UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x      Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2015

 

or

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                  to                  

 

Commission file number 001-33393

 

GENCO SHIPPING & TRADING LIMITED

(Exact name of registrant as specified in its charter)

 

Republic of the Marshall Islands

 

98-043-9758

(State or other jurisdiction of incorporation or organization)

 

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

 

299 Park Avenue, 12th Floor, New York, New York

 

10171

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (646) 443-8550

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Common Stock, par value $.01 per share

 

Name of Each Exchange on Which Registered

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

 

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o  No x

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o No  x

 

The aggregate market value of the registrant’s voting common equity held by non-affiliates of the registrant on the last business day of the registrant’s most recently completed second fiscal quarter, computed by reference to the last sale price of such stock of $7.20 per share as of June 30, 2015 on the OTC Markets, was approximately $283.2 million.  The registrant has no non-voting common equity issued and outstanding.  The determination of affiliate status for purposes of this paragraph is not necessarily a conclusive determination for any other purpose.

 

The number of shares outstanding of the registrant’s common stock as of March 15, 2016 was 72,901,370 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of our Proxy Statement for the 2016 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2015, are incorporated by reference in Part III herein.

 

 

 



 

Website Information

 

We intend to use our website, www.GencoShipping.com, as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Such disclosures will be included in our website’s Investor section. Accordingly, investors should monitor the Investor portion of our website, in addition to following our press releases, SEC filings, public conference calls, and webcasts. To subscribe to our e-mail alert service, please submit your e-mail address at the Investor Relations Home page of the Investor section of our website. The information contained in, or that may be accessed through, our website is not incorporated by reference into or a part of this document or any other report or document we file with or furnish to the SEC, and any references to our website are intended to be inactive textual references only.

 

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PART I

 

ITEM 1.  BUSINESS

 

OVERVIEW

 

We are a New York City-based company, incorporated in the Marshall Islands in 2004.  We transport iron ore, coal, grain, steel products and other drybulk cargoes along worldwide shipping routes through the ownership and operation of drybulk carrier vessels.  Our fleet currently consists of 70 drybulk carriers, including 13 Capesize, eight Panamax, four Ultramax, 21 Supramax, six Handymax and 18 Handysize drybulk carriers, with an aggregate carrying capacity of approximately 5,158,000 deadweight tons (“dwt”).  The average age of our current fleet is approximately 9.4 years.  All of the vessels in our fleet were built in shipyards with reputations for constructing high-quality vessels.  Of the vessels in our fleet, 39 are currently on spot market-related time charters, and ten are on fixed-rate time charter contracts.  Additionally, 21 of the vessels in our fleet are operating in vessel pools.  Under a pool arrangement, the vessels operate under a time charter agreement whereby the cost of bunkers and port expenses are borne by the pool and operating costs including crews, maintenance and insurance are typically paid by the owner of the vessel.  Since the members of the pool share in the revenue generated by the entire group of vessels in the pool, and the pool operates in the spot market, the revenue earned by vessels in vessel pools are subject to the fluctuations of the spot market.  Most of our vessels are chartered to well-known charterers, including Cargill International S.A. and its subsidiaries (“Cargill”), Swissmarine Services S.A. and its subsidiaries (“Swissmarine”) and the Clipper Logger Pool and Clipper Sapphire Pool, in which Clipper Group acts as the pool manager (“Clipper”).

 

See pages 7 - 10 for a table of all vessels that have been delivered to us.

 

On April 7, 2015, we entered into a definitive merger agreement with our indirect, partially-owned subsidiary Baltic Trading Limited (“Baltic Trading”) under which we agreed to acquire Baltic Trading in a stock-for-stock transaction (the “Merger”). Under the terms of the agreement, Baltic Trading became our indirect wholly owned subsidiary, and Baltic Trading shareholders (other than Genco Shipping & Trading Limited (“GS&T”) and its subsidiaries) received 0.216 shares of our common stock for each share of Baltic Trading’s common stock they owned at closing, with fractional shares that were settled in cash. Upon consummation of the transaction on July 17, 2015, our shareholders owned approximately 84.5% of the combined company, and Baltic Trading’s shareholders (other than the GS&T and its subsidiaries) owned approximately 15.5% of the combined company. Shares of Baltic Trading’s Class B stock (all of which we owned) were canceled in the Merger. Our stock commenced trading on the New York Stock Exchange after consummation of the transaction on July 20, 2015 under the symbol “GNK.”

 

Our Board of Directors and Baltic Trading’s Board of Directors established independent special committees to review the transaction and negotiate the terms on behalf of their respective companies. Both independent special committees unanimously approved the transaction. The Boards of Directors of both companies approved the merger by unanimous vote of directors present and voting, with Peter C. Georgiopoulos, Chairman of the Board of each company, recused for the vote. The Merger was approved on July 17, 2015 at the 2015 Annual Meeting of Shareholders (the “Annual Meeting”).

 

Prior to the Merger, as of June 30, 2015, our wholly-owned subsidiary Genco Investments LLC owned 6,356,471 shares of Baltic Trading’s Class B Stock, which represented a 10.85% ownership interest in Baltic Trading and 64.60% of the aggregate voting power of Baltic Trading’s outstanding shares of voting stock at June 30, 2015. Baltic Trading is consolidated, as we also controlled a majority of the voting interest in Baltic Trading prior to the Merger.  Management’s discussion and analysis of our results of operations and financial condition includes the results of Baltic Trading.

 

We report financial information and evaluate our operations by charter revenues and not by the length of ship employment for our customers, i.e., spot or time charters.  Each of our vessels serve the same type of customer, have similar operations and maintenance requirements, operate in the same regulatory environment, and are subject to similar economic characteristics. Based on this, we have determined that we operate in one reportable segment, after the effective date of the Merger on July 17, 2015, in which we are engaged in the ocean transportation of drybulk cargoes worldwide through the ownership and operation of drybulk carrier vessels.  Therefore, the totals previously reported for the two segments (GS&T and Baltic Trading) is the total for the single reportable segment effective upon the Merger.

 

Additionally, on April 7, 2015, we entered into an agreement under which we acquired all of the shares of two single-purpose entities that were wholly owned by Baltic Trading, each of which owns one Capesize drybulk vessel, for an aggregate purchase price of $68.5 million, subject to reduction for $40.6 million of outstanding first-mortgage debt of such single-purpose entities that is to be guaranteed by the Company and an adjustment for the difference between such single-purpose entities’ current assets and total liabilities as of the closing date.  Through the transactions, which closed on April 8, 2015, we acquired the vessels known as the Baltic

 

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Lion and the Baltic Tiger. The independent special committees of both companies’ Boards of Directors reviewed and approved this transaction.

 

We entered into a long-term management agreement (the “Management Agreement”) with Baltic Trading pursuant to which we apply our expertise and experience in the drybulk industry to provide Baltic Trading with commercial, technical, administrative and strategic services. The Management Agreement was for an initial term of approximately 15 years. Baltic Trading paid us for the services we provided it as well as reimbursed us for our costs and expenses incurred in providing certain of these services. Management fee income we earned from the Management Agreement net of any allocated shared expenses, such as salary, office expenses and other general and administrative fees, were taxable to us. Upon consolidation with Baltic Trading, any management fee income earned was eliminated for financial reporting purposes.  The Management Agreement was terminated as of July 18, 2015.

 

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

 

We hold an investment in the capital stock of Jinhui Shipping and Transportation Limited (“Jinhui”) and Korea Line Corporation (“KLC”).  Jinhui is a drybulk shipping owner and operator focused on the Supramax segment of drybulk shipping.  KLC is a marine transportation service company which operates a fleet of carriers which includes carriers for iron ore, liquefied natural gas and tankers for oil and petroleum products.

 

We provide technical services for drybulk vessels purchased by Maritime Equity Partners LLC (“MEP”) under an agency agreement between us and MEP.  These services include oversight of crew management, insurance, drydocking, ship operations and financial statement preparation, but do not include chartering services.  The services were initially provided for a fee of $750 per ship per day plus reimbursement of out-of-pocket costs and will be provided for an initial term of one year.  MEP has the right to cancel provision of services on 60 days’ notice with payment of a one-year termination fee upon a change of our control.  We may terminate provision of the services at any time on 60 days’ notice.  Peter C. Georgiopoulos, our Chairman of the Board of Directors, is a director of and has a minority interest in MEP.  Our arrangement with MEP was approved by an independent committee of our Board of Directors.  On September 30, 2015, under the oversight of an independent committee of our Board of Directors Genco Management (USA) Limited and MEP entered into certain agreements under which MEP paid $2.2 million of the amount of service fees in arrears (of which $0.3 million was paid in 2016 by the new owners of five of the MEP vessels sold in January 2016 as described below) and the daily service fee was reduced from $750 to $650 per day effective on October 1, 2015.  During January 2016, five of MEP’s vessels were sold to third parties,  upon which these vessels were no longer subject to the agency agreement.  Based upon the September 30, 2015 agreement, termination fees were due in the amount $0.3 million, which was assumed by the new owners of the five MEP vessels that were sold.  The amount of these termination fees has been paid in full.  The daily service fee earned for the months of January and February 2016 has also been paid in full.

 

Bankruptcy Reorganization

 

On April 21, 2014 (the “Petition Date”), Genco Shipping & Trading Limited and its subsidiaries other than Baltic Trading and its subsidiaries (the “Debtors”) filed voluntary cases (the “Chapter 11 Cases”) under the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). The Debtors continued to operate their businesses in the ordinary course as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Through the Chapter 11 Cases, the Debtors implemented our Prepackaged Plan of Reorganization of the Debtors Pursuant to Chapter 11 of the Bankruptcy Code (as amended, the “Prepack Plan”) for which the Company solicited votes from certain classes of its creditors prior to commencement of the Chapter 11 Cases in accordance with the Restructuring Support Agreement that the Debtors entered into with certain of its creditors on April 3, 2014.  The Company subsequently emerged from bankruptcy on July 9, 2014.

 

On July 2, 2014, the Bankruptcy Court entered an order (the “Confirmation Order”), confirming the Prepack Plan.  On July 9, 2014 (the “Effective Date”), the Debtors completed their financial restructuring and emerged from Chapter 11 through a series of transactions contemplated by the Prepack Plan, and the Prepack Plan became effective pursuant to its terms.  References to “Successor Company” refer to the Company after July 9, 2014, after giving effect to the application of fresh-start reporting (refer to Note 1 — General Information in the Consolidated Financial Statements).  References to “Predecessor Company” refer to the Company prior to July 9, 2014.  For key components of the Prepack Plan, refer to Note 1 — General Information in the Consolidated Financial Statements.

 

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Going Concern

 

Persistent weak drybulk industry conditions and historically low charter rates have negatively impacted our results of operations, cash flows, and liquidity and may continue to do so in the future. The negative impact on our liquidity, together with a continued decline in vessel values, presents difficulties for remaining in compliance with our credit facility covenants relating to minimum cash, leverage ratios, and collateral maintenance (refer to “Liquidity and Capital Resources”), which could potentially result in defaults and acceleration of the repayment of our outstanding indebtedness.  These factors, as well as recurring losses from operations and negative working capital, raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements have been prepared on the basis of accounting principles applicable to a going concern, which contemplates the realization of assets and extinguishment of liabilities in the normal course of business. Our ability to continue as a going concern is contingent upon, among other things, our ability to: (i) develop and successfully implement a plan to address these factors, which may include refinancing our existing credit agreements, or obtaining waivers or modifications to our credit agreements from our lenders, or raising additional capital through selling assets (including vessels), reducing or delaying capital expenditures, or pursuing other options that may be available to us, which may include pursuing strategic opportunities and equity or debt offerings; (ii) return to profitability, (iii) generating sufficient cash flow from operations, (iv) remaining in compliance with our credit facility covenants, as the same may be modified, and (v) obtaining financing sources to meet our future obligations. The realization of our assets and the satisfaction of our liabilities are subject to uncertainty.  The accompanying consolidated financial statements do not include any direct adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern, except the classification of outstanding indebtedness.  Refer to Note 1 — General Information in the Consolidated Financial Statements for further information.

 

Risks and Uncertainties

 

Our ability to continue as a going concern is contingent upon, among other things, our ability: (i) to develop and successfully implement a plan to address the factors described in the preceding paragraph; (ii) to generate sufficient cash flow from operations; (iii) to reach an acceptable outcome from our discussions with our lenders; and (iv) to obtain financing to meet our future obligations. We believe the consummation of a successful plan is critical to our continued viability and long-term liquidity. While we are working towards achieving these objectives, there can be no certainty that we will be successful in doing so.

 

We urge that appropriate caution be exercised with respect to existing and future investments in any of our liabilities and/or our securities. See “Part I—Item 1A. Risk Factors.”

 

AVAILABLE INFORMATION

 

We file annual, quarterly and current reports, proxy statements, and other documents with the SEC, under the Securities Exchange Act of 1934, or the Exchange Act.  The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC.  The public can obtain any documents that we file with the SEC at www.sec.gov.

 

In addition, our company website can be found on the Internet at www.gencoshipping.com.  The website contains information about us and our operations.  Copies of each of our filings with the SEC on Form 10-K, Form 10-Q and Form 8-K, and all amendments to those reports, can be viewed and downloaded free of charge after the reports and amendments are electronically filed with or furnished to the SEC.  To view the reports, access www.gencoshipping.com, click on Investor, then SEC Filings.  No information on our company website is incorporated by reference into this annual report on Form 10-K.

 

Any of the above documents can also be obtained in print by any shareholder upon request to our Investor Relations Department at the following address:

 

Corporate Investor Relations

Genco Shipping & Trading Limited

299 Park Avenue, 12th Floor

New York, NY 10171

 

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BUSINESS STRATEGY

 

Our strategy is to manage and expand our fleet in a manner that maximizes our cash flows from operations.  To accomplish this objective, we intend to:

 

·                  Strategically expand the size of our fleet — We may acquire additional modern, high-quality drybulk carriers through timely and selective acquisitions in a manner that is accretive to our cash flows.  If we make such acquisitions, we may consider additional debt or equity financing alternatives.

 

·                  Continue to operate a high-quality fleet — We intend to maintain a modern, high-quality fleet that meets or exceeds stringent industry standards and complies with charterer requirements through our technical managers’ rigorous and comprehensive maintenance program.  In addition, our technical managers maintain the quality of our vessels by carrying out regular inspections, both while in port and at sea.

 

·                  Pursue an appropriate combination of time and spot charters — All of our 70 vessels operate under time charters, spot market-related time charters or pool agreements.  Charters under fixed rate contracts provide us with relatively stable revenues, and charterers under spot market-related time charters provide us with market revenues, both of which provide us with a high fleet utilization.  We may in the future pursue other market opportunities for our vessels to capitalize on market conditions, including arranging longer or shorter charter periods and entering into short-term time charters, voyage charters and use of vessel pools.  Our charter strategy in the current unfavorable market has been focused on signing short-term or spot market-related contracts with multinational charterers in order to preserve our ability to capitalize on possible future rate increases.

 

·                  Maintain low-cost, highly efficient operations — During 2015, we outsourced technical management of our fleet, to Wallem Shipmanagement Limited (“Wallem”), Anglo-Eastern Group (“Anglo”), and V.Ships Limited (“V.Ships”), third-party independent technical managers, at a cost we believe is lower than what we could achieve by performing the function in-house.  Our management team actively monitors and controls vessel operating expenses incurred by the independent technical managers by overseeing their activities.  We intend to consolidate our technical management with Wallem and Anglo during 2016.  Finally, we seek to maintain low-cost, highly efficient operations by capitalizing on the cost savings and economies of scale that result from operating sister ships.

 

·                  Capitalize on our management team’s reputation — We seek to capitalize on our management team’s reputation for high standards of performance, reliability and safety, and maintain strong relationships with major international charterers, many of whom consider the reputation of a vessel owner and operator when entering into time charters.  We believe that our management team’s track record improves our relationships with high quality shipyards and financial institutions, many of which consider reputation to be an indicator of creditworthiness.

 

OUR FLEET

 

The table below summarizes the characteristics of our vessels that have been delivered to us:

 

Vessel

 

Class

 

Dwt

 

Year Built

 

 

 

 

 

 

 

 

 

Genco Augustus

 

Capesize

 

180,151

 

2007

 

Genco Claudius

 

Capesize

 

169,025

 

2010

 

Genco Constantine

 

Capesize

 

180,183

 

2008

 

Genco Commodus

 

Capesize

 

169,025

 

2009

 

Genco Hadrian

 

Capesize

 

169,694

 

2008

 

Genco London

 

Capesize

 

177,833

 

2007

 

Genco Maximus

 

Capesize

 

169,025

 

2009

 

Genco Tiberius

 

Capesize

 

175,874

 

2007

 

Genco Tiger

 

Capesize

 

179,185

 

2011

 

Genco Titus

 

Capesize

 

177,729

 

2007

 

Baltic Bear

 

Capesize

 

177,717

 

2010

 

Baltic Lion

 

Capesize

 

179,185

 

2012

 

Baltic Wolf

 

Capesize

 

177,752

 

2010

 

Genco Acheron

 

Panamax

 

72,495

 

1999

 

Genco Beauty

 

Panamax

 

73,941

 

1999

 

Genco Knight

 

Panamax

 

73,941

 

1999

 

Genco Leader

 

Panamax

 

73,941

 

1999

 

 

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Vessel

 

Class

 

Dwt

 

Year Built

 

Genco Raptor

 

Panamax

 

76,499

 

2007

 

Genco Surprise

 

Panamax

 

72,495

 

1998

 

Genco Thunder

 

Panamax

 

76,588

 

2007

 

Genco Vigour

 

Panamax

 

73,941

 

1999

 

Baltic Hornet

 

Ultramax

 

63,574

 

2014

 

Baltic Wasp

 

Ultramax

 

63,389

 

2015

 

Baltic Scorpion

 

Ultramax

 

63,462

 

2015

 

Baltic Mantis

 

Ultramax

 

63,470

 

2015

 

Genco Aquitaine

 

Supramax

 

57,981

 

2009

 

Genco Ardennes

 

Supramax

 

57,981

 

2009

 

Genco Auvergne

 

Supramax

 

57,981

 

2009

 

Genco Bourgogne

 

Supramax

 

57,981

 

2010

 

Genco Brittany

 

Supramax

 

57,981

 

2010

 

Genco Cavalier

 

Supramax

 

53,617

 

2007

 

Genco Hunter

 

Supramax

 

58,729

 

2007

 

Genco Languedoc

 

Supramax

 

57,981

 

2010

 

Genco Loire

 

Supramax

 

53,416

 

2009

 

Genco Lorraine

 

Supramax

 

53,416

 

2009

 

Genco Normandy

 

Supramax

 

53,596

 

2007

 

Genco Picardy

 

Supramax

 

55,257

 

2005

 

Genco Predator

 

Supramax

 

55,407

 

2005

 

Genco Provence

 

Supramax

 

55,317

 

2004

 

Genco Pyrenees

 

Supramax

 

57,981

 

2010

 

Genco Rhone

 

Supramax

 

58,018

 

2011

 

Genco Warrior

 

Supramax

 

55,435

 

2005

 

Baltic Cougar

 

Supramax

 

53,432

 

2009

 

Baltic Jaguar

 

Supramax

 

53,474

 

2009

 

Baltic Leopard

 

Supramax

 

53,447

 

2009

 

Baltic Panther

 

Supramax

 

53,351

 

2009

 

Genco Carrier

 

Handymax

 

47,180

 

1998

 

Genco Marine

 

Handymax

 

45,222

 

1996

 

Genco Muse

 

Handymax

 

48,913

 

2001

 

Genco Prosperity

 

Handymax

 

47,180

 

1997

 

Genco Success

 

Handymax

 

47,186

 

1997

 

Genco Wisdom

 

Handymax

 

47,180

 

1997

 

Genco Avra

 

Handysize

 

34,391

 

2011

 

Genco Bay

 

Handysize

 

34,296

 

2010

 

Genco Challenger

 

Handysize

 

28,428

 

2003

 

Genco Champion

 

Handysize

 

28,445

 

2006

 

Genco Charger

 

Handysize

 

28,398

 

2005

 

Genco Explorer

 

Handysize

 

29,952

 

1999

 

Genco Mare

 

Handysize

 

34,428

 

2011

 

Genco Ocean

 

Handysize

 

34,409

 

2010

 

Genco Pioneer

 

Handysize

 

29,952

 

1999

 

Genco Progress

 

Handysize

 

29,952

 

1999

 

Genco Reliance

 

Handysize

 

29,952

 

1999

 

Genco Spirit

 

Handysize

 

34,432

 

2011

 

Genco Sugar

 

Handysize

 

29,952

 

1998

 

Baltic Breeze

 

Handysize

 

34,386

 

2010

 

Baltic Cove

 

Handysize

 

34,403

 

2010

 

Baltic Fox

 

Handysize

 

31,883

 

2010

 

Baltic Hare

 

Handysize

 

31,887

 

2009

 

Baltic Wind

 

Handysize

 

34,409

 

2009

 

 

FLEET MANAGEMENT

 

Our management team and other employees are responsible for the commercial and strategic management of our fleet.  Commercial management involves negotiating charters for vessels, managing the mix of various types of charters, such as time

 

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charters, voyage charters, vessel pools and spot market-related time charters, and monitoring the performance of our vessels under their charters.  Strategic management involves locating, purchasing, financing and selling vessels.

 

We utilize the services of reputable independent technical managers for the technical management of our fleet.  We currently contract with Wallem, Anglo and V.Ships, independent technical managers, for our technical management. Technical management involves the day-to-day management of vessels, including performing routine maintenance, attending to vessel operations and arranging for crews and supplies.  Members of our New York City-based management team oversee the activities of our independent technical managers.  The head of our technical management team has over 25 years of experience in the shipping industry.

 

Wallem, founded in 1971, Anglo, founded in 1974 and V.Ships, founded in 1984, are among the largest ship management companies in the world.  These technical managers are known worldwide for their agency networks, covering all major ports in China, Hong Kong, Japan, Vietnam, Taiwan, Thailand, Malaysia, Indonesia, the Philippines and Singapore.  These technical managers provide services to over 1,000 vessels of all types, including Capesize, Panamax, Ultramax, Supramax, Handymax and Handysize drybulk carriers that meet strict quality standards.

 

Under our technical management agreements, our technical manager is obligated to:

 

·                  provide personnel to supervise the maintenance and general efficiency of our vessels;

 

·                  arrange and supervise the maintenance of our vessels to our standards to assure that our vessels comply with applicable national and international regulations and the requirements of our vessels’ classification societies;

 

·                  select and train the crews for our vessels, including assuring that the crews have the correct certificates for the types of vessels on which they serve;

 

·                  check the compliance of the crews’ licenses with the regulations of the vessels’ flag states and the International Maritime Organization, or IMO;

 

·                  arrange the supply of spares and stores for our vessels; and

 

·                  report expense transactions to us, and make its procurement and accounting systems available to us.

 

OUR CHARTERS

 

As of March 15, 2016, we employed 39 of our 70 drybulk carriers under spot market-related time charters, which are time charters with rates based on published Baltic Indices.  These types of charters are similar to time charters with the exception of having a variable rate over the term of the time charter agreement.  As such, the revenue earned by these 39 vessels is subject to the fluctuations of the spot market.  Additionally, as of March 15, 2016, we employed ten of our 70 drybulk carriers under fixed-rate time charters.  A time charter involves the hiring of a vessel from its owner for a period of time pursuant to a contract under which the vessel owner places its ship (including its crew and equipment) at the disposal of the charterer.  Under a time charter, the charterer periodically pays a fixed daily charterhire rate to the owner of the vessel and bears all voyage expenses, including the cost of bunkers (fuel), port expenses, agents’ fees and canal dues.

 

The remaining 21 of our drybulk carriers are currently in vessel pools.  We believe that vessel pools provide cost-effective commercial management activities for a group of similar class vessels.  The pool arrangement provides the benefits of a large-scale operation and chartering efficiencies that might not be available to smaller fleets.  Under the pool arrangement, the vessels operate under a time charter agreement whereby the cost of bunkers and port expenses are borne by the charterer and operating costs including crews, maintenance and insurance are typically paid by the owner of the vessel.  Since the members of the pool share in the revenue generated by the entire group of vessels in the pool, and the pool operates in the spot market, the revenue earned by these 21 vessels is subject to the fluctuations of the spot market.

 

Subject to any restrictions in the contract, the charterer determines the type and quantity of cargo to be carried and the ports of loading and discharging.  Our vessels operate worldwide within the trading limits imposed by our insurance terms.  The technical operation and navigation of the vessel at all times remains the responsibility of the vessel owner, which is generally responsible for the vessel’s operating expenses, including the cost of crewing, insuring, repairing and maintaining the vessel, costs of spares and consumable stores, tonnage taxes and other miscellaneous expenses.

 

Each of our current time charters, spot market-related time charters and vessel pool agreements expire within a range of dates (for example, a minimum of 11 and maximum of 13 months following delivery), with the exact end of the time charter left unspecified

 

6



 

to account for the uncertainty of when a vessel will complete its final voyage under the time charter.  The charterer may extend the charter period by any time that the vessel is off-hire.  If a vessel remains off-hire for more than 30 consecutive days, the time charter may be cancelled at the charterer’s option.

 

In connection with the charter of each of our vessels, we incur commissions generally ranging from 1.25% to 6.25% of the total daily charterhire rate of each charter to third-parties, depending on the number of brokers involved with arranging the relevant charter.

 

We monitor developments in the drybulk shipping industry on a regular basis and strategically adjust the charterhire periods for our vessels according to market conditions as they become available for charter.

 

During the beginning of 2009, the Genco Cavalier, a 2007-built Supramax vessel, was on charter to Samsun Logix Corporation (“Samsun”), when Samsun filed for the equivalent of bankruptcy protection in South Korea, otherwise referred to as a rehabilitation application.  On February 5, 2010, the rehabilitation plan submitted by Samsun was approved by the South Korean courts.  As part of the rehabilitation process, our claim of approximately $17.2 million will be settled in the following manner: 34%, or approximately $5.9 million, will be paid in cash in annual installments on December 30 of each year from 2010 through 2019 ranging in percentages from eight to 17; the remaining 66%, or approximately $11.3 million, converted to Samsun shares at a specified value per share.  During the period from July 9 to December 31, 2014, we recorded $0.5 million as Other operating income of which $0.3 million represents 50% of the portion (9%) of the cash settlement that was due on December 30, 2012 and $0.2 million which represents 50% of the portion (8%) of the cash settlement that was due on December 30, 2013.  During the years ended December 31, 2015 and 2013 and the period from January 1 to July 9, 2014, there were no payments remitted by Samsun.  On July 3, 2015, Samsun filed for rehabilitation proceedings for the second time with the South Korean courts due to financial distress.  The rehabilitation plan is still under review by the South Korean courts, and a proposed rehabilitation plan has not yet been implemented.  A meeting for resolution on the proposed rehabilitation plan is expected to be held on March 11, 2016.

 

During January 2011, the Genco Success, a 1997-built Handymax vessel, was on charter to Korea Line Corporation (“KLC”) when KLC filed for a rehabilitation application.  On July 3, 2012, the original rehabilitation plan submitted by KLC was approved by the South Korean courts.  As part of the rehabilitation process, our claim of approximately $0.8 million will be settled in the following manner:  37%, or approximately $0.3 million, will be paid in cash in annual installments on December 30 of each year from 2012 through 2021 ranging in percentages from 0.5 to 43; the remaining 63%, or approximately $0.5 million, converted to KLC shares at a specified value per share.  The final rehabilitation plan was amended and approved by the South Korean courts on October 4, 2013.  During the year ended December 31, 2013, we received a final cash settlement and shares of KLC stock as our final settlement which resulted in operating income of $0.1 million.

 

The following table sets forth information about the current employment of the vessels in our fleet as of March 14, 2016:

 

Vessel

 

Year
Built

 

Charterer

 

Charter
Expiration(1)

 

Cash Daily Rate(2)

 

 

 

 

 

 

 

 

 

Capesize Vessels

 

 

 

 

 

 

 

 

Genco Augustus

 

2007

 

Swissmarine Asia Pte. Ltd.

 

April 2016

 

102% of BCI

Genco Tiberius

 

2007

 

Cargill International S.A.

 

November 2016

 

98% of BCI(3)

Genco London

 

2007

 

Swissmarine Services S.A.

 

December 2016

 

$3,250 with 50% profit sharing(4)

Genco Titus

 

2007

 

Swissmarine Services S.A.

 

June 2016

 

104.5% of BCI

Genco Constantine

 

2008

 

Cargill International S.A.

 

April 2016

 

102% of BCI

Genco Hadrian

 

2008

 

Swissmarine Services S.A.

 

November 2016

 

98.5% of BCI

Genco Commodus

 

2009

 

Swissmarine Asia Pte. Ltd.

 

April 2016

 

98.5% of BCI

Genco Maximus

 

2009

 

Swissmarine Services S.A.

 

March 2016

 

98.5% of BCI

Genco Claudius

 

2010

 

Swissmarine Services S.A.

 

September 2016

 

99% of BCI

Genco Tiger

 

2011

 

Swissmarine Services S.A.

 

October 2016

 

103% of BCI

Baltic Lion

 

2012

 

Swissmarine Services S.A.

 

December 2016

 

$3,250 with 50% profit sharing(5)

Baltic Bear

 

2010

 

Swissmarine Services S.A.

 

April 2016

 

102.5% of BCI

Baltic Wolf

 

2010

 

Swissmarine Services S.A.

 

December 2016

 

$3,250 with 50% profit sharing(6)

 

 

 

 

 

 

 

 

 

Panamax Vessels

 

 

 

 

 

 

 

 

Genco Beauty

 

1999

 

Navig8 Inc.

 

September 2016

 

94.75% of BPI

 

7



 

Genco Knight

 

1999

 

Swissmarine Services S.A.

 

April 2016

 

95% of BPI

Genco Leader

 

1999

 

Navig8 Pan8 Pool Inc.

 

June 2016

 

Spot Pool(7)

Genco Vigour

 

1999

 

Swissmarine Services S.A.

 

April 2016

 

95% of BPI

Genco Acheron

 

1999

 

Hyundai Glovis Co., Ltd.

 

June 2016

 

$4,250(8)

Genco Surprise

 

1998

 

Swissmarine Services S.A.

 

March 2016

 

96% of BPI

Genco Raptor

 

2007

 

GMI Panamax Pool Ltd.

 

June 2016

 

100% of BPI

Genco Thunder

 

2007

 

Swissmarine Services S.A.

 

August 2016

 

100% of BPI

 

 

 

 

 

 

 

 

 

Ultramax Vessels

 

 

 

 

 

 

 

 

Baltic Hornet

 

2014

 

Swissmarine Asia Pte. Ltd.

 

February 2017

 

115.5% of BSI

Baltic Wasp

 

2015

 

Pioneer Navigation Ltd.

 

January 2017

 

$3,250 with 50% profit sharing(9)

Baltic Scorpion

 

2015

 

Swissmarine Asia Pte. Ltd.

 

October 2016

 

115.5% of BSI

Baltic Mantis

 

2015

 

Pioneer Navigation Ltd.

 

December 2016

 

115% of BSI

 

 

 

 

 

 

 

 

 

Supramax Vessels

 

 

 

 

 

 

 

 

Genco Predator

 

2005

 

ED&F Man Shipping Ltd.

 

October 2016

 

98.5% of BSI

Genco Warrior

 

2005

 

Centurion Bulk Pte. Ltd., Singapore

 

June 2016

 

98.5% of BSI

Genco Hunter

 

2007

 

Pioneer Navigation Ltd.

 

Mar. 2016/Jun. 2017

 

106.5%/104% of BSI(10)

Genco Cavalier

 

2007

 

Chun An Chartering Co., Ltd.

 

March 2016

 

$2,000(11)

Genco Lorraine

 

2009

 

Dooyang Limited

 

March 2016

 

$3,000(12)

Genco Loire

 

2009

 

Bulkhandling Handymax A/S

 

June 2016

 

Spot Pool(13)

Genco Aquitaine

 

2009

 

Bulkhandling Handymax A/S

 

June 2016

 

Spot Pool(13)

Genco Ardennes

 

2009

 

Clipper Sapphire Pool

 

September 2016

 

Spot Pool(14)

Genco Auvergne

 

2009

 

Pioneer Navigation Ltd.

 

April 2016

 

100% of BSI

Genco Bourgogne

 

2010

 

Clipper Sapphire Pool

 

September 2016

 

Spot Pool(14)

Genco Brittany

 

2010

 

Clipper Sapphire Pool

 

September 2016

 

Spot Pool(14)

Genco Languedoc

 

2010

 

Clipper Sapphire Pool

 

September 2016

 

Spot Pool(14)

Genco Normandy

 

2007

 

CLdN Cobelfret S.A.

 

March 2016

 

$3,000(15)

Genco Picardy

 

2005

 

Centurion Bulk Pte. Ltd., Singapore

 

July 2016

 

98.5% of BSI

Genco Provence

 

2004

 

Pioneer Navigation Ltd.

 

August 2016

 

100% of BSI

Genco Pyrenees

 

2010

 

Clipper Sapphire Pool

 

September 2016

 

Spot Pool(14)

Genco Rhone

 

2011

 

Pioneer Navigation Ltd.

 

December 2016

 

100% of BSI

Baltic Leopard

 

2009

 

Bulkhandling Handymax A/S

 

October 2016

 

Spot Pool(16)

Baltic Panther

 

2009

 

Bulkhandling Handymax A/S

 

June 2016

 

Spot Pool(13)

Baltic Jaguar

 

2009

 

Cargill Ocean Transportation (Singapore) Pte. Ltd.

 

March 2016

 

$4,000(17)

Baltic Cougar

 

2009

 

Bulkhandling Handymax A/S

 

June 2016

 

Spot Pool(13)

 

 

 

 

 

 

 

 

 

Handymax Vessels

 

 

 

 

 

 

 

 

Genco Success

 

1997

 

Cargill International S.A.

 

April 2016

 

$4,000(18)

Genco Carrier

 

1998

 

Elder Triumphant Shipping Lines  Ltd.

 

March 2016

 

$3,900(19)

Genco Prosperity

 

1997

 

TST NV, Nevis

 

May 2016

 

87.5% of BSI(20)

Genco Wisdom

 

1997

 

ED&F Man Shipping Ltd.

 

April 2016

 

89% of BSI

Genco Marine

 

1996

 

Tongli Samoa Shipping Co., Ltd.

 

March 2016

 

$3,500(21)

Genco Muse

 

2001

 

Dooyang Limited

 

March 2016

 

$3,750(22)

 

 

 

 

 

 

 

 

 

Handysize Vessels

 

 

 

 

 

 

 

 

Genco Sugar

 

1998

 

Clipper Logger Pool

 

September 2016

 

Spot Pool(23)

Genco Pioneer

 

1999

 

Clipper Logger Pool

 

September 2016

 

Spot Pool(23)

Genco Progress

 

1999

 

Clipper Logger Pool

 

September 2016

 

Spot Pool(23)

Genco Explorer

 

1999

 

Clipper Logger Pool

 

September 2016

 

Spot Pool(23)

 

8



 

Genco Reliance

 

1999

 

Clipper Logger Pool

 

September 2016

 

Spot Pool(23)

Baltic Hare

 

2009

 

Clipper Logger Pool

 

September 2016

 

Spot Pool(23)

Baltic Fox

 

2010

 

Clipper Logger Pool

 

September 2016

 

Spot Pool(23)

Genco Charger

 

2005

 

Clipper Logger Pool

 

September 2016

 

Spot Pool(23)

Genco Challenger

 

2003

 

Clipper Logger Pool

 

September 2016

 

Spot Pool(23)

Genco Champion

 

2006

 

Clipper Logger Pool

 

September 2016

 

Spot Pool(23)

Baltic Wind

 

2009

 

Trammo Bulk Carriers

 

April 2016

 

107% of BHSI

Baltic Cove

 

2010

 

Clipper Bulk Shipping Ltd.

 

May 2016

 

100.5% of BHSI

Baltic Breeze

 

2010

 

Trammo Bulk Carriers

 

January 2017

 

103% of BHSI

Genco Ocean

 

2010

 

Falcon Navigation A/S

 

July 2016

 

103% of BHSI

Genco Bay

 

2010

 

Clipper Bulk Shipping Ltd.

 

June 2016

 

102% of BHSI

Genco Avra

 

2011

 

Ultrabulk S.A.

 

April 2017

 

104% of BHSI

Genco Mare

 

2011

 

Pioneer Navigation Ltd.

 

June 2017

 

103.5% of BHSI(24)

Genco Spirit

 

2011

 

Clipper Bulk Shipping Ltd.

 

August 2016

 

$7,000

 


(1)         The charter expiration dates presented represent the earliest dates that our charters may be terminated in the ordinary course. Under the terms of each contract, the charterer is entitled to extend the time charter from two to four months in order to complete the vessel’s final voyage plus any time the vessel has been off-hire.

 

(2)         Time charter rates presented are the gross daily charterhire rates before third-party brokerage commission generally ranging from 1.25% to 6.25%. In a time charter, the charterer is responsible for voyage expenses such as bunkers, port expenses, agents’ fees and canal dues.

 

(3)         We have agreed to an extension with Cargill International S.A. on a spot market-related time charter based on 98% of the Baltic Capesize Index (BCI), published by the Baltic Exchange, as reflected in daily reports. Hire is paid every 15 days in arrears less a 5.00% third-party brokerage commission. The minimum and maximum expiration dates of the time charter are November 7, 2016 and January 7, 2017, respectively. The extension began on January 31, 2016.

 

(4)         We have reached an agreement with Swissmarine Services S.A. on a time charter for 10.5 to 14.5 months at a rate of $3,250 per day with a 50% index-based profit sharing component. Hire is paid every 15 days in advance less a 5.00% third-party brokerage commission. The vessel delivered to charterers on January 31, 2016.

 

(5)         We have agreed to an extension with Swissmarine Services S.A. on a time charter for 10.5 to 14.5 months at a rate of $3,250 per day with a 50% index-based profit sharing component. Hire is paid every 15 days in advance less a 4.50% third-party brokerage commission. The extension began on January 30, 2016.

 

(6)         We have agreed to an extension with Swissmarine Services S.A. on a time charter for 10.5 to 14.5 months at a rate of $3,250 per day with a 50% index-based profit sharing component. Hire is paid every 15 days in advance less a 5.00% third-party brokerage commission. The extension began on January 31, 2016.

 

(7)         We have reached an agreement to enter this vessel into the Navig8 Pan8 Pool, a vessel pool trading in the spot market of which Navig8 Inc. acts as the pool manager. We can withdraw the vessel with three months’ notice.

 

(8)         We have reached an agreement with Hyundai Glovis Co., Ltd. on a time charter for approximately 90 days at a rate of $4,250 per day. Hire is paid every 15 days in advance less a 5.00% third-party brokerage commission. The vessel delivered to charterers on March 3, 2016 after repositioning. The vessel redelivered to us on February 22, 2016.

 

(9)         We have agreed to an extension with Pioneer Navigation Ltd. on a time charter for 11 to 14.5 months at a rate of $3,250 per day with a 50% index-based profit sharing component except for the initial 25 days in which the hire rate is $2,500 per day. Hire is paid every 15 days in arrears less a 5.00% third-party brokerage commission. The extension began on February 29, 2016.

 

(10)  We have agreed to an extension with Pioneer Navigation Ltd. on a spot market-related time charter based on 104% of the Baltic Supramax Index (BSI), published by the Baltic Exchange, as reflected in daily reports. Hire is paid every 15 days in arrears less a 5.00% third-party brokerage commission. The minimum and maximum expiration dates of the time charter are June 15, 2017 and August 15, 2017, respectively. The extension is expected to begin on or about March 15, 2016.

 

(11)  We have reached an agreement with Chun An Chartering Co., Ltd. on a time charter for approximately 30 days at a rate of $2,000 per day. Hire is paid every 15 days in advance less a 5.00% third-party brokerage commission. The vessel delivered to charterers on February 20, 2016 after repositioning. The vessel redelivered to us on February 4, 2016.

 

9



 

(12)  We have reached an agreement with Dooyang Limited on a time charter for approximately 20 days at a rate of $3,000 per day. Hire is paid every 15 days in advance less a 5.00% third-party brokerage commission. The vessel delivered to charterers on February 19, 2016 after repositioning. The vessel redelivered to us on February 14, 2016.

 

(13)  We have reached an agreement to enter these vessels into the Bulkhandling Handymax A/S Pool, a vessel pool trading in the spot market of which Torvald Klaveness acts as the pool manager. We can withdraw a vessel with three months’ notice.

 

(14)  We have reached an agreement to enter these vessels into the Clipper Sapphire Pool, a vessel pool trading in the spot market of which Clipper Group acts as the pool manager. We can withdraw a vessel with a minimum notice of six months.

 

(15)  We have reached an agreement with CLdN Cobelfret S.A. on a time charter for approximately 15 days at a rate of $3,000 per day. Hire is paid in advance less a 5.00% third-party brokerage commission. The vessel delivered to charterers on March 6, 2016 after repositioning. The vessel redelivered to us on March 3, 2016.

 

(16)  We have reached an agreement to enter this vessel into the Bulkhandling Handymax A/S Pool, a vessel pool trading in the spot market of which Torvald Klaveness acts as the pool manager. We can withdraw the vessel with three months’ notice after the vessel has been in the pool for a minimum of four months. The vessel entered the pool on March 13, 2016.

 

(17)  We have reached an agreement with Cargill Ocean Transportation (Singapore) Pte. Ltd. on a time charter for approximately 10 days at a rate of $4,000 per day. Hire is paid every 10 days in advance less a 5.00% third-party brokerage commission. The vessel delivered to charterers on March 10, 2016 after repositioning. The vessel redelivered to us on March 2, 2016.

 

(18)  We have reached an agreement with Cargill International S.A. on a time charter for approximately 40 days at a rate of $4,000 per day. Hire is paid every 15 days in advance less a 5.00% third-party brokerage commission. The vessel delivered to charterers on March 1, 2016 after repositioning.The vessel redelivered to us on January 27, 2016.

 

(19)  We have reached an agreement with Elder Triumphant Shipping Lines Ltd. on a time charter for approximately 20 days at a rate of $3,900 per day. Hire is paid every 15 days in advance less a 5.00% third-party brokerage commission. The vessel delivered to charterers on March 14, 2016 after repositioning. The vessel redelivered to us on March 10, 2016.

 

(20)  We have reached an agreement with TST NV, Nevis on a spot market-related time charter for 3.5 to 6.5 months based on 87.5% of the BSI, as reflected in daily reports. Hire is paid every 15 days in arrears less a 5.00% third-party brokerage commission. The vessel delivered to charterers on February 2, 2016 after repositioning. The vessel redelivered to us on January 4, 2016.

 

(21)  We have reached an agreement with Tongli Samoa Shipping Co., Ltd. on a time charter for approximately 15 days at a rate of $3,500 per day. Hire is paid every 15 days in advance less a 5.00% third-party brokerage commission. The vessel delivered to charterers on March 5, 2016 after repositioning. The vessel redelivered to us on February 26, 2016.

 

(22)  We have reached an agreement with Dooyang Limited on a time charter for approximately 20 days at a rate of $3,750 per day. Hire is paid every 15 days in advance less a 5.00% third-party brokerage commission. The vessel delivered to charterers on March 4, 2016 after repositioning. The vessel redelivered to us on March 1, 2016.

 

(23)  We have reached an agreement to enter these vessels into the Clipper Logger Pool, a vessel pool trading in the spot market of which Clipper Group acts as the pool manager. We can withdraw the vessels with a minimum notice of six months.

 

(24)  We have agreed to an extension with Pioneer Navigation Ltd. on a spot-market related time charter for 12 to 15.5 months based on 103.5% of the Baltic Handysize Index (BHSI), published by the Baltic Exchange, as reflected in daily reports except for the initial 42 days in which hire is based on the average of the Baltic Handysize HS2 and HS3 routes. The extension is expected to begin after completion of drydocking for scheduled maintenance.

 

10



 

CLASSIFICATION AND INSPECTION

 

All of our vessels have been certified as being “in class” by the American Bureau of Shipping (“ABS”), DNVGL or Lloyd’s Register of Shipping (“Lloyd’s”).  Each of these classification societies is a member of the International Association of Classification Societies.  Every commercial vessel’s hull and machinery is evaluated by a classification society authorized by its country of registry.  The classification society certifies that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the vessel’s country of registry and the international conventions of which that country is a member.  Each vessel is inspected by a surveyor of the classification society in three surveys of varying frequency and thoroughness: every year for the annual survey, every two to three years for the intermediate survey and every four to five years for special surveys.  Special surveys always require drydocking.  Vessels that are 15 years old or older are required, as part of the intermediate survey process, to be drydocked every 24 to 30 months for inspection of the underwater portions of the vessel and for necessary repairs stemming from the inspection.

 

In addition to the classification inspections, many of our customers regularly inspect our vessels as a precondition to chartering them for voyages.  We believe that our well-maintained, high-quality vessels provide us with a competitive advantage in the current environment of increasing regulation and customer emphasis on quality.

 

We have implemented the International Safety Management Code, which was promulgated by the International Maritime Organization, or IMO (the United Nations agency for maritime safety and the prevention of marine pollution by ships), to establish pollution prevention requirements applicable to vessels.  We obtained documents of compliance for our offices and safety management certificates for all of our vessels, which are required by the IMO.

 

CREWING AND EMPLOYEES

 

Each of our vessels is crewed with 21 to 24 officers and seamen.  Our technical managers are responsible for locating and retaining qualified officers for our vessels.  The crewing agencies handle each seaman’s training, travel and payroll, and ensure that all the seamen on our vessels have the qualifications and licenses required to comply with international regulations and shipping conventions.  We typically man our vessels with more crew members than are required by the country of the vessel’s flag in order to allow for the performance of routine maintenance duties.

 

As of March 15, 2016, we employed 34 shore-based personnel and approximately 1,575 seagoing personnel on our vessels.

 

CUSTOMERS

 

Our assessment of a charterer’s financial condition and reliability is an important factor in negotiating employment for our vessels.  We generally charter our vessels to major trading houses (including commodities traders), major producers and government-owned entities rather than to more speculative or undercapitalized entities.  Our customers include national, regional and international companies, such as Cargill, Swissmarine, Pioneer Navigation Ltd. and Clipper. For the year ended December 31, 2015, three of our charterers, Swissmarine, Clipper and Pioneer Navigation Ltd., each accounted for more than 10% of our voyage revenue, or 56.49%, in the aggregate.

 

COMPETITION

 

Our business fluctuates in line with the main patterns of trade of the major drybulk cargoes and varies according to changes in the supply and demand for these items.  We operate in markets that are highly competitive and based primarily on supply and demand.  We compete for charters on the basis of price, vessel location and size, age and condition of the vessel, as well as on our reputation as an owner and operator.  We compete with other owners of drybulk carriers in the Capesize, Panamax, Ultramax, Supramax, Handymax and Handysize class sectors, some of whom may also charter our vessels as customers.  Ownership of drybulk carriers is highly fragmented and is divided among approximately 1,990 independent drybulk carrier owners.

 

PERMITS AND AUTHORIZATIONS

 

We are required by various governmental and quasi-governmental agencies to obtain certain permits, licenses, certificates and other authorizations with respect to our vessels.  The kinds of permits, licenses, certificates and other authorizations required for each vessel depend upon several factors, including the commodity transported, the waters in which the vessel operates, the nationality of the vessel’s crew and the age of the vessel.  We believe that we have all material permits, licenses, certificates and other authorizations necessary for the conduct of our operations.  However, additional laws and regulations, environmental or otherwise, may be adopted which could limit our ability to do business or increase the cost of our doing business.

 

11



 

INSURANCE

 

General

 

The operation of any drybulk vessel includes risks such as mechanical failure, collision, property loss, cargo loss or damage and business interruption due to political circumstances in foreign countries, piracy, hostilities and labor strikes.  In addition, there is always an inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade.  The U.S. Oil Pollution Act of 1990, or OPA, which imposes virtually unlimited liability upon owners, operators and demise charterers of vessels trading in the U.S.-exclusive economic zone for certain oil pollution accidents in the United States, has made liability insurance more expensive for ship owners and operators trading in the U.S. market.

 

While we maintain hull and machinery insurance, war risks insurance, protection and indemnity cover, and freight, demurrage and defense cover and loss of hire insurance for our fleet in amounts that we believe to be prudent to cover normal risks in our operations, we may not be able to achieve or maintain this level of coverage throughout a vessel’s useful life.  Furthermore, while we believe that our present insurance coverage is adequate, not all risks can be insured, and there can be no guarantee that any specific claim will be paid, or that we will always be able to obtain adequate insurance coverage at reasonable rates.

 

Hull and Machinery, War Risks, Kidnap and Ransom Insurance

 

We maintain marine hull and machinery, war risks and kidnap and ransom insurance which cover the risk of actual or constructive total loss, for all of our vessels.  Our vessels are each covered up to at least fair market value with deductibles, which depend primarily on the class of the insured vessel and are subject to change.  We are covered, subject to limitations in our policy, to have the crew released in the case of kidnapping due to piracy in the Gulf of Aden / Somalia.

 

Protection and Indemnity Insurance

 

Protection and indemnity insurance is provided by mutual protection and indemnity associations, or P&I Associations, which insure our third-party liabilities in connection with our shipping activities.  This includes third-party liability and other related expenses resulting from the injury or death of crew, passengers and other third parties, the loss or damage to cargo, claims arising from collisions with other vessels, damage to other third-party property, pollution arising from oil or other substances and salvage, towing and other related costs, including wreck removal.  Protection and indemnity insurance is a form of mutual indemnity insurance, extended by protection and indemnity mutual associations, or “clubs.” Subject to the “capping” discussed below, our coverage, except for pollution, is unlimited.

 

We maintain protection and indemnity insurance coverage for pollution of $1 billion per vessel per incident.  The 13 P&I Associations that comprise the International Group insure approximately 90% of the world’s commercial tonnage and have entered into a pooling agreement to reinsure each association’s liabilities.  We are a member of P&I Associations, which are members of the International Group. As a result, we are subject to calls payable to the associations based on the group’s claim records as well as the claim records of all other members of the individual associations and members of the pool of P&I Associations comprising the International Group.

 

Loss of Hire Insurance

 

We maintain loss of hire insurance, which covers business interruptions and related losses that result from the loss of use of a vessel.  Our loss of hire insurance has a 14-day deductible and provides claim coverage for up to 90 days or 180 days, depending on the vessel.

 

ENVIRONMENTAL AND OTHER REGULATION

 

Government regulation significantly affects the ownership and operation of our vessels.  We are subject to international conventions and treaties, national, state and local laws and regulations in force in the countries in which our vessels may operate or are registered relating to safety and health and environmental protection including the storage, handling, emission, transportation and discharge of hazardous and non-hazardous materials, and the remediation of contamination and liability for damage to natural resources.  Compliance with such laws, regulations and other requirements entails significant expense, including vessel modifications and implementation of certain operating procedures.

 

A variety of governmental and private entities subject our vessels to both scheduled and unscheduled inspections.  These entities include the local port authorities, (applicable national authorities such as the U.S. Coast Guard and harbor masters), classification societies, flag state administrations (countries of registry) and charterers.  Some of these entities require us to obtain permits, licenses, certificates and other authorizations for the operation of our vessels.  Our failure to maintain necessary permits, licenses, certificates or authorizations could require us to incur substantial costs or temporarily suspend the operation of one or more of our vessels.

 

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In recent periods, heightened levels of environmental and operational safety concerns among insurance underwriters, regulators and charterers have led to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the drybulk shipping industry.  Increasing environmental concerns have created a demand for vessels that conform to the stricter environmental standards.  We believe that the operation of our vessels is in substantial compliance with applicable environmental laws and regulations and that our vessels have all material permits, licenses, certificates or other authorizations necessary for the conduct of our operations.  However, because such laws and regulations are frequently changed and may impose increasingly stricter requirements, we cannot predict the ultimate cost of complying with these requirements, or the impact of these requirements on the resale value or useful lives of our vessels.  In addition, a future serious marine incident, such as one comparable to the 2010 Deepwater Horizon oil spill, that results in significant oil pollution or otherwise causes significant adverse environmental impact could result in additional legislation or regulation that could negatively affect our profitability.

 

International Maritime Organization (IMO)

 

The United Nations International Maritime Organization (the “IMO”) has adopted the International Convention for the Prevention of Pollution from Ships of 1973, as modified by the Protocol of 1978 relating thereto (collectively referred to as MARPOL 73/78 and herein as “MARPOL”).  MARPOL entered into force on October 2, 1983. It has been adopted by over 150 nations, including many of the jurisdictions in which our vessels operate. MARPOL is broken into six Annexes, each of which regulates a different source of pollution. Annex I relates to oil leakage or spilling; Annexes II and III relate to harmful substances carried, in bulk, in liquid or packaged form, respectively; Annexes IV and V relate to sewage and garbage management, respectively; and Annex VI, lastly, relates to air emissions. Annex VI was separately adopted by the IMO in September of 1997.

 

In 2013, the IMO’s Maritime Environment Protection Committee (“MEPC”) adopted by resolution amendments to the MARPOL Annex I Conditional Assessment Scheme (“CAS”). These amendments, which became effective on October 1, 2014, pertain to revising references to the inspections of bulk carriers and tankers after the 2011 International Code on the Enhanced Programme of Inspections during Surveys of Bulk Carriers and Oil Tankers (“ESP Code”), which enhances the programs of inspections. We may need to make certain financial expenditures to comply with these amendments which we do not anticipate to be material.

 

Air Emissions

 

In September of 1997, the IMO adopted Annex VI to MARPOL to address air pollution.  Effective May 2005, and as subsequently revised, Annex VI sets limits on nitrogen oxide emissions from ships whose diesel engines were constructed (or underwent major conversions) on or after January 1, 2000. It also prohibits “deliberate emissions” of “ozone depleting substances,” defined to include certain halons and chlorofluorocarbons.  “Deliberate emissions” are not limited to times when the ship is at sea; they can for example include discharges occurring in the course of the ships repair and maintenance.  Emissions of “volatile organic compounds” from certain tankers, and the shipboard incineration (from incinerators installed after January 1, 2000) of certain substances (such as polychlorinated biphenyls (PCBs)) are also prohibited.  Annex VI also includes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emissions, known as Emission Control Areas (“ECAs”) (see below).

 

The MEPC, adopted amendments to Annex VI on October 10, 2008, which entered into force on July 1, 2010.  The amended Annex VI seeks to further reduce air pollution by, among other things, implementing a progressive reduction of the amount of sulfur contained in any fuel oil used on board ships.  As of January 1, 2012, the amended Annex VI requires that fuel oil contain no more than 3.50% sulfur (from the previous cap of 4.50%). By January 1, 2020, sulfur content outside sulfur emission control areas must not exceed 0.50%, subject to a feasibility review to be completed no later than 2018.

 

Sulfur content standards are even stricter within certain ECAs. As of July 1, 2010, ships operating within an ECA were not permitted to use fuel with sulfur content in excess of 1.0%, which was further reduced to 0.10% on January 1, 2015.  Amended Annex VI establishes procedures for designating new ECAs. The Baltic Sea and the North Sea have been so designated. Effective August 1, 2012, certain coastal areas of North America were designated ECAs, and as of January 1, 2014 the applicable areas of the United States Caribbean Sea were designated ECAs. If other ECAs are approved by the IMO or other new or more stringent requirements relating to emissions from marine diesel engines or port operations by vessels are adopted by the U.S. Environmental Protection Agency (“EPA”) or the states where we operate, compliance with these regulations could entail significant capital expenditures or otherwise increase the costs of our operations.

 

As of January 1, 2013, MARPOL made mandatory certain measures relating to energy efficiency for ships in part to address greenhouse gas emissions. All new ships are required to utilize the Energy Efficiency Design Index (“EEDI”) and all ships must use a Ship Energy Efficiency Management Plan (“SEEMP”).  Our fleet is already compliant with this requirement.

 

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Amended Annex VI also establishes new tiers of stringent nitrogen oxide emissions standards for new tier III marine engines, depending on their date of installation. The EPA promulgated equivalent (and in some senses stricter) emissions standards in late 2009.

 

Safety Management System Requirements

 

The IMO also adopted the International Convention for the Safety of Life at Sea of 1974 (“SOLAS Convention”) and the International Convention on Load Lines (“LL Convention”), which impose a variety of standards that regulate the design and operational features of ships.  The IMO periodically revises the SOLAS Convention and LL Convention standards.  The SOLAS Convention amendments that relate to the safe manning of vessels were adopted by the IMO in May 2012 and entered in force as of January 1, 2014.  The Convention on Limitation of Liability for Maritime Claims (“LLMC”) was recently amended, and the amendments went into effect on June 8, 2015. The foregoing amendments alter the limits of liability for loss of life or personal injury and property claims against ship owners.

 

Under Chapter IX of the SOLAS Convention, the International Management Code for the Safe Operation of Ships and for Pollution Prevention (“ISM Code”), our operations are also subject to environmental standards and requirements.  The ISM Code requires the owner of a vessel, or any person who has taken responsibility for operation of a vessel, to develop an extensive safety management system that includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for operating its vessels safely and describing procedures for responding to emergencies.  We rely upon the safety management system that we and our technical manager have developed for compliance with the ISM Code.  The failure of a ship owner or bareboat charterer to comply with the ISM Code may subject such party to increased liability, may decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports.

 

The ISM Code requires that vessel operators also obtain a safety management certificate for each vessel they operate.  This certificate evidences compliance by a vessel’s management with code requirements for a safety management system.  No vessel can obtain a certificate unless its manager has been awarded a document of compliance, issued by each flag state, under the ISM Code.  We believe that we have all material requisite documents of compliance for our managers’ offices and safety management certificates for all of our vessels for which such certificates are required by the IMO.  We renew these documents of compliance and safety management certificates as required.

 

Pollution Control and Liability Requirements

 

The IMO has negotiated international conventions that impose liability for pollution in international waters and the territorial waters of the nation’s signatory to such conventions.  The IMO adopted an International Convention for the Control and Management of Ships’ Ballast Water and Sediments (“BWM Convention”) in February 2004.  The BWM Convention’s implementing regulations call for a phased introduction of mandatory ballast water exchange requirements, to be replaced in time with mandatory concentration limits.  The BWM Convention will not become effective until 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the world’s merchant shipping.  To date, the BWM Convention has not yet been ratified, but proposals regarding implementation have recently been submitted to the IMO.  Many of the implementation dates in the BWM Convention have already passed, so that once the BWM Convention enters into force, the period of installation of mandatory ballast water exchange requirements would be extremely short, with several thousand ships a year needing to install ballast water management systems (“BWMS”). For this reason, on December 4, 2013, the IMO Assembly passed a resolution revising the application dates of the BWM Convention so that they are triggered by the entry into force date and not the adoption date in the BWM Convention. This, in effect, makes all vessels constructed before the entry into force date “existing vessels” and allows for the installation of a BWMS on such vessels at the first IOPP (International Oil Pollution Prevention) renewal survey following entry into force of the convention. Furthermore, in October 2014 the MEPC met and adopted additional resolutions concerning the BWM Convention’s implementation. Once mid-ocean ballast exchange ballast water treatment requirements become mandatory, the cost of compliance could increase for ocean carriers and the costs of ballast water treatments may be material. However, many countries already regulate the discharge of ballast water carried by vessels from country to country to prevent the introduction of invasive and harmful species via such discharges. The United States for example requires vessels entering its waters from another country to conduct mid-ocean ballast exchange, or undertake some alternate measure, and to comply with certain reporting requirements.  The system specification requirements for trading in the United States have not been formalized, but we believe the ballast water treatment systems will range from $0.7 million to $1.0 million each, primarily dependent on the size of the vessel.

 

Many countries have ratified and follow the liability plan adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage of 1969, as amended by different Protocols in 1976, 1984, and 1992, and amended in 2000 (the “CLC”). Under the CLC and depending on whether the country in which the damage results is a party to the 1992 Protocol to the CLC, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain exceptions. The 1992 Protocol changed certain limits on liability, expressed using the International Monetary Fund currency unit of Special Drawing Rights. The limits on liability have since been amended so that the

 

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compensation limits on liability were raised. The right to limit liability is forfeited under the CLC where the spill is caused by the ship owner’s personal fault and under the 1992 Protocol where the spill is caused by the ship owner’s personal act or omission by intentional or reckless conduct where the ship owner knew pollution damage would probably result. The CLC requires ships covered by it to maintain insurance covering the liability of the owner in a sum equivalent to an owner’s liability for a single incident. We believe that our protection and indemnity insurance will cover the liability under the plan adopted by the IMO.

 

The IMO adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage (the “Bunker Convention”), to impose strict liability on ship owners for pollution damage in jurisdictional waters of ratifying states caused by discharges of bunker fuel. The Bunker Convention requires registered owners of ships over 1,000 gross tons to maintain insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calculated in accordance with the Convention on Limitation of Liability for Maritime Claims of 1976, as amended). With respect to non-ratifying states, liability for spills or releases of oil carried as fuel in ship’s bunkers typically is determined by the national or other domestic laws in the jurisdiction where the events or damages occur.

 

Noncompliance with the ISM Code or other IMO regulations may subject the vessel owner or bareboat charterer to increased liability, lead to decreases in available insurance coverage for affected vessels or result in the denial of access to, or detention in, some ports.  The U.S. Coast Guard and European Union authorities have indicated that vessels not in compliance with the ISM Code by the applicable deadlines will be prohibited from trading in U.S. and European Union ports, respectively.  As of the date of this report, each of our vessels is ISM Code certified.  However, there can be no assurance that such certificates will be maintained in the future.

 

Anti-Fouling Requirements

 

In 2001, the IMO adopted the International Convention on the Control of Harmful Anti-fouling Systems on Ships (the “Anti-fouling Convention”).  The Anti-fouling Convention prohibits the use of organotin compound coatings to prevent the attachment of mollusks and other sea life to the hulls of vessels.  The exteriors of vessels constructed prior to January 1, 2003 that have not been in drydock must, as of September 17, 2008, either not contain the prohibited compounds or have coatings applied to the vessel exterior that act as a barrier to the leaching of the prohibited compounds.  Vessels of over 400 gross tons engaged in international voyages must obtain an International Anti-fouling System Certificate and undergo a survey before the vessel is put into service or when the anti-fouling systems are altered or replaced. We have obtained Anti-fouling System Certificates for all of our vessels that are subject to the Anti-fouling Convention.

 

The U.S. Oil Pollution Act of 1990 and the Comprehensive Environmental Response, Compensation and Liability Act

 

The U.S. Oil Pollution Act of 1990 (“OPA”) established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills.  OPA affects all “owners and operators” whose vessels trade in the United States, its territories and possessions or whose vessels operate in U.S. waters, which includes the U.S. territorial sea and the 200 nautical mile exclusive economic zone around the U.S.  The United States has also enacted the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) which applies to the discharge of hazardous substances other than oil, except in limited circumstances, whether on land or at sea.  OPA and CERCLA both define “owner or operator” “in the case of a vessel as any person owning, operating or chartering by demise, the vessel.”  Accordingly, both OPA and CERCLA impact our operations.

 

Under OPA, vessel owners and operators are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels.  OPA defines these other damages broadly to include:

 

·                  injury to, destruction or loss of, or loss of use of, natural resources and related assessment costs;

 

·                  injury to, or economic losses resulting from, the destruction of real and personal property;

 

·                  net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction or loss of real or personal property or natural resources;

 

·                  loss of subsistence use of natural resources that are injured, destroyed or lost;

 

·                  lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources; and

 

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·                  net cost of increased or additional public services necessitated by removal activities following a discharge of oil, such as protection from fire, safety or health hazards, and loss of subsistence use of natural resources.

 

OPA contains statutory caps on liability and damages; such caps do not apply to direct cleanup costs.  Effective December 21, 2015, the U.S. Coast Guard adjusted the limits of OPA liability for non-tanker vessels to the greater of $1,100 per gross ton or $939,800 (subject to periodic adjustment for inflation).  These limits of liability do not apply if an incident was proximately caused by the violation of an applicable U.S. federal safety, construction or operating regulation by a responsible party (or its agent, employee or a person acting pursuant to a contractual relationship), or a responsible party’s gross negligence or willful misconduct.  The limitation on liability similarly does not apply if the responsible party fails or refuses to (i) report the incident where the responsibility party knows or has reason to know of the incident; (ii) reasonably cooperate and assist as requested in connection with oil removal activities; or (iii) without sufficient cause, comply with an order issued under the Federal Water Pollution Act (Section 311 (c), (e)) or the Intervention on the High Seas Act.

 

CERCLA contains a similar liability regime whereby owners and operators of vessels are liable for cleanup, removal and remedial costs, as well as damage for injury to, or destruction or loss of, natural resources, including the reasonable costs associated with assessing same, and health assessments or health effects studies.  There is no liability if the discharge of a hazardous substance results solely from the act or omission of a third party, an act of God or an act of war.  Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million for vessels carrying a hazardous substance as cargo and the greater of $300 per gross ton or $500,000 for any other vessel.  These limits do not apply (rendering the responsible person liable for the total cost of response and damages) if the release or threat of release of a hazardous substance resulted from willful misconduct or negligence, or the primary cause of the release was a violation of applicable safety, construction or operating standards or regulations.  The limitation on liability also does not apply if the responsible person fails or refused to provide all reasonable cooperation and assistance as requested in connection with response activities where the vessel is subject to OPA.

 

OPA and CERCLA each preserve the right to recover damages under existing law, including maritime tort law.

 

OPA and CERCLA both require owners and operators of vessels to establish and maintain with the U.S. Coast Guard (the “USCG”) evidence of financial responsibility sufficient to meet the maximum amount of liability to which the particular responsible person may be subject. Vessel owners and operators may satisfy their financial responsibility obligations by providing a proof of insurance, a surety bond, qualification as a self-insurer or a guarantee. We plan to comply with the U.S. Coast Guard’s financial responsibility regulations by providing a certificate of responsibility evidencing sufficient insurance.

 

The 2010 Deepwater Horizon oil spill in the Gulf of Mexico may also result in additional regulatory initiatives or statutes, including the raising of liability caps under OPA.  For example, on August 15, 2012, the U.S. Bureau of Safety and Environmental Enforcement (“BSEE”) implemented a final drilling safety rule for offshore oil and gas operations that strengthens the requirements for safety equipment, well control systems, and blowout prevention practices.  A new rule issued by the U.S. Bureau of Ocean Energy Management (“BOEM”) that increased the limits of liability of damages for offshore facilities under OPA based on inflation took effect in January 2015. In April 2015, it was announced that new regulations are expected to be imposed in the United States regarding offshore oil and gas drilling. In December 2015, the BSEE announced a new pilot inspection program for offshore facilities. Compliance with any new requirements of OPA may substantially impact our cost of operations or require us to incur additional expenses to comply with any new regulatory initiatives or statutes.  Additional legislation, regulations, or other requirements applicable to the operation of our vessels that may be implemented in the future could adversely affect our business.

 

While we do not carry oil as cargo, we do carry bunkers in our drybulk carriers.  We currently maintain pollution liability coverage insurance in the amount of $1 billion per incident for each of our vessels.  If the damages from a catastrophic spill were to exceed our insurance coverage, it could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to pay dividends.

 

Other United States Environmental Regulations

 

The U.S. Clean Water Act (“CWA”) prohibits the discharge of oil or hazardous substances and ballast water in U.S. navigable waters unless authorized by a duly-issued permit or exemption, and imposes strict liability in the form of penalties for any unauthorized discharges.  The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA and CERCLA.  In addition, many U.S. states that border a navigable waterway have enacted environmental pollution laws that impose strict liability on a person for removal costs and damages resulting from a discharge of oil or a release of a hazardous substance. These laws may be more stringent than U.S. federal law.

 

The EPA has enacted rules requiring a permit regulating ballast water discharges and other discharges incidental to the normal operation of certain vessels within U.S. waters under the Vessel General Permit for Discharges Incidental to the Normal

 

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Operation of vessels (the “VGP”).  For a new vessel delivered to an owner or operator after September 19, 2019 to be covered by the VGP, the owner must submit a Notice of Intent (“NOI”) at least 30 days before the vessel operates in U.S. waters. On March 28, 2013, the EPA re-issued the VGP for another five years; this 2013 VGP took effect December 19, 2013.  The 2013 VGP contains numeric ballast water discharge limits for most vessels to reduce the risk of invasive species in U.S. waters, more stringent requirements for exhaust gas scrubbers and the use of environmentally acceptable lubricants.  We will submit NOIs for our vessels where required.

 

The USCG regulations adopted under the U.S. National Invasive Species Act (the “NISA”) also impose mandatory ballast water management practices for all vessels equipped with ballast water tanks entering or operating in U.S. waters that require the installation of equipment to treat ballast water before it is discharged in U.S. waters or, in the alternative, the implementation of other port facility disposal arrangements or procedures.  Vessels not complying with these regulations are restricted from entering U.S. waters.  The USCG must approve any technology before it is placed on a vessel.

 

Notwithstanding the foregoing, as of January 1, 2014, vessels are technically subject to the phasing-in of these standards. As a result, the USCG has provided waivers to vessels which cannot install the as-yet unapproved technology. The EPA, on the other hand, has taken a different approach to enforcing ballast discharge standards under the VGP. On December 27, 2013, the EPA issued an enforcement response policy in connection with the new VGP in which the EPA indicated that it would take into account the reasons why vessels do not have the requisite technology installed, but will not grant any waivers.

 

It should also be noted that in October 2015, the Second Circuit Court of Appeals issued a ruling that directed the EPA to redraft the sections of the 2013 VGP that address ballast water. However, the Second Circuit stated that 2013 VGP will remain in effect until the EPA issues a new VGP. It presently remains unclear how the ballast water requirements set forth by the EPA, the USCG, and IMO BWM Convention, some of which are in effect and some which are pending, will co-exist.

 

The USCG’s revised ballast water standards are consistent with requirements under the BWM Convention. Compliance with the EPA and the USCG regulations could require the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost, or may otherwise restrict our vessels from entering U.S. waters. In addition, certain states have enacted more stringent discharge standards as conditions to their required certification of the VGP.

 

The U.S. Clean Air Act of 1970, including its amendments of 1977 and 1990 (the “CAA”), requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants.  The CAA also requires states to draft State Implementation Plans (“SIPs”) designed to attain national health-based air quality standards in primarily major metropolitan areas and/or industrial areas.  To the extent applicable to our vessels, the operation of our vessels is in compliance with the CAA.

 

European Union Regulations

 

In October 2009, the European Union amended a directive to impose criminal sanctions for illicit ship-source discharges of polluting substances, including minor discharges, if committed with intent, recklessly or with serious negligence and the discharges individually or in the aggregate result in deterioration of the quality of water. Aiding and abetting the discharge of a polluting substance may also lead to criminal penalties. Member States were required to enact laws or regulations to comply with the directive by the end of 2010. Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims. The directive applies to all types of vessels, irrespective of their flag, but certain exceptions apply to warships or where human safety or that of the ship is in danger.

 

The European Union has adopted several regulations and directives requiring, among other things, more frequent inspections of high-risk ships, as determined by type, age, and flag as well as the number of times the ship has been detained. The European Union also adopted and then extended a ban on substandard ships and enacted a minimum ban period and a definitive ban for repeated offenses. The regulation also provided the European Union with greater authority and control over classification societies by imposing more requirements on classification societies and providing for fines or penalty payments for organizations that failed to comply.

 

Greenhouse Gas Regulation

 

Currently, the emissions of greenhouse gases from international shipping are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which entered into force in 2005 and pursuant to which adopting countries have been required to implement national programs to reduce greenhouse gas emissions.  The 2015 United Nations Convention on Climate Change Conference in Paris did not result in an agreement that directly limited greenhouse gas emissions from ships.  As of January 1, 2013, all new ships must comply with two new sets of mandatory requirements, which were adopted by MEPC in July 2011, to address greenhouse gas emissions from ships. Currently operating ships will be required to develop SEEMPs, and minimum energy efficiency levels per capacity mile will apply to new ships, as defined by the EEDI. These requirements could cause us to incur additional compliance costs. The IMO is also planning to implement market-based mechanisms to reduce greenhouse gas emissions from ships at an upcoming MEPC session.  In April 2015, a regulation was adopted requiring that large ships (over 5,000 gross tons)

 

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calling at European Union ports from January 2018 collect and publish data on carbon dioxide emissions and other information. In the United States, the EPA has issued a finding that greenhouse gases endanger the public health and safety and has adopted regulations to limit greenhouse gas emissions from certain mobile sources and large stationary sources. The EPA enforces both the CAA and the international standards found in Annex VI of MARPOL concerning marine diesel emissions, and the sulfur content found in marine fuel. Any passage of climate control legislation or other regulatory initiatives by the IMO, European Union, the U.S. or other countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol, that restrict emissions of greenhouse gases could require us to make significant financial expenditures, including capital expenditures to upgrade our vessels, which we cannot predict with certainty at this time.

 

International Labour Organization

 

The International Labour Organization (ILO) is a specialized agency of the United Nations with headquarters in Geneva, Switzerland. The ILO has adopted the Maritime Labor Convention 2006 (“MLC 2006”). A Maritime Labor Certificate and a Declaration of Maritime Labor Compliance will be required to ensure compliance with the MLC 2006 for all ships above 500 gross tons in international trade. The MLC 2006 entered into force on August 20, 2013. The MLC 2006 requires us to develop new procedures to ensure full compliance with its requirements.

 

Vessel Security Regulations

 

Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security.  On November 25, 2002, the U.S. Maritime Transportation Security Act of 2002 (“MTSA”) came into effect.  To implement certain portions of the MTSA, in July 2003, the USCG issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. The regulations also impose requirements on certain ports and facilities, some of which are regulated by the EPA.

 

Similarly, in December 2002, amendments to the SOLAS Convention created a new chapter of the convention dealing specifically with maritime security.  The new Chapter XI-2 became effective in July 2004 and imposes various detailed security obligations on vessels and port authorities, and mandates compliance with the International Ship and Port Facilities Security Code (the “ISPS Code”).  The ISPS Code is designed to enhance the security of ports and ships against terrorism.  To trade internationally, a vessel must attain an International Ship Security Certificate (“ISSC”) from a recognized security organization approved by the vessel’s flag state.  Among the various requirements are:

 

·                  on-board installation of automatic identification systems to provide a means for the automatic transmission of safety-related information from among similarly equipped ships and shore stations, including information on a ship’s identity, position, course, speed and navigational status;

 

·                  on-board installation of ship security alert systems, which do not sound on the vessel but only alert the authorities on shore;

 

·                  the development of vessel security plans;

 

·                  ship identification number to be permanently marked on a vessel’s hull;

 

·                  a continuous synopsis record kept onboard showing a vessel’s history including the name of the ship, the state whose flag the ship is entitled to fly, the date on which the ship was registered with that state, the ship’s identification number, the port at which the ship is registered and the name of the registered owner(s) and their registered address; and

 

·                  compliance with flag state security certification requirements.

 

A ship operating without a valid certificate may be detained at port until it obtains an ISSC, or may be expelled from port or refused entry at port.

 

The USCG regulations, intended to align with international maritime security standards, exempt from MTSA vessel security measures non-U.S. vessels that have on board, as of July 1, 2004, a valid ISSC attesting to the vessel’s compliance with the SOLAS Convention security requirements and the ISPS Code.  We have implemented the various security measures addressed by the MTSA, the SOLAS Convention and the ISPS Code.

 

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Inspection by Classification Societies

 

Every oceangoing vessel must be ‘‘classed’’ by a classification society.  The classification society certifies that the vessel is ‘‘in class,’’ signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the vessel’s country of registry and the international conventions of which that country is a member.  In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.

 

The classification society also undertakes on request other surveys and checks that are required by regulations and requirements of the flag state.  These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned.

 

For maintenance of the class certification, regular and extraordinary surveys of hull, machinery, including the electrical plant, and any special equipment classes are required to be performed as follows:

 

·                  Annual Surveys:  For seagoing ships, annual surveys are conducted for the hull and the machinery, including the electrical plant, and where applicable for special equipment classed, within three months before or after each anniversary date of the date of commencement of the class period indicated in the certificate.

 

·                  Intermediate Surveys:  Extended annual surveys are referred to as intermediate surveys and typically are conducted two and one-half years after commissioning and each class renewal.  Intermediate surveys are to be carried out at or between the occasion of the second or third annual survey.

 

·                  Class Renewal Surveys:  Class renewal surveys, also known as special surveys, are carried out for the ship’s hull, machinery, including the electrical plant, and for any special equipment classed, at the intervals indicated by the character of classification for the hull.  At the special survey, the vessel is thoroughly examined, including audio-gauging to determine the thickness of the steel structures.  Should the thickness be found to be less than class requirements, the classification society would prescribe steel renewals.  Substantial amounts of money may have to be spent for steel renewals to pass a special survey if the vessel experiences excessive wear and tear.  In lieu of the special survey every four or five years, depending on whether a grace period was granted, a vessel owner has the option of arranging with the classification society for the vessel’s hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five-year cycle.  Upon a vessel owner’s request, the surveys required for class renewal may be split according to an agreed schedule to extend over the entire period of class.  This process is referred to as continuous class renewal.

 

All areas subject to survey as defined by the classification society are required to be surveyed at least once per class period, unless shorter intervals between surveys are prescribed elsewhere.  The period between two subsequent surveys of each area must not exceed five years.

 

Most vessels are also drydocked every 30 to 36 months for inspection of the underwater parts and for repairs related to inspections.  If any defects are found, the classification surveyor will issue a “recommendation,” which must be rectified by the vessel owner within prescribed time limits.

 

Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as “in class” by a classification society which is a member of the International Association of Classification Societies (“IACS”).  In December 2013, the IACS adopted new harmonized Common Structural Rules, which apply to oil tankers and bulk carriers constructed on or after July 1, 2015.  All of our vessels have been certified as being “in class” by ABS, DNVGL or Lloyd’s.  All new and secondhand vessels that we purchase must be certified prior to their delivery under our standard agreements.

 

SEASONALITY

 

We operate our vessels in markets that have historically exhibited seasonal variations in demand and, as a result, charter rates.  We seek to mitigate the risk of these seasonal variations by entering into long-term time charters for our vessels, where possible.  However, this seasonality may result in quarter-to-quarter volatility in our operating results, depending on when we enter into our time charters or if our vessels trade on the spot market.  The drybulk sector is typically stronger in the fall and winter months in anticipation of increased consumption of coal and raw materials in the northern hemisphere during the winter months.  As a result, our revenues could be weaker during the fiscal quarters ended June 30 and September 30, and conversely, our revenues could be stronger during the quarters ended December 31 and March 31.

 

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ITEM 1A.                                         RISK FACTORS

 

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

 

This annual report on Form 10-K contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements use words such as “anticipate,” “budget,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with a discussion of potential future events, circumstances or future operating or financial performance.  These forward-looking statements are based on our management’s current expectations and observations.  Included among the factors that, in our view, could cause actual results to differ materially from the forward looking statements contained in this annual report on Form 10-K are the following: (i) further declines or sustained weakness in demand in the drybulk shipping industry; (ii) continuation of weakness in drybulk shipping rates; (iii) changes in the supply of or demand for drybulk products, generally or in particular regions; (iv) changes in the supply of drybulk carriers including newbuilding of vessels or lower than anticipated scrapping of older vessels; (v) changes in rules and regulations applicable to the cargo industry, including, without limitation, legislation adopted by international organizations or by individual countries and actions taken by regulatory authorities; (vi) increases in costs and expenses including but not limited to: crew wages, insurance, provisions, lube, oil, bunkers, repairs, maintenance and general, administrative, and management fee expenses; (vii) whether our insurance arrangements are adequate; (viii) changes in general domestic and international political conditions; (ix) acts of war, terrorism, or piracy; (x) changes in the condition of the Company’s vessels or applicable maintenance or regulatory standards (which may affect, among other things, our anticipated drydocking or maintenance and repair costs) and unanticipated drydock expenditures; (xi) the Company’s acquisition or disposition of vessels; (xii) the amount of offhire time needed to complete repairs on vessels and the timing and amount of any reimbursement by our insurance carriers for insurance claims, including offhire days; (xiii) the completion of definitive documentation with respect to charters; (xiv) charterers’ compliance with the terms of their charters in the current market environment; (xv) the ability to realize the expected benefits of the our merger with Baltic Trading to the degree, in the amounts or in the timeframe anticipated; (xvi) the extent to which our operating results continue to be affected by weakness in market conditions and charter rates; (xvii) our ability to continue as a going concern, (xviii) our ability to maintain contracts that are critical to our operation, to obtain and maintain acceptable terms with our vendors, customers and service providers and to retain key executives, managers and employees; (xix) our ability to obtain the waivers under our credit facilities described in the “Liquidity and Capital Resources” section; (xx) our ability to implement measures to resolve our liquidity and covenant compliance issues; (xxi) those other risks and uncertainties discussed below under the headings “RISK FACTORS RELATED TO OUR BUSINESS & OPERATIONS”, and (xxii) other factors listed from time to time in our filings with the Securities and Exchange Commission (the “SEC”).  We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

The following risk factors and other information included in this report should be carefully considered.  If any of the following risks actually occur, our business, financial condition, operating results or cash flows could be materially and adversely affected and the trading price of our common stock could decline.

 

RISK FACTORS RELATED TO OUR BUSINESS AND OPERATIONS

 

Industry Specific Risk Factors

 

The current global economic environment may continue to negatively impact our business.

 

The weak global economic environment that has persisted since the global downturn in 2008 continues to negatively impact the drybulk industry.  General market volatility has endured as a result of uncertainty about the growth rate of the world economy and the Chinese economy in particular, on which the drybulk industry depends to a significant degree.  The economies of the U.S., European Union, and  other parts of the world continue to experience slow growth or exhibit weak economic trends. These economic conditions have resulted in decreasing demand for drybulk cargoes, which in turn has led to lower demand for drybulk vessels.  Charter rates have declined significantly in recent years and are near historic lows as a result of this lower demand and an increased supply of drybulk vessels as described below in “The current oversupply of drybulk carrier capacity may lead to continued rate weakness or further reductions in charterhire rates and profitability.”  As a result, a number of drybulk shipping companies, including us, have experienced declining revenues, negative cash flow, and liquidity issues.  There have thus been widespread loan covenant defaults in the drybulk industry as well as declarations of bankruptcy by some operators and shipowners as well as charterers.

 

If the current global economic environment persists, worsens, or does not sufficiently recover, we may be negatively affected in the following ways:

 

·                  As a result of low charter rates that in some instances do not allow us to operate our vessels profitably, our earnings and cash flows could remain at depressed levels or decline.  This may leave us with insufficient cash resources to fund our operations or make required amortization payments under our credit facilities, which would potentially accelerate the repayment of our outstanding indebtedness.  Please refer to “We face liquidity issues as a result of conditions in the current market environment” below for further details.

 

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·                  If our earnings and cash flows remain at depressed levels or decline, we may also breach one or more of the covenants in our credit facilities, including covenants relating to our minimum cash balance and our leverage ratio. This also would potentially accelerate the repayment of outstanding indebtedness.  Please refer to “Covenants under our credit facilities may be difficult to satisfy in the current market environment” below for further details.

 

·                  The market values of our vessels have decreased, which may cause us to recognize losses if any of our vessels are sold, scrapped or if their values are impaired.  Moreover, all of our credit facilities contain collateral maintenance covenants that depend on the appraised values of our vessels.  We currently are not in compliance with some such covenants and may not be in compliance with others if the appraised values of our vessels remain at depressed levels, further decline, or do not sufficiently recover.   Please refer to “The market values of our vessels may decrease, which could adversely affect our operating results or cause us to breach one or more of the covenants in our credit facilities” below for further details.

 

·                  Our charterers may fail to meet their obligations under our time charter agreements.

 

·                  The value of our investment in Jinhui could further decline, and we may recognize additional losses if we were to sell our shares or if the value of our investment is impaired.

 

The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations, cash flows, financial condition, and ability to continue as a going concern.

 

Charterhire rates for drybulk carriers are currently at historically low levels and may remain low or further decrease in the future, which may adversely affect our earnings.

 

The prolonged downturn in the drybulk charter market, from which we derive the large majority of our revenues, has severely affected the drybulk shipping industry. The Baltic Dry Index (“BDI”), an index published by The Baltic Exchange of shipping rates for 26 key drybulk routes, showed relative weakness in 2015 and recorded an average level of 718, compared to a ten-year average level of 2,721, as of February 29, 2016.  The BDI was at a peak of 1,222 in August 2015 and reached a low of 471 in December 2015.  After reaching an all-time low of 290 on February 10, 2016, the BDI marginally increased to reach a level of 329 as of February 29, 2016.   The BDI remains volatile, and the economic conditions underlying its overall decline have not abated.  Accordingly, there can be no assurance that the drybulk charter market will recover in the near future, and the market could experience a further downturn.

 

The supply of and demand for shipping capacity strongly influences freight rates.  Because the factors affecting the supply and demand for vessels are outside of our control and are unpredictable, the nature, timing, direction and degree of changes in industry conditions are also unpredictable.

 

Factors that influence demand for vessel capacity include:

 

·                  demand for and production of drybulk products;

 

·                  global and regional economic and political conditions, including developments in international trade, fluctuations in industrial and agricultural production and armed conflicts;

 

·                  the distance drybulk cargo is to be moved by sea;

 

·                  environmental and other regulatory developments; and

 

·                  changes in seaborne and other transportation patterns.

 

The factors that influence the supply of vessel capacity include:

 

·                  the number of newbuilding deliveries;

 

·                  port and canal congestion;

 

·                  the scrapping rate of older vessels;

 

·                  vessel casualties;

 

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·                  conversion of vessels to other uses;

 

·                  the number of vessels that are out of service, i.e., laid-up, drydocked, awaiting repairs or otherwise not available for hire; and

 

·                  environmental concerns and regulations

 

In addition to the prevailing and anticipated freight rates, factors that affect the rate of newbuilding, scrapping and laying-up include newbuilding prices, secondhand vessel values in relation to scrap prices, costs of bunkers and other operating costs, costs associated with classification society surveys, normal maintenance and insurance coverage, the efficiency and age profile of the existing fleet in the market and government and industry regulation of maritime transportation practices, particularly environmental protection laws and regulations.  These factors influencing the supply of and demand for shipping capacity are outside of our control, and we may not be able to correctly assess the nature, timing and degree of changes in industry conditions.

 

We anticipate that the future demand for drybulk carriers will continue to depend on economic growth in the world’s economies, particularly China and India, seasonal and regional changes in demand, changes in the capacity of the global drybulk carrier fleet and the sources and supply of drybulk cargo to be transported by sea.  Adverse economic, political, social or other developments, including a change in worldwide fleet capacity, could have a material adverse effect on our business, results of operations, cash flows, financial condition, and ability to continue as a going concern.

 

The current oversupply of drybulk carrier capacity may lead to continued rate weakness or further reductions in charterhire rates and profitability.

 

The market supply of drybulk carriers has increased every year since 2010 as a result of the delivery of numerous newbuilding orders, which peaked in 2008.  Scrapping of older vessels has not been sufficient to offset the delivery of such newbuildilngs.  The oversupply of drybulk carrier capacity has resulted in a reduction of charterhire rates, as evidenced by the low rates we have experienced during 2015.  Currently, a large number of our spot market-related time charterers are unprofitable due to the weakness associated with dry cargo freight rates.  Under current market conditions, upon the expiration or termination of our vessels’ current non-spot charters, we may only be able to re-charter our vessels at depressed or unprofitable rates, or we may not be able to charter these vessels at all.  The occurrence of these events could have a material adverse effect on our business, results of operations, cash flows, financial condition, and ability to continue as a going concern.

 

Prolonged declines in charter rates and other market deterioration could cause us to incur impairment charges.

 

We evaluate the carrying amounts of our vessels to determine if events have occurred that would require us to evaluate our vessels for an impairment of their carrying amounts. The recoverable amount of vessels is reviewed based on events and changes in circumstances that would indicate that the carrying amount of the assets might not be recovered. The review for potential impairment indicators and projection of future cash flows related to the vessels is complex and requires us to make various estimates including future freight rates and earnings from the vessels. All of these items have been historically volatile.

 

We determine the recoverable amount of each vessel by estimating the undiscounted future cash flows associated with each vessel. If the recoverable amount is less than the carrying amount of the vessel, the vessel is deemed impaired and such vessel would be written down to its fair value. The carrying values of our vessels may not represent their fair market value in the future because the new market prices of second-hand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Any impairment charges incurred as a result of declines in charter rates could have a material adverse effect on our business, results of operations, cash flows, financial condition, and ability to continue as a going concern.

 

A further economic slowdown, continued weakness, or changes in the economic and political environment in the Asia Pacific region could have a material adverse effect on our business, financial position and results of operations.

 

A significant number of the port calls made by our vessels involve the loading or discharging of raw materials and semi-finished products in ports in the Asia Pacific region.  As a result, a negative change in economic conditions in any Asia Pacific country, and particularly in China, India or Japan, could have an adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.  In particular, in recent years, China has been one of the world’s fastest growing economies in terms of gross domestic product.  China’s gross domestic product grew by 6.9% in 2015 as compared to a 7.4% growth rate in 2014. We cannot assure you that the Chinese economy will not experience a significant contraction in the future.  To the extent the  Chinese government does not continue to pursue a policy of economic growth and urbanization, the level of imports to and exports from China could be adversely affected by changes to these initiatives by the Chinese government, as well as by changes in political, economic and social conditions or other relevant policies of the Chinese government, such as changes in laws, regulations or export and import restrictions.  Notwithstanding economic reform, the Chinese government may adopt policies that favor domestic

 

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drybulk shipping companies and may hinder our ability to compete with them effectively.  The Chinese government has also taken actions seen as protecting domestic industries such as coal or steel, which may reduce the demand for drybulk cargoes bound for China and negatively impact the drybulk industry.  Moreover, a significant or protracted slowdown in the economies of the United States, the European Union or various Asian countries may adversely affect economic growth in China and elsewhere.  Our business, results of operations, cash flows, financial condition and ability to pay dividends will likely be materially and adversely affected by an economic downturn in any of these countries.

 

We are subject to regulation and liability under environmental and operational safety laws that could require significant expenditures and affect our cash flows and net income and could subject us to increased liability under applicable law or regulation.

 

Our business and the operation of our vessels are materially affected by government regulation in the form of international conventions and national, state and local laws and regulations in force in the jurisdictions in which the vessels operate, as well as in the countries of their registration.  Because such conventions, laws, and regulations are often revised, we cannot predict the ultimate cost of complying with them or their impact on the resale prices or useful lives of our vessels.  Additional conventions, laws and regulations may be adopted that could limit our ability to do business or increase the cost of our doing business and that may materially adversely affect our business, results of operations, cash flows, financial condition and ability to pay dividends.  See “Overview — Environmental and Other Regulation” in Item 1, “Business” of this annual report for a discussion of such conventions, laws, and regulations.  We are required by various governmental and quasi-governmental agencies to obtain certain permits, licenses, certificates and financial assurances with respect to our operations.

 

The operation of our vessels is affected by the requirements set forth in the United Nations’ International Maritime Organization’s International Management Code for the Safe Operation of Ships and Pollution Prevention (the “ISM Code”).  The ISM Code requires ship owners, ship managers and bareboat charterers to develop and maintain an extensive “Safety Management System” that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies.  The failure of a ship owner or bareboat charterer to comply with the ISM Code may subject it to increased liability, may invalidate existing insurance or decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports.

 

The U.S. Oil Pollution Act of 1990 (“OPA”) established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills.  OPA affects all owners and operators whose vessels trade in the United States, its territories and possessions or whose vessels operate in U.S. waters.  OPA allows for liability without regard to fault of vessel owners, operators and demise charterers for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels, including bunkers, in U.S. waters.  Such liability is potentially unlimited in cases of willful misconduct or gross negligence.  OPA also expressly permits individual states to impose their own liability regimes with regard to hazardous materials and oil pollution materials occurring within their boundaries, provided they accept, at a minimum, the levels of liability established under OPA.

 

Increased inspection procedures and tighter import and export controls could increase costs and disrupt our business.

 

International shipping is subject to various security and customs inspection and related procedures in countries of origin and destination.  Inspection procedures can result in the seizure of the contents of our vessels, delays in the loading, offloading or delivery and the levying of customs duties, fines or other penalties against us.

 

It is possible that changes to inspection procedures could impose additional financial and legal obligations on us.  Furthermore, changes to inspection procedures could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types of cargo uneconomical or impractical.  Any such changes or developments may have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

We operate our vessels worldwide and as a result, our vessels are exposed to international risks which could reduce revenue or increase expenses.

 

The international shipping industry is an inherently risky business involving global operations.  Our vessels will be at risk of damage or loss because of events such as mechanical failure, collision, human error, war, terrorism, piracy, cargo loss and bad weather.  All these hazards can result in death or injury to persons, increased costs, loss of revenues, loss or damage to property (including cargo), environmental damage, higher insurance rates, damage to our customer relationships, harm to our reputation as a safe and reliable operator and delay or rerouting.  In addition, changing economic, regulatory and political conditions in some countries, including political and military conflicts, have from time to time resulted in attacks on vessels, mining of waterways, piracy, terrorism, labor strikes and boycotts.  Our vessels may operate in particularly dangerous areas, including areas of the South China Sea, the Arabian Sea, the Indian Ocean, the Gulf of Aden off the coast of Somalia, the Gulf of Guinea, and the Red Sea.  In November 2013, the government of the People’s Republic of China announced an Air Defense Identification Zone, or ADIZ, covering much of the East China Sea. When introduced, the Chinese ADIZ was controversial because a number of nations are not honoring the ADIZ,

 

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and the ADIZ includes certain maritime areas that have been contested among various nations in the region. Tensions relating to the Chinese ADIZ may escalate as a result of incidents relating to the ADIZ or other territorial disputes, which may result in additional limitations on navigation or trade.  These sorts of events could interfere with shipping routes and result in market disruptions that could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

Our vessels may suffer damage, and we may face unexpected dry docking costs, which could adversely affect our cash flow and financial condition.

 

If our vessels suffer damage, they may need to be repaired at a drydocking facility.  The costs of drydock repairs are unpredictable and can be substantial.  We may have to pay drydocking costs that our insurance does not cover in full.  In addition, space at drydocking facilities is sometimes limited and not all drydocking facilities are conveniently located.  We may be unable to find space at a suitable drydocking facility or we may be forced to travel to a drydocking facility that is distant from the relevant vessel’s position.  The loss of earnings while our vessels are being repaired and repositioned or from being forced to wait for space or to travel to more distant drydocking facilities, as well as the actual cost of repairs, could negatively impact our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

The operation of drybulk carriers has certain unique operational risks which could affect our earnings and cash flow.

 

The operation of certain ship types, such as drybulk carriers, has certain unique risks.  With a drybulk carrier, the cargo itself and its interaction with the vessel can be an operational risk.  By their nature, drybulk cargoes are often heavy, dense, easily shifted, and react badly to water exposure.  In addition, drybulk carriers are often subjected to battering treatment during unloading operations with grabs, jackhammers (to pry encrusted cargoes out of the hold) and small bulldozers.  This treatment may cause damage to the vessel.  Vessels damaged due to treatment during unloading procedures may be more susceptible to breach to the sea.  Hull breaches in drybulk carriers may lead to the flooding of the vessels’ holds.  If a drybulk carrier suffers flooding in its forward holds, the bulk cargo may become so dense and waterlogged that its pressure may buckle the vessel’s bulkheads, leading to the loss of a vessel.  If we are unable to adequately maintain our vessels, we may be unable to prevent these events.  Any of these circumstances or events may have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.  In addition, the loss of any of our vessels could harm our reputation as a safe and reliable vessel owner and operator.

 

Acts of piracy on ocean-going vessels have continued and could adversely affect our business.

 

Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, the Arabian Sea, the Indian Ocean, the Gulf of Aden off the coast of Somalia, the Gulf of Guinea, and the Red Sea.  Sea piracy incidents continue to occur, particularly in the Gulf of Aden, the Gulf of Guinea and increasingly in Southeast Asia.  If these piracy attacks result in regions in which our vessels are deployed being characterized by insurers as “war risk” zones, or Joint War Committee (JWC) “war and strikes” listed areas, premiums payable for such coverage could increase significantly and such insurance coverage may be more difficult to obtain, if available at all.  In addition, crew costs, including costs that may be incurred to the extent we employ onboard security guards, could increase in such circumstances.  We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us.  In addition, detention hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability of insurance for our vessels, could have a material adverse impact on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

In response to piracy incidents, following consultation with regulatory authorities, we may station guards on some of our vessels in some instances. While our use of guards is intended to deter and prevent the hijacking of our vessels, it may also increase our risk of liability for death or injury to persons or damage to personal property. If we do not have adequate insurance in place to cover such liability, it could adversely impact our business, results of operations, cash flows, and financial condition.

 

Terrorist attacks and other acts of violence or war may have an adverse effect on our business, results of operations and financial condition.

 

Terrorist attacks continue to cause uncertainty in the world’s financial markets and may affect our business, operating results and financial condition. Continuing conflicts and recent developments in the Middle East, and the presence of U.S. and other armed forces in the Middle East and Afghanistan, may lead to additional acts of terrorism and armed conflict around the world, which may contribute to further economic instability in the global financial markets. These uncertainties could also adversely affect our ability to obtain additional financing on terms acceptable to us or at all. In the past, political conflicts have also resulted in attacks on vessels, mining of waterways and other efforts to disrupt international shipping, particularly in the Arabian Gulf region. Any of these occurrences could have a material adverse impact on our business, results of operation, and financial condition.

 

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Compliance with safety and other vessel requirements imposed by classification societies may be costly and could reduce our net cash flows and net income.

 

The hull and machinery of every commercial vessel must be certified as being “in class” by a classification society authorized by its country of registry.  The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and the Safety of Life at Sea Convention.  Our vessels are currently enrolled with the ABS, DNVGL, or Lloyd’s, each of which is a member of the International Association of Classification Societies. Further, to trade internationally, a vessel must attain an International Ship Security Certificate (“ISSC”) from a recognized security organization.

 

A vessel must undergo annual surveys, intermediate surveys and special surveys.  In lieu of a special survey, a vessel’s machinery may be placed on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period.  Our vessels are on special survey cycles for hull inspection and continuous survey cycles for machinery inspection.  Every vessel is also required to be drydocked every five years during the special survey.  For vessels that are less than 15 years old, intermediate surveys can be performed in the form of in-water examination of its underwater parts every two to three years.  For vessels that are older than 15 years, the vessel is required to be drydocked during the intermediate survey as well as the special survey.

 

If any vessel does not maintain its class or fails any annual, intermediate or special survey, the vessel will be unable to trade between ports and will be unemployable and we could be in violation of certain covenants in our credit facilities, which could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, UK Bribery Act, and other applicable worldwide anti-corruption laws.

 

The U.S. Foreign Corrupt Practices Act (“FCPA”) and other applicable worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business.  These laws include the U.K.  Bribery Act, which became effective on July 1, 2011 and which is broader in scope than the FCPA, as it contains no facilitating payments exception.  We charter our vessels into some jurisdictions that international corruption monitoring groups have identified as having high levels of corruption.  Our activities create the risk of unauthorized payments or offers of payments by one of our employees or agents that could be in violation of the FCPA or other applicable anti-corruption laws.  Our policies mandate compliance with applicable anti-corruption laws.  Although we have policies, procedures and internal controls in place to monitor internal and external compliance, we cannot assure that our policies and procedures will protect us from governmental investigations or inquiries surrounding actions of our employees or agents.  If we are found to be liable for violations of the FCPA or other applicable anti-corruption laws (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from civil and criminal penalties or other sanctions.

 

We may be unable to attract and retain qualified, skilled employees or crew necessary to operate our business.

 

Our success depends in large part on our ability to attract and retain highly skilled and qualified personnel.  In crewing our vessels, we require technically skilled employees with specialized training who can perform physically demanding work.  Competition to attract and retain qualified crew members is intense.  If we are not able to increase our rates to compensate for any crew cost increases, it could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.  Any inability our third-party technical managers or we experience in the future to hire, train and retain a sufficient number of qualified employees could impair our ability to manage, maintain and grow our business, which could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

Labor interruptions could disrupt our business.

 

Our vessels are manned by masters, officers and crews that are employed by third parties.  If not resolved in a timely and cost-effective manner, industrial action or other labor unrest could prevent or hinder our operations from being carried out normally and could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

The smuggling of drugs or other contraband onto our vessels may lead to governmental claims against us.

 

We expect that our vessels will call in ports in South America and other areas where smugglers attempt to hide drugs and other contraband on vessels, with or without the knowledge of crew members.  To the extent our vessels are found with contraband, whether inside or attached to the hull of our vessel and whether with or without the knowledge of any of our crew, we may face governmental or other regulatory claims which could have an adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

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Arrests of our vessels by maritime claimants could cause a significant loss of earnings for the related off-hire period.

 

Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages.  In many jurisdictions, a maritime lienholder may enforce its lien by “arresting” or “attaching” a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could result in a significant loss of earnings for the related off-hire period.  In addition, in jurisdictions where the “sister ship” theory of liability applies, a claimant may arrest the vessel which is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner.  In countries with “sister ship” liability laws, claims might be asserted against us or any of our vessels for liabilities of other vessels that we own.

 

Governments could requisition our vessels during a period of war or emergency, resulting in loss of earnings.

 

A government of a vessel’s registry could requisition for title or seize our vessels.  Requisition for title occurs when a government takes control of a vessel and becomes the owner.  A government could also requisition our vessels for hire.  Requisition for hire occurs when a government takes control of a vessel and effectively becomes the charterer at dictated charter rates.  Generally, requisitions occur during a period of war or emergency.  Government requisition of one or more of our vessels could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

Changes in fuel prices could adversely affect our profits.

 

From time to time, we operate vessels on spot charters either directly or by placing them in pools with similar vessels.  Spot charter arrangements generally provide that the vessel owner or pool operator bear the cost of fuel in the form of bunkers, which is a significant expense of operating the vessel.  We currently have 21 vessels operating in vessel pools and we may arrange for more vessels to do so, depending on market conditions.  Depending on the timing of increases in the price of fuel and market conditions, we or pool operators with whom we contract may be unable to pass along increases in fuel prices to our customers.  Currently, the majority of our vessels, excluding vessels operating in pools, are operating under standard time charter arrangements.  Under standard time charter arrangements, the charterer bears the cost of fuel in the form of bunkers.  At the commencement of a charter, the charterer purchases fuel from us at the then-prevailing market rates, and we are obligated to repurchase fuel at that same initial rate when the charterer redelivers the vessel back to us. Market rates at the time the charterer redelivers the vessel to us after completion of the charter (including any direct continuations) may be more or less than the prevailing market rates at the commencement of the charter.  In certain of our short-term time charter agreements, we sell the charterer the amount of the bunkers actually consumed and the charterer is required to redeliver the vessel to us without replenishment of the bunkers consumed. We believe the staggered nature of time charter expirations and the cyclical nature of fuel prices over time should reduce the risk of these repurchase obligations.  However, the date of redelivery of vessels and fluctuations in the price and supply of fuel are unpredictable and therefore these arrangements could result in losses or reductions in working capital that are beyond our control. As is customary in our industry, we do not use hedging agreements on fuel to mitigate these risks.  With respect to time charter agreements, we believe the variable expiration of the relevant contracts makes hedging agreements impractical or uneconomic.

 

Given that under certain arrangements with short-term or spot charters, the vessel owner or pool operator may bear the cost of fuel, the recent volatility in fuel prices could be a factor affecting profitability in these arrangements. To profitably price an individual charter, the vessel owner or pool operator must take into account the anticipated cost of fuel for the duration of the charter. Changes in the actual price of fuel at the time the charter is to be performed could result in the charter being performed at a significantly greater or lesser profit than originally anticipated or even result in a loss.

 

Our results of operations are subject to seasonal fluctuations, which may adversely affect our financial condition.

 

We operate our vessels in markets that have historically exhibited seasonal variations in demand and, as a result, charter rates.  This seasonality may result in quarter-to-quarter volatility in our operating results, depending on when we enter into our time charters or if our vessels trade on the spot market.  The drybulk sector is typically stronger in the fall and winter months in anticipation of increased consumption of coal and raw materials in the northern hemisphere during the winter months.  As a result, our revenues could be weaker during the fiscal quarters ended June 30 and September 30, and conversely, our revenue could be stronger during the quarters ended December 31 and March 31.  This seasonality could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

Company Specific Risk Factors

 

We face liquidity issues as a result of conditions in the current market environment.

 

The persistent, historically low rates in the drybulk shipping market have led to decreases in our overall revenues and operating losses on some of the charters we enter into.  As a result, we have experienced negative cash flows, and in turn, our liquidity has been negatively impacted.  If the current market environment persists or declines further, we may have insufficient liquidity to

 

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fund ongoing operations or satisfy our obligations under our credit facilities, which may lead to a default under one or more of our credit facilities.

 

Moreover, as described in more detail in “Covenants under our credit facilities may be difficult to satisfy in the current market environment below, we face difficulty in maintaining compliance with certain of our credit facility covenants due to market conditions, our liquidity, and the decreased value of our vessels, and we are currently not in compliance with certain of our collateral maintenance covenants.  To the extent we fail to satisfy any of our covenants and such failure is not cured or waived within the applicable grace period, we may be in default under our credit facilities.

 

If we are in default of any of our credit facilities, the repayment of our indebtedness under the relevant facility could potentially be accelerated.   In addition, each of our credit facilities contain cross default provisions that could be triggered by a default under any of our other credit facilities, with the result that the repayment of some or all of our indebtedness could potentially be accelerated.

 

Given the foregoing noncompliance with our collateral maintenance provisions, the existence of the cross default provisions, and the absence of any current solution which would cure the noncompliance for at least the next 12 months, the Company has classified its outstanding indebtedness as a current liability as of December 31, 2015.

 

As a result, we could experience a material adverse effect on our business, results of operations, cash flows, financial condition, ability to pay dividends, and we may cease to continue as a going concern.  For a further discussion of our liquidity issues, see “Liquidity and Captial Resources”  in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” below.

 

Covenants under our credit facilities may be difficult to satisfy in the current market environment.

 

Given the negative impact of the current weak drybulk rate environment on our earnings, we face potential covenant compliance issues.  Based on the size of our fleet, our current credit facilities require us to maintain a minimum cash balance of $52.5 million at all times.  In light of our requirements to fund ongoing operations, make payments under our credit facilities, and the possibility of utilizing cash to resolve collateral maintenance shortfalls described below, we believe that without taking measures that are described below, which may not be available to us, we may not remain in compliance with our minimum cash covenants under our credit facilities during 2016.

 

In addition, given the current weakness in vessel values, we currently do not meet the minimum threshold under the collateral maintenance covenant in certain of our credit facilities, and we believe we may not meet such threshold in certain others of our credit facilities during 2016.  Additionally, this weakness in vessel values could result in us not meeting the leverage ratio requirements in our credit facilities during 2016, which requires us to maintain a ratio not to exceed 70% of financial indebtedness divided by value adjusted total assets, each as defined therein.  See Note 9 — Debt in the financial statements for a description of each facility and the detailed information surrounding the specific collateral maintenance shortfall and applicable cure, if any.

 

We may seek waivers or modifications to our credit agreements, which may be unavailable or subject to conditions.  We may also seek to refinance our indebtedness or raise additional capital through equity or debt offerings or selling assets (including vessels). We cannot be certain that we will accomplish any such actions. Absent such waivers or modifications, if we do not comply with these covenants and fail to cure our non-compliance following applicable notice and expiration of applicable cure periods, we may be in default of one or more of our credit facilities.  As a result, some or all of our indebtedness could be declared immediately due and payable, we may not be able to borrow further under our credit facilities, and we may have to seek alternative sources of financing on terms that may not be favorable to us. If we are unable to service or refinance our current or future indebtedness, we may have to take actions such as reducing or delaying acquisitions or capital expenditures, selling assets, seeking additional debt or equity capital, or pursuing other restructuring options.  To the extent such actions include dispositions of vessels, our ability to do so on acceptable terms may be limited by depressed vessel values, a second-hand market for the sale of vessels that has become less active, and  ongoing limited availability of financing for buyers of vessels.  As a result, we may experience a material adverse effect on our business, financial condition, results of operations and cash flows.

 

The market values of our vessels may decrease, which could adversely affect our operating results.

 

If the book value of one of our vessels is impaired due to unfavorable market conditions or a vessel is sold at a price below its book value, we would incur a loss that could adversely affect our financial results.  Refer to the “Impairment of long-lived assets” section under the heading “Critical Accounting Policies” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” for further information.  The occurrence of these events could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

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Our earnings will be adversely affected if we do not successfully employ our vessels.

 

As of March 15, 2016, approximately 86% of our vessels were in arrangements in which they were trading at spot market rates through spot market-related time charters or operating in a vessel pool.  Thirty-nine of our vessels were engaged under spot market-related time charter contracts that expire (assuming the option periods in the time charters are not exercised) between March 2016 and June 2017, and 21 of our vessels were trading in the spot charter market through participation in pool arrangements.  The remaining ten of the vessels in our fleet were engaged under short-term time charters at fixed rates.  The charterhire rates for our vessels have sometimes declined below the operating costs of our vessels.  Because we currently charter most of our vessels on spot market-related time charters, we are exposed to the cyclicality and volatility of the spot charter market, and we do not have significant long-term, fixed-rate time charters to ameliorate the adverse effects of downturns in the spot market. Capesize vessels, which we operate as part of our fleet, have been particularly susceptible to weakness in spot charter rates.

 

To the extent our vessels trade in the spot charter market, we may experience fluctuations in revenue, cash flow and net income.  The spot charter market is highly competitive, and spot market voyage charter rates may fluctuate dramatically based primarily on the worldwide supply of drybulk vessels available in the market and the worldwide demand for the transportation of drybulk cargoes.  We can provide no assurance that future charterhire rates will enable us to operate our vessels profitably.  In addition, our standard time charter contracts with our customers specify certain performance parameters, which if not met can result in customer claims.  Such claims may have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

The revenues we earn may depend on the success and profitability of any vessel pools in which our vessels operate.

 

Chartering arrangements for our vessels deployed in a pool are handled by the commercial manager of the pool. The profitability of our vessels operating in vessel pools will depend upon the pool managers’ ability to successfully implement a profitable chartering strategy, which could include, among other things, obtaining favorable charters and employing vessels in the pool efficiently in order to service those charters. The pool’s profitability will also depend on minimizing, to the extent possible, time spent waiting for charters and time spent traveling unladen to pick up cargo. Furthermore, should an incident occur that negatively affects a pool’s revenues or should a pool underperform, then our profitability will be negatively impacted as a result. Commercial managers of pools typically exercise significant control and discretion over the operation of the pool, and our success and profitability will depend on the success of the pools in which we participate, particularly if we transition to a new pool. If vessels from other owners which enter into pools in which we participate are not of comparable design or quality to our vessels, or if the owners of such other vessels negotiate for greater pool weightings than those obtained by us, this could negatively impact the profitability of the pools in which we participate or dilute our interest in pool profits. If we wish to withdraw a vessel from a pool, we are required to give advance notice and the agreements we enter into with pools in which we participate may provide the applicable pool the right to defer withdrawal of our vessels. If the commercial manager of the pools in which we participate were to cease serving in such capacity, the pools may not be able to find a replacement commercial manager who will be as successful as the current commercial manager in chartering vessels and who may not have the same customer relationships. Additionally, were we to seek to assume direct commercial management of these vessels, either by choice or because of our failure to negotiate or maintain favorable terms with a profitable and well-managed pool, we may face similar challenges.  Most of our vessels operating in vessel pools are in pools managed by Clipper.  See “We depend upon ten charterers for a large part of our revenues.  The loss of one or more of these charterers could adversely affect our financial performance.” below for a discussion of the risk presented by this concentration of the employment of our vessels.

 

Restrictive covenants under our credit facilities may restrict our growth and operations.

 

Our credit facilities impose operating and financial restrictions that may limit our ability to:

 

·                              utilize cash above a certain amount as a result of cash sweeps;

 

·                              incur additional indebtedness on satisfactory terms or at all;

 

·                              incur liens on our assets;

 

·                              sell our vessels or the capital stock of our subsidiaries;

 

·                              make investments;

 

·                              engage in mergers or acquisitions;

 

·                              pay dividends;

 

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·                              make capital expenditures;

 

·                              compete effectively to the extent our competitors are subject to less onerous financial restrictions; and

 

·                              change the management of our vessels or terminate or materially amend the management agreement relating to any of our vessels.

 

Therefore, we may need to seek permission from our lenders in order to engage in some corporate actions. Our lenders’ interests may be different from ours, and we cannot guarantee that we will be able to obtain our lenders’ permission when needed. This may prevent us from taking actions that are in our best interest and from executing our business strategy of growth through acquisitions and may restrict or limit our ability to pay dividends and finance our future operations.

 

As a result of the adoption of fresh-start reporting, our Consolidated Balance Sheets and Consolidated Statements of Operations subsequent to July 9, 2014 will not be comparable in many respects to our Consolidated Balance Sheets and Consolidated Statements of Operations prior to July 9, 2014.

 

Following the consummation of the Plan, our financial condition and results of operations from and after the Effective Date will not be comparable to the financial condition or results of operations reflected in our historical financial statements due to the application of fresh-start reporting. Fresh-start reporting requires us to adjust our assets and liabilities to their estimated fair values using the acquisition method. Adjustments to the carrying amounts were material and will affect prospective results of operations as balance sheet items are settled, depreciated, amortized or impaired.  As a result, this will make it difficult to assess our performance in relation to prior periods.

 

We depend upon ten charterers for a large part of our revenues.  The loss of one or more of these charterers could adversely affect our financial performance.

 

We have derived a significant part of our revenues from a small number of charterers.  For the year ended December 31, 2015, approximately 80% of our revenues were derived from ten charterers. Of our total revenue for the year ended December 31, 2015, approximately 24.4% and 19.1% of our revenues were derived from two charterers, Swissmarine and Clipper, respectively.  If we were to lose any of these charterers, or if any of these charterers significantly reduced its use of our services or was unable to make charter payments to us, it could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

The aging of our fleet and our practice of purchasing and operating previously owned vessels may result in increased operating costs and vessels off-hire, which could adversely affect our earnings.

 

The majority of our drybulk carriers were previously owned by third parties.  We may seek additional growth through the acquisition of previously owned vessels.  While we typically inspect previously owned vessels before purchase, this does not provide us with the same knowledge about their condition that we would have had if these vessels had been built for and operated exclusively by us.  Accordingly, we may not discover defects or other problems with such vessels before purchase.  Any such hidden defects or problems, when detected, may be expensive to repair, and if not detected, may result in accidents or other incidents for which we may become liable to third parties.  Also, when purchasing previously owned vessels, we do not receive the benefit of any builder warranties if the vessels we buy are older than one year.

 

In general, the costs to maintain a vessel in good operating condition increase with the age of the vessel.  The average age of the vessels in our current fleet is approximately 9.4 years.  Older vessels are typically less fuel-efficient than more recently constructed vessels due to improvements in engine technology and cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers.

 

Governmental regulations, safety and other equipment standards related to the age of vessels may require expenditures for alterations or the addition of new equipment to some of our vessels and may restrict the type of activities in which these vessels may engage.  We cannot assure you that, as our vessels age, market conditions will justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.  As a result, regulations and standards could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

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An increase in operating costs or interest rates could adversely affect our cash flow and financial condition.

 

Our vessel operating expenses include the costs of crewing and insurance.  In addition, to the extent we enter the spot charter market; we would incur the cost of bunkers as part of our voyage expenses.  The price of bunker fuel may increase in the future.  If our vessels suffer damage, they may need to be repaired at a drydocking facility.  The costs of drydock repairs are unpredictable and can be substantial.  Moreover, we expect that the cost of maintenance and drydocking will increase as our fleet ages.  Increases in any of these costs could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

We are also subject to market risks relating to changes in LIBOR rates because we have significant amounts of floating rate debt outstanding.  If LIBOR were to increase significantly, the amount of interest payable on our outstanding indebtedness could increase significantly and could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

We depend to a significant degree upon third-party managers to provide the technical management of our fleet.  Any failure of these technical managers to perform their obligations to us could adversely affect our business.

 

We have contracted the technical management of our fleet, including crewing, maintenance and repair services, to third-party technical management companies.  The failure of these technical managers to perform their obligations could materially and adversely affect our business, results of operations, cash flows, financial condition and ability to pay dividends.  Although we may have rights against our third-party managers if they default on their obligations to us, our shareholders will share that recourse only indirectly to the extent that we recover funds.

 

In the highly competitive international drybulk shipping industry, we may not be able to compete for charters with new entrants or established companies with greater resources.

 

We employ our vessels in a highly competitive market that is capital intensive and highly fragmented.  Competition arises primarily from other vessel owners, some of whom have substantially greater resources than we do.  Competition for the transportation of drybulk cargoes can be intense and depends on price, location, size, age, condition and the acceptability of the vessel and its managers to the charterers.  Due in part to the highly fragmented market, competitors with greater resources could enter and operate larger fleets through consolidations or acquisitions that may be able to offer better prices and fleets than we are able to offer.

 

We are currently prohibited from paying dividends or repurchasing our stock and may not do so when the prohibitions expire.

 

We are currently prohibited from paying dividends under certain of our facilities, the longest restriction of which is in effect until May 1, 2017.  Following May 1, 2017, the amount of dividends we may pay is limited based on the amount of the loans outstanding under the 2015 Revolving Credit Facility and the $98 Million Credit Facility, as well as the ration of the value of vessels and certain other collateral pledge under the $98 Million Credit Facility to the amount of the loan outstanding under such facility.  In addition, dividend may not exceed 50% of our net income (as defined in the 2015 Revolving Credit Facility) and may only be paid out of excess cash flow of Genco and its subsidiaries (as defined in the $98 Million Credit Facility).

 

Moreover, we would make dividend payments to our shareholders only if our Board of Directors, acting in its sole discretion, determines that such payments would be in our best interest and in compliance with relevant legal and contractual requirements.  The principal business factors that our Board of Directors would consider when determining the timing and amount of dividend payments would be our earnings, financial condition and cash requirements at the time.  Marshall Islands law generally prohibits the declaration and payment of dividends other than from surplus.  Marshall Islands law also prohibits the declaration and payment of dividends while a company is insolvent or would be rendered insolvent by the payment of such a dividend.

 

We may incur other expenses or liabilities that would reduce or eliminate the cash available for distribution as dividends.  We may also enter into new agreements or the Marshall Islands or another jurisdiction may adopt laws or regulations that place additional restrictions on our ability to pay dividends.  If we do not pay dividends, the return on your investment would be limited to the price at which you could sell your shares.

 

We may not be able to grow or effectively manage our growth, which could cause us to incur additional indebtedness and other liabilities and adversely affect our business.

 

We may seek growth by expanding our business.  Our future growth will depend on a number of factors, some of which we can control and some of which we cannot.  These factors include our ability to:

 

·                  identify vessels for acquisition;

 

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·                  consummate acquisitions or establish joint ventures;

 

·                  integrate acquired vessels successfully with our existing operations;

 

·                  expand our customer base; and

 

·                  obtain required financing for our existing and new operations.

 

Currently, there is no availability under our existing credit facilities.  These limitations place significant restrictions on financing that we could use for our growth.

 

Growing any business by acquisition presents numerous risks, including undisclosed liabilities and obligations, difficulty obtaining additional qualified personnel, managing relationships with customers and suppliers and integrating newly acquired operations into existing infrastructures.  Future acquisitions could result in the incurrence of additional indebtedness and liabilities that could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.  In addition, competition from other buyers for vessels could reduce our acquisition opportunities or cause us to pay a higher price than we might otherwise pay.  We cannot assure you that we will be successful in executing our growth plans or that we will not incur significant expenses and losses in connection with these plans.

 

We currently maintain all of our cash and cash equivalents with three financial institutions, which subjects us to credit risk.

 

We currently maintain all of our cash and cash equivalents with three financial institutions.  None of our balances are covered by insurance in the event of default by the financial institutions.  The occurrence of such a default of any of these institutions could therefore have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

If we are unable to fund our capital expenditures, we may not be able to continue to operate some of our vessels, which would have a material adverse effect on our business and our ability to pay dividends.

 

In order to fund our capital expenditures, we may be required to incur borrowings or raise capital through the sale of debt or equity securities.  Our ability to borrow money and access the capital markets through future offerings may be limited by our financial condition at the time of any such offering as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control.  Our failure to obtain the funds for necessary future capital expenditures would limit our ability to continue to operate some of our vessels or impair the value of our vessels and could have a material adverse effect on our business, results of operations, financial condition, cash flows and ability to pay dividends.  Even if we are successful in obtaining such funds through financings, the terms of such financings could further limit our ability to pay dividends.

 

We are a holding company, and we depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial obligations or to make dividend payments.

 

We are a holding company, and our subsidiaries, which are all wholly owned by us, either directly or indirectly, conduct all of our operations and own all of our operating assets.  We have no significant assets other than the equity interests in our wholly owned subsidiaries.  As a result, our ability to satisfy our financial obligations and to pay dividends to our shareholders depends on the ability of our subsidiaries to distribute funds to us.  In turn, the ability of our subsidiaries to make dividend payments to us will be dependent on them having profits available for distribution and, to the extent that we are unable to obtain dividends from our subsidiaries, this will limit the discretion of our Board of Directors to pay or recommend the payment of dividends.

 

We are at risk for the creditworthiness of our charterers.

 

The actual or perceived credit quality of our charterers, and any defaults by them, or market conditions affecting the time charter market and the credit markets, may materially affect our ability to obtain the additional capital resources that may be required to purchase additional vessels or may significantly increase our costs of obtaining such capital.  Our inability to obtain additional financing at all or at a higher than anticipated cost may have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

If management is unable to continue to provide reports as to the effectiveness of our internal control over financial reporting or our independent registered public accounting firm is unable to continue to provide us with unqualified attestation reports as to the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.

 

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Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in this and each of our future annual reports on Form 10-K a report containing our management’s assessment of the effectiveness of our internal control over financial reporting and a related attestation of our independent registered public accounting firm.  As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, as amended, management concluded that our internal controls over financial reporting were not effective as of December 31, 2014 as a result of internal control design deficiencies limited to certain aspects of our implementation of fresh-start accounting.  Our independent registered public accounting firm’s attestation report as to the effectiveness of our internal control over financial reporting was qualified as a result.  If, in such future annual reports on Form 10-K, our management cannot provide a report as to the effectiveness of our internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified attestation report as to the effectiveness of our internal control over financial reporting as required by Section 404, investors could lose confidence in the reliability of our Consolidated Financial Statements, which could result in a decrease in the value of our common stock.

 

If we are unable to operate our financial and operations systems effectively or to recruit suitable employees as we expand our fleet, our performance may be adversely affected.

 

Our current financial and operating systems may not be adequate as we implement our plan to expand the size of our fleet, and our attempts to improve those systems may be ineffective.  In addition, as we expand our fleet, we will have to rely on our outside technical managers to recruit suitable additional seafarers and shore-based administrative and management personnel.  We cannot assure you that our outside technical managers will be able to continue to hire suitable employees as we expand our fleet.

 

We may be unable to attract and retain key management personnel and other employees in the shipping industry, which may negatively affect the effectiveness of our management and our results of operations.

 

Our success depends to a significant extent upon the abilities and efforts of our management team and our ability to hire and retain key members of our management team.  The loss of any of these individuals could adversely affect our business prospects and financial condition.  Difficulty in hiring and retaining personnel could have a material adverse effect our business, results of operations, cash flows, financial condition and ability to pay dividends.  We do not intend to maintain “key man” life insurance on any of our officers.

 

Arrangements relating to MEP could require significant time and attention from our personnel and may result in conflicts of interest.

 

We provide technical services for drybulk vessels purchased by MEP under an agency agreement between us and MEP.  These services include oversight of crew management, insurance, drydocking, ship operations and financial statement preparation, but do not include chartering services.  This requires substantial time and attention from these individuals and reduces their availability to serve us.  Our Chairman is a director of and has a minority interest in MEP.  This arrangement was approved by an independent committee of our Board of Directors.  Although we do not provide MEP with chartering services or assistance with the purchase and sale of vessels, the arrangement under the agency agreement may not always be in our best interest or that of our shareholders and could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

Our Chairman may pursue business opportunities in our industry that may conflict with our interests.

 

Our Chairman, Peter C. Georgiopoulos, is not an employee of our company and is not contractually committed to remain as a director of our company or to refrain from other activities in our industry.  Mr. Georgiopoulos actively reviews potential investment opportunities in the shipping industry, including the drybulk sector, from time to time.  Mr. Georgiopoulos is a director of and has a minority interest in MEP, which currently owns an aggregate of seven drybulk vessels.  Mr. Georgiopoulos has informed us that so long as he is a director of our company, prior to making an investment in an entity owning or operating drybulk vessels, he intends to disclose the details of such investment to our board and our independent directors and allow us to pursue the opportunity to the extent we choose to do so and are able.  However, in the event we choose not to pursue any such opportunity or are not able to obtain such an opportunity, Mr. Georgiopoulos may proceed, either alone or with others, with such investments.  As a result of such investments, Mr. Georgiopoulos may have independent interests in the ownership and operation of drybulk vessels that may conflict with our interests.

 

We may not have adequate insurance to compensate us if we lose our vessels or to compensate third parties.

 

There are a number of risks associated with the operation of ocean-going vessels, including mechanical failure, collision, human error, war, terrorism, piracy, property loss, cargo loss or damage and business interruption due to political circumstances in foreign countries, hostilities and labor strikes.  Any of these events may result in loss of revenues, increased costs and decreased cash

 

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flows.  In addition, the operation of any vessel is subject to the inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade.

 

We are insured against tort claims and some contractual claims (including claims related to environmental damage and pollution) through memberships in protection and indemnity associations or clubs, or P&I Associations.  As a result of such membership, the P&I Associations provide us coverage for such tort and contractual claims.  We also carry hull and machinery insurance and war risk insurance for our fleet.  We insure our vessels for third-party liability claims subject to and in accordance with the rules of the P&I Associations in which the vessels are entered.  We currently maintain insurance against loss of hire, which covers business interruptions that result in the loss of use of a vessel.  We can give no assurance that we will be adequately insured against all risks.  We may not be able to obtain adequate insurance coverage for our fleet in the future.  The insurers may not pay particular claims.  Our insurance policies contain deductibles for which we will be responsible and limitations and exclusions which may increase our costs or lower our revenue.

 

We cannot assure you that we will be able to renew our insurance policies on the same or commercially reasonable terms, or at all, in the future.  For example, more stringent environmental regulations have led in the past to increased costs for, and in the future may result in the lack of availability of, protection and indemnity insurance against risks of environmental damage or pollution.  Any uninsured or underinsured loss could harm our business, results of operations, cash flows, financial condition and ability to pay dividends.  In addition, our insurance may be voidable by the insurers as a result of certain of our actions, such as our ships failing to maintain certification with applicable maritime self-regulatory organizations.  Further, we cannot assure you that our insurance policies will cover all losses that we incur, or that disputes over insurance claims will not arise with our insurance carriers.  Any claims covered by insurance would be subject to deductibles, and since it is possible that a large number of claims may be brought, the aggregate amount of these deductibles could be material.  In addition, our insurance policies are subject to limitations and exclusions, which may increase our costs or lower our revenues, thereby possibly having a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

 

We are subject to funding calls by our protection and indemnity associations, and our associations may not have enough resources to cover claims made against them.

 

We are indemnified for legal liabilities incurred while operating our vessels through membership in P&I Associations.  P&I Associations are mutual insurance associations whose members must contribute to cover losses sustained by other association members.  The objective of a P&I Association is to provide mutual insurance based on the aggregate tonnage of a member’s vessels entered into the association.  Claims are paid through the aggregate premiums of all members of the association, although members remain subject to calls for additional funds if the aggregate premiums are insufficient to cover claims submitted to the association. Claims submitted to the association may include those incurred by members of the association, as well as claims submitted to the association from other P&I Associations with which our P&I Association has entered into interassociation agreements.  We cannot assure you that the P&I Associations to which we belong will remain viable or that we will not become subject to additional funding calls which could adversely affect us.

 

We may have to pay U.S. tax on U.S. source income, which would reduce our net income and cash flows.

 

If we do not qualify for an exemption pursuant to Section 883 of the U.S. Internal Revenue Code of 1986, as amended, or the “Code” (which we refer to as the “Section 883 exemption”), then we will be subject to U.S. federal income tax on our shipping income that is derived from U.S. sources.  If we are subject to such tax, our net income and cash flows would be reduced by the amount of such tax.

 

We will qualify for the Section 883 exemption if, among other things, (i) our stock is treated as primarily and regularly traded on an established securities market in the United States (which we refer to as the “publicly traded test”), (ii) we satisfy the qualified shareholder test or the controlled foreign corporation test.  Under applicable Treasury Regulations, the publicly-traded test cannot be satisfied in any taxable year in which persons who actually or constructively own 5% or more of our stock (which we sometimes refer to as “5% shareholders”), together own 50% or more of our stock (by vote or value) for more than half the days in such year (which we sometimes refer to as the “five percent override rule”), unless an exception applies.  A foreign corporation satisfies the qualified shareholder test if more than 50 percent of the value of its outstanding shares is owned (or treated as owned by applying certain attribution rules) for at least half of the number of days in the foreign corporation’s taxable year by one or more “qualified shareholders.”  A qualified shareholder includes a foreign corporation that, among other things, satisfies the publicly traded test.

 

Based on the ownership and trading of our stock in 2015, we believe that we satisfied the publicly traded test and qualified for the Section 883 exemption in 2015.  If we do not qualify for the Section 883 exemption, our U.S. source shipping income, i.e., 50% of our gross shipping income attributable to transportation beginning or ending in the U.S., would be subject to a 4% tax without allowance for deductions (which we sometimes refer to as the “U.S. gross transportation income tax”).  We can provide no assurance

 

33



 

that changes and shifts in the ownership of our stock by 5% shareholders will not preclude us from qualifying for the Section 883 exemption in 2016 or in future taxable years.

 

Baltic Trading’s stock was primarily traded on an established securities market in the U.S. in 2015.  However, we indirectly owned shares of Baltic Trading’s Class B Stock which provided us with over 50% of the combined voting power of all classes of Baltic Trading’s voting stock since Baltic Trading’s IPO was completed on March 15, 2010 until the Merger with Baltic Trading on July 17, 2015 (pursuant to which GS&T exchanged its shares for Baltic Trading’s outstanding common stock).  As a result, Baltic Trading’s Class B Stock will not be treated as regularly traded (a corporation’s stock is not regularly traded if, among other things, 50 percent or more of its stock (by vote or value) is not listed on one or more established securities markets) and Baltic Trading will not satisfy the publicly traded test in 2015 (and cannot satisfy the qualified shareholder test or the controlled foreign corporation test in 2015).  Thus, Baltic Trading does not qualify for a Section 883 exemption in 2015 and was subject to the U.S. gross transportation income tax on its U.S. source shipping income during the years ended December 31, 2015, 2014 and 2013.  During the year ended December 31, 2015 and the period from July 9 to December 31, 2014, Baltic Trading earned and paid U.S. gross transportation income tax on its U.S. source shipping income of approximately $1.7 million and $0.5 million, respectively.  During the period from January 1 to July 9, 2014 and the year ended December 31, 2013, Baltic Trading earned and paid U.S. gross transportation income tax on its U.S. source shipping income of approximately $1.0 million and $0.8 million, respectively.

 

As a result of the Merger, Baltic Trading should qualify for the Section 883 exemption under the qualified shareholder test in 2016 and future taxable years as long as we qualify for the Section 883 exemption by satisfying the publicly-traded test in such years.

 

In addition to our shipping income, we derive income from the technical and commercial management services that we provide to Baltic Trading (until the date of the Merger) and MEP, which results in U.S. source service income for which we are subject to and pay U.S. federal income tax on a net basis.  This taxable net income totaled approximately $3.9 million and $2.2 million during the year ended December 31, 2015 and the period from July 9 to December 31, 2014.  Additionally, this taxable net income totaled approximately $1.7 million and $4.2 million during the period from January 1 to July 9, 2014 and during the year ended December 31, 2013.

 

U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S. shareholders.

 

A foreign corporation generally will be treated as a “passive foreign investment company,” which we sometimes refer to as a PFIC, for U.S. federal income tax purposes if, after applying certain look through rules, either (1) at least 75% of its gross income for any taxable year consists of “passive income” or (2) at least 50% of the average value or adjusted bases of its assets (determined on a quarterly basis) produce or are held for the production of passive income, i.e., “passive assets.”  U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to distributions they receive from the PFIC and gain, if any, they derive from the sale or other disposition of their stock in the PFIC.

 

For purposes of these tests, “passive income” generally includes dividends, interest, gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business, as defined in applicable Treasury Regulations.  Income derived from the performance of services does not constitute “passive income.” By contrast, rental income would generally constitute passive income unless such income was treated under specific rules as derived from the active conduct of a trade or business.  We do not believe that our past or existing operations would cause, or would have caused, us to be deemed a PFIC with respect to any taxable year.  In this regard, we treat the gross income we derive or are deemed to derive from our time and spot chartering activities as services income, rather than rental income.  Accordingly, we believe that (1) our income from our time and spot chartering activities does not constitute passive income and (2) the assets that we own and operate in connection with the production of that income do not constitute passive assets.

 

While there is no direct legal authority under the PFIC rules addressing our method of operation, there is legal authority supporting this position consisting of pronouncements by the U.S. Internal Revenue Service (which we sometimes refer to as the “IRS”), concerning the characterization of income derived from time charters and voyage charters as services income for other tax purposes.  However, it should be noted that there is also legal authority, consisting of case law, which characterizes time charter income as rental income rather than services income for other tax purposes.

 

No assurance can be given that the IRS or a court of law will accept our position, and there is a risk that the IRS or a court of law could determine that we are a PFIC.  Moreover, there can be no assurance that we will not become a PFIC in any future taxable year because the PFIC test is an annual test, there are uncertainties in the application of the PFIC rules, and although we intend to manage our business so as to avoid PFIC status to the extent consistent with our other business goals, there could be changes in the nature and extent of our operations in future taxable years.

 

34



 

If we were to be treated as a PFIC for any taxable year (and regardless of whether we remain a PFIC for subsequent taxable years), our U.S. shareholders would face adverse U.S. tax consequences.  Under the PFIC rules, unless a shareholder makes certain elections available under the Code (which elections could themselves have adverse consequences for such shareholder), such shareholder would be liable to pay U.S. federal income tax at the highest applicable ordinary income tax rates upon the receipt of excess distributions and upon any gain from the disposition of our common stock, plus interest on such amounts, as if such excess distribution or gain had been recognized ratably over the shareholder’s holding period of our common stock.

 

Because we generate all of our revenues in U.S. dollars but incur a portion of our expenses in other currencies, exchange rate fluctuations could hurt our results of operations.

 

We generate all of our revenues in U.S. dollars, but we may incur drydocking costs, special survey fees and other expenses in other currencies.  If our expenditures on such costs and fees were significant, and the U.S. dollar were weak against such currencies, our business, results of operations, cash flows, financial condition and ability to pay dividends could be adversely affected.

 

Legislative action relating to taxation could materially and adversely affect us.

 

Our tax position could be adversely impacted by changes in tax laws, tax treaties or tax regulations or the interpretation or enforcement thereof by any tax authority. For example, legislative proposals have been introduced in the U.S. Congress which, if enacted, could change the circumstances under which we would be treated as a U.S. person for U.S. federal income tax purposes, which could materially and adversely affect our effective tax rate and cash tax position and require us to take action, at potentially significant expense, to seek to preserve our effective tax rate and cash tax position. We cannot predict the outcome of any specific legislative proposals.

 

RISK FACTORS RELATED TO OUR COMMON STOCK

 

Certain shareholders own large portions of our outstanding common stock, which may limit your ability to influence our actions.

 

Certain shareholders currently hold significant percentages of our post-restructuring common stock. As of December 31, 2015, affiliates of Centerbridge Partners, L.P. owned approximately 31.22%; affiliates of Apollo Global Management owned approximately 14.05%; and affiliates of Strategic Value Partners, LLC owned approximately 17.33% of our common stock.

 

To the extent a significant percentage of the ownership of our common stock is concentrated in a small number of holders, such holders will be able to influence the outcome of any shareholder vote, including the election of directors, the adoption or amendment of provisions in our articles of incorporation or by-laws and possible mergers, corporate control contests and other significant corporate transactions.  This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, merger, consolidation, takeover or other business combination involving us.  This concentration of ownership could also discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which could in turn have an adverse effect on the market price of our common stock.

 

If we cannot meet the continued listing requirements of the New York Stock Exchange (the “NYSE”), the NYSE may delist our common shares, which would have an adverse impact on the trading volume, liquidity and market price of our common shares.

 

On February 23, 2016, we were notified by the NYSE that the average closing price of our common shares had fallen below $1.00 per share over a period of 30 consecutive trading days, which is the minimum average share price required by the NYSE under Section 802.01C of the NYSE Listed Company Manual. The notice has no immediate impact on the listing of our common shares, which will continue to be listed and traded on the NYSE during the six-month period described below, subject to our compliance with other listing standards.

 

We have six months following receipt of the NYSE’s notice to regain compliance with the NYSE’s minimum share price requirement. We can regain compliance at any time during the six-month cure period if on the last trading day of any calendar month during the cure period our common shares have a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of such month. Notwithstanding the foregoing, if we determine that we must cure the price condition by taking an action that will require approval of our stockholders, we may also regain compliance by (i) obtaining the requisite stockholder approval by no later than our next annual meeting, (ii) implementing the action promptly thereafter and (iii) the price of our common shares promptly exceeding $1.00 per share, and the price remaining above that level for at least the following 30 trading days.

 

A delisting of our common stock from the NYSE would negatively impact us because it could: (i) reduce the liquidity and market price of our common stock; (ii) reduce the number of investors willing to hold or acquire our common stock, which could

 

35



 

negatively impact our ability to raise equity financing; (iii) limit our ability offer and sell freely tradable securities, thereby preventing us from accessing the public capital markets, (iv) impair our ability to provide equity incentives to our employees, and (v) lead to a default under one or more of our credit facilities. Certain of our credit facilities include a covenant requiring our common stock to be listed on the NYSE or another internationally recognized stock exchange; thus, if our common stock were to be delisted from the NYSE and not listed on another internationally recognized exchange, we could be in default under such facilities.  Given the cross default provisions in our other credit facilities, we could be in default under those facilities as well, with the result that some or all of our indebtedness could be declared immediately due and payable, and we may not have sufficient assets available to satisfy our obligations.

 

Because we are a foreign corporation, you may not have the same rights or protections that a shareholder in a United States corporation may have.

 

We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of corporate law and may make it more difficult for our shareholders to protect their interests.  Our corporate affairs are governed by our amended and restated articles of incorporation and bylaws and the Marshall Islands Business Corporations Act, or BCA.  The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States.  The rights and fiduciary responsibilities of directors under the law of the Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain U.S. jurisdictions and there have been few judicial cases in the Marshall Islands interpreting the BCA.  Shareholder rights may differ as well.  While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, our public shareholders may have more difficulty in protecting their interests in the face of actions by the management, directors or controlling shareholders than would shareholders of a corporation incorporated in a U.S. jurisdiction.  Therefore, you may have more difficulty in protecting your interests as a shareholder in the face of actions by the management, directors or controlling shareholders than would shareholders of a corporation incorporated in a United States jurisdiction.

 

Future sales of our common stock could cause the market price of our common stock to decline.

 

The market price of our common stock could decline due to sales of a large number of shares in the market, including sales of shares by our large shareholders, or the perception that these sales could occur.  These sales could also make it more difficult or impossible for us to sell equity securities in the future at a time and price that we deem appropriate to raise funds through future offerings of common stock.  We may need to raise capital through sales of common stock or other securities for us to raise sufficient funding for, meet a condition of, or constitute  part or all of the consideration required to effect potential transactions we are considering to resolve our liquidity issues.

 

We entered into a registration rights agreement that provides parties who received 10% or more of our common stock in our reorganization with demand and piggyback registration rights. All other parties to this agreement who received our common stock in the reorganization have piggyback registration rights only.

 

We may need to raise additional capital in the future, which may not be available on favorable terms or at all or which may dilute our common stock or adversely affect its market price.

 

We may require additional capital to expand our business and increase revenues, add liquidity in response to negative economic conditions, meet unexpected liquidity needs caused by industry volatility or uncertainty and reduce our outstanding indebtedness under our existing facilities. To the extent that our existing capital and borrowing capabilities are insufficient to meet these requirements and cover any losses, we will need to raise additional funds through debt or equity financings, including offerings of our common stock, securities convertible into our common stock, or rights to acquire our common stock or curtail our growth and reduce our assets or restructure arrangements with existing security holders. Any equity or debt financing, or additional borrowings, if available at all, may be on terms that are not favorable to us. Equity financings could result in dilution to our stockholders, as described further below, and the securities issued in future financings may have rights, preferences and privileges that are senior to those of our common stock. If our need for capital arises because of significant losses, the occurrence of these losses may make it more difficult for us to raise the necessary capital. If we cannot raise funds on acceptable terms if and when needed, we may not be able to take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated requirements.

 

Future issuances of our common stock could dilute our shareholders’ interests in our company.

 

We may, from time to time, issue additional shares of common stock to support our growth strategy, reduce debt or provide us with capital for other purposes that our Board of Directors believes to be in our best interest.  To the extent that an existing shareholder does not purchase additional shares that we may issue, that shareholder’s interest in our company will be diluted, which means that its percentage of ownership in our company will be reduced.  Following such a reduction, that shareholder’s common stock would represent a smaller percentage of the vote in our Board of Directors’ elections and other shareholder decisions.

 

36



 

Volatility in the market price and trading volume of our common stock could adversely impact the trading price of our common stock.

 

The stock market in recent years has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. These broad market factors may materially reduce the market price of our common stock, regardless of our operating performance. The market price of our common stock, which has experienced significant price and volume fluctuations in recent months, could continue to fluctuate significantly for many reasons, including in response to the risks described herein or for reasons unrelated to our operations, such as reports by industry analysts, investor perceptions or negative announcements by our competitors or suppliers regarding their own performance, as well as industry conditions and general financial, economic and political instability. A decrease in the market price of our common stock would adversely impact the value of your shares of common stock.

 

Provisions of our amended and restated articles of incorporation and by-laws may have anti-takeover effects which could adversely affect the market price of our common stock.

 

Several provisions of our amended and restated articles of incorporation and by-laws, which are summarized below, may have anti-takeover effects.  These provisions are intended to avoid costly takeover battles, lessen our vulnerability to a hostile change of control and enhance the ability of our Board of Directors to maximize shareholder value in connection with any unsolicited offer to acquire our company.  However, these anti-takeover provisions could also discourage, delay or prevent (1) the merger or acquisition of our company by means of a tender offer, a proxy contest or otherwise that a shareholder may consider in its best interest and (2) the removal of incumbent officers and directors.

 

Classified Board of Directors.

 

Our amended and restated articles of incorporation provide for the division of our Board of Directors into two classes of directors, with the four members of Class I serving successive terms of one year and the four members of Class I serving an initial term of two years, after which the Board of Directors will cease to be classified.  This classified board provision could discourage a third party from making a tender offer for our shares or attempting to obtain control of us.  It could also delay shareholders who do not agree with the policies of our Board of Directors from removing a majority of our Board of Directors in a single year.

 

Election and Removal of Directors.

 

Our amended and restated articles of incorporation prohibit cumulative voting in the election of directors.  Our by-laws require parties other than the board of directors to give advance written notice of nominations for the election of directors.  Our articles of incorporation also provide that, through the conclusion of the second annual meeting of shareholders following July 9, 2014, our directors may be removed only for cause and only upon the affirmative vote of a majority of the outstanding shares of our capital stock entitled to vote for those directors or by a majority of the members of the board of directors then in office.  These provisions may discourage, delay or prevent the removal of incumbent officers and directors.

 

Limited Actions by Shareholders.

 

Our amended and restated articles of incorporation and our by-laws provide that, consistent with Marshall Islands law, any action required or permitted to be taken by our shareholders must be effected at an annual or special meeting of shareholders or by the unanimous written consent of our shareholders.  Our amended and restated articles of incorporation and our by-laws provide that, subject to certain exceptions, our Chairman, President, or Secretary at the direction of the Board of Directors or our Secretary at the request of one or more shareholders that hold in the aggregate at least a majority of our outstanding shares entitled to vote may call special meetings of our shareholders, and the business transacted at the special meeting is limited to the purposes stated in the notice.

 

Advance Notice Requirements for Shareholder Proposals and Director Nominations.

 

Our by-laws provide that shareholders seeking to nominate candidates for election as directors or to bring business before an annual meeting of shareholders must provide timely notice of their proposal in writing to the corporate secretary.  Generally, to be timely, a shareholder’s notice must be received at our principal executive offices not less than 120 days nor more than 150 days before the anniversary date of the immediately preceding annual meeting of shareholders.  Our by-laws also specify requirements as to the form and content of a shareholder’s notice.  These provisions may impede a shareholder’s ability to bring matters before an annual meeting of shareholders or make nominations for directors at an annual meeting of shareholders.

 

37



 

It may not be possible for our investors to enforce U.S. judgments against us.

 

We are incorporated in the Republic of the Marshall Islands and most of our subsidiaries are also organized in the Marshall Islands.  Substantially all of our assets and those of our subsidiaries are located outside the United States.  As a result, it may be difficult or impossible for United States shareholders to serve process within the United States upon us or to enforce judgment upon us for civil liabilities in United States courts.  In addition, you should not assume that courts in the countries in which we are incorporated or where our assets are located (1) would enforce judgments of United States courts obtained in actions against us based upon the civil liability provisions of applicable United States federal and state securities laws or (2) would enforce, in original actions, liabilities against us based upon these laws.

 

ITEM 1B.                                         UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2.  PROPERTIES

 

We do not own any real property.  In September 2005, we entered into a 15-year lease for office space in New York, New York for which there was a free rental period from September 1, 2005 to July 31, 2006.  On January 6, 2012, we ceased use of this space and entered into a sublease agreement effective November 1, 2013.  Pursuant to the Plan that was approved by the Bankruptcy Court, we rejected the lease agreement on the Effective Date.  Refer to Note 21 — Commitments and Contingencies in our Consolidated Financial statements for further information.

 

Effective April 4, 2011, we entered into a seven-year sub-sublease agreement for additional office space in New York, New York.  The term of the sub-sublease commenced June 1, 2011, with a free base rental period until October 31, 2011.  Following the expiration of the free base rental period, the monthly base rental payments are $82,000 per month until May 31, 2015 and thereafter will be $90,000 per month until the end of the seven-year term.  We have also entered into a direct lease with the over-landlord of such office space that commences immediately upon the expiration of such sub-sublease agreements, for a term covering the period from May 1, 2018 to September 30, 2025; the direct lease provides for a free base rental period from May 1, 2018 to September 30, 2018.  Following the expirations of the free base rental period, the monthly base rental payments will be $186,000 per month from October 1, 2018 to April 30, 2023 and $204,000 per month from May 1, 2023 to September 30, 2025.  For accounting purposes, the sub-sublease agreement and direct lease agreement with the landlord constitute one lease agreement.  As a result of the straight-line rent calculation generated by the free rent period and the tenant work credit, the monthly straight-line rental expense for the term of the entire lease from June 1, 2011 to September 30, 2025 is $130,000.  On the Effective Date, a revised straight-line rent calculation was completed as part of fresh-start reporting which resulted in a revised monthly straight-line rental expense of $150,000 beginning on the Effective Date until September 30, 2025.

 

Future minimum rental payments on the above lease for the next five years and thereafter are as follows:  $1.1 million annually for 2016 through 2017, $0.9 million for 2018, $2.2 million annually for 2019 through 2020 and a total of $11.1 million for the remaining term of the lease.

 

For a description of our vessels, see “Our Fleet” in Item 1, “Business” in this report.

 

We consider each of our significant properties to be suitable for its intended use.

 

ITEM 3.  LEGAL PROCEEDINGS

 

We commenced the Chapter 11 Cases to implement our restructuring. Pursuant to the Bankruptcy Code, the filing of a bankruptcy petition automatically stays certain actions against us, including actions to collect pre-petition indebtedness or to exercise control over the property of our bankruptcy estates. The Plan provided for the treatment of allowed claims against our bankruptcy estates, including pre-petition liabilities. The treatment of such liabilities under the Plan resulted in a material adjustment to our financial statements and has been recorded in Reorganization items, net in our Consolidated Statements of Operation.  Information concerning the Chapter 11 Cases in Item 1, “Business” is incorporated herein by reference.

 

In April 2015, six class action complaints were filed in the Supreme Court of the State of New York, County of New York, styled Erol Sarikaya v. Peter C. Georgiopoulos et al., Index No. 651244/2015, filed on April 15, 2015, voluntarily dismissed, and refiled as Joshua Bourne v. Peter C. Georgiopoulos et al., Index No. 651429/2015, filed on April 28, 2015, Justin Wilson v. Baltic Trading Ltd., et al., Index No. 651241/2015, filed on April 15, 2015, Sangeetha Ganesan v. Baltic Trading Limited et al., Index No. 651279/2015, filed on April 17, 2015, Edward Braunstein v. Peter C. Georgiopoulos et al., Index No. 651368/2015, filed on April 23, 2015, Larry Williams v. Baltic Trading Ltd., et al., Index No. 651371/2015, filed on April 23, 2015, and Larry Goldstein and Bernhard Stomporowski v. John C. Wobensmith et al., Index No. 651407/2015, filed on April 27, 2015. All six complaints purport to be brought by and on behalf of the Baltic Trading’s shareholders. The plaintiff in each action alleges the proposed merger does not

 

38



 

fairly compensate Baltic Trading’s shareholders and undervalues Baltic Trading. Each lawsuit names as defendants some or all of the Company, Baltic Trading, the individual members of Baltic Trading’s board, the Company’s and Baltic Trading’s President, and the Company’s merger subsidiary. The claims generally allege (i) breaches of fiduciary duties of good faith, due care, disclosure to shareholders, and loyalty, including for failing to maximize shareholder value, and (ii) aiding and abetting those breaches. Among other relief, the complaints seek an injunction against the merger, declaratory judgments that the individual defendants breached fiduciary duties, rescission of the merger agreement, and unspecified damages.  On May 26, 2015, the six above described actions were consolidated under the caption In Re Baltic Trading Ltd. Stockholder Litigation, Index No. 651241/2015, and a consolidated class action complaint was filed on June 10, 2015 (the “Consolidated Complaint”).

 

On June 30, 2015, Defendants moved to dismiss the Consolidated Complaint in its entirety.  Plaintiffs subsequently served an Amended Consolidated Complaint, and Defendants directed their motion to dismiss to that amended complaint.  The motion to dismiss is pending.

 

On July 9, 2015, plaintiffs in that action moved to enjoin the merger vote, scheduled to take place on July 17, 2015.  The motion was thereafter fully briefed and argued on July 15, 2015.  The motion to enjoin the vote was denied.  Plaintiffs sought an emergency injunction and temporary restraining order from the New York State Appellate Division, First Department the following day, on July 16, 2015.  The Appellate Division denied the request, and the vote, and subsequent merger, proceeded as scheduled on July 17, 2015.  Plaintiffs thereafter withdrew the appeal.

 

Separately, on or around May 12, 2015, a complaint was filed in the United States District Court for the Southern District of New York, styled Todd J. Biederman v. Baltic Trading Limited et al., 15-cv-3711 (RJS), seeking relief pursuant to Sections 14(a) and 20(a) of the Exchange Act and also alleging breaches of fiduciary duties and aiding and abetting those breaches. That complaint alleges facts and seeks relief similar to that in the actions in the New York State Supreme Court, in addition to claims regarding the adequacy of the preliminary joint proxy statement/prospectus and Form S-4 disclosures.  By order dated December 29, 2015, the case was dismissed without prejudice for failure to prosecute.

 

On March 28, 2014, the Genco Auvergne was arrested due to a disputed claim with the charterer of one of our other vessels, namely the Genco Ardennes.  In order for us to release the Genco Auvergne from its arrest, we entered into a cash collateralized $0.9 million bank guarantee with Skandinaviska Enskilda Banken AB (the “SEB Bank Guarantee”) on April 3, 2014.  The vessel has since been released from its arrest and the bank guarantee was released from escrow to us on June 22, 2015.  The SEB Bank Guarantee resulted in additional indebtedness.  As we were in default under the covenants of our 2007 Credit Facility due to the default on a scheduled debt amortization payment due on March 31, 2014, on April 3, 2014 we received a consent from the lenders under the 2007 Credit Facility to incur this additional indebtedness.  Also, under the $253 Million Term Loan Facility for which the Genco Auvergne is collateralized, we may not incur additional indebtedness related to its collateralized vessels under this facility.  We also received a consent from the lenders under the $253 Million Term Loan Facility on April 3, 2014 in order to enter the SEB Bank Guarantee.

 

We have not been involved in any other legal proceedings which we believe are likely to have, or have had a significant effect on our business, financial position, results of operations or cash flows, nor are we aware of any proceedings that are pending or threatened which we believe are likely to have a significant effect on our business, financial position, results of operations or liquidity.  From time to time, we may be subject to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty claims.  We expect that these claims would be covered by insurance, subject to customary deductibles.  Those claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES

 

MARKET INFORMATION, HOLDERS AND DIVIDENDS

 

Prior to the effective date of our plan of reorganization, our common stock traded on the New York Stock Exchange (the “NYSE”), the OTCQB marketplace, and the OTC Pink marketplace.  Upon such effective date, our original common stock was canceled, and our new common stock subsequently began trading on the OTC Bulletin Board under the symbol “GSKNF.”  The following table summarizes the quarterly high and low bid quotations prices per share of our common stock as reported on the OTC markets from July 15, 2014 to July 17, 2015. No prior established public trading market existed for our new common stock prior to this date.  The OTC markets quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not

 

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necessarily represent actual transactions.  On July 20, 2015, after consummation of the Merger with Baltic Trading as discussed in Item 1, “Business,” our stock commenced trading on the New York Stock Exchange under the symbol “GNK.”

 

FISCAL YEAR ENDED DECEMBER 31, 2015

 

HIGH

 

LOW

 

 

 

 

 

 

 

1st Quarter

 

$

13.50

 

$

8.25

 

2nd Quarter

 

$

8.70

 

$

6.65

 

3rd Quarter

 

$

7.85

 

$

3.82

 

4th Quarter

 

$

3.97

 

$

1.12

 

 

FISCAL YEAR ENDED DECEMBER 31, 2014

 

HIGH

 

LOW

 

 

 

 

 

 

 

3rd Quarter

 

$

21.45

 

$

15.00

 

4th Quarter

 

$

19.85

 

$

12.75

 

 

As of March 15, 2016, there were approximately 39 holders of record of our common stock.

 

We have not declared or paid any dividends since the third quarter of 2008 and currently do not plan to resume the payment of dividends.

 

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PART II

 

ITEM 6.                                                SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

 

 

Successor

 

 

Predecessor

 

 

 

For the

 

Period from

 

 

Period from

 

 

 

 

 

 

 

 

 

Year

 

July 9 to

 

 

January 1 to

 

 

 

 

 

 

 

 

 

Ended

 

December 31,

 

 

July 9,

 

 

 

 

 

 

 

 

 

December 31,

 

2014 (2)

 

 

2014 (2)

 

For the Years Ended December 31,

 

 

 

2015

 

(restated)

 

 

(restated)

 

2013

 

2012

 

2011

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(U.S. dollars in thousands except for share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voyage revenues

 

$

150,784

 

$

98,817

 

 

$

118,759

 

$

224,179

 

$

223,159

 

$

388,929

 

Service revenues

 

3,175

 

1,584

 

 

1,701

 

3,285

 

3,294

 

3,285

 

Total revenues

 

$

153,959

 

$

100,401

 

 

$

120,460

 

$

227,464

 

$

226,453

 

$

392,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voyage expenses

 

20,257

 

7,525

 

 

4,140

 

8,046

 

7,009

 

4,457

 

Vessel operating expenses

 

122,008

 

56,943

 

 

64,670

 

111,671

 

114,318

 

105,514

 

General, administrative and management fees

 

83,902

 

36,915

 

 

31,371

 

34,031

 

35,673

 

33,928

 

Depreciation and amortization

 

79,556

 

36,714

 

 

75,952

 

140,743

 

139,063

 

136,203

 

Other operating income

 

 

(530

)

 

 

(121

)

(265

)

(527

)

Impairment of vessel assets

 

39,893

 

 

 

 

 

 

 

Loss on sale of vessels

 

1,210

 

 

 

 

 

 

 

Goodwill impairment

 

 

166,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

346,826

 

303,634

 

 

176,133

 

294,370

 

295,798

 

279,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(192,867

)

(203,233

)

 

(55,673

)

(66,906

)

(69,345

)

112,639

 

Other expense

 

(58,595

)

(7,538

)

 

(41,122

)

(88,217

)

(87,209

)

(86,186

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before reorganization items, net

 

(251,462

)

(210,771

)

 

(96,795

)

(155,123

)

(156,554

)

26,453

 

Reorganization items, net

 

(1,085

)

(1,591

)

 

(915,640

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income before income taxes

 

(252,547

)

(212,362

)

 

(1,012,435

)

(155,123

)

(156,554

)

26,453

 

Income tax expense

 

(1,821

)

(996

)

 

(815

)

(1,898

)

(1,222

)

(1,385

)

Net (loss) income

 

(254,368

)

(213,358

)

 

(1,013,250

)

(157,021

)

(157,776

)

25,068

 

Less: Net loss attributable to noncontrolling interest

 

(59,471

)

(31,064

)

 

(62,101

)

(9,280

)

(12,848

)

(318

)

Net (loss) income attributable to Genco Shipping & Trading Limited

 

$

(194,897

)

$

(182,294

)

 

$

(951,149

)

$

(147,741

)

$

(144,928

)

$

25,386

 

Net (loss) earnings per share - basic

 

$

(2.96

)

$

(3.02

)

 

$

(21.83

)

$

(3.42

)

$

(3.47

)

$

0.72

 

Net (loss) earnings per share - diluted

 

$

(2.96

)

$

(3.02

)

 

$

(21.83

)

$

(3.42

)

$

(3.47

)

$

0.72

 

Weighted average common shares outstanding - Basic

 

65,831,637

 

60,360,515

 

 

43,568,942

 

43,249,070

 

41,727,075

 

35,179,244

 

Weighted average common shares outstanding - Diluted

 

65,831,637

 

60,360,515

 

 

43,568,942

 

43,249,070

 

41,727,075

 

35,258,205

 

 

41



 

 

 

Successor

 

 

Predecessor

 

 

 

For the

 

Period from

 

 

Period from

 

 

 

 

 

 

 

 

 

Year

 

July 9 to

 

 

January 1 to

 

 

 

 

 

 

 

 

 

Ended

 

December 31,

 

 

July 9,

 

 

 

 

 

 

 

 

 

December 31,

 

2014 (2)

 

 

2014 (2)

 

For the Years Ended December 31,

 

 

 

2015

 

(restated)

 

 

(restated)

 

2013

 

2012

 

2011

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(U.S. dollars in thousands, at end of period)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

121,074

 

$

83,414

 

 

$

N/A

 

$

122,722

 

$

72,600

 

$

227,968

 

Total assets

 

1,724,074

 

1,752,913

 

 

N/A

 

2,957,254

 

2,843,371

 

3,119,277

 

Total debt (current and long-term, including notes payable)

 

588,434

 

430,135

 

 

N/A

 

1,595,945

 

1,524,357

 

1,694,393

 

Total equity

 

1,105,966

 

1,292,774

 

 

N/A

 

1,308,805

 

1,261,207

 

1,361,618

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(U.S. dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(56,086

)

$

(26,835

)

 

$

(33,317

)

$

(3,144

)

$

(18,834

)

$

158,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(56,774

)

(44,101

)

 

(30,535

)

(146,555

)

(3,669

)

(133,367

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

150,520

 

18,273

 

 

77,207

 

199,821

 

(132,865

)

(67,725

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA (1)

 

$

(93,598

)

$

(137,010

)

 

$

(833,366

)

$

83,041

 

$

82,537

 

$

249,080

 

 

 


(1)                     EBITDA represents net (loss) income attributable to Genco Shipping & Trading Limited plus net interest expense, taxes and depreciation and amortization.  EBITDA is included because it is used by management and certain investors as a measure of operating performance. EBITDA is used by analysts in the shipping industry as a common performance measure to compare results across peers.  Our management uses EBITDA as a performance measure in our consolidated internal financial statements, and it is presented for review at our board meetings.  We believe that EBITDA is useful to investors as the shipping industry is capital intensive which often results in significant depreciation and cost of financing.  EBITDA presents investors with a measure in addition to net income to evaluate our performance prior to these costs.  EBITDA is not an item recognized by U.S. GAAP (i.e. non-GAAP measure) and should not be considered as an alternative to net income, operating income or any other indicator of a company’s operating performance required by U.S. GAAP.  EBITDA is not a measure of liquidity or cash flows as shown in our Consolidated Statements of Cash Flows.  The definition of EBITDA used here may not be comparable to that used by other companies.  Pursuant to the amendments entered into on April 30, 2015 for our $100 Million Term Loan Facility and our $253 Million Term Loan Facility, the definition of Consolidated EBITDA used in the financial covenants has been eliminated. The following table demonstrates our calculation of EBITDA and provides a reconciliation of EBITDA to net (loss) income attributable to Genco Shipping & Trading Limited for each of the periods presented above:

 

 

 

Successor

 

 

Predecessor

 

 

 

For the
Year
Ended
December 31,

 

Period from
July 9 to
December 31,
2014

 

 

Period from
January 1 to
July 9,
2014

 

For the Years Ended December 31,

 

 

 

2015

 

(restated)

 

 

(restated)

 

2013

 

2012

 

2011

 

Net (loss) income attributable to Genco Shipping & Trading Limited

 

$

(194,897

)

$

(182,294

)

 

$

(951,149

)

$

(147,741

)

$

(144,928

)

$

25,386

 

Net interest expense

 

19,922

 

7,574

 

 

41,016

 

88,141

 

87,180

 

86,106

 

Income tax expense

 

1,821

 

996

 

 

815

 

1,898

 

1,222

 

1,385

 

Depreciation and amortization

 

79,556

 

36,714

 

 

75,952

 

140,743

 

139,063

 

136,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA (1)

 

$

(93,598

)

$

(137,010

)

 

$

(833,366

)

$

83,041

 

$

82,537

 

$

249,080

 

 

42



 


(2)                     The period from July 9 to December 31, 2014 (Successor Company) and the period from January 1 to July 9, 2014 (Predecessor Company) are distinct reporting periods as a result of our emergence from bankruptcy on July 9, 2014 as reported in our Consolidated Financial Statements.

 

ITEM 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

We are a Marshall Islands company that transports iron ore, coal, grain, steel products and other drybulk cargoes along worldwide shipping routes through the ownership and operation of drybulk carrier vessels.  Our fleet currently consists of 70 drybulk vessels, including 13 Capesize, eight Panamax, four Ultramax, 21 Supramax, six Handymax and 18 Handysize drybulk carriers, with an aggregate carrying capacity of approximately 5,158,000 deadweight tons (“dwt”), and the average age of our fleet is currently approximately 9.4 years.  We seek to deploy our vessels on time charters, spot market-related time charters or in vessel pools trading in the spot market, to reputable charterers, including Cargill, Swissmarine, and the Clipper Logger Pool and Clipper Sapphire Pool, in which Clipper Group acts as the pool manager.  The majority of the vessels in our current fleet are presently engaged under time charter, spot market-related time charter and vessel pool contracts that expire (assuming the option periods in the time charters are not exercised) between March 2016 and June 2017.

 

See pages 7 - 10 for a table of all vessels in our fleet.

 

On April 7, 2015, we entered into a definitive merger agreement with Baltic Trading under which we agreed to acquire Baltic Trading in a stock-for-stock transaction (the “Merger”). Under the terms of the agreement, Baltic Trading became our indirect wholly-owned subsidiary, and Baltic Trading shareholders (other than GS&T and its subsidiaries) received 0.216 shares of our common stock for each share of Baltic Trading’s common stock they owned at closing, with fractional shares that were settled in cash. Upon consummation of the transaction on July 17, 2015, our shareholders owned approximately 84.5% of the combined company, and Baltic Trading’s shareholders (other than the GS&T and its subsidiaries) owned approximately 15.5% of the combined company. Shares of Baltic Trading’s Class B stock (all of which we owned) were canceled in the Merger. Our stock commenced trading on the New York Stock Exchange after consummation of the transaction on July 20, 2015 under the symbol “GNK.”

 

Our Board of Directors and Baltic Trading’s Board of Directors established independent special committees to review the transaction and negotiate the terms on behalf of their respective companies. Both independent special committees unanimously approved the transaction. The Boards of Directors of both companies approved the merger by unanimous vote of directors present and voting, with Peter C. Georgiopoulos, Chairman of the Board of each company, recused for the vote. The Merger was approved on July 17, 2015 at the 2015 Annual Meeting of Shareholders (the “Annual Meeting”).

 

Prior to the Merger, as of June 30, 2015, our wholly-owned subsidiary Genco Investments LLC owned 6,356,471 shares of Baltic Trading’s Class B Stock, which represented a 10.85% ownership interest in Baltic Trading and 64.60% of the aggregate voting power of Baltic Trading’s outstanding shares of voting stock at June 30, 2015. Baltic Trading is consolidated as we also controlled a majority of the voting interest in Baltic Trading prior to the Merger.  Management’s discussion and analysis of our results of operations and financial condition includes the results of Baltic Trading.

 

We report financial information and evaluate our operations by charter revenues and not by the length of ship employment for our customers, i.e., spot or time charters.  Each of our vessels serve the same type of customer, have similar operations and maintenance requirements, operate in the same regulatory environment, and are subject to similar economic characteristics. Based on this, we have determined that we operate in one reportable segment, after the effective date of the Merger on July 17, 2015, in which we are engaged in the ocean transportation of drybulk cargoes worldwide through the ownership and operation of drybulk carrier vessels.  Therefore, the totals previously reported for the two segments (GS&T and Baltic Trading) is the total for the single reportable segment effective upon the Merger.

 

Additionally, on April 7, 2015, we entered into an agreement under which we acquired all of the shares of two single-purpose entities that were wholly owned by Baltic Trading, each of which owns one Capesize drybulk vessel, for an aggregate purchase price of $68.5 million, subject to reduction for $40.6 million of outstanding first-mortgage debt of such single-purpose entities that is to be guaranteed by the Company and an adjustment for the difference between such single-purpose entities’ current assets and total liabilities as of the closing date.  Through the transactions, which closed on April 8, 2015, we acquired the vessels known as the Baltic Lion and the Baltic Tiger. The independent special committees of both companies’ Boards of Directors reviewed and approved this transaction.

 

43



 

On April 21, 2014 (the “Petition Date”), Genco and its subsidiaries other than Baltic Trading (collectively, the “Debtors”) filed voluntary petitions for relief (the “Chapter 11 Cases”). On July 2, 2014, the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) entered an order (the “Confirmation Order”) which approved and confirmed the Plan. On the Effective Date of July 9, 2014, the Debtors emerged from Chapter 11 through a series of transactions contemplated by the Plan, and the Plan became effective pursuant to its terms. Refer to Note 1 in our Consolidated Financial Statements for a detailed description of the Plan.

 

We entered into a long-term management agreement (the “Management Agreement”) with Baltic Trading pursuant to which we applied our expertise and experience in the drybulk industry to provide Baltic Trading with commercial, technical, administrative and strategic services. The Management Agreement was for an initial term of approximately 15 years. Baltic Trading paid us for the services we provided it as well as reimbursed us for our costs and expenses incurred in providing certain of these services. Management fee income we earned from the Management Agreement net of any allocated shared expenses, such as salary, office expenses and other general and administrative fees, were taxable to us. Upon consolidation with Baltic Trading, any management fee income earned was eliminated for financial reporting purposes.  The Management Agreement was terminated as of July 18, 2015.

 

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

 

We hold an investment in the capital stock of Jinhui and KLC.  Jinhui is a drybulk shipping owner and operator focused on the Supramax segment of drybulk shipping.  KLC is a marine transportation service company which operates a fleet of carriers which includes carriers for iron ore, liquefied natural gas and tankers for oil and petroleum products.

 

We provide technical services for drybulk vessels purchased by MEP under an agency agreement between us and MEP.  These services include oversight of crew management, insurance, drydocking, ship operations and financial statement preparation, but do not include chartering services.  The services were initially provided for a fee of $750 per ship per day plus reimbursement of out-of-pocket costs and will be provided for an initial term of one year.  MEP will have the right to cancel provision of services on 60 days’ notice with payment of a one-year termination fee or without a fee upon a change of our control.  We may terminate provision of the services at any time on 60 days’ notice.  Mr. Georgiopoulos is a director of and has a minority interest in MEP.  This arrangement was approved by an independent committee of our Board of Directors.  On September 30, 2015, under the oversight of an independent committee of our Board of Directors Genco Management (USA) Limited and MEP entered into certain agreements under which MEP paid $2.2 million of the amount of service fees in arrears (of which $0.3 million was paid in 2016 by the new owners of five of the MEP vessels sold in January 2016 as described below and the daily service fee was reduced from $750 to $650 per day effective on October 1, 2015.  During January 2016, five of MEP’s vessels were sold to third parties, upon which these vessels were no longer subject to the agency agreement.  Based upon the September 30, 2015 agreement, termination fees were due in the amount $0.3 million, which was assumed by the new owners of the five MEP vessels that were sold.  The amount of these termination fees has been paid in full.  The daily service fee earned for the months of January and February 2016 has also been paid in full.

 

Year ended December 31, 2015 compared to the year ended December 31, 2014

 

Factors Affecting Our Results of Operations

 

We believe that the following table reflects important measures for analyzing trends in our results of operations. The table reflects our ownership days, available days, operating days, fleet utilization, TCE rates and daily vessel operating expenses for the years ended December 31, 2015 and 2014 on a consolidated basis, which includes the operations of Baltic Trading. The period from July 9 to December 31, 2014 (Successor Company) and the period from January 1 to July 9, 2014 (Predecessor Company) are distinct reporting periods as a result of our emergence from bankruptcy on July 9, 2014. References in these results of operation and the percentage change combine the Successor Company and Predecessor Company results for the year ended December 31, 2014 in order to provide comparability of such information to the year ended December 31, 2015.

 

44



 

 

 

For the Years Ended
December 31,

 

Increase

 

 

 

 

 

2015

 

2014

 

(Decrease)

 

% Change

 

Fleet Data:

 

 

 

 

 

 

 

 

 

Ownership days (1)

 

 

 

 

 

 

 

 

 

Capesize

 

4,745.0

 

4,745.0

 

 

 

Panamax

 

2,920.0

 

2,920.0

 

 

 

Ultramax

 

960.8

 

63.7

 

897.1

 

1,408.3

%

Supramax

 

7,665.0

 

7,665.0

 

 

 

Handymax

 

2,190.0

 

2,190.0

 

 

 

Handysize

 

6,570.0

 

6,570.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

25,050.8

 

24,153.7

 

897.1

 

3.7

%