UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12 (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-10137
OR
[_] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report: Not applicable
EXCEL MARITIME CARRIERS LTD.
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(Exact name of Registrant as specified in its charter)
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(Translation of Registrant's name into English)
LIBERIA
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(Jurisdiction of incorporation or organization)
c/o Excel Maritime Carriers Ltd.
Par La Ville Place
14 Par La Ville Road
Hamilton HM JX Bermuda
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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Common shares, par value $0.01 New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the
Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by
the annual report:
As of December 31, 2006, there were 19,595,153 shares of Class A common
stock and 135,326 shares of Class B common stock of the registrant outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
[_] Yes [X] No
If this report is an annual report or transition report, indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
[_] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [_] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_]
Indicate by check mark which financial statement item the registrant has elected
to follow.
[_] Item 17 [X] Item 18
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
[_] Yes [X] No
TABLE OF CONTENTS
PART I
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ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS .......5
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE......................5
ITEM 3 - KEY INFORMATION..............................................5
ITEM 4 - INFORMATION ON THE COMPANY..................................17
ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS................29
ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..................41
ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...........46
ITEM 8 - FINANCIAL INFORMATION.......................................48
ITEM 9 - THE OFFER AND LISTING.......................................48
ITEM 10 - ADDITIONAL INFORMATION.....................................49
ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...........................................56
ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES............................................56
PART II
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ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............56
ITEM 14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS..................................57
ITEM 15T - CONTROLS AND PROCEDURES...................................57
ITEM 16A- AUDIT COMMITTEE FINANCIAL EXPERT...........................58
ITEM 16B- CODE OF ETHICS.............................................58
ITEM 16C- PRINCIPAL ACCOUNTANT FEES AND SERVICES.....................58
ITEM 16D- EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES..........................................58
ITEM 16E- PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS.................................58
PART III
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ITEM 17 - FINANCIAL STATEMENTS.......................................58
ITEM 18 - FINANCIAL STATEMENTS.......................................58
ITEM 19 - EXHIBITS...................................................58
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Matters discussed in this document may constitute forward-looking statements.
The Private Securities Litigation Reform Act of 1995 provides safe harbour
protections for forward-looking statements in order to encourage companies to
provide prospective information about their business. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements, which
are other than statements of historical facts.
Please note in this annual report, "we", "us", "our", "the Company", and "Excel"
all refer to Excel Maritime Carriers Ltd. and its consolidated subsidiaries.
Excel Maritime Carriers Ltd., or the Company, desires to take advantage of the
safe harbour provisions of the Private Securities Litigation Reform Act of 1995
and is including this cautionary statement in connection with this safe harbor
legislation. This document and any other written or oral statements made by us
or on our behalf may include forward-looking statements, which reflect our
current views with respect to future events and financial performance. The words
"believe", "anticipate", "intends", "estimate", "forecast", "project", "plan",
"potential", "will", "may", "should", "expect" and similar expressions identify
forward-looking statements.
The forward-looking statements in this document are based upon various
assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, managements examination of historical operating
trends, data contained in our records and other data available from third
parties. Although we believe that these assumptions were reasonable when made,
because these assumptions are inherently subject to significant uncertainties
and contingencies which are difficult or impossible to predict and are beyond
our control, we cannot assure you that we will achieve or accomplish these
expectations, beliefs or projections.
In addition to these important factors and matters discussed elsewhere herein
and in the documents incorporated by reference herein, important factors that,
in our view, could cause actual results to differ materially from those
discussed in the forward-looking statements include the strength of world
economies and currencies, general market conditions, including fluctuations in
charter hire rates and vessel values, changes in the Company's operating
expenses, including bunker prices, drydocking and insurance costs, changes in
governmental rules and regulations, changes in income tax legislation or actions
taken by regulatory authorities, potential liability from pending or future
litigation, general domestic and international political conditions, potential
disruption of shipping routes due to accidents or political events, and other
important factors described from time to time in the reports filed by the
Company with the Securities and Exchange Commission.
PART I
ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable
ITEM 3 - KEY INFORMATION
A. Selected Financial Data
The following table sets forth our selected historical consolidated
financial data and other operating information for each of the five years in the
five year period ended December 31, 2006. The following information should be
read in conjunction with "Item 5, Operating and Financial Review and Prospects",
the consolidated financial statements, related notes, and other financial
information included herein. The following selected consolidated financial data
of Excel Maritime Carriers Ltd. in the table below are derived from our
consolidated financial statements and notes thereto which have been prepared in
accordance with U.S. generally accepted accounting principles ("US GAAP") and
have been audited by Ernst & Young (Hellas) Certified Auditors Accountants S.A.
("Ernst & Young"), independent registered public accounting firm.
Selected Historical Financial Data
and Other Operating Information Year Ended December 31,
(in thousands of U.S Dollars, except for share and per share
data and Average Daily Results
2002 2003 2004 2005 2006
INCOME STATEMENT DATA
Voyage revenues 15,602 26,094 51,966 118,082 123,551
Revenues from managing related party vessels 385 527 637 522 558
Voyage expenses (7,009) (7,312) (8,100) (11,693) (8,109)
Voyage expenses - related party - - - (1,412) (1,536)
Vessel operating expenses (5,354) (6,529) (7,518) (24,215) (30,414)
Depreciation and amortization (1,080) (1,548) (1,713) (20,714) (30,000)
Management fees - related party (225) (260) (270) - -
General and administrative expenses (1,294) (1,772) (2,867) (6,520) (10,049)
Gain on sale of vessels 569 - - 26,795 -
Contract termination expense - - - (4,963) -
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Operating Income 1,594 9,200 32,135 75,882 44,001
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Interest and finance costs, net (669) (461) (61) (7,878) (12,617)
Other, net 164 (94) (24) 66 145
US source income taxes - - - (311) (426)
Minority Interest - - - - 3
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Net Income 1,089 8,645 32,050 67,759 31,106
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Basic and fully diluted earnings per share 0.09 0.75 2.75 3.64 1.56
Weighted average basic and diluted shares outstanding 11,550,984 11,532,725 11,640,058 18,599,876 19,947,411
Dividends per share 2.15 - - - -
Year Ended December 31,
2002 2003 2004 2005 2006
BALANCE SHEET DATA
Cash and cash equivalents 1,949 3,958 64,903 58,492 86,289
Current assets, including cash 3,157 5,525 71,376 70,547 95,788
Total assets 21,435 24,083 113,997 561,025 549,351
Current liabilities, including current portion
of long-term debt 5,896 4,121 10,566 57,110 43,719
Total long-term debt, excluding current portion 10,090 5,870 5,616 215,926 185,467
Stockholders' equity 5,449 14,092 97,815 287,989 320,161
OTHER FINANCIAL DATA
Net cash from (used in) operating activities (260) 8,887 32,033 73,639 58,344
Net cash from (used in) investing activities 11,996 - (26,220) (417,743) (662)
Net cash from (used in) financing activities (20,771) (6,878) 55,132 337,693 (29,885)
FLEET DATA
Average number of vessels (1) 4.2 5.0 5.0 14.4 17
Available days for fleet (2) 1,458 1,686 1,793 5,070 5,934
Calendar days for fleet (3) 1,524 1,825 1,830 5,269 6,205
Fleet utilization (4) 95.7% 92.4% 98.0% 96.2% 95.6%
AVERAGE DAILY RESULTS
Time charter equivalent (5) 5,894 11,140 24,465 20,705 19,195
Vessel operating expenses(6) 3,513 3,578 4,108 4,596 4,901
General and administrative expenses (7) 849 971 1,567 1,237 1,620
Total vessel operating expenses (8) 4,362 4,549 5,675 5,833 6,521
(1) Average number of vessels is the number of vessels that constituted our
fleet for the relevant period, as measured by the sum of the number of calendar
days each vessel was a part of our fleet during the period divided by the number
of calendar days in that period.
(2) Available days for fleet are the total calendar days the vessels were in our
possession for the relevant period after subtracting for off hire days
associated with major repairs, dry-dockings or special or intermediate surveys.
(3) Calendar days are the total days we possessed the vessels in our fleet for
the relevant period including off hire days associated with major repairs,
dry-dockings or special or intermediate surveys.
(4) Fleet utilization is the percentage of time that our vessels were available
for revenue generating available days, and is determined by dividing available
days by fleet calendar days for the relevant period.
(5) Time charter equivalent, or TCE, is a measure of the average daily revenue
performance of a vessel on a per voyage basis. Our method of calculating TCE is
consistent with industry standards and is determined by dividing voyage revenues
(net of voyage expenses) by available days for the relevant time period. Voyage
expenses primarily consist of port, canal and fuel costs, net of gains or losses
from the sales of bunkers to time charterers that are unique to a particular
voyage, which would otherwise be paid by the charterer under a time charter
contract, as well as commissions.
TCE is a standard shipping industry performance measure used primarily to
compare period-to-period changes in a shipping company's performance despite
changes in the mix of charter types (i.e., spot voyage charters, time charters
and bareboat charters) under which the vessels may be employed between the
periods. The following table reflects the calculation of our TCE rates for the
periods presented.
(in thousands of U.S Dollars, except for Year Ended December 31,
TCE rates, which are expressed in
U.S Dollars, and available days
2002 2003 2004 2005 2006
Voyage revenues 15,602 26,094 51,966 118,082 123,551
Voyage expenses (7,009) (7,312) (8,100) (13,105) (9,645)
Time charter equivalent revenue 8,593 18,782 43,866 104,977 113,906
Available days for fleet 1,458 1,686 1,793 5,070 5,934
Time charter equivalent (TCE) rate 5,894 11,140 24,465 20,705 19,195
(6) Daily vessel operating expenses, which include crew costs, provisions, deck
and engine stores, lubricating oil, insurance, maintenance and repairs is
calculated by dividing vessel operating expenses by fleet calendar days for the
relevant time period.
(7) Daily general and administrative expenses are calculated by dividing general
and administrative expenses by fleet calendar days for the relevant time period.
(8) Total vesFsel operating expenses, or TVOE, is a measurement of our total
expenses associated with operating our vessels. TVOE is the sum of vessel
operating expenses and general and administrative expenses. Daily TVOE is
calculated by dividing TVOE by fleet calendar days for the relevant time period.
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons For the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Some of the following risks relate principally to the industry in
which we operate and our business in general. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
also may impair our business operations. If any of the following risks occur,
our business, financial condition, operating results and cash flows could be
materially adversely affected and the trading price of our securities could
decline.
The cyclical nature of the shipping industry may lead to volatile changes in
freight rates and vessel values which may adversely affect our earnings.
We are an independent shipping company that operates in the dry bulk
shipping markets. One of the factors that impacts our profitability is the
freight rates we are able to charge. The dry bulk shipping industry is cyclical
with attendant volatility in charter hire rates and profitability. The degree of
charter hire rate volatility among different types of dry bulk vessels has
varied widely, and charter hire rates for dry bulk vessels have recently
declined from historically high levels. Fluctuations in charter rates result
from changes in the supply and demand for vessel capacity and changes in the
supply and demand for the major commodities carried by sea internationally.
Because the factors affecting the supply and demand for vessels are outside of
our control and are unpredictable, the nature, timing, direction and degree of
changes in industry conditions are also unpredictable.
Factors that influence demand for vessel capacity include:
o supply and demand for dry bulk products;
o global and regional economic conditions;
o the distance dry bulk cargoes are to be moved by sea; and
o changes in seaborne and other transportation patterns.
The factors that influence the supply of vessel capacity include:
o the number of newbuilding deliveries;
o the scrapping rate of older vessels;
o vessel casualties;
o the level of port congestion;
o changes in environmental and other regulations that may limit the
useful life of vessels;
o the number of vessels that are out of service; and
o changes in global dry bulk commodity production.
We anticipate that the future demand for our dry bulk vessels will be
dependent upon continued economic growth in the world's economies, including
China and India, seasonal and regional changes in demand, changes in the
capacity of the global dry bulk fleet and the sources and supply of dry bulk
cargo to be transported by sea. The capacity of the global dry bulk carrier
fleet seems likely to increase and there can be no assurance that economic
growth will continue. Adverse economic, political, social or other developments
could have a material adverse effect on our business and operating results.
Due to the fact that the market value of our vessels may fluctuate
significantly, we may incur losses when we sell vessels or we may be required to
write down their carrying value, which may adversely affect our earnings.
The fair market values of our vessels have generally experienced high
volatility. Market prices for second-hand dry bulk vessels have recently been at
historically high levels. You should expect the market values of our vessels to
fluctuate depending on general economic and market conditions affecting the
shipping industry and prevailing charter hire rates, competition from other
shipping companies and other modes of transportation, the types, sizes and ages
of our vessels, applicable governmental regulations and the cost of
new-buildings.
If a determination is made that a vessel's future useful life is
limited or its future earnings capacity is reduced, it could result in an
impairment of its value on our financial statements that would result in a
charge against our earnings and the reduction of our shareholder's equity. If
for any reason we sell our vessels at a time when prices have fallen, the sale
may be less than the vessel's carrying amount on our financial statements, and
we would incur a loss and a reduction in earnings.
Rising fuel prices may affect our profitability.
Fuel is a significant, if not the largest, expense in our shipping
operations when vessels are not under period charter. Changes in the price of
fuel may adversely affect our profitability. The price and supply of fuel is
unpredictable and fluctuates based on events outside our control, including
geopolitical developments, supply and demand for oil and gas, actions by OPEC
and other oil and gas producers, war and unrest in oil producing countries and
regions, regional production patterns and environmental concerns. Further, fuel
may become much more expensive in the future, which may reduce the profitability
and competitiveness of our business versus other forms of transportation.
If we violate environmental laws or regulations, the resulting liability may
adversely affect our earnings and financial condition.
Our business and the operation of our vessels are materially affected
by government regulation in the form of international conventions, national,
state and local laws and regulations in force in the jurisdictions in which the
vessels operate, as well as in the country or countries of their registration.
Because such conventions, laws, and regulations are often revised, we cannot
predict the ultimate cost of complying with such conventions, laws and
regulations or the impact thereof on the resale price or useful life of our
vessels. Additional conventions, laws and regulations may be adopted which could
limit our ability to do business or increase the cost of our doing business and
which may materially adversely affect our operations. We are required by various
governmental and quasi-governmental agencies to obtain certain permits, licenses
and certificates with respect to our operations.
The operation of our vessels is affected by the requirements set forth
in the IMO's International Management Code for the Safe Operation of Ships and
Pollution Prevention or the ISM Code. The ISM Code requires shipowners and
bareboat charterers to develop and maintain an extensive "Safety Management
System" that includes the adoption of a safety and environmental protection
policy setting forth instructions and procedures for safe operation and
describing procedures for dealing with emergencies. The failure of a shipowner
or bareboat charterer to comply with the ISM Code may subject such party to
increased liability, may invalidate existing insurance or decrease available
insurance coverage for the affected vessels, and may result in a denial of
access to, or detention in, certain ports. Currently, each of our applicable
vessels is ISM code-certified by Bureau Veritas, and we expect that each other
vessel that we agree to purchase will be ISM code-certified, when delivered to
us. Bureau Veritas has also awarded ISM certification to Maryville Maritime Inc.
or "Maryville", our vessel management company. However, there can be no
assurance that such certification will be maintained indefinitely.
We are subject to inspection by a classification society.
The hull and machinery of every commercial vessel must be classed by a
classification society authorised by its country of registry. The classification
society certifies that a vessel is safe and seaworthy in accordance with the
applicable rules and regulations of the country of registry of the vessel and
the Safety of Life at Sea Convention. The Company's vessels are currently
enrolled with Bureau Veritas, or BV, Nippon Kaiji Kyokai or NKK, Det Norske
Veritas or DNV and Lloyd's Register of Shipping or LRS.
A vessel must undergo Annual Surveys, Intermediate Surveys and Special
Surveys. In lieu of a Special Survey, a vessel's machinery may be on a
continuous survey cycle, under which the machinery would be surveyed
periodically over a five-year period. Our vessels are on Special Survey cycles
for hull inspection and continuous survey cycles for machinery inspection. Every
vessel is also required to be dry-docked every two to three years for inspection
of the underwater parts of such vessel. Generally, we will make a decision to
scrap a vessel or continue operations at the time of a vessel's fifth Special
Survey.
Maritime claimants could arrest our vessels, which could interrupt our cash
flow.
Crew members, suppliers of goods and services to a vessel, shippers of
cargo and other parties may be entitled to a maritime lien against a vessel for
unsatisfied debts, claims or damages. In many jurisdictions a maritime
lienholder may enforce its lien by arresting a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our vessels could
interrupt our cash flow and require us to make significant payments to have the
arrest lifted.
In addition, in some jurisdictions, such as South Africa, under the
"sister ship" theory of liability, a claimant may arrest both the vessel which
is subject to the claimant's maritime lien and any "associated" vessel, which is
any vessel owned or controlled by the same owner. Claimants could try to assert
"sister ship" liability against one vessel in our fleet for claims relating to
another of our ships.
Governments could requisition our vessels during a period of war or emergency,
resulting in loss of earnings.
A government could requisition for title or seize our vessels.
Requisition for title occurs when a government takes control of a vessel and
becomes her owner. Also, a government could requisition our vessels for hire.
Requisition for hire occurs when a government takes control of a vessel and
effectively becomes her charterer at dictated charter rates. Generally,
requisitions occur during a period of war or emergency. Government requisition
of one or more of our vessels would negatively impact our revenues.
World events outside our control may negatively affect the shipping industry,
which could adversely affect our operations and financial condition.
Terrorist attacks like those in New York on September 11, 2001 and
London on July 7, 2005 and the United States' continuing response to these
attacks, as well as the threat of future terrorist attacks, continue to cause
uncertainty in the world financial markets and may affect our business, results
of operations and financial condition. The continuing conflicts in Iraq and
elsewhere may lead to additional acts of terrorism and armed conflict around the
world. In the past, political conflicts resulted in attacks on vessels, mining
of waterways and other efforts to disrupt international shipping. For example,
in October 2002, the VLCC Limburg was attacked by terrorists in Yemen. Acts of
terrorism and piracy have also affected vessels trading in regions such as the
South China Sea. Future terrorist attacks could result in increased volatility
of the financial markets in the United States and globally and could result in
an economic recession in the United States or the world. These uncertainties
could adversely affect our ability to obtain additional financing on terms
acceptable to us or at all. In addition, future hostilities or other political
instability in regions where our vessels trade could affect our trade patterns.
Any of these occurrences could have a material adverse impact on our operating
results, revenue, and costs.
We are affected by voyage charters in the spot market and short-term time
charters in the time charter market, which are volatile.
We charter some of our vessels on a voyage charter, which are charters
for one specific voyage, and short-term time charter basis. A short-term time
charter is a charter with a term of less than six months. Although dependence on
voyage charters and short-term time charters is not unusual in the shipping
industry, the voyage charter and short-term time charter markets are highly
competitive and rates within those markets may fluctuate significantly based
upon available charters and the supply of and demand for sea borne shipping
capacity. While our focus on the voyage and short-term time charter markets may
enable us to benefit if industry conditions strengthen, we must consistently
procure this type of charter business to obtain these benefits. Conversely, such
dependence makes us vulnerable to declining market rates for this type of
charters.
Moreover, to the extent our vessels are employed in the voyage charter
market our voyage expenses will be more significantly impacted by increases in
the cost of bunkers (fuel). Unlike time charters in which the charterer bears
all of the bunker costs, in voyage charters we bear the bunker costs, port
charges and canal dues. As a result, increases in fuel costs in any given period
could have a material adverse effect on our cash flow and results of operations
for the period in which the increase occurs.
There can be no assurance that we will be successful in keeping all
our vessels fully employed in these short-term markets or that future spot and
short-term charter rates will be sufficient to enable our vessels to be operated
profitably.
A drop in spot charter rates may provide an incentive for some charterers to
default on their time charters.
When we enter into a time charter, charter rates under that time
charter are fixed for the term of the charter. If the spot charter rates in the
drybulk shipping industry become significantly lower than the time charter rates
that some of our charterers are obligated to pay us under our existing time
charters, the charterers may have incentive to default under that time charter
or attempt to renegotiate the time charter, which may adversely affect our
operating results and cash flows by reducing our revenues.
We depend upon a few significant customers for a large part of our revenues. The
loss of one or more of these customers could adversely affect our financial
performance.
We have historically derived a significant part of our revenue from a
small number of charterers. During during 2005, we derived approximately 41% of
our gross revenues from five charterers, while during 2006 we derived
approximately 45% of our gross revenues from five charterers.
We face strong competition.
We obtain charters for our vessels in highly competitive markets in
which our market share is insufficient to enforce any degree of pricing
discipline. Although we believe that no single competitor has a dominant
position in the markets in which we compete, we are aware that certain
competitors may be able to devote greater financial and other resources to their
activities than we can, resulting in a significant competitive threat to us.
We cannot give assurances that we will continue to compete
successfully with our competitors or that these factors will not erode our
competitive position in the future.
A decline in the market value of our vessels could lead to a default under our
loan agreements and the loss of our vessels.
When the market value of a vessel declines, it reduces our ability to
refinance the outstanding debt or obtain future financing. Also, declining
vessel values could cause us to breach of some of the covenants under our
financing agreements. In such an event, if we are unable to pledge additional
collateral, or obtain waivers from the lenders, the lenders could accelerate the
debt and in general, if we are unable to service such accelerated debt, we may
have vessels repossessed by our lenders.
Loan agreements may prohibit or impose certain conditions on the payment of
dividends.
Certain of our subsidiaries have entered into a loan facility which
contain a number of financial covenants and general covenants prohibit, among
other things, a subsidiary from paying dividends without the consent of our
lenders until the respective loan facility is paid in full. This prohibition on
paying dividends means that these subsidiaries cannot pay dividends to us until
the respective loan facilities are paid in full or with out the consent of our
lenders, which in turn may affect our ability to make dividend payments to our
shareholders. There can be no assurance that our subsidiaries will pay dividends
to us or that we will make dividend payments to our shareholders even after all
loan facilities are paid in full.
We are a holding company, and we depend on the ability of our subsidiaries to
distribute funds to us in order to satisfy our financial obligations.
We are a holding company and our subsidiaries conduct all of our
operations and own all of our operating assets. We have no significant assets
other than the equity interests in our subsidiaries. As a result, our ability to
satisfy our financial obligations depends on our subsidiaries and their ability
to distribute funds to us. The ability of a subsidiary to make these
distributions could be affected by a claim or other action by a third party,
including a creditor, or by the law of the jurisdiction of their incorporation,
which regulates the payment of dividends by companies.
Our substantial level of indebtedness could adversely affect our financial
condition and could have significant adverse consequences to us.
As a result of our vessel acquisitions during 2005, we have incurred a
substantial amount of indebtedness, which requires significant principal and
interest payments. We may be unable to generate cash sufficient to pay the
principal of, interest on and other amounts due in respect of our indebtedness
when due. In addition, we may incur additional indebtedness. Our substantial
level of indebtedness could have adverse consequences to us, including the
following:
o our ability to obtain additional financing for working capital,
capital expenditures and vessel acquisitions may be impaired;
o a substantial portion of our cash flow from operations may have
to be dedicated to the payment of the principal of and interest
on our indebtedness;
o our leverage may make us more vulnerable to economic downturns
and may limit our ability to withstand competitive pressures;
o if our level of indebtedness is higher than that of some of our
competitors, we may be at a competitive disadvantage and our
flexibility in planning for, or responding to, changing
conditions in our industry, including increased competition or
regulation, may be reduced;
o rising interest rates could have a material adverse effect on us
since a substantial portion of our indebtedness bears interest at
variable rates; and
o if we are unable to service our debt, our creditors could
accelerate our debt and foreclose on our fleet.
Our ability to successfully implement our business plans depends on our ability
to obtain additional financing, which may affect the value of your investment in
the Company.
We will require substantial additional financing to fund the
acquisition of additional vessels and to implement our business plans. We cannot
be certain that sufficient financing will be available on terms that are
acceptable to us or at all. If we cannot raise the financing we need in a timely
manner and on acceptable terms, we may not be able to acquire the vessels
necessary to implement our business plans and consequently you may lose some or
all of your investment in the company.
While we expect that a significant portion of the financing resources
needed to acquire vessels will be through long term debt financing, we may raise
additional funds through additional equity offerings. New equity investors may
dilute the percentage of the ownership interest of existing shareholders in the
company. Sales or the possibility of sales of substantial amounts of shares of
our common stock in the public markets could adversely affect the market price
of our common stock.
Risks associated with the purchase and operation of second hand vessels may
affect our results of operations.
We acquired all of our vessels second hand, and we estimate their
useful lives to be 28 years, depending on various market factors and
management's ability to comply with government and industry regulatory
requirements. Part of our business strategy includes the continued acquisition
of second hand vessels when we find attractive opportunities.
In general, expenditures necessary for maintaining a vessel in good
operating condition increase as a vessel ages. Second hand vessels may also
develop unexpected mechanical and operational problems despite adherence to
regular survey schedules and proper maintenance. Cargo insurance rates also tend
to increase with a vessel's age, and older vessels tend to be less
fuel-efficient than newer vessels. While the difference in fuel consumption is
factored into the freight rates that our older vessels earn, if the cost of
bunker fuels were to increase significantly, it could disproportionately affect
our vessels and significantly lower our profits. In addition, changes in
governmental regulations, safety or other equipment standards may require
- expenditures for alterations to existing equipment;
- the addition of new equipment; or
- restrictions on the type of cargo a vessel may transport.
We cannot give assurances that future market conditions will justify
such expenditures or enable us to operate our vessels profitably during the
remainder of their economic lives.
Our vessels may suffer damage and we may face unexpected drydocking costs which
could affect our cash flow and financial condition
If our vessels suffer damage, they may need to be repaired at a
drydocking facility. The costs of drydock repairs are unpredictable and can be
substantial. We may have to pay drydocking costs that our insurance does not
cover. This would decrease earnings.
Risk of loss and lack of adequate insurance may affect our results
Adverse weather conditions, mechanical failures, human error, war,
terrorism, piracy and other circumstances and events create an inherent risk of
catastrophic marine disasters and property loss in the operation of any
ocean-going vessel. In addition, business interruptions may occur due to
political circumstances in foreign countries, hostilities, labour strikes, and
boycotts. Any such event may result in loss of revenues or increased costs.
Our business is affected by a number of risks, including mechanical
failure of our vessels, collisions, property loss to the vessels, cargo loss or
damage and business interruption due to political circumstances in foreign
countries, hostilities and labor strikes. In addition, the operation of any
ocean-going vessel is subject to the inherent possibility of catastrophic marine
disaster, including oil spills and other environmental mishaps, and the
liabilities arising from owning and operating vessels in international trade.
The United States Oil Pollution Act of 1990, or OPA, by imposing potentially
unlimited liability upon owners, operators and bareboat charterers for certain
oil pollution accidents in the U.S., has made liability insurance more expensive
for ship owners and operators and has also caused insurers to consider reducing
available liability coverage.
We carry insurance to protect against most of the accident-related
risks involved in the conduct of our business and we maintain environmental
damage and pollution insurance coverage. We do not carry insurance covering the
loss of revenue resulting from vessel off-hire time. We believe that our
insurance coverage is adequate to protect us against most accident-related risks
involved in the conduct of our business and that we maintain appropriate levels
of environmental damage and pollution insurance coverage. Currently, the
available amount of coverage for pollution is $1.0 billion for dry bulk carriers
per vessel per incident. However, there can be no assurance that all risks are
adequately insured against, that any particular claim will be paid or that we
will be able to procure adequate insurance coverage at commercially reasonable
rates in the future. More stringent environmental regulations in the past have
resulted in increased costs for insurance against the risk of environmental
damage or pollution. In the future, we may be unable to procure adequate
insurance coverage to protect us against environmental damage or pollution.
Our recent growth will impose significant additional responsibilities on us that
we may not be able to meet if we cannot hire and retain qualified personnel.
With our acquisitions during 2005, we have more than tripled the size
of our fleet. This has imposed significant additional responsibilities on our
management and staff, and, together with the termination of our management
agreement with Excel Management Ltd., has imposed significant additional
responsibilities on the management and staff of our wholly-owned subsidiary
Maryville's Maritime Inc. Although we believe that our current staffing levels
are adequate, future events that we cannot predict may require both us and
Maryville to increase the number of personnel. There can be no assurance that we
will be able to hire qualified personnel when needed. Difficulty in hiring and
retaining qualified personnel could adversely affect our results of operations.
Because most of our employees are covered by industry-wide collective bargaining
agreements, failure of industry groups to renew those agreements may disrupt our
operations and adversely affect our earnings.
We employ approximately 431 seafarers and 70 land-based employees in
our Athens office. The 70 employees in Athens are covered by industry-wide
collective bargaining agreements that set basic standards. We cannot assure you
that these agreements will prevent labour interruptions. Any labour
interruptions could disrupt our operations and harm our financial performance.
Because we generate all of our revenues in U.S. dollars but incur a significant
portion of our expenses in other currencies, exchange rate fluctuations could
hurt our results of operations.
We generate all of our revenues in U.S. dollars but incur
approximately 30 % of our vessel operating expenses in currencies other than
U.S. dollars. This variation in operating revenues and expenses could lead to
fluctuations in net income due to changes in the value of the U.S. dollar
relative to the other currencies, in particular the Japanese yen, the Euro, the
Singapore dollar and the British pound sterling. Expenses incurred in foreign
currencies against which the U.S. dollar falls in value may increase as a result
of these fluctuations, therefore decreasing our net income. We do not hedge
these risks. Our results of operations could suffer as a result.
We may not be exempt from Liberian taxation which would materially reduce our
net income and cash flow by the amount of the applicable tax.
The Republic of Liberia enacted a new income tax law generally
effective as of January 1, 2001, (the "New Act"), which repealed, in its
entirety, the prior income tax law, (the "Prior Law"), in effect since 1977
pursuant to which we and our Liberian subsidiaries, as non-resident domestic
corporations, were wholly exempt from Liberian tax.
In 2004, the Liberian Ministry of Finance issued regulations pursuant
to which a non-resident domestic corporation engaged in international shipping
such as ourselves will not be subject to tax under the New Act retroactive to
January 1, 2001 (the "New Regulations"). In addition, the Liberian Ministry of
Justice issued an opinion that the New Regulations were a valid exercise of the
regulatory authority of the Ministry of Finance. Therefore, assuming that the
New Regulations are valid, we and our Liberian subsidiaries will be wholly
exempt from tax as under the Prior Law. If we were subject to Liberian income
tax under the New Act, we and our Liberian subsidiaries would be subject to tax
at a rate of 35% on our worldwide income. As a result, our net income and cash
flow would be materially reduced by the amount of the applicable tax. In
addition, our shareholders would be subject to Liberian withholding tax on
dividends at rates ranging from 15% to 20%.
Our obligations to issue shares of Class A common stock to Excel Management
under the terms of our management termination agreement are dilutive to our
other investors.
In the management termination agreement that we entered into in early
March 2005 with Excel Management, we agreed to issue to Excel Management 205,442
shares of our Class A common stock, which is approximately 1.5% of the total
number of shares of our Class A common stock outstanding on March 2, 2005. We
further agreed to issue to Excel Management, at any time at which we issue
additional shares of our Class A common stock to any third party for any reason,
such number of additional shares of Class A common stock which, together with
the shares of Class A common stock issued to Excel Management in the original
issuance, equals 1.5% of our total outstanding Class A common stock after taking
into account the third-party issuance and the shares to be issued to Excel
Management under the anti-dilution provisions of the agreement. We will not
receive any consideration from Excel Management for any shares of Class A common
stock issued by us to Excel Management pursuant to an anti-dilution issuance
other than that already received. Our obligation with respect to anti-dilution
issuances ends on December 31, 2008. Issuances of shares of Class A common stock
to Excel Management as a result of the original issuance and anti-dilution
issuances will be dilutive to our shareholders.
Issuance of preferred stock may adversely affect the voting power of our
shareholders and have the effect of discouraging, delaying or preventing a
merger or acquisition, which could adversely affect the market price of our
common stock.
Our articles of incorporation currently authorize our board of
directors to issue preferred shares in one or more series and to determine the
rights, preferences, privileges and restrictions, with respect to, among other
things, dividends, conversion, voting, redemption, liquidation and the number of
shares constituting any series subject to prior shareholders' approval. If our
board of directors determines to issue preferred shares, such issuance may
discourage, delay or prevent a merger or acquisition that shareholders may
consider favorable. The issuance of preferred shares with voting and conversion
rights may also adversely affect the voting power of the holders of common
shares. This could substantially impede the ability of public shareholders to
benefit from a change in control and, as a result, may adversely affect the
market price of our common stock and your ability to realize any potential
change of control premium.
Class B shareholders can exert considerable control over us, which may limit
future shareholders' ability to influence our actions.
Our Class B common shares have 1,000 votes per share and our Class A
common shares have one vote per share. Class B shareholders, including certain
executive officers and directors, together own 100% of our issued and
outstanding Class B common shares, representing approximately 87% of the voting
power of our outstanding capital stock.
Because of the dual class structure of our capital stock, the holders
of Class B common shares have the ability to control and will be able to control
all matters submitted to our stockholders for approval even if they come to own
less than 50% of our outstanding common shares. Even though we are not aware of
any agreement, arrangement or understanding by the holders of our Class B common
shares relating to the voting of their shares of common stock, the holders of
our Class B common shares have the power to exert considerable influence over
our actions.
Because we are a foreign corporation, you may not have the same rights that a
shareholder in a U.S. corporation may have.
We are a Liberian corporation. Our articles of incorporation and
bylaws and the Business Corporation Act of Liberia 1976 govern our affairs.
While the Liberian Business Corporation Act resembles provisions of the
corporation laws of a number of states in the United States, Liberian law does
not as clearly establish your rights and the fiduciary responsibilities of our
directors as do statutes and judicial precedent in some U.S. jurisdictions.
However, while the Liberian courts generally follow U.S. court precedent, there
have been few judicial cases in Liberia interpreting the Liberian Business
Corporation Act. Investors may have more difficulty in protecting their
interests in the face of actions by the management, directors or controlling
shareholders than would shareholders of a corporation incorporated in a U.S.
jurisdiction which has developed a substantial body of case law.
The price of our Class A common stock may be volatile.
The price of our Class A common stock prior to and after an offering
may be volatile, and may fluctuate due to factors such as:
o actual or anticipated fluctuations in quarterly and annual
results;
o mergers and strategic alliances in the shipping industry;
o market conditions in the industry;
o changes in government regulation;
o fluctuations in our quarterly revenues and earnings and those of
our publicly held competitors;
o shortfalls in our operating results from levels forecast by
securities analysts;
o announcements concerning us or our competitors; and
o the general state of the securities market.
Future sales of our Class A common stock may depress our stock price.
The market price of our Class A common stock could decline as a result
of sales of substantial amounts of our Class A common stock in the public market
or the perception that these sales could occur. In addition, these factors could
make it more difficult for us to raise funds through future equity offerings.
ITEM 4 - INFORMATION ON THE COMPANY
A. History and development of the Company
We, Excel Maritime Carriers Ltd., are a shipping company specializing
in the world-wide seaborne transportation of dry bulk cargoes. We were
incorporated under the laws of the Republic of Liberia on November 2, 1988 and
our Class A common stock trades since September 15, 2005 on the New York Stock
Exchange (NYSE) under the symbol "EXM". Prior to that date our Class A common
stock was trading on the American Stock Exchange (AMEX) under the same symbol.
We are a provider of worldwide sea borne transportation services for
dry bulk cargo including among others, iron ore, coal and grain, collectively
referred to as "major bulks," and steel products, fertilizers, cement, bauxite,
sugar and scrap metal, collectively referred to as "minor bulks".
The address of our registered office in Bermuda is 14 Par-la- Villa
Road, Hamilton HM JX, Bermuda. We also maintain executive offices at 17th km
National Road Athens-Lamia & Finikos Str., 145 64, Nea Kifisia, Athens, Greece.
Our telephone number at that address dialing from the U.S. is (011) 30210 818
7000.
B. Business Overview
As of December 31, 2006, our fleet consisted of 17 dry bulk carriers,
comprised of ten Panamax and seven Handymax vessels, representing a carrying
capacity of approximately 1,005,000 dwt. The average age of our vessels as of
December 2006 was 13.8 years. Our vessels carry iron ore, coal and grains,
collectively referred to as "major bulks", and steel products, fertilizers,
cement, bauxite, sugar and scrap metal, collectively referred to as "minor
bulks". Our fleet is managed by Maryville Maritime Inc., one of our wholly-owned
subsidiaries.
Our Fleet
The following is a list of the vessels in our fleet as of December 31,
2006, all of which are dry bulk carriers:
Vessel Name DWT Year Built Type
- ----------- --- ---------- ----
Isminaki 74,577 1998 Panamax
Angela Star 73,798 1998 Panamax
Elinakos 73,751 1997 Panamax
Rodon 73,670 1993 Panamax
Happy Day 71,694 1997 Panamax
Birthday 71,504 1993 Panamax
Renuar 70,128 1993 Panamax
Powerful 70,083 1994 Panamax
Fortezza 69,634 1993 Panamax
First Endeavour 69,111 1994 Panamax
Emerald 45,572 1998 Handymax
Marybelle 42,552 1987 Handymax
Attractive 41,524 1985 Handymax
Lady 41,090 1985 Handymax
Goldmar 39,697 1984 Handymax
Princess I 38,858 1994 Handymax
Swift 37,687 1984 Handymax
Total 1,004,930
On April 27, 2007 the Company's Board of Directors approved the sale of vessel
Goldmar for $15.85 million net of commissions to an affiliated company as per
the Memorandum of Agreement dated April 26, 2007. The vessel was delivered to
her new owners on May 10, 2007.
Our Business Strategy
Our business strategy includes:
o Timely acquisitions of older second hand vessels. We historically have
acquired and operated older second hand vessels. We believe this
strategy has enabled us to generate higher net revenues than those
available from purchasing and operating younger second hand vessels or
newbuildings. Our ability to effectively operate our second hand fleet
is enhanced by our technical management skills and preventive
maintenance programs and our efficient cost structure.
o Capitalizing on our established reputation. We believe that we have
established a reputation in the international shipping community for
maintaining high standards of performance, reliability and safety.
Since the appointment of new management in 1998, the Company has not
suffered the total loss of a vessel at sea or otherwise. In addition,
our wholly-owned management subsidiary, Maryville, carries the
distinction of being one of the first Greece-based ship management
companies to have been certified ISO 14001 compliant by Bureau
Veritas.
o Fleet expansion and reduction in average age. We intend to grow and,
over time, reduce the average age of our fleet through timely and
selective acquisitions of well-maintained second hand dry bulk
carriers. Our acquisition candidates generally are chosen based on
economic and technical criteria. We also expect to explore
opportunities to sell some of our older vessels.
o Balanced Fleet Deployment Strategy. Our fleet deployment strategy
seeks to maximize charter revenue throughout industry cycles while
maintaining cash flow stability. We intend to achieve this through a
balanced portfolio of spot and period time charters. To that end, we
aim to employ our recent acquisitions in the period time charter
market, while the remainder of our fleet is deployed in the spot
charter markets.
Competitive Strengths
We believe that we possess a number of competitive strengths in our industry:
o Experienced Management Team. Our management team has significant
experience in operating dry bulk carriers and expertise in all aspects
of commercial, technical, operational and financial areas of our
business, promoting a focused marketing effort, tight quality and cost
controls, and effective operations and safety monitoring.
o Strong Customer Relationships. We have strong relationships with our
customers and charterers that we believe are the result of the quality
of our fleet and our reputation for dependability. Through Maryville
Maritime Inc., our management subsidiary, we have many
long-established customer relationships, and our management believes
it is well regarded within the international shipping community.
During the past 16 years, vessels managed by Maryville have been
repeatedly chartered by subsidiaries of major dry bulk operators. In
2006, we derived approximately 45% of our gross revenues from five
charterers (out of which 15% was derived from one charterer).
o Cost Efficient Operations. We historically operated our fleet at
competitive costs by carefully selecting second hand vessels,
competitively commissioning and actively supervising cost efficient
shipyards to perform repair, reconditioning and systems upgrading
work, together with a proactive preventive maintenance program both
ashore and at sea, and employing professional, well trained masters,
officers and crews. We believe that this combination has allowed us to
minimize off-hire periods, effectively manage insurance costs and
control overall operating expenses.
Corporate Structure
We own each of our vessels through separate wholly-owned subsidiaries
incorporated in Liberia and Cyprus. Until December 31, 2004 the operations of
our vessels were managed by Excel Management Ltd., an affiliated Liberian
corporation formed on January 13, 1998, under a management agreement that was
terminated early March 2005, with effect from January 1, 2005. Excel Management
had subcontracted to Maryville Maritime Inc., a wholly-owned subsidiary of ours,
since March 2001, some of the management services. These services were provided
at usual market rates and included technical management, such as managing
day-to-day vessel operations including supervising the crewing, supplying,
maintaining and drydocking of vessels, commercial management regarding
identifying suitable vessel charter and sale/purchase opportunities and certain
accounting services. Effective January 1, 2005 Maryville is directly managing
the operations of our vessels, while Excel Management acts as our broker with
respect to, among other matters, the employment of our vessels under a brokering
agreement concluded on March 4, 2005 and pursuant to our instructions. Our
brokering agreement with Excel Management is discussed in more detail in
Operations & Ship Management below.
In addition, as at December 31, 2006 we owned 75% of the outstanding
common stock of Oceanaut Inc. ("Oceanaut"), a corporation in the development
stage, organized on May 3, 2006 under the laws of the Republic of the Marshall
Islands. Oceaunaut was formed to acquire, through a merger, capital stock
exchange, asset acquisition, stock purchase or other similar business
combination, vessels or one or more operating businesses in the shipping
industry. The remaining 25% of Oceanaut is held by certain of the Company's
officers and directors. Upon its incorporation, Oceanaut issued to its
shareholders an aggregate of 4,687,500 shares of common stock and 3,000,000
warrants to purchase an aggregate of 3,000,000 shares of common stock at an
exercise price of $7.00 per share for a consideration of $25,000. Additional
information regarding Oceanaut is provided under the section "Recent
Developments".
The names of our wholly-owned subsidiaries are as follows:
Wholly-owned Subsidiaries as of December 31, 2006
- -------------------------------------------------
Ship-owning Wholly-owned Subsidiaries:
- --------------------------------------
Company Vessel
- ------- ------
Fianna Navigation S.A. Isminaki
Marias Trading Inc. Angela Star
Yasmine International Inc. Elinakos
Tanaka Services Ltd. Rodon
Amanda Enterprises Ltd. Happy Day
Whitelaw Enterprises Co. Birthday
Candy Enterprises Inc. Renuar
Fountain Services Ltd. Powerful
Teagan Shipholding S.A. First Endeavor
Harvey Development Corp. Fortezza
Ingram Limited Emerald
Snapper Marine Ltd. Marybelle
Barland Holding Inc. Attractive
Centel Shipping Co. Ltd. Lady
Pisces Shipholding Ltd. Goldmar
Castalia Services Ltd. Princess I
Liegh Jane Navigation S.A. Swift
We have also established the following companies to acquire vessels:
Company Country of incorporation Date of incorporation
- ------- ------------------------ ---------------------
Magalie Investments Corp. Liberia March 2005
Melba Management Ltd. Liberia April 2005
Minta Holdings S.A. Liberia April 2005
Odell International Ltd. Liberia April 2005
Naia Development Corp. Liberia April 2005
The names of our wholly owned subsidiaries that owned vessels which
were sold during 2005 are as follows:
Company Vessel
- ------- ------
Tortola Shipping Company Limited Lucky Lady
Storler Shipping Company Limited Petalis
Becalm Shipping Company Limited Fighting Lady
Madlex Shipping Company Limited Almar I
Non Ship-owning Wholly-owned Subsidiaries:
Company Country of incorporation Date of incorporation
- ------- ------------------------ ---------------------
Maryville Maritime Inc. Liberia August 1983
Point Holdings Ltd. (1) Liberia February 1998
(1) As of December 31, 2006, Point Holdings Ltd. is parent company (100%
owner) of one Cyprus and sixteen Liberian ship-owning companies and
five Liberian and four Cyprus dormant companies.
Majority-owned Subsidiary as of December 31, 2006
Company Country of incorporation Date of incorporation
- ------- ------------------------ ---------------------
Oceanaut Inc. (1) Republic of the Marshall Islands May 2006
(1) As of December 31, 2006, the Company owns 75% of Oceanaut Inc.
Operations and Ship Management
Historically, our fleet has been managed by Excel Management, Ltd.,
("Excel Management"), an affiliated company controlled by our Chairman of the
Board of Directors, under a five-year management agreement. Under this
agreement, we paid Excel Management a monthly management fee of $15,000 for each
of our vessels and an annual fee for general corporate and clerical management
services of $60,000. The agreement provided that both of these fees would
increase annually by five percent. Excel Management had sub-contracted Maryville
Maritime Inc to perform some of these management services. Maryville became a
wholly-owned subsidiary of ours on March 31, 2001.
In order to streamline operations, reduce costs and take control of
the technical and commercial management of our fleet, in early March 2005, with
effect from January 1, 2005, we reached an agreement with Excel Management to
terminate the management agreement, the term of which was scheduled to extend
until April 30, 2008. The technical and commercial management of our fleet has
been assumed by our wholly-owned subsidiary, Maryville, in order to eliminate
the fees we would have paid to Excel Management for the remaining term of the
management agreement, which would have increased substantially given the
expansion of our fleet from five vessels to 17 vessels through the recent
acquisition of new vessels. As consideration for Excel Management's consent to
terminate the management agreement and forego the fees it would have received
under the management agreement had the agreement remained in effect through its
scheduled expiration in 2008, we have agreed to issue to Excel Management
205,442 shares of our Class A common stock, which is equal to approximately 1.5%
of our Class A common stock outstanding as of March 2, 2005. We have initially
agreed to issue these shares to Excel Management by March 2, 2006. On March 2,
2006, we reached an agreement with Excel Management to extend the issuance of
such shares by March 2, 2007. Excel Management may not transfer these shares for
a period of two years after their issuance, and the shares will contain a
restrictive legend to that effect. In addition to the above-mentioned shares, as
part of the consideration for agreeing to terminate the management agreement, we
agreed to issue to Excel Management, at any time at which we issue additional
shares of our Class A common stock to any third party until December 31, 2008
for any reason, such number of additional shares of Class A common stock which,
together with the shares of Class A common stock issued to Excel Management in
the original issuance, equals 1.5% of our total outstanding Class A common stock
after taking into account the third-party issuance and the shares to be issued
to Excel Management under the anti-dilution provisions of the agreement. If any
such additional shares are issued, Excel Management may not transfer these
additional shares for a period of two years after their issuance.
In connection with our agreement to issue the 205,442 shares of our
Class A common stock and the anti-dilution issuances described above, Excel
Management has agreed to make a one time cash payment to us in an amount equal
to $2.0 million upon delivery of such shares. We will not receive any cash
payment or other future consideration in receipt of shares of Class A common
stock issued to Excel Management in connection with any anti-dilution issuances.
On March 2, 2005 the fair value of the 205,442 Class A common shares to be
issued under the termination agreement and the fair value of the anti-dilution
provisions totalled $7.0 million. On March 2, 2007 Excel Management informed us
of its intention to consummate the transaction regarding the Management
Termination Agreement and we initiated the process of issuing the shares. On
June 19, 2007 we received payment in an amount of $2.0 million upon issuance of
298,403 shares.
On March 4, 2005, we also entered into a one-year brokering agreement
with Excel Management. Under this brokering agreement, Excel Management will,
pursuant to our instructions, act as our broker with respect to, among other
matters, the employment of our vessels. For its chartering services under the
brokering agreement, Excel Management will receive a commission fee equal to
1.25% of the revenue of our vessels. This agreement extends automatically for
successive one-year terms at the end of its initial term. It may be terminated
by either party upon twelve months prior written notice.
Regulation
The business of the Company and the operation of its vessels are
materially affected by government regulation in the form of international
conventions, national, state and local laws and regulations in force in the
jurisdictions in which the vessels operate, as well as in the country or
countries of their registration. Because such conventions, laws, and regulations
are often revised, the Company cannot predict the ultimate cost of complying
with such conventions, laws and regulations or the impact thereof on the resale
price or useful life of its vessels. Additional conventions, laws and
regulations may be adopted which could limit the ability of the Company to do
business or increase the cost of its doing business and which may materially
adversely affect the Company's operations. The Company is required by various
governmental and quasi-governmental agencies to obtain certain permits, licenses
and certificates with respect to its operations. Subject to the discussion below
and to the fact that the kinds of permits, licenses and certificates required
for the operations of the vessels owned by the Company will depend upon a number
of factors, the Company believes that it has been and will be able to obtain all
permits, licenses and certificates material to the conduct of its operations.
The Company believes that the heightened environmental and quality
concerns of insurance underwriters, regulators and charterers will impose
greater inspection and safety requirements on all vessels.
Environmental Regulation - International Maritime Organization ("IMO").
The IMO (the United Nations agency for maritime safety and the
prevention of pollution by ships) has adopted the International Convention for
the Prevention of Marine Pollution, 1973, as modified by the related Protocol of
1978 relating thereto, which has been updated through various amendments, or the
MARPOL Convention. The MARPOL Convention establishes environmental standards
relating to oil leakage or spilling, garbage management, sewage, air emissions,
handling and disposal of noxious liquids and the handling of harmful substances
in packaged forms. The IMO adopted regulations that set forth
pollution-prevention requirements applicable to drybulk carriers. These
regulations have been adopted by over 150 nations, including many of the
jurisdictions in which the Company's vessels operate.
The IMO has also negotiated international conventions that impose
liability for oil pollution in international waters and a signatory's
territorial waters. In September 1997, the IMO adopted Annex VI to the MARPOL
Convention to address air pollution from ships. Annex VI was ratified in May
2004 and took effect on May 19, 2005. Annex VI set limits on sulfur oxide and
nitrogen oxide emissions from ship exhausts and prohibits deliberate emissions
of ozone depleting substances. Annex VI also includes a global cap on the sulfur
content of fuel oil and allows for special areas to be established with more
stringent controls on sulfur emissions. Annex VI regulations pertaining to
nitrogen oxide emissions apply to diesel engines on vessels built on or after
January 1, 2000 or diesel engines undergoing major conversions after such date.
We believe that all our vessels comply in all material respects with Annex VI.
Additional or new conventions, laws and regulations may be adopted that could
adversely affect our business, results of operations, cash flows and financial
condition.
The IMO also has adopted the International Convention for the Safety
of Life at Sea, or SOLAS Convention, which imposes a variety of standards to
regulate design and operational features of ships. SOLAS Convention standards
are revised periodically. We believe that all our vessels are in substantial
compliance with SOLAS Convention standards.
Under Chapter IX of SOLAS Convention, the IMO adopted the
International Management Code for the Safe Operation of Ships and for Pollution
Prevention (the "ISM Code"). The ISM Code requires shipowners and bareboat
charterers to develop and maintain an extensive "Safety Management System" that
includes the adoption of a safety and environmental protection policy setting
forth instructions and procedures for safe operation and describing procedures
for dealing with emergencies. The failure of a shipowner or bareboat charterer
to comply with the ISM Code may subject such party to increased liability, may
decrease available insurance coverage for the affected vessels, and may result
in a denial of access to, or detention in, certain ports. Currently, each of the
Company's applicable vessels is ISM code-certified. However, there can be no
assurance that such certification will be maintained indefinitely.
Environmental Regulations -The United States Oil Pollution Act of 1990.
The Unites States Oil Pollution Act of 1990, or OPA, established an
extensive regulatory and liability regime for the protection and cleanup of the
environment from oil spills. OPA affects all owners and operators whose vessels
trade in the United States, its territories and possessions or whose vessels
operate in United States waters, which includes the United States' territorial
sea and its 200 nautical mile exclusive economic zone.
Under OPA, vessel owners, operators and bareboat charterers are
"responsible parties" and are jointly, severally and strictly liable (unless the
spill results solely from the act or omission of a third party, an act of God or
an act of war) for all containment and clean-up costs and other damages arising
from discharges or threatened discharges of oil from their vessels. OPA defines
these other damages broadly to include:
(i) natural resources damages and the costs of assessment thereof;
(ii) real and personal property damages;
(iii) net loss of taxes, royalties, rents, fees and other lost
revenues;
(iv) lost profits or impairment of earning capacity due to property or
natural resources damage;
(v) net cost of public services necessitated by a spill response,
such as protection from fire, safety or health hazards, and loss
of subsistence use of natural resources.
OPA limits the liability of responsible parties to the greater of $950
per gross ton or $0.8 million per drybulk vessel that is over 300 gross tons
(subject to possible adjustment for inflation). These limits of liability do not
apply if an incident was directly caused by violation of applicable United
States federal safety, construction or operating regulations or by a responsible
party's gross negligence or wilful misconduct, or if the responsible party fails
or refuses to report the incident or to cooperate and assist in connection with
oil removal activities.
We currently maintain for each of our vessel's pollution liability
coverage insurance in the amount of $1 billion per incident. If the damages from
a catastrophic spill exceeded our insurance coverage, it would have a material
adverse effect on our business.
OPA requires owners and operators of vessels to establish and maintain
with the United States Coast Guard evidence of financial responsibility
sufficient to meet their potential liabilities under the OPA. Current, the Coast
Guard regulations require evidence of financial responsibility in the amount of
$1,250 per gross ton, which includes the OPA limitation on liability of $950 per
gross ton and the U.S. Comprehensive Environmental Response, Compensation, and
Liability Act, or CERCLA, liability limit of $300 per gross ton. Liability under
CERCLA is however limited to the grater of $300 per gross ton or $5 million.
Under the regulations, vessel owners and operators may evidence their financial
responsibility by showing proof of insurance, surety bond, self-insurance, or
guaranty. Under OPA, an owner or operator of a fleet of tankers is required only
to demonstrate evidence of financial responsibility in an amount sufficient to
cover the tanker in the fleet having the greatest maximum liability under OPA.
The Coast Guard's regulations concerning certificates of financial
responsibility provide, in accordance with OPA, that claimants may bring suit
directly against an insurer or guarantor that furnishes certificates of
financial responsibility. In the event that such insurer or guarantor is sued
directly, it is prohibited from asserting any contractual defence that it may
have had against the responsible party and is limited to asserting those
defences available to the responsible party and the defence that the incident
was caused by the wilful misconduct of the responsible party.
Certain organizations, which had typically provided certificates of financial
responsibility under pre-OPA 90 laws, including the major protection and
indemnity organizations, have declined to furnish evidence of insurance for
vessel owners and operators if they are subject to direct actions or required to
waive insurance policy defences.
The Coast Guard's financial responsibility regulations may also be
satisfied by evidence of surety bond, guaranty or by self-insurance. Under the
self-insurance provisions, the ship owner or operator must have a net worth and
working capital, measured in assets located in the United States against
liabilities located anywhere in the world, that exceeds the applicable amount of
financial responsibility. The Company has complied with the Coast Guard
regulations by providing a financial guaranty from a related company evidencing
sufficient self-insurance.
OPA specifically permits individual states to impose their own
liability regimes with regard to oil pollution incidents occurring within their
boundaries, and some states have enacted legislation providing for unlimited
liability for oil spills. In some cases, states, which have enacted such
legislation, have not yet issued implementing regulations defining tanker
owners' responsibilities under these laws. The Company intends to comply with
all applicable state regulations in the ports where the Company's vessels call.
Environmental Regulation-Other Environmental Initiatives.
The European Union is considering legislation that will affect the
operation of vessels and the liability of owners for oil pollution. It is
difficult to predict what legislation, if any may be promulgated by the European
Union or any other country or authority.
Although the United States is not a party thereto, many countries have
ratified and follow the liability scheme adopted by the IMO and set out in the
International Convention on Civil Liability for Oil Pollution Damage, 1969, as
amended (the "CLC"), and the Convention for the Establishment of an
International Fund for Oil Pollution of 1971, as amended and supplemented. Under
these conventions, a vessel's registered owner is strictly liable for pollution
damage caused on the territorial waters of a contracting state by discharge of
persistent oil, subject to certain complete defences. Many of the countries that
have ratified the CLC have increased the liability limits through a 1992
Protocol to the CLC. The limits on liability outlined in the 1992 Protocol use
the International Monetary Fund currency unit of Special Drawing Rights, or SDR.
Under an amendment to the 1992 Protocol that became effective on November 1,
2003, for vessels of 5,000 to 140,000 gross tons liability is limited to
approximately 4.51 million SDR plus 631 SDR for each additional gross ton over
5,000. For vessels of over 140,000 gross tons, liability is limited to 89.77
million SDR. The exchange rate between SDRs and U.S. dollars was 0.659811 SDR
per U.S. dollar on June 7, 2007. The right to limit liability is forfeited under
the CLC where the spill is caused by the owner's actual fault or privity and,
under the 1992 Protocol, where the spill is caused by the owner's intentional or
reckless conduct. Vessels trading to contracting states must provide evidence of
insurance covering the limited liability of the owner. In jurisdictions where
the CLC has not been adopted, various legislative schemes or common law govern,
and liability is imposed either on the basis of fault or in a manner similar to
the CLC.
The United States Clean Water Act, or CWA, prohibits the discharge of
oil or hazardous substances into navigable waters and imposes strict liability
in the form of penalties for any unauthorized discharges. The CWA also imposes
substantial liability for the costs of removal, remediation and damages. The CWA
complements the remedies available under the more recent OPA and CERCLA,
discussed above. A recent U.S. federal court decision could result in a
requirement for vessels to obtain CWA permits for the discharge of ballast water
in U.S. ports. Currently, under U.S. Environmental Protection Agency, or EPA,
regulations, vessels are exempt from this permit requirement. However, in
Northwest Environmental Advocates v. EPA, N.D. Cal., No. 03-05760 SI (March 31,
2005), the U.S. District Court for the Northern District of California ordered
the EPA to repeal the exemption. Under the court's ruling, owners and operators
of vessels visiting U.S. ports would be required to comply with the CWA
permitting program or face penalties. Although the EPA will likely appeal this
decision, if the exemption is repealed, we will incur certain costs to obtain
CWA permits for our vessels. While we do not believe that the costs associated
with obtaining such permits would be material, it is difficult to predict the
overall impact of CWA permitting requirements on the drybulk shipping industry.
The U.S. Clean Air Act of 1970, as amended by the Clean Air Act
Amendments of 1977 and 1990, or the CAA, requires the U.S. Environmental
Protection Agency, or EPA, to promulgate standards applicable to emissions of
volatile organic compounds and other air contaminants. Our vessels are subject
to vapor control and recovery requirements for certain cargoes when loading,
unloading, ballasting, cleaning and conducting other operations in regulated
port areas. Our vessels that operate in such port areas are equipped with vapor
control systems that satisfy these requirements. In December 1999, the EPA
issued a final rule regarding emissions standards for marine diesel engines. The
final rule applies emissions standards to new engines beginning with the 2004
model year. In the preamble to the final rule, the EA noted that it may revisit
the application of emissions standards to rebuilt or remanufactured engines if
the industry does not take steps to introduce new pollution control
technologies. While adoption of such standards could require modifications to
some existing marine diesel engines, the extent to which our vessels could be
affected cannot be determined at this time. The CAA also requires states to
draft State Implementation Plans, or SIPs, designed to attain national
health-based air quality standards in primarily major metropolitan and/or
industrial areas. Several SIPs regulate emissions resulting from vessel loading
and unloading operations by requiring the installation of vapor control
equipment. As indicated above, our vessels operating in covered port areas are
already equipped with vapor control systems that satisfy these requirements.
Although a risk exists that new regulations could require significant capital
expenditures and otherwise increase our costs, based on the regulations that
have been proposed to date, we believe that no material capital expenditures
beyond those currently contemplated and no material increase in costs are likely
to be required.
The United States National Invasive Species Act, or NISA, was enacted
in 1996 in response to growing reports of harmful organisms being released into
U.S. ports through ballast water taken on by ships in foreign ports. NISA
established a ballast water management program for ships entering U.S. waters.
Under NISA, mid-ocean ballast water exchange is voluntary, except for ships
heading to the Great Lakes or Hudson Bay, or vessels engaged in the foreign
export of Alaskan North Slope crude oil. However, NISA's reporting and
record-keeping requirements are mandatory for vessels bound for any port in the
United States. Although ballast water exchange is the primary means of
compliance with the act's guidelines, compliance can also be achieved through
the retention of ballast water on board the ship, or the use of environmentally
sound alternative ballast water management methods approved by the U.S. Coast
Guard. If the mid-ocean ballast exchange is made mandatory throughout the United
States, or if water treatment requirements or options are instituted, the cost
of compliance could increase for ocean carriers. Although we do not believe that
the costs of compliance with a mandatory mid-ocean ballast exchange would be
material, it is difficult to predict the overall impact of such a requirement on
the drybulk shipping industry.
Our operations occasionally generate and require the transportation,
treatment and disposal of both hazardous and non-hazardous solid wastes that are
subject to the requirements of the U.S. Resource Conservation and Recovery Act,
or RCRA, or comparable state, local or foreign requirements. In addition, from
time to time we arrange for the disposal of hazardous waste or hazardous
substances at offsite disposal facilities. If such materials are improperly
disposed of by third parties, we may still be held liable for clean up costs
under applicable laws.
The IMO adopted an International Convention for the Control and
Management of Ships' Ballast Water and Sediments, or the BWM Convention, in
February 2004. The BWM Convention's implementing regulations call for a phased
introduction of mandatory ballast water exchange requirements (beginning in
2009), to be replaced in time with mandatory concentration limits. The BWM
Convention will not enter into force until 12 months after it has been adopted
by 30 states, the combined merchant fleets of which represent not less than 35%
of the gross tonnage of the world's merchant shipping. As of April 30, 2007, the
BWM Convention has been adopted by eight states, representing 3.21% of world
tonnage.
The International Dry Bulk Shipping Market
The dry bulk shipping market is the primary provider of global
commodities transportation. Approximately one third of all seaborne trade is dry
bulk related.
After three consecutive years in which demand for seaborne trade has
grown faster than new-building supply, the situation was reversed in mid 2005.
While demand growth slowed, a new all-time high for new-building deliveries,
together with minimal scraping, resulted in a weaker market in 2005 which
continued in the first half of 2006. Since mid 2006 though, the market showed
signs of significant strength and as a result the Baltic Dry Index closed the
year at 4,397.
During 2006, dry bulk trade growth increased by approximately 5%. This
increase is primarily attributed to the heavy demand for major bulk commodities,
such as iron ore and coal, from the Far East region and more specifically from
China. China's economy in 2006 continued growing at a record pace of almost 10%
due to the country's rapid industrial growth.
On the supply side, the world fleet grew in 2006 by approximately 7%
in terms of dwt to 373 million. Scrapping of vessels for 2006 was again at a low
level at approximately 2 million dwt as most of the owners elected to take
advantage of the favorable shipping markets instead of scrapping their vessels.
Customers
The Company has many long-established customer relationships, and
management believes it is well regarded within the international shipping
community. During the past 16 years, vessels managed by Maryville have been
repeatedly chartered by subsidiaries of major dry bulk operators. In 2006, we
derived approximately 45% of our gross revenues from five charterers listed
below:
Daeyang Shipping Co., Ltd 15%
Fratelli D'Amato SpA 9%
Perseveranza Di Navigazione Spa 8%
Oldendorff Carriers GMBH and Co KG 7%
Rizzo Bottiglieri De Carlini Armatori Spa 6%
Total 45%
Inspection by Classification Society
The hull and machinery of every commercial vessel must be classed by a
classification society authorised by its country of registry. The classification
society certifies that a vessel is safe and seaworthy in accordance with the
applicable rules and regulations of the country of registry of the vessel and
the Safety of Life at Sea Convention. The Company's vessels have been certified
as being "in class" by their respective classification societies: Bureau Veritas
("BV"), Lloyd's Register of Shipping and Nippon Kaiji Kyokai Corp. ("NKK").
In addition, our wholly-owned management subsidiary, Maryville
believed in Safety Management and Quality long before they became mandatory by
the relevant institutions. Although the shipping industry was aware that Safety
Management (ISM CODE) would become mandatory as of July 1, 1998, Maryville
Maritime, in conjunction with ISO 9002:1994, commenced operations back in 1995
aiming to voluntarily implement both systems well before the International
Safety Management date.
Maryville was the first ship management company in Greece to receive
simultaneous ISM and ISO Safety and Quality Systems Certifications in February
1996, for the safe operation of dry cargo vessels. Both systems were
successfully implemented in the course of the years, until a new challenge ISO
9001: 2000 and ISO 14001:1996 was set. At the end of 2003, Maryville Maritime's
Management System was among the first five company management systems to have
been successfully audited and found to be in compliance with both management
System Standards mentioned above. Certification to Maryville was issued in early
2004.
A vessel must undergo Annual Surveys, Intermediate Surveys and Special
Surveys. In lieu of a Special Survey, a vessel's machinery may be on a
continuous survey cycle, under which the machinery would be surveyed
periodically over a five-year period. The Company's vessels are on Special
Survey cycles for hull inspection and continuous survey cycles for machinery
inspection. Every vessel is also required to be dry-docked every two to three
years for inspection of the underwater parts of such vessel. Generally, the
Company will make a decision to scrap a vessel or continue operations at the
time of a vessel's fifth Special Survey.
Insurance and Safety
The business of the Company is affected by a number of risks,
including mechanical failure of the vessels, collisions, property loss to the
vessels, cargo loss or damage and business interruption due to political
circumstances in foreign countries, hostilities and labor strikes. In addition,
the operation of any ocean-going vessel is subject to the inherent possibility
of catastrophic marine disaster, including oil spills and other environmental
mishaps, and the liabilities arising from owning and operating vessels in
international trade. OPA, by imposing potentially unlimited liability upon
owners, operators and bareboat charterers for certain oil pollution accidents in
the U.S., has made liability insurance more expensive for ship owners and
operators and has also caused insurers to consider reducing available liability
coverage.
The Company maintains hull and machinery and war risks insurance,
which includes the risk of actual or constructive total loss, and protection and
indemnity insurance with mutual assurance associations. The Company does not
carry insurance covering the loss of revenue resulting from vessel off-hire
time. The Company believes that its insurance coverage is adequate to protect it
against most accident-related risks involved in the conduct of its business and
that it maintains appropriate levels of environmental damage and pollution
insurance coverage. Currently, the available amount of coverage for pollution is
$1.0 billion for dry bulk carriers per vessel per incident. However, there can
be no assurance that all risks are adequately insured against, that any
particular claim will be paid or that the Company will be able to procure
adequate insurance coverage at commercially reasonable rates.
C. Organizational Structure
We are the parent company of the following subsidiaries:
Subsidiary Place of Incorporation Percentage of Ownership
- ---------- ---------------------- -----------------------
Maryville Maritime Inc. Liberia 100%
Point Holdings Ltd. Liberia 100%
Oceanaut, Inc. Republic of the Marshall Islands 75%
D. Property, plant and equipment
We do not own any real estate property. Our management agreement with
our wholly-owned subsidiary Maryville Maritime Inc. includes terms under which
we and our subsidiaries are being offered office space, equipment and
secretarial services at the 17th km National Road Athens-Lamia & Finikos Str.,
Nea Kifisia, Athens, Greece. Maryville has a rental agreement for the rental of
these office premises with an unrelated party.
ITEM 4A - UNRESOLVED STAFF COMMENTS
None.
ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following management's discussion and analysis of the results of
our operations and our financial condition should be read in conjunction with
the financial statements and the notes to those statements included elsewhere in
this report. This discussion includes forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of many factors,
such as those set forth in the "Risk Factors" section and elsewhere in this
report.
A. Operating Results
Factors Affecting Our Results of Operations
Voyage Revenues from Vessels
Gross revenues from vessels consist primarily of (i) hire earned under
time charter contracts, where charterers pay a fixed daily hire or (ii) amounts
earned under voyage charter contracts, where charterers pay a fixed amount per
ton of cargo carried. Gross revenues are also affected by the proportion between
voyage and time charters, since revenues from voyage charters are higher than
equivalent time charter hire revenues, as they cover all costs relating to a
given voyage, including port expenses, canal dues and fuel (bunker) costs.
Accordingly, year-to-year comparisons of gross revenues are not necessarily
indicative of the Trading Fleet's performance. The time charter equivalent per
vessel ("TCE"), which is defined as gross revenue per day less commissions and
voyage costs provides a more accurate measure for comparison.
Voyage Expenses and related party voyage expenses
Voyage expenses and related party voyage expenses consist of all costs
relating to a given voyage, including port expenses, canal dues, fuel (bunker)
costs, net of gains or losses from the sale of bunkers to time charterers and
commissions. Under voyage charters, the owner of the vessel pays such expenses
whereas under time charters the charterer pays such expenses excluding
commissions. Therefore, voyage expenses can exhibit significant fluctuations
from period to period depending on the type of charter arrangement.
Vessel Operating Expenses
Vessel operating expenses consist primarily of crewing, repairs and
maintenance, lubricants, victualling, stores and spares and insurance expenses.
The vessel owner is responsible for all vessel operating expenses in voyage and
time charters.
Depreciation
Vessels' acquisition cost and subsequent improvements are depreciated on a
straight-line method over an estimated economic life of 28 years (from the date
of construction of each vessel). In computing vessels' depreciation the
estimated salvage value is also taken into consideration. Depreciation of
office, furniture and equipment is calculated on a straight line basis over the
estimated useful life of the specific asset placed in service which range from 3
to 7 years.
Amortization of Dry-docking and Special Survey Costs
As of December 31, 2005, dry-docking and special survey costs were
deferred and amortized on a straight-line basis over a period of 2.5 years and 5
years, respectively which approximated the next dry-docking and special survey
due dates. Within 2006 and following management's reassessment of the service
lives of these costs, the amortization period of the deferred special survey
costs was changed from 5 years to the earliest between the date of the next
dry-docking and 2.5 years for all surveys. The effect of this change in
accounting estimate, which does not require retrospective adoption as per SFAS
154 "Accounting Changes and Error Corrections" was to decrease net income and
basic and diluted earnings per share for the year ended December 31, 2006 by
$655,000 and $0.03 per share, respectively.
Management Fees
Management fees consist of fixed management fees per vessel per month
charged by Excel Management Ltd. for managing vessels. As of March 2005, with
effect from January 1st 2005, we reached an agreement with Excel Management Ltd
to terminate our management agreement and the technical and commercial
management of our fleet was assumed by our wholly-owned subsidiary, Maryville.
Results of Operations
Fiscal Year ended December 31, 2006 Compared to Fiscal Year ended December 31,
2005
Voyage Revenues
Voyage revenues increased by $5.4 million or 4.6%, to $123.5 million
for the year ended December 31, 2006 compared to $118.1 million for the same
period in 2005. This increase was primarily attributed to the increase of the
total available days for the fleet to 5,934 for 2006 from 5,070 in 2005 related
to the change in the average number of vessels operating from 14.4 in 2005 to 17
in 2006, partialy counterbalanced by lower average TCE rates experienced in 2006
versus 2005.
Voyage Expenses and related party voyage expenses
Voyage expenses and related party voyage expenses, which primarily
consist of port, canal and fuel costs, net of gains or losses from the sales of
bunkers to time charterers, that are unique to a particular voyage which would
otherwise be paid by the charterer under a time charter contract, as well as
commissions, decreased by $3.5 million, or 26.7 %, to $9.6 million for 2006,
compared to $13.1 million for 2005. This decrease is due to fewer voyage
charters entered into 2006 compared to 2005 and to a lesser extent due to the
net gains from the sale of bunkers to time charterers, partially counterbalanced
by increased commissions paid as a result of higher voyage revenues earned in
2006 as compared to 2005.
Vessel Operating Expenses
Vessel operating expenses, which include crew costs, provisions, deck
and engine stores, lubricating oil, insurance, maintenance and repairs,
increased by $6.2 million, or 25.6%, to $30.4 million for 2006 compared to $24.2
million for 2005. This increase is primarily due to the increase in the calendar
days of the fleet from 5,269 in 2005 to 6,205 in 2006. Daily vessel operating
expenses per vessel increased by $305, or 6.6%, to $4,901 for 2006, compared to
$4,596 for 2005. This increase is primarily due to increased cost of repairs and
spares and increased crewing costs due to normal inflationary pressures.
Depreciation and Amortization
Depreciation and amortization, which includes depreciation of vessels,
depreciation of office furniture and equipment, as well as amortization of dry
docking and special survey costs increased by $9.3 million, or 44.9% to $30.0
million for 2006 compared to $20.7 million for 2005. This increase is primarily
due to increased calendar days of our fleet, as described above with respect to
depreciation expense and increased amortization charges of $0.9 million mainly
due to the company's decision to make a change in the accounting estimate for
the amortization of special survey costs.
General and Administrative Expenses
General and administrative expenses, increased by $3.5 million, or
53.8%, to $10.0 million for 2006 compared to $6.5 million for 2005. This
increase is primarily due to the increase in the overall level of salaries and
bonuses paid in 2006 as compared to 2005.
Gain on sale of vessels
No vessel sales were made in 2006. In 2005, four vessels were sold
resulting in a gain of $26.8 million.
Contract Termination Expense
As a result of the termination of the management agreement between
Excel Maritime Carriers Ltd and Excel Management (discussed in more detail under
the "Operations and Ship Management" section of this report), the Company
incurred in 2005 an expense of approximately $5.0 million representing the
excess of the fair value of the 205,442 Class A shares to be issued and the fair
value of the anti-dilution provisions over the cash consideration of $2.0
million upon delivery of the shares. No contract termination expense incurred in
2006.
Interest and finance costs, net
Net interest cost amounted to $12.6 million in 2006, an increase of
$4.7 million, compared to the $7.9 million in 2005 due to the fact that the debt
in 2006 was outstanding during the whole year in contrast to 2005 and due to
unrealized loss from derivative instruments of $0.8 million related to interest
rate swaps. We did not have any derivative instruments in 2005.
U.S. source income taxes
US Source income taxes amounted to $0.4 million for 2006 as against
$0.3 in 2005.
Fiscal Year ended December 31, 2005 Compared to Fiscal Year ended December 31,
2004
Voyage Revenues
Voyage revenues increased by $66.1 million or 127.1%, to $118.1
million for the year ended December 31, 2005 compared to $52.0 million for the
same period in 2004. This increase was primarily attributed to the increase of
the total available days for the fleet to 5,070 for 2005 from 1,793 in 2004. The
increase in total available days was a direct result of the expansion of our
fleet from 5 vessels in early 2005, to 17 vessels at the end of 2005.
Voyage Expenses and related party voyage expenses
Voyage expenses and related party voyage expenses, which primarily
consist of port, canal and fuel costs, net of gains or losses from the sales of
bunkers to time charterers, that are unique to a particular voyage which would
otherwise be paid by the charterer under a time charter contract, as well as
commissions, increased by $5.0 million, or 61.7 %, to $13.1 million for 2005,
compared to $8.1 million for 2004. This increase is primarily due to the
increase in commissions paid as a result of higher voyage revenues earned in
2005 as compared to 2004.
Vessel Operating Expenses
Vessel operating expenses, which include crew costs, provisions, deck
and engine stores, lubricating oil, insurance, maintenance and repairs,
increased by $16.7 million, or 222.7%, to $24.2 million for 2005 compared to
$7.5 million for 2004. This increase is primarily due to the increase in the
vessels of our fleet from 5 at the end of 2004 to 17 at the end of 2005 and the
corresponding increase in the calendar days of the fleet from 1,830 in 2004 to
5,269 in 2005. Daily vessel operating expenses per vessel increased by $488, or
11.9 %, to $4,596 for 2005, compared to $4,108 for 2004. This increase is
primarily due to the increase in the cost of repairs and spares and to the
increase in our crew costs due to the annual pay increases.
Depreciation and Amortization
Depreciation and amortization, which includes depreciation of vessels
as well as amortization of dry docking and special survey costs increased by
$19.0 million, or 1,117.6% to $20.7 million for 2005 compared to $1.7 million
for 2004. This increase is primarily due to the increase of our fleet and
calendar days of our fleet, as described above, and also reflect the partial
impact of the dry-dockings that were performed on the MV Lady and MV Marybelle
during 2005.
General and Administrative Expenses
General and administrative expenses, increased by $ 3.7 million, or
127.6 %, to $ 6.6 million for 2005 compared to $2.9 million for 2004. This
increase is primarily due to the increase in salary costs due to (i) the
increase in the number of our shore based staff from 31 at the end of 2004 to 57
at the end of 2005, to (ii) the increase in the overall level of salaries and
bonuses paid in 2005 as compared to 2004 and to (iii) the $0.9 million of
compensation expenses recorded in connection with all stock-based employee
compensation awards, which in 2004 it had only accrued for one quarter.
Management fees-related party
As a result of the termination of the management agreement between
Excel Maritime Carriers Ltd and Excel Management (discussed in more detail under
the "Operations and Ship Management" section of this report) in effect from
January 1, 2005, no related party management fees were paid in 2005. For 2004,
the related party management fees amounted to $0.3 million.
Gain on sale of vessels
During 2005, the vessels Petalis, Lucky Lady, Fighting Lady and Almar
I were sold for a total consideration of $37.0 million, resulting in a gain of
$26.8 million. No vessel sales had been made in 2004.
Contract Termination Expense
As a result of the termination of the management agreement between
Excel Maritime Carriers Ltd and Excel Management (discussed in more detail under
the "Operations and Ship Management" section of this report), the Company
incurred an expense of approximately $5.0 million representing the excess of the
fair value of the 205,442 Class A shares to be issued and the fair value of the
anti-dilution provisions over the cash consideration of $2.0 million upon
delivery of the shares.
Interest and finance costs, net
Net interest cost amounted to $7.9 million in 2005, an increase of $7.8 million,
compared to the $0.06 million in 2004. This change is primarily attributed to
the increased debt of approximately $250.9 million that was put on our balance
sheet as a result of the expansion of our fleet in 2005.
U.S source income taxes
US Source income taxes amounted to $0.3 million for 2005 as against $0
in 2004. For all years prior to 2004, the company had claimed exclusions from
the payment of this tax.
B. Liquidity and Capital Resources
The Company operates in a capital-intensive industry, which requires
extensive investment in revenue-producing assets. The liquidity requirements of
the Company relate to servicing its debt, funding investments in vessels,
funding working capital and maintaining cash reserves. Net cash flow generated
by operations and proceeds from assets sales, bank indebtedness and sales of
equity securities have historically been the main source of liquidity and have
been sufficient to cover all requirements.
The Company believes that based upon current levels of vessels'
employment and cash flows from operations, it will have adequate liquidity to
make required payments of principal and interest on the Company's debt and fund
working capital requirements at least through to December 31st, 2007.
Historically our principal source of funds has been equity provided by
our Stockholders, including our offerings of our Class A common stock completed
on December 13, 2004 and March 17, 2005, respectively, operating cash flows and
long-term borrowings. Our principal use of funds has been capital expenditures
to grow our fleet, maintain the quality of our drybulk vessels, comply with
international shipping standards and environmental laws and regulations, fund
working capital requirements, make principal repayments on outstanding loan
facilities, and pay dividends.
Our practice has been to acquire drybulk vessels using a combination
of cash on hand, funds received from equity investors and bank debt secured by
mortgages on our drybulk vessels. Our business is capital intensive and its
future success will depend on our ability to maintain a high-quality fleet
through the acquisition of newer second hand drybulk vessels and the selective
sale of our older drybulk vessels. These acquisitions will be principally
subject to management's expectation of future market conditions as well as our
ability to acquire drybulk vessels on favourable terms.
For legal and economic restrictions on the ability of the company's
subsidiaries to transfer funds to the company in the form of dividends, loans,
or advances and the impact of such restrictions see "Risk factors" above.
Operating Activities
Net cash from operating activities decreased by $ 15.3 million, to
$58.3 million during 2006, compared to net cash from operating activities of
$73.6 million during 2005. This decrease is mainly attributable to payments for
surveys and increased operating and administrative expenses. Net cash from
operating activities increased by $41.6 million, to $73.6 million during 2005,
compared to net cash from operating activities of $32.0 million during 2004 as a
result of the enlargement of our fleet during 2005.
Investing Activities
The net cash used in investing activities for 2006 amounted to $0.7
million, an increase of $417.0 million from 2005. Within 2006 no investing
activity was performed with the exception of office, furniture and equipment as
opposed to the cash paid for the acquisition of 16 vessels net of proceeds
received from the disposal of four vessels during 2005. The net cash used for
investing activities for 2005 amounted to $417.7 million, an increase of $391.5
million from 2004, primarily affected by the cash paid for the acquisition of 16
vessels net of proceeds received from the disposal of four vessels during 2005.
Financing Activities
The net cash used in financing activities was $29.9 million during
2006, compared to net cash from financing activities of $337.7 million during
2005, a decrease of $367.6 million. This decrease was attributed to a $45.4
million decrease in our long term debt as a result of principal repayments and a
decrease in restricted cash of 15.3 million. The net cash from financing
activities was $337.7 million during 2005, compared to net cash from financing
activities of $55.1 million during 2004, an increase of $282.6 million. This
increase was primarily attributed to: (i) an increase of $245.4 million in our
net long term debt partially offset by an increase in restricted cash of $26.2
million and (ii) net proceeds from issuance of common stock of $116.5 million
compared to $51.5 million of such proceeds in 2004.
Summary of Contractual Obligations
The following table sets forth our contractual obligations and their
maturity dates as of December 31, 2006:
Payments due by period
Total 2007 2008 2009 2010 2011 &
Thereafter
Amounts in thousands of U.S Dollars
Long-term debt(1) 219,122 32,826 32,374 27,112 22,531 104,279
Interest Expenses(2) 66,057 13,137 11,435 9,918 8,308 23,259
Rental Payments(3) 4,885 458 477 497 518 2,935
(1) As of December 31, 2006, we have outstanding four bank loans concluded in
order to partially finance the acquisition cost of our vessels with varying
maturities through May 2015.
(2) Our credit facilities bear interest at LIBOR plus a margin. The average
interest rate (including the margin) at December 31, 2006 was 6.25%. For
years 2007 and going forward a constant rate of 5.36% (LIBOR as of June
2007) plus the applicable margin has been used, for purposes of
presentation of contractual obligations in the above table.
(3) In 2005, Maryville entered into a lease agreement which was amended in
February 2006 and further amended in March 2007, for the rental of new
office premises with an unrelated party. Based on the amended lease
agreement, the term of the lease has been extended through February 9,
2015. The monthly rental payment is approximately $32,000 (Euro 27,000),
adjusted annually for inflation increase plus an annual increase of 1.5%
until February 2009. The monthly rental payment amount after February 2009
will be renegotiated.
Critical Accounting Policies
Our consolidated financial statements are prepared based on the
accounting policies described in note 2 to our consolidated financial
statements, which are included under "Item 18. Financial Statements" in this
Annual Report on Form 20-F. The application of such policies may require
management to make significant estimates and assumptions. We believe that the
following are our most critical accounting estimates used in the preparation of
our consolidated financial statements that involve a higher degree of judgment
and could have a significant impact on our future consolidated results of
operations and financial position:
Impairment of Long-Lived Assets
We evaluate the carrying amounts (primarily for vessels and related
drydock and special survey costs) and periods over which long-lived assets are
depreciated to determine if events have occurred which would require
modification to their carrying values or useful lives. In evaluating useful
lives and carrying values of long-lived assets, we review certain indicators of
potential impairment, such as undiscounted projected operating cash flows,
vessel sales and purchases, business plans and overall market conditions. We
determine undiscounted projected net operating cash flows for each vessel and
compare it to the vessel's carrying value. If our estimate of undiscounted
future cash flows for any vessel is lower than the vessel's carrying value plus
any unamortized drydocking and special survey costs, the carrying value is
written down, by recording a charge to operations, to the vessel's fair market
value if the fair market value is lower than the vessel's carrying value. We
estimate fair market value primarily through the use of third party valuations
performed on an individual vessel basis. Furthermore, in the period a long lived
asset meets the "held for sale" criteria of SFAS No.144, a loss is recognized
for any initial adjustment of the long lived asset's carrying amount to fair
value less cost to sell. As vessel values are volatile, the actual fair market
value of a vessel may differ significantly from estimated fair market values
within a short period of time.
Vessels' Depreciation
We record the value of our vessels at their cost (which includes
acquisition costs directly attributable to the vessel and expenditures made to
prepare the vessel for its initial voyage) less accumulated depreciation.
Depreciation begins when the vessel is ready for its intended use, on a
straight-line basis over the vessel's remaining economic useful life, after
considering the estimated residual value (vessel's residual value is equal to
the product of its lightweight tonnage and estimated scrap rate). Second hand
vessels are depreciated from the date of their acquisition through their
remaining estimated useful life. We estimate the useful life of our vessels to
be 28 years from the date of initial delivery from the shipyard and the residual
value of our vessels to be $120 per light weight. A decrease in the useful life
of a dry bulk vessel or in its residual value would have the effect of
increasing the annual depreciation charge. When regulations place limitations
over the ability of a vessel to trade on a worldwide basis, its remaining useful
life is adjusted at the date such regulations become effective.
Accounting for Dry-docking and Special Survey Costs
Our vessels are required to pass drydock and special survey
periodically for major repairs and maintenance that cannot be performed while
the vessels are operating. As of December 31, 2005, dry-docking and special
survey costs were deferred and amortized on a straight-line basis over a period
of 2.5 years and 5 years, respectively which approximated the next dry-docking
and special survey due dates. Within 2006 and following management's
reassessment of the service lives of these costs, the amortization period of the
deferred special survey costs was changed from 5 years to the earliest between
the date of the next dry-docking and 2.5 years for all surveys. The effect of
this change in accounting estimate, which does not require retrospective
adoption as per SFAS 154 "Accounting Changes and Error Corrections", was to
decrease net income and basic and diluted earnings per share for the year ended
December 31, 2006 by $655,000 and $0.03 per share, respectively.
Unamortized dry-docking and special survey costs of vessels that are
sold are written off and included in the calculation of the resulting gain or
loss in the year of the vessel's sale. Costs capitalized as part of the
drydocking and special survey include actual costs incurred at the yard and
parts used in the drydocking. We believe that these criteria are consistent with
industry practice and that our policy of capitalization reflects the economics
and market values of the vessels.
Accounting for Revenue and Expenses
Vessels are chartered using either voyage charters, where a contract
is made in the spot market for the use of a vessel for a specific voyage for a
specified charter rate, or time charters, where a contract is entered into for
the use of a vessel for a specific period of time and a specified daily
charterhire rate. If a charter agreement exists and collection of the related
revenue is reasonably assured, revenue is recognized, as it is earned ratably
over the duration of the period of each voyage or time charter. A voyage is
deemed to commence upon the completion of discharge of the vessel's previous
cargo and is deemed to end upon the completion of discharge of the current
cargo. Demurrage income represents payments by the charterer to the vessel owner
when loading or discharging time exceeded the stipulated time in the voyage
charter and is recognized as it is earned ratably over the duration of the
period of each voyage charter.
Voyage expenses, primarily consisting of port, canal and bunker
expenses net of gains or losses from the sales of bunkers to time charterers,
that are unique to a particular charter are paid for by the charterer under the
time charter arrangements or by us under voyage charter arrangements, except for
commissions, which are always paid for by us regardless of charter type. All
voyage and vessel operating expenses are expensed as incurred, except for
commissions. Commissions paid to brokers are deferred and amortized over the
related voyage charter period to the extent revenue has been deferred since
commissions are earned as our revenues are earned.
Derivatives
We are exposed to the impact of interest rate changes. Our objective
is to manage the impact of interest rate changes on earnings and cash flows of
our borrowings. We use interest rate swaps to manage net exposure to interest
rate changes related to our borrowings and to lower our overall borrowing costs.
Such swap agreements, designated as "economic hedges" are recorded at fair value
in accordance with the provisions of SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" (as amended) which establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value, with
changes in the derivatives' fair value recognized currently in earnings unless
specific hedge accounting criteria are met.
During 2006 we concluded an interest rate collar agreement and an
interest rate swap agreement in order to partially hedge the exposure of
interest rate fluctuations associated with our variable rate borrowings. These
agreements do not meet hedge accounting criteria and the change in their fair
value is recognized through earnings.
Recent Developments
Restricted Stock Grants
-----------------------
On January 15, 2007 the Company's Board of Directors approved the
proposal effected by the Compensation Committee with respect to the incentive
program discussed under "Compensation"-"Stock Option Plan" below, to grant the
total annual bonus for 2006 amounting to $0.7 million in cash, plus an
additional 25% (approximately $0.2 million) in the form of restricted stock. As
of December 31, 2006, the amount of $ 0.7 million cash bonus was accrued by the
Company and is included in General and Administrative in the accompanying 2006
consolidated statement of income, while the granted restricted stock will be
recognized as expense over the vesting period based on the fair value on the
grant date. Half of those shares will be vested on January 1, 2008 and the
remaining half on January 1, 2009.
Management Termination Agreement
--------------------------------
On March 2, 2007 Excel Management Ltd., an affiliated company,
informed the Company of its intention to consummate the transaction regarding
the Management Termination agreement described in "Related Party Transactions"
below. On June 19, 2007 the Company received payment in an amount of $2.0
million upon issuance of 298,403 shares.
Oceanaut
--------
On March 6, 2007 Oceanaut, see "Corporate Structure" above, completed
its initial public offering in the United States under the United States
Securities Act of 1933, as amended. In this respect, 18,750,000 units ("Units")
were sold at a price of $8.00 per Unit, raising gross proceeds of $150.0
million. Prior to the closing of the initial public offering, Oceanaut
consummated a private placement of 1,125,000 units at $8.00 per unit price and
2,000,000 warrants at $1.00 per warrant to the Company, raising gross proceeds
of $11.0 million. Each unit issued in the initial public offering and the
private placement consists of one share of Oceanaut's common stock and one
warrant to purchase one share of common stock.
The initial public offering and the private placement generated gross
proceeds in an aggregate of $161.0 million intended to be used to complete a
business combination with a target business that has not been defined yet.
Therefore, an amount of approximately 95% of the gross proceeds, after payment
of certain amounts to the underwriters, is held in a trust account until the
earlier of (i) the consummation of a Business Combination or (ii) the
distribution of the trust account under Oceanaut's liquidation procedure. The
remaining proceeds including also 500,000 units and 2,000,000 warrants (sold to
the Company during the private placement which do not have any rights to
liquidation distribution and amounts to $6.0 million) may be used to pay for
business, legal and accounting due diligence on prospective acquisitions and
continuing general and administrative expenses, as well as claims raised by any
third party.
In addition, in the event of a dissolution and liquidation of
Oceanaut, the Company will cover any short fall in the trust account resulted by
any claims of various vendors, prospective target businesses or other entities
for services rendered or products sold to Oceanaut if such vendor or prospective
target business or other third party does not execute a valid and enforceable
waiver of any rights or claims to the trust account.
Following the initial public offering and the private placement, the
Company owns approximately 18.9% of the issued and outstanding shares of
Oceanaut, while a percentage of 4.8% is held by certain of the Company's
officers and directors.
Certain officers and directors of the Company serve also as officers
and directors of Oceanaut.
Dividend Policy Initiation
--------------------------
On March 7, 2007 the Company's Board of Directors approved the
implementation of a dividend policy, paid quarterly, commencing in the second
quarter of 2007.
Vessel Sale
-----------
On April 27, 2007 the Company's Board of Directors approved the sale
of vessel Goldmar for $15.85 million net of commissions to an affiliated company
as per the Memorandum of Agreement dated April 26, 2007. The vessel was
delivered to her new owners on May 10, 2007 and the gain based on the carrying
value at the time of delivery amounted to approximately $6.2 million..
Dividends' Declaration
----------------------
On May 22, 2007 the Company declared a quarterly dividend of $0.20 per
share for the first quarter 2007 payable on June 15th 2007 to shareholders of
record on June 1st 2007.
C. Research and development, Patents and Licenses
Not applicable.
D. Trend Information
Not applicable.
E. Off Balance Sheet Arrangements
We do not engage in off-balance sheet arrangements.
ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth the name, age and position within the
Company of each of its Executive Officers and Directors. On December 30, 2002,
the Shareholders voted to amend the Company's Articles of Incorporation to
eliminate the classification of the Company's Directors. Accordingly, all
Directors serve for one year terms. The following table sets forth the name, age
and position of each of the executive officers, executive and non-executive
directors within the Company.
Name Age Position
- ---- --- --------
Gabriel Panayotides 52 Chairman and Director
Christopher Georgakis 43 President, Chief Executive Officer and Director
George Agadakis 54 Vice President, Chief Operating Officer and Director
Eleftherios Papatrifon 37 Chief Financial Officer
Frithjof Platou 70 Independent Non - Executive Director
Evangelos Macris 56 Independent Non - Executive Director
Apostolos Kontoyannis 58 Independent Non - Executive Director
Trevor J. Williams 65 Independent Non - Executive Director
Georgina E. Sousa 58 Secretary (replaced from January 26, 2007 by Deborah L. Paterson)
Biographical information with respect to each of our directors and
executive officers is set forth below.
Gabriel Panayotides had been the Chairman of the Board since February 1998. Mr.
Panayiotides has participated in the ownership and management of ocean going
vessels since 1978. He is also a member of the Greek Committee of Bureau
Veritas, an international classification society. He holds a Bachelors degree
from the Piraeus University of Economics. Mr. Panayotides is a member of the
Board of Directors of D/S Torm.
Christopher J Georgakis was appointed President and Chief Executive Officer of
the Company on November 1, 2004. Mr. Georgakis succeeded Mr. Gabriel
Panayotides, who remains the Company's Chairman of the Board. Mr. Georgakis has
two decades of shipping experience, with a concentration on dry bulk shipping
and joined Excel Maritime following 6 years with privately owned London-based
Sea Challenger Maritime Ltd., a subsidiary of Belmont Shipping Ltd. Mr.
Georgakis holds a B.Sc. in Business Administration, magna cum laude, from United
States International University.
George Agadakis has been Vice President and a Director of the Company since
November 1997. He is the Shipping Director of Maryville and was General Manager
of Maryville from January 1992 to January 2001. From 1983 to 1992 he served as
Insurance and Claims Manager for Maryville. He has held positions as Insurance
and Claims Manager and as a consultant with three other shipping companies since
1976. He holds diplomas in shipping and Marine Insurance from the Business
Centre of Athens, the London School of Foreign Trade Ltd and the London Chamber
of Commerce.
Eleftherios Papatrifon, was appointed Chief Financial Officer on January 1,
2005. Mr. Papatrifon has 15 years of experience in Corporate Finance and Asset
Management. He has worked as a Portfolio Manager for The Prudential Insurance
Company of America and has held senior management positions in the Banking and
Financial Services sectors in Greece. Until recently, Mr. Papatrifon was Head of
Investment Banking at Geniki Bank of Greece, a subsidiary of Societe Generale.
Mr. Papatrifon holds undergraduate (BBA) and graduate (MBA) degrees from Baruch
College (CUNY). He is also a member of the CFA Institute and a CFA
charterholder.
Frithjof Platou, a Norwegian citizen, has broad experience in shipping and
project finance, ship broking, ship agency and trading and has served on the
Boards of several companies in the U.K. and Norway. Since 1984, he manages his
own financial consulting and advisory company, Stoud & Co Limited, specialising
in corporate and project finance for the shipping, offshore oil & gas and
various other industries. He was head of the shipping and offshore departments
at Den Norske Creditbank and Nordic Bank as well as at American Express Bank.
Mr. Platou holds a degree in Business Administration from the University of
Geneva, speaks and writes fluent Norwegian, English, French and German, has a
reasonable knowledge of Spanish and a basic understanding of Japanese.
Evangelos Macris is a member of the Bar Association of Athens and is the
founding partner of Evangelos S. Macris Law Office, a Piraeus based office
specializing in Shipping Law. He holds a degree in Economics and Political
Science from the Pantion University in Athens and a Law Degree from the
University of Athens, as well as a post graduate degree in Shipping Law from the
University of London, University College.
Apostolos Kontoyannis is the Chairman of Investments and Finance Ltd., a
financial consultancy firm he founded in 1987, that specializes in financial and
structuring issues relating to the Greek maritime industry, with offices in
Piraeus and London. Previously, he was employed by Chase Manhattan Bank N.A. in
Frankfurt (Corporate Bank), London (Head of Shipping Finance South Western
European Region) and Piraeus (Manager, Ship Finance Group) from 1975 to 1987.
Mr. Kontoyannis holds a bachelors degree in Finance and Marketing and an M.B.A.
in Finance from Boston University.
Trevor Williams is a Chartered Accountant and prior to founding Consolidated
Services Limited in 1985, a Bermuda-based firm providing management services to
the shipping industry, was the Director of Finance for Mundogas S.A. a company
engaged in the transportation of LPG. Prior to that he worked for Mobil Oil
Corporation .He is a Director of a number of private companies engaged in the
Shipping Industry and is a Director of B+H Ocean Carriers Ltd a public company.
Mr Williams has been a Director of the Company since November 1988.
Georgina Sousa has been Secretary of the Company since February 1998. She joined
the Bermuda law firm of Cos & Wilkinson in 1982 as Senior Company Secretary and
served in that capacity until 1993 when she joined Consolidated Services Limited
as Manager of Corporate Administration, a position she currently holds. From
1976 to 1982, Mrs. Sousa was employed as Company Secretary by the Bermuda law
firm of Appleby, Spurling & Kemp. She acts as Company Secretary of several
private companies and of Chemgas Ltd. and Resource Financing and Investment Ltd.
Mrs. Sousa ceased being Secretary of the Company with effect from January 26,
2007.
Deborah L. Paterson was born in 1962 and was appointed Secretary of the Company
effective January 26, 2007. She joined Clipper Oil Company Limited, Bermuda, as
Company Secretary and served in that capacity until 1986 when she joined
Consolidated Services Limited as a Corporate Manager to a number of companies in
the shipping industry. Mrs Paterson acts as Company Secretary to many private
Companies and to B+H Ocean Carrier Ltd. a public company. She was appointed a
director of Consolidated Services Limited in 1998.
No family relationships exist among any of the Executive Officers and
Directors.
B. Compensation
For the years ended December 31, 2005 and 2006, we paid aggregate
Directors fees and secretarial fees of $0.075 million and $0.2 million,
respectively. The aggregate compensation to the executive officers for the years
ended December 31, 2005 and 2006 was $1.4 million and $2.1 million,
respectively, inclusive of annual bonuses as approved by the Compensation
Committee. We have consulting agreements with companies affiliated with certain
officers and directors of our company in order to compensate them for services
rendered outside Greece. The agreements are of indefinite time. We do not have a
retirement plan for our executive officers or directors.
Stock Option Plan
- -----------------
In October 2004, the Company's Board of Directors approved a Stock
Option Plan providing for granting of 100,000 options to purchase Class A common
shares to the Company's Chief Executive Officer. Prior to October 2004, the
Company had not issued stock-based compensation to its employees. The Company
accounts for employee stock-based compensation in accordance with the provisions
of SFAS No. 123 using the fair value method wherein the fair value of such
awards are determined on the grant date and recognized as compensation expense
in the consolidated statements of income over the vesting period of the options.
As part of his compensation package, Mr. Georgakis received an option
to purchase 100,000 shares of Class A Common Stock after he has been employed
with the Company for three full years. The exercise price for the shares of
Class A Common stock under this option is the closing price of the Class A
Common Stock on October 4, 2004, less a discount of 15%.
Under the terms of the Plan, all stock options granted vest on the
third anniversary of the date upon which the option was granted. The options
expire on the fifth anniversary of the date upon which the option was granted.
The exercise price of the options is the closing price of the Company's common
stock at the grant date, less a discount of 15%. The weighted average grant-date
fair value of options granted during the year was $27.91. The weighted-average
remaining contractual life of options outstanding at December 31, 2006 is 2.76
years.
Incentives program
- ------------------
In December 2006, the Company's Board of Directors, based on a
proposal effected by the Compensation Committee, approved an incentives program
providing for an annual bonus to the Company's executive officers and the
chairman of the Board in the form of cash, restricted stock award and stock
options. In particular, the annual bonus will amount to 2% of the Company's
annual net profits and will be distributed as follows: 50% in cash, 25% in
restricted stock awards vested over a period of two years, of which 50% will be
vested on the 1st anniversary and the remaining 50% on the 2nd anniversary of
the date the stock grant was awarded and 25% in stock options granted over a
period of two years, of which 50% will be exercisable on the 1st anniversary and
the remaining 50% on the 2nd anniversary of the date the options were granted.
The stock options must be exercised within a period of two years from the date
they become effective otherwise they will expire. The stock options will be
priced at the closing market price on the day they are granted less 20%
discount.
On January 15, 2007 the Company's Board of Directors approved the
proposal effected by the Compensation Committee, in relation to the incentive
program discussed above, to grant the total annual bonus for 2006 amounting to $
0.7 million in cash, plus an additional 25% (approximately $0.2 million) in the
form of restricted stock. The granted restricted stock will be recognized as
expense over the vesting period based on their fair value on the grant date.
Half of those shares will be vested on January 1, 2008 and the remaining half on
January 1, 2009.
C. Board Practices
All directors serve until the annual meeting of Shareholders in 2007
and the due nomination, election and qualification of their successors.
The term of office for each director commences from the date of his
election and expires on the date of the next scheduled Annual General Meeting of
Shareholders.
The Company has in the past relied on an exemption from the corporate
governance requirements of the American Stock Exchange that require a listed
company such as the Company to obtain prior shareholder approval for certain
actions, such as an issuance of shares in excess of 20% of the outstanding
shares not beneficially owned by affiliates of the Company, provided that the
Board of Directors of the Company approves such action. The same exemption holds
for the New York Stock Exchange.
The Board and the Company's management have engaged in an ongoing
review of our corporate governance practices in order to oversee our compliance
with the applicable corporate governance rules of the New York Stock Exchange
and the U.S. Securities and Exchange Commission (the "SEC").
The Company has adopted a number of key documents that are the
foundation of its corporate governance, including:
o A Code of Ethics;
o An Audit Committee Charter;
o A Nominating and Corporate Governance Committee Charter.
These documents and other important information on our corporate
governance, including the Board's Corporate Governance Guidelines, are posted in
the "Investor Relations" section of our website, and may be viewed at
http://www.excelmaritime.com. We will also provide any of these documents upon
the written request of a shareholder.
The Board is committed to sound and effective corporate governance
practices. The Board's Corporate Governance Guidelines address a number of
important governance issues such as:
o Selection and monitoring of the performance of the Company's
senior management;
o Succession planning for the Company's senior management;
o Qualification for membership on the Board;
o Functioning of the Board, including the requirement for meetings
of the independent directors; and
o Standards and procedures for determining the independence of
directors.
The Board believes that the Corporate Governance Guidelines and other
governance documents meet current requirements and reflect a very high standard
of corporate governance.
Committees of the Board
- -----------------------
The Board has established an Audit Committee, a Compensation Committee
and a Nomination Committee.
Audit Committee
- ---------------
The members of the Audit Committee are Messrs Apostolos Kontoyannis,
Frithjof Platou and Evangelos Macris, each of whom is an independent Director.
Mr Kontoyannis was elected Chairman of the Audit Committee following the July
29, 2005 Board of Directors Meeting. The Audit Committee is governed by a
written charter, which is approved and reviewed by the Board. The Board has
determined that the members of the Audit Committee meet the applicable
independence requirements of the SEC, the American Stock Exchange and the New
York Stock Exchange, that all members of the Audit Committee fulfill the
requirement of being financially literate and that Messrs Apostolos Kontoyanis
and Frithjof Platou are audit committee financial experts as defined under
current SEC and New York Stock Exchange regulations.
Compensation Committee
- ----------------------
The members of the Compensation Committee are Messrs. Frithjof Platou,
Apostolos Kontoyannis, and Evangelos Macris, each of whom is an independent
Director. Mr Platou is Chairman of the Committee. The Compensation Committee is
appointed by the Board.
Nomination and Corporate Governance Committee
- ---------------------------------------------
The members of the Nomination Committee are Messrs Evangelos Macris,
Apostolos Kontoyannis and Trevor Williams. Mr Macris is Chairman of the
Committee. The Nomination Committee is appointed by the Board.
D. Employees
As of December 31, 2006, we employed 501 employees, consisting of 70
shore-based personnel based in Athens, Greece, and 431 seagoing employees. Our
shore-based employees are covered by industry-wide collective bargaining
agreements that set basic standards of employment.
E. Share Ownership
The common shares beneficially owned by our directors and senior
managers are disclosed in "Item 7. Major Shareholders and Related Party
Transactions" below.
ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth, as of May 30, 2007, certain
information regarding the ownership of the Company's outstanding common
securities by each person known by the Company to own more than 5% of such
securities and all the Directors and senior management as a group.
Number and percentage Number and percentage
of Class A of Class B
Common Shares owned Common Shares owned
------------------- -------------------
Name of Shareholder
Argon S.A. (1) 5,032,520 (25.6%) -
Boston Industries S.A. (2) * 55,676 (41.14%)
Officers & Directors
Gabriel Panayotides (3) - 20,380 (15.06%)-
Christopher Georgakis (4) *
George Agadakis - 625 (0.46%)
All Officers & Directors - 21,005 (15.52%)
* Less than 5%
The Company's major shareholders and Officers and Directors do not
have different rights from other shareholders in the same class
To our knowledge, there are no arrangements, the operation of which
may, at a subsequent date, result in a change in control.
(1) Argon S.A. is holding these shares pursuant to a trust in favour
of Starling Trading Co, a corporation whose sole shareholder is Ms. Ismini
Panayotides, the adult daughter of the Company's Chairman. Ms Panayotides has no
power of voting or disposition of these shares, and disclaims beneficial
ownership of these shares.
(2) Boston Industries S.A. is controlled by Ms. Mary Panayotides, the
spouse of the Company's Chairman. Mr. Panayotides has no power of voting or
disposition of these shares and disclaims beneficial ownership of these shares.
The shares owned by Boston Industries S.A. represent approximately 39.5% of the
total votes represented by all of our shares (both Class A and Class B common
shares) outstanding as of December 31, 2006.
(3) On February 9, 2006, the Company's Board of Directors granted the
Chairman of the Board 20,380 Class A or Class B shares at his option. On July
28, 2006, the Chairman declared to receive all 20,380 shares in the form of
Class B common stock and the Company issued the shares amounting to
approximately $0.2 million.
(4) Mr. Georgakis, the Company's CEO, has the option to purchase
100,000 A Class shares of our Common Stock as part of his compensation package
after he has been employed with the Company for three full years, i.e. after
November 1st, 2007. The exercise price under this option is the closing price on
October 4, 2004, less a discount of 15%.
Related party transactions
- --------------------------
Historically, our fleet has been managed by Excel Management Ltd., or
Excel Management, an affiliated company controlled by our Chairman of the Board
of Directors, under a five-year management agreement. Under this agreement, we
paid Excel Management a monthly management fee of $15,000 for each of our
vessels and an annual fee for general corporate and clerical management services
of $60,000. The agreement provided that both of these fees would increase
annually by five percent. Excel Management had sub-contracted Maryville Maritime
Inc to perform some of these management services. Maryville became a
wholly-owned subsidiary of ours on March 31, 2001.
In order to streamline operations, reduce costs and take control of
the technical and commercial management of our fleet, in early March 2005, with
effect from January 1, 2005, we reached an agreement with Excel Management to
terminate the management agreement, the term of which was scheduled to extend
until April 30, 2008. The technical and commercial management of our fleet has
been assumed by our wholly-owned subsidiary, Maryville, eliminating the fees we
would have paid to Excel Management for the remaining term of the management
agreement, which would have increased substantially given the expansion of our
fleet from five vessels to 17 vessels through the recent acquisition of new
vessels. As consideration for Excel Management's consent to terminate the
management agreement and forego the fees it would have received under the
management agreement had the agreement remained in effect through its scheduled
expiration in 2008, we have agreed to issue to Excel Management 205,442 shares
of our Class A common stock, which is equal to approximately 1.5% of our Class A
common stock outstanding as of March 2, 2005. We initially agreed to issue these
shares to Excel Management by March 2, 2006, but have agreed with Excel
Management to extent this deadline to March 2, 2007. Excel Management may not
transfer these shares for a period of two years after their issuance, and the
shares will contain a restrictive legend to that effect. In addition to the
above mentioned shares, we agreed to issue to Excel Management, at any time at
which we issue additional shares of our Class A common stock to any third party
until December 31, 2008 for any reason, such number of additional shares of
Class A common stock which, together with the shares of Class A common stock
issued to Excel Management in the original issuance, equals 1.5% of our total
outstanding Class A common stock after taking into account the third-party
issuance and the shares to be issued to Excel Management under the anti-dilution
provisions of the agreement.
In connection with our agreement to issue the 205,442 shares of our
Class A common stock and the anti-dilution issuances described above, Excel
Management has agreed to make a one time cash payment to us in an amount equal
to $2.0 million upon delivery of such shares. We will not receive any cash
payment or other future consideration in receipt of shares of Class A common
stock issued to Excel Management in connection with any anti-dilution issuances.
On March 2, 2005 the fair value of the 205,442 Class A common shares to be
issued under the termination agreement and the fair value of the anti-dilution
provisions totalled $7.0 million.
On March 4, 2005, we also entered into a one-year brokering agreement
with Excel Management. Under this brokering agreement, Excel Management will,
pursuant to our instructions, act as our broker with respect to, among other
matters, the employment of our vessels. For its chartering services under the
brokering agreement, Excel Management will receive a commission fee equal to
1.25% of the hire/freight/earnings of our vessels. This agreement extends
automatically for successive one-year terms at the end of its initial term. It
may be terminated by either party upon twelve months prior written notice. On
March 2, 2007 Excel Management infomed us of its intention to consummate the
transaction regarding the Management Termination Agreement and we initiated the
process of issuing the shares. On June 19, 2007 we received payment in an amount
of $2.0 million upon issuance of 298.403 shares.
Our wholly owned subsidiary Maryville provides shipping services to
three related ship-owning companies at a fixed monthly fee per vessel. Such
companies are affiliated with the Chairman of our Board of Directors and the
revenues earned for the years ended December 31, 2004, 2005 and 2006 totalled
$637,000, $522,000 and $558,000, respectively.
C. Interest of Experts and Counsel
Not applicable.
ITEM 8 - FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See Item 18.
Legal Proceedings
- -----------------
None.
Dividends policy
- ----------------
Following a decision of our Board of Directors on March 7, 2007, we commenced a
dividend policy beginning with the first quarter 2007. In this respect, on May
21, 2007 the Board of Directors approved the distribution of a quarterly fixed
dividend of $0.20 per common share. The Board of Directors retains the authority
to alter the dividend policy at its discretion.
B. Significant changes
No significant change occurred except for those mentioned in item 5.
ITEM 9 - THE OFFER AND LISTING
Our Class A common stock trades since September 15, 2005 on the New
York Stock Exchange (NYSE) under the symbol "EXM". Prior to that date our Class
A common stock was trading on the American Stock Exchange (AMEX) under the same
symbol.
The high and low closing prices for the Class A common shares, by
year, in 2002, 2003, 2004, 2005 and 2006 were as follows:
For The Year Ended AMEX /NYSE Low (US$) AMEX /NYSE High (US$)
- ------------------ -------------------- ---------------------
December 31, 2002 1.02 3.50
December 31, 2003 0.90 6.80
December 31, 2004 4.03 59.25
December 31, 2005 11.30 28.47
December 31, 2006 7.66 14.61
The high and low closing prices for the Class A common shares, by quarter, in
2005 and 2006 were as follows:
For The Quarter Ended AMEX /NYSE Low (US$) AMEX /NYSE High (US$)
- --------------------- -------------------- ---------------------
March 31, 2005 17.55 28.47
June 30, 2005 13.58 18.14
September 30, 2005 12.10 16.23
December 31, 2005 11.30 16.65
March 31, 2006 9.78 12.34
June 30, 2006 7.66 10.35
September 30, 2006 8.99 12.40
December 31, 2006 11.48 14.61
The high and low closing prices for the Class A common shares, by
month, over the six months ended December 31, 2006 were as follows:
For The Six Months
- ------------------
Ended AMEX /NYSE Low (US$) AMEX /NYSE High (US$)
- ----- -------------------- ---------------------
July 2006 8.99 10.76
August 2006 9.49 11.87
September 2006 11.52 12.40
October 2006 11.48 13.33
November 2006 13.26 13.94
December 2006 13.70 14.61
On March 17, 2005, we completed an offering of 5,899,000 shares of our
Class A common stock at $21 per share. The net proceeds to us were $116.7
million, which we have used primarily for the acquisition of additional dry bulk
vessels for our fleet.
On December 29, 2006, the closing price of the Class A common shares
as quoted on the NYSE was $14.61. At that date, there were 19,595,153 Class A
and 135,326 Class B shares of common stock issued and outstanding.
ITEM 10 - ADDITIONAL INFORMATION
A. Share Capital
Not applicable
B. Memorandum and articles of association
Articles of Incorporation
- -------------------------
The Company's Amended and Restated Articles of Incorporation provide
that the Company is to engage in any lawful act or activity for which companies
may now or hereafter be organised under the Liberian Business Corporation Act,
as specifically but not exclusively outlined in Article THIRD of the Company's
Articles of Incorporation.
Directors
- ---------
The Board of Directors of the Company consists of seven (7) directors
and it is unclassified. According to the amended Article SIXTH (2)(i) of the
Company's Articles of Incorporation, the Board shall consist of such number of
directors, not less than three (3) and no more than nine (9), as shall be
determined from time to time by the Board of Directors as provided in the
By-Laws or by vote of the Shareholders. The Board may create classes of
Directors any time it deems such an act appropriate, amend the Bylaws to
implement the same and any vacancies created by such action may be filled by way
of a majority vote of the then incumbent directors until the next succeeding
Annual General Meeting of the Company's Shareholders. Shareholders may change
the number of directors or the quorum requirements for meeting of the Board of
Directors by the affirmative vote of the holders of Common Shares representing
at least two thirds of the total number of votes which may be cast at any
meeting of shareholders, as calculated pursuant to Article FIFTH of the Company
entitled to vote thereon. At each Annual General Meeting of the Shareholders of
the Corporation, the successors of the directors shall be elected to hold office
for a term expiring as of the next succeeding Annual General Meeting.
The Company has both Class A Shares and Class B shares. The holders of
the Class A Shares are entitled to one vote per share on each matter requiring
the approval of the holders of Common Shares of the Company, whether pursuant to
the Articles of Incorporation of the Company, its Bylaws, the Liberian Business
Corporation Act or otherwise. The holders of Class B shares are entitled to one
thousand votes per Class B share on each matter requiring approval of the
holders of the Common Shares of the Company. The Board of Directors shall have
the fullest authority permitted by law to provide by resolution for any voting
powers, designations, preferences and relative, participating, optional or other
rights of and any qualifications, limitations or restrictions on the preferred
stock of the Company subject to shareholders' prior approval.
Shareholders meetings
- ---------------------
The Board of Directors is to fix the date and time of the annual
general meeting or other special meeting of shareholders of the Company, after
notice of such meeting is given to each shareholder of record not less than 15
and not more than 60 days before the date of such meeting. The presence in
person or by proxy of shareholders entitled to cast one-third of the total
number of votes shall constitute a quorum for the transaction of business at any
such meeting.
C. Material Contracts
Agreements with Oceanaut
------------------------
For the purposes of Oceanaut's IPO, see "Recent Developments" above,
we entered into the following agreements, which can be found in their
entirety as attachments to Oceanaut's F-1, as described in the references
below:
o Registration Rights Agreement between Oceanaut, Inc. and the
Investors listed therein, with reference to exhibit 4.8;
o Insider Unit and Warrant Purchase Agreement between the Company
and Oceanaut, Inc., with reference to exhibit 4.9;
o Insider Letter from the Company to Oceanaut, Inc., with reference
to exhibit 4.10;
o Right of First Refusal between the Company and Oceanaut, Inc.,
with reference to exhibit 4.11;
Loan Agreements and Derivative Contracts
----------------------------------------
As of December 31, 2006 we had long term debt obligations under four
credit facilities. In relation to two out of the four loans, in July 2006 and
November 2006 we concluded an interest rate collar agreement, for a period of
two years through July 2008 for a fixed notional amount of $75.0 million and an
interest rate swap, for a period of nine years through July 2015 for an
amortizing notional amount of $40.0 million, respectively.
Other than as described above, there were no material contracts, other
than contracts entered into in the ordinary course of business, to which the
Company or any member of the group was a party during the two year period
immediately preceding the date of this report.
D. Exchange Controls
Under Liberian and Greek law, there are currently no restrictions on
the export or import of capital, including foreign exchange controls, or
restrictions that affect the remittance of dividends, interest or other payments
to non resident holders of our common shares.
E. Taxation
Tax Considerations
- ------------------
Liberian Tax Considerations
- ---------------------------
The Company is incorporated in the Republic of Liberia. It has
recently become aware that the Republic of Liberia enacted a new income tax
generally act effective as of January 1, 2001 ("New Act"). In contrast to the
income tax law previously in effect since 1977 ("Prior Law"), which the New Act
repealed in its entirety, the New Act does not distinguish between the taxation
of non-resident Liberian corporations such as ourselves and our Liberian
subsidiaries, who conduct no business in Liberia and were wholly exempted from
tax under Prior Law, and the taxation of ordinary resident Liberian
corporations.
In 2004, the Liberian Ministry of Finance issued regulations pursuant
to which a non-resident domestic corporation engaged in international shipping
such as ourselves will not be subject to tax under the new act retroactive to
January 1, 2001 (the "New Regulations"). In addition, the Liberian Ministry of
Justice issued an opinion that the new regulations were a valid exercise of the
regulatory authority of the Ministry of Finance. Therefore, assuming that the
New Regulations are valid, we and our Liberian subsidiaries will be wholly
exempt from Liberian income tax as under Prior Law.
If we were subject to Liberian income tax under the New Act, we and
our Liberian subsidiaries would be subject to tax at a rate of 35% on our
worldwide income. As a result, our net income and cash flow would be materially
reduced by the amount of the applicable tax. In addition, our shareholders would
be subject to Liberian withholding tax on dividends at rates ranging from 15% to
20%.
United States Federal Income Tax Considerations
- -----------------------------------------------
The following discussion of United States federal income tax is based
on the Code, judicial decisions, administrative pronouncements, and existing and
proposed regulations issued by the United States Department of the Treasury, all
of which are subject to change, possibly with retroactive effect. In addition,
the discussion is based, in part, on the description of our business as
described in "Business" above and assumes that we conduct our business as
described in that section. Except as otherwise noted, this discussion is based
on the assumption that we will not maintain an office or other fixed place of
business within the United States. We have not maintained, and do not intend to
maintain, an office or other fixed place of business in the United States.
Reference in the following discussion to "we" and "us" are to Excel Maritime
Carriers, Ltd. and its subsidiaries on a consolidated basis.
United States Federal Income Taxation Of Our Company
- ----------------------------------------------------
Taxation Of Operating Income: In General
Unless exempt from United States federal income taxation under Code
section 883, a foreign corporation is subject to United States federal income
taxation in respect of any income that is derived from the use of vessels, from
the hiring or leasing of vessels for use on a time, voyage or bareboat charter
basis, or from the performance of services directly related to those uses, which
we refer to as "shipping income", to the extent that the shipping income is
derived from sources within the United States. For these purposes, 50% of
shipping income that is attributable to transportation that begins or ends, but
that does not both begin and end, in the United States constitutes income from
sources within the United States, which we refer to as "U.S.-source shipping
income."
Shipping income attributable to transportation that both begins and
ends in the United States is considered to be 100% from sources within the
United States. We did not engage in transportation that produces income which is
considered to be 100% from sources within the United States.
Section 883
Under section 883 of the Code, a foreign corporation may be exempt
from United States federal income taxation on its U.S.-source shipping income.
Under section 883 of the Code, a foreign corporation is exempt from United
States federal income taxation on its U.S.-source shipping income, if both
(1) it is organized in a foreign country (its "country of
organization") that grants an "equivalent exemption" to corporations organized
in the United States, and
(2) either
(A) more than 50% of the value of its stock is owned, directly or
indirectly, by individuals who are "residents" of its country of
organization or of another foreign country that grants an "equivalent
exemption" to corporations organized in the United States, which we
will refer to as the "50% Ownership Test" or
(B) its stock is "primarily and regularly traded on an
established securities market" in its country of organization, in
another country that grants an "equivalent exemption" to United States
corporations, or in the United States, which we will refer to as the
"Publicly-Traded Test."
Liberia, the jurisdiction where we and certain of our ship-owning
subsidiaries are incorporated, has been formally recognized by the Internal
Revenue Service, or the IRS, as a foreign country that grants an "equivalent
exemption" to United States corporations based on a Diplomatic Exchange of Notes
entered into with the United States in 1988. It is not clear whether the IRS
will still recognize Liberia as an "equivalent exemption" jurisdiction as a
result of the New Act, which on its face does not grant the requisite equivalent
exemption to United States corporations. If the IRS does not so recognize
Liberia as an "equivalent exemption" jurisdiction, we and our subsidiaries will
not qualify for exemption under Code section 883 and would not have so qualified
for 2002 and subsequent years. Assuming, however, that the New Act does not
nullify the effectiveness of the Diplomatic Exchange of Notes, the IRS will
continue to recognize Liberia as an equivalent exemption jurisdiction and we
will be exempt from United States federal income taxation with respect to our
U.S.-source shipping income if either the 50% Ownership Test or the
Publicly-Traded Test is met. Because our Class A common shares are publicly
traded, it is difficult to establish that the 50% Ownership Test is satisfied.
Treasury regulations under Code section 883 were promulgated by the
IRS, in final form in August 2003. These regulations became effective for
calendar year tax payers, like us, beginning with the calendar year 2005.
These regulations provide, in pertinent part, that stock of a foreign
corporation is considered to be "primarily traded" on an established securities
market if the number of shares that are traded during any taxable year on that
market exceeds the number of shares traded during that year on any other
established securities market. Our Class A common shares are "primarily" traded
on the New York Stock Exchange.
Under the regulations, stock of a foreign corporation is considered to
be "regularly traded" on an established securities market if (i) one or more
classes of its stock representing 50 percent or more of its outstanding shares,
by voting power and value, is listed on the market and is traded on the market,
other than in minimal quantities, on at least 60 days during the taxable year;
and (ii) the aggregate number of shares of its stock traded during the taxable
year is at least 10% of the average number of shares of the stock outstanding
during the taxable year. Our shares are not "regularly traded" within the
meaning of the regulations test because of the voting power held by our Class B
common shares. As a result, we do not satisfy the Publicly-Traded Test under the
regulations.
Under the regulations, if we do not satisfy the Publicly-Traded Test
and therefore are subject to the 50% Ownership Test, we would have to satisfy
certain substantiation requirements regarding the identity of our shareholders
in order to qualify for the Code section 883 exemption. We do not satisfy these
requirements. Beginning with calendar year 2005, when the final regulations
became effective, we did not satisfy the Publicly-Traded Test and we do not
satisfy the 50% Ownership Test. Therefore, we do not qualify for the section 883
exemption for 2006 calendar year and, based upon our current capital structure,
do not anticipate qualifying for the section 883 exemption for any future
taxable year.
Section 887
Since we do not qualify for exemption under section 883 of the Code
for taxable years beginning on or after January 1, 2005, our U.S. source
shipping income, to the extent not considered to be "effectively connected" with
the conduct of a U.S. trade or business, as discussed below, is subject to a 4%
tax imposed by section 887 of the Code on a gross basis, without the benefit of
deductions. Since under the sourcing rules described above, no more than 50% of
our shipping income is treated as being derived from U.S. sources, the maximum
effective rate of U.S. federal income tax on our shipping income will never
exceed 2% under the 4% gross basis tax regime. This tax was estimated to be $0.3
million and $0.4 million for the tax years 2005 and 2006, respectively and was
recorded as an expense in the income statement for the years ended December 31,
2005 and 2006.
Effectively Connected Income
To the extent our U.S. source shipping income is considered to be
"effectively connected" with the conduct of a U.S. trade or business, as
described below, any such "effectively connected" U.S. source shipping income,
net of applicable deductions, would be subject to the U.S. federal corporate
income tax currently imposed at rates of up to 35%. In addition, we may be
subject to the 30% "branch profits" tax on earnings effectively connected with
the conduct of such trade or business, as determined after allowance for certain
adjustments, and on certain interest paid or deemed paid attributable to the
conduct of its U.S. trade or business.
Our U.S. source shipping income would be considered "effectively
connected" with the conduct of a U.S. trade or business only if:
o We have, or are considered to have, a fixed place of business in
the United States involved in the earning of shipping income; and
o Substantially all of our U.S. source shipping income is
attributable to regularly scheduled transportation, such as the
operation of a vessel that follows a published schedule with
repeated sailings at regular intervals between the same points
for voyages that begin or end in the United States.
We do not intend to have, or permit circumstances that would result in
having any vessel operating to the United States on a regularly scheduled basis.
Based on the foregoing and on the expected mode of our shipping operations and
other activities, we believe that none of our U.S. source shipping income will
be "effectively connected" with the conduct of a U.S. trade or business.
United States Taxation of Gain on Sale of Vessels
We will not be subject to United States federal income taxation with
respect to gain realized on a sale of a vessel, provided the sale is considered
to occur outside of the United States under United States federal income tax
principles. In general, a sale of a vessel will be considered to occur outside
of the United States for this purpose if title to the vessel, and risk of loss
with respect to the vessel, pass to the buyer outside of the United States. It
is expected that any sale of a vessel by us will be considered to occur outside
of the United States.
Information Reporting and Backup Withholding
- --------------------------------------------
Payments of dividends and sales proceeds that are made within the
United States or through certain US related financial intermediaries generally
are subject to information reporting and backup withholding unless (i) you are a
corporation or other exempt recipient or (ii) in the case of backup withholding,
you provide a correct taxpayer identification number and certify that you are
not subject to backup withholding.
The amount of any backup withholding from a payment to you will be
allowed as a credit against your United States federal income tax liability and
may entitle you to a refund, provided that the required information is furnished
to the Internal Revenue Service.
F. Dividends and paying agents
Not applicable.
G. Statement by experts
Not applicable.
H. Documents on Display
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements we file
reports and other information with the SEC. These materials, including this
annual report and the accompanying exhibits, may be inspected and copied at the
public reference facilities maintained by the Commission at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. You may obtain information on the operation
of the public reference room by calling 1 (800) SEC-0330, and you may obtain
copies at prescribed rates from the Public Reference Section of the Commission
at its principal office in Washington, D.C. 20549. The SEC maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements and
other information that we and other registrants have filed electronically with
the SEC. Our filings are also available on our website at www.excelmaritime.com.
In addition, documents referred to in this annual report may be inspected at our
headquarters at Par La Ville Place, 14 Par La Ville Road, Hamilton HM JX,
Bermuda.
I. Subsidiary Information
Not applicable.
ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
- ---------------------
All of the trading fleet's revenues are in U.S. dollars. Approximately
70% of the trading fleet's total expenses are paid in U.S. dollars, with the
remaining 30% being paid mostly in Euros. The Company does not hedge its
exposure to foreign currency fluctuation. For accounting purposes, expenses
incurred in Euros are translated into U.S. dollars at the exchange rate
prevailing on the date of each transaction.
Inflation Risk
- --------------
Although inflation has had a moderate impact on the trading fleet's
operating and voyage expenses in recent years, management does not consider
inflation to be a significant risk to operating or voyage costs in the current
economic environment. However, in the event that inflation becomes a significant
factor in the global economy, inflationary pressures would result in increased
operating, voyage and financing costs.
Interest Rate Risk
- ------------------
The shipping industry is a capital intensive industry, requiring
significant amounts of investment. Much of this investment is provided in the
form of long-term debt. Our debt usually contains interest rates that fluctuate
with the financial markets. Increasing interest rates could adversely impact
future earnings.
Our interest expense is affected by changes in the general level of
interest rates, particularly LIBOR. As an indication of the extent of our
sensitivity to interest rate changes, an increase of 100 basis points would have
decreased our net income and cash flows in the current year by approximately
$2.4 million based upon our debt level during 2006.
The following table sets forth the sensitivity of our long term debt
in U.S. dollars to a 100 basis points increase in LIBOR during the next five
years on the same basis taking into consideration the interest rate collar
agreement described under "Material Contracts".
Net difference in Earnings and Cash Flows (in $ millions):
Year Amount
------ ------
2007 1.9
2008 1.6
2009 1.4
2010 1.2
2011 0.9
ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable
PART II
ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None
ITEM 14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None
ITEM 15T - CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
Management assessed the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Rule 13a-15(e) of
the Securities Exchange Act of 1934, as of the end of the period covered by this
annual report (as of December 31, 2006). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective as of the evaluation date.
(b) Management's annual report on internal control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
promulgated under the Securities Exchange Act of 1934.
Our internal control system was designed, pursuant to Rule 13a-15(f) or
15d-15(f) promulgated under the Securities Exchange Act of 1934, by or under the
supervision of the Company's principal executive and principal financial
officers and effected by the Company's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree or compliance with the policies or procedures may deteriorate.
Our management with the participation of our Chief Executive Officer
and Chief Financial Officer assessed the effectiveness of the design and
operation of the Company's internal controls over financial reporting pursuant
to Rule 13a-15 of the Securities Exchange Act of 1934, as of December 31, 2006.
In making this assessment, management used the criteria for effective internal
control over financial reporting set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated
Framework. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's internal controls over financial
reporting are effective as of December 31, 2006.
This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.
(c) Changes in internal control over financial reporting
There have been no changes in internal controls over financial
reporting that occurred during the year covered by this annual report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
Item 16A. Audit Committee Financial Expert
In accordance with the rules of the American Stock Exchange, the
exchange at which the Company's stock was listed at the time, the Company was
not required to have an audit committee until July 31, 2005. The Company
appointed an audit committee in accordance with American Stock Exchange and NYSE
requirements prior to such deadline. The Board has determined that Messrs.
Apostolos Kontoyanis and Platou, each an independent member of the Board, are
audit committee financial experts.
Item 16 B. Code of Ethics
The Company has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer and
persons performing similar functions. A copy of our code of ethics is attached
hereto as exhibit 11. We will also provide a hard copy of our code of ethics
free of charge upon written request of a shareholder. Shareholders may direct
their requests to the attention of Mr. Christopher Georgakis. In addition, our
code of ethics is available on our website at www.excelmaritime.com.
Item 16C. Principal Accountant Fees and Related ServicesAudit Fees
Our principal Accountants for the years ended December 31, 2005 and
2006 were Ernst & Young (Hellas), Certified Auditors Accountants S.A. For the
audit of the years ended December 31, 2005 and 2006 they billed us Euro 188,090
and Euro 231,000, respectively.
Audit-Related Fees and Tax Fees
There were no tax, audit-related, or other fees billed in 2005 and
2006.
All Other Fees
None
Item 16D. Exemptions from the listing standards for Audit committees
Not applicable.
Item 16E. Purchases of Equity Securities by Issuer and Affiliated purchasers
None.
PART III
ITEM 17 - FINANCIAL STATEMENTS
See Item 18
ITEM 18 - FINANCIAL STATEMENTS
The following financial statements, together with the report of Ernst & Young
(Hellas) Certified Auditors Accountants S.A. thereon, are filed listed below are
set forth on pages F-1 through F-23 and are filed as a part of this annual
report.
ITEM 19 -EXHIBITS
1.1 Articles of Incorporation of the Company, incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form F-1,
Registration No. 33-8712 filed on May 6, 1998 (the "Registration
Statement").
1.2 Restated Articles of Incorporation of the Company, adopted November 8, 1999
filed on Form 6-K with the Commission on November 19, 1999.
1.3 Amended and Restated By-Laws of the Company adopted on January 10, 2000,
incorporated by reference to Exhibit 1.0 of Form 6-K filed on January 20,
2000.
2.1 Specimen Class A Common Stock Certificate, incorporated by reference to
Exhibit 4.2 of the Registration Statement.
2.2 Specimen Class B Common Stock Certificate, incorporated by reference to the
Company's Form 20-F filed on June 29, 2006.
2.3 Form of Indenture, incorporated by reference to Exhibit 4.3 of the
Company's Registration Statement on Form F-3, Registration No. 333-120259,
filed on November 5, 2004.
4.1 Memoranda of Agreement for two vessels, incorporated by reference to the
Company's Form 6-K filed on March 7, 2005.
4.2 Credit facility in the amount of $27 million, dated December 23, 2004,
incorporated by reference to the Company's Form 6-K filed on March 8, 2005.
4.3 Memorandum of Agreement for one vessel, incorporated by reference to the
Company's Form 6-K filed on March 8, 2005.
4.4 Management Agreement Termination Agreement and Addendum No. 1 to Management
Agreement Termination Agreeement, incorporated by reference to Exhibit 99.1
and 99.2, respectively, to the Company's Form 6-K filed on March 14, 2005.
4.5 Memorandum of Agreement for one vessel, incorporated by reference to the
Company's Form 6-K filed on March 16, 2005.
4.6 Credit facility in the amount of $95 million, dated February 16, 2005,
incorporated by reference to the Company's Form 6-K filed on March 16,
2005.
4.7 Brokering Agreement between the Company and Excel Management Ltd., dated
March 4, 2005, incorporated by reference to the Company's Form 6-K filed on
March 18, 2005.
4.8 Registration Rights Agreement between Oceanaut, Inc. and the Investors
listed therein, incorporated by reference to Exhibit 10.7 to Oceanaut,
Inc.'s Form F-1 (Registration Statement 333-140646) filed on February 13,
2007.
4.9 Insider Unit and Warrant Purchase Agreement between the Company and
Oceanaut, Inc., incorporated by reference to Exhibit 10.8 to Oceanaut,
Inc.'s Form F-1 (Registration Statement 333-140646) filed on February 13,
2007.
4.10 Insider Letter from the Company to Oceanaut, Inc., incorporated by
reference to Exhibit 10.2 to Oceanaut, Inc.'s Form F1/A (Registration
Statement 333-140646) filed on February 28, 2007.
4.11 Right of First Refusal between the Company and Oceanaut, Inc. dated
February 28, 2007, incorporated by reference to Exhibit 10.15 to Oceanaut,
Inc.'s Form F1/A (Registration Statement 333-140646) filed on February 28,
2007.
8.1 Subsidiaries of the Company.
11.1 Code of Ethics, incorporated by reference to the Company's Form 20-F filed
on June 29, 2005.
12.1 Certificate of Chief Executive pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
12.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.
13.1 Certificate of Chief Executive pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1 Consent of Independent Registered Public Accounting Firm.
EXCEL MARITIME CARRIERS LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2005 and 2006 F-3
Consolidated Statements of Income for the
years ended December 31, 2004, 2005 and 2006 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2004, 2005 and 2006 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 2004, 2005 and 2006 F-7
Notes to Consolidated Financial Statements F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
of EXCEL MARITIME CARRIERS LTD.
We have audited the accompanying consolidated balance sheets of Excel Maritime
Carriers Ltd. (the "Company"), as of December 31, 2005 and 2006 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2006. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Excel Maritime
Carriers Ltd. at December 31, 2005 and 2006 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2006 in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young (Hellas) Certified Auditors Accountants S.A.
Athens, Greece
April 25, 2007
F-1
EXCEL MARITIME CARRIERS LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2006
(Expressed in thousands of U.S. Dollars - except for share and per share data)
ASSETS 2005 2006
- ------ ------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 58,492 86,289
Restricted cash 7,988 4,534
Accounts receivable trade, net 1,185 967
Accounts receivable, other 799 1,679
Due from related parties (Note 3) 255 -
Inventories (Note 4) 1,094 1,066
Prepayments and advances 734 1,253
------------- ----------------
Total current assets 70,547 95,788
------------- ----------------
FIXED ASSETS:
Vessels, net (Note 5) 465,668 437,418
Office furniture and equipment, net 524 983
------------- ----------------
Total fixed assets, net 466,192 438,401
------------- ----------------
OTHER NON CURRENT ASSETS:
Goodwill 400 400
Deferred charges, net (Note 6) 1,604 4,296
Restricted cash 22,282 10,466
------------- ----------------
Total assets 561,025 549,351
============= ================
F-2
EXCEL MARITIME CARRIERS LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2006
(Expressed in thousands of U.S. Dollars - except for share and per share data)
2005 2006
------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt, net of
unamortized deferred financing fees (Note 7) 46,890 32,452
Accounts payable 3,307 3,096
Due to related parties (Note 3) - 82
Deferred revenue 1,893 1,892
Accrued liabilities 5,020 5,363
Financial Instruments (Note 8) - 834
------------- ----------------
Total current liabilities 57,110 43,719
------------- ----------------
LONG-TERM DEBT, net of current portion and net
of unamortized deferred financing fees (Note 7) 215,926 185,467
------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 11) - -
------------- ----------------
MINORITY INTEREST - 4
------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.1 par value:
5,000,000 shares authorized, none issued - -
Common Stock, $0.01 par value; 49,000,000
Class A shares and 1,000,000
Class B shares authorized; 19,595,153
Class A shares and 114,946 Class B
shares, issued and outstanding at
December 31, 2005; 19,595,153 Class A
shares and 135,326 Class B shares,
issued and outstanding at
December 31, 2006 (Note 9) 197 197
Additional paid-in capital (Note 9) 181,265 182,410
Shares to be issued ( 298,403 Class A
shares)(Note 3) 6,853 6,853
Accumulated Other Comprehensive Loss - (79)
Due from a related party (Note 3) (2,024) (2,024)
Retained earnings 101,887 132,993
------------- ----------------
288,178 320,350
Less: Treasury stock (78,650 Class A shares
and 588 Class B shares) at
December 31, 2005
and December 31, 2006 (189) (189)
------------- ----------------
Total stockholders' equity 287,989 320,161
----------- ----------------
Total liabilities and stockholders' equity 561,025 549,351
============= ================
The accompanying notes are an integral part of these consolidated statements.
F-3
EXCEL MARITIME CARRIERS LTD.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(Expressed in thousands of U.S Dollars-except for share and per share data)
2004 2005 2006
----------------- ----------------- ---------------
REVENUES:
Voyage revenues (Note 1) 51,966 118,082 123,551
Revenue from managing related party
vessels (Note 3) 637 522 558
-------------- ----------------- ---------------
52,603 118,604 124,109
-------------- ----------------- ---------------
EXPENSES:
Voyage expenses (Note 13) 8,100 11,693 8,109
Voyage expenses - related party
(Notes 3 and 13) - 1,412 1,536
Vessel operating expenses (Note 13) 7,518 24,215 30,414
Depreciation (Note 5) 980 20,092 28,453
Amortization of deferred dry-docking
and special survey costs (Note 6) 733 622 1,547
Contract termination expense - related
party (Note 3) - 4,963 -
Management fees - related party (Note 3) 270 - -
General and administrative expenses 2,867 6,520 10,049
-------------- ----------------- ---------------
20,468 69,517 80,108
-------------- ----------------- ---------------
GAIN ON SALE OF VESSELS (Note 5) - 26,795 -
Operating income 32,135 75,882 44,001
OTHER INCOME (EXPENSES):
Interest and finance costs (Notes 7, 8
and 14) (363) (10,259) (16,751)
Interest income 302 2,381 4,134
Other, net (24) 66 145
-------------- ----------------- ---------------
Total other income (expenses), net (85) (7,812) (12,472)
-------------- ----------------- ---------------
Net income, before taxes 32,050 68,070 31,529
-------------- ----------------- ---------------
-------------- ----------------- ---------------
US Source Income taxes (Note 12) - (311) (426)
-------------- ----------------- ---------------
-------------- ----------------- ---------------
Net income, after taxes and before minority
interest 32,050 67,759 31,103
============== ================= ===============
Minority Interest (Note 1) - - 3
-------------- ----------------- ---------------
Net income 32,050 67,759 31,106
============== ================= ===============
Earnings per common share, basic and diluted 2.75 3.64 1.56
============== ================= ===============
Weighted average number of shares, basic and
diluted 11,640,058 18,599,876 19,947,411
============== ================= ===============
The accompanying notes are an integral part of these consolidated statements.
F-4
EXCEL MARITIME CARRIERS LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(Expressed in thousands of U.S Dollars-except for share and per share data)
Common Stock
------------------------------------
Comprehensive Par Additional Shares to be
Income # of Shares Value Paid-in Capital issued
--------------- --------------- -------------- ------------------ -------------
BALANCE, December 31, 2003 11,611,099 116 12,087 -
- - Net income 32,050 - - - -
- - Issuance of common stock 2,200,000 22 54,978 -
- - Expenses relating to the issuance - - (3,549) -
of common stock
- - Stock based compensation expense - - 222 -
--------------
Comprehensive income 32,050
--------------- --------------- ------------- ------------- ------------
BALANCE, December 31, 2004 13,811,099 138 63,738 -
- - Net income 67,759 - - - -
- - Issuance of common stock 5,899,000 59 123,820 -
- - Expenses relating to the issuance
of common stock - - (7,375) -
- - Stock based compensation expense - - 948 -
--------------
Comprehensive income 67,759
--------------
- - Contract Termination - - 134 6,853
- - Due from a related party - - - -
--------------- ------------ ------------ -----------
BALANCE, December 31, 2005 19,710,099 197 181,265 6,853
- - Net income 31,106 - - - -
- - Issuance of common stock 20,380 - 225 -
- - Stock-based compensation expense - - 920 -
- - Other Comprehensive Income
Unrecognized actuarial losses (79)
--------------
Comprehensive Income 31,027
============== --------------- ------------ ------------ -----------
BALANCE, December 31, 2006 19,730,479 197 182,410 6,853
=============== ============ ============ ===========
F-5
Accumulated Other Due from Total
Comprehensive a related Retained Treasury Stockholders'
Loss party Earnings Total Stock Equity
--------------- ------------- ---------- ------------ -------------- ------------
BALANCE, December 31, 2003 - 2,078 14,281 (189) 14,092
- Net income - 32,050 32,050 - 32,050
- Issuance of common stock - - 55,000 - 55,000
- Expenses relating to the issuance - - (3,549) - (3,549)
of common stock
- Stock based compensation expense - - 222 - 222
Comprehensive income
---------- ------------- ----------- ------------ ----------- ------------
BALANCE, December 31, 2004 - - 34,128 98,004 (189) (97,815)
- Net income - 67,759 67,759 - 67,759
- Issuance of common stock - - 123,879 - 123,879
- Expenses relating to the issuance
of common stock - - (7,375) - (7,375)
- Stock based compensation expense - - 948 - 948
Comprehensive income
- Contract Termination - - 6,987 - 6,987
- Due from a related party (2,024) - (2,024) - (2,024)
---------- ------------- ----------- ------------- ----------- ----------
BALANCE, December 31, 2005 - (2,024) 101,887 288,178 (189) 287,989
- Net income - - 31,106 31,106 - 31,106
- Issuance of common stock - - - 225 - 225
- Stock-based compensation expense - - - 920 - 920
- Other Comprehensive Income
Unrecognized actuarial losses (79) (79) (79)
Comprehensive Income
---------- ------------- ----------- ------------ ----------- ------------
BALANCE, December 31, 2006 (79) (2,024) 132,993 320,350 (189) 320,161
========== ============= =========== ============ =========== ============
The accompanying notes are an integral part of these consolidated statements.
F-6
EXCEL MARITIME CARRIERS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(Expressed in thousands of U.S. Dollars)
2004 2005 2006
--------------- ------------------ -----------------
Cash Flows from Operating Activities:
Net income 32,050 67,759 31,106
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 980 20,092 28,453
Amortization of deferred dry docking
and special survey costs 733 622 1,547
Amortization and write-off of deferred
financing costs 39 526 487
Gain on sale of vessels - (26,795) -
Contract termination expense - 4,963 -
Stock-based compensation expense 222 948 920
Change in fair value of financial
instruments - - 834
Unrecognized actuarial losses - - (79)
Changes in operating assets and liabilities:
Accounts receivable (1,546) 221 (407)
Inventories (46) (536) 28
Prepayments and advances (821) 228 (519)
Accounts payable 328 2,045 (129)
Accrued liabilities 638 3,420 343
Deferred revenue - 1,893 (1)
Payments for dry docking & special survey (544) (1,747) (4,239)
------------ ----------------- --------------
Net Cash provided by Operating Activities 32,033 73,639 58,344
------------ ----------------- --------------
Cash Flows from Investing Activities:
Advances for vessels acquisition (26,220) - -
Additions to vessel cost - (454,241) -
Proceeds from sale of vessels - 37,022 -
Office, furniture & equipment - (524) (662)
------------ ----------------- --------------
Net cash used in Investing Activities (26,220) (417,743) (662)
------------ ----------------- --------------
Cash Flows from Financing Activities:
(Increase) decrease in restricted cash (1,579) (27,777) 15,270
Proceeds from long-term debt 7,750 282,415 -
Principal payments of long-term debt (2,300) (31,530) (45,384)
Minority interest - - 4
Issuance of common stock,net of related
issuance costs 51,451 116,504 225
Payment of financing costs (190) (1,919) -
------------ ----------------- --------------
Net cash provided by (used in) Financing Activities 55,132 337,693 (29,885)
------------ ----------------- --------------
Net increase (decrease) in cash and cash equivalents 60,945 (6,411) 27,797
Cash and cash equivalents at beginning of year 3,958 64,903 58,492
------------ ----------------- --------------
Cash and cash equivalents at end of the year 64,903 58,492 86,289
============ ================= ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest payments 242 8,872 14,224
US Source Income taxes - - 748
============ ================= ==============
The accompanying notes are an integral part of these consolidated statements.
F-7
1. Basis of Presentation and General Information:
The accompanying consolidated financial statements include the accounts of
Excel Maritime Carriers Ltd. and its wholly owned subsidiaries
(collectively, the "Company" or "Excel"). Excel was formed in 1988, under
the laws of the Republic of Liberia. On March 21, 2005 the Company issued
and sold 5,899,000 shares of Class A common stock, registered under its
shelf registration statement, to institutional investors (Note 9). The net
proceeds totaled $116,504 and were used to partly finance the acquisition
cost of sixteen second hand vessels which were delivered to the Company
through December 31, 2005. The Company is engaged in the ocean
transportation of dry bulk cargoes worldwide through the ownership and
operation of bulk carrier vessels and is the sole owner of all outstanding
shares of the following subsidiaries:
Ship-owning companies with vessels in operation at December 31, 2006
--------------------------------------------------------------------
Country of
Company incorporation Date of incorporation Vessel-owned
-------- ------------- --------------------- ------------
1. Centel Shipping Co. Ltd. ("Centel") Cyprus May 2002 Lady
2. Snapper Marine Ltd. ("Snapper") Liberia June 2004 Marybelle
3. Pisces Shipholding Ltd. ("Pisces") Liberia June 2004 Goldmar
4. Liegh Jane Navigation S.A. ("Liegh") Liberia July 2004 Swift
5. Teagan Shipholding S.A. ("Teagan") Liberia November 2004 First Endeavour
6. Fianna Navigation S.A. ("Fianna") Liberia November 2004 Isminaki
7. Ingram Limited ("Ingram") Liberia November 2004 Emerald
8. Whitelaw Enterprises Co. ("Whitelaw") Liberia November 2004 Birthday
9. Castalia Services Ltd. ("Castalia") Liberia November 2004 Princess I
10. Yasmine International Inc. ("Yasmine") Liberia January 2005 Elinakos
11. Candy Enterprises Inc. ("Candy") Liberia February 2005 Renuar
12. Barland Holdings Inc. ("Barland") Liberia February 2005 Attractive
13. Fountain Services Ltd. ("Fountain") Liberia February 2005 Powerful
14. Amanda Enterprises Ltd. ("Amanda") Liberia March 2005 Happy Day
15. Marias Trading Inc. ("Marias") Liberia March 2005 Angela Star
16. Tanaka Services Ltd. ("Tanaka") Liberia March 2005 Rodon
17. Harvey Development Corp. ("Harvey") Liberia March 2005 Fortezza
Ship-owning companies with vessels sold during the year ended December 31, 2005
-------------------------------------------------------------------------------
Country of
Company incorporation Date of incorporation Vessel-owned
-------- ----------------- --------------------- -------------
18. Becalm Shipping Co. Ltd. ("Becalm") Cyprus July 1998 Fighting Lady
19. Tortola Shipping Co. Ltd. ("Tortola") Cyprus July 1998 Lucky Lady
20. Storler Shipping Co. Ltd. ("Storler") Cyprus August 1998 Petalis
21. Madlex Shipping Co. Ltd. ("Madlex") Cyprus January 1999 Almar I
Companies established to acquire vessels
Country of
Company incorporation Date of incorporation
------- ------------- ---------------------
22. Magalie Investments Corp.("Magalie") Liberia March 2005 -
23. Melba Management Ltd. ("Melba") Liberia April 2005 -
24. Minta Holdings S.A. ("Minta") Liberia April 2005 -
25. Odell International Ltd. ("Odell") Liberia April 2005 -
26. Naia Development Corp. ("Naia") Liberia April 2005 -
Other group companies
Country of
Company incorporation Date of incorporation Activity
------- ------------- --------------------- --------
27. Maryville Maritime Inc. ("Maryville") Liberia August 1983 Management company
28. Point Holdings Ltd. ("Point") Liberia February 1998 Holding company
F-8
1. Basis of Presentation and General Information - (continued):
In addition, at December 31, 2006 the Company owns 75% of the outstanding
common stock of Oceanaut Inc. ("Oceanaut"), a corporation in the
development stage, organized on May 3, 2006 under the laws of the Republic
of the Marshall Islands. Oceaunaut was formed to acquire, through a merger,
capital stock exchange, asset acquisition, stock purchase or other similar
business combination, vessels or one or more operating businesses in the
shipping industry. The remaining 25% of Oceanaut is held by certain of the
Company's officers and directors. Upon its incorporation, Oceanaut issued
to its shareholders an aggregate of 4,687,500 shares of common stock and
3,000,000 warrants to purchase an aggregate of 3,000,000 shares of common
stock at an exercise price of $7.00 per share for a consideration of $25.
Effective January 1, 2005 and following the termination of an agreement
with Excel Management Ltd, an affiliated corporation (Note 3), the
operations of the vessels are directly managed by Maryville Maritime Inc.
("Maryville"), a wholly-owned subsidiary, which provides the vessels with a
wide range of shipping management services, such as technical support and
maintenance, supervision of new buildings, insurance consulting,
chartering, financial and accounting services. The fees charged by
Maryville for the management of the Company's fleet, are eliminated for
consolidation purposes in the accompanying consolidated statements of
income.
Charterers individually accounting for more than 10% of the Company's
voyage revenues during the years ended December 31, 2004, 2005 and 2006,
are as follows:
Charterer 2004 2005 2006
- ------------------------------------- ------------- ------------ ----------
Malissa SCTT 15% - -
Transfield Er Capeltd BV 12% - -
Ncs North China Shipping Co Ltd BVI 10% - -
Daeyang Shipping Co Ltd. - 12% 15%
2. Significant Accounting Policies:
(a) Principles of Consolidation: The accompanying consolidated financial
statements have been prepared in accordance with U.S. generally
accepted accounting principles and include in each of the three years
in the period ended December 31, 2006 the accounts and operating
results of Excel Maritime Carriers Ltd. and its wholly-owned and
majority-owned subsidiaries referred to in Note 1 above. All
significant inter-company balances and transactions have been
eliminated in consolidation. The Company consolidates all subsidiaries
that are more than 50 percent owned.
(b) Use of Estimates: The preparation of consolidated financial statements
in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(c) Other Comprehensive Income: The Company follows the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", which requires separate presentation
of certain transactions, which are recorded directly as components of
stockholders' equity. Comprehensive income at December 31, 2004 and
2005 equals net income while at December 31, 2006 comprehensive income
is comprised of net income less unrecognized actuarial losses related
to the adoption and implementation of SFAS 158 (Note 2(w)).
F-9
2. Significant Accounting Policies-(continued):
(d) Concentration of Credit Risk: Financial instruments, which potentially
subject the Company to significant concentrations of credit risk,
consist principally of cash and cash equivalents, trade accounts
receivable and derivative contracts (interest rate swaps). The Company
places its cash and cash equivalents, consisting mostly of deposits,
with high credit qualified financial institutions. The Company
performs periodic evaluations of the relative credit standing of those
financial institutions. The Company limits its credit risk with
accounts receivable by performing ongoing credit evaluations of its
customers' financial condition. The Company does not obtain rights to
collateral to reduce its credit risk. The Company is exposed to credit
risk in the event of nonperformance by counter parties to derivative
instruments; however, the Company limits its exposure by diversifying
among counter parties with high credit ratings.
(e) Foreign Currency Translation: The functional currency of the Company
is the U.S. Dollar because the Company's vessels operate in
international shipping markets, and therefore primarily transact
business in U.S. Dollars. The Company's books of accounts are
maintained in U.S. Dollars. Transactions involving other currencies
during the year are converted into U.S. Dollars using the exchange
rates in effect at the time of the transactions. At the balance sheet
dates, monetary assets and liabilities, which are denominated in other
currencies, are translated into U.S. Dollars at the year-end exchange
rates. Resulting gains or losses are included in general and
administrative expenses in the accompanying consolidated statements of
income.
(f) Cash and Cash Equivalents: The Company considers highly liquid
investments such as time deposits and certificates of deposit with an
original maturity of three months or less to be cash equivalents.
(g) Restricted Cash: Restricted cash includes bank deposits that are
required under the Company's borrowing arrangements which are used to
fund the loan installments coming due. The funds can only be used for
the purposes of loan repayment. In addition, restricted cash also
includes minimum cash deposits required to be maintained with certain
banks under the Company's borrowing arrangements.
(h) Accounts Receivable Trade, net: The amount shown as accounts
receivable-trade, net at each balance sheet date, includes receivables
from charterers for hire, freight and demurrage billings, net of a
provision for doubtful accounts. At each balance sheet date, all
potentially uncollectible accounts are assessed individually for
purposes of determining the appropriate provision for doubtful
accounts. The provision for doubtful accounts at December 31, 2005 and
2006 was $274 and $253, respectively.
(i) Insurance Claims: The Company records insurance claim recoveries for
insured losses incurred on damage to fixed assets and for insured crew
medical expenses. Insurance claim recoveries are recorded, net of any
deductible amounts, at the time the Company's fixed assets suffer
insured damages or when crew medical expenses are incurred, recovery
is probable under the related insurance policies and the Company can
make an estimate of the amount to be reimbursed following the
insurance claim.
(j) Inventories: Inventories consist of consumable bunkers, lubricants and
victualling stores, which are stated at the lower of cost or market
value. Cost is determined by the first in, first out method.
(k) Office, Furniture and Equipment, net: Office, furniture and equipment,
net are stated at cost less accumulated depreciation of $0 and $203
for 2005 and 2006, respectively. Depreciation is calculated on a
straight line basis over the estimated useful life of the specific
asset placed in service which range from three to seven years.
F-10
2. Significant Accounting Policies-(continued):
(l) Vessels, net: Vessels are stated at cost, which consists of the
contract price and any material expenses incurred upon acquisition
(initial repairs, improvements, delivery expenses and other
expenditures to prepare the vessel for her initial voyage). Subsequent
expenditures for major improvements are also capitalized when they
appreciably extend the life, increase the earning capacity or improve
the efficiency or safety of the vessels. Otherwise these amounts are
charged to expense as incurred.
The cost of each of the Company's vessels is depreciated beginning
when the vessel is ready for its intended use, on a straight-line
basis over the vessel's remaining economic useful life, after
considering the estimated residual value (vessel's residual value is
equal to the product of its lightweight tonnage and estimated scrap
rate). Management estimates the useful life of the Company's vessels
to be 28 years from the date of initial delivery from the shipyard.
However, when regulations place limitations over the ability of a
vessel to trade on a worldwide basis, its remaining useful life is
adjusted at the date such regulations become effective.
(m) Prepaid/Deferred charter revenue: Where the Company identifies any
assets or liabilities associated with the acquisition of a vessel, the
Company records all such identified assets or liabilities at fair
value. Fair value is determined by reference to market data. The
Company values any asset or liability arising from the market value of
the time charters assumed when a vessel is acquired. The amount to be
recorded as an asset or liability at the date of vessel delivery is
based on the difference between the current fair value of a charter
with similar characteristics as the time charter assumed and the net
present value of future contractual cash flows from the time charter
contract assumed. When the present value of the time charter assumed
is greater than the current fair value of such charter, the difference
is recorded as prepaid charter revenue. When the opposite situation
occurs, the difference is recorded as deferred revenue. Such assets
and liabilities, respectively, are amortized as a reduction of, or an
increase in, revenue over the period of the time charter assumed.
(n) Impairment of Long-Lived Assets: The Company uses SFAS 144 "Accounting
for the Impairment or Disposal of Long-lived Assets", which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. The standard requires that, long-lived assets and
certain identifiable intangibles held and used or disposed of by an
entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not
be recoverable. When the estimate of undiscounted cash flows,
excluding interest charges, expected to be generated by the use of the
asset is less than its carrying amount, the Company should evaluate
the asset for an impairment loss. Measurement of the impairment loss
is based on the fair value of the asset as provided by third parties.
In this respect, management regularly reviews the carrying amount of
the vessels in comparison with the fair value of the asset as provided
by third parties for each of the Company's vessels. The Company
regularly reviews its vessels for impairment on a vessel by vessel
basis. Furthermore, in the period a long-lived asset meets the "held
for sale" criteria of SFAS No. 144, a loss is recognized for any
reduction of the long-lived asset's carrying amount to its fair value
less cost to sell. No impairment loss was recorded in the years ended
December 31, 2004, 2005 and 2006.
(o) Accounting for Dry-Docking and Special Survey Costs: The Company
follows the deferral method of accounting for dry-docking and special
survey costs whereby actual costs incurred are deferred and as of
December 31, 2005 were amortized on a straight-line basis over a
period of 2.5 years and 5 years, respectively which approximated the
next dry-docking and special survey due dates. Within 2006 and
following management's reassessment of the service lives of these
costs, the amortization period of the deferred special survey costs
was changed from 5 years to the earliest between the date of the next
dry-docking and 2.5 years for all surveys. The effect of this change
in accounitng estimate, which does not require retrospective adoption
as per SFAS 154 "Accounting Changes and Error Corrections", was to
decrease net income and basic and diluted earnings per share for the
year ended December 31, 2006 by $655 and $0.03 per share,
respectively.
Unamortized dry-docking and special survey costs of vessels that are
sold are written off at the time of the respective vessels' sale and
are included in the calculation of the resulting gain or loss from
such sale.
F-11
2. Significant Accounting Policies-(continued):
(p) Financing Costs: Fees paid to lenders or required to be paid to third
parties on the lender's behalf for obtaining loans or refinancing
existing ones are recorded as deferred charges and classified as a
contra to debt. Such fees are deferred and amortized to interest and
finance costs over the life of the related debt using the effective
interest method. Unamortized fees relating to loans repaid or
refinanced as debt extinguishment are expensed as interest and finance
costs in the period the repayment or extinguishment is made.
(q) Accounting for Revenues and Related Expenses: The Company generates
its revenues from charterers for the charterhire of its vessels.
Vessels are chartered using either voyage charters, where a contract
is made in the spot market for the use of a vessel for a specific
voyage for a specified charter rate, or time charters, where a
contract is entered into for the use of a vessel for a specific period
of time and a specified daily charterhire rate. If a charter agreement
exists and collection of the related revenue is reasonably assured,
revenue is recognized, as it is earned ratably over the duration of
the period of each voyage or time charter. A voyage is deemed to
commence upon the completion of discharge of the vessel's previous
cargo and is deemed to end upon the completion of discharge of the
current cargo.
Demurrage income represents payments by the charterer to the vessel
owner when loading or discharging time exceeded the stipulated time in
the voyage charter and is recognized as it is earned ratably over the
duration of the period of each voyage charter.
Deferred revenue includes cash received prior to the balance sheet
date and is related to revenue earned after such date. Voyage
expenses, primarily consisting of port, canal and bunker expenses, net
of gains or losses from the sales of bunkers to time charterers, that
are unique to a particular charter, are paid for by the charterer
under the time charter arrangements or by the Company under voyage
charter arrangements, except for commissions, which are always paid
for by the Company, regardless of charter type. All voyage and vessel
operating expenses are expensed as incurred, except for commissions.
Commissions paid to brokers are deferred and amortized over the
related voyage charter period to the extent revenue has been deferred
since commissions are earned as the Company's revenues are earned.
(r) Repairs and Maintenance: All repair and maintenance expenses including
underwater inspection expenses are expensed in the year incurred and
are included in Vessel operating expenses in the accompanying
consolidated statements of income.
(s) Fair Value of Financial Instruments: Statement of Financial Accounting
Standards "SFAS" No. 107, "Disclosures about Fair Value of Financial
Instruments" requires the disclosure of fair values for all financial
instruments, both on- and off- balance sheet, for which it is
practicable to estimate fair values. The carrying amounts reflected in
the accompanying consolidated balance sheets of temporary cash
investments, accounts receivable and accounts payable are reasonable
estimates of their fair value due to the short maturity of these
financial instruments. The fair values of long-term bank loans
approximate the recorded values, due to their variable interest rates.
The fair value of the swap agreements discussed in Note 8 equates to
the amount that would be paid by or received by the Company to cancel
the swaps.
(t) Derivatives: The Company is exposed to the impact of interest rate
changes. The Company's objective is to manage the impact of interest
rate changes on earnings and cash flows of its borrowings. The Company
uses interest rate swaps to manage net exposure to interest rate
changes related to its borrowings and to lower its overall borrowing
costs. Such swap agreements, designated as "economic hedges" are
recorded at fair value in accordance with the provisions of SFAS 133
"Accounting for Derivative Instruments and Hedging Activities" (as
amended) which establishes accounting and reporting standards
requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair
value, with changes in the derivatives' fair value recognized
currently in earnings unless specific hedge accounting criteria are
met.
F-12
2. Significant Accounting Policies-(continued):
During the year ended December 31, 2006 the Company concluded an
interest rate collar agreement and an interest rate swap agreement in
order to partially hedge the exposure of interest rate fluctuations
associated with its variable rate borrowings (Note 8). These
agreements do not meet hedge accounting criteria and the change in
their fair value is recognized through earnings.
(u) Goodwill: Goodwill represents the excess of the purchase price over
the estimated fair value of net assets acquired. Goodwill is reviewed
annually or more frequently if events or circumstances indicate
possible impairment in accordance with SFAS No. 142 "Goodwill and
Other Intangible Assets". This statement requires that goodwill and
other intangible assets with an indefinite life be amortized but
instead tested for impairment at least annually. The Company has
determined that there is no impairment of goodwill as of and for the
years ended December 31, 2004, 2005 and 2006.
(v) Pension and retirement benefit obligations: Administrative employees
are covered by state-sponsored pension funds. Both employees and the
Company are required to contribute a portion of the employees' gross
salary to the fund. Upon retirement, the state-sponsored pension funds
are responsible for paying the employees retirement benefits and
accordingly the Company has no such obligation. Employer's
contributions for the years ended December 31, 2004, 2005 and 2006
amounted to $214, $391 and $583, respectively.
(w) Staff leaving Indemnities- Administrative personnel: The Company's
employees are entitled to termination payments in the event of
dismissal or retirement with the amount of payment varying in relation
to the employee's compensation, length of service and manner of
termination (dismissed or retired). Employees who resign, or are
dismissed with cause are not entitled to termination payments.
In September 2006, the FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans
- an amendement of FASB Statements No. 87, 88, 106 and 132(R)". This
statement requires balance sheet recognition of the overfunded or
underfunded status of pension and postretirement benefit plans. Under
SFAS No. 158, actuarial gains and losses, prior service costs or
credits, and any remaining transition assets or obligations that have
not been recognized under previous accounting standards must be
recognized in Other Comprehensive Income, net of tax effects, until
they are amortized as a component of net periodic benefit cost. In
addition, the measurement date, the date at which plan assets and the
benefit obligation are measured, is required to be the company's
fiscal year end. SFAS No. 158 does not change the determination of net
periodic benefit cost included in net income or the measurement issues
associated with benefit plan accounting. The Company adopted SFAS No.
158 which is effective for fiscal years ending after December 15,
2006. The Company's liability on an actuarially determined basis, at
December 31, 2005 and 2006 amounted to approximately $249 and $ 412,
respectively, while, the amount recognized as Accumulated Other
Comprehensive Loss at December 31, 2006, following adoption of SFAS
No.158, amounts to $79.
(x) Earnings per Common Share: Basic earnings per common share are
computed by dividing net income available to common stockholders by
the weighted average number of common shares outstanding during the
year. Diluted earnings per common share, reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised. The Company had no dilutive securities
during the years ended December 31, 2004, 2005 and 2006.
(y) Segment Reporting: The Company reports financial information and
evaluates its operations by charter revenues and not by the length of
ship employment for its customers, i.e. spot or time charters. The
Company does not use discrete financial information to evaluate the
operating results for each such type of charter. Although revenue can
be identified for these types of charters, management cannot and does
not identify expenses, profitability or other financial information
for these charters. As a result, management, including the chief
operating decision maker, reviews operating results solely by revenue
per day and operating results of the fleet and thus the Company has
determined that it operates under one reportable segment. Furthermore,
when the Company charters a vessel to a charterer, the charterer is
free to trade the vessel worldwide and, as a result, the disclosure of
geographic information is impracticable.
F-13
2. Significant Accounting Policies-(continued):
(z) Variable Interest Entities: In December 2003, the FASB issued
Interpretation No. 46R, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51 (the "Interpretation"), which revised
Interpretation No. 46, issued in January 2003. The Interpretation
addresses the consolidation of business enterprises (variable interest
entities) to which the usual condition (ownership of a majority voting
interest) of consolidation does not apply. The Interpretation focuses
on financial interests that indicate control. It concludes that in the
absence of clear control through voting interests, a company's
exposure (variable interest) to the economic risks and potential
rewards from the variable interest entity's assets and activities are
the best evidence of control. Variable interests are rights and
obligations that convey economic gains or losses from changes in the
value of the variable interest entity's assets and liabilities.
Variable interests may arise from financial instruments, service
contracts, and other arrangements. If an enterprise holds a majority
of the variable interests of an entity, it would be considered the
primary beneficiary. The primary beneficiary would be required to
include assets, liabilities, and the results of operations of the
variable interest's entity in its financial statements. The Company
was required to adopt the provisions of FIN 46R for entities created
prior to February 2003, in 2004. The adoption of FIN 46R did not have
any impact on the Company's consolidated financial position, results
of operations or cash flows.
(aa) Stock-Based Compensation: In October 2004, the Company's Board of
Directors approved a Stock Option Plan providing for granting of stock
options to the Company's Chief Executive Officer. Prior to October
2004, the Company had not issued stock-based compensation to its
employees.
Prior to January 1, 2006 the Company accounted for employee
stock-based compensation in accordance with the provisions of SFAS No.
123 using the fair value method wherein the fair value of such awards
is determined on the grant date and recognized as compensation expense
in the consolidated statements of income over the vesting period of
the options. Generally, the approach in SFAS No. 123 is similar to the
approach described in SFAS No. 123(R) effective January 1, 2006.
However, SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative. The Company adopted SFAS
123(R) effective January 1, 2006 using the modified prospective method
which requires measurement of compensation cost for all stock based
awards at fair value on date of grant and recognition of compensation
over the service period for awards expected to vest. The adoption of
SFAS No. 123(R) did not have an impact on the Company's results of
operations, financial position or cash flows since the previously
applied option valuation method (Black-Scholes-Merton formula) is
acceptable under SFAS No. 123(R).
(bb) Accounting Changes and Error Corrections: In May 2005, the FASB issued
FASB Statement No. 154, "Accounting Changes and Error Corrections"
(SFAS No. 154). SFAS No. 154 is a replacement of APB Opinion No. 20,
"Accounting Changes" (APB 20) and FASB Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements" (SFAS No. 3). SFAS
No. 154 provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes retrospective
application as the required method for reporting a voluntary change in
accounting principle unless impracticable to do so. APB 20 previously
required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle. SFAS
No. 154 also requires that a change in method of depreciation,
amortization, or depletion for long-lived, non-financial assets be
accounted for as a change in accounting estimate that is affected by a
change in accounting principle. APB 20 previously required that such a
change be reported as a change in accounting principle. SFAS No. 154
is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 31, 2005. The Company adopted
this pronouncement on January 1, 2006.
F-14
2. Significant Accounting Policies-(continued):
(cc) Recent Accounting Pronouncements:
SFAS No. 155: In February 2006 the FASB issued Statement No. 155,
"Accounting for Certain Hybrid Financial Instruments" (SFAS No.155),
which amends FASB Statement No. 133 and FASB Statement 140, and
improves the financial reporting of certain hybrid financial
instruments by requiring more consistent accounting that eliminates
exemptions and provides a means to simplify the accounting for these
instruments. Specifically, FASB Statement No. 155 allows financial
instruments that have embedded derivatives to be accounted for as a
whole (eliminating the need to bifurcate the derivative from its host)
if the holder elects to account for the whole instrument on a fair
value basis. FAS 155 is effective for all financial instruments
acquired or issued after the beginning of an entity's first fiscal
year that begins after September 15, 2006. The Company has not issued
or acquired any hybrid instruments included in the scope of FAS 155
and therefore does not expect the adoption of FAS 155 to affect future
reporting or disclosures.
FASB Interpretation No. 48: In July 2006 the FASB issued FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes--An
Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with SFAS 109, "Accounting for
Income Taxes." FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective beginning in fiscal
year 2007. Based on the Company's expectation that it will continue
not to be liable for income taxes either in the country of its
organization or in the United States (except as noted in Note 12), it
does not expect the adoption of FIN 48 to have a material impact on
its consolidated financial condition and results of operations.
In September 2006 the FASB issued FASB Statement No. 157 "Fair Value
Measurements"(SFAS No. 157). SFAS No. 157 provides guidance for using
fair value to measure assets and liabilities. The standard applies
whenever other standards require (or permit) assets or liabilities to
be measured at fair value. Under the standard, fair value refers to
the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants in
the market in which the reporting entity transacts. SFAS No. 157
clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing the asset or
liability. In support of this principle, the standard establishes a
fair value hierarchy that prioritizes the information used to develop
those assumptions. The fair value hierarchy gives the highest priority
to quoted prices in active markets and the lowest priority to
unobservable data, for example, the reporting entity's own data. Under
the standard, fair value measurements would be separately disclosed by
level within the fair value hierarchy. Statement 157 is effective for
financial statements issued for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. Early
adoption is permitted. The Company will adopt this pronouncement
beginning in fiscal year 2008. The Company is in the process of
evaluating the effect, if any, that the adoption of SFAS 157 will have
on its consolidated financial statements.
In September 2006, with the release of Staff Accounting Bulletin No.
108 ("SAB 108") "Considering the effects of prior year misstatements
when quantifying misstatements in current year financial statement"
the SEC staff provided interpretative guidance on the consideration of
the effects of prior year misstatments in quantifying current year
misstatements for the purposes of a materiality assessment. The
adoption of this SEC release did not have an effect on the Company's
financial position or results of operations.
FSP AUG AIR-1: In September 2006, the FASB issued Staff Position (FSP)
AUG AIR-1, "Accounting for Planned Major Maintenance Activities." FSP
AUG AIR-1 addresses the accounting for planned major maintenance
activities. Specifically, the FSP prohibits the practice of the
accrue-in-advance method of accounting for planned major maintenance
activities. FSP AUG AIR-1 is effective for fiscal years beginning
after December 15, 2006. The Company does not expect FSP AUG AIR-1 to
have an impact on its results of operations and financial position.
F-15
2. Significant Accounting Policies-(continued):
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" ("SFAS 159"), which
permits entities to choose to measure certain financial instruments
and certain other non financial instruments with characteristics
similar to financial instruments at fair value. SFAS 159 is effective
as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Earlier adoption is permitted as of the beginning
of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provisions of FASB Statement No.
157, "Fair Value Measurements." The Company is currently evaluating
the potential impact, if any, that the adoption of SFAS 159, will have
on its consolidated financial statements.
(dd) Reclassification of prior year balances: An amount of $ 5,660, paid in
2006 in relation to the loan discussed in Note 7 below and previously
reflected under "Long-term debt, net of current portion and net of
unamortized deferred financing fees"has been reclassified to "Current
portion of long-term debt, net of unamortized deferred financing fees"
in the accompanying 2005 consolidated balance sheet.
3. Transactions with Related Parties:
(a) Excel Management Ltd.: As of December 31, 2004, the operations of the
Company's vessels were managed by Excel Management Ltd., a corporation
which is controlled by the Company's Chairman of the Board of
Directors, Mr. Gabriel Panayotides. Certain of the services provided
by Excel Management Ltd. were subcontracted to Maryville. The
management fees charged by Excel Management Ltd. during the year ended
December 31, 2004 amounted to $270 and are separately reflected in the
accompanying 2004 consolidated statement of income. The management
agreement with Excel Management Ltd., initially due to expire on April
30, 2008, was terminated on March 2, 2005 with effect from January 1,
2005.
In exchange for terminating the management agreement mentioned above
and in exchange for a one time cash payment of $ 2,024, the Company
agreed to issue 205,442 shares no later than March 2, 2007 (following
an amendement on March 2, 2006 based on an addendum to the original
Management Termination agreement to extend the period for the issuance
of the shares for one year) of its Class A common stock to Excel
Management Ltd. and to issue to Excel Management Ltd additional shares
at any time before January 1, 2009 if the Company issues additional
shares of Class A common stock to any other party for any reason, such
that the number of additional Class A common stock to be issued to
Excel Management Ltd. together with the 205,442 shares of Class A
common stock to be issued to Excel Management Ltd., in the aggregate,
equal 1.5% of the Company's total outstanding Class A common stock
after taking into account the third party issuance and the shares to
be issued to Excel Management Ltd. As at December 31, 2006, the
Company has not issued any shares to Excel Management Ltd., neither
the initial 205,442 shares nor the 92,961 anti-dilution shares
required to be issued as a result of the March 21, 2005 share issuance
to other third parties discussed in Note 9. Furthermore, as at
December 31, 2006 the Company has not received the one-time cash
payment from Excel Management Ltd. which is reflected as a receivable
and classified as a reduction of stockholders' equity in the
accompanying consolidated balance sheets and will be received upon the
issuance of the shares. On March 2, 2007, Excel Management Ltd.
notified the Company of its intention to complete the transaction
under the Management Termination Agreement. See additional discussion
in Note 15. All shares to be issued will be subject to a two-year
lock-up from their date of issuance.
The fair value of the 205,442 Class A shares to be issued under the
Management Termination Agreement and the fair value of the
anti-dilution provisions (based on an independent valuation), totaled
$ 6,987 which has been credited to stockholders' equity. The excess of
the fair value of such shares over the cash consideration of $2,024
amounted to $4,963 and is reflected as Contract termination expense in
the accompanying 2005 consolidated statement of income.
F-16
3. Transactions with Related Parties- (continued):
On March 4, 2005, the Company concluded a brokering agreement with
Excel Management Ltd., under which Excel Management Ltd. was appointed
as the Company's broker to provide services for the employment and
chartering of the Company's vessels, for a commission fee equal to
1.25% of the revenue of each contract Excel Management Ltd. has
brokered. The agreement was effective January 1, 2005 for an initial
period of one year and will be automatically extended for successive
one year periods, unless written notice by either party is given at
least one year prior to the commencement of the applicable one year
extension period. Commissions charged by Excel Management Ltd. during
the years ended December 31, 2005 and 2006, amounted to $1,412 and
$1,536 and are separately reflected in the accompanying consolidated
2005 and 2006 statements of income. Amounts due to Excel Management as
at December 31, 2005 and 2006 were $0 and $82, respectively.
(b) Vessels under management: Maryville (Note 1) provides shipping
services to three related ship-owning companies at a fixed monthly fee
per vessel. Such companies are affiliated with the Chairman of the
Company's Board of Directors and the revenues earned for the years
ended December 31, 2004, 2005 and 2006 totaled $637, $522 and $558
respectively and are separately reflected in the accompanying
consolidated statements of income. Amounts due from these related
ship-owning companies at December 31, 2005 and 2006 were $255 and $0,
respectively.
4. Inventories:
The amounts shown in the accompanying consolidated balance sheets are
analyzed as follows:
2005 2006
------------ -------------
Bunkers 135 20
Lubricants 821 928
Victualling stores 138 118
------------ -------------
1,094 1,066
============ =============
5. Fixed Assets, net:
The amounts in the accompanying consolidated balance sheets are analyzed
as follows:
December 31
2005 2006
---------------- -----------------
Vessels cost 486,395 486,395
Accumulated depreciation (20,727) (48,977)
---------------- -----------------
Vessels, net 465,668 437,418
================ =================
Office, furniture & Equipment 524 1,186
Accumulated depreciation - (203)
---------------- -----------------
Office, furniture & equipment, net 524 983
================ =================
---------------- -----------------
Total fixed assets, net 466,192 438,401
================ =================
The Company's vessels, having total carrying value of $437,418 at
December 31, 2006, have been provided as collateral to secure the bank
loans discussed in Note 7.
During the year ended December 31, 2005, the Company acquired sixteen
dry bulk carrier vessels for an aggregate consideration of $480,461.
One of the above vessels (the vessel Powerful), which was acquired for
cash consideration of $35,300, was under an existing time charter
contract which the Company agreed to assume through arrangement with
the respective charterer. The Company upon delivery of the above
vessel and in accordance with its accounting policy described in Note
2(m) evaluated the charter contract assumed and concluded that the
charter party was already carried at fair value.
F-17
5. Fixed Assets, net-(continued):
In addition, during the year ended December 31, 2005, the vessels
Petalis, Lucky Lady, Fighting Lady and Almar I were sold for a total
consideration of $37,022, resulting in a gain of $26,795 (net of $907
of unamortized dry-docking costs and $4 of unamortized financing costs
written-off as at the date of sale) which is separately reflected in
the accompanying 2005 consolidated statement of income.
On June 3, 2006, the vessel Princess I sustained extensive hull damage
over almost the full length of the hull starboard side after repeated
collisions onto the quay at Port of Tubarao, Brazil, due to parting of
the mooring lines in bad weather. The vessel underwent permanent
repairs at Rio de Janeiro, which commenced on June 15, 2006 and were
completed on July 23, 2006. The total cost of the repairs amounted to
approximately $2.0 million, while as at December 31, 2006 the claims
outstanding balance of $990 is included in Accounts receivable. The
insurance claim is recorded in the statement of income against
vessels' operating expenses.
6. Deferred Charges, net:
The unamortized amounts included in the accompanying consolidated
balance sheets represent dry-docking and special survey costs, and are
analyzed as follows:
December 31
2005 2006
---------------- --------------
Dry-docking & special survey cost 1,744 5,983
Accumulated amortization (140) (1,687)
---------------- ---------------
1,604 4,296
================ ===============
7. Long-term Debt, net of unamortized deferred financing fees:
The amounts in the accompanying consolidated balance sheets are
analyzed as follows:
2005 2006
----------- ------------
Total Long-term debt, net of unamortized
deferred financing fees 262,816 217,919
Less- current portion (46,890) (32,452)
----------- ------------
Long-term portion 215,926 185,467
=========== ============
The Company has outstanding four bank loans, concluded in order to
partially finance the acquisition cost of its vessels, with varying
maturities through May 2015. The loans bear interest at LIBOR plus a
margin and the average interest rate (including the margin) at
December 31, 2005 and 2006 was 5.75% and 6.25%, respectively.
In May and July 2006, two of the loans discussed above were amended to
effect certain changes with respect to the interest margin, the
minimum free liquidity and the definition of excess cash calculations
based on which certain amounts are paid to the bank with respect to
one of the loans.
In addition, during the year ended December 31, 2006, an amount of
$5,660 was paid to one bank as provided in the related loan agreement
against part of the balloon installment and of the scheduled principal
repayment installments in reverse order of their maturity. During the
year ending December 31, 2007 and in accordance with the same loan
provision discussed above, an amount of $ 2,011 will be paid to the
bank.
The loans are secured as follows:
o First priority mortgages over the borrowers vessels;
o First priority assignment of all insurances and earnings of the
mortgaged vessels;
o Pledge over the Company's bank accounts where payments for
charters are deposited by the charterers;
o Corporate guarantee of Excel Maritime Carriers Ltd.
F-18
7. Long-term Debt, net of unamortized deferred financing fees- (continued):
The loans, among others, contain financial covenants requiring the
Company to ensure that the aggregate market value of the mortgaged
vessels at all times exceeds 135% of the aggregate outstanding
principal amount under the loans, that total assets minus total debt
will not, at any time, be less than $150,000 and to maintain liquid
funds of at least 10% of total debt as at December 31, 2005 and of at
least $15,000 as at December 31, 2006. As a result, restricted cash
included in the accompanying consolidated balance sheets represents
bank deposits that are required under the loans and are used to fund
the loan installments falling due, as well as minimum cash deposits
required to be maintained with certain banks in accordance with loan
covenants. The Company is permitted to pay dividends under certain
conditions and for amounts as defined in the related loan agreements.
Interest expense for the years ended December 31, 2004, 2005 and 2006
amounted to $243, $9,538 and $15,315, respectively and is included in
interest and finance costs in the accompanying consolidated statements
of income.
The annual principal payments required to be made after December 31,
2006, are as follows:
2007 32,826
2008 32,374
2009 27,112
2010 22,531
2011 22,992
2012 and thereafter 81,287
---------------
219,122
Less- Financing fees (1,203)
---------------
217,919
===============
8. Financial instruments:
In July and October 2006, the Company entered into two derivative
contracts, consisting of an interest rate collar (cap and floor) and
an interest rate swap agreement maturing in July 2008 and July 2015,
respectively. The Company entered into these financial instruments in
order to partially hedge the exposure of interest rate fluctuations
associated with its variable rate borrowings. These financial
instruments did not meet hedge accounting criteria and accordingly
changes in their fair values are reported in earnings.
As of and for the year ended December 31, 2006, realized and
unrealized gains and losses per category of derivative are analyzed as
follows:
Realized gains (losses) Unrealized gains (losses) Total
---------------------- ------------------------- ------
Interest rate collar $ - $(700) $(700)
Interest rate swap $61 $(134) $(73)
$61 $(834) $(773)
The above unrealized loss from derivative instruments of $834 is
separately reflected as Financial instruments in the accompanying 2006
consolidated balance sheet and was recognized in Interest and finance
costs in the accompanying 2006 consolidated statement of income,
netted by the realized gain of $61. The Company did not have any
hedging transactions as of December 31, 2005.
The Company's authorized capital stock consists of (a) 49,000,000
shares (all in registered form) of common stock, par value $0.01 per
share (the "Class A shares"), (b) 1,000,000 shares (all in registered
form) of common stock, par value $0.01 per share (the "Class B
shares") and (c) 5,000,000 shares (all in registered form) of
preferred stock, par value $0.1 per share. The Board of Directors
shall have the fullest authority permitted by law to provide by
resolution for any voting powers, designations, preferences and
relative, participating, optional or other rights of, or any
qualifications, limitations or restrictions on, the preferred stock as
a class or any series of the preferred stock.
F-19
9. Common Stock and Additional Paid-In Capital:
The holders of the Class A shares and of the Class B shares are
entitled to one vote per share and to 1,000 votes per share,
respectively, on each matter requiring the approval of the holders of
common stock, however each share of common stock shares in the
earnings of the company on an equal basis.
In December 2004, the Company issued and sold 2,200,000 shares of
Class A common stock, registered under its shelf registration
statement to institutional investors at $25.00 per share. The net
proceeds to the Company totaled $51,451. On March 21, 2005 the Company
issued and sold 5,899,000 shares of Class A common stock, registered
under its shelf registration statement, to institutional investors at
$21.00 per share. The net proceeds to the Company totaled $116,504.
Effective September 15, 2005, the Company's Class A shares are listed
on the New York Stock Exchange under the symbol "EXM".
On February 9, 2006, the Company's Board of Directors granted the
Chairman of the Board 20,380 Class A or Class B shares (election at
his option) for services rendered. The fair value of the shares on the
date of grant was $225. On July 28, 2006, the Chairman declared to
receive all 20,380 shares in the form of Class B common stock and the
Company issued the shares. As the grant of shares was for past
services, the Company expensed the fair value of the shares at the
date of grant.
10. Stock-based Compensation:
(a) Stock-Option: On October 5, 2004, the Company adopted a Stock
Option Plan authorizing the issuance and immediate grant of
100,000 options to purchase Class A common shares (the "Plan") to
the Company's Chief Executive Officer. Under the terms of the
Plan, all stock options granted vest on the third anniversary of
the date upon which the option was granted. The options expire on
the fifth anniversary of the date upon which the option was
granted. The exercise price of the options is the closing price
of the Company's common stock at the grant date, less a discount
of 15%. A summary of the Company's stock option activity is as
follows:
Weighted-average Weighted Average
Share Units exercise price Grant Date Fair Value
----------------- --------------- ---------------------
Outstanding at January 1, 2004 - -
Granted 100,000 31.79 27.91
Exercised - - -
Forfeited - - -
Expired - - -
-------------- ------------ ------------------
Outstanding at December 31, 2004 100,000 31.79 27.91
============== ============ ==================
Exercisable at December 31, 2004 - - -
============== ============ ==================
Outstanding at January 1, 2005 100,000 31.79 27.91
Granted - - -
Exercised - - -
Forfeited - - -
Expired - - -
-------------- ------------ ------------------
Outstanding at December 31, 2005 100,000 31.79 27.91
============== ============ ==================
Exercisable at December 31, 2005 - - -
============== ============ ==================
Outstanding at January 1, 2006 100,000 31.79 27.91
Granted - - -
Exercised - - -
Forfeited - - -
Expired - - -
-------------- ------------ ------------------
Outstanding at December 31, 2006 100,000 31.79 27.91
============== ============ ==================
Exercisable at December 31, 2006 - - -
============== ============ ==================
F-20
10. Stock-based Compensation-(continued):
The weighted-average remaining contractual life of options outstanding
at December 31, 2006, is 2.76 years.
The fair value of options granted, which is amortized to the expense
over the option's vesting period, is estimated on the grant date using
the Black-Scholes option-pricing model.
The weighted average assumptions used in determining the fair value of
options granted in 2004 were:
- Expected life of option 3.5 years
- Risk-Free interest rate 3.08%
- Expected volatility of the Company's stock 112.75%
- Expected dividend yield on the Company's stock 0.0%
During the years ended December 31, 2004, 2005 and 2006 the
compensation expense in connection with all stock-based employee
compensation awards amounted to $222, $948 and $920 respectively and
is included in General and Administrative expenses in the accompanying
consolidated statements of income.
(b) Incentives program: In December 2006, the Company's Board of
Directors, based on a proposal effected by the Compensation
Committee, approved an incentives program providing for an annual
bonus to the Company's executive officers and the chairman of the
Board in the form of cash, restricted stock award and stock
options. In particular, the annual bonus will amount to 2% of the
Company's annual net profits and will be distributed as follows:
50% in cash, 25% in restricted stock awards vested over a period
of two years, of which 50% will be vested on the 1st anniversary
and the remaining 50% on the 2nd anniversary of the date the
stock grant was awarded and 25% in stock options granted over a
period of two years, of which 50% will be exercisable on the 1st
anniversary and the remaining 50% on the 2nd anniversary of the
date the options were granted. The stock options must be
exercised within a period of two years from the date they become
effective otherwise they will expire. The stock options will be
priced at the closing market price on the day they are granted
less 20% discount.
11. Commitments and Contingencies:
Various claims, suits, and complaints, including those involving
government regulations and product liability, arise in the ordinary
course of the shipping business. In addition, losses may arise from
disputes with charterers, agents, insurance and other claims with
suppliers relating to the operations of the Company's vessels.
Currently, management is not aware of any such claims or contingent
liabilities, which should be disclosed, or for which a provision
should be established in the accompanying consolidated financial
statements.
The Company accrues for the cost of environmental liabilities when
management becomes aware that a liability is probable and is able to
reasonably estimate the probable exposure. Currently, management is
not aware of any such claims or contingent liabilities, which should
be disclosed, or for which a provision should be established in the
accompanying consolidated financial statements. A minimum of up to $1
billion of the liabilities associated with the individual vessels
actions, mainly for sea pollution, are covered by the Protection and
Indemnity (P&I) Club insurance.
In 2001, Maryville entered into a lease agreement for the rental of
office premises with an unrelated party. The initial term of the lease
agreement was for one year and was renewable in successive one-year
increments through 2010 at Maryville's option after its initial term.
In 2005, Maryville entered into a new lease agreement which was
amended in February 2006 and further amended in March 2007, for the
rental of new office premises with an unrelated party. In February
2006, the relocation of Maryville to its new offices was completed and
the 2001 lease agreement for the rental of the previous premises was
terminated. Based on the amended lease agreement of February 2006, the
term of the lease was for three years effective February 9, 2006 and
the monthly rental will be approximately $32 (Euro 27,000) adjusted
annually for inflation increase plus an additional 1.5%.
F-21
11. Commitments and Contingencies-(continued):
Based on the amended lease agreement of March 2007 the term of the
lease is extended for nine years effective February 2006 through
February 2015 while, the monthly rental after February 2009 will be
renegotiated. Operating lease payments for 2004, 2005 and 2006
amounted to $70, $107 and $381, respectively and are included in
General and Administrative expenses in the accompanying consolidated
statements of income. Future minimum rental payments for each of the
five succeeding fiscal years are as follows:
Total 2007 2008 2009 2010 2011
----- ---- ---- ---- ---- ----
Rental Payments 2,490 458 477 497 518 540
12. Income Taxes:
Taxation on Liberian and Cyprus registered companies: Under the laws
of Liberia and Cyprus, (the countries of the companies' incorporation
and vessels' registration), the companies are subject to registration
and tonnage taxes (Note 13), which have been included in Vessels'
operating expenses in the accompanying consolidated statements of
income. Cyprus does not impose a tax on international shipping income.
With effect from January 1, 2001 the Republic of Liberia enacted a new
general income tax act ("New Act"). In contrast to the income tax law
previously in effect since 1977 ("Prior Law"), which the New Act
repealed in its entirety, the New Act does not distinguish between the
taxation of income of non-resident Liberian corporations such as the
Company and its Liberian subsidiaries, who conduct no business in
Liberia and were wholly exempted from tax under Prior Law, and the
taxation of ordinary resident Liberian corporations. In 2004, the
Liberian Ministry of Finance issued regulations pursuant to which a
non-resident domestic corporation engaged in international shipping
such as the Company will not be subject to tax under the New Act with
retroactive effect from January 1, 2001 (the "New Regulations"). In
addition, the Liberian Ministry of Justice issued an opinion that the
New Regulations were a valid exercise of the regulatory authority of
the Ministry of Finance. Therefore, if the New Regulations are enacted
as law, the Company believes that it and its Liberian subsidiaries
will be wholly exempt from Liberian income tax as under Prior Law and
accordingly no Liberian income tax charge has been provided in the
Company's consolidated income statement for the years presented.
Taxation on US source income: Pursuant to Section 883 of the Internal
Revenue Code of the United States (the "Code"), U.S. source income
from the international operation of ships is generally exempt from
U.S. tax if the company operating the ships meets both of the
following requirements: (a) the Company is organized in a foreign
country that grants an equivalent exception to corporations organized
in the United States and (b) either (i) more than 50% of the value of
the Company's stock is owned, directly or indirectly, by individuals
who are "residents" of the Company's country of organization or of
another foreign country that grants an "equivalent exemption" to
corporations organized in the United States (the "50% Ownership Test")
or (ii) the Company's stock is "primarily and regularly traded on an
established securities market" in its country of organization, in
another country that grants an "equivalent exemption" to United States
corporations, or in the United States (the "Publicly-Traded Test").
Under U.S. Treasury regulations, a Company's stock will be considered
to be "regularly traded" on an established securities market if (i)
one or more classes of its stock representing 50 percent or more of
its outstanding shares, by voting power and value, is listed on the
market and is traded on the market, other than in minimal quantities,
on at least 60 days during the taxable year; and (ii) the aggregate
number of shares of stock traded during the taxable year is at least
10% of the average number of shares of the stock outstanding during
the taxable year.
Treasury regulations interpreting Section 883 were promulgated in
final form in August 2003. These regulations apply to taxable years
beginning after September 24, 2004. As a result, such regulations
became effective for calendar year taxpayers, like the Company,
beginning with the calendar year 2005. Liberia and Cyprus, the
jurisdictions where the Company and its ship-owning subsidiaries are
incorporated, grant an "equivalent exemption" to United States
corporations. Therefore, the Company is exempt from United States
federal income taxation with respect to U.S.-source shipping income if
either the 50% Ownership Test or the Publicly-Traded Test is met.
F-22
12. Income Taxes-(continued):
For the years ended December 31, 2005 and 2006, the Company determined
that it does not satisfy the Publicly-Traded Test on the basis that
its shares are not "regularly traded" because of the voting power held
by its Class B shares. In addition, the Company does not satisfy the
50% Ownership Test because it is unable to substantiate certain
requirements regarding the identity of its shareholders. Since the
Company does not qualify for exemption under section 883 of the Code
for taxable years beginning on or after January 1, 2005, its United
States source shipping income is subject to a 4% tax. For taxation
purposes, United States source shipping income is defined as 50% of
shipping income that is attributable to transportation that begins or
ends, but that does not both begin and end, in the United States. As a
result, an amount of $311 and $426 was recognized in the accompanying
2005 and 2006 consolidated income statements.
13. Voyage and Vessel Operating Expenses:
The amounts in the accompanying consolidated statements of income are
analyzed as follows:
Voyage expenses 2004 2005 2006
--------------- ------------ ------------- ------------
Port charges 1,796 1,330 847
Bunkers 3,381 3,793 290
Commissions charged by third parties 2,923 6,570 6,972
------------ ------------- ------------
8,100 11,693 8,109
Commissions charged by a related party - 1,412 1,536
------------ ------------- ------------
8,100 13,105 9,645
============ ============= ============
Vessel Operating expenses 2004 2005 2006
------------------------- ------------ ------------- -------------
Crew wages and related costs 3,220 9,682 13,278
Insurance 1,181 3,003 3,239
Repairs, spares and maintenance 1,777 6,306 7,986
Consumable stores 1,077 4,615 5,366
Tonnage Taxes (Note 12) 49 113 123
Miscellaneous 214 496 422
------------ ------------- -------------
7,518 24,215 30,414
============ ============= =============
14. Interest and Finance Costs:
The amounts in the accompanying consolidated statements of income are
analyzed as follows:
2004 2005 2006
----------- ------------- -------------
Interest on long term debt 243 9,538 15,315
Financial Instruments (Note 8) - - 773
Amortization and write-off of financing costs 39 526 487
Bank Charges 81 195 176
----------- ------------- -------------
363 10,259 16,751
=========== ============= =============
15. Subsequent Events:
a. On January 15, 2007 the Company's Board of Directors approved the
proposal effected by the Compensation Committee and in relation
to the incentive program discussed under 10(b) above to grant the
total annual bonus for 2006 amounting to $670 in cash, plus an
additional 25% ($167.5) in the form of restricted stock. As of
December 31, 2006, the amount of $670 was accrued by the Company
and is included in General and Administrative in the accompanying
2006 consolidated statement of income, while the granted
restricted stock will be recognized as expense over the vesting
period based on the fair value on the grant date. Half of those
shares will be vested on January 1, 2008 and the remaining half
on January 1, 2009.
F-23
15. Subsequent Events-(continued):
b. On March 2, 2007 Excel Management Ltd., an affiliated company,
informed the Company of its intention to consummate the
transaction regarding the Management Termination agreement
described in Note 3. The Company has initiated the process of
issuing the shares.
c. On March 6, 2007 Oceanaut (Note 1) completed its initial public
offering in the United States under the United States Securities
Act of 1933, as amended. In this respect, 18,750,000 units
("Units") were sold at a price of $8.00 per Unit, raising gross
proceeds of $150.0 million. Prior to the closing of the initial
public offering, Oceanaut consummated a private placement of
1,125,000 units at $8.00 per unit price and 2,000,000 warrants at
$1.00 per warrant to the Company, raising gross proceeds of
$11,000. Each unit issued in the initial public offering and the
private placement consists of one share of Oceanaut's common
stock and one warrant to purchase one share of common stock.
The initial public offering and the private placement generated
gross proceeds in an aggregate of $161.0 million intended to be
used to complete a business combination with a target business
that has not been defined yet. Therefore, an amount of
approximately 95% of the gross proceeds, after payment of certain
amounts to the underwriters, is held in a trust account until the
earlier of (i) the consummation of a Business Combination or (ii)
the distribution of the trust account under Oceanaut's
liquidation procedure. The remaining proceeds including also
500,000 units and 2,000,000 warrants (sold to the Company during
the private placement which do not have any rights to liquidation
distribution and amounts to $6,000) may be used to pay for
business, legal and accounting due diligence on prospective
acquisitions and continuing general and administrative expenses,
as well as claims raised by any third party.
In addition, in the event of a dissolution and liquidation of
Oceanaut, the Company will cover any short fall in the trust
account resulted by any claims of various vendors, prospective
target businesses or other entities for services rendered or
products sold to Oceanaut if such vendor or prospective target
business or other third party does not execute a valid and
enforceable waiver of any rights or claims to the trust account.
Following the initial public offering and the private placement,
the Company owns approximately 18.9% of the issued and
outstanding shares of Oceanaut, while a percentage of 4.8% is
held by certain of the Company's officers and directors.
Certain officers and directors of the Company serve also as
officers and directors of Oceanaut.
d. On March 7, 2007 the Company's Board of Directors approved the
implementation of a dividend policy, paid quarterly, commencing
on the second quarter of 2007.
e. (Unaudited) - On April 27, 2007 the Company's Board of Directors
approved the sale of vessel Goldmar for $15.85 million net of
commissions to an affiliated company as per the Memorandum of
Agreement dated April 26, 2007. The expected realized gain
amounting to approximately $6.2 million will be recognized on
delivery of the vessel in May 2007 and included in the
consolidated financial statements for the year ending December
31, 2007.
f. (Unaudited) - On May 22, 2007 the Company declared a quarterly
dividend of $0.20 per share for the first quarter 2007 payable on
June 15, 2007 to shareholders of record on June 1, 2007.
g. (Unaudited) - In relation to the Management Termination agreement
discussed under b. above, on June 19, 2007 the Company received
the amount of $2.0 million and issued 298,403 shares.
F-24
SK 02545 0001 786071