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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 333-165796
UNITED MARITIME GROUP, LLC
(Exact name of registrant as specified in its charter)
FLORIDA | 59-2147756 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
601 S. Harbour Island Blvd., Suite 230
Tampa, FL 33602
(Address of principal executive offices)
(813) 209-4200
(Companys telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer þ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
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ITEM 1. | FINANCIAL STATEMENTS |
United Maritime Group, LLC and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
(Dollars in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Revenue |
||||||||||||||||
Revenue |
$ | 80,064 | $ | 72,003 | $ | 234,442 | $ | 213,443 | ||||||||
Operating expenses |
||||||||||||||||
Operating expenses |
47,896 | 44,612 | 144,072 | 126,923 | ||||||||||||
Maintenance and repairs |
7,867 | 6,967 | 22,466 | 17,309 | ||||||||||||
Administrative and general |
8,856 | 7,826 | 26,249 | 24,475 | ||||||||||||
Depreciation |
11,356 | 10,490 | 32,923 | 30,800 | ||||||||||||
Amortization of intangible assets |
659 | 659 | 1,977 | 1,977 | ||||||||||||
Asset retirement obligation accretion expense |
51 | 48 | 149 | 140 | ||||||||||||
Loss (gain) on sale of assets |
27 | (23 | ) | (39 | ) | (18 | ) | |||||||||
Total operating expenses |
76,712 | 70,579 | 227,797 | 201,606 | ||||||||||||
Operating income |
3,352 | 1,424 | 6,645 | 11,837 | ||||||||||||
Other income |
837 | 509 | 937 | 535 | ||||||||||||
Loss on derivative instruments |
| (1,860 | ) | | (5,582 | ) | ||||||||||
Equity in loss of unconsolidated affiliate |
| (192 | ) | (127 | ) | (270 | ) | |||||||||
Interest charges: |
||||||||||||||||
Interest expense |
6,634 | 5,794 | 20,041 | 17,547 | ||||||||||||
Interest income |
| | (1 | ) | (2 | ) | ||||||||||
Amortization of deferred financing costs |
536 | 485 | 1,603 | 1,450 | ||||||||||||
Tax provision |
| 9 | | 27 | ||||||||||||
Net loss |
$ | (2,981 | ) | $ | (6,407 | ) | $ | (14,188 | ) | $ | (12,502 | ) | ||||
Other comprehensive loss |
||||||||||||||||
Change in net unrealized loss on cash flow hedges |
811 | 11,853 | 3 | (6,593 | ) | |||||||||||
Comprehensive (loss) income |
$ | (2,170 | ) | $ | 5,446 | $ | (14,185 | ) | $ | (5,909 | ) | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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United Maritime Group, LLC and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
September 30, 2010 |
December 31, 2009 |
|||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 930 | $ | 11,631 | ||||
Accounts receivable trade, net of allowance for doubtful accounts of $446 and $573, respectively |
30,543 | 32,641 | ||||||
Materials and supplies |
18,198 | 15,501 | ||||||
Prepaid expenses and other current assets |
5,841 | 5,136 | ||||||
Total current assets |
55,512 | 64,909 | ||||||
Property and equipment |
458,726 | 444,615 | ||||||
Work in progress |
2,560 | 3,284 | ||||||
Accumulated depreciation |
(116,597 | ) | (84,343 | ) | ||||
Property and equipment, net |
344,689 | 363,556 | ||||||
Other assets: |
||||||||
Deferred financing costs, net of amortization of $1,603 and $0, respectively |
8,801 | 10,312 | ||||||
Intangible assets, net of amortization of $7,541 and $5,564, respectively |
22,087 | 24,064 | ||||||
Deferred drydocking costs, net |
5,363 | 4,606 | ||||||
Investment in unconsolidated affiliate |
| 452 | ||||||
Total other assets |
36,251 | 39,434 | ||||||
Total assets |
$ | 436,452 | $ | 467,899 | ||||
Liabilities and members equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 20,874 | $ | 18,962 | ||||
Accrued expenses |
9,514 | 2,096 | ||||||
Current derivative liability |
141 | 187 | ||||||
Total current liabilities |
30,529 | 21,245 | ||||||
Asset retirement obligation |
2,831 | 2,681 | ||||||
Other liabilities |
9,559 | 8,953 | ||||||
Long-term debt, net of current maturities |
251,985 | 280,125 | ||||||
Total liabilities |
294,904 | 313,004 | ||||||
Members equity |
141,548 | 154,895 | ||||||
Total liabilities and members equity |
$ | 436,452 | $ | 467,899 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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United Maritime Group, LLC and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Operating activities |
||||||||
Net loss |
$ | (14,188 | ) | $ | (12,502 | ) | ||
Adjustments to reconcile net loss to net cash from operating activities |
||||||||
Depreciation |
32,923 | 30,800 | ||||||
Amortization of intangible assets |
1,977 | 1,977 | ||||||
Amortization of deferred financing costs |
1,603 | 1,450 | ||||||
Amortization of deferred drydocking assets |
3,024 | 2,033 | ||||||
Accretion expense |
149 | 140 | ||||||
Stock-based compensation |
338 | 401 | ||||||
Deferred drydocking expenditures |
(3,781 | ) | (2,624 | ) | ||||
Loss on derivative instruments |
| 5,582 | ||||||
Loss on equity investment of unconsolidated affiliate |
127 | 270 | ||||||
Gain on sale of assets |
(39 | ) | (18 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
3,815 | 18,811 | ||||||
Materials and supplies |
(2,697 | ) | 532 | |||||
Prepaid expenses and other assets |
(2,373 | ) | (1,774 | ) | ||||
Other liabilities |
606 | (2,504 | ) | |||||
Accounts payable and accrued expenses |
9,238 | (5,846 | ) | |||||
Net cash provided by operating activities |
30,722 | 36,728 | ||||||
Investing activities |
||||||||
Additions to property and equipment |
(14,248 | ) | (13,202 | ) | ||||
Proceeds from sale of assets |
232 | 174 | ||||||
Distributions from unconsolidated affiliate |
325 | 200 | ||||||
Net cash used by investing activities |
(13,691 | ) | (12,828 | ) | ||||
Financing activities |
||||||||
Repayment of debt |
(60,140 | ) | (8,079 | ) | ||||
Issuance of debt |
32,000 | | ||||||
Capital contribution by stockholder |
500 | | ||||||
Payment of deferred financing costs |
(92 | ) | | |||||
Net cash used by financing activities |
(27,732 | ) | (8,079 | ) | ||||
Net change in cash |
(10,701 | ) | 15,821 | |||||
Cash and cash equivalents, at beginning of period |
11,631 | 11,616 | ||||||
Cash and cash equivalents, at end of period |
$ | 930 | $ | 27,437 | ||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 15,462 | $ | 19,073 |
The accompanying notes are an integral part of these consolidated financial statements.
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United Maritime Group, LLC and Subsidiaries
Consolidated Statement of Changes in Members Equity
(Dollars in thousands, except share amounts)
(Unaudited)
Membership Units | Additional Paid-in Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Total Members Equity |
||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||
Balance at December 31, 2009 |
100 | $ | 173,000 | $ | 2,304 | $ | 308 | $ | (20,717 | ) | $ | 154,895 | ||||||||||||
Net loss |
| | | | (14,188 | ) | (14,188 | ) | ||||||||||||||||
Change in fair value of derivative |
| | | 3 | | 3 | ||||||||||||||||||
Capital contribution |
| | 500 | | | 500 | ||||||||||||||||||
Stock-based compensation |
| | 338 | | | 338 | ||||||||||||||||||
Balance at September 30, 2010 |
100 | $ | 173,000 | $ | 3,142 | $ | 311 | $ | (34,905 | ) | $ | 141,548 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Nature of Business
In this quarterly report, unless the context otherwise requires, or unless specifically stated otherwise, references to the terms we, our, us and the Company refer to United Maritime Group, LLC, United Maritime Group Finance Corp. (Finance Corp.) and all of their subsidiaries that are consolidated under U.S. generally accepted accounting principles (GAAP).
Nature of Business and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with GAAP. The Company has evaluated subsequent events and transactions for potential recognition or disclosure through such time as these statements were filed with the Securities and Exchange Commission, and has included those items deemed to be reportable in Note 13 (Subsequent Events).
The accompanying unaudited consolidated financial statements should be read in conjunction with our December 31, 2009 audited consolidated financial statements and the notes thereto included in the Companys Registration Statement on Form S-4 (Registration No. 333-165796) (the Registration Statement). In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of the Company for the periods covered thereby. The accompanying unaudited consolidated financial statements include the accounts of United Maritime Group, LLC (United Maritime) and its wholly owned subsidiaries (U.S. United Ocean Services, LLC, U.S. United Bulk Terminal, LLC, U.S. United Barge Line, LLC, U.S. United Bulk Logistics, LLC, UMG Towing Company, LLC and U.S. United Inland Services, LLC). United Maritime is a wholly owned subsidiary of GS Maritime Intermediate Holding LLC, a Delaware limited liability company (GS Intermediate). GS Intermediate is a wholly owned subsidiary of GS Maritime Holding LLC, a Delaware limited liability company (GS Maritime). The Companys principal operations are to provide transportation services by barges or ocean-going vessels and materials handling and storage for water-based transportation. All intercompany balances and transactions have been eliminated in consolidation. Neither GS Intermediate nor GS Maritime are consolidated in the accompanying unaudited consolidated financial statements.
The members liability of United Maritime is limited by all protection available under Florida limited liability company law. The life of United Maritime is indefinite.
2. Significant Accounting Policies
In September 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168, The FASB Accounting Standards Codification (ASC) and the Hierarchy of Generally Accepted Accounting Principles, as codified in FASB ASC Topic 105, Generally Accepted Accounting Principles. This standard establishes only two levels of GAAP, authoritative and non-authoritative. The FASB ASC became the source of authoritative, non-governmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (the SEC), which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. As the ASC was not intended to change or alter existing GAAP, the adoption of SFAS No. 168 on July 1, 2009, did not have any impact on the Companys financial statements other than to change the numbering system prescribed by the FASB ASC when referring to GAAP.
Accounting Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. Despite the intention to establish accurate estimates and use reasonable
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
assumptions, actual results could differ from the Companys estimates and such differences could be material.
Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments, which is provided for in bad debt expense. We determine the adequacy of this allowance by regularly reviewing our accounts receivable aging and evaluating individual customers receivables, considering customers financial condition, credit history and other current economic conditions. If a customers financial condition were to deteriorate which might impact its ability to make payment, then additional allowances may be required
Comprehensive Income (Loss)
Accounting Standards Codification (ASC), Comprehensive Income (ASC 220), established standards for the reporting and the display of comprehensive income (loss) and its components in a full set of general purpose financial statements. ASC 220 requires that all items that are required to be recognized under accounting standards as components of comprehensive income (loss) be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company has reported other comprehensive gains and losses in its unaudited consolidated statements of changes in members equity and on the consolidated statement of operations and comprehensive loss.
Inventory Costs
Materials and supplies, including fuel costs, are stated at the lower of cost or market using the average cost method.
Revenue
Revenue is primarily derived from coal, phosphate, and grain transportation (among other cargoes), and transfer and storage services to unaffiliated entities. Revenue from transportation and transfer services is recognized as services are rendered. Revenue from certain transportation services is recognized using the percentage of completion method, which includes estimates of the distance traveled or time elapsed compared to the total estimated contract. Storage revenue is recognized monthly based on the volumes held at the storage facility over the contract grace period.
In 2008, the Company entered into an agreement with Tampa Electric Company that began on January 1, 2009, and extends through 2014. The agreement provides for the provision of transportation, transfer, and blending services for coal, which totals will decline over the life of the contract as a result of Tampa Electric Companys diversification of transportation modes, particularly to rail. Tampa Electric Company is a wholly owned subsidiary of TECO Energy Inc. (TECO Energy).
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. Additions, replacements and betterments are capitalized; maintenance and repairs are charged to expense as incurred. Items sold or retired are removed from the assets and accumulated depreciation accounts and any resulting gains or losses are properly included in the consolidated statements of operations and comprehensive loss.
Planned Major Maintenance
In accordance with the guidance for planned major maintenance activities, expenditures incurred during a drydocking are deferred and amortized on a straight-line basis over the period until the next scheduled drydocking, generally two and a half years. The Company only includes in deferred drydocking costs those direct costs that are incurred as part of the vessels maintenance that is required by the Coast Guard and/or vessel classification society regulation. Direct costs include shipyard costs as well as the costs of placing the vessel in the shipyard. Expenditures for routine maintenance and repairs, whether incurred as part of the drydocking or not, are expensed as incurred.
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and trade receivables. The Company places its cash with high credit quality financial institutions. During the normal course of business, the Company extends credit to customers primarily in North America conducting business in the utility, metallurgical, phosphate and grain industries. The Company performs ongoing credit evaluations of its customers and does not generally require collateral. The customers financial condition and payment history have been considered in determining the allowance for doubtful accounts. The Company assesses the risk of non-performance of the derivatives in determining the fair value of the derivative instruments in accordance with ASC No. 820 (ASC 820), Fair Value Measurements.
Asset Impairment
The Company periodically assesses whether there has been a permanent impairment of its long-lived assets and certain intangibles held and used by the Company, in accordance with ASC No. 360 (ASC 360), Property, Plant, and Equipment and ASC No. 205, Presentation of Financial Statements. ASC 360 establishes standards for determining when impairment losses on long-lived assets have occurred and how impairment losses should be measured. The Company is required to review long-lived assets and certain intangibles, to be held and used, for impairment whenever events or circumstances indicate that the carrying value of such assets may not be recoverable. In performing such a review for recoverability, the Company is required to compare the expected future cash flows to the carrying value of long-lived assets and finite-lived intangibles. If the sum of the expected future undiscounted cash flows is less than the carrying amount of such assets and intangibles, the assets are impaired and the assets must be written down to their estimated fair market value. There were no impairments during the nine months ended September 30, 2010 or September 30, 2009.
Derivative Instruments and Hedging Activities
In March 2008, the FASB issued guidance requiring entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, results of operations and cash flows. The provisions of this guidance require expanded disclosures concerning where derivatives are recorded on the consolidated balance sheet and where gains or losses are recognized in the consolidated results of operations. The Company has adopted the disclosure provisions as of January 1, 2009.
Furthermore, in January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-6, Improving Disclosures about Fair Value Measurements, which requires interim disclosures regarding significant transfers in and out of Level 1 and Level 2 fair value measurements. Additionally, this ASU requires disclosure for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements. These disclosures are required for fair value measurements that fall in either Level 2 or Level 3. Further, the ASU requires separate presentation of Level 3 activity for the fair value measurements. We adopted the interim disclosure requirements under this Topic with the exception of the separate presentation in the Level 3 activity rollforward, which is not effective until fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.
The Company applies the provisions of ASC No. 815, Derivatives and Hedging. These standards require companies to recognize derivatives as either assets or liabilities in the financial statements, to measure those instruments at fair value, and to reflect the changes in the fair values of those instruments as either components of other comprehensive income (OCI) or in net income, depending on the designation of those instruments. The changes in fair value that are recorded in OCI are not immediately recognized in current net income. As the underlying hedged transaction matures or the physical commodity is delivered, the deferred gain or loss on the related hedging instrument must be reclassified from OCI to earnings based on its value at the time of its reclassification. For effective hedge transactions, the amount reclassified from OCI to earnings is offset in net income by the amount paid or received on the underlying transaction.
In December 2007, the Company entered into a derivative contract to limit the exposure to interest rate fluctuations associated with its variable rate debt instruments. The derivative contract was designated
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
as a cash flow hedge. The hedge was for three years and would have expired on December 31, 2010. In December 2009, the Company retired its debt obligations and the derivative contract was paid in full. As of December 31, 2009, the interest hedge liability balance was $0 with the balance of the interest hedge charged to interest expense as of December 31, 2009.
The Company entered into derivative contracts to limit the exposure to price fluctuations for physical purchases of diesel fuel which were designated as cash flow hedges for the forecasted purchases of fuel oil. The hedges are contracted to expire by December 31, 2012, and settle monthly. As of September 30, 2010, the current asset portion of the hedge was valued at $0.5 million and recorded as a current asset, offset by the current liability portion of the hedge valued at $(0.1) million recorded in other liabilities. As of December 31, 2009 the current portion of the hedge valued at $0.3 million was recorded in current assets. During the nine month period ended September 30, 2010, the Company recognized an expense of $0.07 million, and for the nine month period ended September 30, 2009, the Company recognized a reduction in expense of $0.6 million. The Company previously had fuel hedges that were out of the money, but these were terminated early in December 2008. However, due to accounting requirements, the Company amortized those hedges through the end of December 2009, for which we recognized $5.6 million in expense for the nine month period ended September 30, 2009.
ASC 820 requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which of these assets and liabilities must be grouped based on significant levels of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
Level 1Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
As of September 30, 2010, the Company held certain items that are required to be measured at fair value on a recurring basis, including fuel hedge agreements. The following items are measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of September 30, 2010 and December 31, 2009.
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
September 30, 2010 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Other assets: |
||||||||||||||||
Fuel hedge |
$ | 452 | $ | | $ | 452 | $ | | ||||||||
Total |
$ | 452 | $ | | $ | 452 | $ | | ||||||||
Other liabilities |
||||||||||||||||
Fuel hedge |
$ | 141 | $ | | $ | 141 | $ | | ||||||||
Total |
$ | 141 | $ | | $ | 141 | $ | | ||||||||
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
December 31, 2009 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Other assets: |
||||||||||||||||
Fuel hedge |
$ | 308 | $ | | $ | 308 | $ | | ||||||||
Total |
$ | 308 | $ | | $ | 308 | $ | | ||||||||
Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reflected in the financial statements at their carrying value, which approximates their fair value due to their short maturity.
The fair value of the Companys long-term debt was based upon observable inputs other than quoted market prices (Level 2 criteria).
September 30, 2010 | ||||||||||||||||||||
Carrying Value |
Fair Value |
Fair Value Measurement Category | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Senior Secured Notes |
$ | 195 | $ | 198 | $ | | $ | 198 | $ | | ||||||||||
Asset Based Loan |
57 | 57 | | 57 | | |||||||||||||||
Total |
$ | 252 | $ | 255 | $ | | $ | 255 | $ | | ||||||||||
December 31, 2009 | ||||||||||||||||||||
Carrying Value |
Fair Value |
Fair Value Measurement Category | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Senior Secured Notes |
$ | 200 | $ | 200 | $ | | $ | 200 | $ | | ||||||||||
Asset Based Loan |
80 | 80 | | 80 | | |||||||||||||||
Total |
$ | 280 | $ | 280 | $ | | $ | 280 | $ | | ||||||||||
During the nine months ended September 30, 2010 and 2009, respectively, there were no assets that required an adjustment to their carrying values since no impairment indicators were present.
Asset Retirement Obligations
The Company has recognized liabilities for retirement obligations associated with certain long-lived assets, in accordance with ASC No. 410, Asset Retirement and Environmental Obligations. An asset retirement obligation for a long-lived asset is recognized at fair value at inception of the obligation, if there is a legal obligation under an existing or enacted law or statute, a written or oral contract, or by legal construction under the doctrine of promissory estoppels. Retirement obligations are recognized only if the legal obligation exists in connection with or as a result of the permanent retirement, abandonment, or sale of a long-lived asset.
When the liability is initially recorded, the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its future value. The corresponding amount capitalized at inception is depreciated over the remaining useful life of the asset. The liability must be revalued each period based on current market prices.
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The Company recognized accretion expense associated with asset retirement obligations for each of the nine month periods ended September 30, 2010 and 2009 of $0.1 million. During these periods, no new retirement obligations were incurred and no significant revision to estimated cash flows used in determining the recognized asset retirement obligations was necessary.
Deferred Financing Costs
On December 4, 2007 (the Acquisition Date), the Company incurred deferred financing costs of $10.2 million in connection with the incurrence of indebtedness that was used to finance the acquisition of the Company (the Acquisition). These costs were being amortized over the life of the debt using the straight line method, which closely approximated the effective interest method, and were classified as interest expense. In December 2009, the Company refinanced all of the indebtedness that was incurred in connection with the Acquisition, and the unamortized deferred financing costs of $6.4 million associated with such indebtedness were written off. In addition, the Company incurred $10.3 million in financing costs in connection with the issuance of $200 million of senior secured notes due June 15, 2015 (the Senior Secured Notes) and the entry into a new asset based loan facility (the ABL), each of which occurred in December 2009. Such financing costs were deferred and are classified as deferred financing costs at December 31, 2009 and September 30, 2010. During each of the nine month periods ended September 30, 2010 and 2009, the Company amortized $1.6 million and $1.5 million of these costs, respectively.
3. Long-Term Debt
In connection with the Acquisition, the Company incurred $305 million of debt. A first lien credit agreement provided for a $205 million term loan. A second lien credit agreement provided for an additional $100 million of indebtedness. In December 2009, this indebtedness was refinanced and retired with the proceeds received from the issuance of the Senior Secured Notes and borrowings under the ABL. As of September 30, 2010, the aggregate principal amount of indebtedness outstanding under the ABL was $57.0 million.
Interest on the Senior Secured Notes is payable semi-annually, commencing June 15, 2010. The Senior Secured Notes mature and are due on June 15, 2015. The interest rate on the Senior Secured Notes is fixed at 11.75% per annum. No principal payments are due until maturity, subject to early required mandatory prepayment provisions set forth in the indenture governing the Senior Secured Notes.
The interest on the ABL is payable monthly, commencing December 31, 2009. No principal payments are due until maturity on December 22, 2013, subject to early required mandatory prepayment provisions set forth in the credit agreement for the ABL. The interest rate under the ABL as of September 30, 2010 was 4.0625%, which reflects a rate of LIBOR plus the applicable margin of 3.75%.
The following is a schedule by year of approximate future minimum debt payments as of September 30, 2010:
(In millions of dollars) | ||||
2013 |
$ | 57.0 | ||
2014 |
| |||
2015 |
195.0 | |||
Total |
$ | 252.0 | ||
The Companys debt agreements contain various restrictive covenants, including the maintenance of certain financial ratios, and limitations on the ability to pay dividends, incur debt or subject assets to liens. At September 30, 2010, the Company was in compliance in all material respects with all applicable covenants set forth in the indenture governing the Senior Secured Notes and the credit agreement governing the ABL.
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
4. Members Equity
In December 2007, our management team partnered with Greenstreet Equity Partners, LLC, Jefferies Capital Partners, AMCI Capital L.P. and an affiliate of First Reserve Corporation to acquire the Company from TECO Energy. We refer to the foregoing entities collectively as the Equity Sponsors.
On December 4, 2007, GS Maritime issued 100,000 Class A Membership Units to the Equity Sponsors and certain members of our management team. The total member contribution for the Class A Membership Units was $173 million. In connection with the closing of the Acquisition, GS Maritime also issued 9,890 Profit Units for the benefit of directors and employees of the Company. On August 14, 2008, an additional 1,649 Profit Units were issued, bringing the total number of issued and outstanding Profit Units to 11,539. An aggregate of 1,838 Profit Units were forfeited in connection with the departure of certain employees of the Company. In March, 2010, an additional 1,838 Profit Units were issued to certain employees of the Company, bringing the total number of issued and outstanding Profit Units to 11,539.
The GS Maritime Profit Units are issued to certain Company employees, certain members of the Board of Directors, and others at the discretion of GS Maritimes Board of Directors. GS Maritimes Board of Directors has the discretion to issue units at any time, including Profit Units. The Profit Units granted to employees are divided into time-based and performance-based vesting. The time-based units vest over 60 months. Assuming continued employment of the employee with the Company, 20% vest on the first anniversary of the grant date, and the remaining 80% vest in four equal installments on the second, third, fourth, and fifth anniversaries of the grant date. The performance-based units vest based on certain performance conditions being met or achieved and, in all cases, assuming continued employment. The performance conditions relate to holders of Class A Membership Units receiving a specified multiple on their investment upon a liquidation event. If an employee is terminated, GS Maritime may repurchase the employees vested Profit Units at fair market value.
For purposes of determining the compensation expense associated with Profit Unit grants, management valued the business enterprise using a variety of widely accepted valuation techniques which considered a number of factors such as the financial performance of the Company, the values of comparable companies and the lack of marketability of the Companys equity. The Company then used the binomial option pricing model to determine the fair value of these units at the time of grant using valuation assumptions consisting of the expected term in which the units will be realized; a risk-free interest rate equal to the U.S. federal treasury bond rate consistent with the term assumption; expected dividend yield, for which there is none; and expected volatility based on the historical data of equity instruments of comparable companies.
For the grant of Profit Units made in December 2007, the Company used the following valuation assumptions: a term of 5 years, which is based on the expected term in which the units will be realized, a risk-free interest rate of 3.28%, which is the five-year U.S federal treasury bond rate consistent with the term assumptions, and expected volatility of 40.5%, which is based on the historical data of equity instruments of comparable companies. The estimated fair value of the units, less an assumed forfeiture rate of 5%, will be recognized in expense in the Companys financials statements on an accelerated recognition basis over the requisite service periods of the awards (which include expensing a portion of the vesting that occurs in future periods in the current period).
For the grant of Profit Units made in August 2008, the Company used the following valuation assumptions: a term of five years, which is based on the expected term in which the units will be realized, a risk-free interest rate of 3.00%, which is the five-year U.S federal treasury bond rate consistent with the term assumptions, and expected volatility of 48.5%, which is based on the historical data of equity instruments of comparable companies. The estimated fair value of the units, less an assumed forfeiture rate of 10%, will be recognized in expense in the Companys financials statements on an accelerated recognition basis over the requisite service periods of the awards (which include expensing a portion of the vesting that occurs in future periods in the current period).
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
For the grant of Profit Units made in March 2010, the Company used the following valuation assumptions: a term of five years, which is based on the expected term in which the units will be realized, a risk-free interest rate of 2.00%, which is the five-year U.S federal treasury bond rate consistent with the term assumptions, and expected volatility of 50.5%, which is based on the historical data of equity instruments of comparable companies. The estimated fair value of the units, less an assumed forfeiture rate of 5%, will be recognized in expense in the Companys financials statements on an accelerated recognition basis over the requisite service periods of the awards (which include expensing a portion of the vesting that occurs in future periods in the current period).
In accordance with ASC No. 718, Compensation Stock Compensation, the Company recorded stock-based compensation expense for the nine months ended September 30, 2010 and 2009 of $0.3 million and $0.5 million, respectively, which is included in administrative and general expense in the consolidated statements of operations and comprehensive loss. The activity under the plan for the nine months ended September 30, 2010 is presented below.
Profit Units Outstanding |
Weighted Average Grant Date Fair Value |
|||||||
Non-vested balance at end of period December 31, 2009 |
7,374 | $ | 311.52 | |||||
Units granted |
1,838 | 472.60 | ||||||
Units forfeited |
(321 | ) | 388.93 | |||||
Vested |
(233 | ) | 289.60 | |||||
Non-vested balance at end of period September 30, 2010 |
8,658 | $ | 453.04 | |||||
As of September 30, 2010, there was approximately $3.0 million of total unrecognized compensation expense related to the Profit Units. These costs are expected to be recognized over a weighted average period of 4 years.
5. Intangible Assets and Sale-Leasebacks
The Company has assessed all acquired operating leases in order to determine whether the lease terms were favorable or unfavorable given market conditions on the Acquisition Date. As a result, the Company recorded a favorable lease intangible asset for $11.9 million. Also in connection with the Acquisition, an acquired intangible asset of $22.0 million was assigned to customer relationships, which is subject to amortization with a weighted average useful life of approximately 10 years.
Amortization of intangible assets is charged to expense on a straight-line basis in the accompanying consolidated statements of operations and comprehensive loss. If impairment events occur, the Company could accelerate the timing of purchased intangible asset charges. For each of the nine month periods ended September 30, 2010 and 2009, amortization expense related to the intangible assets acquired and the intangible liability assumed was $2.0 million.
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
A summary of intangible assets at September 30, 2010 and 2009 follows (dollars in thousands):
December
31, 2009 Balance |
September
30, 2010 Balance |
|||||||||||||||
Asset Life | Amortization | |||||||||||||||
Favorable LeaseBarges |
13.5 years | $ | 1,498 | $ | 80 | $ | 1,418 | |||||||||
Favorable LeaseOcean Vessels |
6 years | 13,426 | 659 | 12,767 | ||||||||||||
Favorable LeaseDavant facility |
21 years | 998 | 25 | 973 | ||||||||||||
Unfavorable LeaseDavant facility |
22 years | (7,240 | ) | (172 | ) | (7,068 | ) | |||||||||
Customer Relationship (Contracts) |
10 years | 15,382 | 1,385 | 13,997 | ||||||||||||
Total |
$ | 24,064 | $ | 1,977 | $ | 22,087 | ||||||||||
December
31, 2008 Balance |
September
30, 2009 Balance |
|||||||||||||||
Asset Life | Amortization | |||||||||||||||
Favorable LeaseBarges |
13.5 years | $ | 1,605 | $ | 80 | $ | 1,525 | |||||||||
Favorable LeaseOcean Vessels |
6 years | 14,305 | 659 | 13,646 | ||||||||||||
Favorable LeaseDavant facility |
21 years | 1,032 | 25 | 1,007 | ||||||||||||
Unfavorable LeaseDavant facility |
22 years | (7,469 | ) | (172 | ) | (7,297 | ) | |||||||||
Customer Relationship (Contracts) |
10 years | 17,227 | 1,385 | 15,842 | ||||||||||||
Total |
$ | 26,700 | $ | 1,977 | $ | 24,723 | ||||||||||
Estimated future amortization expense is as follows at September 30, 2010:
(Dollars in thousands) | ||||
2010 |
$ | 659 | ||
2011 |
2,636 | |||
2012 |
2,636 | |||
2013 |
12,548 | |||
2014 |
1,758 | |||
Thereafter |
1,849 |
In April 2008, the FASB issued guidance amending the factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset. This guidance requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset, and is an attempt to improve consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. The Company adopted this guidance on January 1, 2009 and has applied it prospectively to intangible assets acquired after the effective date.
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
6. Property and Equipment
Property and equipment consists of the following (dollars in thousands):
Average Useful Lives In Years |
September 30, 2010 |
December 31, 2009 |
||||||||||
(unaudited) | ||||||||||||
Land |
$ | 7,025 | $ | 7,025 | ||||||||
Buildings |
1 - 30 | 4,501 | 4,446 | |||||||||
Vessels |
3 - 28 | 370,353 | 361,344 | |||||||||
Terminals |
1 - 35 | 56,788 | 54,102 | |||||||||
Machinery |
1 - 20 | 11,424 | 10,086 | |||||||||
Other |
1 - 20 | 8,635 | 7,612 | |||||||||
Work in progress |
2,560 | 3,284 | ||||||||||
Total costs |
461,286 | 447,899 | ||||||||||
Accumulated depreciation |
(116,597 | ) | (84,343 | ) | ||||||||
Property and equipment, net |
$ | 344,689 | $ | 363,556 | ||||||||
7. Employee Postretirement Benefits
401(k) Savings Plan
The Company has a 401(k) savings plan covering substantially all employees of the Company that enables participants to save a portion of their compensation up to the limits allowed by IRS guidelines. Effective December 4, 2007, the Company and its subsidiaries employer matching contributions were 100% of up to 6% of eligible participant contributions. Effective May 5, 2009, the Company discontinued the employer contribution to this plan until further notice. Effective July 1, 2010, the Company reinstated the employer matching contribution of 50% of up to 6% of eligible participant compensation. For the nine months ended September 30, 2010 and 2009, the Company recognized $0.2 million and $0.7 million in expense respectively. These expenses are reflected in the administrative and general expense financial statement line item in the Companys consolidated statements of operations and comprehensive loss.
Defined Contribution Plan
On December 4, 2007, the Company established a defined contribution plan. The plan is funded entirely by the Company. Funding levels per employee are determined by the employees service time with the Company and the employees age. The funding levels per year are discretionary and range from 0.0% to 5%. Employees are vested after being with the Company three years. Effective January 1, 2009, the Company discontinued the employer contribution to this plan until further notice and incurred no expense related to the plan in 2009 and for the nine months ended September 30, 2010.
8. Income Taxes
At the Acquisition Date, the Company and all of its subsidiaries were converted from corporations into limited liability companies (each treated as a partnership for federal income tax purposes). As of December 4, 2007, the Company is no longer subject to federal income tax. State income taxes are immaterial in the periods presented.
9. Related Parties
The Company and its subsidiaries enter into certain transactions, in the ordinary course of business, with entities in which directors of the Company or the Equity Sponsors have interests. In addition, the Company is party to a financial consulting and management services agreement with the Equity Sponsors. For each of the nine month periods ended September 30, 2010 and 2009, respectively, the Company incurred management fees under the financial consulting and management services agreement of $1.1
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
million, which is classified as administrative and general expense in the Companys unaudited consolidated statements of operations and comprehensive loss. In addition, approximately $0.7 million and $0.6 million of expenses were incurred for the nine month periods ended September 30, 2010 and 2009, respectively, in the normal course of business for legal services, regulatory compliance, and other services that are with related party vendors.
10. Commitments and Contingencies
Litigation
The Company is involved in various legal proceedings that have arisen in the ordinary course of business. In the opinion of the Companys management, all such proceedings are adequately covered by insurance or, if not so covered, should not result in any liability which would have a material adverse effect on the consolidated financial position or consolidated operations of the Company.
As previously disclosed in the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, which was filed with the Securities and Exchange Commission on August 16, 2010, on August 9, 2010, United Ocean Services, LLC (UOS), a wholly-owned subsidiary of the Company, received a letter from The Mosaic Company (Mosaic) claiming that, as a result of a preliminary injunction affecting Mosaics South Fort Meade phosphate mine, a force majeure event had occurred under UOS contract with Mosaic (the Mosaic Agreement).
In September 2010, UOS received additional communications from Mosaic informing UOS that, effective as of the beginning of the fourth quarter and due to the alleged occurrence of a force majeure event under the terms of the Mosaic Agreement, Mosaic was effectively reducing the amount of phosphate rock shipped using UOS vessels to zero. The letter from Mosaic indicated that, barring judicial relief in respect of the preliminary injunction, Mosaic could not predict when shipments may resume. The Company has advised Mosaic that it does not believe that the issuance of the preliminary injunction affecting Mosaics South Fort Meade phosphate mine constitutes force majeure circumstances within the meaning of the Mosaic Agreement. The Company is currently evaluating its options with respect to the foregoing, and intends to continue to monitor Mosaics ongoing litigation relating to its South Fort Meade phosphate mine in formulating the appropriate course of action.
Operating Leases
The Company rents real property, boats and barges under certain non-cancelable operating leases expiring at various dates through 2029, excluding renewal options. Certain of the leases require the lessee to pay property taxes or are subject to escalating rent clauses. In addition, one lease requires contingent rental payments based on tonnage shipped. This contingent rental, as well as the related minimum rental payment, fluctuates with the Producers Price Index and the Consumer Price Index.
Rental expense for the nine months ended September 30, 2010 and 2009 amounted to approximately $12.9 million and $11.6 million, respectively. Rental expense is included in the operating expenses financial statement line item in the unaudited consolidated statements of operations and comprehensive loss. The following is a schedule by year of approximate future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2010 (dollars in thousands):
(Dollars in thousands) | ||||
2010 |
$ | 3,345 | ||
2011 |
11,722 | |||
2012 |
11,546 | |||
2013 |
10,052 | |||
2014 |
5,349 | |||
Thereafter |
46,101 | |||
Total minimum lease payments |
$ | 88,115 | ||
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Other
As of September 30, 2010, certain financial institutions had issued letters of credit on behalf of the Company with an aggregate face amount of approximately $3.7 million, none of which had been drawn as of September 30, 2010.
11. Business Segments
The Company has three reportable business segments: United Bulk Terminal, United Ocean Services, and United Barge Line. The Company records the corporate activity under the caption Other. The United Bulk Terminal segment includes barge and vessel unloading and loading, and fleeting and shifting. The United Ocean Services segment provides transportation services on domestic and international voyages. The United Barge Line segment includes transporting, fleeting, shifting, and repair services along the Inland Waterways consisting of the Mississippi River, the Ohio River, the Illinois River and their tributaries (collectively known as Inland Waterways).
Management evaluates performance based on segment earnings, which is defined as operating income. The accounting policies of the reportable segments are consistent with those described in the summary of significant accounting policies. Intercompany sales are eliminated upon consolidation.
Reportable segments are business units that offer different products or services. The reportable segments are managed separately because they provide distinct products and services to internal and external customers.
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Reportable Segments | Other (1) | Intersegment Eliminations |
Total | |||||||||||||||||||||
United Bulk Terminal |
United Ocean Services |
United Barge Line |
||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Three months ended September 30, 2010 |
||||||||||||||||||||||||
Total revenue |
$ | 11,203 | $ | 35,987 | $ | 33,300 | $ | 3,177 | $ | | $ | 83,667 | ||||||||||||
Intersegment revenues |
| | | | (3,603 | ) | (3,603 | ) | ||||||||||||||||
Revenue from external customers |
11,203 | 35,987 | 33,300 | 3,177 | (3,603 | ) | 80,064 | |||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Operating expenses |
4,914 | 20,629 | 22,780 | | (427 | ) | 47,896 | |||||||||||||||||
Maintenance and repairs |
1,383 | 4,645 | 1,839 | | | 7,867 | ||||||||||||||||||
Depreciation and amortization |
1,456 | 5,590 | 4,979 | 41 | | 12,066 | ||||||||||||||||||
Loss on sale of assets |
19 | | 8 | | | 27 | ||||||||||||||||||
Administrative and general |
2,171 | 3,340 | 3,267 | 3,255 | (3,177 | ) | 8,856 | |||||||||||||||||
Total operating expenses |
9,943 | 34,204 | 32,873 | 3,296 | (3,604 | ) | 76,712 | |||||||||||||||||
Operating income (loss) |
$ | 1,260 | $ | 1,783 | $ | 427 | $ | (119 | ) | $ | 1 | $ | 3,352 | |||||||||||
Total assets |
$ | 72,033 | $ | 182,818 | $ | 177,315 | $ | 410,535 | $ | (406,249 | ) | $ | 436,452 | |||||||||||
Total capital expenditures |
$ | 422 | $ | 3,922 | $ | 580 | $ | | $ | | $ | 4,924 |
(1) | Other items (including corporate costs) are shown for purposes of reconciling to the Companys consolidated totals as shown in the table above. |
Reportable Segments | Other (1) | Intersegment Eliminations |
Total | |||||||||||||||||||||
United Bulk Terminal |
United Ocean Services |
United Barge Line |
||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Three months ended September 30, 2009 |
||||||||||||||||||||||||
Total revenue |
$ | 7,803 | $ | 34,516 | $ | 30,298 | $ | 2,386 | $ | | $ | 75,003 | ||||||||||||
Intersegment revenues |
| | | | (3,000 | ) | (3,000 | ) | ||||||||||||||||
Revenue from external customers |
7,803 | 34,516 | 30,298 | 2,386 | (3,000 | ) | 72,003 | |||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Operating expenses |
4,114 | 17,809 | 20,707 | | 1,982 | 44,612 | ||||||||||||||||||
Maintenance and repairs |
1,564 | 5,543 | 1,453 | | (1,593 | ) | 6,967 | |||||||||||||||||
Depreciation and amortization |
1,253 | 5,026 | 4,918 | | | 11,197 | ||||||||||||||||||
Loss (gain) on sale of assets |
| | (23 | ) | | | (23 | ) | ||||||||||||||||
Administrative and general |
1,684 | 4,018 | 3,270 | 2,242 | (3,388 | ) | 7,826 | |||||||||||||||||
Total operating expenses |
8,615 | 32,396 | 30,325 | 2,242 | (2,999 | ) | 70,579 | |||||||||||||||||
Operating (loss) income |
$ | (812 | ) | $ | 2,120 | $ | (27 | ) | $ | 144 | $ | (1 | ) | $ | 1,424 | |||||||||
Total assets |
$ | 92,832 | $ | 255,081 | $ | 305,953 | $ | 625,736 | $ | (798,717 | ) | $ | 480,885 | |||||||||||
Total capital expenditures |
$ | 829 | $ | 1,982 | $ | 996 | $ | | $ | | $ | 3,807 |
(1) | Other items (including corporate costs) are shown for purposes of reconciling to the Companys consolidated totals as shown in the table above. |
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Reportable Segments | ||||||||||||||||||||||||
United Bulk Terminal |
United Ocean Services |
United Barge Line |
Other (1) | Intersegment Eliminations |
Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Nine months ended September 30, 2010 |
||||||||||||||||||||||||
Total revenue |
$ | 31,612 | $ | 107,267 | $ | 96,594 | $ | 9,418 | $ | | $ | 244,891 | ||||||||||||
Intersegment revenues |
| | | | (10,449 | ) | (10,449 | ) | ||||||||||||||||
Revenue from external customers |
31,612 | 107,267 | 96,594 | 9,418 | (10,449 | ) | 234,442 | |||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Operating expenses |
13,438 | 62,756 | 68,909 | | (1,031 | ) | 144,072 | |||||||||||||||||
Maintenance and repairs |
5,175 | 13,342 | 3,949 | | | 22,466 | ||||||||||||||||||
Depreciation and amortization |
3,979 | 16,106 | 14,846 | 118 | | 35,049 | ||||||||||||||||||
Loss (gain) on sale of assets |
91 | 1 | (131 | ) | | | (39 | ) | ||||||||||||||||
Administrative and general |
6,231 | 9,786 | 10,148 | 9,496 | (9,412 | ) | 26,249 | |||||||||||||||||
Total operating expenses |
28,914 | 101,991 | 97,721 | 9,614 | (10,443 | ) | 227,797 | |||||||||||||||||
Operating income (loss) |
$ | 2,698 | $ | 5,276 | $ | (1,127 | ) | $ | (196 | ) | $ | (6 | ) | $ | 6,645 | |||||||||
Total assets |
$ | 72,033 | $ | 182,818 | $ | 177,315 | $ | 410,535 | $ | (406,249 | ) | $ | 436,452 | |||||||||||
Total capital expenditures |
$ | 3,835 | $ | 8,297 | $ | 2,066 | $ | 50 | $ | | $ | 14,248 |
(1) | Other items (including corporate costs) are shown for purposes of reconciling to the Companys consolidated totals as shown in the table above. |
Reportable Segments | ||||||||||||||||||||||||
United Bulk Terminal |
United Ocean Services |
United Barge Line |
Other (1) | Intersegment Eliminations |
Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Nine months ended September 30, 2009 |
||||||||||||||||||||||||
Total revenue |
$ | 24,232 | $ | 107,250 | $ | 84,076 | $ | 7,701 | $ | | $ | 223,259 | ||||||||||||
Intersegment revenues |
| | | | (9,816 | ) | (9,816 | ) | ||||||||||||||||
Revenue from external customers |
24,232 | 107,250 | 84,076 | 7,701 | (9,816 | ) | 213,443 | |||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Operating expenses |
11,135 | 56,034 | 59,274 | | 480 | 126,923 | ||||||||||||||||||
Maintenance and repairs |
4,321 | 10,774 | 3,807 | | (1,593 | ) | 17,309 | |||||||||||||||||
Depreciation and amortization |
3,638 | 14,570 | 14,709 | | | 32,917 | ||||||||||||||||||
Loss (gain) on sale of assets |
| | (18 | ) | | | (18 | ) | ||||||||||||||||
Administrative and general |
5,091 | 10,630 | 9,900 | 7,557 | (8,703 | ) | 24,475 | |||||||||||||||||
Total operating expenses |
24,185 | 92,008 | 87,672 | 7,557 | (9,816 | ) | 201,606 | |||||||||||||||||
Operating income (loss) |
$ | 47 | $ | 15,242 | $ | (3,596 | ) | $ | 144 | $ | | $ | 11,837 | |||||||||||
Total assets |
$ | 92,832 | $ | 255,081 | $ | 305,953 | $ | 625,736 | $ | (798,717 | ) | $ | 480,885 | |||||||||||
Total capital expenditures |
$ | 2,100 | $ | 9,260 | $ | 1,832 | $ | 10 | $ | | $ | 13,202 |
(1) | Other items (including corporate costs) are shown for purposes of reconciling to the Companys consolidated totals as shown in the table above. |
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
12. Debtor Guarantor Financial Statements
In December 2009, the Company issued its Senior Secured Notes which were fully and unconditionally guaranteed on a joint and several basis by all the Companys subsidiaries. All subsidiaries are 100% owned by the Company.
CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 2010
Unaudited
(Dollars in thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 587 | $ | 343 | $ | | $ | 930 | ||||||||
Accounts receivable trade, net of allowance for doubtful accounts |
236,973 | 36,496 | (242,926 | ) | 30,543 | |||||||||||
Materials and supplies |
| 18,198 | | 18,198 | ||||||||||||
Prepaid expenses and other current assets |
462 | 5,379 | | 5,841 | ||||||||||||
Total current assets |
238,022 | 60,416 | (242,926 | ) | 55,512 | |||||||||||
Property and equipment, net |
389 | 344,300 | | 344,689 | ||||||||||||
Investment in subsidiaries |
163,323 | | (163,323 | ) | | |||||||||||
Deferred financing costs, net of amortization |
8,801 | | | 8,801 | ||||||||||||
Other assets |
| 5,363 | | 5,363 | ||||||||||||
Intangible asset, net of amortization |
| 22,087 | | 22,087 | ||||||||||||
Total |
$ | 410,535 | $ | 432,166 | $ | (406,249 | ) | $ | 436,452 | |||||||
Liabilities and members equity |
||||||||||||||||
Current liabilities |
||||||||||||||||
Accounts payable |
$ | 7,069 | $ | 256,731 | $ | (242,926 | ) | $ | 20,874 | |||||||
Accrued expenses and other current liabilities |
6,890 | 2,765 | | 9,655 | ||||||||||||
Total current liabilities |
13,959 | 259,496 | (242,926 | ) | 30,529 | |||||||||||
Other deferred liabilities |
| 12,390 | | 12,390 | ||||||||||||
Notes payablelong term debt |
251,985 | | | 251,985 | ||||||||||||
Members equity |
144,591 | 160,280 | (163,323 | ) | 141,548 | |||||||||||
Total |
$ | 410,535 | $ | 432,166 | $ | (406,249 | ) | $ | 436,452 | |||||||
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET AS DECEMBER 31, 2009
Unaudited
(Dollars in thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 11,261 | $ | 370 | $ | | $ | 11,631 | ||||||||
Accounts receivable trade, net of allowance for doubtful accounts |
448,997 | 264,040 | (680,396 | ) | 32,641 | |||||||||||
Materials and supplies |
| 15,501 | | 15,501 | ||||||||||||
Prepaid expenses and other current assets |
578 | 4,558 | | 5,136 | ||||||||||||
Total current assets |
460,836 | 284,469 | (680,396 | ) | 64,909 | |||||||||||
Property and equipment, net |
456 | 363,100 | | 363,556 | ||||||||||||
Investment in subsidiaries |
163,323 | | (163,323 | ) | | |||||||||||
Deferred financing fees, net of amortization |
10,312 | | | 10,312 | ||||||||||||
Other assets |
| 5,058 | | 5,058 | ||||||||||||
Intangible asset, net of amortization |
| 24,064 | | 24,064 | ||||||||||||
Total |
$ | 634,927 | $ | 676,691 | $ | (843,719 | ) | $ | 467,899 | |||||||
Liabilities and members equity |
||||||||||||||||
Current liabilities |
||||||||||||||||
Accounts payable |
$ | 188,583 | $ | 510,775 | $ | (680,396 | ) | $ | 18,962 | |||||||
Accrued expenses and other current liabilities |
704 | 1,579 | | 2,283 | ||||||||||||
Total current liabilities |
189,287 | 512,354 | (680,396 | ) | 21,245 | |||||||||||
Other deferred liabilities |
| 11,634 | | 11,634 | ||||||||||||
Notes payablelong term debt |
280,125 | | | 280,125 | ||||||||||||
Members equity |
165,515 | 152,703 | (163,323 | ) | 154,895 | |||||||||||
Total |
$ | 634,927 | $ | 676,691 | $ | (843,719 | ) | $ | 467,899 | |||||||
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2010
Unaudited
(Dollars in thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Revenue |
$ | 3,177 | $ | 80,490 | $ | (3,603 | ) | $ | 80,064 | |||||||
Operating expenses |
| 56,190 | (427 | ) | 55,763 | |||||||||||
Administrative and general |
3,255 | 8,778 | (3,177 | ) | 8,856 | |||||||||||
Depreciation and amortization |
41 | 12,025 | | 12,066 | ||||||||||||
Loss on sale of assets |
| 27 | | 27 | ||||||||||||
Operating (loss) income |
(119 | ) | 3,470 | 1 | 3,352 | |||||||||||
Interest expense, net |
7,170 | | | 7,170 | ||||||||||||
Other (income) expense, net |
(78 | ) | (759 | ) | | (837 | ) | |||||||||
Net income (loss) |
$ | (7,211 | ) | $ | 4,229 | $ | 1 | $ | (2,981 | ) | ||||||
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2009
Unaudited
(Dollars in thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Revenue |
$ | 2,386 | $ | 72,617 | $ | (3,000 | ) | $ | 72,003 | |||||||
Operating expenses |
| 51,190 | 389 | 51,579 | ||||||||||||
Administrative and general |
2,242 | 8,972 | (3,388 | ) | 7,826 | |||||||||||
Depreciation and amortization |
| 11,197 | | 11,197 | ||||||||||||
Gain on sale of assets |
| (23 | ) | | (23 | ) | ||||||||||
Operating income (loss) |
144 | 1,281 | (1 | ) | 1,424 | |||||||||||
Interest expense, net |
| 6,279 | | 6,279 | ||||||||||||
Other expense, net |
| 1,543 | | 1,543 | ||||||||||||
Loss before tax provision |
144 | (6,541 | ) | (1 | ) | (6,398 | ) | |||||||||
Tax provision |
| 9 | | 9 | ||||||||||||
Net income (loss) |
$ | 144 | $ | (6,550 | ) | $ | (1 | ) | $ | (6,407 | ) | |||||
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2010
Unaudited
(Dollars in thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Revenue |
$ | 9,418 | $ | 235,473 | $ | (10,449 | ) | $ | 234,442 | |||||||
Operating expenses |
| 167,569 | (1,031 | ) | 166,538 | |||||||||||
Administrative and general |
9,496 | 26,165 | (9,412 | ) | 26,249 | |||||||||||
Depreciation and amortization |
118 | 34,931 | | 35,049 | ||||||||||||
Gain on sale of assets |
| (39 | ) | | (39 | ) | ||||||||||
Operating (loss) income |
(196 | ) | 6,847 | (6 | ) | 6,645 | ||||||||||
Interest expense, net |
21,643 | | | 21,643 | ||||||||||||
Other income, net |
(78 | ) | (732 | ) | | (810 | ) | |||||||||
Net (loss) income |
$ | (21,761 | ) | $ | 7,579 | $ | (6 | ) | $ | (14,188 | ) | |||||
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2009
Unaudited
(Dollars in thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Revenue |
$ | 7,701 | $ | 215,558 | $ | (9,816 | ) | $ | 213,443 | |||||||
Operating expenses |
| 145,345 | (1,113 | ) | 144,232 | |||||||||||
Administrative and general |
7,557 | 25,621 | (8,703 | ) | 24,475 | |||||||||||
Depreciation and amortization |
| 32,917 | | 32,917 | ||||||||||||
Gain on sale of assets |
| (18 | ) | | (18 | ) | ||||||||||
Operating income |
144 | 11,693 | | 11,837 | ||||||||||||
Interest expense, net |
| 18,995 | | 18,995 | ||||||||||||
Other expense, net |
| 5,317 | | 5,317 | ||||||||||||
Loss before tax provision |
144 | (12,619 | ) | | (12,475 | ) | ||||||||||
Tax provision |
| 27 | | 27 | ||||||||||||
Net loss |
$ | 144 | $ | (12,646 | ) | $ | | $ | (12,502 | ) | ||||||
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2010
(Dollars in thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Operating activities: |
||||||||||||||||
Net cash provided by operating activities |
$ | 17,016 | $ | 13,706 | $ | | $ | 30,722 | ||||||||
Investing activities: |
||||||||||||||||
Capital expenditures |
(50 | ) | (14,198 | ) | | (14,248 | ) | |||||||||
Other investing activities |
| 557 | | 557 | ||||||||||||
Net cash used in investing activities |
(50 | ) | (13,641 | ) | | (13,691 | ) | |||||||||
Financing activities: |
||||||||||||||||
Net change in debt |
(28,140 | ) | | | (28,140 | ) | ||||||||||
Other financing activities |
408 | | | 408 | ||||||||||||
Net cash used in financing activities |
(27,732 | ) | | | (27,732 | ) | ||||||||||
Net (decrease) increase in cash and cash equivalents |
(10,766 | ) | 65 | | (10,701 | ) | ||||||||||
Cash and cash equivalents, at beginning of period |
11,261 | 370 | | 11,631 | ||||||||||||
Cash and cash equivalents, at end of period |
$ | 495 | $ | 435 | $ | | $ | 930 | ||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2009
(Dollars in thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Operating activities: |
||||||||||||||||
Net cash provided by operating activities |
$ | 16,140 | $ | 20,588 | $ | | $ | 36,728 | ||||||||
Investing activities: |
||||||||||||||||
Capital expenditures |
(10 | ) | (13,192 | ) | | (13,202 | ) | |||||||||
Other investing activities |
| 374 | | 374 | ||||||||||||
Net cash used in investing activities |
(10 | ) | (12,818 | ) | | (12,828 | ) | |||||||||
Financing activities: |
||||||||||||||||
Net change in debt |
(281 | ) | (7,798 | ) | | (8,079 | ) | |||||||||
Other financing activities |
| | | | ||||||||||||
Net cash used in financing activities |
(281 | ) | (7,798 | ) | | (8,079 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents |
15,849 | (28 | ) | | 15,821 | |||||||||||
Cash and cash equivalents, at beginning of period |
11,285 | 331 | | 11,616 | ||||||||||||
Cash and cash equivalents, at end of period |
$ | 27,134 | $ | 303 | $ | | $ | 27,437 | ||||||||
13. Subsequent Events
Effective October 4, 2010, Sal Litrico, the President and Chief Executive Officer of United Maritime Group, LLC (the Company), ceased to be employed by the Company, and will no longer serve on the Board of Directors of GS Maritime the ultimate parent of the company.
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UNITED MARITIME GROUP, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Effective October 4, 2010, Steven Green was named interim President and Chief Executive Officer of the Company and interim Chief Executive Officer of GS Maritime. Mr. Green is currently the Chairman of the Board of Directors of GS Maritime, and has served in such capacity since December 4, 2007. Mr. Green is a former U.S. ambassador to Singapore and has been managing partner of Greenstreet Partners, LP, a merchant bank that was founded by Mr. Green, since 1989.
Effective October 22, 2010, Timothy Bresnahan, the Secretary and Senior Vice President, Business Development of United Maritime Group, LLC (the Company), ceased to be employed by the Company.
With the departure of the President and Chief Executive Officer on October 4, 2010 and the Senior Vice President, Business Development on October 22, 2010, the Company will recognize approximately $1.4 million in additional salary and severance related expense in the fourth quarter of 2010.
On October 28, 2010, the Company learned that Mosaic had reached an agreement with the environmental organizations who have opposed the permits for mining operations at Mosaics South Fort Meade mine. A preliminary injunction relating to those mining permits has given rise to Mosaics claim of circumstances of force majeure under the Mosaic Agreement. The Company understands that the agreement between Mosaic and the environmental organizations will allow the mining of about 200 acres over an estimated four month period at the Hardee County Extension of Mosaics South Fort Meade mine while Mosaics litigation with the environmental organizations continues. Mosaic has indicated to the Company that it does not expect this limited mining will allow them to resume shipments under the Mosaic Agreement. Mosaics position continues to be that the preliminary injunction constitutes a force majeure event which provides relief from the guaranteed annual minimum obligations under the Mosaic Agreement. The Company continues to dispute that claim.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Managements Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as believes, expects, may, estimates, will, should, plans or anticipates or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under Forward-Looking Statements and Risk Factors in the Companys Registration Statement on Form S-4 filed with the Securities and Exchange Commission on July 2, 2010 (the Registration Statement), all of which are incorporated herein by reference. Moreover, we caution you not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with the Companys audited and unaudited consolidated financial statements and related notes thereto in Item 1, FINANCIAL STATEMENTS in this quarterly report and the Companys audited Consolidated Financial Statements for the year ended December 31, 2009 and related Notes that are contained in the Registration Statement.
General
We are a leading independent provider of dry bulk marine transportation services in the U.S.-flag coastwise, U.S. Government cargo preference and inland barge markets. We also own and operate the largest coal and petcoke terminal in the Gulf of Mexico, which is strategically located as the first inbound dry bulk terminal on the Mississippi River. We operate in three business segments: United Ocean Services, United Barge Line and United Bulk Terminal.
United Ocean Services (UOS)
UOS provides transportation services on domestic and international voyages. These services are contracted under single or consecutive voyage charters on a spot basis, or long-term contracts ranging from one to ten years. Most of the international voyages are performed under cargo preference programs, the most significant of which is Public Law 480 (PL-480). We charge for these services either on a per ton or per day basis. Under a per ton contract, we are generally responsible for all expenses including fuel. Revenues under these contracts are based on a per ton rate. We bear the risk of time lost due to weather, maintenance, and delay at docks which are not covered by demurrage. Demurrage is compensation due from the customer when there are delays at the dock that prevent the vessel from loading or unloading within the contract terms. Our contracts have fuel price mechanisms that limit our exposure to changes in fuel price. We also time charter our vessels, such that the customer has exclusive use of a particular vessel for a specified time period and rates are on a per day basis. We pay expenses related to the vessels maintenance and operation and the charterer is responsible for all voyage costs, including port charges and fuel.
Rates for UOS movements are based on the amount of freight demand relative to the availability of vessels to meet that demand. In the coastwise market, a significant portion of the movements are based on long-term contractual relationships. Vessels are often customized or particularly suited for individual customers, cargoes or trades. There has been a reduction in new movements and spot opportunities due to the economic downturn late in 2008. Rates in the cargo preference trade are based on funding for such programs and the availability of U.S.-flag vessels. While cargoes transported have remained relatively steady, capacity in the cargo preference market has increased as charter rates in the international dry bulk
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market have declined, and as coastwise petroleum product movements have been reduced due to declining U.S. gasoline demand. As such, a number of dry bulk vessels and single-hulled product tankers capable of carrying limited grain cargoes have bid for preference cargoes. The single-hulled product tankers are unable to secure petroleum product movements due to customer preference and availability of double-hulled product tankers. These vessels are subject to the Oil Pollution Act of 1990 which, among other requirements, mandates the phase-out dates of single-hulled tank vessels from the petroleum product trade. We anticipate capacity in the cargo preference trade to diminish going forward as certain of the single-hulled product tankers are likely to leave the trade due to insufficient margins, as their specifications make transporting bulk cargoes generally more costly and operationally difficult, and as they are phased out of the petroleum product trade.
If customer requirements for movements of cargoes are reduced or spot employment is not available as a vessel completes its last movement, the vessel may be idle and not generate revenue. If this situation exists for an extended period of time, we may place a vessel in lay up status. While in lay up, all machinery is shut down, the crew is removed and the vessel is secured. Lay up minimizes the costs associated with the vessel, particularly fuel and crew costs. Due to diminished employment opportunities, we placed one tug-barge unit in lay up beginning in March 2009 and one tug-barge unit in lay up beginning in October 2009. This latter unit underwent required drydocking and maintenance and returned to service in the second quarter of 2010. Additionally, two tug-barge units were idled, one in March 2010, the other in September 2010. We will monitor market conditions to determine if and when these units will be returned to service. Restoring a vessel back to active service may require time to hire crews and perform dry-docking or other maintenance required to ensure the vessel is fully compliant with Class and Coast Guard regulations.
Operating costs for UOS consist primarily of crewing, insurance, maintenance, lease, fuel and voyage-specific port and direct costs. Maintenance costs materially fluctuate in relation to the number and extent of regulatory drydockings in any given period. The cost associated with the U.S. Coast Guard and classification society mandated drydocking of vessels are accounted for as follows: (i) regulatory maintenance expenses are recorded as deferred costs and amortized over the period until the next scheduled dry-docking, (ii) routine maintenance expenses, such as inspections, docking costs and other normal expenditures, are expensed as incurred and (iii) costs relating to major steelwork, coatings or any other work that extends the life of the vessel are capitalized. Due to the age of our fleet and the nature of marine transportation, we have spent significant time and capital maintaining our vessels to ensure they are operating efficiently and safely.
United Barge Line (UBL)
UBL provides inland towboat and barge transportation services. UBL primarily performs these services under affreightment contracts, under which our customers engage us to move cargo for a per ton rate from an origin point to a destination point along the Inland Waterways on our barges, pushed primarily by our towboats. Affreightment contracts include both term and spot market arrangements.
Operating costs for UBL consist primarily of crewing, insurance, port costs, lease, maintenance and repairs, and fuel. Most of our term contracts have fuel price mechanisms which limit our exposure to changes in fuel price. However, our spot contracts do not have this mechanism and we therefore bear the risk of fuel price increases. In order to limit our exposure, we currently hedge 50% to 75% of our expected fuel exposure over the next twelve month period.
We primarily utilize our owned fleet of towboats for transporting our barges. To the extent one or more of our towboats has unused capacity, we use the vessel to provide outside towing services. Outside towing revenue is earned by moving barges for third party affreightment carriers at a specific rate per barge per mile moved. These barges are typically added to our existing tows. On limited occasions, we have contracted for the use of third party towboats. Additionally we provide fleeting services on the Inland Waterways. Fleeting is a harbor service that involves barges being moored at our facilities pending orders to shift to a different location.
Rates for inland dry cargo transportation are based on the amount of freight relative to the demand for barges available to load freight. Due to the impact of the current economic downturn on our customers
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shipments of commodities, the industry has experienced declines in both the amount of commodities shipped and rates. This has impacted the movement of coal and petcoke throughout our business and has reduced the northbound transport of raw steel, finished steel and other commodities at UBL.
United Bulk Terminal (UBT)
UBT provides transfer, storage and blending services. Blending is the process of combining multiple grades of coal or petroleum coke cargoes based on customer specifications. Contract types for UBT are primarily based on transfer of cargo (i) from barge to storage to vessel or (ii) from barge directly to vessel. These contracts include a storage allowance and rate structure for storage charges. They include a transfer rate that may contain annual escalation clauses. Within most of its contracts, UBT provides production guarantees to its customers. Production guarantees relate to the tons per hour rate that UBT will guarantee to load or unload their vessels. If they are not met, UBT owes demurrage to the customer; if they are met, UBT earns despatch, which is compensation for loading and unloading faster than the guaranteed rate. The majority of UBT revenue is generated from the transfer of cargoes.
Operating costs for UBT consist primarily of leases related to the property, power consumption, employee costs, and maintenance and repairs of facility equipment.
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Business Segment Selected Financial Data
The following table sets forth, for the periods indicated, amounts derived from our unaudited consolidated financial statements:
Three Months Ended September 30, 2010 |
Three Months Ended September 30, 2009 |
Nine Months Ended September 30, 2010 |
Nine Months Ended September 30, 2009 |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Statement of Operations: |
||||||||||||||||
Revenue: |
||||||||||||||||
UOS |
$ | 35,987 | $ | 34,516 | $ | 107,267 | $ | 107,250 | ||||||||
UBL |
33,300 | 30,298 | 96,594 | 84,076 | ||||||||||||
UBT |
11,203 | 7,803 | 31,612 | 24,232 | ||||||||||||
Other and eliminations |
(426 | ) | (614 | ) | (1,031 | ) | (2,115 | ) | ||||||||
Total |
$ | 80,064 | $ | 72,003 | $ | 234,442 | $ | 213,443 | ||||||||
Operating expenses: (1) |
||||||||||||||||
UOS |
$ | 25,274 | $ | 23,352 | $ | 76,098 | $ | 66,808 | ||||||||
UBL |
24,618 | 22,160 | 72,857 | 63,081 | ||||||||||||
UBT |
6,297 | 5,678 | 18,613 | 15,456 | ||||||||||||
Other and eliminations |
(426 | ) | 389 | (1,030 | ) | (1,113 | ) | |||||||||
Total |
$ | 55,763 | $ | 51,579 | $ | 166,538 | $ | 144,232 | ||||||||
Operating income (loss): |
||||||||||||||||
UOS |
$ | 1,783 | $ | 2,120 | $ | 5,276 | $ | 15,242 | ||||||||
UBL |
427 | (27 | ) | (1,127 | ) | (3,596 | ) | |||||||||
UBT |
1,260 | (812 | ) | 2,698 | 47 | |||||||||||
Other and eliminations |
(118 | ) | 143 | (202 | ) | 144 | ||||||||||
Total |
$ | 3,352 | $ | 1,424 | $ | 6,645 | $ | 11,837 | ||||||||
Balance Sheet (at end of period): |
||||||||||||||||
Total assets: |
||||||||||||||||
UOS |
$ | 182,818 | $ | 255,081 | $ | 182,818 | $ | 255,081 | ||||||||
UBL |
177,315 | 305,953 | 177,315 | 305,953 | ||||||||||||
UBT |
72,033 | 92,832 | 72,033 | 92,832 | ||||||||||||
Other and eliminations |
4,286 | (172,981 | ) | 4,286 | (172,981 | ) | ||||||||||
Total |
$ | 436,452 | $ | 480,885 | $ | 436,452 | $ | 480,885 | ||||||||
(1) | Excludes administrative and general expenses, depreciation and amortization, and gain (loss) on sale of assets. |
History and Transactions
We began operations in 1959 to provide waterborne transportation services for the coal purchased as fuel for Tampa Electric Companys power generation facilities. We were part of Tampa Electric Company until 1980, when we became a wholly owned subsidiary as part of TECO Energys broader diversification. In December 2007, our management team partnered with the Equity Sponsors to acquire the Company from TECO Energy.
Basis of Presentation
The accompanying unaudited consolidated financial statements include the consolidated accounts of the Company for the periods prescribed for this reporting period.
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These statements have been prepared using our basis in the assets and liabilities acquired in the purchase transaction. The acquisition was treated as a purchase and the assets so acquired were valued on our books at our assessments of their fair market value, as described below.
The unaudited consolidated financial statements included in this quarterly report may not necessarily reflect the consolidated financial position, operating results, changes in members equity and cash flows of the Company in the future.
Critical Accounting Policies
Preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of sales and expenses during the reporting period. Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in Item 1 of this quarterly report under the caption NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2: Significant Accounting Policies. The accompanying consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and settlement of liabilities in the ordinary course of business. Critical accounting estimates that affect the reported amounts of assets and liabilities on a going concern basis include amounts recorded as reserves for doubtful accounts, insurance claims and related receivable amounts, revenues and expenses on vessels using the percentage-of-completion method, valuation of fuel hedges, estimates of future cash flows used in impairment evaluations, liabilities for unbilled barge and boat maintenance, liabilities for unbilled harbor and towing services, and depreciable lives of long-lived assets. Estimates have varied from actual results due to specific events occurring that were unknown at the time of the estimate. Those events include items such as acquiring a back haul trip when it was not planned, unplanned vessel maintenance required and medical and property insurance claims.
Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments, which is provided for in bad debt expense. We determine the adequacy of this allowance by regularly reviewing our accounts receivable aging and evaluating individual customers receivables, considering customers financial condition, credit history and other current economic conditions. If a customers financial condition were to deteriorate which might impact its ability to make payment, then additional allowances may be required.
Revenue Recognition
Revenue is primarily derived from coal, phosphate and grain transportation (among other cargoes), and transfer and storage services to unaffiliated entities. Revenues from transportation and transfer services are recognized as services are rendered. Revenue from certain transportation services is recognized using the percentage of completion method, which includes estimates of the distance traveled and/or time elapsed compared to the total estimated contract. Storage revenue is recognized monthly based on the volumes held at the storage facility over the contract grace period. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are reconciled to the actual amounts. If the global market were to unexpectedly deteriorate, our future revenue would be adversely affected.
Inventories
Materials and supplies, including fuel costs, are stated at the lower of cost or market using the average cost method. We regularly review inventory on hand and record provisions based on those reviews. Our term contracts contain provisions that allow us to pass through a significant portion of any fuel expense increase to our customer, thereby reducing, but not eliminating, our fuel price risk. We cannot predict the occurrence of market fluctuations that may significantly increase the costs of materials and supplies.
Property and Equipment
Property and equipment are stated at cost. As a result of the acquisition and the related application of purchase accounting to the acquired assets and liabilities, there is a new basis of property and equipment subsequent to the Acquisition Date. There are items that could affect this basis, which include assumptions
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that there is responsible ownership and management, competent crewing and ongoing maintenance, there are no significant potential environmental hazards associated with the equipment and the vessels are in compliance with all applicable international, federal, state or local regulations. Management is not aware of any impending events or situations that would negatively affect in any material respect the key assumptions used in the analysis.
Planned Major Maintenance
Expenditures incurred during a dry-docking are deferred and amortized on a straight-line basis over the period until the next scheduled dry-docking, generally two and a half years. The Company only includes in deferred dry-docking costs those direct costs that are incurred as part of the vessels maintenance that is required by the Coast Guard and/or classification society regulations. Direct costs include shipyard costs as well as the costs of placing the vessel in the shipyard. Expenditures for routine maintenance and repairs, whether incurred as part of the dry-docking or not, are expensed as incurred. If unforeseen maintenance issues were discovered during the dry-docking process, expenditures could be higher than anticipated.
Asset Retirement Obligations
An asset retirement obligation for a long-lived asset is recognized at fair value at inception of the obligation, if there is a legal obligation under an existing or enacted law or statute, a written or oral contract, or by legal construction under the doctrine of promissory estoppels. Retirement obligations are recognized only if the legal obligation exists in connection with or as a result of the permanent retirement, abandonment, or sale of a long-lived asset.
When the liability is initially recorded, the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its future value. The corresponding amount capitalized at inception is depreciated over the remaining useful life of the asset. The liability must be revalued each period based on current market prices.
No new retirement obligations were incurred and no significant revision to estimated cash flows used in determining the recognized asset retirement obligations were necessary for the nine months ended September 30, 2010. Unforeseen or unknown conditions of future long-lived assets or new governmental regulations applicable to such assets may result in unexpected retirement obligation costs.
Derivative Instruments and Hedging Activities
The Derivative and Hedging Topic of the FASB Codification requires companies to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. This Topic also requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by the Derivative and Hedging Topic of the FASB Codification, we record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of our risk, even though hedge accounting does not apply
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or we elect not to apply hedge accounting. If, due to unexpected market changes, the hedge product is not sufficient to cover our usage and price fluctuations, our expenses may be significantly impacted.
ASC 820, Fair Value Measurements, requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which of these assets and liabilities must be grouped based on significant levels of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
Level 1Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
As of September 30, 2010, the Company held certain items that are required to be measured at fair value on a recurring basis, including fuel hedge agreements. The following items are measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of September 30, 2010 and December 31, 2009.
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
September
30, 2010 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Other assets: |
||||||||||||||||
Fuel hedge |
$ | 452 | $ | | $ | 452 | $ | | ||||||||
Total |
$ | 452 | $ | | $ | 452 | $ | | ||||||||
Other liabilities |
||||||||||||||||
Fuel hedge |
$ | 141 | $ | | $ | 141 | $ | | ||||||||
Total |
$ | 141 | $ | | $ | 141 | $ | | ||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
December
31, 2009 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Other assets: |
||||||||||||||||
Fuel hedge |
$ | 308 | $ | | $ | 308 | $ | | ||||||||
Total |
$ | 308 | $ | | $ | 308 | $ | | ||||||||
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Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reflected in the financial statements at their carrying value, which approximates their fair value due to their short maturity.
The fair value of the Companys long term debt was based upon observable inputs other than quoted market prices (Level 2 criteria).
September 30, 2010 | ||||||||||||||||||||
Fair Value Measurement Category | ||||||||||||||||||||
Carrying Value |
Fair Value |
Level 1 | Level 2 | Level 3 | ||||||||||||||||
Senior Secured Notes |
$ | 195 | $ | 198 | $ | | $ | 198 | $ | | ||||||||||
Asset Based Loan |
57 | 57 | | 57 | | |||||||||||||||
Total |
$ | 252 | $ | 255 | $ | | $ | 255 | $ | | ||||||||||
December 31, 2009 | ||||||||||||||||||||
Fair Value Measurement Category | ||||||||||||||||||||
Carrying Value |
Fair Value |
Level 1 | Level 2 | Level 3 | ||||||||||||||||
Senior Secured Notes |
$ | 200 | $ | 200 | $ | | $ | 200 | $ | | ||||||||||
Asset Based Loan |
80 | 80 | | 80 | | |||||||||||||||
Total |
$ | 280 | $ | 280 | $ | | $ | 280 | $ | | ||||||||||
During the nine months ended September 30, 2010 and 2009, respectively, there were no assets that required an adjustment to their carrying values since no impairment indicators were present.
Long-lived Assets
The Company reviews long-lived assets for impairment annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs undiscounted operating cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on the assets fair value and the discounted cash flow. There were no indications of impairment during the nine months ended September 30, 2010 or September 30, 2009. An unexpected change in vessel market value could create an impairment, thereby resulting in an undetermined loss on the vessel.
Results of Operations
Three Months Ended September 30, 2010 Compared With Three Months Ended September 30, 2009
Revenue. Revenue increased to $80.1 million for the three months ended September 30, 2010 compared to $72.0 million for the three months ended September 30, 2009, an increase of $8.1 million or 11%.
UOS total revenue increased to $36.0 million for the three months ended September 30, 2010 from $34.5 million for the three months ended September 30, 2009, an increase of $1.5 million or 4%. UOS revenue from long-term contracts decreased to $19.8 million for the three months ended September 30, 2010 from $21.7 for the three months ended September 30, 2009, a decrease of $1.9 million or 9% due primarily to a decrease in contracted volumes. The combined UOS revenues from PL-480, spot and time charter increased to $15.6 million for the three months ended September 30, 2010 from $12.4 million for the three months ended September 30, 2009, an increase of $3.2 million, or 26%, due to approximately 18% more operating days in these trades at slightly higher rates per day.
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UBL total revenue increased to $33.3 million for the three months ended September 30, 2010 from $30.3 million for the three months ended September 30, 2009, an increase of $3.0 million or 10%. UBL revenue from open freight, which is generally coal and petcoke, decreased to $18.3 million for the three months ended September 30, 2010 from $19.3 million for the three months ended September 30, 2009, a decrease of $1.0 million or 5%. Revenue from covered freight, which is generally weather-sensitive cargoes such as grain and fertilizers, increased to $7.4 million for the three months ended September 30, 2010 from $5.8 million for the three months ended September 30, 2009, an increase of $1.6 million or 28% due to increases in volumes. UBL outside towing revenue earned by moving barges for other barge owners increased to $3.4 million for the three months ended September 30, 2010 from $3.0 million for the three months ended September 30, 2009, an increase of $0.4 million or 13%. UBL other revenue increased to $4.2 million for the three months ended September 30, 2010 from $2.2 million for the three months ended September 30, 2009, an increase of $2.0 million or 91% and is primarily due to increased fleeting services.
UBT total revenue increased to $11.2 million for the three months ended September 30, 2010 from $7.8 million for the three months ended September 30, 2009, an increase of $3.4 million or 44% due to increases in both volumes and rates obtained over the comparative periods, as well as an increase in storage revenues. Demurrage charges, which are recorded as a contra-revenue, also increased due to increasing barge delays at the terminal.
Operating Expenses. Operating expenses increased to $55.8 million for the three months ended September 30, 2010 from $51.6 million for the three months ended September 30, 2009, an increase of $4.2 million or 8%. Operating expenses for the three months ended September 30, 2010 were 70% of operating revenue, and for the three months ended September 30, 2009, were 72% of revenue. The increase was attributable to higher fuel costs, port costs and maintenance costs, which impacted direct costs by $2.4 million.
Operating expenses for UOS increased to $25.3 million for the three months ended September 30, 2010 from $23.4 million for the three months ended September 30, 2009, an increase of $1.9 million or 8%. The increase in UOS operating expenses for the three months ended September 30, 2010 was primarily attributable to maintenance costs and higher fuel costs, which impacted direct costs by $1.0 million.
Operating expenses for UBL increased to $24.6 million for the three months ended September 30, 2010 from $22.2 million for the three months ended September 30, 2009, an increase of $2.4 million or 11%. The largest increase in UBL operating expenses for the three months ended September 30, 2010 was attributable to higher leasing costs, fuel costs, port costs, and repairs and maintenance, which impacted direct costs by $2.2 million.
Operating expenses for UBT increased to $6.3 million for the three months ended September 30, 2010 from $5.7 million for the three months ended September 30, 2009, an increase of $0.6 million or 11%. The increase in UBT operating expenses for the three months ended September 30, 2010 was primarily driven by higher labor costs.
Administrative and general. Administrative and general costs increased to $8.9 million for the three months ended September 30, 2010 from $7.8 million for the three months ended September 30, 2009, an increase of $1.1 million, or 14%. The increase was primarily attributable to higher salary-related costs, and costs related to being a public filer.
Depreciation and Amortization. Depreciation and amortization increased to $12.1 million for the three months ended September 30, 2010 from $11.2 million for the three months ended September 30, 2009, an increase of $0.9 million or 8%. Substantially all of the increase is due to depreciation and amortization of capitalized improvements to UOS vessels undertaken in 2009 and 2010.
Other Income. Other income increased to a gain of $0.8 million for the three months ended September 30, 2010 from a loss of $1.5 million for the three months ended September 30, 2009, an increase of $2.3 million or 153%. The gain in 2010 results from the sale of scrap materials. The loss in 2009 was primarily attributable to the amortization of a loss on the
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early termination of fuel hedges at the end of 2008, which were being amortized through December 31, 2009. There is no similar loss being amortized in 2010.
Interest Expense. Interest expense increased to $7.2 million for the three months ended September 30, 2010 from $6.3 million for the three months ended September 30, 2009, an increase of $0.9 million or 7%. This increase was due primarily to the increase in interest on the Senior Secured Notes and ABL compared with the indebtedness that was retired in December 2009.
Income Taxes. The Company is a limited liability company and is treated as a partnership for federal income tax purposes. Therefore, it records no income tax provision.
Nine Months Ended September 30, 2010 Compared With Nine Months Ended September 30, 2009
Revenue. Revenue increased to $234.4 million for the nine months ended September 30, 2010 compared to $213.4 million for the nine months ended September 30, 2009, an increase of $21.0 million or 10%.
UOS total revenue remained constant at $107.3 million for the nine months ended September 30, 2010 and September 30, 2009. UOS revenue from long-term contracts decreased to $55.1 million for the nine months ended September 30, 2010 from $65.2 for the nine months ended September 30, 2009, a decrease of $10.1 million or 15% due to a decrease in contracted volumes. The combined UOS revenues from PL-480, spot and time charter increased to $50.8 million for the nine months ended September 30, 2010 from $37.6 million for the nine months ended September 30, 2009, an increase of $13.2 million, or 35%, due to a 31% increase in days utilization in the spot and PL480 markets. Other UOS revenue decreased to $1.4 million for the nine months ended September 30, 2010 from $4.5 million for the nine months ended September 30, 2009, a decrease of $3.1 million, or 69%, due to demurrage and deadfreight revenue earned in the prior period. Deadfreight is a charge payable to us when a customer does not ship contracted minimum tons.
UBL total revenue increased to $96.6 million for the nine months ended September 30, 2010 from $84.1 million for the nine months ended September 30, 2009, an increase of $12.5 million or 15%. UBL revenue from open freight, which is generally coal and petcoke, increased to $55.1 million for the nine months ended September 30, 2010 from $52.5 million for the nine months ended September 30, 2009, an increase of $2.6 million or 5% due to higher south bound volumes of coal and petcoke being delivered to our UBT terminal. UBL revenue from covered freight, which is generally weather-sensitive cargoes such as grain and fertilizers, increased to $20.6 million for the nine months ended September 30, 2010 from $16.8 million for the nine months ended September 30, 2009, an increase of $3.8 million or 23% due to increases in volumes. We transported coal and petcoke in covered barges (after stacking covers), and this activity is booked in covered freight revenue accounts. UBL outside towing revenue earned by moving barges for other barge owners increased to $10.8 million for the nine months ended September 30, 2010 from $8.9 million for the nine months ended September 30, 2009, an increase of $1.9 million or 21% due to higher volumes. UBL other revenue increased to $10.1 million for the nine months ended September 30, 2010 from $5.9 million for the nine months ended September 30, 2009, an increase of $4.2 million or 71% due primarily to increased fleeting services.
UBT total revenue increased to $31.6 million for the nine months ended September 30, 2010 from $24.2 million for the nine months ended September 30, 2009, an increase of $7.4 million or 31% due to increases in both volumes and rates obtained over the comparative periods, as well as an increase in storage revenues.
Operating Expenses. Operating expenses increased to $166.5 million for the nine months ended September 30, 2010 from $144.2 million for the nine months ended September 30, 2009, an increase of $22.3 million or 15%. Operating expenses for the nine months ended September 30, 2010 were 71% of operating revenue, and for the nine months ended September 30, 2009, were 68% of revenue. The increase was attributable to higher fuel costs, port costs and maintenance costs, which impacted direct costs by $20.5 million.
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Operating expenses for UOS increased to $76.1 million for the nine months ended September 30, 2010 from $66.8 million for the nine months ended September 30, 2009, an increase of $9.3 million or 14%. The increase in UOS operating expenses for the nine months ended September 30, 2010 was driven by higher repairs and maintenance, fuel, and port costs of $9.8 million offset by lower labor costs and general supplies costs of $1.5 million.
Operating expenses for UBL increased to $72.9 million for the nine months ended September 30, 2010 from $63.1 million for the nine months ended September 30, 2009, an increase of $9.8 million or 16%. The increase in UBL operating expenses for the nine months ended September 30, 2010 was primarily attributable to higher fuel costs. Additionally, port costs and leasing costs increased. In total, these items impacted direct costs by $9.3 million.
Operating expenses for UBT increased to $18.6 million for the nine months ended September 30, 2010 from $15.5 million for the nine months ended September 30, 2009, an increase of $3.1 million or 20%. The increase in UBT operating expenses for the nine months ended September 30, 2010 was primarily driven by higher labor and port costs, due to higher volumes handled, and higher repairs and maintenance.
Administrative and general. Administrative and general costs increased to $26.2 million for the nine months ended September 30, 2010 from $24.5 million for the nine months ended September 30, 2009, an increase of $1.7 million, or 7%. The increase was primarily attributable to outside professional services related to additional reporting and registration requirements as a result of the financing completed in December 2009.
Depreciation and Amortization. Depreciation and amortization increased to $35.1 million for the nine months ended September 30, 2010 from $32.9 million for the nine months ended September 30, 2009, an increase of $2.2 million or 7%. Substantially all of the increase is due to depreciation and amortization of capitalized improvements to UOS vessels undertaken in 2009 and 2010.
Other Income. Other income increased to $0.8 million for the nine months ended September 30, 2010 from a loss of $5.3 million for the nine months ended September 30, 2009, an increase of $6.1 million or 115%. The gain in 2010 results from the sale of scrap materials. The loss in 2009 was primarily attributable to the amortization of a loss on the early termination of fuel hedges at the end of 2008, which were being amortized through December 31, 2009. There is no similar loss being amortized in 2010.
Interest Expense. Interest expense increased to $21.6 million for the nine months ended September 30, 2010 from $19.0 million for the nine months ended September 30, 2009, an increase of $2.6 million or 14%. This increase was due primarily to the increase in interest on the Senior Secured Notes and ABL compared with the indebtedness.
Income Taxes. The Company is a limited liability company and is treated as a partnership for federal income tax purposes. Therefore it records no income tax provision.
Liquidity and Capital Resources
Our funding requirements include (i) maintenance of our marine fleet and terminal facility, (ii) interest payments and (iii) other working capital requirements. We do not currently anticipate any significant purchases of additional ocean-going vessels or inland towboats or barges. Our primary sources of liquidity are cash generated from operations and borrowings under the ABL.
With the departure of the President and Chief Executive Officer on October 4, 2010 and the Senior Vice President, Business Development on October 22, 2010, the Company will recognize approximately $1.4 million in additional salary and severance related expense in the fourth quarter of 2010.
As noted in Item 13Subsequent Events in the Notes to the Consolidated Financials Statements, we have an ongoing dispute with Mosaic regarding their claim of Force Majeure under our Contract of Affreightment with them. We derived approximately 10% of our revenue for each of the fiscal year ended
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December 31, 2009 and the nine-month period ended September 30, 2010, from Mosaic. We are unable to quantify the impact, if any, at this time of our dispute over the claim of Force Majeure by Mosaic. If Mosaic has a shortfall to their minimum tonnage requirements, which may be material, we will need to determine applicable deadfreight revenue in the fourth quarter. If the dispute with Mosaic continues and is ultimately resolved against us, it could have a material adverse impact on our results of operations.
Notwithstanding any ongoing dispute with Mosaic, we believe that our operating cash flow and amounts available for borrowing under the ABL will be adequate to fund our capital expenditures and working capital requirements for the next twelve months.
The following were the net changes in operating, investing and financing activities for the periods presented:
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Cash flows provided by (used in): |
||||||||
Operating activities |
$ | 30,722 | $ | 36,728 | ||||
Investing activities |
(13,691 | ) | (12,828 | ) | ||||
Financing activities |
(27,732 | ) | (8,079 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
$ | (10,701 | ) | $ | 15,821 | |||
Cash Flows Provided by Operating Activities
Net cash provided by operating activities was $30.7 million for the nine months ended September 30, 2010 as compared to $36.7 million for the nine months ended September 30, 2009, a decrease of $6.0 million. The decrease in cash from operating activities was the result of a larger net operating loss after depreciation, amortization, interest and loss on deferred financing costs and other non-cash items.
Cash Flows Provided by Investing Activities
Net cash used in investing activities was $13.7 million for the nine months ended September 30, 2010 as compared to net cash used in investing activities of $12.8 million for the nine months ended September 30, 2009, an increase in net cash used of $0.9 million. The increase in net cash used in investing activities was primarily attributable to capital improvements on UOS vessels.
Cash Flows Provided by Financing Activities
Net cash used in financing activities was $27.7 million for the nine months ended September 30, 2010 as compared to net cash used in financing activities of $8.1 million for the nine months ended September 30, 2009, an increase in net cash used of $19.6 million. The increase in net cash used in financing activities was primarily attributable to the repayment of our outstanding indebtedness. As a result of the refinancing, we have determined to maintain a smaller cash balance in 2010 than was maintained in 2009 and to borrow under the ABL on an as needed basis. During the quarter, the Company repurchased in aggregate principal amount $5 million in Senior Secured Notes, and may, from time to time, make additional open market, privately negotiated or other purchases.
Capital Expenditures
In 2010, we expect capital expenditures for maintenance and improvement of our vessel fleet, terminal and general capital equipment to be between $16 million and $17 million based on the timing of certain drydockings for UOS units. During the nine months ended September 30, 2010, we incurred $14.2 million in capital expenditures.
Dry-dock expenditures for our ocean-going vessels are driven by Coast Guard and vessel classification society regulations and managements own strict maintenance guidelines and associated dry-docking schedules, which require vessel dry-docking twice every five years. Management expects up to five of our vessels to dry-dock in 2010 and up to four in 2011. Although actual costs cannot presently be
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estimated with certainty, management also expects that future overhauls of both ocean-going and inland vessels in the next three to five years may require significantly higher capital expenditures due to new and anticipated environmental regulations that would require upgrades for reduced air emissions upon the remanufacture of marine diesel engines and the installation of ballast water management systems.
Contractual Obligations
The following is a tabular summary of our future contractual obligations as of September 30, 2010 for the categories set forth below, assuming only scheduled amortizations and repayment at maturity:
2010 | 2011 | 2012 | 2013 | 2014 | After 2014 |
Total Obligations |
||||||||||||||||||||||
(In millions of dollars) | ||||||||||||||||||||||||||||
Senior Secured Notes |
$ | | $ | | $ | | $ | | $ | | $ | 195.0 | $ | 195.0 | ||||||||||||||
Interest on Senior Secured Notes (1) |
11.5 | 22.9 | 22.9 | 22.9 | 22.9 | 11.5 | 114.6 | |||||||||||||||||||||
Asset Based Loan |
| | | 57.0 | | | 57.0 | |||||||||||||||||||||
Interest on ABL (2) |
1.4 | 2.9 | 2.9 | 2.9 | | | 10.1 | |||||||||||||||||||||
Operating Leases |
3.4 | 11.7 | 11.5 | 10.1 | 5.3 | 46.1 | 88.1 | |||||||||||||||||||||
Total |
$ | 16.3 | $ | 37.5 | $ | 37.3 | $ | 92.9 | $ | 28.2 | $ | 252.6 | $ | 464.8 | ||||||||||||||
(1) | Interest is calculated based on a fixed per annum rate of 11.75%. |
(2) | The contractual obligations related to the ABL are calculated based on the level of borrowings at September 30, 2010, and the interest rate at that time of 4.0625% and 0.75% calculated on the unused commitment line. |
Off Balance Sheet, Pension and Other Post-Employment Benefit Liabilities
We do not have any off balance sheet liabilities or any pension or other post-employment benefit liabilities. See the notes to the financial statements in Item 1, Note 2 for new accounting policies.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Market Risk
Fuel Hedging Policy
We are exposed to various market risks, including changes in fuel prices. As of September 30, 2010, we have hedges in place for 0.9 million gallons for the remainder of 2010, 3.5 million gallons and 1.0 million gallons in 2011 and 2012 respectively. These amounts represent 59% of our estimated 2010 UBL fuel exposure, 59% of our expected 2011 UBL fuel exposure, and 17% of our expected 2012 UBL fuel exposure. Our average heating oil swap price as of September 30, 2010 is $2.10 for 2010, $2.33 for 2011, and $2.32 for 2012.
Derivative Instruments and Hedging Activities
In March 2008, the FASB issued guidance requiring entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, results of operations and cash flows. The provisions of this guidance require expanded disclosures concerning where derivatives are recorded on the consolidated balance sheet and where gains and losses are recognized in the consolidated results of operations. The Company has adopted the disclosure provisions as of January 1, 2009.
The Company applies the provisions of ASC No. 815, Derivatives and Hedging. These standards require companies to recognize derivatives as either assets or liabilities in the financial statements, to measure those instruments at fair value, and to reflect the changes in the fair values of those instruments as either components of other comprehensive income (OCI) or in net income, depending on the designation of those instruments. The changes in fair value that are recorded in OCI are not immediately recognized in current net income. As the underlying hedged transaction matures or the physical commodity is delivered, the deferred gain or loss on the related hedging instrument must be reclassified from OCI to earnings based on its value at the time of its reclassification. For effective hedge transactions, the amount reclassified from OCI to earnings is offset in net income by the amount paid or received on the underlying transaction.
In December 2007, the Company entered into a derivative contract to limit the exposure to interest rate fluctuations associated with its variable rate debt instruments. The derivative contract was designated as a cash flow hedge. The hedge was for three years and would have expired on December 31, 2010. In December 2009, the Company refinanced its debt obligations and the derivative contract was paid in full. As of December 31, 2009, the hedge liability balance was $0.
The Company entered into derivative contracts to limit the exposure to price fluctuations for physical purchases of diesel fuel which were designated as cash flow hedges for the forecasted purchases of fuel oil. The hedges are contracted to expire by December 31, 2012, and settle monthly. As of September 30, 2010, the current asset portion of the hedge was valued at $0.5 million and recorded as a current asset, offset by the current liability portion of the hedge valued at $(0.1) million recorded in other liabilities. As of December 31, 2009 the current portion of the hedge valued at $0.3 million was recorded in current assets. During the nine month period ended September 30, 2010, the Company recognized an expense of $0.07 million, and for the nine month period ended September 30, 2009, the Company recognized a reduction in expense of $0.6 million. We previously had fuel hedges that were out of the money, but these were terminated early in December 2008. However, due to accounting requirements, we amortized those hedges through the end of December 2009, for which we recorded $5.6 million in expense for the nine month period ended September 30, 2009.
ASC 820, Fair Value Measurements, requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which of these assets and liabilities must be grouped based on significant levels of inputs. The three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
Level 1Valuations based on quoted prices for identical assets and liabilities in active markets.
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Level 2Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
As of September 30, 2010, the Company held certain items that are required to be measured at fair value on a recurring basis, including fuel hedge agreements. The following items are measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of September 30, 2010 and December 31, 2009.
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
September 30, 2010 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Other assets: |
||||||||||||||||
Fuel hedge |
$ | 452 | $ | | $ | 452 | $ | | ||||||||
Total |
$ | 452 | $ | | $ | 452 | $ | | ||||||||
Other liabilities |
||||||||||||||||
Fuel hedge |
$ | 141 | $ | | $ | 141 | $ | | ||||||||
Total |
$ | 141 | $ | | $ | 141 | $ | | ||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
December 31, 2009 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Other assets: |
||||||||||||||||
Fuel hedge |
$ | 308 | $ | | $ | 308 | $ | | ||||||||
Total |
$ | 308 | $ | | $ | 308 | $ | | ||||||||
Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reflected in the financial statements at their carrying value, which approximates their fair value due to their short maturity.
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The fair value of the Companys long-term debt was based upon observable inputs other than quoted market prices (Level 2 criteria).
September 30, 2010 | ||||||||||||||||||||
Fair Value Measurement Category | ||||||||||||||||||||
Carrying Value |
Fair Value |
Level 1 | Level 2 | Level 3 | ||||||||||||||||
Senior Secured Notes |
$ | 195 | $ | 198 | $ | | $ | 198 | $ | | ||||||||||
Asset Based Loan |
57 | 57 | | 57 | | |||||||||||||||
Total |
$ | 252 | $ | 255 | $ | | $ | 255 | $ | | ||||||||||
December 31, 2009 | ||||||||||||||||||||
Fair Value Measurement Category | ||||||||||||||||||||
Carrying Value |
Fair Value |
Level 1 | Level 2 | Level 3 | ||||||||||||||||
Senior Secured Notes |
$ | 200 | $ | 200 | $ | | $ | 200 | $ | | ||||||||||
Asset Based Loan |
80 | 80 | | 80 | | |||||||||||||||
Total |
$ | 280 | $ | 280 | $ | | $ | 280 | $ | | ||||||||||
During the nine months ended September 30, 2010 and 2009, respectively, there were no assets that required an adjustment to their carrying values since no impairment indicators were present.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and trade receivables. The Company places its cash with high credit quality financial institutions. During the normal course of business, the Company extends credit to customers primarily in North America conducting business in the utility, metallurgical, phosphate and grain industries. The Company performs ongoing credit evaluations of its customers and does not generally require collateral. The customers financial condition and payment history have been considered in determining the allowance for doubtful accounts. The Company assesses the risk of nonperformance of the derivatives in determining the fair value of the derivatives instruments in accordance with ASC No. 820, Fair Value Measurements.
ITEM 4. | CONTROLS AND PROCEDURES. |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 15d-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2010.
This quarterly report does not include a report of managements assessment regarding internal control over financial reporting due to a transition period established by rules of the SEC for new filers.
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ITEM 1. | LEGAL PROCEEDINGS. |
The Company is involved in various legal proceedings that have arisen in the ordinary course of business. In the opinion of the Companys management, all such proceedings are adequately covered by insurance or, if not so covered, should not result in any liability which would have a material adverse effect on the consolidated financial position or consolidated operations of the Company.
ITEM 1A. | RISK FACTORS. |
There have not been any material changes in our risk factors as previously disclosed in our Registration Statement on Form S-4 (Registration No. 333-165796).
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
On November 11, 2010, GS Maritime Holding LLC, the ultimate parent of the Company (GS Maritime), issued an aggregate of 200 profit units to John Binion, Chief Operating Officer of the Company. The profit units were issued to Mr. Binion for no cash consideration. The profit units represent the right to receive a share of GS Maritimes future profits, subject to the payment in full of certain senior equity securities of GS Maritime. The vesting of the profit units is partially time-based and partially performance-based. Half of the profit units vest in five equal annual installments on the first five anniversaries of the date of grant, subject to accelerated vesting in certain circumstances. The other half of the profit units will only vest upon a change in control of GS Maritime (subject to continued employment with the Company through such date), and only to the extent that a certain internal rate of return to GS Maritimes investors is achieved in connection with such change in control. The profit units have not been registered under the Securities Act of 1933, as amended (the Securities Act), or the securities laws of any state. The profit units were issued to Mr. Binion in reliance on the exemptions from registration afforded by Section 4(2) of the Securities Act, Rule 506 of Regulation D under the Securities Act and corresponding provisions of state securities laws, which exempt transactions by an issuer not involving any public offering.
ITEM 5. | OTHER INFORMATION. |
On October 4, 2010, Sal Litrico, the former President and Chief Executive Officer of United Maritime Group, LLC (the Company), ceased to be employed by the Company. As described in the Current Report on Form 8-K filed with the Securities and Exchange Commission (the SEC) on October 7, 2008, Mr. Litrico was eligible to receive certain payments and benefits subject to the execution of a release agreement that is reasonably acceptable to the Company. Subsequent to the cessation of Mr. Litricos employment, the Company and Mr. Litrico entered into a Separation Agreement and General Release Agreement, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.
On October 22, 2010, Timothy Bresnahan, the former Secretary and Senior Vice President, Business Development of the Company, ceased to be employed by the Company. As described in the Current Report on Form 8-K filed with the SEC on October 28, 2008, Mr. Bresnahan was eligible to receive certain payments and benefits subject to the execution of a release agreement that is reasonably acceptable to the Company. Subsequent to the cessation of Mr. Bresnahans employment, the Company and Mr. Bresnahan entered into a Separation Agreement and General Release Agreement, a copy of which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.
On November 11, 2010, the Company entered into amendments to the employment agreements with each of John Binion, Chief Operating Officer of the Company, Walter Bromfield, Senior Vice President, Finance of the Company, Clifford Johnson, Vice President, Sales and Marketing of the Company and Neil McManus, a Vice President of the Company. Each amendment modifies the definition of the term Good Reason in such employees existing employment agreement. A copy of the form of the amendment to each such employment agreement is filed as Exhibit 10.3 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.
On November 11, 2010, the profit unit grant agreements previously entered into between GS Maritime and the holders of such profit units that are subject to performance based vesting were amended to lower the internal rate of return thresholds required for the vesting of such profit units.
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ITEM 6. | EXHIBITS. |
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index, which is attached hereto and incorporated by reference herein.
ITEMS 3 AND 4 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
Pursuant to the requirements of the Securities Exchange Act of 1934, United Maritime Group, LLC has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED MARITIME GROUP, LLC | ||
By: | /S/ JASON GRANT | |
Jason Grant Chief Financial Officer (duly authorized signatory and principal financial officer of the Company) | ||
Date: November 12, 2010 |
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EXHIBIT INDEX
Exhibit No. |
Description | |
10.1 | Separation Agreement for Sal Litrico | |
10.2 | Separation Agreement for Timothy Bresnahan | |
10.3 | Form of Employee Agreement Amendment | |
31.1 | Certificate of the Principal Executive Officer of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certificate of the Principal Financial Officer of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Written Statement of Steven Green, Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Written Statement of Jason Grant, Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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