The table below illustrates our payment obligations due according to the agreements as modified. The long-term portion of the debt obligations on the below table have not been reclassified to current debt.
| 2010 (July 1, 2010 through December 31, 2010) | | $ | 37,461 | |
| 2011 | | | 71,528 | |
| 2012 | | | 103,991 | |
| 2013 | | | 16,041 | |
| 2014 | | | 29,665 | |
| Thereafter | | | 72,480 | |
| | | $ | 331,166 | |
| | | | | |
Classification of Debt
U.S. generally accepted accounting principles require that long-term loans be classified as a current liability when either a covenant violation that gives the lender the right to call the debt has occurred at the balance sheet date, or such a covenant violation would have occurred absent a waiver of those covenants, and in either case it is probable that the covenant violation will not be cured within the next twelve months. At December 31, 2009, the Company did not meet minimum collateral requirements on its loans and anticipated that it would not meet the existing consolidated fixed charge and consolidated leverage ratio requirements during the subsequent twelve months. Accordingly, at December 31, 2009, the debt was considered to be callable by the lenders and the long-term portion of outstanding debt was classified as a current liability on the consolidated balance sheet. The Company obtained waivers from all its lender’s for the minimum collateral requirement through May 14, 2010 by which time amendments to all its credit facilities were finalized. At June 30, 2010, the Company expects to be in compliance with all amended financial covenants during the next twelve months, and the debt is not expected to be callable by the lenders. Accordingly, the long-term portion of outstanding debt at June 30, 2010 is being classified as long-term debt in the consolidated balance sheet.
Loan Modifications
In May 2010 the Company finalized the amendment of its credit agreements. The amended credit agreements set new financial covenant levels, eliminated the minimum consolidated tangible net worth requirement, increased bank margins and provided a new EBITDA calculation. EBITDA, as redefined, excludes additional items such as goodwill or vessel impairment charges incurred through December 31, 2011, costs of up to $3.0 million incurred in connection with the redomiciliation of TBSI, non-cash stock compensation to employees of up to $10.0 million in both 2010 and 2011 and any gain or loss on the sale or other disposition of a vessel.
Borrowings under the amended Bank of America Credit Facility at June 30, 2010 were $132.0 million, consisting of borrowings of $75.0 million under a revolving credit facility (“BOA Revolver”) and a term loan (“BOA Term Loan”) with a current remaining balance of $57.0 million. The full proceeds of any future sale or total loss of a vessel collateralizing the BOA Credit Facility or any disposition of any asset owned by a BOA Credit Facility borrowing subsidiary is required to be applied toward the prepayment of the BOA Revolver. The amount available under the BOA Revolver, which expires March 2012, is reduced by any prepayments.
In connection with the amendment of existing credit facilities, the Company incurred deferred financing costs of $4.0 million during the six months ended June 30, 2010. Applying guidance provided by FASB ASC 470-50-40 - - “Accounting for Modifications and Extinguishment of Debt”, $0.2 million of unamortized deferred financing costs previously incurred was charged to consolidated income during the first quarter of 2010. The financing costs incurred in amending the credit facilities are being amortized over the terms of the respective credit facilities.
Covenants
Our various debt agreements contain both financial and non-financial covenants, and include customary restrictions on the Company’s ability to incur indebtedness or grant liens, pay dividends under certain circumstances, enter into transactions with affiliates, merge, consolidate, or dispose of assets, or change the nature of our business. The Company is required to comply with maritime laws and regulations, maintain the vessels consistent with first-class ship ownership and management practice, keep appropriate accounting records and maintain specified levels of insurance. Covenants for all loan agreements with the exception of the Joh. Berenberg Gossler & Co. KG Bank credit facility require that the Company maintain a minimum consolidated fixed charge ratio, a maximum restricted consolidated leverage ratio and minimum month-end cash and cash equivalent balances. Some of our credit agreements also restrict leverage, investment and capital expenditures without lender consent. The table below sets forth a summary of the financial covenants in place as of June 30, 2010:
| Covenant | | Required as of June 30, 2010 |
| | | |
| Minimum Cash Liquidity | | Qualified cash of $15.0 million, which is defined in the agreement as cash and cash equivalents. |
| Minimum Consolidated Interest Charge Coverage Ratio | | Not less than a ratio of 3.00 to 1.00 at June 30, 2010 and 3.75 to 1.00 at September 30, 2010 of consolidated EBITDA for the four previous quarters to consolidated interest expense for the same period. Not measured after September 30, 2010. |
| | | |
| Maximum Consolidated Leverage Ratio | | Not more than a ratio of 5.00 to 1.00 at June 30, 2010, 3.75 to 1.00 at September 30, 2010, 3.00 to 1.00 at December 31, 2010 and March 31, 2011, 2.75 to 1.00 at June 30, 2011 and 2.50 to 1.00 at September 30, 2011 and thereafter, of consolidated funded indebtedness, as defined in the loan agreements, at the end of a quarter to consolidated EBITDA for the four previous quarters. |
| | | |
| Minimum Consolidated Fixed Charge Coverage Ratio | | Not measured until December 31, 2010. Not less than a ratio of 1.10 to 1.00 at December 31, 2010, 1.30 to 1.00 at March 31, 2011, 1.50 to 1.00 at June 30, 2011 and, 1.75 to 1.00 at September 30, 2011 and thereafter of consolidated EBITDA for the four previous quarters to consolidated interest expense for the same period plus regularly scheduled debt payments for the following 12 months. |
As of June 30, 2010 the Company met the minimum cash liquidity, minimum consolidated interest charge coverage ratio and maximum consolidated leverage ratio requirements.
Credit Facility Terms
The table below summarizes the repayment terms, interest rate benchmark and post amendment margin rates, number of vessels and net book value at June 30, 2010 collateralizing each credit facility:
| | | | | | Base and Margin | | Net Book Value of Collateral at | | Number of Vessels | |
| | | | | | Interest Rate at | | June 30, 2010 | | Collaterazlizing | |
| Credit Facility | | Repayment terms | | June 30, 2010 | | in millions | | Credit Facility | |
| Bank of America - Term Credit Facility | | 15 quarterly installments of $9.5 million through December 31, 2011 | | LIBOR plus 5.25% (a) | | | | | |
| | | | | | | | | | | |
| Bank of America - Revolving Credit Facility, | | Balloon Payment due March 26, 2012 | | LIBOR plus 5.25% (a) | | $ | 360.70 | | 30 | |
| | | | | | | | | | | | |
| The Royal Bank of Scotland Credit Facility | | | | | | | | | | |
| | Construction Period | | Conversion to term loan of the debt associated with each vessel upon delivery of the respective vessel | | LIBOR plus 5.00% | | $ | 116.30 | | 4 | (b) |
| | | | | | | | | | | | |
| | Post Delivery Term Loan | | 20 quarterly installments of $0.4 million commencing three months after delivery of each vessel with a final installment due of $16.6 million | | LIBOR plus 5.00% | | $ | 79.40 | | 2 | |
| | | | | | | | | | | | |
| DVB Group Merchant Bank (Asia) Ltd Credit Facility | | 10 quarterly installments of $4.9 million and 10 quarterly installments of $2.6 million through January 2013 | | LIBOR plus 5.25% (a) | | $ | 35.90 | | 7 | |
| | | | | | | | | | | | |
| Credit Suisse Credit Facility | | 8 quarterly installments of $1.5 million and 32 quarterly installments of $0.9 million through December 2017 and February 2018 | | LIBOR plus 3.25% | | $ | 57.80 | | 2 | |
| | | | | | | | | | | | |
| AIG Commercial Equipment Finance, Inc. Credit Facility | | 8 quarterly installments of $2.63 million and | | LIBOR plus 5.00% | | | | | | |
| | | | 8 quarterly installments of $1.75 million through April 2012 | | With an Interest Rate Floor of 10% | | $ | 75.70 | | 4 | |
| | | | | | | | | | | | |
| Commerzbank AG Credit Facility | | 4 quarterly installments of $1.5 million, and 4 quarterly installments of $1.0 million and 2 quarterly installments of $0.25 million through June 2011 | | LIBOR plus 4.00% | | $ | 21.20 | | 1 | |
| | | | | | | | | | | | |
| Berenberg Bank Credit Facility | | 16 quarterly installments of $0.8 million through June 2012 | | LIBOR plus 5.00% | | $ | 22.10 | | 1 | |
| | | | | | | | | | | 51 | |
| | | |
| (a) - | The base rate increases 50 basis points every six months starting with 5.25% through June 30, 2010; 5.75% through December 31, 2010; 6.25% through June 30, 2010; 6.75% through December 31, 2011 and 7.25% to maturity. | |
| | | | | | | | | | | | |
| (b) - | While vessels are under construction, advances are collateralized by shipbuilding contracts. | | | | | | |
The above credit facilities are collateralized primarily by vessels that are subject to the respective ship mortgages and assignment of the respective vessels’ freight revenue and insurance, as well as guarantees by TBSI and each of its subsidiaries with an ownership interest in the collateralized vessel. The credit agreement with Bank of America, N.A. is also guaranteed by the Company’s non vessel owning subsidiaries. The market value of vessels, as determined by appraisal, is required to be above specified value to loan ratios, as defined in each credit facility agreement, which range from 125% to 177% of the respective credit facility’s outstanding amount. The credit facilities require mandatory prepayment or delivery of additional security in the event that the fair market value of the vessels falls below limits specified. Beginning with the second quarter of 2010, the amended BOA Credit Facility requires that we obtain quarterly third-party vessel valuations of the vessels collateralizing the credit facility. As of June 30, 2010, the Company met the minimum collateral requirements of all credit facilities.
The loan facility agreement with The Royal Bank of Scotland plc (the “RBS Facility”) is collateralized by shipbuilding contracts while the respective vessels are under construction and by ship mortgages on the new vessels and assignment of freight revenue and insurance after delivery of the vessel. Further, the RBS Facility prohibits the Company from materially amending or failing to enforce the shipbuilding contracts.
At June 30, 2010 the Company had $117.5 million outstanding under the RBS Facility consisting of $47.9 million outstanding for delivered vessels, which is collateralized by the Rockaway Belle and Dakota Princess, and had $69.6 million outstanding in construction draw downs as shown below:
| · | $ 20.0 million drawn down on the contract signing, steel cutting, keel laying and launch of Hull No NYHS200722 (Montauk Maiden); |
| · | $ 15.0 million drawn down on the contract signing, steel cutting and keel laying of Hull No NYHS200723 (Comanche Maiden) |
| · | $ 19.6 million drawn down on the contract signing, steel cutting, keel laying and launch of Hull No NYHS200724; (Omaha Belle), and |
| · | $ 15.0 million drawn down on the contract signing, steel cutting and keel laying of Hull No NYHS200725 (Maya Princess). |
The RBS Facility requires that the Company deposit funds into a restricted cash account from which payments due to the Shipyard and not funded by The Royal Bank of Scotland plc (“RBS”) are to be paid. Cash held in the restricted cash account is not counted toward the minimum cash liquidity requirement. At June 30, 2010, there was a balance of $6.2 million in the restricted cash account. The current RBS Facility amendment does not require that additional deposits be made to the restricted cash account; however, no Company funded payments due to the shipyard for the remainder of 2010 are to be made from this account. Instead the balance is to carry over into 2011 and will be used to pay the Company’s share of payments due on the last two vessels to be delivered.
Guarantee Facility
Concurrently with the RBS Facility, the Company entered into a guarantee facility pursuant to which RBS guaranteed certain payments due under the shipbuilding contracts. Under the guarantee facility, RBS has agreed to guarantee up to $14.0 million for each of the six vessels due under the shipbuilding contracts for an aggregate guarantee of $84.0 million. The guarantee on each shipbuilding contract is reduced by $7.0 million after keel laying and $7.0 million after launching. At June 30, 2010, the remaining amount outstanding under the guarantee facility was $14.0 million. The guarantee facility, which expires twelve months after the anticipated delivery date of the respective vessel, is guaranteed by TBSI.
Note 9 — Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations. Currently, the only risk managed by derivative instruments is interest rate risk. Interest rate swaps are entered into to manage the interest rate risk associated with the Company’s floating-rate borrowings. FASB ASC Topic 815 - “Derivatives and Hedging”, requires companies to recognize all derivative instruments at fair value in the statement of financial position. The Company designates and accounts for its interest rate swap contracts as cash flow hedges in accordance with FASB ASC Subtopic 815-30 - “Cash Flow Hedges”.
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
As of June 30, 2010, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swaps was $158.0 million. Interest rate contracts have fixed interest rates ranging from 2.92% to 5.24%, with a weighted average rate of 3.08%. Interest rate contracts having a notional amount of $88.0 million at June 30, 2010, decrease as principal payments on the respective debt are made.
Information on the location and amounts of derivative fair values in the consolidated balance sheets and derivative gains and losses in the consolidated income statements is shown below (in thousands):
| | Liability Derivatives | |
| | June 30, 2010 | | December 31, 2009 | |
| | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | |
| Derivatives designated as hedging instruments under ASC Topic 815 | | | | | | | | |
| | | | | | | | | |
| Interest rate contracts | Other liabilities | | $ | 5,774 | | Other liabilities | | $ | 8,997 | |
| | | | | | | | | | | |
| Derivatives not designated as hedging instruments under ASC Topic 815 | | | | | | | | | | |
| | | | | | | | | | | |
| Interest rate contracts | Other liabilities | | | 3,936 | | Other liabilities | | | 980 | |
| Total derivatives | | | $ | 9,710 | | | | $ | 9,977 | |
| | | Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives (Effective Portion) | |
| Derivatives under ASC Topic 815 Cash Flow Hedging Relationships | | June 30, 2010 | | | December 31, 2009 | |
| Designated Hedges: | | | | | | |
| Interest rate contracts | | $ | (5,130 | ) | | $ | (8,275 | ) |
| De-designated Hedges: | | | | | | | | |
| Interest rate contracts-OCI frozen | | | (5,525 | ) | | | | |
| Total derivatives | | $ | (10,655 | ) | | $ | (8,275 | ) |
| | | | | Amount of Gain or (Loss) Recognized in Income on Derivatives | |
| | | | | For the Three Months Ended June 30, | | | For the Six Months Ended June 30, | |
| Derivatives in Statement 133 Cash Flow Hedging Relationships | | Location of Gain or (Loss) Recognized in Income on Derivatives | | 2010 | | 2009 | | | 2010 | | 2009 | |
| | | | | | | | | | | | | |
| Derivatives Not Designated as Hedging Instruments under Statement 133 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Interest rate contracts | | Interest expense | | $ | 826 | | $ | 510 | | | $ | 895 | | $ | 707 | |
| | | | | | | | | | | | | | | | | |
| Ineffective Portion of Derivatives Designated as Hedging Instruments under Statement 133 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest rate contracts | | Interest expense | | | | | | (355 | ) | | | | | | (564 | ) |
| | | | | $ | 826 | | $ | 155 | | | $ | 895 | | $ | 143 | |
In June 2010, the Company terminated two interest rate contracts. One was a deferred starting interest rate contract, which started December 29, 2014 and continued through December 29, 2019, for the notional amount of $20.0 million of debt, that was callable at the bank’s option at any time during the contract. In connection with this deferred starting interest rate contract, the Company entered into the second of the terminated interest rate contracts, a receiver swap option which gave the Company the right but not the obligation to enter into a subsequent interest rate contract if the bank called the initial contract. Accordingly, changes to the value of these contracts did not qualify for hedge accounting treatment and were included as a component of interest expense in the consolidated statement of income from inception of the contracts.
In June 2010, the Company changed the expiration date, from June 2019 to June 2014, on one of its interest rate contracts that had been designated a hedging instrument. At the time, it was determined that it was no longer probable that the hedging instrument would effectively hedge future cash flows and the hedging instrument was de-designated. The amount to other comprehensive income of $5.9 million was frozen and will be reclassified into earnings quarterly through June 2019. At June 30, 2010, we did not designate the interest rate contract having the new expiration date as a hedging instrument. The Company paid $3.0 million to modify/terminate the three interest rate contracts.
The Company does not obtain collateral or other security to support financial instruments subject to credit risk. The Company monitors the credit risk of our counterparties and enters into agreements only with established banking institutions. The financial stability of those institutions is subject to current and future global and national economic conditions, and governmental support.
Effective January 1, 2008, the Company adopted FASB ASC Topic 820 – “Fair Value Measurements and Disclosures” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value hierarchy for disclosure of fair value measurements is as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities
Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 – Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
The following table summarizes assets and liabilities measured at fair value on a recurring basis at June 30, 2010 (in thousands):
| | | Level 1 | | | Level 2 | | | Level 3 | |
| Liabilities | | | | | | | | | |
| Interest rate contracts | | $ | - | | | $ | 9,710 | | | $ | - | |
Our interest rate swap contracts are traded in the over-the-counter market. The fair value is based on the quoted market price for a similar liability or determined using inputs that use as their basis readily observable market data that are actively quoted and can be validated through external sources.
Note 10 — Investment in Joint Ventures
Investment in a consolidated joint venture:
In January 2010, the Company entered into a joint venture agreement to form Log.Star Navegação S.A. ("Log-Star") a Brazilian corporation. The Company acquired a 70% economic interest in Log-Star while Logística Intermodal S.A. (“Log-In”) an unrelated Brazilian corporation purchased the remaining 30% interest. Log-Star is authorized to transport breakbulk, bulk, liner, and parcel services in the Brazilian coastal cabotage trade as well as in the Amazon River.
Under the joint venture agreement, the Company has the right to appoint or remove the chief operating officer of Log-Star, who is responsible for the management of commercial and operational activities, as well as for the technical management of the vessels. This would allow the Company to have the power to significantly affect Log-Star’s economic performance. Based on the accounting guidance provided by FASB ASC Topic 810 - “Consolidation” the Company is considered the primary beneficiary of Log-Star and is required to consolidate it in the Company’s consolidated financial statements. The Company has consolidated Log-Star’s results in its financial statements.
Investment in non-consolidated variable interest entities (VIE):
In February 2010, the Company acquired a 50% interest in African Project Logistics ("APL") for $0.9 million of which $0.4 million was paid in February 2010. The balance is due in installments when specific performance metrics are met. APL provides project logistics services in South Africa. Additionally, the Company has a 50% interest in Panamerican Port Services SAC, which operates a warehouse located in Callao, Peru and a 50% interest in GAT-TBS Mining Consortium S.A, which mines calcium carbonate aggregates in the Dominican Republic. We have determined that our 50% interest in each of these joint ventures is a VIE.
As of June 30, 2010 our investments in these entities, including equity and loans made and committed to be made subsequent to June 30, 2010, is our maximum exposure to loss from these entities. We are not contractually required to provide any financial or other support to any of the joint ventures. We have determined we are not the primary beneficiary of any of the VIE’s as we do not have the power to direct the activities that most significantly impact their economic performance. Accordingly, we do not consolidate these entities and account for our investments in the entities under the equity method. The investments in the joint ventures are included within other assets and deferred charges in our consolidated financial statements.
Note 11 — Equity Transactions
Class A and Class B Ordinary Shares
The Company has two classes of ordinary shares that are issued and outstanding: Class A ordinary shares, which are listed on the NASDAQ Global Select Market under the symbol "TBSI", and Class B ordinary shares. The Class A ordinary shares and Class B ordinary shares have identical rights to dividends, surplus and assets on liquidation; however, the holders of Class A ordinary shares are entitled to one vote for each Class A ordinary share on all matters submitted to a vote of holders of ordinary shares, while holders of Class B ordinary shares are entitled to one-half of a vote for each Class B ordinary share.
The holders of Class A ordinary shares can convert their Class A ordinary shares into Class B ordinary shares, and the holders of Class B ordinary shares can convert their Class B ordinary shares into Class A ordinary shares at any time. The Class B ordinary shares will automatically convert into Class A ordinary shares upon transfer to any person other than another holder of Class B ordinary shares, as long as the conversion will not cause the Company to become a controlled foreign corporation, as defined in the Internal Revenue Code of 1986, as amended ("Code"), or the Class A ordinary shares have not ceased to be regularly traded on an established securities market for purposes of Section 883 of the Code. During the six months ended June 30, 2010, certain holders of Class A ordinary shares converted 2,350,000 Class A ordinary shares into 2,350,000 Class B ordinary shares.
Warrants
As a result of additional shares issued in connection with our Equity Incentive Plan, the number of shares exercisable under outstanding warrants increased by 2,369 Class A ordinary shares and 35,315 Class B ordinary shares. Accordingly, at June 30, 2010, there were outstanding exercisable warrants to purchase 108,525 Class A ordinary shares and 241,062 Class B ordinary shares held by parties not affiliated with existing shareholders. The warrants are exercisable for a period of ten years following the date on which their exercise condition was met (February 8, 2005), at a price of $0.01 per share.
Treasury Stock
The Company's Equity Incentive Plan permits stock grant recipients to elect a net settlement. Under the terms of a net settlement, the Company retains a specified number of shares to cover the recipient's estimated statutory minimum tax liability. The retained shares are held in the Company's treasury. During the three and six months ended June 30, 2010, a total of 624,369 and 650,869 Class A ordinary shares, respectively, vested with employees. Certain employees elected to have the Company withhold and remit their respective payroll tax obligations. Accordingly, the Company retained and added to its treasury stock 110,832 Class A ordinary shares, valued at $686,000 to cover employees’ estimated payroll tax liability. At June 30, 2010, the Company held 131,703 Class A ordinary shares as treasury stock, having a cost of $1,169,519.
Note 12 — Stock Plan
The Company adopted an Equity Incentive Plan in 2005, which authorizes the grant of "non-qualified" shares to employees and independent directors. In 2009 the Equity Incentive Plan was amended to increase the maximum number of shares that can be granted under the plan, allow for the granting of both Class A ordinary shares and Class B ordinary shares and expand the definition of eligible persons under the plan to include affiliates and agency service companies. The maximum number of shares that can be granted under the plan increased to 5,000,000 shares, including no more than 1,000,000 Class B shares.
Prior to 2010, the Company awarded 234,000 restricted Class A ordinary shares, of which 34,500 shares have not yet vested as of June 30, 2010. On April 15, 2010, the Company awarded 12,500 restricted Class A ordinary shares to its independent directors that vested at the time of the Company’s Annual General Meeting on June 10, 2010. On June 1, 2010, the Company issued 338,869 fully vested Class A ordinary shares to employees. The full award to employees was 559,582 Class A ordinary shares; however, 220,713 Class A ordinary shares were not issued to reimburse the Company for payroll taxes paid on behalf of employees. The shares will be issued by the Company at a later date. On June 30, 2010, the Company issued 169,381 fully vested Class A ordinary shares to senior management. The shares are part of a 273,000 Class A ordinary share award to senior management from which 103,619 shares were withheld, under a net settlement arrangement, to reimburse the Company for payroll taxes paid on behalf of the executives. On June 30, 2010, the Company granted 765,000 Class A ordinary shares to employees. These shares, which had a fair value of $4.7 million at grant date, vest in four equal installments starting June 30, 2011 and will be recognized ratably over the vesting period.
The Company recognized total stock-based compensation costs of $3.3 million and $0.3 million for the three months ended June 30, 2010 and 2009, respectively, and $5.9 million and $0.8 million for the six months ended June 30, 2010 and 2009, respectively. These amounts are reflected in the Consolidated Statement of Income in general and administrative expenses. The company derives no material income tax benefit for stock based compensation due to its tax structure.
At June 30, 2010, unrecognized stock-based compensation expense related to non-vested restricted stock-based awards totaled $4.9 million. The cost of these non-vested awards will be recognized over a weighted-average period of 2.4 years.
Note 13 — Earnings Per Share
The following table, which is in thousands except for the number of shares and loss per share amounts; sets forth the computation of basic and diluted net (loss) per share for the three and six months ended June 30, 2010 and 2009:
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | | (in thousands, except number of shares and earnings per share amounts) | |
| Numerators: | | | | | | | | | | | | |
Net (loss) attributed to TBS International plc and | | | | | | | | | | | | | | | | |
(Loss) available to ordinary shareholders — basic and diluted | | $ | (9,677 | ) | | $ | (16,913 | ) | | $ | (17,520 | ) | | $ | (38,201 | ) |
| | | | | | | | | | | | | | | | | |
| Denominators: | | | | | | | | | | | | | | | | |
Weighted average ordinary shares outstanding — basic and diluted | | | 29,973,420 | | | | 29,827,345 | | | | 29,930,634 | | | | 29,822,402 | |
| | | | | | | | | | | | | | | | | |
| Net (loss) per ordinary share: | | | | | | | | | | | | | | | | |
basic and diluted | | $ | (0.32 | ) | | $ | (0.57 | ) | | $ | (0.59 | ) | | $ | (1.28 | ) |
| | | | | | | | | | | | | | | | | |
Anti-dilutive warrants not included above | | | 349,587 | | | | 311,903 | | | | 349,587 | | | | 311,903 | |
As outlined in sections of FASB ASC Topic 260 – “Earnings per Share”, unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities that should be included in the two-class method of computing loss per share. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings (loss) per share for ordinary stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Our non-vested stock, consisting of time-vested restricted shares are considered participating securities since the share-based awards contain a non-forfeitable right to dividends irrespective of whether the awards ultimately vest.
At June 30, 2010 there were outstanding exercisable warrants to purchase 108,525 Class A and 241,062 Class B ordinary shares, held by parties not affiliated with existing shareholders. The warrants are issuable for nominal consideration upon exercise, which would have caused the warrants to be treated as outstanding for purposes of computing basic earnings per share. However, for the three and six months ended June 30, 2010 and 2009, the warrants were not treated as outstanding for purposes of computing basic and diluted earnings per share because they would be anti-dilutive.
Note 14 — Commitments and Contingencies
Commitments
Charters-in of Vessels
The Company charters-in two vessels (Laguna Belle and Seminole Princess) under amended long-term non-cancelable operating leases (the “Bareboat Charters”), that were part of a sale-leaseback transaction. The Bareboat Charters expire on January 30, 2014. Each Bareboat Charter requires charter hire payments of $10,500 per day for the first 24 months of the charter, $10,000 per day for the 25th through the 36th months of the charter (through January 2010), $8,041 per day for the 37th through the 39th months of the charter (February 2010 through April 2010), $8,240 per day for the 40th through the 48th months of the charter (May 2010 through January 2011), $8,110 per day for the 49th through the 60th months of the charter (February 2011 through January 2012), $8,030 per day for the 61st through the 72nd months of the charter (February 2012 through January 2013) and $7,950 per day for the 73rd through the 84th months of the charter (February 2013 through January 2014). The charter agreements allow for the purchase of the respective vessel at the end of the fifth, sixth or seventh year of the charter period at a vessel price of $11.1 million, $9.15 million, or $6.75 million, respectively, and for the purchase options to be exercised at any other date during the option period at a pro rata price. The leases under the sale-leaseback transactions are classified as operating leases. Deposits of $2.75 million, to be held by the lessor for each charter during the charter period, were required at the inception of the leases. The deposits are to be returned, without interest, at the expiration of the charter period, unless applied earlier toward the amounts due upon exercise of the purchase option.
As mentioned above, the Bareboat Charters contain predetermined fixed decreases of the charter hire payments due under the charters. The Company recognizes the related rental expense on a straight-line basis over the term of the charters and records the difference between the amounts charged to operations and amounts paid as deferred rent expense. At June 30, 2010 and December 31, 2009, deferred rent expense was $3.4 million and $3.5 million, respectively. Deferred leasing costs of $1.7 million are being amortized over the terms of the leases.
The Company, through its consolidated Brazilian joint venture, charters-in three Brazilian flagged vessels under a bareboat charter at a charter hire rate of 5,000 Brazilian Reais per vessel per day that expires in February 2013. The vessels are chartered in from Log-in Logistica Intermodal S.A., who holds the 30% non-controlling interest in the consolidated Brazilian joint venture.
Other Leases
The Company leases four properties, two of which are used by TBSI’s service company subsidiaries, Roymar Ship Management, Inc. (“Roymar”) and TBS Shipping Services and its subsidiaries, for the administration of their operations. The third and fourth properties are office and warehouse space leased by TBS Energy Logistics.
TBS Shipping Services leases its main office space from our chairman and chief executive officer, Joseph E. Royce. The lease expires on December 31, 2010, subject to five one-year renewal options. The lease provides for monthly rent of $20,000, plus operating expenses including real estate taxes.
Roymar renewed the lease for its main offices in November 2009 for one year through November 30, 2010, under the first of two one-year renewal options at a monthly rent of approximately $27,000. The lease requires Roymar to pay additional rent for real estate tax escalations.
At June 30, 2010, we leased property through our subsidiary TBS Energy Logistics. The lease term is for five years commencing October 1, 2009 and running through September 30, 2014. Monthly rent is $8,054 for the first year, October 1, 2009 through September 30, 2010. The monthly rent increases to $8,255, $8,463, $8,677 and $8,898, for the second through fifth years.
TBS Energy Logistics also leases a warehouse for 38 months commencing May 1, 2009 through June 30, 2012 at a monthly rent of $22,000 for the year commencing July 1, 2009 through June 30, 2010. The monthly rent increases to $22,400 and $22,800, for the years ending June 2011 and June 2012, respectively.
As of June 30, 2010, future minimum commitments under operating leases with initial or remaining lease terms exceeding one-year are as follows (in thousands):
| | | | | | Office | | | | |
| At June 30, 2010 | | Vessel Hire | | | Premises | | | Total | |
2010 (July 1, 2010 through December 31, 2010) | | | 4,583 | | | | 439 | | | | 5,022 | |
2011 | | | 9,004 | | | | 371 | | | | 9,375 | |
2012 | | | 8,967 | | | | 239 | | | | 9,206 | |
2013 | | | 6,120 | | | | 105 | | | | 6,225 | |
Thereafter | | | 493 | | | | 80 | | | | 573 | |
| | | $ | 29,167 | | | $ | 1,234 | | | $ | 30,401 | |
| | | | | | | | | | | | | |
Purchase Obligations – New Vessel Buildings
At June 30, 2010, the Company had purchase obligations totaling $45.3 million in connection with its new vessel building program, including a $0.1 million obligation under the contract for the supervision and inspection of vessels under construction. The obligations will become payable as the shipyard meets several milestones through September 2011. As of June 30, 2010, $45.2 million of the purchase obligation is scheduled to be paid as follows: $29.6 million in 2010 and $15.6 million in 2011. The timing of actual payments will vary based upon when the milestones are met.
Contingencies
The Company is periodically a defendant in cases involving personal injury and other matters that arise in the normal course of business. While any pending or threatened litigation has an element of uncertainty, the Company believes that the outcome of these lawsuits or claims, individually or combined, will not materially adversely affect the consolidated financial position, results of operations or cash flows of the Company.
Note 15 — Business Segment
The Company is managed as a single business unit that provides worldwide ocean transportation of dry cargo to its customers through the use of owned and chartered vessels. The vessels are operated as one fleet and when making resource allocation decisions, our chief operating decision maker evaluates voyage profitability data, which considers vessel type and route economics, but gives no weight to the financial impact of the resource allocation decision on an individual vessel basis. The Company's objective in making resource allocation decisions is to maximize its consolidated financial results, not the individual results of the respective vessels or routes.
The Company transports cargo throughout the world, including to and from the United States. Voyage revenue is attributed to non-U.S. countries based on the loading port location. The difference between total voyage revenues and total revenue by country is revenue from the United States. Time charter revenue by country cannot be allocated because the Company does not control the itinerary of the vessel.
Voyage revenue generated in countries excluding the U.S. (in thousands):
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| Country | | 2010 | | 2009 | | | 2010 | | 2009 | |
| Brazil | | $ | 14,181 | | $ | 14,130 | | | $ | 30,154 | | $ | 22,443 | |
| Japan | | | 11,785 | | | 8,584 | | | | 25,178 | | | 19,559 | |
| United Arab Emirates | | | 8,808 | | | 7,427 | | | | 16,978 | | | 20,006 | |
| Chile | | | 7,064 | | | 5,072 | | | | 14,244 | | | 9,902 | |
| China | | | 8,766 | | | 2,125 | | | | 13,753 | | | 6,209 | |
| Peru | | | 5,186 | | | 7,397 | | | | 9,694 | | | 13,556 | |
| Korea | | | 1,934 | | | 731 | | | | 5,277 | | | 4,063 | |
| Argentina | | | 1,320 | | | 2,396 | | | | 1,310 | | | 5,007 | |
| Venezuela | | | 825 | | | 1,233 | | | | 1,532 | | | 1,233 | |
| Others | | | 5,237 | | | 6,518 | | | | 13,329 | | | 9,557 | |
| Total | | $ | 65,106 | | $ | 55,613 | | | $ | 131,449 | | $ | 111,535 | |
| | | | | | | | | | | | | | | |
For the three and six months ended June 30, 2010 no customers and one customer, respectively, accounted for 10% or more of voyage and time charter revenue. For the three and six months ended June 30, 2009, no customers accounted for 10% or more of voyage and time charter revenue.
At June 30, 2010, no customers accounted for 10% or more of charter hires receivables. One customer accounted for 10% or more of charters hire receivables at December 31, 2009.
Note 16 — Subsequent Events
Management evaluated all activity of the Company through the date of issuance of our consolidated financial statements, and concluded that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.
On June 29, 2010, the Company signed a Memorandum of Agreement to sell the Savannah Belle for $2.8 million. The sale was completed on July 20, 2010 and the net proceeds were used to pay down the BOA Revolver.
Forward - - Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect current expectations of the Company's management. They are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include, among other things, all information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities and the effects of future regulation and competition. Forward-looking statements include all statements that are not historical facts and can generally be identified as forward-looking statements because they use words such as "anticipates," "believes," "estimates," "expects," "future," "intends," "plans," "targets," "projects," "sees," "seeks," "should," "will," and similar terms.
Forward-looking statements involve risks, uncertainties and assumptions. Although the Company does not make forward-looking statements unless it believes it has a reasonable basis for doing so, it cannot guarantee their accuracy. Actual results may differ materially from those expressed, implied or projected in or by these forward-looking statements due to important factors that could cause actual results to differ materially from those in the forward-looking statement, including the risks disclosed in our Form 10-K filed with the Securities and Exchange Commission on March 16, 2010, and other unforeseen risks. Among other unforeseen risks, uncertainties, risks and other factors that could cause actual results to differ materially include, but are not limited to:
| · | changes in demand for our services, which are increasingly difficult to predict due to the current economic conditions and uncertainty; |
| · | a decline in vessel valuations; |
| · | our ability to maintain financial ratios and comply with the financial covenants required by our credit facilities as amended; |
| · | our ability to finance our operations and raise additional capital on commercially reasonable terms or at all; |
| · | changes in rules and regulations applicable to the shipping industry, including legislation adopted by international organizations such as the International Maritime Organization and the European Union or by individual countries; |
| · | actions taken by regulatory authorities; |
| · | changes in trading patterns, which significantly may affect overall vessel tonnage requirements; |
| · | changes in the typical seasonal variations in charter rates; |
| · | volatility in costs, including changes in production of or demand for oil and petroleum products, crew wages, insurance, provisions, repairs and maintenance, generally or in particular regions; |
| · | default by financial counterparties; |
| · | a material decline or weakness in shipping rates, which may occur if the economic recovery is not sustainable; |
| · | changes in general domestic and international political conditions; |
| · | changes in the condition of our vessels or applicable maintenance or regulatory standards which may affect, among other things, our anticipated drydocking or maintenance and repair costs; |
| · | increases in the cost of our drydocking program or delays in our anticipated drydocking schedule; |
| · | China Communications Construction Company Ltd./ and Nantong Yahua Shipbuilding Group Co., Ltd.’s ability to complete and deliver the remaining multipurpose tweendeckers on the anticipated schedule and the ability of the parties to satisfy the conditions in the shipbuilding agreements; |
| · | the possible effects of pending and future legislation in the United States that may limit or eliminate potential U.S. tax benefits resulting from our jurisdiction of incorporation; |
| · | Irish corporate governance and regulatory requirements which could prove different or more challenging than currently expected; and |
| · | other factors that are described in the “Risk Factors” sections of reports filed with the Securities and Exchange Commission. |
You should not rely on any forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required under applicable law.
General
The following is a discussion of our financial condition at June 30, 2010 and December 31, 2009 and our results of operations comparing the three and six months ended June 30, 2010 with the three and six months ended June 30, 2009. You should read this section in conjunction with the consolidated financial statements and the related notes to those financial statements included elsewhere in this Quarterly Report.
Overview
We are an ocean transportation services company, originating in 1993, that offers worldwide shipping solutions to a diverse client base of industrial shippers. We operate liner, parcel, bulk and logistic services supported by a fleet of multipurpose tweendeckers, and handysize and handymax bulk carriers. The flexibility of our fleet allows us to carry a wide range of cargo, including industrial goods, project cargo, steel products, metal concentrates, fertilizer, salt, sugar, grain, aggregates and general cargo, which cannot be carried efficiently by container or large dry bulk carriers.
Over the past 17 years, we have developed our business model around key trade routes between Latin America and Japan, South Korea and China, as well as ports in North America, Africa, the Caribbean, and the Middle East. We differentiate ourselves from our competitors by offering a fully integrated shipping solution to our customers, which we refer to as our Five Star Service. As part of our Five Star Service, we offer total project coordination, door-to-door supply chain management including port services, terminal operations, trucking, barging, warehousing, distribution, inland pick-up and delivery, and documentation. We also provide frequent, regularly scheduled voyages within our shipping network and offer additional services such as strategic planning, cargo scheduling, loading and discharge.
As of June 30, 2010, our controlled fleet totaled 49 vessels, including 47 ships that we own, two of which are newly constructed vessels, and two that we charter-in with an option to purchase. In addition to the 49 vessels, we have chartered-in three ships through our consolidated joint venture in Brazil, Log.Star Navegação S.A., ”Log-Star”, for three years, two of these vessels have been in drydock since the time they were delivered to Log-Star. In March 2007, we entered into a contract for six multipurpose vessels with retractable tweendecks. The first vessel, the Rockaway Belle, was delivered in September 23, 2009 and the second vessel, the Dakota Princess, was delivered on March 2010. Both vessels were delivered in China from Nantong Yahua Shipbuilding Group Co., Ltd. Two of the remaining four vessels are scheduled for delivery during the second half of 2010 and the last two deliveries are scheduled for 2011. The two new vessels that are expected to be delivered in the third and fourth quarters of 2010 have been named Montauk Maiden and Omaha Belle, respectively. On June 29, 2010, we signed a Memorandum of Agreement to sell the Savannah Belle. The sale was completed on July 20, 2010.
We target niche markets, which include trade routes, ports and cargoes not efficiently served by container and large dry bulk vessel operators. In order to effectively serve these markets, we offer regularly scheduled voyages using our fleet of multipurpose tweendeckers and handysize and handymax dry bulk carriers. Tweendeck vessels are differentiated by their retractable decks that can create separate holds, facilitating the transportation of non-containerized cargoes. Our vessels are able to navigate and service many ports with restrictions on vessel size and transport many types of cargo that cannot be carried efficiently by containers or large dry bulk carriers. Our Brazilian joint venture, Log-Star, recently obtained an operational license in Brazil to provide domestic shipping services. This Brazilian flagged shipping company will concentrate on the movement of breakbulk, bulk parcels, heavy lift, general and project cargoes along Brazil's coastline and Amazon River basin.
As part of our comprehensive transportation service offering, we provide portside and inland logistics, related support services and solutions for challenging cargoes. In order to provide these services, we employed a professional staff of approximately 175 employees as of June 30, 2010, with extensive experience and diverse backgrounds. In addition, our affiliate, TBS Commercial Group Ltd. has fully staffed agencies and representative offices on five continents, with local teams of commercial agents and port captains who meet regularly with customers to tailor solutions to their logistics needs. We believe this full-service approach to shipping provides a superior level of service that has resulted in the development of long-term relationships with our customers.
Our customers rely on our regular service as an integral part of their supply chain, and many of these relationships have been maintained for over 16 years. We serve approximately 300 customers in more than 20 countries. We have developed long-term relationships with established and well-respected industrial shippers in diverse markets including mining, steel manufacturing, trading, heavy industry, industrial equipment and construction. We believe our business model allows us to respond rapidly to our customers’ changing demands and short delivery windows, increasing the value of our services to them as we enable them to schedule production and distribution.
Non-GAAP Financial Measures
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes financial measures prepared in accordance with United States generally accepted accounting principles (“GAAP”) and one other non-GAAP financial measure, “Earnings (Loss) Before Interest, Taxes, Depreciation, and Amortization” or EBITDA. EBITDA is calculated by adding net interest expense, income taxes, depreciation, and amortization charges to net income (loss) as presented in the Consolidated Statements of Income. This definition of EBITDA may not be comparable to other companies’ EBITDA measure and should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance.
Drydocking
During 2007 and 2008, we engaged in an accelerated steel renewal and replacement program for our drydocked vessels. As a result, we realized savings on the cost of subsequent drydockings for some vessels. Under the accelerated program, steel renewals and replacements were made on the basis of the physical condition of the vessel, including renewals and replacements that were, at that time, believed to be required in the upcoming five to ten years. Vessels must be drydocked twice during a five-year cycle. Our controlled fleet of 49 vessels at June 30, 2010, would require approximately 98 drydockings over five years for an average of 20 vessels per year. The first drydocking of a newly constructed vessel, which would be a special survey of the vessel, is typically done five years after delivery of the vessel from the shipyard.
During the first quarter of 2010, two vessels that entered into drydock during the fourth quarter of 2009 continued their drydocking for 28 days into the first quarter of 2010 and two vessels entered drydock for 45 days. During the second quarter of 2010, five vessels entered drydock for 110 days. Our quarterly schedule of vessels drydocked and anticipated to be drydocked during 2010, including actual and estimated number of drydock days and metric tons of steel renewal, is as follows:
| | Number of vessels in drydock from previous quarter | | | Number of vessels entering drydock during quarter | | Number of drydock days during quarter | | Approximate metric tons (MT) of steel installed |
| Actual | | | | | | | | | | | | |
| First Quarter 2010 | 2 | | | 2 | | 73 | | days | | | 85 | | MT |
| Second Quarter 2010 | | | | 5 | | 110 | | days | | | 481 | | MT |
| Estimated | | | | | | | | | | | | | |
| Third Quarter 2010 | 2 | | | 5 | | 149 | | days | | | 1,090 | | MT |
| Fourth Quarter 2010 | 2 | | | 2 | | 74 | | days | | | 495 | | MT |
| Total for 2010 | | | | 14 | | 406 | | days | | | 2,151 | | MT |
We estimate that vessel drydockings that require less than 100 metric tons of steel renewal will take from 20 to 30 days and that vessel drydockings that require 100 to 500 metric tons of steel renewal will take from 30 to 45 days. We capitalize vessel improvements, including steel renewal and reinforcement, in connection with the first drydocking after we acquire a vessel.
In addition to the above, we have two vessels, chartered-in through our joint venture subsidiary in Brazil, Log-Star, that have been chartered-in for three years and have been in drydock since the time they were delivered to Log-Star.
New Ship Building
We are expanding our fleet of multipurpose retractable tweendeckers through our newbuilding program. In 2007, we contracted China Communications Construction Company Ltd. and Nantong Yahua Shipbuilding Group Co., Ltd. to build six newly designed vessels named the "Roymar Class". These 34,000 dead weight ton (“dwt”) vessels are a larger vessel class and their addition to our fleet will be a significant milestone in the implementation of our business plan to modernize and expand our fleet. While we remain committed to expanding our fleet, pending a significant change in global economic conditions, we are temporarily suspending any further acquisitions of secondhand vessels. Our current business strategy includes growing through newbuildings of multipurpose tweendeckers and chartering-in vessels as needed.
We have taken delivery of the first two of six newbuildings. The Rockaway Belle was delivered in September 2009 and Dakota Princess was delivered in March 2010. Two of the remaining four newbuildings are scheduled for delivery during 2010 and two are scheduled for delivery in 2011. At June 30, 2010, the milestones already met and the quarters in which the remaining milestones are anticipated to be met for the four remaining vessels under construction are listed below:
