The Directors have pleasure in submitting their report together with the audited financial statements of the Company and its subsidiaries (collectively the "Group") for the year ended 31 December 2012.

PRINCIPAL ACTIVITIES, ANALYSIS OF OPERATIONS AND FINANCIAL SUMMARY

The principal activity of the Company is investment holding. The Company's principal subsidiaries (set out in Note 38 to the financial statements) are engaged in the ownership and international operation of modern Handysize and Handymax dry bulk ships and the provision of harbour and offshore tug services in Australasia. In addition, the Group is engaged in the management and investment of the Group's cash and deposits through its treasury activities. A summary of the results and of the assets and liabilities of the Group for the last five financial years is set out in the "Group Financial Summary" section of this Annual Report.

RESULTS AND APPROPRIATIONS

The results of the Group for the year are set out in the consolidated income statement.

Taking into consideration the Group's performance, operating cash flow and current financial position, the Directors have recommended the payment of a final dividend of HK5 cents per share for the year ended 31 December 2012. No interim dividend was declared.

The proposed final dividend for 2012 of HK5 cents per share will be considered at the 2013 Annual General Meeting scheduled on 19 April 2013.

RESERVES AND DISTRIBUTABLE RESERVES

Distributable reserves of the Company at 31 December 2012, calculated in accordance with the Companies Act 1981 of Bermuda, amounted to US$537.4 million.

Movements in the reserves of the Group and of the Company are set out in Note 24 to the financial statements.

DONATIONS

Charitable and other donations made by the Group during the year amounted to US$62,700.

PROPERTY, PLANT AND EQUIPMENT

Movements in the property, plant and equipment of the Group are set out in Note 6 to the financial statements.

SHARE CAPITAL AND PRE-EMPTIVE RIGHTS

Movements in the share capital of the Company are set out in Note 23 to the financial statements.

There is no provision for pre-emptive rights under the Company's Bye-laws and there is no restriction against such rights under Bermuda Law.

CONVERTIBLE BONDS

During the year, the Group issued guaranteed convertible bonds in an aggregate principal amount of US$123.8 million with 1.875% per annum coupon maturing in 2018. The net proceeds from such issue, after deduction of commission and expenses, to be used by the Company primarily for the acquisition of additional Handysize and Handymax vessels as well as for general working capital purposes. Details of such issue and the movements in the other convertible bonds are disclosed in the "Financial Review" section of this Annual Report and under Note 22(c)(ii) to the financial statements.

PURCHASE, SALE OR REDEMPTION OF SECURITIES

Other than for satisfying restricted share awards granted under the LTIS as disclosed below, neither the Company nor any of its subsidiaries has, during the year, purchased, sold or redeemed any of the share capital or convertible bonds of the Company.

LONG TERM INCENTIVE SCHEME

Share awards and share options are granted to Executive Directors, senior management and other employees under the Company's Long Term Incentive Scheme ("LTIS").

(a) Purpose and Eligible Participants of the LTIS

The LTIS enables the Company to grant share awards and share options to eligible participants (and their related trusts and companies), being principally Directors and employees, as an incentive and recognition for their contribution to the Group. The LTIS incentivises performance of participants by linking part of their remuneration to the achievement of the Group. The value offered is related to job grade and contribution to the management of the business.

(b) Maximum Number of Shares

The total number of Shares which may be or have been issued by the Company or transferred to (i) the trustee of the LTIS in satisfaction of share awards and (ii) in respect of options that have been granted or to be granted, under the LTIS or any other schemes must not, in aggregate, exceed 126,701,060 Shares (representing 6.54% of the Shares in issue at 28 February 2013). There were 400,000 outstanding share options and 25,616,000 restricted shares not vested under the LTIS which represents 1.34% of the issued share capital of the Company as at 28 February 2013.

(c) Limit for Each Eligible Participant

The aggregate number of Shares issued and to be issued upon exercise of share options or vesting of share awards granted in any 12 month period to an eligible participant (including vesting of outstanding share awards and both exercised and outstanding options) shall not exceed 1% of the Shares in issue as at the date of grant.

(d) Procedure of Granting Restricted Share Awards

The Board entered into a trust deed to appoint a trustee to administer share awards under the LTIS and to constitute a trust to hold property transferred by the Company to the trustee (which shall include cash or Shares) in order to satisfy grants of share awards. At the direction of the Board, the trustee shall either subscribe for new Shares at par from the Company or acquire existing Shares in the market in accordance with the LTIS.

(e) Basis of Determining the Exercise Price of Options

The exercise price payable on exercise of the share options under the LTIS shall be determined by the Board and notified to each grantee. The exercise price shall not be less than the higher of: (i) the closing price of the Shares as stated in the Stock Exchange's daily quotations sheet on the date of grant of that share option, which must be a business day; (ii) the average of the closing prices per share as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant of that share option; and (iii) the nominal value of the Shares.

All notices to exercise share options shall be accompanied by a remittance for the full amount of the subscription price for the Shares in respect of which the notice is given.

(f) Remaining Life of the Scheme

The LTIS will expire on 14 July 2014. The Board resolved on 28 February 2013 that a new Share Award Scheme ("SAS") should be adopted to replace the LTIS. It further resolved not to make any further grants of share options or share awards under the LTIS from such date. Please refer to page 76 for further details of the SAS.

(g) Awards Granted

Details of the grant of long-term incentives and a summary of the movements of the outstanding incentives during the year ended 31 December 2012 under the LTIS are as follows:

(i) History and Movement of Restricted Share Awards Granted

Note:
(1) Mr. Turnbull voluntarily requested a reduction of his 2012 approved restricted share awards from 618,000 Shares to 300,000 Shares.
(2) 2,628,000 Shares were granted to Mr. Berglund on 1 June 2012 when he joined the Company as Chief Executive Officer and an Executive Director.
(3) Mr. Kocherla was appointed as an Executive Director on 25 June 2012 and 428,000 Shares for vesting on 14 July 2015 were granted to him in the second half of 2012.
(4) 2,124,000 Shares lapsed following Mr. Nyborg's resignation on 15 March 2012.
(5) 1,882,000 Shares vested due to a management buyout of a subsidiary of the Company in February 2012; 41,000 Shares vested as an employee retired; 109,000 Shares vested due to the redundancy of a staff member and 577,000 Shares lapsed as certain employees resigned.

The closing price of the Shares of the Company immediately before the grant of:
(i) 13,753,000 restricted share awards on 1 June 2012 was HK$3.47;
(ii) 257,000 restricted share awards on 22 June 2012 was HK$3.20; and
(iii) 2,119,000 restricted share awards on 28 September 2012 was HK$3.63.

(ii) Share Options and Share Valuation

Share options were granted on 14 July 2004 under the LTIS at an exercise price of HK$2.50 per share. There were 400,000 share options of Other Employees fully vested and not exercised as at 31 December 2012.

Based on a report prepared by Watson Wyatt Hong Kong Limited, the fair market values of the share options granted on 14 July 2004 based on the binomial option pricing model for the exercise period from 14 July 2005 to 13 July 2014 is HK$0.834 per share option.

Note: Key assumptions included an expected dividend yield of 8% per annum, volatility of the Company's share price of 50% per annum, a risk-free rate of interest of 4% and 4.1% per annum on the respective grant dates, that the employees will exercise their share options if the share price is 100% above the exercise price, and an expected rate of leaving service of eligible employees after the vesting date of 0.4% per annum.

Save as disclosed above, no right to subscribe for the securities of the Company or its associated corporations within the meaning of the Securities and Futures Ordinance (the ''SFO''), has been granted by the Company to, nor have any rights been exercised by, any person during the year.

2013 Share Award Scheme

The Company's LTIS will expire in July 2014. In this connection, the Board resolved on 28 February 2013 that a new Share Award Scheme ("SAS") should be adopted to replace the LTIS. The SAS is a single share award scheme under which no share options can be granted. The Board further resolved not to make any further grants of share options or share awards under the LTIS. However all unvested awards granted under the LTIS shall remain valid until they are fully vested or lapse in accordance with the rules of the LTIS.

The SAS will be valid and effective for a term of 10 years from 28 February 2013. It will be administered by the Board in accordance with the rules of the SAS. The trustee, who currently administers the LTIS, shall hold the Shares and deal with the income derived therefrom in accordance with the terms of the trust deed.

The total number of Shares which may be issued by the Company or transferred to the trustee in satisfaction of share awards that are to be granted under the SAS must not exceed 10% of the issued share capital of the Company as at the first date of each financial year during the term of the SAS (equivalent to 193,657,711 Shares as at 1 January 2013). Such overall limit of shares may be purchased in the market or issued at par by the Company utilising either the general issue mandate or a specific mandate separately obtained from the shareholders in a general meeting of the Company.

 

DIRECTORS

The Directors1 who held office up to the date of this Annual Report are set out below:

Note: (1) Pursuant to the Company's Bye-law 87(1), at each annual general meeting one-third of the Directors for the time shall retire from office by rotation, provided that every Director shall be subject to retirement at least once every three years.

Messrs. Mats H. Berglund and Chanakya Kocherla, both Executive Directors appointed by the Board during the year, shall retire at the 2013 Annual General Meeting ("AGM") in accordance with the Company's Bye-law 86(2). In addition, Messrs. Andrew T. Broomhead, Wang Chunlin and Robert C. Nicholson shall retire at the 2013 AGM by rotation pursuant to the Company's Bye-laws 87(1) & (2). Except for Mr. Wang Chunlin who does not offer himself for re-election, all other retiring Directors, being eligible, offer themselves for re-election by shareholders.

DIRECTORS' SERVICE CONTRACTS

None of the Directors who are proposed for re-election at the forthcoming 2013 AGM has a service contract with the Company which is not determinable within one year without payment of compensation, other than statutory compensation.

DIRECTORS' INTERESTS IN CONTRACTS OF SIGNIFICANCE

No contracts of significance in relation to the Group's business to which the Company was a party and in which a Director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

Brief biographical details of Directors and senior management are set out in the "Directors and Senior Management" section of this Annual Report.

DIRECTORS' AND CHIEF EXECUTIVE'S INTERESTS AND SHORT POSITIONS IN THE SHARES, UNDERLYING SHARES AND DEBENTURES OF THE COMPANY OR ANY ASSOCIATED CORPORATION

At 31 December 2012, the discloseable interests and short positions of each Director and the Chief Executive in Shares, underlying Shares and debentures of the Company and its associated corporations within the meaning of Part XV of the SFO, which: (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO, or (b) were required to be entered in the register maintained by the Company under Section 352 of the SFO, or (c) were required pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers were as follows:

Note:
(1) Restricted share awards were granted under the LTIS and have been disclosed on page 75 under the LTIS disclosure in this Report.
(2) 3,581,960 Shares are in the form of 335 units of convertible bonds due 2016 at face value of US$10,000 each, held by a Trust named Bentley Trust (Malta) Limited, of which Mr. Turnbull is the founder.
(3) Mr. Berglund's interest includes 417,003 Shares held in the form of 39 units of convertible bonds due 2016 at face value of US$10,000 each.
(4) 2,291,402 Shares are held via Paulatim Investments Limited which is jointly owned by Mr. Broomhead and his wife, of which 1,283,090 Shares are in the form of 120 units of convertible bonds due 2016 at face value of US$10,000 each and 312,608 Shares are in the form of convertible bonds due 2018 at nominal value of US$200,000.
(5) Mr. Bradshaw is a shareholder holding 100% and 50% of the issued share capital, respectively, of Cormorant Shipping Limited and Goldeneye Shipping Limited. He beneficially owns 353,241 Shares via Cormorant Shipping Limited and is taken to be interested in the 33,176 Shares held by Goldeneye Shipping Limited.

All the interests stated above represent long positions. No short positions were recorded in the register maintained by the Company under section 352 of the SFO as at 31 December 2012.

Saved as disclosed, at no time during the year was the Company, its subsidiaries, or its associated companies a party to any arrangement to enable the Directors and Chief Executive of the Company to hold any interests or short positions in the Shares or underlying Shares in, or debentures of, the Company or its associated corporations.

SUBSTANTIAL SHAREHOLDERS' INTERESTS AND SHORT POSITIONS IN THE SHARES AND UNDERLYING SHARES OF THE COMPANY

The register of substantial shareholders maintained under Section 336 of the SFO shows that as at 31 December 2012, the Company had been notified of the following substantial shareholders' interests and short positions, being 5% or more of the Company's issued share capital.

Note:
(1) The Shares held by Canadian Forest Navigation Co. Ltd. / Compagnie De Navigation Canadian Forest Ltee are held in the capacities of Beneficial owner (relating to 149,446,846 Shares) and Interest in corporation controlled (relating to 103,256,654 Shares).
(2) The long position in Shares held by JP Morgan Chase & Co. is held in the capacities of Beneficial owner (relating to 13,741,030 Shares), Investment manager (relating to 7,716,000 Shares) and Custodian corporation/approved lending agent (relating to 113,976,854 Shares).

Save as disclosed above, to the best of the Directors' knowledge, information and belief, having made all reasonable enquiry, as at 31 December 2012, no other person (other than a Director or Chief Executive of the Company) had an interest or short position in the Shares or underlying Shares of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or recorded in the register required to be kept by the Company under section 336 of the SFO.

MANAGEMENT CONTRACTS

No contracts concerning the management and administration of the whole or any substantial part of the business of the Company were entered into or existed during the year.

MAJOR CUSTOMERS AND SUPPLIERS

During the year, the Group sold less than 30% of its goods and services to its five largest customers and purchased less than 30% of its goods and services from its five largest suppliers.

CONNECTED TRANSACTION

During the year, the Group had no connected transaction that was subject to the Listing Rules' reporting requirements for disclosure in this Annual Report.

COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE

Throughout the year, the Company has been fully compliant with all code provisions of the Corporate Governance Code (effective from 1 April 2012) as contained in Appendix 14 of the Listing Rules, as well as the former Code on Corporate Governance Practices (effective until 31 March 2012). Please also refer to the Corporate Governance Report of this Annual Report.

AUDIT AND REMUNERATION COMMITTEES

Details of the audit and remuneration committees are set out in the Corporate Governance Report of this Annual Report.

AUDITORS

The financial statements have been audited by PricewaterhouseCoopers who retire and, being eligible, offer themselves for re-appointment at the forthcoming 2013 AGM.

PUBLIC FLOAT

On the basis of information that is publicly available to the Company and within the knowledge of the Directors as at the date of this Annual Report, the Company has complied with the Listing Rules requirement to have at least 25% of the Company's total issued share capital held by the public.

By Order of the Board