10-Q 1 egle20130930_10q.htm FORM 10-Q egle20130930_10q.htm

 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

OR

 

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 


 

Commission File Number 001–33831

 

EAGLE BULK SHIPPING INC.

 (Exact name of Registrant as specified in its charter)

 

Republic of the Marshall Islands

 

98–0453513

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

477 Madison AvenueNew York, New York 10022

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (212) 785–2500

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES    X                NO          

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES    X                NO          

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated Filer                       Accelerated Filer                      Non-accelerated Filer                  Smaller reporting company     X       

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES                       NO     X    

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, par value $0.01 per share, 16,658,417 shares outstanding as of November 14, 2013.

 



 

 
1

 

 

TABLE OF CONTENTS

     
   

Page

PART I

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (unaudited)

 
     
 

Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

 3

     
 

Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012

 4

     
 

Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2013 and 2012

 5

     
 

Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2013 

 6

     
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012

 7

     
 

Notes to Consolidated Financial Statements

8

     

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

18

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risks

  30

     

Item 4.

Controls and Procedures

  30

     

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

31

 

Signatures

32

 

 
2

 

 

Part 1 : FINANCIAL INFORMATION

Item 1 : Financial Statements

EAGLE BULK SHIPPING INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   

September 30, 2013

   

December 31, 2012

 

ASSETS:

               

Current assets:

               

Cash and cash equivalents

  $ 19,925,769     $ 18,119,968  

Accounts receivable, net

    11,144,155       9,303,958  

Prepaid expenses

    3,328,383       3,544,810  

Inventories

    12,111,008       12,083,125  

Investment

    22,110,249       197,509  

Other assets and Fair value above contract value of time charters acquired

    3,864,251       549,965  

Total current assets

    72,483,815       43,799,335  

Noncurrent assets:

               

Vessels and vessel improvements, at cost, net of accumulated depreciation of $370,705,330 and $314,700,681, respectively

    1,658,395,104       1,714,307,653  

Other fixed assets, net of accumulated amortization of $640,374 and $515,896, respectively

    364,868       447,716  

Restricted cash

    66,243       276,056  

Deferred drydock costs

    3,177,196       2,132,379  

Deferred financing costs

    18,840,341       25,095,469  

Fair value above contract value of time charters acquired

    -       2,491,530  

Other assets

    861,988       594,012  

Total noncurrent assets

    1,681,705,740       1,745,344,815  

Total assets

  $ 1,754,189,555     $ 1,789,144,150  

LIABILITIES & STOCKHOLDERS' EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 10,937,962     $ 10,235,007  

Accrued interest

    268,430       2,430,751  

Other accrued liabilities

    9,849,461       14,330,141  

Deferred revenue and fair value below contract value of time charters acquired

    -       3,237,694  

Unearned charter hire revenue

    4,383,930       3,755,166  

Fair value of derivative instruments

    -       2,243,833  

Total current liabilities

    25,439,783       36,232,592  

Noncurrent liabilities:

               

Long-term debt

    1,129,478,741       1,129,478,741  

Payment-in-kind loans

    37,112,217       15,387,468  

Deferred revenue and fair value below contract value of time charters acquired

    -       13,850,772  

Total noncurrent liabilities

    1,166,590,958       1,158,716,981  

Total liabilities

    1,192,030,741       1,194,949,573  

Commitment and contingencies

               

Stockholders' equity:

               

Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued

    -       -  

Common stock, $.01 par value, 100,000,000 shares authorized, 16,658,417 and 16,638,092 shares issued and outstanding, respectively

    166,581       166,378  

Additional paid-in capital

    766,562,470       762,313,030  

Retained earnings (net of historical dividends declared of $262,118,388)

    (204,570,237 )     (165,275,389 )

Accumulated other comprehensive loss

    -       (3,009,442 )

Total stockholders' equity

    562,158,814       594,194,577  

Total liabilities and stockholders' equity

  $ 1,754,189,555     $ 1,789,144,150  

 

 The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 
3

 

 

EAGLE BULK SHIPPING INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September

30, 2013

   

September

30, 2012

   

September

30, 2013

   

September

30, 2012

 
                                 
                                 

Revenues, net of commissions

  $ 38,978,418     $ 46,854,671     $ 155,440,916     $ 148,008,304  
                                 

Voyage expenses

    7,683,180       6,480,233       23,288,739       20,370,857  

Vessel expenses

    21,804,188       21,246,653       63,132,366       67,557,977  

Charter hire expenses

    -       1,104,571       -       1,711,144  

Depreciation and amortization

    19,366,495       19,389,042       57,463,027       58,250,356  

General and administrative expenses

    2,946,267       6,497,598       10,878,601       26,551,478  

Gain on time charter agreement termination

    (3,564,771 )           (32,526,047 )      

Total operating expenses

    48,235,359       54,718,097       122,236,686       174,441,812  
                                 

Operating income (loss)

    (9,256,941 )     (7,863,426 )     33,204,230       (26,433,508 )
                                 

Interest expense

    20,729,626       21,981,186       61,957,771       44,995,438  

Interest income

    (3,321 )     (7,252 )     (71,775 )     (23,443 )

Other (Income) expense

    7,646,805       -       10,613,082       (1,028,375 )

Total other expense, net

    28,373,110       21,973,934       72,499,078       43,943,620  
                                 

Net loss

  $ (37,630,051 )   $ (29,837,360 )   $ (39,294,848 )   $ (70,377,128 )
                                 
Weighted average shares outstanding:                                

Basic

    16,986,395       16,821,024       16,973,813       16,153,184  

Diluted

    16,986,395       16,821,024       16,973,813       16,153,184  

                               
Per share amounts:                                

Basic net loss

  $ (2.22 )   $ (1.77 )   $ (2.32 )   $ (4.36 )

Diluted net loss

  $ (2.22 )   $ (1.77 )   $ (2.32 )   $ (4.36 )

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 
4

 

 

EAGLE BULK SHIPPING INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

   

September 30,

   

September 30,

 
    2013      2012     2013     2012  
                                 
                                 

Net loss

  $ (37,630,051 )   $ (29,837,360 )   $ (39,294,848 )   $ (70,377,128 )
                                 

Other comprehensive income:

                               

Change in unrealized loss on investment

    (9,812,255 )     (91,468 )     (9,847,473 )     (852,310 )

Realized loss on investment

    7,646,805             10,613,082        
                                 

Net unrealized gain on derivatives

    657,347       1,725,595       2,243,833       4,988,089  

Total other comprehensive income(loss)

    (1,508,103 )     1,634,127       3,009,442       4,135,779  
                                 
                                 

Comprehensive loss

  $ (39,138,154 )   $ (28,203,233 )   $ (36,285,406 )   $ (66,241,349 )

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 
5

 

 

EAGLE BULK SHIPPING INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013

 

   

Common
shares

   

Common
shares

amount

   

Additional
paid-in
capital

   

Net Loss

   

Accumulated deficit

   

Other comprehensive income (loss)

   

Total stockholders’ equity

 
                                                         

Balance at December 31, 2012

    16,638,092     $ 166,378     $ 762,313,030             $ (165,275,389 )   $ (3,009,442 )   $ 594,194,577  

Net Loss

                    $ (39,294,848 )     (39,294,848 )           (39,294,848 )

Change in unrealized loss on investment

                                  (9,847,473 )     (9,847,473 )

Realized loss on investment

                                  10,613,082       10,613,082  

Net unrealized gain on derivatives

                                  2,243,833       2,243,833  

Vesting of restricted shares, net of shares withheld for employee tax

    20,325       203       (78,738 )                       (78,535 )

Non-cash compensation

                4,328,178                         4,328,178  
                                                         

Balance at September 30, 2013

    16,658,417     $ 166,581     $ 766,562,470             $ (204,570,237 )   $     $ 562,158,814  

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 
6

 

 

EAGLE BULK SHIPPING INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2013

   

2012

 

Cash flows from operating activities:

               

Net loss

  $ (39,294,848 )   $ (70,377,128 )

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

               

Items included in net loss not affecting cash flows:

               

Depreciation

    56,129,127       56,388,161  

Amortization of deferred drydocking costs

    1,333,900       1,862,195  

Amortization of deferred financing costs

    6,271,128       4,428,572  

Amortization of fair value below contract value of time charter acquired

    (10,280,559 )     (3,574,012 )

Payment-in-kind interest on debt

    21,724,749       8,101,953  

Unrealized gain from forward freight agreements, net

    -       246,110  

Investment

    (4,925,952 )     -  

Realized loss from investment

    10,613,082       -  

Gain on time charter agreement termination

    (29,033,503 )     -  

Allowance for accounts receivable

    -       5,351,609  

Non-cash compensation expense

    4,328,178       7,012,714  

Drydocking expenditures

    (2,378,717 )     (1,085,541 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (1,840,197 )     (5,185,340 )

Other assets

    (4,132,227 )     2,089,633  

Prepaid expenses

    216,427       708,671  

Inventories

    (27,883 )     269,672  

Accounts payable

    702,955       (1,169,678 )

Accrued interest

    (2,162,321 )     (861,935 )

Accrued expenses

    (4,448,680 )     505,953  

Deferred revenue

    (3,766,413 )     (471,017 )

Unearned revenue

    628,764       (1,596,072 )

Net cash provided by (used in) operating activities

    (342,990 )     2,644,520  

Cash flows from investing activities:

               

Proceeds from sale of investment

    2,199,243       -  

Vessels improvements

    (92,100 )     (58,521 )

Purchase of other fixed assets

    (41,630 )     (48,497 )

Changes in restricted cash

    209,813       394,362  

Net cash provided by investing activities

    2,275,326       287,344  
                 

Cash flows from financing activities:

               

Deferred financing costs

    (48,000 )     (9,382,792 )

Cash used to settle net share equity awards

    (78,535 )     (65,138 )

Net cash used in financing activities

    (126,535 )     (9,447,930 )

Net increase / (decrease) in cash

    1,805,801       (6,516,066 )

Cash at beginning of period

    18,119,968       25,075,203  

Cash at end of period

  $ 19,925,769     $ 18,559,137  

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 
7

 

 

EAGLE BULK SHIPPING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1. Basis of Presentation and General Information

 

The accompanying consolidated financial statements include the accounts of Eagle Bulk Shipping Inc. and its wholly-owned subsidiaries (collectively, the "Company", “we” or “our”). The Company is engaged in the ocean transportation of dry bulk cargoes worldwide through the ownership, chartering and operation of dry-bulk vessels. The Company's fleet is comprised of Supramax and Handymax dry bulk carriers and the Company operates its business in one business segment.

 

The Company is a holding company incorporated in 2005 under the laws of the Republic of the Marshall Islands and is the sole owner of all of the outstanding shares of its subsidiaries, which are incorporated in the Republic of the Marshall Islands. The primary activity of each of the subsidiaries, other than the Company’s management subsidiaries, is the ownership of a vessel. The operations of the vessels are managed by a wholly-owned subsidiary of the Company, Eagle Shipping International (USA) LLC, a Republic of the Marshall Islands limited liability company.

 

As of September 30, 2013, the Company owned and operated a modern fleet of 45 oceangoing vessels comprised of 43 Supramax and 2 Handymax vessels with a combined carrying capacity of 2,451,259 dwt and an average age of approximately six years.

 

The following table represents certain information about the Company's charterers that individually accounted for more than 10% of the Company's gross charter revenue during the periods indicated:

 

 

% of Consolidated Charter Revenue

 
   

Three Months Ended

   

Nine Months Ended

 
   

September 30, 2013

   

September 30, 2012

   

September 30, 2013

   

September 30, 2012

 

Charterer

                               

Charterer A

    16%       28%       14%       26%  

Charterer B

    -       -       20%       -  

 

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), and the rules and regulations of the Securities and Exchange Commission (“SEC”) which apply to interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes normally included in consolidated financial statements prepared in conformity with U.S. GAAP. They should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2012 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 1, 2013.

 

The accompanying unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) that management considers necessary for a fair statement of its consolidated financial position and results of operations for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire year.

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates and assumptions of the Company are stock-based compensation, the useful lives of fixed assets and intangibles, depreciation and amortization, the allowances for bad debt, and the fair value of derivatives and warrants.

 

 
8

 

 

Liquidity 

 

As further described in Note 4, the Fourth Amended and Restated Credit Facility (as defined in Note 4 and also referred to herein as the “credit agreement”) has financial covenants that begin in 2013 and get increasingly tighter with each progressive quarter. The covenants are primarily driven off of a trailing twelve month calculation of EBITDA. In order to remain in compliance with our covenants, charter hire rates, the primary driver of our EBITDA, must increase over time. Charter hire rates have been driven down during the recession and have been volatile. Despite relatively low charter hire rates in the last part of 2012 and the first three quarters of 2013, the Company estimates that it will meet all of its covenants in 2013, based on the current dry bulk rates that have been in effect from March 2013 and cost cutting measures that the Company has put in place. Such cost cutting measures include but are not limited to reductions in labor costs, upgrades and new equipment expenses. However, if the current charter hire rates do not improve significantly for the remainder of 2013 and in the first quarter of 2014, the Company will not be in compliance with the maximum leverage ratio and the minimum interest coverage ratio covenants under the Fourth Amended and Restated Credit Facility at or after March 31, 2014; and, if charter hire rates deteriorate from current levels or if we are unable to achieve our cost cutting measures or if we realize additional losses on our Korea Lines Corporation available for sale investment, the Company will not be in compliance with the maximum leverage ratio covenant in the fourth quarter of 2013.

 

If the Company does not comply with the financial covenants contained in the Fourth Amended and Restated Credit Facility, such a non-compliance would constitute an event of default under the credit agreement, the Company would seek to obtain a waiver or modification to the credit agreement from our creditors, however there is no guarantee that we would receive such a waiver or that such a waiver would be on terms or conditions that would be acceptable to the Company. If we were to be unable to cure an event of default, our debt could be called by the creditors and all amounts then outstanding would be reclassified as a current liability and alternative sources of financing would need to be sought on terms that may not be favorable to the Company or the Company may need to seek additional capital through equity or debt offerings or through the sale of assets. Should such events happen, there can be no assurances that the Company would be able to procure alternate financing or sufficient sources of additional capital. If the Company were unable to obtain a waiver or modification of the credit agreement or obtain such alternate financing or additional capital, there is substantial doubt about the Company's ability to continue as a going concern. The Company’s credit agreement is described further in Note 4.

 

Korea Line Corporation

 

Since January 2011, Korea Lines Corporation (“KLC”), one of our charterers, has been operating under protective receivership in Seoul, South Korea. Since the fourth quarter of 2011, KLC had not been performing in accordance with the $17,000 per vessel per day shortfall arrangement on 13 of our vessels. As a result we were not recording revenue associated with those amounts owed as collectability was not assured.

 

On January 3, 2013, a comprehensive termination agreement between the Company and KLC became effective, pursuant to which we agreed to accept $63.7 million on a non-interest bearing installment note and 1,224,094 common shares of KLC stock as compensation for the early termination of our 13 charters with KLC. Under the termination agreement, cash payments of $10.3 million were paid in the first quarter of 2013, and the balance of $53.4 million would have been paid in cash installments through 2021, with the majority of the payments to be paid in the last five years. The KLC stock certificates were issued on February 7, 2013 and were secured at the Korean Securities Depository for six months. On August 7, 2013, we took possession of the share certificates.    

 

In the first quarter of 2013, as the settlement effectively terminated the charters with KLC, the Company released $3.5 million of bunker liabilities and an aggregate $13.7 million balance related to deferred revenue and to the unamortized fair value of charters below and above contract value. The Company valued the equity received from KLC at $5.9 million and the note receivable at $2.7 million. The Company recorded revenue associated with the termination of $32.8 million related to amounts previously owed but not recognized and a termination gain of $3.3 million.  

 

On March 28, 2013, the Korean court approved an amendment to the KLC termination agreement after receiving a favorable vote from the concerned parties. The amendment included a 1 to 15 reduction to the number of KLC common shares outstanding at that date and also reduced our long-term receivable by 90%, substituting that portion of the commitment with 538,751 additional common shares of KLC to be issued to the Company at a date to be determined in the second quarter. We evaluated the fair value of the additional KLC common shares to be issued and the impact to our long-term receivable and determined that the aggregate value exceeded the carrying value of our long-term note receivable recorded in January of 2013; therefore, we did not have a loss on that transaction. Under our accounting policy, any gain on that transaction should be recorded upon settlement. As 90% of the long-term note receivable was paid in equity in the second quarter of 2013, we reclassified that portion as a current asset in the “Investment” line of our balance sheet at March 31, 2013. We considered the March 28, 2013 decision by KLC to dilute the value of previously issued KLC shares to be a triggering event requiring the evaluation of whether a permanent decrease in value had occurred. We determined that a permanent decrease in value had occurred and as of March 31, 2013, we recognized the change in the fair value of our existing KLC shares as other-than-temporary and recorded in other expense a loss of approximately $3.0 million.

 

 
9

 

 

On May 9, 2013, the 538,751 additional KLC common shares were issued and secured at the Korean Securities Depository. On November 11, 2013, we took possession of the share certificates.These shares replaced the note receivable recorded pursuant to the January 3, 2013, termination agreement. The fair market value of the shares upon issuance was in excess of the fair value of the receivable and resulted in a gain of $32.5 million in the second quarter of 2013.

 

KLC completed its financial reorganization by the middle of September 2013, and emerged from bankruptcy in October 2013. On October 28, 2013, we received early prepayment of $3.9 million to settle our long term receivable from KLC, which resulted in an additional gain on time charter agreement termination of $3.5 million recognized in the third quarter of 2013 as the carrying value at September 30, 2013 was adjusted to reflect the elimination of credit risk.

 

As of September 30, 2013, we sold 55,628 shares of KLC for a total consideration of $2.2 million and we realized loss of $0.4 million.

 

The KLC stock held by the Company is designated as Available for sale and is reported at fair value, with unrealized gains and losses recorded in shareholders’ equity as a component of accumulated other comprehensive income. As of September 30, 2013, the fair value of the remaining 566,529 KLC shares held by the Company was $22.1 million. As of September 30, 2013, the change in the fair value of our KLC investment was considered as other than temporary, and therefore the Company recorded a non-cash impairment loss of $7.3 million in Other expense in the third quarter of 2013.

  

Note 2. New Accounting Pronouncements

 

In December 2011, Financial Accounting Standards Board (FASB) issued an Accounting Standards Update for balance sheet, which contains new disclosure requirements regarding the nature of an entity's rights of offset and related arrangements associated with its financial instruments and derivative instruments. Under U.S. GAAP, certain derivative and repurchase agreement arrangements are granted exceptions from the general off-setting model. The new disclosure requirement will provide financial statement users information regarding both gross and net exposures. In January 2013, the FASB issued a new ASU, clarifying the scope of disclosures about offsetting assets and liabilities. This ASU limits the scope of the original guidance. These ASUs are effective retrospectively for interim and annual periods beginning on or after January 1, 2013. The Company’s adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In February 2013, the FASB issued updated guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement of income or in the notes, separately for each component of comprehensive income, the current period reclassifications out of accumulated other comprehensive income by the respective line items of net income affected by the reclassification. The updated guidance is effective prospectively for reporting periods beginning after December 15, 2012. The Company’s adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

Note 3.   Vessels

 

                Vessel and Vessel Improvements

 

                At September 30, 2013, the Company’s operating fleet consisted of 45 dry bulk vessels.

 

Vessel and vessel improvements:

 

Vessels and Vessel Improvements, at December 31, 2012

  $ 1,714,307,653  

Vessel Improvements

    92,100  

Depreciation Expense

    (56,004,649 )

Vessels and Vessel Improvements, at September 30, 2013

  $ 1,658,395,104  

 

Note 4.    Debt

 

Debt consists of the following:

 

   

September 30, 2013

   

December 31, 2012

 
                 

Term loans

  $ 1,129,478,741     $ 1,129,478,741  

Payment-in-kind loans

    37,112,217       15,387,468  

Long-term debt

  $ 1,166,590,958     $ 1,144,866,209  

 

 
10

 

 

The Fourth Amended and Restated Credit Agreement

 

On June 20, 2012, the Company entered into a Fourth Amended and Restated Credit Agreement to its credit facility agreement, dated as of October 19, 2007, as amended up to the date thereof (the “Fourth Amended and Restated Credit Agreement”), which, among other things, (i) permanently waives any purported defaults or events of defaults that were the subject of a temporary waiver under the Sixth Amendatory and Commercial Framework Implementation Agreement (the "Sixth Amendment") to the Third Amended and Restated Credit Agreement dated October 19, 2007, including any alleged events of default arising from any purported breach of the minimum adjusted net worth covenant that occurred as a result of any failure to maintain the required adjusted net worth; (ii) converts the $1,129,478,741 outstanding under the revolving credit facility into a term loan; (iii) sets the maturity date as December 31, 2015, and, subject to the Company's satisfaction of certain conditions, including a collateral coverage ratio at December 31, 2015 of less than 80%, provides an option to the Company to further extend the maturity date by an additional 18 months to June 30, 2017 (the "Termination Date"); (iv) requires no mandatory repayments of principal until the Termination Date, other than a quarterly sweep of cash on hand in excess of $20,000,000 and upon the sale of vessels, additional financings or future equity raises by the Company. All amounts outstanding under the term loan will bear interest at LIBOR plus a margin that will include a payment-in-kind ("PIK") component.  The initial cash margin of 3.50% and PIK margin of 2.50% can be reduced on the basis of reduced leverage and proceeds from future equity raises by the Company.

 

The Fourth Amended and Restated Credit Agreement also provides for a new Liquidity Facility in the aggregate amount of $20,000,000, which permits the purchase or sale of vessels within certain parameters, permits the management of third party vessels and provides that all capitalized interest will be evidenced in the form of PIK loans, which will mature on the Termination Date.  On the Termination Date, the Company may elect to either (i) repay the PIK loans in cash; or (ii) convert the PIK loans into shares of cumulative convertible preferred stock, par value $10.00 per share. As of September 30, 2013, the outstanding amount of the term loan was $1,129,478,741, the amount of the PIK loans was $37,112,217 and no amount was drawn on the Liquidity Facility. In connection with the Fourth Amended and Restated Credit Amendment, the Company recorded $12,636,295 of deferred financing costs that are amortized over the life of the term loan, including amendment and professional fees.

 

In addition, the Fourth Amended and Restated Credit Agreement replaces the previously existing financial covenants and substitutes them with new covenants, which require the Company to (i) maintain a maximum leverage ratio of the term loan indebtedness, excluding the PIK loans, to EBITDA (as defined in the Fourth Amended and Restated Credit Agreement) on a trailing four quarter basis, commencing in the quarterly period ending September 30, 2013, of 13.9:1, December 31, 2013, of 12.3:1, March 31, 2014 of 10.6:1, June 30, 2014 of 9.2:1, September 30, 2014 of 8.5:1, December 31, 2014 of 8.1:1, March 31, 2015 of 7.8:1, June 30, 2015 of 7.6:1, September 30, 2015 of 7.5:1, and December 31, 2015 of 7.3:1 and, should the Termination Date be extended under the Company’s option, further declining in intervals to 6.2:1 for the quarterly period ending March 31, 2017; (ii) maintain a minimum interest coverage ratio of EBITDA to cash interest expenses on a trailing four quarter basis, expressed as a percentage, commencing in the quarterly period ending June 30, 2013, of 130%, September 30, 2013, of 140%, December 31, 2013, of 160%, March 31, 2014 of 180%, June 30, 2014 of 200%, September 30, 2014 of 210%, December 31, 2014 of 220%, March 31, 2015 of 220%, June 30, 2015 of 220%, September 30, 2015 of 220%, and December 31, 2015 of 220% and, should the Termination Date be extended, further escalating in intervals to 230% for the quarterly period ending March 31, 2017; (iii) maintain free cash with the agent in one or more accounts in an amount equal to $500,000 per vessel owned directly or indirectly by the Company, provided that the unutilized amount of the liquidity facility shall be deemed to constitute free cash for these purposes; and (iv) maintain a maximum collateral coverage ratio, commencing in the quarterly period ending September 30, 2014, of 100% of the term loan indebtedness and any related swap exposure, declining in intervals to 80% for the quarterly period ending December 31, 2015 and, should the Termination Date be extended, further declining in intervals to 70% for the quarterly period ending March 31, 2017. Refer to Note 1 - General Information- Liquidity note for further information regarding compliance with our covenants.

 

In connection with the Fourth Amended and Restated Credit Agreement, the Company entered into a Warrant Agreement, dated June 20, 2012, pursuant to which the Company issued 3,148,584 warrants convertible on a cashless basis into shares of the Company's common stock, par value $0.01 (the "Warrant Shares"), at a strike price of $0.01 per share of common stock. One-third of the warrants are exercisable immediately, the next third of the warrants are exercisable when the price of the Company's common stock reaches $10.00 per share and the last third of the warrants are exercisable when the price of the Company's common stock reaches $12.00 per share. Unexercised warrants will expire on June 20, 2022. The Company determined the relative fair value of the Warrant Shares at $7.2 million using the Monte Carlo simulation which was performed, and the mean value was selected. The assumptions used in the Monte Carlo simulation were the underlying stock price of $2.98, risk-free rate of 1.64%, expected volatility of 79.3%, expected term of 10 years and expected dividend yield of 0%. The fair value of the warrants was recorded as deferred financing cost and amortized over of the life the term loan agreement.

 

 
11

 

 

        Our obligations under the Fourth Amended and Restated Credit Agreement are secured by a first priority mortgage on each of the vessels in our fleet, and by a first assignment of all freights, earnings, insurances and requisition compensation relating to our vessels. The Fourth Amended and Restated Credit Agreement also limits our ability to create liens on our assets in favor of other parties.

 

For the nine months ended September 30, 2013, interest rates on the outstanding debt ranged from 3.64% to 7.40%, including a margin of 2.50% over LIBOR for the period up to June 19, 2012 and a margin of 3.50% over LIBOR thereafter. The weighted average effective interest rate for the nine months ended September 30, 2013, was 3.98%.

 

Interest Expense, inclusive of the PIK loans, consisted of:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

2013

   

September 30,

2012

   

September 30,

2013

   

September 30,

2012

 

Loan Interest

  $ 18,623,406     $ 19,884,907     $ 55,686,643     $ 40,566,866  

Amortization of Deferred Financing Costs

    2,106,220       2,096,279       6,271,128       4,428,572  

Total Interest Expense

  $ 20,729,626     $ 21,981,186     $ 61,957,771     $ 44,995,438  

 

Interest paid, exclusive of the PIK loans, in the nine-month periods ended September 30, 2013 and 2012 amounted to $36,124,215 and $33,326,847, respectively.

 

Note 5.   Derivative Instruments and Fair Value Measurements

 

Interest-Rate Swaps

 

The Company entered into interest rate swaps to effectively convert a portion of its debt from a floating to a fixed-rate basis. Under these swap contracts, exclusive of applicable margins, the Company paid fixed rate interest and received floating-rate interest amounts based on three-month LIBOR settings. The swaps were designated and qualified as cash flow hedges. The following table summarizes the interest rate swaps in place as of September 30, 2013 and December 31, 2012.

 

 

Notional Amount

Outstanding –

September 30, 2013

   

Notional Amount

Outstanding –

December 31, 2012

   

Fixed Rate

   

Maturity

  $ -     $ 81,500,000     3.895%    

01/2013

    -       84,800,000     3.900%    

09/2013

  $ -     $ 166,300,000              

 

The Company records the fair value of the interest rate swaps as an asset or liability on its balance sheet. The effective portion of the swap is recorded in accumulated other comprehensive income. No portion of the cash flow hedges was ineffective during the period ended September 30, 2013. The last swap expired in September 2013.

 

Forward freight agreements, bunker swaps and freight derivatives

 

The Company trades in forward freight agreements (“FFAs”), bunker swaps and freight derivatives markets, with the objective of utilizing these markets as economic hedging instruments that reduce the risk of specific vessels to changes in the freight market and/or bunker costs. The Company’s FFAs, bunker swaps and freight derivatives have not qualified for hedge accounting treatment. As of September 30, 2013 and December 31, 2012, the Company did not have any open positions and no fair value for derivative instruments is reflected in the accompany balance sheets.

 

Tabular disclosure of derivatives location

 

No portion of the cash flow hedges shown below was ineffective during the period ended September 30, 2013. The effect of cash flow hedging relationships on the balance sheets as of September 30, 2013 and December 31, 2012, and the statement of operations for the periods ended September 30, 2013 and 2012 are as follows:

 

 
12

 

 

The effect of designated derivative instruments on the consolidated balance sheets:  

 

   

Amount of Loss Recognized in AOCI on Derivative
(Effective Portion)

 

Derivatives designated for cash flow hedging relationships

 

September 30, 2013

   

December 31, 2012

 
                 

Interest rate swaps

  $ 0     $ (2,243,833 )

Total

  $ 0     $ (2,243,833 )

 

The effect of derivative instruments on statements of operations:

 


     

Effective Portion of Gain (Loss) Reclassified from Accumulated Other

Comprehensive Income (Loss)

 
     

Three Months Ended

   

Nine Months Ended

 
 

Location

of Gain (Loss)

Recognized

 

September 30,

2013

   

September 30,

2012

   

September 30,

2013

   

September 30,

2012

 

Derivatives designated as hedging instruments

                                 

Interest rate swaps

Interest expense

  $ (657,812 )   $ (1,622,399 )   $ (2,302,273 )   $ (5,348,189 )

 

     

Amount of Gain (Loss)

   

Amount of Gain (Loss)

 
     

Three Months Ended

   

Nine Months Ended

 
 

Location

of Gain (Loss)

Recognized

 

September 30,

2013

   

September 30,

2012

   

September 30,

2013

   

September 30, 2

012

 

Derivatives not designated as hedging instruments

                                 

FFAs, bunker swaps, freight and bunker derivatives

Other income

  $     $     $     $ 1,028,375  

 

Cash Collateral Disclosures

 

The Company does not offset fair value amounts recognized for derivatives by the right to reclaim cash collateral or the obligation to return cash collateral. The amount of collateral to be posted is defined by the terms of the respective master agreement executed with counterparties or exchanges and is required when agreed upon threshold limits are exceeded. As of September 30, 2013 and December 31, 2012, the Company had no outstanding amounts paid as collateral related to the derivative fair value positions.

 

Fair Value Measurements

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

 

Cash, cash equivalents and restricted cash—the carrying amounts reported in the consolidated balance sheet for interest-bearing deposits approximate their fair value due to their short-term nature thereof.

 

Debt—the carrying amounts of borrowings under the revolving credit agreement approximate their fair value, due to the variable interest rate nature thereof.

 

 
13

 

 

Interest rate swaps—the fair value of interest rate swaps (used for hedging purposes) is the estimated amount that the Company would receive or pay to terminate the swaps at the reporting date.

 

Forward freight agreements (FFAs)—the fair value of FFAs is determined based on quoted rates.

 

Freight and bunker derivative instruments—the fair value of freight and bunker derivative contracts is the estimated amount that the Company would receive or pay to terminate the option contracts at the reporting date.

 

Bunker swaps—the fair value of bunker swaps is the estimated amount that the Company would receive or pay to terminate the swaps at the reporting date.

 

Investment— include our available-for-sale securities that are traded in active market internationally. The fair value is measured by using closing stock price from active market.

 

The Company defines fair value, establishes a framework for measuring fair value and provides disclosures about fair value measurements. The fair value hierarchy for disclosure of fair value measurements is as follows:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities. Our Level 1 non-derivatives include cash, money-market accounts, restricted cash accounts and investment.

 

Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable. Our Level 2 non-derivatives include our term loan account.

 

Level 3 – Inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

 

The following table summarizes assets and liabilities measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012:

 

   

September 30, 2013

   

December 31, 2012

 
   

Level 1

   

Level 2

   

Level 3

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                                               

Investment

  $ 22,110,249                 $ 197,509              

Liabilities:

                                               

Interest rate swaps

                          $ 2,243,833        

 

 

Note 6. Accounts Receivable

 

Accounts receivable for the periods ended September 30, 2013 and December 31, 2012 include allowance for doubtful accounts of zero and $5,351,609, respectively.

 

Note 7. Commitments and Contingencies

 

Legal Proceedings

 

The Company is involved in legal proceedings and may become involved in other legal matters arising in the ordinary course of its business. The Company evaluates these legal matters on a case-by-case basis to make a determination as to the impact, if any, on its business, liquidity, results of operations, financial condition or cash flows. The Company currently is party to the legal proceedings described below.

 

Shareholder Derivative Lawsuits

 

On June 13, 2011, a complaint against the Company's board of directors and a former director was filed in the United States District Court for the Southern District of New York alleging, among other things, that the directors breached their fiduciary duties of loyalty, good faith and care in connection with (i) director and officer compensation in the years 2008, 2009 and 2010; (ii) the Company's Management Agreement with Delphin Shipping LLC ("Delphin") (specifically, according to the complaint, alleging conflicts of interest between the Company's Chief Executive Officer, Delphin and the Company); and (iii) the adjournment of the Company's 2011 Annual Meeting of Shareholders. The complaint seeks rescission of director and officer compensation for those years as well as rescission of the Management Agreement, and seeks unspecified damages. The Company moved for summary judgment on April 1, 2013.

 

 
14

 

 

                On August 23, and August 30, 2011, respectively, two additional complaints were filed in the Supreme Court of the State of New York (New York County) against the Company's board of directors and a former director alleging substantially similar breaches of fiduciary duties as those alleged in the lawsuit filed on June 13, 2011. On January 10, 2012, a motion by the Company was granted, which stays these state court actions pending the outcome of the June 13, 2011 federal action.   Those matters remain stayed. 

 

                On October 31, 2011, a complaint was filed in the United States District Court for the Southern District of New York by one of the plaintiffs in the June 13, 2011 federal action against the Company and its board of directors alleging deficiencies in the Company's proxy statement in connection with its special meeting of shareholders that was held on November 17, 2011. The Company revised its proxy statement prior to the meeting, causing plaintiffs to withdraw a request for injunctive relief in connection with their complaint.  The Company served an answer in this action on March 19, 2012.

 

Following the motion for summary judgment with respect to the June 13, 2011 federal action and mediation of the matter, on June 14, 2013 the parties therein moved for an order granting a proposed settlement (the "Proposed Settlement"), which, if approved, would act to settle each of the above-referenced actions.  The Proposed Settlement contains a denial by all defendants of wrongdoing and liability and mutual releases between and amongst the parties.  It also provides for certain changes to the Company's policies concerning director and executive compensation and certain other corporate governance policies with which plaintiffs in those actions had taken issue. The Proposed Settlement permits Plaintiffs' counsel to request an award of attorneys' fees and expenses which, in the aggregate, does not exceed $1.575 million, which if approved would be paid by the insurance and, in part, by the Company. A hearing on the Proposed Settlement was held on September 4, 2013, and was continued until November 14, 2013. On that date, the settlement was approved, including an attorneys' fee award to plaintiffs of $1.2 million plus expenses not to exceed $65,000. 

 

Vessel Technical Management Contract

 

The Company has technical management agreements for certain of its vessels with independent technical managers. The Company paid average monthly technical management fees of $10,315 and $10,312 per vessel during the nine months ended September 30, 2013 and 2012, respectively.

 

Other Commitments

 

On July 28, 2011, the Company entered into an agreement to charter-in a 37,000 dwt newbuilding Japanese vessel that is expected to be delivered between May 2014 and October 2014 for seven years with an option for an additional one year. The hire rate for the first to seventh year is $13,500 per day and $13,750 per day for the eighth year option. The Company has options to purchase the vessel starting at the end of the fifth year.

 

Note 8. Related Party Transactions

 

On August 4, 2009, the Company entered into a management agreement (the "Management Agreement") with Delphin Shipping LLC ("Delphin"), a Marshall Islands limited liability company affiliated with Kelso Investment Associates VII, KEP VI, LLC and the Company's Chief Executive Officer, Sophocles Zoullas.  Delphin was formed for the purpose of acquiring and operating dry bulk and other vessels. Under the terms of the Management Agreement, the Company provides commercial and technical supervisory vessel management services to dry bulk vessels acquired by Delphin for a fixed monthly management fee based on a sliding scale. Pursuant to the terms of the Management Agreement, the Company has been granted an opportunity to acquire for its own account any dry bulk vessel that Delphin proposes to acquire.  The Company has also been granted a right of first refusal on any dry bulk charter opportunity, other than a renewal of an existing charter for a Delphin-owned vessel that the Company reasonably deems suitable for a Company-owned vessel.  The Management Agreement also provides the Company a right of first offer on the sale of any dry bulk vessel by Delphin. The term of the Management Agreement is one year and is renewable for successive one year terms at the option of Delphin.

 

 
15

 

 

Pursuant to the Management Agreement, the Company contracted to provide commercial and technical supervisory management services for Delphin vessels for a monthly fee of $15,834 for the first 10 vessels, $11,667 for the second 10 vessels and $8,750 for the third 10 vessels. Construction of the first vessel commenced in December 2010. Total management fees for the periods ended September 30, 2013 and 2012 amounted to $1,635,066 and $1,635,066, respectively. The advanced balance received from Delphin on account for the management of its vessels as of September 30, 2013 amounted to $224,274. The total reimbursable expenses for the periods ended September 30, 2013 and 2012 amounted to $412,350 and $267,410, respectively. The balance due from Delphin as of September 30, 2013 amounted to $131,910. The balance due mainly consists of management fees, administrative service fees and other reimbursable expenses.

 

Note 9. Earnings Per Common Share

 

The computation of basic net loss per share is based on the weighted average number of common shares outstanding during the period. Weighted average shares outstanding for the period ended September 30, 2013, includes the weighted average underlying Warrant Shares issuable upon exercise of the 327,978 warrants at the exercise price of $0.01 per share. In accordance with the accounting literature, the Company has given effect to the issuance of these warrants in computing basic net loss per share because the underlying shares are issuable for little or no cash consideration. Diluted net loss per share gives effect to stock options and restricted stock units using the treasury stock method, unless the impact is anti-dilutive. Diluted net loss per share as of September 30, 2013, does not include 303,664 restricted stock units and 1,908,371 stock options as their effect was anti-dilutive. Diluted net loss per share as of September 30, 2012, does not include 614,458 restricted stock units and 1,908,371 stock options as their effect was anti-dilutive.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

2013

   

September 30,

2012

   

September 30,

2013

   

September 30,

2012

 

Net loss

  $ (37,630,051 )   $ (29,837,360 )   $ (39,294,848 )   $ (70,377,128 )

Weighted Average Shares – Basic

    16,986,395       16,821,024       16,973,813       16,153,184  

Dilutive effect of stock options and restricted stock units

    -       -       -       -  

Weighted Average Shares - Diluted

    16,986,395       16,821,024       16,973,813       16,153,184  

Basic Earnings Per Share

  $ (2.22 )   $ (1.77 )   $ (2.32 )   $ (4.36 )

Diluted Earnings Per Share

  $ (2.22 )   $ (1.77 )   $ (2.32 )   $ (4.36 )

 

Note 10. Stock Incentive Plans

 

Effective as of the opening of trading on May 22, 2012, the Company completed a 1 for 4 reverse stock split as previously approved by the Company's shareholders. Proportional adjustments were made to the Company's issued and outstanding common stock and to its common stock underlying stock options and other common stock-based equity grants outstanding immediately prior to the effectiveness of the reverse stock split to reflect the reverse stock split. No fractional shares were issued in connection with the reverse stock split, as shareholders who would have otherwise held a fractional share of common stock received a cash payment in lieu of that fractional share. All references herein to common stock and per share data have been retrospectively adjusted to reflect the reverse stock split.

 

2011 Equity Incentive Plan. In November 2011, our shareholders approved the 2011 Equity Incentive Plan (the “2011 Plan”) for the purpose of affording an incentive to eligible persons. The 2011 Equity Incentive Plan provides for the grant of equity based awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, unrestricted stock, other equity based or equity related awards, and/or performance compensation awards based on or relating to the Company's common shares to eligible non-employee directors, officers, employees or consultants. The 2011 Plan is administered by a compensation committee or such other committee of the Company's board of directors. An aggregate of 5.9 million of the Company's common shares have been authorized for issuance under the 2011 Plan. The shares reserved for issuance under the 2011 Plan did not adjust in accordance with the 1 for 4 reverse stock split discussed above. However, the 2011 Plan was approved by shareholders subject to the Company’s confirmation in the proxy materials relating to the approval of the 2011 Plan that no options granted under the plan would, in the aggregate, exceed 10% of the Company’s issued and outstanding shares on a fully diluted basis on the date the options first become exercisable.

 

2009 Equity Incentive Plan. In May 2009, our shareholders approved the 2009 Equity Incentive Plan (the “2009 Plan”) for the purpose of affording an incentive to eligible persons. The 2009 Plan provides for the grant of equity based awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, unrestricted stock, other equity based or equity related awards, and/or performance compensation awards based on or relating to the Company’s common shares to eligible non-employee directors, officers, employees or consultants. The 2009 Plan is administered by a compensation committee or such other committee of the Company’s board of directors. A maximum of 1.05 million of the Company’s common shares have been authorized for issuance under the 2009 Plan, which have been adjusted in accordance with the one-for-four reverse stock split effective on May 22, 2012.

 

 
16

 

 

As of September 30, 2013, RSUs covering a total of 303,664 of the Company’s shares are outstanding. The restricted stock units (“RSUs”) vest ratably between three to five years. These RSUs also entitle the participant to receive a dividend equivalent payment on the unvested portion of the underlying shares granted under the award, each time the Company pays a dividend to the Company’s shareholders. The dividend equivalent rights on the unvested RSUs are forfeited upon termination of employment. The Company is amortizing to non-cash compensation expense the fair value of the non-vested restricted stock at the grant date. For the nine months ended September 30, 2013 and 2012, the amortization charge was $3,494,528 and $5,924,091, respectively. The remaining expense for each of the years ending 2013 and 2014 will be $380,206 and $528,905, respectively.

 

As of September 30, 2013 and December 31, 2012, options covering 1,908,371 of the Company’s common shares are outstanding with exercise prices ranging from $3.34 to $87.52 per share (the market prices at dates of grants). The options granted to the independent non-employee directors vested and became exercisable on the grant dates. The options granted to members of its management under the 2005 Plan and 2009 Plan vest and become exercisable over three years. The options granted to members of its management under the 2011 Plan vest in four equal annual installments beginning on the grant date. All options expire between five to ten years from the date of grant. For the nine months ended September 30, 2013 and 2012, the Company has recorded a non-cash compensation charge from stock options of $833,650 and $1,088,623, respectively. The remaining expense for each of the years ending 2013, 2014 and 2015 will be $154,851, $432,310 and $123,032 respectively.

 

The non-cash compensation expenses recorded by the Company and included in General and Administrative Expenses are as follows:

 

   

Three Months Ended

   

Nine Months Ended

 
    September 30,     September 30,     September 30,     September 30,  
   

2013

   

2012

   

2013

   

2012

 

Stock Option Plans

  $ 154,851     $ 340,671     $ 833,650     $ 1,088,623  

Restricted Stock Grants

    407,753       1,790,119       3,494,528       5,924,091  

Total Non-cash compensation expense

  $ 562,604     $ 2,130,790     $ 4,328,178     $ 7,012,714  

 

As of September 30, 2013, Dividend Equivalent Rights Awards (“DERs”) equivalent to 147,667 of the Company’s common shares are outstanding to its independent non-employee directors and members of its management. These DERs entitle the participant to receive a dividend equivalent payment each time the Company pays a dividend to the Company’s shareholders. For the nine and three months ended September 30, 2013 and 2012, no compensation expenses were recorded.

 

 
17

 

 

ITEM   2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

The following is a discussion of the Company's financial condition and results of operation for the nine-month periods ended September 30, 2013 and 2012. This section should be read in conjunction with the consolidated financial statements included elsewhere in this report and the notes to those financial statements.

 

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995, and are intended to be covered by the safe harbor provided for under these sections. These statements may include words such as “believe,” “estimate,” “project,” “intend,” “expect,” “plan,” “anticipate,” and similar expressions in connection with any discussion of the timing or nature of future operating or financial performance or other events. Forward-looking statements reflect management's current expectations and observations with respect to future events and financial performance. Where we express an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed, projected, or implied by those forward-looking statements. The principal factors that affect our financial position, results of operations and cash flows include charter market rates, which have declined significantly from historic highs, periods of charter hire, vessel operating expenses and voyage costs, which are incurred primarily in U.S. dollars, depreciation expenses, which are a function of the cost of our vessels, significant vessel improvement costs and our vessels' estimated useful lives, and financing costs related to our indebtedness. Our actual results may differ materially from those anticipated in these forward looking statements as a result of certain factors which could include the following: (i) changes in demand in the dry bulk market, including, without limitation, changes in production of, or demand for, commodities and bulk cargoes, generally or in particular regions; (ii) greater than anticipated levels of dry bulk vessel newbuilding orders or lower than anticipated rates of dry bulk vessel scrapping; (iii) changes in rules and regulations applicable to the dry bulk industry, including, without limitation, legislation adopted by international bodies or organizations such as the International Maritime Organization and the European Union or by individual countries; (iv) actions taken by regulatory authorities; (v) changes in trading patterns significantly impacting overall dry bulk tonnage requirements; (vi) changes in the typical seasonal variations in dry bulk charter rates; (vii) changes in the cost of other modes of bulk commodity transportation; (viii) changes in general domestic and international political conditions; (ix) changes in the condition of the Company's vessels or applicable maintenance or regulatory standards (which may affect, among other things, our anticipated drydocking costs); (x) significant deteriorations in charter hire rates from current levels or the inability of the Company to achieve its cost-cutting measures, (xi) the outcome of legal proceeding in which we are involved; and (xii) and other factors listed from time to time in our filings with the Securities and Exchange Commission. This discussion also includes statistical data regarding world dry bulk fleet and orderbook and fleet age. We generated some of this data internally, and some were obtained from independent industry publications and reports that we believe to be reliable sources. We have not independently verified this data nor sought the consent of any organizations to refer to their reports in this Quarterly Report. We disclaim any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

Overview

 

Eagle Bulk Shipping Inc. (the "Company", "we", "us", or "our"), incorporated under the laws of the Republic of the Marshall Islands (the "Marshall Islands") and headquartered in New York City, is engaged primarily in the ocean transportation of a broad range of major and minor bulk cargoes, including iron ore, coal, grain, cement and fertilizer, along worldwide shipping routes. We operate in the Handymax sector of the dry bulk industry, with particular emphasis on the Supramax class of vessels. We own one of the largest fleets of Supramax dry bulk vessels in the world. Supramax dry bulk vessels range in size from 50,000 to 60,000 deadweight tons, or dwt. These vessels have the cargo loading and unloading flexibility of on-board cranes while offering cargo carrying capacities approaching that of Panamax dry bulk vessels, which range in size from 60,000 to 100,000 dwt and must rely on port facilities to load and offload their cargoes. We believe that the cargo handling flexibility and cargo carrying capacity of the Supramax class vessels make them attractive to charterers.

 

As of September 30, 2013, we owned and operated a modern fleet of 45 oceangoing vessels comprised of 43 Supramax and 2 Handymax vessels with a combined carrying capacity of 2,451,259 dwt and an average age of approximately six years.

 

Each of our vessels is owned by us through a separate wholly owned Republic of the Marshall Islands limited liability company.

 

On June 20, 2012, we entered into a Fourth Amended and Restated Credit Agreement, as discussed in Note 4 to the consolidated financial statements included in this Quarterly Report and the section entitled “Liquidity and Capital Resources” below.

 

The Fourth Amended and Restated Credit Facility has financial covenants that begin in 2013 and get increasingly tighter with each progressive quarter. The covenants are primarily driven off of a trailing twelve month calculation of EBITDA. In order to remain in compliance with our covenants, charter hire rates, the primary driver of our EBITDA, must increase over time. Charter hire rates have been driven down during the recession and have been volatile. Despite relatively low charter hire rates in the last part of 2012 and the first three quarters of 2013, the Company estimates that it will meet all of its covenants in 2013, based on the current dry bulk rates that have been in effect from March 2013 and cost cutting measures that the Company has put in place. Such cost cutting measures include but are not limited to reductions in labor costs, upgrades and new equipment expenses. However, if the current charter hire rates do not improve significantly for the remainder of 2013 and in the first quarter of 2014, the Company will not be in compliance with the maximum leverage ratio and the minimum interest coverage ratio covenants under the Fourth Amended and Restated Credit Facility at or after March 31, 2014; and, if charter hire rates deteriorate from current levels or if we are unable to achieve our cost cutting measures or if we realize additional losses on our Korea Lines Corporation available for sale investment, the Company will not be in compliance with the maximum leverage ratio covenant in the fourth quarter of 2013.

 

 
18

 

 

If the Company does not comply with the financial covenants contained in the Fourth Amended and Restated Credit Facility, such a non-compliance would constitute an event of default under the credit agreement, the Company would seek to obtain a waiver or modification to the credit agreement from our creditors, however there is no guarantee that we would receive such a waiver or that such a waiver would be on terms or conditions that would be acceptable to the Company. If we were to be unable to cure an event of default, our debt could be called by the creditors and all amounts then outstanding would be reclassified as a current liability and alternative sources of financing would need to be sought on terms that may not be favorable to the Company or the Company may need to seek additional capital through equity or debt offerings or through the sale of assets. Should such events happen, there can be no assurances that the Company would be able to procure alternate financing or sufficient sources of additional capital. If the Company were unable to obtain a waiver or modification of the credit agreement or obtain such alternate financing or additional capital, there is substantial doubt about the Company's ability to continue as a going concern.

 

On January 3, 2013, a comprehensive termination agreement between the Company and KLC became effective, pursuant to which we agreed to accept $63.7 million on a non-interest bearing installment note and 1,224,094 common shares of KLC stock as compensation for the early termination of our 13 charters with KLC. Under the termination agreement, cash payments of $10.3 million were paid in the first quarter of 2013, and the balance of $53.4 million would have been paid in cash installments through 2021, with the majority of the payments to be paid in the last five years. The KLC stock certificates were issued on February 7, 2013 and were secured at the Korean Securities Depository for six months. On August 7, 2013, we took possession of the share certificates.    

 

In the first quarter of 2013, as the settlement effectively terminated the charters with KLC, the Company released $3.5 million of bunker liabilities and an aggregate $13.7 million balance related to deferred revenue and to the unamortized fair value of charters below and above contract value. The Company valued the equity received from KLC at $5.9 million and the note receivable at $2.7 million. The Company recorded revenue associated with the termination of $32.8 million related to amounts previously owed but not recognized and a termination gain of $3.3 million.  

 

On March 28, 2013, the Korean court approved an amendment to the KLC termination agreement after receiving a favorable vote from the concerned parties. The amendment included a 1 to 15 reduction to the number of KLC common shares outstanding at that date and also reduced our long-term receivable by 90%, substituting that portion of the commitment with 538,751 additional common shares of KLC to be issued to the Company at a date to be determined in the second quarter. We evaluated the fair value of the additional KLC common shares to be issued and the impact to our long-term receivable and determined that the aggregate value exceeded the carrying value of our long-term note receivable recorded in January of 2013; therefore, we did not have a loss on that transaction. Under our accounting policy, any gain on that transaction should be recorded upon settlement. As 90% of the long-term note receivable was paid in equity in the second quarter of 2013, we reclassified that portion as a current asset in the “Investment” line of our balance sheet at March 31, 2013. We considered the March 28, 2013 decision by KLC to dilute the value of previously issued KLC shares to be a triggering event requiring the evaluation of whether a permanent decrease in value had occurred. We determined that a permanent decrease in value had occurred and as of March 31, 2013, we recognized the change in the fair value of our existing KLC shares as other-than-temporary and recorded in other expense a loss of approximately $3.0 million.

  

On May 9, 2013, the 538,751 additional KLC common shares were issued and secured at the Korean Securities Depository. On November 11, 2013, we took possession of the share certificates. These shares replace the note receivable recorded pursuant to the January 3, 2013, termination agreement. The fair market value of the shares upon issuance was in excess of the fair value of the receivable and result a gain of $32.5 million in the second quarter of 2013.

 

KLC completed its financial reorganization by the middle of September 2013, and emerged from bankruptcy in October 2013. On October 28, 2013, we received early prepayment of $3.9 million to settle our long term receivable from KLC, which resulted in an additional gain on time charter agreement termination of $3.5 million recognized in the third quarter of 2013 as the carrying value at September 30, 2013 was adjusted to reflect the elimination of credit risk.

 

As of September 30, 2013, we sold 55,628 shares of KLC for a total consideration of $2.2 million and we realized loss of $0.4 million.

 

The KLC stock held by the Company is designated as Available for sale and is reported at fair value, with unrealized gains and losses recorded in shareholders’ equity as a component of accumulated other comprehensive income. As of September 30, 2013, the fair value of the remaining 566,529 KLC shares held by the Company was $22.1 million. As of September 30, 2013, the change in the fair value of our KLC investment was considered as other than temporary, and therefore the Company recorded a non-cash impairment loss of $7.3 million in Other expense in the third quarter of 2013.

 

We maintain our principal executive offices at 477 Madison Avenue, New York, New York 10022. Our telephone number at that address is (212) 785-2500. Our website address is www.eagleships.com. Information contained on our website does not constitute part of this Quarterly Report.

 

Our financial performance is based on the following key elements of our business strategy:

 

 

(1)

concentration in one vessel category: Supramax class of Handymax dry bulk vessels, which we believe offer size, operational and geographical advantages over Panamax and Capesize vessels;

 

 

(2)

our strategy is to balance between long-term time charters and revenues generated by short-term time charters and voyage charters to maximize our financial performance throughout shipping cycles. We have entered into time and voyage charter employment contracts for all the vessels in our operating fleet. We charter some of our vessels pursuant to one- to three-year time charters to allow us to take advantage of the stable cash flow and high utilization rates that are associated with medium to long-term time charters. The vessels that are on charters whose revenues are linked to the Baltic Supramax index generally have durations of one-year or less. These index linked charters and voyage charters will provide us with the revenue upside when the market improves. We believe that this structure provides significant visibility to our future financial results and allows us to take advantage of the relatively stable cash flows and high utilization rates that are associated with medium- to long-term time charters, while at the same time providing us with the revenue upside potential from the index linked or short-term time charters or voyage charters. All the charters provide for fixed semi-monthly payments in advance. While we remain focused on securing charters with fixed base rates, we have also entered into contracts with fixed minimum rates and profit sharing arrangements, enabling us to benefit from an increasing rate environment while still minimizing downside risk. We regularly monitor the dry bulk shipping market and based on market conditions we may consider taking advantage of short-term charter rates;

 

 

(3)

maintain high quality vessels and improve standards of operation through improved environmental procedures, crew training and maintenance and repair procedures; and

 

 

(4)

maintain a balance between purchasing vessels as market conditions and opportunities arise and maintaining prudent financial ratios (e.g. leverage ratio).

 

 

 
19

 

 

We have employed all of our vessels in our operating fleet on time and voyage charters. The following table represents certain information about our revenue earning charters with respect to our operating fleet as of September 30, 2013:

 

Vessel

 

Year

Built

 

  Dwt  

 Charter Expiration (1)

 

 

 Daily Charter Hire Rate

   

 

 

 

 

 

 

 

 

 

 

 

   

Avocet

 

2010

 

 

53,462

 

Oct 2013

 

$

8,000(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bittern

 

2009

 

 

57,809

 

Nov 2013 to Jan 2014

 

$

8,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canary

 

2009

 

 

57,809

 

Nov 2013 to Dec 2013

 

$

10,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cardinal

 

2004

 

 

55,362

 

Nov 2013

   

Voyage(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condor

 

2001

 

 

50,296

 

Oct 2013

 

$

9,000(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crane

 

2010

 

 

57,809

 

Nov 2013

   

Voyage (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crested Eagle

 

2009

 

 

55,989

 

Nov 2013

 

$

 7,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crowned Eagle

 

2008

 

 

55,940

 

Nov 2013 to Dec 2013

 

$

 9,450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Egret Bulker 

 

2010 

 

 

57,809 

 

Nov 2013

 

8,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Falcon

 

2001

 

 

50,296

 

Oct 2013

 

$

8,500(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gannet Bulker

 

2010

 

 

57,809

 

Dec 2013 to Feb 2014

 

$

8,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Golden Eagle

 

2010

 

 

55,989

 

Nov 2013 to Dec 2013

 

$

9,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goldeneye

 

2002

 

 

52,421

 

Oct 2013

   

Voyage (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grebe Bulker

 

2010

 

 

57,809

 

Oct 2013

 

$

6,000(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrier

 

2001

 

 

50,296

 

Nov 2013

 

$

 10,750(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hawk I

 

2001

 

 

50,296

 

Oct 2013

 

$

 10,000(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ibis Bulker

 

2010

 

 

57,775

 

Oct 2013

 

$

7,750(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Imperial Eagle

 

2010

 

 

55,989

 

Jul 2014 to Nov 2014

 

 

Index

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jaeger

 

2004

 

 

52,248

 

Nov 2013

 

$

13,750(2)

 

 

 

 

 
20

 

 

Jay

 

2010

 

 

57,802

 

Nov 2013

 

$

8,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kestrel I

 

2004

 

 

50,326

 

Oct 2013

 

$

9,850(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Kingfisher

 

2010

 

 

57,776

 

Nov 2013 to Dec 2013

 

$

8,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kite

 

1997

 

 

47,195

 

Nov 2013

 

$

7,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kittiwake

 

2002

 

 

53,146

 

Oct 2013

 

$

6,500(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Martin

 

2010

 

 

57,809

 

Oct 2013

   

Voyage (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merlin

 

2001

 

 

50,296

 

Oct 2013

 

$

9,600(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nighthawk

 

2011

 

 

57,809

 

Oct 2013

 

$

9,000(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oriole

 

2011

 

 

57,809

 

Dec 2013 to Feb 2014

 

$

 10,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Osprey I

 

2002

 

 

50,206

 

Dec 2013

 

$

 10,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owl

 

2011

 

 

57,809

 

Oct 2013

 

$

10,500(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Peregrine

 

2001

 

 

50,913

 

Nov 2013

 

 

 Voyage (2)

 

 

                         

Petrel Bulker

 

 

2011

 

 

 

57,809

 

 

May 2014 to Sep 2014

 

 

 

$17,650(4) (with 50%

profit share over $20,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Puffin Bulker

 

 

2011

 

 

 

57,809

 

 

May 2014 to Sep 2014

 

 

 

$17,650(4) (with 50%

profit share over $20,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redwing

 

2007

 

 

53,411

 

Nov 2013

 

$

6,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Roadrunner Bulker 

 

  2011

 

 

 

  57,809

 

 

Aug 2014 to Dec 2014

 

 

 

$17,650(4) (with 50%

profit share over $20,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandpiper Bulker 

 

2011

 

 

 

57,809

 

 

Aug 2014 to Dec 2014

 

 

 

$17,650(4) (with 50%

profit share over $20,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shrike

 

2003

 

 

53,343

 

Oct 2013

 

$

 7,850(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skua

 

2003

 

 

53,350

 

Dec 2013

 

$

8,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sparrow

 

2000

 

 

48,225

 

Oct 2013

 

$

12,000(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stellar Eagle

 

2009

 

 

55,989

 

Jan 2014 to Feb 2014

 

 

Index(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tern

 

2003

 

 

50,200

 

Drydocking

 

 

 (6)

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Thrasher

 

2010

 

 

53,360

 

Oct 2013

 

$

8,300(2)

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Thrush

 

2011

 

 

53,297

 

Oct 2013

 

$

7,000(2)

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

     Woodstar

 

2008

 

 

53,390

 

Oct 2013

 

$

5,000(2)

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Wren

 

2008

 

 

53,349

 

Nov 2013

 

$

 6,000

 

 

 

 


 

(1)

The date range provided represents the earliest and latest date on which the charterer may redeliver the vessel to the Company upon the termination of the charter. The time charter hire rates presented are gross daily charter rates before brokerage commissions, ranging from 0.625% to 5.00%, to third party ship brokers.

 

(2)

Upon conclusion of the previous charter the vessel will commence a short term charter for up to six months or a spot voyage.

 

(3)

Index, an average of the trailing Baltic Supramax Index.

 

(4)

The charterer has an option to extend the charter by two periods of 11 to 13 months each.

 

(5)

Upon conclusion of previous charter, the vessel will be entered into Navig8 Bulk Pool for a period between 10 to 14 months.

 

(6)

Upon conclusion of the drydocking the vessel will commence a short term charter for up to six months.

 

 

 
21

 

 

Fleet Management

 

The management of our fleet includes the following functions:

 

Strategic management. We locate, obtain financing and insurance for, purchase and sell vessels.

 

Commercial management. We obtain employment for our vessels and manage our relationships with charterers.

 

Technical management. The technical manager performs day-to-day operations and maintenance of our vessels.

 

Commercial and Strategic Management

 

We carry out the commercial and strategic management of our fleet through our wholly owned subsidiaries, Eagle Shipping International (USA) LLC, a Republic of the Marshall Islands limited liability company that maintains its principal executive offices in New York City, and Eagle Bulk Pte. Ltd, a Singapore company. We currently have a total of fifty-eight shore based personnel, including our senior management team and our office staff, who either directly or through these subsidiaries, provides the following services:

 

•     commercial operations and technical supervision;

•     safety monitoring;

•     vessel acquisition; and

•     financial, accounting and information technology services.

Technical Management

 

The technical management of a portion of our fleet is provided by our unaffiliated third party technical managers, V.Ships and Anglo Eastern International Ltd., which we believe are two of the world's largest providers of independent ship management and related services. We have also set up our own in-house technical management capability, through which we provide technical management services to a portion of our vessels, in order to establish a vessel management bench-mark with the external technical managers. We review the performance of the managers on an annual basis and may add or change technical managers.

  

Technical management includes managing day-to-day vessel operations, performing general vessel maintenance, ensuring regulatory and classification society compliance, supervising the maintenance and general efficiency of vessels, arranging our hire of qualified officers and crew, arranging and supervising drydocking and repairs, purchasing supplies, spare parts and new equipment for vessels, appointing supervisors and technical consultants and providing technical support. Our technical managers also manage a