Aframax PRESIDENT’S REPORT 8 Teekay Shipping Annual Report December 31, 1999 income break-even level of our fleet, raising And, of course, Teekay continues to maintain a our earnings power. worldwide network of chartering offices which provide 24 hour coverage to our customers. Last year we estimated that we would see annual merger cost synergies of approximately $10 The move to ship teams has streamlined our million by July 2000; $6.5 million through the internal information flow, strengthening ship elimination of duplicated overhead and $3.5 to shore communications, increasing our vessel million in operating costs. These projections planning flexibility and stimulating our creative remain on track. problem solving abilities. Significant new investment in global information systems is Our role as co-founder of the MARCAS marine improving communications and information purchasing co-operative has provided the systems on board ships and in our offices. cumulative buying power of 225 vessels, allowing us to effectively reduce costs on Going forward, we intend to focus on maximiz- The successful integration of the Bona and Teekay fleets was completed on schedule. The company is already benefiting commonly purchased services and materials. ing the benefits of our position as we enter from the predicted synergies. These include items such as lubricating oil, what appears to be a cyclical upturn phase, be paints, chemicals and welding supplies. Our it in our current size or as a bigger company, intention is to grow MARCAS further. should the opportunity arise for us to use our balance sheet again. We will remain focused on A major Teekay goal to become our customers’ creating increased value for our shareholders. service partner of choice has seen the Company In other words, we intend to remain “on become increasingly more proactive in meeting course” towards pre-eminence in the global our customers’ evolving needs. As a result, tanker industry. we have secured a number of contracts in the Atlantic basin. These flexible, often high I would like to thank all Teekay employees for volume contracts benefit our customers and at their dedication and commitment to making the same time enhance our fleet utilization and this transitional year so productive. They have provide us with preferred access to premium earned the right to take a great deal of pride in trade routes. what they have achieved in 1999, namely to firmly place Teekay on an exciting strategic A key to this customer focused approach path for the future. lies in improving communications, both within the Company and with our customers. Consolidating and centralizing our operations has helped to simplify our structure and deliver superior customer service and communication. Bjorn Moller President and CEO Teekay Shipping Annual Report December 31, 1999 9 ON COURSE DIRECTION STRICT DISCIPLINE and a clear understanding of the forces which drive the tanker cycle have enabled Teekay to take advantage of opportunities for growth, many of which occur when the market is down. Having ready access to capital during a downturn facilitates the Company’s ability to react swiftly and independently. d e v e l o p i n g s t r a t e g i e s t h a t c a p i t a l i z e o n t h e m a r k e t c y c l e MARKET REVIEW 10 Teekay Shipping Annual Report December 31, 1999 M A R K E T R E V I E W The tanker industry is cyclical in nature, affected by several interrelated supply and demand factors. % Growth 4 3 2 1 0 -1 -2 -3 GDP Growth vs Oil Demand 91 92 93 94 95 96 97 98 99 00 CALENDAR YEAR World GDP Oil Consumption Incremental Oil Production World GDP Projection Oil Consumption Projection Information based on industry data Supply and Demand Cycles The oil tanker industry is characterized by the Overall tanker supply changes are determined periodic volatility of its charter rates (TCEs). by the number of new tankers delivered and the Much of this rate volatility arises from the fact number of older vessels removed from the that the demand for oil tankers is highly elastic market through scrapping. The decision by an while oil tanker supply is, in the short-term, owner whether to scrap a vessel is, in large relatively inelastic. part, influenced by the age of the vessel, current and projected income from the vessel and the Changes in tanker demand are primarily driven cost of any modifications that the vessel may by changes in oil production. This is, in turn, require to pass the required periodic surveys. largely driven by oil consumption, which is, All of these factors are weighed against the itself, closely correlated with world GDP scrap price the owner can obtain. growth, as can be seen in the accompanying graph. Oil production is also affected in the short term by variations in OPEC policies. Teekay Shipping Annual Report December 31, 1999 11 MARKET REVIEW Aframax TCE Rates vs Oil Production Aframax TCE Rates ($/day) Incremental Oil Production (million bpd) 20,000 15,000 10,000 5,000 3 2 1 0 (1) (2) Growth In Oil Demand MILLIONS B/D 80 70 60 50 92 93 94 95 96 97 98 99 91 CALENDAR YEAR Aframax TCE Rates World Oil Production 88 89 90 91 92 93 94 95 96 97 98 99 CALENDAR YEAR Source: IEA, PIRA Energy Group The Current Position The 1999 tanker environment was one of the balance of the year. This reduced the declining TCE rates. Aframax rates fell from demand for oil transportation services and, the early year high of $18,000 per day to a low therefore, placed downward pressure on of approximately $10,000 per day, which TCE rates. persisted for the second half of the year. Contributing to these depressed rates were low dead weight tonnes) or 0.7% in 1999. The pace oil consumption growth in 1998 and early 1999, of newbuilding tanker deliveries in 1999 rose OPEC oil production cutbacks and a growth in to 20.3 mdwt from 13.3 mdwt in 1998, as the Total tanker supply grew by 2.2 mdwt (million the world tanker fleet. large number of vessels ordered in 1997 and early 1998 entered the market. During 1999, Oil consumption growth during 1999 was 1.6%, the rate of scrapping rose sharply each quarter, which, while higher than 1998 growth, was still with fourth quarter 1999 scrapping reaching lower than growth levels seen from 1995 to a level close to the total of the previous six 1997. By the fourth quarter of 1999, however, months. For the whole of 1999, a total of oil consumption growth had rebounded to peak 17.8 mdwt was scrapped, the highest level levels seen earlier in the decade. in 14 years. In the spring of 1999, OPEC responded to the This net increase in global tanker supply slower pace of growth in global oil consumption combined with lower demand created an with production cuts so deep that they triggered environment of low freight rates similar a draw down of world crude inventories during to the last weak market in 1992. MARKET REVIEW 12 Teekay Shipping Annual Report December 31, 1999 Tanker Supply/ Demand Balance MILLIONS OF DWT Orderbook vs. Ageing Fleet MILLIONS OF DWT 320 240 160 80 0 88 89 90 91 92 93 94 95 96 97 98 99 CALENDAR YEAR Supply Demand Source: Maritime Strategies Int., Information based on industry data 120 90 60 30 0 88 89 90 91 92 93 94 95 96 97 98 99 CALENDAR YEAR Vessels 20 years and older World Tanker Orderbook Information based on industry data The Outlook For calendar year 2000, the International continue as the number of tankers reaching 25 Energy Agency is forecasting growth in oil years of age increases in 2000 and 2001. Most consumption of 2.4%, consistent with strong crude oil tankers, and virtually all Aframax world GDP growth. If this forecast oil con- tankers trading internationally, are being sumption level is to be realized, oil production scrapped prior to reaching 25 years of age. It levels will need to step up significantly. should be noted that in each of the past three years, the number of tankers scrapped has It is anticipated that much of the production exceeded those reaching 25 years of age. increase will come in the form of long haul oil from Middle East OPEC, the source of most of The pace of new tanker deliveries is set to the world’s idle capacity. An increase in their decline, particularly in the latter half of 2000. level of production would have an immediate The world shipyard orderbook indicates that positive impact on tanker demand. during the next two years the pace of deliveries will drop significantly from the levels of the On the supply side, we believe the level of previous 12 months. scrapping seen in the latter stages of 1999 will Teekay Shipping Annual Report December 31, 1999 13 ON COURSE EFFICIENCY AN EFFECTIVE BACKHAUL AND CARGO PARCELLING strategy helps improve vessel profitability, yielding higher average per day revenue than the industry standard. Teekay’s uniform fleet and its increased size create greater flexibility for vessel substitution and schedule changes. Cross-functional operations teams dedicated to specific ships, ensure effective operational processes and efficient customer service. o p t i m i z i n g f l e e t s c h e d u l i n g a n d u t i l i z a t i o n ON COURSE 14 Teekay Shipping Annual Report December 31, 1999 QUALITY OPERATIONAL POLICIES AND PROCEDURES are designed to safeguard personnel and protect the environment. Teekay has an excellent safety record, having set standards acknowledged to be among the highest in the industry. The Company is firmly committed to a proactive approach to loss prevention, continuously reviewing and improving safety management processes and training practices. U p h o l d i n g s a f e t y a n d e n v i r o n m e n t a l s t a n d a r d s Teekay Shipping Annual Report December 31, 1999 15 FLEET PROFILE F L E E T P R O F I L E as of December 31, 1999 Year Built 1997 1995 1994 1992 1992 1992 1992 1991 1991 1991 1990 1990 1990 1990 1989 1995 1995 1995 1990 1990 1988 1988 1988 1988 1986 1985 1998 1994 1993 1992 1990 1989 1989 1988 1988 1987 1987 1991 1989 1989 1988 1988 Tankers Hull Type DWT NAMURA CLASS Seabridge * Seamaster * Torres Spirit Mendana Spirit SAMSUNG CLASS Aegean Pride * Kanata Spirit Kareela Spirit Kiowa Spirit Koa Spirit Kyeema Spirit Silver Paradise * OTHER AFRAMAX Bornes ** Shannon Spirit Cook Spirit Clare Spirit Magellan Spirit Double Hull Single Hull Single Hull Single Hull 105,200 101,000 96,000 81,700 Double Hull Double Hull Double Hull Double Hull Double Hull Double Hull Double Hull 105,300 113,000 113,000 113,000 113,000 113,000 105,200 Double Sides Single Hull Double Sides Single Hull Double Sides 88,900 99,300 91,500 95,200 95,000 Subtotal Aframax 5,983,200 OIL/BULK/ORE (OBO) CARRIERS Victoria Spirit Vancouver Spirit Teekay Fulmar Teekay Forum Teekay Fortuna ** Teekay Fountain Teekay Freighter ** Teekay Fair Teekay Favour Teekay Foam Double Hull Double Hull Double Bottom Double Bottom Double Bottom Double Bottom Double Bottom Double Hull Double Bottom Double Bottom 103,200 103,200 78,500 78,500 78,500 78,500 75,400 75,500 82,500 78,500 Subtotal Oil/Bulk/Ore Carriers 832,300 OTHER SIZE TANKERS Inago ** Musashi Spirit Erati ** Palmerston Barrington Scotland Double Sides 159,800 Single Hull 280,700 159,700 Double Sides Double Bottom 36,700 33,300 Double Hull 40,800 Double Sides Subtotal Other Tankers 711,000 TOTAL DWT 7,526,500 Year Built 1996 1990 1990 1980 1999 1999 1999 1999 1999 1999 1998 1990 1987 1987 1986 1985 1993 1992 1983 1983 1982 1982 1982 1981 1981 1981 1993 1993 1992 1990 1989 1982 Tankers Hull Type DWT ONOMICHI CLASS Hamane Spirit Poul Spirit Torben Spirit Samar Spirit Leyte Spirit Luzon Spirit Mayon Spirit Palmstar Lotus Palmstar Thistle Teekay Spirit Palmstar Poppy Onozo Spirit Palmstar Cherry Palmstar Rose Palmstar Orchid HYUNDAI CLASS Falster Spirit Gotland Spirit Sotra Spirit Shilla Spirit Ulsan Spirit Dampier Spirit (FSO) Namsan Spirit Pacific Spirit Pioneer Spirit Mersey Spirit Clyde Spirit IMABARI CLASS Nassau Spirit Senang Spirit Sebarok Spirit Seraya Spirit Seafalcon * Alliance Spirit Sentosa Spirit Seletar Spirit Semakau Spirit Singapore Spirit Sudong Spirit MITSUBISHI CLASS Kyushu Spirit Sabine Spirit Koyagi Spirit Columbia Spirit Hudson Spirit MITSUI CLASS Shetland Spirit Orkney Spirit Double Hull Double Hull Double Hull Double Hull Double Hull Double Hull Double Hull Single Hull Single Hull Single Hull Single Hull Single Hull Single Hull Single Hull Single Hull Double Hull Double Hull Double Hull Single Hull Single Hull Single Hull Single Hull Single Hull Single Hull Double Sides Double Sides Double Hull Double Hull Double Hull Double Sides Double Sides Double Sides Double Sides Double Sides Double Sides Double Sides Double Sides 105,300 105,300 98,600 98,600 98,600 98,600 98,600 100,200 100,200 100,200 100,200 100,200 100,200 100,200 100,200 95,400 95,400 95,400 106,700 106,700 106,700 106,700 106,700 106,700 94,700 94,700 107,000 95,700 95,700 97,300 97,300 97,300 97,300 95,000 97,300 97,300 97,300 Double Sides Double Sides Single Hull Double Sides Double Sides 95,600 84,800 96,000 84,800 84,800 Double Hull Double Hull 106,200 106,200 1994 1993 *Time Chartered-in (FSO) Floating storage and off-take vessel ** Partially owned vessels (Bornes, Inago, Erati 50%; Teekay Fortuna 67%; Teekay Freighter 52%) ON COURSE 16 Teekay Shipping Annual Report December 31, 1999 STABILITY COST EFFECTIVE OPERATIONS and a strong balance sheet have contributed to the Company’s ability to endure volatile market conditions. Ready access to capital allows Teekay to take advantage of growth opportunities during downturns while maintaining balance sheet integrity. m a i n t a i n i n g a s t r o n g b a l a n c e s h e e t Teekay Shipping Annual Report December 31, 1999 17 ON COURSE F I N A N C I A L R E V I E W MANAGEMENT DISCUSSION 18 Teekay Shipping Annual Repor t December 31, 1999 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Teekay has changed its fiscal year end from March 31 to December 31, effective December 31, 1999, in order to facilitate comparison of its operating results to those of other companies in the transportation industry. GENERAL Teekay is a leading provider of international crude oil and petroleum product transportation services to major oil companies, major oil traders and government agencies worldwide. The Company’s fleet consists of 76 vessels (including five vessels time-chartered-in and three vessels owned by a joint venture), for a total cargo-carrying capacity of approximately 7.5 million tonnes. During the nine months ended December 31, 1999, approximately 61% of the Company’s net voyage revenues were derived from spot voyages. The balance of the Company’s revenue is generated by two other modes of employment: time charters, whereby vessels are chartered to customers for a fixed period; and contracts of affreightment (“COAs”), whereby the Company carries an agreed quantity of cargo for a customer over a specified trade route within a given period of time. In the nine months ended December 31, 1999, approximately 13% of net voyage revenues were generated by time charters and COAs priced on a spot market basis. In the aggregate, approximately 74% of the Company’s net voyage revenues during the nine months ended December 31, 1999 were derived from spot voyages or time charters and COAs priced on a spot market basis, with the remaining 26% being derived from fixed-rate time- charters and COAs. This dependence on the spot market, which is within industry norms, contributes to the volatility of the Company’s revenues, cash flow from operations and net income. Historically, the tanker industry has been cyclical, experiencing volatility in profitability and asset values resulting from changes in the supply of, and demand for, vessel capacity. In addition, tanker markets have historically exhibited seasonal variations in charter rates. Tanker markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere and unpredictable weather patterns that tend to disrupt vessel scheduling. In December 1997, the Company acquired two vessels and related shore support services from an Australian affiliate of Caltex Petroleum. These two tankers, together with one of the Company’s existing Aframax tankers, have been time chartered to the Caltex affiliate in connection with the Company’s provision of Caltex’s oil transportation requirements formerly provided by that affiliate. In addition, the Company has converted one of its existing vessels to a floating storage and off-loading vessel, which is sharing crews with the vessels employed in the Caltex arrangement (together with the other three vessels involved in this arrangement, the “Australian Vessels”). Vessel operating expenses for the Australian Vessels are substantially higher than those for the rest of the Company’s fleet, primarily as a result of higher costs associated with employing an Australian crew. The time-charter rates for the Australian Vessels are correspondingly higher to compensate for these increased costs. During the nine months ended December 31, 1999, the Australian Vessels earned net voyage revenues and an average TCE rate (as defined below) of $27.2 million and $25,218, respectively, and incurred vessel operating expenses of $9.3 million, or $8,485 on a per ship per day basis. In comparison, during the year ended March 31, 1999, the Australian Vessels earned net voyage revenues and an average TCE rate of $38.2 million and $26,329, respectively, and incurred vessel operating expenses of $14.9 million, or $10,173 on a per ship per day basis. The results of the Australian Vessels are included in the Company’s Consolidated Financial Statements included herein. ACQUISITION OF BONA SHIPHOLDING LTD. On June 11, 1999, the Company acquired Bona Shipholding Ltd. (“Bona”) for aggregate consideration (including estimated transaction expenses of $19.0 million) of $450.3 million, consisting of $39.9 million in cash, $294.0 million of assumed debt (net of cash acquired of $91.7 million) and the balance of $97.4 million in shares of the Company’s common stock. Bona was the third largest operator of medium-size tankers, controlling a fleet of vessels consisting of 15 Aframax tankers, eight oil/bulk/ore carriers and, through a joint venture, 50% interests in one additional Aframax tanker and two Suezmax tankers. Bona engaged in the transportation of oil, oil products, and dry bulk commodities, primarily in the Atlantic region. Through this acquisition, the Company has combined Bona’s market strength in the Atlantic region with the Company’s franchise in the Indo-Pacific Basin. For the year ended December 31, 1998, Bona earned net voyage revenues of $148.9 million resulting in income from vessel operations of $29.5 million and net income of $16.6 million. The acquisition of Bona has been accounted for using the purchase method of accounting. Bona’s operating results are reflected in the Company’s financial statements commencing June 11, 1999. As a result of this acquisition, the Company anticipates annual cost savings of approximately $10 million, commencing after an estimated 12-month integration period, through a reduction in combined overhead costs, increased purchasing power, and other operational efficiencies. The Company also believes that the acquisition will create revenue enhancement opportunities as a result of owning a larger fleet with a greater selection of vessels to match customer demands and enable the Company to further extend the breadth of services provided to its customers. Teekay Shipping Annual Repor t December 31, 1999 19 MANAGEMENT DISCUSSION MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONT’D) Historically, the Company has depreciated its vessels for accounting purposes over an economic life of 20 years down to estimated residual values. Bona depreciated its vessels over an economic life of 25 years down to estimated scrap values, the method used by the majority of companies in the shipping industry. Effective April 1, 1999, the Company revised the estimated useful life of its vessels to 25 years and also replaced the estimated residual values with estimated scrap values. Since such changes, the Company’s average depreciation expense per vessel has decreased from historical levels. As a result of the Bona acquisition, the Company expects that its general and administrative expenses, while remaining relatively stable on a per vessel basis during the first few fiscal quarters of combined operations, will begin to decline on a per vessel basis as efficiencies are obtained from the integration of the two companies’ operations. The Company’s interest expense has increased as a result of debt that was assumed as part of the acquisition. All oil/bulk/ore carriers (“O/B/O”) owned by Bona have been operated through an O/B/O pool managed by a subsidiary of Bona. Net voyage revenues from the O/B/O pool are currently included on a 100% basis in the Company’s consolidated financial statements. Where the Company owns less than 50% of a vessel, the minority participants’ share of the O/B/O pool is reflected as a time charter hire expense. The Company anticipates that these O/B/Os will earn lower average TCE rates than the rest of the Teekay fleet as these vessels command lower rates than modern Aframax tankers under typical market conditions, which reflects the lower capital cost of these vessels. RESULTS OF OPERATIONS Bulk shipping industry freight rates are commonly measured at the net voyage revenue level in terms of “time charter equivalent” (or “TCE”) rates, defined as voyage revenues less voyage expenses (excluding commissions), divided by voyage ship-days for the round-trip voyage. Voyage revenues and voyage expenses are a function of the type of charter, either spot charter or time charter, and port, canal and fuel costs depending on the trade route upon which a vessel is sailing, in addition to being a function of the level of shipping freight rates. For this reason, shipowners base economic decisions regarding the deployment of their vessels upon anticipated TCE rates, and industry analysts typically measure bulk shipping freight rates in terms of TCE rates. Therefore, the discussion of revenue below focuses on net voyage revenue and TCE rates. Nine Months Ended December 31, 1999 versus Year Ended March 31, 1999 As a result of the Company’s change in fiscal year end from March 31 to December 31, the current fiscal period’s results are for the nine month period ended December 31, 1999, while the comparative results are for the twelve month period ended March 31, 1999. Where indicated in the following discussions, percentage change figures reflect the annualized results for the nine month period ended December 31, 1999. The annualized results for the nine month period ended December 31, 1999 are not necessarily indicative of those for a full fiscal year. The results for the nine month period ended December 31, 1999 includes the results of Bona commencing June 11, 1999. On an annualized basis, the Company’s average fleet size increased 39.5% in the nine month period ended December 31, 1999 compared to the year ended March 31, 1999. Aframax TCE rates declined during the second half of 1998 and 1999 due to a reduction in tanker demand, oil production cutbacks and a large number of newbuilding deliveries. TCE rates will be dependent upon oil production levels, oil consumption growth, the number of vessels scrapped and charterers’ preference for modern tankers. As a result of the Company’s dependence on the tanker spot market, any fluctuations in Aframax TCE rates will impact the Company’s revenues and earnings. Net voyage revenues were $248.4 million in the nine month period ended December 31, 1999, as compared to $318.4 million in the year ended March 31, 1999, representing a 4.0% increase on an annualized basis from the year ended March 31, 1999. This is mainly the result of an increase in fleet size, offset by a 31.5% decrease in the Company’s average TCE rate, excluding the Australian Vessels, of $13,410 for the nine month period ended December 31, 1999, from $19,576 for the year ended March 31, 1999. As of December 31, 1999, the Company changed its process of estimating net voyage revenues from a load port-to-load port basis to a discharge port-to-discharge port basis, which is consistent with most other shipping companies. This change in voyage estimate resulted in a one-time increase in net voyage revenues of $5.7 million for the nine month period ended December 31, 1999. Vessel operating expenses, which include crewing, repairs and maintenance, insurance, stores, lubes, and communication expenses, increased to $98.8 million in the nine month period ended December 31, 1999 from $84.4 million in the year ended March 31, 1999, representing a 56.1% increase on an annualized basis. This increase was mainly the result of the addition of the Bona vessels, which currently have higher operating expenses than the remainder of Teekay’s fleet. MANAGEMENT DISCUSSION 20 Teekay Shipping Annual Repor t December 31, 1999 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONT’D) Time charter hire expense was $30.7 million in the nine month period ended December 31, 1999, up from $29.7 million in the year ended March 31, 1999, primarily due to the Bona acquisition. The minority pool participants’ net voyage revenues in the O/B/O pool managed by a Bona subsidiary is reflected as time charter hire expense. The average number of vessels time-chartered-in by the Company was four in the nine month period ended December 31, 1999, the same as in the year ended March 31, 1999. Depreciation and amortization expense decreased to $68.3 million in the nine month period ended December 31, 1999, from $93.7 million in the year ended March 31, 1999, representing a 2.8% decrease on an annualized basis. This reflects the change in estimated useful life of the vessels from 20 to 25 years, partially offset by the increase in fleet size arising from the acquisition of Bona. Depreciation and amortization expense included amortization of drydocking costs of $6.3 million and $8.6 million in the nine month period ended December 31, 1999 and in the year ended March 31, 1999, respectively. Had Teekay retained its previous depreciation policy and applied this policy to the Bona fleet, depreciation expense would have been $22.5 million higher in the current period. General and administrative expenses were $27.0 million in the nine month period ended December 31, 1999, as compared to $25.0 million in the year ended March 31, 1999, representing a 44.1% increase on an annualized basis primarily as a result of the acquisition of Bona. Interest expense increased to $45.0 million in the nine month period ended December 31, 1999 from $44.8 million in the year ended March 31, 1999, representing a 33.9% increase on an annualized basis. This increase reflects the $386 million in additional debt assumed as part of the Bona acquisition and an increase in interest rates. Interest income decreased to $5.8 million in the nine month period ended December 31, 1999 from $6.4 million in the year ended March 31, 1999. On an annualized basis, interest income increased by 20.8% as a result of increased interest rates and higher cash and marketable securities balances. Other loss of $4.0 million in the nine month period ended December 31, 1999 consisted primarily of future income taxes related to the Australian Vessels and one-time employee and severance-related costs, partially offset by equity income from a 50%-owned joint venture. Other income of $5.5 million in the year ended March 31, 1999 consisted primarily of gains on the sale of vessels. As a result of the foregoing factors, net loss was $19.6 million in the nine month period ended December 31, 1999, compared to net income of $45.4 million in the year ended March 31, 1999. The results for the year ended March 31, 1999 included an extraordinary loss of $7.3 million on the redemption of the Company’s 9 5/8% First Preferred Ship Mortgage Notes (the “9 5/8% Notes”), and gains on asset sales of $7.1 million. There were no extraordinary items and no asset sales in the nine month period ended December 31, 1999. Year Ended March 31, 1999 (“Fiscal 1999”) versus Year Ended March 31, 1998 (“Fiscal 1998”) Operating results for these two fiscal years generally reflect a cyclical peak in average TCE rates in fiscal 1998 followed by a decline in TCE rates experienced by the Company’s fleet during the second half of fiscal 1999 and growth in the size of the Company’s fleet. In addition, the fiscal 1999 results include a full year of results from the four Australian Vessels whereas the fiscal 1998 results only include approximately three months of results from three of the Australian Vessels, which have higher operating expenses and earn correspondingly higher TCE rates. The Company sold two of its older Aframax tankers during the fiscal year ended March 31, 1999 and added four newer Aframax tankers (including three time-chartered-in vessels) to its fleet during the same period. As a result, the Company’s average fleet size increased by two vessels, or 8.9%, in fiscal 1999 compared to fiscal 1998, following an earlier increase of two vessels, or 4.9% in fiscal 1998. Net voyage revenues increased 4.3% to $318.4 million in fiscal 1999 from $305.3 million in fiscal 1998, reflecting the increase in the Company’s fleet size and higher TCE rates earned on the Australian Vessels, partially offset by lower spot TCE rates. The Company’s average overall TCE rate in fiscal 1999, excluding the Australian Vessels, was down 8.4% to $19,576 from $21,373 in fiscal 1998. Vessel operating expenses increased 19.7% to $84.4 million in fiscal 1999 from $70.5 million in fiscal 1998, mainly as a result of higher crewing costs associated with the Australian Vessels and an adjustment to crew wage rates and salaries effective April 1, 1998. Time-charter hire expense was $29.7 million in fiscal 1999, up from $10.6 million in fiscal 1998, as the average number of vessels time-chartered-in by the Company increased to four in fiscal 1999 from two in fiscal 1998. Depreciation and amortization expense decreased by 1.3% to $93.7 million in fiscal 1999 from $94.9 million in fiscal 1998, primarily as a result of lower amortization of drydocking costs during the current year due to fewer scheduled drydockings compared to the previous fiscal year. Depreciation and amortization expense included amortization of drydocking costs of $8.6 million and $11.7 million in fiscal years 1999 and 1998, respectively. Teekay Shipping Annual Repor t December 31, 1999 21 MANAGEMENT DISCUSSION MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONT’D) General and administrative expenses rose 16.1% to $25.0 million in fiscal 1999 from $21.5 million in fiscal 1998, primarily as a result of the hiring of additional personnel in connection with the expansion of the Company’s operations, particularly in Australia. The fiscal 1999 results include the Australian Vessels for the full year in comparison to three months in fiscal 1998 for three of the Australian Vessels. Interest expense decreased by 20.4% to $44.8 million in fiscal 1999 from $56.3 million in fiscal 1998, reflecting the reduction in the Company’s total debt and lower average interest rates on debt borrowings. In June 1998, the Company completed a public offering of its Common Stock resulting in net proceeds to the Company of approximately $69.0 million. These net proceeds, together with other funds, were applied in August 1998 to redeem the Company’s outstanding 9 5/8% Notes. Other income of $5.5 million in fiscal 1999 consisted primarily of $7.1 million in gains on the sale of two vessels, offset partially by $1.9 million in income taxes related to the Australian Vessels. Other income of $11.2 million in fiscal 1998 consisted primarily of gains on the sale of vessels. As a result of the foregoing factors, net income was $45.4 million in fiscal 1999, compared to net income of $70.5 million in fiscal 1998. Net income for fiscal 1999 included an extraordinary loss of $7.3 million arising from the redemption of the 9 5/8% Notes and gains on asset sales of $7.1 million. Net income for fiscal 1998 included $14.4 million in gains on asset sales. The following table illustrates the relationship between fleet size (measured in ship-days), TCE performance, and operating results per calendar ship-day. To facilitate comparison to the prior years’ results, unless otherwise indicated, the figures in the table below exclude the results from the Company’s Australian Vessels. NINE MONTHS ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1999 MARCH 31, 1999 MARCH 31, 1998 International Fleet: Average number of ships Total calendar ship-days Revenue generating ship-days (A) Net voyage revenue before commissions (1) (B) (000s) TCE (B/A) Operating results per calendar ship-day: Net voyage revenue Vessel operating expense General and administrative expense Drydocking expense Operating cash flow per calendar ship-day Australian Vessels: 61 16,797 15,807 $ 211,971 $ 13,410 $ 12,190 5,719 1,510 392 $ 4,569 43 15,612 14,647 $ 286,735 $ 19,576 $ 17,950 4,969 1,465 613 $ 10,903 42 15,341 14,229 $ 304,115 $ 21,373 $ 19,358 4,554 1,375 765 $ 12,664 Operating cash flow per calendar ship-day $ 14,643 $ 14,509 $ 13,482 Total Fleet: Operating cash flow per calendar ship-day $ 5,177 $ 11,171 $ 12,682 (1) Nine months ended December 31, 1999 figure excludes the $5.7 million adjustment arising from the change in voyage estimate from a load port-to-load port basis to a discharge port-to-discharge port basis. LIQUIDITY AND CAPITAL RESOURCES The Company’s total liquidity, including cash, restricted cash, marketable securities and undrawn long-term lines of credit, was $237.4 million as at December 31, 1999, up from $143.3 million as at March 31, 1999, and $186.3 million as at March 31, 1998. The increase in liquidity during the nine month period ended December 31, 1999 was primarily the result of drawing an additional $100 million under one of the Company’s revolving credit facilities. Net cash flow from operating activities decreased to $51.5 million in the nine month period ended December 31, 1999, compared to $137.7 million in the year ended March 31, 1999, and $161.1 million in the year ended March 31, 1998. This primarily reflects the change in TCE rates during these periods. Scheduled debt repayments were $32.3 million during the nine month period ended December 31, 1999, compared to $50.6 million in the year ended March 31, 1999 and $33.9 million in the year ended March 31, 1998. MANAGEMENT DISCUSSION 22 Teekay Shipping Annual Repor t December 31, 1999 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONT’D) Dividends declared during the nine month period ended December 31, 1999 were $23.17 million, or $0.645 per share, of which $23.15 million was paid in cash and the remainder was paid in the form of shares of Common Stock issued under the Company’s dividend reinvestment plan. During the nine month period ended December 31, 1999, the Company incurred capital expenditures for vessels and equipment of $23.3 million, consisting mainly of payments made towards the two newbuilding double-hull Aframax tankers delivered in July and September of 1999. Cash expenditures for drydocking were $6.6 million in the nine month period ended December 31, 1999 compared to $11.7 million in the year ended March 31, 1999 and $18.4 million in the year ended March 31, 1998. There were fewer scheduled drydockings than usual during the nine month period ended December 31, 1999. As part of its growth strategy, the Company will continue to consider strategic opportunities, including the acquisition of additional vessels and expansion into new markets. The Company may choose to pursue such opportunities through internal growth, joint ventures, or business acquisitions. The Company intends to finance any future acquisitions through various sources of capital, including internally generated cash flow, existing credit lines, additional debt borrowings, and the issuance of additional shares of capital stock. MARKET RATE RISKS The Company is exposed to market risk from foreign currency and changes in interest rate fluctuations. The Company uses interest rate swaps and forward foreign currency contracts to manage these risks, but does not use financial instruments for trading or speculative purposes. INTEREST RATE RISK The Company invests its cash and marketable securities in financial instruments with maturities of less than three months within the parameters of its investment policy and guidelines. The Company uses interest rate swaps to manage the impact of interest rate changes on earnings and cash flows. The differential to be paid or received under these swap agreements is accrued as interest rates change and is recognized as an adjustment to interest expense. Premiums and receipts, if any, are recognized as adjustments to interest expense over the lives of the individual contracts. FOREIGN EXCHANGE RATE RISK The international tanker industry’s functional currency is the U.S. dollar. Virtually all of the Company’s revenues and most of its operating costs are in U.S. dollars. The Company incurs certain operating expenses, drydocking, and overhead costs in foreign currencies, the most significant of which are Japanese yen, Singapore dollars, Canadian dollars, Australian dollars and Norwegian kroner. During the nine months ended December 31, 1999, approximately 20.4% of vessel and voyage costs, overhead and drydock expenditures were denominated in these currencies. However, the Company has the ability to shift its purchase of goods and services from one country to another and, thus, from one currency to another, on relatively short notice. The Company enters into forward contracts as a hedge against changes in certain foreign exchange rates. Market value gains and losses are deferred and recognized during the period in which the hedged transaction is recorded in the accounts. (IN USD 000’S) December 31, 1999 FX Forward Contracts Interest Rate Swap Agreements Debt March 31, 1999 FX Forward Contracts Debt CONTRACT AMOUNT CARRYING AMOUNT ASSET LIABILITY FAIR VALUE $ 4,448 200,000 1,085,167 $ 2,905 641,719 $ $ – – – – – $ – – 1,085,167 $ (20) 4,488 1,060,417 $ – 641,719 $ (22) 637,219 YEAR 2000 COMPLIANCE The Company relies on computer systems, software, databases, third party electronic data interchange interfaces and embedded processors to operate its business. The Company successfully implemented a program to systematically address the Year 2000 problem. The Company was Year 2000 compliant prior to the rollover to the Year 2000. The Company will continue to monitor electronic date recognition issues. Teekay Shipping Annual Repor t December 31, 1999 23 MANAGEMENT DISCUSSION MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONT’D) FORWARD-LOOKING STATEMENTS The Company’s Annual Report on Form 20-F for the nine months ended December 31, 1999 and this Annual Report to Shareholders for 1999 contain certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) concerning future events and the Company’s operations, performance and financial condition, including, in particular, statements regarding: Aframax TCE rates in the near-term; tanker supply and demand; supply and demand for oil; the Company’s market share; future capital expenditures; the Company’s growth strategy and measures to implement such strategy; the Company’s competitive strengths; future success of the Company; cost savings and other benefits that may be realized in connection with the Bona acquisition; and Year 2000 compliance. Words such as “expects,” “intends,” “plans,” “believes,” “anticipates,” “estimates” and variations of such words and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks and are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the Company. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to: changes in production of or demand for oil and petroleum products, either generally or in particular regions; the cyclical nature of the tanker industry and its dependence on oil markets; the supply of tankers available to meet the demand for transportation of petroleum products; charterers’ preference for modern tankers; greater than anticipated levels of tanker newbuilding orders or less than anticipated rates of tanker scrapping; changes in trading patterns significantly impacting overall tanker tonnage requirements; changes in typical seasonal variations in tanker charter rates; the Company’s dependence on spot oil voyages; competitive factors in the markets in which the Company operates; environmental and other regulation; the Company’s potential inability to achieve and manage growth; risks associated with operations outside the United States; the potential inability of the Company to generate internal cash flow and obtain additional debt or equity financing to fund capital expenditures; the Company’s ability to successfully integrate Bona into the Company’s operations; and other factors detailed from time to time in the Company’s periodic reports filed with the U.S. Securities and Exchange Commission. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with respect thereto or any change in events, conditions or circumstances on which any such statement is based. AUDITOR’S REPORT 24 Teekay Shipping Annual Repor t December 31, 1999 AUDITORS’ REPORT To the Shareholders of TEEKAY SHIPPING CORPORATION We have audited the accompanying consolidated balance sheets of Teekay Shipping Corporation and subsidiaries as of December 31, 1999 and March 31, 1999, and the related consolidated statements of income and retained earnings and cash flows for the nine month period ended December 31, 1999 and for the years ended March 31, 1999 and 1998. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Teekay Shipping Corporation and subsidiaries as at December 31, 1999 and March 31, 1999, and the consolidated results of their operations and their cash flows for the nine month period ended December 31, 1999 and for the years ended March 31, 1999 and 1998, in conformity with accounting principles generally accepted in the United States. Nassau, Bahamas, February 11, 2000 Chartered Accountants Teekay Shipping Annual Repor t December 31, 1999 25 CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (in thousands of U.S. dollars, except per share amounts) Net Voyage Revenues Voyage revenues Voyage expenses Net voyage revenues Operating Expenses Vessel operating expenses Time charter hire expense Depreciation and amortization General and administrative NINE MONTHS ENDED DECEMBER 31, 1999 YEAR ENDED MARCH 31, 1999 YEAR ENDED MARCH 31, 1998 $ 377,882 $ 411,922 $ 406,036 129,532 93,511 100,776 248,350 318,411 305,260 98,780 30,681 68,299 27,018 84,397 29,666 93,712 25,002 70,510 10,627 94,941 21,542 224,778 232,777 197,620 Income From Vessel Operations 23,572 85,634 107,640 Other Items Interest expense Interest income Other income (loss) (note 11) Net income (loss) before extraordinary loss Extraordinary loss on bond redemption (note 6) Net income (loss) Retained earnings, beginning of the period Dividends declared (44,996) (44,797) (56,269) 5,842 (4,013) 6,369 5,506 7,897 11,236 (43,167) (32,922) (37,136) (19,595) – (19,595) 446,897 427,302 (23,172) 52,712 (7,306) 45,406 428,102 473,508 (26,611) 70,504 – 70,504 382,178 452,682 (24,580) Retained earnings, end of the period $ 404,130 $ 446,897 $ 428,102 Basic Earnings per Common Share (note 9) • Net income (loss) before extraordinary loss • Net income (loss) Diluted Earnings per Common Share (note 9) • Net income (loss) before extraordinary loss • Net income (loss) $ $ $ $ (0.54) (0.54) (0.54) (0.54) $ $ $ $ 1.70 1.46 1.70 1.46 $ $ $ $ 2.46 2.46 2.44 2.44 The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED BALANCE SHEETS 26 Teekay Shipping Annual Repor t December 31, 1999 CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars) ASSETS Current Cash and cash equivalents Marketable securities (note 4) Accounts receivable Prepaid expenses and other assets Total current assets Marketable securities (note 4) Vessels and equipment (notes 1 and 6) At cost, less accumulated depreciation of $624,727 (March 31, 1999 – $557,946) Advances on newbuilding contracts Total vessels and equipment Investment in joint venture Other assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current Accounts payable Accrued liabilities (note 5) Current portion of long-term debt (note 6) Total current liabilities Long-term debt (note 6) Other long-term liabilities Total liabilities Minority interest Stockholders’ equity Capital stock (note 9) Retained earnings Total stockholders’ equity AS AT DECEMBER 31, 1999 AS AT MARCH 31, 1999 $ 220,327 $ 118,435 – 30,753 29,579 8,771 22,995 16,195 280,659 166,396 6,054 5,050 1,666,755 1,218,916 – 55,623 1,666,755 1,274,539 19,402 9,814 – 6,235 $1,982,684 $1,452,220 $ 20,431 $ 11,926 39,515 66,557 126,503 1,018,610 3,400 19,285 39,058 70,269 602,661 1,900 1,148,513 674,830 2,104 – 427,937 404,130 330,493 446,897 832,067 777,390 $1,982,684 $1,452,220 Commitments and contingencies (notes 7 and 10) The accompanying notes are an integral part of the consolidated financial statements. Teekay Shipping Annual Repor t December 31, 1999 27 CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars) Cash and cash equivalents provided by (used for) OPERATING ACTIVITIES Net income (loss) Add (deduct) charges to operations not requiring a payment of cash and cash equivalents: Depreciation and amortization Gain on disposition of assets Loss on bond redemption Equity income Future income taxes Other NINE MONTHS ENDED DECEMBER 31, 1999 YEAR ENDED MARCH 31, 1999 YEAR ENDED MARCH 31, 1998 $ (19,595) $ 45,406 $ 70,504 68,299 – – (721) 1,500 1,134 93,712 (7,117) 7,306 – 1,900 1,218 94,941 (14,392) 2,175 (45) – 2,735 Change in non-cash working capital items related to operating activities (note 12) 896 (4,717) 5,201 Net cash flow from operating activities 51,513 137,708 161,119 FINANCING ACTIVITIES Proceeds from long-term debt Scheduled repayments of long-term debt Prepayments of long-term debt Net proceeds from issuance of Common Stock Cash dividends paid Capitalized loan costs 100,000 (32,252) (10,000) – (23,150) – 230,000 (50,577) 208,600 (33,876) (268,034) (150,655) 68,751 (26,222) (690) 5,126 (15,990) (994) Net cash flow from financing activities 34,598 (46,772) 12,211 INVESTING ACTIVITIES Expenditures for vessels and equipment Expenditures for drydocking Proceeds from disposition of assets Net cash acquired through purchase of Bona Shipholding Ltd. (note 3) Acquisition costs related to purchase of Bona Shipholding Ltd. (note 3) Net cash flow from investment Proceeds on sale of available-for-sale securities Purchases of available-for-sale securities Other (23,313) (6,598) – 51,774 (13,806) – 13,724 (6,000) – (85,445) (11,749) 23,435 (197,199) (18,376) 33,863 – – – 13,305 – – – – 6,380 14,854 (42,154) (268) Net cash flow from investing activities 15,781 (60,454) (202,900) Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of the period 101,892 118,435 30,482 87,953 (29,570) 117,523 Cash and cash equivalents, end of the period $220,327 $118,435 $ 87,953 The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28 Teekay Shipping Annual Repor t December 31, 1999 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. They include the accounts of Teekay Shipping Corporation (“Teekay”), which is incorporated under the laws of the Republic of the Marshall Islands, and its wholly owned or controlled subsidiaries (the “Company”). Significant intercompany items and transactions have been eliminated upon consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain of the comparative figures have been reclassified to conform with the presentation adopted in the current period. Reporting currency The consolidated financial statements are stated in U.S. dollars because the Company operates in international shipping markets which utilize the U.S. dollar as the functional currency. Change in fiscal year end The Company changed its fiscal year end from March 31 to December 31, effective December 31, 1999. The following is a summary of selected financial information for the comparative twelve and nine month periods ended December 31, 1999 and 1998: RESULTS OF OPERATIONS Net voyage revenues Income from vessel operations Net income (loss) before extraordinary loss Net income (loss) Net income (loss) before extraordinary loss per common share – basic and diluted Net income (loss) per common share – basic and diluted CASH FLOWS Net cash flow from operating activities Net cash flow from financing activities Net cash flow from investing activities TWELVE MONTHS TWELVE MONTHS NINE MONTHS ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1998 (UNAUDITED) (UNAUDITED) (UNAUDITED) $ 318,348 34,189 (17,723) (17,723) (0.50) (0.50) 71,633 76,948 5,613 $ 327,016 103,660 66,451 59,145 2.19 1.95 151,779 (74,407) (127,372) $ 248,413 75,017 50,840 43,534 1.65 1.41 117,588 (89,122) (50,286) Operating revenues and expenses Voyage revenues and expenses are recognized on the percentage of completion method of accounting. The Company has refined its estimation process from a load-to-load basis to a discharge-to- discharge basis under the percentage of completion method to more precisely reflect net voyage revenues. This refinement in accounting estimate resulted in an increase in net voyage revenues of $5.7 million, or 16 cents per share, for the nine month period ended December 31, 1999. Estimated losses on voyages are provided for in full at the time such losses become evident. The consolidated balance sheets reflect the deferred portion of revenues and expenses applicable to subsequent periods. Voyage expenses comprise all expenses relating to particular voyages, including bunker fuel expenses, port fees, canal tolls, and brokerage commissions. Vessel operating expenses comprise all expenses relating to the operation of vessels, including crewing, repairs and maintenance, insurance, stores, lubes, communications, and miscellaneous expenses. Teekay Shipping Annual Repor t December 31, 1999 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D) (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) Marketable securities The Company’s investments in marketable securities are classified as available-for-sale securities and are carried at fair value. Net unrealized gains or losses on available-for-sale securities, if material, are reported as a separate component of stockholders’ equity. Vessels and equipment All pre-delivery costs incurred during the construction of newbuildings, including interest costs, and supervision and technical costs are capitalized. The acquisition cost and all costs incurred to restore used vessel purchases to the standard required to properly service the Company’s customers are capitalized. Depreciation is calculated on a straight-line basis over a vessel’s useful life from the date a vessel is initially placed in service. Effective April 1, 1999, the Company revised the estimated useful life of its vessels from 20 years to 25 years, consistent with most other public tanker companies. This change in accounting estimate resulted in a reduction of depreciation expense of $22.5 million, or 62 cents per share, for the nine month period ended December 31, 1999. Interest costs capitalized to vessels and equipment for the nine month period ended December 31, 1999 and the years ended March 31, 1999 and 1998 aggregated $1,710,000, $3,018,000, and $283,000, respectively. Expenditures incurred during drydocking are capitalized and amortized on a straight-line basis over the period until the next anticipated drydocking. When significant drydocking expenditures recur prior to the expiry of this period, the remaining balance of the original drydocking is expensed in the month of the subsequent drydocking. Drydocking expenses amortized for the nine month period ended December 31, 1999 and the years ended March 31, 1999 and 1998 aggregated $6,275,000, $8,583,000, and $11,737,000, respectively. Investment in joint ventures The Company has a 50% participating interest in the joint venture (Soponata-Teekay Limited). The joint venture is accounted for using the equity method whereby the investment is carried at the Company’s original cost plus its proportionate share of undistributed earnings. Investment in the Panamax OBO Pool All oil/bulk/ore carriers (“OBO”) owned by the Company are operated through a Panamax OBO Pool. The participants in the Pool are the companies contributing vessel capacity to the Pool. The voyage revenues and expenses of these vessels have been included on a 100% basis in the consolidated financial statements. The minority pool participants’ share of the result has been deducted as time charter hire expense. Other assets Loan costs, including fees, commissions and legal expenses, are capitalized and amortized on a straight line basis over the term of the relevant loan. Amortization of loan costs is included in interest expense. Interest rate swap agreements The differential to be paid or received, pursuant to interest rate swap agreements, is accrued as interest rates change and is recognized as an adjustment to interest expense. Premiums and receipts, if any, are recognized as adjustments to interest expense over the lives of the individual contracts. Forward contracts The Company enters into forward contracts as a hedge against changes in certain foreign exchange rates. Market value gains and losses are deferred and recognized during the period in which the hedged transaction is recorded in the accounts. Cash and cash equivalents The Company classifies all highly liquid investments with a maturity date of three months or less when purchased as cash and cash equivalents. Cash interest paid during the nine month period ended December 31, 1999 and the years ended March 31, 1999 and 1998 totaled $63,086,000, $48,527,000, and $55,141,000, respectively. Income taxes The legal jurisdictions of the countries in which Teekay and the majority of its subsidiaries are incorporated do not impose income taxes upon shipping-related activities. The Company’s Australian ship-owning subsidiaries are subject to income taxes (see Note 11). The Company accounts for such taxes using the liability method pursuant to Statement of Financial Accounting Standards No. 109, “ Accounting for Income Taxes”. Accounting for Stock-Based Compensation Under Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation”, disclosures of stock-based compensation arrangements with employees are required and companies are encouraged (but not required) to record compensation costs associated with employee stock option awards, based on estimated fair values at the grant dates. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 (“APB 25”) “Accounting for Stock Issued to Employees” and has disclosed the required pro forma effect on net income and earning per share as if the fair value method of accounting as prescribed in SFAS 123 had been applied (see Note 9 – Capital Stock). Comprehensive income The Company follows Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”, which establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. For the nine month period ended December 31, 1999, and the years ended March 31, 1999 and 1998, the Company did not have any components of comprehensive income. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 Teekay Shipping Annual Repor t December 31, 1999 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D) (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) Recent accounting pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, which establishes new standards for recording derivatives in interim and annual financial statements. This statement requires recording all derivative instruments as assets or liabilities, measured at fair value. Statement No. 133, as amended by FASB Statement No. 137, is effective for fiscal years beginning after June 15, 2000. Management has not determined the impact, if any, that the adoption of the new statement will have on the consolidated results of operations or financial position of the Company. 2. BUSINESS OPERATIONS The Company is engaged in the ocean transportation of petroleum cargoes worldwide through the ownership and operation of a fleet of tankers. All of the Company’s revenues are earned in international markets. One customer, an international oil company, accounted for 13% ($48,140,000) of the Company’s consolidated voyage revenues during the nine month period ended December 31, 1999. No other customer accounted for more than 10% of the Company’s consolidated voyage revenues. During the year ended March 31, 1999, three customers, all international oil companies, individually accounted for 12% ($51,411,000), 12% ($50,727,000) and 10% ($42,797,000), respectively, of the Company’s consolidated voyage revenues. During the year ended March 31, 1998, a single customer, also an international oil company, accounted for 14% ($56,357,000) of the Company’s consolidated voyage revenues. 3. ACQUISITION OF BONA SHIPHOLDING LTD. On June 11, 1999, Teekay purchased Bona Shipholding Ltd. (“Bona”) for aggregate consideration (including estimated transaction expenses of $19.0 million) of $450.3 million, consisting of $39.9 million in cash, $294.0 million of assumed debt (net of cash acquired of $91.7 million) and the balance of $97.4 million in shares of Teekay’s Common Stock. Bona’s operating results are reflected in these financial statements commencing the effective date of the acquisition. The following table shows comparative summarized condensed pro forma financial information for the nine month period ended December 31, 1999, and for the year ended March 31, 1999 and gives effect to the acquisition as if it had taken place April 1, 1998: Net voyage revenues Income from vessel operations Net income (loss) before extraordinary loss Net income (loss) Net income (loss) before extraordinary loss per common share – basic and diluted Net income (loss) per common share – basic and diluted PRO FORMA NINE MONTHS ENDED DECEMBER 31, 1999 YEAR ENDED MARCH 31, 1999 (UNAUDITED) (UNAUDITED) $ 272,469 26,127 (22,482) (22,482) $ 463,696 132,122 86,505 79,199 (0.59) (0.59) 2.31 2.11 Teekay Shipping Annual Repor t December 31, 1999 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) 4. INVESTMENTS IN MARKETABLE SECURITIES DECEMBER 31, 1999 Available-for-sale securities MARCH 31, 1999 Available-for-sale securities GROSS GROSS MARKET AND UNREALIZED UNREALIZED COST GAINS LOSSES CARRYING VALUE APPROXIMATE $ 6,051 $ 13,865 6 – $ (3) $ 6,054 (44) 13,821 The cost and approximate market value of available-for-sale securities by contractual maturity, as at December 31, 1999 and March 31, 1999, are shown as follows: DECEMBER 31, 1999 Less than one year Due after one year through five years MARCH 31, 1999 Less than one year Due after one year through five years 5. ACCRUED LIABILITIES Voyage and vessel Interest Payroll and benefits 6. LONG-TERM DEBT Revolving Credit Facilities First Preferred Ship Mortgage Notes (8.32%) U.S. dollar debt due through 2008 Term Loans U.S. dollar debt due through 2009 Less current portion APPROXIMATE MARKET AND CARRYING VALUE COST $ – 6,051 $ – 6,054 $ 6,051 $ 6,054 $ 8,771 5,094 $ 8,771 5,050 $ 13,865 $ 13,821 DECEMBER 31, MARCH 31, 1999 1999 $ 12,469 12,619 14,427 $ 6,868 7,552 4,865 $ 39,515 $ 19,285 DECEMBER 31, MARCH 31, 1999 1999 $ 634,000 $ 169,000 225,000 226,167 1,085,167 66,557 225,000 247,719 641,719 39,058 $ 1,018,610 $ 602,661 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 32 Teekay Shipping Annual Repor t December 31, 1999 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D) (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) The Company has two long-term Revolving Credit Facilities (the “Revolvers”) available, which, as at December 31, 1999, provided for borrowings of up to $645.0 million. Interest payments are based on LIBOR (December 31, 1999: 6.0%; March 31, 1999: 5.0%) plus a margin depending on the financial leverage of the Company; at December 31, 1999, the margins ranged between 0.6% and 0.9% (March 31,1999: 0.5%). The amount available under the Revolvers reduces semi-annually with final balloon reductions in 2006 and 2008. The Revolvers are collateralized by first priority mortgages granted on forty of the Company’s Aframax tankers and oil/bulk/ore carriers, together with certain other related collateral, and a guarantee from the Company for all amounts outstanding under the Revolvers. The 8.32% First Preferred Ship Mortgage Notes due February 1, 2008 (the “8.32% Notes”) are collateralized by first preferred mortgages on seven of the Company’s Aframax tankers, together with certain other related collateral, and are guaranteed by seven subsidiaries of Teekay that own the mortgaged vessels (the “8.32% Notes Guarantor Subsidiaries”) to a maximum of 95% of the fair value of their net assets. As at December 31, 1999, the fair value of these net assets approximated $182.0 million. The 8.32% Notes are also subject to a sinking fund, which will retire $45.0 million principal amount of the 8.32% Notes on each February 1, commencing 2004. Upon the 8.32% Notes achieving Investment Grade Status and subject to certain other conditions, the guarantees of the 8.32% Notes Guarantor Subsidiaries will terminate, all of the collateral securing the obligations of the Company and the 8.32% Notes Guarantor Subsidiaries under the Indenture and the Security Documents will be released (whereupon the Notes will become general unsecured obligations of the Company) and certain covenants under the Indenture will no longer be applicable to the Company. In August 1998, the Company redeemed the remaining $98.7 million of the 9 5/8% First Preferred Ship Mortgage Notes (the “9 5/8% Notes”) which resulted in an extraordinary loss of $7.3 million, or 24 cents per share, for the year ended March 31, 1999. The Company has several term loans outstanding, which, as at December 31,1999, totalled $226.2 million. Interest payments are based on LIBOR plus a margin. At December 31,1999, the margins ranged between 0.65% and 1.25%. The term loans reduce in quarterly or semi-annual payments with varying maturities through 2009. All term loans of the Company are collateralized by first preferred mortgages on the vessels to which the loans relate, together with certain other collateral, and guarantees from Teekay. As at December 31, 1999, the Company was committed to a series of interest rate swap agreements whereby $200.0 million of the Company’s floating rate debt was swapped with fixed rate obligations having an average remaining term of 3.8 years, expiring between December 2001 and February 2005. These arrangements effectively change the Company’s interest rate exposure on $200.0 million of debt from a floating LIBOR rate to an average fixed rate of 6.28%. The Company is exposed to credit loss in the event of non-performance by the counter parties to the interest rate swap agreements; however, the Company does not anticipate non-performance by any of the counter parties. Among other matters, the long-term debt agreements generally provide for such items as maintenance of certain vessel market value to loan ratios and minimum consolidated financial covenants, prepayment privileges (in some cases with penalties), and restrictions against the incurrence of additional debt and new investments by the individual subsidiaries without prior lender consent. The amount of Restricted Payments, as defined, that the Company can make, including dividends and purchases of its own capital stock, is limited as of December 31, 1999, to $188.0 million. Certain of the loan agreements require a minimum level of free cash be maintained. As at December 31, 1999, this amount was $26.0 million. The aggregate annual long-term debt principal repayments required to be made for the five fiscal years subsequent to December 31, 1999 are $66,557,000 (fiscal 2000), $92,196,000 (fiscal 2001), $90,043,000 (fiscal 2002), $132,157,000 (fiscal 2003), and $114,078,000 (fiscal 2004). 7. LEASES Charters-out Time charters to third parties of the Company’s vessels are accounted for as operating leases. The minimum future revenues to be received on time charters currently in place are $82,204,000 (fiscal 2000), $72,158,000 (fiscal 2001), $57,830,000 (fiscal 2002), $39,035,000 (fiscal 2003), $39,140,000 (fiscal 2004), and $132,063,000 thereafter. The minimum future revenues should not be construed to reflect total charter hire revenues for any of the years. Charters-in Minimum commitments under vessel operating leases are $22,795,000 (fiscal 2000) and $2,981,000 (fiscal 2001). Teekay Shipping Annual Repor t December 31, 1999 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D) (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) 8. FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts of all financial instruments approximate fair market value except for the following: Long-term debt – The fair values of the Company’s fixed rate long-term debt are based on either quoted market prices or estimated using discounted cash flow analyses, based on rates currently available for debt with similar terms and remaining maturities. Interest rate swap agreements and foreign exchange contracts – The fair value of interest rate swaps and foreign exchange contracts, used for hedging purposes, is the estimated amount that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates, the current credit worthiness of the swap counter parties and foreign exchange rates. The estimated fair value of the Company’s financial instruments is as follows: DECEMBER 31, 1999 MARCH 31, 1999 CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE Cash, cash equivalents and marketable securities Long-term debt Interest rate swap agreements (note 6) Foreign currency contracts (note 10) $ 226,381 1,085,167 – – $ 226,381 1,060,417 4,488 (20) $ 132,256 641,719 – – $ 132,256 637,219 – (22) The Company transacts interest rate swap and foreign currency contracts with investment grade rated financial institutions and requires no collateral from these institutions. 9. CAPITAL STOCK AUTHORIZED 25,000,000 Preferred Stock with a par value of $1 per share 725,000,000 Common Stock with a par value of $0.001 per share ISSUED AND OUTSTANDING Balance March 31, 1997 Reinvested Dividends Exercise of Stock Options Balance March 31, 1998 June 15, 1998 Share Offering 2,800,000 shares at $24.7275 per share of Common Stock (net of share issue costs) Reinvested Dividends Exercise of Stock Options Balance March 31, 1999 June 11, 1999 Common Stock issued on acquisition of Bona Reinvested Dividends Balance December 31, 1999 COMMON STOCK THOUSANDS OF SHARES $ 247,637 8,590 5,126 261,353 68,700 389 51 330,493 97,422 22 $ 427,937 28,328 273 232 28,833 2,800 13 2 31,648 6,415 1 38,064 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34 Teekay Shipping Annual Repor t December 31, 1999 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D) (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) In June 1998, the Company sold 2,800,000 shares in a public offering. The Company used the net proceeds from the offering of approximately $69.0 million, together with other funds, to redeem the outstanding 9 5/8% Notes. In September 1998, the Company’s shareholders approved an amendment to the Company’s 1995 Stock Option Plan (the “Plan”) to increase the number of shares of Common Stock reserved and available for future grants of options under the Plan by an additional 1,800,000 shares. As of December 31, 1999, the Company had reserved 3,642,000 shares of Common Stock for issuance upon exercise of options granted pursuant to the Plan. During the nine month period ended December 31, 1999 and the years ended March 31, 1999 and 1998, the Company granted options under the Plan to acquire up to 1,463,500, 573,000 and 359,750 shares of Common Stock (the “Grants”), respectively, to certain eligible officers, employees (including senior sea staff), and directors of the Company. The options have a 10-year term and vest equally over four years from the date of grant. A summary of the Company’s stock option activity, and related information for the nine month period ended December 31, 1999 and the years ended March 31, 1999 and 1998 are as follows: DECEMBER 31, 1999 MARCH 31, 1999 MARCH 31, 1998 WEIGHTED- AVERAGE EXERCISE PRICE $ 26.46 17.11 – 21.12 WEIGHTED- AVERAGE EXERCISE PRICE $ 26.66 26.05 21.50 30.44 OPTIONS (000’S) 1,161 573 (2) (3) WEIGHTED- AVERAGE EXERCISE PRICE $ 23.40 33.50 22.02 30.39 OPTIONS (000’S) 1,056 360 (232) (23) OPTIONS (000’S) 1,729 1,464 – (94) Outstanding-beginning of period Grant Exercised Forfeited Outstanding–end of period 3,099 22.14 1,729 26.46 1,161 26.66 Exercisable–end of period 1,019 25.35 731 24.08 565 22.14 Weighted-average fair value of options granted during the period (per option) $ 3.88 $ 5.93 $ 8.13 Exercise prices for the options outstanding as of December 31, 1999 ranged from $16.88 to $33.50. These options have a weighted-average remaining contractual life of 8.18 years. As the exercise price of the Company’s employee stock options equals the market price of underlying stock on the date of grant, no compensation expense is recognized under APB 25. Had the Company recognized compensation costs for the Grants consistent with the methods recommended by SFAS 123 (see Note 1 – Accounting for Stock-Based Compensation), the Company’s net income and earnings per share for the nine month period ended December 31, 1999 and the years ended March 31, 1999 and 1998 would have been stated at the pro forma amounts as follows: NET INCOME (LOSS) : As reported Pro forma BASIC EARNINGS PER COMMON SHARE: As reported Pro forma DILUTED EARNINGS PER COMMON SHARE: As reported Pro forma NINE MONTHS ENDED DECEMBER 31, 1999 YEAR ENDED MARCH 31, 1999 YEAR ENDED MARCH 31, 1998 $ (19,595) (21,828) $ 45,406 43,715 $ 70,504 69,090 (0.54) (0.60) (0.54) (0.60) 1.46 1.41 1.46 1.41 2.46 2.41 2.44 2.39 Teekay Shipping Annual Repor t December 31, 1999 35 CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars) Basic earnings per share is based upon the following weighted average number of common shares outstanding: 36,384,000 shares for the nine month period ended December 31, 1999; 31,063,000 shares for the year ended March 31, 1999; and 28,655,000 shares for the year ended March 31, 1998. Diluted earnings per share, which gives effect to the aforementioned stock options, is based upon the following weighted average number of common shares outstanding: 36,405,000 shares for the nine month period ended December 31, 1999; 31,063,000 shares for the year ended March 31, 1999; and 28,870,000 shares for the year ended March 31, 1998. The fair values of the Grants were estimated on the dates of grant using the Black-Scholes option-pricing model with the following assumptions: risk-free average interest rates of 5.8% for the nine month period ended December 31, 1999; and 5.40%, and 6.29%, for the years ended March 31, 1999 and 1998, respectively; dividend yield of 3.0%; expected volatility of 25%; and expected lives of 5 years. 10. COMMITMENTS AND CONTINGENCIES The Company has guaranteed 50% of the outstanding mortgage debt in the joint venture company, Soponata-Teekay Limited, totalling $28.8 million as at December 31, 1999. The Company has guaranteed its share of committed, uncalled capital in certain limited partnerships totalling $3.1 million as at December 31, 1999. As at December 31, 1999, the Company was committed to foreign exchange contracts for the forward purchase of approximately Japanese yen 100 million, Singapore dollars 2.4 million and Norwegian kroner 16.0 million for U.S. dollars, at an average rate of Japanese yen 102.06 per U.S. dollar, Singapore dollar 1.65 per U.S. dollar and Norwegian kroner 7.99 per U.S. dollar, respectively, for the purpose of hedging accounts payable and accrued liabilities. 11. OTHER INCOME (LOSS) Gain on disposition of assets Equity in joint venture Write off of loan costs due to refinancing Loss on extinguishment of debt Future income taxes Miscellaneous NINE MONTHS ENDED DECEMBER 31, 1999 YEAR ENDED MARCH 31, 1999 YEAR ENDED MARCH 31, 1998 $ – 721 – – (1,500) (3,234) $ 7,117 – – – (1,900) 289 $14,392 45 (1,308) (2,175) – 282 $ (4,013) $ 5,506 $11,236 12. CHANGE IN NON-CASH WORKING CAPITAL ITEMS RELATED TO OPERATING ACTIVITIES Accounts receivable Prepaid expenses and other assets Accounts payable Accrued liabilities NINE MONTHS ENDED DECEMBER 31, 1999 YEAR ENDED MARCH 31, 1999 YEAR ENDED MARCH 31, 1998 $ (5,462) 307 (6,571) 12,622 $ 1,332 (2,409) (4,238) 598 $ 2,484 880 5,814 (3,977) $ 896 $ (4,717) $ 5,201 FIVE YEAR FINANCIAL SUMMARY 36 Teekay Shipping Annual Repor t December 31, 1999 FIVE YEAR SUMMARY OF FINANCIAL INFORMATION (U.S. dollars in thousands, except per share and per day data and ratios) Income Statement Data: Net voyage revenues Income from vessel operations Net income (loss) before extraordinary items Extraordinary loss on bond redemption Net income (loss) Per Share Data: Earnings per share Weighted average shares outstanding (thousands) 9 MONTHS ENDED FISCAL YEAR ENDED MARCH 31, DECEMBER 31, 1999 1999 1998 1997 1996 $ 248,350 $ 318,411 $ 305,260 $ 280,212 $ 245,745 23,572 85,634 107,640 94,258 76,279 (19,595) 52,712 70,504 42,630 29,070 – (19,595) (7,306) 45,406 – 70,504 – 42,630 – 29,070 $ (0.54) $ 1.46 $ 2.46 $ 1.52 $ 1.17 36,384 31,063 28,655 28,138 24,837 Balance Sheet Data (at end of period): Total assets $1,982,684 $1,452,220 $1,460,183 $1,372,838 $1,355,301 Total stockholders’ equity 832,067 777,390 689,455 629,815 599,395 Other Financial Data: EBITDA $ 89,839 $ 186,069 $ 209,582 $ 191,632 $ 166,233 Net debt to capitalization (%) 50.8 39.6 46.9 48.0 51.0 Capital expenditures: Vessel purchases, gross Drydocking Fleet Data: $ 452,584 $ 85,445 $ 197,199 $ 65,104 $ 123,843 4,971 7,213 12,409 23,124 11,641 Average number of ships 65 47 43 41 39 Time-charter equivalent (TCE) $ 13,410 $ 19,576 $ 21,373 $ 20,356 $ 18,438 Total operating cash flow per ship per day 5,177 11,171 12,682 11,819 10,613 Teekay Shipping Annual Repor t December 31, 1999 37 BOARD OF DIRECTORS BOARD OF DIRECTORS Sean Day Bjorn Moller Axel Karlshoej Leif O. Höegh Michael Dingman Chairman of the Board of Directors President of Seagin International, LLC Director, President and CEO Director and Chairman Emeritus President of Nordic Industries Inc. Director Director Managing Director of Leif Höegh (UK) Ltd. Chairman and Chief Executive Officer of The Shipston Group Limited Arthur F. Coady Director, Executive Vice President Steve G.K. Hsu Thomas Kuo-Yuen Hsu Morris L. Feder Director Chairman of Oak Maritime (H.K.) Limited Director Executive Director of Expedo + Company (London) Ltd. Director President of Worldwide Cargo Inc. CORPORATE INFORMATION 38 Teekay Shipping Annual Repor t December 31, 1999 CORPORATE INFORMATION Teekay Shipping (Canada) Ltd. Suite 1400, One Bentall Centre 505 Burrard Street Vancouver, BC V7X 1M5 Canada Tel: +1 (604) 683-3529 Fax: +1 (604) 844-6600 Teekay Shipping (USA), Inc. One Corporate Plaza 2525 Bay Area Blvd., Suite 600 Houston, Texas 77058-1557 USA Tel: +1 (281) 228-0595 Fax: +1 (281) 228-0626 Teekay Shipping (UK) Ltd. 49 St. James’s Street London SW1A 1JT United Kingdom Tel: +44 (207) 408-1555 Fax: +44 (207) 408-1115 Teekay Shipping (Singapore) Pte. Ltd. 8 Shenton Way, #44-03 Temasek Tower Singapore 068811 Tel: +65 221-7988 Fax: +65 222-3338 STOCK TRANSFER AGENT AND REGISTRAR The Bank of New York 101 Barclay Street, 11 West P.O. Box 11258 Church Street Station New York, New York 10286 Tel: 1-800-524-4458 Teekay Shipping Corporation 4th Floor, Euro Canadian Centre Marlborough Street & Navy Lyon Road P.O. Box SS-6293 Nassau Bahamas Teekay Shipping (Norway) AS Rådhusgaten 27 P.O. Box 470 Sentrum N-0105 Oslo Norway Tel: +47 (22) 31 00 00 Fax: +47 (22) 31 00 01 Teekay Shipping (Australia) Pty. Ltd. Level 6, Bayview Tower 1753-1765 Botany Road Banksmeadow NSW 2019 Australia Tel: +61 (2) 9316-1000 Fax: +61 (2) 9316-1001 Teekay Shipping (Japan) Ltd. 6F Eiyu Irifune Building 1-13 Irifune 3-Chome Chuo-ku, Tokyo 104-0042 Japan Tel: +81 (3) 5543-2731 Fax: +81 (3) 5543-2730 Teekay Shipping Limited 4th Floor, Euro Canadian Centre Marlborough Street & Navy Lyon Road P.O. Box SS-6293 Nassau Bahamas Tel: +1 (242) 322-8020 Fax: +1 (242) 328-7330 Teekay Shipping (Glasgow) Ltd. 183 St. Vincent Street Glasgow G2 5QD United Kingdom Tel: +44 (141) 222-9000 Fax: +44 (141) 243-2100 Teekay Shipping Latvia 4 Torna Street, IIC, #102 Riga LV1050 Latvia Tel: +371 (7) 508092 Fax: +371 (7) 213069 Teekay Shipping Philippines, Inc. Ground Floor, PVB Building General Luna Street Corner Potenciana Street Intamuros, Manila Philippines Tel: +63 (2) 527-5491 Fax: +63 (2) 227-2166 Teekay Shipping (India) Pvt. Ltd. 817 Raheja Chambers 213 Nariman Point Mumbai, India 400 021 Tel: +91 (22) 287-2252 Fax: +91 (22) 202-5884 STOCK EXCHANGE LISTING New York Stock Exchange Symbol: TK There were 38.1 million shares outstanding at December 31, 1999. INVESTOR RELATIONS A copy of the Company’s Annual Report on Form 20-F is available by writing or calling to: SHARE PRICE INFORMATION The following table sets forth the New York Stock Exchange high and low prices of the Company’s stock for each quarter during the nine months ending December 31, 1999: QUARTER ENDED HIGH LOW June 30, 1999 Sept. 30, 1999 Dec. 31, 1999 $18 5/8 $18 15/16 $16 1/8 $15 1/8 $15 3/16 $13 3/4 DIVIDENDS DECLARED (PER SHARE) $0.215 $0.215 $0.215 Teekay Shipping (Canada) Ltd., Investor Relations 1400 - 505 Burrard Street Vancouver, B.C. Canada V7X 1M5 Tel: +1 (604) 844-6654 Fax: +1 (604) 844-6619 Email: investor.relations@teekay.com Website: www.teekay.com I I I S N O T A C N U M M O C C G E T A R T S C D D C Y B N G I S E D www.teekay.com Teekay Shipping Corporation N a s s a u Va n c o u v e r H o u s t o n L o n d o n S i n g a p o r e O s l o S y d n e y To k y o G l a s g o w R i g a M a n i l a M u m b a i 

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