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1 - GENERAL INFORMATION
The accompanying condensed consolidated financial statements include the accounts of Genco Shipping & Trading Limited (GS&T), its wholly owned subsidiaries, and its subsidiary, Baltic Trading Limited (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 is incorporated under the laws of the Marshall Islands and as of June 30, 2011 is the sole owner of all of the outstanding shares of the following subsidiaries: Genco Ship Management LLC; Genco Investments LLC; Genco Management (USA) Limited; and the ship-owning subsidiaries as set forth below.
Below is the list of GS&Ts wholly owned ship-owning subsidiaries as of June 30, 2011:
(1) Delivery and built date for vessel being delivered in the future is an estimate based on guidance received from the seller and the shipyard.
Baltic Trading Limited (Baltic Trading) was a wholly-owned indirect subsidiary of GS&T until Baltic Trading completed its initial public offering, or IPO, on March 15, 2010. As of June 30, 2011, GS&Ts wholly-owned subsidiary Genco Investments LLC owned 5,699,088 shares of Baltic Tradings Class B Stock, which represented a 25.22% ownership interest in Baltic Trading and 83.50% of the aggregate voting power of Baltic Tradings outstanding shares of voting stock. Additionally, pursuant to the subscription agreement between Genco Investments LLC and Baltic Trading, for so long as GS&T directly or indirectly holds at least 10% of the aggregate number of outstanding shares of Baltic Tradings common stock and Class B stock, Genco Investments LLC will be entitled to receive an additional number of shares of Baltic Tradings Class B stock equal to 2% of the number of common shares issued in the future, other than shares issued under Baltic Tradings 2010 Equity Incentive Plan.
Below is the list of Baltic Tradings wholly owned ship-owning subsidiaries as of June 30, 2011:
The Company provides technical services for drybulk vessels purchased by Maritime Equity Partners (MEP), which is managed by a company owned by Peter C. Georgiopoulos, Chairman of the Board of Directors of GS&T. These services include oversight of crew management, insurance, drydocking, ship operations and financial statement preparation, but do not include chartering services. The services are provided for a fee of $750 per ship per day plus reimbursement of out-of-pocket costs and will be provided for an initial term of one year. MEP has the right to cancel provision of services on 60 days notice with payment of a one-year termination fee upon a change in control of the Company. The Company may terminate provision of the services at any time on 60 days notice. Peter C. Georgiopoulos, the Companys Chairman of the Board, is a minority investor in MEP, and affiliates of Oaktree Capital Management, L.P., of which Stephen A. Kaplan, a director of the Company, is a principal, are majority investors in MEP. |
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2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), which include the accounts of Genco Shipping & Trading Limited, its wholly owned subsidiaries and Baltic Trading, a subsidiary in which the Company owns a majority of the voting interests and exercises control. All intercompany accounts and transactions have been eliminated in consolidation.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and the rules and regulations of the Securities and Exchange Commission (the SEC). In the opinion of management of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and operating results have been included in the statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Companys annual report on Form 10-K for the year ended December 31, 2010 (the 2010 10-K). The results of operations for the periods ended June 30, 2011 are not necessarily indicative of the operating results for the full year.
Vessels, net
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 vessels 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 tons (lwt). Effective January 1, 2011, the Company increased the estimated scrap value of the vessels from $175/lwt to $245/lwt prospectively based on the 15-year average scrap value of steel. The change in the estimated scrap value will result in a decrease in depreciation expense over the remaining life of the vessel assets. During the three and six months ended June 30, 2011, the increase in the estimated scrap value resulted in a decrease in depreciation expense of $618 and $1,229, respectively.
Noncontrolling interest
Net loss (income) attributable to noncontrolling interest during the three and six months ended June 30, 2011 and 2010 reflects the noncontrolling interests share of the net loss of Baltic Trading, a subsidiary of the Company, which owns and employs drybulk vessels in the spot market or on spot market-related time charters. The spot market represents immediate chartering of a vessel, usually for single voyages. At June 30, 2011, the noncontrolling interest held a 74.78% economic interest in Baltic Trading while only holding 16.50% of voting power.
Income taxes
Pursuant to certain agreements, GS&T technically and commercially manages vessels for Baltic Trading, as well as provides technical management of vessels for MEP in exchange for specified fees for these services provided. These services are performed by Genco Management (USA) Limited (Genco (USA)), which has elected to be taxed as a corporation for United States federal income tax purposes. As such, Genco (USA) is subject to United States federal income tax on its worldwide net income, including the net income derived from providing these services. Genco (USA) has entered into a cost-sharing agreement with the Company and Genco Ship Management LLC, collectively Manco, pursuant to which Genco (USA) agrees to reimburse Manco for the costs incurred by Genco (USA) for the use of Mancos personnel and services in connection with the provision of the services for both Baltic Trading and MEPs vessels.
Total revenue earned for these services during the three months ended June 30, 2011 and 2010 was $1,562 and $2,429, respectively, of which $743 and $2,429, respectively, eliminated upon consolidation. After allocation of certain expenses, there was taxable income of $749 associated with these activities for the three months ended June 30, 2011. This resulted in estimated tax expense of $327 for the three months ended June 30, 2011. After allocation of certain expenses, there was taxable income of $1,598 associated with these activities for the three months ended June 30, 2010. This resulted in income tax expense of $719 for the three months ended June 30, 2010.
Total revenue earned for these services during the six months ended June 30, 2011 and 2010 was $3,101 and $2,429, respectively, of which $1,472 and $2,429, respectively, eliminated upon consolidation. After allocation of certain expenses, there was taxable income of $1,446 associated with these activities for the six months ended June 30, 2011. This resulted in estimated tax expense of $691 for the six months ended June 30, 2011. After allocation of certain expenses, there was taxable income of $1,598 associated with these activities for the six months ended June 30, 2010. This resulted in income tax expense of $719 for the six months ended June 30, 2010.
Baltic Trading is subject to income tax on its United States source income. During the three months ended June 30, 2011 and 2010, Baltic Trading had United States operations which resulted in United States source income of $1,394 and $0, respectively. Baltic Tradings United States income tax expense for the three months ended June 30, 2011 and 2010 was $28 and $0, respectively.
During the six months ended June 30, 2011 and 2010, Baltic Trading had United States operations which resulted in United States source income of $2,457 and $0, respectively. Baltic Tradings United States income tax expense for the six months ended June 30, 2011 and 2010 was $23 and $0, respectively.
Voyage expense recognition
In time charters, spot market-related time charters and pool agreements, 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. There are certain other non-specified voyage expenses such as commissions which are typically borne by the Company. At the inception of a time charter, the Company records the difference between the cost of bunker fuel delivered by the terminating charterer and the bunker fuel sold to the new charterer as a gain or loss within voyage expenses. These differences in bunkers resulted in net gains of $1,294 and $459 during the three months ended June 30, 2011 and 2010, respectively, and $1,653 and $1,016 during the six months ended June 30, 2011 and 2010, respectively.
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3 - SEGMENT INFORMATION
The Company determines its operating segments based on the information utilized by the chief operating decision maker to assess performance. Based on this information, the Company has two operating segments, GS&T and Baltic Trading. Both GS&T and Baltic Trading are engaged in the ocean transportation of drybulk cargoes worldwide through the ownership and operation of drybulk carrier vessels. GS&T seeks to deploy its vessels on time charters, spot market-related time charters or in vessel pools trading in the spot market and Baltic Trading seeks to deploy its vessel charters in the spot market, which represents immediate chartering of a vessel, usually for single voyages, or employing vessels on spot market-related time charters. Segment results are evaluated based on net income. The accounting policies applied to the reportable segments are the same as those used in the preparation of the Companys condensed consolidated financial statements.
The following table presents a reconciliation of total revenue from external (third party) customers for the Companys two operating segments to total consolidated revenue from external customers for the Company for the three and six months ended June 30, 2011 and 2010.
The following table presents a reconciliation of total intersegment revenue, which eliminates upon consolidation, for the Companys two operating segments for the three and six months ended June 30, 2011 and 2010. The intersegment revenue noted in the following table represents revenue earned by GS&T pursuant to the management agreement entered into with Baltic Trading, which includes commercial service fees, technical service fees and sale and purchase fees, if any.
The following table presents a reconciliation of total net income for the Companys two operating segments to total consolidated net income for the three and six months ended June 30, 2011 and 2010. The eliminating net income noted in the following table consists of the elimination of intercompany transactions between GS&T and Baltic Trading as well as dividends received by GS&T from Baltic Trading for its Class B shares of Baltic Trading.
The following table presents a reconciliation of total assets for the Companys two operating segments to total consolidated net assets as of June 30, 2011 and December 31, 2010. The eliminating assets noted in the following table consist of the elimination of intercompany transactions resulting from the capitalization of fees paid to GS&T by Baltic Trading as vessel assets, including related accumulated depreciation, as well as the outstanding receivable balance due to GS&T from Baltic Trading as of June 30, 2011 and December 31, 2010.
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4 - CASH FLOW INFORMATION
As of June 30, 2011 and December 31, 2010, the Company had nine and ten interest rate swaps, respectively, which are described and discussed in Note 11 Interest Rate Swap Agreements. The fair value of all nine of the swaps is in a liability position of $35,362, $9,770 of which was classified within current liabilities, as of June 30, 2011. At December 31, 2010, the ten swaps were in a liability position of $43,297, $4,417 of which was classified within current liabilities.
For the six months ended June 30, 2011, the Company had non-cash investing activities not included in the Condensed Consolidated Statement of Cash Flows for items included in accounts payable and accrued expenses consisting of $1,386 for the purchase of vessels, $77 associated with deposits on vessels and $51 for the purchase of other fixed assets. Additionally, for the six months ended June 30, 2011 the Company had non-cash investing activities not included in the Condensed Consolidated Statement of Cash Flows for items included in prepaid expenses and other current assets as of June 30, 2011 consisting of $22 interest receivable associated with deposits on vessels.
For the six months ended June 30, 2010, the Company had non-cash investing activities not included in the Condensed Consolidated Statement of Cash Flows for items included in accounts payable and accrued expenses consisting of $692 for the purchase of vessels, $289 associated with deposits on vessels, $48 associated with deposits on vessels to be sold and $69 for the purchase of other fixed assets. Additionally, for the six months ended June 30, 2010, the Company had non-cash financing activities not included in the Condensed Consolidated Statement of Cash Flows for items included in accounts payable and accrued expenses consisting of $434 associated with deferred financing fees and $35 associated with common stock issuance costs related to the initial public offering of Baltic Trading. Also, for the six months ended June 30, 2010, the Company had non-cash investing activities not included in the Condensed Consolidated Statement of Cash Flows for items included in prepaid expenses and other current assets as of June 30, 2010 consisting of $17 associated with deposits on vessels.
For the six months ended June 30, 2011, the Company made a reclassification of $6,989 from deposits on vessels to vessels, net of accumulated depreciation, due to the completion of the purchase of the Genco Rhone and Genco Avra.
During the six months ended June 30, 2011 and 2010, cash paid for interest, net of amounts capitalized and including bond coupon interest paid, was $40,225 and $30,897, respectively.
During the six months ended June 30, 2011 and 2010, cash paid for estimated income taxes was $695 and $0, respectively.
On March 5, 2010, the Board of Directors approved a grant of 75,000 shares of nonvested common stock to Peter Georgiopoulos, Chairman of the Board. The fair value of such nonvested stock was $1,718. Additionally, on May 13, 2010, the Company made grants of nonvested common stock under the Genco Shipping & Trading Limited 2005 Equity Incentive Plan in the amount of 15,000 shares in the aggregate to directors of the Company. The fair value of such nonvested stock was $331.
On March 10, 2010, 358,000 and 108,000 shares of Baltic Tradings nonvested common stock were granted to Peter Georgiopoulos, Chairman of the Board, and John Wobensmith, Baltic Tradings President and Chief Financial Officer, respectively, which were approved by Baltic Tradings Board of Directors on such date. The fair value of such nonvested stock was $6,524 based on the IPO price of $14.00 per share. Both of these grants of nonvested common stock vest ratably in four annual installments commencing on the first anniversary of the closing of Baltic Tradings IPO, March 15, 2010. Additionally, on March 15, 2010, Baltic Trading made grants of nonvested common stock in the amount of 12,500 shares in the aggregate to directors of Baltic Trading. The fair value of such nonvested stock was $175 based on the IPO price of $14.00 per share. These grants vested on March 15, 2011, the first anniversary of the grant date.
On May 12, 2011, the Company made grants of nonvested common stock under the Genco Shipping & Trading Limited 2005 Equity Incentive Plan in the amount of 15,000 shares in the aggregate to directors of the Company. The fair value of such nonvested stock was $120.
On May 12, 2011, Baltic Trading made grants of nonvested common stock in the amount of 12,500 shares to directors of Baltic Trading. The fair value of such nonvested stock was $87.
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5 - VESSEL ACQUISITIONS AND DISPOSITIONS
On March 29, 2011, GS&T took delivery of the Genco Rhone, a 58,000 dwt Supramax vessel, which was purchased from Bourbon S.A. (Bourbon) pursuant to the Master Agreement dated June 24, 2010 between GS&T and Bourbon. The Genco Rhone is the last of 13 vessels to be acquired and retained by GS&T under such agreements. GS&T paid a total purchase price of approximately $35.7 million for the Genco Rhone which was financed with available cash, including proceeds from its concurrent offerings of common stock and 5.00% Convertible Senior Notes due August 15, 2015, which were completed on July 27, 2010. The Company drew down from the $253 million term loan facility to refund $21.5 million associated with the purchase of the Genco Rhone on March 30, 2011.
On May 12, 2011, GS&T took delivery of the Genco Avra, a 35,000 dwt Handysize newbuilding, which was purchased from companies within the Metrostar group of companies pursuant to the agreement dated June 3, 2010 to acquire five Handysize vessels. Genco Avra is the third of five vessels to be delivered pursuant to the aforementioned agreement. GS&T utilized available cash of $9.9 million, as well as $20.0 million under its $100 million term loan facility, to pay the remaining balance of $29.9 million.
Refer to Note 1 General Information for a listing of the vessels for which GS&T and Baltic Trading have entered into agreements to purchase.
The Genco Avra, the Handysize vessel acquired from Metrostar during the second quarter of 2011, had an existing below market time charter at the time of acquisition. GS&T recorded a liability for time charter acquired of $372 during the second quarter of 2011. Below market time charters, including those acquired during previous periods, were amortized as an increase to voyage revenue in the amount of $496 and $1,103 for the three months ended June 30, 2011 and 2010, respectively, and $969 and $2,435 for the six months ended June 30, 2011 and 2010, respectively.
Capitalized interest expense associated with newbuilding contracts for the three months ended June 30, 2011 and 2010 was $48 and $145, respectively. Capitalized interest expense associated with newbuilding contracts for the six months ended June 30, 2011 and 2010 was $127 and $145, respectively.
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6 - INVESTMENTS
The Company holds an investment in the capital stock of Jinhui Shipping and Transportation Limited (Jinhui). Jinhui is a drybulk shipping owner and operator focused on the Supramax segment of drybulk shipping. This investment is designated as Available For Sale (AFS) and is reported at fair value, with unrealized gains and losses recorded in shareholders equity as a component of accumulated other comprehensive loss (AOCI). At June 30, 2011 and December 31, 2010, the Company held 16,335,100 shares of Jinhui capital stock which is recorded at its fair value of $42,450 and $54,714, respectively, based on the closing price on June 30, 2011 and December 30, 2010.
The Company reviews the investment in Jinhui for other than temporary impairment on a quarterly basis. There were no impairment charges recognized for the three and six months ended June 30, 2011 and 2010.
The unrealized gain on the Jinhui capital stock remains a component of AOCI, since this investment is designated as an AFS security.
Refer to Note 12 Accumulated Other Comprehensive (Loss) Income for a breakdown of the components of AOCI. |
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7 - EARNINGS PER COMMON SHARE
The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the year. The computation of diluted earnings per share assumes the vesting of nonvested stock awards (refer to Note 17 Nonvested Stock Awards), for which the assumed proceeds upon vesting are deemed to be the amount of compensation cost attributable to future services and are not yet recognized using the treasury stock method, to the extent dilutive. Of the 807,987 nonvested shares outstanding at June 30, 2011 (refer to Note 17 Nonvested Stock Awards), 664,738 shares are anti-dilutive. The Companys diluted earnings per share will also reflect the assumed conversion under the Companys convertible debt if the impact is dilutive under the if converted method. The impact of the shares convertible under the Companys convertible notes is excluded from the computation of diluted earnings per share when interest expense per common share obtainable upon conversion is greater than basic earnings per share.
The components of the denominator for the calculation of basic earnings per share and diluted earnings per share are as follows:
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8 - RELATED PARTY TRANSACTIONS
The following represent the only related party transactions disclosed in these condensed consolidated financial statements:
The Company makes available employees performing internal audit services to General Maritime Corporation (GMC), where the Companys Chairman, Peter C. Georgiopoulos, also serves as Chairman of the Board. For the six months ended June 30, 2011 and 2010, the Company invoiced $91 and $66, respectively, to GMC, which includes time associated with such internal audit services. Additionally, during the six months ended June 30, 2011 and 2010, the Company incurred travel and other expenditures totaling $164 and $148, respectively, reimbursable to GMC or its service provider. At June 30, 2011 the amount due to the Company from GMC was $33 and at December 31, 2010 the amount due to GMC from the Company was $74.
During the six months ended June 30, 2011 and 2010, the Company incurred legal services (primarily in connection with vessel acquisitions) aggregating $13 and $206, respectively, from Constantine Georgiopoulos, the father of Peter C. Georgiopoulos, Chairman of the Board. At June 30, 2011 and December 31, 2010, $0 and $234, respectively, were outstanding to Constantine Georgiopoulos.
During the six months ended June 30, 2011 and 2010, the Company utilized the services of North Star Maritime, Inc. (NSM) which is owned and operated by one of GS&Ts directors, Rear Admiral Robert C. North, USCG (ret.). NSM, a marine industry consulting firm, specializes in international and domestic maritime safety, security and environmental protection issues. NSM billed $2 and $8 for services rendered during the six months ended June 30, 2011 and 2010. There are no amounts due to NSM at June 30, 2011 and December 31, 2010.
During 2009 and 2010, GS&T and Baltic Trading, respectively, entered into agreements with Aegean Marine Petroleum Network, Inc. (Aegean) to purchase lubricating oils for certain vessels in their fleets. Peter C. Georgiopoulos, Chairman of the Board of the Company, is Chairman of the Board of Aegean. During the six months ended June 30, 2011 and 2010, the Company incurred costs for lubricating oils supplied by Aegean to the Companys vessels aggregating $854 and $621, respectively. At June 30, 2011 and December 31, 2010, $44 and $302 remained outstanding, respectively.
During the six months ended June 30, 2011 and 2010, the Company invoiced MEP for technical services provided and expenses paid on MEPs behalf aggregating $1,665 and $26, respectively. MEP is managed by a company owned by Peter C. Georgiopoulos, Chairman of the Board. At June 30, 2011 and December 31, 2010, $4 and $57, respectively, was due to the Company from MEP. Total service revenue earned by the Company for technical service provided to MEP for the six months ended June 30, 2011 and 2010 was $1,629 and $0, respectively.
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9 - LONG-TERM DEBT
Long-term debt consists of the following:
2007 Credit Facility
On July 20, 2007, the Company entered into a credit facility with DnB Nor Bank ASA (as amended, the 2007 Credit Facility). The maximum amount that may be borrowed under the 2007 Credit Facility at June 30, 2011 is $1,252,000. As of June 30, 2011, the Company has utilized its maximum borrowing capacity under the 2007 Credit Facility.
The collateral maintenance financial covenant is currently waived and the Companys cash dividends and share repurchases have been suspended until this covenant can be satisfied.
The significant covenants in the 2007 Credit Facility have been disclosed in the 2010 10-K. As of June 30, 2011, the Company believes it is in compliance with all of the financial covenants under its 2007 Credit Facility with the exception of the collateral maintenance financial covenant, which has been waived as discussed above.
At June 30, 2011, there were no letters of credit issued under the 2007 Credit Facility.
$100 Million Term Loan Facility
On August 12, 2010, the Company entered into the $100,000 secured term loan facility ($100 Million Term Loan Facility). As of June 30, 2011, three drawdowns of $20,000 each had been made for the deliveries of the Genco Ocean, Genco Bay and Genco Avra. These drawdowns were made on August 17, 2010, August 23, 2010 and May 9, 2011, respectively. During the six months ended June 30, 2011, total required repayments of $1,763 were made. As of June 30, 2011, total availability under the $100 Million Term Loan Facility was $40,000. The Company has used or intends to use the $100 Million Term Loan Facility to fund or refund the Company a portion of the purchase price of the acquisition of five vessels from companies within the Metrostar group of companies (Refer to Note 5 Vessel Acquisitions and Dispositions).
The Company believes it is in compliance with all of the financial covenants under the $100 Million Term Loan Facility as of June 30, 2011.
$253 Million Term Loan Facility
On August 20, 2010, the Company entered into the $253,000 senior secured term loan facility ($253 Million Term Loan Facility). As of June 30, 2011, total drawdowns of $253,000 have been made under the $253 Million Term Loan Facility to fund or refund to the Company a portion of the purchase price of the 13 Bourbon vessels delivered during the third quarter of 2010 and first quarter of 2011. As of June 30, 2011, there was no availability under the $253 Million Term Loan Facility.
The Company believes it is in compliance with all of the financial covenants under the $253 Million Term Loan Facility as of June 30, 2011.
2010 Baltic Trading Credit Facility
On April 16, 2010, Baltic Trading entered into a $100,000 senior secured revolving credit facility with Nordea Bank Finland plc, acting through its New York branch (as amended, the 2010 Baltic Trading Credit Facility). An amendment to the 2010 Baltic Trading Credit Facility was entered into by Baltic Trading effective November 30, 2010. Among other things, this amendment increased the commitment amount of the 2010 Baltic Trading Credit Facility from $100,000 to $150,000. As of June 30, 2011, total available working capital borrowings were $23,500 as $1,500 was drawn down during 2010 for working capital purposes. As of June 30, 2011, $43,750 remained available under the 2010 Credit Facility as the total commitment under this facility decreased by $5,000 from $150,000 to $145,000 on May 31, 2011.
As of June 30, 2011, the Company believes Baltic Trading is in compliance with all of the financial covenants under the 2010 Baltic Trading Credit Facility.
Interest rates
The following tables sets forth the effective interest rate associated with the interest expense for the Companys debt facilities noted above, including the rate differential between the pay fixed, receive variable rate on the interest rate swap agreements that were in effect (refer to Note 11 Interest Rate Swap Agreements), combined, and the cost associated with unused commitment fees. Additionally, it includes the range of interest rates on the debt, excluding the impact of swaps and unused commitment fees:
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10 - CONVERTIBLE SENIOR NOTES
The Company issued $125,000 of 5.0% Convertible Senior Notes on July 27, 2010 (the 2010 Notes). The Indenture includes customary agreements and covenants by the Company, including with respect to events of default.
The following tables provide additional information about the Companys 2010 Notes.
The remaining period over which the unamortized discount will be recognized is 4.1 years. As of June 30, 2011, the if-converted value of the 2010 Notes does not exceed their principal amount.
The 2010 Notes have been classified as a noncurrent liability on the consolidated balance sheet as of June 30, 2011 because the Company can settle the principal amount of the notes with shares, cash, or a combination thereof at its discretion.
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11 - INTEREST RATE SWAP AGREEMENTS
As of June 30, 2011 and December 31, 2010, the Company had nine and ten interest rate swap agreements outstanding, respectively, with DnB NOR Bank ASA to manage interest costs and the risk associated with changing interest rates related to the Companys 2007 Credit Facility. The total notional principal amount of the swaps at June 30, 2011 and December 31, 2010 was $706,233 and $756,233, respectively, and the swaps have specified rates and durations.
The following table summarizes the interest rate swaps designated as cash flow hedges that were in place as of June 30, 2011 and December 31, 2010:
The following table summarizes the derivative asset and liability balances at June 30, 2011 and December 31, 2010:
The following tables present the impact of derivative instruments and their location within the Condensed Consolidated Statement of Operations:
The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations For the Three Month Period Ended June 30, 2011
The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations For the Three Month Period Ended June 30, 2010
The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations For the Six Month Period Ended June 30, 2011
The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations For the Six Month Period Ended June 30, 2010
At June 30, 2011, ($21,528) of AOCI is expected to be reclassified into interest expense over the next 12 months associated with interest rate derivatives.
The Company is required to provide collateral in the form of vessel assets to support the interest rate swap agreements, excluding vessel assets of Baltic Trading. At June 30, 2011, the Companys 35 vessels mortgaged under the 2007 Credit Facility served as collateral in the aggregate amount of $100,000.
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12 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of AOCI included in the accompanying condensed consolidated balance sheets consist of net unrealized gain (loss) on cash flow hedges and net unrealized gain (loss) from investments in Jinhui stock as of June 30, 2011 and December 31, 2010.
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13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Companys financial instruments at June 30, 2011 and December 31, 2010 are noted below. All carrying values approximate the instruments fair values with the exception of the 2010 Notes.
The fair value of the investments is based on quoted market rates. The fair value of the floating rate debt under the 2007 Credit Facility, $100 Million Term Loan Facility, $253 Million Term Loan Facility and the 2010 Baltic Trading Credit Facility are estimated based on current rates offered to the Company for similar debt of the same remaining maturities. Additionally, the Company considers its creditworthiness in determining the fair value of floating rate debt under the credit facilities. The carrying value approximates the fair market value for these floating rate loans. The fair value of the convertible senior notes payable represents the market value of the 2010 Notes at June 30, 2011 without bifurcating the value of the conversion option. The fair value of the interest rate swaps is the estimated amount the Company would receive to terminate the swap agreements at the reporting date, taking into account current interest rates and the creditworthiness of both the swap counterparty and the Company.
The Accounting Standards Codification subtopic 820-10, Fair Value Measurements & Disclosures (ASC 820-10), applies to all assets and liabilities that are being measured and reported on a fair value basis. This guidance enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that are not corroborated by market data.
The following table summarizes the valuation of the Companys investments and financial instruments by the above pricing levels as of the valuation dates listed:
The Company holds an investment in the capital stock of Jinhui, which is classified as a long-term investment. The stock of Jinhui is publicly traded on the Oslo Stock Exchange and is considered a Level 1 item. The Companys interest rate derivative instruments are pay-fixed, receive-variable interest rate swaps based on LIBOR. The Company has elected to use the income approach to value the derivatives, using observable Level 2 market inputs at measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements. Refer to Note 11 Interest Rate Swap Agreements for further information regarding the Companys interest rate swap agreements. ASC 820-10 states that the fair value measurement of an asset or liability must reflect the nonperformance risk of the entity and the counterparty. Therefore, the impact of the counterpartys creditworthiness when in an asset position and the Companys creditworthiness when in a liability position has also been factored into the fair value measurement of the derivative instruments in an asset or liability position and did not have a material impact on the fair value of these derivative instruments. As of June 30, 2011, both the counterparty and the Company are expected to continue to perform under the contractual terms of the instruments.
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14 - OTHER ASSETS, NET
Other assets consist of deferred financing costs, which include fees, commissions and legal expenses associated with securing loan facilities and other debt offerings. Total net deferred financing costs consist of the following as of June 30, 2011 and December 31, 2010:
Amortization expense for deferred financing costs for the three months ended June 30, 2011 and 2010 was $793 and $338, respectively. Amortization expense for deferred financing costs for the six months ended June 30, 2011 and 2010 was $1,572 and $602, respectively. This amortization expense is recorded as a component of interest expense in the Condensed Consolidated Statements of Operations.
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15 - REVENUE FROM TIME CHARTERS
Total voyage revenue earned on time charters, including revenue earned in vessel pools and spot market-related time charters, for the three months ended June 30, 2011 and 2010 was $98,511 and $105,337, respectively, and for the six months ended June 30, 2011 and 2010 was $199,130 and $200,018, respectively. Included in revenues for the three months ended June 30, 2011 and 2010 was profit sharing revenue of $29 and $65, respectively. Additionally, included in revenues for the six months ended June 30, 2011 and 2010 was profit sharing revenue of $122 and $65, respectively. Future minimum time charter revenue, based on vessels committed to noncancelable time charter contracts as of July 20, 2011 is expected to be $63,036 for the remainder of 2011, $53,005 during 2012, $4,790 during 2013 and $748 during 2014, assuming off-hire due to any scheduled drydocking and that no additional off-hire time is incurred. For most drydockings, the Company assumes twenty days of offhire. Future minimum revenue excludes revenue earned for the five vessels currently in pool arrangements and vessels that are currently on or will be on spot market-related time charters as spot rates cannot be estimated.
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16 - COMMITMENTS AND CONTINGENCIES
In September 2005, the Company entered into a 15-year lease for office space in New York, New York for which there was a free rental period from September 1, 2005 to July 31, 2006. The monthly straight-line rental expense from September 1, 2005 to August 31, 2020 is $39. As a result of the straight-line rent calculation generated by the free rent period and the tenant work credit, the Company had a deferred rent credit at June 30, 2011 and December 31, 2010 of $632 and $657, respectively. Rent expense under this lease for the three months ended June 30, 2011 and 2010 was $117 for each respective period. Rent expense under this lease for the six months ended June 30, 2011 and 2010 was $233 for each respective period.
Future minimum rental payments on the above lease for the next five years and thereafter are as follows: $259 for the remainder of 2011, $518 annually for 2012 through 2014, $529 for 2015 and a total of $2,568 for the remaining term of the lease.
Effective April 4, 2011, the Company entered into a seven-year sub-sublease agreement for additional office space in New York, New York. The term of the sub-sublease commenced June 1, 2011, with a free base rental period until October 31, 2011. Following the expiration of the free base rental period, the monthly base rental payments will be $82 per month until May 31, 2015 and thereafter will be $90 per month until the end of the seven-year term. Pursuant to the sub-sublease agreement, the sublessor is obligated to contribute $472 toward the cost of the Companys alterations to the sub-subleased office space. The Company has also entered into a direct lease with the over-landlord of such office space that will commence immediately upon the expiration of such sub-sublease agreement, for a term covering the period from May 1, 2018 to September 30, 2025; the direct lease provides for a free base rental period from May 1, 2018 to September 30, 2018. Following the expiration of the free base rental period, the monthly base rental payments will be $186 per month from October 1, 2018 to April 30, 2023 and $204 per month from May 1, 2023 to September 30, 2025. For accounting purposes, the sub-sublease agreement and direct lease agreement with the landlord will constitute one lease agreement. As a result of the straight-line rent calculation generated by the free rent period and the tenant work credit, the monthly straight-line rental expense for the term of the entire lease from June 1, 2011 to September 30, 2025 will be $130. The Company had a deferred rent credit at June 30, 2011 of $602. Rent expense pertaining to this new lease for the three and six months ended June 30, 2011 was $130.
Future minimum rental payments on the above lease for the next five years and thereafter are as follows: $164 for the remainder of 2011, $982 annually for 2012 through 2014, $1,037 for 2015 and a total of $18,658 for the remaining term of the lease.
The remaining vessel that the Company has agreed to purchase from Metrostar, the Genco Spirit, is expected to be delivered during the fourth quarter of 2011 for a remaining purchase price of $29,925. The Genco Mare was delivered to the Company on July 20, 2011 refer to Note 20 Subsequent Events for further information.
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17 - NONVESTED STOCK AWARDS
The table below summarizes the Companys nonvested stock awards for the six months ended June 30, 2011 under the Genco Shipping & Trading Limited 2005 Equity Incentive Plan (the GS&T Plan):
The total fair value of shares that vested under the GS&T Plan during the six months ended June 30, 2011 and 2010 was $120 and $331, respectively.
For the three and six months ended June 30, 2011 and 2010, the Company recognized nonvested stock amortization expense for the GS&T Plan, which is included in general, administrative and management fees, as follows:
The fair value of nonvested stock at the grant date is equal to the closing stock price on that date. The Company is amortizing these grants over the applicable vesting periods, net of anticipated forfeitures. As of June 30, 2011, unrecognized compensation cost of $8,384 related to nonvested stock will be recognized over a weighted average period of 3.96 years.
The following table presents a summary of Baltic Tradings nonvested stock awards for the six months ended June 30, 2011 under the Baltic Trading Plan:
The total fair value of shares that vested under the Baltic Trading Plan during the six months ended June 30, 2011 and 2010 was $1,131 and $0, respectively.
For the three and six months ended June 30, 2011 and 2010, the Company recognized nonvested stock amortization expense for the Baltic Trading Plan, which is included in general, administrative and management fees, as follows:
The Company is amortizing Baltic Tradings grants over the applicable vesting periods, net of anticipated forfeitures. As of June 30, 2011, unrecognized compensation cost of $3,461 related to nonvested stock will be recognized over a weighted average period of 2.81 years.
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18 - SHARE REPURCHASE PROGRAM
Since the inception of its share repurchase program through June 30, 2011, the Company has repurchased and retired 278,300 shares of its common stock for $11,500. Currently, the terms of the 2007 Credit Facility require the Company to suspend all share repurchases until the Company can represent that it is in a position to again satisfy the collateral maintenance covenant. No share repurchases were made during the three and six months ended June 30, 2011 and 2010. |
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20 - SUBSEQUENT EVENTS
On July 20, 2011, the Company took delivery of the Genco Mare, a 34,428 dwt Handysize newbuilding, from a company within the Metrostar group of companies. The Company utilized cash on hand and drew down $20,000 on its $100 Million Term Loan Facility on July 15, 2011 to fund the remaining purchase price of the vessel in the amount of $29,925.
On July 25, 2011, Baltic Trading declared a dividend of $0.10 per share to be paid on or about August 12, 2011 to shareholders of record as of August 5, 2011. The aggregate amount of the dividend is expected to be approximately $2.3 million, of which approximately $1.7 million will be paid to minority shareholders, which Baltic Trading anticipates will be funded from cash on hand at the time payment is to be made.
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