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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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 ___________
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GENCO SHIPPING & TRADING LIMITED
--------------------------------
(Exact name of registrant as specified in its charter)
Republic of the Marshall Islands 98-043-9758
-------------------------------- -----------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
35 West 56th Street, New York, NY 10019
(Address of principal executive offices)
(Zip Code)
(646) 443-8550
(Registrant's telephone number, including area code)
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 and 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.
Yes No X
------- --------
Indicate by checkmark whether registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
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APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the issuer's classes of common
stock, as of July 21, 2005:
Common stock, $0.01 per share 25,260,000 shares.
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Genco Shipping & Trading Limited
Form 10-Q for the Quarter Ended June 30, 2005
Index
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Page
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
a) Consolidated Balance Sheets - June 30, 2005
(unaudited) and December 31, 2004 3
b) Consolidated Statements of Operations
(unaudited) -
Three and Six Months Ended June 30, 2005 4
c) Consolidated Statement of Shareholder's
Equity (unaudited) - Six Months Ended
June 30, 2005 5
d) Consolidated Statement of Cash Flows
(unaudited) - Six Months Ended June 30, 2005 6
e) Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 29
Item 4. Control and Procedures 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits 30
2
Genco Shipping & Trading Limited
(A Wholly Owned Subsidiary of Fleet Acquisition LLC)
Consolidated Balance Sheets as of June 30, 2005 (Unaudited)
And December 31, 2004
(U.S. Dollars in thousands)
June 30, December 31,
2005 2004
----------- -----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 26,222 $ 7,431
Due from charterers 43 664
Prepaid expenses and other current assets 2,686 434
-------- --------
Total current assets 28,951 8,529
-------- --------
Non-current Assets:
Vessels, net of accumulated depreciation of
$10,068 and $421, respectively 411,803 148,070
Deferred drydock, net of accumulated
depreciation of $4 and $0, respectively 183 --
Deferred financing costs, net 4,104 4,106
Other assets 125 --
Deposits on vessels -- 40,923
-------- --------
Total non-current assets 416,215 193,099
Total assets $445,166 $201,628
======== ========
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,846 $ 845
Current portion of long term debt 82,500 23,203
-------- --------
Total current liabilities 84,346 24,048
-------- --------
Noncurrent liabilities:
Deferred revenue 3,864 1,643
Long term debt 253,875 102,563
-------- --------
Total noncurrent liabilities 257,739 104,206
-------- --------
Total liabilities 342,085 128,254
-------- --------
Commitments and contingencies
Shareholder's equity:
Common stock, par value $0.01; 100,000,000
shares authorized; 13,500,000 issued and
outstanding 135 135
Paid in capital 75,037 72,332
Retained earnings 27,909 907
-------- --------
Total shareholder's equity 103,081 73,374
-------- --------
Total liabilities and shareholder's equity $445,166 $201,628
======== ========
See accompanying notes to consolidated financial statements.
3
Genco Shipping & Trading Limited
(A Wholly Owned Subsidiary of Fleet Acquisition LLC)
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2005
(U.S. Dollars in Thousands, Except Earnings per Share)
Three Months Six Months
Ended Ended
June 30, 2005 June 30, 2005
------------- -------------
(unaudited) (unaudited)
Revenues $ 30,950 $ 52,349
------------ ------------
Operating expenses:
Voyage expenses 1,020 1,910
Vessel operating expenses 3,417 5,432
General and administrative expenses 933 1,193
Management fees 478 809
Depreciation 5,670 9,651
------------ ------------
Total operating expenses 11,518 18,995
------------ ------------
Operating income 19,432 33,354
------------ ------------
Interest income (expense):
Interest income 183 266
Interest expense (3,998) (6,618)
------------ ------------
Net interest expense (3,815) (6,352)
------------ ------------
Net income $ 15,617 $ 27,002
============ ============
Earnings per share-basic $ 1.16 $ 2.00
============ ============
Weighted average common shares outstanding 13,500,000 13,500,000
============ ============
See accompanying notes to consolidated financial statements.
4
Genco Shipping & Trading Limited
(A Wholly Owned Subsidiary of Fleet Acquisition LLC)
Consolidated Statement of Shareholder's Equity for the Six Months Ended
June 30, 2005
(U.S. Dollars in Thousands)
Common Paid in Retained
Stock Capital Earnings Total
----- ------- -------- -----
Balance--January 1, 2005 $ 135 $ 72,332 $ 907 $ 73,374
Capital contributions 2,705 2,705
Net income 27,002 27,002
-------- -------- -------- --------
Balance--June 30, 2005
(unaudited) $ 135 $ 75,037 $ 27,909 $103,081
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
5
Genco Shipping & Trading Limited
(A Wholly Owned Subsidiary of Fleet Acquisition LLC)
Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2005
(U.S. Dollars in Thousands)
Six Months
ended
June 30, 2005
-------------
(Unaudited)
Cash flows from operating activities:
Net income $ 27,002
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 9,651
Amortization of deferred financing costs 413
Change in assets and liabilities:
Decrease in due from charterers 621
Increase in prepaid expenses and other current assets (2,252)
Increase in accounts payable and accrued expenses 1,001
Increase in deferred revenue 2,221
Deferred drydock costs incurred (187)
---------
Net cash provided by operating activities 38,470
---------
Cash flows from investing activities:
Purchase of vessels and equipment, net of deposits (232,479)
---------
Net cash used in investing activities (232,479)
---------
Cash flows from financing activities:
Proceeds from bank loan 231,234
Payments to retire bank debt (20,625)
Deferred financing costs (411)
Deferred registration costs (103)
Capital contributions from shareholder 2,705
---------
Net cash provided by financing activities 212,800
---------
Net increase in cash 18,791
Cash at beginning of period 7,431
---------
Cash at end of period $ 26,222
=========
Supplemental disclosure of cash flow information--
Cash paid during the period for interest $ 5,003
=========
See accompanying notes to consolidated financial statements.
6
Genco Shipping & Trading Limited
(A Wholly Owned Subsidiary of Fleet Acquisition LLC)
(U.S. Dollars in Thousands)
Notes to Consolidated Financial Statements for the Three and Six Months Ended
June 30, 2005
1 - GENERAL INFORMATION
The accompanying consolidated financial statements include the accounts of Genco
Shipping & Trading Limited ("GS&T") and its wholly owned subsidiaries
(collectively, the "Company"). The Company is engaged in the ocean
transportation of drybulk cargoes worldwide through the ownership and operation
of drybulk carrier vessels. GS&T was incorporated on September 27, 2004 under
the laws of the Marshall Islands and is the sole owner of all of the outstanding
shares of the following subsidiaries: Genco Ship Management LLC, and the 16
ship-owning subsidiaries as set forth below. The Company began operations on
December 6, 2004 with the delivery of its first vessel.
The Company agreed to acquire a fleet of 16 drybulk carriers from an
unaffiliated third party. As of June 30, 2005, the Company had taken delivery of
the all of the vessels as shown below:
Wholly Owned Vessels Date Year
Subsidiaries Acquired dwt Delivered Built
- ------------ -------- --------- -----
Genco Reliance Limited ....... Genco Reliance 29,952 12/6/04 1999
Genco Glory Limited .......... Genco Glory 41,061 12/8/04 1984
Genco Vigour Limited ......... Genco Vigour 73,941 12/15/04 1999
Genco Explorer Limited ....... Genco Explorer 29,952 12/17/04 1999
Genco Carrier Limited ........ Genco Carrier 47,180 12/28/04 1998
Genco Sugar Limited .......... Genco Sugar 29,952 12/30/04 1998
Genco Pioneer Limited ........ Genco Pioneer 29,952 1/4/05 1999
Genco Progress Limited ....... Genco Progress 29,952 1/12/05 1999
Genco Wisdom Limited ......... Genco Wisdom 47,180 1/13/05 1997
Genco Success Limited ........ Genco Success 47,186 1/31/05 1997
Genco Beauty Limited ......... Genco Beauty 73,941 2/7/05 1999
Genco Knight Limited ......... Genco Knight 73,941 2/16/05 1999
Genco Leader Limited ......... Genco Leader 73,941 2/16/05 1999
Genco Marine Limited ......... Genco Marine 45,222 3/29/05 1996
Genco Prosperity Limited ..... Genco Prosperity 47,180 4/4/05 1997
Genco Trader Limited ......... Genco Trader 69,388 6/7/05 1990
The purchase price of the 16 vessels aggregated to approximately $421,900, which
was funded from a portion of the $75,172 generated from GS&T's issuance of
common stock to Fleet Acquisition LLC (the "Parent Company" or "Parent"), from
the borrowings under the Company's credit facility and from the Company's cash
flows from operations.
On July 22, 2005, the Company completed its initial public offering - See Note 8
"Subsequent Events."
Prior to the initial public offering, the Company was 100% owned by the Parent,
Fleet Acquisition LLC, a limited liability company organized on November 3, 2004
under the laws of the Marshall Islands. Fleet Acquisition LLC is owned 66.53% by
OCM Opportunity (Oaktree Capital Management), 26.63% by Peter Georgiopoulos, and
6.84% by others. Following the initial public offering, the Parent maintains
53.44% ownership in the Company.
The information set forth in these consolidated financial statements for the
three and six months ended June 30, 2005 is unaudited and reflects all
adjustments, consisting only of normal recurring adjustments, which, in the
opinion of management, are necessary to present fairly the financial position
and results of operations of the
7
Company for the period. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the full fiscal year.
All dollar amounts, except earnings per share, appearing in these consolidated
financial statements are in thousands.
On July 18, 2005, prior to the closing of the public offering of the Company's
common stock, the Company's Board of Directors and stockholder approved a split
(in the form of a stock dividend giving effect to a 27,000:1 common stock split)
of the Company's common stock. All share and per share amounts relating to
common stock, included in the accompanying consolidated financial statements and
footnotes have been restated to reflect the stock split for all periods
presented.
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------
Principles of consolidation
- ---------------------------
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
include the accounts of Genco Shipping & Trading Limited and its wholly owned
subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation.
Business geographics
- ---------------------
Non-U.S. operations accounted for 100% of revenues and net income. The Company's
vessels regularly move between countries in international waters, over hundreds
of trade routes.
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 different types of charters.
Although revenue can be identified for these types of charters, management
cannot and does not separately 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.
Revenue and voyage expense recognition
- --------------------------------------
Since the Company's inception, revenues have been generated from time charter
agreements. A time charter involves placing a vessel at the charterer's disposal
for a set period of time during which the charterer may use the vessel in return
for the payment by the charterer of a specified daily hire rate. In time
charters, operating costs including crews, maintenance and insurance are
typically paid by the owner of the vessel and specified voyage costs such as
fuel and port charges are paid by the charterer. Time charter revenues are
recorded over the term of the charter as service is provided. Revenues are
recognized on a straight line basis as the average revenue over the term of the
respective time charter agreement. The Company had no performance claims at
December 31, 2004 and minimal performance claims at June 30, 2005.
Vessel operating expenses
- -------------------------
Vessel operating expenses include crew wages and related costs, the cost of
insurance, expenses relating to repairs and maintenance, the cost of spares and
consumable stores, and other miscellaneous expenses. Vessel operating expenses
are recognized when incurred.
8
Vessels, net
- ------------
Vessels, net are stated at cost less accumulated depreciation. Included in
vessel costs are acquisition costs directly attributable to the acquisition of a
vessel and expenditures made to prepare the vessel for its initial voyage.
Vessels are depreciated on a straight-line basis over their estimated useful
lives, determined to be 25 years from the date of initial delivery from the
shipyard.
Depreciation expense is calculated based on cost less the estimated residual
scrap value. The costs of significant replacements, renewals and betterments are
capitalized and depreciated over the shorter of the vessel's remaining estimated
useful life or the estimated life of the renewal or betterment. Undepreciated
cost of any asset component being replaced that was acquired after the initial
vessel purchase is written off as a component of vessel operating expense.
Expenditures for routine maintenance and repairs are expensed as incurred. Scrap
value is estimated by the Company by taking the cost of steel times the weight
of the ship noted in lightweight ton (lwt). At June 30, 2005 and December 31,
2004, the Company estimated the cost of steel to be approximately $175/lwt.
Deferred drydocking costs
- -------------------------
Our vessels are required to be drydocked approximately every 30 to 60 months for
major repairs and maintenance that cannot be performed while the vessels are
operating. We capitalize the costs associated with the drydockings as they occur
and depreciate these costs on a straight-line basis over the period between
drydockings. Costs capitalized as part of a vessel's drydocking include actual
costs incurred at the drydocking yard; cost of fuel consumed between the
vessel's last discharge port prior to the drydocking and the time the vessel
leaves the drydocking yard; cost of hiring riding crews to perform
drydocking-related activities and cost of parts that are reasonably made in
anticipation of reducing the duration or cost of the drydocking; cost of travel,
lodging and subsistence of personnel sent to the drydocking site to supervise;
and the cost of hiring a third party to oversee the drydocking.
Inventory
- ---------
Inventories consist of lubricants, which are stated at the lower of cost or
market. Cost is determined by the first-in, first-out method.
Impairment of long-lived assets
- -------------------------------
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than their carrying
amounts. In the evaluation of the fair value and future benefits of long-lived
assets, the Company performs an analysis of the anticipated undiscounted future
net cash flows of the related long-lived assets. If the carrying value of the
related asset exceeds the undiscounted cash flows, the carrying value is reduced
to its fair value. Various factors including anticipated future charter rates,
estimated scrap values, future drydocking costs and estimated vessel operating
costs, are included in this analysis.
For the three and six months ended June 30, 2005, no impairment charges were
recorded, based on the analysis described above.
Deferred financing costs, net
- -----------------------------
Deferred financing costs include fees, commissions and legal expenses associated
with securing loan facilities. These costs are amortized over the life of the
related debt, which is included in interest expense. Accumulated amortization of
deferred financing costs as of June 30, 2005 and December 31, 2004 were $473 and
$60, respectively.
9
Deposits on vessels
- -------------------
Deposits on vessels consist of payments made to the seller of vessels in advance
of the Company taking possession of the vessel.
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.
Income taxes
- ------------
Pursuant to the U.S. Internal Revenue Code of 1986 as amended (the "Code"),
Section 883, effective for the Company's fiscal years beginning on or after
December 1, 1987, qualified income derived from the international operations of
ships is excluded from gross income and exempt from U.S. federal income tax if
the company, engaged in the international operation of ships, meets certain
requirements. Among other things, in order to qualify, the company must be
incorporated in a country which grants an equivalent exemption to U.S. citizens
and corporations and must satisfy certain qualified ownership requirements.
The Company is incorporated in the Marshall Islands. Pursuant to the income tax
laws of the Marshall Islands, the Company is not subject to Marshall Islands
income tax.
The Marshall Islands has been officially recognized by the Internal Revenue
Service as a qualified foreign country that currently grants the requisite
equivalent exemption from tax.
Unless exempt from United States federal income taxation under the rules
discussed above, a foreign corporation is subject to United States federal
income taxation on its "shipping income" that is treated as derived from sources
within the United States, to which we refer as "United States source shipping
income." For these purposes "shipping income" means any income that is derived
from the use of vessels, from the hiring or leasing of vessels for use on a time
voyage, from the participation in a pool, partnership, strategic alliance, joint
operating agreement, code sharing arrangement or other joint venture it directly
or indirectly owns or participates in that generates such income, or from the
performance of services directly related to those uses. For tax purposes,
"United States source shipping income" includes (i) 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 and (ii) 100% of shipping income that is
attributable to transportation that both begins and ends in the United States.
In October 2004, the U.S. Congress enacted the American Jobs Creation Act of
2004. The Act provided for certain changes in the taxation of U.S.-owned
shipping companies. The Company does not believe that such changes will impact
its exemption from taxation of its U.S. operations.
Deferred revenue
- ----------------
Deferred revenue primarily relates to cash received from charterers prior to it
being earned. These amounts are recognized as income in the appropriate future
periods.
Accounting estimates
- --------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include vessel and drydock
valuations and the valuation of due from charterers. Actual results could differ
from those estimates.
10
Concentration of credit risk
- ----------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk are trade receivables. With respect to accounts receivable, the
Company attempts to limit its credit risk by performing ongoing credit
evaluations and, when deemed necessary, requiring letters of credit, guarantees
or collateral. Although the Company earned 100% of revenues from ten customers,
management does not believe significant risk exists in connection with the
Company's concentrations of credit at June 30, 2005.
Fair value of financial instruments
- -----------------------------------
The estimated fair values of the Company's financial instruments approximate
their individual carrying amounts as of June 30, 2005 and December 31, 2004 due
to their short-term maturity or the variable-rate nature of the respective
borrowings.
Earnings per share
- ------------------
Earnings per share has been calculated by dividing the net income by weighted
average number of common shares outstanding during the period. There is no
dilution for the three and six months ended June 30, 2005.
New accounting pronouncements
- -----------------------------
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R
that will require compensation costs related to share-based payment transactions
to be recognized in the financial statements. With limited exceptions, the
amount of compensation cost will be measured based on the grant-date fair value
of the equity or liability instruments issued. In addition, liability awards
will be remeasured each reporting period. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
SFAS 123R replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and
supersedes APB 25. This Statement will be effective as of the beginning of the
first fiscal year that begins after June 15, 2005.
Entities that used the fair-value-based method for either recognition or
disclosure under SFAS No. 123 will apply this revised Statement using a modified
version of prospective application. Under this transition method, for the
portion of outstanding awards for which the requisite service has not yet been
rendered, compensation cost is recognized on or after the required effective
date based on the grant-date fair value of those awards calculated under SFAS
No. 123 for either recognition or pro forma disclosures. For periods before the
required effective date, those entities may elect to apply a modified version of
the retrospective application under which financial statements for periods are
adjusted on a basis consistent with the pro forma disclosures required for those
periods by SFAS No. 123. The adoption of SFAS No. 123R will not have a material
impact on the Company's financial statements.
3 - DEPOSITS ON VESSELS
- -----------------------
Under the terms of the purchase agreement between the company and an
unaffiliated seller, the Company was required to make a deposit of 15% of the
purchase price for each vessel to be acquired for its initial fleet. The deposit
for each vessel is applied towards the purchase price of that vessel on the
acquisition date. As of June 30, 2005 there were no vessel deposits remaining
and at December 31, 2004, deposits held for the subsequent purchase of the
remaining ten vessels were $40,923.
4 - RELATED PARTY TRANSACTIONS
- ------------------------------
The following are related party transactions not disclosed elsewhere in these
financial statements:
In April 2005, the Company began renting office space as its principal executive
offices in a building currently leased by GenMar Realty LLC, a company wholly
owned by Peter C. Georgiopoulos, the Chairman of the Board. There is no lease
agreement between the Company and GenMar Realty LLC. The Company currently pays
an occupancy fee on a month-to-month basis in the amount of $55. For the three
and six months ended June 30, 2005, the Company incurred $110 and $110,
respectively.
11
During the three and six months ended June 30, 2005, the Company incurred legal
services (primarily in connection with vessel acquisitions) aggregating $13 and
$120 from Constantine Georgiopoulos, father of Peter C. Georgiopoulos, Chairman
of the Board. At June 30, 2005 and December 31, 2004, $13 and $83, respectively,
were outstanding to Constantine Georgiopoulos.
The Company has obtained an insurance policy through Leeds & Leeds Company Inc.,
a broker. Leeds & Leeds Company Inc. currently holds less than 0.1% ownership in
the Parent. The Company incurred $681 and $1,042 of insurance expense to them
for the three and six months ended June 30, 2005, respectively.
5 - LONG-TERM DEBT
- ------------------
Long-term debt consists of the following:
June 30, December 31,
2005 2004
------- -----------
(unaudited)
Term Loan..................................... $336,375 $125,766
Less: Current portion of long-term debt....... 82,500 23,203
-------- --------
Long-term debt................................ $253,875 $102,563
On December 3, 2004 the Company entered into a credit facility ("2004 Credit
Facility") with a limit of $357,000 with a group of lender banks. The loan has a
five-year maturity at a rate of LIBOR plus 1.375% per year until $100,000 has
been repaid and thereafter at LIBOR plus 1.250%. In the event of late principal
payments, additional interest charges will be incurred. The following table sets
forth our contractual obligations and the maturity dates as of:
Period Ending December 31, Total
2005 (July 1, 2005 to December 31, 2005)................... $41,250
2006....................................................... 82,500
2007....................................................... 43,125
2008....................................................... 30,000
2009....................................................... 30,000
Thereafter................................................. 109,500
--------
$336,375
========
The December 2004 Credit Facility is secured by a first priority mortgage on
each of the vessels in the Company's fleet and a first assignment of all
freights, earnings and insurances. The terms and conditions of the 2004 Credit
Facility require compliance with certain restrictive covenants. Under the credit
facility, the Company is required to maintain certain financial covenants
requiring among other things to ensure that, the aggregate market value of the
vessels in the fleet that secure the obligation under the 2004 Credit Facility
exceed the aggregate principal amount of debt outstanding under the 2004 Credit
Facility and maintain certain ratios such as: interest coverage ratios and
maximum leverage ratios. In addition, the Company must employ all vessels under
a fixed rate charter for a term ending no sooner than 24 months immediately
following the vessel's purchase and maintain certain minimum funding
requirements from the Parent. Vessel charterers must be approved by the lenders
under the original credit facility.
The Company failed to comply with such covenants by employing certain vessels
under fixed-rate charters for terms ending sooner than 24 months immediately
following the vessel's purchase. The Company received a waiver in May 2005 that
deemed all charters entered into to be in compliance with the covenant for
chartering except for the Genco Leader. Additionally, the Company took delivery
of the Genco Trader in June 2005 and the Company
12
established a fixed-rate charter with terms less than 24 months. In July 2005,
the Company received waivers extending the required compliance date of the Genco
Leader and Genco Trader through December 31, 2005.
The Company was obligated to receive a minimum amount of funding from the Parent
on the earlier of December 15, 2004 or the delivery of the fourth vessel. On
December 15, 2004, the Company was underfunded from its parent by $2,705. In
May 2005, the Company received a waiver for the underfunding through May 31,
2005. The Parent made the required capital contribution in May 2005.
Interest rates during the three and six months ended June 30, 2005 averaged
4.48% and 4.382%, respectively, and ranged from 4.125% to 4.563% during the
three months ended June, 30, 2005 and ranged from 3.688% to 4.563% for the six
months ended June 30, 2005.
6 - REVENUE FROM TIME CHARTERS
- ------------------------------
Total revenue earned on time charters for the three and six months ended June
30, 2005 was $30,950 and $52,349, respectively. Future minimum time charter
revenue, based on vessels committed to noncancelable time charter contracts as
of June 30, 2005 will be $57,960 during the remaining six months of 2005,
$100,697 during 2006 and $5,330 during 2007.
7 - LEGAL PROCEEDINGS
- ---------------------
From time to time the Company will be subject to legal proceedings and claims in
the ordinary course of its business, principally personal injury and property
casualty claims. Such claims, even if lacking merit, could result in the
expenditure of significant financial and managerial resources. The Company is
not aware of any legal proceedings or claims that it believes will have,
individually or in the aggregate, a material adverse effect on the Company, its
financial condition, results of operations or cash flows.
8 - SUBSEQUENT EVENTS
- ---------------------
On July 22, 2005, the Company offered 11,760,000 shares at $21 dollars per share
resulting in gross proceeds of $246,960. After considering the underwriting
commissions and other registration expenses, the Company netted approximately
$230,142 which was used to repay debt under the credit facility which the
Company operated under through July 29, 2005.
Subsequent to the initial public offering, the Company entered into a new credit
facility as of July 29, 2005. The new credit facility is with a syndicate of
commercial lenders consisting of Nordea Bank Finland Plc, New York Branch, DnB
NOR Bank ASA, New York Branch and Citigroup Global Markets Limited. The credit
facility has been used to refinance the outstanding indebtedness under the
original credit facility, and will be used in the future to acquire additional
vessels and for working capital requirements. Under the terms of the new credit
facility, borrowings in the amount of $106,233 were used to repay indebtedness
under the original facility. After the initial borrowings under the new
facility, $343,767 remains available to fund future vessel acquisitions, and the
Company may borrow up to $20,000 of the $343,767 for working capital purposes.
The new credit facility has a term of ten years. The facility permits borrowings
up to 65% of the value of the vessels that secure the obligations under the new
credit facility up to the facility limit, provided that conditions to drawdown
are satisfied. The facility limit is $450,000 for a period of six years.
Thereafter, the facility limit is reduced by an amount equal to 8.125% of the
total commitment, semi-annually over a period of four years and is reduced to $0
on the tenth anniversary.
The obligations under the credit facility are secured by a first priority
mortgage on each of the vessels in our fleet as well as any future vessel
acquisitions pledged as collateral and funded by the new credit facility. The
new credit facility is also secured by a first priority security interest in
earnings and insurance proceeds related to the collateral vessels. The Company
may grant additional security from time to time.
13
Interest on the amounts drawn is payable at the rate of 0.95% per annum over
LIBOR until the fifth anniversary of the closing of the new credit facility and
1.00% per annum over LIBOR thereafter. The Company is also obligated to pay a
commitment fee equal to 0.375% per annum on any undrawn amounts available under
the facility. On July 29, 2005, the Company paid an arrangement fee to the
Lender of $2,700 which equates to 0.6% of the total commitment of $450,000.
Under the terms of the new credit facility, the Company will be permitted to pay
or declare dividends so long as no default or event of default has occurred and
is continuing or would result from such declaration or payment.
The new credit facility has certain covenants that require among other things to
ensure that the fair market value of the collateral vessels maintains a certain
multiple as compared to the outstanding indebtedness; maintain a certain ratio
of total indebtedness to total capitalization; maintain a certain ratio of
earnings before interest, taxes, depreciation and amortization to interest
expense; and maintain working capital liquidity in an amount of not less than
$500 per vessel securing the borrowings.
In July 2005, the Company approved an equity incentive plan allowing for the
issuance of up to 2,000,000 shares of common stock to our officers, key
employees and directors.
During the third quarter the remaining unamortized deferred financing costs of
$4,104 at June 30, 2005 will be expensed as the original credit facility has
been repaid and replaced with our new facility.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
This report contains forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward looking statements are based on management's current expectations and
observations. Included among the factors that, in our view, could cause actual
results to differ materially from the forward looking statements contained in
this report are the following: (i) changes in demand or rates in the drybulk
shipping industry; (ii) changes in the supply of or demand for drybulk products,
generally or in particular regions; (iii) changes in the supply of drybulk
carriers including newbuilding of vessels or lower than anticipated scrapping of
older vessels; (iv) changes in rules and regulations applicable to the cargo
industry, including, without limitation, legislation adopted by international
organizations or by individual countries and actions taken by regulatory
authorities; (v) increases in costs and expenses including but not limited to:
crew wages, insurance, provisions, repairs, maintenance and general and
administrative expenses; (vi) the adequacy of our insurance arrangements; (vii)
changes in general domestic and international political conditions; (viii)
changes in the condition of the Company's vessels or applicable maintenance or
regulatory standards (which may affect, among other things, our anticipated
drydocking or maintenance and repair costs) and unanticipated drydock
expenditures; and other factors listed from time to time in our public filings
with the Securities and Exchange Commission including, without limitation, the
Registration Statement on Form S-1, as amended, for our initial public offering
(See Registration Statement No. 333-124718). Our ability to pay dividends in any
period will depend upon factors including the limitations under our loan
agreements, applicable provisions of Marshall Islands law and the final
determination by the Board of Directors each quarter after its review of our
financial performance. The timing and amount of dividends, if any, could also be
affected by factors affecting cash flows, results of operations, required
capital expenditures, or reserves. As a result, the amount of dividends actually
paid may vary.
The following management's discussion and analysis should be read in conjunction
with our historical consolidated financial statements and the related notes
included in this 10-Q. Due to our short period of operation, we do not have
comparable historical data available for the three months and six months ended
June 30, 2005. Therefore, the following management discussion compares the
results for the three months ended March 31, 2005 with the results for the three
months ended June 30, 2005 wherever applicable.
General
- -------
We are a newly formed Marshall Islands company incorporated in September 2004 to
transport iron ore, coal, grain, steel products and other drybulk cargoes along
worldwide shipping routes through the ownership and operation of drybulk carrier
vessels. Half of the vessels in our fleet are younger than six years old. Our
fleet consists of five Panamax, six Handymax and five Handysize drybulk
carriers, with an aggregate carrying capacity of approximately 790,000 dwt. The
average age of our fleet was approximately eight years as of June 30, 2005 as
compared to the average age for the world fleet of approximately 16 years for
the drybulk shipping segments in which we compete. All of the vessels in our
fleet are on time charters to reputable charterers, including Lauritzen Bulkers
A/S ("Lauritzen Bulkers"), Cargill International S.A. ("Cargill"), Hyundai
Merchant Marine Cc. Ltd. ("HMMC"), BHP Billiton Marketing AG ("BHP"),
Dampskibsselskabet "Norden" A/S ("DS Norden"), E D & F Man Shipping Limited
("EDF Man Shipping"), and NYK Bulkship Europe ("NYK Europe"). With the exception
of the Genco Leader and the Genco Trader, our vessels are fixed on long-term
time charters for terms greater than one year that expire (assuming the option
periods in the time charters are not exercised) between August 2006 and March
2007.
15
We acquired our fleet of 16 drybulk carriers free of any existing time charter.
Each vessel in our fleet was delivered to us on the date specified in the
following chart:
Vessel Acquired Date Delivered Class Year Built
--------------- -------------- ----- ----------
Genco Reliance 12/6/04 Handysize 1999
Genco Glory 12/8/04 Handymax 1984
Genco Vigour 12/15/04 Panamax 1999
Genco Explorer 12/17/04 Handysize 1999
Genco Carrier 12/28/04 Handymax 1996
Genco Sugar 12/30/04 Handysize 1998
Genco Pioneer 1/4/05 Handysize 1999
Genco Progress 1/12/05 Handysize 1999
Genco Wisdom 1/13/05 Handymax 1997
Genco Success 1/31/05 Handymax 1997
Genco Beauty 2/7/05 Panamax 1999
Genco Knight 2/16/05 Panamax 1999
Genco Leader 2/16/05 Panamax 1999
Genco Marine 3/29/05 Handymax 1996
Genco Prosperity 4/4/05 Handymax 1997
Genco Trader 6/7/05 Panamax 1990
We intend to grow our fleet through timely and selective acquisitions of vessels
in a manner that is accretive to our cash flow. In connection with this growth
strategy, we negotiated a new credit facility that has been used to refinance
the outstanding indebtedness under our original credit facility remaining after
application of a portion of the net proceeds of the public offering as described
in Note 8 ("Subsequent Events") in the above financial statements.
Our management team and our other employees are responsible for the commercial
and strategic management of our fleet. Commercial management includes the
negotiation of charters for vessels, managing the mix of various types of
charters, such as time charters and voyage charters, and monitoring the
performance of our vessels under their charters. Strategic management includes
locating, purchasing, financing and selling vessels. We intend to use the
services of reputable independent technical managers for the technical
management of our fleet. We currently contract with Wallem, an independent
technical manager, to provide technical management at a lower cost than we
believe would be possible in-house. Technical management involves the day-to-day
management of vessels, including performing routine maintenance, attending to
vessel operations and arranging for crews and supplies. Members of our New York
City-based management team oversee the activities of our independent technical
manager. The management team is led by our President, Robert Gerald Buchanan,
who has 40 years of experience in the shipping industry and most recently served
as the managing director of Wallem. Mr. Buchanan has a broad range of
experience, most recently as a senior executive involved in ship management
operations and engineering. Our Chief Financial Officer, John C. Wobensmith, has
over 11 years of experience in the shipping industry, with a concentration in
shipping finance.
Factors affecting our results of operations
- -------------------------------------------
We believe that the following table reflects important measures for analyzing
trends in our results of operations. The table reflects our ownership days,
available days, operating days, fleet utilization, TCE rates and daily vessel
operating expenses for the three months and six months ended June 30, 2005.
Because all of our vessels have operated on time charters, our TCE rates equal
our time charter rates less any brokerage commissions paid by us to unaffiliated
parties.
16
For the
three months For the
ended six months ended
June 30, 2005 June 30, 2005
------------- ----------------
Fleet Data:
Ownership days (1)
Panamax 387.9 618.6
Handymax 543.0 863.7
Handysize 455.0 890.9
Total 1,385.9 2,373.2
Available days (2)
Panamax 385.6 613.2
Handymax 542.0 860.4
Handysize 455.0 890.1
Total 1,382.6 2,363.7
Operating days (3)
Panamax 384.6 606.1
Handymax 535.1 852.2
Handysize 452.3 887.4
Total 1,372.0 2,345.7
Fleet utilization (4)
Panamax 99.7% 98.8%
Handymax 98.7% 99.0%
Handysize 99.4% 99.7%
Fleet average 99.2% 99.2%
For the
three months For the
ended six months ended
June 30, 2005 June 30, 2005
------------- ----------------
(U.S. dollars)
Average Daily Results:
Time Charter Equivalent (5)
Panamax $ 27,456 $ 27,745
Handymax 21,446 21,235
Handysize 16,965 17,027
Fleet average 21,648 21,339
Daily vessel operating
expenses (6)
Panamax $ 2,565 $ 2,542
Handymax 2,503 2,285
Handysize 2,335 2,117
Fleet average 2,465 2,289
Definitions
- -----------
In order to understand our discussion of our results of operations, it is
important to understand the meaning of the following terms used in our analysis
and the factors that influence our results of operations.
17
(1) Ownership days. We define ownership days as the aggregate number of days in
a period during which each vessel in our fleet has been owned by us. Ownership
days are an indicator of the size of our fleet over a period and affect both the
amount of revenues and the amount of expenses that we record during a period.
(2) Available days. We define available days as the number of our ownership days
less the aggregate number of days that our vessels are off-hire due to scheduled
repairs or repairs under guarantee, vessel upgrades or special surveys and the
aggregate amount of time that we spend positioning our vessels. Companies in the
shipping industry generally use available days to measure the number of days in
a period during which vessels should be capable of generating revenues.
(3) Operating days. We define operating days as the number of our available days
in a period less the aggregate number of days that our vessels are off-hire due
to unforeseen circumstances. The shipping industry uses operating days to
measure the aggregate number of days in a period during which vessels actually
generate revenues.
(4) Fleet utilization. We calculate fleet utilization by dividing the number of
our operating days during a period by the number of our available days during
the period. The shipping industry uses fleet utilization to measure a company's
efficiency in finding suitable employment for its vessels and minimizing the
number of days that its vessels are off-hire for reasons other than scheduled
repairs or repairs under guarantee, vessel upgrades, special surveys or vessel
positioning.
(5) TCE rates. We define TCE rates as our revenues (net of voyage expenses)
divided by the number of our available days during the period, which is
consistent with industry standards. TCE rate is a common shipping industry
performance measure used primarily to compare daily earnings generated by
vessels on time charters with daily earnings generated by vessels on voyage
charters, because charterhire rates for vessels on voyage charters are generally
not expressed in per-day amounts while charterhire rates for vessels on time
charters generally are expressed in such amounts.
(6) Daily vessel operating expenses. We define daily vessel operating expenses
to include crew wages and related costs, the cost of insurance, expenses
relating to repairs and maintenance (excluding drydocking), the costs of spares
and consumable stores, tonnage taxes and other miscellaneous expenses. Daily
vessel operating expenses are calculated by dividing vessel operating expenses
by ownership days for the relevant period.
18
Operating data
- --------------
The following discusses our operating income and net income for the three and
six months ended June 30, 2005.
For the For the
three months ended six months ended
June 30, 2005 June 30, 2005
------------- -------------
(U.S. dollars in thousands, except for
per share amounts)
Income Statement Data:
Revenues $ 30,950 $ 52,349
--------- ---------
Operating Expenses:
Voyage expenses 1,020 1,910
Vessel operating expenses 3,417 5,432
General and administrative expenses 933 1,193
Management fees 478 809
--------- ---------
Depreciation 5,670 9,651
--------- ---------
Total operating expenses 11,518 18,995
--------- ---------
Operating income 19,432 33,354
Net interest expense (3,815) (6,352)
--------- ---------
Net income $ 15,617 $ 27,002
========= =========
Earnings per share--Basic (1) $ 1.16 $ 2.00
========= =========
June 30, 2005 December 31, 2004
------------- -----------------
(U.S. dollars in thousands)
Balance Sheet Data:
Cash $ 26,222 $ 7,431
Total assets 445,166 201,628
Total debt (current and long-term) 336,375 125,766
Total shareholder's equity 103,081 73,374
For the
six months ended
June 30, 2005
-------------
(U.S. dollars in
thousands)
Cash Flow Data:
Net cash flow provided by operating activities $ 38,470
Net cash flow used in investing activities (232,479)
Net cash provided by financing activities 212,800
EBITDA (2) 43,005
(1) Gives effect to a 27,000:1 approved stock split in the form of a stock
dividend, which results in weighted average outstanding shares of
13,500,000 for the period.
19
(2) EBITDA represents net income plus net interest expense, income tax expense,
depreciation and amortization. EBITDA is included because it is used by
management and certain investors as a measure of operating performance.
EBITDA is used by analysts in the shipping industry as a common performance
measure to compare results across peers. Our management uses EBITDA as a
performance measure in consolidating monthly internal financial statements
and it is presented for review at our board meetings. EBITDA is also used
by our lenders in certain loan covenants. For these reasons, we believe
that EBITDA is a useful measure to present to our investors. EBITDA is not
an item recognized by U.S. GAAP and should not be considered as an
alternative to net income, operating income or any other indicator of a
company's operating performance required by U.S. GAAP. EBITDA is not a
source of liquidity or cash flows as shown in our consolidated statement of
cash flows. The definition of EBITDA used here may not be comparable to
that used by other companies.
For the For the
three months ended six months ended
June 30, 2005 June 30, 2005
------------------ ----------------
(U.S. dollars in thousands)
Net income $15,617 $27,002
Net interest expense 3,815 6,352
Income tax expense -- --
Depreciation 5,670 9,651
------- -------
EBITDA $25,102 $43,005
Results of operations
- ---------------------
Revenues
- --------
Our revenues are driven primarily by the number of vessels in our fleet, the
number of days during which our vessels operate and the amount of daily
charterhire rates that our vessels earn under charters, that, in turn, are
affected by a number of factors, including:
o the duration of our charters;
o our decisions relating to vessel acquisitions and disposals;
o the amount of time that we spend positioning our vessels;
o the amount of time that our vessels spend in drydock undergoing repairs;
o maintenance and upgrade work;
o the age, condition and specifications of our vessels;
o levels of supply and demand in the drybulk shipping industry; and
o other factors affecting spot market charter rates for drybulk carriers.
We are a newly organized company, and took delivery of our first six vessels in
December 2004. The remaining ten vessels of our fleet were delivered in the
first six months of 2005, eight in the first quarter and two in the second
quarter. The increase in the size of our fleet has enabled us to grow our
revenues significantly and to increase our ownership, available and operating
days. We believe that the relatively young age of the vessels in our fleet,
20
combined with the effectiveness of the measures that we have undertaken to
minimize periods during which our vessels are off-hire, including effective
maintenance programs and experienced crew selection, should enable us to
maintain relatively high vessel utilization rates.
For the three-month period ended March 31 and June 30, 2005, revenues were $21.4
million and $31.0 million, respectively, and consisted of charter payments for
our vessels. The increase in revenues was attributable to the delivery of the
final two vessels under our original fleet purchase agreement along with a full
quarter of operation for the vessels delivered during the first quarter of 2005.
The average TCE rate of our fleet for the three-months ended March 31 and June
30, 2005 increased from $20,904 a day to $21,648 a day, respectively. The
increase was associated primarily with profits generated from the difference in
bunker prices at the time we took delivery of the vessels from COFCO versus our
delivery of the vessels under their initial long-term time charters.
For the three-months ended March 31 and June 30, 2005, we had ownership days of
987.3 and 1,385.9 days, respectively. The increase in the number of ownership
days was a result of the delivery of additional vessels during the first and
second quarter of 2005. During the same periods, our fleet utilization was
unchanged at 99.2%.
The following table sets forth information about the charters in our fleet as of
June 30, 2005:
Time Charter
Vessel Rate (1) Charterer Charter Expiration (2)
- ------ -------- --------- ----------------------
Genco Beauty $ 29,000 Cargill February 2007
Genco Knight 29,000 BHP January 2007
Genco Leader 27,500(3) Cargill July 2005
Genco Vigour 29,000 BHP December 2006
Genco Trader 17,350 STX Pan Ocean Co., Ltd. July 2005
Genco Success 23,850 Korea Line Corporation January 2007
Genco Carrier 24,000 DBCN Corporation December 2006
Genco Prosperity 23,000 DS Norden March 2007
Genco Wisdom 24,000 HMMC January 2007
Genco Marine 26,000(4) NYK Europe March 2007
Genco Glory 18,250 EDF Man Shipping December 2006
Genco Explorer 17,250 Lauritzen Bulkers August 2006
Genco Pioneer 17,250 Lauritzen Bulkers September 2006
Genco Progress 17,250(5) Lauritzen Bulkers September 2006
Genco Reliance 17,250 Lauritzen Bulkers August 2006
Genco Sugar 17,250 Lauritzen Bulkers August 2006
- ------------------
(1) Time charter rates presented are the gross daily charterhire rates before
the payments of brokerage commissions ranging from 1.25% to 5% to unaffiliated
third parties. In a time charter, the charterer is responsible for voyage
expenses such as bunkers, port expenses, agents' fees and canal dues.
(2) The dates presented on this table represent the earliest dates that our
charters may be terminated. Except with respect to the Genco Trader and Genco
Leader charters, under the terms of the contracts, charterers are entitled to
extend time charters from two to four months in order to complete the vessel's
final voyage plus any time the vessel has been off-hire.
(3) Rate is $27,500 if discharge is between Singapore and Japan or $27,000 if
discharge is elsewhere in Southeast Asia, that is, Indonesia, Malaysia, the
Philippines or Thailand.
(4) The time charter rate is $26,000 until March 2006 and $18,000 thereafter.
21
(5) The time charter rate was $21,560 through March 2005 and $17,250 thereafter.
For the six-months ended June 30, 2005, we had ownership days of 2,373.2. Our
fleet utilization also remained unchanged at 99.2%.
Voyage expenses
- ---------------
We incur voyage expenses that include port and canal charges, fuel (bunker)
expenses and brokerage commissions payable to unaffiliated parties. Port and
canal charges and bunker expenses primarily increase in periods during which
vessels are employed on voyage charters because these expenses are for the
account of the vessel owner. Currently, we do not incur port and canal charges
and bunker expenses related to the consumption of bunkers as part of our
vessels' overall expenses, because all of our vessels are employed under time
charters that require the charterer to bear all of those expenses.
As is common in the shipping industry, we pay brokerage commissions ranging from
1 1/4% to 5% of the total daily charterhire rate of each charter to unaffiliated
ship brokers and in-house brokers associated with the charterers, depending on
the number of brokers involved with arranging the charter. We believe that the
amounts and the structures of our commissions are consistent with industry
practices.
For the three-months ended March 31, and June 30, 2005, voyage expenses were $.9
and $1.0 million, respectively, and consisted primarily of brokerage commissions
paid to unaffiliated parties. We expect that the amount of our total commissions
will continue to grow as a result of future vessel acquisitions.
For the six-months ended June 30, 2005, voyage expenses were $1.9 million.
Vessel operating expenses
- -------------------------
Vessel operating expenses include crew wages and related costs, the cost of
insurance, expenses relating to repairs and maintenance, the cost of spares and
consumable stores, tonnage taxes and other miscellaneous expenses. During the
three-months ended March 31 and June 30, 2005, vessels operating expenses
increased from $2.0 million to $3.4 million, respectively, as a result of the
increase in the number of vessels under operation in our fleet. The average
daily vessel operating expenses for our fleet were $2,042 and $2,465 per day for
the three-months ended March 31 and June 30, 2005, respectively. The increase is
due to the delivery of one additional Panamax vessel, which have higher
operating costs than Handymax and Handysize vessels, combined with a longer
operating period for the fourteen vessels delivered through March 31, 2005. We
believe daily vessel operating expenses are best measured for comparative
purposes over a 12-month period in order to take into account all of the
expenses that each vessel in our fleet will incur over a full year of operation.
As such, we believe our daily vessel operating expenses for the three-months
ended March 31, and June 30, 2005 are not reflective of our future vessel
operating expenses due to the short period of operations and will likely
increase over a 12-month operating period.
The average daily vessel operating expenses for our fleet were $2,289 per day
for the six-months ended June 30, 2005.
Based on management's estimates and budgets provided by Wallem, we expect our
vessels to have daily vessel operating expenses during 2005 of:
Average Daily
Vessel Type Budgeted Amount
----------- ---------------
Panamax............................... $3,344
Handymax.............................. 3,035
Handysize............................. 2,898
22
Our vessel operating expenses, which generally represent fixed costs, will
increase as a result of the expansion of our fleet. Other factors beyond our
control, some of which may affect the shipping industry in general, including,
for instance, developments relating to market prices for insurance, may also
cause these expenses to increase.
General and administrative expenses
- -----------------------------------
We incur general and administrative expenses, including our onshore
vessel-related expenses such as legal and professional expenses, and other
general vessel expenses. Our general and administrative expenses also include
our payroll expenses, including those relating to our executive officers, and
rent. For the three-months ended March 31, and June 30, 2005, general and
administrative expenses were $0.3 and $0.9 million, respectively. We expect
general and administrative expenses to increase as a result of the expansion of
our fleet, and the costs associated with running a public company, including the
preparation of disclosure documents, legal and accounting costs, incremental
director and officer liability insurance costs, director and executive
compensation, and costs related to compliance with the Sarbanes-Oxley Act of
2002.
For the six-months ended June 30, 2005, general and administrative expenses were
$1.2 million.
Management fees
- ---------------
The Company incurs management fees to third-party technical management companies
that include such services as the day-to-day management of vessels, including
performing routine maintenance, attending to vessel operations and arranging for
crews and supplies. For the three-months ended March 31, and June 30, 2005,
management fees were $0.3 and $0.5 million, respectively. The increase is
primarily due to the delivery of two additional vessels during the second
quarter, in addition to the longer operating period for the eight vessels
delivered throughout the first quarter ended March 31, 2005.
For the six-months ended June 30, 2005, management fees were $0.8 million.
Depreciation
- ------------
We depreciate the cost of our vessels on a straight-line basis over the expected
useful life of each vessel. Depreciation is based on the cost of the vessel less
its estimated residual value. We estimate the useful life of our vessels to be
25 years, which we believe is common in the drybulk shipping industry.
Furthermore, we estimate the residual values of our vessels to be based upon$175
per lightweight ton, which we believe is standard in the drybulk shipping
industry. For the three-months ended March 31, and June 30, 2005, depreciation
charges increased from $4.0 to $5.7 million, respectively, due to the growth of
our fleet throughout the first and second quarters.
For the six-months ended June 30, 2005, depreciation charges were $9.7 million.
Net interest expense
- --------------------
For the three-months ended March 31, and June 30, 2005, net interest expense was
$2.6 and $4.0 million, respectively, and consisted of interest payments made
under our original credit facility as well as the amortization of bank fees
related to our original credit facility. The increase in net interest expense is
due to the increase in the Company's debt through out the first and second
quarters due to the aforementioned vessel acquisitions.
For the six-months ended June 30, 2005, net interest expense was $6.4 million.
Liquidity and capital resources
- -------------------------------
To date we have financed our capital requirements with cash flow from
operations, equity contributions and bank debt. We have used our funds primarily
to fund vessel acquisitions, regulatory compliance expenditures and the
repayment of bank debt and the associated interest expense. We will require
capital to fund ongoing operations, acquisitions and debt service. We anticipate
that internally generated cash flow and borrowing under our credit
23
facility will be sufficient to fund the operations of our fleet, including our
working capital requirements for the next 12 to 18 months.
We expect to rely on operating cash flows as well as long-term borrowings to
implement our growth plan and our dividend policy. We believe that our current
cash balance as well as operating cash flows and available borrowings under our
credit facilities will be sufficient to meet our liquidity needs for the next
year.
Dividend policy
- ---------------
Our dividend policy is to declare quarterly distributions to shareholders by
each February, May, August and November commencing in November, 2005,
substantially equal to our available cash from operations during the previous
quarter, less cash expenses for that quarter (principally vessel operating
expenses and debt service) and any reserves our board of directors determines we
should maintain. These reserves may cover, among other things, drydocking,
repairs, claims, liabilities and other obligations, interest expense and debt
amortization, acquisitions of additional assets and working capital. While we
cannot assure you that we will do so, and subject to the limitations set forth
below, we expect to declare a dividend per share of $0.54 by November 2005
(based on our operations for the third quarter of 2005). However, we may incur
other expenses or liabilities that would reduce or eliminate the cash available
for distribution as dividends.
The declaration and payment of any dividend will be subject to the discretion of
our board of directors. The timing and amount of dividend payments will depend
on our earnings, financial condition, cash requirements and availability, fleet
renewal and expansion, restrictions in our loan agreements, the provisions of
Marshall Islands law affecting the payment of distributions to shareholders and
other factors. Our board of directors may review and amend our dividend policy
from time to time in light of our plans for future growth and other factors.
We believe that under current law, our dividend payments from earnings and
profits will constitute "qualified dividend income" and, as such, will generally
be subject to a 15% U.S. federal income tax rate with respect to non-corporate
U.S. individual shareholders (through 2008). Distributions in excess of our
earnings and profits will be treated first as a non-taxable return of capital to
the extent of a U.S. shareholder's tax basis in its common stock on a
dollar-for-dollar basis and, thereafter, as capital gain.
Cash flow
- ---------
Net cash provided by operating activities for the six-month period ended June
30, 2005, was $38.5 million. Net cash from operating activities was primarily a
result of recorded net income of $27.0 million and depreciation charges of $9.7
million. Net cash used in investing activities was $232.5 million and related
solely to the acquisition of ten additional vessels during 2005. Net cash
provided by financing activities was $212.8 million and consisted primarily of
$231.2 million in proceeds from our original credit facility used to finance the
acquisition of ten additional vessels and an additional equity contribution of
$2.7 million off-set by a scheduled $20.6 million debt payment on June 1, 2005.
On July 22, 2005, we completed our public offering of 11,760,000 shares of our
Common Stock at $21 dollars per share resulting in gross proceeds of $246,960.
After deducting the underwriting commissions and other registration expenses, we
netted approximately $230,142, which was used to repay debt under our December
2004 Credit Facility (which we operated under through July 29, 2005, as
described below).
Our original credit facility
- ----------------------------
On December 3, 2004 the Company entered into a credit facility ("2004 Credit
Facility") with a limit of $357 million with a group of lender banks. The loan
had a five-year maturity at a rate of LIBOR plus 1.375% per year until $100
million had been repaid and thereafter at LIBOR plus 1.250%. In the event of
late principal payments additional interest charges would have been incurred.
The December 2004 Credit Facility was secured by a first priority mortgage on
each of the vessels in the Company's fleet and a first assignment of all
freights, earnings and insurances. The terms and conditions of the 2004 Credit
24
Facility required compliance with certain restrictive covenants. Under the
credit facility, the Company was required to meet certain financial covenants
requiring among other things to ensure that the aggregate market value of the
vessels in the fleet that secure the obligation under the 2004 Credit Facility
exceeded the aggregate principal amount of debt outstanding under the 2004
Credit Facility and maintained certain ratios such as: interest coverage ratios
and maximum leverage ratios. In addition, the Company represented that all
vessels would be employed under a fixed rate charter for a term ending no sooner
than 24 months immediately following the vessel's purchase and maintained
certain minimum funding requirements from the Parent. Charter counterparties
were to be approved by the lenders under the original credit facility.
The Company failed to comply with such representations by employing certain
vessels under fixed-rate charters for terms of less than 24 months immediately
following the vessel's purchase. The Company received a waiver in May 2005 that
deemed all charters entered into to be in compliance with the representations
for chartering except for the Genco Leader and Genco Trader. Additionally, the
Company took delivery of Genco Trader in June 2005 with a fixed-rate charter
with a term of less than 24 months. In July 2005, the Company received waivers
extending the required compliance date of the Genco Leader through December 31,
2005.
The Company was obligated to receive a minimum amount of funding from the Parent
on the earlier of December 15, 2004 or the delivery of the fourth vessel. On
December 15, 2004, the Company was under funded from its parent by $2.7 million.
In May 2005, the Company received a waiver for the under funding through May 31,
2005. The Parent made the required capital contribution in May 2005.
Interest rates during the three and six months ended June 30, 2005 averaged
4.48% and 4.382%, respectively, and ranged from 4.125% to 4.563% during the
three months ended June, 30, 2005 and ranged from 3.688% to 4.563% for the six
months ended June 30, 2005.
Our new credit facility
- -----------------------
Subsequent to the initial public offering, the Company entered into a new credit
facility as of July 29, 2005. The new credit facility is with a syndicate of
commercial lenders consisting of Nordea Bank Finland Plc, New York Branch, DnB
NOR Bank ASA, New York Branch and Citigroup Global Markets Limited. The credit
facility has been used to refinance our indebtedness, and will be used in the
future to acquire additional vessels and for working capital requirements. Under
the terms of our new credit facility, borrowings in the amount of $106.2 million
were used to repay indebtedness under our original facility. After our initial
borrowings under the new facility, $343.8 million remains available to fund
future vessel acquisitions, and we may borrow up to $20.0 million of the $343.8
million for working capital purposes.
The new credit facility has a term of ten years. The facility permits borrowings
up to 65% of the value of the vessels that secure our obligations under the new
credit facility up to the facility limit, provided that conditions to drawdown
are satisfied. The facility limit is $450 million for a period of six years.
Thereafter, the facility limit is reduced by an amount equal to 8.125% of the
total commitment, semi-annually over a period of four years and is reduced to $0
on the tenth anniversary.
Our obligations under the credit facility are secured by a first priority
mortgage on each of the vessels in our fleet as well as any future vessel
acquisitions pledged as collateral and funded by the new credit facility. The
new credit facility is also secured by a first priority security interest in
earnings and insurance proceeds related to the collateral vessels. We may grant
additional security from time to time.
Our ability to borrow amounts under the new credit facility is subject to
customary documentation relating to the facility, including security documents,
satisfactory of certain customary conditions precedent and compliance with terms
and conditions included in the loan documents. Before each drawdown, we are
required, among other things, to provide to the lenders acceptable valuations of
the vessels in our fleet confirming that the aggregate amount outstanding under
the facility (determined on a pro forma basis giving effect to the amount
proposed to be drawn down) will not exceed 65% of the value of the vessels
pledged as collateral. To the extent the vessels in our fleet that secure our
obligations under the new credit facility are insufficient to satisfy minimum
security requirements at the time of a drawdown or any time thereafter, we will
be required to grant additional security or obtain a waiver or
25
consent from the lenders. We will also not be permitted to borrow amounts under
the facility, and will be required to immediately repay all amounts outstanding
under the facility, if we experience a change in control.
Interest on the amounts drawn is payable at the rate of 0.95% per annum over
LIBOR until the fifth anniversary of the closing of the new credit facility and
1.00% per annum over LIBOR thereafter. We are also obligated to pay a commitment
fee equal to 0.375% per annum on any undrawn amounts available under the
facility. On July 29, 2005, the Company paid an arrangement fee to the Lender of
$2.7 million which equates to .6% of the total commitment of $450 million. In
the quarter ended September 30, 2005, the Company will incur an expense of $4.1
million to write-off deferred financing fess associated with our original credit
facility which was entirely repaid on July 29, 2005.
Under the terms of our new credit facility, we are permitted to pay or declare
dividends in accordance with our dividend policy so long as no default or event
of default has occurred and is continuing or would result from such declaration
or payment.
Contractual obligations
- -----------------------
The following table sets forth our contractual obligations and their maturity
dates that is reflective of the outstanding debt after giving effect to the
subsequent initial pubic offering and the repayment of the original credit
facility with proceeds from the offering and borrowings under the new credit
facility. The interest and fees are also reflective of the new credit facility.
Here is the information on our contractual obligations:
Within One One to Three Three to Five More than
Total Year (1) Years Years Five Years
----- -------- ----- ----- ----------
(U.S. dollars in thousands)
Bank loans $106,233 $0 $0 $0 $106,233
Interest and fees $62,866 $5,394 $12,473 $12,473 $32,526
(1) Represents the six month period ending December 31, 2005.
- -------------------------------------------------------------
Capital expenditures
- --------------------
We make capital expenditures from time to time in connection with our vessel
acquisitions. Our recent vessel acquisitions consist of our fleet of five
Panamax drybulk carriers, six Handymax drybulk carriers and five Handysize
drybulk carriers.
In addition to acquisitions that we may undertake in future periods, we will
incur additional capital expenditures due to special surveys and drydockings.
During June 2005 and at the delivery of the vessel, the Company incurred a
deferred drydock cost associated with the Genco Trader for sand blasting the
holds so that the vessel can be properly employed. We estimate our drydocking
costs for our fleet through 2007 to be:
Estimated
Drydocking
Cost
----
(U.S. dollars in
Year millions)
----
2005 (remaining six months) $0.3
2006 1.7
2007 2.1
We believe that the funding of these costs will be met with cash we generate
from operations.
26
Off-balance sheet arrangements
- ------------------------------
We do not have any off-balance sheet arrangements.
Inflation
- ---------
Inflation has only a moderate effect on our expenses given current economic
conditions. In the event that significant global inflationary pressures appear,
these pressures would increase our operating, voyage, administrative and
financing costs.
Critical accounting policies
- ----------------------------
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of those financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptions and
conditions.
Critical accounting policies are those that reflect significant judgments of
uncertainties and potentially result in materially different results under
different assumptions and conditions. We have described below what we believe
are our most critical accounting policies, because they generally involve a
comparatively higher degree of judgment in their application. For a description
of all our significant accounting policies, see Note 2 to our consolidated
financial statements included in this 10-Q.
Revenue and voyage expense recognition
- --------------------------------------
Revenues are generated from time charter agreements. A time charter involves
placing a vessel at the charterer's disposal for a set period of time during
which the charterer may use the vessel in return for the payment by the
charterer of a specified daily or monthly hire rate. In time charters, operating
costs such as for crews, maintenance and insurance are typically paid by the
owner of the vessel and specified voyage costs such as fuel and port charges are
paid by the charterer. Time charter revenues are recorded over the term of the
charter as service is provided. Revenues are recognized on a straight-line basis
as the average revenue over the term of the respective time charter agreement.
Vessel operating expenses are recognized when incurred. We have no significant
performance claims under our time charter agreements.
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. We depreciate our
drybulk vessels on a straight-line basis over their estimated useful lives,
estimated to be 25 years from the date of initial delivery from the shipyard.
Depreciation is based on cost less the estimated residual scrap value. We
estimate the residual values of our vessels to be based upon $175 per
lightweight ton. An increase in the useful life of a drybulk vessel or in its
residual value would have the effect of decreasing the annual depreciation
charge and extending it into later periods. A decrease in the useful life of a
drybulk vessel or in its residual value would have the effect of increasing the
annual depreciation charge. However, when regulations place limitations over the
ability of a vessel to trade on a worldwide basis, we will adjust the vessel's
useful life to end at the date such regulations preclude such vessel's further
commercial use.
Impairment of long-lived assets
- -------------------------------
We follow Statement of Financial Accounting Standards ("SFAS") No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the asset's carrying amount. In
the evaluation of the fair value and future benefits of long-lived assets, we
perform an analysis of the anticipated undiscounted future net cash flows of the
related long-lived
27
assets. If the carrying value of the related asset exceeds the undiscounted cash
flows, the carrying value is reduced to its fair value. Various factors
including future charter rates, scrap values, future drydock costs and vessel
operating costs are included in this analysis.
Deferred drydocking costs
- -------------------------
Our vessels are required to be drydocked approximately every 30 to 60 months for
major repairs and maintenance that cannot be performed while the vessels are
operating. We capitalize the costs associated with drydockings as they occur and
depreciate these costs on a straight-line basis over the period between
drydockings. Capitalized drydocking costs include actual costs incurred at the
drydock yard; cost of fuel consumed between the vessel's last discharge port
before the drydocking and the time the vessel leaves the drydock yard; cost of
hiring riding crews to perform drydocking-related activities and cost of parts
that are believed to be reasonably likely to reduce the duration or cost of the
drydocking; cost of travel, lodging and subsistence of our personnel sent to the
drydocking site to supervise; and the cost of hiring a third party to oversee a
drydocking. We believe that these criteria are consistent with U.S. GAAP
guidelines and industry practice and that our policy of capitalization reflects
the economics and market values of the vessels.
28
ITEM 3. QUALITATIVE AND QUANTITATIVE MARKET RISK
- ------- ----------------------------------------
Interest rate risk
- ------------------
We are subject to market risks relating to changes in interest rates because we
have significant amounts of floating rate debt outstanding. During 2005, we paid
interest on this debt based on LIBOR plus an average spread of 1.35% on our bank
loans. A 1% increase in LIBOR would have increased our interest expense for the
three-month period ended June 30, 2005 from $4.0 million to $4.6 million.
Currency and exchange rates risk
- --------------------------------
We generate all of our revenues in U.S. dollars, but currently incur an
immaterial amount of our operating expenses in currencies other than the U.S.
dollar.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, under the supervision and
with the participation of management, including the Company's Chief Executive
Officer and its Chief Financial Officer, the Company has evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based
upon that evaluation, the Company's Chief Executive Officer and its Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are effective in timely alerting them at a reasonable assurance level
to material information relating to the Company required to be included in its
periodic Securities and Exchange Commission filings. There have been no
significant changes in the Company's internal controls that could significantly
affect internal controls subsequent to the date of their evaluation.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company will be subject to legal proceedings and claims in
the ordinary course of its business, principally personal injury and property
casualty claims. Such claims, even if lacking merit, could result in the
expenditure of significant financial and managerial resources. The Company is
not aware of any legal proceedings or claims that it believes will have,
individually or in the aggregate, a material adverse effect on the Company, its
financial condition, results of operations or cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
In compliance with Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, we
have provided certifications of our Principal Executive Officer and Principal
Financial Officer to the Securities and Exchange Commission. The certifications
provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 accompanying
this report have not been filed pursuant to the Securities Exchange Act of 1934.
29
Item 6. Exhibits
Exhibit Document
- ------- --------
3.1 Amended and Restated Articles of Incorporation of the Company as
adopted July 5, 2005 (incorporated by reference to Exhibit 3.1 to
report on Form S-1/A dated July 6, 2005).
3.2 Amended and Restated Bylaws of the Company as adopted July 6, 2005
(incorporated by reference to Exhibit 3.2 to report on Form S-1/A
dated July 6, 2005).
3.3 Articles of Amendment of Articles of Incorporation of the Company as
adopted July 21, 2005 (incorporated by reference to Exhibit 3.2 to
report on Form S-1/A dated July 21, 2005).
4.1 Form of Shareholders' Rights Agreement (incorporated by reference
to Exhibit 4.2 to report on Form S-1/A dated July 18, 2005).
10.1 Form of Registration Rights Agreement (incorporated by reference to
Exhibit 4.2 to report on Form S-1/A dated July 18, 2005).
10.2 Form of 2005 Equity Incentive Plan (incorporated by reference to
Exhibit 4.2 to report on Form S-1/A dated July 18, 2005).
10.3 Credit Agreement, dated as of December 3, 2004, among Fleet
Acquisition LLC, Genco Shipping & Trading Limited, the Lenders party
hereto from time to time, Citibank Global Markets Limited and Nordea
Bank Finland PLC, New York Branch (incorporated by reference to
Exhibit 10.3 to report on Form S-1/A dated June 16, 2005).
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
(*) Filed with this Report.
(Remainder of page left intentionally blank)
30
SIGNATURES
In accordance with the registration requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereto duly authorized.
GENCO SHIPPING & TRADING LIMITED
DATE: August 18, 2005
/s/ ROBERT GERALD BUCHANAN President
- ---------------------------------- (Principal Executive Officer)
ROBERT GERALD BUCHANAN
/s/ JOHN C. WOBENSMITH Chief Financial Officer, Secretary
- ---------------------------------- and Treasurer
JOHN C. WOBENSMITH (Principal Financial and Accounting
Officer)
31
Exhibit Index
-------------
Exhibit Document
- ------- --------
3.1 Amended and Restated Articles of Incorporation of the Company as
adopted July 5, 2005 (incorporated by reference to Exhibit 3.1 to
report on Form S-1/A dated July 6, 2005).
3.2 Amended and Restated Bylaws of the Company as adopted July 6, 2005
(incorporated by reference to Exhibit 3.2 to report on Form S-1/A
dated July 6, 2005).
3.3 Articles of Amendment of Articles of Incorporation of the Company as
adopted July 21, 2005 (incorporated by reference to Exhibit 3.2 to
report on Form S-1/A dated July 21, 2005).
4.1 Form of Shareholders' Rights Agreement (incorporated by reference to
Exhibit 4.2 to report on Form S-1/A dated July 18, 2005).
10.1 Form of Registration Rights Agreement (incorporated by reference to
Exhibit 4.2 to report on Form S-1/A dated July 18, 2005).
10.2 Form of 2005 Equity Incentive Plan (incorporated by reference to
Exhibit 4.2 to report on Form S-1/A dated July 18, 2005).
10.3 Credit Agreement, dated as of December 3, 2004, among Fleet
Acquisition LLC, Genco Shipping & Trading Limited, the Lenders party
hereto from time to time, Citibank Global Markets Limited and Nordea
Bank Finland PLC, New York Branch (incorporated by reference to
Exhibit 10.3 to report on Form S-1/A dated June 16, 2005).
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
(*) Filed with this Report.
(Remainder of page left intentionally blank)
32