EXHIBIT 99.1

 

DANAOS CORPORATION

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion and analysis should be read in conjunction with our interim condensed consolidated financial statements (unaudited) and the notes thereto included elsewhere in this report.

 

Results of Operations

 

Three months ended September 30, 2016 compared to three months ended September 30, 2015

 

During the three months ended September 30, 2016, Danaos had an average of 55 containerships compared to 56 containerships for the three months ended September 30, 2015. Our fleet utilization decreased to 96.7% in the three months ended September 30, 2016 compared to 100.0% in the three months ended September 30, 2015.

 

Operating Revenues

 

Operating revenues decreased by 22.7%, or $32.8 million, to $111.8 million in the three months ended September 30, 2016 from $144.6 million in the three months ended September 30, 2015.

 

Operating revenues for the three months ended September 30, 2016 reflect:

 

·    $24.8 million decrease in revenues in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to loss of revenue from cancelled charters with Hanjin Shipping for eight of our vessels, for which we ceased recognizing revenue effective as of July 1, 2016.  See “Recent Developments.”

 

·    $1.1 million decrease in revenues in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the sale of the Federal on January 8, 2016.

 

·    $4.5 million decrease in revenues in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the re-chartering of certain of our vessels at lower rates.

 

·    $2.4 million decrease in revenues due to lower fleet utilization in the three months ended September 30, 2016 compared to the three months ended September 30, 2015.

 

Voyage Expenses

 

Voyage expenses increased by $0.4 million, to $3.3 million in the three months ended September 30, 2016 from $2.9 million in the three months ended September 30, 2015.

 

Vessel Operating Expenses

 

Vessel operating expenses decreased by 5.7%, or $1.6 million, to $26.6 million in the three months ended September 30, 2016 from $28.2 million in the three months ended September 30, 2015. The decrease is attributable to a 3.7% decrease in the average daily operating cost per vessel while the average number of vessels in our fleet during the three months ended September 30, 2016 decreased by 1.8% compared to the three months ended September 30, 2015.

 

The average daily operating cost per vessel decreased to $5,462 per day for the three months ended September 30, 2016 from $5,669 per day for the three months ended September 30, 2015. Management believes that our daily operating cost ranks as one of the most competitive in the industry.

 

Depreciation

 

Depreciation expense decreased by 2.1%, or $0.7 million, to $32.5 million in the three months ended September 30, 2016 from $33.2 million in the three months ended September 30, 2015, mainly due to decreased depreciation expense for twelve vessels for which we recorded an impairment charge on December 31, 2015 and due to the decreased average number of vessels in our fleet in the three months ended September 30, 2016 following the sale of the Federal on January 8, 2016.

 

1

 

Amortization of Deferred Drydocking and Special Survey Costs

 

Amortization of deferred dry-docking and special survey costs increased by $0.6 million, to $1.5 million in the three months ended September 30, 2016 from $0.9 million in the three months ended September 30, 2015. The increase is mainly due to the increased payments for dry-docking and special survey costs related to certain vessels over the last nine months.

 

Bad Debt Expense

 

Bad debt expense of $15.8 million in the three months ended September 30, 2016 compared to nil in the three months ended September 30, 2015 relates to receivables from Hanjin Shipping, which were written-off.

 

General and Administrative Expenses

 

General and administrative expenses remained stable, amounting to $5.5 million both in the three months ended September 30, 2016 and in the three months ended September 30, 2015.

 

Interest Expense and Interest Income

 

Interest expense decreased by 0.5%, or $0.1 million, to $21.0 million in the three months ended September 30, 2016 from $21.1 million in the three months ended September 30, 2015 including the amortization of deferred finance costs reclassified from other finance expenses to interest expense of $3.2 million and $3.5 million, respectively. The decrease in interest expense was mainly due to the decrease in our average debt by $243.0 million, to $2,632.0 million in the three months ended September 30, 2016, from $2,875.0 million in the three months ended September 30, 2015 and a $0.3 million decrease in the amortization of deferred finance costs, which were partially offset by an increase in average cost of debt due to the increase in US$ Libor.

 

The Company is deleveraging its balance sheet. As of September 30, 2016, the debt outstanding gross of deferred finance costs was $2,615.4 million compared to $2,860.1 million as of September 30, 2015. As a result principally of the cancellation of eight charters with Hanjin Shipping, we expect the rate at which we reduce our leverage to decline.

 

Interest income increased by $0.5 million to $1.4 million in the three months ended September 30, 2016 compared to $0.9 million in the three months ended September 30, 2015. The increase is mainly attributed to the interest income recognized on HMM notes receivable.

 

Other Finance Expenses

 

Other finance expenses decreased by $0.1 million, to $1.1 million in the three months ended September 30, 2016 from $1.2 million in the three months ended September 30, 2015, following the reclassification of the amortization of deferred finance costs from other finance expenses to interest expense of $3.2 million and $3.5 million, respectively.

 

Equity loss on investments

 

Equity loss on investments decreased by $0.3 million, to $0.7 million in the three months ended September 30, 2016 compared to a loss of $1.0 million in the three months ended September 30, 2015 and relates to the investment in Gemini Shipholdings Corporation (“Gemini”), acquired in August 2015, in which the Company has a 49% shareholding interest. This loss is attributed to operating losses of two out of the four vessels that have been acquired by Gemini.

 

Unrealized and realized (loss)/gain on derivatives

 

Unrealized gains on interest rate swaps amounted to $1.6 million in the three months ended September 30, 2016 compared to unrealized gains of $2.6 million in the three months ended September 30, 2015. The unrealized gains were attributable to mark to market valuation of our swaps.

 

Realized loss on interest rate swaps decreased by $10.0 million, to $2.2 million in the three months ended September 30, 2016 from $12.2 million in the three months ended September 30, 2015. This decrease is attributable to a $375.0 million decrease in the average notional amount of swaps during the three months ended September 30, 2016 compared to the three months ended September 30, 2015 as a result of swap expirations.

 

2

 

Other income/(expenses), net

 

Other income/(expenses), net decreased by $12.9 million, to $12.8 million net expenses in the three months ended September 30, 2016 from $0.1 million net income in the three months ended September 30, 2015 due to a $12.9 million recognized loss on sale of HMM equity securities for cash proceeds of $38.1 million, which were acquired by Danaos in July 2016 as part of the charter restructuring agreement with HMM. See Note 8 “Other Current and Non-Current Assets” to our unaudited condensed consolidated financial statements included in this report.

 

Nine months ended September 30, 2016 compared to nine months ended September 30, 2015

 

During the nine months ended September 30, 2016, Danaos had an average of 55 containerships compared to 56 containerships for the nine months ended September 30, 2015. Our fleet utilization decreased to 96.0% in the nine months ended September 30, 2016 compared to 99.2% in the nine months ended September 30, 2015.

 

Operating Revenues

 

Operating revenues decreased by 9.0%, or $38.4 million, to $386.2 million in the nine months ended September 30, 2016 from $424.6 million in the nine months ended September 30, 2015.

 

Operating revenues for the nine months ended September 30, 2016 reflect:

 

·    $24.8 million decrease in revenues in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to loss of revenue from cancelled charters with Hanjin Shipping for eight of our vessels, for which we ceased recognizing revenue effective as of July 1, 2016.  See “Recent Developments.”

 

·    $2.3 million decrease in revenues in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the sale of the Federal on January 8, 2016.

 

·    $7.1 million decrease in revenues in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the re-chartering of certain of our vessels at lower rates.

 

·    $4.2 million decrease in revenues due to lower fleet utilization in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.

 

Voyage Expenses

 

Voyage expenses increased by $0.8 million, to $10.0 million in the nine months ended September 30, 2016 from $9.2 million in the nine months ended September 30, 2015. The increase is mainly due to increased bunkering expenses.

 

Vessel Operating Expenses

 

Vessel operating expenses decreased by 1.8%, or $1.5 million, to $83.6 million in the nine months ended September 30, 2016, from $85.1 million in the nine months ended September 30, 2015. The decrease is due to a decrease in average number of vessels in our fleet by 1.8% and due to a 0.4% decrease in the average daily operating cost per vessel during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.

 

The average daily operating cost per vessel decreased to $5,749 per day for the nine months ended September 30, 2016 from $5,770 per day for the nine months ended September 30, 2015. Management believes that our daily operating cost ranks as one of the most competitive in the industry.

 

Depreciation

 

Depreciation expense decreased by 2.0%, or $2.0 million, to $96.6 million in the nine months ended September 30, 2016 from $98.6 million in the nine months ended September 30, 2015, mainly due to decreased depreciation expense for twelve vessels for which we recorded an impairment charge on December 31, 2015 and due to the decreased average number of vessels in our fleet in the nine months ended September 30, 2016 following the sale of the Federal on January 8, 2016.

 

3

 

Amortization of Deferred Drydocking and Special Survey Costs

 

Amortization of deferred dry-docking and special survey costs increased by $1.1 million, to $4.0 million in the nine months ended September 30, 2016 from $2.9 million in the nine months ended September 30, 2015. The increase is mainly due to the increased payments for dry-docking and special survey costs related to certain vessels over the last nine months.

 

Bad Debt Expense

 

Bad debt expense of $15.8 million in the nine months ended September 30, 2016 compared to nil in the nine months ended September 30, 2015 relates to receivables from Hanjin Shipping, which were written-off.

 

General and Administrative Expenses

 

General and administrative expenses remained stable, amounting to $16.1 million both in the nine months ended September 30, 2016 and in the nine months ended September 30, 2015.

 

Interest Expense and Interest Income

 

Interest expense decreased by 3.7%, or $2.4 million, to $61.8 million in the nine months ended September 30, 2016 from $64.2 million in the nine months ended September 30, 2015 including the amortization of deferred finance costs reclassified from other finance expenses to interest expense of $9.7 million and $10.7 million, respectively. The change in interest expense was mainly due to the decrease in our average debt by $240.5 million, to $2,685.5 million in the nine months ended September 30, 2016, from $2,926.0 million in the nine months ended September 30, 2015 and due to a $1.0 million decrease in the amortization of deferred finance costs, which were partially offset by an increase in average cost of debt due to the increase in US$ Libor.

 

The Company is deleveraging its balance sheet. As of September 30, 2016, the debt outstanding gross of deferred finance costs was $2,615.4 million compared to $2,860.1 million as of September 30, 2015. As a result principally of the cancellation of eight charters with Hanjin Shipping, we expect the rate at which we reduce our leverage to decline.

 

Interest income increased by $0.7 million to $3.2 million in the nine months ended September 30, 2016 compared to $2.5 million in the nine months ended September 30, 2015. The increase is mainly attributed to the interest income recognized on HMM notes receivable.

 

Other Finance Expenses

 

Other finance expenses decreased by $0.2 million, to $3.3 million in the nine months ended September 30, 2016 from $3.5 million in the nine months ended September 30, 2015, following the reclassification of the amortization of deferred finance costs from other finance expenses to interest expense of $9.7 million and $10.7 million, respectively.

 

Equity loss on investments

 

Equity loss on investments of $1.6 million in the nine months ended September 30, 2016 compared to a loss of $1.0 million in the nine months ended September 30, 2015 relate to the investment in Gemini Shipholdings Corporation (“Gemini”), acquired in August 2015, in which the Company has a 49% shareholding interest. This loss is attributed to operating losses of two out of the four vessels that have been acquired by Gemini.

 

Unrealized and realized (loss)/gain on derivatives

 

Unrealized gains on interest rate swaps amounted to $3.7 million in the nine months ended September 30, 2016 compared to unrealized gains of $11.6 million in the nine months ended September 30, 2015. The unrealized gains were attributable to mark to market valuation of our swaps, as well as reclassification of unrealized losses from Accumulated Other Comprehensive Loss to our earnings due to the discontinuation of hedge accounting since July 1, 2012.

 

Realized loss on interest rate swaps decreased by $40.3 million, to $7.5 million in the nine months ended September 30, 2016 from $47.8 million in the nine months ended September 30, 2015. This decrease is attributable to a $675.8 million decrease in the average notional amount of swaps during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 as a result of swap expirations.

 

4

 

Other income/(expenses), net

 

Other income/(expenses), net decreased by $12.5 million, to $12.4 million net expenses in the nine months ended September 30, 2016 from $0.1 million net income in the nine months ended September 30, 2015 mainly due to a $12.9 million recognized loss on sale of HMM equity securities for cash proceeds of $38.1 million, which were acquired by Danaos in July 2016 as part of the charter restructuring agreement with HMM. See Note 8 “Other Current and Non-Current Assets” to our unaudited condensed consolidated financial statements included in this report.

 

Liquidity and Capital Resources

 

Our principal sources of funds have been operating cash flows, vessel sales, long-term bank borrowings and a common stock sale in August 2010, as well as our initial public offering in October 2006. Our principal uses of funds have been capital expenditures to establish, grow and maintain our fleet, comply with international shipping standards, environmental laws and regulations and to fund working capital requirements, including debt repayments.

 

Our short-term liquidity needs primarily relate to funding our vessel operating expenses, debt interest payments and servicing the current portion of our debt obligations. Our long-term liquidity needs primarily relate to debt repayment and capital expenditures related to any further growth of our fleet. We anticipate that our primary sources of funds will be cash from operations and equity or capital markets debt financings, subject to restrictions on uses of such funds and incurrence of debt in our credit facilities.

 

Under our existing multi-year charters as of September 30, 2016, giving effect to the charter restructuring agreement with Hyundai Merchant Marine (“HMM”) and loss of revenue from the cancellation of all eight of our charters with Hanjin Shipping discussed below under “Recent Developments,” we had contracted revenues of $100.1 million for the remainder of 2016, $376.3 million for 2017 and, thereafter, approximately $1.7 billion. Although these expected revenues are based on contracted charter rates, we are dependent on the ability and willingness of our charterers, some of which are facing substantial financial pressure, to meet their obligations under these charters in the current weak containership market.

 

As of September 30, 2016, we had cash and cash equivalents of $128.2 million. As of September 30, 2016, we had no remaining borrowing availability under our credit facilities. As of September 30, 2016, we had $2,590.1 million of outstanding indebtedness, net of deferred finance costs of $25.3 million. We have principal payments of $230.7 million due under our credit facilities in the next twelve months, and are also required by the Bank Agreement to apply a substantial portion of our remaining cash from operations to the repayment of principal under our financing arrangements.

 

As a result of a decrease in our operating income and the charter-attached market value of certain of our vessels caused principally by the cancellation of our eight charters with Hanjin Shipping, we were in breach of certain covenants in our Bank Agreement (as defined below) and other credit facilities as of September 30, 2016. We have obtained waivers of the breaches of the minimum security cover, consolidated net leverage and consolidated net worth financial covenants contained in our financing arrangements covering the period until April 1, 2017. If we are unable to comply with the covenants in our financing arrangements, obtain waivers or reach agreements with our lenders to modify such financing arrangements, we may have to restructure our obligations (see discussion under “Going Concern” and “Credit Facilities” below).

 

On January 24, 2011, we entered into a definitive agreement, which we refer to as the “Bank Agreement”, which became effective on March 4, 2011, in respect of our existing financing arrangements (other than our credit facilities with the Export Import Bank of Korea (“KEXIM”) and with KEXIM and ABN Amro), and for new credit facilities, which we refer to as the “January 2011 Credit Facilities”, from certain of our lenders aggregating $424.75 million. We are required under the Bank Agreement to apply a substantial portion of our cash from operations to the repayment of principal under our financing arrangements. We currently expect that the remaining portion of our cash from operations will be sufficient to fund all of our other obligations, provided that we are able to comply with the covenants in our financing arrangements and our charter counterparties perform their contractual obligations.  See “Going Concern” below. Under the Bank Agreement, we are subject to limits on our ability to incur additional indebtedness without our lenders’ consent and requirements for the application of proceeds from any future vessel sales or financings, including sales of equity, as well as other transactions. See “Item 5. Operating and Financial Review and Prospects”, as well as Note 12, Long-term Debt to our consolidated financial statements in our Annual Report on Form 20-F for the year ended December 31, 2015 filed with the Securities and Exchange Commission on March 15, 2016.

 

5

 

We anticipate that our primary sources of funds described above, including future equity or debt financings in the case of any further growth of our fleet to the extent permitted under our credit facilities, will be sufficient to satisfy all of the short-term and long-term liquidity needs described above, up to the 2018 scheduled maturity of the credit facilities under our Bank Agreement, provided that we are able to comply with the covenants in our financing arrangements and our charter counterparties perform their contractual obligations.

 

Our board of directors determined in 2009 to suspend the payment of further cash dividends as a result of market conditions in the international shipping industry and in order to conserve cash to be applied toward the financing of our then extensive newbuilding program. Under the Bank Agreement and the Sinosure-CEXIM credit facility, we are not permitted to pay cash dividends or repurchase shares of our capital stock unless (i) our consolidated net leverage is below 6:1 for four consecutive quarters and (ii) the ratio of the aggregate market value of our vessels to our outstanding indebtedness exceeds 125% for four consecutive quarters and provided that an event of default has not occurred and we are not, and after giving effect to the payment of the dividend, in breach of any covenant.

 

We have 15,000,000 outstanding warrants, which will expire on January 31, 2019, with an exercise price of $7.00 per share. We will not receive any cash upon exercise of the warrants as the warrants are only exercisable on a cashless basis.

 

In July 2014, ZIM and its creditors entered into definitive documentation effecting ZIM’s restructuring with its creditors. The terms of the restructuring included a reduction in the charter rates payable by ZIM under its time charters, expiring in 2020 or 2021, for six of our vessels. The terms also included our receipt of approximately $49.9 million aggregate principal amount of unsecured, interest bearing ZIM notes maturing in 2023 (consisting of $8.8 million of 3% Series 1 Notes due 2023 amortizing subject to available cash flow in accordance with a corporate cash sweep mechanism, and $41.1 million of 5% Series 2 Notes due 2023 non-amortizing (of the 5% interest rate, 3% is payable quarterly in cash and 2% is payable in kind, accrued quarterly with deferred cash payment on maturity)) and ZIM shares representing approximately 7.4% of the outstanding ZIM shares immediately after the restructuring, in exchange for such charter rate reductions and cancellation of ZIM’s other obligations to us which relate to the outstanding long term receivable as of December 31, 2013. See Note 8 to our unaudited condensed consolidated financial statements included in this report.

 

In July 2016, we entered into a charter restructuring agreement with Hyundai Merchant Marine (“HMM”) which provides for a 20% reduction, for the period until December 31, 2019 (or earlier charter expiration in the case of eight vessels), in the charter hire rates payable for thirteen of the Company’s vessels currently employed with HMM. In exchange, under the charter restructuring agreement we received (i) $32.8 million principal amount of senior, unsecured Loan Notes 1, amortizing subject to available cash flows, which accrue interest at 3% per annum payable on maturity in July 2024, (ii) $6.2 million principal amount of senior, unsecured, non-amortizing Loan Notes 2, which accrue interest at 3% per annum payable on maturity in December 2022 and (iii) 4,637,558 HMM shares, which were sold on September 1, 2016 for cash proceeds of $38.1 million. See Note 8 to our unaudited condensed consolidated financial statements included in this report.

 

Going Concern

 

As a result of a decrease in our operating income and the charter-attached market value of certain of our vessels caused principally by the cancellation of eight charters with Hanjin Shipping, which recently filed for receivership with the Seoul Central District Court, we were in breach of certain financial covenants under our Bank Agreement and our other credit facilities as of September 30, 2016. Refer to Note 11 to our unaudited condensed consolidated financial statements contained in this report for further details. We have obtained waivers of the breaches of these financial covenants, including the lenders rights to call the debt due to non-compliance with these financial covenants, until April 1, 2017. As these waivers were obtained for a period of less than the next 12 months from the balance sheet date, and in accordance with the guidance related to the classification of obligations that are callable by the lenders, we have classified our long-term debt, net of deferred finance costs as current, resulting in total current liabilities amounting to $2,665 million, which substantially exceeded our total current assets amounting to $183 million as of September 30, 2016. Although these conditions and events raise substantial doubt about our ability to continue as a going concern for a reasonable period of time, we continue to generate positive cash flows from our operations and currently are in a position to service all our contractual obligations.

 

In light of the above, the condensed consolidated financial statements included in this report were prepared assuming that we will continue as a going concern. Therefore, the accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities, other than the reclassification of long-term debt to current liabilities as described above, or any other adjustments that might result in the event we are unable to continue as a going concern.

 

6

 

Cash Flows

 

		Nine Months			Nine Months
		ended			ended
		September 30, 2016			September 30, 2015
		(In thousands)
Net cash provided by operating activities		$	224,371		$	202,167
Net cash used in investing activities		$	(8,326	)	$	(8,084	)
Net cash used in financing activities		$	(160,054	)	$	(155,616	)

 

Net Cash Provided by Operating Activities

 

Net cash flows provided by operating activities increased by $22.2 million, to $224.4 million provided by operating activities in the nine months ended September 30, 2016 compared to $202.2 million provided by operating activities in the nine months ended September 30, 2015. The increase was mainly the result of a reduction in realized losses from derivatives by $40.3 million, cash proceeds from sale of HMM securities of $38.1 million, reduced interest expense by $1.4 million, a $0.7 million decrease in voyage and vessel operating expenses, which were partially offset by a decrease of $38.4 million in operating revenues, a change in working capital of $13.0 million and higher payments for dry-docking and special survey costs by $7.5 million in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.

 

Net Cash Used in Investing Activities

 

Net cash flows used in investing activities increased by $0.2 million, to $8.3 million in the nine months ended September 30, 2016 compared to $8.1 million in the nine months ended September 30, 2015. The change reflects a $2.6 million increase in investments in affiliates and a $2.8 million increase in additions to vessels cost, which were partially offset by net proceeds from sale of vessel of $5.2 million in the nine months ended September 30, 2016 compared to no proceeds in the nine months ended September 30, 2015.

 

Net Cash Used in Financing Activities

 

Net cash flows used in financing activities increased by $4.5 million, to $160.1 million used in financing activities in the nine months ended September 30, 2016 compared to $155.6 million used in financing activities in the nine months ended September 30, 2015. The increase is mainly due to an increase in debt payments by $4.5 million and a decrease in deferred finance costs by $0.7 million, which were partially offset by a change in restricted cash by $0.7 million in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.

 

Non-GAAP Financial Measures

 

We report our financial results in accordance with U.S. generally accepted accounting principles (GAAP). Management believes, however, that certain non-GAAP financial measures used in managing the business may provide users of this financial information additional meaningful comparisons between current results and results in prior operating periods. Management believes that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain items that impact the overall comparability. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating our performance. See the table below for supplemental financial data and corresponding reconciliation to GAAP financial measures. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP.

 

7

 

EBITDA and Adjusted EBITDA

 

EBITDA represents net income before interest income and expense, taxes, depreciation, as well amortization of deferred drydocking & special survey costs, amortization of deferred realized losses of cash flow interest rate swaps, amortization of finance costs and finance costs accrued. Adjusted EBITDA represents net income before interest income and expense, taxes, depreciation, amortization of deferred drydocking & special survey costs, amortization of deferred realized losses of cash flow interest rate swaps, amortization of finance costs and finance costs accrued, unrealized gain on derivatives, realized loss on derivatives, gain/(loss) on sale of vessels, bad debt expense and loss on sale of HMM securities. We believe that EBITDA and Adjusted EBITDA assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. EBITDA and Adjusted EBITDA are also used: (i) by prospective and current customers as well as potential lenders to evaluate potential transactions; and (ii) to evaluate and price potential acquisition candidates. Our EBITDA and Adjusted EBITDA may not be comparable to that reported by other companies due to differences in methods of calculation.

 

EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are: (i) EBITDA/Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and (ii) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA/Adjusted EBITDA do not reflect any cash requirements for such capital expenditures. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Because of these limitations, EBITDA/Adjusted EBITDA should not be considered as principal indicators of our performance.

 

EBITDA and Adjusted EBITDA Reconciliation to Net Income

 

		Nine Months			Nine Months
		ended			ended
		September 30, 2016			September 30, 2015
		(In thousands)
Net income		$	80,372		$	110,482
Depreciation		96,586			98,558
Amortization of deferred drydocking & special survey costs		3,971			2,924
Amortization of deferred realized losses of cash flow interest rate swaps		3,016			3,004
Amortization of finance costs		9,677			10,661
Finance costs accrued (Exit Fees under our Bank Agreement)		2,617			2,744
Interest income		(3,196		)	(2,549		)
Interest expense		52,119			53,520
EBITDA		245,162			279,344
Loss on sale of vessels		36			—
Bad debt expense		15,834			—
Loss on sale of HMM securities		12,906			—
Realized loss on derivatives		4,494			44,833
Unrealized gains on derivatives		(3,719		)	(11,551		)
Adjusted EBITDA		$	274,713		$	312,626

 

8

 

EBITDA decreased by $34.1 million, to $245.2 million in the nine months ended September 30, 2016 from $279.3 million in the nine months ended September 30, 2015. This decrease was mainly attributed to a $38.4 million decrease in operating revenues, bad debt expense of $15.8 million, loss on sale of HMM securities of $12.9 million and a $0.6 million increased loss on equity investments, which were partially offset by a $32.5 million decrease in unrealized and realized losses on derivatives and a $0.7 million decrease in voyage and vessel operating expenses in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.

 

Adjusted EBITDA decreased by $37.9 million, to $274.7 million in the nine months ended September 30, 2016 from $312.6 million in the nine months ended September 30, 2015. This decrease was mainly attributed to a $38.4 million decrease in operating revenues, a $0.6 million increased loss on equity investments, which were partially offset by a $0.7 million decrease in voyage and vessel operating expenses. Adjusted EBITDA for the nine months ended September 30, 2016 is adjusted mainly for unrealized gains on derivatives of $3.7 million, realized losses on derivatives of $4.5 million, bad debt expense of $15.8 million and a loss on sale of HMM securities of $12.9 million.

 

Credit Facilities

 

We, as borrower, and certain of our subsidiaries, as guarantors, have entered into a number of credit facilities in connection with financing the acquisition of certain vessels in our fleet, which are described in Note 12, Long-term Debt to our consolidated financial statements in our Annual Report on Form 20-F for the year ended December 31, 2015 filed with the Securities and Exchange Commission on March 15, 2016. The following table summarizes all our credit facilities:

 

Lender		Outstanding Principal Amount (in millions)(1)			Collateral Vessels
The Royal Bank of Scotland(2)		$	652.9		The Hyundai Progress , the Hyundai Highway , the Hyundai Bridge , the Zim Monaco , the Express Argentina (ex Hanjin Buenos Aires) , the Express France (ex Hanjin Versailles) , the Express Spain (ex Hanjin Algeciras) , the CMA CGM Racine and the CMA CGM Melisande
Aegean Baltic Bank—HSH Nordbank—Piraeus Bank(3)		$	627.8		The Hyundai Vladivostok , the Hyundai Advance , the Hyundai Stride , the Hyundai Future , the Hyundai Sprinter , the Amalia C , the MSC Zebra , the Danae C, the Dimitris C, the Performance and the Priority
Citi		$	129.4		The CMA CGM Moliere and the CMA CGM Musset
Deutsche Bank		$	166.1		The Zim Rio Grande , the Zim Sao Paolo and the OOCL Istanbul
Credit Suisse		$	191.6		The Zim Luanda , the CMA CGM Nerval and the YM Mandate
ABN Amro-Bank of America Merrill Lynch-Burlington-Sequoia-National Bank of Greece		$	220.0		The SNL Colombo , the YM Seattle , the YM Vancouver and the YM Singapore
Commerzbank—Credit Suisse—Golden Tree		$	246.6		The OOCL Novorossiysk , the Express Brazil (ex Hanjin Santos), the YM Maturity , the Express Black Sea (ex Hanjin Constantza) and the CMA CGM Attila
HSH Nordbank		$	14.5		The Deva and the Derby D
KEXIM		$	0.7		The Europe (ex CSCL Europe) and the CSCL America
KEXIM-ABN Amro		$	34.4		The CSCL Pusan and the CSCL Le Havre
January 2011 Credit Facilities
Aegean Baltic—HSH Nordbank—Piraeus Bank(3)		$	48.9		The Hyundai Speed , the Express Rome (ex Hanjin Italy) and the CMA CGM Rabelais
RBS(2)		$	54.9		The Hyundai Smart and the Express Berlin (ex Hanjin Germany)
ABN Amro Club Facility		$	12.7		The Express Athens (ex Hanjin Greece)
Club Facility		$	31.1		The Hyundai Together and the Hyundai Tenacity
Citi-Eurobank		$	57.2		The Hyundai Ambition
Sinosure-CEXIM-Citi-ABN Amro		$	108.5		The CMA CGM Tancredi , the CMA CGM Bianca and the CMA CGM Samson

 

---

(1)                                           As of September 30, 2016, gross of deferred finance costs

(2)                                           Pursuant to the Bank Agreement, this credit facility is also secured by a second priority lien on the Derby D , the CSCL America and the CSCL Le Havre

(3)                                           Pursuant to the Bank Agreement, this credit facility is also secured by a second priority lien on the Deva , the Europe (ex CSCL Europe) and the CSCL Pusan

 

9

 

As of September 30, 2016, there was no remaining borrowing availability under the Company’s credit facilities.

 

As a result of a decrease in our operating income and charter-attached market value of certain of our vessels caused mainly by the cancellation of our eight charters with Hanjin Shipping, we were in breach of the minimum security cover, consolidated net leverage and consolidated net worth financial covenants contained in our Bank Agreement and our other credit facilities as of September 30, 2016. We have obtained waivers of the breaches of these financial covenants covering the period until April 1, 2017. As these waivers were obtained for a period of less than the next 12 months from the balance sheet date, and in accordance with the guidance related to the classification of obligations that are callable by the lenders, we have classified our long-term debt, net of deferred financing costs as current.

 

For additional details regarding the Bank Agreement, the January 2011 Credit Facilities and the Sinosure-CEXIM Credit Facility, please refer to “Item 5. Operating and Financial Review and Prospects” as well as Note 12, Long-term Debt to our consolidated financial statements in our Annual Report on Form 20-F for the year ended December 31, 2015 filed with the Securities and Exchange Commission on March 15, 2016.

 

Qualitative and Quantitative Disclosures about Market Risk

 

Interest Rate Swaps

 

We have entered into interest rate swap agreements converting floating interest rate exposure into fixed interest rates in order to hedge our exposure to fluctuations in prevailing market interest rates, as well as interest rate swap agreements converting the fixed rate we pay in connection with certain of our credit facilities into floating interest rates in order to economically hedge the fair value of the fixed rate credit facilities against fluctuations in prevailing market interest rates. We do not use financial instruments for trading or other speculative purposes.

 

On July 1, 2012, we elected to prospectively de-designate interest rate swaps for which we were obtaining hedge accounting treatment due to the compliance burden associated with this accounting policy. As a result, all changes in the fair value of our interest rate swap agreements are recorded in earnings under “Net unrealized and realized losses on derivatives” from the de-designation date forward. We evaluated whether it is probable that the previously hedged forecasted interest payments are probable to not occur in the originally specified time period. We have concluded that the previously hedged forecasted interest payments are probable of occurring. Therefore, unrealized gains or losses in accumulated other comprehensive loss associated with the previously designated cash flow interest rate swaps will remain in accumulated other comprehensive loss and recognized in earnings when the interest payments will be recognized. Furthermore, the fair value of the hedged item associated with the previously designated fair value interest rate swaps will be frozen and recognized in earnings when the interest payments will be recognized. If such interest payments were to be identified as being probable of not occurring, both the accumulated other comprehensive loss balance and the fair value of hedged debt balance pertaining to the respective amounts would be reversed through earnings immediately. Refer to Note 12, Financial Instruments, to our unaudited condensed consolidated financial statements included in this report.

 

Foreign Currency Exchange Risk

 

We did not enter into derivative instruments to hedge the foreign currency translation of assets or liabilities or foreign currency transactions during the nine months ended September 30, 2016 and 2015.

 

Off-Balance Sheet Arrangements

 

We do not have any transactions, obligations or relationships that could be considered material off-balance sheet arrangements.

 

Capitalization and Indebtedness

 

The table below sets forth our consolidated capitalization as of September 30, 2016.

 

·                                          on an actual basis; and

 

·                                          on an as adjusted basis to reflect in the period from October 1, 2016 to December 15, 2016 debt repayments of $89.0 million, of which $81.5  million relates to the Bank Agreement, $6.8 million to our Sinosure-CEXIM-Citi-ABN Amro credit facility and $0.7 million to our Export-Import Bank of Korea credit facility.

 

10

 

Other than these adjustments, there have been no material changes to our capitalization from debt or equity issuances, re-capitalizations, special dividends, or debt repayments as adjusted in the table below from October 1, 2016 to December 15, 2016 . This table should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this report.

 

		As of September 30, 2016
		Actual			As adjusted
		(US Dollars in thousands)
Debt:
Total debt (1)		$	2,590,107		$	2,501,161
Stockholders’ equity:
Preferred stock, par value $0.01 per share; 100,000,000 preferred shares authorized and none issued		—			—
Common stock, par value $0.01 per share; 750,000,000 shares authorized; 109,799,352 shares issued and outstanding (2)		1,098			1,098
Additional paid-in capital		546,822			546,822
Accumulated other comprehensive loss		(99,881		)	(99,881		)
Retained earnings		477,447			477,447
Total stockholders’ equity		925,486			925,486
Total capitalization		$	3,515,593		$	3,426,647

 

---

(1)                                  Net of deferred finance costs of $25.3 million. All of our indebtedness is secured.

 

(2)                                  Does not include 15 million warrants issued in 2011 to purchase shares of common stock, at an exercise price of $7.00 per share, which we issued to lenders participating in our comprehensive financing plan. The warrants, which will expire on January 31, 2019, are exercisable solely on a cashless exercise basis.

 

Recent Developments

 

Hanjin Shipping

 

On September 1, 2016, Hanjin Shipping, a charterer of eight of our vessels under long term, fixed rate charter party agreements, referred to the Bankruptcy Court of Seoul in South Korea, which issued an order to commence the rehabilitation proceedings of Hanjin Shipping. Hanjin Shipping has cancelled all eight of its charter party agreements with us , which represented approximately $560 million of our $2.8 billion of contracted revenue as of June 30, 2016, and returned each of the vessels to us. We have rechartered five 3,400 TEU vessels on short-term charters at market rates and are seeking chartering opportunities for the other three vessels in the prevailing weak containership charter market. As a result of these events, we ceased recognizing revenue from Hanjin Shipping effective from July 1, 2016 onwards and recognized a bad debt expense amounting to $15.8 million relating to unpaid charter hire recorded as accounts receivable as of June 30, 2016 in our condensed consolidated statements of income for the nine month period ended September 30, 2016. We have an unsecured claim for unpaid charter hire, charges, expenses and loss of profit against Hanjin Shipping totaling $597.9 million submitted to the Bankruptcy Court of Seoul.

 

HMM

 

In July 2016, we entered into a charter restructuring agreement with HMM as part of the agreements it reached with its creditors and owners of its chartered-in fleet in connection with the restructuring of its obligations. The charter restructuring agreement provides for a 20% reduction, for the period until December 31, 2019 (or earlier charter expiration in the case of eight vessels), in the charter hire rates payable for thirteen of our vessels currently employed with HMM. In exchange, under the charter restructuring agreement we received (i) $32.8 million principal amount of senior, unsecured loan notes, amortizing subject to available cash flows, which accrue interest at 3% per annum payable on maturity in July 2024, (ii) $6.2 million principal amount of senior, unsecured, non-amortizing loan notes, which accrue interest at 3% per annum payable on maturity in December 2022 and (iii) 4,637,558 HMM shares issued on July 23, 2016, which were sold for cash proceeds of $38.1 million on September 1, 2016.

 

11

 

Forward Looking Statements

 

Matters discussed in this report may constitute forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements reflect our current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts. The forward-looking statements in this report are based upon various assumptions, many of which are based, in turn, upon further assumptions, including management’s examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that it will achieve or accomplish these expectations, beliefs or projections. Important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include the strength of world economies and currencies, general market conditions, including changes in charterhire rates and vessel values, charter counterparty performance, ability to obtain financing and comply with covenants contained in our financing agreements, changes in demand that may affect attitudes of time charterers to scheduled and unscheduled drydocking, changes in our operating expenses, including bunker prices, dry-docking and insurance costs, actions taken by regulatory authorities, potential liability from pending or future litigation, domestic and international political conditions, potential disruption of shipping routes due to accidents and political events or acts by terrorists. Risks and uncertainties are further described in reports filed by us with the U.S. Securities and Exchange Commission.

 

12

 

INDEX TO FINANCIAL STATEMENTS

 

Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 (unaudited)	F-2
Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	F-3
Condensed Consolidated Statements of Comprehensive Income/(Loss) for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	F-4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited)	F-5
Notes to the Condensed Consolidated Financial Statements (unaudited)	F-6

 

F- 1

 

DANAOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(Expressed in thousands of United States Dollars, except share and per share amounts)

 

				As of
				September 30,			December 31,
		Notes		2016			2015
ASSETS
CURRENT ASSETS
Cash and cash equivalents				$	128,244		$	72,253
Restricted cash		4		695			2,818
Accounts receivable, net				4,052			10,652
Inventories				12,386			11,040
Prepaid expenses				1,380			1,079
Due from related parties				32,696			19,007
Vessels held for sale		5		—			6,264
Other current assets		8, 12b		4,015			4,457
Total current assets				183,468			127,570
NON-CURRENT ASSETS
Fixed assets at cost, net of accumulated depreciation of $787,379 (2015: $690,794)		5		3,354,691			3,446,323
Deferred charges, net		6		9,567			4,751
Investments in affiliates		7		19,688			11,289
Other non-current assets		8		100,474			72,188
Total non-current assets				3,484,420			3,534,551
Total assets				$	3,667,888		$	3,662,121
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable				$	15,998		$	12,971
Accrued liabilities		9		17,410			14,014
Current portion of long-term debt		11		2,590,107			269,979
Unearned revenue				30,330			9,853
Other current liabilities		10,12a		10,799			5,328
Total current liabilities				2,664,644			312,145
LONG-TERM LIABILITIES
Long-term debt, net		11		—			2,470,417
Unearned revenue, net of current portion				75,078			24,426
Other long-term liabilities				2,680			13,219
Total long-term liabilities				77,758			2,508,062
Total liabilities				2,742,402			2,820,207
Commitments and Contingencies		13		—			—
STOCKHOLDERS’ EQUITY
Preferred stock (par value $0.01, 100,000,000 preferred shares authorized and not issued as of September 30, 2016 and December 31, 2015)		14		—			—
Common stock (par value $0.01, 750,000,000 common shares authorized as of September 30, 2016 and December 31, 2015. 109,799,352 and 109,781,744 issued and outstanding as of September 30, 2016 and December 31, 2015, respectively)		14		1,098			1,098
Additional paid-in capital				546,822			546,822
Accumulated other comprehensive loss		12a		(99,881		)	(103,081		)
Retained earnings				477,447			397,075
Total stockholders’ equity				925,486			841,914
Total liabilities and stockholders’ equity				$	3,667,888		$	3,662,121

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F- 2

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DANAOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(Expressed in thousands of United States Dollars, except share and per share amounts)

 

				Three months ended						Nine months ended
				September 30,						September 30,
		Notes		2016			2015			2016			2015
OPERATING REVENUES				$	111,752		$	144,542		$	386,225		$	424,616
OPERATING EXPENSES
Voyage expenses				(3,312		)	(2,952		)	(10,002		)	(9,170		)
Vessel operating expenses				(26,633		)	(28,165		)	(83,528		)	(85,058		)
Depreciation				(32,464		)	(33,217		)	(96,586		)	(98,558		)
Amortization of deferred drydocking and special survey costs		6		(1,541		)	(868		)	(3,971		)	(2,924		)
Bad debt expense		13		(15,834		)	—			(15,834		)	—
General and administrative expenses				(5,475		)	(5,486		)	(16,137		)	(16,137		)
Loss on sale of vessels		5		—			—			(36		)	—
Income From Operations				26,493			73,854			160,131			212,769
OTHER INCOME (EXPENSES):
Interest income				1,356			859			3,196			2,549
Interest expense				(21,022		)	(21,065		)	(61,796		)	(64,181		)
Other finance expenses				(1,109		)	(1,185		)	(3,347		)	(3,520		)
Equity loss on investments		7		(663		)	(992		)	(1,597		)	(992		)
Other income/(expense), net		8		(12,824		)	108			(12,424		)	143
Net unrealized and realized losses on derivatives		12		(628		)	(9,511		)	(3,791		)	(36,286		)
Total Other Expenses, net				(34,890		)	(31,786		)	(79,759		)	(102,287		)
Net Income/(Loss)				$	(8,397	)	$	42,068		$	80,372		$	110,482
EARNINGS PER SHARE
Basic and diluted earnings/(loss) per share				$	(0.08	)	$	0.38		$	0.73		$	1.01
Basic and diluted weighted average number of common shares (in thousands)		15		109,800			109,785			109,800			109,785

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F- 3

 

DANAOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (unaudited)

(Expressed in thousands of United States Dollars)

 

		Three months ended						Nine months ended
		September 30,						September 30,
		2016			2015			2016			2015
Net income/(loss) for the period		$	(8,397	)	$	42,068		$	80,372		$	110,482
Other comprehensive income
Amortization of deferred realized losses on cash flow hedges		1,013			1,012			3,016			3,004
Reclassification of unrealized losses to earnings		—			7,069			184			28,558
Total Other Comprehensive Income		1,013			8,081			3,200			31,562
Comprehensive Income / (Loss)		$	(7,384	)	$	50,149		$	83,572		$	142,044

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

F- 4

 

DANAOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Expressed in thousands of United States Dollars)

 

		Nine months ended
		September 30,
		2016			2015
Cash Flows from Operating Activities
Net income		$	80,372		$	110,482
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		96,586			98,558
Amortization of deferred drydocking and special survey costs		3,971			2,924
Amortization of finance costs		9,677			10,661
Exit fee accrued on debt		2,617			2,744
Bad debt expense		15,834			—
Loss on sale of securities		12,906			—
Payments for drydocking and special survey costs deferred		(8,787		)	(1,307		)
Loss on sale of vessels		36			—
Amortization of deferred realized losses on interest rate swaps		3,016			3,004
Unrealized gains on derivatives		(3,719		)	(11,551		)
Equity loss on investments		1,597			992
(Increase)/Decrease in
Accounts receivable		(9,234		)	52
Inventories		(1,346		)	1,020
Prepaid expenses		(683		)	(291		)
Due from related parties		(13,689		)	(9,158		)
Other assets, current and non-current		34,748			2,690
Increase/(Decrease) in
Accounts payable		3,013			(1,333		)
Accrued liabilities		3,396			(5,568		)
Unearned revenue, current and long-term		(4,505		)	(3,181		)
Other liabilities, current and long-term		(1,435		)	1,429
Net Cash provided by Operating Activities		224,371			202,167
Cash Flows from Investing Activities
Vessels additions		(3,508		)	(734		)
Investments in affiliates		(9,996		)	(7,350		)
Net proceeds from sale of vessels		5,178			—
Net Cash used in Investing Activities		(8,326		)	(8,084		)
Cash Flows from Financing Activities
Payments of long-term debt		(162,177		)	(121,913		)
Payments of vendor financing		—			(35,835		)
Deferred finance costs		—			(692		)
Decrease in restricted cash		2,123			2,824
Net Cash used in Financing Activities		(160,054		)	(155,616		)
Net Increase in Cash and Cash Equivalents		55,991			38,467
Cash and Cash Equivalents at beginning of period		72,253			57,730
Cash and Cash Equivalents at end of period		$	128,244		$	96,197

 

T he accompanying notes are an integral part of these condensed consolidated financial statements.

 

F- 5

 

DANAOS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1                               Basis of Presentation and General Information

 

The accompanying condensed consolidated financial statements (unaudited) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The reporting and functional currency of the Company is the United States Dollar.

 

Danaos Corporation (“Danaos” or “Company”), formerly Danaos Holdings Limited, was formed on December 7, 1998 under the laws of Liberia and is presently the sole owner of all outstanding shares of the companies listed below. Danaos Holdings Limited was redomiciled in the Marshall Islands on October 7, 2005. In connection with the redomiciliation, the Company changed its name to Danaos Corporation. On October 14, 2005, the Company filed and the Marshall Islands accepted Amended and Restated Articles of Incorporation. The authorized capital stock of Danaos Corporation is 750,000,000 shares of common stock with a par value of $0.01 and 100,000,000 shares of preferred stock with a par value of $0.01. Refer to Note 14, Stockholders’ Equity.

 

In the opinion of management, the accompanying condensed consolidated financial statements (unaudited) of Danaos and subsidiaries contain all adjustments necessary to present fairly, in all material respects, the Company’s condensed consolidated financial position as of September 30, 2016 and December 31, 2015, the condensed consolidated results of operations for the three and nine months ended September 30, 2016 and 2015 and the condensed consolidated cash flows for the nine months ended September 30, 2016 and 2015. All such adjustments are deemed to be of a normal, recurring nature. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in Danaos’ Annual Report on Form 20-F for the year ended December 31, 2015. The results of operations for the three and nine months ended September 30, 2016, are not necessarily indicative of the results to be expected for the full year.

 

The year-end condensed consolidated balance sheet data was derived from audited financial statements except for the effect of the adoption of the Accounting Standards Update No. 2015-03 “Simplifying the Presentation of Debt Issuance Costs” (Note 2), but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

The Company’s principal business is the acquisition and operation of vessels. Danaos conducts its operations through the vessel owning companies whose principal activity is the ownership and operation of containerships that are under the exclusive management of a related party of the Company.

 

The accompanying condensed consolidated financial statements (unaudited) represent the consolidation of the accounts of the Company and its wholly owned subsidiaries. The subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date that control ceases. Inter-company transaction balances and unrealized gains on transactions between the companies are eliminated.

 

The Company also consolidates entities that are determined to be variable interest entities, of which the Company is the primary beneficiary, as defined in the authoritative guidance under U.S. GAAP . A variable interest entity is defined as a legal entity where either (a) equity interest holders as a group lack the characteristics of a controlling financial interest, including decision making ability and an interest in the entity’s residual risks and rewards, or (b) the equity holders have not provided sufficient equity investment to permit the entity to finance its activities without additional subordinated financial support, or (c) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.

 

The condensed consolidated financial statements (unaudited) have been prepared to reflect the consolidation of the companies listed below. The historical balance sheets and results of operations of the companies listed below have been reflected in the condensed consolidated balance sheets and condensed consolidated Statements of Income, cash flows and stockholders’ equity at and for each period since their respective incorporation dates.

 

The consolidated companies are referred to as “Danaos,” or “the Company.”

 

As of September 30, 2016, Danaos included the vessel owning companies (the “Danaos Subsidiaries”) listed below. All vessels are container vessels:

 

F- 6

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DANAOS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Company		Date of Incorporation		Vessel Name		Year Built		TEU(2)
Megacarrier (No. 1) Corp.		September 10, 2007		Hyundai Together		2012		13,100
Megacarrier (No. 2) Corp.		September 10, 2007		Hyundai Tenacity		2012		13,100
Megacarrier (No. 3) Corp.		September 10, 2007		Hyundai Smart		2012		13,100
Megacarrier (No. 4) Corp.		September 10, 2007		Hyundai Speed		2012		13,100
Megacarrier (No. 5) Corp.		September 10, 2007		Hyundai Ambition		2012		13,100
CellContainer (No. 6) Corp.		October 31, 2007		Express Berlin (ex Hanjin Germany)		2011		10,100
CellContainer (No. 7) Corp.		October 31, 2007		Express Rome (ex Hanjin Italy)		2011		10,100
CellContainer (No. 8) Corp.		October 31, 2007		Express Athens (ex Hanjin Greece)		2011		10,100
Karlita Shipping Co. Ltd.		February 27, 2003		CSCL Pusan		2006		9,580
Ramona Marine Co. Ltd.		February 27, 2003		CSCL Le Havre		2006		9,580
Teucarrier (No. 5) Corp.		September 17, 2007		CMA CGM Melisande		2012		8,530
Teucarrier (No. 1) Corp.		January 31, 2007		CMA CGM Attila		2011		8,530
Teucarrier (No. 2) Corp.		January 31, 2007		CMA CGM Tancredi		2011		8,530
Teucarrier (No. 3) Corp.		January 31, 2007		CMA CGM Bianca		2011		8,530
Teucarrier (No. 4) Corp.		January 31, 2007		CMA CGM Samson		2011		8,530
Oceanew Shipping Ltd.		January 14, 2002		Europe (ex CSCL Europe)		2004		8,468
Oceanprize Navigation Ltd.		January 21, 2003		CSCL America		2004		8,468
Boxcarrier (No. 2) Corp.		June 27, 2006		CMA CGM Musset(1)		2010		6,500
Boxcarrier (No. 3) Corp.		June 27, 2006		CMA CGM Nerval(1)		2010		6,500
Boxcarrier (No. 4) Corp.		June 27, 2006		CMA CGM Rabelais(1)		2010		6,500
Boxcarrier (No. 5) Corp.		June 27, 2006		CMA CGM Racine(1)		2010		6,500
Boxcarrier (No. 1) Corp.		June 27, 2006		CMA CGM Moliere(1)		2009		6,500
Expresscarrier (No. 1) Corp.		March 5, 2007		YM Mandate		2010		6,500
Expresscarrier (No. 2) Corp.		March 5, 2007		YM Maturity		2010		6,500
Actaea Company Limited		October 14, 2014		Performance		2002		6,402
Asteria Shipping Company Limited		October 14, 2014		Priority		2002		6,402
Auckland Marine Inc.		January 27, 2005		SNL Colombo		2004		4,300
Wellington Marine Inc.		January 27, 2005		YM Singapore		2004		4,300
Continent Marine Inc.		March 22, 2006		Zim Monaco		2009		4,253
Medsea Marine Inc.		May 8, 2006		OOCL Novorossiysk		2009		4,253
Blacksea Marine Inc.		May 8, 2006		Zim Luanda		2009		4,253
Bayview Shipping Inc.		March 22, 2006		Zim Rio Grande		2008		4,253
Channelview Marine Inc.		March 22, 2006		Zim Sao Paolo		2008		4,253
Balticsea Marine Inc.		March 22, 2006		OOCL Istanbul		2008		4,253
Seacarriers Services Inc.		June 28, 2005		YM Seattle		2007		4,253
Seacarriers Lines Inc.		June 28, 2005		YM Vancouver		2007		4,253
Containers Services Inc.		May 30, 2002		Deva		2004		4,253
Containers Lines Inc.		May 30, 2002		Derby D		2004		4,253
Boulevard Shiptrade S.A		September 12, 2013		Dimitris C		2001		3,430
CellContainer (No. 4) Corp.		March 23, 2007		Express Spain (ex Hanjin Algeciras)		2011		3,400
CellContainer (No. 5) Corp.		March 23, 2007		Express Black Sea (ex Hanjin Constantza)		2011		3,400
CellContainer (No. 1) Corp.		March 23, 2007		Express Argentina (ex Hanjin Buenos Aires)		2010		3,400
CellContainer (No. 2) Corp.		March 23, 2007		Express Brazil (ex Hanjin Santos)		2010		3,400
CellContainer (No. 3) Corp.		March 23, 2007		Express France (ex Hanjin Versailles)		2010		3,400
Vilos Navigation Company Ltd.		May 30, 2013		MSC Zebra		2001		2,602
Trindade Maritime Company		April 10, 2013		Amalia C		1998		2,452
Sarond Shipping Inc.		January 18, 2013		Danae C		2001		2,524
Speedcarrier (No. 7) Corp.		December 6, 2007		Hyundai Highway		1998		2,200
Speedcarrier (No. 6) Corp.		December 6, 2007		Hyundai Progress		1998		2,200
Speedcarrier (No. 8) Corp.		December 6, 2007		Hyundai Bridge		1998		2,200
Speedcarrier (No. 1) Corp.		June 28, 2007		Hyundai Vladivostok		1997		2,200
Speedcarrier (No. 2) Corp.		June 28, 2007		Hyundai Advance		1997		2,200
Speedcarrier (No. 3) Corp.		June 28, 2007		Hyundai Stride		1997		2,200
Speedcarrier (No. 5) Corp.		June 28, 2007		Hyundai Future		1997		2,200
Speedcarrier (No. 4) Corp.		June 28, 2007		Hyundai Sprinter		1997		2,200
Vessel sold in 2016
Federal Marine Inc.		February 14, 2006		Federal		1994		4,651

 

---

(1)                                  Vessel subject to charterer’s option to purchase vessel after first eight years of time charter term for $78.0 million.

(2)                                  Twenty-feet equivalent unit, the international standard measure for containers and containership capacity.

 

F- 7

 

DANAOS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2                               Significant Accounting Policies

 

All accounting policies are as described in the Company’s Annual Report on Form 20-F for the year ended December 31, 2015 filed with the Securities and Exchange Commission on March 15, 2016, except as described below under “Changes in Accounting Principles”.

 

Changes in Accounting Principles

 

The Company historically presented fees incurred for obtaining loans as deferred charges in the consolidated balance sheets. During the nine months ended September 30, 2016, the Company adopted Accounting Standards Update No. 2015-03 “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the consolidated balance sheets as a direct deduction from the carrying amount of debt liability, consistent with debt discounts. Upon adoption, the Company applied the new guidance retrospectively to prior periods presented in the consolidated financial statements. The effect of the retrospective application of this change in accounting principle on the Company’s consolidated balance sheet as of December 31, 2015 resulted in a reduction of deferred charges, net by $35.0 million, with a corresponding reduction of long-term debt, net. Additionally, amortization of deferred charges amounting to $10.7 million was reclassified from other finance expenses to interest expense in the condensed consolidated statements of income for the nine months ended September 30, 2015.

 

Equity securities that are acquired and held principally for the purpose of resale in the near term are classified as trading securities based on management’s intention on the date of acquisition and are recorded at fair value based on quoted market prices with changes in fair value and realized gains/(losses) presented under other income/(expenses), net in the condensed consolidated Statements of Income.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-9 “Revenue from Contracts with Customers” (“ASU 2014-09”), which will supersede the current revenue recognition guidance and outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The ASU 2014-09 was amended by ASU 2015-14 “Revenue from Contracts with Customers: Deferral of the Effective Date” (“ASU 2015-014”), which was issued in August 2015. Public entities can now elect to defer implementation of ASU 2014-09 to interim and annual periods beginning after December 15, 2017. Additionally, ASU 2015-14 permits early adoption of the standard but not before the original effective date, i.e. annual period beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. In addition, in 2016, the FASB issued four amendments, which clarified the guidance on certain items such as reporting revenue as a principal versus agent, identifying performance obligations, accounting for intellectual property licenses, assessing collectability and presentation of sales taxes. The Company is currently evaluating the impact that the adoption of the new standard will have on its consolidated financial statements and associated disclosures, and have not yet selected a transition method.

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Presentation of Financial Statements — Going Concern (Sub-Topic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and notes disclosures.

 

.

 

F- 8