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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 September 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&T’s wholly owned ship-owning subsidiaries as of September 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 September 30, 2011, GS&T’s wholly-owned subsidiary Genco Investments LLC owned 5,699,088 shares of Baltic Trading’s Class B Stock, which represented a 25.22% ownership interest in Baltic Trading and 83.50% of the aggregate voting power of Baltic Trading’s 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 Trading’s common stock and Class B stock, Genco Investments LLC will be entitled to receive an additional number of shares of Baltic Trading’s Class B stock equal to 2% of the number of common shares issued in the future, other than shares issued under Baltic Trading’s 2010 Equity Incentive Plan.
Below is the list of Baltic Trading’s wholly owned ship-owning subsidiaries as of September 30, 2011:
The Company provides technical services for drybulk vessels purchased by Maritime Equity Partners LLC (“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 Company’s 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 GS&T, 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 Company’s 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 September 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 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 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 nine months ended September 30, 2011, the increase in the estimated scrap value resulted in a decrease in depreciation expense of $625 and $1,854, respectively. The decrease in depreciation expense resulted in a $0.01 increase of the basic and diluted earnings per share during the three months ended September 30, 2011. The decrease in depreciation expense resulted in a $0.05 increase of the basic and diluted earnings per share during the nine months ended September 30, 2011.
Noncontrolling interest
Net loss (income) attributable to noncontrolling interest during the three and nine months ended September 30, 2011 and 2010 reflects the noncontrolling interest’s share of the net loss (income) 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 September 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 Manco’s personnel and services in connection with the provision of the services for both Baltic Trading and MEP’s vessels.
Total revenue earned for these services during the three months ended September 30, 2011 and 2010 was $1,588 and $1,683, respectively, of which $760 and $1,221, respectively, eliminated upon consolidation. After allocation of certain expenses, there was taxable income of $668 associated with these activities for the three months ended September 30, 2011. This resulted in estimated tax expense of $319 for the three months ended September 30, 2011. After allocation of certain expenses, there was taxable income of $972 associated with these activities for the three months ended September30, 2010. This resulted in income tax expense of $438 for the three months ended September 30, 2010.
Total revenue earned for these services during the nine months ended September 30, 2011 and 2010 was $4,689 and $4,119, respectively, of which $2,232 and $3,650, respectively, eliminated upon consolidation. After allocation of certain expenses, there was taxable income of $2,113 associated with these activities for the nine months ended September 30, 2011. This resulted in estimated tax expense of $1,010 for the nine months ended September 30, 2011. After allocation of certain expenses, there was taxable income of $2,570 associated with these activities for the nine months ended September 30, 2010. This resulted in income tax expense of $1,157 for the nine months ended September 30, 2010.
Baltic Trading is subject to income tax on its United States source income. During the three months ended September 30, 2011 and 2010, Baltic Trading had United States operations which resulted in United States source income of $452 and $1,439, respectively. Baltic Trading’s United States income tax expense for the three months ended September 30, 2011 and 2010 was $9 and $29, respectively.
During the nine months ended September 30, 2011 and 2010, Baltic Trading had United States operations which resulted in United States source income of $2,909 and $1,439, respectively. Baltic Trading’s United States income tax expense for the nine months ended September 30, 2011 and 2010 was $31 and $29, 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.
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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 Company’s condensed consolidated financial statements.
The following table presents a reconciliation of total voyage revenue from external (third party) customers for the Company’s two operating segments to total consolidated voyage revenue from external customers for the Company for the three and nine months ended September 30, 2011 and 2010.
The following table presents a reconciliation of total intersegment revenue, which eliminates upon consolidation, for the Company’s two operating segments for the three and nine months ended September 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 Company’s two operating segments to total consolidated net income for the three and nine months ended September 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 Company’s two operating segments to total consolidated net assets as of September 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 September 30, 2011 and December 31, 2010.
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4 - CASH FLOW INFORMATION
As of September 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 $32,927, $5,475 of which was classified within current liabilities, as of September 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 nine months ended September 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 $804 for the purchase of vessels, $26 associated with deposits on vessels and $1,305 for the purchase of other fixed assets. Additionally, for the nine months ended September 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 September 30, 2011 consisting of $15 interest receivable associated with deposits on vessels.
For the nine months ended September 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 $5,526 for the purchase of vessels, $121 associated with deposits on vessels and $29 for the purchase of other fixed assets. Additionally, for the nine months ended September 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 $1,087 associated with deferred financing fees, $35 associated with common stock issuance costs related to the initial public offering of Baltic Trading and $322 associated with the issuance costs related to the concurrent stock offering and issuance of Convertible Senior Notes completed on July 27, 2010. Also, for the nine months ended September 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 September 30, 2010 consisting of $37 interest receivable associated with deposits on vessels and ($27) associated with the purchase of vessels.
For the nine months ended September 30, 2011, the Company made a reclassification of $10,354 from deposits on vessels to vessels, net of accumulated depreciation, due to the completion of the purchase of the Genco Rhone, Genco Avra and Genco Mare.
During the nine months ended September 30, 2011 and 2010, cash paid for interest, net of amounts capitalized and including bond coupon interest paid, was $61,642 and $45,639, respectively.
During the nine months ended September 30, 2011 and 2010, cash paid for estimated income taxes was $1,010 and $1,110, respectively.
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.
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 Trading’s nonvested common stock were granted to Peter Georgiopoulos, Chairman of the Board, and John Wobensmith, Baltic Trading’s President and Chief Financial Officer, respectively, which were approved by Baltic Trading’s 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 Trading’s 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.
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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 and July 20, 2011, GS&T took delivery of the Genco Avra and Genco Mare, respectively. These vessels are both 35,000 dwt Handysize newbuildings which were purchased from companies within the Metrostar group of companies pursuant to the agreement dated June 3, 2010 to acquire five Handysize vessels. Genco Avra and Genco Mare are the third and fourth of five vessels delivered pursuant to the aforementioned agreement. GS&T utilized available cash of $19.9 million, as well as $40.0 million under its $100 million term loan facility, to pay the remaining balance of $59.9 million.
Refer to Note 1 — General Information for a listing including the remaining vessel for which GS&T has entered into an agreement 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 $463 and $1,457 for the three months ended September 30, 2011 and 2010, respectively, and $1,432 and $3,893 for the nine months ended September 30, 2011 and 2010, respectively.
Capitalized interest expense associated with newbuilding contracts for the three months ended September 30, 2011 and 2010 was $33 and $204, respectively. Capitalized interest expense associated with newbuilding contracts for the nine months ended September 30, 2011 and 2010 was $165 and $349, 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 September 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 $27,849 and $54,714, respectively, based on the closing price on September 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 nine months ended September 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 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 18 — 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 September 30, 2011 (refer to Note 18 — Nonvested Stock Awards), 649,738 shares are anti-dilutive. The Company’s diluted earnings per share will also reflect the assumed conversion under the Company’s convertible debt if the impact is dilutive under the “if converted” method. The impact of the shares convertible under the Company’s 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:
The following table sets forth a reconciliation of the net income attributable to GS&T and the net income attributable to GS&T for diluted earnings per share under the “if-converted” method:
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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 Company’s Chairman, Peter C. Georgiopoulos, also serves as Chairman of the Board. For the nine months ended September 30, 2011 and 2010, the Company invoiced $136 and $106, respectively, to GMC, which includes time associated with such internal audit services. Additionally, during the nine months ended September 30, 2011 and 2010, the Company incurred travel and other expenditures totaling $168 and $170, respectively, reimbursable to GMC or its service provider. At September 30, 2011 the amount due to the Company from GMC was $15 and at December 31, 2010, the amount due to GMC from the Company was $74.
During the nine months ended September 30, 2011 and 2010, the Company incurred legal services (primarily in connection with vessel acquisitions) aggregating $38 and $326, respectively, from Constantine Georgiopoulos, the father of Peter C. Georgiopoulos, Chairman of the Board. At September 30, 2011 and December 31, 2010, $13 and $234, respectively, were outstanding to Constantine Georgiopoulos.
During the nine months ended September 30, 2011 and 2010, the Company utilized the services of North Star Maritime, Inc. (“NSM”) which is owned and operated by one of GS&T’s 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 nine months ended September 30, 2011 and 2010. There are no amounts due to NSM at September 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 nine months ended September 30, 2011 and 2010, the Company incurred costs for lubricating oils supplied by Aegean to the Company’s vessels aggregating $1,342 and $852, respectively. At September 30, 2011 and December 31, 2010, $365 and $302 remained outstanding, respectively.
During the nine months ended September 30, 2011 and 2010, the Company invoiced MEP for technical services provided and expenses paid on MEP’s behalf aggregating $2,514 and $37,354, respectively. The expenses incurred during the nine months ended September 30, 2010 included the purchase of a Bourbon vessel on MEP’s behalf. MEP is managed by a company owned by Peter C. Georgiopoulos, Chairman of the Board. At September 30, 2011 and December 31, 2010, $18 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 nine months ended September 30, 2011 and 2010 was $2,457 and $462, 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 September 30, 2011 is $1,239,500. As of September 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 Company’s cash dividends and share repurchases have been suspended until this covenant can be satisfied. The total amount of the 2007 Credit Facility is subject to quarterly reductions of $12,500 which began on March 31, 2009 through March 31, 2012 and is subject to quarterly reductions of $48,195 beginning June 30, 2012 and thereafter until the maturity date, July 20, 2017. A final payment of $250,600 will be due on the maturity date.
The significant covenants in the 2007 Credit Facility have been disclosed in the 2010 10-K. As of September 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 September 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 September 30, 2011, four drawdowns of $20,000 each had been made for the deliveries of the Genco Ocean, Genco Bay, Genco Avra and Genco Mare. These drawdowns were made on August 17, 2010, August 23, 2010, May 9, 2011 and July 15, 2011, respectively. During the nine months ended September 30, 2011, total required repayments of $3,243 were made. As of September 30, 2011, total availability under the $100 Million Term Loan Facility was $20,000. The Company has used 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 and Note 21 — Subsequent Events).
The Company believes it is in compliance with all of the financial covenants under the $100 Million Term Loan Facility as of September 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 September 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. During the nine months ended September 30, 2011, total required repayments of $14,841 were made. As of September 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 September 30, 2011.
The Company believes that given the current prolonged weakness in drybulk shipping rates, the Company likely will not meet the maximum leverage ratio covenant at some point by the end of the first quarter of 2012, The maximum leverage ratio is defined in its 2007 Credit Facility, $100 Million Term Loan Facility and $253 Million Term Loan Facility. The Company is in discussion with its lenders to seek waivers or modifications to the aforementioned credit facilities.
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 September 30, 2011, total available working capital borrowings were $23,500 as $1,500 was drawn down during 2010 for working capital purposes. As of September 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 September 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 Company’s 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 Company’s 2010 Notes:
The remaining period over which the unamortized discount will be recognized is 3.9 years. As of September 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 September 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 September 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 Company’s 2007 Credit Facility. The total notional principal amount of the swaps at September 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 September 30, 2011 and December 31, 2010:
The following table summarizes the derivative asset and liability balances at September 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 September 30, 2011
The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations For the Three Month Period Ended September 30, 2010
The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations For the Nine Month Period Ended September 30, 2011
The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations For the Nine Month Period Ended September 30, 2010
At September 30, 2011, ($16,750) 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 September 30, 2011, the Company’s 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 September 30, 2011 and December 31, 2010.
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13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company’s financial instruments at September 30, 2011 and December 31, 2010 are noted below. All carrying values either equal or approximate the instrument’s 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 September 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 carrying amounts of the Company’s other financial instruments at September 30, 2011 and December 31, 2010 (principally Due from charterers and Accounts payable and accrued expenses), approximate fair values because of the relatively short maturity of these instruments.
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 Company’s 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 Company’s 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 Company’s 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 counterparty’s creditworthiness when in an asset position and the Company’s 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 September 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 September 30, 2011 and December 31, 2010:
Amortization expense for deferred financing costs for the three months ended September 30, 2011 and 2010 was $796 and $589, respectively. Amortization expense for deferred financing costs for the nine months ended September 30, 2011 and 2010 was $2,368 and $1,191, respectively. This amortization expense is recorded as a component of interest expense in the Condensed Consolidated Statements of Operations.
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15 - FIXED ASSETS
Fixed assets consist of the following:
Depreciation and amortization expense for fixed assets for the three months ended September 30, 2011 and 2010 was $124 and $129, respectively. Depreciation and amortization expense for fixed assets for the nine months ended September 30, 2011 and 2010 was $372 and $372, respectively.
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16 - 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 September 30, 2011 and 2010 was $93,484 and $117,558, respectively, and for the nine months ended September 30, 2011 and 2010 was $292,614 and $317,576, respectively. Included in revenues for the three months ended September 30, 2011 and 2010 was profit sharing revenue of $1 and $244, respectively. Additionally, included in revenues for the nine months ended September 30, 2011 and 2010 was profit sharing revenue of $121 and $309, respectively. Future minimum time charter revenue, based on vessels committed to noncancelable time charter contracts as of October 28, 2011 is expected to be $27,815 for the remainder of 2011, $53,481 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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17 - 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 September 30, 2011 and December 31, 2010 of $619 and $657, respectively. Rent expense under this lease for the three months ended September 30, 2011 and 2010 was $117 for each period. Rent expense under this lease for the nine months ended September 30, 2011and 2010 was $350 for each period.
Future minimum rental payments on the above lease for the next five years and thereafter are as follows: $129 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 Company’s 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 September 30, 2011 of $991. Rent expense pertaining to this new lease for the three and nine months ended September 30, 2011 was $389 and $519, respectively.
Future minimum rental payments on the above lease for the next five years and thereafter are as follows: $82 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.
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18 - NONVESTED STOCK AWARDS
The table below summarizes the Company’s nonvested stock awards for the nine months ended September 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 nine months ended September 30, 2011 and 2010 was $120 and $331, respectively. The total fair value is calculated as the number of shares vested during the period multiplied by the fair value on the vesting date.
For the three and nine months ended September 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 September 30, 2011, unrecognized compensation cost of $6,912 related to nonvested stock will be recognized over a weighted-average period of 3.71 years.
The following table presents a summary of Baltic Trading’s nonvested stock awards for the nine months ended September 30, 2011 under the Baltic Trading Plan:
The total fair value of shares that vested under the Baltic Trading Plan during the nine months ended September 30, 2011 and 2010 was $1,131 and $0, respectively. The total fair value is calculated as the number of shares vested during the period multiplied by the fair value on the vesting date.
For the three and nine months ended September 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 Trading’s grants over the applicable vesting periods, net of anticipated forfeitures. As of September 30, 2011, unrecognized compensation cost of $2,838 related to nonvested stock will be recognized over a weighted-average period of 2.56 years.
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19 - SHARE REPURCHASE PROGRAM
Since the inception of its share repurchase program through September 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 nine months ended September 30, 2011 and 2010.
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20 - LEGAL PROCEEDINGS
From time to time, the Company may 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 effect on the Company, its financial condition, results of operations or cash flows.
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21 - SUBSEQUENT EVENTS
On October 27, 2011, Baltic Trading declared a dividend of $0.12 per share to be paid on or about November 18, 2011 to shareholders of record as of November 11, 2011. The aggregate amount of the dividend is expected to be approximately $2.7 million, of which approximately $2.0 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.
On November 7, 2011, GS&T drew down $20,000 on its $100 Million Term Loan Facility to fund the purchase of the Genco Spirit, a Handysize newbuilding, from a company within the Metrostar group of companies. The Genco Spirit is expected to be delivered on or about November 10, 2011.
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