Genco Shipping & Trading - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended September 30, 2008

 

OR

 

 

For the transition period from _________________________ to _________________________

 

Commission file number 000-51442

 

(Exact name of registrant as specified in its charter)

 

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

 

Yes     X          No          

 

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

 

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

 

Yes               No       X   

 

The number of shares outstanding of each of the issuer’s classes of common stock, as of November 10, 2008:

Common stock, $0.01 per share 31,517,678 shares.

Genco Shipping & Trading Limited

Form 10-Q for the three and nine months ended September 30, 2008 and 2007

 

                                                                                                       ;                                        Page

 

PART I.  FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

Genco Shipping & Trading Limited

Consolidated Balance Sheets as of September 30, 2008

and December 31, 2007

(U.S. Dollars in thousands, except for share data)

 

 

 

Genco Shipping & Trading Limited

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007

(U.S. Dollars in Thousands, Except for Earnings per Share and Share Data)

(Unaudited)

Genco Shipping & Trading Limited

Consolidated Statement of Shareholders’ Equity and Comprehensive Income (Unaudited)

For the Nine Months Ended September 30, 2008

(U.S. Dollars in Thousands Except for Per Share and Share Data)

See accompanying notes to consolidated financial statements.

 

Genco Shipping & Trading Limited

Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2008 and 2007

(U.S. Dollars in Thousands)

(Unaudited)

Genco Shipping & Trading Limited

 (U.S. Dollars in Thousands Except Per Share and Share Data)

 

 

 

The accompanying consolidated financial statements include the accounts of Genco Shipping & Trading Limited (“GS&T”) and its wholly owned subsidiaries (collectively, the “Company,” “we” or “us”). The Company is engaged in the ocean transportation of drybulk cargoes worldwide through the ownership and operation of drybulk carrier vessels. GS&T was incorporated on September 27, 2004 under the laws of the Marshall Islands and is the sole owner of all of the outstanding shares of the following subsidiaries: Genco Ship Management LLC; Genco Investments LLC; and the ship-owning subsidiaries as set forth below.

 

Below is the list of the Company’s wholly owned ship-owning subsidiaries as of September 30, 2008:

 

 

 

 

 

 

 

(1) Dates for vessels being delivered in the future are estimates based on guidance received from the sellers and/or the respective shipyards. 

 

(2) Built dates for vessels delivering in the future are estimates based on guidance received from the sellers and respective shipyards.

 

 

During May 2008, the Company closed on an equity offering of 2,702,669 shares of Genco common stock at an offering price of $75.47 per share.  The Company received net proceeds of approximately $195,479 after deducting underwriters' fees and expenses.  On May 28, 2008, the Company utilized $195,000 of these proceeds to repay outstanding borrowings under the 2007 Credit Facility.  Additionally, in the same offering, OCM Fleet Acquisition LLC sold 1,000,000 shares at the same offering price of $75.47 per share.  The Company did not receive any proceeds from the common stock sold by OCM Fleet Acquisition LLC. As a result of the foregoing transactions, Mr. Georgiopoulos may be deemed to beneficially own 13.13% of our common stock (including shares held through Fleet Acquisition LLC), and OCM Fleet Acquisition LLC may be deemed to beneficially own 4.80% of our common stock.

 

The accompanying unaudited consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements included in the Annual Report on our Form 10-K for the year ended December 31, 2007 (the “2007 10-K”). 

 

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which include the accounts of Genco Shipping & Trading Limited and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of financial position and operating results have been included in the statements. Interim results are not necessarily indicative of results for a full year. Reference is made to the December 31, 2007 consolidated financial statements of Genco Shipping & Trading Ltd. contained in the 2007 10-K.

 

Deferred revenue primarily relates to cash received from charterers prior to it being earned. These amounts are recognized as income when earned.  Additionally, deferred revenue includes estimated customer claims mainly

due to time charter performance issues.  As of September 30, 2008 and December 31, 2007, the company had a reserve of $1,140 and $734, respectively, related to these estimated customer claims.

Financial instruments that potentially subject the Company to concentrations of credit risk are amounts due from charterers. With respect to amounts due from charterers, the Company attempts to limit its credit risk by performing ongoing credit evaluations and, when deemed necessary, requiring letters of credit, guarantees or collateral.  The Company earned 100% of revenues from nineteen and twelve customers for the three months ended September 30, 2008 and 2007, respectively, and 100% of revenues from twenty and seventeen customers for the nine months ended September 30, 2008 and 2007, respectively.  Management does not believe significant risk exists in connection with the Company’s concentrations of credit at September 30, 2008 and December 31, 2007.

For the three months ended September 30, 2008 there are two customers that individually accounted for more than 10% of revenue, Cargill International S.A.. and Pacific Basin Chartering Ltd., which represented 27.53% and  12.60% of revenue, respectively.  For the three months ended September 30, 2007 there were four customers that individually accounted for more than 10% of revenue, Lauritzen Bulkers A/S, Cargill International S.A., STX Panocean (UK) Co., Ltd., and Pacific Basin Chartering Ltd., which represented 15.66%, 14.08%, 12.98% and 10.27% of revenue, respectively.

For the nine months ended September 30, 2008 there were two customers that individually accounted for more than 10% of revenue, Cargill International S.A. and Pacific Basin Chartering Ltd., which represented 29.36% and 14.52% of revenue, respectively.  For the nine months ended September, 2007 there is one customer that individually accounted for more than 10% of revenue, Lauritzen Bulkers A/S, which represented 15.90% of revenue.

The Company maintains all of its cash with one financial institution.  None of the Company's cash balances are covered by insurance in the event of default by this financial institution.

In September 2006, FASB issued SFAS No.157, “Fair Value Measurements” which enhances existing guidance for measuring assets and liabilities using fair value. Previously, guidance for applying fair value was incorporated in several accounting pronouncements.  The new statement provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities.  While the statement does not add any new fair value measurements, it does change current practice. One such change is a requirement to adjust the value of nonvested stock for the effect of the restriction even if the restriction lapses within one year.

Additionally, in February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, which delays the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 and interim periods with those fiscal years for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until January 1, 2009 for calendar year end entities. The Company has already adopted this Statement except as it applies to nonfinancial assets and liabilities as noted in FSP 157-2. The partial adoption of SFAS No. 157 did not have a significant impact on its consolidated results of operations or financial position. The Company is currently evaluating the effect that the adoption of SFAS No. 157, as it relates to nonfinancial assets and liabilities, will have on its consolidated results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”).  Under this statement, the Company may elect to report financial instruments and certain other items at fair value on a contract-by-contract basis with changes in value reported in earnings.  This election is irrevocable.  SFAS No. 159 is effective for the Company commencing in 2008.  Early adoption within 120 days of the beginning of the year was permissible, provided the Company had adopted SFAS No. 157.  The Company adopted SFAS 159 on January 1, 2008 and elected not to report financial instruments and certain other items at fair value on a contract-by-contract basis with changes in value reported in earnings.

 

 

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R will significantly change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions. SFAS No. 141R also includes a substantial number of new disclosure requirements and applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. As the provisions of SFAS No. 141R are applied prospectively, the impact to the Company cannot be determined until any such transactions occur.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB statement 133” (“SFAS No. 161”). The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, results of operations and cash flows. The new standard also improves transparency about how and why a company uses derivative instruments and how derivative instruments and related hedged items are accounted for under SFAS No. 133. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  The Company’s management is currently assessing the new disclosure requirements required by SFAS No. 161.

 

The Company currently has nine interest rate swaps, and these swaps are described and discussed in Note 8. The fair value of eight of the swaps is in a liability position of $22,891 and one of the swaps is in an asset position of $657 as of September 30, 2008.  At December 31, 2007, the swaps were in a liability position of $21,039.

For the nine months ended September 30, 2008, the Company had non-cash investing activities not included in the Consolidated Statement of Cash Flows for items included in accounts payable and accrued expenses consisting of $407 for the purchase of vessels, $483 associated with deposits on vessels, $25 for the purchase of other fixed assets, and $51 for the purchase of short-term investments.  For the nine months ended September 30, 2008, the Company also had non-cash financing activities not included in the Consolidated Statement of Cash Flows for items included in accounts payable and accrued expenses consisting of $160 associated with deferred financing costs, and $1,460 associated with stock repurchases, which are reflected as share repurchases at September 30, 2008.  Additionally, for the nine months ended September 30, 2008, the Company had items in prepaid expenses and other current assets consisting of $4,455 which reduced the deposits on vessels. For the nine months ended September 30, 2007, the Company had non-cash investing activities not included in the Consolidated Statement of Cash Flows for items included in accounts payable and accrued expenses consisting of $417 for the purchase of vessels, $235 associated with deposits on vessels, $23 for the purchase of other fixed assets, and $116 for the purchase of short-term investments.  For the nine months ended September 30, 2007, the Company did not have any non-cash financing activities not included in the Consolidated Statement of Cash Flows for items in accounts payable and accrued expenses.

 

For the nine months ended September 30, 2008, the Company made a non-cash reclassification of $30,335 from deposits on vessels to vessels net of accumulated depreciation due to the completion of the purchase of the Genco Champion and Genco Constantine.

During the nine months ended September 30, 2008 and September 30, 2007, the cash paid for interest, including interest amounts capitalized was $39,833 and $14,165, respectively.

On January 10, 2008 the Board of Directors approved a grant of 100,000 shares of nonvested common stock to Peter Georgiopoulos, Chairman of the Board.  The fair value of such nonvested stock was $4,191 on the grant date and was recorded in equity.  Additionally, on February 13, 2008 and July 24, 2008, the Company made grants of nonvested common stock under the Plan in the amount of 12,500 and 15,000 shares, respectively, to directors of the Company. The fair value of such nonvested stock was $689 and $938, respectively, on the grant dates and was recorded in equity.

On February 8, 2007 the Company granted nonvested stock to certain directors and employees. The fair value of such nonvested stock was $494 on the grant date and was recorded in equity.  Additionally, during January 2007, nonvested stock forfeited amounted to $54 for shares granted in 2005 and is recorded in equity.  Lastly, during May 2007, nonvested stock forfeited amounted to $88 for shares granted in 2006 and 2005 and is recorded in equity.

 

On June 16, 2008 the Company agreed to acquire six drybulk newbuildings from Lambert Navigation Ltd., Northville Navigation Ltd., Providence Navigation Ltd., and Primebulk Navigation Ltd., for an aggregate purchase price of $530,000.  This acquisition was subsequently cancelled in November 2008, as described further in Note 21 – Subsequent Events.  Additionally, on May 9, 2008, the Company agreed to acquire three 2007 built vessels, consisting of two Panamax vessels and one Supramax vessel, from Bocimar International N.V. and Delphis N.V for an aggregate purchase price of approximately $257,000 which have all been acquired through the third quarter of 2008.  Upon completion the remaining four Capesize vessels from companies within the Metrostar Management Corporation group, Genco's fleet will consist of 35 drybulk vessels, consisting of nine Capesize, eight Panamax, four Supramax, six Handymax and eight Handysize vessels, with an aggregate carrying capacity of approximately 2,909,000 dwt and an average age of 6.6 years.

On February 26, 2008, the Company completed the sale of the Genco Trader.  The Company realized a net gain of approximately $26,227 and had net proceeds of $43,084 from the sale of the vessel in the first quarter of 2008. The Genco Trader was classified as held for sale at December 31, 2007 in the amount of $16,857.

On February 21, 2008, the Company completed the acquisition of the Genco Constantine, a 2008 built Capesize vessel from companies within the Metrostar Management Corporation group.  The remaining four Capesize vessels are expected to be built, and subsequently delivered to Genco, between the first quarter of 2009 and the third quarter of 2009.  As of December 31, 2007, four of the nine Capesize vessels, the Genco Augustus, Genco Tiberius, Genco London, and Genco Titus, all 2007 built vessels, had been delivered to Genco.

On January 2, 2008, the Company completed the acquisition of the Genco Champion, the last vessel acquired from affiliates of Evalend Shipping Co. S.A.  On December 31, 2007, the Company had completed the acquisition of five of the vessels, the Genco Predator, Genco Warrior, Genco Hunter, Genco Charger, and Genco Challenger.

Below and above market time charters acquired were amortized as a net increase to revenue in the amounts of $4,935 and $1,176, respectively, for the three months ended September 30, 2008 and September 30, 2007.  Below and above market time charters acquired were amortized as a net increase to revenue in the amounts of $16,545 and $259, respectively, for the nine months ended September 30, 2008 and September 30, 2007.

Capitalized interest expense associated with the newbuilding contracts acquired for the three months ended September 30, 2008 and 2007 was $1,543 and $2,090, respectively.   Capitalized interest expense associated with the newbuilding contracts acquired for the nine months ended September 30, 2008 and 2007 was $4,328 and $2,090, respectively.

The purchase and sale of the aforementioned vessels is consistent with the Company's strategy of selectively expanding the number and maintaining the high-quality vessels in the fleet.

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 other comprehensive income (“OCI”).  At September 30, 2008 and December 31, 2007, the Company holds an investment of 16,335,100, and 15,439,800 shares of Jinhui capital stock, respectively, which is recorded at the fair value of $60,461 and $167,524, respectively based on the closing price on September 30, 2008 and December 28, 2007 (the last trading date on the Oslo exchange in 2007) of 21.70 NOK and 59.00 NOK, respectively.  Effective on August 16, 2007, the Company elected to utilize hedge accounting for forward contracts hedging the currency risk associated with the Norwegian

Kroner cost basis in the Jinhui stock.  The hedge is limited to the lower of the cost basis or the market value at time of the designation.  The unrealized appreciation in the stock and the currency translation gain above the cost basis are recorded as a component of OCI.  Realized gains and losses on the sale of these securities will be reflected in the consolidated statement of operations in other (expense) or income once sold.  Time value of the forward contracts are excluded from effectiveness testing and recognized currently in income.  For the nine months ended  September 30, 2008 and September 30, 2007, an immaterial amount was recognized in income or (expense) from derivative instruments associated with excluded time value and ineffectiveness.   On October 10, 2008 the Company elected to discontinue the purchase of forward currency contracts associated with Jinhui by entering into an offsetting trade that closed the previously opened currency contract and thereby eliminated the hedge on Jinhui.

 

The unrealized currency translation gain for any unhedged portion for the Jinhui capital stock remains a component of OCI since this investment is designated as an AFS security.  The hedged portion of the currency translation (loss)/gain has been reclassed to the income statement as a component of (loss) income from derivative instruments.  Refer to Note 9 – Accumulated Other Comprehensive Income for a breakdown of the components of accumulated OCI.

 

The following table sets forth the unrealized currency translation (loss)/gain recognized on the short-term investment excluding offsetting (gains)/losses on the hedged forward contracts:

 

 If the Company’s investment in Jinhui is determined to be other-than-temporarily impaired, the impairment loss would be reclassified from equity and recorded as a loss in the income statement for the amount of the impairment.  As a result of the current financial environment, we reviewed the investment in Jinhui for indicators of other-than-temporary impairment. This determination required significant judgment. In making this judgment, we evaluated, among other factors, the duration and extent to which the fair value of the investment is less than its cost; the general market conditions, including factors such as industry and sector performance; and our intent and ability to hold the investment.  As of September 30, 2008, the Company’s investment in Jinhui was not deemed to be other-than-temporarily impaired.

At September 30, 2008, the Company had one short-term forward currency contract to hedge the Company’s exposure to the Norwegian Kroner related to the cost basis of Jinhui stock as described above.  The forward currency contract for a notional amount of 739.2 million NOK (Norwegian Kroner) or $128,105, was settled on October 22, 2008 which resulted in a cash settlement received of $10,297.  The Company has elected to discontinue the forward currency contract and hedge due to the underlying market value of Jinhui.  At December 31, 2007, the Company had one short-term forward currency contract to hedge the Company’s exposure to the Norwegian Kroner related to the cost basis of Jinhui stock as described above.  The forward currency contract for a notional amount of 685.1 million NOK (Norwegian Kroner) or $124,557, matured on January 17, 2008.  The short-term asset (liability) associated with the forward currency contract at September 30, 2008 and December 31, 2007 is $1,926 and ($1,448), respectively, and is presented as the fair value of derivatives on the balance sheet.  The gain (loss) associated with these respective liabilities is included as a component of (loss) income from derivative instruments and is offset by a reclassification from OCI for the hedged portion of the currency gain (loss) on short-term investments.

The following table sets forth the net (loss)/gain, realized and unrealized, related to the forward currency contracts and to the hedged translation on the cost basis of the Jinhui stock.  These are reflected as income/(loss) from derivative instruments and are included as a component of other expense.

 

 

 

The computation of basic earnings (loss) per share is based on the weighted average number of common shares outstanding during the year. The computation of diluted earnings (loss) per share assumes the vesting of nonvested stock awards (see Note 18), for which the assumed proceeds upon grant are deemed to be the amount of compensation cost attributable to future services and not yet recognized using the treasury stock method, to the extent dilutive. For the three and nine months ended September 30, 2008 and 2007, the restricted stock grants are dilutive. 

 

The components of the denominator for the calculation of basic earnings per share and diluted earnings per share are as follows:

 

The following are related party transactions not disclosed elsewhere in these financial statements:

 

The Company makes an employee performing internal audit services available to General Maritime Corporation (“GMC”), where the Company’s Chairman, Peter C. Georgiopoulos, also serves as Chairman of the Board, Chief Executive Officer and President.   For the nine months ended September 30, 2008 and 2007, the Company invoiced $100 and $93, respectively, to GMC for the time associated with such internal audit services.  Additionally, during the nine months ended September 30, 2008 and 2007, the Company incurred travel and other related expenditures totaling $252 and $119, respectively, reimbursable to GMC or its service provider.   For the nine months ended September 30, 2008 approximately $9 of these travel expenditures were paid from the gross proceeds received from the May 2008 equity offering and as such were included in the determination of net proceeds.  At September 30, 2008 and December 31, 2007, the amount due GMC is $7 and $5, respectively.

 

During the nine months ended September 30, 2008 and 2007, the Company incurred legal services aggregating $87 and $133 from Constantine Georgiopoulos, father of Peter C. Georgiopoulos, Chairman of the Board. At September 30, 2008 and December 31, 2007, $26 and $86, respectively, was outstanding to Constantine Georgiopoulos.

 

In December 2006, the Company engaged the services of WeberCompass (Hellas) S.A. (“WC”), a shipbroker, to facilitate the sale of the Genco Glory.  One of our directors, Basil G. Mavroleon, is a Managing Director of WC and a Managing Director and shareholder of Charles R. Weber Company, Inc., which is 50%

 shareholder of WC.  WC was paid a commission of $132, or 1% of the gross selling price of the Genco Glory. No amounts were due to WC at September 30, 2008 or at December 31, 2007.

 

During March 2007, the Company utilized the services of North Star Maritime, Inc. (“NSM”) which is owned and operated by one of our 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 was paid $12 for services rendered.  No amounts were due to NSM at September 30, 2008 or at December 31, 2007.

 

 

Long-term debt consists of the following:

 

As discussed in Note 21 – Subsequent Events, the Company repaid $53,000 in debt associated with the deposits for the six vessels whose acquisition was cancelled using cash flow from operations, thereby reducing the debt outstanding under the Company’s 2007 Credit Facility to $1,076,500.

On September 4, 2008, the Company executed a Credit Agreement for its new $320 million credit facility (“2008 Term Facility”).  The Company had previously announced the bank commitment for this facility in a press release on August 18, 2008.  The 2008 Term Facility is underwritten by Nordea Bank Finland Plc, New York Branch, who serves as Administrative Agent, Bookrunner, and Collateral Agent, as well as other banks.

The terms of the 2008 Term Facility provide that it is to be cancelled upon a cancellation of the acquisition contracts for the six vessels described above in Note 4 – Vessel Acquisitions and Dispositions.  Cancellation of the facility would result in a non-cash charge in the fourth quarter of 2008 to interest expense of approximately $2,300 associated with unamortized deferred financing costs.   The Company is discussing the potential extension of this facility with its lenders.

 

On July 20, 2007, the Company entered into a credit facility with DnB Nor Bank ASA (the “2007 Credit Facility”) for the purpose of acquiring the nine new Capesize vessels and refinancing the Company’s existing 2005 Credit Facility and Short-Term Line.  DnB Nor Bank ASA is also Mandated Lead Arranger, Bookrunner, and Administrative Agent. The Company has used borrowings under the 2007 Credit Facility to repay amounts outstanding under the 2005 Credit Facility and the Short-Term Line, and these two facilities have accordingly been terminated.  The maximum amount that may be borrowed under the 2007 Credit Facility is $1,377,000.  Subsequent to the equity offering completed in October 2007, the Company is no longer required pay up to $6,250 or such lesser amount as is available from Net Cash Flow (as defined in the credit agreement for the 2007 Credit Facility) each fiscal quarter to reduce borrowings under the 2007 Credit Facility.  As of September 30, 2008, $247,500 remains available to fund future vessel acquisitions.  The Company may borrow up to $50,000 of the $247,500 for working capital purposes.

 

The significant covenants in the 2007 Credit Facility have been disclosed in the 2007 10-K.  As of September 30, 2008, the Company believes it is in compliance with all of the financial covenants under its 2007 Credit Facility, as amended.

 

 

At September 30, 2008, there were no letters of credit issued under the 2007 Credit Facility.

On June 18, 2008, the Company entered into an amendment to the 2007 Credit Facility allowing the Company to prepay vessel deposits to give the Company flexibility in refinancing potential vessel acquisitions.

 The following table sets forth the repayment of the outstanding debt of $1,129,500 at September 30, 2008 under the 2008 Term Facility and the 2007 Credit Facility:

 

As discussed in Note 21 – Subsequent Events, the Company repaid $53,000 in debt associated with the deposits for the six vessels whose acquisition was cancelled using cash flow from operations, thereby reducing the debt outstanding under the Company’s 2007 Credit Facility to $1,076,500.

The following tables sets forth the effective interest rate associated with the interest expense for the 2007 Credit Facility, as amended, including the rate differential between the pay fixed receive variable rate on the swaps that were in effect, combined, and the cost associated with unused commitment fees.  Additionally, it includes the range of interest rates on the debt, excluding the unused commitment fees:

 

In conjunction with the Company entering into a long-term office space lease (See Note 16 - Lease Payments), the Company was required to provide a letter of credit to the landlord in lieu of a security deposit. As of September 21, 2005, the Company obtained an annually renewable unsecured letter of credit with DnB NOR Bank.  The letter of credit amount as of September 30, 2008 and December 31, 2007 was in the amount of $416 and $520, respectively, at a fee of 1% per annum. The letter of credit was reduced to $416 on August 1, 2008 and is cancelable on each renewal date provided the landlord is given 150 days minimum notice. 

 

 

 

The Company has entered into nine interest rate swap agreements with DnB NOR Bank to manage interest costs and the risk associated with changing interest rates. The total notional principal amount of the swaps is $681,233 and the swaps have specified rates and durations.

The following table summarizes the interest rate swaps in place as of September 30, 2008 and December 31, 2007:

The interest (expense) income pertaining to the interest rate swaps for the three months ended September 30, 2008 and 2007 was ($3,449) and $251, respectively.  The interest (expense) income pertaining to the interest rate swaps for the nine months ended September 30, 2008 and 2007 was ($7,317) and $745, respectively.

The liability associated with these swaps at September 30, 2008 and December 31, 2007 is $22,891 and $21,039, respectively, which are presented as the fair value of derivatives on the balance sheet.  Additionally, at September 30, 2008, the Company had a swap in an asset position of $657, which is presented as the fair value of derivatives on the balance sheet.  As of September 30, 2008 and December 31, 2007, the Company has accumulated OCI of ($22,208) and ($21,068), respectively, related to the effectively hedged portion of the swaps.  Hedge ineffectiveness associated with the interest rate swaps resulted in income or (loss) from derivative instruments of $14 for the three months ended September 30, 2008.  Hedge ineffectiveness associated with the interest rate swaps resulted in income or (loss) from derivative instruments of ($7) for the nine months ended September 30, 2008.  For the three and nine months ended September 30, 2007, hedge ineffectiveness associated with the interest rate swaps resulted in income or (loss) from derivative instruments of ($16).   At September 30, 2008, ($10,208) of OCI is expected to be reclassified into interest expense over the next 12 months associated with interest rate derivatives.

 

The components of accumulated other comprehensive income included in the accompanying consolidated balance sheets consist of net unrealized gain (loss) from short-term investments, net gain (loss) on derivative instruments designated and qualifying as cash-flow hedging instruments, and cumulative translation adjustments on the short-term investment in Jinhui stock as of September 30, 2008 and December 31, 2007.

 

The estimated fair values of the Company’s financial instruments are as follows:

 

 

The fair value of the short-term investments is based on quoted market rates.  The fair value of the revolving credit facility is 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 the revolving credit facility.  The carrying value approximates the fair market value for the floating rate loans.  The fair value of the interest rate and currency swaps (used for purposes other than trading) is the estimated amount the Company would receive to terminate the swap agreements at the reporting date, taking into account current interest rates, NOK spot rates, and the creditworthiness of both the swap counterparty and the Company

 

The Company elected to early adopt SFAS No. 157 beginning in its 2007 fiscal year, and there was no material impact to its first quarter financial statements.  SFAS No. 157 applies to all assets and liabilities that are being measured and reported on a fair value basis. SFAS No. 157 requires new disclosure that establishes a framework for measuring fair value in GAAP, and expands disclosure about fair value measurements.  This statement 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 statement requires that assets and liabilities carried at fair value will 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 our short-term investments and financial instruments by the above SFAS No. 157 pricing levels as of the valuation dates listed:

 

 

 

 

The Company holds an investment in the capital stock of Jinhui, which is classified as a short-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.  In addition, the Company’s derivative instruments include a forward currency contract based on the Norwegian Kroner.   The Company has elected to use the income approach to value the derivatives, using observable Level 2 market expectations 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, NOK spot rates and credit risk at commonly quoted intervals).  Mid-market pricing is used as a practical expedient for fair value measurements.  SFAS No. 157 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, 2008, both the counterparty and the Company are expected to continue to perform under the contractual terms of the instruments.

 

 

 

As discussed in Note 21 – Subsequent Events, the Company has agreed to cancel the previously announced acquisition of six drybulk newbuildings from Lambert Navigation Ltd., Northville Navigation Ltd., Providence Navigation Ltd., and Primebulk Navigation Ltd.  Included in Interest receivable on deposits for vessels to be acquired is approximately $400 of interest receivable on the $53,000 deposits that have been forfeited by the Company, which will be charged to the income statement in the fourth quarter.

 

 

 

 

 

Other assets consist of deferred financing costs which include fees, commissions and legal expenses associated with securing loan facilities. These costs are amortized over the life of the related debt, which is included in interest expense. The Company has unamortized deferred financing costs of $9,347 and $6,130, respectively, at September 30, 2008 and December 31, 2007 associated with the 2007 Credit Facility and 2008 Term Facility. Accumulated amortization of deferred financing costs as of September 30, 2008 and December 31, 2007 was $845 and $288, respectively.  During July 2007, the Company refinanced its previous facilities (the Short-Term Line and the 2005 Credit Facility) resulting in the non-cash write-off of the unamortized deferred financing cost of $3,568 to interest expense.  The Company has incurred deferred financing costs of $7,893 and $2,298 in total for the 2007 Credit Facility and the 2008 Term Facility, respectively.  Amortization expense for deferred financing costs, including the write-off any unamortized costs upon refinancing credit facilities for the three months ended September 30, 2008 and 2007 was $214 and $3,694, respectively.  Amortization expense for deferred financing costs, including the write-off any unamortized costs upon refinancing credit facilities for the nine months ended September 30, 2008 and 2007 was $556 and $3,966, respectively.

 

 

 

 

 

 

 

 

 

Total revenue earned on time charters for the three months ended September 30, 2008 and 2007 was $107,557 and $45,630, respectively, and for the nine months ended September 30, 2008 and 2007 was $303,798 and $119,697, respectively. Future minimum time charter revenue, based on vessels committed to noncancelable time charter contracts as of October 30, 2008 is expected to be $­­­­99,244 for the remaining quarter of 2008, $307,952 during 2009, $198,728 during 2010, $69,405 during 2011 and $16,607 during 2012, assuming 20 days of off-hire due to any scheduled drydocking and no additional off-hire time is incurred.  Future minimum revenue excludes the

future acquisitions of the remaining four Capesize vessels to be acquired, which are to be delivered to Genco in the future, since estimated delivery dates are not firm.

 

 

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.  Additionally, the Company obtained a tenant work credit of $324. 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 has a deferred rent credit at September 30, 2008 and December 31, 2007 of $711 and $725, respectively.  Rent expense for the three months ended September 30, 2008 and 2007, was $117 for each of the respective periods.  Rent expense for the nine months ended September 30, 2008 and 2007, was $350 for each of the respective periods.

Future minimum rental payments on the above lease for the next five years and thereafter are as follows: $121 for the remainder of 2008, $486 for 2009, $496 for 2010, $518 for 2011 through 2012 and a total of $4,132 for the remaining term of the lease.

 

 

In August 2005, the Company established a 401(k) plan which is available to full-time employees who meet the plan’s eligibility requirements.  This 401(k) plan is a defined contribution plan, which permits employees to make contributions up to maximum percentage and dollar limits allowable by IRS Code Sections 401(k), 402(g), 404 and 415 with the Company matching up to the first six percent of each employee’s salary on a dollar-for-dollar basis.  The matching contribution vests immediately.  For three months ended September 30, 2008 and 2007, the Company’s matching contribution to the Plan was $24 and $25, respectively, and for the nine months ended September 30, 2008 and 2007, the Company’s matching contribution to the Plan was $112 and $90, respectively.

 

 

On July 12, 2005, the Company’s board of directors approved the Genco Shipping and Trading Limited 2005 Equity Incentive Plan (the “Plan”).  Under this plan, the Company’s board of directors, the compensation committee, or another designated committee of the board of directors may grant a variety of stock-based incentive awards to employees, directors and consultants whom the compensation committee (or other committee or the board of directors) believes are key to the Company’s success.  Awards may consist of incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent rights, nonvested stock, unrestricted stock and performance shares.  The aggregate number of shares of common stock available for award under the Plan is 2,000,000 shares.

 

Grants of nonvested common stock to executives and employees vest ratably on each of the four anniversaries of the determined vesting date, which are typically held during May.  Grants of nonvested common stock to directors vest the earlier of the first anniversary of the grant date or the date of the next annual shareholders’ meeting.  On January 10, 2008, the Board of Directors approved a grant of 100,000 shares of nonvested common stock to Peter Georgiopoulos, Chairman of the Board, which vests ratably on each of the ten anniversaries of the determined vesting date beginning with November 15, 2008.

 

 

 

 

The following table presents a summary of the Company’s nonvested stock awards for the nine months ending September 30, 2008:

 

 

 

On February 13, 2008, our board of directors approved a share repurchase program for up to a total of $50,000 of the Company's common stock.  The board will review the program after 12 months.  Share repurchases will be made from time to time for cash in open market transactions at prevailing market prices or in privately negotiated transactions. The timing and amount of purchases under the program will be determined by management based upon market conditions and other factors.  Purchases may be made pursuant to a program adopted under Rule 10b5-1 under the Securities Exchange Act. The program does not require the Company to purchase any specific number or amount of shares and may be suspended or reinstated at any time in the Company's discretion and without notice. Repurchases will be subject to restrictions under the 2007 Credit Facility and 2008 Term Facility.  The 2007 Credit Facility was amended as of February 13, 2008 to permit the share repurchase program and provide that the dollar amount of shares repurchased is counted toward the maximum dollar amount of dividends that may be paid in any fiscal quarter.

Through September 30, 2008, the Company repurchased and retired 278,300 shares of its common stock for $11,500.  As of September 30, 2008, the Company is permitted under the program to acquire additional shares of its common stock for up to $38,500.

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 adverse effect on the Company, its financial condition, results of operations or cash flows.

 

 

 

 

On October 23, 2008, the Board of Directors declared a dividend of $1.00 per share to be paid on or about November 28, 2008 to shareholders of record as of November 17, 2008.  The aggregate amount of the dividend is expected to be $31,518, which the Company anticipates will be funded from cash on hand at the time payment is to be made.

On October 28, 2008, the Company received $676 from Leeds & Leeds in relation to the loss of hire insurance claim for the Genco Hunter as a result of the collision on August 7, 2008.  An initial claim of 27 loss of hire days, which includes a deductible period of 14 days, was approved for a total of $845.  Of the total $845, eighty percent, or $676, was received and the remaining twenty percent will be settled upon completion of the total claim.  The total off-hire time related to this claim was approximately 41 days, and the Company has put forth the remainder of the claim to the underwriters.

On November 3, 2008, the Company agreed to cancel the previously announced acquisition of six drybulk newbuildings from Lambert Navigation Ltd., Northville Navigation Ltd., Providence Navigation Ltd., and Primebulk Navigation Ltd., with an aggregate purchase price of $530,000.  As part of the agreement, the selling group will retain the deposits totaling $53,000 plus the interest earned on such deposits for the six vessels, comprised of three Capesize and three Handysize vessels. This transaction will result in a charge in the fourth quarter of 2008 to the Company’s income statement of approximately $54,000 related to the forfeiture of these deposits.  The $54,000 includes approximately $53,600, which is recorded in Deposits on vessels and includes net capitalized interest, and approximately $400 of interest income receivable which is recorded as part of Prepaid expenses and other current assets.

On November 4, 2008, the Company repaid $53,000 in debt associated with the deposits for the six vessels whose acquisition was cancelled using cash flow from operations, thereby reducing the debt outstanding under the Company’s 2007 Credit Facility to $1,076,500.

Lastly, the terms of the 2008 Term Facility provide that it is to be cancelled upon a cancellation of the acquisition contracts for the six vessels.  Cancellation of the facility would result in a non-cash charge in the fourth quarter of 2008 to interest expense of approximately $2,300 associated with unamortized deferred financing costs.

 

 

 

This report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with a discussion of potential future events, circumstances or future operating or financial performance.  These forward-looking statements are based on management’s current expectations and observations. Included among the factors that, in our view, could cause actual results to differ materially from the forward looking statements contained in this report are the following (i) changes in demand or rates in the drybulk shipping industry; (ii) changes in the supply of or demand for drybulk products, generally or in particular regions; (iii) changes in the supply of drybulk carriers including newbuilding of vessels or lower than anticipated scrapping of older vessels; (iv) changes in rules and regulations applicable to the cargo industry, including, without limitation, legislation adopted by international organizations or by individual countries and actions taken by regulatory authorities; (v) increases in costs and expenses including but not limited to: crew wages, insurance, provisions, repairs, maintenance and general and administrative expenses; (vi) the adequacy of our insurance arrangements; (vii) changes in general domestic and international political conditions; (viii) changes in the condition of the Company’s vessels or applicable maintenance or regulatory standards (which may affect, among other things, our anticipated drydocking or maintenance and repair costs) and unanticipated drydock expenditures; (ix) the amount of offhire time needed to complete repairs on vessels and the timing and amount of any reimbursement by our insurance carriers for insurance claims including offhire days; (x) our acquisition or disposition of vessels; (xi) the fulfillment of the closing conditions under, or the execution of customary additional documentation for, the Company’s agreements to acquire a total of four drybulk vessels; (xii) the decision of the charterer of the Genco Hadrian with respect to the option mentioned in the table on pages 30-31; (xiii) the results of the investigation into the incident involving the collision of the Genco Hunter described below, the possible cause of and liability for such incident, and the scope of insurance coverage available to Genco for such incident; and other factors listed from time to time in our filings with the Securities and Exchange Commission, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2007 and subsequent reports on Form 8-K and Form 10-Q.  Our ability to pay dividends in any period will depend upon factors including the limitations under our loan agreements, applicable provisions of Marshall Islands law and the final determination by the Board of Directors each quarter after its review of our financial performance.  The timing and amount of dividends, if any, could also be affected by factors affecting cash flows, results of operations, required capital expenditures, or reserves.  As a result, the amount of dividends actually paid may vary.

 

The following management’s discussion and analysis should be read in conjunction with our historical consolidated financial statements and the related notes included in this Form 10-Q.

 

 

We are a Marshall Islands company incorporated in September 2004 to transport iron ore, coal, grain, steel products and other drybulk cargoes along worldwide shipping routes through the ownership and operation of drybulk carrier vessels. As of September 30, 2008, our fleet consisted of five Capesize, eight Panamax, four Supramax, six Handymax and eight Handysize drybulk carriers, with an aggregate carrying capacity of approximately 2,226,500 dwt, and the average age of our fleet was approximately 6.5 years, as compared to the average age for the world fleet of approximately 15 years for the drybulk shipping segments in which we compete. The Company seeks to time charter vessels in our fleet to reputable charterers, including Lauritzen Bulkers A/S, Cargill International S.A., Hyundai Merchant Marine Co., Ltd., STX Panocean (UK) Co., Ltd., Pacific Basin Chartering Ltd., A/S Klaveness, Global Chartering Limited (a subsidiary of Arcelor Mittal Group), COSCO Bulk Carriers Co., Ltd., and NYK Bulkship Europe S.A. All of the vessels in our fleet are presently engaged under time charter contracts that expire (assuming the option periods in the time charters are not exercised) between October 2008 and August 2012.

 

See pages 30-31 for a table of all vessels currently in our fleet or expected to be delivered to us.

 We intend to grow our fleet through timely and selective acquisitions of vessels in a manner that is accretive to our cash flow. In connection with this growth strategy, we negotiated the 2007 Credit Facility and 2008 Term Facility, for the purpose of acquiring the nine new Capesize vessels from Metrostar, refinancing the

 outstanding indebtedness under our previous credit facilities, and acquiring additional vessels since entering into the Capesize acquisition with Metrostar.

Our management team and our other employees are responsible for the commercial and strategic management of our fleet. Commercial management includes the negotiation of charters for vessels, managing the mix of various types of charters, such as time charters and voyage charters, and monitoring the performance of our vessels under their charters. Strategic management includes locating, purchasing, financing and selling vessels. We currently contract with four independent technical managers, to provide technical management of our fleet at a lower cost than we believe would be possible in-house. Technical management involves the day-to-day management of vessels, including performing routine maintenance, attending to vessel operations and arranging for crews and supplies. Members of our New York City-based management team oversee the activities of our independent technical managers.

On August 7, 2008, the Genco Hunter, a 2007-built Supramax vessel, collided with another vessel while transiting the Singapore Straits.  No injuries and no pollution from either vessel have been reported.  An investigation into the cause of the incident by the Maritime and Port Authority of Singapore has commenced with Genco’s full cooperation. The Genco Hunter remained offhire for a total of approximately 24 days for both temporary and permanent repairs during Q3 2008 and expects to be reimbursed under hull and machinery insurance claims related to this vessel for repair costs. The Genco Hunter is currently on a time charter with Pacific Basin Chartering Ltd. at a daily rate of $62,000, less a 5% third party commission.  The Company expects to be reimbursed for the offhire time of approximately twenty seven days which is in excess of fourteen day deductible period and the Company has received $676 from the Company’s insurance underwriter during October 2008 as partial payment of the loss of hire claim.  The loss of hire insurance will be reflected as revenue as approved by the Company’s insurance underwriter.

On November 3, 2008, the Company agreed to cancel the previously announced acquisition of six drybulk newbuildings from Lambert Navigation Ltd., Northville Navigation Ltd., Providence Navigation Ltd., and Primebulk Navigation Ltd., with an aggregate purchase price of $530 million.  As part of the agreement, the selling group will retain the deposits totaling $53 million for the six vessels, comprised of three Capesize and three Handysize vessels.   This transaction will result in a charge in the fourth quarter of 2008 to the income statement of approximately $54 million related to the forfeiture of the deposits associated with the acquisition.  The Company plans to repay the $53 million in debt associated with the deposits for the vessels using cash flow from operations, thereby reducing the debt outstanding under the Company’s 2007 revolving credit facility to $1,076.5 million.  Lastly, the terms of the 2008 Term Facility provide that it is to be cancelled upon a cancellation of the acquisition contracts for the six vessels.  Cancellation of the facility would result in a non-cash charge in the fourth quarter of 2008 to interest expense of approximately $2.3 million associated with unamortized deferred financing costs.  The Company is discussing with its lenders the potential extension of this facility.

 

 We believe that the following table reflects important measures for analyzing trends in our results of operations.  The table reflects our ownership days, available days, operating days, fleet utilization, TCE rates and daily vessel operating expenses for the three and nine months ended September 30, 2008 and 2007.