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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 September 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 X No
---- ----
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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Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the issuer's classes of common
stock, as of November 4, 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 September 30, 2005
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets -
September 30, 2005 (unaudited) and
December 31, 2004 3
b) Consolidated Statements of Operations (unaudited) -
Three and Nine Months Ended
September 30, 2005 4
c) Consolidated Statement of Shareholders' Equity (unaudited) -
Nine Months Ended
September 30, 2005 5
d) Consolidated Statement of Cash Flows (unaudited) -
Nine Months Ended
September 30, 2005 6
e) Notes to Consolidated
Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 33
Item 4. Control and Procedures 33
PART II OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits 35
2
Genco Shipping & Trading Limited
Consolidated Balance Sheets as of September 30, 2005
And December 31, 2004
(U.S. Dollars in thousands)
September 30, December 31,
2005 2004
------------ -----------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 47,273 $ 7,431
Due from charterers 376 664
Prepaid expenses and other current assets 2,680 434
-------- --------
Total current assets 50,329 8,529
-------- --------
Noncurrent assets:
Vessels, net of accumulated depreciation of
$16,145 and $421, respectively 405,806 148,070
Deferred drydock, net of accumulated depreciation
of $20 and $0, respectively 167 --
Deferred financing costs, net of accumulated 2,940 4,106
amortization of $51 and $60, respectively
Other fixed assets, net of accumulated depreciation 273 --
and amortization of $23 and $0, respectively
Fair value of derivative instrument 1,305 --
Deposits on vessels 3,445 40,923
-------- --------
Total noncurrent assets 413,936 193,099
-------- --------
Total assets $464,265 $201,628
======== ========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 3,122 $ 845
Current portion of long term debt -- 23,203
-------- --------
Total current liabilities 3,122 24,048
-------- --------
Noncurrent liabilities:
Deferred revenue 4,555 1,643
Deferred rent credit 41 --
Long term debt 109,678 102,563
-------- --------
Total noncurrent liabilities 114,274 104,206
-------- --------
Total liabilities 117,396 128,254
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock, par value $0.01; 100,000,000 shares
authorized; issued and outstanding 25,260,000 and
13,500,000 shares at September 30, 2005 and
December 31, 2004, respectively 253 135
Paid in capital 305,062 72,332
Accumulated other comprehensive income 1,305 --
Retained earnings 40,249 907
-------- --------
Total shareholders' equity 346,869 73,374
-------- --------
Total liabilities and shareholders' equity $464,265 $201,628
======== ========
See accompanying notes to consolidated financial statements.
3
Genco Shipping & Trading Limited
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2005
(U.S. Dollars in Thousands, Except Earnings per Share)
Three Months Nine Months
Ended Ended
September 30, September 30,
2005 2005
------------- ------------
(unaudited) (unaudited)
Revenues $ 31,172 $ 83,521
------------ ------------
Operating expenses:
Voyage expenses 1,134 3,044
Vessel operating expenses 3,818 9,250
General and administrative expenses 1,222 2,415
Management fees 326 1,135
Depreciation 6,116 15,767
------------ ------------
Total operating expenses 12,616 31,611
------------ ------------
Operating income 18,556 51,910
------------ ------------
Interest income (expense):
Interest income 329 595
Interest expense (6,545) (13,163)
------------ ------------
Net interest expense (6,216) (12,568)
------------ ------------
Net income $ 12,340 $ 39,342
============ ============
Earnings per share-basic $ 0.55 $ 2.38
============ ============
Weighted average common shares
outstanding-basic 22,575,652 16,558,462
============ ============
See accompanying notes to consolidated financial statements.
4
Genco Shipping & Trading Limited
Consolidated Statement of Shareholders' Equity for the Nine Months Ended
September 30, 2005
(U.S. Dollars in Thousands)
Accumulated
Other
Common Paid in Retained Comprehensive Comprehensive
Stock Capital Earnings Income Income Total
---------------------------------------------------------------------------------------
Balance - January 1, 2005 $ 135 $ 72,332 $ 907 $ -- $ 73,374
Net Income 39,342 39,342 39,342
Unrealized derivative gains from
cash flow hedge 1,305 1,305 1,305
---------
Comprehensive income 40,647
---------
Capital contribution from Fleet
Acquisition LLC 2,705 2,705
Issuance of common stock 118 230,025 230,143
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Balance - September 30, 2005
(unaudited) $ 253 $305,062 $ 40,249 $ 1,305 $346,869
====================================================== ========
See accompanying notes to consolidated financial statements.
5
Genco Shipping & Trading Limited
Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 2005
(U.S. Dollars in Thousands)
Nine Months
Ended
September 30,
2005
------------
(unaudited)
Cash flows from operating activities:
Net income $ 39,342
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 15,767
Amortization of deferred financing costs 4,536
Change in assets and liabilities:
Decrease in due from charterers 288
Increase in prepaid expenses and other current assets (2,246)
Increase in accounts payable and accrued expenses 2,277
Increase in deferred revenue 2,912
Increase in deferred rent credit 41
Deferred drydock costs incurred (187)
---------
Net cash provided by operating activities 62,730
---------
Cash flows from investing activities:
Purchase of vessels, net of deposits (235,982)
Purchase of other fixed assets (296)
---------
Net cash used in investing activities (236,278)
---------
Cash flows from financing activities:
Proceeds from credit facilities 340,912
Payments to retire Original Credit Facility (357,000)
Payment of deferred financing costs (3,370)
Capital contributions from Fleet Acquisition LLC 2,705
Net proceeds from issuance of common stock 230,143
---------
Net cash provided by financing activities 213,390
---------
Net increase in cash 39,842
Cash at beginning of period 7,431
---------
Cash at end of period $ 47,273
=========
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the period for interest $ 8,147
=========
See accompanying notes to consolidated financial statements.
6
Genco Shipping & Trading Limited
(U.S. Dollars in Thousands)
Notes to Consolidated Financial Statements for the Three and Nine Months Ended
September 30, 2005 (unaudited)
- ------------------------------------------------------------------------------
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. Additionally, on August 16, the
Company established a fully owned subsidiary for the purpose of the Genco Muse
acquisition described 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 on November 19, 2004. As of September 30, 2005, the
Company had taken delivery of all of the vessels as shown below:
Wholly Owned Vessels dwt Date Year
Subsidiaries Acquired 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 initial capital contributions of $75,172 in conjunction with
GS&T's issuance of common stock to Fleet Acquisition LLC (the "Former Parent
Company"), from borrowings under the Company's previous credit facility
("Original Credit Facility") and from the Company's cash flows from operations.
On July 22, 2005, the Company completed its initial public offering of
11,760,000 shares at $21 per share resulting in gross proceeds of $246,960.
After underwriting commissions and other offering expenses, net proceeds to the
Company were $230,143.
Prior to its initial public offering, the Company was 100% owned by 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
Principal Opportunities III Fund, L.P. and OCM Principal Opportunities Fund
IIIA, L.P. of which Oaktree Management LLC is the General Partner, 26.63% by
Peter Georgiopoulos, and 6.84% by others. Following the initial public offering,
Fleet Acquisition LLC has maintained a 53.44% ownership in the Company.
7
The information set forth in these consolidated financial statements for the
three and nine months ended September 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 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 GS&T's common
stock, GS&T'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.
Acquisitions
- ------------
When the Company enters into an acquisition transaction, it determines whether
the acquisition transaction was the purchase of an asset or a business based on
the facts and circumstances of the transaction.
When a vessel is acquired with an existing time charter, the Company allocates
the purchase price of the vessel and the time charter, based on, among other
things, vessel market valuations and the present value (using an interest rate
which reflects the risks associated with the acquired charters) of the
difference between (i) the contractual amounts to be paid pursuant to the
charter terms and (ii) management's estimate of the fair market charter rate,
measured over a period equal to the remaining term of the charter. The
capitalized above-market (assets) and below-market (liabilities) charters are
amortized as a reduction or increase, respectively, to voyage revenues over the
remaining term of the charter.
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
8
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.
As of September 30, 2005 and December 31, 2004, the Company had a reserve of $83
and $0, respectively, associated with estimated customer claims against the
Company for time charter performance issues.
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.
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 September 30, 2005 and December
31, 2004, the Company estimated the residual value of vessels to be $175/lwt.
Other fixed assets, net
- -----------------------
Other fixed assets, net are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are based on a straight line basis
over the estimated useful life of the specific asset placed in service. The
following table is used in determining the estimated useful lives:
Description Useful lives
--------------------------------- ------------
Leasehold improvements 15 years
Furniture, fixtures & other equipment 10 years
Vessel equipment 2-5 years
Computer equipment 4 years
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; 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.
9
Inventory
- ---------
Inventory consists of lubricants and bunkers (fuel) 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 nine months ended September 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. In July 2005, the Company
entered into a new credit facility ("New Credit Facility"), which resulted in a
write-off of $4,103 of unamortized deferred financing costs associated with the
Original Credit Facility. The Company has incurred additional deferred financing
costs of $2,991 on the New Credit Facility. Accumulated amortization of deferred
financing costs as of September 30, 2005 and December 31, 2004 was $51 and $60,
respectively.
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 Section 883 of the U.S. Internal Revenue Code of 1986 as amended
(the "Code"), 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 a
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
10
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.
Comprehensive income
- --------------------
The Company follows Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in financial statements.
Comprehensive income is comprised of net income and amounts related to the
adoption of SFAS No. 133.
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 amounts due from charterers. Actual results
could differ from those estimates.
Concentration of credit risk
- ----------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk are amounts due from charterers. With respect to amounts due from
charterers, 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
fifteen customers, management does not believe significant risk exists in
connection with the Company's concentrations of credit at September 30, 2005 and
December 31, 2004.
Fair value of financial instruments
- -----------------------------------
The estimated fair values of the Company's financial instruments such as amounts
due from charterers, accounts payable and long term debt approximate their
individual carrying amounts as of September 30, 2005 and December 31, 2004 due
to their short-term maturity or the variable-rate nature of the respective
borrowings.
The fair value of the interest rate swap (used for purposes other than trading)
is the estimated amount the Company would receive to terminate the swap
agreement at the reporting date, taking into account current interest rates and
the creditworthiness of the swap counterparty.
11
Interest rate risk management
- -----------------------------
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 its earnings and
cash flow in relation to its borrowings. The Company entered into an interest
rate swap with an effective date of September 14, 2005 and uses this interest
swap to manage net exposure to interest rate changes related to a portion of its
borrowings and to manage its overall borrowing costs.
The Company held one interest rate risk management instrument at September 30,
2005 and no instruments at December 31, 2004. As of September 30, 2005, the
Company is party to an interest rate swap agreement to hedge cash flow that
expires on July 29, 2015 and effectively converts floating rate obligations to a
fixed rate instrument. The asset recognized in connection with the Company's
cash flow hedge at September 30, 2005 and December 31, 2004 is $1,305 and $0,
respectively, and is presented as the fair value of derivative instrument for
this cash flow hedge on the balance sheet. As of September 30, 2005 and December
31, 2004, the Company has other comprehensive income (OCI) of $1,305 and $0,
respectively, related to this instrument.
Derivative financial instruments
- --------------------------------
To manage its exposure to fluctuating interest rates, the Company uses an
interest rate swap agreement. Interest rate differentials to be paid or received
under these agreements are accrued and recognized as an adjustment of interest
expense related to the designated debt. The fair value of the interest rate swap
agreement and changes in fair value are recognized in the financial statements
as non-current asset or liability.
Amounts receivable or payable arising at the settlement of interest rate swaps
are deferred and amortized as an adjustment to interest expense over the period
of interest rate exposure provided the designated liability continues to exist.
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 nine months ended September 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
12
December 31, 2004, deposits held for the subsequent purchase of the ten vessels
were $40,923. As of September 30, 2005, the Company had deposits of $3,445
consisting of 10% of the purchase price of the Genco Muse, which the Company
took delivery of on October 14, 2005.
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 nine months ended September 30, 2005, the Company incurred rent expense of
$165 and $275, respectively.
In the quarter ended September 2005, the Company incurred travel related
expenditures totaling $113 reimbursable to General Maritime Corporation where
Peter C. Georgiopoulos also serves as Chairman of the Board ,Chief Executive
Officer and President that related to travel in conjunction with the initial
public offering. These travel expenditures will be paid from the gross proceeds
received from the initial public offering and as such are included in the
determination of net proceeds. In addition, prior to the initial public
offering, the Company also purchased $25 of computers and incurred $17 of
expense for consultative services provided by General Maritime Corporation. At
September 30, 2005 and December 31, 2004, the Company owes General Maritime
Corporation $113 and $0, respectively.
During the three and nine months ended September 30, 2005, the Company incurred
legal services (primarily in connection with vessel acquisitions) aggregating
$54 and $174 from Constantine Georgiopoulos, father of Peter C. Georgiopoulos,
Chairman of the Board. At September 30, 2005 and December 31, 2004, $25 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
Fleet Acquisition LLC. The Company incurred $681 and $1,723 of insurance expense
to them for the three and nine months ended September 30, 2005, respectively.
5 - LONG-TERM DEBT
- ------------------
Long-term debt consists of the following:
September 30, December 31,
2005 2004
--------------------------
(unaudited)
Revolver, Original Credit Facility.............. - $125,766
Revolver, New Credit Facility................... $109,678
Less: Current portion of revolver............... - 23,203
-------------------------
Long-term debt.................................. $109,678 $102,563
=========================
New credit facility
- -------------------
The Company entered into the 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 New Credit Facility has been used to
refinance our indebtedness under the Company's Original Credit Facility, and may
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 Credit
Facility and an additional borrowing of
13
$3,445 was obtained in August which was used as a deposit for the newly acquired
Genco Muse. After these borrowings $340,322 remains available to fund future
vessel acquisitions. The Company may borrow up to $20,000 of the $340,322 for
working capital purposes.
The New Credit Facility has a term of ten years. The facility permits borrowings
up to 65% of the fair 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. Certain of these conditions require the Company, 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. The New Credit 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 $450,000 commitment, semi-annually over a period of four years and is
reduced to $0 on the tenth anniversary.
The obligations under the New 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 this facility. The New Credit
Facility is also secured by a first priority security interest in our earnings
and insurance proceeds related to the collateral vessels. The Company may grant
additional security interest in vessels acquired that are not mortgaged.
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
lenders 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 is permitted to pay or
declare dividends in accordance with its dividend policy 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.
The New Credit Facility permits the issuance of letters of credit up to a
maximum amount of $50,000. The conditions under which the letter of credit
amounts can be issued are substantially the same as the conditions for borrowing
funds under the facility. Each letter of credit must terminate within twelve
months, but can be extended for successive periods also not exceeding twelve
months. The Company pays a fee of 1/8 of 1% per annum on the amount of letters
of credit outstanding. At September 30, 2005 and December 31, 2004, there were
no letters of credit issued under the New Credit Facility.
The following table sets forth our contractual obligations and the maturity
dates as of:
Period Ending December 31, Total
2005 (October 1, 2005 to December 31, 2005)................ $-
2006....................................................... -
2007....................................................... -
2008....................................................... -
2009....................................................... -
Thereafter................................................. 109,678
--------
$109,678
========
14
Letter of credit
- ----------------
In conjunction with the Company entering into a new long-term office space lease
(See Note 9 - Lease Payments), the Company was required to provide a letter of
credit to the landlord in lieu of a security deposit. As of September 21, 2005,
the Company obtained an annually renewable unsecured letter of credit with DnB
NOR Bank in the amount of $650 at a fee of 1% per annum. The letter of credit is
reduced to $520 on August 1, 2006 and is cancelable on each renewal date
provided the landlord is given 150 days minimum notice.
Original credit facility
- ------------------------
The Original Credit Facility, entered into on December 3, 2004, has been
refinanced by the New Credit Facility. The Original Credit Facility 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 Original
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 Original Credit Facility required
compliance with certain restrictive covenants. Under the Original Credit
Facility, the Company was required to maintain certain financial covenants
requiring among other things to ensure that, the aggregate market value of the
vessels in the fleet that secured the obligation under the Original Credit
Facility exceed the aggregate principal amount of debt outstanding under the
this facility and maintained certain ratios such as: interest coverage ratios
and maximum leverage ratios. In addition, the Company was required to 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 Fleet Acquisition LLC. Vessel charterers required approval by
the lenders under the Original Credit Facility.
The Company failed to comply with such requirements 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 requirement for
chartering except for the Genco Leader. Additionally, the Company took delivery
of the Genco Trader in June 2005 and the Company 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 the Genco
Trader through December 31, 2005.
The Company was obligated to receive a minimum amount of funding from Fleet
Acquisition LLC on the earlier of December 15, 2004 or the delivery of the
fourth vessel. On December 15, 2004, the Company was underfunded from Fleet
Acquisition LLC by $2,705. In May 2005, the Company received a waiver for the
underfunding through May 31, 2005. Fleet Acquisition LLC made the required
capital contribution in May 2005.
The Company's entry into the New Credit Facility in July 2005, resulted in a
write-off to interest expense of $4,103 of unamortized deferred financing costs
associated with the Original Credit Facility.
Interest rates
- --------------
Interest rates, including the cost associated with the unused commitment fees
incurred, during the three and nine months ended September 30, 2005 averaged
5.26% and 4.60%, respectively. The interest rates on the debt, excluding the
unused commitment fess ranged from 4.45% to 4.76% during the three months ended
September, 30, 2005 and ranged from 3.69% to 4.76% for the nine months ended
September 30, 2005.
Interest rate swap agreements
- -----------------------------
Effective as of September 14, 2005, the Company entered into an interest rate
swap agreement with DnB NOR Bank to manage interest costs and the risk
associated with changing interest rates. The notional principal amount of the
swap is $106,233 and the swap's expiration date coincides with the expiration of
the New Credit Facility on July 29, 2015. The swap agreement hedges the interest
rate for the notional amount to a fixed rate of 4.485% plus, pursuant to the
credit facility agreement, 0.95% per annum until the fifth anniversary of the
New Credit Facility and 1.00%
15
per annum thereafter. The differential to be paid or received for these swap
agreements is recognized as an adjustment to interest expense as incurred.
The Company has determined that this interest rate swap agreement, which
initially hedged the corresponding debt, continues to perfectly hedge the debt.
Interest expense pertaining to the interest rate swap for the three and nine
months ended September 30, 2005 was $36 and $36, respectively.
The fair value of the interest rate swap agreement was $1,305 as of September
30, 2005. No interest rate swaps were in effect at December 31, 2004.
6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------
The estimated fair values of the Company's financial instruments are as follows:
September 30, 2005 December 31, 2004
--------------------------------------------------------
Carrying Fair Value Carrying Value Fair Value
Value
-----------------------------------------------------------------------------------------------
Cash $47,273 $47,273 $7,431 $7,431
Floating rate debt 109,678 109,678 125,766 125,766
Cash flow hedge - net asset position 1,305 1,305 - -
===============================================================================================
The fair value of the revolving credit facilities are estimated based on current
rates offered to the Company for similar debt of the same remaining maturities.
The carrying value approximates the fair market value for the variable rate
loans. The fair value of the interest rate swap (used for purposes other than
trading) is the estimated amount the Company would receive to terminate the swap
agreement at the reporting date, taking into account current interest rates and
the creditworthiness of the swap counterparty.
7 - OTHER FIXED ASSETS
- ----------------------
Other fixed assets consist of the following:
September December
30, 2005 31, 2004
- --------------------------------------------------------------------------
Other fixed assets:
Vessel equipment $69 $-
Leasehold improvements in progress 59 -
Furniture and fixtures 96 -
Computer equipment 72 -
- -------------------------------------------------------------------------
Total Cost 296 -
Less: accumulated depreciation and amortization 23 -
- -------------------------------------------------------------------------
Total $273 $-
- -------------------------------------------------------------------------
8 - REVENUE FROM TIME CHARTERS
- ------------------------------
Total revenue earned on time charters for the three and nine months ended
September 30, 2005 was $31,172 and $83,521, respectively. Future minimum time
charter revenue, based on vessels committed to noncancelable time charter
contracts as of September 30, 2005 plus the anticipated revenue from the newly
acquired Genco Muse will be $30,738 during the remaining three months of 2005,
$108,519 during 2006 and $10,581 during 2007, assuming no off-hire time is
incurred.
9 - LEASE PAYMENTS
- ------------------
In September 2005, the Company entered into a 15-year lease for office space in
New York, New York. The monthly rental is as follows: Free rent from September
1, 2005 to July 31, 2006, $40 per month from August 1,
16
2006 to August 31, 2010. $43 per month from September 1, 2010 to August 31,
2015, and $46 per month from September 1, 2015 to August 31, 2020. The monthly
straight-line rental expense from September 1, 2005 to August 31, 2020 is $41.
The Company has the option to extend the lease for a period of 5 years from
September 1, 2020 to August 31, 2025. The rent for the renewal period is
determined by taking 95% of the prevailing market rate for the six months prior
to the commencement date of the extension term.
Future minimum rental payments on the above lease for the next five years are as
follows: 2005 - $0, 2006 -$202, $486 per year for 2007 through 2009 and $5,664
thereafter.
10 - SAVINGS PLAN
- -----------------
In August 2005, the Company established a 401(K) Plan (the "Plan") which is
available to full-time employees who meet the Plan's eligibility requirements.
This Plan is a defined contribution plan, which permits employees to make
contributions up to 96 percent of their annual salaries with the Company
matching up to the first six percent. The matching contribution vests
immediately. For the three and nine months ended September 30, 2005 the
Company's matching contribution to the Plan was $10 and $10, respectively.
11 - 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.
12 - SUBSEQUENT EVENTS
- ----------------------
On October 14, 2005, the Company took delivery of the Genco Muse, a 48,913 dwt
Handymax drybulk carrier. The vessel is a 2001 Japanese-built vessel. The total
purchase price of the vessel was $34,450. The purchase price included the
assumption of an existing time charter with Qatar Navigation QSC at a rate of
$26.5 per day. This asset purchase is consistent with the Company's strategy of
selectively expanding the number of high-quality vessels in the fleet.
On October 31, 2005, the Company made grants of restricted common stock under
its equity incentive plan in the amount of 118,612 shares to the executive
officers, employees and directors of the Company. The executive and employee
grants vest ratably on each of the four anniversaries of the date of the
Company's initial public offering (July 22, 2005). Grants to directors vest in
full on the earliest of the first anniversary of the grant date, the date of the
next annual shareholders meeting of the Company, and the first anniversary of
the Company's initial public offering. Upon grant of the restricted stock, an
amount of unearned compensation equivalent to the market value at the date of
the grant, or $1,949, was recorded as a component of shareholders' equity.
Amortization of this charge will be included in general and administrative
expense and will be $144, $635, $457, $458, and $255 in 2005, 2006, 2007, 2008,
and 2009, respectively, in accordance with the provisions of Accounting
Principles Board Opinion ("APB") NO. 25, "Accounting for Stock Issued to
Employees".
On October 31, 2005, the Board of Directors declared a dividend of $0.60 per
share on or about November 28, 2005 to shareholders of record as of November 14,
2005. The aggregate amount of the dividend is expected to be $15,227, which the
Company anticipates will be funded from cash on hand at the time payment is to
be made.
17
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) and subsequent reports on Form 10-Q
and Form 8-K. 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 nine months ended
September 30, 2005. Therefore, the following management discussion compares the
results for the three months ended June 30, 2005 with the results for the three
months ended September 30, 2005 wherever applicable.
General
- -------
We are a 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.
As of September 30, 2005, our fleet consisted 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 8.5
years as of September 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"),
ED& 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.
18
On August 23, 2005, we entered into a Memorandum of Agreement for the purchase
of the Genco Muse, a 48,913 DWT Handymax bulk carrier built in 2001 in Japan. We
took delivery of the vessel on October 14, 2005. 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
Genco Muse 10/14/05 Handymax 2001
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 the New Credit Facility, which 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.
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 nine months ended September 30,
2005. Because all of our vessels have operated on time charters, our TCE rates
equal our time charter rates less voyage expenses consisting primarily of
brokerage commissions paid by us to unaffiliated parties.
19
For the For the
three months ended nine months ended
September 30, 2005 September 30, 2005
------------------ ------------------
Fleet Data:
Ownership days (1)
Panamax 460.0 1,078.6
Handymax 552.0 1,415.7
Handysize 460.0 1,350.9
Total 1,472.0 3,845.2
Available days (2)
Panamax 460.0 1,073.2
Handymax 552.0 1,412.4
Handysize 460.0 1,350.0
Total 1,472.0 3,835.7
Operating days (3)
Panamax 457.7 1,063.8
Handymax 551.3 1,401.9
Handysize 451.2 1,338.6
Total 1,460.2 3,804.3
Fleet utilization (4)
Panamax 99.5% 99.1%
Handymax 99.9% 99.3%
Handysize 98.1% 99.2%
Fleet average 99.2% 99.2%
For the For the
three months ended nine months ended
September 30, 2005 September 30, 2005
------------------ ------------------
(U.S. dollars)
Average Daily Results:
Time Charter Equivalent (5)
Panamax $22,937 $25,684
Handymax 21,301 21,261
Handysize 16,803 16,951
Fleet average 20,407 20,981
Daily vessel operating
expenses (6)
Panamax $2,779 $2,643
Handymax 2,603 2,409
Handysize 2,398 2,213
Fleet average 2,594 2,406
20
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.
(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.
For the three For the nine
months ended months ended
Income statement data September 30, 2005 September 30, 2005
--------------------------------------------------------------------
Voyage revenues $ 31, 172 $ 83,521
Voyage expenses $ 1,134 $ 3,044
--------------------------------------------------------------------
Net voyage revenue $ 30,038 $ 80,477
--------------------------------------------------------------------
(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.
21
Operating data
- --------------
The following discusses our operating income and net income for the three and
nine months ended September 30, 2005.
For the For the
three months ended nine months ended
September 30, 2005 September 30, 2005
------------------ ------------------
(U.S. dollars in thousands, except for
per share amounts)
Income Statement Data:
Revenues $31,172 $83,521
------- -------
Operating Expenses:
Voyage expenses 1,134 3,044
Vessel operating expenses 3,818 9,250
General and administrative expenses 1,222 2,415
Management fees 326 1,135
Depreciation 6,116 15,767
------- -------
Total operating expenses 12,616 31,611
------- -------
Operating income 18,556 51,910
Net interest expense (6,216) (12,568)
------- -------
Net income $12,340 $39,342
======= =======
Earnings per share - Basic $0.55 $2.38
===== =====
Weighted average common shares
outstanding - Basic 22,575,652 16,558,462
========== ==========
September 30, 2005 December 31, 2004
------------------ -----------------
(U.S. dollars in thousands)
Balance Sheet Data:
Cash $47,273 $7,431
Total assets 464,265 201,628
Total debt (current and long-term) 109,678 125,766
Total shareholders' equity 346,869 73,374
For the
nine months ended
September 30, 2005
------------------
(U.S. dollars in
thousands)
Cash Flow Data:
Net cash flow provided by operating $62,730
activities
Net cash flow used in investing activities (236,278)
Net cash provided by financing activities 213,390
EBITDA (1) 67,677
22
(1) 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 nine months ended
September 30, 2005 September 30, 2005
------------------ ------------------
(U.S. dollars in thousands)
Net income $12,340 $39,342
Net interest expense 6,216 12,568
Income tax expense -- --
Depreciation 6,116 15,767
------- -------
EBITDA $24,672 $67,677
======= =======
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,
23
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 September 30 and June 30, 2005, revenues were
$31.2 million and $31.0 million, respectively, and consisted of charter payments
for our vessels. All of the 16 vessels acquired under the original fleet
purchase agreement operated during the quarter ended September 30, 2005.
The average TCE rate of our fleet for the three-months ended September 30 and
June 30, 2005 were $20,407 a day and $21,648 a day, respectively. The decrease
was due primarily to lower charter rates achieved on the Genco Leader and the
Genco Trader, the two vessels in our fleet that trade in the spot market.
Overall, the dry bulk chartering markets averaged lower rates in the third
quarter of 2005 than in the second quarter of 2005.
For the three-months ended September 30 and June 30, 2005, we had ownership days
of 1,472.0 days and 1,385.9 days, respectively. The increase in the number of
ownership days was a result of the first full quarter of operations for all 16
vessels purchased under the original fleet purchase agreement. 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
September 30, 2005 including the subsequent acquisition of the Genco Muse
delivered on October 14, 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 15,750 Noble Chartering, Inc. October 2005
Genco Vigour 29,000 BHP December 2006
Genco Trader 20,000 Cargill October 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(3) NYK Europe March 2007
Genco Glory 18,250 EDF Man Shipping December 2006
Genco Muse 26,500(4) Qatar Navigation QSC September 2007
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) The time charter rate is $26,000 until March 2006 and $18,000 thereafter.
24
(4) Since this vessel was acquired with an existing time charter at an above
market rate, the Company allocates the purchase price between the vessel and a
deferred asset for the value assigned to the above market charterhire. This
deferred asset is amortized as a reduction to voyage revenues over the remaining
term of the charter, resulting in a daily rate of approximately $22,000
recognized as revenue. For cash flow purposes, the Company will continue to
receive $26,500 per day.
(5) The time charter rate was $21,560 through March 2005 and $17,250 thereafter.
For the nine-months ended September 30, 2005, we had ownership days of 3,845.2
and revenues of $83.5 million.
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 September 30 and June 30, 2005, voyage expenses were
$1.1and $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 nine-months ended September 30, 2005, voyage expenses were $3.0 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 September 30 and June 30, 2005, vessel operating expenses
were $3.8 million and $3.4 million, respectively. This increase is a result of
the greater number of vessels in operation during the quarter ended September
30, 2005. The average daily vessel operating expenses for our fleet were $2,594
and $2,465 per day for the three-months ended September 30 and June 30, 2005,
respectively. The increase is due to a longer operating period for our 16
vessels. 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 September 30 and June 30, 2005 do not reflect of our future
vessel operating expenses due to the short period of operations and will likely
increase over a 12-month operating period.
For the nine months ended September 30, 2005, the average daily vessel operating
expenses for our fleet was $2,406 per day and total vessel operating expenses
was $9.3 million.
Based on management's estimates and budgets provided by Wallem, we expect our
vessels to have daily vessel operating expenses during 2005 of:
25
Average Daily
Vessel Type Budgeted Amount
----------- ---------------
Panamax............................... $3,344
Handymax.............................. 3,035
Handysize............................. 2,898
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. Our general and
administrative expenses also include our payroll expenses, including those
relating to our executive officers, and rent. For the three-months ended
September 30 and June 30, 2005, general and administrative expenses were $1.2
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 nine-months ended September 30, 2005, general and administrative
expenses were $2.4 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 September 30 and June 30, 2005,
management fees were $0.3 and $0.5 million, respectively.
For the nine-months ended September 30, 2005, management fees were $1.1 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 September 30 and June 30, 2005,
depreciation charges were $6.1 million and $5.7 million, respectively. This
increase is due to a full period of operations for our fleet in the third
quarter.
For the nine-months ended September 30, 2005, depreciation charges were $15.8
million.
Net interest expense
- --------------------
For the three months ended September 30, and June 30, 2005, net interest expense
was $6.2 and $3.8 million, respectively. Net interest expense consisted of
interest payments made under our Original Credit Facility, our New Credit
Facility, interest income, as well as a one-time charge of $4.1 million
associated with the write-down of unamortized deferred bank fees related to our
Original Credit Facility.
For the nine-months ended September 30, 2005, net interest expense was $12.6
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 New Credit
26
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
New Credit Facility will be sufficient to meet our liquidity needs for the next
year.
In August 2003, we agreed to acquire the Western Muse, a 48,913 dwt Handymax
drybulk carrier, from Western Bulk PTE LTD for $34.5 million. We took delivery
of the vessel, which we renamed the Genco Muse, in October 2005, and financed
its purchase under our revolving credit facility.
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. On October
31, 2005, the Board of Directors declared a dividend of $0.60 per share on or
about November 28, 2005 to shareholders of record as of November 14, 2005. The
aggregate amount of the dividend is expected to be $15.2 million, which the
Company anticipates will be funded from cash on hand at the time payment is to
be made.. 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 that meet certain holding period requirements
(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 nine-month period ended
September 30, 2005, was $62.7 million. Net cash from operating activities was
primarily a result of recorded net income of $39.3 million and depreciation
charges of $15.8 million. Net cash used in investing activities was $236.3
million and related mostly to the acquisition of ten additional vessels during
2005 for $236.0 million. Net cash provided by financing activities was $213.4
million and consisted primarily of $231.2 million in proceeds from our Original
Credit Facility used to finance the acquisition of ten additional vessels, net
proceeds from our initial public equity offering of $230.1 million and $109.7
million in borrowings under our New Credit Facility. In addition, we retired the
$357.0 million outstanding under our Original Credit Facility.
New credit facility
- -------------------
Subsequent to our 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 New
Credit Facility has been used to refinance our indebtedness under our Original
Credit Facility, and may 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 Credit Facility. After our initial
27
borrowings, under the New Credit Facility and an additional borrowing of $3.4
million in August 2005 to fund the deposit on the newly acquired Genco Muse,
$340.3 million remains available to fund future vessel acquisitions, and we may
borrow up to $20.0 million of the $340.3 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 $450 million commitment, semi-annually over a period of four years and is
reduced to $0 on the tenth anniversary.
Our obligations under the New 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 our
earnings and insurance proceeds related to the collateral vessels. The Company
may grant additional security interest in vessels acquired that are not
mortgaged.
Our ability to borrow amounts under the New Credit Facility is subject to
customary documentation relating to the facility, including security documents,
satisfaction 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 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 lenders
of $2.7 million which equates to .6% of the total commitment of $450 million. In
the quarter ended September 30, 2005, we incurred an expense of $4.1 million to
write-off deferred financing fees 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.
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.
Our original credit facility
- ----------------------------
On December 3, 2004 the Company entered into the Original 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 Original 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 Original Credit
Facility required compliance with certain restrictive covenants. Under the
Original Credit Facility, the Company was required to meet certain financial
covenants requiring among other things to ensure that the aggregate market value
28
of the vessels in the fleet that secure the obligation under the Original Credit
Facility exceeded the aggregate principal amount of debt outstanding under the
Original Credit Facility and maintained certain ratios such as: interest
coverage ratios and maximum leverage ratios. In addition, the Company was
required to 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 Fleet Acquisition LLC. Charter
counterparties were to be approved by the lenders under the Original Credit
Facility.
The Company failed to comply with such requirements 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 requirement for chartering
except for the Genco Leader and the Genco Trader. Additionally, the Company took
delivery of the 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 and Genco Trader through December
31, 2005.
The Company was obligated to receive a minimum amount of funding from Fleet
Acquisition LLC on the earlier of December 15, 2004 or the delivery of the
fourth vessel. On December 15, 2004, the Company was under funded from Fleet
Acquisition LLC by $2.7 million. In May 2005, the Company received a waiver for
the under funding through May 31, 2005. Fleet Acquisition LLC made the required
capital contribution in May 2005.
Interest rate swap agreements
- -----------------------------
Effective as of September 14, 2005, the Company entered into an interest rate
swap agreement with DnB NOR Bank to manage interest costs and the risk
associated with changing interest rates. The notional principal amount of the
swap is $106,233 and the swap's expiration date coincides with the expiration of
the New Credit Facility on July 29, 2015. The swap agreement hedges the interest
rate for the notional amount to a fixed rate of 4.485% plus pursuant to the
credit facility agreement 0.95% per annum until the fifth anniversary of the New
Credit Facility and 1.00% per annum thereafter. The differential to be paid or
received for these swap agreements is recognized as an adjustment to interest
expense as incurred.
It is the Company's policy to utilize hedge accounting for derivative
instruments. The Company qualified for hedge accounting treatment and the
Company has determined that this interest rate swap agreement, which initially
hedged the corresponding debt, continues to perfectly hedge the debt. Interest
expense pertaining to the interest rate swap for the three and nine months ended
September 30, 2005 was $36 and $36, respectively.
The fair value of the interest rate swap agreement was $1,305 as of September
30, 2005. There was no interest rate swap entered into at December 31, 2004.
Interest rates
- --------------
Interest rates, including the cost associated with the unused commitment fees
incurred during the three and nine months ended September 30, 2005 averaged
5.26% and 4.60%, respectively. The interest on the debt, excluding the unused
commitment fees ranged from 4.45% to 4.76% during the three months ended
September 30, 2005 and ranged from 3.69% to 4.76% for the nine months ended
September 30, 2005.
29
Contractual obligations
- -----------------------
The following table sets forth our contractual obligations and their maturity
dates that is reflective of the outstanding debt, including the effective fixed
rate on the interest rate swap agreement and after giving effect to the
subsequent borrowings made for the acquisition of the Genco Muse. The interest
and fees are also reflective of the New Credit Facility and the interest rate
swap agreement. 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 $140,683 $ -- $ -- $ -- $140,683
Interest and borrowing fees $ 83,256 $ 2,221 $ 17,378 $ 17,378 $ 46,279
Office lease $ 7,323 $ -- $ 688 $ 971 $ 5,664
(1) Represents the three month period ending December 31, 2005.
- ---------------------------------------------------------------
Capital expenditures
- --------------------
We make capital expenditures from time to time in connection with our vessel
acquisitions. Our vessel acquisitions consist of our fleet of five Panamax
drybulk carriers, seven 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 could be properly employed. We estimate our drydocking
costs for our fleet through 2007 to be:
Estimated Drydocking
Cost
----
(U.S. dollars in millions)
Year
- ----
2005 (remaining three months) $0.3
2006 2.0
2007 2.1
The costs reflected are dependent upon the location where the drydockings are
performed and actual results may vary. We believe that the funding of these
costs will be met with cash we generate from operations.
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, general and
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
30
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. As of September 30, 2005
and December 31, 2004, the Company had a reserve of $83 and $0, respectively,
associated with estimated customer claims against the Company for time charter
performance issues.
Acquisitions
- ------------
When the Company enters into an acquisition transaction, it determines whether
the acquisition transaction was the purchase of an asset or a business based on
the facts and circumstances of the transaction.
When a vessel is acquired with an existing time charter, the Company allocates
the purchase price of the vessel and the time charter based on, among other
things, vessel market valuations and the present value (using an interest rate
which reflects the risks associated with the acquired charters) of the
difference between (i) the contractual amounts to be paid pursuant to the
charter terms and (ii) management's estimate of the fair market charter rate,
measured over a period equal to the remaining term of the charter. The
capitalized above-market (assets) and below-market (liabilities) charters are
amortized as a reduction or increase, respectively, to voyage revenues over the
remaining term of the charter.
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
31
assets, we perform 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 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.
Fair value of financial instruments
- -----------------------------------
The estimated fair values of the Company's financial instruments such as amounts
due from charterers, accounts payable and long term debt approximate their
individual carrying amounts as of September 30, 2005 and December 31, 2004 due
to their short-term maturity or the variable-rate nature of the respective
borrowings.
The fair value of the interest rate swap (used for purposes other than trading)
is the estimated amount the Company would receive to terminate the swap
agreement at the reporting date, taking into account current interest rates and
the creditworthiness of the swap counterparty.
Interest rate risk management
- -----------------------------
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 its earnings and
cash flow in relation to its borrowings. The Company entered into an interest
rate swap with an effective date of September 14, 2005 and uses this interest
swap to manage net exposure to interest rate changes related to a portion of its
borrowings and to manage its overall borrowing costs.
The Company held one interest rate risk management instrument at September 30,
2005 and no instruments at December 31, 2004. As of September 30, 2005, the
Company is party to an interest rate swap agreement that expires on July 29,
2015 and effectively converts floating rate obligations to a fixed rate
instrument. The asset in connection with the Company's cash flow hedge at
September 30, 2005 and December 31, 2004 is $1.3 million and $0, respectively,
and is presented as the fair value of derivative instrument for this cash flow
hedge on the balance sheet. As of September 30, 2005 and December 31, 2004, the
Company has other comprehensive income (OCI) of $1.3 million and $0,
respectively, related to this instrument.
Derivative financial instruments
- --------------------------------
To manage its exposure to fluctuating interest rates, the Company uses an
interest rate swap agreement. Interest rate differentials to be paid or received
under these agreements are accrued and recognized as an adjustment of interest
expense related to the designated debt. The fair value of the interest rate swap
agreement and changes in fair value are recognized in the financial statements
as non-current asset or liability.
Amounts receivable or payable arising at the settlement of interest rate swaps
are deferred and amortized as an adjustment to interest expense over the period
of interest rate exposure provided the designated liability continues to exist.
32
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 the
Original Credit Facility, LIBOR plus 0.95% for the debt prior to the swap or in
excess of the swap notional amount on the New Credit Facility, and after the
effective date of the interest rate swap, an effective rate of 4.485% plus a
margin of .095% on the swap notional amount of $106.2 million. A 1% increase in
LIBOR would have increased our interest expense for the three-month period ended
September 30, 2005 from $6.5 million to $6.9 million.
Effective as of September 14, 2005, the Company entered into an interest rate
swap agreement with DnB NOR Bank to manage interest costs and the risk
associated with changing interest rates. The notional principal amount of the
swap is $106.2 million and the swap's expiration date coincides with the
expiration of the New Credit Facility on July 29, 2015. The swap agreement
hedges the interest rate for the notional amount to a fixed rate of 4.485% plus
pursuant to the credit facility agreement 0.95% per annum until the fifth
anniversary of the New Credit Facility and 1.00% per annum thereafter. The
differential to be paid or received for these swap agreements is recognized as
an adjustment to interest expense as incurred.
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.
33
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.
34
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 2005 Equity Incentive Plan, as amended and restated effective
October 31, 2005 (incorporated by reference to Exhibit 10.1 to
report on Form 8-K dated November 3, 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 of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
32.1 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
(*) Filed with this Report.
(Remainder of page left intentionally blank)
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
GENCO SHIPPING & TRADING LIMITED
By: /s/ ROBERT GERALD BUCHANAN
DATE: November 7, 2005 ----------------------------------
Robert Gerald Buchanan
President
(Principal Executive Officer)
DATE: November 7, 2005 By: /s/ JOHN C. WOBENSMITH
----------------------------------
John C. Wobensmith
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial and Accounting
Officer)
36
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 2005 Equity Incentive Plan, as amended and restated effective October
31, 2005 (incorporated by reference to Exhibit 10.1 to report on Form
8-K dated November 3, 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)
37