UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A | ||
(Amendment No. 1) |
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . . . . . to . . . . . . . . . . . . . .
Commission File No. 2-63322
International Shipholding Corporation
(Exact name of registrant as specified in its charter)
Delaware
36-2989662
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
650 Poydras Street, New Orleans, Louisiana
70130
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (504) 529-5461
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class
on which registered
Common Stock, $1 Par Value
New York Stock Exchange
6.0% Convertible Exchangeable Preferred Stock
New York Stock Exchange
7¾% Senior Notes Due 2007
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ÖNo
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 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. Ö
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes NoÖ
State the aggregate market value of the voting stock held by non-affiliates of the registrant, as of the last business day of the registrant’s most recently completed second fiscal quarter.
Date
Amount
June 30, 2005
$63,197,873
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common stock, $1 par value. . . . . . . . 6,112,087 shares outstanding as of February 22, 2006
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement dated March 14, 2006, have been incorporated by reference into Part III of this Form 10-K.
EXPLANATORY NOTE
International Shipholding Corporation (“the Company”) owns a 50% equity interest in Dry Bulk Cape Holding, Inc., a Panamanian company (“Dry Bulk”). Dry Bulk is a holding company engaged in international bulk carrier operations through its four wholly-owned subsidiaries. The Company also owns a 26.1% equity interest in Belden Cement Holding, Inc., a Panamanian company (“BCH”). BCH is an investment holding company, which through its subsidiaries manages a fleet of cement carriers. In 2005, the Company’s ownership interest in Dry Bulk and BCH each met the significant subsidiary test at the 20% level. Additionally, the Company’s ownership interest in Dry Bulk met the same test for 2004. As a result, the Company is required by Rule 3-09 of Regulation S-X under the Securities Exchange Act of 1934 (the “Exchange Act”) to provide audited consolidated financial statements for BCH for the year ended December 31, 2005 and for Dry Bulk for the years ended December 31, 2004 and 2005 by June 30, 2006. Item 15 is the only portion of the Company’s 2005 Form 10-K being supplemented or amended by this Form 10-K/A.
This Amendment No. 1 does not change any other information set forth in the original filing of the Company’s Form 10-K for the year ended December 31, 2005. However, in accordance with Rule 12b-15, this Amendment No. 1 includes new Rule 13a-14(a)/15d-14(a) certifications as Exhibits 31.1 and 31.2 and new Rule 13a-14(b)/15d-14(b) certifications as Exhibits 32.1 and 32.2.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following financial statements, schedules and exhibits are filed as part of this report:
(a) 1.
Financial Statements
The following financial statements and related notes were filed as a part of the Company’s Form 10-K filed on March 10, 2006:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended December 31, 2005, 2004, and 2003
Consolidated Balance Sheets at December 31, 2005 and 2004
Consolidated Statements of Changes in Stockholders’ Investment for the years ended December 31, 2005, 2004, and 2003
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
(i)
The following financial statement schedules were filed as a part of the Company’s Form 10-K filed on March 10, 2006:
Report of Independent Registered Public Accounting Firm
Schedule II -- Valuation and Qualifying Accounts and Reserves
(ii)
The following financial statement schedules of Dry Bulk are included on pages A-1 through A-18 of this Form 10-K/A pursuant to Rule 3-09 of Regulation S-X:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets at December 31, 2005 and 2004
Consolidated Statements of Income for the years ended December 31, 2005 and 2004
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004
Notes to the Consolidated Financial Statements
(iii)
The following financial statement schedules of BCH are included on pages B-1 through B-7 of this Form 10-K/A pursuant to Rule 3-09 of Regulation S-X:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet at December 31, 2005
2
Consolidated Statement of Income for the year ended December 31, 2005
Consolidated Statement of Changes in Stockholders’ Investment for the year ended December 31, 2005
Consolidated Statement of Cash Flows for the year ended December 31, 2005
Notes to the Financial Statements
3.
Exhibits
(3.1)
Restated Certificate of Incorporation of the Registrant (filed with the Securities and Exchange Commission as Exhibit 3.1 to the Registrant's Form 10-Q for the quarterly period ended September 30, 2004 and incorporated herein by reference)
(3.2)
By-Laws of the Registrant (filed with the Securities and Exchange Commission as Exhibit 3.2 to the Registrant's Form 10-Q for the quarterly period ended September 30, 2004 and incorporated herein by reference)
(3.3)
Certificate of Designations of the 6.0% Convertible Exchangeable Preferred Stock of the Registrant filed with the Delaware Secretary of State on January 5, 2005 (filed with the Securities and Exchange Commission as Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated January 6, 2005 and filed with the Securities and Exchange Commission on January 7, 2005 and incorporated herein by reference)
(4.1)
Specimen of Common Stock Certificate (filed as an exhibit to the Registrant's Form 8-A filed with the Securities and Exchange Commission on April 25, 1980 and incorporated herein by reference)
(4.2)
Indenture between the Registrant and The Bank of New York, as Trustee, with respect to the 7¾% Senior Notes due October 15, 2007 (filed with the Securities and Exchange Commission as Exhibit 4.2 to the Registrant's Form 10-Q for the quarterly period ended September 30, 2004 and incorporated herein by reference)
(4.3)
Form of 7¾% Senior Note due October 15, 2007 (included in Exhibit 4.2 hereto and incorporated herein by reference)
(4.4)
Indenture, dated as of January 6, 2005, by and between the Registrant and The Bank of New York, as Trustee, with respect to the 6.0% Convertible Subordinated Notes due 2014 (filed with the Securities and Exchange Commission as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated January 6, 2005 and filed with the Securities and Exchange Commission on January 7, 2005 and incorporated herein by reference)
(4.5)
Form of 6.0% Convertible Subordinated Note due 2014 (included in Exhibit 4.4 hereto and incorporated herein by reference)
(4.6)
Specimen of 6.0% Convertible Exchangeable Preferred Stock Certificate (filed with the Securities and Exchange Commission as Exhibit 4.6 to Pre-Effective Amendment No. 3, dated December 23, 2004 and filed with the Securities and Exchange Commission on December 23, 2004, to the Registrant's Registration Statement on Form S-1 (Registration No. 333-120161) and incorporated herein by reference)
(4.7)
Certificate of Designations of the 6.0% Convertible Exchangeable Preferred Stock of the Registrant filed with the Delaware Secretary of State on January 5, 2005 (filed as Exhibit 3.3 hereto and incorporated herein by reference)
(10.1)
Credit Agreement, dated as of September 30, 2003, by and among LCI Shipholdings, Inc. and Central Gulf Lines, Inc., as Joint and Several Borrowers, the banks and financial institutions listed therein, as Lenders, HSBC Bank PLC, as Facility Agent, DnB NOR Bank ASA, as Documentation Agent, Deutsche Schiffsbank Aktiengesellschaft, as Security Trustee, and the Registrant, as Guarantor (filed with the Securities and Exchange Commission as Exhibit 10.2 to Pre-Effective Amendment No. 2, dated December 10, 2004 and filed with the Securities and Exchange Commission on December 10, 2004, to the Registrant's Registration Statement on Form S-1 (Registration No. 333-120161) and incorporated herein by reference)
(10.2)
Credit Agreement, dated as of December 6, 2004, by and among LCI Shipholdings, Inc., Central Gulf Lines, Inc. and Waterman Steamship Corporation, as Borrowers, the banks and financial institutions listed therein, as Lenders, Whitney National Bank, as Administrative Agent, Security Trustee and Arranger, and the Registrant, Enterprise Ship Company, Inc., Sulphur Carriers, Inc., Gulf South Shipping PTE Ltd. and CG Railway, Inc., as Guarantors (filed with the Securities and Exchange Commission as Exhibit 10.3 to Pre-Effective Amendment No. 2, dated December 10, 2004 and filed with the Securities and Exchange Commission on December 10, 2004, to the Registrant's Registration Statement on Form S-1 (Registration No. 333-120161) and incorporated herein by reference)
(10.3)
Credit Agreement, dated September 26, 2005, by and among Central Gulf Lines, Inc., as Borrower, the banks and financial institutions listed therein, as Lenders, DnB NOR Bank ASA, as Facility Agent and
3
Arranger, and Deutsche Schiffsbank Aktiengesellschaft, as Security Trustee and Arranger, and the Registrant, as Guarantor (filed with the Securities and Exchange Commission as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated September 30, 2005 and incorporated herein by reference)
(10.4)
Credit Agreement, dated December 13, 2005, by and among CG Railway, Inc., as Borrower, the investment company, Liberty Community Ventures III, L.L.C., as Lender, and the Registrant, as Guarantor*
(10.5)
Consulting Agreement, dated January 1, 2006, between the Registrant and Niels W. Johnsen*
(10.6)
Summary of Executive Officer’s Salaries*
(10.7)
International Shipholding Corporation Stock Incentive Plan (filed with the Securities and Exchange Commission as Exhibit 10.5 to the Registrant's Form 10-K for the annual period ended December 31, 2004 and incorporated herein by reference)
(10.8)
Form of Stock Option Agreement for the Grant of Non-Qualified Stock Options under the International Shipholding Corporation Stock Incentive Plan (filed with the Securities and Exchange Commission as Exhibit 10.6 to the Registrant's Form 10-K for the annual period ended December 31, 2004 and incorporated herein by reference)
(10.9)
Description of Non-Management Director Compensation (filed with the Securities and Exchange Commission as Exhibit 10.7 to the Registrant's Form 10-K for the annual period ended December 31, 2004 and incorporated herein by reference)
(10.10)
Description of Life Insurance Benefits Provided by the Registrant to Niels W. Johnsen and Erik F. Johnsen Plan (filed with the Securities and Exchange Commission as Exhibit 10.8 to the Registrant's Form 10-K for the annual period ended December 31, 2004 and incorporated herein by reference)
(21.1)
Subsidiaries of International Shipholding Corporation*
(31.1)
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **
(31.2)
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **
(32.1)
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **
(32.2)
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **
____________
*
Previously filed as part of the Registrant’s Form 10-K for the year ended December 31, 2005, filed with the Commission on March 10, 2006.
**
Submitted electronically herewith.
4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of 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.
INTERNATIONAL SHIPHOLDING CORPORATION
(Registrant)
June 30, 2006 | By | /s/ Manuel G. Estrada |
Manuel G. Estrada
Vice President and Chief Financial Officer
5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Dry Bulk Cape Holding Inc.:
We have audited the accompanying consolidated balance sheet of Dry Bulk Cape Holding Inc. and its subsidiaries (the “Group”) as of December 31, 2005 and the related consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the consolidated financial position of Dry Bulk Cape Holding Inc. as of December 31, 2005, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE S.p.A.
Genoa, Italy
June 29, 2006
A-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Dry Bulk Cape Holding Inc.:
We have audited the accompanying consolidated balance sheet of Dry Bulk Cape Holding Inc. and subsidiaries (the “Group”) as of December 31, 2004 and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Group's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2004, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 19, the accompanying consolidated financial statements have been restated.
/s/
Ernst & Young AS
Bergen, Norway
June 24, 2005, except with respect to Note 19 as to which the
date is June 29, 2006
/s/
Eirik Moe
State Authorized Public Accountant
A-2
DRY BULK CAPE HOLDING INC. | |||
CONSOLIDATED BALANCE SHEETS | |||
(In thousands of USD) |
|
|
|
December 31, | December 31, | ||
2005 | 2004 (Restated) | ||
ASSETS | |||
CURRENT ASSETS: | |||
Due from shareholders | 524 | 264 | |
Due from management company | 406 | - | |
Due from related companies | - | 687 | |
Inventories | 184 | 204 | |
Prepaid expenses and other current assets | 602 | 251 | |
Total current assets | 1,716 | 1,406 | |
Vessels, net of accumulated depreciation | 115,415 | 70,193 | |
Other assets | 340 | 411 | |
TOTAL ASSETS | 117,471 | 72,010 | |
| |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||
CURRENT LIABILITIES: | |||
Current portion of bank borrowings | 6,500 | 4,313 | |
Accrued liabilities-derivative contracts | - | 665 | |
Trade accounts payable | 285 | 719 | |
Due to related companies | 179 | - | |
Accrued expenses | 1,094 | 63 | |
Working capital advanced from shareholders | 260 | 300 | |
Total current liabilities | 8,318 | 6,060 | |
Long term bank borrowings, less current portion | 97,000 | 54,925 | |
Total liabilities | 105,318 | 60,985 | |
SHAREHOLDERS’ EQUITY: | |||
Common shares | - | - | |
Additional paid-in capital | 6,702 | 6,662 | |
Retained earnings | 5,451 | 4,363 | |
Total shareholders’ equity | 12,153 | 11,025 | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | 117,471 | 72,010 | |
See notes to consolidated financial statements. |
A-3
DRY BULK CAPE HOLDING INC. | ||||
CONSOLIDATED STATEMENT OF INCOME | ||||
(In thousands of USD) |
|
|
| |
For the year ended December 31, | ||||
2005 | 2004 (Restated) | |||
Shipping income | 15,595 | 18,788 | ||
Operating expenses: | ||||
Vessel expenses | (2,701) | (2,116) | ||
Vessels' depreciation | (3,277) | (2,584) | ||
(5,978) | (4,700) | |||
GROSS PROFIT | 9,617 | 14,088 | ||
Management fees | (526) | (448) | ||
General and administrative expenses | (38) | (102) | ||
(564) | (550) | |||
OPERATING INCOME | 9,053 | 13,538 | ||
Financial expenses, net | (2,965) | (2,047) | ||
NET INCOME | 6,088 | 11,491 | ||
See notes to consolidated financial statements. | ||||
A-4
DRY BULK CAPE HOLDING INC. | |||||||||||||||||
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY | |||||||||||||||||
For the years ended December 31, 2004 and 2005 | |||||||||||||||||
(In thousands of USD) |
|
|
|
|
|
|
|
|
| ||||||||
Accumulated | |||||||||||||||||
Additional | Other | ||||||||||||||||
Common | Paid-In | Retained | Comprehensive | Comprehensive | |||||||||||||
Stock |
| Capital |
| Earnings |
| Income |
| Total | Income | ||||||||
BALANCE-January 1, 2004, as previously reported | - | 6,662 | 596 | 476 | 7,734 | ||||||||||||
Restatement of accounting for interest rate swaps (Note 19) | - | - | 476 | (476) | - | ||||||||||||
BALANCE-January 1, 2004, as restated | - | 6,662 | 1,072 | - | 7,734 | ||||||||||||
Net income | - | - | 11,491 | - | 11,491 | 11,491 | |||||||||||
Dividends paid | - |
| - |
| (8,200) |
| - |
| (8,200) | ||||||||
BALANCE-December 31, 2004 | - | 6,662 | 4,363 | - | 11,025 | ||||||||||||
Net income | - | - | 6,088 | - | 6,088 | 6,088 | |||||||||||
Capital increase | - | 40 | - | - | 40 | 0 | |||||||||||
Dividends paid | - | - | (5,000) | - | (5,000) | ||||||||||||
|
|
|
|
|
|
|
| ||||||||||
BALANCE—December 31, 2005 | - | 6,702 |
| 5,451 |
| - |
| 12,153 | |||||||||
See notes to consolidated financial statements. | |||||||||||||||||
A-5
DRY BULK CAPE HOLDING INC. | ||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||
(In thousands of USD) |
|
|
| |
Years ended December 31, | ||||
2005 |
| 2004 (Restated) | ||
OPERATING ACTIVITIES: | ||||
Net income | 6,088 | 11,491 | ||
Adjustments to reconcile net income to net cash provided | ||||
by operating activities: | ||||
Depreciation of vessels | 3,277 | 2,584 | ||
Amortization of deferred financing costs | 71 | 71 | ||
Fair value adjustment on derivative instruments | (236) | (1,200) | ||
Changes in operating assets and liabilities: | ||||
Inventories | 20 | (96) | ||
Other current assets | 20 | (200) | ||
Trade accounts payable | (434) | 494 | ||
Other current liabilities | 1,074 |
| (78) | |
Interest rate swap termination | (292) | (665) | ||
Net cash provided by operating activities | 9,588 | 12,401 | ||
INVESTING ACTIVITIES: | ||||
Purchases of vessels | (48,500) | - | ||
Net variation in settlement account with DryLog Group | (350) |
| 112 | |
Net cash used in investing activities | (48,850) | 112 | ||
FINANCING ACTIVITIES: | ||||
Proceeds from bank borrowings | 103,500 | - | ||
Repayments of bank borrowings | (59,238) | (4,313) | ||
Dividends paid | (5,000) |
| (8,200) | |
Net cash used in financing activities | 39,262 | (12,513) | ||
NET INCREASE IN CURRENT FINANCIAL POSITION | - | - | ||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW | ||||
INFORMATION: | ||||
Interest paid | 2,280 | 2,786 | ||
See notes to consolidated financial statements. | ||||
A-6
DRY BULK CAPE HOLDING INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2005
(Amounts expressed in thousands of USD unless otherwise stated)
1.
ORGANIZATION AND BUSINESS
Dry Bulk Cape Holding Inc. (the “Company”) was founded on September 16, 2003 and is incorporated in the Republic of Panama. DryLog Bulkcarriers Ltd. and Cape Shipholding Inc. (collectively, the “Shareholders”) each owned 50% of the Company’s outstanding common shares.
At December 31, 2004, the Company had two subsidiaries: Dry Bulk Africa Ltd. (“Bulk Africa”) and Dry Bulk Australia Ltd (“Bulk Australia”). These subsidiaries were initially incorporated in Liberia, but are now incorporated in the British Virgin Islands (“BVI”). Each of the subsidiaries owns a bulk carrier cape size vessel: the “M.V. Africa” and the “M.V. Australia”, respectively.
In November 2005 the Company established in the British Virgin Islands two new subsidiaries: Dry Bulk Fern Ltd (“Bulk Fern”) and Dry Bulk Cedar Ltd (“Bulk Cedar”).
Each of these new subsidiaries purchased a bulk carrier panamax vessel built in 1998: “M.V. Bulk Fern” and “M.V. Bulk Cedar” respectively, using the liquidity provided by a new loan facility with HSH Nordbank.
Collectively, the Company and its subsidiaries are referred to as the “Group” herein.
The Group is engaged in international bulk carrier shipping operations.
Starting from the end of November 2005, M.V. Bulk Fern and M.V. Bulk Cedar are employed in time charter contracts with the related company Coeclerici Ceres Bulk Carriers Transportes Maritimos Lda., which is 35% owned by DryLog Group, the parent company of DryLog Bulkcarriers Ltd.
According to the time charter contracts, considered as operating lease contracts, the hire is a rata per day or pro-rata for the period starting from the vessels’ delivery, except for the off-hire period. The amount of the hire revenues during the next years for the period fixed in the contracts, is expected to be in line with the amount of 2005, considering that in 2005 the Group operated the vessels only for one month. The time charter contracts will expire in October 2008.
The M. V. Africa and the M.V. Australia participate in the C Transport Cape Size Ltd. shipping pool (the “Shipping Pool”). There are approximately fifteen and thirty other vessels in the Shipping Pool as of December 31, 2005 and 2004, respectively, some of these vessels being owned by related parties. Since September 2004, the Shipping Pool has been ultimately owned and managed by one of the Group’s shareholders (the “DryLog Group”).
The pool agreement provides, the result of operations of the Shipping Pool will be allocated to each member vessel on the basis of a key figure expressing the relative theoretical earning capacity of such member vessel, based on the cargo carrying capacity, capability and efficiency of operations and on any deficiency whatsoever attributable to any member vessel, including the consequence of such member vessel’s age, flag or crewing.
A-7
During each year, C Transport Cape Size Ltd. determines the amount of the result of business to be corresponded by way of a provisional hire paid monthly to each pool vessel also considering cash availability and cash flow projections. The final distribution is calculated on the net pool result and is made each calendar year following the presentation of the audited accounts of the operations of the pool.
The participation of MV. Africa and the M.V. Australia in the Shipping Pool is for an indefinite period unless the Group serves a three months advance exit notice; in order to exit, the Group should pay to or receive from the Pool compensation on the basis of the market value of Pool’s portfolio at the time of the exit.
The Company has no employees. The operative management is provided by the DryLog Group. The technical manager of the vessels was the related company, Ceres Hellenic Shipping Enterprises Ltd until the end of November 2005. The nature of the relationship is such that the DryLog Group shareholders have an interest in Ceres Hellenic Shipping Enterprises Ltd. Starting from December 2005 Unisea Shipping Ltd has been appointed as technical manager.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting—The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Consolidation—The consolidated financial statements include the financial statements of the Company and its 100% controlled subsidiaries. Those subsidiaries included Bulk Africa and Bulk Australia for the years ended December 31, 2005 and 2004, and also included Bulk Fern and Bulk Cedar as of December 31, 2005.
The financial statements used for the preparation of the consolidated financial statements are those as of December 31, 2005 and 2004, the dates coinciding with the year-end for each year presented of the group holding company, approved by the stockholders of the individual companies or prepared by the Boards of Directors for their approval.
The assets and liabilities of the consolidated companies are consolidated on the line-by-line method, eliminating the book value of the investments against the related net equities of the companies.
The difference between the carrying value of the investments and the corresponding net equity is allocated to the assets and liabilities based on the current values at the time of acquisition. No instances of the application of this policy occurred during either 2005 or 2004.
Intercompany balances and transactions, including intercompany profits and unrealized profits and losses are eliminated. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances
Use of Estimates—The preparation of the Group’s financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities reported therein and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results reported in future periods may differ from these estimates.
Revenue Recognition— The Group’s revenue under its Shipping Pool time charter arrangements are based on an allocation of the Shipping Pool’s annual distributed income. Shipping Pool annual distributable income is initially attributed to each member vessel on the basis of a key figure, expressing the relative theoretical earnings capacity of the member vessel, based on the cargo carrying capacity,
A-8
capability and efficiency of operation in and between respective trades in which the member vessels are employed, and on any deficiency attributable to any member vessel including the consequence of such member vessel’s age, flag or crewing. The Shipping Pool’s annual distributable income is then allocated giving weighting to each vessel and the number of days the vessel was available for charter excluding off-hire periods. The off-hire periods for each vessel consist of dry-docking, laid-up periods, extended periods of break-down and other mutually agreed periods.
The Shipping Pool’s annual distributed income is computed based on the Shipping Pool Manager’s interpretation of the terms of the underlying Shipping Pool Agreement, and as ultimately agreed on an annual basis by the Shipping Pool’s Committee. The Shipping Pool periodically enters into freight forward and bunker hedging contracts in an attempt to hedge the availability of the pool fleet and stabilize the amount of the Shipping Pool’s income to be allocated to Shipping Pool participants. These derivative contracts are accounted for by the Shipping Pool on a cash basis when determining the amount of income that it will distribute annually. Each Shipping Pool participant’s proportionate share of Shipping Pool derivative contract settlements (contingent rental) is treated as a component of the annual distributed income when ultimately realized.
Interest income is accrued on a time basis, by reference to the principal outstanding and to the effective interest rate applicable.
Foreign Currencies—The functional currency of the Group is the United States dollar (“USD”) because the majority of its revenues, costs, vessels purchased, and debt and trade liabilities are either priced, incurred, payable or otherwise measured in USD. Transactions denominated in foreign currencies are translated into USD using the rate ruling at the date of the transaction. Monetary assets and liabilities denominated into foreign currencies are translated into USD, at year-end rates. All resulting exchange differences are dealt with in the consolidated statement of income.
Cash and Cash Equivalents—The Group does not maintain cash accounts in its own name. Rather, Shipping Pool distributions are received by (and expenditures paid by) the DryLog Group on the Group’s behalf.
Vessel expenses and dry-docking cost— Vessel expenses are direct costs incurred to operate the Group’s vessels. These costs are expensed as incurred.
The Groups defers certain costs related to the dry-docking of the vessels. Deferred dry-docking costs are capitalized as incurred and amortized on a straight-line basis over the period between dry-dockings (generally five years). No dry-docking costs were incurred in 2005.
Financial instruments— Financial instruments carried on the balance sheet include accounts and other receivables, trade and other payables as well as long-term debt. The Group was also party to financial instruments that reduce exposure to fluctuations in interest rates. These interest rate swap arrangements are initially recorded at cost and are remeasured to fair value at subsequent reporting date. The fair value of all financial instruments approximates their carrying values.
Changes in fair value of derivatives financial instruments that are designated as effective cash flow hedges, are recognized directly as a component of shareholders’ equity. Amounts presented as a component of shareholders’ equity are recognized in the income statement in the same period in which the hedged firm commitment or forecasted transaction affects the net income. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognized in the consolidated statement of income as they arise. The Company did not enter into any new derivative contracts in 2005.
A-9
Deferred Financing Costs—The Group defers loan arrangement costs incurred in connection with its bank loans and amortizes them over the loan repayment period as an incremental increase to interest expenses.
Inventories—Inventories are valued at the lower of cost or market. Cost is determined on a FIFO basis.
Vessels, net— The Group’s vessels are stated at historical cost, less accumulated depreciation. The cost of the vessel, less an estimated residual value, is depreciated on a straight-line basis over its estimated remaining useful life. The vessel's life is estimated at 25 years from the date of construction and its residual value is based on its scrap value.
Maintenance and repairs that do not extend the useful life of the asset are charged to operations as incurred. Major renovation costs and modifications are capitalized and depreciated over the estimated remaining useful life.
Impairment losses are recorded on vessels when indicators of impairment are present and the undiscounted cash flows estimated to be generated by the assets are less than the vessels’ carrying amount. In the evaluation of the fair value and future benefits of vessels, the Group performs an analysis of the anticipated undiscounted future net cash flows of the vessels. If the carrying value of the related vessels exceeds the undiscounted cash flows, the carrying value of the vessel is reduced to its fair value. Various factors including future charter rates and vessel operating costs are included in this analysis. The Group determined that no impairment loss needed to be recognized for applicable vessel for 2005.
Income Taxes— Although the Company is incorporated in the Republic of Panama it has no business activities in Panama. Earnings from transactions that are completed, consummated or take effects outside Panama, are not considered to be taxable in Panama. Dividends received by Panamanian companies are only taxed when derived from earnings taxable in Panama. Consequently, dividends received from the Company’s BVI subsidiaries are not subject to taxation. Revenues arising from international shipping commerce of national merchant ships legally registered in Panama, even if the shipping contracts have been entered into Panama, are also specifically exempt from taxation.
All the subsidiaries are currently incorporated in the BVI. Based on their activities, they are categorized as International Business Companies (“IBC”) and thus not subject to income taxation in the BVI. There are no withholding taxes on the distribution of IBC profits as dividends to the Company.
The Group provides for income taxes in accordance with Financial Accounting Standards Board Statement No. 109, “Accounting for Income Taxes”. Under Statement No. 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.
Due to the nature of the Group’s operations, no income taxes have been reflected in the accompanying consolidated financial statements.
Comprehensive Income—Comprehensive income is defined as the change in equity of a company during a period from non-owner sources. Comprehensive income of the Group for the years ended December 31, 2004 and 2005 consisted only of the reported net income.
Reclassifications – Certain reclassifications have made to the presentation of the accompanying 2004 consolidated financial statements so as to conform to 2005 presentations.
A-10
Adoption of Accounting Standards—In December 2003, the FASB issued FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. Interpretation No. 46R provides guidance on the identification of entities for which control is achieved through means other than through voting rights and how to determine when and which business enterprise should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either the equity investors, if any, do not have a controlling financial interest or the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. The adoption of Interpretation No. 46R had no impact on the Group’s consolidated financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials should be recognized as current period charges. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of this statement is not expected to have a material impact on the Group’s consolidated financial position and results of operations. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets of APB Opinion No. 29, and replaces it with an exception for exchanges that do not have commercial substance. The adoption of this statement is not expected to have a material impact on the Group’s consolidated financial position and results of operations. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.
In December of 2004, the FASB issued Statement No. 123 (revised 2004), "Share-Based Payment," which is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation." Statement No. 123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and amends FASB Statement No. 95, "Statement of Cash Flows." Statement No. 123(R) 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 disclosures are no longer an alternative. Statement No. 123(R) is effective for periods beginning after June 15, 2005.
The Group does not expect Statement No. 123(R) to have an effect on the consolidated financial statements as it currently does not have any stock-based compensation arrangements.
3.
DUE FROM SHAREHOLDERS
As of December 31, 2005 and 2004 this caption of USD 524 thousand and USD 264 thousand, respectively, consists of the following:
o
financial receivable from DryLog Bulkcarriers Ltd of USD 520 thousand and USD 171 thousand, respectively, related to the settlement account used by the shareholder in order to make payments and receive collections on behalf of the Group;
o
receivables from Cape Shipholding Inc., of USD 4 thousand and USD 93 thousand, respectively, related to legal fees.
A-11
4.
DUE FROM MANAGEMENT COMPANY
As of December 31, 2005 and 2004 this caption of USD 406 thousand and USD 0, respectively, includes the amounts advanced in favor of the technical managers of the vessels Unisea Shipping Ltd. as of December 31, 2005 and Coeclerici Transport Cape Size Ltd. as of December 31, 2004.
5.
INVENTORIES
The amount of USD 184 thousand and USD 204 thousand shown as inventories represents the cost of lubricants on board the vessels as at the end of 2005 and 2004, respectively.
6.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of December 31, 2005 and 2004 this caption of USD 602 thousand and USD 251 thousand, respectively, consists of the following:
2005 | 2004 | |||
Other accounts receivable | 311 | 103 | ||
Prepaid expenses | 220 | 77 | ||
Other Current Assets | 71 | 71 | ||
Total | 602 | 251 |
Other accounts receivable mainly relate to the amounts advanced in favor of shipping agents and masters. Prepaid expenses mainly represent unexpired insurance and club calls.
7.
VESSELS, NET OF ACCUMULATED DEPRECIATION
The movements in this caption are the following (in USD thousands):
2005 | 2004 | |||
Cost | ||||
At January 1, | 73,000 | 73,000 | ||
Acquisitions in | 48,500 | 0 | ||
At December 31, | 121,500 | 73,000 | ||
Accumulated depreciation | ||||
At January 1, | 2,808 | 224 | ||
Charge for the year | 3,277 | 2,584 | ||
At December 31, | 6,085 | 2,808 | ||
Net Book Value | ||||
At January 1, | 70,192 | 72,776 | ||
At December 31, | 115,415 | 70,192 |
The increase in 2005 for USD 48,500 thousand, relates to the purchase price of M.V. “Bulk Fern” and
A-12
M.V. “Bulk Cedar” from unrelated parties. The present insured value of the vessels in respect of actual and/or constructive total loss is USD 106,400 thousand. There are preferred mortgages registered on the Group's vessels M.V. "Bulk Australia", "Bulk Australia", “Bulk Cedar” and “Bulk Fern”, as security for the unpaid balance of a loans provided advanced by financial institutions.
8.
OTHER ASSETS
Other assets of USD 340 thousand and USD 411 thousand as of December 31, 2005 and 2004, respectively, entirely relates to deferred financing costs.
9.
BANK BORROWINGS
In order to purchase the panamax vessels “Bulk Fern” and “Bulk Cedar” and refinance part of the existing indebtedness, in November 2005 the Group decided to pay back the whole amount of the loan existing at the end of 2004 (USD 59,238 thousand), obtaining from HSH Nordbank AG a new loan facility of USD 103,500 thousand. The terms of the credit facilities outstanding at December 31, 2004 are presented below followed by the terms of the new loan facility obtained in 2005.
Original | Balance Outstanding | |
Credit Facility | Amount | at December 31, 2004 |
Secured Loan Facility Agreement provided to fund the acquisition of the “Bulk Africa” and the “Bulk Australia”. These borrowings are repayable beginning six months from the initial advance date and thereafter in six-month installments of principal ($1,800,000) and interest. The interest rate during 2004 was 1.063% above the Lenders’ LIBOR rate (a total rate of 3.627% at December 31, 2004). A final balloon payment of $24,200,000 is due in 2011. | $53,000,000 | $49,400,000 |
Secured Loan Agreement also provided to fund the acquisition of the “M.V. Africa” and the “M.V. Australia”. These borrowings are repayable beginning six months from the initial advance date and thereafter in six-month installments of principal ($356,250) and interest. The interest rate during 2004 was 1.375% above the Lenders’ LIBOR rate (a total rate of 3.939% at December 31, 2004). | 5,700,000 | 4,987,500 |
Revolving Credit Facility Agreement provided to both fund the acquisition of the “Bulk Africa” and the “Bulk Australia” and also to provide funds for working capital purposes. These borrowings are repayable via a single balloon payment due in 2011. The interest rate during 2004 was 1.375% above the Lenders’ LIBOR rate (a total rate of 3.939% at December 31, 2004). | 4,850,000 | 4,850,000 |
Total long-term debt | 59,237,500 | |
Less: current portions of long-term borrowings | (4,312,500) |
A-13
Long-term borrowings, less current portion | $63,550,000 | $54,925,000 |
The Credit Facilities were provided through equal participation of HSN Hordbank AG (Germany), Alpha Bank AE (Greece), Credit Suise (Switzerland) and Nordea Bank Finland (England). The credit facilities were collateralized by first priority mortgages over both Group vessels, as well as assignments of both vessels’ earnings and insurance. The agreements also provided for provisions of cross–default to the extent that any single borrowing was deemed to be in a state of default. The facilities were ultimately guaranteed in varying amounts by the Group’s shareholders. The agreements restricted the Group from making dividends or other distributions to its shareholders without the prior written consent of the lenders, which in the case of $8,200,000 in 2004 distributions was received.
The HSH Nordbank AG loan is repayable in 32 consecutive quarterly installments starting from January 28, 2006. The first 12 installments will amount to USD 1,625 thousand each; the remaining 20 installments will amount to USD 2,125 thousand each. With the last installment the Group should also reimburse a final balloon of USD 41,500 thousand. The reimbursement schedule is the following (in USD thousands):
2006...............................6,500
2007...............................6,500
2008.............................. 6,500
2009...............................8,500
2010...............................8,500
Thereafter................... 67,000
Total 103,500
The interest rate is LIBOR plus a spread of 1.25%, which approximates 5.6% at December 31, 2005.
The above facility is collateralized by first priority mortgage registered over all Group's vessels, as well as assignments of such vessel's earnings and insurance.
The facility loan agreement with HSH Nordbank AG signed at the end of November 2005, mandates that the Group respect some financial covenants. In case the Group will not meet the financial covenants and not remedy immediately, the bank could request the immediate repayment of the loan’s outstanding amount.
Two of the financial covenants related to:
o
minimum cash liquidity of USD 1 million,
o
ratio of current assets to current liabilities not less than one
are not required to be met by the Group until the end of the first quarter 2006. As of December 31, 2005 the remaining financial covenants stated in the facility loan agreement were met.
At the end of 2005 the amount of the current portion of the debt is USD 6,500 thousand; the long-term portion amounts to USD 97,000 thousand.
A-14
10.
TRADE ACCOUNTS PAYABLE
The balance of trade payables (USD 285 thousand and USD 719 thousand) at December 31, 2005 and 2004, respectively, represents the current amount due to suppliers in the normal course of business operations for transport activities. The balance is entirely payable within 12 months, according to the normal payment terms of the company.
11.
DUE TO AND FROM RELATED COMPANIES
This caption entirely relates to the amount due to and from the Shipping Pool, C Transport Cape Size Ltd., due to the final revenues adjustment that resulted when the final distribution was calculated on the net pool result for M.V. “Bulk Africa” and “Bulk Australia”.
12.
ACCRUED EXPENSES
This caption of USD 1,094 thousand and USD 63 thousand as of December 31, 2005 and 2004, respectively, mainly relates to the accrued interest expenses for 2005 and to operating expenses for 2004.
13.
WORKING CAPITAL ADVANCED BY SHAREHOLDERS
In the previous years each Shareholder advanced working capital to the Company in the amount of USD 150 thousand cash, totaling USD 300 thousand as of December 31, 2004. The advanced working capital is regulated by a Joint Venture Agreement, signed on November 5, 2003 by the Shareholders. The advance was made to meet the working capital needs of the Group and is interest-free. The advance will be repaid at the discretion of the Company’s Board of Directors. During 2005 part of the working capital advances for USD 40 thousand has been converted into capital. As consequence at the end of 2005 the advances from shareholders amount to USD 260 thousand.
14.
SHAREHOLDERS’ EQUITY
In January 2005, the Group granted each Shareholder the option of to purchase fifty additional common shares. In connection with this option, the authorized capital of the Company was increased to 600 common shares of which 500 shares have been issued. Concurrently, the shares were divided into 300 shares each of Class A and Class B common shares. All shares confer the same rights and are subject to the same obligations and restrictions. This subsequent division of shares has been reflected in the accompanying consolidated financial statements for the period presented.
On the basis of the Joint Venture Agreement signed on November 5, 2003, the two 50% shareholders have agreed to contribute by way of equity to the Group:
o
an amount not exceeding USD 6,347 thousand per shareholder, and
o
all amounts payable from time to time by the Group under the loan agreements to the extent to which such amounts cannot be funded by the net earnings of the Group.
Each shareholder shall contribute towards the equity contribution in accordance with their owner
A-15
percentage in the Group. As of December 31, 2005 the additional paid in capital to the Group from the shareholders was USD 6,702 thousand and USD 6,662 thousand as of December 31, 2005 and 2004, respectively, of which 50% of the amount was paid by each shareholder.
The Joint Venture Agreement provides that, shareholders cannot, without prior written consent of the other shareholder:
o
mortgage, pledge or otherwise encumber its legal or beneficial interest in the shares,
o
sell, transfer or otherwise dispose of all or any of its shares or any legal interest therein, and or
o
enter into any agreement with respect to the voting rights attached to all or any of its shares.
The shareholders can however transfer any of their shares to an entity within the same Group. The joint venture agreement continues to be effective until: (a) each shareholder transfers its shares in the Group to the other shareholder, or (b) an effective resolution is passed or a binding offer is made to wind up the Group, whichever is the earlier.
The changes in the shareholders’ equity during 2005 and 2004 are shown in the consolidated statements of shareholders equity.
15.
SHIPPING INCOME
The shipping income of USD 15,595 thousand and USD 18,788 thousand for the years ended December 31, 2005 and 2004, respectively, are composed as following:
2005 | 2004 | |||
Revenues from pool | 14,943 | 18,788 | ||
Revenues from time charters contracts | 652 | 0 | ||
Total shipping income | 15,595 | 18,788 |
Revenues from pool relate to the income earned by the related company, C Transport Cape Size Ltd, in connection with the employment of the vessels “Bulk Africa” and “Bulk Australia”.
Revenues from time charters’ contracts relate to the hire paid by the related company, Coeclerici Ceres Bulk Carriers Transportes Maritimos Lda., for M.V. “Bulk Fern” and “Bulk Cedar” during the period from the vessels’ delivery (beginning of December) to year-end.
16.
MANAGEMENT FEES
The detail of the management fees is the following:
2005 | 2004 | |||
Ceres Hellenic Shipping Enterprises Ltd | 264 | 352 | ||
Unisea Shipping Ltd | 158 | 0 | ||
DryLog Ltd | 104 | 96 | ||
Total | 526 | 448 |
A-16
The ship management agreement with the related company, Ceres Hellenic Shipping Enterprises Ltd, was terminated at the end of November 2005 when the new technical manger, Unisea Shipping Ltd (an unrelated party) was appointed.
In 2005 and 2004 Drylog Ltd (the shareholder of DryLog Bulkcarriers Ltd) provided the accounting, reporting, treasury and other corporate functions to the Group for a management fee of USD 4 thousand per month per vessel (total 2005 fees of USD 104 thousand and total 2004 fees of USD 96 thousand).
17.
FINANCIAL EXPENSES, NET
This caption includes the following:
2005 | 2004 (Restated) | |||
Interest income | 45 | 20 | ||
Loan interest expenses | (3,175) | (1,630) | ||
Interest rate swaps | 236 | (341) | ||
Amortization of deferred financing costs | (71) | (71) | ||
Other non-operating expenses | - | (25) | ||
Total financial expenses, net | (2,965) | (2,047) |
18.
RELATED PARTIES
Transactions with related parties are those with C Transport Cape Size Ltd, Coeclerici Ceres Bulk Carriers Transportes Maritimos Lda, Ceres Hellenic Shipping Enterprises Ltd, DryLog Ltd, (as described in Notes 1, 4, 15, and 16, respectively) and with the shareholders, DryLog Bulkcarriers Ltd and Cape Shipholding Inc. (as described in Note 3).
19.
DERIVATIVE CONTRACTS
Drylog Group assumed, in connection of its acquisitions of four vessels in 2003 (which included M.V. Bulk Africa and M.V. Bulk Australia), interest rate swaps in which the seller was original counter party. Dry Bulk Africa and Dry bulk Australia agreed with Drylog ltd. to assume the rights and obligation under the interest rate swaps in proportion of the combined value of M.V. Bulk Africa and M.V. Bulk Australia to the vessels acquired (four vessels). The Group utilized those interest rate swaps to manage the exposure of interest rate movements on its credit facilities.
The Group received USD 3,285 thousand from the Drylog Group; which amount was in proportion to the cash received by the Drylog Group in connection with its assumption of the interest rate swaps referred to above. Such interest rate swaps fix its interest rates from 3.74% to 5.27% through the following terms:
Notional | Expiration | Fair | |||||
Obligor | Amount | Date | Value | ||||
(portion attributable to the Group) | |||||||
Bulk Africa | 25,900 | Dec. 31, 2005 | 1,620 | ||||
Bulk Australia | 26,600 | Dec. 31, 2006 | 1,665 | ||||
Total | 52,500 | 3,285 |
A-17
The Group initially accounted for these agreements as effective cash flow hedges under the provisions of Statement of Financial Accounting Standard No. 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133). However, upon further consideration of the Group’s accounting policy for these agreements in 2005, the Group has concluded that due to the fair value that existed for these contracts upon assumption, that the Group’s previous documentation of hedge effectiveness using the “short-cut” method prescribed by FAS 133 was not appropriate. Also understanding that no further evaluation and or documentation of hedge effectiveness was performed at either the date of assumption or subsequent thereto, the Group has concluded that accounting for these agreements as effective cash flow hedges under FAS 133 through December 31, 2004 was not appropriate. Accordingly, the Group has restated the accompanying 2004 consolidated financial statements to adjust this past accounting. The impact of this adjustment is: to decrease 2004 interest expense by USD 39 thousand, increase 2004 net income by USD 39 thousand, increase retained earnings as of January 1, 2004 by USD 476 thousand, and decrease accumulated other comprehensive income as of January 1, 2004 by USD 476 thousand. This adjustment has no impact on total shareholders equity as of either January 1, 2004 or December 31, 2004, or operating cash flows for the year ended December 31, 2004.
Drylog Group and the Group decided to terminate these contracts. The Group paid its share of the fee of USD 665 thousand to terminate in 2004 interest rate swaps with notional amounts attributable to the Group amounting to USD 42,000 thousand and paid its share of the fee of USD292 thousand in June 2005 terminate effective in June 2005 the remaining interest rate swaps with notional amount attributable to the Group amount to USD 10,500 thousand.
******
A-18
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Belden Cement Holding Inc.
We have audited the accompanying consolidated balance sheet of Belden Cement Holding Inc. (the “Group”) as of December 31, 2005 and the related consolidated statements of income, changes in stockholders' investment, and cash flows for the year then ended. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Group's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2005, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
New Orleans, Louisiana
June 2, 2006
B-1
BELDEN CEMENT HOLDING INC. | |
CONSOLIDATED BALANCE SHEET | |
As of December 31, 2005 | |
ASSETS | |
Current Assets: | |
Cash and Cash Equivalents | $ 610,517 |
Due from Related Parties | 37,325 |
Prepaid Expenses | 103,712 |
Total Current Assets | 751,554 |
Investment in Unconsolidated Entity | 45,124 |
Property and Equipment, at Cost: | |
Machinery Equipment | 305,287 |
Furniture and Equipment | 57,723 |
363,010 | |
Less - Accumulated Depreciation | (169,431) |
193,579 | |
Due from Related Parties | 22,946,954 |
| $ 23,937,211 |
LIABILITIES AND STOCKHOLDERS' INVESTMENT | |
Current Liabilities: | |
Accrued Liabilities | $ 134,789 |
Due to Related Parties | 496,737 |
Total Current Liabilities | 631,526 |
Stockholders' Investment: | |
Common Stock, $50.00 Par Value, 230 Shares | |
Authorized at December 31, 2005 | 11,500 |
Additional Paid-In Capital | 9,980,348 |
Retained Earnings | 13,350,221 |
Accumulated Other Comprehensive Loss | (36,384) |
23,305,685 | |
$ 23,937,211 | |
The accompanying notes are an integral part of these statements.
B-2
BELDEN CEMENT HOLDING INC. | |
CONSOLIDATED STATEMENT OF INCOME | |
For the Year Ended December 31, 2005 | |
Revenues | $ 13,252,759 |
Operating Expenses | (5,829,825) |
Depreciation | (3,896,347) |
Gross Profit | 3,526,587 |
Administrative and General Expenses | (1,370,690) |
Gain on Sale of Assets | 6,186,552 |
Operating Income | 8,342,449 |
Interest and Other: | |
Interest Expense | (1,899,389) |
Investment Income | 105,423 |
Other Income | 80,528 |
(1,713,438) | |
Net Income | $ 6,629,011 |
The accompanying notes are an integral part of these statements.
B-3
BELDEN CEMENT HOLDING INC. | ||||||||||||
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ INVESTMENT | ||||||||||||
For the Year Ended December 31, 2005 | ||||||||||||
| Accumulated | |||||||||||
Additional |
| Other |
| |||||||||
Common | Paid-In | Retained | Comprehensive | |||||||||
Stock | Capital | Earnings | Loss | Total | ||||||||
Balance at December 31, 2004 | $ 11,500 | $ 9,980,348 | $ 6,721,210 | $ (31,053) | $ 16,682,005 | |||||||
Comprehensive Income: | ||||||||||||
Net Income for Year Ended December 31, 2005 | - | - | 6,629,011 | - | 6,629,011 | |||||||
Other Comprehensive Loss: | ||||||||||||
Foreign Currency Translation Adjustments | - | - | - | (5,331) | (5,331) | |||||||
Total Comprehensive Income | 6,623,680 | |||||||||||
Balance at December 31, 2005 | $ 11,500 | $ 9,980,348 | $13,350,221 |
| $ (36,384) |
| $ 23,305,685 | |||||
The accompanying notes are an integral part of these statements.
B-4
BELDEN CEMENT HOLDING INC. | |
CONSOLIDATED STATEMENT OF CASH FLOWS | |
For the Year Ended December 31, 2005 | |
Cash Flows from Operating Activities: | |
Net Income | $ 6,629,011 |
Adjustments to Reconcile Net Income to Net Cash | |
Provided by Operating Activities: | |
Depreciation | 3,896,347 |
Amortization of Deferred Charges | 725,609 |
Gain on Sale of Assets | (6,186,552) |
Translation Gain | (5,331) |
Changes in: | |
Accounts Receivable | 227,590 |
Deferred Drydocking Charges | (962,180) |
Due from Unconsolidated Entity | 224,470 |
Due from Shareholders | 2,010,000 |
Accrued Liabilities | (571,113) |
Due to Related Parties | 268,571 |
Net Cash Provided by Operating Activities | 6,256,422 |
Cash Flows from Investing Activities: | |
Purchase of Property and Equipment | (995,191) |
Proceeds from Sale of Vessels | 54,375,000 |
Cash Transfer on Disposal of Subsidiaries | (544,971) |
Net Cash Provided by Investing Activities | 52,834,838 |
Cash Flows from Financing Activities: | |
Due from Related Parties | (7,357,321) |
Repayment of Long-term Debt | (44,948,585) |
Proceeds from Long-term Debt | 2,087,504 |
Repayment of Loan from Shareholders | (11,110,585) |
Dividends Paid | (801,905) |
Net Cash Used by Financing Activities | (62,130,892) |
Net Change in Cash and Cash Equivalents | (3,039,632) |
Cash and Cash Equivalents at Beginning of Year | 3,650,149 |
Cash and Cash Equivalents at End of Year | $ 610,517 |
The accompanying notes are an integral part of these statements.
B-5
BELDEN CEMENT HOLDING INC.
Notes to the Financial Statements – December 31, 2005
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
The accompanying consolidated financial statements include the accounts of Belden Cement Holding Inc. (“BCHI”) (incorporated in the Republic of Panama) and its majority-owned subsidiaries. In this report, the terms “we,” “us,” “our,” and “the Company” refer to BCHI and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Our policy is to consolidate all subsidiaries in which we hold a greater than 50% voting interest or otherwise exercise significant influence over operating and financial activities. We use the equity method to account for investments in entities in which we hold a 20% to 50% voting interest and the cost method to account for investments in entities in which we hold less than 20% voting interest and in which we cannot exercise significant influence over operating and financial activities.
The financial statements are presented in United States dollars, which is also the measurement currency of the Company and its subsidiary. The financial statements are not presented in the currency of the country in which the holding company is domiciled as most of our transactions are denominated in US dollar.
Nature of Operations
The principal activity of BCHI is that of an investment holding company. The principal activities of the subsidiaries of BCHI include ship ownership and commercial ship management and brokering.
Use of Estimates
The preparation of financial statements in conformity with accounting principals generally accepted in the United States requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods.
Foreign Currency Transactions
Certain of our revenues and expenses are converted into or denominated in foreign currencies. All exchange adjustments are charged or credited to income in the year incurred.
Property
For financial reporting purposes, our property and equipment are depreciated on a straight-line basis over their estimated useful lives. Management estimates the useful lives of these assets to be within 2 to 18 years. The cost of an asset comprises its purchase price or construction cost and any directly attributable costs of bringing the asset to working condition for its intended use. Changes in the expected level of usage and technological developments could impact the economic useful lives and the residual values of these assets; therefore future depreciation expense could be revised.
Costs of all major property additions and betterments are capitalized. Ordinary maintenance and repair costs are expensed as incurred. Interest and finance costs relating to property and equipment under construction are capitalized to properly reflect the cost of assets acquired. No interest was capitalized in 2005.
During 2005, we recognized a net gain of $6,186,552 from the sale of all of our vessels.
We monitor all of our fixed assets for impairment and perform an impairment analysis in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” when triggering events or circumstances indicate a fixed asset may be impaired.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash on hand, demand deposits, and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
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BELDEN CEMENT HOLDING INC.
Notes to the Financial Statements – December 31, 2005
Revenue Recognition
Revenue from charter of vessels is recognized on a straight-line basis over the year of the charter and after providing for off-service days. Revenue from management and technical consultancy service is recognized upon completion of services rendered.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” Provisions for income taxes include deferred income taxes that are provided on items of income and expense, which affect taxable income in one period and financial statement income in another.
Deferred Charges
We defer certain costs related to the drydocking of our vessels. Deferred drydocking costs are capitalized as incurred and amortized on a straight-line basis over the period between drydockings.
NOTE 2 – UNCONSOLIDATED ENTITIES
We have a 40% interest in Belden Ship Management Inc., which manages our vessels.
NOTE 3 – TRANSACTIONS WITH RELATED PARTIES
We sold certain of our vessels to Belden Shipholding Pte Ltd for $39.9 million in 2005, resulting in a gain of $1.2 million. We also sold certain of our subsidiaries to Belden Shipholding Pte Ltd for $9.7 million. We have a receivable due from Belden Shipholding Pte Ltd for $22.9 million as of December 31, 2005. The receivable is unsecured and interest free. Belden Shipholding Pte Ltd has the option at any time to repay the full amount or in part. We do not expect to be repaid this amount in the next twelve months.
NOTE 4 – INCOME TAX
The Company is not liable for income tax in the countries that it operates in. As of December 31, 2005, we had unutilized tax losses of approximately $145,000 available to offset against future taxable profits subject to agreement with the Income Tax Authorities and compliance with the relevant provisions of the Income Tax Act. The potential deferred tax asset arising from these unutilized tax losses has not been recognized in the financial statements.
NOTE 5 – SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid
During 2005, we paid $1,268,137 of interest.
Notes Receivable
During 2005, we sold certain vessels to a related party for $39.9 million in the form of a receivable. We also sold certain of our subsidiaries to the same related party for $9.7 million in the form of a receivable.
NOTE 6 – SUBSEQUENT EVENTS
In January of 2006, Belden Shipholding Pte Ltd acquired all of the shares of the Company for $12 million.
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