PART I
Danaos Corporation is a corporation domesticated in the Republic of The Marshall Islands that is referred to in this Annual Report on
Form 20-F, together with its subsidiaries, as "Danaos Corporation," "the Company," "we," "us," or "our." This report should be read in conjunction with our consolidated financial statements and
the accompanying notes thereto, which are included in Item 18 to this annual report.
We
use the term "twenty foot equivalent unit," or "TEU," the international standard measure of containers, in describing the capacity of our containerships. Unless otherwise indicated,
all references to currency amounts in this annual report are in U.S. dollars.
All
data regarding our fleet and the terms of our charters is as of February 28, 2017. As of February 28, 2017, we owned 55 containerships aggregating 329,588 TEU in
capacity. Gemini Shipholdings Corporation ("Gemini"), a Marshall Islands company incorporated in August 2015 and beneficially owned 49% by Danaos Corporation and 51% by Virage
International Ltd. ("Virage"), a company controlled by Danaos Corporation's largest stockholder, owned an additional four containerships of 23,998 TEU aggregate capacity as of
February 28, 2017. We do not consolidate Gemini's results of operations and account for our minority equity interest in Gemini under the equity method of accounting. See "Item 4.
Information on the CompanyBusiness OverviewOur Fleet".
Item 1. Identity of Directors, Senior Management and Advisers
Not Applicable.
Item 2. Offer Statistics and Expected Timetable
Not Applicable.
Item 3. Key Information
Selected Financial Data
The following table presents selected consolidated financial and other data of Danaos Corporation and its consolidated subsidiaries for each of
the five years in the five year period ended December 31, 2016. The table should be read together with "Item 5. Operating and Financial
Review and Prospects." The selected consolidated financial data of Danaos Corporation as of December 31, 2016 and 2015 and each of the three years ended December 31, 2016 is derived from
our consolidated financial statements and notes thereto included elsewhere in this Form 20-F, which have been prepared in accordance with U.S. generally accepted accounting principles, or
"U.S. GAAP", and have been audited by PricewaterhouseCoopers S.A., an independent registered public accounting firm. Our selected consolidated financial data as of December 31,
2014, 2013 and 2012 and for each of the two years ended December 31, 2013 is derived from our consolidated financial statements not included herein and reflect the retrospective application of
the change in accounting principle for deferred finance costs.
Our
audited consolidated statements of operations, statements of comprehensive income, changes in stockholders' equity and cash flows for the years ended December 31, 2016, 2015
and 2014, and the
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consolidated
balance sheets at December 31, 2016 and 2015, together with the notes thereto, are included in "Item 18. Financial Statements" and should be read in their entirety.
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Year Ended December 31,
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2016
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2015
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2014
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2013
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2012
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In thousands, except per share amounts and other data
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STATEMENT OF OPERATIONS
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Operating revenues
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$
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498,332
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$
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567,936
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$
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552,091
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$
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588,117
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$
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589,009
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Voyage expenses
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(13,925
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)
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(12,284
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)
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(12,974
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)
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(11,770
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)
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(13,503
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)
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Vessel operating expenses
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(109,384
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)
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(112,736
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)
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(113,755
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)
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(122,074
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)
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(123,356
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)
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Depreciation
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(129,045
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)
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(131,783
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(137,061
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)
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(137,414
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)
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(143,938
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Amortization of deferred drydocking and special survey costs
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(5,528
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)
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(3,845
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(4,387
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(5,482
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(6,070
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Impairment loss
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(415,118
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(41,080
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(75,776
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(19,004
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(129,630
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General and administrative expenses
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(22,105
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(21,831
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(21,442
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(19,458
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(20,379
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Gain/(loss) on sale of vessels
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(36
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5,709
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(449
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830
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Income/(loss) from operations
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(212,643
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244,377
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192,405
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272,466
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152,963
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Interest income
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4,682
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3,419
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1,703
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2,210
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1,642
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Interest expense(1)
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(82,966
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(84,435
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(95,050
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(106,616
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(101,654
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Other finance expenses(1)
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(4,932
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(4,658
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(4,687
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(4,689
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(3,793
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Equity loss on investments
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(16,252
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(1,941
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)
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Other income/(expenses), net
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(41,602
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111
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422
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302
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811
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Unrealized and realized losses on derivatives
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(12,482
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(39,857
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(98,713
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(126,150
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(155,173
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Total other expenses, net
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(153,552
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(127,361
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(196,325
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(234,943
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(258,167
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Net income/(loss)
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$
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(366,195
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$
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117,016
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$
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(3,920
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$
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37,523
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$
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(105,204
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PER SHARE DATA
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Basic and diluted earnings/(loss) per share of common stock
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$
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(3.34
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$
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1.07
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$
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(0.04
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)
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$
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0.34
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$
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(0.96
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Basic and diluted weighted average number of shares (in thousands)
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109,802
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109,785
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109,676
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109,654
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109,613
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CASH FLOW DATA
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Net cash provided by operating activities
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$
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261,967
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$
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271,676
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$
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192,181
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$
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189,025
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$
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166,558
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Net cash provided by/(used in) investing activities
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(9,379
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(13,292
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11,437
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6,087
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(369,789
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Net cash provided by/(used in) financing activities
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(251,124
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(243,861
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(214,041
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(182,587
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207,497
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Net increase/(decrease) in cash and cash equivalents
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1,464
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14,523
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(10,423
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12,525
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4,266
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BALANCE SHEET DATA (at year end)
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Total current assets
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$
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135,954
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$
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127,570
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$
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103,073
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$
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126,866
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$
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98,673
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Total assets(1)
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3,127,064
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3,662,121
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3,802,172
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4,002,644
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4,132,893
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Total current liabilities, including current portion of long-term debt
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2,566,281
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312,145
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328,082
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369,888
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365,252
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Current portion of long-term debt
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2,504,932
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269,979
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178,116
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146,462
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125,076
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Current portion of Vendor financing
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46,530
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57,388
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57,388
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Long-term debt, net of current portion(1)
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2,470,417
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2,723,984
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2,901,733
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3,018,320
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Vendor financing, net of current portion
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17,837
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64,367
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121,754
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Total stockholders' equity
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487,713
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841,914
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688,149
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598,476
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440,304
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Common stock shares outstanding (in thousands)
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109,799
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109,782
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109,669
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109,653
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109,604
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Common stock at par value
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1,098
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1,098
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1,097
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1,097
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1,096
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OTHER DATA
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Number of vessels at period end
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55
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56
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56
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59
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64
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TEU capacity at period end
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329,588
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334,239
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334,239
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345,179
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363,049
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Ownership days
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20,138
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20,440
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20,406
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22,257
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22,910
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Operating days
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19,057
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20,239
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19,905
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20,784
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21,297
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-
(1)
-
The
comparative figures presented give effect to a retrospective application of the change in accounting principle for deferred finance costs as per Accounting
Standards Update No. 2015-03 "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"), which resulted in a reduction of deferred charges, total assets, long-term debt, net and
total liabilities by $49,020, $63,908 and $79,152 as of December 31, 2014, 2013 and 2012, respectively and the reclassification of the amortization of deferred finance costs from "Other finance
expenses" to "Interest expense" of $15,431 and $14,314 for the years ended December 31, 2013 and 2012, respectively.
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In
the first quarter of 2009, our board of directors decided to suspend the payment of further cash dividends as a result of market conditions in the international shipping industry. Our
payment of dividends is subject to the discretion of our Board of Directors. Our loan agreements and the provisions of Marshall Islands law also contain restrictions that affect our ability to pay
dividends and we generally will not be permitted to pay cash dividends under the terms of the bank agreement ("Bank Agreement") and new financing agreements which we entered into in 2011. See
"Item 3. Key InformationRisk FactorsRisks Inherent in Our BusinessWe are generally not permitted to pay cash dividends under our financing arrangements."
See "Item 8. Financial InformationDividend Policy."
Capitalization and Indebtedness
The table below sets forth our consolidated capitalization as of December 31, 2016:
-
-
on an actual basis; and
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-
on an as adjusted basis to reflect, in the period from January 1, 2017 to February 28, 2017, scheduled debt repayments of
$48.3 million, of which $44.9 million relates to our Bank Agreement and $3.4 million relates to our Sinosure-CEXIM-Citibank-ABN Amro credit facility.
Other
than these adjustments, there have been no material changes to our capitalization from debt or equity issuances, re-capitalizations, special dividends, or debt repayments as
adjusted in the table below between January 1, 2017 and February 28, 2017.
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As of December 31, 2016
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Actual
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As adjusted
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(US Dollars in thousands)
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Debt:
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Total debt(1)
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$
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2,504,932
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$
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2,456,599
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Stockholders' equity:
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Preferred stock, par value $0.01 per share; 100,000,000 preferred shares authorized and none issued; actual and as adjusted
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Common stock, par value $0.01 per share; 750,000,000 shares authorized; 109,799,352 shares issued and outstanding; actual and as adjusted(2)(3)
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1,098
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1,098
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Additional paid-in capital
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546,898
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546,898
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Accumulated other comprehensive loss
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(91,163
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)
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(91,163
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)
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Retained earnings
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30,880
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30,880
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Total stockholders' equity
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487,713
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487,713
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Total capitalization
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$
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2,992,645
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$
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2,944,312
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(1)
-
All
of our indebtedness is secured.
-
(2)
-
Does
not include 15 million warrants issued in 2011 to purchase shares of common stock, at an exercise price of $7.00 per share, which we issued to the
lenders participating in our comprehensive financing plan. The warrants, which will expire on January 31, 2019, are exercisable solely on a cashless exercise basis.
-
(3)
-
Excludes
25,000 shares of common stock that we have agreed to issue in 2017 to employees of our manager in respect of equity awards granted in 2016.
Reasons for the Offer and Use of Proceeds
Not Applicable.
4
Table of Contents
RISK FACTORS
Risks Inherent in Our Business
Our business, and an investment in our securities, involves a high degree of risk, including risks relating
to the downturn in the container shipping market, which continues to adversely affect the major liner companies which charter our vessels and as well as our earnings and our compliance with our loan
covenants.
The downturn in the containership market, from which we derive all of our revenues, has severely affected the container shipping industry,
particularly the large liner companies to which we charter our vessels, and has adversely affected our business. The containership market has declined sharply since mid-2015, reaching the lowest
levels since the historically low levels of 2008 and 2009, after a mild upturn in the first half of 2015 from the generally low levels experienced since the third quarter of 2011. The benchmark rates
have declined in all quoted size sectors, with the deepest decline in the benchmark one-year daily rate of a 4,400 TEU Panamax containership, which was $36,000 in May 2008 and after reaching $15,000
in the first half of 2015, was at $4,150 in December 2016. The decline in charter rates is due to various factors, including the level of global trade, including exports from China to Europe and the
United States, and increases in containership capacity. The decline in the containership market has affected the major liner companies which charter our vessels, including Hanjin Shipping which
cancelled long-term charters for eight of our vessels after it filed for court receivership in September 2016 and Hyundai Merchant Marine ("HMM") with which we agreed to charter modifications in July
2016. Other liner companies have also reported large losses again in 2016, including some of our charterers. The decline in the containership market also affects the value of our vessels, which follow
the trends of freight rates and containership charter rates, and the earnings on our charters, and similarly, affects our cash flows and liquidity. As a result of a decrease in our operating income
and charter-attached market value of certain of our vessels caused mainly by the cancellation of our eight charters with Hanjin Shipping, as well as weak conditions prevailing in the containership
market, we were in breach of the minimum security cover, consolidated net leverage and consolidated net worth financial covenants contained in our Bank Agreement (as defined below) and our other
credit facilities as of December 31, 2016. We have obtained waivers of the breaches of these financial covenants covering the period until April 1, 2017. The recent further decline in
the containership charter market may continue to have additional adverse consequences for our industry including limited financing for vessel acquisitions and newbuildings, a less active secondhand
market for the sale of vessels, additional charterers not performing under, or requesting modifications of, existing time charters and loan covenant defaults. This significant downturn in the
container shipping industry could adversely affect our ability to service our debt and other obligations and adversely affect our results of operations and financial condition.
Low containership charter rates and containership vessel values have affected, and any future declines in
these rates and values may continue to affect, our ability to comply with various covenants in our credit facilities.
Our credit facilities, which are secured by mortgages on our vessels, require us to maintain specified collateral coverage ratios and satisfy
financial covenants, including requirements based on the market value of our containerships, our net worth and consolidated debt to EBITDA. Persistently low containership charter rates, or the failure
of our charterers to fulfill their obligations under their charters for our vessels, due to the financial pressure on these liner companies from the significant decreases in demand for the seaborne
transport of containerized cargo or otherwise, has adversely affected our ability to comply with covenants in our financing arrangements. The market
value of containerships is sensitive to, among other things, changes in the charter markets with vessel values deteriorating in times when charter rates are falling and improving when charter rates
are anticipated to rise. The depressed state of the containership charter market coupled with the prevailing difficulty in obtaining financing for vessel purchases has generally adversely affected
containership values. Under the agreement ("Bank Agreement") we entered into in the first quarter of 2011 for the restructuring of
5
Table of Contents
our
then existing credit facilities and certain credit facilities we entered into in January 2011 ("January 2011 Credit Facilities"), the financial covenants in our financing arrangements were reset
to levels that gradually tighten over the period through the maturity of these financing arrangements in late 2018. As a result of a decrease in our operating income and charter-attached market value
of certain of our vessels caused mainly by the cancellation of our eight charters with Hanjin Shipping, as well as weak conditions prevailing in the containership market, we were in breach of the
minimum security cover, consolidated net leverage and consolidated net worth financial covenants contained in our Bank Agreement and our other credit facilities as of December 31, 2016. We have
obtained waivers of the breaches of these financial covenants covering the period until April 1, 2017.
If
we are unable to comply with these financial and other covenants under our credit facilities after the expiration of these waivers, or obtain waivers or reach agreements with our
lenders to modify or refinance such loan agreements, our lenders may accelerate our indebtedness and foreclose on the vessels in our fleet, which would impair our ability to continue to conduct our
business. Any such acceleration, because of the cross-default provisions in our loan agreements, could in turn lead to additional defaults under our other loan agreements and the consequent
acceleration of the indebtedness thereunder and the commencement of similar foreclosure proceedings by our other lenders. If our indebtedness were accelerated in full or in part, it would be difficult
in the current financing environment for us to refinance our debt or obtain additional financing and we could lose our vessels if our lenders foreclose upon their liens, which would adversely affect
our ability to continue our business.
Our inability to comply with certain financial and other covenants under our loan agreements and our working
capital deficit raise substantial doubt about our ability to continue as a going concern.
As a result of a decrease in our operating income and the charter attached market value of certain of our vessels caused principally by the
cancellation of eight charters with Hanjin Shipping, as well as weak conditions in the containership market, we were in breach of certain financial covenants under our Bank Agreement and our other
credit facilities as of December 31, 2016. Refer to Note 12 to our consolidated financial statements for further details. We have obtained waivers of the breaches of the financial
covenants, including the lenders rights to call the debt due to
non-compliance with these financial covenants, until April 1, 2017. As these waivers were obtained for a period of less than the next 12 months from the balance sheet date, and in
accordance with the guidance related to the classification of obligations that are callable by the lenders, we have classified our long-term debt, net of deferred finance costs as current, resulting
in total current liabilities amounting to $2,566.3 million, which substantially exceeded our total current assets amounting to $136.0 million as of December 31, 2016. If we are
unable to comply with the covenants in our loan agreements, obtain waivers or reach agreements with our lenders to modify or refinance such loan agreements, we may have to restructure our obligations
in a court supervised process or otherwise. These conditions and events raise substantial doubt about our ability to continue as a going concern for a reasonable period of time. In light of the above,
the consolidated financial statements included in this report were prepared assuming that we will continue as a going concern. Therefore, the accompanying consolidated financial statements do not
include any adjustments relating to the recoverability and classification of recorded assets and liabilities, other than the reclassification of long-term debt to current liabilities as described
above, or any other adjustments that might result in the event we are unable to continue as a going concern.
We may have difficulty securing profitable employment for our vessels in the currently depressed
containership market.
Of our 55 vessels, as of February 28, 2017, 24 are employed on time charters expiring between March 2017 and December 2017. Given the
current depressed state of the containership charter market, we may be unable to secure employment for these vessels at attractive rates, or at all, when, if
6
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applicable,
their charters expire. Although we do not receive any revenues from our vessels while not employed, as was also the case for certain of our vessels for periods in recent years, we are
required to pay expenses necessary to maintain the vessel in proper operating condition, insure it and service any indebtedness secured by such vessel. If we cannot re-charter our vessels profitably,
our results of operations and operating cash flow will be adversely affected.
We are dependent on the ability and willingness of our charterers to honor their commitments to us for all of
our revenues and the failure of our counterparties to meet their obligations under our charter agreements could cause us to suffer losses or otherwise adversely affect our business.
We derive all of our revenues from the payment of charter hire by our charterers. Each of our 55 containerships are currently employed
under time or bareboat charters with twelve liner companies, with 97% of our revenues in 2016 generated from six such companies. We could lose a charterer or the benefits of a time charter
if:
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-
the charterer fails to make charter payments to us because of its financial inability, disagreements with us, defaults on a payment or
otherwise;
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-
the charterer exercises certain specific limited rights to terminate the charter;
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-
we do not take delivery of any newbuilding containership we may contract for at the agreed time; or
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-
the charterer terminates the charter because the ship fails to meet certain guaranteed speed and fuel consumption requirements and we are
unable to rectify the situation or otherwise reach a mutually acceptable settlement.
In
2016 Hanjin Shipping cancelled the charters for eight of our vessels after it filed for court receivership in September 2016 and in July 2016 we agreed to modifications to the
charters for 13 of our vessels with HMM with substantial charter rate reductions. We have also contributed to ZIM's past restructurings by agreeing to receive a portion of the charter hire payable
under time charters for six of our vessels in the form of long-term notes and ZIM's 2014 agreement with its creditors included a significant reduction in the charter rates payable by ZIM under its
time charters, expiring in 2020 or 2021, for six of our vessels and we received unsecured, non-amortizing, interest bearing ZIM notes maturing in 2023 and ZIM shares in exchange for such reductions
and cancellation of ZIM's other obligations to us which relate to the previously deferred charter hire.
If
we lose a time charter, we may be unable to re-deploy the related vessel on terms as favorable to us or at all. For instance, all of the eight vessels previously chartered to Hanjin
Shipping were rechartered on short-term charters at significantly lower rates, after remaining idle for a number of months in the case of the three 10,100 TEU vessels, following Hanjin Shipping's
cancellation of the charters. We would not receive any revenues from such a vessel while it remained unchartered, but we may be required to pay expenses necessary to maintain the vessel in proper
operating condition, insure it and service any indebtedness secured by such vessel.
Many
of the time charters on which we deploy our containerships provide for charter rates that are significantly above current market rates. The ability and willingness of each of our
counterparties to perform its obligations under their time charters with us will depend on a number of factors that are beyond our control and may include, among other things, general economic
conditions, the condition of the container shipping industry, which has generally experienced sharp declines since mid-2015 from the already weaker levels generally experienced during the limited
recovery from the 2008-2009 economic crisis, and the overall financial condition of the counterparty. Furthermore, the combination of a reduction in cash flow resulting from declines in world trade, a
reduction in borrowing bases under credit facilities and the reduced availability of debt and equity financing may result in a significant reduction in the ability of our charterers to make charter
payments to us, with a number of large liner
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companies
announcing efforts to obtain third party aid and restructure their obligations, including some of our charterers. The likelihood of a charterer seeking to renegotiate or defaulting on its
charter with us may be heightened to the extent such customers are not able to utilize the vessels under charter from us, and instead leave such chartered vessels idle. Should a counterparty fail to
honor its obligations under agreements with us, it may be difficult to secure substitute employment for such vessel, and any new charter arrangements we secure may be at lower rates given the
currently depressed situation in the charter market. Gemini, in which we have minority equity investment, faces the same risks with respect to its vessels that it employs on time charters.
If
our charterers fail to meet their obligations to us or attempt to renegotiate our charter agreements, as part of a court-led restructuring or otherwise, we could sustain significant
reductions in revenue and earnings which could have a material adverse effect on our business, financial condition, results of operations and cash flows, as well as our ability to pay dividends, if
any, in the future, and comply with the covenants in our credit facilities. In such an event, we could be unable to service our debt and other obligations and could ourselves have to restructure our
obligations in a court supervised process or otherwise.
We depend upon a limited number of customers for a large part of our revenues. The loss of these customers
could adversely affect us.
Our customers in the containership sector consist of a limited number of liner operators. The percentage of our revenues derived from these
customers has varied in past years. In the past several years, CMA CGM, Hanjin Shipping, Hyundai Merchant Marine, Yang Ming, China Shipping and ZIM have represented substantial amounts of our revenue.
In 2016, approximately 97% of our operating revenues were generated by these six customers, while in 2015, approximately 99% of our operating revenues were derived from these customers. As of
February 28, 2017, we have charters for thirteen of our vessels with CMA CGM, for thirteen of our vessels with Hyundai, for eight of our vessels with Yang Ming, for seven of our vessels with
ZIM and for two of our vessels with China Shipping. We expect that a limited number of liner companies may continue to generate a substantial portion of our revenues. Some of these liner companies
have publicly acknowledged the financial difficulties facing them, reported substantial losses again in 2016. In 2016 Hanjin Shipping, from which 10% and 17% of our revenues in 2016 and 2015,
respectively, were generated, cancelled the charters for eight of our vessels after it filed for court receivership in September 2016 and in July 2016 we agreed to charter rate reductions under the
charters for 13 of our vessels with HMM, from which 32% of our revenues were generated in 2016. ZIM's 2014 restructuring agreement with its creditors included a significant reduction in the charter
rates payable by ZIM under its time charters, expiring in 2020 or 2021, for six of our vessels. If any of these liner operators cease doing business or do not fulfill their obligations under their
charters for our vessels, due to the financial pressure on these liner companies from the significant decreases in demand for the seaborne transport of containerized cargo or otherwise, our results of
operations and cash flows, and ability to comply with covenants in our financing arrangements, could be adversely affected. Further, if we encounter any difficulties in our relationships with these
charterers, our results of operations, cash flows and financial condition could be adversely affected.
Our profitability and growth depend on the demand for containerships and the current global economic
weakness, and the impact on consumer confidence and consumer spending may continue to result in a decrease in containerized shipping volume and adversely affect charter rates. Charter hire rates for
containerships may continue to experience volatility or settle at depressed levels, which would, in turn, adversely affect our profitability.
Demand for our vessels depends on demand for the shipment of cargoes in containers and, in turn, containerships. The ocean-going container
shipping industry is both cyclical and volatile in terms
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of
charter hire rates and profitability. Containership charter rates peaked in 2005 and generally stayed strong until the middle of 2008, when the effects of the economic crisis began to affect global
container trade, and in 2008 and 2009 the ocean-going container shipping industry experienced severe declines, with charter rates at significantly lower levels than the historic highs of the prior few
years. Containership charter rates again declined sharply beginning in the third quarter of 2011, after limited improvement in 2010 and 2011, before recovering somewhat in the first half of 2015.
Since mid-2015 rates have declined sharply, remain well below long-term averages and could remain at depressed levels for an extended period. Variations in containership charter rates result from
changes in the supply and demand for ship capacity and changes in the supply and demand for the major products transported by containerships. The factors affecting the supply and demand for
containerships and supply and demand for products shipped in containers are outside of our control, and the nature, timing and degree of changes in industry conditions are unpredictable. The slowdown
in the global economy and disruptions in the credit markets may continue to reduce demand for products shipped in containers and, in turn, containership capacity.
Factors
that influence demand for containership capacity include:
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supply and demand for products suitable for shipping in containers;
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changes in global production of products transported by containerships;
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the distance that container cargo products are to be moved by sea;
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the globalization of manufacturing;
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global and regional economic and political conditions;
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-
developments in international trade;
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-
changes in seaborne and other transportation patterns, including changes in the distances over which containerized cargoes are transported and
steaming speed of vessels;
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environmental and other regulatory developments; and
-
-
currency exchange rates.
Factors
that influence the supply of containership capacity include:
-
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the number of new building deliveries;
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-
the scrapping rate of older containerships;
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the price of steel and other raw materials;
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changes in environmental and other regulations that may limit the useful life of containerships;
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the number of containerships that are out of service; and
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port congestion.
Consumer
confidence and consumer spending remain relatively weak and uncertain. Consumer purchases of discretionary items, many of which are transported by sea in containers, generally
decline during periods where disposable income is adversely affected or there is economic uncertainty and, as a result, liner company customers may ship fewer containers or may ship containers only at
reduced rates. Any such decrease in shipping volume could adversely impact our liner company customers and, in turn, demand for containerships. As a result, charter rates and vessel values in the
containership sector have decreased significantly and the counterparty risk associated with the charters for our vessels has increased.
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Our
ability to recharter our containerships upon the expiration or termination of their current charters and the charter rates payable under any renewal or replacement charters will
depend upon, among other things, the prevailing state of the charter market for containerships. As of February 28, 2017, the charters for twenty-four of our existing vessels expire between
March 2017 and December 2017. If the charter market, which has experienced sharp declines since mid-2015 from already low levels, is depressed when our vessels' charters expire, we may be forced to
recharter the containerships, if we were able to recharter such vessels at all, at sharply reduced rates and possibly at rates whereby we incur a loss. If we were unable to recharter our vessels on
favorable terms, we may potentially scrap certain of such vessels, which may reduce our earnings or make our earnings volatile. The same issues will exist if we acquire additional containerships, if
we are able to recharter such vessels at all, and attempt to obtain multi-year charter arrangements as part of an acquisition and financing plan.
The Bank Agreement in respect of our financing arrangements imposes stringent operating and financial
restrictions on us which may, among other things, limit our ability to grow our business and currently effectively prevent us from pursuing opportunities to acquire newbuilding and other recently
built containerships that meet the needs of our liner company customers.
Under the terms of the Bank Agreement, our credit facilities and financing arrangements impose more stringent operating and financial
restrictions on us than those previously contained in our credit facilities. These restrictions, as described in "Item 5. Operating and Financial Review and Prospects," generally preclude us
from:
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incurring additional indebtedness without the consent of our lenders, except to the extent the proceeds of such additional indebtedness is used
to repay existing indebtedness;
-
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creating liens on our assets, generally, unless for the equitable and ratable benefit of our existing lenders;
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selling capital stock of our subsidiaries;
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disposing of assets without the consent of the lenders with loans collateralized by such assets and, in case of such approval, using the
proceeds thereof to repay indebtedness;
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using a significant portion of the proceeds from equity issuances for any purpose other than to repay indebtedness;
-
-
using more than a minimal amount of our free cash from operations for purposes other than repayment of indebtedness;
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engaging in transactions that would constitute a change of control, as defined in such financing agreement, without repaying all of our
indebtedness in full;
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paying dividends, absent a substantial reduction in our leverage; or
-
-
changing our manager or certain members of our management.
As
a result we have reduced discretion in operating our business and may have difficulty growing our business. In particular, the conditions on the use of equity proceeds and incurrence
of indebtedness effectively prevent us from pursuing opportunities to acquire newbuildings and other recently built containerships that meet the needs of our liner company customers with the resulting
risks of a deterioration in our reputation and standing with our customers and a loss of competitive position among other containership owners.
In
addition, our respective lenders under these financing arrangements will, at their option, be able to require us to repay in full amounts outstanding under such respective credit
facilities, upon a "Change of Control" of our company, which for these purposes and as further described in "Item 5. Operating and Financial Review and ProspectsBank
Agreement", includes Dr. Coustas
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ceasing
to be our Chief Executive Officer, Dr. Coustas and members of his family ceasing to collectively own over one-third of the voting interest in our outstanding capital stock or any other
person or group controlling more than 20% of the voting power of our outstanding capital stock.
The
Bank Agreement and our financing arrangements contain financial covenants requiring us to:
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maintain a ratio of (i) the market value of all of the vessels in our fleet, on a charter-inclusive basis, plus the net realizable value
of any additional collateral, to (ii) our consolidated total debt above specified minimum levels gradually increasing from 90% through December 31, 2011 to 130% from September 30,
2017 through September 30, 2018. This ratio was required to be 120% as of December 31, 2016;
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maintain a minimum ratio of (i) the market value of the nine vessels (
Hyundai Smart, Hyundai Speed, Hyundai
Ambition, Hyundai Together, Hyundai Tenacity, Express Athens (ex Hanjin Greece), Express Rome (ex Hanjin Italy), Express Berlin (ex Hanjin Germany) and CMA CGM Rabelais
)
collateralizing the January 2011 Credit Facilities, calculated on a charter-free basis, plus the net realizable value of any additional collateral, to (ii) our aggregate debt outstanding under
the January 2011 Credit Facilities of 100% from September 30, 2012 through September 30, 2018;
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-
maintain minimum free consolidated unrestricted cash and cash equivalents, less the amount of the aggregate variable principal amortization
amounts, described above, of $30.0 million at the end of each calendar quarter;
-
-
ensure that our (i) consolidated total debt less unrestricted cash and cash equivalents to (ii) consolidated EBITDA (defined as
net income before interest, gains or losses under any hedging arrangements, tax, depreciation, amortization and any other non-cash item, capital gains or losses realized from the sale of any vessel,
finance charges and capital losses on vessel cancellations and before any non-recurring items and excluding any accrued interest due to us but not received on or before the end of the relevant period;
provided that non-recurring items excluded from this calculation shall not exceed 5% of EBITDA calculated in this manner) for the last twelve months does not exceed a maximum ratio gradually
decreasing from 12:1 on December 31, 2010 to 4.75:1 on September 30, 2018. This ratio was required to be 6.0:1 as of December 31, 2016;
-
-
ensure that the ratio of our (i) consolidated EBITDA for the last twelve months to (ii) net interest expense (defined as interest
expense (excluding capitalized interest), less interest income, less realized gains on interest rate swaps (excluding capitalized gains) and plus realized losses on interest rate swaps (excluding
capitalized losses)) exceeds a minimum level of 1.50:1 through September 30, 2013 and thereafter gradually increasing to 2.80:1 by September 30, 2018. This ratio was required to be 2.3:1
as of December 31, 2016; and
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-
maintain a consolidated market value adjusted net worth (defined as the amount by which our total consolidated assets adjusted for the market
value of our vessels in the water less cash and cash equivalents in excess of our debt service requirements exceeds our total consolidated liabilities after excluding the net asset or liability
relating to the fair value of derivatives as reflected in our financial statements for the relevant period) of at least $400 million.
The
provisions of our KEXIM-ABN Amro credit facility, which is not covered by the Bank Agreement, have been aligned with the above covenants through November 20, 2018 and our
Sinosure-CEXIM credit facility has similar financial covenants and a collateral coverage covenant of 125% per tranche as described in "Item 5. Operating and Financial Review and Prospects."
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As a result of a decrease in our operating income and charter-attached market value of certain of our vessels caused mainly by the cancellation of our eight
charters with Hanjin Shipping, as well as weak conditions prevailing in the containership market, we were in breach of the minimum security cover, consolidated net leverage and consolidated net worth
financial covenants contained in our Bank Agreement and our other credit facilities as of December 31, 2016. We have obtained waivers of the breaches of these financial covenants covering the
period until April 1, 2017. If we are unable to meet our payment or covenant compliance obligations under the terms of the Bank Agreement covering our credit facilities or our other financing
arrangements, upon expiration of our current waivers or otherwise, and are unable to obtain a waiver or reach an agreement with our lenders our lenders could then accelerate our indebtedness and
foreclose on the vessels in our fleet securing those credit facilities, which could result in cross-defaults under our other credit facilities, and the consequent acceleration of the indebtedness
thereunder and the commencement of similar foreclosure proceedings by other lenders. The loss of any of these vessels would have a material adverse effect on our operating results and financial
condition and could impair our ability to operate our business.
Substantial debt levels could limit our flexibility to obtain additional financing and pursue other business
opportunities and our ability to service our outstanding indebtedness will depend on our future operating performance, including the charter rates we receive under charters for our vessels.
As of December 31, 2016, we had outstanding indebtedness of $2.5 billion and, while we have no remaining borrowing availability
under our existing loan agreements, we may incur substantial additional indebtedness, as market conditions warrant over the medium to long-term and to the extent permitted by our existing lenders,
further grow our fleet. This level of debt could have important consequences to us, including the following:
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our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be
impaired or such financing may be unavailable on favorable terms;
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-
we will need to use substantially all of our free cash from operations, as required under the terms of our Bank Agreement, to make principal
and interest payments on our debt, reducing the funds that would otherwise be available for future business opportunities and, if permitted by our lenders and reinstated, dividends to our
stockholders;
-
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our debt level could make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our business or the
economy generally; and
-
-
our debt level may limit our flexibility in responding to changing business and economic conditions.
Our
ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and
financial, business, regulatory and other factors, some of which are beyond our control. In particular, the charter rates we obtain for our vessels, including the twenty-four vessels with charters
expiring between March 2017 and
December 2017, and any reductions in contracted charter rates for our vessels and other concessions, such as we agreed in 2014 with ZIM for six of our vessels, such as we agreed in 2016 with Hyundai
for thirteen of our vessels or the cancellation of our charters for eight vessels with Hanjin Shipping in 2016 due to its bankruptcy, will have a significant impact on our ability to service our
indebtedness. Due to the restrictions on the use of cash from operations and other sources for purposes other than the repayment of indebtedness, even if we otherwise generate sufficient cash flow to
service our debt, we may still be forced to take actions such as reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or
refinancing our debt or seeking additional equity capital. We may not be able to effect any of these remedies on satisfactory terms, or at all. In addition, restrictions in the Bank Agreement in
respect of our credit facilities and a relative
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lack
of liquidity in the debt and equity markets could hinder our ability to refinance our debt or obtain additional financing on favorable terms in the future.
Substantially all of our approximately $2.5 billion of indebtedness is scheduled to mature by the end
of 2018 under our Bank Agreement and other loan agreements, which we may have difficulty refinancing in the current financing environment.
Of our $2.5 billion of indebtedness as of December 31, 2016, approximately $2.4 billion is scheduled to mature by
December 31, 2018, all of which has been reclassified as current liabilities as a result of the breach of certain covenants in our Bank Agreement and other loan agreements which have been
waived for a period ending April 1, 2017. We do not have sufficient cash or other resources, nor do we expect to generate sufficient cash from operations, to fund these balloon payments and we
will be required to seek to refinance this maturing indebtedness with new debt financing which has not yet been arranged. In the current shipping industry financing environment and based on the
current market value of our containerships, which is substantially less than our outstanding indebtedness on an aggregate basis, the existing charters for our containerships and the state of the
containership charter market, it will be difficult to obtain the financing necessary to refinance the full amount of this indebtedness. These circumstances and the prevailing conditions in the global
financial markets, as well as the restrictions in our Bank Agreement, may also preclude us from raising sufficient equity capital to facilitate refinancing these amounts. If we are unable to refinance
our indebtedness scheduled to mature in 2018, our lenders may foreclose on our vessels or we may have to restructure our obligations, which may impede our ability to continue to operate our business.
Disruptions in world financial markets and the resulting governmental action could have a further material
adverse impact on our results of operations, financial condition and cash flows, and could cause the market price of our common stock to decline further.
Europe, the United States and other parts of the world continue to exhibit weak economic trends. For example, the credit markets in Europe and,
to a lesser extent, the United States have experienced significant contraction, de-leveraging and reduced liquidity, and European Union and international organizations, as well as the United States
federal government and state governments, have implemented and are considering a broad variety of governmental action and/or new regulation of the financial markets. Securities and futures markets and
the credit markets are subject to comprehensive statutes, regulations and other requirements. The U.S. Securities and Exchange Commission, or the SEC, other regulators, self-regulatory organizations
and securities exchanges are authorized to take extraordinary actions in the event of market emergencies, and may effect changes in law or interpretations of existing laws.
Credit
markets and the debt and equity capital markets have been distressed at times since the severe disruptions and volatility of 2008 and 2009. These issues, along with the re-pricing
of credit risk and the difficulties being experienced by financial institutions have made, and will likely continue to make, it difficult to obtain financing. As a result of the disruptions in the
credit markets, the cost of obtaining bank financing has increased as many lenders have increased interest rates, enacted tighter lending standards, required more restrictive terms, including higher
collateral ratios for advances, shorter maturities and smaller loan amounts, refused to refinance existing debt at maturity at all or on terms similar to our current debt. Furthermore, certain banks
that have historically been significant lenders to the shipping industry have announced an intention to reduce or cease lending activities in the shipping industry. We cannot be certain that financing
will be available on acceptable terms or at all. If financing is not available when needed, or is available only on unfavorable terms, we may be unable to meet our obligations as they come due. In the
absence of available financing, we may be unable to take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our revenues and
results of operations.
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We
face risks attendant to changes in economic environments, changes in interest rates, and instability in the banking and securities markets around the world, among other factors. Major
market disruptions and the current adverse changes in market conditions and the regulatory climate in the United States and worldwide may adversely affect our business or impair our ability to borrow
amounts under any future financial arrangements. We cannot predict how long the current market conditions will last. However, these recent and developing economic and governmental factors, together
with the concurrent decline in charter rates and vessel values, may have a material adverse effect on our results of operations, financial condition or cash flows, have caused the price of our common
stock to decline and could cause the price of our common stock to decline further.
In
addition, as a result of the ongoing economic slump in Greece resulting from the sovereign debt crisis and the related austerity measures implemented by the Greek government, our
operations in Greece may be subjected to new regulations that may require us to incur new or additional compliance or other administrative costs and may require that we pay to the Greek government new
taxes or other fees. Furthermore, the change in the Greek government and potential shift in its policies may undermine Greece's political and economic stability, which may adversely affect our
operations and those of our manager located in Greece. We also face the risk that strikes, work stoppages, civil unrest and violence within Greece, as well as the capital controls in effect in Greece
since mid-2015, may disrupt our shoreside operations and those of our manager located in Greece.
Weak economic conditions throughout the world, particularly in Europe and in the Asia Pacific region, could
have a material adverse effect on our business, financial condition and results of operations.
Economic conditions have remained relatively weak since the 2008-2009 economic crisis and renewed concerns about the pace of the recovery in
different parts of the world, including China, have emerged in recent months. Continuing concerns regarding the possibility of sovereign debt defaults by European Union member countries, including
Greece, and the potential for recession in Europe have resulted in devaluation of the Euro and have led to concerns regarding consumer demand both in Europe and other parts of the world, including the
United States. The deterioration in the global economy has caused, and may continue to cause, a decrease in worldwide demand for certain goods and, thus, container shipping. Continuing economic
instability could have a material adverse effect on our financial condition and results of operations. In particular, we anticipate a significant number of the port calls made by our vessels will
continue to involve the loading or unloading of containers in ports in the Asia Pacific region. As a result, negative changes in economic conditions in any Asia Pacific country, and particularly in
China, may exacerbate the effect of the significant downturns in the economies of the United States and the European Union and may have a material adverse effect on our business, financial position
and results of operations, as well as our future prospects. In recent years, China has been one of the world's fastest growing economies in terms of gross domestic product, which has had a significant
impact on shipping demand. Recently, however, significant concerns have arisen over slowing growth in China and other countries in the Asia Pacific region and regarding how long such countries may
experience slowed or even negative economic growth in the future. Moreover, the current relative weakness in the economies of the United States, the European Union and other Asian countries may
further adversely affect economic growth in China and elsewhere. In particular, the possibility of sovereign debt defaults by European Union member countries, including Greece, and any resulting
weakness of the Euro, including against the Chinese renminbi, could adversely affect European consumer demand, particularly for goods imported, many of which are shipped in containerized form, from
China and elsewhere in Asia, and reduce the availability of trade financing which is vital to the conduct of international shipping. In addition, the charters that we enter into with Chinese
customers, including the charters we currently have with China Shipping for four of our vessels, may be subject to new regulations in China that may require us to incur new or additional compliance or
other administrative costs and may require that we pay to the Chinese government new taxes or other fees. Changes in laws and regulations, including with regards to tax matters, and their
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implementation
by local authorities could affect our vessels chartered to Chinese customers as well as our vessels calling to Chinese ports and could have a material adverse effect on our business,
results of operations and financial condition. Our business, financial condition, results of operations, ability to pay dividends, if any, as well as our future prospects, will likely be materially
and adversely affected by a further economic downturn in any of these countries.
A decrease in the level of export of goods, in particular from Asia, or an increase in trade protectionism
globally, including from the United States, could have a material adverse impact on our charterers' business and, in turn, could cause a material adverse impact on our business, financial condition,
results of operations, cash flows and ability to make cash distributions and service or refinance our debt.
Our operations expose us to the risk that increased trade protectionism from the United States or other nations adversely affect our business.
Governments may turn to trade barriers to protect or revive their domestic industries in the face of foreign imports, thereby depressing the demand for shipping. Restrictions on imports, including in
the form of tariffs, could have a major impact on global trade and demand for shipping. Trade protectionism in the markets that our charterers serve may cause an increase in the cost of exported
goods, the length of time required to deliver goods and the risks associated with exporting goods and, as a result, a decline in the volume of exported goods and demand for shipping.
The
new U.S. president was elected on a platform promoting trade protectionism. The results of the presidential election have thus created significant uncertainty about the future
relationship between the United States and China and other exporting countries, including with respect to trade policies, treaties, government regulations and tariffs. On January 23, 2017, the
U.S. President signed an executive order withdrawing the United States from the Trans-Pacific Partnership, a global trade agreement intended to include the United States, Canada, Mexico, Peru and a
number of Asian countries. Protectionist developments, or the perception they may occur, may have a material adverse effect on global economic conditions, and may significantly reduce global trade
and, in particular, trade between the United States and other countries, including China.
Our
containerships are deployed on routes involving containerized trade in and out of emerging markets, and our charterers' container shipping and business revenue may be derived from
the shipment of goods from Asia to various overseas export markets, including the United States and Europe. Any reduction in or hindrance to the output of Asia-based exporters could have a material
adverse effect on the growth rate of Asia's exports and on our charterers' business.
Furthermore,
the government of China has implemented economic policies aimed at increasing domestic consumption of Chinese-made goods and containing capital outflows. These policies may
have the effect of reducing the supply of goods available for exports and the level of international trading and may, in turn, result in a decrease in demand for container shipping. In addition,
reforms in China for a gradual shift to a "market economy" including with respect to the prices of certain commodities, are unprecedented or experimental and may be subject to revision, change or
abolition and if these reforms are reversed or amended, the level of imports to and exports from China could be adversely affected.
Any
new or increased trade barriers or restrictions on trade would have an adverse impact on our charterers' business, operating results and financial condition and could thereby affect
their ability to make timely charter hire payments to us and to renew and increase the number of their time charters with us. Such adverse developments could in turn have a material adverse effect on
our business, financial condition, results of operations, cash flow and our ability to service or refinance our debt.
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Demand for the seaborne transport of products in containers, which has declined sharply since mid-2015, has a
significant impact on the financial performance of liner companies and, in turn, demand for containerships and our charter counterparty risk.
Demand for the seaborne transportation of products in containers, which is significantly impacted by global economic activity, has declined
sharply since mid-2015, reaching the lowest levels since the historically low levels of 2008 and 2009. Consequently, the cargo volumes and freight rates achieved by liner companies, with which all of
the existing vessels in our fleet are chartered, have declined sharply, reducing liner company profitability and, at times, failing to cover the costs of liner companies operating vessels on their
shipping lines. In response to such reduced cargo volume and freight rates, the number of vessels being actively deployed by liner companies decreased, with approximately 7% of the world containership
fleet estimated to be out of service at the end of 2016, which was below the 12% high of December 2009 but up significantly from 1.3% at the end of 2014. Moreover, newbuilding containerships with an
aggregate capacity of approximately 3.2 million TEUs, representing approximately 16% of the existing global fleet capacity at the end of 2016, were under construction, which may exacerbate the
surplus of containership capacity further reducing charterhire rates or increasing the number of unemployed vessels. Many liner companies, including some of our customers, reported substantial losses
in 2016 and other recent years, as well as having announced plans to reduce the number of vessels they charter-in and enter into consolidating mergers and cooperative alliances as part of efforts to
reduce the size of their fleets to better align fleet capacity with the reduced demand for marine transportation of containerized cargo.
The
reduced demand and resulting financial challenges faced by our liner company customers has significantly reduced demand for containerships and may increase the likelihood of one or
more of our customers being unable or unwilling to pay us the contracted charterhire rates, such as we agreed with HMM in 2016 and ZIM in 2014 and Hanjin Shipping's cancellation of long-term charters
for eight of our vessels in 2016, which are generally significantly above prevailing charter rates, under the charters for our vessels. We generate all of our revenues from these charters and if our
charterers fail to meet their obligations to us, we would sustain significant reductions in revenue and earnings, which could materially adversely affect our business and results of operations, as
well as our ability to comply with covenants in our credit facilities.
An over-supply of containership capacity may prolong or further depress the current low charter rates and
adversely affect our ability to recharter our containerships at profitable rates or at all and, in turn, reduce our profitability.
While the size of the containership order book has declined from the historic highs reached in mid-2008, at the end of 2016 newbuilding
containerships with an aggregate capacity of approximately 3.2 million TEUs were under construction, representing approximately 16% of the existing global fleet capacity. The size of the
orderbook is large relative to historic levels and, notwithstanding that some orders may be cancelled or delayed, will likely result in a significant increase in the size of the world containership
fleet over the next few years. An over-supply of containership capacity, particularly in conjunction with the currently low level of demand for the seaborne transport of containers, which proposed
liner company alliances may accentuate, could exacerbate the recent decrease in charter rates or prolong the period during which low charter rates prevail. We do not hedge against our exposure to
changes in charter rates, due to increased supply of containerships or otherwise. As such, if the current low charter rate environment persists, or a further reduction occurs, during a period when the
current charters for our containerships expire or are terminated, we may only be able to recharter those containerships at reduced or unprofitable rates or we may not be able to charter those vessels
at all. As of February 28, 2017, the charters for twenty-four of our vessels expire between March 2017 and December 2017.
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Our profitability and growth depends on our ability to expand relationships with existing charterers and to
obtain new time charters, for which we will face substantial competition from established companies with significant resources as well as new entrants.
One of our objectives over the mid- to long-term is, when market conditions warrant and it is feasible, given the restrictions currently
contained in our Bank Agreement, to acquire additional containerships in conjunction with entering into additional multi-year, fixed-rate time charters for these vessels. We employ our vessels in
highly competitive markets that are capital intensive and highly fragmented, with a highly competitive process for obtaining new multi-year time charters that generally involves an intensive screening
process and competitive bids, and often extends for several months. Generally, we compete for charters based on price, customer relationship, operating expertise, professional reputation and the size,
age and condition of our vessels. Recently, in light of the dramatic downturn in the containership charter market, other containership owners, including many of the KG-model shipping entities, have
chartered their vessels to liner companies at extremely low rates, including at unprofitable levels, increasing the price pressure when competing to secure employment for our containerships. Container
shipping charters are awarded based upon a variety of factors relating to the vessel operator, including:
-
-
shipping industry relationships and reputation for customer service and safety;
-
-
container shipping experience and quality of ship operations (including cost effectiveness);
-
-
quality and experience of seafaring crew;
-
-
the ability to finance containerships at competitive rates and financial stability in general;
-
-
relationships with shipyards and the ability to get suitable berths;
-
-
construction management experience, including the ability to obtain on-time delivery of new ships according to customer specifications;
-
-
willingness to accept operational risks pursuant to the charter, such as allowing termination of the charter for force majeure events; and
-
-
competitiveness of the bid in terms of overall price.
We
face substantial competition from a number of experienced companies, including state-sponsored entities and major shipping companies. Some of these competitors have significantly
greater financial resources than we do, and can therefore operate larger fleets and may be able to offer better charter rates. We anticipate that other marine transportation companies may also enter
the containership sector, including many with strong reputations and extensive resources and experience. This increased competition may cause greater price competition for time charters and, in
stronger market conditions, for secondhand vessels and newbuildings.
In
addition, a number of our competitors in the containership sector, including several that are among the largest charter owners of containerships in the world, have been established in
the form of a German KG (Kommanditgesellschaft), which provides tax benefits to private investors. Although the German tax law was amended to significantly restrict the tax benefits to taxpayers who
invest in these entities after November 10, 2005, the tax benefits afforded to all investors in the KG-model shipping entities continue to be significant, and such entities may continue to be
attractive investments. Their focus on these tax benefits allows the KG-model shipping entities more flexibility in offering lower charter rates to liner companies. Further, since the charter rate is
generally considered to be one of the principal factors in a charterer's decision to charter a vessel, the rates offered by these sizeable competitors can have a depressing effect throughout the
charter market.
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As
a result of these factors, we may be unable to compete successfully with established companies with greater resources or new entrants for charters at a profitable level, or at all,
which would have a material adverse effect on our business, results of operations and financial condition.
We may have more difficulty entering into multi-year, fixed-rate time charters if a more active short-term or
spot container shipping market develops.
One of our principal strategies is to enter into multi-year, fixed-rate containership time charters particularly in strong charter rate
environments, although in weaker charter rate environments, such as the one that currently exists, we would generally expect to target somewhat shorter charter terms of three to six years or even
shorter periods, particularly for smaller vessels. As more vessels become available for the spot or short-term market, we may have difficulty entering into additional multi-year, fixed-rate time
charters for our containerships due to the increased supply of containerships and the possibility of lower rates in the spot market and, as a result, our cash flows may be subject to instability in
the long-term. A more active short-term or spot market may require us to enter into charters based on changing market rates, as opposed to contracts based on a fixed rate, which could result in a
decrease in our cash flows and net income in periods when the market for container shipping is depressed, as it is currently, or insufficient funds are available to cover our financing costs for
related containerships.
Delays in deliveries of any newbuilding vessels we may order or any secondhand vessels we may agree to
acquire could harm our business.
Delays in the delivery of any newbuilding containerships we may order or any secondhand vessels we may agree to acquire, would delay our receipt
of revenues under any arranged time charters and could result in the cancellation of such time charters or other liabilities under such charters, and therefore adversely affect our anticipated results
of operations. The delivery of any newbuilding containership could also be delayed because of, among other things:
-
-
work stoppages or other labor disturbances or other events that disrupt the operations of the shipyard building the vessels;
-
-
quality or engineering problems;
-
-
changes in governmental regulations or maritime self-regulatory organization standards;
-
-
lack of raw materials;
-
-
bankruptcy or other financial crisis of the shipyard building the vessel;
-
-
our inability to obtain requisite financing or make timely payments;
-
-
a backlog of orders at the shipyard building the vessel;
-
-
hostilities or political or economic disturbances in the countries where the containerships are being built;
-
-
weather interference or catastrophic event, such as a major earthquake or fire;
-
-
our requests for changes to the original vessel specifications;
-
-
requests from the liner companies, with which we have arranged charters for such vessels, to delay construction and delivery of such vessels
due to weak economic conditions and container shipping demand;
-
-
shortages of or delays in the receipt of necessary construction materials, such as steel;
-
-
our inability to obtain requisite permits or approvals; or
-
-
a dispute with the shipyard building the vessel.
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The
shipbuilders with which we contract for any newbuilding may be affected by the ongoing instability of the financial markets and other market conditions, including with respect to the
fluctuating price of commodities and currency exchange rates. In addition, the refund guarantors under any newbuilding contracts we enter into, which would be banks, financial institutions and other
credit agencies, may also be affected by financial market conditions in the same manner as our lenders and, as a result, may be unable or unwilling to meet their obligations under their refund
guarantees. If shipbuilders or refund guarantors are unable or unwilling to meet their obligations to us, this will impact our acquisition of vessels and may materially and adversely affect our
operations and our obligations under our credit facilities.
The
delivery of any secondhand containership we may agree to acquire could be delayed because of, among other things, hostilities or political disturbances, non-performance of the
purchase agreement
with respect to the vessels by the seller, our inability to obtain requisite permits, approvals or financing or damage to or destruction of the vessels while being operated by the seller prior to the
delivery date.
Certain of the containerships in our fleet are subject to purchase options held by the charterers of the
respective vessels, which, if exercised, could reduce the size of our containership fleet and reduce our future revenues.
The chartering arrangements with respect to the
CMA CGM Moliere
, the
CMA
CGM Musset
, the
CMA CGM Nerval
, the
CMA CGM Rabelais
and the
CMA CGM Racine
include
options for the charterer, CMA CGM, to purchase the vessels eight years after the commencement of their respective charters,
which will fall in September 2017, March 2018, May 2018, July 2018 and August 2018, respectively, each for $78.0 million. As of February 28, 2017, none of these options has been
exercised. The option exercise prices with respect to these vessels reflect an estimate, made at the time of entry into the applicable charter, of market prices, which are in excess of the vessels'
book values net of depreciation, at the time the options become exercisable. If CMA-CGM were to exercise these options with respect to any or all of these vessels, the expected size of our
containership fleet would be reduced and, if there were a scarcity of secondhand containerships available for acquisition at such time and because of the delay in delivery associated with
commissioning newbuilding containerships, we could be unable to replace these vessels with other comparable vessels, or any other vessels, quickly or, if containership values were higher than
currently anticipated at the time we were required to sell these vessels, at a cost equal to the purchase price paid by CMA-CGM. Consequently, if these purchase options were to be exercised, the
expected size of our containership fleet would be reduced, and as a result our anticipated level of revenues would be reduced.
Containership values have recently decreased significantly, and may remain at these depressed levels, or
decrease further, and over time may fluctuate substantially. Depressed vessel values could cause us to incur impairment charges, such as the $415.1 million, $41.1 million and
$75.8 million impairment losses we recorded as of December 31, 2016, December 31, 2015 and December 31, 2014, respectively, for our older vessels, or to incur a loss if
these values are low at a time we are attempting to dispose of a vessel.
Due to the sharp decline in world trade and containership charter rates, the market values of the containerships in our fleet are currently
significantly lower than prior to the downturn that began in the second half of 2008. Containership values may remain at current low, or lower, levels for a prolonged period of time and can fluctuate
substantially over time due to a number of different factors, including:
-
-
prevailing economic conditions in the markets in which containerships operate;
-
-
changes in and the level of world trade;
-
-
the supply of containership capacity;
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-
-
prevailing charter rates; and
-
-
the cost of retrofitting or modifying existing ships, as a result of technological advances in vessel design or equipment, changes in
applicable environmental or other regulations or standards, or otherwise.
We
review our vessels for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. As of December 31, 2016
and December 31, 2015, we concluded that events occurred and circumstances had changed, which may trigger the existence of potential impairment of our long-lived assets and we performed
impairment testing and we recorded an impairment loss of $415.1 million and $41.1 million, respectively for our older vessels, and we have
incurred impairment charges in prior years as well. Conditions in the containership market also required us to record other impairment losses in 2016, including with respect to our investment in
Gemini and our ZIM securities. In the future, if the market values of our vessels experience further deterioration or we lose the benefits of the existing charter arrangements for any of our vessels
and cannot replace such arrangements with charters at comparable rates, we may be required to record additional impairment charges in our financial statements, which could adversely affect our results
of operations. Any impairment charges incurred as a result of declines in charter rates could negatively affect our financial condition and results of operations. In addition, if we sell any vessel at
a time when vessel prices have fallen and before we have recorded an impairment adjustment to our financial statements, the sale may be at less than the vessel's carrying amount on our financial
statements, resulting in a loss and a reduction in earnings.
We are generally not permitted to pay cash dividends under our financing arrangements.
Prior to 2009, we paid regular cash dividends on a quarterly basis. In the first quarter of 2009, our board of directors suspended the payment
of cash dividends as a result of market conditions in the international shipping industry and in particular the sharp decline in charter rates and vessel values in the containership sector. Until such
market conditions significantly improve, it is unlikely that we will reinstate the payment of dividends and if reinstated, it is likely that any dividend payments would be at reduced levels. The Bank
Agreement, which restructured our credit facilities and provides new financing arrangements, does not permit us to pay cash dividends or repurchase shares of our common stock until the termination of
such agreements in late 2018, absent a significant decrease in our leverage.
We are a holding company and we depend on the ability of our subsidiaries to distribute funds to us in order
to satisfy our financial obligations.
We are a holding company and our subsidiaries conduct all of our operations and own all of our operating assets. We have no significant assets
other than the equity interests in our subsidiaries and our equity investment in Gemini. As a result, our ability to pay our contractual obligations and, if permitted by our lenders and reinstated, to
make any dividend payments in the future depends on our subsidiaries and their ability to distribute funds to us. The ability of a subsidiary to make these distributions could be affected by a claim
or other action by a third party, including a creditor, or by the law of their respective jurisdictions of incorporation which regulates the payment of dividends by companies. If we are unable to
obtain funds from our subsidiaries, even if our lenders agreed to allow dividend payments, our board of directors may exercise its discretion not to declare or pay dividends. If we reinstate dividend
payments in the future, we do not intend to seek to obtain funds from other sources to make such dividend payments, if any.
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If we are unable to fund our capital expenditures for additional vessels, we may not be able to grow our
fleet.
We would have to make substantial capital expenditures to grow our fleet. We have no remaining borrowing availability under our existing credit
facilities. In order to fund capital expenditures for future fleet growth to the extent feasible given the current restrictions in our Bank Agreement and other financing arrangements, we generally
plan to use equity financing given the restrictions that are contained in our restructured credit facilities and other financing arrangements on the use of cash from our operations, debt financings
and asset sales for purposes other than debt repayment. Our ability to access the capital markets through future offerings may be limited by our financial condition at the time of any such offering as
well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. Moreover, only a portion of the
proceeds from any equity financings that we are able to complete will be permitted to be used for purposes other than debt repayment under our restructured and other financing arrangements, which
could also adversely affect our ability to complete an equity financing on favorable terms. Our failure to obtain funds for future capital expenditures could limit our ability to grow our fleet.
We must make substantial capital expenditures to maintain the operating capacity of our fleet, which may
reduce the amount of cash available for other purposes.
Maintenance capital expenditures include capital expenditures associated with modifying an existing vessel or acquiring a new vessel to the
extent these expenditures are incurred to maintain the operating capacity of our existing fleet. These expenditures could increase as a result of changes in the cost of labor and materials; customer
requirements; increases in our fleet size or the cost of replacement vessels; governmental regulations and maritime self-regulatory organization standards relating to safety, security or the
environment; and competitive standards. Significant capital expenditures, including to maintain the operating capacity of our fleet, may reduce the cash available for other purposes.
Our ability to obtain additional debt financing for future acquisitions of vessels may be dependent on the
performance of our then existing charters and the creditworthiness of our charterers.
We have no remaining borrowing availability under our existing credit facilities. We intend, however, to borrow against vessels we may acquire
in the future as part of our medium to long term growth plan to the extent permitted under our existing financing arrangements. The actual or perceived credit quality of our charterers, and any
defaults by them, may materially affect our ability to obtain the additional capital resources that we will require to purchase additional vessels or may significantly increase our costs of obtaining
such capital. Our inability to obtain additional financing or committing to financing on unattractive terms could have a material adverse effect on our business, results of operations and financial
condition.
We are exposed to volatility in LIBOR.
Loans advanced under our credit facilities are, generally, advanced at a floating rate based on LIBOR, which has been stable and at historically
low levels in recent years, but was volatile in prior years, which can affect the amount of interest payable on our debt, and which, in turn, could have an adverse effect on our earnings and cash
flow. LIBOR rates have been at historically low levels for an extended period of time and may continue to increase from these low levels. Our financial condition could be materially adversely affected
at any time that we have not entered into interest rate hedging arrangements to hedge our interest rate exposure and the interest rates applicable to our credit facilities and any other financing
arrangements we may enter into in the future increase. Moreover, even if we have entered into interest rate swaps or other derivative instruments for purposes of
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managing
our interest rate or bunker cost exposure, our hedging strategies may not be effective and we may incur substantial losses.
We may enter into derivative contracts to hedge our exposure to fluctuations in interest rates, which could
result in higher than market interest rates and charges against our income.
As of December 31, 2016, we did not have any interest rate swap arrangements. In the past, however, we have entered into interest rate
swaps in substantial aggregate notional amounts, generally for purposes of managing our exposure to fluctuations in interest rates applicable to indebtedness under our credit facilities, which were
advanced at floating rates based on LIBOR, as well as interest rate swap agreements converting fixed interest rate exposure under our credit facilities advanced at a fixed rate of interest to floating
rates based on LIBOR. Any hedging strategies we choose to employ, may not be effective and we may again incur substantial losses, as we did in 2015 and prior years. Since our discontinuation of hedge
accounting for interest rate swaps and any other derivative instruments from July 1, 2012, we recognize all fluctuations in the fair value of such contracts in our consolidated Statements of
Operations. Recognition of such fluctuations in our statement of operations may increase the volatility of our earnings. Any hedging activities we engage in may not effectively manage our interest
rate exposure or have the desired impact on our financial conditions or results of operations.
Because we generate all of our revenues in United States dollars but incur a portion of our expenses in other
currencies, exchange rate fluctuations could hurt our results of operations.
We generate all of our revenues in United States dollars and for the year ended December 31, 2016, we incurred approximately 26.0% of our
vessels' expenses in currencies other than United States dollars, mainly Euros. This difference could lead to fluctuations in net income due to changes in the value of the United States dollar
relative to the other currencies, in particular the Euro. Expenses incurred in foreign currencies against which the United States dollar falls in value could increase, thereby decreasing our net
income. We have not hedged our currency exposure and, as a result, our U.S. dollar-denominated results of operations and financial condition could suffer. In addition, to the extent charter hire rates
with respect to any port calls our vessels may make in Iran must be paid in a currency other than the U.S. dollar, due to continuing U.S. primary sanctions applicable to U.S. dollar transfers, we
would be exposed to fluctuations in the value of that currency.
Due to our lack of diversification, adverse developments in the containership transportation business could
reduce our ability to meet our payment obligations and our profitability.
We rely exclusively on the cash flows generated from charters for our vessels that operate in the containership sector of the shipping industry.
Due to our lack of diversification, adverse developments in the container shipping industry have a significantly greater impact on our financial condition and results of operations than if we
maintained more diverse assets or lines of business.
We may have difficulty properly managing our growth through acquisitions of additional vessels and we may not
realize the expected benefits from these acquisitions, which may have an adverse effect on our financial condition and performance.
To the extent market conditions warrant and we are able to obtain sufficient financing for such purposes in compliance with the restrictions in
our financing arrangements, we intend to grow our business over the medium to long-term by ordering newbuilding containerships and through selective acquisitions of additional vessels, including
through our investment in Gemini. Future growth will primarily depend on:
-
-
locating and acquiring suitable vessels;
-
-
identifying and consummating vessel acquisitions or joint ventures relating to vessel acquisitions;
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-
-
enlarging our customer base;
-
-
developments in the charter markets in which we operate that make it attractive for us to expand our fleet;
-
-
managing any expansion;
-
-
the operations of the shipyard building any newbuilding containerships we may order; and
-
-
obtaining required financing, within the restrictions placed on the use of funds by our existing financing arrangements, on acceptable terms.
Although
containership charter rates and vessel values currently are at historically low levels, during periods in which charter rates are high, vessel values generally are high as well,
and it may be difficult to acquire vessels at favorable prices. Moreover, our financing arrangements impose significant restrictions on our ability to use debt financing, or cash from operations,
asset sales or equity financing, for purposes, such as vessel acquisitions, other than debt repayment without the consent of our lenders. In addition, growing any business by acquisition presents
numerous risks, such as managing relationships with customers and integrating newly acquired assets into existing infrastructure. We cannot give any assurance that we will be successful in executing
any growth plans or that we will not incur significant expenses and losses in connection with any future growth efforts.
We are subject to regulation and liability under environmental laws that could require significant
expenditures and affect our cash flows and net income.
Our business and the operation of our vessels are materially affected by environmental regulation in the form of international, national, state
and local laws, regulations, conventions and standards in force in international waters and the jurisdictions in which our vessels operate, as well as in the country or countries of their
registration, including those governing the management and disposal of hazardous substances and wastes, the cleanup of oil spills and other contamination, air emissions, wastewater discharges and
ballast water management. Because such conventions, laws, and regulations are often revised, we cannot predict the ultimate cost of complying with such requirements or their impact on the resale price
or useful life of our vessels. We are required by various governmental and quasi-governmental agencies to obtain certain permits, licenses, certificates and financial assurances with respect to our
operations. Many environmental requirements are designed to reduce the risk of pollution, such as from oil spills, and our compliance with these requirements could be costly. To comply with these and
other regulations, including the new MARPOL Annex VI sulfur emission requirements instituting a global 0.5% sulphur cap on marine fuels from January 1, 2020 and the IMO ballast water
management ("BWM") convention, which requires vessels to install expensive ballast water treatment systems ("BWTS") before the first MARPOL renewal survey conducted after September 8, 2017 and
for all vessels to be certified in accordance with the BWM
convention by September 8, 2017, we may be required to incur additional costs to meet new maintenance and inspection requirements, develop contingency plans for potential spills, and obtain
insurance coverage. (Please read "Item 4B. Business OverviewRegulation" for more information on the regulations applicable to our vessels.) Additional conventions, laws and
regulations may be adopted that could limit our ability to do business or increase the cost of doing business and which may materially and adversely affect our operations.
Environmental
requirements can also affect the resale value or useful lives of our vessels, could require a reduction in cargo capacity, ship modifications or operational changes or
restrictions, could lead to decreased availability of insurance coverage for environmental matters or could result in the denial of access to certain jurisdictional waters or ports or detention in
certain ports. Under local, national and foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations and natural resource
damages liability, in the event that there is
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a
release of petroleum or hazardous materials from our vessels or otherwise in connection with our operations. Environmental laws often impose strict liability for remediation of spills and releases
of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault. The 2010 explosion of the
Deepwater
Horizon
and the subsequent release of oil into the Gulf of Mexico may result in further regulation of the shipping industry, including modifications to liability schemes. We
could also become subject to personal injury or property damage claims relating to the release of hazardous substances associated with our existing or historic operations. Violations of, or
liabilities under, environmental requirements can result in substantial penalties, fines and other sanctions, including, in certain instances, seizure or detention of our vessels.
The
operation of our vessels is also affected by the requirements set forth in the International Maritime Organization's, or IMO's, International Management Code for the Safe Operation
of Ships and Pollution Prevention, or the ISM Code. The ISM Code requires shipowners and bareboat charterers to develop and maintain an extensive "Safety Management System" that includes the adoption
of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. Failure to comply with the ISM Code
may subject us to increased liability, may decrease available insurance coverage for the affected ships, and may result in denial of access to, or detention in, certain ports.
In
connection with a 2001 incident involving the presence of oil on the water on the starboard side of one of our former vessels, the
Henry
(ex
CMA CGM Passiflore
) in Long Beach, California, our manager pled guilty to one count of
negligent discharge of oil and one count of obstruction of justice, based on a charge of attempted concealment of the source of the discharge. Consistent with the government's practice in similar
cases, our manager agreed, among other things, to develop and implement an approved third party consultant monitored environmental compliance plan. Any violation of this environmental compliance plan
or any penalties, restitution or heightened environmental compliance
plan requirements that are imposed relating to alleged discharges in any other action involving our fleet or our manager could negatively affect our operations and business.
Climate change and greenhouse gas restrictions may adversely impact our operations.
Due to concern over the risks of climate change, a number of countries and the International Maritime Organization, or "IMO", have adopted, or
are considering the adoption of, regulatory frameworks to reduce greenhouse gas emission from ships. These regulatory measures may include adoption of cap and trade regimes, carbon taxes, increased
efficiency standards and incentives or mandates for renewable energy. Emissions of greenhouse gases from international shipping currently are not subject to the Kyoto Protocol to the United Nations
Framework Convention on Climate Change, or the "Kyoto Protocol", or any amendments or successor agreements. The Paris Agreement adopted under the United Nations Framework Convention on Climate Change
in December 2015, which contemplates commitments from each nation party thereto to take action to reduce greenhouse gas emissions and limit increases in global temperatures but did not include any
restrictions or other measures specific to shipping emissions. However, restrictions on shipping emissions are likely to continue to be considered and a new treaty may be adopted in the future that
includes additional restrictions on shipping emissions to those already adopted under the International Convention for the Prevention of Marine Pollution from Ships, or the "MARPOL Convention".
Compliance with future changes in laws and regulations relating to climate change could increase the costs of operating and maintaining our ships and could require us to install new emission controls,
as well as acquire allowances, pay taxes related to our greenhouse gas emissions or administer and manage a greenhouse gas emissions program.
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Increased inspection procedures, tighter import and export controls and new security regulations could cause
disruption of our containership business.
International container shipping is subject to security and customs inspection and related procedures in countries of origin, destination, and
certain trans-shipment points. These inspection procedures can result in cargo seizure, delays in the loading, offloading, trans-shipment, or delivery of containers, and the levying of customs duties,
fines or other penalties against exporters or importers and, in some cases, charterers and charter owners.
Since
the events of September 11, 2001, U.S. authorities increased container inspection rates and further increases have been contemplated. Government investment in non-intrusive
container scanning technology has grown and there is interest in electronic monitoring technology, including so-called "e-seals" and "smart" containers, that would enable remote, centralized
monitoring of containers during shipment to identify tampering with or opening of the containers, along with potentially measuring other characteristics such as temperature, air pressure, motion,
chemicals, biological agents and radiation. Also, additional vessel security requirements have been imposed including the installation of security alert and automatic information systems on board
vessels.
It
is further unclear what changes, if any, to the existing inspection and security procedures will ultimately be proposed or implemented, or how any such changes will affect the
industry. It is possible that such changes could impose additional financial and legal obligations, including additional responsibility for inspecting and recording the contents of containers and
complying with additional security procedures on board vessels, such as those imposed under the ISPS Code. Changes to the inspection and security procedures and container security could result in
additional costs and obligations on carriers and may, in certain cases, render the shipment of certain types of goods by container uneconomical or impractical. Additional costs that may arise from
current inspection or security procedures or future proposals that may not be fully recoverable from customers through higher rates or security surcharges.
Our vessels may call on ports located in countries that are subject to restrictions imposed by the United
States government, which could negatively affect the trading price of our shares of common stock.
From time to time on charterers' instructions, our vessels have called and may again call on ports located in countries subject to sanctions and
embargoes imposed by the United States government and countries identified by the United States government as state sponsors of terrorism. The U.S. sanctions and embargo laws and regulations vary in
their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time.
On
January 16, 2016, "Implementation Day" for the Iran Joint Comprehensive Plan of Action (JCPOA), the United States lifted its secondary sanctions against Iran which prohibited
certain conduct by non-U.S. companies and individuals that occurred entirely outside of U.S. jurisdiction involving specified industry sectors in Iran, including the energy, petrochemical, automotive,
financial, banking, mining, shipbuilding and shipping sectors. By lifting the secondary sanctions against Iran, the U.S. government effectively removed U.S. imposed restraints on dealings by non-U.S.
companies, such as our Company, and individuals with these formerly targeted Iranian business sectors. Non-U.S. companies continue to be prohibited under U.S. sanctions from (i) knowingly
engaging in conduct that seeks to evade U.S. restrictions on transactions or dealings with Iran or that causes the export of goods or services from the United States to Iran, (ii) exporting,
reexporting or transferring to Iran any goods, technology, or services originally exported from the U.S. and / or subject to U.S. export jurisdiction and (iii) conducting transactions with the
Iranian or Iran-related individuals and entities that remain or are placed in the future on OFAC's list of Specially Designated Nationals and Blocked Persons (SDN List), notwithstanding the lifting of
secondary sanctions. The U.S. has the ability to reimpose sanctions
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against
Iran, including if, in the future, Iran does not comply with its obligations under the nuclear agreement.
The
U.S. government's primary Iran sanctions remain largely unchanged after Implementation Day and as a consequence, U.S. persons continue to be broadly prohibited from engaging in
transactions or dealings in or with Iran or its government. In addition, U.S. persons continue to be broadly prohibited from engaging in transactions or dealings with the Government of Iran and
Iranian financial institutions, which effectively impacts the transfer of funds to, from, or through the U.S. financial system whether denominated in US dollars or any other currency.
In
2016, 2015 and 2014, no vessels operated by us made any calls to ports in Cuba, Iran, Syria or Sudan. Certain vessels in our fleet, however, are operated by liner companies under
long-term bareboat charters, pursuant to which the liner company does not notify us of its ports of call and controls all aspects of these vessels' operation including technical management, manning
with its own officers and crew as well as its ports of call, cargoes and routes within the limits set forth in the charters, which include compliance with applicable law. Although we believe that we
are in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future,
particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines or other penalties and could result in some investors
deciding, or being required, to divest their interest, or not to invest, in the Company. Additionally, some investors may decide to divest their interest, or not to invest, in the Company simply
because we do business with companies that do lawful business in sanctioned countries. Moreover, our charterers may violate applicable sanctions and embargo laws and regulations as a result of actions
that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. As a result of the lifting of U.S. secondary sanctions (and relevant EU sanctions) relating
to Iran, we can anticipate that some of our charterers may direct our vessels to carry containers to or from Iran. This could have various effects on us, such as affecting our reputation and our
relationships with our investors and financing sources, affecting the cost of our insurance with respect to such voyages, and potentially increase our exposure to foreign currency fluctuations.
Investor perception of the value of our common stock may also be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding
countries.
Governments could requisition our vessels during a period of war or emergency, resulting in loss of earnings.
A government of a ship's registry could requisition for title or seize our vessels. Requisition for title occurs when a government takes control
of a ship and becomes the owner. Also, a government could requisition our containerships for hire. Requisition for hire occurs when a government takes control of a ship and effectively becomes the
charterer at dictated charter rates. Generally, requisitions occur during a period of war or emergency. Government requisition of one or more of our vessels may negatively impact our revenues and
results of operations.
Terrorist attacks and international hostilities could affect our results of operations and financial
condition.
Terrorist attacks such as the attacks on the United States on September 11, 2001 and more recent attacks in other parts of the world, and
the continuing response of the United States and other countries to these attacks, as well as the threat of future terrorist attacks, continue to cause uncertainty in the world financial markets and
may affect our business, results of operations and financial condition. Events in the Middle East and North Africa, including Egypt and Syria, and the conflicts in Iraq and Afghanistan may lead to
additional acts of terrorism, regional conflict and other armed conflicts around the world, which may contribute to further economic instability in the global financial markets. These uncertainties
could also adversely affect our ability to obtain additional financing on terms acceptable to us, or at all.
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Terrorist
attacks targeted at sea vessels, such as the October 2002 attack in Yemen on the VLCC Limburg, a ship not related to us, may in the future also negatively affect our operations
and financial condition and directly impact our containerships or our customers. Future terrorist attacks could result in increased volatility of the financial markets in the United States and
globally and could result in an economic recession affecting the United States or the entire world. Any of these occurrences could have a material adverse impact on our operating results, revenue and
costs.
Changing
economic, political and governmental conditions in the countries where we are engaged in business or where our vessels are registered could affect us. In addition, future
hostilities or other political instability in regions where our vessels trade could also affect our trade patterns and adversely affect our operations and performance.
Acts of piracy on ocean-going vessels have recently increased in frequency, which could adversely affect our
business.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea and in the Gulf of
Aden off the coast of Somalia. Despite leveling off somewhat in the last few years, the frequency of piracy incidents has increased significantly since 2008, particularly in the Gulf of Aden off the
coast of Somalia. For example, in January 2010, the Maran Centaurus, a tanker vessel not affiliated with us, was captured by pirates in the Indian Ocean while carrying crude oil estimated to be worth
$20 million, and was released in January 2010 upon a ransom payment of over $5 million. In addition, crew costs, including costs due to employing onboard security guards, could increase
in such circumstances. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, any detention or hijacking as a result of
an act of piracy against our vessels, or an increase in cost, or unavailability, of insurance for our vessels, could have a material adverse impact on our business, financial condition, results of
operations and ability to pay dividends.
Risks inherent in the operation of ocean-going vessels could affect our business and reputation, which could
adversely affect our expenses, net income and stock price.
The operation of ocean-going vessels carries inherent risks. These risks include the possibility of:
-
-
marine disaster;
-
-
environmental accidents;
-
-
grounding, fire, explosions and collisions;
-
-
cargo and property losses or damage;
-
-
business interruptions caused by mechanical failure, human error, war, terrorism, political action in various countries, or adverse weather
conditions;
-
-
work stoppages or other labor problems with crew members serving on our vessels, substantially all of whom are unionized and covered by
collective bargaining agreements; and
-
-
piracy.
Such
occurrences could result in death or injury to persons, loss of property or environmental damage, delays in the delivery of cargo, loss of revenues from or termination of charter
contracts, governmental fines, penalties or restrictions on conducting business, higher insurance rates, and damage to our reputation and customer relationships generally. Any of these circumstances
or events could increase our costs or lower our revenues, which could result in reduction in the market price of our shares of common stock. The involvement of our vessels in an environmental disaster
may harm our reputation as a safe and reliable vessel owner and operator.
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Our insurance may be insufficient to cover losses that may occur to our property or result from our
operations due to the inherent operational risks of the shipping industry.
The operation of any vessel includes risks such as mechanical failure, collision, fire, contact with floating objects, property loss, cargo loss
or damage and business interruption due to political circumstances in foreign countries, hostilities and labor strikes. In addition, there is always an
inherent possibility of a marine disaster, including oil spills and other environmental mishaps. There are also liabilities arising from owning and operating vessels in international trade. We procure
insurance for our fleet against risks commonly insured against by vessel owners and operators. Our current insurance includes (i) hull and machinery insurance covering damage to our vessels'
hull and machinery from, among other things, contact with free and floating objects, (ii) war risks insurance covering losses associated with the outbreak or escalation of hostilities and
(iii) protection and indemnity insurance (which includes environmental damage and pollution insurance) covering third-party and crew liabilities such as expenses resulting from the injury or
death of crew members, passengers and other third parties, the loss or damage to cargo, third-party claims arising from collisions with other vessels, damage to other third-party property, pollution
arising from oil or other substances and salvage, towing and other related costs and (iv) loss of hire insurance for the
CSCL Pusan
and the
CSCL Le Havre
.
We
can give no assurance that we are adequately insured against all risks or that our insurers will pay a particular claim. Even if our insurance coverage is adequate to cover our
losses, we may not be able to obtain a timely replacement vessel in the event of a loss. Under the terms of our credit facilities, we will be subject to restrictions on the use of any proceeds we may
receive from claims under our insurance policies. Furthermore, in the future, we may not be able to obtain adequate insurance coverage at reasonable rates for our fleet. We may also be subject to
calls, or premiums, in amounts based not only on our own claim records but also the claim records of all other members of the protection and indemnity associations through which we receive indemnity
insurance coverage for tort liability. Our insurance policies also contain deductibles, limitations and exclusions which, although we believe are standard in the shipping industry, may nevertheless
increase our costs.
In
addition, we do not currently carry loss of hire insurance (other than for the
CSCL Pusan
and the
CSCL Le
Havre
to satisfy our loan agreement requirements). Loss of hire insurance covers the loss of revenue during extended vessel off-hire periods, such as those that occur during an
unscheduled drydocking due to damage to the vessel from accidents. Accordingly, any loss of a vessel or any extended period of vessel off-hire, due to an accident or otherwise, could have a material
adverse effect on our business, results of operations and financial condition and our ability to pay dividends, if any, to our stockholders.
Maritime claimants could arrest our vessels, which could interrupt our cash flows.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against that
vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through foreclosure proceedings. The arrest or attachment of
one or more of our vessels could interrupt our cash flows and require us to pay large sums of money to have the arrest lifted.
In
addition, in some jurisdictions, such as South Africa, under the "sister ship" theory of liability, a claimant may arrest both the vessel that is subject to the claimant's maritime
lien and any "associated"
vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert "sister ship" liability against one vessel in our fleet for claims relating to another of our ships.
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The aging of our fleet may result in increased operating costs in the future, which could adversely affect
our earnings.
In general, the cost of maintaining a vessel in good operating condition increases with the age of the vessel. As our fleet ages, we may incur
increased costs. Older vessels are typically less fuel efficient and more costly to maintain than more recently constructed vessels due to improvements in engine technology. Cargo insurance rates also
increase with the age of a vessel, making older vessels less desirable to charterers. Governmental regulations and safety or other equipment standards related to the age of a vessel may also require
expenditures for alterations or the addition of new equipment to our vessels, and may restrict the type of activities in which our vessels may engage. Although our current fleet of 55 containerships
had an average age (weighted by TEU capacity) of approximately 8.4 years as of February 28, 2017, we cannot assure you that, as our vessels age, market conditions will justify such
expenditures or will enable us to profitably operate our vessels during the remainder of their expected useful lives.
Increased competition in technology and innovation could reduce our charter hire income and the value of our
vessels.
The charter rates and the value and operational life of a vessel are determined by a number of factors, including the vessel's efficiency,
operational flexibility and physical life. Efficiency includes speed and fuel economy. Flexibility includes the ability to enter harbors, utilize related docking facilities and pass through canals and
straits. Physical life is related to the original design and construction, maintenance and the impact of the stress of operations. If new ship designs currently promoted by shipyards as more fuel
efficient perform as promoted or containerships are built that are more efficient or flexible or have longer physical lives than our vessels, competition from these more technologically advanced
containerships could adversely affect the amount of charter-hire payments that we receive for our containerships once their current time charters expire and the resale value of our containerships.
This could adversely affect our ability to service our debt or pay dividends, if any, to our stockholders.
Compliance with safety and other requirements imposed by classification societies may be very costly and may
adversely affect our business.
The hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry. The
classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and the Safety of Life at Sea
Convention, and all vessels must be awarded ISM certification.
A
vessel must undergo annual surveys, intermediate surveys and special surveys. In lieu of a special survey, a vessel's machinery may be on a continuous survey cycle, under which the
machinery would be surveyed periodically over a five-year period. Each of the vessels in our fleet is on a special survey cycle for hull inspection and a continuous survey cycle for machinery
inspection.
If
any vessel does not maintain its class or fails any annual, intermediate or special survey, and/or loses its certification, the vessel will be unable to trade between ports and will
be unemployable, and we could be in violation of certain covenants in our loan agreements. This would negatively impact our operating results and financial condition.
Our business depends upon certain employees who may not necessarily continue to work for us.
Our future success depends to a significant extent upon our chief executive officer, Dr. John Coustas, and certain members of our senior
management and that of our manager. Dr. Coustas has substantial experience in the container shipping industry and has worked with us and our manager for many years. He and others employed by us
and our manager are crucial to the execution of our business strategies and to the growth and development of our business. In addition, under the terms of
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the
Bank Agreement, Dr. Coustas ceasing to serve as our Chief Executive Officer, absent a successor acceptable to our lenders, would constitute an event of default under these agreements. If
these certain individuals were no longer to be affiliated with us or our manager, or if we were to otherwise cease to receive advisory services from them, we may be unable to recruit other employees
with equivalent talent and experience, and our business and financial condition may suffer as a result.
The provisions in our restrictive covenant agreement with our chief executive officer restricting his ability
to compete with us, like restrictive covenants generally, may not be enforceable and, subject to certain limitations, will not apply to vessels acquired during the period existing restrictions in our
Bank Agreement apply in their current form and companies affiliated with our Chief Executive Officer, Dr. Coustas, may acquire vessels that compete with our fleet.
Dr. Coustas, our chief executive officer, has entered into a restrictive covenant agreement with us under which he is precluded during
the term of our management agreement with our manager, Danaos Shipping, and for one year thereafter from owning and operating drybulk ships or containerships larger than 2,500 TEUs and from acquiring
or investing in a business that owns or operates such vessels. Courts generally do not favor the enforcement of such restrictions, particularly when they involve individuals and could be construed as
infringing on their ability to be employed or to earn a livelihood. Our ability to enforce these restrictions, should it ever become necessary, will depend upon the circumstances that exist at the
time enforcement is sought. We cannot be assured that a court would enforce the restrictions as written by way of an injunction or that we could necessarily establish a case for damages as a result of
a violation of the restrictive covenants.
In
connection with our investment in Gemini in 2015, these restrictions were waived, with the approval of our independent directors, with respect to vessels acquired by Gemini. In
addition, a committee of
independent directors previously determined that the restrictions in the restrictive covenant agreement will not apply, subject to certain limitations, until certain restrictions in the Bank Agreement
cease to apply in their current form. Consequently, companies, other than Gemini, that are affiliated with our Chief Executive Officer, Dr. John Coustas, may directly or indirectly acquire, own
and operate, and Danaos Shipping, our manager, may manage, vessels that compete directly with ours, subject to a chartering priority in favor of our containerships of similar TEU capacity instituted
to protect our containerships from competition for chartering opportunities. In addition, our manager would be permitted to manage any such vessels acquired by entities affiliated with
Dr. Coustas and Dr. Coustas and our other executive officers would be permitted to provide services with respect to such vessels and the entities owning, operating and managing such
vessels. In such cases, these entities and individuals could compete with our fleet and may face conflicts between their own interests and their obligations to us, and such individuals may not devote
all of their time to our business.
We depend on our manager to operate our business.
Pursuant to the management agreement and the individual ship management agreements, our manager and its affiliates provides us with technical,
administrative and certain commercial services (including vessel maintenance, crewing, purchasing, shipyard supervision, insurance, assistance with regulatory compliance and financial services). Our
operational success will depend significantly upon our manager's satisfactory performance of these services. Our business would be harmed if our manager failed to perform these services
satisfactorily. In addition, if the management agreement were to be terminated or if its terms were to be altered, our business could be adversely affected, as we may not be able to immediately
replace such services, and even if replacement services were immediately available, the terms offered could be less favorable than the ones currently offered by our manager. Our management agreement
with any new manager may not be as favorable.
Our
ability to compete for and enter into new time charters and to expand our relationships with our existing charterers depends largely on our relationship with our manager and its
reputation and
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relationships
in the shipping industry. If our manager suffers material damage to its reputation or relationships, it may harm our ability to:
-
-
renew existing charters upon their expiration;
-
-
obtain new charters;
-
-
successfully interact with shipyards during periods of shipyard construction constraints;
-
-
obtain financing on commercially acceptable terms or at all;
-
-
maintain satisfactory relationships with our charterers and suppliers; or
-
-
successfully execute our business strategies.
If
our ability to do any of the things described above is impaired, it could have a material adverse effect on our business and affect our profitability.
Our manager is a privately held company and there is little or no publicly available information about it.
The ability of our manager to continue providing services for our benefit will depend in part on its own financial strength. Circumstances
beyond our control could impair our manager's financial strength, and because it is a privately held company, information about its financial strength is not available. As a result, our stockholders
might have little advance warning of problems affecting our manager, even though these problems could have a material adverse effect on us. As part of our reporting obligations as a public company, we
will disclose information regarding our manager that has a material impact on us to the extent that we become aware of such information.
We are a Marshall Islands corporation, and the Marshall Islands does not have a well developed body of
corporate law.
Our corporate affairs are governed by our articles of incorporation and bylaws and by the Marshall Islands Business Corporations Act, or BCA.
The provisions of the BCA are similar to provisions of the corporation laws of a number of states in the United States. However, there have been few judicial cases in the Republic of The Marshall
Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the law of the Republic of The Marshall Islands are not as clearly established as the rights and fiduciary
responsibilities of directors under statutes or judicial precedent in existence in certain U.S. jurisdictions. Stockholder rights may differ as well. While the BCA does specifically incorporate the
non-statutory law, or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, our public stockholders may have more difficulty in protecting
their interests in the face of actions by the management, directors or controlling stockholders than would stockholders of a corporation incorporated in a U.S. jurisdiction.
It may be difficult to enforce service of process and enforcement of judgments against us and our officers
and directors.
We are a Marshall Islands corporation, and our registered office is located outside of the United States in the Marshall Islands. A majority of
our directors and officers reside outside of the United States, and a substantial portion of our assets and the assets of our officers and directors are located outside of the United States. As a
result, you may have difficulty serving legal process within the United States upon us or any of these persons. You may also have difficulty enforcing, both in and outside of the United States,
judgments you may obtain in the U.S. courts against us or these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws.
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There
is also substantial doubt that the courts of the Marshall Islands would enter judgments in original actions brought in those courts predicated on U.S. federal or state securities
laws. Even if you were successful in bringing an action of this kind, the laws of the Marshall Islands may prevent or restrict you from enforcing a judgment against our assets or our directors and
officers.
We maintain cash with a limited number of financial institutions including financial institutions that may be
located in Greece, which will subject us to credit risk.
We maintain all of our cash with a limited number of financial institutions, including institutions that are located in Greece. These financial
institutions located in Greece may be subsidiaries of international banks or Greek financial institutions. Economic conditions in Greece have been, and continue to be, severely disrupted and volatile,
and as a result of sovereign weakness, Moody's Investor Services Inc. has downgraded the bank financial strength ratings, as well as the deposit and debt ratings, of several Greek banks to
reflect their weakening stand-alone financial strength and the anticipated additional pressures stemming from the country's challenged economic prospects. In addition, in 2015, Greece implemented
capital controls restricting the transfer of funds out of Greece, which could restrict our uses of the limited amount of cash we hold in Greece.
We
do not expect that any of our balances held with Greek financial institutions will be covered by insurance in the event of default by these financial institutions. The occurrence of
such a default could therefore have a material adverse effect on our business, financial condition, results of operations and cash flows. If we are unable to fund our capital expenditures, we may not
be able to continue to operate some of our vessels, which would have a material adverse effect on our business.
Risks Relating to Our Common Stock
The market price of our common stock has fluctuated widely and the market price of our common stock may
fluctuate in the future.
The market price of our common stock has fluctuated widely since our initial public offering in October 2006, reaching a high of $40.26 per
share in 2007 and a low of $2.15 per share, most recently in the fourth quarter of 2016, and may continue to do so as a result of many factors, including our actual results of operations and perceived
prospects, the prospects of our competition and of the shipping industry in general and in particular the containership sector, differences between our actual financial and operating results and those
expected by investors and analysts, changes in analysts' recommendations or projections, changes in general valuations for companies in the shipping industry, particularly the containership sector,
changes in general economic or market conditions and broad market fluctuations.
If
the market price of our common stock remains below $5.00 per share our stockholders will not be able to use such shares as collateral for borrowing in margin accounts. This inability
to use shares of our common stock as collateral may depress demand and certain institutional investors are restricted from investing in shares priced below $5.00, which may also lead to sales of such
shares creating downward pressure on and increased volatility in the market price of our common stock.
Future issuances of equity, including upon exercise of outstanding warrants, or equity- linked securities, or
future sales of our common stock by existing stockholders, may result in significant dilution and adversely affect the market price of our common stock.
We issued 15 million warrants, for no additional consideration, to our existing lenders participating in the Bank Agreement covering our
then existing credit facilities and certain new credit facilities, entitling such lenders to purchase, solely on a cashless exercise basis, additional shares of our common stock, at an initial
exercise price of $7.00 per share. We have also agreed to register the warrants and
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underlying
common stock for resale under the Securities Act, and have registered 8,044,176 warrants and underlying shares.
We
may have to attempt to sell additional shares in the future to satisfy our capital and operating needs, however, under our debt agreements we are prohibited from using a significant
portion of the proceeds from equity issuances for purposes other than the repayment of indebtedness. In addition, lenders may be unwilling to provide future financing or may provide future financing
only on unfavorable terms. In light of the restrictions on our use of cash from operations, debt financings, equity proceeds and asset sales contained in our Bank Agreement governing our credit
facilities, to finance further growth we would likely have to issue additional shares of common stock or other equity securities. If we sell shares in the future, the prices at which we sell these
future shares will vary, and these variations may be significant. If made at currently prevailing prices, these sales would be significantly dilutive of existing stockholders.
Subsequent
resales of substantial numbers of such shares in the public market, moreover, could adversely affect the market price of our shares. We filed with the SEC a shelf registration
statements on Form F-3 registering under the Securities Act an aggregate of 88,222,555 shares of our common stock for resale on behalf of selling stockholders, including our executive officers,
and granted registration rights in respect of additional shares of our common stock held by certain other investors
in our August 2010 equity offering. In the aggregate these 98,372,555 registered shares represent approximately 89.6% of our outstanding shares of common stock as of February 28, 2017. These
shares may be sold in registered transactions and may also be resold subject to the requirements of Rule 144 under the Securities Act. Sales or the possibility of sales of substantial amounts
of our common stock by these shareholders in the public markets could adversely affect the market price of our common stock.
We
cannot predict the effect that future sales of our common stock or other equity related securities would have on the market price of our common stock.
The Coustas Family Trust, our principal existing stockholder, controls the outcome of matters on which our
stockholders are entitled to vote and its interests may be different from yours.
The Coustas Family Trust, under which our chief executive officer is a beneficiary, together with other members of the Coustas Family, owned
approximately 61.8% of our outstanding common stock as of February 28, 2017. This stockholder is able to control the outcome of matters on which our stockholders are entitled to vote, including
the election of our entire board of directors and other significant corporate actions. The interests of this stockholder may be different from yours. Under the terms of the Bank Agreement governing
our credit facilities, Dr. Coustas, together with the Coustas Family Trust and his family, ceasing to own over one-third of our outstanding common stock will constitute an event of default in
certain circumstances.
We are a "controlled company" under the New York Stock Exchange rules, and as such we are entitled to
exemptions from certain New York Stock Exchange corporate governance standards, and you may not have the same protections afforded to stockholders of companies that are subject to all of the New York
Stock Exchange corporate governance requirements.
We are a "controlled company" within the meaning of the New York Stock Exchange corporate governance standards. Under the New York Stock
Exchange rules, a company of which more than 50% of the voting power is held by another company or group is a "controlled company" and may elect not to comply with certain New York Stock
Exchange corporate governance requirements, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that the
nominating committee be composed entirely of independent directors and have a written charter addressing the committee's purpose and responsibilities, (3) the requirement that
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the
compensation committee be composed entirely of independent directors and have a written charter addressing the committee's purpose and responsibilities and (4) the requirement of an annual
performance evaluation of the nominating and corporate governance and compensation committees. We may utilize these exemptions, and currently a non-independent director serves on our compensation
committee and on our nominating and corporate governance committee. As a result, non-independent directors, including members of our management who also serve on our board of directors, may serve on
the compensation or the nominating and corporate governance committees of our board of directors which, among other things, fix the compensation of our management, make stock and option awards and
resolve governance issues regarding us. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the New York Stock Exchange corporate
governance requirements.
Anti-takeover provisions in our organizational documents could make it difficult for our stockholders to
replace or remove our current board of directors or could have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market price of the shares
of our common stock.
Several provisions of our articles of incorporation and bylaws could make it difficult for our stockholders to change the composition of our
board of directors in any one year, preventing them from changing the composition of our management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that
stockholders may consider favorable.
These
provisions:
-
-
authorize our board of directors to issue "blank check" preferred stock without stockholder approval;
-
-
provide for a classified board of directors with staggered, three-year terms;
-
-
prohibit cumulative voting in the election of directors;
-
-
authorize the removal of directors only for cause and only upon the affirmative vote of the holders of at least 66
2
/
3
% of the
outstanding stock entitled to vote for those directors;
-
-
prohibit stockholder action by written consent unless the written consent is signed by all stockholders entitled to vote on the action;
-
-
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings; and
-
-
restrict business combinations with interested stockholders.
We
have adopted a stockholder rights plan pursuant to which our board of directors may cause the substantial dilution of the holdings of any person that attempts to acquire us without
the approval of our board of directors. In addition, our respective lenders under our existing credit facilities covered by the Bank Agreement for the restructuring thereof and the new credit
facilities will be entitled to require us to repay in full amounts outstanding under such credit facilities, if Dr. Coustas ceases to be our Chief Executive Officer or, together with members of
his family and trusts for the benefit thereof, ceases to collectively own over one-third of the voting interest in our outstanding capital stock or any other person or group controls more than 20.0%
of the voting power of our outstanding capital stock.
These
anti-takeover provisions, including the provisions of our stockholder rights plan, could substantially impede the ability of public stockholders to benefit from a change in control
and, as a result, may adversely affect the market price of our common stock and your ability to realize any potential change of control premium.
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Tax Risks
We may have to pay tax on U.S.-source income, which would reduce our earnings.
Under the United States Internal Revenue Code of 1986, as amended, or the Code, 50% of the gross shipping income of a ship owning or chartering
corporation, such as ourselves, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States is characterized as U.S.-source shipping income
and as such is subject to a 4% U.S. federal income tax without allowance for deduction, unless that corporation qualifies for exemption from tax under Section 883 of the Code and the Treasury
Regulations promulgated thereunder.
Other
than with respect to four of our vessel-owning subsidiaries, as to which we are uncertain whether they qualify for this statutory tax exemption, we believe that we and our
subsidiaries currently qualify for this statutory tax exemption and we currently intend to take that position for U.S. federal income tax reporting purposes. However, there are factual circumstances
beyond our control that could cause us or our subsidiaries to fail to qualify for the benefit of this tax exemption and thus to be subject to U.S. federal income tax on U.S.-source shipping income.
There can be no assurance that we or any of our subsidiaries will qualify for this tax exemption for any year. For example, even assuming, as we expect will be the case, that our shares are regularly
and primarily traded on an established securities market in the United States, if shareholders each of whom owns, actually or under applicable attribution rules, 5% or more of our shares own, in the
aggregate, 50% or more of our shares, then we and our subsidiaries will generally not be eligible for the Section 883 exemption unless we can establish, in accordance with specified ownership
certification procedures, either (i) that a sufficient number of the shares in the closely-held block are owned, directly or under the applicable attribution rules, by "qualified shareholders"
(generally, individuals resident in certain non-U.S. jurisdictions) so that the shares in the closely-held block that are not so owned could not constitute 50% or more of our shares for more than half
of the days in the relevant tax year or (ii) that qualified shareholders owned more than 50% of our shares for at least half of the days in the relevant taxable year. There can be no assurance
that we will be able to establish such ownership by qualified shareholders for any tax year. In connection with the four vessel-owning subsidiaries referred to above, we note that qualification under
Section 883 will depend in part upon the ownership, directly or under the applicable attribution rules, of preferred shares issued by such subsidiaries as to which we are not the direct or
indirect owner of record.
If
we or our subsidiaries are not entitled to the exemption under Section 883 for any taxable year, we or our subsidiaries would be subject for those years to a 4% U.S. federal
income tax on our gross U.S. source shipping income. The imposition of this taxation could have a negative effect on our business and would result in decreased earnings available for distribution to
our stockholders. A number of our charters contain provisions that obligate the charterers to reimburse us for the 4% gross basis tax on our U.S. source shipping income.
If we were treated as a "passive foreign investment company," certain adverse U.S. federal income tax
consequences could result to U.S. stockholders.
A foreign corporation will be treated as a "passive foreign investment company," or PFIC, for U.S. federal income tax purposes if at least 75%
of its gross income for any taxable year consists of certain types of "passive income," or at least 50% of the average value of the corporation's assets produce or are held for the production of those
types of "passive income." For purposes of these tests, "passive income" includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than
rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services
does not constitute "passive income." In general, U.S. stockholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the distributions they
35
Table of Contents
receive
from the PFIC, and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC. If we are treated as a PFIC for any taxable year, we will provide information
to U.S. stockholders to enable them to make certain elections to alleviate certain of the adverse U.S. federal income tax consequences that would arise as a result of holding an interest in a PFIC.
While
there are legal uncertainties involved in this determination, including as a result of a decision of the United States Court of Appeals for the Fifth Circuit in
Tidewater Inc. and Subsidiaries v. United
States
, 565 F.3d 299 (5th Cir. 2009) which held that income derived from certain time
chartering activities should be treated as rental income rather than services income for purposes of the foreign sales corporation rules under the U.S. Internal Revenue Code, we believe we should not
be treated as a PFIC for the taxable year ended December 31, 2016. However, if the principles of the
Tidewater
decision were applicable to our
time charters, we would likely be treated as a PFIC. Moreover, there is no assurance that the nature of our assets, income and operations will not change or that we can avoid being treated as a PFIC
for subsequent years.
The enactment of proposed legislation could affect whether dividends paid by us constitute qualified dividend
income eligible for the preferential rate.
Legislation has been previously introduced that would deny the preferential rate of federal income tax currently imposed on qualified dividend
income with respect to dividends received from a non-U.S. corporation, unless the non-U.S. corporation either is eligible for benefits of a comprehensive income tax treaty with the United States or is
created or organized under the laws of a foreign country which has a comprehensive income tax system. Because the Marshall Islands has not entered into a comprehensive income tax treaty with the
United States and imposes only limited taxes on corporations organized under its laws, it is unlikely that we could satisfy either of these requirements. It is not possible at this time to predict
with certainty whether or in what form legislation of this sort might be proposed, or enacted.
If we became subject to Liberian taxation, the net income and cash flows of our Liberian subsidiaries and
therefore our net income and cash flows, would be materially reduced.
A number of our subsidiaries are incorporated under the laws of the Republic of Liberia. The Republic of Liberia enacted a new income tax act
effective as of January 1, 2001 (the "New Act") which does not distinguish between the taxation of "non-resident" Liberian corporations, such as our Liberian subsidiaries, which conduct no
business in Liberia and were wholly exempt from taxation under the income tax law previously in effect since 1977, and "resident" Liberian corporations which conduct business in Liberia and are, and
were under the prior law, subject to taxation.
The
New Act was amended by the Consolidated Tax Amendments Act of 2011, which was published and became effective on November 1, 2011 (the "Amended Act"). The Amended Act
specifically exempts from taxation non-resident Liberian corporations such as our Liberian subsidiaries that engage in international shipping (and are not engaged in shipping exclusively within
Liberia) and that do not engage in other business or activities in Liberia other than those specifically enumerated in the Amended Act. In addition, the Amended Act made such exemption from taxation
retroactive to the effective date of the New Act.
If,
however, our Liberian subsidiaries were subject to Liberian income tax under the Amended Act, they would be subject to tax at a rate of 35% on their worldwide income. As a result,
their, and subsequently our, net income and cash flows would be materially reduced. In addition, as the ultimate stockholder of the Liberian subsidiaries, we would be subject to Liberian withholding
tax on dividends paid by our Liberian subsidiaries at rates ranging from 15% to 20%, which would limit our access to funds generated by the operations of our subsidiaries and further reduce our income
and cash flows.
36
Table of Contents
Item 4. Information on the Company
History and Development of the Company
Danaos Corporation is an international owner of containerships, chartering its vessels to many of the world's largest liner companies. We are a
corporation domesticated in the Republic of The Marshall Islands on October 7, 2005, under the Marshall Islands Business Corporations Act, after having been incorporated as a Liberian company
in 1998 in connection with the consolidation of our assets under Danaos Holdings Limited. In connection with our domestication in the Marshall Islands we changed our name from Danaos Holdings Limited
to Danaos Corporation. Our manager, Danaos Shipping Company Limited, or Danaos Shipping, was founded by Dimitris Coustas in 1972 and since that time it has continuously provided seaborne
transportation services under the management of the Coustas family. Dr. John Coustas, our chief executive officer, assumed responsibility for our management in 1987. Dr. Coustas has
focused our business on chartering containerships to liner companies and has overseen the expansion of our fleet from three multi-purpose vessels in 1987 to the 55 containerships comprising our fleet
as of February 28, 2017. In 2015, we formed a joint venture, Gemini Shipholdings Corporation, in which we have 49% minority equity interest, with our largest stockholder, Danaos Investments
Limited as Trustee of the 883 Trust, which we refer to as the Coustas Family Trust, to acquire, own and operate containerships. As of February 28, 2017, Gemini had acquired a fleet of four
containerships aggregating 23,998 TEU in capacity.
In
October 2006, we completed an initial public offering of our common stock in the United States and our common stock began trading on the New York Stock Exchange. In August 2010, we
completed a common stock sale of 54,054,055 shares for $200 million and in 2011 we issued warrants to purchase 15 million shares of our common stock.
Our
company operates through a number of subsidiaries incorporated in Liberia, Cyprus, Malta and the Republic of the Marshall Islands, all of which are wholly-owned by us and either
directly or
indirectly owns the vessels in our fleet. A list of our active subsidiaries as of February 28, 2017, and their jurisdictions of incorporation, is set forth in Exhibit 8 to this Annual
Report on Form 20-F.
Our
principal executive offices are c/o Danaos Shipping Co. Ltd., Athens Branch, 14 Akti Kondyli, 185 45 Piraeus, Greece. Our telephone number at that address is
+30 210 419 6480.
Business Overview
We are an international owner of containerships, chartering our vessels to many of the world's largest liner companies. As of
February 28, 2017, we had a fleet of 55 containerships aggregating 329,588 TEUs, making us among the largest containership charter owners in the world, based on total TEU capacity. Gemini, in
which we have a 49% minority equity interest, had a fleet of four containerships of 23,998 TEU aggregate capacity as of February 28, 2017.
Our
strategy is to charter our containerships under multi-year, fixed-rate period charters to a diverse group of liner companies, including many of the largest companies globally, as
measured by TEU capacity. As of February 28, 2017, these customers included China Shipping, CMA-CGM, COSCO, Hyundai Merchant Marine, Niledutch, MSC, Yang Ming, ZIM Israel Integrated Shipping
Services, Nippon Yusen Kaisha Line (NYK), Hapag Lloyd, OOCL and Maersk Line and for Gemini, NYK, Hapag Lloyd and OOCL.
37
Table of Contents
Our Fleet
Following the completion of our extensive new-building program, Danaos has been established as one of the largest containership operating
lessors in the world. Since going public in 2006, we have almost tripled our TEU carrying capacity. Today, our fleet is one of the most modern in the industry and includes some of the largest
containerships in the world, which are designed with certain technological advances and customized modifications that make them efficient with respect to
both voyage speed and loading capability when compared to many existing vessels operating in the containership sector. On January 8, 2016 we completed the sale of the vessel
Federal,
which was held
for sale as of December 31, 2015. During 2014, we sold five of our older vessels, the
Marathonas
, the
Messologi
, the
Mytilini
, the
Commodore
and the
Duka,
and we acquired two secondhand 6,402 TEU containerships built in 2002, the
Performance
and the
Priority
.
We
deploy our containership fleet principally under multi-year charters with major liner companies that operate regularly scheduled routes between large commercial ports , although in
weaker containership charter markets such as is currently prevailing we charter more of our vessels on shorter term charters so as to be available to take advantage of any increase in charter rates.
As of February 28, 2017, our containership fleet was comprised of fifty-three containerships deployed on time charters and two containerships deployed on bareboat charters. The average age
(weighted by TEU) of the 55 vessels in our containership fleet was approximately 8.4 years as of February 28, 2017. As of February 28, 2017, the average remaining duration of the
charters for our containership fleet was 6.4 years (weighted by aggregate contracted charter hire).
The table below provides additional information, as of February 28, 2017, about our fleet of 55 cellular containerships and the four
cellular containerships owned by Gemini, in which we have a 49% equity interest.
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel Name
|
|
Year
Built
|
|
Vessel
Size
(TEU)
|
|
Initial Time
Charter
Term(1)
|
|
Expiration
of Charter(1)
|
|
Charterer
|
Hyundai Ambition
|
|
|
2012
|
|
|
13,100
|
|
12 years
|
|
June 2024
|
|
Hyundai
|
Hyundai Speed
|
|
|
2012
|
|
|
13,100
|
|
12 years
|
|
June 2024
|
|
Hyundai
|
Hyundai Smart
|
|
|
2012
|
|
|
13,100
|
|
12 years
|
|
May 2024
|
|
Hyundai
|
Hyundai Tenacity
|
|
|
2012
|
|
|
13,100
|
|
12 years
|
|
March 2024
|
|
Hyundai
|
Hyundai Together
|
|
|
2012
|
|
|
13,100
|
|
12 years
|
|
February 2024
|
|
Hyundai
|
Express Rome (ex Hanjin Italy)(3)
|
|
|
2011
|
|
|
10,100
|
|
0.4 year
|
|
August 2017
|
|
OOCL
|
Express Berlin (ex Hanjin Germany)(3)
|
|
|
2011
|
|
|
10,100
|
|
0.2 year
|
|
June 2017
|
|
Yang Ming
|
Express Athens (ex Hanjin Greece)(3)
|
|
|
2011
|
|
|
10,100
|
|
0.4 year
|
|
August 2017
|
|
OOCL
|
CSCL Le Havre
|
|
|
2006
|
|
|
9,580
|
|
12 years
|
|
September 2018
|
|
China Shipping
|
CSCL Pusan
|
|
|
2006
|
|
|
9,580
|
|
12 years
|
|
July 2018
|
|
China Shipping
|
CMA CGM Melisande
|
|
|
2012
|
|
|
8,530
|
|
12 years
|
|
November 2023
|
|
CMA-CGM
|
CMA CGM Attila
|
|
|
2011
|
|
|
8,530
|
|
12 years
|
|
April 2023
|
|
CMA-CGM
|
CMA CGM Tancredi
|
|
|
2011
|
|
|
8,530
|
|
12 years
|
|
May 2023
|
|
CMA-CGM
|
CMA CGM Bianca
|
|
|
2011
|
|
|
8,530
|
|
12 years
|
|
July 2023
|
|
CMA-CGM
|
CMA CGM Samson
|
|
|
2011
|
|
|
8,530
|
|
12 years
|
|
September 2023
|
|
CMA-CGM
|
CSCL America
|
|
|
2004
|
|
|
8,468
|
|
0.8 year
|
|
July 2017
|
|
COSCO
|
Europe (ex CSCL Europe)(4)
|
|
|
2004
|
|
|
8,468
|
|
0.8 year
|
|
June 2017
|
|
COSCO
|
CMA CGM Moliere(2)
|
|
|
2009
|
|
|
6,500
|
|
12 years
|
|
August 2021
|
|
CMA-CGM
|
CMA CGM Musset(2)
|
|
|
2010
|
|
|
6,500
|
|
12 years
|
|
February 2022
|
|
CMA-CGM
|
CMA CGM Nerval(2)
|
|
|
2010
|
|
|
6,500
|
|
12 years
|
|
April 2022
|
|
CMA-CGM
|
CMA CGM Rabelais(2)
|
|
|
2010
|
|
|
6,500
|
|
12 years
|
|
June 2022
|
|
CMA-CGM
|
CMA CGM Racine(2)
|
|
|
2010
|
|
|
6,500
|
|
12 years
|
|
July 2022
|
|
CMA-CGM
|
Priority
|
|
|
2002
|
|
|
6,402
|
|
1 year
|
|
November 2017
|
|
NYK
|
Performance
|
|
|
2002
|
|
|
6,402
|
|
0.8 year
|
|
March 2017
|
|
NYK
|
Colombo (ex SNL Colombo)(4)
|
|
|
2004
|
|
|
4,300
|
|
12 years
|
|
March 2019
|
|
Yang Ming
|
38
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel Name
|
|
Year
Built
|
|
Vessel
Size
(TEU)
|
|
Initial Time
Charter
Term(1)
|
|
Expiration
of Charter(1)
|
|
Charterer
|
YM Singapore
|
|
|
2004
|
|
|
4,300
|
|
12 years
|
|
October 2019
|
|
Yang Ming
|
YM Seattle
|
|
|
2007
|
|
|
4,253
|
|
12 years
|
|
July 2019
|
|
Yang Ming
|
YM Vancouver
|
|
|
2007
|
|
|
4,253
|
|
12 years
|
|
September 2019
|
|
Yang Ming
|
ZIM Rio Grande
|
|
|
2008
|
|
|
4,253
|
|
12 years
|
|
May 2020
|
|
ZIM
|
ZIM Sao Paolo
|
|
|
2008
|
|
|
4,253
|
|
12 years
|
|
August 2020
|
|
ZIM
|
OOCL Istanbul
|
|
|
2008
|
|
|
4,253
|
|
12 years
|
|
September 2020
|
|
ZIM
|
ZIM Monaco
|
|
|
2009
|
|
|
4,253
|
|
12 years
|
|
November 2020
|
|
ZIM
|
OOCL Novorossiysk
|
|
|
2009
|
|
|
4,253
|
|
12 years
|
|
February 2021
|
|
ZIM
|
ZIM Luanda
|
|
|
2009
|
|
|
4,253
|
|
12 years
|
|
May 2021
|
|
ZIM
|
Derby D
|
|
|
2004
|
|
|
4,253
|
|
0.5 year
|
|
September 2017
|
|
CMA-CGM
|
Deva
|
|
|
2004
|
|
|
4,253
|
|
0.4 year
|
|
March 2017
|
|
ZIM
|
Dimitris C
|
|
|
2001
|
|
|
3,430
|
|
1 year
|
|
March 2017
|
|
Niledutch
|
Express Black Sea (ex Hanjin Constantza)(3)
|
|
|
2011
|
|
|
3,400
|
|
0.3 year
|
|
March 2017
|
|
NYK
|
Express Spain (ex Hanjin Algeciras)(3)
|
|
|
2011
|
|
|
3,400
|
|
0.3 year
|
|
March 2017
|
|
Maersk Line
|
Express Argentina (ex Hanjin Buenos Aires)(3)
|
|
|
2010
|
|
|
3,400
|
|
0.5 year
|
|
June 2017
|
|
Maersk Line
|
Express Brazil (ex Hanjin Santos)(3)
|
|
|
2010
|
|
|
3,400
|
|
0.7 year
|
|
June 2017
|
|
CMA-CGM
|
Express France (ex Hanjin Versailles)(3)
|
|
|
2010
|
|
|
3,400
|
|
0.7 year
|
|
June 2017
|
|
CMA-CGM
|
Danae C
|
|
|
2001
|
|
|
2,524
|
|
1 year
|
|
May 2017
|
|
Hapag Lloyd
|
MSC Zebra
|
|
|
2001
|
|
|
2,602
|
|
3 years
|
|
October 2017
|
|
MSC
|
Amalia C
|
|
|
1998
|
|
|
2,452
|
|
0.3 year
|
|
May 2017
|
|
Yang Ming
|
Hyundai Advance
|
|
|
1997
|
|
|
2,200
|
|
10 years
|
|
June 2017
|
|
Hyundai
|
Hyundai Future
|
|
|
1997
|
|
|
2,200
|
|
10 years
|
|
August 2017
|
|
Hyundai
|
Hyundai Sprinter
|
|
|
1997
|
|
|
2,200
|
|
10 years
|
|
August 2017
|
|
Hyundai
|
Hyundai Stride
|
|
|
1997
|
|
|
2,200
|
|
10 years
|
|
July 2017
|
|
Hyundai
|
Hyundai Progress
|
|
|
1998
|
|
|
2,200
|
|
10 years
|
|
December 2017
|
|
Hyundai
|
Hyundai Bridge
|
|
|
1998
|
|
|
2,200
|
|
10 years
|
|
January 2018
|
|
Hyundai
|
Hyundai Highway
|
|
|
1998
|
|
|
2,200
|
|
10 years
|
|
January 2018
|
|
Hyundai
|
Hyundai Vladivostok
|
|
|
1997
|
|
|
2,200
|
|
10 years
|
|
May 2017
|
|
Hyundai
|
|
|
|
Gemini Vessels
|
|
|
|
|
|
|
NYK Lodestar(5)
|
|
|
2001
|
|
|
6,422
|
|
2 years
|
|
September 2017
|
|
NYK
|
NYK Leo(5)
|
|
|
2002
|
|
|
6,422
|
|
3 years
|
|
February 2019
|
|
NYK
|
Suez Canal(5)(6)
|
|
|
2002
|
|
|
5,610
|
|
1 year
|
|
July 2017
|
|
OOCL
|
Genoa(5)(6)
|
|
|
2002
|
|
|
5,544
|
|
0.5 year
|
|
March 2017
|
|
Hapag Lloyd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bareboat
Charter
Term(1)
|
|
|
|
|
YM Mandate
|
|
|
2010
|
|
|
6,500
|
|
18 years
|
|
January 2028
|
|
Yang Ming
|
YM Maturity
|
|
|
2010
|
|
|
6,500
|
|
18 years
|
|
April 2028
|
|
Yang Ming
|
-
(1)
-
Earliest
date charters could expire. Most charters include options for the charterers to extend their terms.
-
(2)
-
The
charters with respect to the
CMA CGM Moliere
, the
CMA CGM Musset
, the
CMA CGM Nerval
, the
CMA CGM Rabelais
and the
CMA CGM Racine
include an option for the charterer, CMA-CGM, to purchase the vessels eight years after the commencement of the respective charters, which will fall in September 2017, March 2018, May 2018, July 2018
and August 2018, respectively, each for $78.0 million.
-
(3)
-
Vessels
were renamed following the redelivery from Hanjin Shipping.
-
(4)
-
In
September 2016, the
CSCL Europe
was renamed to
Europe
at the request
of the charterer of this vessel. In May 2016, the
SNL Colombo
was renamed to
Colombo
at the request of the
charterer of this vessel.
-
(5)
-
Vessels
acquired by Gemini, in which Danaos holds a 49% equity interest.
-
(6)
-
A
subsidiary of Gemini holds a leasehold bareboat charter interest in such vessel, which was financed by and is subject to a capital lease pursuant to which such
subsidiary will acquire all rights to such vessel at the end of such lease.
On August 5, 2015, we entered into a Shareholders Agreement (the "Gemini Shareholders Agreement"), with Gemini Shipholdings Corporation
("Gemini") and Virage International Ltd.
39
Table of Contents
("Virage"),
a company controlled by our largest stockholder Danaos Investments Limited as Trustee of the 883 Trust, in connection with the formation of Gemini to acquire and operate containerships. We
and Virage own 49% and 51%, respectively, of Gemini's issued and outstanding share capital. Under the Gemini Shareholders Agreement, we and Virage have preemptive rights with respect to issuances of
Gemini capital stock as well as tag-along rights, drag-along rights and certain rights of first refusal with respect to proposed transfers of Gemini equity interests. In addition, certain actions by
Gemini, including acquisitions or dispositions of vessels and newbuilding contracts, require the unanimous approval of the Gemini board of directors including the director designated by the Company,
who is currently our Chief Operating Officer Iraklis Prokopakis. Mr. Prokopakis also serves as Chief Operating Officer of Gemini, and our Chief Financial Officer, Evangelos Chatzis, serves as
Chief Financial Officer of Gemini, for which services Messrs. Prokopakis and Chatzis do not receive any additional compensation. We also have the right to purchase all of the equity interests
in Gemini that we do not own for fair market value at any time after December 31, 2018, or earlier if permitted under our credit facilities, provided that such fair market value is not below
the net book value of such equity interests.
As the container shipping industry has grown, the major liner companies have increasingly contracted for containership capacity. As of
February 28, 2017, our diverse group of customers in the containership sector included China Shipping, CMA-CGM, Hyundai Merchant Marine, MSC, Niledutch, Yang Ming, ZIM Israel Integrated
Shipping Services, NYK, Hapag Lloyd, OOCL, COSCO and Maersk Line. Gemini has chartered two of its containerships to NYK, one to OOCL and one to Hapag Lloyd.
The
containerships in our fleet are primarily deployed under multi-year, fixed-rate time charters having initial terms that range from less than one to 18 years. These charters
expire at staggered dates ranging from March 2017 to the second quarter of 2028. The staggered expiration of the multi-year, fixed-rate charters for our vessels is both a strategy pursued by our
management and a result of the growth in our fleet over the past several years. Under our time charters, the charterer pays voyage expenses such as port, canal and fuel costs, other than brokerage and
address commissions paid by us, and we pay for vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs. We are also
responsible for each vessel's intermediate and special survey costs.
Under
the time charters, when a vessel is "off-hire" or not available for service, the charterer is generally not required to pay the hire rate, and we are responsible for all costs. A
vessel generally will be deemed to be off-hire if there is an occurrence preventing the full working of the vessel due to, among other things, operational deficiencies, drydockings for repairs,
maintenance or inspection, equipment breakdown, delays due to accidents, crewing strikes, labor boycotts, noncompliance with government water pollution regulations or alleged oil spills, arrests or
seizures by creditors or our failure to maintain the vessel in compliance with required specifications and standards. In addition, under our time charters, if any vessel is off-hire for more than a
certain amount of time (generally between 10-20 days), the charterer has a right to terminate the charter agreement for that vessel. Charterers also have the right to terminate the time
charters in various other circumstances, including but not limited to, outbreaks of war or a change in ownership of the vessel's owner or manager without the charterer's approval.
The charters with respect to the
CMA CGM Moliere
, the
CMA CGM
Musset
, the
CMA CGM Nerval
, the
CMA CGM Rabelais
and the
CMA CGM Racine
include an
option for the charterer, CMA-CGM, to purchase the vessels eight years after the commencement of the respective charters,
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which
will fall in September 2017, March 2018, May 2018, July 2018 and August 2018, respectively, each for $78.0 million. In each case, the option to purchase the vessel must be exercised
15 months prior to the dates noted in the preceding sentence. As of February 28, 2017, none of these options has been exercised. The $78.0 million option prices reflect an
estimate, made at the time of entry into the applicable charter, of the fair market value of the vessels at the time we would be required to sell the vessels upon exercise of the options. If CMA-CGM
were to exercise these options with respect to any or all of these vessels, the expected size of our containership fleet would be reduced, and as a result our anticipated level of revenues after such
sale would be reduced.
Management of Our Fleet
Our chief executive officer, chief operating officer, chief financial officer and deputy chief operating officer provide strategic management
for our company while these officers also supervise, in conjunction with our board of directors, the management of these operations by Danaos Shipping, our manager. We have a management agreement
pursuant to which our manager and its affiliates provide us and our subsidiaries with technical, administrative and certain commercial services for an initial term that expired on December 31,
2008, with automatic one year renewals for an additional 12 years at our option. Our manager reports to us and our board of directors through our chief executive officer, chief operating
officer and chief financial officer, each of which is appointed by our board of directors.
Our
manager is regarded as an innovator in operational and technological aspects in the international shipping community. Danaos Shipping's strong technological capabilities derive from
employing highly educated professionals, its participation and assumption of a leading role in European Community research projects related to shipping, and its close affiliation to Danaos Management
Consultants, a leading ship-management software and services company.
Danaos
Shipping achieved early ISM certification of its container fleet in 1995, well ahead of the deadline, and was the first Greek company to receive such certification from Det Norske
Veritas, a leading classification society. In 2004, Danaos Shipping received the Lloyd's List Technical Innovation Award for advances in internet-based telecommunication methods for vessels. In 2015,
Danaos Shipping received the Lloyd's List Intelligence Big Data Award for their "Waves" fleet performance system, which provides advanced performance monitoring, close bunkers control, emissions
monitoring, energy management, safety performance monitoring, risk management and advance superintendence for the vessels.
Danaos
Shipping maintains the quality of its service by controlling directly the selection and employment of seafarers through its crewing offices in Piraeus, Greece, Russia, as well as
in Odessa and Mariupol in Ukraine and in Zanzibar, Tanzania and we assume directly all related crewing, technical and other costs in our operating expenses. Investments in new facilities in Greece by
Danaos Shipping enable enhanced training of seafarers and highly reliable infrastructure and services to the vessels.
Danaos
Shipping provides vessel management services to Gemini at the same rates we pay under our management agreement with Danaos Shipping. Historically, Danaos Shipping only
infrequently managed vessels other than those in our fleet and currently it does not actively manage any other company's vessels, other than vessels owned by Gemini. Danaos Shipping also does not
arrange the employment of other vessels and has agreed that, during the term of our management agreement, it will not provide any management services to any other entity without our prior written
approval, other than with respect to other entities controlled by Dr. Coustas, our chief executive officer, which do not operate within the containership (larger than 2,500 TEUs) or drybulk
sectors of the shipping industry or in the circumstances described below. In connection with our investment in Gemini in 2015, these restrictions were waived, with the approval of our independent
directors, with respect to containerships acquired by Gemini. Other than with respect to Gemini and a participation in a vessel-owning company
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through
Raven International Corporation, Dr. Coustas does not currently control any such vessel-owning entity. We believe we have and will derive significant benefits from our relationship with
Danaos Shipping.
Dr. Coustas
has also personally agreed to the same restrictions on the provision, directly or indirectly, of management services during the term of our management agreement. In
addition, our chief executive officer (other than in his capacities with us) and our manager have separately agreed not, during the term of our management agreement and for one year thereafter, to
engage, directly or indirectly, in (i) the ownership or operation of containerships of larger than 2,500 TEUs or (ii) the ownership or operation of any drybulk carriers or
(iii) the acquisition of or investment in any business involved in the ownership or operation of containerships of larger than 2,500 TEUs or any drybulk carriers. Notwithstanding these
restrictions, if our independent directors decline the opportunity to acquire any such containerships or to acquire or invest in any such business, our chief executive officer will have the right to
make, directly or indirectly, any such acquisition or investment during the four-month period following such decision by our independent directors, so long as such acquisition or investment is made on
terms no more favorable than those offered to us. In this case, our chief executive officer and our manager will be permitted to provide management services to such vessels. In connection with our
investment in Gemini in 2015, these restrictions were waived, with the approval of our independent directors, with respect to containerships acquired by Gemini. The arrangement approved by a committee
of independent directors in 2014, described in "Item 7. Major Shareholders and Related Party TransactionsRelated Party TransactionsNon-Competition", which
lifted these restrictions, subject to certain limitations, while the restrictions in our Bank Agreement continue to apply to us in their current form, also remains in effect.
Danaos
Shipping provides us with administrative, technical and certain commercial management services under a management agreement whose initial term expired at the end of 2008. The
management agreement automatically renews for a one-year period if we do not provide 12 months' notice of termination and the fees payable for each renewal period are adjusted by agreement
between us and our manager. For 2017, our manager will receive the following fees (i) a fee of $850 per day, (ii) a fee of $425 per vessel per day for vessels on bareboat charter, pro
rated for the number of calendar days we own each vessel, (iii) a fee of $850 per vessel per day for vessels other than those on bareboat charter, pro rated for the number of calendar days we
own each vessel, (iv) a fee of 1.25% on all freight, charter hire, ballast bonus and demurrage for each vessel, (v) a fee of 0.5% based on the contract price of any vessel bought or sold
by it on our behalf, excluding newbuilding contracts, and (vi) a flat fee of $725,000 per newbuilding vessel, if any, which is capitalized, for the on premises supervision of any newbuilding
contracts by selected engineers and others of its staff. In addition, from January 1, 2013 to April 30, 2015, our Manager provided us with the services of our Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer and Deputy Chief Operating Officer for an annual fee. We have directly employed our executive officers from May 1, 2015 onwards.
We operate in markets that are highly competitive and based primarily on supply and demand. Generally, we compete for charters based upon price,
customer relationships, operating expertise, professional reputation and size, age and condition of the vessel. Competition for providing containership services comes from a number of experienced
shipping companies. In the containership sector, these companies include Zodiac Maritime, Seaspan Corporation and Costamare Inc. A number of our competitors in the containership sector have
been financed by the German KG (Kommanditgesellschaft) system, which was based on tax benefits provided to private investors. While the German tax law has been amended to significantly restrict the
tax benefits available to taxpayers who invest in such entities after November 10, 2005, the tax benefits afforded to all investors in the KG-financed entities will continue to be significant
and such entities may continue to be attractive
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investments.
These tax benefits allow these KG-financed entities to be more flexible in offering lower charter rates to liner companies.
The
containership sector of the international shipping industry is characterized by the significant time necessary to develop the operating expertise and professional reputation
necessary to obtain and retain customers and, in the past, a relative scarcity of secondhand containerships, which necessitated reliance on newbuildings which can take a number of years to complete.
We focus on larger TEU capacity containerships, which we believe have fared better than smaller vessels during global downturns in the containership sector. We believe larger containerships, even
older containerships if well maintained, provide us with increased flexibility and more stable cash flows than smaller TEU capacity containerships.
Crewing and Employees
Since May 1, 2015, we have directly employed our Chief Executive Officer, our Chief Operating Officer, our Chief Financial Officer and
our Deputy Chief Operating Officer, whose services had been provided to us under our Management Agreement with our Manager, Danaos Shipping, from January 1, 2013 to April 30, 2015. As of
December 31, 2016, 1,196 people served on board the vessels in our fleet and Danaos Shipping, our manager, employed 146 people, all of whom were shore-based. In addition, our manager is
responsible for recruiting, either directly or through a crewing agent, the senior officers and all other crew members for our vessels and is reimbursed by us for all crew wages and other crew
relating expenses. We believe the streamlining of crewing arrangements through our manager ensures that all of our vessels will be crewed with experienced crews that have the qualifications and
licenses required by international regulations and shipping conventions.
Permits and Authorizations
We are required by various governmental and other agencies to obtain certain permits, licenses and certificates with respect to our vessels. The
kinds of permits, licenses and certificates required by governmental and other agencies depend upon several factors, including the commodity being transported, the waters in which the vessel operates,
the nationality of the vessel's crew and the age of a vessel. All permits, licenses and certificates currently required to permit our vessels to operate have been obtained. Additional laws and
regulations, environmental or otherwise, may be adopted which could limit our ability to do business or increase the cost of doing business.
Inspection by Classification Societies
Every seagoing vessel must be "classed" by a classification society. The classification society certifies that the vessel is "in class,"
signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the vessel's country of
registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag
state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.
The
classification society also undertakes on request other surveys and checks that are required by regulations and requirements of the flag state. These surveys are subject to
agreements made in each individual case and/or to the regulations of the country concerned.
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Table of Contents
For
maintenance of the class, regular and extraordinary surveys of hull and machinery, including the electrical plant, and any special equipment classed are required to be performed as
follows:
Annual Surveys.
For seagoing ships, annual surveys are conducted for the hull and the machinery, including the electrical plant, and
where
applicable, on special equipment classed at intervals of 12 months from the date of commencement of the class period indicated in the certificate.
Intermediate Surveys.
Extended annual surveys are referred to as intermediate surveys and typically are conducted two and one-half years
after
commissioning and each class renewal. Intermediate surveys may be carried out on the occasion of the second or third annual survey.
Class Renewal Surveys.
Class renewal surveys, also known as special surveys, are carried out on the ship's
hull and machinery, including the electrical plant, and on any special equipment classed at the intervals indicated by the character of classification for the hull. During the special survey, the
vessel is thoroughly examined, including audio-gauging to determine the thickness of the steel structures. Should the thickness be found to be less than class requirements, the classification society
would prescribe steel renewals. The classification society may grant an one-year grace period for completion of the special survey. Substantial amounts of funds may have to be spent for steel renewals
to pass a special survey if the vessel experiences excessive wear and tear. In lieu of the special survey every four or five years, depending on whether a grace period is granted, a shipowner has the
option of arranging with the classification society for the vessel's hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five-year cycle.
At an owner's application, the surveys required for class renewal may be split according to an agreed schedule to extend over the entire period of class. This process is referred to as continuous
class renewal.
The
following table lists the next drydockings and special surveys scheduled for the vessels in our current containership fleet:
|
|
|
|
|
Vessel Name*
|
|
Next Survey
|
|
Next Drydocking
|
Amalia C
|
|
March 2018
|
|
March 2018
|
Danae C
|
|
March 2021
|
|
March 2021
|
Dimitris C
|
|
March 2021
|
|
March 2021
|
MSC Zebra
|
|
January 2021
|
|
October 2019
|
Hyundai Progress
|
|
February 2018
|
|
February 2018
|
Hyundai Highway
|
|
March 2018
|
|
March 2018
|
Hyundai Bridge
|
|
March 2018
|
|
March 2018
|
CMA CGM Musset
|
|
March 2020
|
|
March 2018
|
CMA CGM Nerval
|
|
May 2020
|
|
March 2018
|
Express Argentina (ex Hanjin Buenos Aires)
|
|
February 2020
|
|
February 2018
|
Zim Rio Grande
|
|
July 2018
|
|
July 2023
|
Zim Sao Paolo
|
|
September 2018
|
|
September 2023
|
CMA CGM Rabelais
|
|
July 2020
|
|
May 2018
|
Express Brazil (exHanjin Santos)
|
|
April 2020
|
|
March 2018
|
CMA CGM Racine
|
|
August 2020
|
|
June 2018
|
OOCL Istanbul
|
|
November 2018
|
|
November 2023
|
CSCL Pusan
|
|
September 2021
|
|
May 2019
|
Express France (ex Hanjin Versailles)
|
|
October 2020
|
|
February 2018
|
Zim Monaco
|
|
January 2019
|
|
January 2024
|
CSCL Le Havre
|
|
November 2021
|
|
March 2019
|
Deva
|
|
March 2019
|
|
March 2019
|
Colombo (ex SNL Colombo)
|
|
March 2019
|
|
March 2017
|
OOCL Novorossiysk
|
|
March 2019
|
|
February 2024
|
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Table of Contents
|
|
|
|
|
Vessel Name*
|
|
Next Survey
|
|
Next Drydocking
|
Derby D
|
|
April 2019
|
|
April 2017
|
Express Spain (ex Hanjin Algeciras)
|
|
January 2021
|
|
November 2018
|
Zim Luanda
|
|
June 2019
|
|
June 2024
|
Europe (ex CSCL Europe)
|
|
August 2019
|
|
August 2022
|
CSCL America
|
|
November 2019
|
|
September 2022
|
CMA CGM Moliere
|
|
September 2019
|
|
July 2018
|
YM Singapore
|
|
September 2019
|
|
July 2022
|
Express Berlin (ex Hanjin Germany)
|
|
March 2021
|
|
September 2018
|
Express Rome (ex Hanjin Italy)
|
|
April 2021
|
|
October 2018
|
Express Black Sea (ex Hanjin Constantza)
|
|
April 2021
|
|
January 2021
|
Express Athens (ex Hanjin Greece)
|
|
May 2021
|
|
November 2018
|
CMA CGM Attila
|
|
July 2021
|
|
January 2019
|
CMA CGM Tancredi
|
|
August 2021
|
|
February 2019
|
CMA CGM Bianca
|
|
October 2021
|
|
April 2019
|
CMA CGM Samson
|
|
December 2021
|
|
June 2019
|
CMA CGM Melisande
|
|
February 2017
|
|
August 2019
|
Hyundai Smart
|
|
May 2017
|
|
November 2019
|
Hyundai Together
|
|
February 2017
|
|
August 2019
|
Hyundai Tenacity
|
|
March 2017
|
|
September 2019
|
Priority
|
|
June 2017
|
|
June 2020
|
Performance
|
|
March 2017
|
|
March 2020
|
Hyundai Speed
|
|
June 2017
|
|
December 2019
|
Hyundai Ambition
|
|
June 2017
|
|
December 2019
|
Hyundai Vladivostok
|
|
July 2017
|
|
July 2017
|
Hyundai Advance
|
|
October 2017
|
|
October 2017
|
YM Seattle
|
|
September 2017
|
|
June 2019
|
Hyundai Stride
|
|
September 2017
|
|
September 2017
|
Hyundai Future
|
|
September 2017
|
|
September 2017
|
YM Vancouver
|
|
November 2017
|
|
November 2020
|
Hyundai Sprinter
|
|
December 2017
|
|
December 2017
|
-
*
-
Does
not include vessels under bareboat charters and the vessels owned by Gemini.
All
areas subject to surveys as defined by the classification society are required to be surveyed at least once per class period, unless shorter intervals between surveys are otherwise
prescribed. The period between two subsequent surveys of each area must not exceed five years. Vessels under bareboat charter, such as the
YM Mandate
,
and
YM Maturity
, are drydocked by their charterers.
Most
vessels are also drydocked every 30 to 36 months for inspection of their underwater parts and for repairs related to such inspections. If any defects are found, the
classification surveyor will issue a "recommendation" which must be rectified by the ship-owner within prescribed time limits.
Most
insurance underwriters make it a condition for insurance coverage that a vessel be certified as "in class" by a classification society which is a member of the International
Association of Classification Societies. All of our vessels are certified as being "in class" by Lloyd's Register of Shipping, Bureau Veritas, NKK, Det Norske Veritas & Germanischer Lloyd and
the Korean Register of Shipping.
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Risk of Loss and Liability Insurance
The operation of any vessel includes risks such as mechanical failure, collision, property loss, cargo loss or damage and business interruption
due to political circumstances in foreign countries, hostilities and labor strikes. In addition, there is always an inherent possibility of marine disaster, including oil spills and other
environmental mishaps, and the liabilities arising from owning and operating vessels in international trade. The U.S. Oil Pollution Act of 1990, or OPA 90, which imposes virtually unlimited liability
upon owners, operators and demise charterers of vessels trading in the United States exclusive economic zone for certain oil pollution accidents in the United States, has made liability insurance more
expensive for shipowners and operators trading in the United States market.
While
we maintain hull and machinery insurance, war risks insurance, protection and indemnity coverage for our containership fleet in amounts that we believe to be prudent to cover
normal risks in our operations, we may not be able to maintain this level of coverage throughout a vessel's useful life. Furthermore, while we believe that our insurance coverage will be adequate, not
all risks can be insured, and there can be no guarantee that any specific claim will be paid, or that we will always be able to obtain adequate insurance coverage at reasonable rates.
Dr. John
Coustas, our chief executive officer, is the Deputy Chairman of the Board of Directors of The Swedish Club, our primary provider of insurance, including a substantial
portion of our hull & machinery, war risk and protection and indemnity insurance.
Hull & Machinery, Loss of Hire and War Risks Insurance
We maintain marine hull and machinery and war risks insurance, which covers the risk of particular average, general average, 4/4ths collision
liability, contact with fixed and floating objects (FFO) and actual or constructive total loss in accordance with the Nordic Plan for all of our vessels. Our vessels will each be covered up to at
least their fair market value after meeting certain deductibles per incident per vessel.
We
carried a minimum loss of hire coverage with respect to the
CSCL America
and the
Europe (ex CSCL
Europe)
, to cover standard requirements of KEXIM until the repayment of our loan in 2016. We also carry minimum loss of hire coverage for the
CSCL
Pusan
and
CSCL Le Havre
, to cover standard requirements of KEXIM and ABN Amro, the banks providing financing for our acquisition
of these vessels. We do not and will not obtain loss of hire insurance covering the loss of revenue during extended off-hire periods for the other vessels in our fleet, other than with respect to any
period during which our vessels are detained due to incidents of piracy, because we believe that this type of coverage is not economical and is of limited value to us, in part because historically our
fleet has had a limited number of off-hire days.
Protection and indemnity ("P&I") insurance provides insurance cover to its Members in respect of liabilities, costs or expenses incurred by them
in their capacity as owner or operator of the respective entered ship and arising out of an event during the period of insurance as a direct consequence of the operation of the ship. This includes
third-party liability, crew liability and other related expenses resulting from the injury or death of crew, passengers and other third parties, the loss or damage to cargo, and except where the cover
is provided in the hull and machinery policy, also third-party claims arising from collision with other vessels and damage to other third-party property. Indemnity cover is also provided for liability
for the discharge or escape of oil or other substance, or threat of escape of such substances. Other liabilities which include salvage, towing, wreck removal and an omnibus provision are also
included. Our protection and indemnity insurance, is provided by mutual protection
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and
indemnity associations, or P&I associations entered in the International Group of P&I Associations, who together provide poolable cover to almost unlimited capacity (about US$4.3 billion
per event) except where otherwise limited by International Convention or the relevant domestic law.
Our
protection and indemnity insurance coverage in accordance with the International Group of P&I Club Agreement for pollution will be US$1.0 billion per event. Our P&I Excess war
risk coverage limit is US$500.0 million and in respect of certain war and terrorist risks the liabilities arising from Bio-Chemical etc., the limit is US$30.0 million. For passengers and
seaman risks, the limit is US$3.0 billion, with a sub- limit of US$2.0 billion for passenger claims only. The thirteen P&I associations that comprise the International Group insure
approximately 90% of the world's commercial blue-water tonnage and have entered into a pooling agreement to reinsure each association's liabilities. As a member of a P&I association, that is a member
of the International Group, we will be subject to calls payable to the associations based inter-alia on the International Group's claim records, as well as the individual claims' records of all other
members of the analogous individual associations and their performance. If our insurance providers are not able to obtain reinsurance for port calls in Iran, due to continuing U.S. primary sanctions
applicable to U.S. persons facilitating transactions involving Iran, we may have to pay additional premiums with respect to any port calls that our charterers direct our vessels to make in Iran.
Environmental and Other Regulations
Government regulation significantly affects the ownership and operation of our vessels. They are subject to international conventions, national,
state and local laws, regulations and standards in force in international waters and the countries in which our vessels may operate or are registered, including those governing the management and
disposal of hazardous substances and wastes, the cleanup of oil spills and other contamination, air emissions, wastewater discharges and ballast water management. These laws and regulations include
OPA, the U.S. Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), the U.S. Clean Water Act, the International Convention for Prevention of Pollution from Ships,
regulations adopted by the IMO and the European Union, various volatile organic compound air emission requirements and various Safety of Life at Sea ("SOLAS") amendments, as well as other regulations
described below. Compliance with these laws, regulations and other requirements entails significant expense, including vessel modifications and implementation of certain operating procedures.
A
variety of governmental and private entities subject our vessels to both scheduled and unscheduled inspections. These entities include the local port authorities (U.S. Coast Guard,
harbor master or equivalent), classification societies, flag state administration (country of registry), charterers and, particularly, terminal operators. Certain of these entities require us to
obtain permits, licenses,
certificates and financial assurances for the operation of our vessels. Failure to maintain necessary permits or approvals could require us to incur substantial costs or result in the temporary
suspension of operation of one or more of our vessels.
We
believe that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to greater inspection and safety
requirements on all vessels and may accelerate the scrapping of older vessels throughout the industry. Increasing environmental concerns have created a demand for vessels that conform to the stricter
environmental standards. We are required to maintain operating standards for all of our vessels that emphasize operational safety, quality maintenance, continuous training of our officers and crews
and compliance with U.S. and international regulations. We believe that the operation of our vessels is in substantial compliance with applicable environmental laws and regulations. Because such laws
and regulations are frequently changed and may impose increasingly stricter requirements, any future requirements may limit our ability to do business, increase our operating costs, force the early
retirement of some of our vessels, and/or affect their resale value, all of which could have a material adverse effect on our
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financial
condition and results of operations. In addition, a future serious marine incident that causes significant adverse environmental impact, such as the 2010
Deepwater
Horizon
oil spill, could result in additional legislation or regulation that could negatively affect our profitability.
Our vessels are subject to standards imposed by the IMO (the United Nations agency for maritime safety and the prevention of pollution by
ships). The IMO has adopted regulations that are designed to reduce pollution in international waters, both from accidents and from routine operations. These regulations address oil discharges,
ballasting and unloading operations, sewage, garbage, and air emissions. For example, Annex III of the International Convention for the Prevention of Pollution from Ships, or MARPOL, regulates
the transportation of marine pollutants, and imposes standards on packing, marking, labeling, documentation, stowage, quantity limitations and pollution prevention. These requirements have been
expanded by the International Maritime Dangerous Goods Code, which imposes additional standards for all aspects of the transportation of dangerous goods and marine pollutants by sea.
In
September 1997, the IMO adopted Annex VI to the International Convention for the Prevention of Pollution from Ships to address air pollution from vessels. Annex VI,
which came into effect on May 19,
2005, set limits on sulfur oxide ("SOx") and NOx emissions from vessels and prohibited deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI also included a
global cap on the sulfur content of fuel oil and allowed for special areas to be established with more stringent controls on sulfur emissions. Annex VI has been ratified by some, but not all
IMO member states, including the Marshall Islands. Pursuant to a Marine Notice issued by the Marshall Islands Maritime Administrator as revised in March 2005, vessels flagged by the Marshall Islands
that are subject to Annex VI must, if built before the effective date, obtain an International Air Pollution Prevention Certificate evidencing compliance with Annex VI by the first dry
docking after May 19, 2005, but no later than May 19, 2008. All vessels subject to Annex VI and built after May 19, 2005 must also have this Certificate. We have obtained
International Air Pollution Prevention certificates for all of our vessels. Amendments to Annex VI regarding particulate matter, NOx and SOx emission standards entered into force in July 2010.
The amendments provide for a progressive reduction in SOx emissions from ships, with the global sulfur cap reduced initially to 3.50% (from the current 4.50%), effective from January 1, 2012;
then progressively to 0.50%, effective from January 1, 2020. The IMO confirmed in October 2016 that a global 0.5% sulfur cap on marine fuels will come into force on January 1, 2020, as
agreed in amendments adopted in 2008 for Annex VI to MARPOL. Annex VI sets progressively stricter regulations to control sulfur oxides (SOx) and nitrous oxides (NOx) emissions from
ships, which present both environmental and health risks. The 0.5% sulfur cap marks a significant reduction from the current global sulfur cap of 3.5%, which had been implemented since
January 1, 2012. When the 2020 sulfur cap was decided upon in 2008, it was also agreed that a review should be undertaken by 2018 to assess whether there was sufficient compliant fuel available
to meet the 2020 date, failing which, the date could be deferred to 2025. That review was completed in July 2016 by a consortium of consultants led by CE Delft and submitted to the IMO's Marine
Environment Protection Committee (MEPC) during their 70th session. The review concluded that sufficient compliant fuel would be available to meet the new requirement. However, there have been
competing studies, that hold the opposing view that refining capacity will not be sufficient in 2020, with an estimated 60-70% additional sulfur plant capacity required by 2020. There have also been
questions as to how the sulfur cap will be enforced, as it is up to individual parties to MARPOL to enforce fines and sanctions. The Annex VI amendments also establish tiers of stringent NOx
emissions standards for new marine engines, depending on their dates of installation. The United States ratified the amendments, and all vessels subject to Annex VI must comply with the amended
requirements when entering U.S. ports or operating in U.S. waters. Additionally, more stringent emission standards apply in coastal areas designated by MEPC as Emission Control Areas (ECAs). The North
American ECA,
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which
includes the area extending 200 nautical miles from the Atlantic/Gulf and Pacific Coasts of the United States and Canada, the Hawaiian Islands, and the French territories of St. Pierre
and Miquelon, has been enforceable since August 1, 2012. Fuel used by vessels operating in the ECA cannot contain more than 1.0% sulfur, dropping to no more than 0.1% sulfur in 2015. NOx after-
treatment requirements became effective in 2016. The U.S. Caribbean ECA, which includes the waters of Puerto Rico and the Virgin Islands, became enforceable on January 1, 2014. We may incur
costs to install control equipment on our engines in order to comply with the new requirements. Other ECAs may be designated, and the jurisdictions in which our vessels operate may adopt more
stringent emission standards independent of IMO.
The
operation of our vessels is also affected by the requirements set forth in the IMO's International Management Code for the Safe Operation of Ships and Pollution Prevention, or the
ISM Code, which was adopted in July 1998. The ISM Code requires shipowners and bareboat charterers to develop and maintain an extensive "Safety Management System" that includes the adoption of a
safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. The ISM Code requires that vessel
operators obtain a Safety Management Certificate for each vessel they operate. This certificate evidences compliance by a vessel's management with code requirements for a Safety Management System. No
vessel can obtain a certificate unless its operator has been awarded a document of compliance, issued by each flag state, under the ISM Code. The failure of a shipowner or bareboat charterer to comply
with the ISM Code may subject such party to increased liability, decrease available insurance coverage for the affected vessels or result in a denial of access to, or detention in, certain ports.
Currently, each of the vessels in our fleet is ISM code-certified. However, there can be no assurance that such certifications will be maintained indefinitely.
In
2001, the IMO adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage, or the Bunker Convention, which imposes strict liability on ship owners for
pollution damage in jurisdictional waters of ratifying states caused by discharges of bunker oil. The Bunker Convention also requires registered owners of ships over a certain size to maintain
insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calculated in accordance
with the Convention on Limitation of Liability for Maritime Claims of 1976, as amended). The Bunker Convention entered into force on November 21, 2008. Our entire fleet has been issued a
certificate attesting that insurance is in force in accordance with the insurance provisions of the Convention. In jurisdictions where the Bunkers Convention has not been adopted, such as the United
States, various legislative schemes or common law govern, and liability is either strict or imposed on the basis of fault.
OPA established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. It applies to
discharges of any oil from a vessel, including discharges of fuel oil and lubricants. OPA affects all owners and operators whose vessels trade in the United States, its territories and possessions or
whose vessels operate in U.S. waters, which include the United States' territorial sea and its two hundred nautical mile exclusive economic zone. While we do not carry oil as cargo, we do carry fuel
oil (or bunkers) in our vessels, making our vessels subject to the OPA requirements.
Under
OPA, vessel owners, operators and bareboat charterers are "responsible parties" and are jointly, severally and strictly liable (unless the discharge of oil results solely from the
act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other
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damages
arising from discharges or threatened discharges of oil from their vessels. OPA defines these other damages broadly to include:
-
-
natural resources damage and the costs of assessment thereof;
-
-
real and personal property damage;
-
-
net loss of taxes, royalties, rents, fees and other lost revenues;
-
-
lost profits or impairment of earning capacity due to property or natural resources damage; and
-
-
net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards, and loss of subsistence
use of natural resources.
OPA
preserves the right to recover damages under existing law, including maritime tort law.
OPA
liability is limited to the greater of $1,100 per gross ton or $939,800 for non-tank vessels, subject to periodic adjustment by the U.S. Coast Guard (USCG). These limits of liability
do not apply if an incident was directly caused by violation of applicable U.S. federal safety, construction or operating regulations or by a responsible party's gross negligence or willful
misconduct, or if the responsible party
fails or refuses to report the incident or to cooperate and assist in connection with oil removal activities.
OPA
requires owners and operators of vessels to establish and maintain with the USCG evidence of financial responsibility sufficient to meet their potential liabilities under the OPA.
Under the regulations, vessel owners and operators may evidence their financial responsibility by providing proof of insurance, surety bond, self-insurance, or guaranty, and an owner or operator of a
fleet of vessels is required only to demonstrate evidence of financial responsibility in an amount sufficient to cover the vessels in the fleet having the greatest maximum liability under OPA. Under
the self-insurance provisions, the shipowner or operator must have a net worth and working capital, measured in assets located in the United States against liabilities located anywhere in the world,
that exceeds the applicable amount of financial responsibility. We have complied with the USCG regulations by providing a financial guaranty in the required amount.
OPA
specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states have enacted
legislation providing for unlimited liability for oil spills. In some cases, states which have enacted such legislation have not yet issued implementing regulations defining vessels owners'
responsibilities under these laws. We intend to comply with all applicable state regulations in the ports where our vessels call.
We
currently maintain, for each of our vessels, oil pollution liability coverage insurance in the amount of $1 billion per incident. In addition, we carry hull and machinery and
protection and indemnity insurance to cover the risks of fire and explosion. Given the relatively small amount of bunkers our vessels carry, we believe that a spill of oil from the vessels would not
be catastrophic. However, under certain circumstances, fire and explosion could result in a catastrophic loss. While we believe that our present insurance coverage is adequate, not all risks can be
insured, and there can be no guarantee that any specific claim will be paid, or that we will always be able to obtain adequate insurance coverage at reasonable rates. If the damages from a
catastrophic spill exceeded our insurance coverage, it would have a severe effect on us and could possibly result in our insolvency.
In
response to the BP Deepwater Horizon oil spill, a number of bills that could potentially increase or even eliminate the limits of liability under OPA have been introduced in the U.S.
Congress. Compliance with any new OPA requirements could substantially impact our costs of operation or require us to incur additional expenses.
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Title VII of the Coast Guard and Maritime Transportation Act of 2004, or the CGMTA, amended OPA to require the owner or operator of any non-tank vessel of 400
gross tons or more, that carries oil of any kind as a fuel for main propulsion, including bunkers, to have an approved response plan for each vessel. The vessel response plans include detailed
information on actions to be taken by vessel personnel to prevent or mitigate any discharge or substantial threat of such a discharge of oil from the vessel due to operational activities or
casualties. We have approved response plans for each of our vessels.
CERCLA governs spills or releases of hazardous substances other than petroleum or petroleum products. The owner or operator of a ship, vehicle
or facility from which there has been a release is liable without regard to fault for the release, and along with other specified parties may be jointly and severally liable for remedial costs. Costs
recoverable under CERCLA include cleanup and
removal costs, natural resource damages and governmental oversight costs. Liability under CERCLA is generally limited to the greater of $300 per gross ton or $0.5 million per vessel carrying
non-hazardous substances ($5.0 million for vessels carrying hazardous substances), unless the incident is caused by gross negligence, willful misconduct or a violation of certain regulations,
in which case liability is unlimited. The USCG's financial responsibility regulations under OPA also require vessels to provide evidence of financial responsibility for CERCLA liability in the amount
of $300 per gross ton. As noted above, we have provided a financial guaranty in the required amount to the USCG.
The U.S. Clean Water Act, or CWA, prohibits the discharge of oil or hazardous substances in navigable waters and imposes strict liability in the
form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under the more
recent OPA and CERCLA, discussed above. Under U.S. Environmental Protection Agency, or EPA, regulations we are required to obtain a CWA permit regulating and authorizing any discharges of ballast
water or other wastewaters incidental to our normal vessel operations if we operate within the three-mile territorial waters or inland waters of the United States. The permit, which EPA has designated
as the Vessel General Permit for Discharges Incidental to the Normal Operation of Vessels, or VGP, incorporated the then-current U.S. Coast Guard requirements for ballast water management, as well as
supplemental ballast water requirements and limits for 26 other specific discharges. Regulated vessels cannot operate in U.S. waters unless they are covered by the VGP. To do so, vessel owners must
submit a Notice of Intent, or NOI, at least 30 days before the vessel operates in U.S. waters. To comply with the VGP vessel owners and operators may have to install equipment on their vessels
to treat ballast water before it is discharged or implement port facility disposal arrangements or procedures at potentially substantial cost. The VGP also requires states to certify the permit, and
certain states have imposed more stringent discharge standards as a condition of their certification. Many of the VGP requirements have already been addressed in our vessels' current ISM Code SMS
Plan. As part of a settlement of a lawsuit challenging the VGP, EPA issued a new VGP (2013 VGP) that became effective on December 19, 2013. The 2013 VGP contains numeric effluent limits for
ballast water discharges that are expressed as maximum concentrations of living organisms per unit of ballast water volume discharged. These requirements correspond with the IMO's requirements under
the International Convention for the Control and Management of Ships' Ballast Water and Sediments, or the BWM Convention, discussed below, and are consistent with the USCG's 2012 ballast water
discharge standards described below. The 2013 VGP also includes additional management requirements for non-ballast water discharges and requires the submission of annual reports by all vessels covered
by the 2013 VGP. EPA is implementing the 2013 VGP on a staggered basis, depending on the size of a vessel and its first drydocking between January 1, 2014 and January 1, 2016. Vessels
that are constructed after December 1, 2013 are immediately subject
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to
the requirements of the 2013 VGP. The ballast water management standards of the 2013 VGP were challenged by the Canadian Shipowners' Association in the U.S. Second Circuit Court of Appeals. The
U.S. Second Circuit Court of Appeals ruled on October 5, 2015 that EPA had acted arbitrarily and capriciously with respect to certain of the ballast water provisions in the 2013 VGP. The Court
remanded the issue to EPA to either justify its approach in the 2013 VGP or redraft the ballast water sections of the VGP consistent with the Court's ruling. In the meantime, the 2013 VGP will remain
in effect. Although there are no USCG-approved ballast water management systems, EPA to date has refused to extend or waive the date for compliance with the ballast water management requirements in
the 2013 VGP. Instead, EPA will consider why a vessel does not have compliant ballast water management technology if it takes action to enforce the new requirements. We have submitted NOIs for all of
our vessels that operate or potentially operate in U.S. waters and have submitted annual reports for all of our covered vessels.
The Federal Clean Air Act (CAA) requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air
contaminants. Our vessels are subject to CAA vapor control and recovery standards for cleaning fuel tanks and conducting other operations in regulated port areas and emissions standards for so-called
"Category 3" marine diesel engines operating in U.S. waters. The marine diesel engine emission standards are currently limited to new engines beginning with the 2004 model year. However, on
April 30, 2010, EPA adopted more stringent standards for emissions of particulate matter, sulfur oxides, and nitrogen oxides and other related provisions for new Category 3 marine diesel
engines installed on vessels registered or flagged in the U.S. We may incur costs to install control equipment on our vessels to comply with the new standards. Several states regulate emissions from
vessel vapor control and recovery operations under federally-approved State Implementation Plans. The California Air Resources Board has adopted clean fuel regulations applicable to all vessels
sailing within 24 miles of the California coast whose itineraries call for them to enter any California ports, terminal facilities or internal or estuarine waters. Only marine gas oil or marine diesel
oil fuels with 0.1% sulfur will be allowed. If new or more stringent requirements relating to marine fuels or emissions from marine diesel engines or port operations by vessels are adopted by EPA or
the states, compliance with these regulations could entail significant capital expenditures or otherwise increase the costs of our operations.
The EU has also adopted legislation that: requires member states to impose criminal sanctions for certain pollution events, such as the
unauthorized discharge of tank washings. The European Parliament recently endorsed a European Commission proposal to criminalize certain pollution discharges from ships. If the proposal becomes formal
EU law, it will affect the operation of vessels and the liability of owners for oil and other pollutant discharges. It is difficult to predict what legislation, if any, may be promulgated by the
European Union or any other country or authority.
The
Paris Memorandum of Understanding on Port State Control (Paris MoU) to which 27 nations are party adopted the "New Inspection Regime" (NIR) to replace the existing Port State Control
system, effective January 1, 2011. The NIR is a significant departure from the previous system, as it is a risk based targeting mechanism that will reward quality vessels with a smaller
inspection burden and subject high-risk ships to more in-depth and frequent inspections. The inspection record of a vessel, its age and type, the Voluntary IMO Member State Audit Scheme, and the
performance of the flag State and recognized organizations are used to develop the risk profile of a vessel.
The
U.S. National Invasive Species Act, or NISA, was enacted in 1996 in response to growing reports of harmful organisms being released into U.S. ports through ballast water taken on by
ships in foreign ports. Under NISA, the USCG adopted regulations in July 2004 imposing mandatory ballast
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water
management practices for all vessels equipped with ballast water tanks entering U.S. waters. These requirements can be met by performing mid-ocean ballast exchange, by retaining ballast water on
board the ship, or by using environmentally sound alternative ballast water management methods approved by the USCG. (However, mid-ocean ballast exchange is mandatory for ships heading to the Great
Lakes or Hudson Bay, or vessels engaged in the foreign export of Alaskan North Slope crude oil.) Mid-ocean ballast exchange is the primary method for compliance with the USCG regulations, since
holding ballast water can prevent ships from performing cargo operations upon arrival in the United States, and alternative methods are still under development. Vessels that are unable to conduct
mid-ocean ballast exchange due to voyage or safety concerns may discharge minimum amounts of ballast water (in areas other than the Great Lakes and the Hudson River), provided that they comply with
record keeping requirements and document the reasons they could not follow the required ballast water management requirements. On March 23, 2012 the USCG adopted ballast water discharge
standards that set maximum acceptable discharge limits for living organisms and established standards for ballast water management systems. The regulations became effective on June 21, 2012 and
were phased in between January 1, 2014 and January 1, 2016 for existing vessels, depending on the size of their ballast water tanks and their next drydocking date. As from
December 30, 2016, the USCG has
approved 3Ballast Water Treatment Systems. Our fleet has obtained extensions for the vessels due for dry-docking in 2017 and 2018 which are deferred to their next scheduled dry-docking date. The Coast
Guard has not issued extension letters to the vessels with compliance dates on or after January 1, 2019. Now that a type approved system is available, the status of these applications will be
changed from "received" to "held in abeyance "since the application's original criteria are no longer valid. In order to receive approval for an extension, additional information must be submitted
including appropriate documentation as to why compliance with the requirements is not possible.
Although
the USCG ballast water management requirements are consistent with the requirements in EPA's 2013 VGP, the USCG intends to review the practicability of implementing even more
stringent ballast water discharge standards. In the past absence of federal standards, states enacted legislation or regulations to address invasive species through ballast water and hull cleaning
management and permitting requirements. Michigan's ballast water management legislation was upheld by the Sixth Circuit Court of Appeals and California enacted legislation extending its ballast water
management program to regulate the management of "hull fouling" organisms attached to vessels and adopted regulations limiting the number of organisms in ballast water discharges. Other states may
proceed with the enactment of requirements similar to those of California and Michigan or the adoption of requirements that are more stringent than the EPA and USCG requirements. We could incur
additional costs to comply with additional USCG or state ballast water management requirements.
At
the international level, the IMO adopted the BWM Convention in February 2004. The Convention's implementing regulations call for a phased introduction of mandatory ballast water
exchange requirements, to be replaced in time with mandatory concentration limits. The BWM Convention was not to enter into force until 12 months after it was adopted by 30 states, the combined
merchant fleets of which represent not less than 35% of the gross tonnage of the world's merchant shipping. On September 8, 2016, this threshold was met (with 52 contracting parties making up
35.14%). Thus, the BWM Convention will enter into force on September 8, 2017. Many of the implementation dates originally contained in the BWM Convention have already passed, so that once the
convention enters into force, the period for installation of mandatory ballast water exchange requirements would be very short, with several thousand ships per year needing to install the systems.
Consequently, the IMO Assembly passed a resolution in December 2013 revising the dates for implementation of the ballast water management requirements so that they are triggered by the entry into
force date. In effect, this makes all vessels constructed before the entry into force date "existing" vessels, allowing for the installation of ballast water management systems on such vessels at the
first renewal IOPP survey following entry into force of the BWM Convention.
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If
the mid-ocean ballast exchange is made mandatory throughout the United States or at the international level, or if ballast water treatment requirements or options are instituted, the
cost of compliance could increase for ocean carriers. Although we do not believe that the costs of compliance with a mandatory mid-ocean ballast exchange would be material, it is difficult to predict
the overall impact of such a requirement on our business.
The
2005 Kyoto Protocol to the United Nations Framework Convention on Climate Change required adopting countries to implement national programs to reduce emissions of certain greenhouse
gases, but emissions from international shipping are not subject to the soon to expire Kyoto Protocol. The Paris Agreement adopted under the United Nations Framework Convention on Climate Change in
December 2015, contemplates commitments from each nation party thereto to take action to reduce greenhouse gas emissions and limit increases in global temperatures but did not include any restrictions
or other measures specific to shipping emissions. However, restrictions on shipping emissions are likely to continue to be considered and a new treaty may be adopted in the future that includes
restrictions on shipping emissions. The IMO's MEPC adopted two new sets of mandatory requirements to address greenhouse gas emissions from vessels at its July 2011 meeting. The EEDI establishes a
minimum energy efficiency level per capacity mile and will be applicable to new vessels. The Ship Energy Efficiency Management Plan is applicable to currently operating vessels of 400 metric tons and
above and we are in compliance. These requirements entered into force in January 2013 and could cause us to incur additional compliance costs in the future. The IMO is also considering the development
of market based mechanisms to reduce greenhouse gas emissions from vessels, as well as sustainable development goals for marine transportation, but it is impossible to predict the likelihood that such
measures might be adopted or their potential impacts on our operations at this time. In 2015, the EU adopted a regulation requiring large vessels (over 5,000 gross tons) calling at EU ports to
monitor, report and verify their carbon dioxide emissions, beginning in January 2018. Negotiators from the European Parliament and the European Union Council provisionally adopted rules to implement
this strategy in November 2014 and the European Parliament and Council of Ministers are expected to adopt the regulations. The U.S. EPA Administrator issued a finding that greenhouse gases threaten
the public health and safety and has adopted regulations relating to the control of greenhouse gas emissions from certain mobile sources and proposed regulations that would restrict greenhouse gas
emissions from certain large stationary sources. Although the EPA findings and regulations do not extend to vessels and vessel engines, the EPA is separately considering a petition from the California
Attorney General and environmental groups to regulate greenhouse gas emissions from ocean-going vessels under the CAA. Any passage of climate control legislation or other regulatory initiatives by the
IMO, the EU or individual countries in which we operate or any international treaty adopted to succeed the Kyoto Protocol could require us to make significant financial expenditures or otherwise limit
our operations that we cannot predict with certainty at this time.
Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On
November 25, 2002, the U.S. Maritime Transportation Security Act of 2002 (MTSA) came into effect. To implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard issued
regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. Similarly, in December 2002, amendments
to SOLAS created a new chapter of the convention dealing specifically with maritime security. The new chapter went into effect in July 2004, and imposes various detailed security obligations on
vessels and port authorities, most of which are contained in the newly created International Ship and Port Facilities Security (ISPS) Code.
The
ISPS Code is designed to protect ports and international shipping against terrorism. To trade internationally a vessel must obtain an International Ship Security Certificate, or
ISSC, from a
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recognized
security organization approved by the vessel's flag state. To obtain an ISSC a vessel must meet certain requirements, including:
-
-
on-board installation of automatic identification systems to enhance vessel-to-vessel and vessel-to-shore communications;
-
-
on-board installation of ship security alert systems that do not sound on the vessel but alert the authorities on shore;
-
-
the development of vessel security plans;
-
-
identification numbers to be permanently marked on a vessel's hull;
-
-
a continuous synopsis record to be maintained on board showing the vessel's history, including the vessel ownership, flag state registration,
and port registrations; and
-
-
compliance with flag state security certification requirements.
In
addition, as of January 1, 2009, every company and/or registered owner is required to have an identification number which conforms to the IMO Unique Company and Registered
Owner Identification Number Scheme. Our Manager has also complied with this amendment to SOLAS XI-1/3-1.
The
U.S. Coast Guard regulations are intended to align with international maritime security standards and exempt non-U.S. vessels that have a valid ISSC attesting to the vessel's
compliance with SOLAS security requirements and the ISPS Code from the requirement to have a U.S. Coast Guard approved vessel security plan. We have implemented the various security measures addressed
by the MTSA, SOLAS and the ISPS Code and have ensured that our vessels are compliant with all applicable security requirements. Our fleet, as part of our continuous improvement cycle, is reviewing
vessels SSPs and is maintaining best Management practices during passage through security risk areas.
Seasonality
Our containerships primarily operate under multi-year charters and therefore are not subject to the effect of seasonal variations in demand.
Properties
We have no freehold or leasehold interest in any real property. We occupy space at 3, Christaki Kompou Street, Peters House, 3300, Limassol,
Cyprus and 14 Akti Kondyli, 185-45 Piraeus, Greece that is owned by our manager, Danaos Shipping, and which is provided to us as part of the services we receive under our management agreement.
Item 4A. Unresolved Staff Comments
Not applicable.
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Item 5. Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations should be read in conjunction with the
financial statements and the notes to those statements included elsewhere in this annual report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result
of many factors, such as those set forth under "Item 3. Key InformationRisk Factors" and elsewhere in this annual report, our actual results may differ materially from those
anticipated in these forward-looking statements.
Overview
Our business is to provide international seaborne transportation services by operating vessels in the containership sector of the shipping
industry. As of February 28, 2017, we had a fleet of 55 containerships aggregating 329,588 TEU, making us among the largest containership charter owners in the world, based on total TEU
capacity. Gemini, in which we hold a 49% minority equity interest, owned four additional containerships aggregating 23,998 TEU in capacity, as of February 28, 2017. We do not consolidate
Gemini's results of operations and account for our minority equity interest under the equity method of accounting, which is recorded under "Equity loss on investment" in our consolidated statements of
operations.
We
primarily deploy our containerships on multi-year, fixed-rate charters to take advantage of the stable cash flows and high utilization rates typically associated with multi-year
charters, although in weaker containership charter markets such as is currently prevailing we charter more of our vessels on shorter term charters so as to be able to take advantage of any increase in
charter rates. As of February 28, 2017, fifty-three containerships in our fleet were employed on time charters out of which twenty-four expire in 2017, and two containerships were employed on
bareboat charters. Gemini has employed all of its containerships on time charters. Our containerships are generally employed on multi-year charters to large liner companies that charter-in vessels on
a multi-year basis as part of their business strategies. As of February 28, 2017, our diverse group of customers in the containership sector
included China Shipping, CMA-CGM, COSCO, Hyundai, MSC, Niledutch, Yang Ming, ZIM Israel Integrated Shipping Services, NYK, Hapag Lloyd, OOCL and Maersk Line, and for Gemini, NYK, OOCL and Hapag Lloyd.
The
average number of containerships in our fleet for the years ended December 31, 2016, 2015 and 2014 was 55.0, 56.0 and 55.9, respectively.
Purchase Options
The charters with respect to the
CMA CGM Moliere
, the
CMA CGM
Musset
, the
CMA CGM Nerval
, the
CMA CGM Rabelais
and the
CMA CGM Racine
include an
option for the charterer, CMA-CGM, to purchase the vessels eight years after the commencement of the respective charters,
which will fall in September 2017, March 2018, May 2018, July 2018 and August 2018, respectively, each for $78.0 million. In each case, the option to purchase the vessel must be exercised
15 months prior to the acquisition dates described in the preceding sentence and none have been exercised to date. The $78.0 million option prices reflect an estimate, made at the time
of entry into the applicable charter, of the fair market value of the vessels at the time we would be required to sell the vessels upon exercise of the options. If CMA-CGM were to exercise these
options with respect to any or all of these vessels, the expected size of our containership fleet would be reduced, and as a result our anticipated level of revenues would be reduced.
Our Manager
Our operations are managed by Danaos Shipping, our manager, under the supervision of our officers and our board of directors. We believe our
manager has built a strong reputation in the
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shipping
community by providing customized, high-quality operational services in an efficient manner for both new and older vessels. We have a management agreement pursuant to which our manager and
its affiliates provide us and our subsidiaries with technical, administrative and certain commercial
services. The initial term of this agreement expired on December 31, 2008, and the agreement now renews each year for a one-year term for the next 12 years thereafter unless we give a
one-year notice of non-renewal (subject to certain termination rights described in "Item 7. Major Shareholders and Related Party Transactions"). Our manager is ultimately owned by Danaos
Investments Limited as Trustee of the 883 Trust, which we refer to as the Coustas Family Trust. Danaos Investments Limited is the trustee of the Coustas Family Trust, of which Dr. Coustas and
other members of the Coustas family are beneficiaries. The Coustas Family Trust is also our largest stockholder.
Hanjin Shipping
On September 1, 2016, Hanjin Shipping, a charterer of eight of our vessels under long term, fixed rate charter party agreements, referred
to the Seoul Central District Court, which issued an order to commence the rehabilitation proceedings of Hanjin Shipping. Hanjin Shipping has cancelled all eight of its charter party agreements with
us, which represented approximately $560 million of our $2.8 billion of contracted revenue as of June 30, 2016, and returned each of the vessels to us. On February 17, 2017
the Seoul Central District Court (Bankruptcy Division), declared the bankruptcy of Hanjin Shipping, converting the rehabilitation proceeding to a bankruptcy proceeding. The Seoul Central District
Court (Bankruptcy Division) appointed a bankruptcy trustee to dispose of Hanjin Shipping's remaining assets and distribute the proceeds from the sale of such assets to Hanjin Shipping's creditors
according to their priorities. We rechartered all eight vessels on short-term charters at market rates in the prevailing weak containership charter market. As a result of these events, we ceased
recognizing revenue from Hanjin Shipping effective from July 1, 2016 onwards and recognized a bad debt expense amounting to $15.8 million relating to unpaid charter hire recorded as
accounts receivable as of June 30, 2016 in our consolidated statements of operations in the year ended December 31, 2016. We have an unsecured claim for unpaid charter hire, charges,
expenses and loss of profit against Hanjin Shipping totaling $597.9 million submitted to the Seoul Central District Court.
As
a result of a decrease in our operating income and charter-attached market value of certain of our vessels caused mainly by the cancellation of our eight charters with Hanjin
Shipping, we were in breach of the minimum security cover, consolidated net leverage and consolidated net worth financial covenants contained in our Bank Agreement and our other credit facilities as
of December 31, 2016. We have obtained waivers of the breaches of these financial covenants covering the period until April 1, 2017. As these waivers were obtained for a period of less
than the next 12 months after the balance sheet date, and in accordance with the guidance related to the classification of obligations that are callable by the lenders, we have classified our
long-term debt, net of deferred finance costs as current. We are in discussions with our lenders regarding the covenant waivers that expire on April 1, 2017. See "Going Concern."
Factors Affecting Our Results of Operations
Our financial results are largely driven by the following factors:
-
-
Number of Vessels in Our Fleet.
The number of vessels in our fleet, and
their TEU capacity, is the primary factor in determining the level of our revenues. Aggregate expenses also increase as the size of our fleet increases. Vessel acquisitions and dispositions will have
a direct impact on the number of vessels in our fleet. From time to time we have sold, generally older, vessels in our fleet. For example, in January 2016 we sold one of our older vessels, the
Federal,
and in 2014 we entered into an agreement with the lenders under the HSH Nordbank AG-Aegean Baltic Bank-Piraeus Bank credit facility, under
which we sold five of our older vessels, the
Marathonas
, the
Messologi
, the
Mytilini
, the
Commodore
and the
Duka
and we acquired two
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secondhand
6,402 TEU containerships built in 2002, the
Priority
and the
Performance
. Five of our
vessels, which have an aggregate capacity of 32,500 TEUs, are subject to arrangements pursuant to which the charterer has options to purchase the vessels at stipulated prices on the eighth
anniversaries of the charters which fall in September 2017, March 2018, May 2018, July 2018 and August 2018, respectively of which none have been exercised to date. If any of these purchase options
were to be exercised, the expected size of our containership fleet would be reduced, and as a result our anticipated level of revenues would be reduced.
-
-
Charter Rates.
Aside from the number of vessels in our fleet, the charter
rates we obtain for these vessels are the principal drivers of our revenues. Charter rates are based primarily on demand for capacity as well as the available supply of containership capacity at the
time we enter into the charters for our vessels. As a result of macroeconomic conditions affecting trade flow between ports served by liner companies and economic conditions in the industries which
use liner shipping services, charter rates can fluctuate significantly. Although the multi-year charters on which we deploy our containerships make us less susceptible to cyclical containership
charter rates than vessels operated on shorter-term charters, we are exposed to varying charter rate environments when our chartering arrangements expire or we lose a charter such as occurred with the
charter cancellations by Hanjin Shipping in 2016, and we seek to deploy our containerships under new charters. The staggered maturities of our containership charters also reduce our exposure to any
stage in the shipping cycle. As of February 28, 2017, the charters for twenty-four of our existing vessels are scheduled to expire between March 2017 and December 2017. With the prevailing low
charter rate levels, we expect that we will have to re-charter many of these vessels at the existing low spot charter rates.
-
-
Utilization of Our Fleet.
Due to the multi-year charters under which they
are operated, our containerships have consistently been deployed at or near full utilization. During 2016, our fleet utilization decreased to 94.6% compared to 99.0% in 2015, principally due to Hanjin
Shipping's filing for receivership and cancellation of long term charters for eight of our vessels. In addition, the amount of time our vessels spend in drydock undergoing repairs or undergoing
maintenance and upgrade work affects our results of operations. Historically, our fleet has had a limited number of off-hire days. For example, there were 1,005 total off-hire days for our entire
fleet during 2016 other than for scheduled drydockings and special surveys and excluding laid up vessels compared to 153 total off-hire days for our entire fleet during 2015 other than for scheduled
drydockings and special surveys and excluding laid up vessels. The increase in off-hire days in 2016 compared to 2015 was mainly due to the redelivery of eight of our vessels in the second half of
2016 from Hanjin Shipping due to its filing for court receivership. An increase in annual off-hire days could reduce our utilization. The efficiency with which suitable employment is secured, the
ability to minimize off-hire days and the amount of time spent positioning vessels also affects our results of operations. If the utilization patterns of our containership fleet changes our financial
results would be affected.
-
-
Expenses.
Our ability to control our fixed and variable expenses, including
those for commission expenses, crew wages and related costs, the cost of insurance, expenses for repairs and maintenance, the cost of spares and consumable stores, tonnage taxes and other
miscellaneous expenses also affects our financial results. In addition, factors beyond our control, such as developments relating to market premiums for insurance and the value of the U.S. dollar
compared to currencies in which certain of our expenses, primarily crew wages, are denominated can cause our vessel operating expenses to increase.
In
addition to those factors described above affecting our operating results, our net income is significantly affected by our financing arrangements, including any interest rate swap
arrangements, and, accordingly, prevailing interest rates and the interest rates and other financing terms we may obtain in the future.
58
Table of Contents
The
following table presents the contracted utilization of our operating fleet as of December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018 - 2019
|
|
2020 - 2021
|
|
2022 - 2026
|
|
2027 - 2028
|
|
Total
|
|
Contracted revenue (in millions)(1)
|
|
$
|
379.9
|
|
$
|
627.8
|
|
$
|
558.0
|
|
$
|
488.2
|
|
$
|
23.0
|
|
$
|
2,076.9
|
|
Number of vessels whose charters are set to expire in the respective period(2)
|
|
|
24
|
|
|
8
|
|
|
7
|
|
|
14
|
|
|
2
|
|
|
55
|
|
TEUs on expiring charters in the respective period
|
|
|
109,754
|
|
|
40,666
|
|
|
32,018
|
|
|
134,150
|
|
|
13,000
|
|
|
329,588
|
|
Contracted Operating(3) days
|
|
|
14,466
|
|
|
19,287
|
|
|
14,103
|
|
|
11,207
|
|
|
855
|
|
|
59,918
|
|
Total Operating(3) days
|
|
|
19,850
|
|
|
39,623
|
|
|
39,816
|
|
|
98,719
|
|
|
35,667
|
|
|
233,675
|
|
Contracted Operating days/Total Operating days
|
|
|
72.9
|
%
|
|
48.7
|
%
|
|
35.4
|
%
|
|
11.4
|
%
|
|
2.4
|
%
|
|
25.6
|
%
|
-
(1)
-
Annual
revenue calculations are based on an assumed 364 revenue days per annum, based on contracted charter rates from our current charter agreements. Additionally,
the revenues above reflect an estimate of off-hire days to perform periodic maintenance. If actual off-hire days are greater than estimated, these would decrease the level of revenues above. Although
these revenues are based on contractual charter rates, any contract is subject to performance by our counterparties and us. See "Operating Revenues," including the contracted revenue
table presented therein, for more information regarding our contracted revenues.
-
(2)
-
Refers
to the incremental number of vessels with charters expiring within the respective period.
-
(3)
-
Operating
days calculations are based on an assumed 364 operating days per annum. Additionally, the operating days above reflect an estimate of off-hire days to
perform periodic maintenance. If actual off-hire days are greater than estimated, these would decrease the amount of operating days above.
Our operating revenues are driven primarily by the number of vessels in our fleet, the number of operating days during which our vessels
generate revenues and the amount of daily charter hire that our vessels earn under time charters which, in turn, are affected by a number of factors, including our decisions relating to vessel
acquisitions and dispositions, the amount of time that we spend positioning our vessels, the amount of time that our vessels spend in drydock undergoing repairs, maintenance and upgrade work, the age,
condition and specifications of our vessels and the levels of supply and demand in the containership charter market. Vessels operating in the spot market generate revenues that are less predictable
but can allow increased profit margins to be captured during periods of improving charter rates.
Revenues
from multi-year period charters comprised substantially all of our revenues for the years ended December 31, 2016, 2015 and 2014. The revenues relating to our multi-year
charters will be affected by any additional vessels subject to multi-year charters we may acquire in the future, as well as by the disposition of any such vessel in our fleet. Our revenues will also
be affected if any of our charterers cancel a multi-year charter or fail to perform at existing contracted rates. Our multi-year charter agreements have been contracted in varying rate environments
and expire at different times. Generally, we do not employ our vessels under voyage charters under which a shipowner, in return for a fixed sum, agrees to transport cargo from one or more loading
ports to one or more destinations and assumes all vessel operating costs and voyage expenses.
59
Table of Contents
Our
expected revenues as of December 31, 2016, based on contracted charter rates, from our charter arrangements for our containerships is shown in the table below. Although these
expected revenues are based on contracted charter rates, any contract is subject to performance by the counterparties. If the charterers, some of which are currently facing substantial financial
pressure, are unable or unwilling to make charter payments to us, our results of operations and financial condition will be materially adversely affected, as was the case with the cancellation of
long-term, fixed rate charters for eight of our vessels by Hanjin Shipping in 2016. See "Item 3. Key InformationRisk FactorsWe are dependent on the ability and
willingness of our charterers to honor their commitments to us for all of our revenues and the failure of our counterparties to meet their obligations under our charter agreements could cause us to
suffer losses or otherwise adversely affect our business."
Contracted Revenue from Multi-Year Charters as of December 31, 2016(1)
(Amounts in millions of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Vessels(2)
|
|
2017
|
|
2018 - 2019
|
|
2020 - 2021
|
|
2022 - 2026
|
|
2027 - 2028
|
|
Total
|
|
55
|
|
$
|
379.9
|
|
$
|
627.8
|
|
$
|
558.0
|
|
$
|
488.2
|
(3)
|
$
|
23.0
|
|
$
|
2,076.9
|
|
-
(1)
-
Annual
revenue calculations are based on an assumed 364 revenue days per annum representing contracted revenues, based on contracted charter rates from our current
charter agreements. Although these revenues are based on contractual charter rates, any contract is subject to performance by the counter parties and us. Additionally, the revenues above reflect an
estimate of off-hire days to perform periodic maintenance. If actual off-hire days are greater than estimated, these would decrease the level of revenues above.
-
(2)
-
Includes
the
CMA CGM Moliere
delivered to us in 2009 and the
CMA CGM
Musset
, the
CMA CGM Nerval
, the
CMA CGM Rabelais
and the
CMA CGM Racine
, delivered
to us in 2010, which are each subject to options for the charterer to purchase the vessels eight years after the commencement
of the respective charters, which fall in September 2017, March 2018, May 2018, July 2018 and August 2018, respectively, each for $78.0 million. The $78.0 million option prices
reflected, at the time we entered into the applicable charter, an estimate of the fair market value of the vessels at the time we would be required to sell the vessels upon exercise of the options.
-
(3)
-
An
aggregate of $242.5 million ($48.5 million with respect to each vessel) of revenue with respect to the
CMA CGM
Moliere
, the
CMA CGM Musset
, the
CMA CGM Nerval
, the
CMA
CGM Rabelais
and the
CMA CGM Racine
, following September 2017, March 2018, May 2018, July 2018 and August 2018, respectively, is
included in the table because we cannot predict the likelihood of these options being exercised.
We
generally do not charter our containerships in the spot market, although due to the Hanjin Shipping charter cancellations and weak charter market conditions we currently have
twenty-four vessels employed in the spot market. Vessels operating in the spot market generate revenues that are less predictable than vessels on period charters, although this chartering strategy can
enable vessel owners to capture increased profit margins during periods of improvements in charter rates. Deployment of vessels in the spot market creates exposure, however, to the risk of declining
charter rates, as spot rates may be higher or lower than those rates at which a vessel could have been time chartered for a longer period.
Voyage expenses include port and canal charges, bunker (fuel) expenses (bunker costs are normally covered by our charterers, except in certain
cases such as vessel re-positioning), address commissions and brokerage commissions. Under multi-year time charters and bareboat charters, such as those on which we charter our containerships and
under short-term time charters, the charterers bear the voyage
60
Table of Contents
expenses
other than brokerage and address commissions and fees. As such, voyage expenses represent a relatively small portion of our vessels' overall expenses.
From
time to time, in accordance with industry practice and in respect of the charters for our containerships we pay brokerage commissions of approximately 0.75% to 2.5% of the total
daily charter hire rate under the charters to unaffiliated ship brokers associated with the charterers, depending on the number of brokers involved with arranging the charter. We also pay address
commissions of 1.25% up to 3.5% to a limited number of our charterers. Our manager will also receive a fee of 0.5% based on the contract price of any vessel bought or sold by it on our behalf,
excluding newbuilding contracts.
In 2016, 2015 and 2014 we paid a fee to our manager of 1.25% on all freight, charter hire, ballast bonus and demurrage for each vessel. In 2017, this fee will remain at 1.25%.
Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses for repairs and maintenance, the cost of spares
and consumable stores, tonnage taxes and other miscellaneous expenses. Aggregate expenses increase as the size of our fleet increases. Factors beyond our control, some of which may affect the shipping
industry in general, including, for instance, developments relating to market premiums for insurance, may also cause these expenses to increase. In addition, a substantial portion of our vessel
operating expenses, primarily crew wages, are in currencies other than the U.S. dollar and any gain or loss we incur as a result of the U.S. dollar fluctuating in value against these currencies is
included in vessel operating expenses. We fund our manager monthly in advance with amounts it will need to pay our fleet's vessel operating expenses.
Under
time charters, such as those on which we charter all but two of the containerships in our fleet as of February 28, 2017, we pay for vessel operating expenses. Under bareboat
charters, such as those on which we chartered the remaining two containerships in our fleet, our charterers bear substantially all vessel operating expenses, including the costs of crewing, insurance,
surveys, drydockings, maintenance and repairs.
We follow the deferral method of accounting for special survey and drydocking costs, whereby actual costs incurred are deferred and are
amortized on a straight-line basis over the period until the next scheduled survey and drydocking, which is two and a half years. If special survey or drydocking is performed prior to the scheduled
date, the remaining unamortized balances are immediately written off. The amortization periods reflect the estimated useful economic life of the deferred charge, which is the period between each
special survey and drydocking.
Major
overhaul performed during drydocking is differentiated from normal operating repairs and maintenance. The related costs for inspections that are required for the vessel's
certification under the requirement of the classification society are categorized as drydock costs. A vessel at drydock performs certain assessments, inspections, refurbishments, replacements and
alterations within a safe non-operational environment that allows for complete shutdown of certain machinery and equipment, navigational, ballast (keep the vessel upright) and safety systems, access
to major underwater
components of vessel (rudder, propeller, thrusters and anti-corrosion systems), which are not accessible during vessel operations, as well as hull treatment and paints. In addition, specialized
equipment is required to access and maneuver vessel components, which are not available at regular ports.
Repairs
and maintenance normally performed during operation either at port or at sea have the purpose of minimizing wear and tear to the vessel caused by a particular incident or normal
wear and tear. Repair and maintenance costs are expensed as incurred.
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Table of Contents
We have recognized an impairment loss of $415.1 million in relation to 25 of our vessels as of December 31, 2016 compared to an
impairment loss of $41.1 million in relation to 13 of our vessels as of December 31, 2015. The impairment loss as of December 31, 2016 was (i) due to the impairment loss of
$205.2 million recognized for five 3,400 TEU vessels formerly chartered to Hanjin Shipping, and (ii) the impairment loss of $209.9 million recognized for 18 of our vessels of
4,300 TEU or less capacity and for two 6,400 TEU vessels as a result of the continued weakness of containership market and the other than temporary nature of the decline in these vessels' values. See
"Critical Accounting PoliciesImpairment of Long-lived Assets."
We depreciate our containerships on a straight-line basis over their estimated remaining useful economic lives. We estimated the useful lives of
our containerships to be 30 years from the year built. Depreciation is based on cost, less the estimated scrap value of $300 per ton for all vessels.
We paid our manager the following fees for 2016 and 2015: (i) a fee of $850 per day, (ii) a fee of $425 per vessel per day for
vessels on bareboat charter, pro rated for the number of calendar days we own each vessel, (iii) a fee of $850 per vessel per day for vessels other than those on bareboat charter, pro rated for
the number of calendar days we own each vessel, (iv) a flat fee of $725,000 per newbuilding vessel, if any, which we capitalize, for the on premises supervision of newbuilding contracts by
selected engineers and others of its staff and a fee of €0.51 million ($0.56 million) for the services of our executive officers for the period from January 1,
2015 to April 30, 2015, after which date we have directly employed our executive officers. Our executive officers received an aggregate of €1.5 million
($1.7 million) and €1.0 million ($1.1 million) in compensation for the year ended 2016 and for period from May 1, 2015 to December 31, 2015,
respectively. For the year ended December 31, 2014, we paid our manager: (i) a fee of $800 per day, (ii) a fee of $400 per vessel per day for vessels on bareboat charter, pro
rated for the number of calendar days we own each vessel, (iii) a fee of $800 per vessel per day for vessels other than those on bareboat charter, pro rated for the number of calendar days we
own each vessel, (iv) a flat fee of $725,000 per newbuilding vessel, if any, which we capitalize, for the on premises supervision of newbuilding contracts by selected engineers and others of
its staff and an annual fee of €1.47 million ($1.92 million) for the services of our executive officers.
For
2017, we will pay a fee of $850 per day, a fee of $425 per vessel per day for vessels on bareboat charter and a fee of $850 per vessel per day for vessels on time charter.
Furthermore,
general and administrative expenses include audit fees, legal fees, board remuneration, executive officers compensation, directors & officers insurance, stock
exchange fees and other general and administrative expenses.
At each balance sheet date, all potentially uncollectible accounts receivable are assessed individually for purposes of determining the
appropriate provision for doubtful accounts based on our history of write-offs, level of past due accounts based on the contractual term of the receivables and current relationship with and economic
status of our customers. We recorded bad debt expense of $15.8 million in the year ended December 31, 2016 related to unpaid charter hire recorded as accounts receivable from Hanjin
Shipping prior to its filing for court receivership in September 2016. There were no bad debt expenses in the year ended December 31, 2015 and 2014.
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Table of Contents
Other Income/(Expenses), Net
In 2016, we recorded other expenses of $41.6 million mainly consisting of $29.4 million impairment loss on ZIM securities and a
$12.9 million loss on sale of HMM equity securities. In 2015 and 2014, we recorded income of $0.1 million and $0.4 million, respectively for various non-operating items.
Interest Expense, Interest Income and Other finance expenses
We incur interest expense on outstanding indebtedness under our credit facilities which we include in interest expense. We also incurred
financing costs in connection with establishing those facilities, which is included in our finance expenses. Further, we earn interest on cash deposits in interest bearing accounts and on interest
bearing securities, which we include in interest income. We will incur additional interest expense in the future on our outstanding borrowings and under future borrowings.
The interest rate swap arrangements we entered into were generally based on the forecasted delivery of vessels we contracted for and our debt
financing needs associated therewith. All changes in the fair value of our cash flow interest rate swap agreements are recorded in earnings under "Net Unrealized and Realized Losses on Derivatives".
Recognition of non-cash fair value movements of our interest rate swaps directly in our earnings creates potential volatility in our reported earnings. We recorded in our earnings gross unrealized
gains from changes in the fair value of the cash flow interest rate swaps of $4.5 million and $48.9 million for the year ended December 31, 2016 and December 31, 2015,
respectively.
We
evaluated whether it is probable that the previously hedged forecasted interest payments prior to June 30, 2012 are probable to not occur in the originally specified time
period. We have concluded that the previously hedged forecasted interest payments are probable of occurring. Therefore, unrealized gains or losses in accumulated other comprehensive loss associated
with the previously designated cash flow interest rate swaps will remain frozen in accumulated other comprehensive loss and recognized in earnings when the interest payments will be recognized. If
such interest payments were to be identified as being probable of not occurring, the accumulated other comprehensive loss balance pertaining to these amounts would be reversed through earnings
immediately. We reclassified from Accumulated Other Comprehensive Loss to our earnings unrealized losses of $0.2 million and recognized accelerated amortization of accumulated other
comprehensive loss of $7.7 million in connection with the impairment losses recognized on the respective vessels, resulting in net unrealized losses of $3.1 million for the year ended
December 31, 2016.
As
of December 31, 2016, all of our cash flow interest rate swap arrangements have expired.
Results of Operations
Year ended December 31, 2016 compared to the year ended December 31, 2015
During the year ended December 31, 2016, we had an average of 55 containerships compared to 56 containerships for the year ended
December 31, 2015. Our fleet utilization for 2016 was 94.6%, while the effective fleet utilization for the fleet under employment, excluding the off charter days of the ex-Hanjin Shipping
vessels, decreased to 97.3% in the year ended December 31, 2016 compared to 99.0% in the year ended December 31, 2015.
Operating revenues decreased by 12.3%, or $69.6 million, to $498.3 million in the year ended December 31, 2016 from
$567.9 million in the year ended December 31, 2015.
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Table of Contents
Operating
revenues for the year ended December 31, 2016 reflect:
-
-
$48.1 million decrease in revenues in the year ended December 31, 2016 compared to the year ended December 31, 2015 due to
loss of revenue from cancelled charters with Hanjin Shipping for eight of our vessels, for which we ceased recognizing revenue effective as of July 1, 2016.
-
-
$2.8 million decrease in revenues in the year ended December 31, 2016 compared to the year ended December 31, 2015 due to
the sale of the
Federal
on January 8, 2016.
-
-
$14.5 million decrease in revenues in the year ended December 31, 2016 compared to the year ended December 31, 2015 due to
the re-chartering of certain of our vessels at lower rates.
-
-
$4.2 million decrease in revenues due to lower fleet utilization in the year ended December 31, 2016 compared to the year ended
December 31, 2015.
Voyage expenses increased by $1.6 million, to $13.9 million in the year ended December 31, 2016 from $12.3 million
in the year ended December 31, 2015. The increase is mainly due to increased bunkering expenses.
Vessel operating expenses decreased by 2.9%, or $3.3 million, to $109.4 million in the year ended December 31, 2016, from
$112.7 million in the year ended December 31, 2015. The decrease is due to a decrease in average number of vessels in our fleet by 1.8% and due to a 1.5% decrease in the average daily
operating cost per vessel during the year ended December 31, 2016 compared to the year ended December 31, 2015.
The
average daily operating cost per vessel decreased to $5,637 per day for the year ended December 31, 2016 from $5,720 per day for the year ended December 31, 2015.
Management believes that our daily operating cost ranks as one of the most competitive in the industry.
Depreciation expense decreased by 2.1%, or $2.8 million, to $129.0 million in the year ended December 31, 2016 from
$131.8 million in the year ended December 31, 2015, mainly due to decreased depreciation expense for twelve vessels for which we recorded an impairment charge on December 31, 2015
and due to the decreased average number of vessels in our fleet in the year ended December 31, 2016 following the sale of the Federal on January 8, 2016.
Amortization of deferred dry-docking and special survey costs increased by $1.7 million, to $5.5 million in the year ended
December 31, 2016 from $3.8 million in the year ended December 31, 2015. The increase is mainly due to the increased payments for dry-docking and special survey costs related to
certain vessels over the last year.
General and administrative expenses increased by $0.3 million to $22.1 million in the year ended December 31, 2016 from
$21.8 million in the year ended December 31, 2015.
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Table of Contents
Bad debt expense of $15.8 million in the year ended December 31, 2016 relates to unpaid charter hire recorded as accounts
receivable from Hanjin Shipping prior to its bankruptcy, which were written-off. There were no bad debt expenses in the year ended December 31, 2015.
We have recognized an impairment loss of $415.1 million in relation to 25 of our vessels as of December 31, 2016 compared to an
impairment loss of $41.1 million in relation to 13 of our vessels as of December 31, 2015. The impairment loss as of December 31, 2016 was (i) due to the impairment loss of
$205.2 million recognized for five 3,400 TEU vessels formerly chartered to Hanjin Shipping, and (ii) the impairment loss of $209.9 million recognized for 18 of our vessels of
4,300 TEU and less capacity and for two 6,400 TEU vessels as a result of the continued weakness of containership market and the other than temporary nature of the decline in these vessels' values. See
"Critical Accounting PoliciesImpairment of Long-lived Assets."
Interest Expense, Interest Income and Other Finance Expenses
Interest expense decreased by 1.7%, or $1.4 million, to $83.0 million in the year ended December 31, 2016 from
$84.4 million in the year ended December 31, 2015. This included the amortization of deferred finance costs reclassified from other finance expenses to interest expense of
$12.7 million and $14.0 million, respectively. The change in interest expense was mainly due to a $1.3 million decrease in the amortization of deferred finance costs and due to a
decrease in our average debt by $242.5 million, to $2,652.2 million in the year ended December 31, 2016, from $2,894.7 million in the year ended December 31, 2015,
which were partially offset by an increase in average cost of debt due to the increase in US$ Libor.
The
Company is deleveraging its balance sheet. As of December 31, 2016, the debt outstanding gross of deferred finance costs was $2,527.3 million compared to
$2,775.4 million as of December 31, 2015. We expect the rate at which we reduce our leverage to decline, primarily as a result of the cancellation of eight charters with Hanjin Shipping.
Interest
income increased by $1.3 million to $4.7 million in the year ended December 31, 2016 compared to $3.4 million in the year ended December 31,
2015. The increase is mainly attributed to the interest income recognized on HMM notes receivable.
Other
finance expenses increased by $0.2 million, to $4.9 million in the year ended December 31, 2016 from $4.7 million in the year ended December 31,
2015, following the reclassification of the amortization of deferred finance costs from other finance expenses to interest expense of $12.7 million and $14.0 million, respectively.
Equity loss on investments increased by $14.3 million, to $16.2 million in the year ended December 31, 2016 compared to a
loss of $1.9 million in the year ended December 31, 2015 and relates to the investment in Gemini in which the Company has a 49% shareholding interest. This loss increase is mainly
attributed to our share of impairment loss for Gemini vessels amounting to $14.6 million in the year ended December 31, 2016.
Unrealized loss on interest rate swaps amounted to $3.1 million in the year ended December 31, 2016 compared to unrealized gains
of $16.3 million in the year ended December 31, 2015. The accelerated amortization of accumulated other comprehensive loss of $7.7 million was partially offset by
65
Table of Contents
the
unrealized gains of $4.6 million attributable to mark to market valuation of our swaps in the year ended December 31, 2016.
Realized
loss on interest rate swaps decreased by $46.7 million, to $9.4 million in the year ended December 31, 2016 from $56.1 million in the year ended
December 31, 2015. This decrease was attributable to lower interest swap rates combined with a $522.0 million decrease in the average notional amount of swaps during the year ended
December 31, 2016 compared to the year ended December 31, 2015 as a result of swap expirations.
The
table below provides an analysis of the items discussed above, and which were recorded in the years ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
2016
|
|
Year ended
December 31,
2015
|
|
|
|
(in millions)
|
|
Cash flow interest rate swaps
|
|
|
|
|
|
|
|
Realized losses expensed in consolidated Statements of Operations
|
|
$
|
(5.5
|
)
|
$
|
(52.7
|
)
|
Unrealized gains
|
|
|
4.3
|
|
|
16.2
|
|
Amortization of deferred realized losses
|
|
|
(4.0
|
)
|
|
(4.0
|
)
|
Accelerated amortization of deferred realized losses
|
|
|
(7.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized and realized losses on cash flow interest rate swaps
|
|
$
|
(12.9
|
)
|
$
|
(40.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value interest rate swaps
|
|
|
|
|
|
|
|
Unrealized losses on swap asset
|
|
$
|
(0.1
|
)
|
$
|
(0.5
|
)
|
Reclassification of fair value hedged debt to Statements of Operations
|
|
|
0.4
|
|
|
0.6
|
|
Realized gains
|
|
|
0.1
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Unrealized and realized gains on fair value interest rate swaps
|
|
$
|
0.4
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized and realized losses on derivatives
|
|
$
|
(12.5
|
)
|
$
|
(39.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expenses),net
Other income/(expenses), net increased to $41.6 million expenses in the year ended December 31, 2016 from $0.1 million
income in the year ended December 31, 2015 mainly due to a $29.4 million impairment loss in ZIM equity and debt securities and a $12.9 million recognized loss on sale of HMM
equity securities, which we acquired in July 2016 as part of the charter restructuring agreement with HMM, for cash proceeds of $38.1 million.
Year ended December 31, 2015 compared to the year ended December 31, 2014
During the year ended December 31, 2015, we had an average of 56.0 containerships compared to 55.9 containerships for the year ended
December 31, 2014. Our fleet utilization increased to 99.0% in the year ended December 31, 2015 compared to 97.5% in the year ended December 31, 2014. We did not sell or acquire
any vessels in 2015. During the year ended December 31, 2014, we sold five of our older vessels, the
Marathonas
, the
Commodore
, the
Mytilini
, the
Duka
and the
Messologi,
and we acquired two 6,402 TEU secondhand containerships built in 2002, the
Performance
and
the
Priority
.
Operating revenues increased by 2.9%, or $15.8 million, to $567.9 million in the year ended December 31, 2015, from
$552.1 million in the year ended December 31, 2014.
66
Table of Contents
Operating
revenues for the year ended December 31, 2015 reflect:
-
-
$10.5 million of additional revenues in the year ended December 31, 2015 compared to the year ended December 31, 2014,
related to the
Priority
and the
Performance
, which were added to our fleet on November 5, 2014.
-
-
$4.6 million increase in revenues in the year ended December 31, 2015 compared to the year ended December 31, 2014,
related to revenue recognition accounting of the Zim restructuring that became effective on July 16, 2014.
-
-
$2.3 million increase in revenues in the year ended December 31, 2015 compared to the year ended December 31, 2014 due to
improved re-chartering of some of our vessels at higher rates.
-
-
$2.1 million decrease in revenues in the year ended December 31, 2015 compared to the year ended December 31, 2014,
related to the
Commodore, the Marathonas,
the
Duka,
the
Messologi
and the
Mytilini,
which were generating revenues in the year ended December 31, 2014
and were sold within 2014.
-
-
$0.5 million of additional revenues due to improved fleet utilization in the year ended December 31, 2015 compared to the year
ended December 31, 2014.
Voyage expenses decreased by $0.7 million, to $12.3 million in the year ended December 31, 2015, from $13.0 million
in the year ended December 31, 2014.
Vessel operating expenses decreased by 1.0%, or $1.1 million, to $112.7 million in the year ended December 31, 2015, from
$113.8 million in the year ended December 31, 2014. The reduction is attributable to a 2% improvement in the average daily operating cost per vessel between the two periods, which
decreased to $5,720 per day for the year ended December 31, 2015, from $5,838 per day for the year ended December 31, 2014. We believe that our daily operating cost ranks as one of the
most competitive in the industry.
Depreciation expense decreased by 3.9%, or $5.3 million, to $131.8 million in the year ended December 31, 2015 from
$137.1 million in the year ended December 31, 2014, mainly due to the lower depreciation expense on the eight 2,200 TEU vessels with respect to which we recorded an impairment charge on
December 31, 2014.
Amortization of deferred dry-docking and special survey costs decreased by $0.6 million, to $3.8 million in the year ended
December 31, 2015, from $4.4 million in the year ended December 31, 2014. The decrease is mainly due to the expiration of the amortization periods related to certain vessels
during the year ended December 31, 2015 compared to the year ended December 31, 2014.
General and administrative expenses increased by $0.4 million, to $21.8 million in the year ended December 31, 2015, from
$21.4 million the year ended December 31, 2014. Effective
January 1, 2015, our management fees were adjusted to a fee of $850 per day, a fee of $425 per vessel per day for vessels on bareboat charter and a fee of $850 per vessel per day for vessels on
time charter.
67
Table of Contents
There were no vessel sales in the year ended December 31, 2015. Gain on sale of vessels amounted to $5.7 million in the year ended
December 31, 2014 as a result of sale of the
Marathonas
, the
Commodore
, the
Mytilini
, the
Duka
and the
Messologi
(on
February 26, 2014, April 25, 2014, May 15, 2014, May 15, 2014 and May 20, 2014, respectively).
As of December 31, 2015, we recognized an impairment loss of $39.0 million in relation to twelve of our older vessels held and
used and $2.1 million in relation to the
Federal,
which was held for sale as of December 31, 2015. As of December 31, 2014, we
recognized an impairment loss of $75.8 million in relation to eight 2,200 TEU vessels. See "Critical Accounting PoliciesImpairment of Long-lived Assets."
Interest Expense, Interest Income and Other Finance Expenses
Interest expense decreased by 11.2%, or $10.6 million, to $84.4 million in the year ended December 31, 2015, from
$95.0 million in the year ended December 31, 2014 including the amortization of deferred finance costs reclassified from other finance expenses to interest expense of
$14.0 million and $15.1 million, respectively. The change in interest expense was mainly due to the decrease in our average debt by $221.8 million, to $2,894.7 million in
the year ended December 31, 2015, from $3,116.5 million in the year ended December 31, 2014, due to a $1.1 million decrease in the
amortization of deferred finance costs, as well as the decrease in the cost of debt servicing in the year ended December 31, 2015 compared to the year ended December 31, 2014, mainly
driven by the accelerated amortization of our fixed rate debt, which bears a higher cost compared to our floating rate debt.
As
of December 31, 2015, the debt outstanding was $2,775.4 million compared to $3,015.5 million as of December 31, 2014.
Interest
income amounted to $3.4 million in the year ended December 31, 2015 compared to $1.7 million in the year ended December 31, 2014. This increase is
attributed to the interest income related to the ZIM securities we received in the ZIM restructuring that became effective on July 16, 2014.
Other
finance costs, net remained stable amounting to $4.7 million in the year ended December 31, 2015 and December 31, 2014, following the reclassification of the
amortization of deferred finance costs from other finance expenses to interest expense of $14.0 million and $15.1 million, respectively.
Equity loss on investments of $1.9 million in the year ended December 31, 2015 relates to the investment in Gemini where the
Company has a 49% shareholding interest. This loss reflects operating losses of two out of the four vessels that have been acquired by Gemini that have not yet entered into long-term charter
arrangements. We did not have any equity investments accounted for under the equity method of accounting in the year ended December 31, 2014.
Unrealized gain on interest rate swaps amounted to $16.2 million in the year ended December 31, 2015 compared to a gain of
$24.9 million in the year ended December 31, 2014. The unrealized gains were attributable to mark to market valuation of our swaps, as well as reclassification of unrealized
68
Table of Contents
losses
from Accumulated Other Comprehensive Loss to our earnings due to the discontinuation of hedge accounting since July 1, 2012.
Realized
loss on interest rate swaps decreased by $67.4 million, to $56.2 million in the year ended December 31, 2015, from $123.6 million in the year ended
December 31, 2014. This decrease is attributable to a $1,402.9 million lower average notional amount of swaps during the year ended December 31, 2015 compared to the year ended
December 31, 2014 as a result of swap expirations.
The
table below provides an analysis of the items discussed above, and which were recorded in the years ended December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
2015
|
|
Year ended
December 31,
2014
|
|
|
|
(in millions)
|
|
Cash flow interest rate swaps
|
|
|
|
|
|
|
|
Realized losses expensed in consolidated Statements of Operations
|
|
$
|
(52.7
|
)
|
$
|
(120.6
|
)
|
Unrealized gains
|
|
|
16.2
|
|
|
25.2
|
|
Amortization of deferred realized losses
|
|
|
(4.0
|
)
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
Unrealized and realized losses on cash flow interest rate swaps
|
|
$
|
(40.5
|
)
|
$
|
(99.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value interest rate swaps
|
|
|
|
|
|
|
|
Unrealized losses on swap asset
|
|
$
|
(0.5
|
)
|
$
|
(0.9
|
)
|
Reclassification of fair value hedged debt to earnings
|
|
|
0.6
|
|
|
0.6
|
|
Realized gains
|
|
|
0.5
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
Unrealized and realized gains on fair value interest rate swaps
|
|
$
|
0.6
|
|
$
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized and realized losses on derivatives
|
|
$
|
(39.9
|
)
|
$
|
(98.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Our principal source of funds has been equity provided by our stockholders from our initial public offering in October 2006 and common stock
sale in August 2010, operating cash flows, vessel sales, and long-term bank borrowings. Our principal uses of funds have been capital expenditures to establish, grow and maintain our fleet, comply
with international shipping standards, environmental laws and regulations and to fund working capital requirements.
Our
short-term liquidity needs primarily relate to the funding of our vessel operating expenses, debt interest payments and servicing the current portion of our debt obligations and cash
flow interest rate swaps liabilities. Our long-term liquidity needs primarily relate to debt repayment, with over $2.4 billion of debt originally scheduled to mature by December 2018, and
capital expenditures related to any further growth of our fleet.
We
anticipate that our primary sources of funds will be cash from operations and equity or capital markets debt financings, subject to restrictions on uses of such funds contained in our
Bank Agreement.
Under
our existing multi-year charters as of December 31, 2016, giving effect to the charter restructuring agreement with HMM and loss of revenue from the cancellation of all
eight of our charters with Hanjin Shipping, we had contracted revenues of $379.9 million for 2017, $332.2 million for 2018 and, thereafter, approximately $1.4 billion. Although
these contracted revenues are based on contracted charter rates, we are dependent on the ability and willingness of our charterers, some of which are facing substantial financial pressure, to meet
their obligations under these charters. See "Risk Factors."
69
Table of Contents
As
of December 31, 2016, we had cash and cash equivalents of $73.7 million and restricted cash of $2.8 million. As of December 31, 2016, we had no remaining
borrowing availability under our credit facilities. As of December 31, 2016, we had $2,527.3 million of outstanding indebtedness gross of deferred finance costs. See "Item 11.
Quantitative and Qualitative Disclosures About Market Risk."
As
a result of a decrease in our operating income and the charter-attached market value of certain of our vessels caused principally by the cancellation of our eight charters with Hanjin
Shipping, as well as the decline in containership market conditions we were in breach of certain covenants in our Bank Agreement (as defined below) and other credit facilities as of
December 31, 2016. We have obtained waivers of the breaches of the minimum security cover, consolidated net leverage and consolidated net worth financial covenants contained in our financing
arrangements covering the period until April 1, 2017. We are currently in discussions with our lenders regarding our anticipated non-compliance with these covenants absent an extension of these
waivers and the refinancing of the significant amount of our indebtedness maturing in 2018. If we are unable to comply with the covenants in our financing arrangements, obtain waivers or reach
agreements with our lenders to modify or refinance such financing arrangements, we may have to restructure our obligations in a court-supervised process or otherwise (see discussion under "Going
Concern" and "Credit Facilities" below).
Under
the Bank Agreement, from May 15, 2013, we are required to apply a substantial portion of our cash from operations to the repayment of principal under our financing
arrangements. We currently expect that the remaining portion of our cash from operations will be sufficient to fund all of our other obligations, provided that we are able to comply with the covenants
in our financing arrangement or obtain waivers and our charter counterparties perform their contractual obligations, up to the maturity of our Bank Agreement and other credit facilities in 2018 which
we will need to attempt to refinance. See "Going Concern" below. The Bank Agreement also contains requirements for the application of proceeds from any future vessel sales or financings, as well as
other transactions. See "Bank Agreement" and "Credit Facilities" below.
Our
board of directors determined in 2009 to suspend the payment of further cash dividends as a result of market conditions in the international shipping industry and in order to
conserve cash to be applied toward the financing of our extensive new building program. In addition, under the Bank Agreement relating to our existing credit facilities and various new financing
arrangements and the Sinosure-CEXIM credit facility, we are not permitted to pay cash dividends or repurchase shares of our capital stock unless (i) our consolidated net leverage is below 6:1
for four consecutive quarters and (ii) the ratio of the aggregate market value of our vessels to our outstanding indebtedness exceeds 125% for four consecutive quarters and provided that an
event of default has not occurred and we are not, and after giving effect to the payment of the dividend, in breach of any covenant.
We
will not receive any cash upon any exercise of the 15 million warrants to purchase shares of our common stock issued to our lenders participating in our comprehensive financing
plan contemplated by our Bank Agreement described herein, as such warrants are only exercisable on a cashless basis.
In
July 2014, ZIM and its creditors entered into definitive documentation effecting ZIM's restructuring with its creditors on substantially the same terms as the agreement in principle
previously announced by ZIM in January 2014. The terms of the restructuring include a reduction in the charter rates payable by ZIM under its time charters, expiring in 2020 or 2021, for six of our
vessels. The terms also include our receipt of approximately $49.9 million aggregate principal amount of unsecured, interest bearing ZIM notes maturing in 2023 (consisting of
$8.8 million of 3% Series 1 Notes due 2023 amortizing subject to available cash flow in accordance with a corporate cash sweep mechanism, and $41.1 million of 5% Series 2
Notes due 2023 non-amortizing (of the 5% interest rate, 3% is payable quarterly in cash and 2% is payable in kind, accrued quarterly with deferred cash payment on maturity)) and ZIM shares
representing approximately 7.4% of the outstanding ZIM shares
70
Table of Contents
immediately
after the restructuring, in exchange for such charter rate reductions and cancellation of ZIM's other obligations to us, which relate to the outstanding long term receivable as of
December 31, 2013. ZIM's charter-owner creditors designated two of the nine members of ZIM's initial Board of Directors following the restructuring, including one director nominated by us,
Dimitris Chatzis, the father of our Chief Financial Officer.
In
July 2016, we entered into a charter restructuring agreement with Hyundai Merchant Marine ("HMM") which provides for a 20% reduction, for the period until December 31, 2019 (or
earlier charter expiration in the case of eight vessels), in the charter hire rates payable for thirteen of our vessels currently employed with HMM. In exchange, under the charter restructuring
agreement we received (i) $32.8 million principal amount of senior, unsecured Loan Notes 1, amortizing subject to available cash flows, which accrue interest at 3% per annum
payable on maturity in July 2024, (ii) $6.2 million principal amount of senior, unsecured, non-amortizing Loan Notes 2, which accrue
interest at 3% per annum payable on maturity in December 2022 and (iii) 4,637,558 HMM shares, which were sold on September 1, 2016 for cash proceeds of $38.1 million.
Going Concern
As a result of a decrease in our operating income and the charter attached market value of certain of our vessels caused principally by the
cancellation of eight charters with Hanjin Shipping, which recently filed for receivership with the Seoul Central District Court in September 2016, we were in breach of certain financial covenants
under our Bank Agreement and our other credit facilities as of December 31, 2016. Refer to Note 12 to our consolidated financial statements for further details. We have obtained waivers
of the breaches of the financial covenants, including the lenders rights to call the debt due to non-compliance with these financial covenants, until April 1, 2017. As these waivers were
obtained for a period of less than the next 12 months from the balance sheet date, and in accordance with the guidance related to the classification of obligations that are callable by the
lenders, we have classified our long-term debt, net of deferred finance costs as current, resulting in total current liabilities amounting to $2,566.3 million, which substantially exceeded our
total current assets amounting to $136.0 million as of December 31, 2016. We are currently in discussions with our lenders regarding our non-compliance with these covenants absent an
extension of these waivers. If we are unable to comply with the covenants in our debt agreements, obtain waivers or reach agreements with our lenders to modify or refinance such debt agreements, we
may have to restructure our obligations in a court supervised process or otherwise. These conditions and events raise substantial doubt about our ability to continue as a going concern for a
reasonable period of time. However, we continue to generate positive cash flows from our operations and currently are in a position to service all our operational obligations as well as all scheduled
principal and interest payments under the original terms of our debt agreements.
In
light of the above, the consolidated financial statements included in this report were prepared assuming that we will continue as a going concern. Therefore, the accompanying
consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities, other than the reclassification of long-term debt
to current liabilities as described above, or any other adjustments that might result in the event we are unable to continue as a going concern.
71
Table of Contents
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
2016
|
|
Year ended
December 31,
2015
|
|
Year ended
December 31,
2014
|
|
|
|
(In thousands)
|
|
Net cash provided by operating activities
|
|
$
|
261,967
|
|
$
|
271,676
|
|
$
|
192,181
|
|
Net cash provided by/(used in) investing activities
|
|
$
|
(9,379
|
)
|
$
|
(13,292
|
)
|
$
|
11,437
|
|
Net cash used in financing activities
|
|
$
|
(251,124
|
)
|
$
|
(243,861
|
)
|
$
|
(214,041
|
)
|
Net cash flows provided by operating activities decreased by 3.6%, or $9.7 million, to $262.0 million in the year ended
December 31, 2016 compared to $271.7 million in the year ended December 31, 2015. The decrease was primarily the result of a decrease of $69.6 million in operating revenue,
higher payments for drydocking and special survey costs by $6.6 million and a change in working capital of $21.2 million, which were partially offset by a decrease in realized losses
from derivatives of $46.7 million, cash proceeds from sale of HMM securities of $38.1 million and a decrease in total expense of $2.1 million in the year ended December 31,
2016 compared to the year ended December 31, 2015.
Net
cash flows provided by operating activities increased by 41.4%, or $79.5 million, to $271.7 million in the year ended December 31, 2015 compared to
$192.2 million in the year ended December 31, 2014. The increase was primarily the result of a reduction in realized losses from derivatives of $67.4 million,
reduced interest expenses by $9.6 million, and lower payments for drydocking and special survey costs by $4.6 million, in the year ended December 31, 2015 compared to the year
ended December 31, 2014.
Net cash flows used in investing activities decreased by $3.9 million, to $9.4 million in the year ended December 31, 2016
compared to $13.3 million in the year ended December 31, 2015. The difference is attributed to a $3.2 million decrease in cash used in investments in affiliates and
$4.1 million increase in net proceeds from sale of vessels, which were partially offset by an $3.4 million increase in amounts used in vessel additions and other related capital
expenditures in the year ended December 31, 2016 compared to the year ended December 31, 2015.
Net
cash flows (used in)/provided by investing activities decreased by $24.7 million, to $13.3 million used in investing activities in the year ended December 31,
2015 compared to $11.4 million provided by investing activities in the year ended December 31, 2014. The difference is attributed to a $49.5 million decrease in net proceeds from
sale of vessels and $13.2 million of cash used for investments in affiliates in the year ended December 31, 2015 compared to no investments in the year ended December 31, 2014,
which were partially offset by a $38.0 million decrease in amounts used in vessel purchases and other related capital expenditures in the year ended December 31, 2015 compared to the
year ended December 31, 2014.
Net cash flows used in financing activities increased by $7.2 million, to $251.1 million in the year ended December 31,
2016 compared to $243.9 million in the year ended December 31, 2015, as a result of a $7.9 million increase in repayments of long-term debt, which amounted to
$251.1 million in the year ended December 31, 2016 compared to $243.2 million in the year ended December 31, 2015. Additionally, the increase was partially offset by a
$0.7 million decrease in deferred finance costs.
72
Table of Contents
Net
cash flows used in financing activities increased by $29.9 million, to $243.9 million in the year ended December 31, 2015 compared to $214.0 million in
the year ended December 31, 2014, as a result of a $21.7 million increase in repayments of long-term debt, which amounted to $243.2 million in the year ended December 31,
2015 compared to $221.5 million in the year ended December 31, 2014. Additionally, the decrease is due to a $11.9 million movement in restricted cash, which was offset partially
by a $3.7 million decrease in deferred finance costs.
We report our financial results in accordance with U.S. generally accepted accounting principles (GAAP). Management believes, however, that
certain non-GAAP financial measures used in managing the business may provide users of this financial information additional meaningful comparisons between current results and results in prior
operating periods. Management believes that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of
historical information that excludes certain items that impact the overall comparability. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions
and in evaluating our performance. See the table below for supplemental financial data and corresponding reconciliation to GAAP financial measures. Non-GAAP financial measures should be viewed in
addition to, and not as an alternative for, our reported results prepared in accordance with GAAP.
EBITDA represents net income before interest income and expense, taxes, depreciation, as well as amortization of deferred drydocking &
special survey costs, amortization of deferred realized losses of cash flow interest rate swaps, amortization of finance costs and finance costs accrued. Adjusted EBITDA represents net income before
interest income and expense, taxes, depreciation, amortization of deferred drydocking & special survey costs, amortization of deferred realized losses of cash flow interest rate swaps,
amortization of finance costs and finance costs accrued, impairment losses, stock based compensation, (gain)/loss on sale of vessels, unrealized (gain)/loss on derivatives, realized loss on
derivatives, bad debt expense, loss on sale of securities and accelerated amortization of accumulated other comprehensive loss. We believe that EBITDA and Adjusted EBITDA assist investors and analysts
in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. EBITDA and Adjusted EBITDA are
also used: (i) by prospective and current customers as well as potential lenders to evaluate potential transactions; and (ii) to evaluate and price potential acquisition candidates. Our
EBITDA and Adjusted EBITDA may not be comparable to that reported by other companies due to differences in methods of calculation.
EBITDA
and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under
U.S. GAAP. Some of these limitations are: (i) EBITDA/Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and (ii) although depreciation
and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA/Adjusted EBITDA do not reflect any cash requirements for such
capital expenditures. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our
presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Because of these limitations, EBITDA/Adjusted
EBITDA should not be considered as principal indicators of our performance.
73
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
2016
|
|
Year ended
December 31,
2015
|
|
Year ended
December 31,
2014
|
|
|
|
(In thousands)
|
|
Net income/(loss)
|
|
$
|
(366,195
|
)
|
$
|
117,016
|
|
$
|
(3,920
|
)
|
Depreciation
|
|
|
129,045
|
|
|
131,783
|
|
|
137,061
|
|
Amortization of deferred drydocking & special survey costs
|
|
|
5,528
|
|
|
3,845
|
|
|
4,387
|
|
Amortization of deferred realized losses of cash flow interest rate swaps
|
|
|
4,028
|
|
|
4,017
|
|
|
4,016
|
|
Amortization of finance costs
|
|
|
12,652
|
|
|
14,038
|
|
|
15,070
|
|
Finance costs accrued (Exit Fees under our Bank Agreement)
|
|
|
3,447
|
|
|
3,639
|
|
|
3,745
|
|
Interest income
|
|
|
(4,682
|
)
|
|
(3,419
|
)
|
|
(1,703
|
)
|
Interest expense
|
|
|
70,314
|
|
|
70,397
|
|
|
79,980
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(145,863
|
)
|
|
341,316
|
|
|
238,636
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain)/loss on sale of vessels
|
|
|
36
|
|
|
|
|
|
(5,709
|
)
|
Impairment loss
|
|
|
415,118
|
|
|
41,080
|
|
|
75,776
|
|
Impairment loss on securities
|
|
|
29,384
|
|
|
|
|
|
|
|
Impairment loss component of equity loss on investments
|
|
|
14,642
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
15,834
|
|
|
|
|
|
|
|
Loss on sale of securities
|
|
|
12,906
|
|
|
|
|
|
|
|
Accelerated amortization of accumulated other comprehensive loss
|
|
|
7,706
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
76
|
|
|
88
|
|
|
638
|
|
Realized loss on derivatives
|
|
|
5,397
|
|
|
52,125
|
|
|
119,612
|
|
Unrealized gain on derivatives
|
|
|
(4,649
|
)
|
|
(16,285
|
)
|
|
(24,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
350,587
|
|
$
|
418,324
|
|
$
|
404,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
decreased by $487.2 million, to $(145.9) million in the year ended December 31, 2016, from $341.3 million in the year ended December 31, 2015. The
decrease was mainly attributable to an increase in impairment losses by $418.1 million, a $69.6 million decrease in operating revenues, an $15.8 million increase in bad debt
expense and an $12.9 million increase in loss on sale of securities in the year ended December 31, 2016 compared to the year ended December 31, 2015. This decrease was partially
offset by a $27.4 million decrease in unrealized and realized losses on derivatives, a $2.1 million decrease in total expenses and a $0.3 million operating performance improvement
on equity investments before impairment loss in the year ended December 31, 2016 compared to the year ended December 31, 2015.
Adjusted
EBITDA decreased by $67.7 million, to $350.6 million in the year ended December 31, 2016 from $418.3 million in the year ended December 31,
2015. The decrease was attributed to a $69.6 million decrease in operating revenues, which was partially offset by a $2.1 million decrease in total expenses and a $0.3 million
operating performance improvement on equity investments before impairment loss in the year ended December 31, 2016 compared to the year ended December 31, 2015.
EBITDA
increased by $102.7 million, to $341.3 million in the year ended December 31, 2015, from $238.6 million in the year ended December 31, 2014. The
increase was mainly attributable to a $58.9 million decrease in unrealized and realized losses on derivatives, a decreased impairment loss by $34.7 million, a $15.8 million
increase in operating revenues, in the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase was partially offset by a $1.9 million loss on
equity investments incurred in the year ended December 31, 2015 and a $5.7 million gain on sale of vessels incurred in the year ended December 31, 2014 compared to a nil gain in
the year ended December 31, 2015.
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Table of Contents
Adjusted EBITDA increased by $14.3 million, to $418.3 million in the year ended December 31, 2015, from $404.0 million in the year
ended December 31, 2014. The increase was attributed to a $15.8 million increase in operating revenues, an improvement of $0.4 million in operating costs in the year ended
December 31, 2015 compared to the year ended December 31, 2014, which was offset by a $1.9 million loss on equity investments incurred in the year ended December 31, 2015.
Bank Agreement
As noted above, on January 24, 2011, we entered into an agreement, which is referred to as the Bank Agreement, that, upon its
effectiveness on March 4, 2011, superseded, amended and supplemented the terms of each of our then- existing credit facilities ("Pre-existing Credit Facilities") (other than our credit
facilities with KEXIM and KEXIM-ABN Amro which are not covered thereby), and provides for, among other things, revised amortization schedules, maturities, interest rates, financial covenants, events
of defaults, guarantee and security packages. As of
December 31, 2016, we were in breach of the minimum security cover, consolidated net leverage and consolidated net worth financial covenants of the Bank Agreement. For additional details,
please see Note 12, Long-term Debt, to our consolidated financial statements included elsewhere herein.
Under the terms of the Bank Agreement, borrowings under each of our pre-existing Credit Facilities, which excludes the KEXIM and KEXIM-ABN Amro
credit facilities which were not covered by the Bank Agreement, bear interest at an annual interest rate of LIBOR plus a margin of 1.85%.
Under the terms of the Bank Agreement we are required to make quarterly principal payments in fixed amounts, in relation to our total debt
commitments from our lenders under the Bank Agreement and the January 2011 Credit Facilities (see "January 2011 Credit Facilities" below), as specified in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 15,
|
|
May 15,
|
|
August 15,
|
|
November 15,
|
|
December 31,
|
|
Total
|
|
2017
|
|
|
44,939
|
|
|
36,691
|
|
|
35,338
|
|
|
31,872
|
|
|
|
|
|
148,840
|
|
2018
|
|
|
34,152
|
|
|
37,585
|
|
|
44,399
|
|
|
45,334
|
|
|
65,969
|
|
|
227,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
376,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
*
-
These
principal payments represent originally scheduled maturities and assume debt will not be called by the lenders earlier due to the breaches of financial
covenants. The Company may elect to make the scheduled payments shown in the above table three months earlier.
Furthermore,
an additional variable payment in such amount that, together with the fixed principal payment (as disclosed above), equals 92.5% of Actual Free Cash Flow for such quarter
until the earlier of (x) the date on which our consolidated net leverage is below 6:1 and (y) May 15, 2015; and thereafter through maturity, which will be December 31, 2018
for each covered credit facility, we will be required to make quarterly principal payments in fixed amounts as specified in the Bank Agreement and described above plus an additional payment in such
amount that, together with the fixed principal payment, equals 89.5% of Actual Free Cash Flow for such quarter. In addition, any additional amounts of cash and cash equivalents from January 1,
2015 until maturity in excess of the greater of (1) $50 million of accumulated unrestricted cash and cash equivalents and (2) 2% of our consolidated
debt), would be applied first to the prepayment of the January 2011 Credit Facilities and after the January 2011 Credit Facilities are repaid, to the Pre-existing Credit Facilities. Under the Bank
Agreement, "Actual Free Cash Flow" with respect to each credit facility covered thereby would be
75
Table of Contents
equal
to revenue from the vessels collateralizing such facility, less the sum of (a) interest expense under such credit facility, (b) pro-rata portion of payments under our interest rate
swap arrangements and (c) per vessel operating expenses and pro-rata per vessel allocation of general and administrative expenses (which are not permitted to exceed the relevant budget by more
than 20%), plus the pro-rata share of operating cash flow of any Applicable Second Lien Vessel (which will mean, with respect to a Pre-existing Credit Facility, a vessel with respect to which the
participating lenders under such credit facility have a second lien security interest and the first lien credit facility has been repaid in full). The last payment due on December 31, 2018,
will also include the unamortized remaining principal debt balances, as such amounts will be determinable following the fixed and variable amortization.
Under
the terms of the Bank Agreement, we will continue to be required to make any mandatory prepayments provided for under the terms of our existing credit facilities and will be
required to make additional prepayments as follows:
-
-
50% of the first $300 million of net equity proceeds, including convertible debt and hybrid instruments (excluding the
$200 million of net equity proceeds which were a condition to the Bank Agreement and which were received in August 2010), after entering into the Bank Agreement and 25% of any additional net
equity proceeds thereafter until December 31, 2018; and
-
-
any debt proceeds (after repayment of any underlying secured debt covered by vessels collateralizing the new borrowings) (excluding the January
2011 Credit Facilities, the Sinosure-CEXIM Credit Facility and the Hyundai Samho Vendor Financing), which amounts would first be applied to repayment of amounts outstanding under the January 2011
Credit Facilities and then to the Pre-existing Credit Facilities.
Any
equity proceeds retained by us and not used within 12 months for certain specified purposes would be applied for prepayment of the January 2011 Credit Facilities and then to
the Pre-existing Credit Facilities. We would also be required to prepay the portion of a credit facility attributable to a
particular vessel upon the sale or total loss of such vessel; the termination or loss of an existing charter for a vessel, unless replaced within a specified period by a similar charter acceptable to
the lenders; or the termination of a newbuilding contract. Our respective lenders under our Pre-existing Credit Facilities covered by the Bank Agreement and the January 2011 Credit Facilities may, at
their option, require us to repay in full amounts outstanding under such respective credit facilities, upon a "Change of Control" of the Company, which for these purposes is defined as
(i) Dr. Coustas ceasing to be our Chief Executive Officer, (ii) our common stock ceasing to be listed on the NYSE (or other recognized stock exchange), (iii) a change in
the ultimate beneficial ownership of the capital stock of any of our subsidiaries or ultimate control of the voting rights of those shares, (iv) Dr. Coustas and members of his family
ceasing to collectively own over one-third of the voting interest in our outstanding capital stock or (v) any other person or group controlling more than 20% of the voting power of our
outstanding capital stock.
Under the Bank Agreement, the financial covenants under each of our credit facilities (other than under the KEXIM-ABN Amro credit facility which
is not covered thereby, but which, respectively, has been aligned with those covenants below through November 20, 2018 (the maturity of the respective credit facility) under the supplemental
letter signed on September 12, 2013, amendment thereto and the KEXIM credit facility, which contains only a collateral coverage covenant of 130%), have been reset to require us
to:
-
-
maintain a ratio of (i) the market value of all of the vessels in our fleet, on a charter-inclusive basis, plus the net realizable value
of any additional collateral, to (ii) our consolidated total debt
76
Table of Contents
above
specified minimum levels gradually increasing from 90% through December 31, 2011 to 130% from September 30, 2017 through September 30, 2018;
-
-
maintain a minimum ratio of (i) the market value of the nine vessels (
Hyundai Smart, Hyundai Speed, Hyundai
Ambition, Hyundai Together, Hyundai Tenacity, Express Athens (ex Hanjin Greece), Express Rome (ex Hanjin Italy), Express Berlin (ex Hanjin Germany)
and the
CMA CGM Rabelais
)
collateralizing the 2011 January Credit Facilities, calculated on a charter-free basis, plus the net realizable value of any
additional collateral, to (ii) our aggregate debt outstanding under the January 2011 Credit Facilities of 100% from September 30, 2012 through September 30, 2018;
-
-
maintain minimum free consolidated unrestricted cash and cash equivalents, less the amount of the aggregate variable principal amortization
amounts, described above, of $30.0 million at the end of each calendar quarter;
-
-
ensure that our (i) consolidated total debt less unrestricted cash and cash equivalents to (ii) consolidated EBITDA (defined as
net income before interest, gains or losses under any hedging arrangements, tax, depreciation, amortization and any other non-cash item, capital gains or losses realized from the sale of any vessel,
finance charges and capital losses on vessel cancellations and before any non-recurring items and excluding any accrued interest due to us but not received on or before the end of the relevant period;
provided that non-recurring items excluded from this calculation shall not exceed 5% of EBITDA calculated in this manner) for the last twelve months does not exceed a maximum ratio gradually
decreasing from 12:1 on December 31, 2010 to 4.75:1 on September 30, 2018;
-
-
ensure that the ratio of our (i) consolidated EBITDA for the last twelve months to (ii) net interest expense (defined as interest
expense (excluding capitalized interest), less interest income, less realized gains on interest rate swaps (excluding capitalized gains) and plus realized losses on interest rate swaps (excluding
capitalized losses)) exceeds a minimum level of 1.50:1 through September 30, 2013 and thereafter gradually increasing to 2.80:1 by September 30, 2018; and
-
-
maintain a consolidated market value adjusted net worth (defined as the amount by which our total consolidated assets adjusted for the market
value of our vessels in the water less cash and cash equivalents in excess of our debt service requirements exceeds our total consolidated liabilities after excluding the net asset or liability
relating to the fair value of derivatives as reflected in our financial statements for the relevant period) of at least $400 million.
As
a result of a decrease in our operating income caused mainly by the loss of contractual revenue from Hanjin Shipping, we were in breach of the minimum security cover, consolidated net
leverage and consolidated net worth financial covenants related to our loan facilities as of December 31, 2016. We have obtained temporary waivers of the breaches of these financial covenants,
including the lenders rights to call the debt due to non-compliance with financial covenants until April 1, 2017. As these waivers were obtained for a period of less than the next
12 months from the balance sheet date, and in accordance with the guidance related to the classification of obligations that are callable by the lenders, we have classified our long-term debt,
net of deferred finance costs as current.
For
the purpose of these covenants, the market value of our vessels will be calculated, except as otherwise indicated above, on a charter-inclusive basis (using the present value of the
"bareboat-equivalent" time charter income from such charter) so long as a vessel's charter has a remaining duration at the time of valuation of more than 12 months plus the present value of the
residual value of the relevant vessel (generally equivalent to the charter free value of an equivalent a vessel today at the age such vessel would be at the expiration of the existing time charter).
The market value of any newbuilding vessels would equal the lesser of such amount and the newbuilding vessel's book value.
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Table of Contents
Under
the terms of the Bank Agreement, the covered credit facilities also contain customary events of default, including those relating to cross-defaults to other indebtedness, defaults
under our swap agreements, non-compliance with security documents, material adverse changes to our business, a Change of Control as described above, a change in our Chief Executive Officer, our common
stock ceasing to be listed on the NYSE (or another recognized stock exchange), a change in any material respect, or breach of the management agreement by, the manager for the vessels securing the
respective credit facilities and cancellation or amendment of the time charters (unless replaced with a similar time charter with a charterer acceptable to the lenders) for the vessels securing the
respective credit facilities.
Under
the terms of the Bank Agreement, we generally will not be permitted to incur any further financial indebtedness or provide any new liens or security interests, unless such security
is provided for the equal and ratable benefit of each of the lenders party to the intercreditor agreement we entered into with each of the lenders participating under the Bank Agreement, other than
security arising by operation of law or in connection with the refinancing of outstanding indebtedness, with the consent, not to be unreasonably withheld, of all lenders with a lien on the security
pledged against such outstanding indebtedness. In addition, we would not be permitted to pay cash dividends or repurchase shares of our capital stock unless (i) our consolidated net leverage is
below 6:1 for four consecutive quarters and (ii) the ratio of the aggregate market value of our vessels to our outstanding indebtedness exceeds 125% for four consecutive quarters and provided
that an event of default has not occurred and we are not, and after giving effect to the payment of the dividend, in breach of any covenant.
Each of our Pre-existing Credit Facilities and swap arrangements, to the extent applicable, covered by the Bank Agreement continued to be
secured by their previous collateral on the same basis, and received, to the extent not previously provided, pledges of the shares of our subsidiaries owning the vessels collateralizing the applicable
facilities, cross-guarantees from each subsidiary owning the vessels collateralizing such facilities, assignment of the refund guarantees in relation to any newbuildings funded by such facilities and
other customary shipping industry collateral.
January 2011 Credit Facilities (Aegean Baltic BankHSH NordbankPiraeus Bank,
RBS, ABN Amro Club facility, Club Facility and Citibank-Eurobank)
On January 24, 2011, as contemplated by the Bank Agreement, we entered into agreements for the following new term loan credit facilities
("January 2011 Credit Facilities") to finance newbuildings which were delivered in 2011 and 2012:
-
(i)
-
a
$123.8 million credit facility provided by HSH, which is secured by the
Hyundai Speed
, the
Express Rome
(ex
Hanjin
Italy)
and the
CMA CGM Rabelais
and customary shipping industry collateral related thereto;
-
(ii)
-
a
$100.0 million credit facility provided by RBS, which is secured by the
Hyundai Smart
and the
Express Berlin (ex Hanjin Germany)
and customary
shipping industry collateral related thereto;
-
(iii)
-
a
$37.1 million credit facility with ABN Amro and lenders participating under the Bank Agreement which is secured by the
Express
Athens (ex Hanjin Greece)
and customary shipping industry collateral related thereto;
-
(iv)
-
a
$83.9 million new club credit facility provided, on a pro-rata basis, by the other existing lenders participating under the Bank Agreement, which is
secured by the
Hyundai Together
and
Hyundai Tenacity
and customary shipping industry collateral related
thereto; and
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Table of Contents
-
(v)
-
a
$80.0 million credit facility with Citibank and Eurobank, which is secured by the
Hyundai Ambition
and
customary shipping industry collateral related thereto ((i)-(v), collectively, the "New Credit Facilities").
Borrowings under each of the January 2011 Credit Facilities bear interest at an annual interest rate of LIBOR plus a margin of 1.85%, subject,
on and after January 1, 2013, to increases in the applicable margin to: (i) 2.50% if the outstanding indebtedness thereunder exceeds $276 million, (ii) 3.00% if the
outstanding indebtedness thereunder exceeds $326 million and (iii) 3.50% if the outstanding indebtedness thereunder exceeds $376 million.
Under the Bank Agreement, we were not required to repay any outstanding principal amounts under our January 2011 Credit Facilities until
May 15, 2013 and thereafter we are required to make quarterly principal payments in fixed amounts as specified in the Bank Agreement plus an additional quarterly variable amortization payment,
all as described above under "Bank AgreementPrincipal Payments."
Covenants, Events of Default and Other Terms
The January 2011 Credit Facilities contain substantially the same financial and operating covenants, events of default, dividend restrictions
and other terms and conditions as applicable to our Pre-existing Credit Facilities as revised under the Bank Agreement described above.
Lenders participating in the $83.9 million club credit facility described above received a lien on
Hyundai
Together
and
Hyundai Tenacity
as additional security in respect of the pre-existing credit facilities the Company had with such
lenders. The lenders under the other January 2011 Credit Facilities also received a lien on the respective vessels securing such January 2011 Credit Facilities as additional collateral in respect of
its pre-existing credit facilities and interest rate swap arrangements with such lenders and Citibank and Eurobank also received a second lien on
Hyundai
Ambition
as collateral in respect of its previously unsecured interest rate arrangements with them.
In
addition, Aegean BalticHSH NordbankPiraeus Bank also received a second lien on the
Deva
, the
Europe (ex CSCL Europe)
and the
CSCL Pusan
as collateral in respect of all borrowings from Aegean
BalticHSH NordbankPiraeus Bank. RBS also received a second lien on the
Derby D,
the
CSCL
America
and the
CSCL Le Havre
as collateral in respect of all borrowings from RBS. In 2016, following the repayment of the KEXIM
loan, the second lien on the
CSCL America
became a first lien on RBS loan and the second lien on the
Europe (ex CSCL
Europe)
became a first lien on Aegean BalticHSH NordbankPiraeus Bank loan.
Our
obligations under the January 2011 Credit Facilities are guaranteed by our subsidiaries owning the vessels collateralizing the respective credit facilities. Our Manager has also
provided an undertaking to continue to provide us with management services and to subordinate its rights to the rights of its lenders, the security trustee and applicable hedge counterparties.
Sinosure-CEXIM-Citibank-ABN Amro Credit Facility
On February 21, 2011, we entered into a bank agreement with Citibank, acting as agent, ABN Amro and the Export-Import Bank of China
("CEXIM") for a senior secured credit facility (the "Sinosure-CEXIM Credit Facility") of $203.4 million for the newbuilding vessels, the
CMA CGM
79
Table of Contents
Tancredi
, the
CMA CGM Bianca
and the
CMA CGM Samson
, securing such tranche for
post-delivery financing of these vessels. We took delivery of the respective vessels in 2011. The China Export & Credit Insurance Corporation, or Sinosure, covers a number of political and
commercial risks associated with each tranche of the credit facility.
Borrowings under the Sinosure-CEXIM Credit Facility bear interest at an annual interest rate of LIBOR plus a margin of 2.85% payable
semi-annually in arrears. We are required to repay principal amounts drawn in consecutive semi-annual installments over a ten-year period commencing from the delivery of the respective newbuilding.
Covenants, Events of Default and Other Terms
The Sinosure-CEXIM credit facility was amended and restated, effective on June 30, 2013, to align its financial covenants with our Bank
Agreement (except for the minimum ratio of the charter free market value of certain vessels, as described in the Bank Agreement, which is not applicable) described above and continues to require us to
maintain a minimum ratio of the market value of the vessel collateralizing a tranche of the facility to debt outstanding under such tranche of 125%.
The
Sinosure-CEXIM credit facility also contains customary events of default, including those relating to cross-defaults to other indebtedness, defaults under its swap agreements,
non-compliance with security documents, material adverse changes to its business, a Change of Control as described above, a change in our Chief Executive Officer, its common stock ceasing to be listed
on the NYSE (or Nasdaq or another recognized stock exchange), a change in any material respect, or breach of the management agreement by, the manager for the mortgaged vessels and cancellation or
amendment of the time charters (unless replaced with a similar time charter with a charterer acceptable to the lenders) for the mortgaged vessels.
We
will not be permitted to pay cash dividends or repurchase shares of our capital stock unless (i) our consolidated net leverage is below 6:1 for four consecutive quarters and
(ii) the ratio of the aggregate market value of our vessels to our outstanding indebtedness exceeds 125% for four consecutive quarters and provided that an event of default has not occurred and
we are not, and after giving effect to the payment of the dividend are not, in breach of any covenant.
The Sinosure-CEXIM Credit Facility is secured by customary shipping industry collateral relating to the financed vessels, the
CMA CGM Tancredi
, the
CMA CGM Bianca
and the
CMA CGM
Samson
.
Exit Fees
We will be required to pay an Initial Exit Fee of $15.0 million. Furthermore, we are required to pay an Additional Exit Fee of
$10.0 million, as we did not repay at least $150.0 million in the aggregate with equity proceeds by December 31, 2013. Both Exit Fees, in the respective proportion to Existing
Facilities and New Money Facilities, are payable the earlier of (a) December 31, 2018 and (b) the date on which the respective facilities are repaid in full. The Exit Fees will
accrete in the consolidated Statements of Operations over the life of the respective facilities (with the effective interest method) and are reported under "Long-term debt" in the consolidated Balance
Sheets. We had recognized an amount of $18.9 million and $15.5 million as of December 31, 2016 and December 31, 2015, respectively.
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Table of Contents
Warrants
In 2011, we issued an aggregate of 15,000,000 warrants to our lenders under the Bank Agreement and the January 2011 Credit Facilities to
purchase, solely on a cash-less exercise basis, an aggregate of 15,000,000 shares of our common stock, which warrants have an exercise price of $7.00 per share. All of these warrants will expire on
January 31, 2019.
Credit Facilities
We, as borrower, and certain of our subsidiaries, as guarantors, have entered into a number of credit facilities in connection with financing
the acquisition of certain vessels in our fleet, which are
81
Table of Contents
described
in Note 12 to our consolidated financial statements included in this annual report. The following summarizes certain terms of our credit facilities:
|
|
|
|
|
|
Lender
|
|
Outstanding
Principal
Amount
(in millions)(1)
|
|
Collateral Vessels
|
The Royal Bank of Scotland(2)
|
|
$
|
648.5
|
|
The
Hyundai Progress
, the
Hyundai Highway
, the
Hyundai Bridge
, the
Zim Monaco
, the
Express Argentina (ex Hanjin Buenos Aires)
, the
Express France (ex Hanjin Versailles)
, the
Express Spain (ex Hanjin Algeciras)
, the
CMA CGM Racine,
the
CSCL America
and the
CMA CGM Melisande
|
Aegean Baltic BankHSH NordbankPiraeus Bank(3)
|
|
$
|
624.6
|
|
The
Hyundai Vladivostok
, the
Hyundai Advance
, the
Hyundai Stride
, the
Hyundai Future
, the
Hyundai Sprinter
, the
Amalia C
, the
MSC Zebra
, the
Danae C
, the
Dimitris C,
the
Performance,
the
Europe (ex CSCL
Europe)
and the
Priority
|
Citibank
|
|
$
|
127.3
|
|
The
CMA CGM Moliere
and the
CMA CGM Musset
|
Deutsche Bank
|
|
$
|
164.6
|
|
The
Zim Rio Grande
, the
Zim Sao Paolo
and the
OOCL Istanbul
|
Credit Suisse
|
|
$
|
189.1
|
|
The
Zim Luanda
, the
CMA CGM Nerval
and the
YM Mandate
|
ABN AmroBank of America Merrill LynchBurlingtonSequoiaNational Bank of Greece
|
|
$
|
217.6
|
|
The
Colombo (ex SNL Colombo)
, the
YM Seattle
, the
YM Vancouver
and the
YM Singapore
|
EntrustpermalCredit SuisseGolden Tree
|
|
$
|
242.2
|
|
The
OOCL Novorossiysk
, the
Express Brazil (ex Hanjin Santos),
the
YM Maturity
,
the
Express Black Sea
(ex
Hanjin Constantza)
and the
CMA CGM Attila
|
HSH Nordbank
|
|
$
|
12.2
|
|
The
Deva
and the
Derby D
|
KEXIMABN Amro
|
|
$
|
34.4
|
|
The
CSCL Pusan
and the
CSCL Le Havre
|
January 2011 Credit Facilities
|
Aegean BalticHSH NordbankPiraeus Bank(3)
|
|
$
|
34.6
|
|
The
Hyundai Speed
, the
Express Rome (ex Hanjin Italy)
and the
CMA CGM Rabelais
|
RBS(2)
|
|
$
|
42.4
|
|
The
Hyundai Smart
and the
Express Berlin (ex Hanjin Germany)
|
ABN Amro Club Facility
|
|
$
|
9.6
|
|
The
Express Athens (ex Hanjin Greece)
|
Club Facility
|
|
$
|
11.6
|
|
The
Hyundai Together
and the
Hyundai Tenacity
|
CitibankEurobank
|
|
$
|
47.9
|
|
The
Hyundai Ambition
|
SinosureCEXIMCitibankABN Amro
|
|
$
|
101.7
|
|
The
CMA CGM Tancredi
, the
CMA CGM Bianca
and the
CMA CGM Samson
|
-
(1)
-
As
of December 31, 2016.
82
Table of Contents
-
(2)
-
Pursuant
to the Bank Agreement, this credit facility is also secured by a second priority lien on the
Derby D
and the
CSCL Le Havre
.
-
(3)
-
Pursuant
to the Bank Agreement, this credit facility is also secured by a second priority lien on the
Deva
and the
CSCL Pusan
.
As
of December 31, 2016, there was no remaining borrowing availability under any of the Company's credit facilities.
The
weighted average interest rate on our borrowings for the years ended December 31, 2016, 2015 and 2014 was 2.6%, 2.4% and 2.5%, respectively.
As
described above, the interest rate, amortization profile and certain other terms of each of our previously existing credit facilities were adjusted to provide for consistent terms
under each facility pursuant to the terms of the Bank Agreement, other than with respect to our KEXIM-ABN Amro credit facility, which is not covered by the Bank Agreement, but was amended through a
separate supplemental agreement signed on September 12, 2013. Our KEXIM-ABN Amro credit facility, under which $25.4 million of the outstanding indebtedness, as of December 31,
2016, bears interest at a fixed rate of 5.52% and $9.0 million of the outstanding indebtedness, as of December 31, 2016, bears interest at a rate of LIBOR plus a margin, have maturity
dates of November 2018 and September 2018 (in respect of the fixed rate tranche) and November 2018 and September 2018 (in respect of the floating rate tranche), respectively.
Interest Rate Swaps
In the past, we entered into interest rate swap agreements converting floating interest rate exposure into fixed interest rates in order to
hedge our exposure to fluctuations in prevailing market interest rates, as well as interest rate swap agreements converting the fixed rate we paid in connection with certain of our credit facilities
into floating interest rates in order to economically hedge the fair value of the fixed rate credit facilities against fluctuations in prevailing market interest rates. All of these interest rate swap
agreements have expired and we do not currently have any outstanding interest rate swap agreements. See "Item 11. Quantitative and Qualitative
Disclosures About Market Risk" and "Factors Affecting our Results of OperationsUnrealized and realized loss on derivatives."
Contractual Obligations
Our contractual obligations as of December 31, 2016 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
Less than
1 year
(2017)
|
|
1 - 3 years
(2018 - 2019)
|
|
3 - 5 years
(2020 - 2021)
|
|
|
|
in thousands of Dollars
|
|
Long-term debt obligations of contractual fixed debt principal repayments(1)
|
|
$
|
2,508,314
|
|
|
180,449
|
|
|
2,287,185
|
|
|
40,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations including both contractual fixed and estimated variable debt principal repayments(2)
|
|
$
|
2,508,314
|
|
|
180,449
|
|
|
2,287,185
|
|
|
40,680
|
|
Interest on long-term debt obligations(3)
|
|
$
|
150,160
|
|
|
72,368
|
|
|
75,681
|
|
|
2,111
|
|
Payments to our manager(4)
|
|
$
|
23,892
|
|
|
23,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,682,366
|
|
$
|
276,709
|
|
$
|
2,362,866
|
|
$
|
42,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
These
long-term debt obligations reflect our existing debt obligations as of December 31, 2016 giving effect to the Bank Agreement under which we are required
to make quarterly principal
83
Table of Contents
payments
in fixed amounts and additional principal payments in such amounts that, together with the fixed principal payment, equals a certain percentage of our Actual Free Cash Flow each quarter
(refer to "Bank AgreementPrincipal Payments" above). These amounts include only the contractually fixed principal payments, and no variable amortization amounts and
assume debt will not be called by the lenders earlier due to the breaches of financial covenants. The last payment, due on December 31, 2018, will also include the unamortized remaining
principal debt balances, as such amounts will be determinable following the fixed and variable amortization. These long-term debt obligations also include contractual amortization payments of our
Sinosure-CEXIM and KEXIM-ABN Amro credit facilities.
-
(2)
-
These
long-term debt obligations reflect our existing debt obligations as of December 31, 2016 giving effect to the Bank Agreement under which we are required
to make quarterly principal payments in fixed amounts and additional principal payments in such amounts that, together with the fixed principal payment, equals a certain percentage of our Actual Free
Cash Flow each quarter (refer to "Bank AgreementPrincipal Payments" above). These amounts include both the contractually fixed principal payments, as well as management's
estimate of the future Actual Free Cash Flows and resulting variable amortization. The last payment due on December 31, 2018, will also include the unamortized remaining principal debt
balances, as such amounts will be determinable following the fixed and variable amortization. These long-term debt obligations also include contractual amortization payments of our Sinosure-CEXIM and
KEXIM-ABN Amro credit facilities.
-
(3)
-
The
interest payments in this table reflect our existing debt obligations as of December 31, 2016 giving effect to the Bank Agreement under which we are
required to make quarterly principal payments in fixed amounts and additional principal payments in such amounts that, together with the fixed principal payment, equals a certain percentage of our
Actual Free Cash Flow each quarter. The calculation of interest is based on outstanding debt balances as of December 31, 2016 amortized by both the contractual fixed and variable amortization
payments, with such variable amortization payments based on management estimates as described in footnote 2 to this table above. The interest payments in this table are based on an assumed LIBOR rate
of 1.38% in 2017, 1.75% in 2018 and up to a maximum of 2.38% thereafter. The actual variable amortization we pay may differ from management's estimates, which would result in different interest
payment obligations.
-
(4)
-
Under
our management agreement with Danaos Shipping, effective January 1, 2015, the management fees are a fee of $850 per day, a fee of $425 per vessel per
day for vessels on bareboat charter and $850 per vessel per day for vessels on time charter. As of December 31, 2016, we had a fleet of 55 containerships, out of which 53 are on time charter
and 2 on bareboat charter. These management fees will be adjusted annually by agreement between us and our manager. In addition, we also will pay our manager a fee of 1.25% of the gross freight,
demurrage and charter hire collected from the employment of our ships, 0.5% of the contract price of any vessels bought or sold on our behalf and $725,000 per newbuilding vessel, if any, for the
supervision of any newbuilding contracts. We expect to be obligated to make the payments set forth in the above table under our management agreement in the year ending December 31, 2017, based
on our revenue, as reflected above under "Factors Affecting Our Results of OperationsOperating Revenues," and our currently anticipated vessel acquisitions and dispositions
and chartering arrangements described in this annual report. No interest is payable with respect to these obligations if paid on a timely basis, therefore no interest payments are included in these
amounts.
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Table of Contents
Research and Development, Patents and Licenses
We incur from time to time expenditures relating to inspections for acquiring new vessels that meet our standards. Such expenditures are
insignificant and they are expensed as they are incurred.
Trend Information
Our results of operations depend primarily on the charter hire rates that we are able to realize. Charter hire rates paid for containerships are
primarily a function of the underlying balance between vessel supply and demand and respective charter-party details. The demand for containerships is determined by the underlying demand for goods
which are transported in containerships.
After
improving in 2010 and early 2011 from the historic lows in late 2008 and 2009, since the third quarter of 2011 freight rates obtained by liner companies have declined and charter
rates for containerships have decreased sharply, with significant further declines, in many cases to a level below operating costs. Although global demand for seaborne transportation of containerized
cargoes is estimated to have increased modestly overall in 2016, the market has experienced a significant decline in demand since the middle of 2015. As such, container freight rates and containership
charter rates
are expected to remain under pressure, including due to the significant amount of newbuildings scheduled to be delivered in 2017, which may be offset part by the potential for higher scrapping
activity, until global economic demand strengthens thereby absorbing capacity. Global demand is expected to be impacted by continued economic weakness in Europe and the resulting impact on consumer
demand in Europe, the impact of low commodity prices on imports into commodity-exporting developing economies and slower Chinese economic activity. Global containership demand is, however, expected to
balance supply growth in 2017, while differing across different trade lanes and vessel sizes. In particular, the relative weakness of the main trade lanes, which utilize larger vessels, has resulted
in cascading of larger containerships for use on shorter trades, with such cascading expected to continue.
The
idle containership fleet at the end of 2016 stood at approximately 7% of global fleet capacity, well above the 1.3% level at the end of 2014, and the highest level since early 2010.
Earnings fell sharply with the guideline rate for a 4,400 TEU Panamax reaching a record low of $4,150 per day at the end of 2016. After limited containership newbuilding orders since 2009, other than
some ordering in early 2011, containership newbuilding orders increased significantly in 2013 through 2015 before tailing off. The size of the order book compared to global fleet capacity was
approximately 16% as of the end of 2016, down from record high levels in 2008 but still relatively high compared to historical averages. In particular, larger containerships of greater than 10,000 TEU
represent a significant majority of the order book with approximately 2,200,000 TEU of vessels of over 10,000 TEU scheduled to be delivered between 2017 and 2019. The "slow-steaming" of services since
2009, particularly on longer trade routes, enabled containership operators to both moderate the impact of high bunker costs, while absorbing additional capacity. This has proved to be an effective
approach and it currently appears likely that this will remain in place in the coming year. A number of liner companies, including some of our customers, reported substantial losses in 2016 and other
recent years, with Hanjin Shipping filing for court receivership, as well as having announced plans to reduce the number of vessels they charter-in and enter into consolidating mergers or form
cooperative alliances as part of efforts to reduce the size of their fleets to better align fleet capacity with the reduced demand for marine transportation of containerized cargo, all of which may
decrease the demand for chartered-in containership tonnage.
Off-Balance Sheet Arrangements
We do not have any other transactions, obligations or relationships that could be considered material off-balance sheet arrangements.
85
Table of Contents
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make estimates in the application of
our accounting policies based on our best assumptions, judgments and opinions. We base these estimates on the information currently available to us and on various other assumptions we believe are
reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Following is a discussion of the accounting policies that involve a high
degree of judgment and the methods of their application. For a further description of our material accounting policies, please refer to Note 2, Significant Accounting Policies, to our
consolidated financial statements included elsewhere in this annual report.
Vessels are stated at cost, which consists of the contract purchase price and any material expenses incurred upon acquisition (improvements and
delivery expenses), less accumulated depreciation. Subsequent expenditures for conversions and major improvements are also capitalized when they appreciably extend the life, increase the earning
capacity or improve the efficiency or safety of the vessels. Otherwise we charge these expenditures to expenses as incurred. Our financing costs incurred during the construction period of the vessels
are included in vessels' cost.
The
vessels that we acquire in the secondhand market are treated as a business combination to the extent that such acquisitions include continuing operations and business
characteristics, such as management agreements, employees and customer base, otherwise we treat an acquisition of a secondhand vessel as a purchase of assets which has been the case for all of our
vessel acquisitions. Where we identify any intangible assets or liabilities associated with the acquisition of a vessel purchased on the secondhand market, we record all identified tangible and
intangible assets or liabilities at fair value. Fair value is determined by reference to market data and the discounted amount of expected future cash flows. We have in the past acquired certain
vessels in the secondhand market. These acquisitions were considered to be acquisitions of assets, which were also recorded at fair value. Certain vessels in our fleet that were purchased in the
secondhand market were acquired with existing charters. We determined that the existing charter contracts for these vessels did not have a material separate fair value and, therefore, we recorded such
vessels at their fair value, which equaled the consideration paid.
The
determination of the fair value of acquired assets and assumed liabilities requires us to make significant assumptions and estimates of many variables, including market charter
rates, expected future charter rates, future vessel operating expenses, the level of utilization of our vessels and our weighted average cost of capital. The use of different assumptions could result
in a material change in the fair
value of these items, which could have a material impact on our financial position and results of operations.
Our revenues and expenses are recognized on the accrual basis. Revenues are generated from bareboat hire and time charters. Bareboat hire
revenues are recorded over the term of the hire on a straight-line basis. Time charter revenues are recorded over the term of the charter as service is provided. Unearned revenue includes revenue
received in advance, and the amount recorded for an existing time charter acquired in conjunction with an asset purchase.
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Table of Contents
We follow the deferral method of accounting for special survey and drydocking costs. Actual costs incurred are deferred and are amortized on a
straight- line basis over the period until the next scheduled survey, which is two and a half years. If special survey or drydocking is performed prior to the scheduled date, the remaining unamortized
balances are immediately written-off.
Major
overhauls performed during drydocking are differentiated from normal operating repairs and maintenance. The related costs for inspections that are required for the vessel's
certification under the requirement of the classification society are categorized as drydock costs. A vessel at drydock performs certain assessments, inspections, refurbishments, replacements and
alterations within a safe non-operational environment that allows for complete shutdown of certain machinery and equipment, navigational, ballast (keep the vessel upright) and safety systems, access
to major underwater
components of vessel (rudder, propeller, thrusters anti-corrosion systems), which are not accessible during vessel operations, as well as hull treatment and paints. In addition, specialized equipment
is required to access and maneuver vessel components, which are not available at regular ports.
Our vessels represent our most significant assets and we state them at our historical cost, which includes capitalized interest during
construction and other construction, design, supervision and predelivery costs, less accumulated depreciation. We depreciate our containerships, and for the periods prior to their sale, our drybulk
carriers, on a straight-line basis over their estimated remaining useful economic lives. We estimate the useful lives of our containerships to be 30 years in line with the industry practice.
Depreciation is based on cost less the estimated scrap value of the vessels. Should certain factors or circumstances cause us to revise our estimate of vessel service lives in the future or of
estimated scrap values, depreciation expense could be materially lower or higher. Such factors include, but are not limited to, the extent of cash flows generated from future charter arrangements,
changes in international shipping requirements, and other factors many of which are outside of our control.
We
have calculated the residual value of the vessels taking into consideration the 10 year average and the five year average of the scrap. We have applied uniformly the scrap
value of $300 per ton for all vessels. We believe that $300 per ton is a reasonable estimate of future scrap prices, taking into consideration the cyclicality of the nature of future demand for scrap
steel. Although we believe that the assumptions used to determine the scrap rate are reasonable and appropriate, such assumptions are highly subjective, in part, because of the cyclical nature of
future demand for scrap steel.
With regard to our equity securities in ZIM, which were initially recognized at cost of $28.7 million, we evaluate if any event or change
in circumstances has occurred in the reporting period that may have a significant adverse effect on the fair value of our investment. If an event or change that causes an adverse effect on the fair
value of our investment occurs, as evidenced by the presence of an impairment indicator, the fair value of our investment should be estimated. In 2016, ZIM experienced significant deterioration of its
financial results, reported significant operating losses, negative equity and negative working capital mainly as a result of the adverse change in the general containership market conditions. As a
result of these adverse conditions, we estimated the fair value of our equity investment in ZIM at nil, therefore we have recorded an impairment loss amounting to $28.7 million as of
December 31, 2016, which was recognized under "Other income/(expenses), net" in the Consolidated Statements of Operations.
With
regard to our debt securities in ZIM and HMM, we recognized these securities as held to maturity based on our positive intent and ability to hold these securities to maturity. These
securities are reported at amortized costs, net of impairment losses. We evaluate these securities for other than
87
Table of Contents
temporary
impairment at each reporting date. Debt securities are considered impaired if the fair value of the investment is less than its amortized costs. In our evaluation we consider the following
(i) if we intend to sell these debt securities, (ii) it is more likely than not that we will be required to sell these securities before the recovery of their entire amortized cost basis
or (iii) if a credit loss exists, which means that we do not expect to recover the entire amortized cost basis of these securities. As of December 31, 2016, we do not intend to sell
these debt securities and we evaluate that it is not more likely than not that we will be required to sell these debt securities before the recovery of their amortized cost basis. With regard to ZIM
debt securities, as a result of the deterioration of ZIM's financial results, as described above, we do not expect the present value of future cash flows to be collected to exceed their amortized cost
basis due to a change in the timing of these expected cash flows. Thus other than temporary impairment, a credit loss, has occurred as of December 31, 2016 amounting to $0.7 million,
which was recognized under "Other income/(expenses), net" in the Consolidated Statements of Operations. No other than temporary impairment loss was identified with regard to HMM debt securities as of
December 31, 2016.
We evaluate the net carrying value of our vessels for possible impairment when events or conditions exist that cause us to question whether the
carrying value of the vessels will be recovered from future undiscounted net cash flows. An impairment charge would be recognized in a period if the fair value of the vessels was less than their
carrying value and the carrying value was not recoverable from future undiscounted cash flows. Considerations in making such an impairment evaluation would include comparison of current carrying value
to anticipated future operating cash flows, expectations with respect to future operations, and other relevant factors.
As
of December 31, 2016, we concluded that events occurred and circumstances had changed, which may trigger the existence of potential impairment of our vessels. These indicators
included loss of a charterer in 2016, volatility in the charter market and decline in the vessels' market values, as well as the potential impact the current marketplace may have on our future
operations. As a result, we performed an impairment assessment of our vessels by comparing the undiscounted projected net operating cash flows for each vessel to their carrying value. Our strategy is
to charter our vessels under
multi- year, fixed rate period charters that range from less than one to 18 years for our current vessels, providing us with contracted stable cash flows. The significant factors and
assumptions we used in our undiscounted projected net operating cash flow analysis included operating revenues, off-hire revenues, dry docking costs, operating expenses and management fees estimates.
Revenue
assumptions were based on contracted time charter rates up to the end of life of the current contract of each vessel as well as the estimated average time charter equivalent
rates for the remaining life of the vessel after the completion of its current contract. The estimated daily time charter equivalent rates used for non-contracted revenue days are based on a
combination of (i) recent charter market rates, (ii) conditions existing in the containership market as of December 31, 2016, (iii) historical average time charter rates,
based on publications by independent third party maritime research services, and (iv) estimated future time charter rates, based on publications by independent third party maritime research
services that provide such forecasts. We have five 2012-built 13,100 TEU vessels currently employed on 12-year charters, with breakeven rechartering rates of about $14,922 per day on average. Vessels
of this size are recent entrants into the containership market and, accordingly, historical data as to their re-chartering rates is episodic. We estimated rechartering rates for these 13,100 TEU
vessels for step one of the impairment analysis based on forecasts of independent third party maritime research services, which took into account recent chartering rates for newbuilding vessels of
this size and estimates based on historical charter rates for other larger sized containerships. Recognizing that the container transportation is cyclical and subject to significant volatility based
on factors beyond our control we believe that the appropriate historical average time charter rates to use
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Table of Contents
as
a benchmark for impairment testing of our vessels are the most recent 10 to 15 year averages, to the extent available, as such averages take into account the volatility and cyclicality of
the market. Management believes the use of revenue estimates, based on the combination of factors (i) to (iv) above, to be reasonable as of the reporting date.
In
addition, we used annual operating expenses escalation factors and estimations of scheduled and unscheduled off-hire revenues based on historical experience. All estimates used and
assumptions made were in accordance with our internal budgets and historical experience of the shipping industry.
The
more significant factors that could impact management's assumptions regarding time charter equivalent rates include (i) loss or reduction in business from significant
customers, (ii) unanticipated changes in demand for transportation of containers, (iii) greater than anticipated levels of containership newbuilding orders or lower than anticipated
levels of containership scrappings, and (iv) changes in rules and regulations applicable to the shipping industry, including legislation adopted by international organizations such as IMO and
the EU or by individual countries. Although management believes that the assumptions used to evaluate potential impairment are reasonable and appropriate at the time they were made, such assumptions
are highly subjective and likely to change, possibly materially, in the
future. There can be no assurance as to how long charter rates and vessel values will remain at their current low levels or whether they will improve by a significant degree.
As
of December 31, 2016, our assessment concluded that step two of the impairment analysis was required for twenty-five of our vessels held and used, as their undiscounted
projected net operating cash flows did not exceed their carrying value. The fair values of these vessels were determined with assistance from valuations obtained from third party independent
shipbrokers. As of December 31, 2016 we recorded an impairment loss of $415.1 million for twenty-five of our vessels held and used.
Impairment Sensitivity Analysis
For the 30 vessels for which our assessment concluded that step two of the impairment analysis was not required, an internal analysis, which
used a discounted cash flow model utilizing inputs and assumptions based on market observations as of December 31, 2016, and is also in accordance with our vessels' market valuation as
described in our credit facilities and accepted by our lenders, suggests that 7 vessels have current market values that exceed their carrying values and 23 vessels may have current market values below
their carrying values. We believe that each of the 23 vessels identified as having estimated market values less than their carrying value, 18 of which are currently under long-term time or charters
expiring from July 2018 through November 2023 and 5 of which are currently under time charters expiring through August 2017, will recover their carrying values through the end of their useful lives,
based on their undiscounted net cash flows calculated in accordance with our impairment assessment.
While
the Company intends to hold and operate its vessels, the following table presents information with respect to the carrying amount of the Company's vessels and indicates whether
their estimated market values are below their carrying values. The carrying value of each of the Company's vessels does not represent its market value or the amount that could be obtained if the
vessel were sold. The Company's estimates of market values are based on an internal analysis, which used a discounted cash flow model utilizing inputs and assumptions based on market observations, and
is also in accordance with its vessels' market valuation, determined as of the dates indicated, following the methodology as described in its credit facilities and accepted by its lenders. In
addition, because vessel values are highly volatile, these estimates may not be indicative of either the current or future prices that the Company could achieve if it were to sell any of the vessels.
The Company would not record a loss for any of the vessels for which the market value is below its carrying value unless and until the
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Table of Contents
Company
either determines to sell the vessel for a loss or determines that the vessel's carrying value is not recoverable as discussed above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel
|
|
TEU
|
|
Year
Built
|
|
Net Book Value
December 31,
2016
(In thousands
of Dollars)
|
|
Net Book Value
December 31,
2015
(In thousands
of Dollars)
|
|
Hyundai Together
|
|
|
13,100
|
|
|
2012
|
|
|
152,464
|
|
|
158,008
|
|
Hyundai Tenacity
|
|
|
13,100
|
|
|
2012
|
|
|
152,316
|
|
|
157,848
|
|
Hyundai Speed
|
|
|
13,100
|
|
|
2012
|
|
|
154,445
|
|
|
160,005
|
|
Hyundai Smart
|
|
|
13,100
|
|
|
2012
|
|
|
153,874
|
|
|
159,433
|
|
Hyundai Ambition
|
|
|
13,100
|
|
|
2012
|
|
|
154,992
|
|
|
160,555
|
|
Express Berlin (ex Hanjin Germany)(2)
|
|
|
10,100
|
|
|
2011
|
|
|
127,464
|
|
|
132,260
|
|
Express Rome (ex Hanjin Italy)(2)
|
|
|
10,100
|
|
|
2011
|
|
|
127,918
|
|
|
132,714
|
|
Express Athens (ex Hanjin Greece)(2)
|
|
|
10,100
|
|
|
2011
|
|
|
128,079
|
|
|
132,872
|
|
CSCL Le Havre(2)
|
|
|
9,580
|
|
|
2006
|
|
|
58,467
|
|
|
60,843
|
|
CSCL Pusan(2)
|
|
|
9,580
|
|
|
2006
|
|
|
57,399
|
|
|
59,750
|
|
CMA CGM Melisande(2)
|
|
|
8,530
|
|
|
2012
|
|
|
105,666
|
|
|
109,441
|
|
CMA CGM Attila(2)
|
|
|
8,530
|
|
|
2011
|
|
|
100,516
|
|
|
104,174
|
|
CMA CGM Tancredi(2)
|
|
|
8,530
|
|
|
2011
|
|
|
102,688
|
|
|
106,421
|
|
CMA CGM Bianca(2)
|
|
|
8,530
|
|
|
2011
|
|
|
103,117
|
|
|
106,837
|
|
CMA CGM Samson(2)
|
|
|
8,530
|
|
|
2011
|
|
|
103,249
|
|
|
106,958
|
|
CSCL America(2)
|
|
|
8,468
|
|
|
2004
|
|
|
47,189
|
|
|
47,352
|
|
Europe (ex CSCL Europe)(2)
|
|
|
8,468
|
|
|
2004
|
|
|
46,367
|
|
|
46,470
|
|
CMA CGM Moliere(2)
|
|
|
6,500
|
|
|
2009
|
|
|
76,095
|
|
|
79,092
|
|
CMA CGM Musset(2)
|
|
|
6,500
|
|
|
2010
|
|
|
77,443
|
|
|
80,443
|
|
CMA CGM Nerval(2)
|
|
|
6,500
|
|
|
2010
|
|
|
77,952
|
|
|
80,951
|
|
CMA CGM Rabelais(2)
|
|
|
6,500
|
|
|
2010
|
|
|
78,728
|
|
|
81,740
|
|
CMA CGM Racine(2)
|
|
|
6,500
|
|
|
2010
|
|
|
78,638
|
|
|
81,627
|
|
YM Mandate
|
|
|
6,500
|
|
|
2010
|
|
|
82,728
|
|
|
85,957
|
|
YM Maturity
|
|
|
6,500
|
|
|
2010
|
|
|
83,746
|
|
|
86,988
|
|
Performance(1)
|
|
|
6,402
|
|
|
2002
|
|
|
8,350
|
|
|
17,897
|
|
Priority(1)
|
|
|
6,402
|
|
|
2002
|
|
|
8,350
|
|
|
17,907
|
|
Colombo (ex SNL Colombo)(1)
|
|
|
4,300
|
|
|
2004
|
|
|
15,609
|
|
|
43,382
|
|
YM Singapore(1)
|
|
|
4,300
|
|
|
2004
|
|
|
18,406
|
|
|
44,545
|
|
YM Seattle(1)
|
|
|
4,253
|
|
|
2007
|
|
|
17,000
|
|
|
53,507
|
|
YM Vancouver(1)
|
|
|
4,253
|
|
|
2007
|
|
|
17,875
|
|
|
54,145
|
|
ZIM Rio Grande(2)
|
|
|
4,253
|
|
|
2008
|
|
|
48,175
|
|
|
50,187
|
|
ZIM Sao Paolo(2)
|
|
|
4,253
|
|
|
2008
|
|
|
48,764
|
|
|
50,780
|
|
OOCL Istanbul(2)
|
|
|
4,253
|
|
|
2008
|
|
|
48,999
|
|
|
51,008
|
|
ZIM Monaco(2)
|
|
|
4,253
|
|
|
2009
|
|
|
49,622
|
|
|
51,666
|
|
OOCL Novorossiysk(2)
|
|
|
4,253
|
|
|
2009
|
|
|
49,773
|
|
|
51,785
|
|
ZIM Luanda(2)
|
|
|
4,253
|
|
|
2009
|
|
|
50,501
|
|
|
52,533
|
|
Derby D(1)
|
|
|
4,253
|
|
|
2004
|
|
|
5,225
|
|
|
23,193
|
|
Deva(1)
|
|
|
4,253
|
|
|
2004
|
|
|
5,225
|
|
|
22,776
|
|
Dimitris C(1)
|
|
|
3,430
|
|
|
2001
|
|
|
5,025
|
|
|
10,583
|
|
Express Brazil (ex Hanjin Santos)(1)
|
|
|
3,400
|
|
|
2010
|
|
|
7,250
|
|
|
49,661
|
|
Express France (ex Hanjin Versailles)(1)
|
|
|
3,400
|
|
|
2010
|
|
|
7,250
|
|
|
50,052
|
|
Express Spain (ex Hanjin Algeciras)(1)
|
|
|
3,400
|
|
|
2011
|
|
|
7,650
|
|
|
50,795
|
|
Express Argentina (ex Hanjin Buenos Aires)(1)
|
|
|
3,400
|
|
|
2010
|
|
|
7,250
|
|
|
49,381
|
|
Express Black Sea (ex Hanjin Constantza)(1)
|
|
|
3,400
|
|
|
2011
|
|
|
7,650
|
|
|
51,594
|
|
MSC Zebra(1)
|
|
|
2,602
|
|
|
2001
|
|
|
4,050
|
|
|
7,871
|
|
Danae C(1)
|
|
|
2,524
|
|
|
2001
|
|
|
3,575
|
|
|
8,086
|
|
Amalia C(1)
|
|
|
2,452
|
|
|
1998
|
|
|
3,350
|
|
|
6,200
|
|
90
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel
|
|
TEU
|
|
Year
Built
|
|
Net Book Value
December 31,
2016
(In thousands
of Dollars)
|
|
Net Book Value
December 31,
2015
(In thousands
of Dollars)
|
|
Hyundai Advance(1)
|
|
|
2,200
|
|
|
1997
|
|
|
3,511
|
|
|
6,650
|
|
Hyundai Future(1)
|
|
|
2,200
|
|
|
1997
|
|
|
3,647
|
|
|
7,000
|
|
Hyundai Sprinter(1)
|
|
|
2,200
|
|
|
1997
|
|
|
3,689
|
|
|
7,000
|
|
Hyundai Stride(1)
|
|
|
2,200
|
|
|
1997
|
|
|
3,562
|
|
|
6,750
|
|
Hyundai Progress(1)
|
|
|
2,200
|
|
|
1998
|
|
|
4,066
|
|
|
7,900
|
|
Hyundai Bridge(1)
|
|
|
2,200
|
|
|
1998
|
|
|
4,183
|
|
|
8,150
|
|
Hyundai Highway(1)
|
|
|
2,200
|
|
|
1998
|
|
|
4,177
|
|
|
8,150
|
|
Hyundai Vladivostok(1)
|
|
|
2,200
|
|
|
1997
|
|
|
3,422
|
|
|
6,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
2,906,721
|
|
$
|
3,446,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
As
of December 31, 2016, we recorded an impairment loss of $415.1 million in aggregate for these twenty-five vessels, with each vessel written down to
its fair value.
-
(2)
-
Indicates
vessels for which, as of December 31, 2016, the estimated market value is lower than the vessel's carrying value. The aggregate carrying value of
these 23 vessels exceeded their aggregate estimated market value by approximately $637.9 million as of December 31, 2016 and by approximately $252.6 million as of
December 31, 2015 in relation to 24 vessels. The aggregate increase in the amount by which the carrying values exceeded the estimated market values for these 23 vessels as of
December 31, 2016 as compared to December 31, 2015 is attributable to the deterioration of containership values as a consequence of reduced demand for seaborne transportation of
containerized cargoes due to the weak global economic environment. We believe, however, that each of these 23 vessels, 18 of which are currently under long-term time charters expiring from July 2018
through November 2023 and 5 of which are currently under time charters expiring through August 2017, will recover their carrying values through the end of their useful lives, based on their
undiscounted net cash flows calculated in accordance with management's impairment assessment. We currently do not expect to sell any of these vessels, or otherwise dispose of them, significantly
before the end of their estimated useful life. Other than 24 vessels which had aggregate carrying values that were $252.6 million in excess of their aggregate estimated market values as of
December 31, 2015, which included 11 vessels, for which we recognized an impairment charge as of December 31, 2016, no other vessels had carrying values in excess of their estimated
market values as of December 31, 2015.
As
discussed above, we believe that the appropriate historical period to use as a benchmark for impairment testing of our vessels is the most recent 10 to 15 years, to the extent
available, as such averages take into account the volatility and cyclicality of the market. Charter rates are, however, subject to change based on a variety of factors that we cannot control and we
note that charter rates over the last few years have been, on average, below their ten to fifteen year historical average.
In
connection with the impairment testing of our vessels as of December 31, 2016, for the 23 vessels that our internal analysis suggests that may have current market values below
their carrying values, we performed a sensitivity analysis on the most sensitive and/or subjective assumption that has the potential to affect the outcome of the test, the projected charter rate used
to forecast future cash flows for non-contracted days. The following table summarizes information about these 23 vessels,
91
Table of Contents
including
the breakeven charter rates and the one-year charter rate historical average for the last 1, 3, 5, 10 and 15 years, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel/Year Built
|
|
Break Even
re-chartering
rate(7)
($ per day)
|
|
Assumed
Rechartering
Rate(8)/Percentage
difference between
break even and
assumed
re-chartering
rates(9)
($ per day)/(%)
|
|
1 year
charter rate
historical
average of
last 1 year
($ per day)
|
|
1 year
charter rate
historical
average of
last 3 years
($ per day)
|
|
1 year
charter rate
historical
average of
last 5 years
($ per day)
|
|
1 year
charter rate
historical
average of
last 10 years
($ per day)
|
|
1 year
charter rate
historical
average of
last 15 years
($ per day)
|
|
3 × 10,100 TEU vessels (2011)(1)
|
|
$
|
25,488
|
|
$
|
40,000 / 36.3
|
%
|
$
|
10,067
|
|
$
|
22,694
|
|
$
|
27,790
|
|
$
|
33,845
|
|
$
|
42,578
|
|
2 × 9,580 TEU vessels (2006)(2)
|
|
$
|
15,109
|
|
$
|
32,750 / 53.9
|
%
|
$
|
9,751
|
|
$
|
21,983
|
|
$
|
26,919
|
|
$
|
32,789
|
|
$
|
41,248
|
|
5 × 8,530 TEU vessels (2011 - 2012)(3)
|
|
$
|
12,414
|
|
$
|
35,000 / 64.5
|
%
|
$
|
9,114
|
|
$
|
20,548
|
|
$
|
25,164
|
|
$
|
30,644
|
|
$
|
38,550
|
|
2 × 8,468 TEU vessels (2004)(4)
|
|
$
|
15,925
|
|
$
|
30,500 / 47.8
|
%
|
$
|
9,077
|
|
$
|
20,463
|
|
$
|
25,062
|
|
$
|
30,521
|
|
$
|
38,394
|
|
5 × 6,500 TEU vessels (2009 - 2010)(5)
|
|
$
|
13,222
|
|
$
|
25,000 / 47.1
|
%
|
$
|
6,575
|
|
$
|
12,525
|
|
$
|
15,965
|
|
$
|
21,955
|
|
$
|
29,435
|
|
6 × 4,253 TEU vessels (2008 - 2009)(6)
|
|
$
|
14,349
|
|
$
|
15,760 / 9.0
|
%
|
$
|
5,064
|
|
$
|
8,459
|
|
$
|
8,832
|
|
$
|
14,803
|
|
$
|
20,939
|
|
-
(1)
-
Our
three 10,100 TEU vessels out of which two are under short-term time charter contracts with OOCL and one with Yang Ming with the earliest expiration dates of the
charters being as follows: the
Express Rome,
on August 30, 2017, the
Express Athens,
on
August 30, 2017 and the
Express Berlin,
on June 22, 2017.
-
(2)
-
Our
two 9,580 TEU vessels are under long-term time charter contracts with CSCL with the earliest expiration dates of the charters being as follows: the
CSCL Pusan,
on July 8, 2018 and the
CSCL Le Havre,
on September 20, 2018.
-
(3)
-
Our
five 8,530 TEU vessels are under long-term time charter contracts with CMA-CGM with the earliest expiration dates of the charters being as follows: the
CMA CGM Attila
, on April 8, 2023, the
CMA CGM Tancredi
, on May 22, 2023, the
CMA CGM Bianca
, on July 26, 2023, the
CMA CGM Samson
, on
September 15, 2023 and the
CMA CGM Melisande
, on November 28, 2023.
-
(4)
-
Our
two 8,468 TEU vessels are under long-term time charter contracts, which will expire within the next twelve months with CSCL with the earliest expiration dates of
the charters being as follows: the
Europe
, on June 5, 2017 and the
CSCL America
, on July 24,
2017.
-
(5)
-
Our
five 6,500 TEU vessels are under long-term time charter contracts with CMA CGM with the earliest expiration dates of the charters being as follows: the
CMA CGM Moliere
, on August 28, 2021, the
CMA CGM Musset
, on February 12, 2022, the
CMA CGM Nerval
, on April 17, 2022, the
CMA CGM Rabelais
,
on June 2, 2022 and the
CMA CGM Racine,
on July 16, 2022.
-
(6)
-
Six
of our 4,253 TEU vessels are under long-term time charter contracts with ZIM Integrated Shipping Services with the earliest expiration dates of the charters
being as follows: the
ZIM Rio Grande
, on May 20, 2020, the
ZIM Sao Paolo
, on August 8, 2020,
the
OOCL Istanbul
, on September 19, 2020, the
ZIM Monaco
, on November 18, 2020, the
OOCL Novorossiysk
, on February 14, 2021 and the
ZIM Luanda
, on May 12, 2021.
-
(7)
-
The
breakeven re-chartering rate is the charter rate that if used in step one of the impairment testing will result in the undiscounted total cash flows being equal
to the carrying value of the vessel. The use of charter rates below the breakeven re-chartering rate would trigger step two of the impairment testing that would result in the recording of an aggregate
impairment loss of $637.9 million as of December 31, 2016.
-
(8)
-
Re-chartering
rate used in our impairment testing as of December 31, 2016, to estimate the revenues for the remaining life of the respective vessels after the
expiration of their existing charter contracts.
-
(9)
-
The
variance in percentage points of the breakeven re-chartering rate per day compared to the per day re-chartering assumption used in Step 1 of the Company's
impairment testing analysis.
If
we had used the historical average one-year charter rates for the last 10 or 15 years, the results of our 2016 impairment testing on all vessel categories discussed on the
above table would not have been impacted, as the cash flow forecasts would still result in each vessel's carrying cost being recovered. If, however, historical average one-year charter rates for the
last 1, 3, or 5 years had been
92
Table of Contents
used
in the cash flow forecasts of our three 10,100 TEU vessels, two 9,580 TEU vessels, five 8,530 TEU vessels, two 8,486 TEU vessels, five 6,500 TEU vessels and six 4,253 TEU vessels, then the
carrying values of the respective vessels, which are currently under time charters expiring from June 2017 through November 2023 would not have been recovered. As noted above, we believe that the
appropriate historical period to be used as a reference for the purposes of impairment testing of these vessels should be from 10 to 15 years as such averages take into account the volatility
and cyclicality of the market. Additionally, on the premise of a 30 year useful life, given that these vessels will have a remaining life above 15 years when they come off charter, the
historical 10 to 15 year average is considered by the management as the most reasonable reference point when assessing the earnings generation potential of these vessels during their remaining
life after expiry of their current charters.
We
also performed a sensitivity analysis on the other 7 vessels identified as having current market values exceeding their carrying values, which indicated that if we had used the
historical average one-year charter rates for corresponding size vessels (for our five 13,100 TEU vessels, rates for 9,500 to 10,100 TEU vessels were used for purposes of this sensitivity analysis)
for the most recent 1, 3 or 5 year periods, the cash flow forecasts would still have resulted in each vessel's carrying cost being recovered for all vessels. The breakeven re-chartering rates
for all 7 vessels ranged from zero, in two cases, and otherwise $14,922 per day. We believe that each of these 7 vessels, which had an average remaining useful life of about 25 years, an
average remaining charter duration of about 8 years and an average useful life after the end of their current charters of about 17 years, can be reasonably anticipated to recover their
carrying values through the end of their useful lives. Furthermore, as discussed above, the Company's internal analysis suggested that each of these vessels had a market value in excess of its
carrying value as of December 31, 2016.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-9 "Revenue from Contracts with Customers" ("ASU 2014-09"), which will
supersede the current revenue recognition guidance and outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The ASU 2014-09 was
amended by ASU 2015-14 "Revenue from Contracts with Customers: Deferral of the Effective Date" ("ASU 2015-014"), which was issued in August 2015. Public entities can now elect to defer implementation
of ASU 2014-09 to interim and annual periods beginning after December 15, 2017. Additionally, ASU 2015-14 permits early adoption of the standard but not before the original effective date,
i.e. annual period beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. In addition, in 2016, the FASB
issued four amendments, which clarified the guidance on certain items such as reporting revenue as a principal versus agent, identifying performance obligations, accounting for intellectual property
licenses, assessing collectability and presentation of sales taxes. The Company is currently evaluating the impact that the adoption of the new standard will have on its consolidated financial
statements and associated disclosures, and has not yet selected a transition method.
In
January 2016, the FASB issued Accounting Standards Update No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). ASU 2016-01
requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those
that result in consolidation of the investee). The amendments in this Update also require an entity to present separately in other comprehensive income the portion of the total change in the fair
value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for
financial instruments. In addition the amendments in this Update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not
public business entities and the requirement for to disclose the methods and significant assumptions used to estimate the fair value that
93
Table of Contents
is
required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The amendments are effective for annual periods ending after
December 15, 2017, including interim periods within those fiscal years. Early application is not permitted. The Company is currently evaluating the new guidance to determine the impact it will
have on its consolidated financial statements and notes disclosures.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). ASU 2016-02 will apply to both types of
leasescapital (or finance) leases and operating leases. According to the new Accounting Standard, lessees will be required to recognize assets and liabilities on the balance sheet for the
rights and obligations created by all leases with terms of more than 12 months. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. Early application is permitted. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements
and notes disclosures.
In
March 2016, the FASB issued ASU 2016-07, "InvestmentsEquity Method and Joint Ventures (Topic 323)" ("ASU 2016-07"), which simplifies the accounting for
equity method investments by removing the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an
increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis
of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. ASU 2016-07 is effective for
fiscal years beginning after December 15, 2016, and interim periods within those years, and must be applied prospectively. Early adoption is permitted. The Company is currently evaluating the
provisions of this guidance and assessing its impact on its consolidated financial statements and notes disclosures.
In
March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)"
("ASU 2016-08"), which clarifies the implementation guidance on principal versus agent considerations. The amendments in ASU 2016-8 affect the guidance in the ASU 2014-09, which is not
yet effective. ASU 2016-08 is effective for fiscal years beginning after December 15, 2017, and interim reporting periods within those years. Early application is permitted for annual
reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the provisions of this guidance and
assessing its impact on its consolidated financial statements and notes disclosures.
In
March 2016, the FASB issued ASU 2016-09, "CompensationStock CompensationImprovements to Employee Share-Based Payment Accounting (Topic 718)" ("ASU
2016-09"), which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. Under the new standard, all excess income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and
the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether
the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. In regards to forfeitures, the entity
may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. ASU 2016-09 is effective for fiscal
years beginning after December 15, 2016 including interim periods within that reporting period, however early adoption is permitted. The Company is currently evaluating the guidance to
determine the Company's adoption method and the effect it will have on its consolidated financial statements and notes disclosures.
94
Table of Contents
In
June 2016, the FASB issued ASU 2016-13, "Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"),
which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade
receivables. The ASU 2016-13 is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact
of the new standard on the Company's consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"). The FASB
issued ASU 2016-15 to decrease the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this
update provide guidance on eight specific cash flow issues. Additionally, in November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted
Casha consensus of the FASB Emerging Issues Task Force" ("ASU 2016-18"), which requires that amounts described as restricted cash and restricted cash equivalents be included with
cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. These revised standards are effective for fiscal years, and for
interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of these updated standards on the
Company's consolidated statements of cash flows.
In
October 2016, the FASB issued ASU 2016-17 "Consolidation (Topic 810), Interests Held Through Related Parties That Are Under Common Control" ("ASU 2016-17").
ASU 2016-17 changes how a single decision maker will consider its indirect interests when performing the primary beneficiary analysis under the variable interest entity ("VIE") model. Under
ASU 2015-02 "Consolidation (Topic 810), Amendments to the Consolidation Analysis," a single decision maker was required to consider an indirect interest held by a related party under
common control in its entirety. Under ASU 2016-17, the single decision maker will consider the indirect interest on a proportionate basis. ASU 2016-17 does not change the characteristics
of a primary beneficiary in the VIE model. The amendments of ASU 2016-17 are effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The Company
is currently evaluating the impact of the new standard on the Company's consolidated financial statements.
Item 6. Directors, Senior Management and Employees
The following table sets forth, as of February 28, 2017, information for each of our directors and executive officers.
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Dr. John Coustas
|
|
|
61
|
|
President and CEO and Class I Director
|
Iraklis Prokopakis
|
|
|
66
|
|
Senior Vice President, Chief Operating Officer and Treasurer and Class II Director
|
Evangelos Chatzis
|
|
|
44
|
|
Chief Financial Officer and Secretary
|
Dimitris Vastarouchas
|
|
|
49
|
|
Deputy Chief Operating Officer
|
George Economou
|
|
|
64
|
|
Class II Director
|
Myles R. Itkin
|
|
|
69
|
|
Class I Director
|
Miklós Konkoly-Thege
|
|
|
74
|
|
Class III Director
|
William Repko
|
|
|
67
|
|
Class II Director
|
The
term of our Class I directors expires in 2018, the term of our Class II directors expires in 2017 and the term of our Class III directors expires in 2019.
Certain biographical information about each of these individuals is set forth below.
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Dr. John Coustas
is our President, Chief Executive Officer and a member of our board of directors.
Dr. Coustas has over 30 years of experience in the shipping industry. Dr. Coustas assumed management of our company in 1987 from his father, Dimitris Coustas, who founded Danaos
Shipping in 1972, and has been responsible for our corporate strategy and the management of our affairs since that time. Dr. Coustas is also a member of the board of directors of the Union of
Greek Shipowners and the Cyprus Union of Shipowners, President of HELMEPA (Hellenic Maritime Protection Agency), as well as Deputy Chairman of the board of directors of The Swedish Club.
Dr. Coustas holds a degree in Marine Engineering from National Technical University of Athens as well as a Master's degree in Computer Science and a Ph.D. in Computer Controls from Imperial
College, London.
Iraklis Prokopakis
is our Senior Vice President, Treasurer, Chief Operating Officer and a member of our board of directors.
Mr. Prokopakis joined us in 1998 and has over 38 years of experience in the shipping industry. Prior to entering the shipping industry, Mr. Prokopakis was a captain in the
Hellenic Navy. He holds a Bachelor of Science in Mechanical Engineering from Portsmouth University in the United Kingdom, a Master's degree in Naval Architecture and a Ship Risk Management Diploma
from the Massachusetts Institute of Technology in the United States and a post-graduate diploma in business studies from the London School of Economics. Mr. Prokopakis also has a Certificate in
Operational Audit of Banks from the Management Center Europe in Brussels and a Safety Risk Management
Certificate from Det Norske Veritas. He is a member of the Board of the Hellenic Chamber of Shipping and the Owners' Committee of the Korean Register of Shipping.
Evangelos Chatzis
is our Chief Financial Officer and Secretary. Mr. Chatzis has been with Danaos Corporation since 2005 and has
over 21 years of experience in corporate finance and the shipping industry. During his years with Danaos he has been actively engaged in the company's initial public offering in the United
States and has led a variety of projects, the latest being the successfully concluded comprehensive financing plan of the company. Throughout his career he has developed considerable experience in
operations, corporate finance, treasury and risk management and international business structuring. Prior to joining Danaos, Evangelos was the Chief Financial Officer of Globe Group of Companies, a
public company in Greece engaged in a diverse scope of activities including dry bulk shipping, the textile industry, food production & distribution and real estate. During his years with Globe
Group, he was involved in mergers and acquisitions, corporate restructurings and privatizations. He holds a Bachelor of Science degree in Economics from the London School of Economics, a Master's of
Science degree in Shipping & Finance from City University Cass Business School, as well as a post-graduate diploma in Shipping Risk Management from IMD Business School.
Dimitris Vastarouchas
is our Deputy Chief Operating Officer. Mr. Vastarouchas has been the Technical Manager of our Manager since
2005 and has over 20 years of experience in the shipping industry. Mr. Vastarouchas initially joined our Manager in 1995 and prior to becoming Technical Manager he was the New Buildings
Projects and Site Manager, under which capacity he supervised newbuilding projects in Korea for 4,250, 5,500 and 8,500 TEU containerships. He holds a degree in Naval Architecture & Marine
Engineering from the National Technical University of Athens, Certificates & Licenses of expertise in the fields of Aerodynamics (C.I.T.), Welding (CSWIP), Marine Coating (FROSIO) and Insurance
(North of England P&I). He is also a qualified auditor by Det Norske Veritas and Certified Negotiator by Schranner Negotiations Institute (SNI).
George Economou
has been a member of our board of directors since 2010. Mr. Economou has over 40 years of experience in the
maritime industry. Mr. Economou began his career in 1976 and worked in shipping companies mostly in New York before starting his own company in 1986. Between 1986 and 1991, he invested and
participated in the formation of numerous individual shipping companies. He has served as Chairman and Chief Executive Officer of Dryships Inc. since its incorporation in 2004 and as President
until 2016. He successfully took the company public in February 2005 on NASDAQ under the trading symbol: DRYS. Mr. Economou oversaw the company's growth into the largest US listed dry bulk
company in fleet size and revenue and the second largest Panamax
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owner
in the world. The company subsequently invested and developed Ocean Rig UDW, an owner of rigs and ships involved in ultra deep water drilling, which is also trading on NASDAQ under the trading
symbol: ORIG. Mr. Economou is a graduate of the Massachusetts Institute of Technology and
holds both a Bachelor of Science and a Master of Science degree in Naval Architecture and Marine Engineering and a Master of Science in Shipping and Shipbuilding Management.
Myles R. Itkin
has been a member of our board of directors since 2006. Mr. Itkin was the Executive Vice President, Chief Financial
Officer and Treasurer of Overseas Shipholding Group, Inc. ("OSG"), in which capacities he served, with the exception of a promotion from Senior Vice President to Executive Vice President in
2006, from 1995 to 2013. Prior to joining OSG in June 1995, Mr. Itkin was employed by Alliance Capital Management L.P. as Senior Vice President of Finance. Prior to that, he was Vice
President of Finance at Northwest Airlines, Inc. Mr. Itkin served on the board of directors of the U.K. P&I Club from 2006 to 2013. Mr. Itkin holds a Bachelor's degree from
Cornell University and an MBA from New York University.
On
November 14, 2012, OSG filed voluntary petitions for reorganization for itself and 180 of its subsidiaries under Chapter 11 of Title 11 of the United States Code in the
U.S. Bankruptcy Court for the District of Delaware. On January 23, 2017, Mr. Itkin, and OSG, consented to an SEC order finding they violated or caused the violation of, among other
provisions, the negligence-based antifraud provisions as well as reporting, books-and-records, and internal controls provisions of the federal securities laws, in relation to the failure to recognize
tax liabilities in OSG's financial statements resulting from its controlled foreign subsidiary guaranteeing OSG's debt. Mr. Itkin agreed to pay a $75,000 penalty and OSG agreed to pay a
$5 million penalty subject to bankruptcy court approval.
Miklós Konkoly-Thege
has been a member of our board of directors since 2006. Mr. Konkoly-Thege began at Det Norske
Veritas ("DNV"), a ship classification society, in 1984. From 1984 through 2002, Mr. Konkoly-Thege served in various capacities with DNV including Chief Operating Officer, Chief Financial
Officer and Corporate Controller, Head of Corporate Management Staff and Head of Business Areas. Mr. Konkoly-Thege became President and Chairman of the Executive Board of DNV in 2002 and served
in that capacity until his retirement in May 2006. Mr. Konkoly-Thege is a member of the board of directors of Wilhelmsen Technical Solutions AS, Callenberg Technology Group AB and Stena Hungary
Holding KFT. Mr. Konkoly-Thege holds a Master of Science degree in civil engineering from Technische Universität Hannover, Germany and an MBA from the University of Minnesota.
William Repko
has been a member of our board of directors since July 2014. Mr. Repko has nearly 40 years of investing,
finance and restructuring experience. Mr. Repko retired from Evercore Partners in February 2014 where he had served as a senior advisor, senior managing director and was a co-founder of the
firm's Restructuring and Debt Capital Markets Group since September 2005. Prior to joining Evercore Partners Inc., Mr. Repko served as chairman and head of the Restructuring Group at
J.P. Morgan Chase, a leading investment banking firm, where he focused on providing comprehensive solutions to clients' liquidity and reorganization challenges. In 1973, Mr. Repko joined
Manufacturers Hanover Trust Company, a commercial bank, which after a series of mergers became part of J.P. Morgan Chase. Mr. Repko has been named to the Turnaround Management
Association (TMA)-sponsored Turnaround, Restructuring and Distressed Investing Industry Hall of Fame. Mr. Repko has served on the Board of Directors of Stellus Capital Investment Corporation
(SCM:NYSE) since 2012 and is Chairman of its Compensation Committee and serves on the Audit Committee. Mr. Repko received his B.S. in Finance from Lehigh University.
Compensation of Directors and Senior Management
Non-executive directors receive annual fees of $70,000 per annum beginning January 1, 2015 (previously $62,500 per annum), plus
reimbursement for their out-of-pocket expenses, which amounts are payable at the election of each non-executive director in cash or stock as described below under
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"Equity
Compensation Plan." We do not have service contracts with any of our non-employee directors. We have employment agreements with two directors who are also executive officers of
our company, as well as with our other two executive officers.
Since
May 1, 2015, we have directly employed our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Deputy Chief Operating Officer, who received
aggregate compensation of €1.0 million ($1.1 million) for the period from May 1, 2015 to December 31, 2015 and €1.5 million
($1.7 million) for the year ended December 31, 2016. From January 1, 2014 to April 30, 2015, our manager provided us with the services of these officers. In 2015 (for the
period from January 1, 2015 to April 30, 2015) and 2014 we paid our manager a fee of €0.51 million ($0.56 million) and €1.47 million
($1.92 million), respectively, for such services. Our executive officers are eligible, in the discretion of our board of directors and compensation committee, for incentive compensation and
restricted stock, stock options or other awards under our equity compensation plan, which is described below under "Equity Compensation Plan."
Our
executive officers are entitled to severance payments for termination without "cause" or for "good reason" generally equal (i) two times the executive officer's annual salary
plus bonus (based on an average of the prior three years), including the value on the date of grant of any equity grants made under our equity compensation plan during that three-year period (which,
for stock options, will be the Black- Scholes value), as well as continued benefits, if any, for 24 months or (ii) if such termination without cause or for good reason occurs within two
years of a "change of control" of our company the greater of (a) the amount calculated as described in clause (i) but changing the multiple from two to three and (b) a specified
dollar amount for each executive officer (approximately €4.6 million in the aggregate for all executive officers), as well as continued benefits, if any, for 36 months.
Employees
From May 1, 2015, we directly employ our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Deputy Chief
Operating Officer, whose services had been provided to us under our Management Agreement from January 1, 2013 to April 30, 2015. Approximately 1,196 officers and crew members served on
board the vessels we own as of December 31, 2016, but are employed by our manager. Crew wages and other related expenses are paid by our manager and our manager is reimbursed by us.
Share Ownership
The common stock beneficially owned by our directors and executive officers and/or companies affiliated with these individuals is disclosed in
"Item 7. Major Shareholders and Related Party Transactions" below.
Board of Directors
At December 31, 2016 and February 28, 2017, we had six members on our board of directors. The board of directors may change the
number of directors to not less than two, nor more than 15, by a vote of a majority of the entire board. Each director is elected to serve until the third succeeding annual meeting of stockholders and
until his or her successor shall have been duly elected and qualified, except in the event of death, resignation or removal. A vacancy on the board created by death, resignation, removal (which may
only be for cause), or failure of the stockholders to elect the entire class of directors to be elected at any election of directors or for any other reason, may be filled only by an affirmative vote
of a majority of the remaining directors then in office, even if less than a quorum, at any special meeting called for that purpose or at any regular meeting of the board of directors.
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In
accordance with the terms of the August 6, 2010 common stock subscription agreement between Sphinx Investments Corp. and us, we have agreed to nominate Mr. Economou or
such other person, in each case who shall be acceptable to us, designated by Sphinx Investments Corp., for election by our stockholders to the Board of Directors at each annual meeting of stockholders
at which the term of Mr. Economou or such other director so designated expires, so long as such investor beneficially owns a specified minimum amount of our common stock. We have been informed
that our largest stockholder, a family trust established by Dr. John Coustas, and Dr. John Coustas have agreed to vote all of the shares of common stock they own, or over which they have
voting control, in favor of any such nominee standing for election.
During
the year ended December 31, 2016, the board of directors held seven meetings. Each director attended all of the meetings of the board of directors and of the committees of
which the director was a member, other than Mr. William Repko who did not attend one of the meetings of the Board and one of the audit, compensation and nominating and governance committees
meetings of the Board and Mr. Economou who did not attend five of the meetings of the Board. Our board of directors has determined that each of Messrs. Economou, Itkin, Konkoly-Thege,
and Repko were independent (within the requirements of the NYSE and SEC).
To
promote open discussion among the independent directors, those directors met, in 2016, seven times in regularly scheduled executive session without participation of our company's
management and will continue to do so in 2017. Mr. Myles Itkin served as the presiding director for purposes of these meetings. Stockholders who wish to send communications on any topic to the
board of directors or to the independent directors as a group, or to the presiding director, Mr. Myles Itkin, may do so by writing to our Secretary, Mr. Evangelos Chatzis, Danaos
Corporation, c/o Danaos Shipping Co. Ltd., 14 Akti Kondyli, 185 45 Piraeus, Greece.
Corporate Governance
The board of directors and our company's management has engaged in an ongoing review of our corporate governance practices in order to oversee
our compliance with the applicable corporate governance rules of the New York Stock Exchange and the SEC.
We
have adopted a number of key documents that are the foundation of its corporate governance, including:
-
-
a Code of Business Conduct and Ethics for officers and employees;
-
-
a Code of Conduct for the chief executive officer and senior financial officers;
-
-
a Code of Ethics for directors;
-
-
a Nominating and Corporate Governance Committee Charter;
-
-
a Compensation Committee Charter; and
-
-
an Audit Committee Charter.
These
documents and other important information on our governance, including the board of director's Corporate Governance Guidelines, are posted on the Danaos Corporation website, and
may be viewed at
http://www.danaos.com
. We will also provide a paper copy of any of these documents upon the written request of a stockholder.
Stockholders may direct their requests to the attention of our Secretary, Mr. Evangelos Chatzis, Danaos Corporation, c/o Danaos Shipping Co. Ltd., 14 Akti Kondyli,
185 45 Piraeus, Greece.
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Committees of the Board of Directors
We are a "controlled company" within the meaning of the New York Stock Exchange corporate governance standards. Pursuant to certain exceptions
for foreign private issuers and controlled companies, we are not required to comply with certain of the corporate governance practices followed by U.S. and non-controlled companies under the New York
Stock Exchange listing standards. We comply fully with the New York Stock Exchange corporate governance rules applicable to both U.S. and foreign private issuers that are "controlled companies,"
however, as permitted for controlled companies, one member of the compensation committee and one member of the nominating and corporate governance committee is a non-independent director and, in
accordance with Marshall Islands law, we obtained board of director approval but not shareholder approval for our August 2010 common stock sale and the extension of the termination date of our equity
compensation plan in 2016 to September 2019. See "Item 16G. Corporate Governance."
Our audit committee consists of Myles R. Itkin (chairman), Miklós Konkoly-Thege and William Repko. Our board of directors has
determined that Mr. Itkin qualifies as an audit committee "financial expert," as such term is defined in Regulation S-K. The audit committee is responsible for (1) the hiring,
termination and compensation of the independent auditors and approving any non-audit work performed by such auditor, (2) approving the overall scope of the audit, (3) assisting the board
in monitoring the integrity of our financial statements, the independent accountant's qualifications and independence, the performance of the independent accountants and our internal audit function
and our compliance with legal and regulatory requirements, (4) annually reviewing an independent auditors' report describing the auditing firms' internal quality-control procedures, any
material issues raised by the most recent internal quality-control review, or peer review, of the auditing firm, (5) discussing the annual audited financial and quarterly statements with
management and the independent auditor, (6) discussing earnings press releases, as well as financial information and earning guidance, (7) discussing policies with respect to risk
assessment and risk management, (8) meeting separately, periodically, with management, internal auditors and the independent auditor, (9) reviewing with the independent auditor any audit
problems or difficulties and management's response, (10) setting clear hiring policies for employees or former employees of the independent auditors, (11) annually reviewing the adequacy
of the audit committee's written charter, (12) handling such other matters that are specifically delegated to the audit committee by the board of directors from time to time,
(13) reporting regularly to the full board of directors and (14) evaluating the board of directors' performance. During 2016, there were five meetings of the audit committee.
Our compensation committee consists of Miklós Konkoly-Thege (chairman), Iraklis Prokopakis and William Repko. The compensation
committee is responsible for (1) reviewing key employee compensation policies, plans and programs, (2) reviewing and approving the compensation of our chief executive officer and other
executive officers, (3) developing and recommending to the board of directors compensation for board members, (4) reviewing and approving employment contracts and other similar
arrangements between us and our executive officers, (5) reviewing and consulting with the chief executive officer on the selection of officers and evaluation of executive performance and other
related matters, (6) administration of stock plans and other incentive compensation plans, (7) overseeing compliance with any applicable compensation reporting requirements of the SEC,
(8) retaining consultants to advise the committee on executive compensation practices and policies and (9) handling such other matters that are specifically delegated to the compensation
committee by the board of directors from time to time. During 2016, there were five meetings of the compensation committee.
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Our nominating and corporate governance committee consists of Myles R. Itkin (chairman), Iraklis Prokopakis and William Repko. The nominating
and corporate governance committee is responsible for (1) developing and recommending criteria for selecting new directors, (2) screening and recommending to the board of directors
individuals qualified to become executive officers, (3) overseeing evaluations of the board of directors, its members and committees of the board of directors and (4) handling such other
matters that are specifically delegated to the nominating and corporate governance committee by the board of directors from time to time. During 2016, there were five meetings of the nominating and
corporate governance committee.
We have adopted an equity compensation plan, which we refer to as the Plan. The Plan is generally administered by the compensation committee of
our board of directors, except that the full board may act at any time to administer the Plan, and authority to administer any aspect of the Plan may be delegated by our board of directors or by the
compensation committee to an executive officer or to any other person. The Plan allows the plan administrator to grant awards of shares of our common stock or the right to receive or purchase shares
of our common stock (including options to purchase common stock, restricted stock and stock units, bonus stock, performance stock, and stock appreciation rights) to our employees, directors or other
persons or entities providing significant services to us or our subsidiaries, including employees of our manager, and also provides the plan administrator with the authority to reprice outstanding
stock options or other awards. The actual terms of an award, including the number of shares of common stock relating to the award, any exercise or purchase price, any vesting, forfeiture or transfer
restrictions, the time or times of exercisability for, or delivery of, shares of common stock, will be determined by the plan administrator and set forth in a written award agreement with the
participant. Any options granted under the Plan will be accounted for in accordance with accounting guidance for share-based compensation.
The
aggregate number of shares of our common stock for which awards may be granted under the Plan cannot exceed 6% of the number of shares of our common stock issued and outstanding at
the time any award is granted. Awards made under the Plan that have been forfeited (including our repurchase of shares of common stock subject to an award for the price, if any, paid to us for such
shares of common stock, or for their par value) or cancelled or have expired, will not be treated as having been granted for purposes of the preceding sentence.
The
Plan requires that the plan administrator make an equitable adjustment to the number, kind and exercise price per share of awards in the event of our recapitalization,
reorganization, merger, spin-off, share exchange, dividend of common stock, liquidation, dissolution or other similar transaction or event. In addition, the plan administrator will be permitted to
make adjustments to the terms and conditions of any awards in recognition of any unusual or nonrecurring events. Unless otherwise set forth in an award agreement, any awards outstanding under the Plan
will vest upon a "change of control," as defined in the Plan. Our board of directors may, at any time, alter, amend, suspend, discontinue or terminate the Plan, except that any amendment will be
subject to the approval of our stockholders if required by applicable law, regulation or stock exchange rule and that, without the consent of the affected participant under the Plan, no action may
materially impair the rights of such participant under any awards outstanding under the Plan. The Plan will terminate on September 17, 2019.
As
of April 18, 2008, the Board of Directors and the Compensation Committee approved incentive compensation of the Manager's employees with its shares from time to time, after
specific for each such time, decision by the compensation committee and the Board of Directors in order to provide a means of compensation in the form of free shares under its 2006 equity compensation
plan to certain
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employees
of the Manager of the Company's common stock. The plan was effective as of December 31, 2008. Pursuant to the terms of the plan, employees of the Manager may receive (from time to
time) shares of the Company's common stock as additional compensation for their services offered during the preceding period. The stock will have no vesting period and the employee will own the stock
immediately after grant. The total amount of stock to be granted to employees of the Manager will be at the Company's Board of Directors' discretion only and there will be no contractual obligation
for any stock to be granted as part of the employees' compensation package in future periods. As of December 15, 2016, the Company granted 25,000 shares, which will be issued in 2017 to be
distributed to the employees of the Manager and recorded an expense of $0.1 million, representing the fair value of the stock granted as at the date of the grant. As of December 11,
2015, the Company granted 15,879 shares, to be distributed to the employees of the Manager and recorded an expense of $0.1 million, representing the fair value of the stock granted as at the
date of the grant. During 2016, the Company issued 17,608 shares of common stock in partial settlement of 2015 and 2014 grants. As of December 10, 2014, the Company granted 115,185 shares to
certain employees of the Manager, out of which 112,315 shares were issued and distributed to the employees of the Manager in 2015 and recorded in "General and Administrative Expenses" an expense of
$0.6 million representing the fair value of the stock granted as at the date of grant. Refer to Note 20, Stock Based Compensation, in the notes to our consolidated financial statements
included elsewhere herein.
The
Company has also established the Directors Share Payment Plan under its 2006 equity compensation plan. The purpose of the plan is to provide a means of payment of all or a portion of
compensation payable to directors of the Company in the form of Company's Common Stock. The plan was effective as of April 18, 2008. Each member of the Board of Directors of the Company may
participate in the plan. Pursuant to the terms of the plan, Directors may elect to receive in Common Stock all or a portion of their compensation. During 2016, 2015 and 2014, none of the directors
elected to receive in Company shares his compensation. Refer to Note 19, Stock Based Compensation, in the notes to our consolidated financial statements included elsewhere herein.
Item 7. Major Shareholders and Related Party Transactions
Related Party Transactions
Danaos Shipping Co. Ltd., which we refer to as our Manager, is ultimately owned by Danaos Investments Limited as Trustee of the
883 Trust, which we refer to as the Coustas Family Trust. Danaos Investments Limited is the trustee of the Coustas Family Trust, of which Dr. Coustas and other members of the Coustas family are
beneficiaries. Dr. Coustas has certain powers to remove and replace Danaos Investments Limited as Trustee of the 883 Trust. The Coustas Family Trust is also our largest stockholder, owning
approximately 61.8% of our outstanding common stock as of February 28, 2017. Our Manager has provided services to our vessels since 1972 and continues to provide technical, administrative and
certain commercial services which support our business, as well as comprehensive ship management services such as technical supervision and commercial management, including chartering our vessels
pursuant to a management agreement which was amended and restated as of May 1, 2015. From January 1, 2014 to April 30, 2015, when we resumed directly employing our executive
officers, our Manager also provided us with the services of our executive officers.
Management
fees in respect of continuing operations under our management agreement amounted to approximately $17.1 million in 2016, $17.4 million in 2015 and
$16.3 million in 2014. The related expenses are presented under "General and administrative expenses" on the Statement of Operations. We pay monthly advances in regard to the next month
vessels' operating expenses. These prepaid monthly expenses are presented in our consolidated balance sheet under "Due from related parties" and totaled $32.6 million and $19.0 million
as of December 31, 2016 and 2015, respectively.
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Under our management agreement, our Manager is responsible for providing us with technical, administrative and certain commercial services,
which include the following:
-
-
technical services
, which include managing day-to-day vessel operations, performing general
vessel maintenance, ensuring regulatory compliance and compliance with the law of the flag of each vessel and of the places where the vessel operates, ensuring classification society compliance,
supervising the maintenance and general efficiency of vessels, arranging the hire of qualified officers and crew, training, transportation, insurance of the crew (including processing all claims),
performing normally scheduled drydocking and general and routine repairs, arranging insurance for vessels (including marine hull and machinery, protection and indemnity and risks insurance),
purchasing stores, supplies, spares, lubricating oil and maintenance capital expenditures for vessels, appointing supervisors and technical consultants and providing technical support, shoreside
support, shipyard supervision, and attending to all other technical matters necessary to run our business;
-
-
administrative services
, which include, in each direction of our Chief Executive Officer, Chief
Operating Officer and Chief Financial Officer, assistance with the maintenance of our corporate books and records, payroll services, assistance with the preparation of our tax returns and financial
statements, assistance with corporate and regulatory compliance matters not related to our vessels, procuring legal and accounting services (including the preparation of all necessary budgets for
submission to us), assistance in complying with United States and other relevant securities laws, human resources, cash management and bookkeeping services, development and monitoring of internal
audit controls, disclosure controls and information technology, assistance with all regulatory and reporting functions and obligations, furnishing any reports or financial information that might be
requested by us and other non-vessel related administrative services, assistance with office space, providing legal and financial compliance services, overseeing banking services (including the
opening, closing, operation and management of all of our accounts including making deposits and withdrawals reasonably necessary for the management of our business and day-to-day operations),
arranging general insurance and director and officer liability insurance (at our expense), providing all administrative services required for subsequent debt and equity financings and attending to all
other administrative matters necessary to ensure the professional management of our business; and
-
-
commercial services
, which include chartering our vessels, assisting in our chartering,
locating, purchasing, financing and negotiating the purchase and sale of our vessels, supervising the design and construction of newbuildings, and such other commercial services as we may reasonably
request from time to time.
Our Manager reports to us and our Board of Directors through our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer,
each of which is appointed by our board of directors. Under our management agreement, our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer may direct the Manager to remove
and replace any officer or any person who serves as the head of a business unit of our Manager. Furthermore, our Manager will not remove any person serving as an officer or senior manager without the
prior written consent of our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer.
The fees payable to our manager for each renewal period under our management agreement are adjusted by agreement between us and our manager. For
2017 we will pay our manager the following
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fees:
(i) a fee of $850 per day, (ii) a fee of $425 per vessel per day for vessels on bareboat charter, pro rated for the number of calendar days we own each vessel, (iii) a fee
of $850 per vessel per day for vessels other than those on bareboat charter, pro rated for the number of calendar days we own each vessel, (iv) a fee of 1.25% on all freight, charter hire,
ballast bonus and demurrage for each vessel, (v) a fee of 0.5% based on the contract price of any vessel bought or sold by it on our behalf, excluding newbuilding contracts, and (vi) a
flat fee of $725,000 per newbuilding vessel, if any, which we capitalize, for the on premises supervision of any newbuilding contracts by selected engineers and others of its staff. We believe these
fees are no more than the rates we would need to pay an unaffiliated third party to provide us with these management services.
In
addition, from January 1, 2014 to April 30, 2015 our manager provided us with the services of our Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer and Deputy Chief Operating Officer. We paid our manager fees of €0.51 million ($0.56 million), for the period from January 1, 2015 to April 30, 2015
and €1.47 million ($1.92 million) in 2014 for such services. From May 1, 2015, we have directly employed our executive officers.
We
also advance, on a monthly basis, all technical vessel operating expenses with respect to each vessel in our fleet to enable our Manager to arrange for the payment of such expenses on
our behalf. To the extent the amounts advanced are greater or less than the actual vessel operating expenses of our fleet for a quarter, our Manager or us, as the case may be, will pay the other the
difference at the end of such quarter, although our Manager may instead choose to credit such amount against future vessel operating expenses to be advanced for future quarters.
The initial term of the management agreement expired on December 31, 2008. The management agreement now automatically renews for one-year
periods and will be extended, unless we give 12-months' written notice of non-renewal and subject to the termination rights described below, in additional one-year increments until December 31,
2020, at which point the agreement will expire.
Our Manager's Termination Rights.
Our Manager may terminate the management agreement prior to the end of its term in the two following
circumstances:
-
-
if any moneys payable by us shall not have been paid within 60 business days of payment having been demanded in writing; or
-
-
if at any time we materially breach the agreement and the matter is unresolved within 60 days after we are given written notice from our
Manager.
Our Termination Rights.
We may terminate the management agreement prior to the end of its term in the two following circumstances upon
providing the
respective notice:
-
-
if at any time our Manager neglects or fails to perform its principal duties and obligations in any material respect and the matter is
unresolved within 20 days after our Manager receives written notice of such neglect or failure from us; or
-
-
if any moneys payable by the Manager under or pursuant to the management agreement are not promptly paid or accounted for in full within 10
business days by the Manager in accordance with the provisions of the management agreement.
We
also may terminate the management agreement immediately under any of the following circumstances:
-
-
if either we or our Manager ceases to conduct business, or all or substantially all of the properties or assets of either such party is sold,
seized or appropriated;
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-
-
if either we or our Manager files a petition under any bankruptcy law, makes an assignment for the benefit of its creditors, seeks
relief under any law for the protection of debtors or adopts a plan of liquidation, or if a petition is filed against us or our Manager seeking to declare us or it an insolvent or bankrupt and such
petition is not dismissed or stayed within 40 business days of its filing, or if our Company or the Manager admits in writing its insolvency or its inability to pay its debts as they mature, or if an
order is made for the appointment of a liquidator, manager, receiver or trustee of our Company or the Manager of all or a substantial part of its assets, or if an encumbrancer takes possession of or a
receiver or trustee is appointed over the whole or any part of the Manager's or our Company's undertaking, property or assets or if an order is made or a resolution is passed for our Manager's or our
winding up;
-
-
if a distress, execution, sequestration or other process is levied or enforced upon or sued out against our Manager's property which is not
discharged within 20 business days;
-
-
if the Manager ceases or threatens to cease wholly or substantially to carry on its business otherwise than for the purpose of a reconstruction
or amalgamation without insolvency previously approved by us; or
-
-
if either our Manager or we are prevented from performing any obligations under the management agreement by any cause whatsoever of any nature
or kind beyond the reasonable control of us or our Manager respectively for a period of two consecutive months or more.
In
addition, we may terminate any applicable ship management agreement in any of the following circumstances:
-
-
if we or any subsidiary of ours ceases to be the owner of the vessel covered by such ship management agreement by reason of a sale thereof, or
if we or any subsidiary of ours ceases to be registered as the owner of the vessel covered by such ship management agreement;
-
-
if a vessel becomes an actual or constructive or compromised or arranged total loss or an agreement has been reached with the insurance
underwriters in respect of the vessel's constructive, compromised or arranged total loss or if such agreement with the insurance underwriters is not reached or it is adjudged by a competent tribunal
that a constructive loss of the vessel has occurred;
-
-
if the vessel covered by such ship management agreement is requisitioned for title or any other compulsory acquisition of the vessel occurs,
otherwise than by requisition by hire; or
-
-
if the vessel covered by such ship management agreement is captured, seized, detained or confiscated by any government or persons acting or
purporting to act on behalf of any government and is not released from such capture, seizure, detention or confiscation within 20 business days.
Our Manager has agreed that, during the term of the management agreement, it will not provide any management services to any other entity
without our prior written approval, other than with respect to entities controlled by Dr. Coustas, our Chief Executive Officer, which do not operate within the containership (larger than 2,500
twenty foot equivalent units, or TEUs) or drybulk sectors of the shipping industry or in the circumstances described below. Dr. Coustas does not currently control any such vessel-owning entity
or have an equity interest in any such entity, other than Raven International Corporation, owner of one 1,700 TEU vessel. Dr. Coustas has also personally agreed to the same restrictions on the
provision, directly or indirectly, of management services during this period. In addition, our Chief Executive Officer (other than in his capacities with us) and our Manager have separately agreed
not, during the term of our management agreement and for one year thereafter, to
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engage,
directly or indirectly, in (i) the ownership or operation of containerships of larger than 2,500 TEUs or (ii) the ownership or operation of any drybulk carriers or
(iii) the acquisition of or investment in any business involved in the ownership or operation of containerships larger than 2,500 TEUs or
drybulk carriers. Notwithstanding these restrictions, if our independent directors decline the opportunity to acquire any such containerships or drybulk carriers or to acquire or invest in any such
business, our Chief Executive Officer will have the right to make, directly or indirectly, any such acquisition or investment during the four-month period following such decision by our independent
directors, so long as such acquisition or investment is made on terms no more favorable than those offered to us. In this case, our Chief Executive Officer and our Manager will be permitted to provide
management services to such vessels. In connection with our investment in Gemini (see "Gemini Shipholdings Corporation" below), these restrictions on our Chief Executive Officer and our
Manager were waived, with the approval of our independent directors, with respect to vessels acquired by Gemini.
Because
the restrictions in the Bank Agreement dated January 24, 2011 among the Company, its subsidiaries, The Royal Bank of Scotland PLC and the other financial
institutions named therein, effectively prevent us from acquiring additional containerships meeting the expressed preferences of our liner company clients for newbuildings and other recently built
containerships which would employ the latest energy efficient design and technology and take full advantage of the economies offered by the widening of the Panama Canal, a committee of independent
directors determined that these restrictions will not apply, subject to the limitations described below, to containerships or drybulk carriers acquired, or whose acquisition is funded solely with
equity capital committed (together with debt whenever arranged), while the restrictions in the Bank Agreement continue to apply to us in their current form. Any such containership acquisitions may not
in the aggregate exceed one-third of the total assets of the Company, determined on a book value basis. The Company's vessels will also have a chartering priority over any vessels of similar TEU
capacity acquired by an entity in which Dr. Coustas has a direct or indirect investment during the period of the stated restrictions in the restrictive covenant agreement with
Dr. Coustas and the management fees charged to the Company under its management agreement will be no higher than the fees charged in respect of any such vessels. As of the date of this report,
no vessels have been acquired pursuant to the foregoing arrangement.
The
committee of independent directors also concluded that, given the restrictions in the Bank Agreement, the Company, during the term of the Bank Agreement, could not exercise any right
of first refusal afforded it under the restrictive covenant agreement as described above and therefore the parties to that agreement could acquire, operate and, under our management agreement, manage
without contractual restriction any number of containerships in competition with the Company, and that the limits on the aggregate amount of containership acquisitions, a requirement for management
fee parity and a right of first refusal on chartering opportunities should afford a level of competitive protection to the Company not currently available in respect of vessel acquisition
opportunities declined by the Company in accordance with the terms of the restrictive covenant agreement described above. The committee also concluded that the ownership, operation or management of
drybulk carriers is not complementary to the Company's current or contemplated business. In coming to its conclusion, the committee believed that this arrangement should help preserve the manager's
relationship with our liner company clients and forestall our competitors' ability to capitalize on the restrictions under which we are operating because of the Bank Agreement.
Our Manager has agreed that it will not transfer, assign, sell or dispose of all or a significant portion of its business that is necessary for
the services our Manager performs for us without the prior written consent of our Board of Directors. Furthermore, in the event of any proposed sale of our Manager, we have a right of first refusal to
purchase our Manager. This prohibition and right of first refusal is in effect throughout the term of the management agreement and for a period of one year
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following
the expiry or termination of the management agreement. Our Chief Executive Officer, Dr. John Coustas, or any trust established for the Coustas family (under which Dr. Coustas
and/or a member of his family is a beneficiary), is required, unless we expressly permit otherwise, to own 80% of our Manager's outstanding capital stock during the term of the management agreement
and 80% of the voting power of our Manager's outstanding capital stock. In the event of any breach of these requirements, we would be entitled to purchase the capital stock of our Manager owned by
Dr. Coustas or any trust established for the Coustas family (under which Dr. Coustas and/or a member of his family is a beneficiary). Under the terms of certain of our financing
agreements, including the Bank Agreement, the failure of our Manager to continue managing our vessels securing such agreements would constitute an event of default thereunder.
On August 5, 2015, we entered into a Shareholders Agreement (the "Gemini Shareholders Agreement"), with Gemini Shipholdings Corporation
("Gemini") and Virage International Ltd. ("Virage"), a company controlled by our largest stockholder, Danaos Investments Limited as Trustee of the 883 Trust, in connection with the formation of
Gemini to acquire and operate containerships. We and Virage own 49% and 51%, respectively, of Gemini's issued and outstanding share capital. Under the Gemini Shareholders Agreement, we and Virage have
preemptive rights with respect to issuances of Gemini capital stock as well as tag-along rights, drag-along rights and certain rights of first refusal with respect to proposed transfers of Gemini
equity interests. In addition, certain actions by Gemini, including acquisitions or dispositions of vessels and newbuilding contracts, require the unanimous approval of the Gemini board of directors
including the director designated by the Company, who is currently our Chief Operating Officer Iraklis Prokopakis. Mr. Prokopakis also serves as Chief Operating Officer of Gemini, and our Chief
Financial Officer, Evangelos Chatzis, serves as
Chief Financial Officer of Gemini, for which services Messrs. Prokopakis and Chatzis do not receive any additional compensation. We also have the right to purchase all of the equity interests
in Gemini that we do not own for fair market value at any time after December 31, 2018, or earlier if permitted under our credit facilities, provided that such fair market value is not below
the net book value of such equity interests.
In
2015, prior to our equity investment, Gemini acquired a 100% interest in entities with capital leases for the containerships
Suez Canal
and
Genoa
and the entity with a memorandum of agreement to acquire the containership
NYK Lodestar
. In
February 2016, Gemini acquired the containership
NYK Leo
. Gemini financed these acquisitions with the assumption of capital lease obligations,
borrowings under a secured loan facility and an aggregate of $47.4 million of equity contributions from the Company and Virage. We do not guarantee any debt of Gemini or its subsidiaries.
In
connection with our investment in Gemini, the restrictions on the ownership, operation and management of containerships set forth in the restrictive covenant agreement with our Chief
Executive Officer, the management agreement with our Manager and our executive officers' respective employment agreements were waived, with the approval of the independent directors of our board of
directors, with respect to vessels acquired, owned and operated by Gemini. Danaos Shipping provides vessel management services to Gemini at the same rates as we pay pursuant to our management
agreement with Danaos Shipping.
Dr. John Coustas, our Chief Executive Officer, is a Deputy Chairman of the Board of Directors of The Swedish Club, our primary provider
of insurance, including a substantial portion of our hull & machinery, war risk and protection and indemnity insurance. During the years ended December 31, 2016, 2015 and 2014, we paid
premiums of $5.6 million, $6.3 million and $8.5 million, respectively, to The Swedish Club under these insurance policies.
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Table of Contents
Our Chief Executive Officer, Dr. John Coustas, co-founded and has a 50.0% ownership interest in Danaos Management Consultants, which
provides the ship management software deployed on the vessels in our fleet to our Manager on a complementary basis. Dr. Coustas does not participate in the day-to-day management of Danaos
Management Consultants.
We occupy office space that is owned by our Manager and which is provided to us as part of the services we receive under our management
agreement.
As described above under "Item 6. Directors, Senior Management and EmployeesBoard of Directors", following completion of our
$200.0 million equity transaction on August 12, 2010, which satisfied a condition to the Bank Agreement and approximately $425 million of new debt financing, Mr. George
Economou joined the Board of Directors of the Company as an independent director in accordance with the terms of the common stock subscription agreement between Sphinx Investments Corp. and the
Company. We have agreed to nominate Mr. Economou or such other person, in each case who shall be acceptable to us, designated by Sphinx Investments Corp., for election by our stockholders to
the Board of Directors at each annual meeting of stockholders at which the term of Mr. Economou or such other director so designated expires, so long as such investor beneficially owns a
specified minimum amount of common stock. We have been informed that our largest stockholder, Danaos Investments Limited as Trustee of the 883 Trust, and Dr. John Coustas have agreed to vote
all of the shares of our common stock owned by them, or over which they have voting control, in favor of any such nominee standing for election.
Major Stockholders
The following table sets forth certain information regarding the beneficial ownership of our outstanding common stock as of February 28,
2017 held by:
-
-
each person or entity that we know beneficially owns 5% or more of our common stock;
-
-
each of our officers and directors; and
-
-
all our directors and officers as a group.
Our
major stockholders have the same voting rights as our other stockholders. Beneficial ownership is determined in accordance with the rules of the SEC. In general, a person who has
voting power or investment power with respect to securities is treated as a beneficial owner of those securities.
Beneficial
ownership does not necessarily imply that the named person has the economic or other benefits of ownership. For purposes of this table, shares subject to options, warrants or
rights or shares exercisable within 60 days of February 28, 2017 are considered as beneficially owned by the person holding those options, warrants or rights. Each stockholder is
entitled to one vote for each share held. The applicable percentage of ownership of each stockholder is based on 109,799,352 shares of common stock outstanding as of February 28, 2017.
Information for certain holders is based on their latest filings with the SEC or information delivered to us. Except as noted below, the address of all stockholders,
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officers
and directors identified in the table and accompanying footnotes below is in care of our principal executive offices.
|
|
|
|
|
|
|
|
|
|
Number of Shares of Common Stock Owned
|
|
Percentage of Common Stock
|
|
Executive Officers and Directors:
|
|
|
|
|
|
|
|
John Coustas(1)
|
|
|
67,828,140
|
|
|
61.8
|
%
|
Chairman, President and Chief Executive Officer
|
|
|
|
|
|
|
|
Iraklis Prokopakis
|
|
|
471,384
|
|
|
*
|
|
Director, Senior Vice President and Chief Operating Officer
|
|
|
|
|
|
|
|
Evangelos Chatzis
|
|
|
125,000
|
|
|
*
|
|
Chief Financial Officer and Secretary
|
|
|
|
|
|
|
|
Dimitris Vastarouchas
|
|
|
89,931
|
|
|
*
|
|
Deputy Chief Operating Officer
|
|
|
|
|
|
|
|
George Economou(2)
|
|
|
21,621,621
|
|
|
19.7
|
%
|
Director
|
|
|
|
|
|
|
|
Myles R. Itkin
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
Miklós Konkoly-Thege
|
|
|
86,966
|
|
|
*
|
|
Director
|
|
|
|
|
|
|
|
William Repko
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
5% Beneficial Owners:
|
|
|
|
|
|
|
|
Danaos Investments Limited as Trustee of the 883 Trust(2)
|
|
|
67,828,140
|
|
|
61.8
|
%
|
Sphinx Investments Corp.(3)
|
|
|
21,621,621
|
|
|
19.7
|
%
|
All executive officers and directors as a group (8 persons)
|
|
|
90,223,042
|
|
|
82.2
|
%
|
-
*
-
Less
than 1%.
-
(1)
-
By
virtue of shares owned indirectly through Danaos Investments Limited as Trustee of the 883 Trust, which is our principal stockholder. The beneficiaries of the
trust are Dr. Coustas and members of his family. The board of directors of the trustee consists of four members, none of whom are beneficiaries of the trust or members of the Coustas family,
and has voting and dispositive control over the shares held by the trust. Dr. Coustas has certain powers to remove and replace Danaos Investments Limited as Trustee of the 883 Trust. This does
not necessarily imply economic ownership of the securities.
-
(2)
-
Includes
67,633,140 shares which, according to a Schedule 13D jointly filed with the SEC on August 16, 2010 by Danaos Investments Limited as Trustee of
the 883 Trust and Dr. John Coustas, Danaos Investments Limited as Trustee of the 883 Trust owns and has sole voting power and sole dispositive power with respect to all such shares, and 195,000
shares held by Danaos Investments Limited as Trustee of the 883 Trust which were granted to Dr. Coustas as an equity award in December 2011. The beneficiaries of the trust are
Dr. Coustas and members of his family. The board of directors of the trustee consists of four members, none of whom are beneficiaries of the trust or members of the Coustas family, and has
voting and dispositive control over the shares held by the trust. Dr. Coustas has certain powers to remove and replace Danaos Investments Limited as
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Table of Contents
-
(3)
-
According
to an Amendment No . 1 to Schedule 13D filed with the SEC on December 22, 2016, Sphinx Investments Corp. is a wholly-owned subsidiary of
Maryport Navigation Corp., a Liberian company. Mr. George Economou, a member of our Board of Directors, may be deemed the beneficial owner of the shares held by Sphinx Investments Corp. The
address of Sphinx Investments Corp. is c/o Mare Services Limited, 5/1 Merchants Street, Valletta, Malta.
As
of February 28, 2017, we had approximately five stockholders of record, four of which were located in the United States and held an aggregate of 109,674,352 shares of common
stock. However, one of the United States stockholders of record is CEDEFAST, a nominee of The Depository Trust Company, which held 109,972,102 shares of our common stock. Accordingly, we believe that
the shares held by CEDEFAST include shares of common stock beneficially owned by both holders in the United States and non-United States beneficial owners, including 90,098,042 shares which may be
deemed to be beneficially owned by our officers and directors resident outside the United States and no shares which may be deemed to be beneficially owned by directors resident in the United States
as reflected in the above table. We are not aware of any arrangements the operation of which may at a subsequent date result in our change of control.
The
Coustas Family Trust, under which our chief executive officer is a beneficiary, together with other members of the Coustas Family, owns approximately 61.8% of our outstanding common
stock. This stockholder is able to control the outcome of matters on which our stockholders are entitled to vote, including the election of our entire board of directors and other significant
corporate actions. Our respective lenders under our existing credit facilities covered by the Bank Agreement and the January 2011 Credit Facilities will be entitled to require us to repay in full
amounts outstanding under such respective credit facilities, if, among other circumstances, Dr. Coustas ceases to be our Chief Executive Officer or, together with members of his family and
trusts for the benefit thereof, ceases to collectively own over one-third of the voting interest in our outstanding capital stock or any other person or group controls more than 20.0% of the voting
power of our outstanding capital stock.
In
2011, we issued, for no additional consideration, an aggregate of 15,000,000 warrants to our lenders under the Bank Agreement and January 2011 Credit Facilities to purchase, solely on
a cashless exercise basis, an aggregate of 15,000,000 shares of our common stock, which warrants have an exercise price of $7.00 per share. All warrants will expire on January 31, 2019.
Item 8. Financial Information
See "Item 18. Financial Statements" below.
Significant Changes.
No significant change has occurred since the date of the annual financial statements included in this annual
report on
Form 20-F.
Legal Proceedings.
On September 1, 2016, Hanjin Shipping, a charterer of eight of our vessels, referred to the Seoul Central
District Court,
which issued an order to commence the rehabilitation proceedings of Hanjin Shipping. Hanjin Shipping has cancelled all eight charter party agreements with the Company. On February 17, 2017 the
Seoul Central District Court (Bankruptcy Division), declared the bankruptcy of Hanjin Shipping, converting the rehabilitation proceeding to a bankruptcy proceeding. The Seoul Central District Court
(Bankruptcy Division) appointed a bankruptcy trustee to dispose of Hanjin Shipping's remaining assets and distribute the proceeds from the sale of such assets to Hanjin Shipping's creditors according
to their priorities.
The
Company ceased recognizing revenue from Hanjin Shipping effective from July 1, 2016 onwards and recognized a bad debt expense amounting to $15.8 million in its
Consolidated Statements
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of
Operations for the year ended December 31, 2016. The Company has a total unsecured claim submitted to the Seoul Central District Court for unpaid charter hire, charges, expenses and loss of
profit against Hanjin Shipping totaling $597.9 million, which is not recognized in the accompanying Consolidated Balance Sheet as of December 31, 2016.
We
have not been involved in any other legal proceedings that we believe would have a significant effect on our business, financial position, results of operations or liquidity, and we
are not aware of any proceedings that are pending or threatened that may have a material effect on our business, financial position, results of operations or liquidity. From time to time, we may be
subject to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty claims.
We expect that these claims would be covered by insurance, subject to customary deductibles. However, those claims, even if lacking merit, could result in the expenditure of significant financial and
managerial resources.
Dividend Policy.
Our board of directors has determined to suspend the payment of cash dividends as a result of market conditions in the
international
shipping industry. Declaration and payment of any future dividend is subject to the discretion of our board of directors. In addition, under the Bank Agreement relating to various of our credit
facilities other, we generally will not be permitted to pay cash dividends or repurchase shares of our capital stock through December 31, 2018, absent a substantial reduction in our leverage.
We are a holding company, and we depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial obligations and to make any dividend payments. See
"Item 3. Key InformationRisk FactorsRisks Inherent in Our Business" for a discussion of the risks related to dividend payments, if any.
After
our initial public offering, we paid regular quarterly dividends from February 2007 to November 19, 2008. We paid no dividends in 2006 and, prior to our initial public
offering, in 2005 we paid dividends of $244.6 million to our stockholders from our retained earnings.
Item 9. The Offer and Listing
Our common stock is listed on the New York Stock Exchange under the symbol "DAC."
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Table of Contents
Trading on the New York Stock Exchange
Since our initial public offering in the United States in October 2006, our common stock has been listed on the New York Stock Exchange under
the symbol "DAC." The following table shows the high and low sales prices for our common stock during the indicated periods.
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
2012
|
|
$
|
4.88
|
|
$
|
2.44
|
|
2013
|
|
$
|
4.90
|
|
$
|
2.76
|
|
2014
|
|
$
|
7.75
|
|
$
|
3.96
|
|
2015
(Annual)
|
|
$
|
6.70
|
|
$
|
4.56
|
|
First Quarter
|
|
|
6.55
|
|
|
4.56
|
|
Second Quarter
|
|
|
6.70
|
|
|
5.82
|
|
Third Quarter
|
|
|
6.49
|
|
|
4.94
|
|
Fourth Quarter
|
|
|
6.64
|
|
|
4.70
|
|
2016
(Annual)
|
|
$
|
6.14
|
|
$
|
2.15
|
|
First Quarter
|
|
|
6.14
|
|
|
3.78
|
|
Second Quarter
|
|
|
4.35
|
|
|
2.70
|
|
Third Quarter
|
|
|
4.90
|
|
|
2.57
|
|
Fourth Quarter
|
|
|
4.40
|
|
|
2.15
|
|
August 2016
|
|
|
4.49
|
|
|
3.20
|
|
September 2016
|
|
|
3.35
|
|
|
2.57
|
|
October 2016
|
|
|
2.75
|
|
|
2.29
|
|
November 2016
|
|
|
4.40
|
|
|
2.15
|
|
December 2016
|
|
|
3.20
|
|
|
2.50
|
|
2017
First Quarter (through February 28, 2017)
|
|
$
|
2.85
|
|
$
|
2.30
|
|
January 2017
|
|
|
2.85
|
|
|
2.45
|
|
February 2017
|
|
|
2.70
|
|
|
2.30
|
|
Item 10. Additional Information
Share Capital
Under our articles of incorporation, our authorized capital stock consists of 750,000,000 shares of common stock, $0.01 par value per share, of
which, as of December 31, 2016 and February 28, 2017, 109,799,352 shares were issued and outstanding and fully paid, and 100,000,000 shares of blank check preferred stock, $0.01 par
value per share, of which, as of December 31, 2016 and February 28, 2017, no shares were issued and outstanding and fully paid. One million shares of the blank check preferred stock have
been designated Series A Participating Preferred Stock in connection with our adoption of a stockholder rights plan as described below under "Stockholder Rights Plan." All of our
shares of stock are in registered form.
In 2011, we issued an aggregate of 15,000,000 warrants to our lenders under the Bank Agreement and January 2011 Credit Facilities to purchase,
solely on a cash-less exercise basis, an aggregate of 15,000,000 shares of our common stock, which warrants have an exercise price of $7.00 per share. All warrants will expire on January 31,
2019.
As
a result of the warrants being exercisable solely on a cash-less basis, the number of shares of common stock that would be issuable upon such an exercise will generally be reduced.
For instance, in the event 100 warrants were exercised at the current exercise price of $7.00 per share at a time when the applicable fair market value (defined in the warrant agreement to be,
generally, the average of the
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Table of Contents
closing
price of our common stock over the preceding five trading days) of our common stock was $10.00 per share, 30 shares of our common stock would be issuable rather than 100 shares of our common
stock. We will not receive any cash proceeds upon the exercise of warrants.
The
number of shares of our common stock issuable upon exercise of a warrant will be adjusted upon the occurrence of certain events including, without limitation, the payment of a
dividend on, or the making of any distribution in respect of, capital stock of the Company, payment of which is made in:
-
-
shares of the Company's common stock; or
-
-
options, warrants or rights to purchase, or securities convertible into or convertible or exercisable for, shares of common stock of the
Company at an exercise price below the then current market price per share of the common stock.
An
adjustment will also be made in the event of a combination, subdivision or reclassification of the common stock. Adjustments will be made whenever and as often as any specified event
requires an adjustment to occur, provided that no adjustment will be required until such time as the adjustment would be at least one percent (1%). No adjustments will be made for issuances under the
Company's equity compensation plan, as amended or supplemented, which provides for issuances of up to six percent (6%) of the Company's outstanding common stock.
Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred stock, holders of shares of common stock are entitled to receive ratably all dividends, if any, declared by our board of
directors out of funds legally available for dividends. Holders of common stock do not have conversion, redemption or preemptive rights to subscribe to any of our securities. All outstanding shares of
common stock are fully paid and nonassessable. The rights, preferences and privileges of holders of shares of common stock are subject to the rights of the holders of any shares of preferred stock
which we may issue in the future.
Under the terms of our articles of incorporation, our board of directors has authority, without any further vote or action by our stockholders,
to issue up to 100,000,000 shares of blank check preferred stock, of which 1,000,000 shares have been designated Series A Participating Preferred Stock in connection with our adoption of a
stockholder rights plan as described below under "Stockholder Rights Plan." Our board of directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent
a change of control of our company or the removal of our management.
Stockholder Rights Plan
General
Each share of our common stock includes a right that entitles the holder to purchase from us a unit consisting of one-thousandth of a share of
our Series A participating preferred stock at a purchase price of $25.00 per unit, subject to specified adjustments. The rights are issued pursuant to a rights agreement between us and American
Stock Transfer & Trust Company, as rights agent, which, as amended, expires on December 17, 2017. Until a right is exercised, the holder of a right will have no rights to vote or receive
dividends or any other stockholder rights.
The
rights may have anti-takeover effects. The rights will cause substantial dilution to any person or group that attempts to acquire us without the approval of our board of directors.
As a result, the
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overall
effect of the rights may be to render more difficult or discourage any attempt to acquire us. Because our board of directors can approve a redemption of the rights or a permitted offer, the
rights should not interfere with a merger or other business combination approved by our board of directors. The adoption of the rights agreement was approved by our stockholders prior to our initial
public offering.
We
have summarized the material terms and conditions of the rights agreement and the rights below. For a complete description of the rights, we encourage you to read the rights
agreement, which is an exhibit to this annual report.
The rights are attached to all shares of our outstanding common stock and will attach to all common stock that we issue prior to the rights
distribution date that we describe below. The rights are not exercisable until after the rights distribution date and will expire at the close of business on the tenth anniversary date of the adoption
of the rights plan, unless we redeem or exchange them earlier as described below. The rights will separate from the common stock and a rights distribution date will occur, subject to specified
exceptions, on the earlier of the following two dates:
-
-
10 days following a public announcement that a person or group of affiliated or associated persons or an "acquiring person" has acquired
or obtained the right to acquire beneficial ownership of 20% or more of our outstanding common stock; or
-
-
10 business days following the start of a tender or exchange offer that would result, if closed, in a person becoming an "acquiring person."
Existing
stockholders prior to our initial public offering and their affiliates, as well as any person who would otherwise be an "acquiring person" solely as a result of acquiring shares
of common stock pursuant to a subscription agreement with us dated as of August 6, 2010, are excluded from the definition of "acquiring person" for purposes of the rights, and therefore their
ownership or future share acquisitions cannot trigger the rights. Specified "inadvertent" owners that would otherwise become an acquiring person, including those who would have this designation as a
result of repurchases of common stock by us, will not become acquiring persons as a result of those transactions.
Our
board of directors may defer the rights distribution date in some circumstances, and some inadvertent acquisitions will not result in a person becoming an acquiring person if the
person promptly divests itself of a sufficient number of shares of common stock.
Until
the rights distribution date:
-
-
our common stock certificates will evidence the rights, and the rights will be transferable only with those certificates; and
-
-
any new shares of common stock will be issued with rights and new certificates will contain a notation incorporating the rights agreement by
reference.
As
soon as practicable after the rights distribution date, the rights agent will mail certificates representing the rights to holders of record of common stock at the close of business
on that date. After the rights distribution date, only separate rights certificates will represent the rights.
We
will not issue rights with any shares of common stock we issue after the rights distribution date, except as our board of directors may otherwise determine.
A "flip-in event" will occur under the rights agreement when a person becomes an acquiring person. If a flip-in event occurs and we do not
redeem the rights as described under the heading
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"Redemption
of Rights" below, each right, other than any right that has become void, as described below, will become exercisable at the time it is no longer redeemable for the number of
shares of common stock, or, in some cases, cash, property or other of our securities, having a current market price equal to two times the exercise price of such right.
If
a flip-in event occurs, all rights that then are, or in some circumstances that were, beneficially owned by or transferred to an acquiring person or specified related parties will
become void in the circumstances the rights agreement specifies.
A "flip-over event" will occur under the rights agreement when, at any time after a person has become an acquiring
person:
-
-
we are acquired in a merger or other business combination transaction; or
-
-
50% or more of our assets, cash flows or earning power is sold or transferred.
If
a flip-over event occurs, each holder of a right, other than any right that has become void as we describe under the heading "Flip-In Event" above, will have the right to
receive the number of shares of common stock of the acquiring company having a current market price equal to two times the exercise price of such right.
The number of outstanding rights associated with our common stock is subject to adjustment for any stock split, stock dividend or subdivision,
combination or reclassification of our common stock occurring prior to the rights distribution date. With some exceptions, the rights agreement does not require us to adjust the exercise price of the
rights until cumulative adjustments amount to at least 1% of the exercise price. It also does not require us to issue fractional shares of our preferred stock that are not integral multiples of one
one-hundredth of a share, and, instead we may make a cash adjustment based on the market price of the common stock on the last trading date prior to the date of exercise. The rights agreement reserves
us the right to require, prior to the occurrence of any flip-in event or flip-over event that, on any exercise of rights, that a number of rights must be exercised so that we will issue only whole
shares of stock.
At any time until 10 days after the date on which the occurrence of a flip-in event is first publicly announced, we may redeem the rights
in whole, but not in part, at a redemption price of $0.01 per right. The redemption price is subject to adjustment for any stock split, stock dividend or similar transaction occurring before the date
of redemption. At our option, we may pay that redemption price in cash, shares of common stock or any other consideration our board of directors
may select. The rights are not exercisable after a flip-in event until they are no longer redeemable. If our board of directors timely orders the redemption of the rights, the rights will terminate on
the effectiveness of that action.
We may, at our option, exchange the rights (other than rights owned by an acquiring person or an affiliate or an associate of an acquiring
person, which have become void), in whole or in part. The
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exchange
must be at an exchange ratio of one share of common stock per right, subject to specified adjustments at any time after the occurrence of a flip-in event and prior
to:
-
-
any person other than our existing stockholders becoming the beneficial owner of common stock with voting power equal to 50% or more of the
total voting power of all shares of common stock entitled to vote in the election of directors; or
-
-
the occurrence of a flip-over event.
While the rights are outstanding, we may amend the provisions of the rights agreement only as
follows:
-
-
to cure any ambiguity, omission, defect or inconsistency;
-
-
to make changes that do not adversely affect the interests of holders of rights, excluding the interests of any acquiring person; or
-
-
to shorten or lengthen any time period under the rights agreement, except that we cannot change the time period when rights may be redeemed or
lengthen any time period, unless such lengthening protects, enhances or clarifies the benefits of holders of rights other than an acquiring person.
At
any time when no rights are outstanding, we may amend any of the provisions of the rights agreement, other than decreasing the redemption price.
Memorandum and Articles of Association
Our purpose is to engage in any lawful act or activity relating to the business of chartering, rechartering or operating containerships, drybulk
carriers or other vessels or any other lawful act or activity customarily conducted in conjunction with shipping, and any other lawful act or activity approved by the board of directors. Our articles
of incorporation and bylaws do not impose any limitations on the ownership rights of our stockholders.
Under
our bylaws, annual stockholder meetings will be held at a time and place selected by our board of directors. The meetings may be held in or outside of the Marshall Islands. Special
meetings may be called by the board of directors or, at the request of the holders of a majority of our issued and outstanding stock entitled to vote on the matters proposed to be considered at such
meeting, or by our
secretary. Our board of directors may set a record date between 15 and 60 days before the date of any meeting to determine the stockholders that will be eligible to receive notice and vote at
the meeting.
Our directors are elected by a plurality of the votes cast at each annual meeting of the stockholders by the holders of shares entitled to vote
in the election. There is no provision for cumulative voting.
The
board of directors may change the number of directors to not less than two, nor more than 15, by a vote of a majority of the entire board. Each director shall be elected to serve
until the third succeeding annual meeting of stockholders and until his or her successor shall have been duly elected and qualified, except in the event of death, resignation or removal. A vacancy on
the board created by death, resignation, removal (which may only be for cause), or failure of the stockholders to elect the entire class of directors to be elected at any election of directors or for
any other reason, may be filled only by an affirmative vote of a majority of the remaining directors then in office, even if less than a quorum, at any special meeting called for that purpose or at
any regular meeting of the board of
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directors.
The board of directors has the authority to fix the amounts which shall be payable to the members of our board of directors for attendance at any meeting or for services rendered to us.
Under the Marshall Islands Business Corporations Act, or the BCA, our stockholders have the right to dissent from various corporate actions,
including any merger or sale of all or substantially all of our assets not made in the usual course of our business, and to receive payment of the fair value of their shares. However, the right of a
dissenting stockholder under the BCA to receive payment of the fair value of his shares is not available for the shares of any class or series of stock, which shares or depository receipts in respect
thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of the stockholders to act upon the agreement of merger or consolidation, were
either (i) listed on a securities exchange or
admitted for trading on an interdealer quotation system or (ii) held of record by more than 2,000 holders. The right of a dissenting stockholder to receive payment of the fair value of his or
her shares shall not be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving
corporation. In the event of any further amendment of our articles of incorporation, a stockholder also has the right to dissent and receive payment for his or her shares if the amendment alters
certain rights in respect of those shares. The dissenting stockholder must follow the procedures set forth in the BCA to receive payment. In the event that we and any dissenting stockholder fail to
agree on a price for the shares, the BCA procedures involve, among other things, the institution of proceedings in the high court of the Republic of The Marshall Islands in which our Marshall Islands
office is situated or in any appropriate jurisdiction outside the Marshall Islands in which our shares are primarily traded on a local or national securities exchange. The value of the shares of the
dissenting stockholder is fixed by the court after reference, if the court so elects, to the recommendations of a court-appointed appraiser.
Under the BCA, any of our stockholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action,
provided that the stockholder bringing the action is a holder of common stock both at the time the derivative action is commenced and at the time of the transaction to which the action relates.
Several provisions of our articles of incorporation and bylaws may have anti-takeover effects. These provisions are intended to avoid costly
takeover battles, lessen our vulnerability to a hostile change of control and enhance the ability of our board of directors to maximize stockholder value in connection with any unsolicited offer to
acquire us. However, these anti-takeover provisions, which are summarized below, could also discourage, delay or prevent (1) the merger or acquisition of our company by means of a tender offer,
a proxy contest or otherwise, that a stockholder may consider in its best interest and (2) the removal of incumbent officers and directors.
Under the terms of our articles of incorporation, our board of directors has authority, without any further vote or action by our stockholders,
to issue up to 5,000,000 shares of blank check preferred stock, of which 1,000,000 shares have been designated Series A Participating Preferred Stock in connection with our adoption of a
stockholder rights plan as described above under "Stockholder Rights Plan." Our board of directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent
a change of control of our company or the removal of our management.
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Our articles of incorporation provide for a board of directors serving staggered, three-year terms. Approximately one-third of our board of
directors will be elected each year. This classified board provision could discourage a third party from making a tender offer for our shares or attempting to obtain control of our company. It could
also delay stockholders who do not agree with the policies of the board of directors from removing a majority of the board of directors for two years.
Our articles of incorporation and bylaws prohibit cumulative voting in the election of directors. Our bylaws require parties other than the
board of directors to give advance written notice of nominations for the election of directors. Our bylaws also provide that our directors may be removed only for cause and only upon the affirmative
vote of the holders of at least 66
2
/
3
% of the outstanding shares of our capital stock entitled to vote for those directors. These provisions may discourage, delay or prevent the removal
of incumbent officers and directors.
Our bylaws provide that special meetings of our stockholders may be called by our board of directors or, at the request of holders of a majority
of the common stock entitled to vote at such meeting, by our secretary.
Our bylaws provide that stockholders seeking to nominate candidates for election as directors or to bring business before an annual meeting of
stockholders must provide timely notice of their proposal in writing to the corporate secretary.
Generally,
to be timely, a stockholder's notice must be received at our principal executive offices not less than 90 days or more than 120 days prior to the first
anniversary date of the previous year's annual meeting. Our bylaws also specify requirements as to the form and content of a stockholder's notice. These provisions may impede stockholders' ability to
bring matters before an annual meeting of stockholders or to make nominations for directors at an annual meeting of stockholders.
Although the BCA does not contain specific provisions regarding "business combinations" between companies organized under the laws of the
Marshall Islands and "interested stockholders," we have included these provisions in our articles of incorporation. Specifically, our articles of incorporation prohibit us from engaging in a "business
combination" with certain persons for three years following the date the person becomes an interested stockholder. Interested stockholders generally include:
-
-
any person who is the beneficial owner of 15% or more of our outstanding voting stock; or
-
-
any person who is our affiliate or associate and who held 15% or more of our outstanding voting stock at any time within three years before the
date on which the person's status as an interested stockholder is determined, and the affiliates and associates of such person.
Subject
to certain exceptions, a business combination includes, among other things:
-
-
certain mergers or consolidations of us or any direct or indirect majority-owned subsidiary of ours;
-
-
any sale, lease, exchange, mortgage, pledge, transfer or other disposition of our assets or of any subsidiary of ours having an aggregate
market value equal to 10% or more of either the
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These
provisions of our articles of incorporation do not apply to a business combination if:
-
-
before a person became an interested stockholder, our board of directors approved either the business combination or the transaction in which
the stockholder became an interested stockholder;
-
-
upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction commenced, other than certain excluded shares;
-
-
at or following the transaction in which the person became an interested stockholder, the business combination is approved by our board of
directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of the holders of at least 66
2
/
3
% of our outstanding voting
stock that is not owned by the interest stockholder;
-
-
the stockholder was or became an interested stockholder prior to the consummation of the initial public offering of our common stock under the
Securities Act;
-
-
a stockholder became an interested stockholder inadvertently and (i) as soon as practicable divests itself of ownership of sufficient
shares so that the stockholder ceases to be an interested stockholder; and (ii) would not, at any time within the three-year period immediately prior to a business combination between our
company and such stockholder, have been an interested stockholder but for the inadvertent acquisition of ownership; or
-
-
the business combination is proposed prior to the consummation or abandonment of and subsequent to the earlier of the public announcement or
the notice required under our articles of incorporation which (i) constitutes one of the transactions described in the following sentence; (ii) is with or by a person who either was not
an interested stockholder during the previous three years or who became an interested stockholder with the approval of the board; and (iii) is approved or not opposed by a majority of the
members of the board of directors then in office (but not less than one) who were directors prior to any person becoming an interested stockholder during the previous three years or were recommended
for election or elected to succeed such directors by a majority of such directors. The proposed transactions referred to in the preceding sentence are limited to:
-
(i)
-
a
merger or consolidation of our company (except for a merger in respect of which, pursuant to the BCA, no vote of the stockholders of our company is required);
-
(ii)
-
a
sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), whether as part of a dissolution or
otherwise, of assets of our company or of any direct or indirect majority-owned subsidiary of our company (other
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Our
Board of Directors approved the acquisition by Sphinx Investment Corp. of shares of our common stock from another stockholder in December 2016 for purposes of this provision.
Material Contracts
For a summary of the following agreements, please see the specified section of this Annual Report on Form 20-F. Such summaries are not
intended to be complete and reference is made to the contracts themselves, which are exhibits to this Annual Report on Form 20-F.
For
a description of the Amended and Restated Management Agreement, dated as of May 1, 2015, between Danaos Shipping Company Limited and Danaos Corporation, please see
"Item 7. Major Shareholders and Related Party TransactionsManagement Agreement."
For
a description of the Restrictive Covenant Agreement, dated October 11, 2006, between Danaos Corporation and Dr. John Coustas, please see "Item 7. Major
Shareholders and Related Party TransactionsNon-competition."
For
a description of the Stockholder Rights Agreement, dated September 18, 2006, between Danaos Corporation and American Stock Transfer & Trust Company, as Rights Agent, as
amended, please see "Item 10. Additional InformationShare CapitalStockholder Rights Plan."
For
a description of the Restructuring Agreement, dated January 24, 2011, between the Company, its subsidiaries and its lenders and swap- counterparties and lenders and the
Company's credit facilities and financing arrangements, please see "Item 5. Operating and Financial Review and ProspectsBank Agreement." For additional information regarding our
credit facilities, including the financial covenants contained therein, see Note 12 to our consolidated financial statements included elsewhere in this annual report.
For
a description of the Shareholders Agreement, dated as of August 5, 2015, by and among Gemini Shipholdings Corporation, the Company and Virage International Ltd., please
see "Item 7. Major Shareholders and Related Party TransactionsRelated Party TransactionsGemini Shipholdings Corporation."
Exchange Controls and Other Limitations Affecting Stockholders
Under Marshall Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or
restrictions that affect the remittance of dividends, interest or other payments to non-resident holders of our common stock. In mid-2015, Greece implemented capital controls restricting the transfer
of funds out of Greece, which would restrict our use of the limited amount of cash we hold in Greece for the remittance of dividends, interest or other payments to non- resident holders of our common
stock outside of Greece.
We
are not aware of any limitations on the rights to own our common stock, including rights of non-resident or foreign stockholders to hold or exercise voting rights on our common stock,
imposed by foreign law or by our articles of incorporation or bylaws.
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Tax Considerations
We are a Marshall Islands corporation. Because we do not, and we do not expect that we will, conduct business or operations in the Marshall
Islands, under current Marshall Islands law we are not subject to tax on income or capital gains and our stockholders will not be subject to Marshall Islands taxation or withholding on dividends and
other distributions, including upon a return
of capital, we make to our stockholders. In addition, our stockholders, who do not reside in, maintain offices in or engage in business in the Marshall Islands, will not be subject to Marshall Islands
stamp, capital gains or other taxes on the purchase, ownership or disposition of common stock, and such stockholders will not be required by the Republic of The Marshall Islands to file a tax
return relating to the common stock.
Each
stockholder is urged to consult their tax counsel or other advisor with regard to the legal and tax consequences, under the laws of pertinent jurisdictions, including the Marshall
Islands, of their investment in us. Further, it is the responsibility of each stockholder to file all state, local and non-U.S, as well as U.S. federal tax returns that may be required of them.
The Republic of Liberia enacted a new income tax act effective as of January 1, 2001 (the "New Act"). In contrast to the income tax law
previously in effect since 1977, the New Act does not distinguish between the taxation of "non-resident" Liberian corporations, such as our Liberian subsidiaries, which conduct no business in Liberia
and were wholly exempt from taxation under the prior law, and "resident" Liberian corporations which conduct business in Liberia and are (and were under the prior law) subject to taxation.
The
New Act was amended by the Consolidated Tax Amendments Act of 2011, which was published and became effective on November 1, 2011 (the "Amended Act"). The Amended Act
specifically exempts from taxation non-resident Liberian corporations such as our Liberian subsidiaries that engage in international shipping (and are not engaged in shipping exclusively within
Liberia) and that do not engage in other business or activities in Liberia other than those specifically enumerated in the Amended Act. In addition, the Amended Act made such exemption from taxation
retroactive to the effective date of the New Act.
If,
however, our Liberian subsidiaries were subject to Liberian income tax under the Amended Act, they would be subject to tax at a rate of 35% on their worldwide income. As a result,
their, and subsequently our, net income and cash flow would be materially reduced. In addition, as the ultimate shareholder of the Liberian subsidiaries we would be subject to Liberian withholding tax
on dividends paid by our Liberian subsidiaries at rates ranging from 15% to 20%.
The following discussion of United States federal income tax matters is based on the Internal Revenue Code of 1986, or the Code, judicial
decisions, administrative pronouncements, and existing and proposed regulations issued by the United States Department of the Treasury, all of which are in effect and available and subject to change,
possibly with retroactive effect. Except as otherwise noted, this discussion is based on the assumption that we will not maintain an office or other fixed place of business within the United States.
We have no current intention of maintaining such an office. References in this discussion to "we" and "us" are to Danaos Corporation and its subsidiaries on a consolidated basis, unless the context
otherwise requires.
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United States Federal Income Taxation of Our Company
Taxation of Operating Income: In General
Unless exempt from United States federal income taxation under the rules discussed below, a foreign corporation is subject to United States
federal income taxation in respect of any income that is derived from the use of vessels, from the hiring or leasing of vessels for use on a time, operating or bareboat charter basis, from the
participation in a pool, partnership, strategic alliance, joint operating agreement or other joint venture it directly or indirectly owns or participates in that generates such income, or from the
performance of services directly related to those uses, which we refer to as "shipping income," to the extent that the shipping income is derived from sources within the United States. For these
purposes, 50% of shipping income that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States constitutes income from sources within the
United States, which we refer to as "United States-source shipping income."
Shipping
income attributable to transportation that both begins and ends in the United States is generally considered to be 100% from sources within the United States. We do not expect
to engage in transportation that produces income which is considered to be 100% from sources within the United States.
Shipping
income attributable to transportation exclusively between non- United States ports is generally considered to be 100% derived from sources outside the United States. Shipping
income derived from sources outside the United States will not be subject to any United States federal income tax.
In
the absence of exemption from tax under Section 883 of the Code, our gross United States-source shipping income and that of our vessel-owning or vessel-operating subsidiaries,
unless determined to be effectively connected with the conduct of a United States trade or business, as described below, would be subject to a 4% tax imposed without allowance for deductions as
described below.
Other than with respect to four of our vessel-owning subsidiaries which are discussed in greater detail below, under Section 883 of the
Code, we and our vessel-owning or vessel-operating subsidiaries will be exempt from United States federal income taxation on United States-source shipping income if:
-
(1)
-
we
and such subsidiaries are organized in foreign countries (our "countries of organization") that grant an "equivalent exemption" to corporations organized in the
United States; and
-
(2)
-
either
-
(A)
-
more
than 50% of the value of our stock is owned, directly or indirectly, by individuals who are "residents" of our country of organization or of another foreign
country that grants an "equivalent exemption" to corporations organized in the United States, which we refer to as the "50% Ownership Test"; or
-
(B)
-
our
stock is "primarily and regularly traded on an established securities market" in our country of organization, in another country that grants an "equivalent
exemption" to United States corporations, or in the United States, which we refer to as the "Publicly-Traded Test."
We
believe, based on Revenue Ruling 2008-17, 2008-12 IRB 626, and, in the case of the Marshall Islands, an exchange of notes between the United States and the Marshall Islands, 1990-2
C.B. 321, in the case of Liberia, an exchange of notes between the United States and Liberia, 1988-1 C.B. 463, in the case of Cyprus, an exchange of notes between the United States and Cyprus, 1989-2
C.B. 332 and,
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in
the case of Malta, an exchange of notes between the United States and Malta, 1997-1 C.B. 314, (each an "Exchange of Notes"), that the Marshall Islands, Liberia, Cyprus and Malta, the jurisdictions
in which we and our vessel-owning and vessel-operating subsidiaries are incorporated, grant an "equivalent exemption" to United States corporations. Therefore, we believe that we and our vessel-owning
and vessel-operating subsidiaries will be exempt from United States federal income taxation with respect to United States-source shipping income if either the 50% Ownership Test or the Publicly-Traded
Test is met. While we believe that we currently satisfy the 50% Ownership Test, we expect that, if the 883 Trust were to come to own 50% or less of our shares, it may be difficult for us to satisfy
the 50% Ownership Test due to the public trading of our stock. Our ability to satisfy the Publicly-Traded Test is discussed below.
The
Section 883 regulations provide, in pertinent part, that stock of a foreign corporation will be considered to be "primarily traded" on an established securities market in a
particular country if the number of shares of each class of stock that are traded during any taxable year on all established securities markets in that country exceeds the number of shares in each
such class that are traded during that year on established securities markets in any other single country. For 2016, our common stock, which is the sole class of our issued and outstanding stock, was
"primarily traded" on the New York Stock Exchange and we anticipate that that will also be the case for subsequent taxable years.
Under
the regulations, our common stock will be considered to be "regularly traded" on an established securities market if one or more classes of our stock representing more than 50% of
our outstanding shares, by total combined voting power of all classes of stock entitled to vote and total value, is listed on the market. We refer to this as the "listing threshold". Since our common
stock is our sole class of stock we satisfied the listing threshold for 2016 and expect to continue to do so for subsequent taxable years.
It
is further required that with respect to each class of stock relied upon to meet the listing threshold (i) such class of the stock is traded on the market, other than in
minimal quantities, on at least 60 days during the taxable year or 1/6 of the days in a short taxable year; and (ii) the aggregate number of shares of such class of stock traded on such
market is at least 10% of the average number of shares of such class of stock outstanding during such year or as appropriately adjusted in the case of a short taxable year. We believe that we
satisfied the trading frequency and trading volume tests years for 2016 and we expect to continue to satisfy these requirements for subsequent taxable years. Even if this were not the case, the
regulations provide that the trading frequency and trading volume tests will be deemed satisfied if, as was the case for 2016 and we expect to be the case with our common stock for subsequent taxable
years, such class of stock is traded on an established market in the United States and such stock is regularly quoted by dealers making a market in such stock.
Notwithstanding
the foregoing, the regulations provide, in pertinent part, that a class of our stock will not be considered to be "regularly traded" on an established securities market
for any taxable year in which 50% or more of such class of our outstanding shares of the stock is owned, actually or constructively under specified stock attribution rules, on more than half the days
during the taxable year by persons who each own 5% or more of the value of such class of our outstanding stock, which we refer to as the "5 Percent Override Rule."
For
purposes of being able to determine the persons who own 5% or more of our stock, or "5% Stockholders," the regulations permit us to rely on those persons that are identified on
Schedule 13G and Schedule 13D filings with the United States Securities and Exchange Commission, or the "SEC," as having a 5% or more beneficial interest in our common stock. The
regulations further provide that an investment company which is registered under the Investment Company Act of 1940, as amended, will not be treated as a 5% Stockholder for such purposes.
More
than 50% of our shares of common stock are currently owned by 5% stockholders. Thus, we will be subject to the 5% Override Rule unless we can establish that among the shares
included in the
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closely-held
block of our shares of common stock there are a sufficient number of shares of common stock that are owned or treated as owned by "qualified stockholders" such that the shares of common
stock included in such block that are not so treated could not constitute 50% or more of the shares of our common stock for more than half the number of days during the taxable year. In order to
establish this, such qualified stockholders would have to comply with certain documentation and certification requirements designed to substantiate their identity as qualified stockholders. For these
purposes, a "qualified stockholder" includes (i) an individual that owns or is treated as owning shares of our common stock and is a resident of a jurisdiction that provides an exemption that
is equivalent to that provided by Section 883 of the Code and (ii) certain other persons. There can be no assurance that we will not be subject to the 5 Percent Override Rule with
respect to any taxable year.
Approximately
61.8% of our shares will be treated, under applicable attribution rules, as owned by the 883 Trust whose ownership of our shares will be attributed, during his lifetime, to
John Coustas, our chief executive officer, for purposes of Section 883. Dr. Coustas has entered into an agreement with us regarding his compliance, and the compliance of certain entities
that he controls and through which he owns our shares, with the certification requirements designed to substantiate status as qualified stockholders. In certain circumstances, including circumstances
where Dr. Coustas ceases to be a "qualified stockholder" or where the 883 Trust transfers some or all of our shares that it holds, Dr. Coustas' compliance, and the compliance of certain
entities that he controls or through which he owns our shares, with the terms of the agreement with us will not enable us to satisfy the requirements for the benefits of Section 883. Following
Dr. Coustas' death, there can be no assurance that our shares that are treated, under applicable attribution rules, as owned by the 883 Trust will be treated as owned by a "qualified
stockholder" or that any "qualified stockholder" to whom ownership of all or a portion of such ownership is attributed will comply with the ownership certification requirements under
Section 883.
Accordingly,
there can be no assurance that we or any of our vessel-owning or vessel-operating subsidiaries will qualify for the benefits of Section 883 for any taxable year.
To
the extent the benefits of Section 883 are unavailable, our U.S.-source shipping income, to the extent not considered to be "effectively connected" with the conduct of a United
States trade or business, as described below, would be subject to a 4% tax imposed by Section 887 of the Code on a gross basis, without the benefit of deductions. Since, under the sourcing
rules described above, we expect that no more than 50% of our shipping income would be treated as being derived from United States sources, we expect that the maximum effective rate of United States
federal income tax on our gross shipping income would never exceed 2% under the 4% gross basis tax regime. Many of our charters contain provisions obligating the charter to reimburse us for amounts
paid in respect of the 4% tax with respect to the activities of the vessel subject to the charter.
To
the extent the benefits of the Section 883 exemption are unavailable and our United States-source shipping income is considered to be "effectively connected" with the conduct
of a United States trade or business, as described below, any such "effectively connected" U.S.-source shipping income, net of applicable deductions, would be subject to the United States federal
corporate income tax currently imposed at rates of up to 35%. In addition, we may be subject to the 30% "branch profits" taxes on earnings effectively connected with the conduct of such trade or
business, as determined after allowance for certain adjustments, and on certain interest paid or deemed paid attributable to the conduct of our United States trade or business.
Our
U.S.-source shipping income, other than leasing income, will be considered "effectively connected" with the conduct of a United States trade or business only
if:
-
-
we have, or are considered to have, a fixed place of business in the United States involved in the earning of shipping income; and
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-
-
substantially all (at least 90%) of our U.S.-source shipping income, other than leasing income, is attributable to regularly scheduled
transportation, such as the operation of a vessel that follows a published schedule with repeated sailings at regular intervals between the same points for operating that begin or end in the United
States.
Our
U.S.-source shipping income from leasing will be considered "effectively connected" with the conduct of a U.S. trade or business only if:
-
-
we have, or are considered to have a fixed place of business in the United States that is involved in the meaning of such leasing income; and
-
-
substantially all (at least 90%) of our U.S.-source shipping income from leasing is attributable to such fixed place of business.
For
these purposes, leasing income is treated as attributable to a fixed place of business where such place of business is a material factor in the realization of such income and such
income is realized in the ordinary course of business carried on through such fixed place of business. Based on the foregoing and on the expected mode of our shipping operations and other activities,
we believe that none of our U.S.-source shipping income will be "effectively connected" with the conduct of a U.S. trade or business.
Regardless of whether we qualify for exemption under Section 883, we will not be subject to United States federal income taxation with
respect to gain realized on a sale of a vessel, provided the sale is considered to occur outside of the United States under United States federal income tax principles. In general, a sale of a vessel
will be considered to occur outside of the United States for this purpose if title to the vessel, and risk of loss with respect to the vessel, pass to the buyer outside of the United States. It is
expected that any sale of a vessel will be so structured that it will be considered to occur outside of the United States unless any gain from such sale is expected to qualify for exemption under
Section 883.
As used herein, the term "United States Holder" means a beneficial owner of common stock or warrants that is a United States citizen or
resident, United States corporation or other United States entity taxable as a corporation, an estate the income of which is subject to United States federal income taxation regardless of its source,
or a trust if a court within the United States is able to exercise primary jurisdiction over the administration of the trust and one or more United States persons have the authority to control all
substantial decisions of the trust. The discussion that follows deals only with common stock or warrants that are held by a United States Holder as capital assets, and does not address the treatment
of United States Holders that are subject to special tax rules, including a United States Holder, if any, that has received our warrants as compensation for services.
If
a partnership holds our common stock or warrants, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership.
Partners in a partnership holding our common stock or warrants are encouraged to consult their tax advisor.
Subject to the discussion of passive foreign investment companies, or PFICs, below, any distributions made by us with respect to our common
stock to a United States Holder will generally constitute dividends, which may be taxable as ordinary income or "qualified dividend income"
as described in more detail below, to the extent of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Distributions in excess of our
earnings
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and
profits will be treated first as a nontaxable return of capital to the extent of the United States Holder's tax basis in his common stock on a dollar for dollar basis and thereafter as capital
gain. Because we are not a United States corporation, United States Holders that are corporations will not be entitled to claim a dividends received deduction with respect to any distributions they
receive from us. Dividends paid with respect to our common stock will generally be treated as passive category income or, in the case of certain types of United States Holders, general category income
for purposes of computing allowable foreign tax credits for United States foreign tax credit purposes. Dividends paid on our common stock to a United States Holder who is an individual, trust or
estate (a "United States Individual Holder") should be treated as "qualified dividend income" that is taxable to such United States Individual Holders at preferential tax rates provided that
(1) the common stock is readily tradable on an established securities market in the United States (such as the New York Stock Exchange); (2) we are not a PFIC for the taxable year during
which the dividend is paid or the immediately preceding taxable year (see the discussion below under "PFIC Status and Material U.S. Federal Tax Consequences"); and (3) the United
States Individual Holder owns the common stock for more than 60 days in the 121- day period beginning 60 days before the date on which the common stock becomes ex-dividend. Special rules
may apply to any "extraordinary dividend". Generally, an extraordinary dividend is a dividend in an amount which is equal to or in excess of ten percent of a stockholder's adjusted basis (or fair
market value in certain circumstances) in a share of common stock paid by us. If we pay an "extraordinary dividend" on our common stock that is treated as "qualified dividend income," then any loss
derived by a United States Individual Holder from the sale or exchange of such common stock will be treated as long-term capital loss to the extent of such dividend.
There
is no assurance that any dividends paid on our common stock will be eligible for these preferential rates in the hands of a United States Individual Holder. Any dividends paid by
us which are not eligible for these preferential rates will be taxed to a United States Individual Holder at the standard ordinary income rates.
Legislation
has been previously introduced that would deny the preferential rate of federal income tax currently imposed on qualified dividend income with respect to dividends received
from a non-U.S. corporation, unless the non-U.S. corporation either is eligible for the benefits of a comprehensive income tax treaty with the United States or is created or organized under the laws
of a foreign country which has a comprehensive income tax system. Because the Marshall Islands has not entered into a comprehensive income tax treaty with the United States and imposes only limited
taxes on corporations organized under its laws, it is unlikely that we could satisfy either of these requirements. Consequently, if this legislation were enacted in its current form the preferential
rate of federal income tax described above may no longer be applicable to dividends received from us. As of the date hereof, it is not possible to predict with certainty whether or in what form
legislation of this sort might be proposed, or enacted.
The
exercise price of our warrants, and the amount of common stock to be issued upon exercise, are subject to adjustment under certain circumstances. If such an adjustment increases a
proportionate interest of a United States Holder of a warrant in the fully diluted common stock, or increases a proportionate interest of a United States Holder of common stock in the fully diluted
common stock, the United States Holder of the warrants, or common stock, whose proportionate interest increased may be treated as having received a constructive distribution, which may be taxable to
such United States Holder as a dividend. The warrants by their terms permit us to increase the amount of common stock issuable on an exercise of the warrants to prevent deemed dividend treatment with
respect to holders of our common stock.
Sale, Exchange or other Disposition of Common Stock or Warrants
Assuming we do not constitute a PFIC for any taxable year, a United States Holder generally will recognize taxable gain or loss upon a sale,
exchange or other disposition of our common stock or
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warrants
in an amount equal to the difference between the amount realized by the United States Holder from such sale, exchange or other disposition and the United States Holder's tax basis in such
stock or warrants. Such gain or loss will be treated as long-term capital gain or loss if the United States Holder's holding period is greater than one year at the time of the sale, exchange or other
disposition. Such capital gain or loss will generally be treated as United States-source income or loss, as applicable, for United States foreign tax credit purposes. A United States Holder's ability
to deduct capital losses is subject to certain limitations.
Assuming we do not constitute a PFIC for any taxable year, the tax treatment of a cashless exercise of our warrants, which is the only form of
exercise provided by their terms, is not free from doubt. A cashless exercise may be treated as a tax-free recapitalization of the warrant into our common stock, and as a result an exercising United
States Holder would not recognize gain or loss on the exercise, and would have a tax basis and holding period in the common stock issued upon
exercise reflecting the tax basis and holding period of the exercised warrant. It is conceivable, however, that a cashless exercise may be treated in the same manner as an exercise of the warrants for
cash, generally resulting in neither gain nor loss for the exercising United States Holder, but the United States Holder would then be treated as having sold a portion of the stock received on
exercise to us, reflecting common stock equal to the exercise price for the warrants, and as a result may recognize gain (or loss) reflecting the amount by which the fair market value of such common
stock exceeds (or is less than) the United States Holder's tax basis in such common stock (reflecting, in turn, such United States Holder's tax basis in the warrants exercised in exchange for such
common stock). United States Holders are urged to consult with their tax advisers regarding the tax treatment of a cashless exercise of the warrants.
Assuming
we do not constitute a PFIC for any taxable year, if a warrant expires unexercised, a United States Holder will recognize a capital loss, reflecting the United States Holder's
tax basis in the expired warrant. A United States Holder's ability to deduct capital losses is subject to certain limitations.
Special United States federal income tax rules apply to a United States Holder that holds stock or warrants in a foreign corporation classified
as a passive foreign investment company, or PFIC, for United States federal income tax purposes. In general, we will be treated as a PFIC in any taxable year in which, after applying certain
look-through rules, either:
-
-
at least 75% of our gross income for such taxable year consists of passive income (e.g., dividends, interest, capital gains and rents
derived other than in the active conduct of a rental business); or
-
-
at least 50% of the average value of our assets during such taxable year produce, or are held for the production of, passive income.
For
purposes of determining whether we are a PFIC, we will be treated as earning and owning our proportionate share of the income and assets, respectively, of any of our subsidiary
corporations in which we own at least 25% of the value of the subsidiary's stock. Income earned, or deemed earned, by us in connection with the performance of services will not constitute passive
income. By contrast, rental
income will generally constitute "passive income" unless we are treated under specific rules as deriving our rental income in the active conduct of a trade or business.
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We
may hold, directly or indirectly, interests in other entities that are PFICs ("Subsidiary PFICs"). If we are a PFIC, each United States Holder will be treated as owning its pro-rata
share by value of the stock of any such Subsidiary PFICs.
While
there are legal uncertainties involved in this determination, we believe that we should not be treated as a PFIC for the taxable year ended December 31, 2016. We believe
that, although there is no legal authority directly on point, the gross income that we derive from time chartering activities of our subsidiaries should constitute services income rather than rental
income. Consequently, such income should not constitute passive income and the vessels that we or our subsidiaries operate in connection with the production of such income should not constitute
passive assets for purposes of determining whether we are a PFIC. The characterization of income from time charters, however, is uncertain. Although there is older legal authority supporting this
position consisting of case law and Internal Revenue Service, or IRS, pronouncements concerning the characterization of income derived from time charters as services income for other tax purposes, the
United States Court of Appeals for the Fifth Circuit held in
Tidewater Inc. and Subsidiaries v. United States
, 565 F.3d 299;
(5th Cir. 2009), that income derived from certain time chartering activities should be treated as rental income rather than services income for purposes of the "foreign sales corporation" rules
under the Code. The IRS has stated that it disagrees with and will not acquiesce to the
Tidewater
decision, and in its discussion stated that the time
charters at issue in
Tidewater
would be treated as producing services income for PFIC purposes. However, the IRS's statement with respect to the
Tidewater
decision was an administrative action that cannot be relied upon or otherwise cited as precedent by taxpayers. Consequently, in the absence of
any binding legal authority specifically relating to the statutory provisions governing PFICs, there can be no assurance that the IRS or a court would agree with the
Tidewater
decision. However, if the
principles of the
Tidewater
decision were applicable to our time
charters, we would likely be treated as a PFIC. Moreover, although we intend to conduct our affairs in a manner to avoid being classified as a PFIC, we cannot assure you that the nature of our assets,
income and operations will not change, or that we can avoid being treated as a PFIC for any taxable year.
If
we were to be treated as a PFIC for any taxable year, a United States Holder would be required to file an annual report with the IRS for that year with respect to such holder's common
stock or warrants. In addition, as discussed more fully below, if we were to be treated as a PFIC for any taxable year, a United States Holder of our common stock would be subject to different
taxation rules depending on whether the United States Holder makes an election to treat us as a "Qualified Electing Fund," which election we refer to as a "QEF election." As an alternative to making a
QEF election, a United States Holder should be able to make a "mark-to-market" election with respect to our common stock, as discussed below. Under the PFIC rules, a United States Holder of our
warrants would not be permitted to make either a QEF election or a mark-to-market election with respect to our warrants.
If a United States Holder makes a timely QEF election with respect to our common stock, which United States Holder we refer to as an "Electing
Holder," for United States federal income tax purposes each year the Electing Holder must report his, her or its pro-rata share of our ordinary earnings and our net capital gain, if any, for our
taxable year that ends with or within the taxable year of the Electing Holder, regardless of whether or not distributions were received from us by the Electing Holder. Generally, a QEF election should
be made on or before the due date for filing the electing United States Holder's U.S. federal income tax return for the first taxable year in which our common stock is held by such United States
Holder and we are classified as a PFIC. The Electing Holder's adjusted tax basis in the common stock would be increased to reflect taxed but undistributed earnings and profits. Distributions of
earnings and profits that had been previously taxed would result in a corresponding reduction in the adjusted tax basis in the common stock and would not be taxed again once distributed. An Electing
Holder would generally recognize capital gain or loss on the sale,
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exchange
or other disposition of our common stock. A United States Holder would make a QEF election with respect to any year that our company and any Subsidiary PFIC are treated as PFICs by filing one
copy of IRS Form 8621 with his, her or its United States federal income tax return and a second copy in accordance with the instructions to such form. If we were to become aware that we were to
be treated as a PFIC for any taxable year, we would notify all United States Holders of such treatment and would provide all necessary information to any United States Holder who requests such
information in order to make the QEF election described above with respect to our common stock and the stock of any Subsidiary PFIC.
Alternatively, if we were to be treated as a PFIC for any taxable year and, as we anticipate, our common stock is treated as "marketable stock,"
a United States Holder of our common stock would be allowed to make a "mark-to- market" election with respect to our common stock, provided the United States Holder completes and files IRS
Form 8621 in accordance with the relevant instructions and related Treasury Regulations. If that election is made, the United States Holder generally would include as ordinary income in each
taxable year the excess, if any, of the fair market value of the common stock at the end of the taxable year over such holder's adjusted tax basis in the
common stock. The United States Holder also would be permitted an ordinary loss in respect of the excess, if any, of the United States Holder's adjusted tax basis in the common stock over its fair
market value at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. A United States Holder's tax basis in
his, her or its common stock would be adjusted to reflect any such income or loss amount. Gain realized on the sale, exchange or other disposition of our common stock would be treated as ordinary
income, and any loss realized on the sale, exchange or other disposition of the common stock would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains
previously included by the United States Holder. A mark-to-market election under the PFIC rules with respect to our common stock would not apply to a Subsidiary PFIC, and a United States Holder would
not be able to make such a mark-to-market election in respect of its indirect ownership interest in that Subsidiary PFIC. Consequently, United States Holders of our common stock could be subject to
the PFIC rules with respect to income of the Subsidiary PFIC, the value of which already had been taken into account indirectly via mark-to-market adjustments.
Finally, if we were treated as a PFIC for any taxable year, a United States Holder who does not make either a QEF election or a "mark-to-market"
election for that year, whom we refer to as a "Non-Electing Holder," would be subject to special rules with respect to (1) any excess distribution (i.e., the portion of any distributions
received by the Non-Electing Holder on our common stock in a taxable year in excess of 125% of the average annual distributions received by the Non-Electing Holder in the three preceding taxable
years, or, if shorter, the Non-Electing Holder's holding period for the common stock) and (2) any gain realized on the sale, exchange or other disposition of our common stock or warrants. Under
these special rules:
-
-
the excess distribution or gain would be allocated ratably over the Non-Electing Holder's aggregate holding period for the common stock or
warrants;
-
-
the amount allocated to the current taxable year or to any portion of the United States Holder's holding period prior to the first taxable year
for which we were a PFIC would be taxed as ordinary income; and
-
-
the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class
of taxpayer for that year, and an interest charge for
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If
we were treated as a PFIC for any taxable year, a U.S. Holder that owns our share or warrants would be required to file an annual information return with the IRS reflecting such
ownership, regardless of whether a QEF election or a mark-to-market election had been made.
Although
there is no governing authority as to the consequences of an exercise of warrants where the issuer is a PFIC, under proposed regulations, the exercise of warrants would not be
treated as a disposition for PFIC purposes, and a United States Holder that exercises a warrant, consistent with these proposed regulations, would have a holding period in the resulting common stock
that reflects the United States Holder's holding period in the warrants.
If
a United States Holder held our common stock or warrants during a period when we were treated as a PFIC but the United States Holder did not have a QEF election in effect with respect
to us, then in the event that we failed to qualify as a PFIC for a subsequent taxable year, the United States Holder could elect to cease to be subject to the rules described above with respect to
those shares by making a "deemed sale" or, in certain circumstances, a "deemed dividend" election with respect to our common stock or warrants. If the United States Holder makes a deemed sale
election, the United States Holder will be treated, for purposes of applying the rules described in the preceding paragraph, as having disposed of our common stock or warrants for their fair market
value on the last day of the last taxable year for which we qualified as a PFIC (the "termination date"). The United States Holder would increase his, her or its basis in such common stock or warrants
by the amount of the gain on the deemed sale described in the preceding sentence. Following a deemed sale election, the United States Holder would not be treated, for purposes of the PFIC rules, as
having owned the common stock or warrants during a period prior to the termination date when we qualified as a PFIC.
If
we were treated as a "controlled foreign corporation" for United States tax purposes for the taxable year that included the termination date, then a United States Holder could make a
deemed dividend election with respect to our common stock. If a deemed dividend election is made, the United States
Holder is required to include in income as a dividend his, her or its pro-rata share (based on all of our stock held by the United States Holder, directly or under applicable attribution rules, on the
termination date) of our post-1986 earnings and profits as of the close of the taxable year that includes the termination date (taking only earnings and profits accumulated in taxable years in which
we were a PFIC into account). The deemed dividend described in the preceding sentence is treated as an excess distribution for purposes of the rules described in the second preceding paragraph. The
United States Holder would increase his, her or its basis in our common stock by the amount of the deemed dividend. Following a deemed dividend election, the United States Holder would not be treated,
for purposes of the PFIC rules, as having owned the common stock during a period prior to the termination date when we qualified as a PFIC. For purposes of determining whether the deemed dividend
election is available, we will generally be treated as a controlled foreign corporation for a taxable year when, at any time during that year, United States persons, each of whom owns, directly or
under applicable attribution rules, common stock having 10% or more of the total voting power of our common stock, in the aggregate own, directly or under applicable attribution rules, shares
representing more than 50% of the voting power or value of our common stock.
A
deemed sale or deemed dividend election must be made on the United States Holder's original or amended return for the shareholder's taxable year that includes the termination date and,
if made on an amended return, such amended return must be filed not later than the date that is three years after the due date of the original return for such taxable year. Special rules apply where a
person is treated, for purposes of the PFIC rules, as indirectly owning our common stock or warrants.
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A beneficial owner of common stock or warrants that is not a United States Holder and is not treated as a partnership for United States federal
income tax purposes is referred to herein as a "Non-United States Holder."
Non-United States Holders generally will not be subject to United States federal income tax or withholding tax on dividends received from us
with respect to our common stock, unless that income is effectively connected with the Non-United States Holder's conduct of a trade or business in the United States. If the Non-United States Holder
is entitled to the benefits of a United States income tax treaty with respect to those dividends, that income generally is taxable only if it is attributable to a permanent establishment maintained by
the Non-United States Holder in the United States.
Sale, Exchange or Other Disposition of Common Stock or Warrants
Non-United States Holders generally will not be subject to United States federal income tax or withholding tax on any gain realized upon the
sale, exchange or other disposition of our common stock or warrants, or an exercise of warrants, unless:
-
-
the gain is effectively connected with the Non-United States Holder's conduct of a trade or business in the United States. If the Non- United
States Holder is entitled to the benefits of an income tax treaty with respect to that gain, that gain generally is taxable only if it is attributable to a permanent establishment maintained by the
Non-United States Holder in the United States; or
-
-
the Non-United States Holder is an individual who is present in the United States for 183 days or more during the taxable year of
disposition and other conditions are met.
If
the Non-United States Holder is engaged in a United States trade or business for United States federal income tax purposes, the income from the common stock or warrants, including
dividends (with respect to the common stock) and the gain from the sale, exchange or other disposition of the stock that is effectively connected with the conduct of that trade or business (including
deemed gain, if any, with respect to an exercise of the warrants, as described above in "United States
Federal Income Taxation of United States HoldersExercise or Expiration of Warrants") will generally be subject to regular United States federal income tax in the same manner as discussed
in the previous section relating to the taxation of United States Holders. In addition, in the case of a corporate Non-United States Holder, such holder's earnings and profits that are attributable to
the effectively connected income, which are subject to certain adjustments, may be subject to an additional branch profits tax at a rate of 30%, or at a lower rate as may be specified by an applicable
income tax treaty.
In general, dividend payments, or other taxable distributions, made within the United States to a noncorporate United States holder will be
subject to information reporting requirements and backup withholding tax if such holder:
-
-
fails to provide an accurate taxpayer identification number;
-
-
is notified by the IRS that it has failed to report all interest or dividends required to be shown on its federal income tax returns; or
-
-
in certain circumstances, fails to comply with applicable certification requirements.
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Non-United
States Holders may be required to establish their exemption from information reporting and backup withholding by certifying their status on IRS Form W-8BEN, W-8ECI or
W-8IMY, as applicable.
If
a holder sells our common stock or warrants to or through a United States office or broker, the payment of the proceeds is subject to both United States backup withholding and
information reporting unless the holder certifies that it is a non-United States person, under penalties of perjury, or the holder otherwise establishes an exemption. If a holder sells our common
stock through a non-United States office of a non-United States broker and the sales proceeds are paid outside the United States, information reporting and backup withholding generally will not apply
to that payment. However, United States information reporting requirements, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is made outside the United
States, if a holder sells our common stock through a non-United States office of a broker that is a United States person or has some other contacts with the United States.
Backup
withholding tax is not an additional tax. Rather, a holder generally may obtain a refund of any amounts withheld under backup withholding rules that exceed such stockholder's
income tax liability by filing a refund claim with the IRS.
Dividends and Paying Agents
Not applicable.
Statement by Experts
Not applicable.
Documents on Display
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we
file reports and other information as a foreign private issuer with the SEC. You may inspect and copy our public filings without charge at the public reference facilities maintained by the SEC at
100 F Street, N.E., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information about the public reference room. You may obtain copies of all or any part of such materials from the SEC upon payment of prescribed fees. You may
also inspect reports and other information regarding registrants, such as us, that file electronically with the SEC without charge at a web site maintained by the SEC at
http://www.sec.gov
.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
In connection with certain of our credit facilities under which we pay a floating rate of interest, we entered into interest rate swap
agreements designed to pro-actively and efficiently manage our floating rate exposure. We have recognized these derivative instruments on the consolidated balance sheet at their fair value. Pursuant
to the adoption of our Risk Management Accounting Policy, and after putting in place the formal documentation required by the accounting guidance for derivatives and hedging in order to designate
these swaps as hedging instruments, as of June 15, 2006, these interest rate swaps qualified for hedge accounting, and, accordingly, from that time until June 30, 2012, only hedge
ineffectiveness amounts arising from the differences in the change in fair value of the hedging instrument and the hedged item were recognized in the Company's earnings. Assessment and measurement of
prospective and retrospective effectiveness for these interest rate swaps were performed on a quarterly basis until June 30, 2012. For qualifying cash flow hedges, the fair value gain or loss
associated with the effective portion of the cash flow hedge was recognized initially in
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stockholders'
equity, and recognized to the Statement of Operations in the periods when the hedged item affects profit or loss. On July 1, 2012, we elected to prospectively de-designate cash
flow interest rate swaps for which we were obtaining hedge accounting treatment due to the compliance burden associated with this accounting policy. As a result, all changes in the fair value of our
cash flow interest rate swap agreements are recorded in earnings under "Unrealized and Realized Losses on Derivatives" from the de-designation date forward. We have not held or issued derivative
financial instruments for trading or other speculative purposes.
The
interest rate swap agreements converting floating interest rate exposure into fixed, as of December 31, 2016 and 2015 were as follows (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counter-party
|
|
Contract
Trade
Date
|
|
Effective
Date
|
|
Termination
Date
|
|
Notional
Amount
on
Effective
Date
|
|
Fixed Rate
(Danaos
pays)
|
|
Floating Rate
(Danaos
receives)
|
|
Fair Value
December 31,
2016
|
|
Fair Value
December 31,
2015
|
|
Citibank
|
|
|
02/07/2008
|
|
|
2/11/2011
|
|
|
2/11/2016
|
|
$
|
200,000
|
|
4.695% p.a.
|
|
USD LIBOR 3M BBA
|
|
|
|
|
$
|
(1,012
|
)
|
ABN Amro
|
|
|
06/06/2013
|
|
|
1/4/2016
|
|
|
12/31/2016
|
|
$
|
325,000
|
|
1.4975% p.a.
|
|
USD LIBOR 3M BBA
|
|
|
|
|
|
(2,113
|
)
|
ABN Amro
|
|
|
05/31/2013
|
|
|
1/4/2016
|
|
|
12/31/2016
|
|
$
|
250,000
|
|
1.4125% p.a.
|
|
USD LIBOR 3M BBA
|
|
|
|
|
|
(1,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of swap liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Accounting
guidance for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities requires that an entity recognize all
derivatives as either assets or liabilities in the consolidated balance sheet and measures those instruments at fair value. If certain conditions are met, a derivative may be specifically designated
as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
These interest rate swaps are designed to economically hedge the fair value of the fixed rate loan facilities against fluctuations in the market
interest rates by converting our fixed rate loan facilities to floating rate debt. Pursuant to the adoption of our Risk Management Accounting Policy, and after putting in place the formal
documentation required by hedge accounting in order to designate these swaps as hedging instruments, as of June 15, 2006, these interest rate swaps qualified for hedge accounting, and,
accordingly, from that time until June 30, 2012, hedge ineffectiveness amounts arising from the differences in the change in fair value of the hedging instrument and the hedged item were
recognized in our earnings. Assessment and measurement of prospective and retrospective effectiveness for these interest rate swaps was performed on a quarterly basis, on the financial statement and
earnings reporting dates.
On
July 1, 2012, we elected to prospectively de-designate fair value interest rate swaps for which it was applying hedge accounting treatment due to the compliance burden
associated with this accounting policy. All changes in the fair value of our fair value interest rate swap agreements will continue to be recorded in earnings under "Unrealized and Realized Losses on
Derivatives" from the de-designation date forward.
133
Table of Contents
The
interest rate swap agreements converting fixed interest rate exposure into floating, as of December 31, 2016 and 2015 were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counter party
|
|
Contract
trade
Date
|
|
Effective
Date
|
|
Termination
Date
|
|
Notional
Amount
on
Effective
Date
|
|
Fixed Rate
(Danaos
receives)
|
|
Floating Rate
(Danaos
pays)
|
|
Fair Value
December 31,
2016
|
|
Fair Value
December 31,
2015
|
|
RBS
|
|
|
11/15/2004
|
|
|
12/15/2004
|
|
|
8/27/2016
|
|
$
|
60,528
|
|
5.0125% p.a.
|
|
USD LIBOR 3M BBA + 0.835% p.a.
|
|
|
|
|
$
|
55
|
|
RBS
|
|
|
11/15/2004
|
|
|
11/17/2004
|
|
|
11/2/2016
|
|
$
|
62,342
|
|
5.0125% p.a.
|
|
USD LIBOR 3M BBA + 0.855% p.a.
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
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|
The
total fair value change of the interest rate swaps for the years ended December 31, 2016, 2015 and 2014, amounted to $(0.1) million, $(0.5) million and $(0.9) million,
respectively, and is included in the consolidated Statements of Operations in "Net unrealized and realized losses on derivatives". The related asset of nil and $0.1 million as of
December 31, 2016 and 2015, respectively, are presented under "Other current assets" in the consolidated balance sheet as of December 31, 2016 and 2015, respectively.
We
reclassified from "Current portion of long-term debt" and "Long-term debt, net of current portion", where its fair value of hedged item is recorded, to our earnings unrealized
gains/losses an amount of $0.4 million and $0.6 million for the years ended December 31, 2016 and 2015, respectively. The related liability of the fair value hedged debt of nil
and $0.4 million is presented under "Long-term Debt" in the consolidated balance sheet as of December 31, 2016 and 2015, respectively.
We, according to our long-term strategic plan to maintain relative stability in our interest rate exposure, have decided to swap part of our
interest expenses from floating to fixed. To this effect, we entered into interest rate swap transactions with varying start and maturity dates, in order to pro- actively and efficiently manage our
floating rate exposure.
These
interest rate swaps are designed to economically hedge the variability of interest cash flows arising from floating rate debt, attributable to movements in three-month USD$ LIBOR.
According to our Risk Management Accounting Policy, and after putting in place the formal documentation required by hedge accounting in order to designate these swaps as hedging instruments, as from
their inception, these interest rate swaps qualified for hedge accounting and, accordingly, from that time until June 30, 2012, only hedge ineffectiveness amounts arising from the differences
in the change in fair value of the hedging instrument and the hedged item were recognized in our earnings. Assessment and measurement of prospective and retrospective effectiveness for these interest
rate swaps were performed on a quarterly basis. For qualifying cash flow hedges, the fair value gain or loss associated with the effective portion of the cash flow hedge was recognized initially in
stockholders' equity, and recognized to the Statement of Operations in the periods when the hedged item affects profit or loss.
On
July 1, 2012, we elected to prospectively de-designate cash flow interest rate swaps for which we were obtaining hedge accounting treatment due to the compliance burden
associated with this accounting policy. As a result, all changes in the fair value of our cash flow interest rate swap agreements are recorded in earnings under "Unrealized and Realized Losses on
Derivatives" from the
de-designation date forward. We evaluated whether it is probable that the previously hedged forecasted interest payments are probable to not occur in the originally specified time period. We concluded
that the previously hedged forecasted interest payments are probable of occurring. Therefore, unrealized gains or losses in accumulated other comprehensive loss associated with the previously
designated cash flow interest rate swaps will remain in accumulated other comprehensive loss and recognized in
134
Table of Contents
earnings
when the interest payments will be recognized. If such interest payments were to be identified as being probable of not occurring, the accumulated other comprehensive loss balance pertaining
to these amounts would be reversed through earnings immediately.
We
recorded in the consolidated Statements of Operations unrealized gains of $4.5 million, $48.9 million and $114.2 million in relation to fair value changes of cash
flow interest rate swaps for the years ended December 31, 2016, 2015 and 2014, respectively. Furthermore, $0.2 million, $32.6 million and $88.9 million of unrealized losses
were reclassified from Accumulated Other Comprehensive Loss to earnings for year ended December 31, 2016, 2015 and 2014, respectively.
The
variable-rate interest on specific borrowings that was associated with vessels under construction was capitalized as a cost of the specific vessels. In accordance with the accounting
guidance on derivatives and hedging, the amounts in accumulated other comprehensive income related to realized gains or losses on cash flow hedges that have been entered into and qualify for hedge
accounting, in order to hedge the variability of that interest, are classified under other comprehensive income and are reclassified into earnings over the depreciable life of the constructed asset,
since that depreciable life coincides with the amortization period for the capitalized interest cost on the debt. An amount of $4.0 million, $4.0 million and $4.0 million was
reclassified into earnings for the years ended December 31, 2016, 2015 and 2014, respectively, representing amortization over the depreciable life of the vessels. Additionally, the Company
recognized accelerated amortization of these deferred realized losses of $7.7 million in connection with the impairment losses recognized on the respective vessels for the year ended
December 31, 2016.
Assuming
no changes to our borrowings or hedging instruments after December 31, 2016, a 10 basis points increase in interest rates on our floating rate debt outstanding at
December 31, 2016 would result in a decrease of approximately $2.4 million in our earnings in 2017. These amounts are determined by calculating the effect of a hypothetical interest rate
change on our floating rate debt. These amounts do not include the effects of certain potential results of changing interest rates, such as a different level of overall economic activity, or other
actions management may take to mitigate this risk. Furthermore, this sensitivity analysis does not assume alterations in our gross debt or other changes in our financial position.
We generate all of our revenues in U.S. dollars, but for the year ended December 31, 2016 we incurred approximately 26.0% of our
operating expenses in currencies other than U.S. dollars (mainly in Euros). As of December 31, 2016, approximately 30.4% of our outstanding accounts payable were denominated in currencies other
than the U.S. dollar (mainly in Euro). We have not entered into derivative instruments to hedge the foreign currency translation of assets or liabilities or foreign currency transactions.
Item 12. Description of Securities Other than Equity Securities
Not Applicable.
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