Results of Operations for the three-month and six-month periods ended June 30, 2007 and 2006
We believe that the measures for analyzing future trends in our results of operations consist of the following:
Our fleet size in 2007 has increased from that of 2006, resulting in an increase in Ownership days. During the three-month period ended June 30, 2007, we operated 18 vessels compared to 14 vessels in the corresponding quarter in 2006. During the six-month period ended June 30, 2007, we operated 18 vessels, net of the sale of the SHIKRA in the first quarter of 2007, compared to 14 vessels in the corresponding period in 2006.
All our vessels are employed on time charters. Our time charter equivalent (‘‘TCE’’) rate is equal to the time charter rate. As is common in the shipping industry, we pay commissions ranging from 1.25% to 6.25% of the total daily charter hire rate of each charter to unaffiliated ship brokers and in-house brokers associated with the charterers, depending on the number of brokers involved with arranging the charter.
Net revenues for the three-month period ended June 30, 2007 of $28,338,047 included billed time charter revenues of $31,011,901, deductions for brokerage commissions of $1,593,854 and amortization
of net prepaid charter revenue of $1,080,000. Net revenues for the three-month period ended June 30, 2007 were 18% greater than net revenues for the three-month period ended June 30, 2006, primarily due to a larger fleet size as reflected by increased operating days. Net revenue for the three-month period ended June 30, 2006 of $24,105,383 included billed time charter revenues of $26,199,776, deductions for brokerage commissions of $1,320,894 and amortization of net prepaid charter revenue of $773,500.
Net revenues for the six-month period ended June 30, 2007 of $55,246,579 included billed time charter revenues of $60,488,275, deductions for brokerage commissions of $3,081,696 and amortization of net prepaid charter revenue of $2,160,000. Net revenues for the six-month period ended June 30, 2007 were 15% greater than net revenues for the six-month period ended June 30, 2006, primarily due to a larger fleet size as reflected by increased operating days. Net revenue for the six-month period ended June 30, 2006 of $47,895,435 included billed time charter revenues of $52,247,893, deductions for brokerage commissions of $2,641,958 and amortization of net prepaid charter revenue of $1,710,500.
Vessel Expenses
Vessel expenses for the three-month period ended June 30, 2007 were $6,856,581 compared to $4,919,422 in the three-month period ended June 30, 2006. The increase in vessel expense is attributable to a larger fleet size in operation for the second quarter of 2007 and increases in vessel crew and lubricants costs. Vessel expenses for the three-month period ended June 30, 2007 included $6,435,504 in vessel operating costs and $421,077 in technical management fees. For the three-month period ended June 30, 2006, vessel expenses included $4,584,922 in vessel operating costs and $334,500 in technical management fees.
Vessel expenses for the six-month period ended June 30, 2007 were $13,102,479 compared to $9,624,419 in the six-month period ended June 30, 2006. The increase in vessel expense is attributable to a larger fleet size in operation for the six-month period of 2007 and increases in vessel crew and lubricants costs. Vessel expenses for the six-month period ended June 30, 2007 included $12,271,965 in vessel operating costs and $830,514 in technical management fees. For the six-month period ended June 30, 2006, vessel expenses included $8,954,919 in vessel operating costs and $669,500 in technical management fees.
Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the cost of spares and consumable stores and related inventory, tonnage taxes, pre-operating costs associated with the delivery of acquired vessels including providing the newly acquired vessels with initial provisions and stores, and other miscellaneous expenses.
Our vessel expenses will increase with the enlargement of our fleet. Other factors beyond our control, some of which may affect the shipping industry in general, may also cause these expenses to increase, including, for instance, developments relating to market prices for crew, insurance and petroleum-based lubricants and supplies.
Depreciation and Amortization
The cost of our vessels is depreciated on a straight-line basis over the expected useful life of each vessel. Depreciation is based on the cost of the vessel less its estimated residual value. We estimate the useful life of our vessels to be 28 years from the date of initial delivery from the shipyard to the original owner. Furthermore, we estimate the residual values of our vessels to be $150 per lightweight ton, which we believe is common in the dry bulk shipping industry. Our depreciation charges will increase as our fleet is enlarged which will lead to an increase in ownership days.
For the three-month periods ended June 30, 2007 and 2006, total depreciation and amortization expense were $6,046,953 and $4,937,661, respectively. Total depreciation and amortization expense for the three-month period ended June 30, 2007 includes $5,719,027 of vessel depreciation and $327,926 relating to the amortization of deferred drydocking costs. Comparable amounts the for three-month period ended June 30, 2006 were $4,749,665 of vessel depreciation and $187,996 of amortization of deferred drydocking costs.
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For the six-month periods ended June 30, 2007 and 2006, total depreciation and amortization expense were $11,837,584 and $9,757,243, respectively. Total depreciation and amortization expense for the six-month period ended June 30, 2007 includes $11,234,675 of vessel depreciation and $602,909 relating to the amortization of deferred drydocking costs. Comparable amounts for the six-month period ended June 30, 2006 were $9,447,136 of vessel depreciation and $310,107 of amortization of deferred drydocking costs.
Amortization of deferred financing costs is included in interest expense. These financing costs relate to costs associated with our revolving credit facility and these are amortized over the life of the facility. For the three-month periods ended June 30, 2007 and 2006, the amortization of deferred financing costs was $59,772 and $33,275, respectively. For the six-month periods ended June 30, 2007 and 2006, the amortization of deferred financing costs was $117,784 and $66,225, respectively.
General and Administrative Expenses
Our general and administrative expenses include onshore vessel administration related expenses such as legal and professional expenses and administrative and other expenses including payroll and expenses relating to our executive officers and office staff, office rent and expenses, directors fees, and directors and officers insurance.
General and administrative expenses for the three-month periods ended June 30, 2007 and 2006 were $1,573,174 and $1,114,024, respectively. The increase in general and administrative expenses for the three-month period ended June 30, 2007 was attributable to expenses associated with a larger fleet.
General and administrative expenses for the six-month periods ended June 30, 2007 and 2006 were $3,216,994 and $2,099,503, respectively. The increase in general and administrative expenses for the six-month period ended June 30, 2007 was attributable to expenses associated with a larger fleet. We expect general and administrative expenses to increase as we expand our fleet
Non-Cash Compensation Expense
For the three-month periods ended June 30, 2007 and 2006, the Company recorded non-cash compensation charges of $124,356 and $1,938,970, respectively. The expense for the three-month period ended June 30, 2007 relates to the fair value of the stock options granted in January 2007 to certain directors of the Company and members of management under the 2005 Stock Incentive Plan. The expense for the three-month period ended June 30, 2006 relates to profits interests awarded to members of the Company’s management by the Company’s principal shareholder Eagle Ventures LLC.
For the six-month periods ended June 30, 2007 and 2006, the Company recorded non-cash compensation charges of $3,383,579 and $2,691,656, respectively. The expense for the six-month period ended June 30, 2007 includes $245,767 which relates to the stock options granted in January 2007 to members of management under the 2005 Stock Incentive Plan. The expense for the six-month period ended June 30, 2006 includes $2,644,623 in non-cash, non-dilutive charges relating to profits interests awarded to members of the Company’s management by the Company’s former principal shareholder Eagle Ventures LLC, and a non-cash amount of $47,033 which relates to the stock options granted to certain directors of the Company under the 2005 Stock Incentive Plan.
On January 16, 2007, Eagle Ventures LLC (‘‘Eagle Ventures’’) sold 7,202,679 shares of the Company’s common shares in a secondary offering. The Company did not receive any proceeds from this offering. Based on the discretion of the compensation committee of Eagle Ventures, exercised in accordance with the Fifth LLC Agreement, Eagle Ventures redeemed and retired the common interests held by certain members in full liquidation of the common interests held by such members. The remaining proceeds received by Eagle Ventures will be retained until a future distribution is determined to be made by the compensation committee of Eagle Ventures. Future distributions of the remaining cash proceeds, and the proceeds received from the sale of the 127,778 common shares held by Eagle Ventures, will be distributed to the remaining members of Eagle Ventures, including an
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affiliate of Kelso and members of our management that hold profits interests, in accordance with the Fifth LLC Agreement, as modified by the permitted discretion of the compensation committee of Eagle Ventures reflected in an amendment to the Fifth LLC Agreement.
These non-cash, non-dilutive charges relate to profits interests awarded to members of the Company’s management by the Company’s former principal shareholder, Eagle Ventures. These profits interests diluted only the interests of the owners of Eagle Ventures, and did not dilute the direct holders of the Company’s common shares. The non-cash compensation charge was recorded as an expense over the estimated service period in accordance with SFAS No. 123(R). The non-cash compensation charges were based on the fair value of the profits interests which were ‘‘marked to market’’ at the end of each reporting period. The impact of any changes in the estimated fair value of the profits interests were recorded as a change in estimate cumulative to the date of change. The expense relating to the profits interest is now fixed. There will be no charges in future periods. The Company’s Financial Statements for the year ended Dece mber 31, 2006 on Form 10-K includes a more detailed description of these profits interests.
Interest and Finance Costs
During the three-month period ended June 30, 2007, we borrowed a total of $36,752,038 from our $500,000,000 revolving credit facility. Of these borrowings, $12,848,038 was used to fund the deposit for one newbuilding vessel which was contracted for construction during the period, and $23,904,000 was used to partly fund the purchase of the three vessels, the SHRIKE, SKUA and KITTIWAKE, which we agreed to acquire in the first quarter of 2007 and which were delivered in the second quarter of 2007.
During the six-month period ended June 30, 2007, we borrowed a total of $74,841,779 from our $500,000,000 revolving credit facility. Of these borrowings, $38,497,779 was used to fund the deposits and part of the capitalized financing costs for the three newbuilding vessels which were contracted for construction during the period, and $36,344,000 was used to partly fund the purchase price of the three vessels mentioned above. We also used $12,440,000 from the gross proceeds of the sale of the SHIKRA to repay borrowings from the revolving credit facility.
At June 30, 2007, our debt consisted of $302,376,599 in borrowings under the revolving credit facility. These borrowings consisted of $238,704,000 for the 18 vessels in operation and $63,672,599 to fund the deposits and capitalized interest on our five newbuilding vessels. Interest expense on the debt borrowed to fund the deposits for the newbuilding vessels is capitalized (see below).
The facility bears interest at the rate of 0.75% to 0.85% over LIBOR, depending upon the amount of debt drawn as a percentage of the value of the Company’s vessels. We also pay on a quarterly basis a commitment fee of 0.25% per annum on the undrawn amount of the facility.
For the three-month period ended June 30, 2007, interest rates applicable on our debt ranged from 4.97% to 6.09%, including the applicable margin. The weighted average effective interest rate was 5.48%. For the three-month period ended June 30, 2006, interest rates applicable on our debt ranged from 5.17% to 6.29%, including the applicable margin. The weighted average effective interest rate was 5.30%.
For the six-month period ended June 30, 2007, interest rates applicable on our debt ranged from 4.97% to 6.09%, including the applicable margin. The weighted average effective interest rate was 5.47%. For the six-month period ended June 30, 2006, interest rates applicable on our debt ranged from 5.17% to 6.29%, including the applicable margin. The weighted average effective interest rate was 5.28%.
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Interest Expense, exclusive of capitalized interest, consists of:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | | | Six Months Ended |
| | | | June 30, 2007 | | | June 30, 2006 | | | June 30, 2007 | | | June 30, 2006 |
| Loan Interest | | | | $ | 2,957,413 | | | | | $ | 1,893,185 | | | | | $ | 5,906,167 | | | | | $ | 3,734,475 | |
| Commitment Fees | | | | | 143,254 | | | | | | 190,862 | | | | | | 288,613 | | | | | | 382,973 | |
| Amortization of Deferred Financing Costs | | | | | 59,772 | | | | | | 33,275 | | | | | | 117,784 | | | | | | 66,225 | |
| Total Interest Expense | | | | $ | 3,160,439 | | | | | $ | 2,117,322 | | | | | $ | 6,312,564 | | | | | $ | 4,183,673 | |
Capitalized Interest
For the three-month period ended June 30, 2007, interest expense on the debt borrowed to fund the deposits for the newbuilding vessels amounted to $847,623 ($811,489 in interest and $36,134 in amortization of financing expenses) and this amount has been capitalized as part of the cost of the newbuilding vessels and is included in Advances for Vessel Construction in the financial statements as of June 30, 2007.
For the six-month period ended June 30, 2007, interest expense on the debt borrowed to fund the deposits for the newbuilding vessels amounted to $1,356,674 ($1,284,803 in interest and $71,871 in amortization of financing expenses) and this amount has been capitalized as part of the cost of the newbuilding vessels and is included in Advances for Vessel Construction in the financial statements as of June 30, 2007.
Interest Rate Swaps
We have entered into interest rate swaps to effectively convert a portion of its debt from a floating to a fixed-rate basis. The swaps are designated and qualify as cash flow hedges.
During the first six months ended June 30, 2007, we entered into an interest rate swap contract for a notional amount of $25,776,443. This contract matures in March 2010. On this contract, exclusive of applicable margin, the Company will pay 4.90% fixed-rate interest and receive floating-rate interest amounts based on three-month LIBOR settings. We have four other interest rate swap contracts as follows:
| | |
| – | Notional amount of $100,000,000 with a fixed interest rate of 4.22% and maturity in September 2010 |
| | |
| – | Notional amount of $30,000,000 with a fixed interest rate of 4.54% and maturity in September 2010 |
| | |
| – | Notional amount of $84,800,000 with a fixed interest rate of 5.24% and maturity in September 2009 |
| | |
| – | Notional amount of $25,048,118 with a fixed interest rate of 4.74% and maturity in September 2011 |
We record the fair value of the interest rate swaps as an asset or liability on the balance sheet. The effective portion of the swap is recorded in accumulated other comprehensive income. Accordingly, $4,820,257 and $2,936,804 have been recorded in Other Assets in the financial statements as of June 30, 2007 and December 31, 2006, respectively.
Subsequent to the quarter ended June 30, 2007, we entered into an interest rate swap contract for a notional amount of $36,752,038. This contract matures in August 2012. Under this contract, exclusive of applicable margin, the Company will pay 5.225% fixed-rate interest and receive floating-rate interest amounts based on three-month LIBOR settings.
Foreign Currency Swaps
The shipping industry’s functional currency is the U.S. dollar. All our revenues and the majority of our operating expenses and the entirety of our management expenses are in U.S. dollars.
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Therefore, we do not use or intend to use financial derivatives to mitigate the risk of exchange rate fluctuations for our revenues and expenses.
However, we have entered into foreign exchange swap transactions to hedge foreign currency risks on our capital asset transactions (vessel newbuildings). The swaps are designated and qualify as cash flow hedges.
During the three-month period ended June 30, 2007, the Company swapped a total of 3.84 billion in Japanese yen currency exposure into the equivalent of $33,677,326. During the six-month period ended June 30, 2007, the Company swapped a total of 11.5 billion in Japanese yen currency exposure into the equivalent of $100,063,505. After giving effect to the deposits paid for the newbuildings, at June 30, 2007, the Company had outstanding foreign currency swap contracts for notional amounts aggregating 11.280 billion Japanese yen swapped into the equivalent of $104,259,998.
At December 31, 2006, the Company had outstanding foreign currency swap contracts for notional amounts aggregating 4.386 billion Japanese yen swapped into the equivalent of $42,310,465.
We record the fair value of the currency swaps as an asset or liability in our financial statements. The effective portion of the swap is recorded in accumulated other comprehensive income. Accordingly, an amount of $4,692,967 and $359,180 have been recorded in Other Liabilities in the accompanying financial statements as of June 30, 2007 and December 31, 2006, respectively.
Gain on Sale of Vessel
On February 27, 2007, we sold the SHIKRA, a 1984-built Handymax vessel, to an unrelated third party for $12,525,000. We incurred total expenses of $513,518 relating to the sale. We recorded a gain on the sale of $872,568.
EBITDA
EBITDA represents operating earnings before extraordinary items, depreciation and amortization, interest expense, and income taxes, if any. EBITDA is included because it is used by certain investors to measure a company’s financial performance. EBITDA is not an item recognized by GAAP and should not be considered a substitute for net income, cash flow from operating activities and other operations or cash flow statement data prepared in accordance with accounting principles generally accepted in the United States or as a measure of profitability or liquidity. EBITDA is presented to provide additional information with respect to the Company’s ability to satisfy its obligations including debt service, capital expenditures, and working capital requirements. While EBITDA is frequently used as a measure of operating results and the ability to meet debt service requirements, the definition of EBITDA used here may not be comparable to that used by other com panies due to differences in methods of calculation.
Our revolving credit facility permits us to pay dividends in amounts up to our earnings before extraordinary or exceptional items, interest, taxes, depreciation and amortization (Credit Agreement EBITDA), less the aggregate amount of interest incurred and net amounts payable under interest rate hedging agreements during the relevant period and an agreed upon reserve for dry-docking. Therefore, we believe that this non-GAAP measure is important for our investors as it reflects our ability to pay dividends. The following table is a reconciliation of net income, as reflected in the consolidated statements of operations, to the Credit Agreement EBITDA:
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | | | Six Months Ended |
| | | | June 30, 2007 | | | June 30, 2006 | | | June 30, 2007 | | | June 30, 2006 |
| Net Income | | | | $ | 11,924,695 | | | | | $ | 9,391,736 | | | | | $ | 20,412,483 | | | | | $ | 20,184,237 | |
| Interest Expense | | | | | 3,160,439 | | | | | | 2,117,322 | | | | | | 6,312,564 | | | | | | 4,183,673 | |
| Depreciation and Amortization | | | | | 6,046,953 | | | | | | 4,937,661 | | | | | | 11,837,584 | | | | | | 9,757,243 | |
| Amortization of Prepaid and Deferred Revenue | | | | | 1,080,000 | | | | | | 773,500 | | | | | | 2,160,000 | | | | | | 1,710,500 | |
| EBITDA | | | | | 22,212,087 | | | | | | 17,220,219 | | | | | | 40,722,631 | | | | | | 35,835,653 | |
| Adjustments for Exceptional Items: | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-cash Compensation Expense(1) | | | | | 124,356 | | | | | | 1,938,970 | | | | | | 3,383,579 | | | | | | 2,691,656 | |
| Credit Agreement EBITDA | | | | $ | 22,336,443 | | | | | $ | 19,159,189 | | | | | $ | 44,106,210 | | | | | $ | 38,527,309 | |
| (1) | Management’s participation in profits interests in Eagle Ventures LLC and stock options (see Notes to our financial statements) |
Effects of Inflation
We do not believe that inflation has had or is likely, in the foreseeable future, to have a significant impact on vessel operating expenses, drydocking expenses or general and administrative expenses.
Liquidity and Capital Resources
Net cash provided by operating activities during the six-month periods ended June 30, 2007 and 2006 was $37,606,769 and $32,993,258, respectively. The increase was primarily due to cash generated from the operation of the fleet for 2,822 operating days in the six-month period ended June 30, 2007 compared to 2,297 operating days during the same period in 2006.
Net cash used in investing activities during the six-month period ended June 30, 2007, was $166,314,920. During the six-month period ended June 30, 2007, we purchased three modern Supramax vessels, the SHRIKE, SKUA and KITTIWAKE, for a total contract price of $138,700,000. We also incurred associated costs of $103,974 relating to these vessel acquisitions. During the six-month period ended June 30, 2007, for our newbuilding program, we placed deposits in Japanese yen of the equivalent of $38,113,9 74 for three 56,000 deadweight ton vessels, the CROWNED EAGLE, CRESTED EAGLE and STELLAR EAGLE, which are to be constructed and delivered in November 2008, February 2009 and April 2009, respectively. These deposits are in addition to the deposits of $24,798,118 that were placed for the GOLDEN EAGLE and IMPERIAL EAGLE in 2006. We have also incurred associated capitalized interest costs of $1,356,674and capitalized legal, insurance and technical supervision costs of $123,651. On February 12, 2007, we sold the SHIKRA, a 1984-built Handymax vessel, to an unrelated third party for $12,525,000 and we incurred total expenses of $513,518 relating to the sale.
Net cash provided by financing activities during the six-month period ended June 30, 2007 was $129,312,075. In the six-month period ended June 30, 2007, we received $110,171,870 in gross proceeds from the sale of common shares of the Company and we paid costs of $3,186,989 associated with the sale. We borrowed $74,841,779 from our revolving credit facility, of which amount $38,497,779 was used to fund the deposits for the three newbuilding vessels which were contracted for construction during the period and part of the capitalized financing costs for the newbuilding vessels on order, and $36,344,000 was used to partly fund the deposits for the three vessels which we agreed to acquire in the period. We used $12,440,000 from the gross proceeds of the sale of the SHIKRA to repay borrowings from the r evolving credit facility. During the six-month period ended June 30, 2007, we paid $39,165,910 in dividends. Net cash provided by financing activities during the six-month period ended June 30, 2006 was $39,927,970 as the Company borrowed $42,400,000 from its revolving credit facility, raised $33,000,000 from a private placement of common shares of the Company and paid $35,470,500 in dividends.
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As of June 30, 2007, our cash balance was $22,879,415 compared to a cash balance of $22,275,491 at December 31, 2006. In addition, $7,200,000 in cash deposits are maintained with our lender for loan compliance purposes and this amount is recorded in Restricted Cash in our financial statements as of June 30, 2007. The cash deposit amount at the end of December 31, 2006 was $6,400,000. Also recorded in Restricted Cash is an amount of $124,616 which is collateralizing a letter of credit relating to our office lease.
At June 30, 2007, we had a remaining undrawn capacity of $197,623,401 available to borrow for future acquisitions of dry bulk vessels under our $500,000,000 revolving credit facility. The facility also provides us with the ability to borrow up to $15,000,000 for working capital purposes. (See section entitled ‘‘Revolving Credit Facility’’ for a description of the facility).
We anticipate that our current financial resources, together with cash generated from operations and, if necessary, borrowings under our revolving credit facility will be sufficient to fund the operations of our fleet, including our working capital requirements, for at least the next 12 months. We were in compliance with all of the covenants contained in our debt agreements as of June 30, 2007.
On July 24, 2007, the Company entered into an agreement to acquire 26 Supramax newbuilding vessels from an unrelated privately owned Greek shipping company for a total purchase price of approximately $1,100,000,000. The agreement includes consideration of $150,000,000 to purchase all of the issued and outstanding shares of capital stock of 19 wholly owned subsidiaries of Kyrini Shipping Inc., a Liberian corporation whose primary assets consists of contracts for the construction of 18 Supramax drybulk vessels and options for the construction of a further 8 Supramax drybulk vessels which were exercised on August 1, 2007. The transaction also includes options for the construction of an additional 9 Supramax drybulk vessels. The closing of the transaction, which is expected to occur on or before August 14, 2007, is subject to closing conditions customary to a transaction of this type and size. Total payments for the 26 vessels unde r the construction contracts are approximately $944,000,000. The construction contracts call for the 26 vessels to be delivered between August 2008 and April 2012. To facilitate the closing of the transaction and acquire the rights to the newbuilding contracts, the Company will draw upon its revolving credit facility which has been temporarily increased to $550,000,000 specifically for this purpose. The Company intends to enter into a new proposed $1,600,000,000 revolving credit facility, which is subject to the negotiation of definitive documentation and the closing of the transaction.
Dividends
Our policy is to declare quarterly dividends to stockholders in March, May, August and November in amounts that are substantially equal to our available cash from operations during the previous quarter less any cash reserves for drydocking and working capital.
Our revolving credit facility permits us to pay quarterly dividends in amounts up to our quarterly earnings before extraordinary or exceptional items, interest, taxes, depreciation and amortization (Credit Agreement EBITDA), less the aggregate amount of interest incurred and net amounts payable under interest rate hedging agreements during the relevant period and an agreed upon reserve for drydocking for the period, provided that there is not a default or breach of loan covenant under the credit facility and the payment of the dividends would not result in a default or breach of a loan covenant. Depending on market conditions in the dry bulk shipping industry and acquisition opportunities that may arise, we may be required to obtain additional debt or equity financing which could affect our dividend policy.
On February 15, 2007, our Board of Directors declared a cash dividend for the fourth quarter of 2006 of $0.51 per share, based on 35,900,001 of the Company’s common shares outstanding, payable to all shareholders of record as of February 28, 2007. The aggregate amount of this cash dividend paid to our shareholders on March 2, 2007 was $18,309,000.
On April 18, 2007, our Board of Directors declared a cash dividend for the first quarter of 2007 of $0.50 per share based on 41,713,820 of the Company’s common shares outstanding, payable to all
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shareholders of record as of April 30, 2007. The aggregate amount of this cash dividend paid to our shareholders on May 3, 2007 was $20,856,909. Since we did not own the three vessels we agreed to acquire in the first quarter and did not receive the benefit of their revenues during the first quarter (the SHRIKE delivered on April 24, 2007 and SKUA and KITTIWAKE delivered in June 2007), we funded approximately $2,850,000 of this dividend from excess working capital in order to pay the indicated dividend of $0.50 per share.
On July 18, 2007, our Board of Directors declared a cash dividend for the second quarter of 2007 of $0.47 per share, based on 41,713,820 of the Company’s common shares outstanding, payable to all shareholders of record as of August 1, 2007. The aggregate amount of this cash dividend paid to the Company’s shareholders on August 7, 207 was $19,605,495.
Sale of Common Shares
On January 16, 2007, our then principal shareholder, Eagle Ventures LLC, sold 7,202,679 of the Company’s common shares from its holdings of the Company’s common stock in a secondary sale in a private placement. The Company did not receive any proceeds from this offering.
On March 6, 2007, we sold 5,400,000 of our common stock at a price to the public of $18.95 per share raising gross proceeds of $102,330,000. On March 23, 2007, we raised an additional $7,841,870 in gross proceeds from the underwriter’s exercise of their over-allotment option for the purchase of 413,819 of our common shares. We used the net proceeds from the offering to fund a portion of the acquisition costs of three vessels, the SHRIKE, SKUA and KITTIWAKE, which were delivered in the second quarter o f 2007. We incurred fees and expenses of $3,186,989 relating to the sale of our common shares.
Revolving Credit Facility
In July 2005, we entered into a 10-year $330,000,000 revolving credit facility. As of December 31, 2005, the outstanding indebtedness under the revolving credit facility was $140,000,000. In July 2006, we amended and increased our initial revolving credit facility to $450,000,000 with a new term of ten years expiring in July 2016. In November 2006, we further enhanced our facility to $500,000,000 to facilitate our newbuilding program. The facility also provides us with the ability to borrow up to $15,000,000 for working capital purposes. There are no principal repayment obligations under the amended facility until July 2012. Over the remaining four years until maturity in July 2016, the facility will reduce in semi-annual amounts of $28,750,000 with a final reduction of $270,000,000 occurring simultaneously with the last semi-annual reduction. The Company’s Form 10-K for the year ended December 31, 2006 inc ludes a more detailed description of the revolving credit facility.
At June 30, 2007, the Company’s debt consisted of $302,376,599 in borrowings under the $500,000,000 revolving credit facility. These borrowings consisted of $238,704,000 for the 18 vessels in operation and $63,672,599 to fund the deposits and capitalized interest on its five newbuilding vessels. At June 30, 2007, we had a remaining undrawn capacity of $197,623,401 available to borrow under the revolving credit facility for future acquisitions of dry bulk vessels.
On May 4, 2007, the Company’s sole lender agreed to provide an incremental commitment of up to $250,000,000, in addition to its existing $500,000,000 credit facility. The incremental commitment is subject to the same terms and conditions as the existing credit facility. We paid an arrangement fee of $50,000 to the lender in connection with the incremental commitment to the revolving credit facility. On July 24, 2007, the Company temporarily increased its revolving credit facility to $550,000,000 to facilitate the closing of the stock purchase transaction and acquire the rights to the newbuilding contracts described herein. The Company will incur an arrangement fee of $250,000 in connection with the increase of the facility.
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Contractual Obligations
The following table sets forth our expected contractual obligations and their maturity dates as of June 30, 2007:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands of U.S. dollars) | | | Within
One Year | | | One to
Three Years | | | Three to
Five Years | | | More than
Five Years | | | Total |
| Vessels(1) | | | | $ | — | | | | | $ | 104,260 | | | | | $ | — | | | | | $ | — | | | | | $ | 104,260 | |
| Bank Loans | | | | | — | | | | | | — | | | | | | — | | | | | | 302,377 | | | | | | 302,377 | |
| Interest and borrowing fees(2) | | | | | 15,213 | | | | | | 30,342 | | | | | | 30,467 | | | | | | 68,291 | | | | | | 144,313 | |
| Office lease(3) | | | | | 250 | | | | | | 500 | | | | | | 188 | | | | | | — | | | | | | 938 | |
| Total | | | | $ | 15,463 | | | | | $ | 135,102 | | | | | $ | 30,655 | | | | | $ | 370,668 | | | | | $ | 551,888 | |
| (1) | The balance of the contract price in US dollars for the five newbuilding vessels which are to be constructed and delivered between November 2008 and February 2010. |
| (2) | The Company is a party to floating-to-fixed interest rate swaps covering notional amounts of $100,000,000, $30,000,000, $84,800,000, $25,048,118 and $25,776,443 as of June 30, 2007 that effectively convert the Company’s interest rate exposure from a floating rate based on LIBOR to a fixed rate of 4.22%, 4.54%, 5.24%, 4.74% and 4.90% respectively, plus applicable margin. Interest and borrowing fees includes capitalized interest for the newbuilding vessels. |
| (3) | Remainder of the 63-month lease on the office space which we occupy. |
Capital Expenditures
Our capital expenditures relate to the purchase of vessels and capital improvements to our vessels which are expected to enhance the revenue earning capabilities and safety of these vessels.
During the three-month period ended June 30, 2007, for our newbuilding program, we placed a deposit in Japanese yen of an equivalent of $12,848,038 for a 56,000 deadweight ton vessel, the STELLAR EAGLE, which is to be constructed and delivered in April 2009.
During the six-month period ended June 30, 2007, we acquired three Supramax vessels, the SHRIKE, SKUA and KITTIWAKE, for a total contract price of $138,700,000 and associated costs of $103,974. During the six-months period ended June 30, 2007, for our newbuilding program, we placed deposits in Japanese yen of the equivalent of $38,113,974 for three 56,000 deadweight ton vessels, the CROWNED EAGLE, CRESTED EAGLE and STELLAR EAGLE, which are to be constructed and delivered in November 2008, February 2009 and April 2009, respectively. These deposits are in addition to the $24,798,118 that was placed for the GOLDEN EAGLE and IMPERIAL EAGLE in 2006.
In addition to acquisitions that we may undertake in future periods, the Company’s other major capital expenditures include funding the Company’s maintenance program of regularly scheduled drydocking necessary to preserve the quality of our vessels as well as to comply with international shipping standards and environmental laws and regulations. Although the Company has some flexibility regarding the timing of its dry docking, the costs are relatively predictable. Management anticipates that vessels are to be drydocked every two and a half years. Funding of these requirements is anticipated to be met with cash from operations. We anticipate that this process of recertification will require us to reposition these vessels from a discharge port to shipyard facilities, which will reduce our available days and operating days during that period.
Drydocking costs incurred are amortized to expense on a straight-line basis over the period through the date the next drydocking for those vessels are scheduled to occur. For the three-month period ended June 30, 2007, three of our vessels passed drydock surveys. During the corresponding period in 2006 we did not drydock any vessels. For the six-month periods ended June 30, 2007 and 2006, we spent $628,307 and $1,464,473, respectively on vessel drydockings. The following table represents certain information about the estimated costs for anticipated vessel drydockings in the next four quarters, along with the anticipated off-hire days:
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| | | | | | | | | |
| Quarter Ending | | | Off-hire Days(1) | | | Projected Costs(2) |
| September 30, 2007 | | | | | 60 | | | | $1.6 million |
| December 31, 2007 | | | | | 15 | | | | $0.4 million |
| March 31, 2008 | | | | | 30 | | | | $0.8 million |
| June 30, 2008 | | | | | 30 | | | | $0.8 million |
| (1) | Actual duration of drydocking will vary based on the condition of the vessel, yard schedules and other factors. |
| (2) | Actual costs will vary based on various factors, including where the drydockings are actually performed. |
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
There have been no material changes from the ‘‘Interest Rate Risk’’ previously disclosed in our Form 10-K for the year ended December 31, 2006.
Currency and Exchange Rates
The shipping industry’s functional currency is the U.S. dollar. The Company generates all of its revenues in U.S. dollars. The majority of the Company’s operating expenses and the entirety of its management expenses are in U.S. dollars. The Company does not intend to use financial derivatives to mitigate the risk of exchange rate fluctuations for its revenues and expenses.
The Company has entered into foreign exchange swap transactions to hedge foreign currency risks on its capital asset transactions (vessel newbuildings). The swaps are designated and qualify as cash flow hedges. In 2006, the Company entered into foreign exchange swap transactions to hedge the Japanese yen exposure into US dollars for the purchase price in Japanese yen of two new-build vessels which are expected to be constructed and delivered to the Company in January 2010 and February 2010. After giving effect to the deposits paid on these newbuildings, at December 31, 2006, the Company had outstanding foreign currency swap contracts for notional amounts aggregating 4.386 billion Japanese yen swapped into the equivalent of $42,310,465.
During the three-month period ended June 30, 2007, the Company entered into foreign exchange swap transactions to hedge the Japanese yen exposure into US dollars for the purchase price in Japanese yen of a new-build vessel, the STELLAR EAGLE, which is expected to be delivered to the Company in April 2009. During this three-month period, the Company swapped a total of 3.84 billion in Japanese yen currency exposure into the equivalent of $33,677,326.
During the six-month period ended June 30, 2007, the Company entered into foreign exchange swap transactions to hedge the Japanese yen exposure into US dollars for the purchase price in Japanese yen of three new-build vessels, the CROWNED EAGLE, CRESTED EAGLE and STELLAR EAGLE, which are expected to be delivered to the Company in November 2008, February 2009 and April 2009, respectively. During this six-month period, the Company swapped a total of 11.5 billion in Japanese yen currency exposure into the equivalent of $100,063,505.
After giving effect to the deposits paid for the newbuildings, at June 30, 2007, the Company had outstanding foreign currency swap contracts for notional amounts aggregating 11.280 billion Japanese yen swapped into the equivalent of $104,259,998 which includes 4.386 billion Japanese yen swapped into the equivalent of $42,310,465 at December 31, 2006 for the GOLDEN EAGLE and IMPERIAL EAGLE.
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The Company records the fair value of the currency swaps as an asset or liability in its financial statements. The effective portion of the swap is recorded in accumulated other comprehensive income. Accordingly, an amount of $4,692,967 and $359,180 have been recorded in Other Liabilities in the accompanying financial statements as of June 30, 2007 and December 31, 2006, respectively.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the ‘‘Exchange Act’’)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
Item 1 — Legal Proceedings
We are not aware of any legal proceedings or claims to which we or our subsidiaries are party or of which our property is subject. From time to time in the future, we may be subject to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty claims. Those claims, even if lacking merit, could result in the expenditure by us of significant financial and managerial resources.
Item 1A — Risk Factors
There have been no material changes from the ‘‘Risk Factors’’ previously disclosed in our Form 10-K for the year ended December 31, 2006.
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds
On January 12, 2007, the Company granted 13,334 shares of the Company’s stock in options to its independent non-employee directors and 524,000 of the Company’s stock in options to its management. These options have an exercise price of $17.80 and became exercisable for the non-employee directors on the grant date while the options for management vest and become exercisable over three years. All options expire ten years from the date of grant.
On March 17, 2006, the Company granted 56,666 shares of the Company’s stock in options to its independent non-employee directors. These options vested and became exercisable on the grant date at an exercise price of $13.23 per share. All options expire ten years from the date of grant.
Item 3 — Defaults upon Senior Securities
None.
Item 4 — Submission of Matters to a Vote of Security Holders
None.
Item 5 — Other Information
None.
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Item 6 — Exhibits
EXHIBIT INDEX
| | | | | | |
| 3 | .1 | | | | Amended and Restated Articles of Incorporation of the Company* |
| 3 | .2 | | | | Amended and Restated Bylaws of the Company* |
| 31 | .1 | | | | Rule 13a-14(d) / 15d-14(a)_Certification of CEO |
| 31 | .2 | | | | Rule 13a-14(d) / 15d-14(a)_Certification of CFO |
| 32 | .1 | | | | Section 1350 Certification of CEO |
| 32 | .2 | | | | Section 1350 Certification of CFO |
| * | Incorporated by reference to the Registration Statement on Form S-1, Registration No. 333-123817. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EAGLE BULK SHIPPING INC.
By: /s/ Sophocles N. Zoullas
Sophocles N. Zoullas
Chairman of the Board and
Chief Executive Officer
Date: August 8, 2007
By: /s/ Alan S. Ginsberg
Alan S. Ginsberg
Chief Financial Officer
and Treasurer
Date: August 8, 2007
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