MC
SHIPPING
INC. AND SUBSIDIARIES
I
N D E X
PART
I: FINANCIAL INFORMATION
ITEM
1: CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MC
SHIPPING INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
JUNE
30,
|
|
|
DECEMBER
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(UNAUDITED)
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$ |
4,562,944
|
|
|
$ |
1,838,044
|
|
Restricted
cash
|
|
|
4,571,421
|
|
|
|
4,594,402
|
|
Charterhire/freight
receivables
|
|
|
2,365,501
|
|
|
|
1,668,948
|
|
Recoverable
from insurers
|
|
|
677,503
|
|
|
|
1,037,523
|
|
Inventories
|
|
|
1,446,650
|
|
|
|
1,592,890
|
|
Prepaid
expenses and other current assets
|
|
|
2,027,980
|
|
|
|
1,301,757
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
15,651,999
|
|
|
|
12,033,564
|
|
|
|
|
|
|
|
|
|
|
VESSELS,
AT COST
|
|
|
236,127,238
|
|
|
|
236,127,238
|
|
Less
accumulated depreciation
|
|
|
(55,880,441 |
) |
|
|
(45,136,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
180,246,797
|
|
|
|
190,990,515
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
Vessel
acquisition deposits
|
|
|
4,070,000
|
|
|
|
-
|
|
Investments
in associated companies
|
|
|
14,656,277
|
|
|
|
8,801,155
|
|
Furniture
and equipment (net of accumulated depreciation of $52,341 at
June 30, 2007
and $26,638 at December 31, 2006)
|
|
|
209,857
|
|
|
|
225,071
|
|
Dry-docking
costs (net of accumulated amortization of $4,507,911 at June
30, 2007 and
$3,457,217 at December 31, 2006)
|
|
|
7,177,835
|
|
|
|
8,056,312
|
|
Debt
issuance costs (net of accumulated amortization of $65,770 at
June 30,
2007 and $99,395 at December 31,
2006)
|
|
|
276,646
|
|
|
|
432,024
|
|
Other
assets
|
|
|
953,115
|
|
|
|
790,748
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
223,242,526
|
|
|
$ |
221,329,389
|
|
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF
THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
MC
SHIPPING INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
JUNE
30,
|
|
|
DECEMBER
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,576,257
|
|
|
$ |
4,290,287
|
|
Charterhire
received in advance
|
|
|
1,922,565
|
|
|
|
1,518,088
|
|
Accrued
expenses
|
|
|
2,401,766
|
|
|
|
4,338,367
|
|
Payable
to affiliates
|
|
|
329,893
|
|
|
|
369,423
|
|
Accrued
interest
|
|
|
1,583,932
|
|
|
|
1,964,908
|
|
Dividend
payable
|
|
|
594,717
|
|
|
|
594,259
|
|
Current
portion of secured loans
|
|
|
23,576,219
|
|
|
|
26,167,176
|
|
Current
portion of long-term charter obligations
|
|
|
9,008,727
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
40,994,076
|
|
|
|
39,242,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG
TERM DEBT
|
|
|
|
|
|
|
|
|
Secured
loans, net of current portion
|
|
|
94,241,900
|
|
|
|
124,269,936
|
|
Long-term
charter obligations, net of current portion
|
|
|
28,432,231
|
|
|
|
-
|
|
DEFERRED
GAIN ON SALE OF VESSELS
|
|
|
6,074,469
|
|
|
|
8,436,563
|
|
OTHER
LIABILITIES
|
|
|
563,928
|
|
|
|
1,133,175
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
170,306,694
|
|
|
|
173,082,182
|
|
|
|
|
|
|
|
|
|
|
COMMITMENT
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value – 20,000,000 shares authorized 9,510,017 shares
issued and outstanding at June 30, 2007 (9,508,141 at December
31,
2006)
|
|
|
95,100
|
|
|
|
95,081
|
|
Additional
paid-in capital
|
|
|
48,479,788
|
|
|
|
48,459,807
|
|
Retained
earnings
|
|
|
3,932,435
|
|
|
|
-
|
|
Accumulated
other comprehensive income/(loss)
|
|
|
428,509
|
|
|
|
(307,681 |
) |
|
|
|
52,935,832
|
|
|
|
48,247,207
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
223,242,526
|
|
|
$ |
221,329,389
|
|
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF
THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
MC
SHIPPING
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
For
the
three months ended June 30, 2007 and June 30, 2006
(UNAUDITED)
|
|
JUNE
30,
|
|
|
JUNE
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
CHARTERHIRE
AND OTHER INCOME
|
|
$ |
16,395,174
|
|
|
$ |
9,940,984
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
Commission
on charterhire
|
|
|
(184,109 |
) |
|
|
(131,694 |
) |
Vessel
operating expenses
|
|
|
(5,439,900 |
) |
|
|
(4,721,267 |
) |
Amortization
of dry-docking costs
|
|
|
(525,505 |
) |
|
|
(478,373 |
) |
Depreciation
|
|
|
(5,533,867 |
) |
|
|
(2,696,298 |
) |
General
and administrative expenses
|
|
|
(880,623 |
) |
|
|
(673,185 |
) |
|
|
|
|
|
|
|
|
|
INCOME
FROM VESSEL OPERATIONS
|
|
|
3,831,170
|
|
|
|
1,240,167
|
|
|
|
|
|
|
|
|
|
|
Net
gain on sale of vessels
|
|
|
-
|
|
|
|
1,028,693
|
|
Recognized
deferred gain on sale of vessels
|
|
|
1,187,572
|
|
|
|
1,187,572
|
|
Equity
in income / (losses) of associated companies
|
|
|
386,537
|
|
|
|
(247,741 |
) |
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
5,405,279
|
|
|
|
3,208,691
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME/(EXPENSE)
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(3,113,800 |
) |
|
|
(1,301,278 |
) |
Interest
income
|
|
|
133,979
|
|
|
|
115,452
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
2,425,458
|
|
|
$ |
2,022,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.26
|
|
|
$ |
0.21
|
|
Diluted
earnings per share
|
|
$ |
0.26
|
|
|
$ |
0.21
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
9,510,017
|
|
|
|
9,499,086
|
|
Diluted
weighted average number of shares outstanding
|
|
|
9,510,017
|
|
|
|
9,555,141
|
|
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF
THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
MC
SHIPPING INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
For
the
six months ended June 30, 2007 and June 30, 2006
(UNAUDITED)
|
|
JUNE
30,
|
|
|
JUNE
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
CHARTERHIRE
AND OTHER INCOME
|
|
$ |
31,899,340
|
|
|
$ |
20,048,239
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
Commission
on charterhire
|
|
|
(292,075 |
) |
|
|
(264,815 |
) |
Vessel
operating expenses
|
|
|
(10,349,255 |
) |
|
|
(8,620,401 |
) |
Amortization
of dry-docking costs
|
|
|
(1,050,694 |
) |
|
|
(717,138 |
) |
Depreciation
|
|
|
(10,768,933 |
) |
|
|
(4,796,064 |
) |
General
and administrative expenses
|
|
|
(1,663,875 |
) |
|
|
(1,187,172 |
) |
|
|
|
|
|
|
|
|
|
INCOME
FROM VESSEL OPERATIONS
|
|
|
7,774,508
|
|
|
|
4,462,649
|
|
|
|
|
|
|
|
|
|
|
Net
gain on sale of vessels
|
|
|
-
|
|
|
|
1,028,693
|
|
Recognized
deferred gain on sale of vessels
|
|
|
2,362,094
|
|
|
|
2,362,094
|
|
Equity
in income of associated companies
|
|
|
923,584
|
|
|
|
44,241
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
11,060,186
|
|
|
|
7,897,677
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME/(EXPENSE)
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(6,286,609 |
) |
|
|
(2,451,927 |
) |
Interest
income
|
|
|
347,951
|
|
|
|
289,014
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
5,121,528
|
|
|
$ |
5,734,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.54
|
|
|
$ |
0.61
|
|
Diluted
earnings per share
|
|
$ |
0.54
|
|
|
$ |
0.60
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
9,509,602
|
|
|
|
9,436,184
|
|
Diluted
weighted average number of shares outstanding
|
|
|
9,532,973
|
|
|
|
9,554,846
|
|
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF
THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
MC
SHIPPING INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the
six months ended June 30, 2007 and June 30, 2006
(UNAUDITED)
|
|
JUNE
30,
|
|
|
JUNE
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
5,121,528
|
|
|
$ |
5,734,764
|
|
Adjustments
to reconcile net income to net cash provided from operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
10,768,933
|
|
|
|
4,796,064
|
|
Recognized
deferred gain on sale of vessels
|
|
|
(2,362,094 |
) |
|
|
(2,362,094 |
) |
Amortization
of dry-docking costs
|
|
|
1,050,694
|
|
|
|
717,138
|
|
Amortization
of debt issuance costs
|
|
|
155,378
|
|
|
|
34,703
|
|
Equity
in income of associated companies
|
|
|
(923,584 |
) |
|
|
(44,241 |
) |
Shares
based compensation to directors
|
|
|
20,000
|
|
|
|
20,000
|
|
Net
gain on sale of vessels
|
|
|
-
|
|
|
|
(1,028,693 |
) |
Changes
in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
Charterhire/freight
receivables
|
|
|
(696,553 |
) |
|
|
(283,165 |
) |
Recoverable
from insurers
|
|
|
360,020
|
|
|
|
(551,003 |
) |
Inventories
|
|
|
146,240
|
|
|
|
(187,577 |
) |
Prepaid
expenses and other current assets
|
|
|
(726,223 |
) |
|
|
(910,026 |
) |
Dry-docking
costs capitalized
|
|
|
(172,217 |
) |
|
|
(5,000,511 |
) |
Accounts
payable
|
|
|
(2,714,030 |
) |
|
|
1,349,643
|
|
Charterhire
received in advance
|
|
|
404,477
|
|
|
|
644,977
|
|
Accrued
expenses
|
|
|
(1,936,601 |
) |
|
|
4,416,987
|
|
Payable
to affiliates
|
|
|
(39,530 |
) |
|
|
288,686
|
|
Accrued
interest
|
|
|
(380,976 |
) |
|
|
12,571
|
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED FROM OPERATING ACTIVITIES
|
|
|
8,075,461
|
|
|
|
7,648,223
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of furniture and office equipment
|
|
|
(10,001 |
) |
|
|
(135,963 |
) |
Proceeds
from disposals of vessels
|
|
|
-
|
|
|
|
1,222,544
|
|
Dividends
from / (investments in) associated companies
|
|
|
(4,931,538 |
) |
|
|
(320,000 |
) |
Vessel
acquisition deposits / Purchases of vessels
|
|
|
(4,070,000 |
) |
|
|
(15,000,000 |
) |
Vessels
pre-operating expenses
|
|
|
-
|
|
|
|
(41,411 |
) |
Other
assets
|
|
|
(1,046 |
) |
|
|
-
|
|
Restricted
cash deposits
|
|
|
22,981
|
|
|
|
(125,107 |
) |
|
|
|
|
|
|
|
|
|
NET
CASH USED BY INVESTING ACTIVITIES
|
|
|
(8,989,604 |
) |
|
|
(14,399,937 |
) |
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayments
of long-term debt
|
|
|
(37,177,945 |
) |
|
|
(6,058,000 |
) |
Proceeds
from long-term debt
|
|
|
42,000,000
|
|
|
|
8,000,000
|
|
Proceeds
from issuance of common stock
|
|
|
-
|
|
|
|
1,286,365
|
|
Dividend
paid
|
|
|
(1,188,635 |
) |
|
|
(1,151,362 |
) |
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED FROM FINANCING ACTIVITIES
|
|
|
3,633,420
|
|
|
|
2,077,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF FOREIGN CURRENCY TRANSLATIONS
|
|
|
5,623
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE
/ (DECREASE) IN CASH
|
|
|
2,724,900
|
|
|
|
(4,674,702 |
) |
CASH
AT BEGINNING OF PERIOD
|
|
|
1,838,044
|
|
|
|
12,292,015
|
|
|
|
________________
|
|
|
________________
|
|
CASH
AT END OF PERIOD
|
|
$ |
4,562,944
|
|
|
$ |
7,617,313
|
|
|
|
|
|
|
|
|
|
|
Interest
paid during the period, including interest portion of long-term
charter
obligations
|
|
$ |
6,387,892
|
|
|
$ |
2,301,740
|
|
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF
THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
MC
SHIPPING INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
1. BASIS OF PRESENTATION
The
accompanying unaudited condensed
consolidated financial statements of MC Shipping Inc. and subsidiaries
(the
“Company”) have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America
for
complete financial statements. In the opinion of Management, adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six months ended
June
30, 2007 are not necessarily indicative of the results that may be expected
for
the year ending December 31, 2007. These consolidated financial statements
should be read in conjunction with the Company's 2006 Annual Report on
Form
10-K. The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of
America requires management to make estimates and assumptions that affect
the
reported amounts of assets and liabilities, and disclosure of contingent
assets
and liabilities, at the date of the consolidated financial statements,
and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE
2. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: MC
Shipping
Inc. was incorporated in the Republic of Liberia and, through its subsidiaries,
presently owns and operates a fleet of 19 vessels, of which nine are wholly
owned liquefied petroleum gas (“LPG”) carrier vessels. In addition, the Company
has a 25.8% percent interest in an entity that owns and operates four
containerships, a 50% interest in another entity that owns and operates
an LPG
carrier, and a 25% interest in an entity that owns and operates five LPG
carriers. The Company has sold these five ships and continues to operate
them
under medium term time charter contracts. The Company has contracted to
purchase
four additional vessels as outlined in Note 3: Purchase of Vessels.
REVENUE
RECOGNITION: The Company employs its vessels on time
charter or voyage charter. With time charters, the Company receives a fixed
charterhire per on-hire day and is responsible for meeting all the operating
expenses of its wholly owned vessels, such as crew costs, insurance, repairs
and
maintenance. Time charter revenue is recognized on an accrual basis
and is recorded over the term of the charter as service is provided. Vessels
on
time charter may experience off-hire time for the following reasons: dry-docking
and planned repair time, technical reasons, underperformance of the vessel
or
positioning. Off-hire is deducted from the hire.
In
the case of voyage charters, the
vessel is contracted only for a voyage between two or several ports: the
Company
is paid for the cargo transported and pays all voyage costs, such as bunker
and
port expenses in addition to the operating expenses. Voyage charter revenue
and
related expenses are recorded based on the percentage of service completed
at
the balance sheet date, gross of voyage expenses.
COMPREHENSIVE
INCOME: Comprehensive income consists of foreign currency
translation adjustments and unrealised gains or losses on cash flow
hedges.
|
|
Three
months Ended
June
30, 2007
|
|
|
Three
months Ended
June
30, 2006
|
|
|
Six
months Ended
June
30, 2007
|
|
|
Six
months Ended
June
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
$
|
972,205
|
|
|
$
|
647,857
|
|
|
$
|
736,190
|
|
|
$
|
1,364,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
2,425,457
|
|
|
|
2,022,865
|
|
|
|
5,121,527
|
|
|
|
5,734,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$
|
3,397,662
|
|
|
$
|
2,670,722
|
|
|
$
|
5,857,717
|
|
|
$
|
7,099,511
|
|
DEBT
ISSUANCE COSTS: Debt
issuance costs are being amortized, using the interest method, over the
terms of
the long-term credit facilities. Amortization of debt
issuance costs, included in interest expense, amounted to $17,274 and $34,547
in
the quarter and in the six months ended June 30, 2007 respectively ($19,698
and
$37,054 in the quarter and in the six months ended June 30, 2006 respectively).
In the first quarter of 2007, an amount of $120,831 representing the unamortized
balance of the debt issuance costs incurred in 2004 in connection with
the $21.2
million prepaid under the Fortis Loan was written off and recorded as interest
expense.
EARNINGS
PER SHARE: Basic and diluted earnings per share are calculated in
accordance with FASB Statement No. 128, Earnings per Share. Basic earnings
per
share exclude dilution and are computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur if
outstanding options were exercised or converted into common stock. There
were no
stock options or common stock equivalents that could potentially dilute
basic
EPS in the future that were not included in the computation of diluted
EPS for
each period presented.
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available for common stockholders
|
|
$ |
2,425,457
|
|
|
$ |
2,022,865
|
|
|
$ |
5,121,527
|
|
|
$ |
5,734,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares
|
|
|
9,510,017
|
|
|
|
9,499,086
|
|
|
|
9,509,602
|
|
|
|
9,436,184
|
|
Dilutive
effect of employee stock options
|
|
|
-
|
|
|
|
56,055
|
|
|
|
23,371
|
|
|
|
118,662
|
|
Diluted
average number of common shares
|
|
|
9,510,017
|
|
|
|
9,555,141
|
|
|
|
9,532,973
|
|
|
|
9,554,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic earnings per share
|
|
$ |
0.26
|
|
|
$ |
0.21
|
|
|
$ |
0.54
|
|
|
$ |
0.61
|
|
-
Diluted earnings per share
|
|
$ |
0.26
|
|
|
$ |
0.21
|
|
|
$ |
0.54
|
|
|
$ |
0.60
|
|
NOTE
3: PURCHASE OF VESSELS
On
June 12, 2007, the Company agreed to
acquire three LPG vessels from the subsidiaries of the Komaya Group of
Japan at a total cost of $40.7 million. The vessels, Windermere, Ullswater
and Grasmere, built in 1995, 1996 and 1997, respectively, are fully pressurized
LPG tankers of 6,500 to 7,200 cbm capacity each. The vessels are expected
to be
delivered before August 15, 2007. Simultaneously with the purchase, the
vessels
will be time-chartered to Vitol S.A., a major international oil and gas
trading
company for initial periods of up to three years. The acquisition is being
funded from the Company’s current cash holdings and a $35,000,000 loan granted
by KfW IPEX-Bank (see Note 9: Subsequent Events). The Company made a $4.07
million down payment on the purchase of the Windermere, Ullswater and Grasmere
vessels.
On
June 25, 2007, the Company agreed to
acquire an LPG vessel from a subsidiary of Vitol S.A. at a cost of $26
million.
The vessel, Keswick, is a fully pressurized LPG tanker built in 2003 of
11,000cbm capacity. The vessel is expected to be delivered in mid 2008.
Simultaneously with the purchase it will be time chartered back to Vitol
S.A.
for a period of three years. The Company expects to finance this acquisition
with a combination of bank debt and equity from the Company’s cash resources.
The Company committed to Vitol S.A. for the amount of 10% of the vessel’s
purchase price. This commitment will be replaced with a cash deposit in
March
2008, approximately three months prior to the vessel’s delivery. Until then, no
cash down payment will be required on the vessel.
NOTE
4. INVESTMENT IN ASSOCIATED COMPANIES
The
summary of changes in investment in
associated companies during the six months ended June 30, 2007 was as
follows:
|
|
MUNIA
|
|
|
Waterloo
|
|
|
LTF
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
at December 31, 2006
|
|
$ |
5,616,534
|
|
|
|
3,184,621
|
|
|
|
-
|
|
|
|
8,801,155
|
|
Share
of net income
|
|
|
362,205
|
|
|
|
198,320
|
|
|
|
363,059
|
|
|
|
923,584
|
|
(Dividend
from) / Investment in associated companies
|
|
|
(180,000 |
) |
|
|
750,000
|
|
|
|
4,361,538
|
|
|
|
4,931,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
at June 30, 2007
|
|
|
5,798,739
|
|
|
|
4,132,941
|
|
|
|
4,724,597
|
|
|
|
14,656,277
|
|
MUNIA
In
January 2005, the Company invested
$4 million in Munia Mobiliengesellschaft mbH & Co. KG (“MUNIA”), a special
purpose German KG company formed by the German finance house KGAL. MUNIA
simultaneously purchased four container vessels from MC Shipping and chartered
them to AP Møller until February 1st 2008,
September
1st 2008,
May
15th 2009
and
February 1st
2009, for each vessel respectively. The Company participates for 25.8%
in the
equity and in the profits and losses of MUNIA and will receive the following
percentages of the net sale proceeds of each of the vessels: 0% of the
first
$3.9 million, 100% of the next $1 million and 40% of any amount in excess
of
$4.9 million. In the quarter and in the six month period ended June 30,
2007,
the 25.8% share of net income of MUNIA included in the Company's condensed
financial statements was $158,760 and $362,205 respectively (in 2006, $88,364
and $321,038 respectively). MUNIA is expected to pay dividends on a
semi-annual basis. The Company received the fourth dividend installment
of
$180,000 from MUNIA in January 2007 and a fifth payment of $180,000 in
July
2007. The Company’s investment in MUNIA was $5,798,739 at June 30, 2007, which
included the additional amounts invested in 2006 as discussed below, compared
to
$5,616,534 at December 31, 2006. The Company accounts for its investment
in
MUNIA using the equity method of accounting.
As
part of the transaction, the Company
has agreed to guarantee certain levels of operating expenses and of employment
for the vessels until February 1st 2008,
September
1st 2008,
May
15th 2009
and
February 1st
2009, for each vessel or earlier in case of sale or total loss of a vessel
(“MUNIA guarantee”). As a result, the off hire and the excess or surplus of
operating expenses, up to a certain extent, will be absorbed by the Company.
As
compensation for issuing such guarantee, the Company receives a daily guarantee
fee for each vessel, which is included in charterhire and other income
in the
accompanying condensed consolidated statements of income. In the quarter
and in
the six month period ended June 30, 2007, the recognized income for such
guarantee fees amounted to $87,724 and $172,137 respectively (in 2006,
$64,256
and $134,071 respectively). For the first half of 2007, the operating expenses
of the vessels were approximately at the guaranteed level and no payment
was
required by the Company under the MUNIA guarantee. The Company cannot estimate
the amount of any future payments required under the MUNIA guarantee at
this
time.
In
December 2006, one of the vessels
owned by MUNIA, Maersk Belawan was dry-docked. The dry-dock had not been
anticipated at the time of the sale to MUNIA and in order to effectuate
the
dry-dock, MUNIA agreed to waive its rights under the operating guarantee
and
MUNIA and the Company agreed to share in the costs of the dry-dock. The
cost of
the dry-dock amounted to approximately $1.4 million (including off-hire)
and was
shared between MUNIA (approximately $300,000) and the Company (approximately
$1.1 million). The Company agreed to share in the dry-dock in order to
protect
its investment in the residual net sale proceeds of the vessel. The Company’s
share of the dry-dock was recorded as an additional investment in
MUNIA.
In
July 2007, MUNIA
agreed to sell the Maersk Belawan vessel to a third party for a gross
consideration of $13.15 million or $12.89 million net with delivery expected
in
the first quarter of 2008 and it is anticipated that this investment will
be
recovered in full from the proceeds on this sale and the gain generated.
The
proceeds will be used to prepay the loan balance on the vessel and pay
the costs
and duties incurred in connection with the sale. Remaining net proceeds
are
expected to be distributed to the shareholders of MUNIA, including the
Company,
which will receive $1 million plus 40% of any amount in excess of $4.9
million.
It is expected that if the sale takes place that the Company will receive
cash
proceeds of approximately $3.1 million and book a gain on the investment
of
approximately $1 million.
On
September 20, 2005, the m/v ‘Maersk
Barcelona’ owned by MUNIA suffered a malfunction of her oily water separator,
which resulted in an accidental overboard discharge of oil-contaminated
water
off the coast of France. On March 22, 2006, the technical managers of the
vessel
were fined 720,000 euros and the captain 80,000 euros by a French court;
a
judgment which they appealed. On June 28, 2007, the court of appeal generally
confirmed the decision of the first instance court; however according to
the
latest ruling, the technical managers of the vessel were fined 760,000
euros and
the captain 40,000 euros. All expenses to be incurred by the Company under
the
MUNIA guarantee were accrued for in 2005 and the Company expects that costs
beyond the deductible will be covered by insurance, as the discharge was
not
deliberate.
WATERLOO
In
April 2005, the Company entered into
a 50/50 joint venture agreement with Petredec Limited, a leading LPG trading
and
shipping company, pursuant to which each joint venture partner acquired
fifty
percent of the issued share capital of Waterloo Shipping Limited (“Waterloo”).
The joint venture acquired the 1983-built, 59,725cbm LPG carrier Galileo
and
chartered it to Petredec for a period of four years. The Company and Petredec
each advanced an amount of $2,481,923 to Waterloo and Waterloo borrowed
$11.2
million from Danmarks Skibskreditfond (Danish Ship Finance). The bank loan
bears
interest at LIBOR plus 1.05% and was repayable in 16 equal quarterly
installments of $610,156 plus a balloon payment of $1,437,504 due on April
5,
2009. The loan is non-recourse to the joint venture partners, except for
a
corporate guarantee limited to $850,000 for each joint venture
partner.
The
Galileo dry-docked in the second
and third quarters of 2006 and extensive upgrading was performed to enable
the
vessel to operate for an additional five years. Reflecting the extended
life of
the vessel, the charter with Petredec was extended by an additional year
to
April 2010. In order to fund the cost of the dry-dock, the Company and
Petredec
each advanced to Waterloo an additional amount of $750,000 in 2007 and
$1,850,000 in 2006. In September 2006, Waterloo borrowed an additional
amount of
$2 million from the Danish Ship Finance. As of June 30, 2007, the amount
outstanding under the loan was $8,068,752 repayable in 12 quarterly repayments
of $735,156 (first ten), $342,192 (eleventh) and $375,000 (twelfth). The
other
terms of the loan remain unchanged.
The
Company accounts for its investment
in Waterloo using the equity method of accounting. In the quarter ended
June 30,
2007, the share of the net income of Waterloo included in the Company's
condensed financial statements was $142,366 (it was a loss of $336,105
in the
quarter ended June 30, 2006). In the six month period ended June 30, 2007, the
Company’s share of the net income of Waterloo was $198,320 compared to a loss of
$276,797 for the same period in 2006. The Company’s investment in Waterloo was
$4,132,941 at June 30, 2007; it was $3,184,621 at December 31,
2006.
LTF
In
December 2006, the Company entered
into agreements for the sale and charter back of six LPG carriers with
Beteiligungsgesellschaft LPG Tankerflotte mbH & Co. KG (“LTF”), a special
purpose German KG company formed by the German finance house MPC Munchmeyer
Petersen AG (“MPC”). LTF agreed to purchase the vessels, Auteuil, Cheltenham,
Malvern, Coniston, Longchamp and Deauville from the Company for a total
sale
price of $52 million and to simultaneously charter them back to the Company
at
$225,000 per month for a period of four years commencing on the delivery
date of
each vessel. The first five vessels were delivered to LTF and simultaneously
chartered back by the Company in January 2007. The sixth vessel, the Deauville
is expected to be delivered to LTF in August 2007, as opposed to the originally
expected delivery before June 30, 2007. This later than expected delivery
will
be compensated by the Company to LTF at a rate of $1,250 per day for the
period
commencing from June 30, 2007 until the actual delivery. During that period,
the
Company will however earn a greater daily amount from the operation of
the
vessel under her current employment contract. The Company will reinvest
up to
$5.4 million in LTF for approximately 25% of the equity. Upon delivery
of the
first five vessels in January 2007, the Company invested $4.36 million
in
LTF.
The
Company participates in
approximately 25% in the equity and in the profits and losses of LTF. In
the
quarter and in the six month period ended June 30, 2007, the 25% share
of net
income of LTF included in the Company's condensed financial statements
was
$85,411 and $363,059, respectively. LTF is expected to pay dividends on
a
semi-annual basis. No dividends have been received to date. The Company’s
investment in LTF was $4,724,597 at June 30, 2007. The Company accounts
for its
investment in LTF using the equity method of accounting.
As
part of the LTF transaction, the
Company has agreed to guarantee the difference between the full management
budget and the actual ship operating expenses for an amount not to exceed
$135
per day per vessel for four years after the delivery of each vessel. For
the
quarter and the six months ended June 30, 2007, the operating expenses
of the
vessels were approximately at the budget level and no payment was required
by
the Company under the LTF guarantee. The Company cannot estimate the amount
of
any future payments required under the LTF guarantee at this time.
NOTE
5. RELATED COMPANY TRANSACTIONS
The
By-Laws of the Company provide that
related party transactions and transactions giving rise to potential conflicts
of interest are subject to review by the Audit Committee of the
Company.
V.Ships
On
August 1, 2006, V.Ships ceased to be
an affiliate of MC Shipping. For 18 years prior to that, the Company
had employed the services of V.Ships as technical manager for its vessels.
During the third quarter of 2006, the technical management of the vessels
managed by V.Ships was transferred to three non-related technical managers
on
industry competitive terms. The four container vessels owned by MUNIA,
in which
the Company owns 25.8%, are still managed by V.Ships.
MPC
Steamship
On
December 18, 2006, the Company
entered into agreements to sell the LPG carriers, Auteuil, Deauville,
Cheltenham, Malvern, Coniston and Longchamp to Beteiligungsgesellschaft
LPG
Tankerflotte mbH & Co. KG (“LTF”), a special purpose German KG company
formed by the German finance house MPC Munchmeyer Petersen AG (“MPC”) for a
total sale price of $52 million. Five of six vessels were delivered to
LTF in
January 2007. The Company charters back the vessels for a period of four
years
from the respective delivery date and will reinvest up to $5.4 million
in LTF
for approximately 25% of the equity (see Note 4). Mr. Schomburg (Director)
is a
member of the Supervisory Board of MPC Münchmeyer Petersen Steamship GmbH &
Co. KG. Mr. Schomburg excused himself from discussions relating to this
transaction.
Other
Certain
of the directors of the Company
are involved in outside business activities similar to those conducted
by the
Company. Mr. Bogazzi and Mr. Wedell-Wedellsborg (directors) are
involved in the business of purchasing, owning and selling cargo vessels
through
their shipping companies. As a result of these affiliations, such
persons may experience conflicts of interest in connection with the selection,
purchase, operation and sale of the Company’s vessels and those of other
entities affiliated with such persons.
At
June 30, 2007, the Company had net
intercompany payable balances to affiliates of $329,893, compared to $369,423
payable to affiliates at December 31, 2006. The balance at June 30, 2007
includes $9,932 payable to MUNIA for amounts due under the guarantee agreement
and for the dry-dock of a vessel and current account balances with the
managers.
At December 31, 2006 the balance payable to MUNIA was $296,475.
No
officer was indebted to the Company
at any time since the beginning of the fiscal year 2007.
NOTE
6. SHAREHOLDERS' EQUITY
The
summary of changes in shareholders'
equity during the six months ended June 30, 2007 was as follows:
|
|
Common
|
|
|
Additional
|
|
|
Retained
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Stock
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
Other
|
|
|
Shareholders
|
|
|
|
at
par
|
|
|
Capital
|
|
|
|
|
|
Comprehensive
|
|
|
Equity
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$ |
95,081
|
|
|
$ |
48,459,807
|
|
|
$ |
-
|
|
|
$ |
(307,681 |
) |
|
$ |
48,247,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
5,121,528
|
|
|
|
|
|
|
|
5,121,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,623
|
|
|
|
5,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
730,567
|
|
|
|
730,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock to Directors
|
|
|
19
|
|
|
|
19,981
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared
|
|
|
|
|
|
|
|
|
|
|
(1,189,093 |
) |
|
|
|
|
|
|
(1,189,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2007
|
|
$ |
95,100
|
|
|
$ |
48,479,788
|
|
|
$ |
3,932,435
|
|
|
$ |
428,509
|
|
|
$ |
52,935,832
|
|
As
of June 30, 2007, there were
9,510,017 shares issued and outstanding.
The
last quarterly installment of the
2006 dividend ($0.0625 per share) amounting to $594,259 was paid on February
2,
2007. On March 21 2007, the Company’s Board of Directors declared a quarterly
cash dividend of $0.0625 per share of common stock, which was distributed
on
April 30, 2007. The cash dividend of $594,376 was recorded as a reduction
of
Retained Earnings.
On
June 25 2007, the Company’s Board of
Directors declared a second quarterly cash dividend of $0.0625 per share
of
common stock, which was distributed on July 30, 2007 to the shareholders
of
record on July 16, 2007. The second quarterly cash dividend of $594,717
was also
recorded as a reduction of Retained Earnings.
In
2006, directors, who are not
officers of the Company or of an affiliated company, received $5,000 of
their
total annual compensation by issuance of shares of the Company’s common stock of
equivalent value. In February 2007, a total of 1,876 shares were distributed
to
the directors as part of their annual compensation. The total amount of
compensation expense recognized in 2006 in connection with the issuance
of such
shares was $20,000.
In
2007, all directors of the Company,
except for the President and Chief Executive Officer, receive $20,000 of
their
total annual compensation by issuance of shares of the Company’s common stock of
equivalent value. In July 2007, a total of 5,404 shares were distributed
to the
directors as part of their compensation for the first sixth months of 2007.
The
total amount of compensation expense recognized in the first six months
of 2007
in connection with the issuance of such shares was $60,000.
NOTE
7. LONG TERM DEBT AND CHARTER OBLIGATIONS
Long-term
debt and charter obligations consisted of the following at June 30, 2007
and
December 31, 2006:
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
Scotia
Loan
|
|
$ |
113,631
|
|
|
$ |
123,326
|
|
Fortis
Loan
|
|
|
4,187
|
|
|
|
27,111
|
|
|
|
|
117,818
|
|
|
|
150,437
|
|
less
current portion
|
|
|
23,576
|
|
|
|
26,167
|
|
Secured
loans, net of current portion
|
|
|
94,242
|
|
|
|
124,270
|
|
|
|
|
|
|
|
|
|
|
Long-term
charter obligations
|
|
|
37,441
|
|
|
|
-
|
|
less
current portion
|
|
|
9,009
|
|
|
|
-
|
|
Long
term charter obligations, net of current portion
|
|
|
28,432
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
long-term debt, net of current portion
|
|
$ |
122,674
|
|
|
$ |
124,270
|
|
The
current portion of the Fortis Loan
of approximately $4.2 million will be repaid upon the delivery of the last
vessel, the Deauville, sold to LTF (see Note 4) that is presently expected
in
August 2007. The remaining balance of the current portion of the
Scotia Loan in amount of approximately $19.4 million will be repaid from
the
current earnings of the relevant vessels, against which this debt had been
secured (see discussion of the Scotia Loan below). The Company estimates
that
such earnings will be sufficient to satisfy the debt service
requirements.
The
current portion of the charter
obligations (see Note 4) will be repaid from the earnings on the vessels
that
had been charter back from LTF and employed by the Company on time and
voyage
charter contracts to third parties. The Company expects the current earnings
from such employment contracts to be sufficient to meet the charter payment
obligations.
Long
Term Debt
On
October 11, 2004, the Company
entered into a $45,000,000 loan agreement with Fortis Bank in order to
refinance
all of its outstanding debt (the “Fortis Loan”). The facility bears interest at
LIBOR plus 1.25% and is repayable over six years in equal quarterly
installments. Concurrently, the Company entered into an interest rate swap
agreement as a result of which the variable rate, exclusive of margin,
has been
effectively fixed at 3.075 % until October 2007. In January 2005, the Company
prepaid $15 million under the Fortis Loan and cash balances of $5 million
held
as collateral by the bank were released. In January 2007, the Company prepaid
$17,973,435, the portion of the Fortis Loan attributable to five LPG vessels
sold to LTF (See Note 4). On March 5, 2007, the Company prepaid an additional
$3,256,414, the portion of the Fortis Loan attributable to the London Bridge
and
Blackfriars Bridge vessels. After this prepayment, the amount outstanding
on the
Fortis Loan as of June 30, 2007 was $4,186,819, corresponding to the
attributable portion outstanding on the remaining vessel expected to be
delivered to LTF in August 2007. This amount will be prepaid at the time
of
delivery of the vessel to LTF.
In
April 2005, the Company entered into
a $68,000,000 loan agreement with Scotiabank in order to partially fund
the
acquisition of two vessels, the Tower Bridge and Chelsea Bridge. The loan
consisted of two advances and bore interest at LIBOR plus 0.85%. The first
advance of $41 million was repayable over eleven years in twenty two equal
semi-annual installments of $1,772,500 plus a balloon payment of $2,005,000
in
April 2016. The second advance of $27 million was repayable over seven
years in
fourteen equal semi-annual installments of $1,785,500 plus a balloon payment
of
$2,003,000 in April 2012. Swap agreements were concurrently entered into
as a
result of which the variable rates, exclusive of margin, have been effectively
fixed until October 2010 at 4.58% and 4.545%, respectively for the first
and
second advance. In July 2006, the then outstanding balance under the loan
granted by Scotiabank of $60,884,000 was refinanced as described
below.
On
July 10, 2006, the Company entered
into a $126,884,000 loan agreement with Scotiabank (the “Scotia Loan”) in order
to refinance the outstanding amount of the previous loan granted by Scotiabank
of $60,884,000 granted in April 2005 and for the balance to partially finance
the acquisition of the Maersk Houston, Kew Bridge and Barnes Bridge vessels.
As
of June 30, 2007, the amount outstanding under the Scotia Loan was $113,631,300.
The loan is structured in five advances as follows:
1)
Advance A in an amount of
$27,429,000 was used to repay the outstanding amount of the loan granted
in
April 2005 by Scotiabank to partially fund the acquisition of the Chelsea
Bridge
($23,429,000) and for working capital purposes. Advance A was drawn on
July 24,
2006 and is repayable as follows: one semi-annual repayment of $1,785,500
on
October 5, 2006, eleven semi-annual repayments of $2,149,100 plus a balloon
of
$2,003,400 on April 5, 2012. Advance A bears interest at LIBOR plus
0.85%.
2)
Advance B in an amount of
$41,455,000 was used to repay the outstanding amount of the loan granted
on
April 5, 2005 by Scotiabank to partially fund the acquisition of the Tower
Bridge ($37,455,000) and for working capital purposes. Advance B was drawn
on
July 24, 2006 and is repayable as follows: one semi-annual repayment of
$1,772,500 in October 2006, nineteen semi-annual repayments of $1,983,100
plus a
balloon of $2,003,600 on April 5, 2016. Advance B bears interest at LIBOR
plus
0.85%.
3)
Advance C in an amount of
$37,000,000 was used to partially fund the acquisition of the Maersk Houston.
Advance C was drawn on July 13, 2006 and is repayable as follows: nineteen
quarterly repayments of $1,080,000 starting on January 24, 2007, twenty
quarterly repayments of $674,000 plus three balloon amounts of $1,000,000
payable upon the occurrence of certain circumstances relating to the Chelsea
Bridge, Tycho Brahe and Immanuel Kant. Advance C bears interest at LIBOR
plus
0.95%.
4)
Advance D in an amount of
$11,000,000 was used to partially fund the acquisition of the Kew Bridge.
Advance D was drawn on July 24, 2006 and is repayable in seven quarterly
repayments of $875,500 starting on January 24, 2007 and ten quarterly repayments
of $487,150. Advance D bears interest at LIBOR plus 0.95%.
5)
Advance E in an amount of
$10,000,000 was used to partially fund the acquisition of the Barnes Bridge.
Advance E was drawn on July 24, 2006 and is repayable in seven quarterly
repayments of $825,750 starting on January 24, 2007 and ten quarterly repayments
of $421,975. Advance E bears interest at LIBOR plus 0.95%.
The
existing interest rate swap
agreements hedging the previous loan granted by Scotiabank remained in
place. In
addition, an interest rate swap agreement was entered into with Scotiabank,
as a
result of which the variable rate on the additional amount of $8,000,000
granted
under Advances A and B, has been effectively fixed at 5.70% (exclusive
of
margin) for 3.7 years. Another interest rate swap agreement was also entered
into with Scotiabank, as a result of which the variable rate on the Advances
C,
D and E has been effectively fixed at 5.69% (exclusive of margin) for the
first
five years. Each of the interest rate swaps’ notional amounts and durations
match the scheduled repayments of the corresponding advances.
The
Company has issued guarantees in
relation to the loans and the borrowers have granted ship mortgages over
the
vessels as security. The Blackfriars Bridge, London Bridge, and the La
Forge are
the Company’s only vessels not pledged as collateral under any debt agreement.
The loan agreements contain financial covenants related to minimum liquidity
reserves of $5,000,000, minimum value clauses for the vessels, and minimum
tangible net worth, all as defined in the loan agreements. Under the Scotiabank
agreement, monthly transfers are made to retention accounts, which are
applied
in discharge of the next principal and interest payment due under the loan.
The
Company has complied with all applicable debt covenants, or received the
appropriate waivers from lenders, for all periods presented.
On
July 30, 2007, the Company entered
into a $35,000,000 loan agreement with KfW IPEX-Bank (the “KfW Loan”) in order
to partially fund the acquisition of three vessels, the Grasmere, Ullswater
and
Windermere that are expected to be delivered before August 15, 2007 (See
Note 9:
Subsequent Events).
Long-Term
Charter Obligations
In
January 2007, the Company delivered
five of six LPG vessels sold to LTF and simultaneously chartered them back
at
$225,000 per vessel per month for a period of four years, starting from
each
respective delivery date (see Note 4). The transaction is a sale and charter
back with continuing involvement that does not qualify for sale-leaseback
accounting under US GAAP and is accounted for as a financing. As a result,
upon
receiving the proceeds on the five vessels, the Company recorded a total
capitalized lease of $42 million for the amount received. Each
charter payment paid to LTF is recorded part as interest and part as principal.
The breakdown between principal and interest is calculated so that the
$42
million liability is fully amortized over the four year charter period.
The
effective annual average interest rate for this transaction is 12.44%.
As of
June 30, 2007 the total unamortized balance of the long-term charter
obligations, including current portion was $37,441,051.
The
Company employs these vessels on
time and voyage charter contracts to third parties and this employment
income is
sufficient to meet the charter payment obligations.
NOTE
8: STOCK OPTION PLAN
On
June
20, 2001, the shareholders authorized the creation of a Stock Option Plan
for
the Company’s employees. Under the terms of the plan, the options give the right
to purchase one share per option and expire in June 2011. As of March 31,
2007,
47,000 options awarded to the Company’s former Chief Financial Officer were
outstanding; they had an exercise price of $9.228 per share and were fully
vested. Following the departure of the former Chief Financial Officer
from the Company effective April 2, 2007, these 47,000 stock options expired
unexercised and have become again available for grants under the Stock
Option
Plan. In June 2007, the Company’s board of directors resolved not to grant any
further options under the Stock Option Plan. As of June 30, 2007, no stock
options were outstanding.
NOTE
9: SUBSEQUENT EVENTS
On
July 30, 2007, the Company entered
into a $35,000,000 loan agreement with KfW IPEX-Bank (the “KfW Loan”) in order
to partially fund the acquisition of three vessels, the Grasmere, Ullswater
and
Windermere that are expected to be delivered before August 15, 2007. The
loan
consists of three advances and bears interest at LIBOR plus 0.75%. The
first
advance of $12.5 million is repayable over ten years in thirty nine equal
quarterly installments of $212,802 plus a balloon payment of $4,200,722
due on
the 10th
anniversary of the drawdown. The second advance of $11.9 million is repayable
over ten years in thirty nine equal quarterly installments of $202,588
plus a
balloon payment of $3,999,068 due on the 10th anniversary
of the
drawdown. The third advance of $10.6 million is repayable over ten years
in
thirty nine equal quarterly installments of $180,456 plus a balloon payment
of
$3,562,216 due on the 10th anniversary
of the
drawdown. The Company has issued a guarantee in relation to the KfW Loan,
guaranteeing the performance of its wholly owned subsidiaries as borrowers
under
the loan agreement. The borrowers will grant ship mortgages over the vessels
once they are delivered as security.
On
July
30, 2007, the Company and Bear Stearns Merchant Banking (“BSMB”) announced the
signing of a merger agreement providing for the Company to be acquired,
subject
to certain terms and conditions and a vote by the Company’s shareholders, by a
newly-formed entity controlled by BSMB. Under the terms of the merger agreement,
the Company’s shareholders will receive $14.25 per share in cash in exchange for
their shares of the Company’s common stock.
Concurrent
with the signing of the merger agreement, the Company’s principal shareholders,
Navalmar Transportes Maritimos LDA (an entity controlled by Enrico Bogazzi)
and
Weco-Rederi Holding A/S (an entity controlled by Johan Wedell-Wedellsborg),
with
collective ownership of approximately 53% of the common stock of MC Shipping,
sold their shares of Company common stock to BSMB at the same $14.25 price
per
share that is payable under the merger agreement.
The
Transaction Committee of the Company’s Board of Directors – which is comprised
solely of directors who are neither Company officers nor affiliates of
the
former principal shareholders and was created to independently evaluate
the
transaction – recommended the merger to the Board of Directors. The
Transaction Committee received an opinion from DnB NOR Markets, Inc. with
respect to the fairness, from a financial point of view, of the price to
be
received by Company shareholders in the merger. Based on the
Transaction Committee’s recommendation, the Board of Directors approved the
transaction and resolved to recommend that the Company shareholders adopt
the
merger agreement. The representatives of the former principal
shareholders resigned from the Board of Directors prior to its deliberations
on
the merger agreement.
A
special
meeting of MC Shipping shareholders has been scheduled for September 5,
2007 to
vote on the merger agreement. Shareholders of record on August 9,
2007 will be entitled to vote at this special meeting. In order to be
approved by shareholders, the merger agreement must be supported by the
holders
of at least two-thirds of the shares present and voting at the special
meeting,
but in no event less than a majority of the outstanding shares. BSMB
has agreed to vote its approximate 53% stake in favor of the adoption of
the
merger agreement. Because completion of the merger is not conditioned
on the receipt of any governmental or regulatory approvals, the merger
is
expected to close immediately following receipt of Company shareholder
approval. Shareholders who dissent from the merger will be entitled
to assert appraisal rights under Liberian law.
The
merger agreement includes a “go shop” provision that permits the Transaction
Committee and its advisors to actively solicit alternative proposals from
third
parties for the next 35 days. There can be no assurance that the
solicitation of proposals will result in an alternative transaction, and
the
Company does not intend to disclose developments with respect to this
solicitation process until it is completed. Provided that it has not
elected to match such proposal, BSMB has agreed in the merger agreement
to
support a qualified superior proposal accepted by the Board of Directors
(by
tendering its shares or voting in favor of a merger, as applicable) if
such
superior proposal has a price per share of at least $15.00 and is not subject
to
a financing condition or other conditions more onerous than those contained
in
the merger agreement. If the Company terminates the merger agreement
with BSMB in order to accept an alternative proposal, the Company will
be
required to pay a termination fee of $7,750,000 to BSMB.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Certain
of the information contained in
this Form 10-Q may constitute “forward-looking statements” as that term is
defined under United States federal securities laws. “Forward-looking
statements” are subject to risks, uncertainties and other factors which could
cause actual events to differ materially from those stated in such statements,
including the identification of suitable vessels for purchase, the availability
of additional financing for the Company, if needed, the cyclical nature
of the
shipping industry, competition, general economic conditions and other risk
factors detailed in the Company’s filings with the SEC.
Results
of Operations for the quarter and the six months ended June 30,
2007.
Recent
significant events
On
December 18, 2006, the Company
entered into agreements for the sale and leaseback of six LPG carriers,
Auteuil,
Deauville, Cheltenham, Malvern, Coniston and Longchamp to
Beteiligungsgesellschaft LPG Tankerflotte mbH & Co. KG (“LTF”), a special
purpose German KG company formed by the German finance house MPC Munchmeyer
Petersen AG (“MPC”) for a total sales price of $52 million. The total book value
of the vessels was approximately $32.3 million. Simultaneously with the
sale,
the Company agreed to charter back the vessels at $225,000 per month for
a
period of four years and reinvest $5,400,000 in LTF for approximately 25%
of the
equity, thereby remaining committed to the ships and its customers.
The
delivery and charter back of five of the above vessels took place in January
2007 as follows:
Vessel
|
|
Delivery
Date
|
Coniston
|
|
January
11, 2007
|
Auteuil
|
|
January
24, 2007
|
Cheltenham
|
|
January
25, 2007
|
Longchamp
|
|
January
26, 2007
|
Malvern
|
|
January
30, 2007
|
Upon
actual delivery of the vessels,
the Company received $42 million; prepaid $17,973,435 of the Fortis Loan;
and
reinvested $4,361,539 in LTF for an interest equal to approximately 25%
of the
equity. The net proceeds to the Company were approximately $19,665,000.
The
delivery of the sixth vessel to LTF is expected to take place in August
2007.
The
Company did not recognize a gain on sale of these vessels as the transaction
is
accounted for as a financing under US GAAP. As a result:
-
|
The
vessels remain on the balance sheet of the Company and are depreciated
to
zero over the four year charter period starting from each respective
delivery date.
|
-
|
Revenues
from chartering the vessels by the Company are recorded as revenues
in
accordance with the Company’s revenue recognition policies. The Company
cannot estimate at this time the revenues it will derive from
the
chartering of the vessels over the next four years, since the
vessels are
currently employed on voyages or time charters not exceeding
one
year.
|
-
|
The
Company does not pay for the vessels’ operating expenses since it is
time-chartering the vessels from LTF. However it is guaranteeing
up to
$135 per day per vessel if the operating expenses exceed a pre-agreed
budget.
|
-
|
Upon
receiving the sale proceeds on the five vessels delivered through
January
2007, the Company recorded a total liability of $42 million for
the amount
received. After the $17.97 million prepayment of the portion
of the Fortis
Loan attributable to five vessels, the debt of the Company increased
by a
net amount of $24.03 million.
|
-
|
Each
charter payment paid to LTF is recorded part as interest and
part as
principal. The breakdown between principal and interest is calculated
so
that the $42 million liability is amortized over the four year
charter
period. The average effective annual interest rate for this transaction
is
12.44%.
|
-
|
The
Company’s $4.36 million investment in LTF was recorded as an investment
in
associated companies.
|
As
of February 19, 2007, after nine and
a half years with the Company, the Company’s Chief Financial Officer, Ms.
Dominique Sergent accepted a position with another shipping company and
left the
Company effective April 2, 2007. The position of the Chief Financial Officer
has
been filled on an interim basis by Mr. Gorchakov, the Company’s Chief Investment
Officer.
In
the first half of 2007, the Company
made additional advances in total of $750,000 to Waterloo to fund the cost
of
the dry-dock of the Galileo vessel that took place in 2006. During that
dry-dock, extensive upgrading was performed to enable the vessel to trade
for an
additional five years and the vessel is operating profitably in
2007.
In
March 2007, the Company settled a
dispute with the previous charterers of the La Forge vessel by agreeing
compensation in the amount of $1,550,292 arising out of the extended dry-docking
of the La Forge in 2006 and resulting damages to the sub-charterers. This
settlement resulted in a loss over previous reserves of $500,292 for amounts
receivable from the charterers that were taken during 2006. The loss resulting
from this settlement was fully recorded in 2006. The Company is seeking
recovery
of this loss and other damages from the ship’s previous managers.
On
March 5, 2007, the Company prepaid
$3,246,414, the portion of the Fortis Loan attributable to the London Bridge
and
Blackfriars Bridge vessels. After this prepayment, the amount outstanding
on the
Fortis Loan was approximately $4,186,818, corresponding to the attributable
portion outstanding on the remaining vessel expected to be delivered to
LTF in
August 2007. This amount will be prepaid at the time of sale of the
vessel.
On
April
30, 2007, the Company paid the first 2007 quarterly dividend of $0.0625
per
share, declared on March 21, 2007, which amounted to $594,376.
In
June 2007, the Company contracted to
acquire four additional LPG vessels and continues its strategic focus on
the LPG
sector (See Note 3: Purchase of Vessels). Following their delivery,
the Company’s fleet will comprise 23 wholly or partially owned vessels, of which
19 are LPG carriers ranging in capacity from 3,000 to 78,000 cbm.
In
July
2007, MUNIA
agreed to sell the Maersk Belawan vessel to a third party for a gross
consideration of $13.15 million or $12.89 million net with delivery expected
in
the first quarter of 2008 and it is anticipated that this investment will
be
recovered in full from the proceeds on this sale and the gain generated.
The
proceeds will be used to prepay the loan balance on the vessel and pay
the costs
and duties incurred in connection with the sale. Remaining net proceeds
are
expected to be distributed to the shareholders of MUNIA, including the
Company,
which will receive $1 million plus 40% of any amount in excess of $4.9
million.
It is expected that if the sale takes place that the Company will receive
cash
proceeds of approximately $3.1 million and book a gain on the investment
of
approximately $1 million.
On
July 30, 2007, the Company entered
into a $35,000,000 loan agreement with KfW IPEX-Bank (the “KfW Loan”) in order
to partially fund the acquisition of three vessels, the Grasmere, Ullswater
and
Windermere that are expected to be delivered before August 15,
2007.
On
July
30, 2007, the Company and Bear Stearns Merchant Banking (“BSMB”) announced the
signing of a merger agreement providing for the Company to be acquired,
subject
to certain terms and conditions and a vote by the Company’s shareholders, by a
newly-formed entity controlled by BSMB. Under the terms of the merger agreement,
the Company’s shareholders will receive $14.25 per share in cash in exchange for
their shares of the Company’s common stock (see: Subsequent Events
below).
The
Company plans to open a commercial
and marketing office in Singapore in the third quarter to facilitate the
growth
in the fleet and Company’s activities. The Company has hired a Managing Director
for the office and will seek to build up its operations.
Revenue
The
Company had revenue from
charterhire and other sources amounting to $16,395,174 for the quarter
and
$31,899,340 for the six month period ended June 30, 2007 ($9,940,984 for
the
quarter and $20,048,239 for the six month period ended June 30, 2006).
The
substantial increase in revenues is principally due to the effect of the
additional vessels purchased in late March, April and July 2006 (approximately
80% contribution to the increase) and higher charter rates (approximately
15%
contribution to the increase). No revenue has been recognized on the Kew
Bridge
vessel since January 14, 2007 on the expiry of the loss of earnings insurance.
However, the Company is currently engaged in discussions with the charterers
with regards to compensating the Company for a portion of lost revenues
in 2007.
The Company expects continued revenue growth in the second half of
2007.
In
the first half of 2007, the
Company's on-hire performance of the vessels on time charter was 99.3%
on a
potential 2,534 days (for the first half of 2006, it was 92.4% on a potential
of
1,813 days). The increase in on-hire performance is due to the fact that
in the
first six months of 2007 no vessels dry-docked, whereas three ships underwent
dry-docking in the same period of 2006 and one vessel incurred off-hire
for
repairs.
Eight
of the Company's nine
fully-owned vessels and four of the five chartered-in vessels are currently
fixed on time charters. Future minimum revenues from these non-cancellable
charters are as follows for the years ending December 31:
Second
half of 2007
|
|
$ |
27,273,100
|
|
2008
|
|
$ |
37,841,200
|
|
2009
|
|
$ |
24,721,200
|
|
2010
|
|
$ |
11,986,200
|
|
2011
|
|
$ |
3,870,600
|
|
All
four vessels soon to be acquired
by the Company under the contracts agreed in June 2007 are fixed on time
charters. Additional future minimum revenues from these non-cancellable
charters
are expected to be as follows for the years ending December 31:
Second
half of 2007
|
|
$ |
4,249,000
|
|
2008
|
|
$ |
8,429,500
|
|
2009
|
|
$ |
6,660,000
|
|
2010
|
|
$ |
4,740,000
|
|
2011
|
|
$ |
2,765,000
|
|
Costs
and Expenses
Commission
on charterhire was $184,109
for the quarter and $292,075 for the six months ended June 30, 2007. It
was
$131,694 for the quarter and $264,815 for the six months ended June 30,
2006.
The increase in commission is due to the increase in revenues on the vessels
and
is partially off-set by charter contracts where no commission is
payable.
Vessel
operating expenses plus
amortization of dry-docking costs were $5,965,405 for the quarter and
$11,399,949 for the six months ended June 30, 2007. They were $5,199,640
for the
quarter and $9,337,539 for the six months ended June 30, 2006. Vessel
operating expenses comprise vessel running costs, voyage costs (such as
fuel
costs, port charges and canal dues incurred directly while vessels are
unemployed or are employed on voyage charters) and management fees. As
a
percentage of revenue, vessel operating expenses plus amortization of
dry-docking costs decreased from 43.3% in the first half of 2006 to 35.7%
in the
first half of 2007. Daily operating expenses per vessel averaged $5,763
for the first half of 2007 as compared to $5,204 for the first half of
2006
(excluding the LPG vessels sold to LTF in January 2007). The decrease in
vessel
operating expenses as a percentage of revenues in the six months ended
June 30,
2007 is due to the increase in charterhire. The absolute increase in vessel
operating expenses was principally due to the addition of five LPG vessels
purchased in 2006 and the fact that several vessels were operated on voyage
charters. For voyage charters, the vessel is contracted for a voyage between
two
ports: the Company is paid for the tonnage transported and pays for all
voyage
costs, including port expenses and bunker, in addition to the operating
expenses
of the vessels, such as crew costs, insurance, repairs and maintenance.
The
increase in operating expenses was partially offset by the sale of five
LPG
vessels to LTF that are chartered back on time charter basis and the Company
does not pay for the vessels’ operating expenses, except for the voyage costs
when vessels are operated on voyage charter.
Following
a grounding incident of the
Kew Bridge in 2006, the repairs of the vessel started in February 2007
and are
currently expected to be finished in August 2007. The Company has not been
required to advance any material funds in connection with this incident
and
Management does not believe that the Company will incur significant costs
related to the incident as repair costs are expected to be substantially
covered
by insurance.
Upon
change of ship managers in the
third quarter of 2006, the Company recorded various invoices received from
the
previous managers as liabilities. Having made a thorough review of these
invoices in the fourth quarter of 2006 and the first quarter of 2007, certain
invoices were judged to be improperly billed to the Company and not due
to the
previous managers. During the first quarter of 2007, the Company has adjusted
these invoices to reflect management’s best estimate of amounts ultimately due
to the previous managers. The effects of this adjustment have been included
in
the operating results of the first quarter of 2007.
Depreciation
totalled $5,533,867 in the
quarter and $10,768,933 for the first six months of 2007 ($2,696,298 in
the
quarter and $4,796,064 for the six months ended June 30 2006). The increase
in
depreciation is principally due to the purchase of five LPG vessels acquired
in
March and July 2006 and the change in depreciation of the five LPG vessels
sold
to LTF and chartered back by the Company. The transaction is a sale and
leaseback with continuing involvement that does not qualify for sale-leaseback
accounting under US GAAP and is accounted for as a financing under US GAAP.
As a
result, the sold vessels remain on the balance sheet of the Company and
are
depreciated to zero over the four year charter period.
General
and administrative expenses amounted to $880,624 for the quarter and $1,663,877
for the six months ended June 30, 2007. They were $673,185 for the quarter
and
$1,187,172 for the six months ended June 30, 2006. The increase in
general and administrative expenses is for the most part due to the opening
of
additional office in London and increase in the number of employees of
the
Company. Increasing weakness of the United States dollar could
have a negative impact on the Company’s overheads as approximately 75% of these
costs are in Euros or pounds sterling.
Interest
Income and Expense
Interest
expense amounted to $3,113,800
for the quarter and $6,286,609 for the six months ended June 30, 2007
($1,301,278 for the quarter and $2,451,927 for the six months ended June
30,
2006). The increase in interest expense resulted from the increase in the
Company’s debt (see Note 8: “Long Term Debt” of the Item 1 “Condensed
Consolidated Financial Statements”) and the write-off of the unamortized balance
of the debt issuance costs incurred in 2004 in connection with the $21.2
million
prepaid under the Fortis Loan in the first quarter of 2007.
Interest
income totalled $133,979 for
the quarter and $347,951 for the six months ended June 30, 2007($115,452
for the
quarter and $289,014 for the six months ended June 30, 2006). The increase
in
interest income is due to higher interest rates and the increased
liquidity.
Impairment
loss
As
of June 30, 2007, the Company
evaluated the recoverability of its long term assets in accordance with
FAS 144
and determined that no provision for impairment loss was required as the
carrying values of such assets were deemed to be recoverable at this
time.
In
accordance with SFAS 144 “Accounting
for the Impairment or Disposal of Long Lived Assets”, the Company’s vessels,
including vessels owned by associated companies, are regularly reviewed
for
impairment. The Company performs the impairment valuations at the individual
vessel level pursuant to paragraph 10 of SFAS 144. To consider whether
there is
an impairment indicator, the Company compares the book value and the market
value of each vessel at the end of each quarterly reporting period. On
the basis
of appraisals received in July 2007 from one leading independent shipbroker,
the
market value of all of the Company’s vessels, including the Kew Bridge (fully
classed and repaired) and vessels owned by associated companies were above
their
book values. Therefore, the Company considered there was no indication
of
impairment.
Deferred
Gain
Recognized
Deferred Gain totalled
$1,187,572 for the quarter and $2,362,094 for the six months ended on June
30,
2007 (in 2006, same amounts were recognized in the corresponding periods)
and
represents the portion of Deferred Gain on sale of assets recognized as
income
during the period.
Equity
in Income of associated companies
Equity
in net income of associated
companies totalled $386,537 for the quarter and $ 923,584 for the six months
ended June 30, 2007, as compared to net loss of $247,741 for the quarter
and net
income of $44,241 for the six months ended June 30, 2006.
|
|
Three
months ended
June
30, 2007
|
|
|
Three
months ended
June
30, 2006
|
|
|
Six
months ended
June
30, 2007
|
|
|
Six
months ended
June
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MUNIA
share of net income
|
|
$ |
158,760
|
|
|
$ |
88,364
|
|
|
|
362,205
|
|
|
|
321,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waterloo
share of net (loss)/income
|
|
|
142,366
|
|
|
|
(336,105 |
) |
|
|
198,320
|
|
|
|
(276,797 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTF
share of net income
|
|
|
85,411
|
|
|
|
-
|
|
|
|
363,059
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in (loss)/income of associated companies
|
|
|
386,537
|
|
|
|
(247,741 |
) |
|
|
923,584
|
|
|
|
44,241
|
|
The
Company’s 25.8% share of MUNIA’s
net income amounted to $158,760 for the quarter and $362,205 for the six
month
ended June 30, 2007, as compared to $88,364 for the quarter
and
$321,038 for the six
months ended June 30, 2006. The on-hire performance of the container vessels
was
99.97% on a potential 724 days in the six month period ended June 30, 2007,
as
compared to 99.99% on a potential 724 days in the six month period ended
June
30, 2006. The Company’s investment in MUNIA was $5,798,739 as of June 30, 2007
as compared to $5,616,533 as of December 31, 2006. The increase is due
to the
net income of MUNIA and is partially offset by dividends of $180,000 received
in
January 2007.
The
Company’s share of the net income
of Waterloo was $142,365 and $198,319 in the quarter and in the six month
period
ended June 30, 2007 (it was a loss of $336,105 and $276,797 for the quarter
and
for the six months ended June 30, 2006). The vessel’s on-hire
performance was 99.89% on a potential 181 days (for the first half of 2006,
it
was 66.0% on a potential 181 days). The increase in the on-hire performance
is
associated with the off-hire resulting from the dry-docking of the vessel
in
2006.
In
February 2007, the Company and
Petredec each made an additional advance of $500,000 to Waterloo to fund
the
cost of the dry-dock that took place in 2006. On April 27, 2007, in
order to complete funding the cost of the dry-dock of the Galileo vessel,
the
Company and Petredec each advanced to Waterloo an additional amount of
$250,000.
As a result, the Company’s investment in Waterloo was $4,132,940 at June 30,
2007 ($3,184,620 at December 31, 2006).
Information
with respect to the net
income of LTF for the quarter and the six month ended June 30, 2007 is
not
entirely available to the Company. Management has estimated the net income
of
LTF based on the actual results of LTF for the first quarter and budgeted
amounts for the second quarter of 2007. The Company’s estimated 25% share of
LTF’s net income amounted to $85,411 for the quarter ended June 30, 2007,
including adjustment for actual results in the first quarter 2007. The
Company’s
estimated share of LTF’s net income for the six month ended June 30, 2007 was
$363,059. The Company’s investment in LTF was $4,724,598 at June 30,
2007.
Subsequent
events
In
July
2007, MUNIA
agreed to sell the Maersk Belawan vessel to a third party for a gross
consideration of $13.15 million or $12.89 million net with delivery expected
in
the first quarter of 2008 and it is anticipated that this investment will
be
recovered in full from the proceeds on this sale and the gain generated.
The
proceeds will be used to prepay the loan balance on the vessel and pay
the costs
and duties incurred in connection with the sale. Remaining net proceeds
are
expected to be distributed to the shareholders of MUNIA, including the
Company,
which will receive $1 million plus 40% of any amount in excess of $4.9
million.
It is expected that if the sale takes place that the Company will receive
cash
proceeds of approximately $3.1 million and book a gain on the investment
of
approximately $1 million.
On
July
30, 2007, the Company entered into a $35,000,000 loan agreement with KfW
IPEX-Bank (the “KfW Loan”) in order to partially fund the acquisition of three
vessels, the Grasmere, Ullswater and Windermere that are expected to be
delivered before August 15, 2007. (See Note 9: “Subsequent Events” of the Item 1
“Condensed Consolidated Financial Statements”). The Company has issued a
guarantee in relation to the KfW Loan, guaranteeing the performance of
its
wholly owned subsidiaries as borrowers under the loan agreement. The borrowers
will grant ship mortgages over the vessels once they are delivered as
security.
The
Company issued a guarantee to Vitol
S.A. in support of its subsidiary in connection with the purchase of the
Keswick
vessel scheduled for mid 2008 for the amount of 10% of the vessel’s purchase
price. This guarantee will be replaced with a cash deposit in March 2008,
approximately three months prior to the vessel’s delivery. Until then, no cash
down payment will be required on the vessel.
On
July
30, 2007, the Company paid the second 2007 quarterly dividend of $0.0625
per
share, declared on June 25, 2007, which amounted to $594,717.
On
July
30, 2007, the Company and Bear Stearns Merchant Banking (“BSMB”) announced the
signing of a merger agreement providing for the Company to be acquired,
subject
to certain terms and conditions and a vote by the Company’s shareholders, by a
newly-formed entity controlled by BSMB. Under the terms of the merger agreement,
the Company’s shareholders will receive $14.25 per share in cash in exchange for
their shares of the Company’s common stock.
Concurrent
with the signing of the merger agreement, the Company’s principal shareholders,
Navalmar Transportes Maritimos LDA (an entity controlled by Enrico Bogazzi)
and
Weco-Rederi Holding A/S (an entity controlled by Johan Wedell-Wedellsborg),
with
collective ownership of approximately 53% of the common stock of MC Shipping,
sold their shares of Company common stock to BSMB at the same $14.25 price
per
share that is payable under the merger agreement.
The
Transaction Committee of the Company’s Board of Directors – which is comprised
solely of directors who are neither Company officers nor affiliates of
the
former principal shareholders and was created to independently evaluate
the
transaction – recommended the merger to the Board of Directors. The
Transaction Committee received an opinion from DnB NOR Markets, Inc. with
respect to the fairness, from a financial point of view, of the price to
be
received by Company shareholders in the merger. Based on the
Transaction Committee’s recommendation, the Board of Directors approved the
transaction and resolved to recommend that the Company shareholders adopt
the
merger agreement. The representatives of the former principal
shareholders resigned from the Board of Directors prior to its deliberations
on
the merger agreement.
A
special
meeting of MC Shipping shareholders has been scheduled for September 5,
2007 to
vote on the merger agreement. Shareholders of record on August 9,
2007 will be entitled to vote at this special meeting. In order to be
approved by shareholders, the merger agreement must be supported by the
holders
of at least two-thirds of the shares present and voting at the special
meeting,
but in no event less than a majority of the outstanding shares. BSMB
has agreed to vote its approximate 53% stake in favor of the adoption of
the
merger agreement. Because completion of the merger is not conditioned
on the receipt of any governmental or regulatory approvals, the merger
is
expected to close immediately following receipt of Company shareholder
approval. Shareholders who dissent from the merger will be entitled
to assert appraisal rights under Liberian law.
The
merger agreement includes a “go shop” provision that permits the Transaction
Committee and its advisors to actively solicit alternative proposals from
third
parties for the next 35 days. There can be no assurance that the
solicitation of proposals will result in an alternative transaction, and
the
Company does not intend to disclose developments with respect to this
solicitation process until it is completed. Provided that it has not
elected to match such proposal, BSMB has agreed in the merger agreement
to
support a qualified superior proposal accepted by the Board of Directors
(by
tendering its shares or voting in favor of a merger, as applicable) if
such
superior proposal has a price per share of at least $15.00 and is not subject
to
a financing condition or other conditions more onerous than those contained
in
the merger agreement. If the Company terminates the merger agreement
with BSMB in order to accept an alternative proposal, the Company will
be
required to pay a termination fee of $7,750,000 to BSMB.
Management
of the Company is not expected to change prior to the merger or shareholders’
meeting.
Market
Conditions
The
Company operates in three sectors of the LPG shipping industry covering
small,
medium and large LPG tankers. In the second half of 2007, the overall market
for
LPG carriers continued to remain strong.
All
the
Company’s small LPG tankers coming to the end of their contracts have been
renewed with charterers at rates that represent an improvement over the
previous
contracts.
The
Company’s ships in the mid sizes have continued to work under medium term
contracts, the sector has been affected by the extended repair period of
Kew
Bridge following her grounding in India in September 2006. This vessel
will
return to service in August and will contribute positively to the results
of
this fleet in the third quarter. She will make a substantial contribution
in the
fourth quarter when she is expected to work for the full period.
The
Company’s large fleet remains under medium to long term charter, except for La
Forge which will benefit from rates that have risen strongly in the last
3
months.
The
main
LPG trade between Arabian Gulf countries and Japan serves as a market indicator
and the freight rates on this route are considered the industry benchmark
for
VLGCs. The table below demonstrates the average freight rates
achieved on this route in the last few years. The table also shows the
evolution
of 12-month time charter rates for vessels of sizes and types similar to
the
Company’s ships.
LPG
market
|
2005
|
2006
|
June
2007
|
Voyage
rates ($/mt) Arabian Gulf/Japan
|
40.51
|
46.71
|
36.58
|
12-month
time charter ($/day)
|
|
|
|
78,000
m3
average daily charter rate
|
33,538
|
37,327
|
25,493
|
15,000
m3
average daily charter rate
|
21,440
|
23,014
|
23,684
|
3,500
m3
average daily charter rate
|
7,566
|
7,401
|
7,730
|
Sources:
|
©
Clarkson Research Services Limited; © Lorentzen & Stemoco; © Barry
Rogliano Salles;
|
|
©
Inge Steensland AS; © SSY Gas
Ltd.
|
In
the
first six months of 2007, the market for containerships was strong. The
four
container vessels, which are 25.8% owned by the Company, are fixed on long
term
charters with AP Møller until February 1st 2008,
September
1st 2008,
May
15th 2009
and
February 1st
2009, respectively, at rates which remain well below current market levels.
Advantage was taken of the market strength to unlock the value of one of
the
vessels as described above (see: Subsequent Events).
Market
value of the fleet
On
the basis of appraisals received in
July 2007 from one leading independent shipbroker, the market value of
the
Company’s wholly owned fleet was approximately $211 million compared to book
values of $158.3 million on June 30, 2007. Appraisals are based on the
technical
specifications of each vessel, but are not based on a physical inspection
of the
vessels. On this basis, the excess of market value over book value was
approximately $52.7 million or $5.54 per share. The Company’s shareholders’
equity was equal to $53,211,834 as of June 30, 2007, not including the
deferred
gain on sale of vessels of $6,074,469. In December 2006,
the excess of appraised value over book value was approximately $49.9 million
or
$5.25 per share; in July 2006, it was approximately $56.8 million or $5.97
per
share.
Value
(US$ million) as of:
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
Wholly-owned
fleet:
|
|
|
|
|
|
|
Net
book value
|
|
|
158.3
|
|
|
|
191.0
|
|
Market value
|
|
|
211.0
|
|
|
|
240.9
|
|
Market
surplus over book value
|
|
|
52.7
|
|
|
|
49.9
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
52.9
|
|
|
|
48.2
|
|
Deferred
gain on sale of vessels
|
|
|
6.1
|
|
|
|
8.4
|
|
Total
market-adjusted equity plus deferred gain
|
|
|
111.7
|
|
|
|
106.5
|
|
Five
LPG tankers sold to LTF in January
2007 are excluded from the valuations as of June 30, 2007. The vessels
were sold
for $42 million and their book value at the time of sale was approximately
$24.7
million. However, the Company did not recognize a gain on sale of these
vessels
as the transaction is accounted for as a financing under US GAAP.
The
vessel owned by Waterloo was valued
in July 2007 by one leading independent broker at $22 million as against
a book
value of $11.3 million as of June 30, 2007. As of June 30, 2007, the debt
outstanding on the vessel owned by Waterloo was approximately $8.1
million.
Values
of the Company’s ships are
subject to market fluctuations, cyclical nature of the shipping industry,
competition, general economic conditions and other risk factors.
Liquidity
and Sources of Capital
Liquidity
At
June
30, 2007, the Company had total cash of $9,134,365 (December 31, 2006 -
$6,432,446), of which deposits totaling $4,571,421 (December 31, 2006 -
$4,594,402) were pledged to guarantee the Company’s performance under the Scotia
loan agreement and $4,562,944 was available in cash (December 31, 2006
-
$1,838,044). The Company’s loan agreements contain debt covenants related to
minimum liquid assets of $5,000,000.
The
ratio of current assets to current
liabilities increased from 0.31 at December 31, 2006 to 0.38 at June 30,
2007.
At
June 30, 2007, the Company had a
working capital deficit of approximately $25.4 million, including the current
portion of the long-term debt in the amount of approximately $23.6 million
and
the current portion of the charter obligations in amount of approximately
$9
million.
The
current portion of the Fortis Loan
of approximately $4.2 million will be repaid upon the delivery of the last
vessel, the Deauville, sold to LTF, which is presently expected in August
2007.
Upon delivery, the Company will receive $10 million, repay the Fortis Loan
and
reinvest approximately $1 million in LTF (see Item 1. Condensed Consolidated
Financial Statements - Note 4: Investment in Associated Companies). The
remaining balance of the current portion of the Scotia Loan in amount of
approximately $19.4 million will be repaid from the earnings of the relevant
vessels, against which this debt had been secured and that are employed
on
medium-term charters. The Company estimates that such earnings will be
sufficient to satisfy the debt service requirements.
The
current portion of the charter
obligations will be repaid from the earnings on the vessels that had been
charter back from LTF and employed by the Company on time and voyage charter
contracts to third parties. The Company expects the income from such employment
contracts to be sufficient to meet the charter payment
obligations.
Operating
activities
The
Company generated cash flows from
operations of $8,075,460 in the six months ended June 30, 2007 in comparison
to
$7,648,223 in the six months ended June 30, 2006. The increase is due for
the
most part to the full effect in 2007 of four out of five additional vessels
acquired between March and July 2006. On the fifth vessel, the Kew Bridge
no
revenue has been received since January 14, 2007 on the expiry of the loss
of
earnings insurance. The Company is currently engaged in discussions with
the
charterers of the Kew Bridge with regards to compensating the Company for
a
portion of lost revenues in 2007.
Investing
activities
The
Company used cash flows in
investing activities of 8,989,605 in the first six months of 2007 in comparison
to $14,399,937 in the first six months of 2006.
In
January 2007, the Company delivered
five of six LPG vessels sold to LTF and simultaneously chartered them back
for a
period of four years, in accordance with the sale and leaseback agreement
concluded on December 18, 2006 (see Item 1. Condensed Consolidated Financial
Statements - Note 4: Investment in Associated Companies). Upon actual delivery
of the vessels, the Company reinvested $4,361,538 in LTF for an interest
equal
to approximately 25% of the equity. The delivery of the sixth vessel to
LTF and
corresponding reinvestment in LTF of $1,038,462 is expected to take place
in
August 2007.
In
the first six months of 2007, the
Company received $180,000 dividend from MUNIA and advanced a total of $750,000
to Waterloo (see Item 1. Condensed Consolidated Financial Statements -
Note 4:
Investment in Associated Companies).
In
June 2007, the Company made a $4.07
million down payment on the purchase of three vessels. In the third quarter
2007, the Company expects to use cash flows of approximately $36.93 million
for
the balance of the purchase price of three LPG vessels that are expected
to be
delivered in August 2007 (see Item 1. Condensed Consolidated Financial
Statements - Note 3: Purchase of Vessels).
Financing
activities
The
Company generated cash flows from
financing activities of 3,633,423 in the first six months of 2007 compared
to $
2,077,003 in the first six months of 2006.
In
the
first the first six months of 2007, the Company repaid or prepaid net borrowings
of $32,618,994; capitalized $42,000,000 in long-term charter obligations
related
to the five LPG vessels sold to LTF and repaid $4,558,951 as principal
portion
of such charter obligations. As a result, the Company's total long term
debt
(including the current portion and long-term charter obligations) increased
from
$150,437,112 as of December 31, 2006 to $155,259,170 as of June 30, 2007.
The
Company’s long term borrowings (including the current portion, but excluding
long-term charter obligations) decreased from $150,437,112 as of December
31,
2006 to $117,818,119 as of June 30, 2007.
In
the
third quarter 2007, the Company expects to receive $35,000,000 loan proceeds
under the KfW Loan for financing of the acquisition of three LPG vessels
(see
Subsequent Events).
Dividends
The
last quarterly installment of the
2006 dividend ($0.0625 per share) amounting to $594,259 was paid on February
2,
2007. The first installment of the 2007 dividend ($0.0625 per share) amounting
to $594,376 was paid on April 30, 2007.
Contractual
obligations
As
of
August 6, 2007, after incurrence of the KfW Loan (see Subsequent Events),
the
Company's contractual debt obligations, including principal portion of
the
long-term charter obligations were as follows:
Payments
due by period
|
Total
|
Less
than 1 year
|
2-3
years
|
4-5
years
|
More
than 5 years
|
Fortis
Loan
|
$ 4,186,819
|
$ 4,186,819
|
-
|
-
|
-
|
Scotia
Loan
|
$
113,631,300
|
$ 19,389,400
|
$ 33,233,925
|
$
30,681,575
|
$ 30,326,400
|
KfW
Loan
|
$ 35,000,000
|
$ 2,383,384
|
$ 2,383,384
|
$ 2,383,384
|
$ 23,083,080
|
Long-term
charter obligations
|
$ 37,441,051
|
$ 9,008,727
|
$ 21,950,104
|
$ 6,482,220
|
-
|
Total
|
$
190,259,170
|
$ 34,968,330
|
$ 57,567,413
|
$
39,547,179
|
$ 53,409,480
|
The
above table does not include
effects of the sixth vessel not yet delivered to LTF. Upon delivery of
the sixth
vessel to LTF, which is expected to take place in August 2007, the Company
will
capitalize an additional charter obligation of $10 million and
additionally invest approximately $1.04 million in LTF to make
up for an interest equal to approximately 25% of LTF’s equity.
Guarantees
and Off-Balance Sheet Financial Arrangements
The
Company issued guarantees in
relation to the Fortis, Scotia and KfW Loans. In addition, the Company
issued a
guarantee of $850,000 in relation with the loan granted by Danmarks
Skibskreditfond to Waterloo (see Item 1. Condensed Consolidated Financial
Statements – Note 4: Investment in Associated Companies).
In
connection with the sale of the
container vessels in January 2005, the Company agreed to guarantee to the
purchaser certain levels of operating expenses and of employment for the
vessels
until February 1st 2008,
September
1st 2008,
May
15th 2009
and
February 1st
2009, for each vessel (or earlier in case of sale or total loss of a vessel).
As
a result, the excess or surplus of operating expenses, up to a certain
extent,
will be absorbed by the Company. As compensation for issuing such guarantee,
the
Company receives a daily guarantee fee for each vessel, which is included
in
Revenues.
In
connection with the sale of the
small LPG vessels in January 2007, the Company agreed to guarantee the
difference between the full management budget and the actual ship operating
expenses for an amount not to exceed $135 per day and per vessel for four
years
after the delivery of each vessel.
In
February 2007, the Company posted a
$2.5 million bank guarantee in favor of the La Forge charterers in relation
to
their claim arising out of the extended dry-docking of the vessel in 2006
and
the resulting damages. The bank guarantee was secured by a cash deposit
of $2.5
million. Simultaneously, the Company agreed to guarantee to the charterers
the
performance of its subsidiary owning the La Forge. On April 10, 2007, the
Company fully settled the dispute with the previous charterers of La Forge
and
both the $2.5 million bank guarantee and the Company’s guarantee on behalf of
its ship owning subsidiary were cancelled.
The
Company issued a guarantee to Vitol
S.A. in support of its subsidiary in connection with the purchase of the
Keswick
vessel scheduled for mid 2008 for the amount of 10% of the vessel’s purchase
price. This guarantee will be replaced with a cash deposit in March 2008,
approximately three months prior to the vessel’s delivery. Until then, no cash
down payment will be required on the vessel.
The
Company had no other off-balance
sheet financial arrangements as of June 30, 2007
Contingencies
On
September 20, 2005, the m/v ‘Maersk
Barcelona’ owned by MUNIA suffered a malfunction of her oily water separator,
which resulted in an accidental overboard discharge of oil-contaminated
water
off the coast of France. On March 22, 2006, the technical managers of the
vessel
were fined 720,000 euros and the captain 80,000 euros by a French court;
a
judgment which they appealed. On June 28, 2007, the court of appeal generally
confirmed the decision of the first instance court; however according to
the
latest ruling, the technical managers of the vessel were fined 760,000
euros and
the captain 40,000 euros. All expenses to be incurred by the Company under
the
MUNIA guarantee were accrued for in 2005 and the Company expects that costs
beyond the deductible will be covered by insurance, as the discharge was
not
deliberate.
In
the third quarter of 2006, the Kew
Bridge suffered a grounding incident in Ratnagiri off the West Coast of
India
and was re-floated with a combination of lightening cargo from the vessel
into
another ship and by pulling with tugs. In the first quarter 2007, the incident
had a material impact on the Company’s revenues as no
revenue has been recognized on the Kew Bridge since January 14, 2007 on
the
expiry of the loss of earnings insurance. However, the Company is currently
engaged in discussions with the charterers with regards to compensating
the
Company for a portion of lost revenues in 2007. The repairs on the vessel
started in February 2007 and are currently expected to be finished in August
2007. The Company has not been required to advance any material funds in
connection with this incident and Management does not believe that the
Company
will incur significant costs related to the incident as repair costs are
expected to be substantially covered by insurance.
Future
cash requirements
At
June 30, 2007, the Company had a
working capital deficit of approximately $25.4 million, including the current
portion of the long-term debt in the amount of approximately $23.6 million
and
the current portion of the charter obligations in amount of approximately
$9
million.
The
current portion of the Fortis Loan
of approximately $4.2 million will be repaid upon the delivery of the last
vessel, the Deauville, sold to LTF, which is presently expected in August
2007.
Upon delivery, the Company will receive $10 million, repay the Fortis Loan
and
reinvest approximately $1 million in LTF (see Item 1. Condensed Consolidated
Financial Statements - Note 4: Investment in Associated Companies). The
remaining balance of the current portion of the Scotia Loan in amount of
approximately $19.4 million will be repaid from the earnings of the relevant
vessels, against which this debt had been secured and that are employed
on
medium-term charters. The Company estimates that such earnings will be
sufficient to satisfy the debt service requirements.
The
current portion of the charter
obligations will be repaid from the earnings on the vessels that had been
charter back from LTF and employed by the Company on time and voyage charter
contracts to third parties. The Company expects the income from such employment
contracts to be sufficient to meet the charter payment obligations.
Management
believes that the net cash generated by operating activities and sale of
the
Deauville vessel in August 2007 will provide sufficient funds to enable
the
Company to meet its liquidity requirements throughout 2007.
Critical
Accounting Policies
There
have been no significant changes
to the Company’s critical accounting policies during the six months ended June
30, 2007, as compared to those the Company disclosed in the Management
Discussion and Analysis section of its Form 10-K for the year ended December
31,
2006.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
The
Company operates
internationally and is exposed to certain market risks that, in the normal
course of business, include fluctuations in interest rates and currency
exchange
rates. While the Company occasionally uses derivative financial instruments
to
reduce these risks, the Company does not enter into derivative financial
instruments for trading or speculative purposes.
Impact
of Interest Rate fluctuations
As
of June 30, 2007 the Company had
$113,631,300 of debt outstanding at variable rates, which have been fixed
through the use of interest rate swap agreements as detailed below.
As
of June 30, 2007
|
Notional
amount
|
Fair
value
|
Interest
rate
|
Expiration
|
First
swap / Scotia Loan
|
$ 19,858,000
|
332,239
|
4.580%
|
April
2010
|
Second
swap / Scotia Loan
|
$ 33,910,000
|
605,339
|
4.545%
|
April
2010
|
Third
swap / Scotia Loan
|
$ 7,425,800
|
(496,716)
|
5.700%
|
April
2010
|
Fourth
swap / Scotia Loan
|
$ 52,437,500
|
(67,212)
|
5.690%
|
April
2011
|
Total
|
$ 113,631,300
|
373,650
|
|
|
As
of June 30, 2007, the Company had
$4,186,819 of variable interest debt whose interest rate has not been fixed.
A
one-percentage point variation in interest rate would increase or decrease
the
amount of annual interest paid by approximately $6,080. However, this amount
of
variable interest debt is expected to be repaid in August 2007.
Impact
of currency fluctuations
The
Company’s functional currency is
the US dollar; however, a number of trade transactions related to normal
vessel
operations are performed in other currencies. Trade payables and accrued
expenses as well as cash and trade receivables in foreign currencies are
converted at year end exchange rates and therefore recorded at fair value.
The
Company does not hold any other assets or liabilities denominated in foreign
currencies.
Increasing
weakness of the United States dollar could have a negative impact on the
Company’s general and administrative expenses ($1,663,877 for the six month
period ended June 30, 2007), as approximately 75% of these costs are in
Euros or
English pounds.
Evaluation
of disclosure controls and procedures.
The
Company’s Management have evaluated
the effectiveness of the Company’s “disclosure controls and procedures” (as
defined in the Securities and Exchange Act of 1934 Rules 13a-14(c) and
15d-14(c)) as of June 30, 2007, (the “Evaluation Date”). Based on
such review, they have concluded that, as of the Evaluation Date, the Company’s
disclosure controls and procedures were effective to ensure that material
information relating to the Company and its consolidated subsidiaries would
be
made known to them by others within those entities.
Changes
in internal controls.
In
the third quarter of 2006, the
Company transferred the technical management of nine vessels to three different
ship managers. Technical managers are responsible for the accounting of
all of
the operating expenses of the vessels, except for the voyage expenses.
Control
procedures had been in place with the prior technical manager for many
years and
certain weaknesses were discovered in this procedure. New control procedures
have been established with the new technical managers. Management identified
certain shortfalls in such controls and as a result, hired additional technical
and accounting staff and implemented new procedures to address these
issues.
In
February 2007, the Company hired a
Chief Technical Officer whose responsibilities include overseeing the technical
managers and enforcing the controls and procedures with them.
The
change of the Chief Financial
Officer is not expected to have effect on the Company’s disclosure controls and
procedures.
We
continually monitor our internal
controls, including the controls and procedures of our technical managers
and if
any weaknesses are identified we will take steps to implement additional
internal controls as necessary.