DEAR FELLOW SHAREHOLDERS

The fortune of global shipping has always been hostage to the vagaries of world trade and global economic activity. Within the prevailing environment of sluggish international trade and a negative economic outlook, 2002 was a challenging year for the shipping industry. That I.M.Skaugen performed satisfactorily overall is a measure of the resilience and flexibility of our business strategy. It is also a testament to the dedication and enthusiasm of my colleagues around the world - on land and on sea.

The shipping industry in general suffered a period of weak demand and excess capacity in 2002, with declining freight and charter rates. In addition, to these ‘everyday’challenges, we have also been experiencing a lengthy period of declining asset values resulting from a steady reduction in the replacement (i.e. newbuilding) cost of vessels – some 33 percent over the last 10 years. This adds to the annual cost of depreciation that we, as vessel owners, need to earn in order to cover our cost of funds, and it makes this industry a very difficult one in which to earn a return on capital.

A series of corporate accounting scandals in the USA that started in 2001 badly damaged worldwide investor confidence. Against a backdrop of subdued market sentiment, depressed financial markets, a heightened awareness of terrorism throughout the world, continuing conflict in the Middle East and the possibility of war in Iraq, the OECD does not foresee any broad-based recovery until mid-2003, when the U.S. recovery should pick up steam. Such a climate makes risk capital more costly and much harder for smaller companies like ours to attract.

FINANCIAL PERFORMANCE AND REVIEW OF OPERATIONS
Overall the results for the last two years are pleasing and we hope at least to maintain this progress – if not improve on it - in the coming year.

It has long been our strategy to ensure that we, as a company, can still perform satisfactorily notwithstanding any weakness in the gas carrier business of Norgas. We experienced a ’10-year low’ in time-charter earnings this year for the Norgas gas carrier operations, but managed to turn in an acceptable financial result at Group level nevertheless.

In the face of considerable market adversity in 2002, we maintained our clear focus of being the leader in both our niche markets in terms of cost and service standards.

The SPT shuttle tanker business, operated out of Houston, maintained its leading position in the market carrying some 14 percent of the US sea-borne oil imports – more than any other company in the world. It has an impeccable safety record and is constantly setting higher targets to enhance service levels within the industry.

Across the Group we implemented a series of cost-cutting measures, which were rigorously observed, and we took steps to streamline our operations and consolidate our financial position - something we have achieved without compromising the level of service that our customers have come to expect and despite the significant investments made over the last two years in renewing the Norgas core fleet. Thus we are well positioned to harness the expected economic upswing, when it occurs, and improve our long-term performance.

FROM CONCEPT TO REALITY
The delivery in October of the first of our new ‘Super-cooler’ ethylene tankers, MV ‘Norgas Orinda’, marked another milestone in our quest to bring our customers the best in innovative technology. MV ‘Norgas Sonoma’ was delivered in January and we anticipate delivery of the remaining four tankers during the course of 2003.

We are confident that these new vessels will have rewarding commercial lives. Their design incorporates features that enable sound improvements in productivity, which may well exceed our own planned targets – and more importantly those expected of any other gas vessel ploughing the seas today!

The break-even level for these new ships is in line with earnings realised in the current markets and with the current Norgas cost structure. We anticipate therefore that these new vessels should perform well in a ‘low market’, with the potential for being very good earners when the market picks up. Strategically this injection of new efficiency and technology into the fleet will help us to ‘turn the tables’ at Norgas and to reach the cost and service leadership position that we have striven for over the years.

The whole newbuilding project is a project ‘well done’ – well planned and executed, with no surprises except for price savings! For this we can thank our site team in Shanghai and the excellent cooperation they have with the Hudong-Zhonghua yard, not to mention our innovative design team here at Norgas.

DIVIDEND
A good dividend of NOK7.50 per share, or almost 10% of the share price, was paid in March 2002. The yield on our stock was about 12 percent in 2002 and we have outperformed most relevant indices since 1999. I trust that the shareholders will approve the proposed dividend of NOK7 per share for the year 2002 as this compensates – at least in part - for the cost of investors’ capital tied up in a somewhat lacklustre market.

The IMSK share continues to be priced low compared to the prevailing EBITDA earnings. The year-end share price of NOK75 is about 4.7 times the current EBITDA earnings of US$25.8 million less our net debt of US$64 million.

OUTLOOK
We remain cautiously optimistic about the Group’s prospects for the coming year in view of the current economic conditions and political situation.

But, however much we are buffeted by events outside our control in the coming year, our buoyant enthusiasm for our vision will remain unscathed – our vision of being the leading provider of transportation services within our specified segments. ‘Excellence in execution’ - our aim is for the Skaugen name and our ‘Diamond S’ logo to be synonymous with impeccable customer service and cost efficiency in the oil and LPG/ petrochemical industries and for our customers to feel as highly valued as indeed they are.

Our focus in 2003 will be to chart a safe and steady course, be the waters rough or smooth, in our pursuit of delivering excellent service and a continued solid performance.

We should keep in mind that:
“- it is not the strongest of the species that survive, nor the most intelligent,
but the most responsive to change.”

Thus the future can be ours if we manage this well!

Morits Skaugen jr.
CEO

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