SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
_________________________
FORM
10-Q
_________________________
QUARTERLY
REPORT UNDER SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
_________________________
|
Quarter
ended June 30, 2005
|
|
Commission
File Number:
|
||
|
|
1-10231
|
MC
SHIPPING INC.
(Exact
name of the registrant as specified in its charter)
_________________________
|
LIBERIA
|
98-0101881
|
|||
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
___________________________
Richmond
House, 12 Par-la-ville Road, Hamilton HM CX. Bermuda
(Address
of principal executive offices)
_________________________
441-295-7933
(Registrant's
telephone number, including area code)
_________________________
Indicate
by check mark whether the registrant (1) has filed all reports required
to be
filed by Section 13 or 15 (d) of the Securities Exchange Act 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 þ NO ¨
Indicate
by a check mark whether the registrant is an accelerated filer (as
defined in
Rule 12b-2 of the Exchange Act).
YES ¨ NO þ
Indicate
the number of shares outstanding of each of the registrant's classes
of common
stock, as of the latest practicable date.
|
Class
|
Shares
outstanding at
|
||
|
June
30, 2005
|
|||
|
Common
stock,
|
|||
|
par
value $.01
|
8,913,658
|
||
1
I
N D E X
|
Page
|
||
|
PART
1 :
|
FINANCIAL
INFORMATION
|
|
|
Item
1. Financial
Statements
|
||
|
3
|
||
|
5
|
||
|
6
|
||
|
7
|
||
|
8
|
||
|
17
|
||
|
Item
3. Market
Risk
|
22
|
|
|
Item
4. Controls
and Procedures
|
22
|
|
|
PART
II :
|
OTHER
INFORMATION
|
23
|
|
Item
1. Legal
Proceedings
|
23
|
|
|
Item
2. Changes
in Securities
|
23
|
|
|
Item
3. Defaults
upon Senior Securities
|
23
|
|
|
23
|
||
|
Item
5. Other
Information
|
23
|
|
|
Item
6. Exhibits
|
23
|
|
|
24
|
||
PART
I: FINANCIAL INFORMATION
|
ITEM
1:
|
CONSOLIDATED
BALANCE SHEETS
ASSETS
|
JUNE
30
2005
|
DECEMBER
31
2004
|
||||||
|
(unaudited)
|
|||||||
|
CURRENT
ASSETS
|
|||||||
|
Cash
|
$
|
12,319,593
|
$
|
11,629,896
|
|||
|
Restricted
cash
|
1,675,646
|
-
|
|||||
|
Hire
receivables
|
-
|
4,835
|
|||||
|
Recoverable
from insurers
|
51,500
|
55,529
|
|||||
|
Inventories
|
483,654
|
1,044,353
|
|||||
|
Receivables
from affiliates
|
550,328
|
80,492
|
|||||
|
Prepaid
expenses and other current assets
|
1,510,641
|
1,280,088
|
|||||
|
TOTAL
CURRENT ASSETS
|
16,591,362
|
14,095,193
|
|||||
|
VESSELS,
AT COST
|
155,162,794
|
109,303,246
|
|||||
|
Less
- Accumulated depreciation
|
(28,842,690
|
)
|
(52,251,877
|
)
|
|||
|
126,320,104
|
57,051,369
|
||||||
|
OTHER
ASSETS
|
|||||||
|
Investments
in Associated Companies
|
6,546,344
|
-
|
|||||
|
Furniture
& Equipment (net of accumulated depreciation of $13,184 at
June 30,
2005 and $30,645 at December 31 ,2004)
|
3,972
|
-
|
|||||
|
Dry-docking
costs (net of accumulated amortisation of $1,351,433 at June
30, 2005 and
$3,439,685 at December 31, 2004)
|
1,780,475
|
3,829,590
|
|||||
|
Restricted
Cash
|
-
|
5,000,000
|
|||||
|
Debt
issuance costs (net of accumulated amortisation of $33,798
at June 30,
2005 and $10,323 at December 31, 2004)
|
462,631
|
340,916
|
|||||
|
TOTAL
ASSETS
|
$
|
151,704,888
|
$
|
80,317,068
|
|||
THE
ACCOMPANYING NOTES ARE AN INTEGRAL
PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
MC
SHIPPING INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
JUNE
30
2005
|
DECEMBER
31
2004
|
||||||
|
(unaudited)
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Accounts
payable
|
$
|
853,966
|
$
|
529,960
|
|||
|
Hire
received in advance
|
793,560
|
584,843
|
|||||
|
Accrued
expenses
|
3,304,489
|
3,045,787
|
|||||
|
Accrued
interest
|
1,110,978
|
319,923
|
|||||
|
Current
portion of long term debt
|
12,116,000
|
7,500,000
|
|||||
|
TOTAL
CURRENT LIABILITIES
|
18,178,993
|
11,980,513
|
|||||
|
LONG
TERM DEBT
|
|||||||
|
Secured
Loans
|
83,384,000
|
37,500,000
|
|||||
|
TOTAL
LIABILITIES
|
101,562,993
|
49,480,513
|
|||||
|
DEFERRED
GAIN ON SALE OF VESSELS
|
15,601,145
|
-
|
|||||
|
SHAREHOLDERS’
EQUITY
|
|||||||
|
Common
stock, $.01 par value - 20,000,000 shares authorised 8,913,658
shares
issued at June 30, 2005 (8,765,974 at December 31, 2004)
|
89,137
|
87,660
|
|||||
|
Additional
paid-in capital
|
50,935,066
|
51,280,010
|
|||||
|
Accumulated
deficit
|
(15,734,099
|
)
|
(20,792,717
|
)
|
|||
|
Accumulated
comprehensive (loss) / income
|
(749,354
|
)
|
261,602
|
||||
|
34,540,750
|
30,836,555
|
||||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
151,704,888
|
$
|
80,317,068
|
|||
THE
ACCOMPANYING NOTES ARE AN INTEGRAL
PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED
STATEMENTS OF INCOME
For
the Quarters ended June 30, 2005 and June 30, 2004
(unaudited)
|
JUNE
30
2005
|
JUNE
30
2004
|
||||||
|
CHARTERHIRE
AND OTHER INCOME
|
$
|
9,628,735
|
$
|
7,881,660
|
|||
|
COSTS
AND EXPENSES
|
|||||||
|
Commission
on Charterhire
|
(131,887
|
)
|
(196,756
|
)
|
|||
|
Vessel
Operating Expenses
|
(3,756,246
|
)
|
(3,866,093
|
)
|
|||
|
Amortisation
of Drydocking Costs
|
(166,217
|
)
|
(355,160
|
)
|
|||
|
Depreciation
|
(2,363,335
|
)
|
(1,285,203
|
)
|
|||
|
General
and Administrative Expenses
|
(550,664
|
)
|
(734,925
|
)
|
|||
|
OPERATING
INCOME
|
2,660,386
|
1,443,523
|
|||||
|
OTHER
INCOME/(EXPENSES)
|
|||||||
|
Interest
Expense
|
(1,217,768
|
)
|
(913,270
|
)
|
|||
|
Interest
Income
|
82,937
|
26,547
|
|||||
|
Recognized
deferred gain on sale of vessels
|
1,187,572
|
-
|
|||||
|
Equity
in income of associated companies
|
148,872
|
-
|
|||||
|
Loss
on Repurchases of Notes
|
-
|
(20,355
|
)
|
||||
|
NET
INCOME
|
$
|
2,861,999
|
$
|
536,445
|
|||
|
EARNINGS
PER SHARE
|
|||||||
|
Basic
earnings per share
|
$
|
0.33
|
$
|
0.06
|
|||
|
Diluted
earnings per share
|
$
|
0.32
|
$
|
0.06
|
|||
|
Basic
weighted average number of shares outstanding
|
8,785,950
|
8,724,021
|
|||||
|
Diluted
weighted average number of shares outstanding
|
8,946,431
|
8,825,013
|
|||||
THE
ACCOMPANYING NOTES ARE AN INTEGRAL
PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED
STATEMENTS OF INCOME
For
the six months ended June 30, 2005 and June 30, 2004
(unaudited)
|
JUNE
30
2005
|
JUNE
30
2004
|
||||||
|
CHARTERHIRE
AND OTHER INCOME
|
$
|
15,867,221
|
$
|
15,777,436
|
|||
|
COSTS
AND EXPENSES
|
|||||||
|
Commission
on Charterhire
|
(285,743
|
)
|
(387,130
|
)
|
|||
|
Vessel
Operating Expenses
|
(6,480,113
|
)
|
(8,251,994
|
)
|
|||
|
Amortisation
of Dry-docking Costs
|
(386,885
|
)
|
(710,320
|
)
|
|||
|
Depreciation
|
(3,541,611
|
)
|
(2,570,790
|
)
|
|||
|
General
and Administrative Expenses
|
(1,087,066
|
)
|
(1,067,153
|
)
|
|||
|
OPERATING
INCOME
|
4,085,803
|
2,790,049
|
|||||
|
OTHER
INCOME/(EXPENSES)
|
|||||||
|
Interest
Expense
|
(1,572,117
|
)
|
(1,918,491
|
)
|
|||
|
Interest
Income
|
216,508
|
62,045
|
|||||
|
Recognized
deferred gain on sale of vessels
|
2,114,139
|
-
|
|||||
|
Equity
in income of associated companies
|
64,421
|
-
|
|||||
|
Gains
on Repurchases of Notes
|
-
|
403,240
|
|||||
|
NET
INCOME
|
$
|
4,908,754
|
$
|
1,336,843
|
|||
|
EARNINGS
PER SHARE
|
|||||||
|
Basic
earnings per share
|
$
|
0.56
|
$
|
0.15
|
|||
|
Diluted
earnings per share
|
$
|
0.55
|
$
|
0.15
|
|||
|
Basic
weighted average number of shares outstanding
|
8,779,631
|
8,724,021
|
|||||
|
Diluted
weighted average number of shares outstanding
|
8,928,359
|
8,825,013
|
|||||
THE
ACCOMPANYING NOTES ARE AN INTEGRAL
PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED
STATEMENT OF CASH FLOWS
For
the six months ended June 30, 2005 and June 30, 2004
(unaudited)
|
JUNE
30
2005
|
JUNE
30
2004
|
||||||
|
OPERATING
ACTIVITIES:
|
|||||||
|
NET
INCOME
|
$
|
4,908,754
|
$
|
1,336,843
|
|||
|
Adjustments
to reconcile Net Income to net cash provided from operating
activities
|
|||||||
|
Depreciation
|
3,541,611
|
2,570,790
|
|||||
|
Recognized
deferred gain on sale of vessels
|
(2,114,139
|
)
|
-
|
||||
|
Amortisation
of Dry-docking costs
|
386,885
|
710,320
|
|||||
|
Amortisation
of issuance costs
|
23,475
|
72,650
|
|||||
|
Dry-docking
Costs Capitalised
|
(140,972
|
)
|
(106,785
|
)
|
|||
|
Gains
on repurchases of Senior Notes
|
-
|
(403,240
|
)
|
||||
|
Share
of income of associated companies
|
(64,421
|
)
|
-
|
||||
|
Shares
issued to directors
|
17,333
|
-
|
|||||
|
Stock-based
employee compensation
|
74,932
|
-
|
|||||
|
Changes
in Operating Assets and Liabilities:
|
|||||||
|
Hire
receivables
|
4,835
|
8,489
|
|||||
|
Recoverable
from insurers
|
4,029
|
(147,693
|
)
|
||||
|
Inventories
|
560,699
|
(184,217
|
)
|
||||
|
Receivables
from affiliates
|
(469,836
|
)
|
87,423
|
||||
|
Prepaid
expenses and other current assets
|
(230,553
|
)
|
(2,113
|
)
|
|||
|
Accounts
payable
|
324,006
|
122,692
|
|||||
|
Accrued
expenses
|
258,702
|
(1,121,689
|
)
|
||||
|
Hire
received in advance
|
208,717
|
-
|
|||||
|
Accrued
interest
|
791,055
|
(179,740
|
)
|
||||
|
NET
CASH PROVIDED FROM OPERATING
ACTIVITIES
|
$
|
8,085,112
|
$
|
2,763,730
|
|||
|
INVESTING
ACTIVITIES:
|
|||||||
|
Purchase
of office equipment
|
(3,641
|
)
|
90
|
||||
|
Sale
of vessels
|
29,802,138
|
-
|
|||||
|
Investments
in Associated Companies
|
(6,481,923
|
)
|
-
|
||||
|
Acquisitions
of vessels
|
(82,977,250
|
)
|
-
|
||||
|
Change
in restricted cash
|
3,324,354
|
4,946
|
|||||
|
NET
CASH (USED) / PROVIDED BY INVESTING ACTIVITIES
|
$
|
(56,336,322
|
)
|
$
|
5,036
|
||
|
FINANCING
ACTIVITIES:
|
|||||||
|
Repayments
of long-term debt
|
(17,500,000
|
)
|
(2,089,777
|
)
|
|||
|
Repurchases
of Senior Notes
|
-
|
(4,047,500
|
)
|
||||
|
Drawdown
of term loans
|
68,000,000
|
-
|
|||||
|
Issuance
of stock
|
262,695
|
-
|
|||||
|
Debt
issuance costs
|
(262,269
|
)
|
-
|
||||
|
Dividends
|
(548,563
|
)
|
-
|
||||
|
Comprehensive
Income
|
(1,010,956
|
)
|
125,625
|
||||
|
NET
CASH PROVIDED / (USED) BY FINANCING ACTIVITIES
|
$
|
48,940,907
|
$
|
(6,011,652
|
)
|
||
|
INCREASE
/ (DECREASE) IN CASH
|
689,697
|
(3,242,886
|
)
|
||||
|
CASH
AT BEGINNING OF PERIOD
|
11,629,896
|
16,446,582
|
|||||
|
CASH
AT END OF PERIOD
|
$
|
12,319,593
|
$
|
13,203,696
|
|||
THE
ACCOMPANYING NOTES ARE AN INTEGRAL
PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2005
(UNAUDITED)
NOTE
1. BASIS
OF PRESENTATION
The
accompanying unaudited consolidated financial statements of MC Shipping
Inc. and
subsidiaries (the “Company”) have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information. Accordingly, they do not include all of the information
and
footnotes required by generally accepted accounting principles for
complete
financial statements. In the opinion of Management, adjustments (consisting
of
normal recurring accruals) considered necessary for a fair presentation
have
been included. Operating results for the quarter and the 6 month period
ended
June 30, 2005 are not necessarily indicative of the results that may
be expected
for the year ending December 31, 2005. These consolidated financial
statements
should be read in conjunction with the Company's Annual Report on Form
10-K.
NOTE
2. ORGANIZATION
AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
The Company is incorporated in the Republic of Liberia and, through
its
subsidiaries, owns and operates eleven vessels comprising nine liquefied
petroleum gas (“LPG”) carriers and two multipurpose seariver vessels.
In addition,
the Company has a 25.8% percent interest in four containerships and
a 50%
interest in another LPG carrier.
PRINCIPLES
OF CONSOLIDATION: The consolidated financial statements include the
accounts of
MC Shipping Inc. and its wholly-owned subsidiaries. All inter-company
accounts
and transactions have been eliminated. Investments of 20-50% ownership
in
associated companies are accounted for under the equity method.
REVENUE
RECOGNITION: Charter revenues are derived from time charters, voyage
charters
and bareboat charters. Time charter and bareboat charter revenue is
recognized
on an accrual basis. Voyage charter revenue and related expenses are
accounted
for on the percentage of completion method. Other income includes demurrage,
pooling of income or lump sum expenses and guarantee fees.
VESSEL
REPAIR AND OVERHAUL: Normal vessel repair and maintenance costs are
charged to
income when incurred. Costs incurred during dry-docking and periodic
inspections
for regulatory and insurance purposes are deferred and charged to income
rateably over the period of five years to the next intermediate or
special
survey dry-docking.
VESSELS
AND DEPRECIATION: Vessels are stated at cost, which includes contract
price and
other direct costs relating to acquiring and placing the vessels in
service.
Depreciation is calculated, based on cost, less estimated salvage value,
using
the straight-line method, over the remaining economic life of each
vessel. The
economic life of LPG carriers is assumed to extend from the date of
their
construction to the date of the final special survey which is closest
to thirty
years from the date of their construction. The economic life of other
vessels is
assumed to extend from the date of their construction to the date of
the final
special survey, which is closest to twenty-five years from the date
of their
construction. If a vessel is used beyond its fifth special survey,
its economic
life is assumed to extend to the end of its current charter.
IMPAIRMENT
OF LONG LIVED ASSETS: In accordance with SFAS 144 “Accounting for the Impairment
or Disposal of Long-Lived Assets”, the Company’s long lived assets are regularly
reviewed for impairment (see Note 6).
SEGMENT
REPORTING: The Company operates as a single segment, as Management
internally
evaluates the performance of the enterprise as a whole and not on the
basis of
separate business units or different type of charter.
COMPREHENSIVE
INCOME: Comprehensive income consists of foreign currency translation
adjustment
and unrealised gains or losses on cash flow hedges.
DEBT
ISSUANCE COSTS: Debt issuance costs are being amortized, using the
interest
method, over the terms of the long-term credit facilities.
INTEREST
RATE SWAPS: Occasionally, the Company enters into interest-rate swap
agreements
to fix the variable interest rate of some of its outstanding debt.
As these
interest rate swaps are designated and qualifying as a cash flow hedge
(i.e.
hedging the exposure to variability in expected future cash flows that
are
attributable to a particular risk), the effective portion of the gain
or loss on
the derivative instrument is reported as a component of other comprehensive
income and reclassified into earnings in the same line item associated
with the
forecasted transaction in the same period during which the hedged transaction
affects earnings. If a swap is cancelled, the cancellation cost is
recorded as
interest expense.
INVENTORIES:
Inventories consist principally of lubricating oil and victualling
and are
stated at cost, determined by the first-in, first-out method.
RESTRICTED
CASH: Certain cash balances are pledged to guarantee the Company’s performance
under the loan agreements. They are classified as Current Assets or
Other Assets
depending on the expected length of time of the restriction.
EARNINGS
PER SHARE: Basic and diluted earnings per share are calculated in accordance
with FASB Statement No. 128, Earnings per Share. Basic earnings per
share
exclude dilution and are computed by dividing net income by the weighted-average
number of common shares outstanding for the period. Diluted earnings
per share
reflect the potential dilution that could occur if outstanding options
were
exercised or converted into common stock. All prior period basic and
diluted
earnings per share calculations presented have been restated to reflect
the
impact of the stock dividend declared in April 2004.
|
3
months ended
June
30, 2005
|
3
months ended
June
30, 2004
|
6
months ended
June
30, 2005
|
6
months ended
June
30, 2004
|
||||||||||
|
Numerator:
|
|||||||||||||
|
Net
income available for common stockholders
|
$
|
2,861,999
|
$
|
536,445
|
$
|
4,908,754
|
$
|
1,336,843
|
|||||
|
Denominator:
|
|||||||||||||
|
Weighted
average number of common shares
|
8,785,950
|
8,724,021
|
8,779,631
|
8,724,021
|
|||||||||
|
Dilutive
effect of employee stock options
|
160,481
|
100,992
|
148,728
|
100,992
|
|||||||||
|
Diluted
average number of common shares
|
8,946,431
|
8,825,013
|
8,928,359
|
8,825,013
|
|||||||||
|
Earnings
per common share:
|
|||||||||||||
|
-
Basic earnings per share
|
0.33
|
0.06
|
0.56
|
0.15
|
|||||||||
|
-
Diluted earnings per share
|
0.32
|
0.06
|
0.55
|
0.15
|
|||||||||
There
were no options that could potentially dilute basic EPS in the future
that were
not included in the computation of diluted EPS for each period presented
because
their impact was anti-dilutive.
TAXATION:
The Company is not subject to corporate income taxes in Liberia because
its
income is derived from non-Liberian sources. Additionally, the Company
believes
that it is not subject to corporate income taxes in other jurisdictions,
including the United States.
RECOVERABLE
FROM INSURERS:
Insurance
receivables correspond to amounts recoverable under either Hull & Machinery
insurance or Loss of Earnings insurance. Hull & Machinery insurance covers
repair costs beyond a certain deductible and Loss of Earnings insurance
covers
the loss in revenues resulting from the immobilization of the vessel
beyond a
certain number of days.
GAINS
ON REPURCHASES OF NOTES:
Gains on repurchases of Notes are calculated as the face value of the
Notes
repurchased, minus amount paid for the Notes, minus brokerage commission,
if
any, minus write off of the corresponding portion of issuance
costs.
DEFERRED
GAIN ON SALE OF VESSELS: Deferred gain on sale of vessels is calculated
as the
sale price of the vessels, minus book value of the vessels and of the
dry-dock
costs at the time of sale, minus transaction costs, minus write off
of the
unamortized balance of the debt issuance costs incurred in 2004 in
connection
with the Fortis Loan corresponding to the $15 million prepayment. The
deferred
gain on sale of vessels, which amounted to $17,715,284 in January 2005,
is
recognized as income by the Company on a prorata temporis basis until
February
1st
2008, September 1st
2008, May 15th
2009 and February 1st
2009 for the respective vessel after deduction of payments, if any,
made under
the Performance Guarantee in such quarter (see Item 2 - Management’s Discussion
- Guarantees).
FOREIGN
CURRENCY TRANSLATION: The functional currency of the Company is the
U.S. Dollar
because the Company’s vessels operate in international shipping markets, which
primarily transact business in U.S. Dollars. The Company’s accounting records
are maintained in U.S. Dollars. A number of trade transactions related
to normal
vessel operations performed in other currencies during the year are
converted
into U.S. Dollars using the exchange rates in effect at the time of
the
transactions. At the balance sheet dates, trade payables and accrued
expenses as
well as cash and trade receivables in foreign currencies are converted
at year
end exchange rates. Resulting gains or losses are recorded in vessel
operating
expenses.
STOCK-BASED
COMPENSATION:
The Company has a stock-based employee compensation plan, which is
described
more fully in Note 9. The Company accounts for this plan under the
recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock
Issued to
Employees, and related interpretations.
RECENT
STATEMENTS OF FINANCIAL ACCOUNTING STANDARD: On December 16, 2004,
the Financial
Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised
2004),
Share-Based Payment, which requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the
income
statement based on their fair values. Pro forma disclosure will no
longer be an
alternative. The Company expects to adopt Statement 123(R) on January
1,
2006.
NOTE
3: SALE
AND PURCHASE OF VESSELS
On
January 20, 2005, the Company sold four container
vessels to
MUNIA Mobiliengesellschaft mbH & Co. (“MUNIA”), a special purpose German KG
company formed by the German finance house KGAL,
a
German KG, for a total price of $29,843,360. After
repayment of $15 million under the Fortis Loan (see Note 8. Long Term
Debt), the
sale generated a cash surplus of $14.8 million, of which $4 million
was
reinvested in Munia for a 25.8% equity participation (see Note 4 Investment
in
Associated Company). The sale generated a net accounting gain of $17,715,284,
which was recorded as a deferred gain on sale of vessels. As part of
the
transaction, the Company has agreed to guarantee certain levels of
operating
expenses and of employment for the vessels (see Item 2 - Management’s Discussion
- Guarantees).
In
April 2005, the Company acquired two very large gas carriers (“VLGCs”) from the
Bergesen Group of Norway. The vessels, M/v ‘Berge Flanders’ of 75,000
m3
capacity (built 1991) and M/v ‘Berge Kobe’ of 77,000 m3
capacity (built 1987) were acquired for considerations of $50,717,250
and
$32,260,000, respectively. The vessels are time-chartered to the Bergesen
Group
for a minimum period of five years. The acquisitions were funded with
a $68
million loan from Scotiabank Europe PLC and for the balance with internal
cash
resources.
NOTE
4. INVESTMENT
IN ASSOCIATED COMPANIES
In
January 2005, the Company invested $4 million in MUNIA, a special purpose
German
KG company formed by the German finance house KGAL, a German KG. MUNIA
purchased
four container vessels from MC Shipping for a total consideration of
$29.8
million and chartered them to AP Møller until February 1st
2008, September 1st
2008, May 15th
2009 and February 1st
2009, for each vessel respectively. MUNIA contracted the technical
management of
the vessels out to V.Ships.
MUNIA
is a limited partnership with equity in the amount of $15.5 million.
The limited
partners of MUNIA include MC Shipping with an equity contribution of
$4 million
(25.8%), V Ships (1%), ALCAS GmbH, a subsidiary of KGAL (1%) and MIRAN
GmbH
(72.2%). MIRAN is in the process of selling limited partnership interests
to
certain German individual investors (the “Individual Investors”) who enter into
a trust agreement with a fiduciary partner.
MUNIA
borrowed $18 million from Danmarks Skibskreditfond to finance the balance
of the
purchase price of the vessels and the working capital. The bank loan
bears
interest at LIBOR plus 1.05% and consists of four advances of $4.5
million each.
Each advance is repayable in equal quarterly instalments of $450,000
plus a
balloon due on February 1st
2008, September 1st
2008, May 15th
2009 and February 1st
2009, for each vessel respectively. The loan is secured by mortgages
on the
vessels and is non-recourse to the partners of MUNIA. Swap agreements
were
concurrently entered into, as a result of which the interest rate has
been
effectively fixed at rates ranging from 4.73 to 4.85% depending on
the final
maturity of each advance.
The
managing partner is MUNIA Mobilien-Verwaltungsgesellschaft mbH (the
“Managing
Partner”). The Managing Partner has sole power of representation toward third
parties and may, in the ordinary course of business without the consent
of the
partners, enter into management contracts, enter into any contract
necessary for
the operation of the vessels (purchase contracts, insurance policy,
employment
contracts, agency contracts), enter into the existing charter parties
with
Maersk, charter the vessels up to 6 months, change the vessel register
or flag,
enter into agreements regarding the placement of equity, enter into
loan
agreements, perform repairs on the vessels up to $500,000, grant credit
to the
suppliers, assume the bookkeeping and handle the payment of transactions,
etc.
The right to enter into agreements also includes the amendment and
cancellation
of such agreements. The financial statements of MUNIA to be prepared
in USD
currency will be signed by the Managing Partner. V.Ships will receive
a fee of
$230,000 from MUNIA as a broker fee on the acquisition of the
vessels.
The
original partnership agreement was signed in January 2005. An amended
partnership agreement, dated as of March 31, 2005, was signed on June
7, 2005:
the equity of the partnership was raised from $15.2 to $15.5 million
which
reduced MC Shipping’s initial participation from 26.3% to 25.8%; V.Ships and
ALCAS, a subsidiary of KGAL, were introduced as partners; an Advisory
Board
consisting of representatives of the limited partners was created to
approve
certain major decisions; there was no change in the repartition of
profits and
losses between the partners.
The
Company participates for 25.8% in the profits and losses of the partnership
and
will receive the following percentages of the net sale proceeds of
each of the
ships: 0% of the first $3.9 million, 100% of the next $1 million and
40% of any
amount in excess of $4.9 million. As part of the transaction, the Company
has
agreed to guarantee certain levels of operating expenses and of employment
for
the vessels (see Item 2 - Management’s Discussion - Guarantees). The share of
net income of MUNIA included in the Company's financial statements
was $270,849
for the quarter and $186,419 for the six months ended June 30,
2005.
In
April 2005, Waterloo Shipping Limited (“Waterloo”), the joint venture company
set up on a 50/50 basis by the Company and Petredec Limited, a leading
LPG
trading and shipping company, acquired the 1983-built, 59,725cbm, LPG
carrier
‘Galileo’ (ex ‘Isomeria’) for a total consideration of $16 million and chartered
the vessel to Petredec for a period of four years. The vessel is technically
managed by V.Ships. The Company and Petredec each advanced an amount
of
$2,481,923 to Waterloo and Waterloo borrowed $11.2 million from Danmarks
Skibskreditfond. The bank loan bears interest at LIBOR plus 1.05% and
is
repayable in 16 equal quarterly instalments of $610,156 plus a balloon
of
$1,437,504. The loan is non-recourse to the joint venture partners,
except for a
corporate guarantee limited to $850,000 for each joint venture partner.
The
share of the net loss of Waterloo included in the Company's financial
statements
was $121,977 for the quarter ended June 30, 2005 as the LPG carrier
Galileo
suffered off-hire during its first 3 months of operation due to initial
technical problems.
NOTE
5. RELATED
COMPANY TRANSACTIONS
V.Investments
Limited (“V.Investments”), V.Ships Group Ltd., V.Holdings Limited (“V.Ships”),
Greysea Limited, Close Securities Limited, Close Investment Partners
Limited,
Navalmar (UK) Limited (“Navalmar”), Bogazzi Fimpar S.p.A., and Enrico Bogazzi
control over 50% of the outstanding stock of the Company.
Certain
of the directors and executive officers of the Company are involved
in outside
business activities similar to those conducted by the Company. Mr.
Antony
Crawford (Chief Executive Officer, President and Director) is also
the Chief
Executive Officer of V.Investments, a subsidiary of V.Ships handling
the
financial, commercial and investment activities of the group; he is
a director
and minority shareholder of V.Holdings Limited, the holding company
of the
V.Ships group; he is joint managing director of AL Ships, a marketing
company
jointly owned by V.Ships and KGAL; he is a director of Finship, a Rotterdam
based financial advisory company jointly owned by V.Ships and ING Bank.
Mr Biggi
is the President and Chief Executive Officer of V.Holdings Ltd and
an executive
officer of its principal subsidiaries which provide management-related
services
to the Company. Mr. Biggi is also a shareholder of Greysea, which owns
a
participation in V.Ships. Mr. Bogazzi (Director) is involved in the
business of
purchasing, owning and selling cargo vessels through the Bogazzi Group
of
shipping companies. As a result of these affiliations, such persons
may
experience conflicts of interest in connection with the selection,
purchase,
operation and sale of the Company's vessels and those of other entities
affiliated with such persons.
The
By-Laws of the Company provide that any of the transactions giving
rise to
potential conflicts of interest are subject to review by the Audit
Committee of
the Company's Board of Directors which is also charged with the responsibility
of monitoring and reviewing transactions to be entered into with affiliates.
Management believes that the terms of all the transactions described
herein with
V.Ships were fair to the Company.
The
Company, via its wholly owned subsidiaries, has entered into Management
Agreements with V.Ships for the technical operation of all the Company's
fleet,
excluding the seariver vessels which are managed by an independent
vessel
manager because of the specialised nature of the trade. The Agreements
are
“cost-plus” contracts under which the Company reimburses all costs incurred by
V.Ships for the operation of the Company's vessels and V.Ships is paid
a fixed
management fee. In 2005, the management fees payable to V.Ships are
fixed at the
rate of $9,250 per vessel/per month for the container vessels and the
large LPG
carriers and at the rate of $9,167 per vessel/per month for the other
LPG
carriers (in 2004, $8,600 and $8,500 respectively). In the quarter
and in the
six month period ended June 30, 2005, $244,356 and $513,963 respectively
were
paid by the Company to V.Ships for services provided to the Company
pursuant to
the Management Agreements (in 2004, $290,379 and $580,758, respectively).
If
the Company deems it necessary to employ the services of V.Ships in
the
acquisition or disposal of vessels, the Company will pay commissions
and legal
fees determined in light of current industry practice. In the quarter
and in the
six month period ended June 30, 2005, legal fees and expenses totalling
$17,341
and $35,968 were paid by the Company to affiliates of V.Ships (no such
commissions or legal fees were paid in 2004).
The
Company leases office space from an affiliate of V.Ships. In the quarter
and in
the six month period ended June 30, 2005, the rental cost paid to the
affiliate
of V.Ships was approximately $23,205 and $47,574 (in 2004, $21,185
and $42,793,
respectively).
In
the quarter and in the six month period ended June 30, 2005, the Company
paid
approximately $7,250 and $14,000 for accounting services to an affiliate
of
V.Ships (in 2004, $7,750 and $15,500, respectively).
In
August 2004, the Company entered into a service agreement with V.Investments
Limited whereby, the Company pays a fee of £10,000 per month in consideration of
V.Ships permitting the Chief Executive Officer to provide his services
to the
Company. V.Ships is also entitled to reimbursement of all business
expenses
incurred by the CEO in the provision of his services.
In
addition, on a case by case basis, as technical manager of the Company’s fleet,
V.Ships may use on behalf of the Company the services of other service
providers
for insurance, crew and staff travelling, port agency services, manning,
safety
and training services, and miscellaneous services. Some of the service
providers
may be affiliates of V. Ships.
At
June 30, 2005, the Company had intercompany balances of trade account
receivable
from affiliates of $550,328 ($80,492 at December 31, 2004). This amount
includes
$493,589 receivable from MUNIA for the payment of the lube oil remaining
on
board at the time of sale of the container vessels.
NOTE
6. PROVISION
FOR IMPAIRMENT LOSS
At
June 30, 2005, the Company evaluated the recoverability of its vessels
and its
investments in associated companies in accordance with FAS 144 and
determined
that no provision for loss was required as the carrying values of such
assets
were deemed to be recoverable.
In
July 2005, the Company received appraisals for its gas fleet from a
leading
independent shipbroker. The seariver vessels values were assumed to
remain at
their appraised values of January 2005. On this basis, the appraised
value of
the Company’s fully owned fleet was approximately $167 million compared to a
book value of $126,320,104 on June 30, 2005 (see also Management’s Discussion
and Analysis of Financial Condition and Results of Operations - Market
Value of
the vessels).
In
accordance with SFAS 144 “Accounting for the Impairment or Disposal of Long
Lived Assets”, the Company’s vessels are regularly reviewed for impairment. The
Company performs the impairment valuations at the individual vessel
level
pursuant to paragraph 10 of SFAS 144. To consider whether there is
an impairment
indicator, the Company compares the book value and the market value
of each
vessel at the end of each quarterly reporting period. At year end,
the market
value used by the Company is equal to the average of the appraisals
provided by
two leading independent shipbrokers. Appraisals are based on the technical
specifications of each vessel, but are not based on a physical inspection
of the
vessel. At quarter end, the market value is assessed by the President
on the
basis of market information, shipping newsletters, sale of comparable
vessels
reported in the press, informal discussions with shipbrokers or unsolicited
proposals received from third parties for the vessels. Whenever a vessel’s
market value is above its book value, the Company considers there is
no
indication of impairment. Whenever a vessel’s market value is below its book
value, the Company considers there is a potential impairment and performs
a
recoverability test. The Company estimates the undiscounted future
cash flows
attributable to the vessel in order to determine if the book value
of such
vessel is recoverable. If the book value of the vessel exceeds the
estimated
undiscounted future cash flows attributable to the vessel, the Company
recognizes an impairment loss equal to the excess of the book value
over the
market value as defined above.
The
Company’s investment in MUNIA is also reviewed for impairment at each quarter
end. To consider whether there is an indication of impairment, the
Company
compares the fair market value or estimated scrap value of each container
vessel
at the end of the quarterly reporting period with the minimum threshold
of $4.9
million, which corresponds to a full recovery of the investment (see
Note 4.
Investment in Associated Companies). Whenever the fair market value
or estimated
scrap value of a vessel is below $4.9 million (corresponding to a price
of scrap
of $314 per ton), the Company considers there is a potential impairment
and
performs a recoverability test. The Company estimates the undiscounted
future
cash flows attributable to the investment in order to determine if
the book
value of such investment is recoverable. If the book value of the investment
exceeds the estimated undiscounted future cash flows attributable to
the
investment, the Company recognizes an impairment loss equal to the
excess of the
book value over the scrap value.
The
assumptions used to determine, whether the sum of undiscounted cash
flows
expected to result from the use and eventual disposition of an asset
exceeds the
carrying value, involve a considerable degree of judgment on the part
of
Management. Actual results could differ from those estimates, which
could have a
material effect on the recoverability of the assets.
NOTE
7. SHAREHOLDERS'
EQUITY
The
net income of $4,908,754 for the six months ended June 30, 2005 has
been
recorded as a reduction in accumulated deficit. In March 2005, the
Company's
Board of Directors decided to distribute a dividend of $0.25 per share
payable
in four equal quarterly instalments of $0.0625 to be recorded as a
reduction of
Additional paid-in capital. The first instalment of $548,563 was paid
on April
29, 2005. The date of record for the next instalment is July 14, 2005
and the
date of distribution July 28, 2005.
The
summary of changes in shareholders' equity during the six months ended
June 30,
2005 is as follows:
|
USD
|
Common
Stock
Par
Value
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
Income
|
Total
Shareholders
Equity
|
|||||||||||
|
December
31, 2004
|
87,660
|
51,280,010
|
(20,792,717
|
)
|
261,602
|
30,836,555
|
||||||||||
|
Net
Income
|
4,908,754
|
4,908,754
|
||||||||||||||
|
Foreign
currency translation adjustment
|
(13,280
|
)
|
(13,280
|
)
|
||||||||||||
|
Unrealised
losses on cash flow hedges
|
(997,676
|
)
|
(997,676
|
)
|
||||||||||||
|
Stock-based
employee compensation
|
74,932
|
74,932
|
||||||||||||||
|
Issuance
of stock to Directors
|
48
|
17,285
|
17,333
|
|||||||||||||
|
Dividends
|
(548,563
|
)
|
(548,563
|
)
|
||||||||||||
|
Issuance
of stock under stock option plan
|
1,429
|
261,266
|
262,695
|
|||||||||||||
|
June
30, 2005
|
89,137
|
50,935,066
|
(15,734,099
|
)
|
(749,354
|
)
|
34,540,750
|
|||||||||
|
|
|
|||||||||||||||
In
June 2005, the Company’s Board of Directors extended the authorization to
repurchase up to 400,000 shares of its common stock. Shares will be
repurchased
in the open market at times and prices considered appropriate by the
Company.
The timing of any purchases and the exact number of shares to be purchased
will
be dependent on market conditions. Repurchased stock, if any, will
be held in
treasury.
Directors,
who are not officers of the Company or of an affiliated company, receive
$5,000
out of their total annual compensation by allotment of shares of the
Company’s
common stock of equivalent value. In 2005, 4,766 shares were issued
representing
director compensation of $17,333 for the period April 1 to December
31,
2004.
NOTE
8. LONG
TERM DEBT
On
January 20, 2005, upon the sale of the container vessels, the Company
repaid $15
million under the loan agreement with Fortis Bank (the “Fortis Loan”) and the
repayment schedule of the remaining loan was reduced
proportionately. An
amount of $116,194 representing the unamortized balance of the debt
issuance
costs incurred in 2004 in connection with such portion of the Fortis
Loan was
written off and recorded as a reduction of the Deferred Gain on sale
of vessels.
Concurrently with such prepayment, cash balances of $5 million held
as
collateral by Fortis Bank were released. As of June 30, 2005, the amount
outstanding under the Fortis Loan was $27,500,000.
In
April 2005, the Company entered into a $68,000, 000 loan agreement
with
Scotiabank (the “Scotia Loan”) in order to partially fund the acquisition of two
vessels. The loan consists of two advances, bears interest at LIBOR
plus 0.85%
and is guaranteed by the Company:
|
-
|
the
first advance of $41 million was drawn by one of the Company’s wholly
owned subsidiaries, to finance the acquisition of the ‘Berge Flanders’.
This advance is repayable over eleven years in twenty two
equal
semi-annual instalments of $1,772,500 plus a balloon of $2,005,000.
|
|
-
|
the
second advance of $27 million was drawn by another of the
Company’s wholly
owned subsidiaries in order to finance the acquisition of
the ‘Berge
Kobe’. This advance is repayable over seven years in fourteen
equal
semi-annual instalments of $1,785,500 plus a balloon of $2,003,000.
|
Swap
agreements were concurrently entered into with Scotiabank, as a result
of which
the variable rate, exclusive of margin, has been effectively fixed
for the first
five years at 4.58 % and 4.545% respectively for the first and second
advance.
The
borrowers have granted ship mortgages over their vessels as security.
The loan
agreements contain debt covenants related to minimum liquidity reserves
of
$5,000,000, minimum value clauses for the vessels, minimum interest
coverage of
2:1 and minimum tangible net worth. As of June 30, 2005, tangible net
worth
exceeded the minimum requirement by $4,805,801. The Company has complied
with
all applicable debt covenants for all periods presented.
NOTE
9: STOCK
OPTION PLAN
The
following table summarizes the activity under the stock plan during
the first 6
months of 2005:
|
Number
of shares
|
Weighted
average
exercise
price
|
||||||
|
Options
outstanding as of December 31, 2004
|
142,918
|
1.84
|
|||||
|
Options
granted in 2005
|
186,398
|
9.228
|
|||||
|
Options
exercised in 2005
|
142,918
|
1.84
|
|||||
|
Options
forfeited in 2005
|
-
|
-
|
|||||
|
Options
outstanding as of June 30, 2005
|
186,398
|
9.228
|
|||||
|
Options
exercisable as of June 30, 2005
|
186,398
|
9.228
|
|||||
On
June 14, 2005, the Company’s Board of Directors approved the issuance of 186,398
options to employees at an exercise price of $9.228 per share. Options
granted
under this plan are granted with an exercise price equal to the average
of the
Company’s stock price over the ten days prior to the grant date. As a result,
the intrinsic value of these options on the grant date was $0.402 per
share and
the Company recognized a non cash compensation charge of $74,932. The
fair value
for these options was estimated to be equal to $2.96 per share at the
date of
grant using a Black-Scholes option pricing model with the following
assumptions:
|
2005
|
||
|
Risk-free
interest rate
|
3.70%
|
|
|
Volatility
|
54%
|
|
|
Expected
option term (in years)
|
2
|
|
|
Dividend
yield
|
2.50%
|
On
June 14, 2005, the Board modified the vesting conditions of the stock
options
under the terms of the plan. From now on, the options vest 100% on
the day
following the grant date. There are no more options to be granted under
the plan
as of June 30, 2005.
The
following table illustrates the effect on net income and earnings per
share if
the Company had applied the fair value recognition provisions of FASB
Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
|
3
months ended
June
30, 2005
|
3
months ended
June
30, 2004
|
6
months ended
June
30, 2005
|
6
months ended
June
30, 2004
|
||||||||||
|
Net
income, as reported
|
$
|
2,861,999
|
$
|
536,445
|
$
|
4,908,754
|
$
|
1,336,843
|
|||||
|
Add:
Stock-based employee compensation expense included in reported
net
income
|
74,932
|
-
|
74,932
|
-
|
|||||||||
|
Deduct:
total stock-based employee compensation expense determined
under fair
value based method for all awards
|
(642,875
|
)
|
(3,590
|
)
|
(657,844
|
)
|
(7,180
|
)
|
|||||
|
Proforma
net income
|
2,294,056
|
532,855
|
4,325,842
|
1,329,663
|
|||||||||
|
Earnings
per share:
|
|||||||||||||
|
Basic
- as reported
|
0.33
|
0.06
|
0.56
|
0.15
|
|||||||||
|
Basic
- pro forma
|
0.26
|
0.06
|
0.49
|
0.15
|
|||||||||
|
Diluted
- as reported
|
0.32
|
0.06
|
0.55
|
0.15
|
|||||||||
|
Diluted
- pro forma
|
0.26
|
0.06
|
0.48
|
0.15
|
|||||||||
_____________________________
Results
of Operations for the quarter ended on June 30, 2005.
Significant
events during the six months
In
the first 6 months of 2005, the Company focused its activities in the
LPG
sector. The company sold its four container vessels in January, while
retaining
a 25.6% interest, bought two very large gas carriers from Bergesen
and 50% of
another one from Shell in April (see Note 3. Sale and Purchase of vessels
and
Note 4. Investments in Associated Companies).
Revenues
The
Company had revenue from charterhire and other sources amounting to
$9,628,735
for the quarter and $15,867,221 for the six month period ended June
30, 2005
($7,881,660 for the quarter and $15,777,436 for the six month period
ended June
30, 2004). The increase in revenues is a result of the change in fleet
composition.
In
the first half of 2005, the Company's on-hire performance of the vessels
on time
charter was 99.6% on a potential 1441 days (for
the first half
of 2004, it was 99.0%
on a potential of 2002 days).
The increase in on-hire performance is due to the fact that no ship
underwent
dry-docking during the first six months of 2005, compared to one ship
in the
same period of 2004.
Whenever
possible, the Company employs its vessels on long term time charters
with first
class charterers. All of the Company's eleven fully-owned vessels (except
the
sea river vessels) are currently fixed on time charters. Future minimum
revenues
from these non-cancellable charters are as follows:
|
Last
6 months of 2005
|
$
|
18,202,500
|
||
|
2006
|
$
|
28,040,000
|
||
|
2007
|
$
|
19,150,625
|
||
|
2008
|
$
|
16,980,000
|
||
|
2009
|
$
|
16,980,000
|
||
|
2010
|
$
|
4,245,000
|
Costs
and Expenses
Commission
on charterhire was $131,887 for the quarter and $285,743 for the six
months
ended June 30, 2005. It was $196,756 for the quarter and $387,130 for
the six
months ended June 30, 2004. The increase is directly related to increased
revenues.
Vessel
operating expenses plus amortisation of dry-docking costs totalled
$3,922,463
for the quarter and $6,866,998 for the six months ended June 30, 2005.
They were
$4,221,253 for the quarter and $8,962,314 for the six months ended
June 30,
2004. Vessel operating expenses comprise vessel running costs, direct
costs
(such as fuel costs, port charges and canal dues incurred directly
while vessels
are unemployed or are employed on voyage charters) and management fees.
As a
percentage of revenue, vessel operating expenses plus amortisation
of
dry-docking costs decreased from 56.8% in the first half of 2004 to
43.3% in the
first half of 2005. Daily operating expenses per vessel on time charter
(excluding the container vessels sold in January 2005) averaged $3,608
in the
first half of 2005, as compared to $3,168 in the first half of 2004.
The changes
in vessel operating expenses as a percentage of revenues and in daily
operating
expenses are due to the change in fleet composition and to higher charter
rates.
Depreciation
totalled $2,363,335 in the quarter and
$3,541,611 for the first six months
of 2005 ($1,285,203 for the quarter and $2,570,790
for
the six months ended June 30 2004). The increase in depreciation following
the
purchase of two vessels in April 2005 was more important than the reduction
due
to the sale of four vessels in January 2005.
General
and administrative expenses amounted to $550,664 for
the quarter and
$1,087,066 for the six months ended
June 30, 2005. They were $734,925
for
the quarter and $1,067,153
for
the six months ended June 30, 2004. In the second quarter of 2004,
the Company
incurred certain non-recurring expenses in relation to the change of
ownership
of the Company and the offer for additional equity received by the
Company.
Interest
Expense
Interest
expense amounted to $1,217,768 for
the quarter and $1,572,117 for the six months ended June 30, 2005 ($913,270
for the quarter and $1,918,491
for
the six months ended June 30, 2004). Despite the increase in long term
debt, the
interest expense is significantly reduced in the first 6 months of
2005 due to
the refinancing of the 11.25% Senior Notes at a substantially lower
rate in
October 2004.
Interest
Income
Interest
income totalled $82,937 for the quarter and $216,508 for
the six months ended June 30, 2005 ($26,547
for the quarter and $62,045
for
the six months ended June 30, 2004). The increase in interest income
is due to
higher interest rates.
Deferred
Income
Deferred
income totalled $1,187,572 for the quarter and $2,114,139 for the six
months
that ended June 30, 2005 and represents the portion of Deferred Gain
on sale of
assets recognized as income during the relevant period (see Note
2). There were no payments made under the guarantee as of June 30,
2005 and
therefore no deduction from deferred income. The container vessels
experienced
no off-hire during the quarter and operated within their budget.
Equity
in Income of associated companies
Equity
in net income of associated companies totalled $148,872 for the quarter
and
$64,421 for the six months ended June 30, 2005.
|
3
months ended
June
30, 2005
|
6
months ended
June
30, 2005
|
||||||
|
MUNIA
|
$
|
270,849
|
$
|
186,398
|
|||
|
Waterloo
|
(121,977
|
)
|
(121,977
|
)
|
|||
|
Equity
in net income of associated companies
|
148,872
|
64,421
|
|||||
The
Company’s 25.8% share of MUNIA’s net income amounted to $270,849 and $186,398
respectively for the quarter and for the six month periods ended June
30, 2005.
The on-hire performance of the container vessels was 100% on a potential
644
days.
The
LPG carrier Galileo, owned by Waterloo, suffered off-hire during its
first 3
months of operation due to initial technical problems. The on-hire
performance
of the Galileo was 83.0% on a potential 87 days. As a result, Waterloo
experienced a loss in the quarter ended June 30, 2005 and the Company’s share of
Waterloo’s loss was $121,977.
Market
Conditions
Five
of the Company’s six small pressurized LPG vessels are due for renewal between
December 2005 and June 2006. The existing charter rates of these vessels
are
significantly below current market rates. Management feels that the
charter
market will remain strong for the next twelve months and that the Company
will
be able to take advantage of such improved rates as the existing charters
come
for renewal.
The
market for VLGCs (very large gas carriers) was also quite strong in
the first
part of 2005; however, the Company’s three fully-owned VLGC are fixed on
long-term timecharter. The first one will be free in September 2006
and the
other two are fixed at least until April 2010. The Galileo owned by
the
associated company Waterloo Shipping is contracted until May 2009.
In
the 2nd
quarter of 2005, the scrapping prices of vessels have come down somewhat
from
the very high levels of the beginning of 2005.
Market
value of the vessels
In
July 2005, the Company received appraisals for its gas fleet from a
leading
independent shipbroker (see Note 6. Provision for Impairment Loss).
The Company
seariver vessels and the container vessels sold to MUNIA and 25.8%
owned by the
Company were not appraised at this time and were assumed to remain
respectively
at their appraised value of January 2005 and their book value.
On
this basis, Management estimates that the excess of market value over
book value
of the Company’s fleet and Investment in Associated Companies is equal to
approximately $43 million, or $4.80
per share. Such excess is subject to market fluctuations, cyclical
nature of the
shipping industry, competition, general economic conditions and other
risk
factors. The Company’s shareholders’ equity was equal to $34,540,750 as of June
30, 2005, not including the deferred gain on sale of vessels of
$15,601,145.
Liquidity
and Sources of Capital
Liquidity
The
Company had $12,319,593 in Cash at June 30, 2005 (December 31, 2004
-
$11,629,896). Restricted cash amounted to $1,675,646 (December 31,
2004 -
$5,000,000). In addition, it should be noted that $1,098,320 were deposited
in
vessels operating accounts which are directly operated by the vessel
technical
managers (December 31, 2004 - $1,255,280).
The
ratio of current assets to current liabilities decreased from 1.18
at December
31, 2004 to 0.91 at June 30, 2005. The reduction is mainly due to the
fact that,
upon the acquisition of two vessels in April 2005, the Company's current
portion
of long term debt increased by $7,116,000 after the drawdown of the
Scotia loan.
However, the cash flows from the purchased vessels, which are employed
under
five year time charters at fixed charter rates, are expected to be
more than
sufficient to cover the expected interest and principal repayments
of such
loan.
Operating
activities
The
Company generated cash flows from operations of $8,085,112 in the six
months
ended June 30, 2005 in comparison to $2,763,730 in the six months ended
June 30,
2004. The increase is due to higher charter rates and a change in the
fleet
composition resulting in higher net income.
In
the first half of 2005, the Company did not dry-dock any vessel, against
one
vessel in the same period of 2004. Four vessels are planned to be dry-docked
in
the second half of 2005 (three vessels in the second half of 2004).
Investing
activities
In
April 2005, the Company acquired two very large gas carriers (“VLGCs”) from the
Bergesen Group of Norway. The vessels, M/v ‘Berge Flanders’ of 75,000
m3
capacity (built 1991) and M/v ‘Berge Kobe’ of 77,000 m3
capacity (built 1987) were acquired for considerations of $50,717,250
and
$32,260,000, respectively. The vessels are time-chartered to the Bergesen
Group
for a minimum period of five years. The acquisitions were funded with
a $68
million loan from Scotiabank Europe PLC and for the balance with internal
cash
resources.
In
April 2005, Waterloo Shipping Limited (“Waterloo”), a joint venture company set
up on a 50/50 basis by the Company and Petredec Limited, a leading
LPG trading
and shipping company, acquired the 1983-built, 59,725 m3,
LPG carrier ‘Galileo’ (ex ‘Isomeria’) for a total consideration of $16 million
and chartered the vessel to Petredec for a period of four years. The
vessel is
technically managed by V.Ships. The Company and Petredec each advanced
an amount
of $2,481,923 to Waterloo and Waterloo borrowed $11.2 million from
Danmarks
Skibskreditfond. The bank loan bears interest at LIBOR plus 1.05% and
is
repayable in 16 equal quarterly instalments of $610,156 plus a balloon
of
$1,437,504. The loan is non-recourse to the joint venture partners,
except for a
corporate guarantee limited to $850,000 for each joint venture partner.
Financing
activities
In
the first six months of 2005, the Company repaid net borrowings of
$17,500,000.
These repayments on the Fortis Loan consisted of: normal scheduled
repayments of
$2,500,000 and a prepayment of $15,000,000 at the time of the sale
of the four
container vessels.
In
April, the Company borrowed $68 million to partially finance the acquisition
of
two vessels. The debt service of this loan during the first five years
is more
than adequately supported by time charters with a first class charterer.As
a
result, the Company's long term debt (including current portion) increased
from
$28,750,000 as of March 31, 2005 to $95,500,000 as of June 30, 2005.
Dividend
The
Company resumed the distribution of cash dividends and expects to pay
$0.0625
per share per quarter. The first distribution took place on April 29,
2005 and
amounted to $548,563.
Contractual
obligations
As
of June 30, 2005, the Company's contractual obligations were as
follows:
Payments
due by period
|
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
||||||||||||
|
Fortis
loan due 2010
|
$
|
27,500,000
|
$
|
5,000,000
|
$
|
10,000,000
|
$
|
10,000,000
|
$
|
2,500,000
|
||||||
|
Scotia
loan due 2016
|
$
|
68,000,000
|
$
|
7,116,000
|
$
|
14,232,000
|
$
|
14,232,000
|
$
|
32,420,000
|
||||||
|
Total
|
$
|
95,500,000
|
$
|
12,116,000
|
$
|
24,232,000
|
$
|
24,232,000
|
$
|
34,920,000
|
||||||
Future
cash requirements
Management
believes that the net cash generated by operating activities will provide
sufficient funds to enable the Company to meet its liquidity requirements
throughout 2005. After the completion of the acquisitions and investments
that
took place in April 2005, Management believes that the Company still
has excess
cash to invest and is looking actively at the acquisition of vessels.
However,
the Company does not currently have any significant commitments for
capital
expenditures.
Contingencies
In
June 2001, the Company sold the 1984-built container vessel Maersk
Tampa to a
non-affiliated Company with the Maersk charter attached. The buyer
had the
option to give the vessel back on charter to the Company in November
2004 for 12
months at a daily rate of $17,900, then a second option in November
2005 for a
period of 6 months at a daily rate of $17,500. The first option was
not
exercised. The aggregate amount of the Company’s commitment under the second
option is approximately $3,182,000. This amount does not take into
consideration
any revenues the Company would earn from chartering out the vessel
to another
party. As of August 2005, the current charter rate for six month time
charter of
a vessel similar to the Maersk Tampa is well in excess of $17,500 and
the
expected revenues from the chartering out of the vessel would cover
the expected
amount of the commitment. There is no assurance today, however, as
to where
market rates will be in November 2005.
Share
Repurchase Program
The
Company Share repurchase Program is not expected to have a material
impact on
the Company liquidity. The buy back will be used if management feels
the stock
trades at or below levels where it does not accurately reflect the
potential of
the Company and where it makes such action attractive. It is designed
as one of
the tools to enhance shareholder value and will not replace or repress
the
strategy in place to grow the Company.
Guarantees
The
Company has issued guarantees in relation to the Fortis and Scotia
Loans. In
addition, the Company has issued a guarantee of $850,000 in relation
with the
loan granted by Danmarks Skibskreditfond to Waterloo (see Investing
Activities).
In
connection with the sale of the container vessels in January 2005,
the Company
has agreed to guarantee to the purchaser certain levels of operating
expenses
and of employment for the vessels until February 1st
2008, September 1st
2008, May 15th
2009 and February 1st
2009, for the respective vessel (or earlier in case of sale or total
loss of the
respective vessel). As a result, the excess or surplus of operating
expenses, up
to a certain extent, will be absorbed by the Company. As compensation
for
issuing such guarantee, the Company receives a daily guarantee fee
for each
vessel, which is included in Revenues.
Critical
Accounting Policies
The
Company believes that there have been no significant changes to its
critical
accounting policies during the six months ended June 30, 2005, as compared
to
those the Company disclosed in the Management Discussion and Analysis
section of
its Form 10-K for the year ended December 31, 2004.
Off-Balance
sheet Arrangements
The
Company had no off-balance sheet financial arrangements as of June
30,
2005.
Forward
looking statements
Certain
of the information contained in this Form 10-Q may constitute “forward-looking
statements” as that term is defined under United States federal securities laws.
“Forward-looking statements” are subject to risks, uncertainties and other
factors which could cause actual events to differ materially from those
stated
in such statements, including the identification of suitable vessels
for
purchase, the availability of additional financing for the Company,
if needed,
the cyclical nature of the shipping industry, competition, general
economic
conditions and other risk factors detailed in the Company’s filings with the
SEC.
____________________________
|
ITEM
3:
|
Interest
Rate Swaps
The
Company holds three interest rate swap agreements, which are used to
hedge the
Company’s interest rate exposure associated with its long-term debt.
|
As
of June 30, 2005
|
Notional
amount
|
Fair
value
|
Interest
rate
|
Expiry
|
|||||||||
|
First
swap / Fortis loan
|
$
|
27,500,000
|
$
|
400,914
|
3.075
|
%
|
October
2007
|
||||||
|
Second
swap / Scotia loan
|
$
|
41,000,000
|
$
|
(424,127
|
)
|
4.580
|
%
|
April
2010
|
|||||
|
Third
swap / Scotia loan
|
$
|
27,000,000
|
$
|
(765,163
|
)
|
4.545
|
%
|
April
2010
|
|||||
Long
term Debt
As
of June30, 2005, the Company had no variable interest debt.
Impact
of Currency Fluctuations
The
Company’s functional currency is the US dollar; however, a number of trade
transactions related to normal vessel operations are performed in other
currencies. Trade payables and accrued expenses as well as cash and
trade
receivables in foreign currencies are converted at year end exchange
rates and
therefore recorded at fair value. The Company does not hold any other
assets or
liabilities denominated in foreign currencies.
______________________________
|
ITEM
4:
|
Evaluation
of disclosure controls and procedures.
The
Company’s Chief Executive Officer and Chief Financial Officer have evaluated
the
effectiveness of the Company’s “disclosure controls and procedures” (as defined
in the Securities and Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c))
as of
June 30, 2005, (the “Evaluation Date”). Based on such review, they have
concluded that, as of the Evaluation Date, the Company’s disclosure controls and
procedures were effective to ensure that material information relating
to the
Company and its consolidated subsidiaries would be made known to them
by others
within those entities.
Changes
in internal controls.
There
were no significant changes in the Company’s internal controls or, to the
knowledge of the Company’s Chief Executive Officer and Chief Financial Officer,
in other factors that could significantly affect the Company’s disclosure
controls and procedures subsequent to the Evaluation Date.
__________________________________
PART
II: OTHER INFORMATION
None
None
None
None
None
| (a) |
Exhibit
10.1 Memorandum
of Agreement for the purchase of Berge
Kobe
|
| Exhibit 10.2 Memorandum of Agreement for the purchase of Berge Flanders |
|
|
Exhibit
10.3 Amended
Partnership Agreement, dated as of March 31,2005, signed
on June 7, 2005
(non-binding translation)
|
| Exhibit 10.4 Loan Agreement with Scotia Bank and Guarantee Agreement dated March 30, 2005 |
|
(b)
|
|
Certification
provided by the Chief Executive Officer of the Company pursuant
to Section
302 of the Sarbanes-Oxley Act of
2003.
|
|
(c)
|
|
Certification
provided by the Chief Financial Officer of the Company pursuant
to Section
302 of the Sarbanes-Oxley Act of
2003.
|
|
(d)
|
|
Certification
provided by the Chief Executive Officer and the Chief Financial
Officer of
the Company pursuant to Section 906 of the Sarbanes-Oxley
Act of
2003.
|
|
(e)
|
Reports
on Form 8-K
|
None
Pursuant
to the Securities Exchange Act of 1934, the registrant has duly caused
this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
MC
SHIPPING INC.
|
|||
|
Registrant
|
|||
|
Date
: August 1, 2005
|
/S/
ANTONY CRAWFORD
|
||
|
Antony
Crawford
|
|||
|
Chief
Executive Officer
|
|||
|
President
and Chief Operating Officer
|
|||
|
(Principal
Executive Officer)
|
|||
|
Date
: August 1, 2005
|
/S/
DOMINIQUE SERGENT
|
||
|
Dominique
Sergent
|
|||
|
Vice
President
|
|||
|
Chief
Financial Officer and Treasurer
|
|||
|
(Principal
Financial and Accounting
Officer)
|
|||
24