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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number 1-34153
Date of event requiring this shell company report
Global Ship Lease, Inc.
(Exact name of Registrant as specified in its charter)
Republic of The Marshall Islands
(Jurisdiction of incorporation or organization)
c/o Portland House
Stag Place
London SW1E 5RS
United Kingdom
(Address of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Class A Common Shares, par value of $0.01 per share
Warrants
Units
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
46,830,467 Class A Common Shares, par value of $0.01 per share
7,405,956 Class B Common Shares, par value of $0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. Yes ☐ No ☒
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 ☒ 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 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, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒ International Financial Reporting Standards as Issued by the International Accounting Standards Board ☐ Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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GLOBAL SHIP LEASE, INC.
INDEX TO REPORT ON FORM 20-F
PART I
Item 1.
Identity of Directors, Senior Management and Advisors
Item 2.
Offer Statistics and Expected Timetable
Item 3.
Key Information
A. Selected Financial Data
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
Item 4.
Information on the Company
A. History and Development of the Company
B. Business Overview
C. Organizational Structure
D. Property, Plants and Equipment
Item 5.
Operating and Financial Review and Prospects
A. Results of Operations
B. Liquidity and Capital Resources
C. Research and Development
D. Trend Information
E. Off-Balance Sheet Arrangements
F. Contractual Obligations
Item 6.
Directors, Senior Management and Employees
A. Directors and Senior Management
B. Compensation
C. Board Practices
D. Employees
E. Share Ownership
Item 7.
Major Shareholders and Related Party Transactions
A. Major Shareholders
B. Related Party Transactions
Item 8.
Financial Information
A. Financial Statements and Other Financial Information
B. Significant Changes
Item 9.
The Offer and Listing
Page
1
2
2
2
2
5
5
5
19
19
19
36
36
36
36
45
49
49
50
50
51
51
53
55
56
56
56
56
57
58
58
59
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Item 10.
Additional Information
A. Share Capital
B. Memorandum and Articles of Association
C. Material Contracts
D. Exchange Controls
E. Taxation
F. Dividends and Paying Agents
G. Statements by Experts
H. Documents on Display
Item 11.
Quantitative and Qualitative Disclosures About Market Risk
Item 12.
Description of Securities Other than Equity Securities
PART II
Item 13.
Defaults, Dividend Arrearages and Delinquencies
Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15.
Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B.
Code of Ethics
Item 16C.
Principal Accountant Fees and Services
Item 16D. Exemptions from the Listing Standards for Audit Committees
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16F.
Change in Registrants’ Certifying Accountant
Item 16G. Corporate Governance
PART III
Item 17.
Financial Statements
Item 18.
Financial Statements
Item 19.
Exhibits
Page
61
61
61
61
61
61
68
68
68
68
69
70
70
70
70
71
71
71
72
72
72
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72
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PART I
This Annual Report contains forward-looking statements. Forward-looking statements provide Global Ship Lease’s current expectations or forecasts of future
events. Forward-looking statements include statements about Global Ship Lease’s expectations, beliefs, plans, objectives, intentions, assumptions and other
statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “ongoing,”
“plan,” “potential,” “predict,” “project,” “will” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking
statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Examples of forward-looking statements in this
Annual Report include, but are not limited to, statements regarding Global Ship Lease’s disclosure concerning its operations, cash flows, financial position,
dividend policy and likelihood of success in acquiring additional vessels to expand its business.
Forward-looking statements appear in a number of places in this Annual Report including, without limitation, in the sections entitled “Business Overview,”
“Management’s Discussion and Analysis of Financial Conditions and Operations,” and “Dividend Policy.” The risks and uncertainties include, but are not
limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
future operating or financial results;
expectations regarding the future growth of the container shipping industry, including the rates of annual demand and supply growth;
the financial condition of CMA CGM, our charterer and sole source of operating revenue, and its ability to pay charterhire in accordance with the
charters;
Global Ship Lease’s financial condition and liquidity, including its ability to obtain additional waivers which might be necessary under the existing
credit facility or obtain additional financing to fund capital expenditures, contracted and yet to be contracted vessel acquisitions including the two
newbuildings to be purchased from German interests in the fourth quarter of 2010, and other general corporate purposes;
Global Ship Lease’s ability to meet its financial covenants and repay its credit facility;
Global Ship Lease’s expectations relating to dividend payments and forecasts of its ability to make such payments including the availability of cash
and the impact of constraints under its credit facility;
future acquisitions, business strategy and expected capital spending;
operating expenses, availability of crew, number of off-hire days, drydocking and survey requirements and insurance costs;
general market conditions and shipping industry trends, including charter rates and factors affecting supply and demand;
assumptions regarding interest rates and inflation;
changes in the rate of growth of global and various regional economies;
risks incidental to vessel operation, including piracy, discharge of pollutants and vessel accidents and damage including total or constructive total
loss;
estimated future capital expenditures needed to preserve its capital base;
Global Ship Lease’s expectations about the availability of ships to purchase, the time that it may take to construct new ships, or the useful lives of its
ships;
Global Ship Lease’s continued ability to enter into or renew long-term, fixed-rate charters;
the continued performance of existing long-term, fixed-rate time charters;
Global Ship Lease’s ability to capitalize on its management team’s and board of directors’ relationships and reputations in the containership industry
to its advantage;
changes in governmental and classification societies’ rules and regulations or actions taken by regulatory authorities;
expectations about the availability of insurance on commercially reasonable terms;
unanticipated changes in laws and regulations including taxation;
potential liability from future litigation; and
other factors discussed in “Risk Factors.”
1
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Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause
actual results to differ materially from those expected or implied by the forward-looking statements. Global Ship Lease’s actual results could differ materially
from those anticipated in forward-looking statements for many reasons, including the factors described in “Risk Factors” in this Annual Report. Accordingly, you
should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report. Global Ship Lease undertakes no obligation to
publicly revise any forward-looking statement to reflect circumstances or events after the date of this Annual Report or to reflect the occurrence of unanticipated
events. You should, however, review the factors and risks Global Ship Lease describes in the reports it will file from time to time with the Securities and Exchange
Commission, or SEC, after the date of this Annual Report.
Unless the context otherwise requires, references to “the company”, “we”, “us” or “our” refers to Global Ship Lease, Inc.; “CMA CGM” refers to CMA CGM
S.A., “initial Charterer” refers to CMA CGM in its capacity as a charterer of our vessels; and “Ship Manager” refers to CMA Ships, a wholly-owned subsidiary
of CMA CGM and our current ship manager.
For the definition of certain terms used in this Annual Report, please see “Glossary of Shipping Terms” at the end of this Annual Report.
Unless otherwise indicated, all references to “$” and “dollars” in this Annual Report are in United States dollars. We use the term “TEU”, meaning twenty-foot
equivalent unit, the international standard measure of container size, in describing volumes in world container trade and other measures, including the capacity
of Global Ship Lease’s containerships, which we also refer to as vessels. Unless otherwise indicated, we calculate the average age of Global Ship Lease’s vessels
on a weighted average basis, based on TEU capacity.
Item 1.
Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2.
Offer Statistics and Expected Timetable
Not applicable.
Item 3.
Key Information
A. Selected Financial Data
You should read the information set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Global Ship Lease’s combined financial statements and notes thereto, which are referred to as Global Ship Lease’s combined financial
statements, included elsewhere in this Annual Report.
This selected historical combined financial and operating information gives effect to the Merger as at August 14, 2008 and consequently the combined
financial statements up to December 31, 2009 include two distinct reporting periods (i) January 1, 2004 through August 14, 2008 (“Predecessor”) and
(ii) August 15, 2008 through December 31, 2009 (“Successor”), which relate to the period preceding the Merger and the period succeeding the Merger,
respectively. Further, the company derived all of its revenue in 2009 and virtually all of its revenue in 2008 from chartering out its vessels under its continuing
business of long-term fixed rate time charters whereas for periods before 2008, under predecessor accounting rules, it earned virtually all of its revenue from
carrying containerized cargo. Global Ship Lease uses the term “Predecessor Group” to mean the container shipping services provided by the 10 secondhand
vessels, which it purchased in December 2007, and two newly built vessels, which it purchased in January 2008, in Global Ship Lease’s initial fleet when these
vessels were owned and operated by CMA CGM and its subsidiaries rather than to mean any particular entity or entities.
There are significant differences between Global Ship Lease’s business after the acquisition of its initial fleet in December 2007 and January 2008, when it
started its time charter business, and the business of Global Ship Lease’s Predecessor Group when the vessels earned revenue from carrying cargo for customers.
Accordingly, the selected historical combined financial data prior to January 2008, which includes mainly the Predecessor Group’s trading activities of the vessels
earning freight rates or revenue from carrying cargo for third party customers, are not indicative of the results Global Ship Lease would have achieved had it
historically operated as an independent ship-owning company earning charterhire or of Global Ship Lease’s future results.
The combined financial statements for the Successor period reflect the acquisition of Global Ship Lease, Inc., as a result of the Merger, under the purchase
method of accounting. The results of the Successor are not comparable to the results of the Predecessor due to the difference in the basis of presentation under
purchase accounting as compared to historical cost and due to the changes in capital and legal structure following the Merger including the company becoming
listed on the New York Stock Exchange.
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The historical selected combined financial data as of December 31, 2009, 2008 and 2007 and for each of the years then ended (2008 including two distinct
reporting periods before and after the Merger) together with such information for the years ended December 31, 2006 and 2005 have been derived from audited
combined financial statements of Global Ship Lease, Inc. The historical selected combined financial data as of December 31, 2006 and 2005 is derived from
carve-out information of the Predecessor Group prepared by management of CMA CGM. Certain financial information has been rounded, and, as a result, certain
totals shown in this Annual Report may not equal the arithmetic sum of the figures that should otherwise aggregate to those totals.
3
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This selected financial information should be read together with, and is qualified in its entirety by, Global Ship Lease’s combined financial statements and
the notes thereto included elsewhere in this Annual Report.
GLOBAL SHIP LEASE, INC.
August 15 to
December 31
2008
January 1 to
August 14
2008
2009
2007
2006
2005
Successor
Successor
Predecessor
Predecessor
Predecessor
Predecessor
(in millions of U.S. dollars, except per share data)
Statement of Income
Operating revenues:
Freight revenue (1)
Time charter revenue (2)
Operating expenses:
Voyage expenses (3)
Vessel expenses
Depreciation
General and administrative (4)
Other operating income / (expense)
Total operating expenses
Operating income
Non operating income/ (expense)
Interest income
Interest expense
Realized and unrealized gain on interest rate derivatives
Income before income taxes
Taxes on income
Net income (loss)
Net income per share in thousand $ per share
Basic and diluted (5)
Weighted average number of common shares outstanding
Basic and diluted
Net income (loss) per Class A common share in $
Basic and diluted (5)
Weighted average number of Class A common shares outstanding
Basic in millions
Diluted in millions
Net (loss) per Class B common share in $
Basic and diluted
Weighted average number of Class B common shares outstanding
Basic and diluted in millions
$ —
148.7
$
—
(41.4)
(37.3)
(8.7)
0.4
(87.0)
61.7
$
$
0.5
(24.2)
4.8
42.8
(0.4)
42.4
n.a.
n.a.
0.91
46.5
46.8
Nil
7.4
—
39.1
—
(11.9)
(8.7)
(3.7)
0.1
(24.2)
14.9
0.4
(3.8)
(55.3)
(43.9)
(0.1)
(44.0)
n.a.
n.a.
(1.30)
33.8
33.8
Nil
7.4
$
$
2.1
55.9
332.2
2.9
$
299.6
—
$
111.6
—
$
(1.9)
(18.1)
(12.2)
(3.8)
(0.1)
(36.1)
21.9
0.4
(17.6)
2.7
7.4
—
7.4
74
100
n.a.
n.a.
n.a.
n.a.
n.a.
$
(249.5)
(24.0)
(16.1)
(17.8)
2.3
(304.9)
30.2
0.2
(13.6)
—
16.8
—
16.8
168
100
n.a.
n.a.
n.a.
n.a.
n.a.
$
(213.1)
(22.6)
(16.7)
(11.3)
11.9
(251.9)
47.7
—
(15.1)
—
32.7
—
32.7
327
100
n.a.
n.a.
n.a.
n.a.
n.a.
$
(70.2)
(13.7)
(7.2)
(2.7)
(2.5)
(96.2)
15.4
—
(6.4)
—
9.0
—
9.0
90
100
n.a.
n.a.
n.a.
n.a.
n.a.
Statement of cash flow
Net cash from operating activities
Balance sheet data (at period end)
Total current assets
Total vessels
Total assets
Long-term debt (current and non-current portion)
Shareholder loan (6)
$
72.9
$
14.0
$
20.7
$
56.6
$
22.8
$
17.4
44.2
961.7
1,027.4
588.2
—
4
32.9
906.9
966.6
542.1
—
n/a
n/a
n/a
n/a
n/a
192.9
475.3
674.6
401.1
176.9
32.1
286.2
344.5
139.2
—
11.2
177.8
203.0
109.9
—
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Preferred shares
Stockholders’ equity
Other data (time charter business)
Number of vessels in operation at period end
Ownership days
Utilization (7)
August 15 to
December 31
2008
2009
January 1 to
August 14
2008
2007
2006
2005
Successor
Successor
Predecessor
Predecessor
Predecessor
Predecessor
48.0
327.6
48.0
295.0
(in millions of U.S. dollars, except per share data)
—
n.a.
—
87.5
—
170.0
17
5,968
98.8%
16
1,717
100%
12
2,699
98%
10
159
99%
n.a
n.a
n.a
—
18.4
n.a
n.a
n.a
(1)
(2)
This line item reports revenue earned by the Predecessor Group from carrying cargo on the vessels.
This line item reports revenues earned from Global Ship Lease’s chartering business following the purchase of its initial fleet of 10 secondhand vessels in
December 2007.
This line item reports the voyage related expenses of carrying cargo by the Predecessor Group.
(3)
(4) Global Ship Lease’s combined financial statements include the general and administrative expenses incurred by its Predecessor Group related to its
operations and such costs incurred by Global Ship Lease as a wholly owned subsidiary of CMA CGM in the predecessor period prior to the Merger.
Subsequent to the completion of the Merger, Global Ship Lease has incurred additional administrative expenses, including legal, accounting, treasury,
premises, securities regulatory compliance and other costs normally incurred by an independent listed public entity. Accordingly, general and
administrative expenses incurred by and allocated to the Predecessor Group and incurred in the predecessor period do not purport to be indicative of future
expenses.
The weighted average number of shares outstanding of Global Ship Lease as of June 30, 2008 has been used for purposes of computing earnings per share
for all presented prior periods.
(5)
(6) Amounts due to the former shareholder were not assumed by Global Ship Lease following completion of the Merger.
(7) Utilization is used to measure our efficiency in operating the fleet and is calculated by dividing the total number of operating days by the total number of
ownership days, with the result expressed as a percentage. Operating days represent the number of days in the period that the vessels were available and
were not off-hire for any reason, including scheduled dry-dockings, breakdowns or repairs. Ownership days represent the number of days in the period that
we owned the relevant vessels. These data are non-GAAP statistical measures used by management to assess operating performance and are not included in
combined financial statements prepared under U.S. GAAP.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Related to Our Business
Global Ship Lease is highly dependent on charter payments from CMA CGM.
All of Global Ship Lease’s vessels in its fleet are chartered to its initial Charterer, CMA CGM. The initial Charterer’s payments to Global Ship Lease under the
charters are currently its sole source of revenue. Global Ship Lease is highly dependent on the performance by the initial Charterer of its obligation under the
charters. The container shipping industry has suffered a significant cyclical downturn with a substantial amount of excess ship capacity and many container
shipping companies, including CMA CGM, have reported substantial losses in 2009. Further, CMA CGM announced in September 2009 that CMA CGM and its
lenders are exploring a potential financial restructuring to address its short and medium term financing requirements and that CMA CGM is seeking to reduce and
in some cases cancel certain ship deliveries. Global Ship Lease is not involved in these discussions and it is not possible to predict the outcome of these
discussions. In addition, Global Ship Lease has experienced delays in receiving charterhire payments from the initial Charterer, where between one and three
instalments have been outstanding, which under the charter contracts are due to be paid every 15 days in advance. If the initial Charterer ceases doing business or
fails to perform its obligations under Global Ship Lease’s charters, Global Ship Lease’s business, financial position and results of operations would be materially
adversely affected as it is probable that, even if the company was able to find replacement charters, such replacement charters would be at significantly lower
daily rates and shorter durations. If such events occur, there would be significant uncertainty about Global Ship Lease’s ability to continue as a going concern.
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Global Ship Lease’s credit facility contains restrictive covenants including a maximum leverage ratio based on borrowings under the credit facility
expressed as a percentage of charter-free market value of its secured vessels. As a result of an amendment to the credit facility effective as of August 20,
2009 (the “Credit Facility Amendment”), regular testing of the leverage ratio covenant has been suspended effectively until April 30, 2011 and
prepayment of outstanding borrowings commencing November 30, 2009 is required. If the leverage ratio tested as of April 30, 2011, or earlier in certain
circumstances set forth in the credit facility, exceeds the permitted level, or if the company fails to meet the minimum scheduled prepayments, the
lenders under the credit facility may require the company to make a prepayment of the borrowings or provide additional security, which would likely
cause a default under the credit facility and which would raise substantial doubt about the company’s ability to continue as a going concern.
Global Ship Lease entered into its current credit facility with Fortis Bank (Nederland) N.V. (the “Agent”), Citibank Global Markets Limited, HSH Nordbank AG,
Sumitomo Mitsui Banking Corporation, Brussels Branch, KFW, DnB Nor Bank ASA and Bank of Scotland in order to acquire its current fleet, additional vessels
and fund working capital, among other things. As of December 31, 2008, outstanding borrowings under the credit facility were $542.1 million. Subsequently, the
company borrowed an additional $57.0 million under the credit facility to partially finance the purchase of the CMA CGM Berlioz. The credit facility contains
restrictive covenants including minimum cash, minimum net worth, minimum EBITDA to debt service, maximum net debt to total capital and maximum leverage
ratio, which is the ratio of borrowings under credit facility to the charter-free market value of security posted. If Global Ship Lease exceeds the maximum
permitted leverage ratio of 75%, the Agent may require a prepayment of borrowings or the delivery of additional security to the extent necessary to reduce the
leverage ratio to 75%.
Due to the global economic downturn and significantly reduced demand for container shipping services and containerships, combined with continued delivery of
newbuildings, containership values have experienced dramatic declines since mid 2008. Purchase and sale transactions in the containership market have been
very limited, confined primarily to small vessels and, in instances where such transactions have been completed, the prices have been significantly lower than
comparable transactions in the past. No newbuilding orders have been placed for many months and many ship brokers have not been providing certificates of
market value due to the disrupted market.
Due to the possibility that Global Ship Lease could exceed the maximum permitted leverage ratio under the credit facility as a result of the declines in charter-free
market values of its vessels, Global Ship Lease’s lenders agreed to enter into the Credit Facility Amendment. Under the Credit Facility Amendment, the
maximum 75% leverage ratio will not apply until the leverage ratio is first tested after the expiration of the waiver period which is up to and including
November 30, 2010. Consequently the first such test is scheduled to be as of April 30, 2011. In addition, and in connection with the purchase of the CMA CGM
Berlioz for $82.0 million, which was completed in August 2009, the Credit Facility Amendment permitted drawings of up to $42.0 million under the main credit
facility and up to an additional $20.0 million as a newly created Over Advance Portion. In August, $42 .0 million was drawn under the main credit facility and
$15.0 million was drawn under the Over Advance Portion. The $25.0 million balance of the purchase price was met from available cash. The Credit Facility
Amendment provides that borrowings under the Over Advance Portion will be paid quarterly commencing November 2009 with free cash in excess of $20.0
million determined as of the previous month end. The Over Advance Portion is required to be fully prepaid by June 30, 2010. The credit facility will be repaid
quarterly commencing June 30, 2010 with free cash in excess of $20.0 million determined as of the previous month end, subject to a minimum $40.0 million
prepayment per rolling four-quarters as long as the leverage ratio is, or is deemed to be, over 75%. When the leverage ratio becomes 75% or less, scheduled
repayments will be set at $10.0 million per quarter.
If the leverage ratio at the next test date scheduled for April 30, 2011 exceeds 75% or if the company fails to meet its scheduled prepayments under the credit
facility or is otherwise in potential default under the credit facility, and if a further amendment to or waiver under the credit facility or other relief is not obtained,
the Agent may require a prepayment of borrowings or the delivery of additional security. In such an event, Global Ship Lease is likely to go into default under the
credit facility, which would raise substantial doubt about its ability to continue as a going concern.
The credit facility also imposes additional operating and financial restrictions on Global Ship Lease. These restrictions may limit its ability to, among other
things:
•
•
•
•
•
•
incur additional indebtedness in the vessel owning subsidiaries, including through the issuance of guarantees;
change the management of its vessels without the prior consent of the lender;
permit liens on its assets;
sell its vessels or change the ownership of its subsidiaries;
merge or consolidate with, or transfer all or substantially all its assets to, another person; and
enter into certain types of charters.
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Therefore, Global Ship Lease may need to seek consent from its lenders in order to engage in certain corporate actions. Its lenders’ interests may be different
from Global Ship Lease’s and it cannot guarantee that it will be able to obtain its lenders’ consent when needed. This may limit its ability to pay dividends,
finance its future operations, make acquisitions or pursue business opportunities. Please see Item 4B “Business Overview—Global Ship Lease Credit Facility” for
more information.
The Credit Facility Amendment provides that Global Ship Lease may not declare or pay common dividends before November 30, 2010 or until the
leverage ratio is no more than 75%, whichever is later.
The Credit Facility Amendment provides that Global Ship Lease may not declare or pay common dividends before November 30, 2010 or until the leverage ratio
is no more than 75%, whichever is later. As a result, Global Ship Lease has suspended its previous policy of paying dividends to common shareholders.
Additionally, Global Ship Lease’s credit facility provides that it may not pay dividends if there is a continuing default under the facility. Global Ship Lease is also
prohibited from paying dividends if the payment of the dividend would result in a default and any payments to be made into the retention account are not fully up
to date. The charter-free market value of Global Ship Lease’s vessels can fluctuate substantially depending on market supply and demand for vessels. Since mid
2008, due to an excess of containership capacity as described above, vessel values have fallen significantly. In addition, it is probable that the market value of
Global Ship Lease’s vessels will decrease over time, as vessels generally decrease in value as they age. Consequently, the leverage ratio is volatile and will likely
increase over time, which will negatively affect Global Ship Lease’s ability to comply with its leverage ratio covenants. This, in turn, will impact Global Ship
Lease’s ability to resume dividend payments in the future.
Global Ship Lease cannot assure you that it will be able to refinance any indebtedness incurred under its credit facility.
Global Ship Lease cannot assure you that at the credit facility’s final maturity date in August 2016 or when otherwise required, it will be able to refinance its
indebtedness on terms that are acceptable to Global Ship Lease or at all. The actual or perceived credit quality of its charterers, any defaults by them, and the
market value of its fleet, among other things, may materially affect its ability to obtain new or replacement debt financing. If Global Ship Lease is not able to
refinance its indebtedness, it will have to dedicate cash flow from operations not already committed to prepay borrowings to pay the principal and interest of its
indebtedness. Global Ship Lease cannot assure you that it will be able to generate cash flow in amounts that are sufficient for these purposes. If Global Ship Lease
is not able to satisfy its debt service obligations with its cash flow from operations, Global Ship Lease may have to sell some or all of its assets, which may not be
possible and which would have an adverse effect on its cash flows and results of operations. If Global Ship Lease is unable to meet its debt obligations for any
reason, its lenders could declare its debt, together with accrued interest and fees, to be immediately due and payable and foreclose on vessels in its fleet.
Under the Credit Facility Amendment, all undrawn commitments of approximately $200.0 million was cancelled and consequently Global Ship Lease
does not have any capacity under the credit facility to pay for any further vessel acquisitions, including the two 4,250 TEU newbuildings scheduled to be
delivered in the fourth quarter of 2010. If Global Ship Lease is unable to secure sufficient financing, it will not be able to meet its obligations under the
purchase contracts and Global Ship Lease may be exposed to legal action by the sellers for damages.
On September 11, 2008, Global Ship Lease entered into contracts to purchase from German interests two 4,250 TEU containerships for a price of approximately
$77.4 million each. The vessels are expected to be delivered in December 2010 and are to be chartered to Zim Integrated Shipping Services Limited (“Zim”) for
seven to eight years. A deposit of 10% was paid when the purchase contracts were signed and the balance of 90%, or approximately $139.3 million, is due upon
delivery. As a result of the Credit Facility Amendment, Global Ship Lease has no capacity to borrow any further amounts under the credit facility to fund the
remainder of the purchase price of the two newbuildings, and as such, must secure other sources of financing to meet its obligations to the sellers under the
contracts. Global Ship Lease’s obligations under the purchase contracts are not conditioned on either the availability of financing or on the performance of the
charters. Although the purchase contracts contain a clause to limit liability in the event of buyer default to the forfeiture of the previously paid deposit, this
limitation on liability may not be effective. Unless Global Ship Lease can secure additional financing or an amendment to the purchase contracts, Global Ship
Lease may be exposed to legal action by the sellers for damages which may exceed the deposit already paid. In addition, Global Ship Lease may suffer
impairment loss on any part of the deposit which has been paid and which might not be recoverable.
The status of Global Ship Lease’s agreements to charter the two 4,250 TEU newbuildings is uncertain due to the financial restructuring of Zim.
Global Ship Lease has an agreement with Zim to charter the two 4,250 TEU newbuildings upon their delivery for a term of seven to eight years at a net rate of
$28,000 per vessel per day. In November 2009 Zim announced a financial restructuring in order to reduce its cashflow burden, including obtaining a reduction in
charter payments under certain long-term charter agreements. Although Global Ship Lease has not agreed to any reduction in charterhire, Zim could unilaterally
fail to perform under the charters when the charters are due to go into effect, such that Global Ship Lease could become the owner of the vessels with no effective
charters in place.
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Global Ship Lease’s Ship Manager and CMA CGM, its initial Charterer, are privately held companies and there is little or no publicly available
information about them.
CMA CGM is Global Ship Lease’s sole Charterer and its wholly owned subsidiary, CMA Ships, is Global Ship Lease’s Ship Manager. CMA CGM’s ability to
continue to pay charterhire and CMA Ships’ ability to render ship management services will depend in part on their own financial strength. CMA CGM has
guaranteed the performance of CMA Ships under the ship management agreements. As described above, the container shipping sector has suffered a severe
cyclical downturn and has been incurring substantial losses. Furthermore, many containership operators, including CMA CGM, have commitments to purchase
newbuildings for delivery over the next three to four years which may not be fully funded with committed financing.
Circumstances beyond their control could impair CMA CGM’s and CMA Ships’ financial strength, and because they are privately held companies, information
about their financial strength is not publicly available. As a result, Global Ship Lease and an investor in its securities might have little advance warning of
financial or other problems affecting CMA CGM or their wholly owned subsidiaries even though their financial or other problems could have a material adverse
effect on Global Ship Lease.
CMA CGM and Global Ship Lease’s Ship Manager have conflicts of interest with Global Ship Lease and limited contractual duties, which may make
them favor their own interests to Global Ship Lease’s detriment.
Conflicts of interest may arise between Global Ship Lease, on the one hand, and CMA CGM, Global Ship Lease’s initial Charterer, and CMA Ships, its Ship
Manager, on the other hand. As a result of these conflicts, Global Ship Lease’s Ship Manager may favor its own or its parent company’s interests over Global
Ship Lease’s interests. These conflicts may have unfavorable consequences for Global Ship Lease. For example, Global Ship Lease’s Ship Manager could be
encouraged to incur unnecessary costs, for which it would seek reimbursement from Global Ship Lease. Although Global Ship Lease’s ship management
agreements expressly prohibit its Ship Manager from giving preferential treatment when performing any of its ship management services to any other vessel that
is affiliated with it, or otherwise controlled by CMA CGM, conflicts of interest may arise between Global Ship Lease, and its Ship Manager and its initial
Charterer.
Global Ship Lease’s financial reporting is dependent on CMA CGM.
Under the ship management agreement with CMA Ships, the Ship Manager is obligated to provide Global Ship Lease with requisite financial information on a
timely basis so that Global Ship Lease can meet its own reporting obligations under U.S. securities laws. CMA Ships and its parent company CMA CGM are
privately held French corporations with financial reporting schedules different from Global Ship Lease. If CMA Ships or any of its affiliates is delayed in
providing Global Ship Lease with key financial information, Global Ship Lease could fail to meet its financial reporting deadlines.
CMA CGM could compete with Global Ship Lease.
Along with many other vessel-owning companies, CMA CGM, currently Global Ship Lease’s sole Charterer and largest holder of its common shares, could
compete with Global Ship Lease in its search to purchase newbuildings and secondhand vessels. Further, CMA CGM is not precluded from acting as an owner in
the direct chartering market. While Global Ship Lease understands that CMA CGM currently has no intention of doing so, competition from CMA CGM may
potentially harm Global Ship Lease’s ability to grow the business and may decrease its results of operations.
Certain terms in Global Ship Lease’s agreements with CMA CGM and its affiliates may be the result of negotiations that were not conducted at arms-
length and may not reflect market standard terms. In addition, they may include terms that may not be obtained from future negotiations with
unaffiliated third parties.
The asset purchase agreement, the charters, the ship management agreements and the other contractual agreements Global Ship Lease entered into with CMA
CGM and its wholly owned subsidiaries were made in the context of an affiliated relationship and were negotiated in the overall context of the previously
contemplated public offering of its Class A common shares in 2007, the Merger in August 2008 and other related transactions. Global Ship Lease’s agreements
with CMA CGM may include terms that could not have been obtained from arms-length negotiations with unaffiliated third parties for similar services and assets.
As a result, its future operating results may be negatively affected if Global Ship Lease does not receive terms as favorable in future negotiations with unaffiliated
third parties or has to enter into lengthy and costly negotiations with third parties in connection with entering into such agreements.
Global Ship Lease’s growth depends on its ability to purchase further vessels, obtain new charters and maintain and potentially expand its relationship
with CMA CGM. Global Ship Lease will require additional financing to be able to grow and will face substantial competition.
One of Global Ship Lease’s objectives is to grow by acquiring additional vessels and chartering them out to container shipping companies including potentially
CMA CGM. This will be particularly challenging since Global Ship Lease will need to obtain additional financing in order to acquire vessels. Due to the global
banking crisis and the severe cyclical downturn in the containership industry, financing for investment in containerships, whether newbuildings or existing
vessels, is severely limited. Further, demand for new long-term or medium-term charters of containerships has significantly reduced due to the current excess of
capacity.
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The process of obtaining new charterers is highly competitive and often takes several months. Charters are awarded based upon a variety of factors relating to the
vessel owner, including:
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competitiveness of overall price;
the availability of committed financing;
containership experience and quality of ship operations (including cost effectiveness);
shipping industry relationships and reputation for reliability, customer service and safety;
quality and experience of seafaring crew;
the ability to finance containerships at competitive rates and financial stability generally;
relationships with shipyards and the ability to get suitable berths for newbuildings; and
construction management experience, including the ability to obtain on-time delivery of new vessels according to customer specifications.
Global Ship Lease will face substantial competition in expanding its business, including with respect to obtaining new containership charters, from a number of
experienced companies. Many of these competitors may have greater financial resources than Global Ship Lease, and may also operate larger fleets and may be
able to offer better charter rates. Due to the industry downturn, there are an increasing number of vessels available for charter, including many from owners with
strong reputations and experience. The lack of available financing and excess supply of vessels in the container shipping market results in a more active short-
term charter market and greater price competition for charters. As a result of these factors, Global Ship Lease may be unable to purchase additional
containerships, expand its relationships with CMA CGM or to obtain new charterers on a profitable basis, if at all, which would have a material adverse effect on
its business, results of operations and financial condition.
Global Ship Lease may be unable to make or realize expected benefits from vessel acquisitions, and implementing its growth strategy through
acquisitions may harm its business, financial condition and operating results.
Global Ship Lease’s growth strategy includes, among other things, selectively acquiring newbuildings and secondhand vessels. Growing any business through
acquisition presents numerous risks, such as undisclosed liabilities and obligations, the possibility that indemnification agreements will be unenforceable or
insufficient to cover potential losses and obtaining the necessary resources to manage an enlarged business. Global Ship Lease cannot give any assurance that it
will be successful in executing its growth plans, that Global Ship Lease will be able to employ any acquired vessels under long-term charters or have ship
management agreements with similar or better terms than those Global Ship Lease has obtained from its Ship Manager or that it will not incur significant
expenses and losses in connection with its future growth.
Factors that may limit Global Ship Lease’s ability to acquire additional vessels include availability of financing, shipyard capacity for newbuildings, the relatively
small number of independent fleet owners and the limited number of modern vessels with appropriate characteristics not subject to existing long-term or other
charters. Competition from other purchasers could reduce Global Ship Lease’s acquisition opportunities or cause Global Ship Lease to pay higher prices.
Any acquisition of a vessel may not be profitable to Global Ship Lease and may not generate cash flow sufficient to justify Global Ship Lease’s investment. In
addition, Global Ship Lease’s acquisition growth strategy exposes Global Ship Lease to risks that may harm its business, financial condition and operating results,
including risks that Global Ship Lease may:
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fail to obtain financing, ship management agreements and charters on acceptable terms;
be unable, including through its ship managers, to hire, train or retain qualified shore and seafaring personnel to manage and operate its growing
business and fleet;
fail to realize anticipated benefits of cost savings or cash flow enhancements;
decrease its liquidity by using a significant portion of its available cash or borrowing capacity to finance acquisitions;
significantly increase its interest expense or financial leverage if Global Ship Lease incurs additional debt to finance acquisitions;
incur or assume unanticipated liabilities, losses or costs associated with the vessels acquired; or
not be able to pay dividends.
Unlike newbuildings, secondhand vessels typically do not carry warranties as to their condition at the time of acquisition. While Global Ship Lease would
generally inspect existing containerships prior to purchase, such an inspection would normally not provide Global Ship Lease with as much knowledge of a
containership’s condition as if it had been built for Global Ship Lease and operated
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by Global Ship Lease during its life. Future repairs and maintenance costs for existing vessels are difficult to predict and may be substantially higher than for
equivalent vessels of which Global Ship Lease has had direct experience. These additional costs could decrease Global Ship Lease’s cash flow and reduce its
liquidity.
Global Ship Lease’s business depends upon certain individuals who may not necessarily continue to be affiliated with Global Ship Lease.
Global Ship Lease’s current performance and future success depends to a significant extent upon its Chief Executive Officer, Ian J. Webber, its Chief Financial
Officer, Susan J. Cook, its Chief Commercial Officer, Thomas A. Lister and its Chief Technical Officer, Vivek Puri. Mr. Webber, Ms. Cook, Mr. Lister and
Mr. Puri have an aggregate of over 80 years of experience in the shipping industry and have worked with several of the world’s largest shipping companies. They
and members of the board of directors are crucial to the execution of the company’s business strategies and to the growth and development of its business. If these
individuals were no longer to be affiliated with Global Ship Lease, or if Global Ship Lease were to otherwise cease to receive advisory services from them,
Global Ship Lease may be unable to recruit other employees with equivalent talent and experience, and its business and financial condition may suffer as a result.
Global Ship Lease is a recently formed company with a limited separate operating history and its historical financial and operating data are not
representative of its future results.
Global Ship Lease is a recently formed company with limited operating history. The historical combined financial statements included in this Annual Report
include, mainly as comparatives, its Predecessor Group’s historical business activities as a container shipping company earning revenue from transporting
shippers’ cargo and incurring both vessel and voyage expenses, including fuel costs and all costs related to handling of containers for its vessels while the vessels
were owned and operated by CMA CGM until the date of the individual transfer of each of 10 vessels in December 2007 and two further vessels in January 2008.
These historical combined financial statements reflect the results of Global Ship Lease under its fixed-rate long-term charters, ship management agreements and
its financing arrangements only from the date of the individual transfer to it of each vessel in December 2007, January 2008, December 2008 and August 2009.
Further, Global Ship Lease’s capital and legal structure changed significantly as a result of the Merger in August 2008, including it becoming listed on the New
York Stock Exchange. Consequently, historical financial information is not a meaningful representation of its future results of operations.
Global Ship Lease has not performed and does not intend to perform underwater inspections of its vessels.
Although Global Ship Lease performed physical inspections of the vessels, Global Ship Lease has not performed and does not intend to perform any underwater
inspections either prior to or after their purchase. As a result, Global Ship Lease will not be aware of any damage to a vessel that may exist at the time of delivery
and which could only be discovered through an underwater inspection. Global Ship Lease purchased the vessels and newbuildings from CMA CGM on an “as is”
basis, subject to CMA CGM being responsible for any class condition or recommendation that existed at the date of delivery of the vessels. However, if any
damage is subsequently found, Global Ship Lease could incur substantial costs to repair the damage which would not be recoverable from the sellers.
Global Ship Lease is a holding company and it depends on the ability of its subsidiaries to distribute funds to Global Ship Lease in order to satisfy its
financial and other obligations.
Global Ship Lease is a holding company and has no significant assets other than the equity interests in its subsidiaries. Global Ship Lease’s subsidiaries own all of
its vessels and payments under charters are made to the subsidiaries. As a result, its ability to pay dividends depends on the performance of its subsidiaries and
their ability to distribute funds to it. The ability of its subsidiaries to make these distributions could be affected by a claim or other action by a third party,
including a creditor, or by Marshall Islands law or the laws of any jurisdiction which regulates the payment of dividends by companies. If Global Ship Lease is
unable to obtain funds from its subsidiaries, Global Ship Lease may not be able to meet its own liabilities or pay dividends, including on its preferred shares.
As its fleet ages, Global Ship Lease may incur increased operating costs, which would adversely affect its earnings.
In general, the day-to-day cost of operating and maintaining a vessel in good operating condition increases with age. In addition, older vessels are typically less
fuel efficient and would attract lower charter rates compared to modern more fuel efficient vessels. Governmental regulations and safety or other equipment
standards may also require expenditures for alterations, or the addition of new equipment, to its vessels and may restrict the type of activities in which its vessels
may engage. Global Ship Lease cannot assure you that, as its vessels age, market conditions will justify those expenditures or expenditures to otherwise improve
fuel efficiency to enable it to operate its vessels profitably during the remainder of their useful lives.
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Global Ship Lease’s insurance may be insufficient to cover losses that may occur to its property or result from its operations.
The shipping industry has inherent operational risks. Although Global Ship Lease carries hull and machinery insurance, war risks insurance and protection and
indemnity insurance (which includes environmental damage and pollution insurance), Global Ship Lease may not be adequately insured against all risks or its
insurers may not pay every claim. Even if its insurance coverage is adequate to cover its losses, Global Ship Lease may not be able to obtain a replacement vessel
in the event of a total or constructive total loss in a timely manner. Further, under the terms of its credit facility, Global Ship Lease is subject to restrictions on the
use of any proceeds Global Ship Lease may receive from claims in the event of a total or constructive total loss under its insurance policies. Furthermore, in the
future, Global Ship Lease may not be able to obtain adequate insurance coverage at reasonable rates for its fleet. Global Ship Lease may also be subject to calls,
or premiums, in amounts based not only on its own claim records but also the claim records of all other members of the protection and indemnity associations
through which Global Ship Lease receives indemnity insurance coverage for tort liability. In addition, insurers typically charge additional premiums if vessels
transit certain “excluded areas” which may be subject to higher risk of piracy, war or terrorism. Global Ship Lease cannot be certain that its insurers will continue
to provide such cover, or that it will be able to pass these increased costs to its charterers. Its insurance policies also contain deductibles, limitations and
exclusions which, although Global Ship Lease believes are standard in the shipping industry, may nevertheless increase its costs.
In addition, Global Ship Lease does not presently carry loss-of-hire insurance, which covers the loss of revenue during extended vessel off-hire periods, such as
those that might occur during an unscheduled drydocking due to damage to the vessel from an accident. Accordingly, any vessel that is off-hire for an extended
period of time, due to an accident or otherwise, could have a material adverse effect on the company’s business, results of operations and financial condition.
Global Ship Lease is incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of corporate law.
Global Ship Lease’s corporate affairs are governed by its articles of incorporation and bylaws and by the Business Corporations Act of the Republic of the
Marshall Islands, or BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there have
been few judicial cases in the Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the law of the
Republic of the Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in
existence in certain United States jurisdictions. Shareholder rights may differ as well. While the BCA does specifically incorporate the non-statutory law, or
judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, Global Ship Lease’s shareholders may have more
difficulty in protecting their interests in the face of actions by the management, directors or controlling shareholders than would shareholders of a corporation
incorporated in a United States jurisdiction.
Because Global Ship Lease is organized under the laws of the Republic of the Marshall Islands, it may be difficult to serve Global Ship Lease with legal
process or enforce judgments against it, its directors or its management.
Global Ship Lease is organized under the laws of the Republic of the Marshall Islands, and substantially all of its assets are located outside of the United States.
Its principal executive offices are located outside the United States and most of its directors and officers reside outside the United States. As a result, it may be
difficult or impossible for you to bring an action against Global Ship Lease or against its directors or its management in the United States if you believe that your
rights have been infringed under securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Republic of the
Marshall Islands and of other jurisdictions may prevent or restrict you from enforcing a judgment against Global Ship Lease’s assets or its directors and officers.
Global Ship Lease cannot assure you if and when Global Ship Lease will resume paying dividends.
As a result of the Credit Facility Amendment, the credit facility prohibits the declaration or payment of any common dividend until the later of November 30,
2010 or when the leverage ratio is no more than 75%. The declaration and payment of dividends is also subject at all times to the discretion of Global Ship
Lease’s board of directors. When permitted by the credit facility and other contractual obligations, Global Ship Lease may resume the distribution of a portion of
its cash flow to its shareholders, while retaining the remaining cash flow for reinvestment in its business, to fund vessel or fleet acquisitions, make debt
repayments and for other purposes, as determined by Global Ship Lease’s management and board of directors. There can be no assurance that its actual results
will be as anticipated, that its board of directors will not increase the level of cash reserves or otherwise change its dividend policy or that Global Ship Lease will
not have additional cash expenses or liabilities, including extraordinary expenses.
In addition to restrictions imposed by the credit facility, the timing and amount of future dividends, if any, could also be affected by various factors, including:
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Global Ship Lease’s earnings, financial condition and anticipated cash requirements;
unexpected repairs to, or required expenditures on, vessels or drydocking costs in excess of those anticipated;
additional acquisitions of vessels;
the loss of a vessel; and
the provisions under Marshall Islands law affecting distributions to shareholders, which generally prohibit the payment of dividends other than from
surplus (retained earnings and the excess of consideration received from the sale of shares above the par value of the shares) or while a company is
insolvent or would be rendered insolvent by the payment of such dividend.
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Global Ship Lease has anti-takeover provisions in its organizational documents that may discourage a change of control.
Certain provisions of Global Ship Lease’s articles of incorporation and bylaws may have an anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that a shareholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares
held by shareholders.
Certain of these provisions provide for:
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a classified board of directors with staggered three-year terms;
restrictions on business combinations with certain interested shareholders;
directors only to be removed for cause and only with the affirmative vote of holders of at least a majority of the common shares entitled to vote in the
election of directors;
advance notice for nominations of directors by shareholders and for shareholders to include matters to be considered at annual meetings; and
a limited ability for shareholders to call special shareholder meetings.
These anti-takeover provisions could make it more difficult for a third party to acquire Global Ship Lease, even if the third party’s offer may be considered
beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares.
The price of Global Ship Lease’s securities may be volatile.
The price of Global Ship Lease’s common shares, units and warrants may be volatile, and may fluctuate due to factors such as:
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actual or anticipated fluctuations in quarterly and annual results;
market conditions in the industry;
perceived counterparty risk;
fluctuations in Global Ship Lease’s quarterly revenues and earnings and those of publicly held containership owners or operators;
shortfalls in Global Ship Lease’s operating results from levels forecasted by securities analysts;
announcements concerning Global Ship Lease or other containership owners or operators;
limited operating history;
mergers and strategic alliances in the shipping industry;
changes in government regulation; and
the general state of the securities markets.
The international containership industry has been highly unpredictable and volatile. The market for common shares in companies operating in this industry may
be equally volatile.
There will be a substantial number of Global Ship Lease’s common shares available for sale in the future that may adversely affect the market price of
Global Ship Lease’s Class A common shares.
The common shares (not including the common shares underlying the sponsors warrants nor the common shares purchased by Mr. Gross and CMA CGM on the
closing date of the Merger pursuant to assignment and acceptance agreements with Marathon) issued in the Merger to Marathon’s initial stockholders and CMA
CGM were subject to transfer restrictions set forth in the stockholders agreement. Generally, such shares could not be sold for one year from the date of the
Merger. Furthermore, in connection with the Credit Facility Amendment, CMA CGM has agreed not to reduce its holding of common shares below the present
level of approximately 24.4 million Class A and B common shares before November 30, 2010. Pursuant to the registration rights agreement entered into at the
effective time of the Merger, Marathon’s initial stockholders and CMA CGM can demand that Global Ship Lease register the resale of their common shares at any
time after the one year anniversary of the Merger. Holders of the sponsor warrants were also entitled to request at any time after the Merger and did so request that
the company register the Class A common shares underlying the sponsor warrants on a shelf registration statement. The registration and availability of such a
significant number of securities for trading in the public market may have an adverse effect on the market price of Global Ship Lease’s Class A common shares.
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The outstanding warrants may be exercised in the future, which would increase the number of shares eligible for future resale in the public market and
result in dilution to our shareholders.
There are 5,500,000 sponsor warrants with an exercise price of $6.00 which expire August 24, 2010. The sponsor warrants must be exercised on a cashless basis.
There are 6,188,088 Class A warrants expiring September 1, 2013 with an exercise price of $9.25. These are owned by CMA CGM, Michael Gross and other
initial stockholders of Marathon. In addition, there are outstanding public warrants to purchase an aggregate of 39,531,348 Class A common shares that expire
August 24, 2010. These warrants would likely only be exercised if the $6.00 or $9.25 per share exercise price is below the market price of the Class A common
shares. To the extent they are exercised, additional Class A common shares will be issued, which will result in dilution to our shareholders and increase the
number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price
of our shares.
Global Ship Lease has swapped the majority of its anticipated core debt from floating rate based on LIBOR to fixed rate debt until at least March 2013
and therefore is locked into a base borrowing rate to which the applicable spread is added to determine the effective rate. Accordingly, Global Ship
Lease has removed most of the volatility from its interest charge, other than for changes in the applicable margin, and is unable to benefit from falling
LIBOR rates.
As part of its risk management strategy and in order to avoid volatility in its interest expense as well as meet the requirement of the credit facility to fix the
interest rate on at least 50% of drawn debt, Global Ship Lease has swapped the majority of its anticipated core debt from floating rate based on LIBOR to fixed
rate debt until at least March 2013. Approximately $580 million of debt has been swapped into an average fixed rate of 3.59%. Global Ship Lease is therefore
unable to benefit from falling LIBOR rates. Further, under the terms of the Credit Facility Amendment, prepayment of outstanding borrowings has been
accelerated and it is likely that Global Ship Lease will be in an over-hedged position.
Depending on fluctuations in LIBOR, our interest rate swap agreements and their accounting treatment in ourfinancial statements could result in
deceases in our reported net income.
We have entered into certain financial instrument contracts to hedge our exposure to interest rate fluctuations. These derivative instruments are accounted for
under the relevant U.S. GAAP guidance at market value, as none of the derivatives qualify for hedge accounting, with changes in the value being recognized
directly in our combined statement of income. During the year ended December 31, 2009, LIBOR the related forward interest rate curve experienced upward
movement which significantly impacted the estimated market value of our financial instruments, resulting in a non-cash gain of $17.9 million in 2009. However,
for the period from August 15, 2008 to December 31, 2008, we recorded a non-cash loss of $55.9 million.
Future interest rate volatility may expose our net income to significant variations.
Risks Related to the Industry of Global Ship Lease
Global Ship Lease’s growth and long term profitability depend mainly upon growth in demand for containerships and the condition of the charter
market. The container shipping industry is cyclical and volatile and the industry is currently experiencing a severe cyclical downturn. There is an excess
of vessel capacity and demand for containerships has fallen. Charter rates and vessel values have dropped, thus reducing the company’s ability to secure
new charterers at attractive rates.
The container shipping industry is both cyclical and volatile in terms of charter rates and profitability. Fluctuations in charter rates result from changes in the
supply and demand for ship capacity, which is driven mainly by changes in the supply and demand for world trade container shipping services. There is currently
an oversupply of ship capacity which has caused freight rates, charter rates and asset values, to fall. Charter rates have decreased significantly since mid 2008 and
although short term charter rates have increased recently, rates may decrease in the future. The factors affecting the supply and demand for containerships and
container shipping services are outside Global Ship Lease’s control, and the nature, timing and degree of changes in industry conditions are unpredictable.
The factors that influence demand for containership capacity include:
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supply and demand for products suitable for shipping in containers;
changes in the pattern of global production of products transported by containerships;
the globalization of manufacturing;
global and regional economic and political conditions;
developments in international trade;
changes in seaborne and other transportation patterns, including changes in the distances over which container cargoes are transported, the size of
containerships, the extent of trans-shipments and the competitiveness of other forms of marine transportation including dry bulk and refrigerated
vessels;
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environmental and other legal and regulatory developments;
the price of oil and economics of slow steaming;
the availability of trade finance and currency exchange rates; and
port and canal congestion.
The factors that influence the supply of containership capacity include:
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the containership newbuilding orderbook;
the availability of financing;
the scrapping rate of older containerships;
the number of containerships off-hire;
the price of steel and other raw materials;
changes in environmental and other laws and regulations that may limit the useful life of containerships;
the availability of shipyard capacity;
port and canal congestion; and
the price of oil, economics of slow steaming and number of vessels laid-up.
Global Ship Lease’s ability to re-charter its fleet upon the expiration or termination of its charters, and the charter rates receivable under and the duration of any
renewal or replacement charters will depend upon, among other things, the then state of the containership market and how the then age and quality of Global Ship
Lease’s fleet are perceived by the market. If the containership market is in a period of depression when Global Ship Lease’s vessels’ charters expire for whatever
reason, including an oversupply of containership capacity, Global Ship Lease may be forced to re-charter its vessels at reduced or unprofitable rates, which may
reduce or eliminate its earnings or make its earnings increasingly volatile, or it may not be able to re-charter its vessels at all. The same issues will exist if Global
Ship Lease acquires additional vessels without charter arrangements in place, or at the expiration of charters that may be in place, obliging Global Ship Lease to
try to fix employment of the additional vessels in the spot market while attempting to subject them to a long-term time charter arrangement.
If the market value of vessels or charter rates substantially declines then Global Ship Lease may incur a financial loss if it attempts to sell one or more of
its vessels.
Containership values can fluctuate substantially over time and have recently declined significantly. A number of factors may contribute to a decrease in the
market value of containerships, including:
•
•
•
•
unfavorable economic conditions in the market in which the containership trades;
a substantial or extended decline in world trade growth leading to reduced demand for container shipping services;
increases or an oversupply in global containership capacity; and
the cost of retrofitting or modifying existing ships, as a result of technological advances in vessel design or equipment, changes in applicable
environmental or other regulations or standards or otherwise.
If a charter terminates when the charter market for containerships is depressed, Global Ship Lease may be unable to re-charter the vessel at attractive rates and,
rather than continue to incur costs to maintain and finance the vessel, Global Ship Lease may seek to dispose of it. It is likely that in such circumstances asset
values will also be depressed. Inability to dispose of the containership at a reasonable price could result in a loss on the vessel’s sale and adversely affect Global
Ship Lease’s results of operations and financial condition.
Future fluctuations in charter rates and vessel values may trigger a possible impairment of Global Ship Lease’s vessels as described in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations of Global Ship Lease—Critical Accounting Policies and Estimates.”
Charter-free market values of Global Ship Lease’s vessels pledged as security under the credit facility may also impact its ability to satisfy its leverage ratio
covenant under the credit facility.
Global Ship Lease may have more difficulty entering into long-term charters if a more active and cheaper short-term or spot container shipping market
develops.
At the expiration of Global Ship Lease’s charters, if a charter terminates early for any reason or if Global Ship Lease acquires vessels charter-free, Global Ship
Lease will need to charter or re-charter its vessels. Should more vessels be available on the spot or short-term market at the time Global Ship Lease is seeking to
fix new long-term charters, Global Ship Lease may have difficulty entering into such charters at profitable rates and for any term other than short term and, as a
result, Global Ship Lease’s cash flow may be subject
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to instability in the long-term. In addition, it would be more difficult to fix relatively older vessels should there be an oversupply of younger vessels on the
market. A more active short-term or spot market may require Global Ship Lease to enter into spot or short-term charters based on prevailing market rates, as
opposed to long-term contracts based on a fixed rate, which could result in a decrease in Global Ship Lease’s cash flow in periods when charter rates are
depressed.
Acts of piracy on ocean-going vessels have recently increased in frequency, which could adversely affect our business.
Piracy is an inherent risk in the operation of ocean-going vessels and has recently affected vessels trading in several regions of the world such as the South China
Sea, the Gulf of Aden and off the coast of Somalia. In recent years, the frequency of piracy incidents against commercial shipping vessels has increased
significantly, particularly in the Gulf of Aden and off the coast of Somalia. Pirate attacks on any of the company’s vessels could result in loss of life, the
kidnapping of crew or the theft, damage or destruction of vessels or of containers or cargo being transported thereon. We may not be adequately insured to cover
losses from these incidents, which could have a material adverse effect on our business, results of operations and financial condition. In addition, insurance
premiums and costs such as onboard security guards, should we decide to employ them, could increase in such circumstances. Further, acts of piracy may
materially adversely affect our charterers, impairing their ability to make payments to us under our charters.
Terrorist attacks and international hostilities could affect its results of operations and financial condition.
Terrorist attacks, such as the attacks on the United States on September 11, 2001, and the continuing response of the United States and other countries to these
attacks, as well as the threat of future terrorist attacks, continue to cause uncertainty in the world financial markets and may affect Global Ship Lease’s business,
results of operations and financial condition from increased security costs and more rigorous inspection procedures at borders and ports. From time to time acts of
terrorism, regional conflict and other armed conflict around the world, may contribute to further economic instability in the global financial markets. These
uncertainties could also adversely affect Global Ship Lease’s ability to obtain additional financing on terms acceptable to Global Ship Lease or at all.
Terrorist attacks targeted at oceangoing vessels may also negatively affect Global Ship Lease’s future operations and financial condition from, for example,
increased insurance costs, and directly impact its containerships or its customers. Future terrorist attacks could result in increased market volatility or even a
recession in the United States or elsewhere or negatively affect global financial markets, and could further increase inspection and security requirements and
regulation that could slow its operations and negatively affect its profitability. Any of these occurrences could have a material adverse impact on Global Ship
Lease’s operating results, revenue and costs.
Risks inherent in the operation of containerships could impair the ability of the initial Charterer to make payments to Global Ship Lease, increase its
costs or reduce the value of Global Ship Lease’s assets.
Global Ship Lease’s containerships and its cargoes are at risk of being damaged or lost because of events such as marine accidents, bad weather, mechanical
failures, human error, war, terrorism, piracy, environmental accidents and other circumstances or events. Any of these events connected to Global Ship Lease’s
vessels or other vessels under the initial Charterer’s control, or any other factor which negatively affects the initial Charterer’s business such as the current
economic downturn and significant cyclical depression in the container shipping industry, could impair the ability of the initial Charterer to make payments to
Global Ship Lease pursuant to its charters. Although the initial Charterer is obligated to pay Global Ship Lease charterhire regardless of the amount of cargo
being carried on board, it is possible that generally low cargo volumes and low freight rates or events noted above may render the initial Charterer financially
unable to pay Global Ship Lease its hire. Furthermore, there is a risk that a vessel may become damaged, lost or destroyed during normal operations and any such
occurrence may cause Global Ship Lease additional expenses to repair or substitute the vessel or may render Global Ship Lease unable to provide the vessel for
chartering, which will cause Global Ship Lease to lose charter revenue.
These occurrences could also result in death or injury to persons, loss of property or environmental damage, loss of revenues from or termination of charter
contracts, governmental fines, penalties or restrictions on conducting business, higher insurance rates, and damage to Global Ship Lease’s reputation and
customer relationships generally. Any of these circumstances or events could increase its costs or lower Global Ship Lease’s revenues, which could result in
reduction in the market price of its Class A common shares.
Maritime claimants could arrest Global Ship Lease’s vessels, which could interrupt the initial Charterer’s or Global Ship Lease’s cash flow.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against that vessel for
unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through foreclosure proceedings. The
arrest or attachment of one or more of Global Ship Lease’s vessels, for valid or invalid reasons, could interrupt the initial Charterer’s or Global Ship Lease’s cash
flow and require the initial Charterer or Global Ship Lease or Global Ship Lease’s insurance to pay a significant amount to have the arrest lifted. In addition, in
some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel that is subject to the claimant’s maritime
lien and any “associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert “sister ship” liability against one
vessel in its fleet for claims relating to another vessel in its fleet. In any event, any lien imposed may adversely affect its results of operations by delaying the
revenue gained from ships.
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Governments could requisition Global Ship Lease’s vessels during a period of war or emergency without adequate compensation.
A government could requisition one or more of Global Ship Lease’s vessels for title or for hire. Requisition for title occurs when a government takes control of a
vessel and becomes its owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes its charterer at dictated
charter rates. Generally, requisitions occur during periods of war or emergency, although governments may elect to requisition vessels in other circumstances.
Although Global Ship Lease would likely be entitled to compensation in the event of a requisition of one or more of its vessels, the amount and timing of
payment would be uncertain. Government requisition of one or more of Global Ship Lease’s vessels may negatively impact its revenues and cash flow.
Technological innovation could reduce Global Ship Lease’s charter income and the value of Global Ship Lease’s vessels.
The charter rates and the value and operational life of a vessel are determined by a number of factors including the vessel’s efficiency, operational flexibility and
physical condition. Efficiency includes speed, fuel economy and the ability to load and discharge containers quickly. Flexibility includes the ability to enter
harbors with draft or other physical considerations, utilize related dock facilities, such as cranes, load or unload with on-board cranes, carry temperature
controlled containers and pass through canals and straits. Physical condition is related to the original design and construction, maintenance and the impact of the
stress of operations. If new containerships are built that are more efficient or more flexible or have longer physical lives than Global Ship Lease’s vessels,
competition from these more technologically advanced containerships could adversely affect the amount of charterhire Global Ship Lease receives for its vessels
once their initial charters expire and the resale value of its vessels could significantly decrease.
Compliance with safety and other vessel requirements imposed by classification societies may be costly and may adversely affect Global Ship Lease’s
business and operating results.
The hull and machinery of every commercial vessel must conform to the rules and standards of a classification society approved by the vessel’s country of
registry. Such societies set the rules and standards for the design, construction, classification, and surveys of vessels and conduct surveys to determine whether
vessels are in compliance with such rules and standards. A certification by the society is an attestation that the vessel is in compliance with the society’s rules and
standards. A vessel involved in international trade must also conform to national and international regulations on safety, environment and security, including (but
not limited to) the Safety of Life at Sea Convention, or SOLAS, and the International Convention for the Prevention of Pollution from Ships. A vessel conforms
to such regulations by obtaining certificates from its country of registry and/or a classification society authorized by the country of registry.
A vessel must undergo annual surveys, intermediate surveys and special surveys. In lieu of a special or class renewal survey, a vessel’s machinery may be
reviewed on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Please see “Business Overview—
Inspection by Classification Societies” for more information regarding annual surveys, intermediate surveys and special surveys. Bureau Veritas, Lloyd’s Register
and Germanischer Lloyd, the classification societies for the vessels in Global Ship Lease’s fleet, may approve and carry out in-water inspections of the
underwater parts of its vessels once every three to five years, in lieu of drydocking inspections. In-water inspections are typically less expensive than drydocking
inspections and Global Ship Lease intends to conduct in-water inspections when that option is available to it.
If a vessel does not maintain its “in class” certification or fails any annual survey, intermediate survey or special survey, port authorities may detain the vessel,
refuse her entry into port or refuse to allow her to trade resulting in the vessel being unable to trade and therefore rendering her unemployable. In the event that a
vessel becomes unemployable, Global Ship Lease could also be in violation of provisions in its charters, insurance coverage, covenants in its loan agreements and
ship registration requirements and its revenues and future profitability would be negatively affected.
Global Ship Lease is subject to regulation and liability under environmental laws that could require significant expenditures and affect Global Ship
Lease’s cash flows and net income.
The shipping industry, and the operations of containerships, are materially affected by environmental regulation in the form of international conventions, national,
state and local laws and regulations in force in the jurisdictions in which Global Ship Lease’s containerships operate, as well as in the country or countries of their
registration, including those governing the management and disposal of hazardous substances and wastes, the cleanup of oil spills and other contamination, air
emissions, water discharges and ballast water management. Because such conventions, laws and regulations are often revised, Global Ship Lease cannot predict
the cost of complying with such requirements or the impact thereof on the value or useful life of its containerships. Additional conventions, laws and regulations
may be adopted that could limit Global Ship Lease’s ability to do business or increase the cost of its doing business and which may materially adversely affect
Global Ship Lease’s operations. Global Ship Lease is required by various governmental and quasi-governmental agencies to obtain certain permits, licenses,
certificates and financial assurances with respect to its operations. Many environmental requirements are designed to reduce the risk of pollution, such as oil
spills, and compliance with these requirements can be costly.
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Environmental requirements can also affect the value or useful lives of vessels, require a reduction in cargo capacity, ship modifications or operational changes or
restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports,
or detention in certain ports. Under local, national and foreign laws, as well as international treaties and conventions, Global Ship Lease could incur material
liabilities, including cleanup obligations and natural resource damages, in the event that there is a release of oil-based products or other hazardous materials from
its vessels or otherwise in connection with its operations. Global Ship Lease could also become subject to personal injury or property damage claims relating to
the release of hazardous materials associated with its existing or historic operations. Violations of, or liabilities under, environmental requirements can result in
substantial penalties, fines and other sanctions, including in certain instances, criminal liabilities or seizure or detention of its vessels.
In addition, significant compliance costs could be incurred due to existing environmental laws and regulations and those that may be adopted, which could require
new maintenance and inspection procedures and new restrictions on air emissions from its containerships, the development of contingency arrangements for
potential spills and/or obtaining insurance coverage. Government regulation of vessels, particularly in the areas of safety and environmental requirements, can be
expected to become increasingly strict in the future and require Global Ship Lease to incur significant capital expenditures on its vessels to keep them in
compliance, or even to scrap or sell certain vessels altogether. Global Ship Lease believes that regulation of the shipping industry will continue to become more
stringent and more expensive for Global Ship Lease and its competitors. Substantial violations of applicable requirements or a catastrophic release of bunker fuel
from one of its containerships, among other events, could have a material adverse impact on its business, financial condition and results of operations. For
additional information on these and other environmental requirements, you should carefully review the information contained in “Business Overview—
Environmental and Other Regulations.”
Risks Related to Tax Matters
Global Ship Lease’s operating income could fail to qualify for an exemption from U.S. federal income taxation, which will reduce its cash flow.
Global Ship Lease does not expect to be engaged in a United States trade or business. In the case of a foreign corporation that is not so engaged, the Internal
Revenue Code of 1986, as amended (the “Code”), imposes a 4% U.S. federal income tax (without allowance of any deductions) on 50% of the corporation’s gross
transportation income that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States, unless the corporation
qualifies for the exemption provided in Section 883 of the Code. The imposition of this tax could have a negative effect on Global Ship Lease’s business,
financial condition and results of operations. Under the charter agreements, the initial Charterer has agreed to provide reimbursement for any such taxes as the
initial Charterer determines where each vessel trades.
There are factual circumstances, such as the composition of its shareholder base, beyond Global Ship Lease’s control that could cause it not to have the benefit of
the exemption provided by Section 883 of the Code and thereby be subject to the 4% tax described above. Based on information that Global Ship Lease has as to
its shareholders and other matters, Global Ship Lease may qualify for the Section 883 exemption for 2009. Because the availability of the Section 883 exemption
depends on matters over which Global Ship Lease has no control, Global Ship Lease can give no assurances that it will or will continue to qualify for the
Section 883 exemption. See “Additional Information—Taxation—Taxation of Global Ship Lease—The Section 883 exemption” for a more comprehensive
discussion of the transportation income exemption.
Global Ship Lease could be taxed as a United States corporation.
Section 7874 of the Code provides that a foreign corporation which acquires substantially all the properties of a U.S. corporation is generally treated as though it
were a U.S. corporation for U.S. federal income tax purposes if, after the acquisition, at least 80% (by vote or value) of the stock of the foreign corporation is
owned by former shareholders of the U.S. corporation by reason of owning stock in the U.S. corporation. Akin Gump Strauss Hauer & Feld LLP has given a legal
opinion that this rule should not apply to Global Ship Lease. Such opinion relied, in part, on assumptions, representations and other information as to certain
factual matters, including valuation. Valuation is a question of fact and is subjective. There can be no assurance that the Internal Revenue Service (the “IRS”)
would not seek to challenge the correctness of such assumptions, representations or other information or the conclusion reached in such legal opinion, or that such
a challenge would not be successful. Akin Gump Strauss Hauer & Feld LLP has not undertaken any obligation to update its opinion.
If Global Ship Lease were to be treated as a U.S. corporation, its net income would be subject to U.S. federal corporate income tax, with the highest statutory rate
currently being 35%. The imposition of this tax would likely have a negative effect on its business, financial condition and results of operations. Please see
“Additional Information—Taxation—Taxation of Global Ship Lease—Possibility of taxation as a U.S. corporation” for a more comprehensive discussion of the
tax consequences to Global Ship Lease being taxed as a U.S. corporation.
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Certain adverse U.S. federal income tax consequences could arise for United States holders.
Shareholders of a “passive foreign investment company,” or PFIC, that are United States persons within the meaning of the Code, which Global Ship Lease refers
to as “United States shareholders,” are subject to a disadvantageous U.S. federal income tax regime with respect to the distributions they receive from a PFIC and
the gain, if any, they derive from the sale or other disposition of their shares in a PFIC (as discussed below). In addition, dividends paid by a PFIC do not
constitute qualified dividend income and, hence, are ineligible for the preferential rate of tax that applies to qualified dividend income.
A foreign corporation is treated as a PFIC if either (1) 75% or more of its gross income for any taxable year consists of certain types of “passive income” or
(2) 50% or more of the average value of the corporation’s assets produce or are held for the production of those types of “passive income.” For purposes of these
tests, “passive income” includes dividends, interest and gains from the sale or exchange of investment property and rents and royalties other than rents and
royalties which are received from unrelated parties in connection with the active conduct of a trade or business; income derived from the performance of services
does not, however, constitute “passive income.”
While there are legal uncertainties involved in this determination, based on representations made by Global Ship Lease, GSL Holdings and Marathon, Simpson
Thacher & Bartlett LLP, or Simpson Thacher, has advised Global Ship Lease, and has delivered an opinion to the effect, that (1) the charters Global Ship Lease
has entered into with CMA CGM should constitute service contracts rather than leases for U.S. federal income tax purposes and (2) as a result, the income from
these charters should not constitute “passive income,” and the assets Global Ship Lease owns for the production of this income should not constitute passive
assets. Based on this opinion, Global Ship Lease does not expect that it will constitute a PFIC with respect to the current or any future taxable year.
There is, however, no direct legal authority under the PFIC rules addressing its current and projected future operations. In addition, Simpson Thacher’s opinion
was based on certain representations made by Global Ship Lease, GSL Holdings and Marathon, and such representations were not and will not be presented for
review to the IRS. Accordingly, no assurance can be given that the IRS will not assert that Global Ship Lease is a PFIC with respect to any taxable year, nor that a
court would not uphold any such assertion. Moreover, no assurance can be given that Global Ship Lease will be able to avoid PFIC classification for any future
taxable year if Global Ship Lease decides to change the nature and/or extent of its operations. Simpson Thacher has not undertaken any obligation to update its
opinion.
Further, in a recent case not concerning PFICs, Tidewater Inc. v. U.S., 2009-1 USTC ¶ 50,337, the Fifth Circuit held that a vessel time charter at issue generated
rental, rather than services, income. However, the court’s ruling was contrary to the position of the IRS that the time charter income should be treated as services
income, and the terms of the time charter in that case differ in material respects from the terms of most of Global Ship Lease’s time charters. No assurance can be
given that the IRS or a court of law would accept Global Ship Lease’s position, and there is a risk that the IRS or a court of law could determine that the company
is a PFIC.
If the IRS were to determine that Global Ship Lease is or has been a PFIC for any taxable year, its United States shareholders will face adverse United States tax
consequences. Distributions paid by Global Ship Lease with respect to its shares will not constitute qualified dividend income if Global Ship Lease were a PFIC
in the year Global Ship Lease pays a dividend or in the prior taxable year and, hence, will not be eligible for the preferential rate of tax that applies to qualified
dividend income. In addition, its United States shareholders (other than shareholders who have made a “qualified electing fund” or “mark-to-market” election)
will be subject to special rules relating to the taxation of “excess distributions”—with excess distributions being defined to include certain distributions Global
Ship Lease may make on its Class A common shares as well as gain recognized by a U.S. holder on a disposition of its Class A common shares. In general, the
amount of any “excess distribution” will be allocated ratably to each day of the U.S. holder’s holding period for its Class A common shares. The amount allocated
to the current year and any taxable year prior to the first taxable year for which Global Ship Lease was a PFIC will be included in the U.S. holder’s gross income
for the current year as ordinary income. With respect to amounts allocated to prior years for which Global Ship Lease was a PFIC, the tax imposed for the current
year will be increased by the “deferred tax amount,” which is an amount calculated with respect to each prior year by multiplying the amount allocated to such
year by the highest rate of tax in effect for such year, together with an interest charge as though the amounts of tax were overdue. See “Additional Information—
Taxation—Taxation of Global Ship Lease—Tax Consequences of Holding Class A Common Shares—U.S. holders—Consequences of possible passive foreign
investment company classification” for a more comprehensive discussion of the U.S. federal income tax consequences to United States shareholders if Global
Ship Lease were treated as a PFIC (including those applicable to United States shareholders who make a qualified electing fund or mark-to-market election).
Global Ship Lease may be subject to taxation on all or part of its income in the United Kingdom, which could have a material adverse effect on its
results of operations.
If Global Ship Lease were considered to be a resident of the United Kingdom or to have a permanent establishment in the United Kingdom, all or a part of its
profits could be subject to UK corporate tax, which currently has a maximum rate of 28%. Global Ship Lease is managed and controlled from outside the United
Kingdom and restricts its activities within the United Kingdom so that its UK taxes will be minimized. Certain intra-group services may be provided from within
the United Kingdom, in which case UK corporate tax will be payable on the arms-length price for those services. The appropriate arms-length price in these
circumstances is likely to be a matter of negotiation with the UK taxing authorities.
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Because some administrative and executive services will be provided to Global Ship Lease by a subsidiary company located in the United Kingdom and certain of
its directors may reside in the United Kingdom, and because UK statutory and case law fail to definitively identify the activities that constitute a trade being
carried on in the United Kingdom through a permanent establishment, the UK taxing authorities may contend that Global Ship Lease is subject to UK corporate
tax on all of its income, or on a greater portion of its income than Global Ship Lease currently expects to be taxed. If the UK taxing authorities made such a
contention, Global Ship Lease could incur substantial legal costs defending its position, and, if Global Ship Lease was unsuccessful in its defense, its results of
operations would be materially adversely affected.
Item 4.
Information on the Company
A. History and Development of the Company
Global Ship Lease is a Republic of the Marshall Islands corporation that owns a fleet of modern containerships of diverse sizes and charters the vessels out under
long-term, fixed-rate charters to reputable container shipping companies to generate stable revenues.
Pursuant to an asset purchase agreement (the “asset purchase agreement”) with CMA CGM and certain of its vessel-owning subsidiaries, Global Ship Lease
acquired from CMA CGM its current fleet of 14 secondhand vessels and three newly built vessels. All of the vessels are time chartered to CMA CGM (which, in
such capacity, is sometimes referred to as the “initial Charterer”) for terms between five and 17 years equal to a non-weighted average term of 9.1 years
remaining at December 31, 2009 for the 17 vessels in the fleet at that date. Global Ship Lease’s management team undertakes all management of, and strategy for,
its fleet and supervises the day-to-day ship management of its vessels which is currently provided by CMA Ships (the “Ship Manager”), a wholly owned
subsidiary of CMA CGM, pursuant to ship management agreements.
On March 21, 2008, Global Ship Lease entered into a merger agreement pursuant to which Marathon Acquisition Corp. (“Marathon”) and Global Ship Lease,
Inc., a subsidiary of CMA CGM, merged with and into GSL Holdings, Inc. (“GSL Holdings”), Marathon’s newly-formed, wholly owned Marshall Islands
subsidiary, with GSL Holdings (now renamed Global Ship Lease, Inc.) continuing as the surviving company incorporated in the Republic of the Marshall Islands
(collectively, “Merger”). The Merger was consummated on August 14, 2008.
Pursuant to the Merger, holders of shares of Marathon common stock (other than Marathon Founders, LLC and the other initial stockholders of Marathon)
received one Class A common share of Global Ship Lease for each share of Marathon common stock issued and outstanding immediately prior to the effective
time of the Merger. In respect of the aggregate 9,375,000 shares of Marathon common stock held by them, Marathon Founders, LLC and the other initial
stockholders of Marathon received in the Merger an aggregate of 2,846,906 Class A common shares of Global Ship Lease, 3,471,906 Class B common shares and
warrants to acquire an aggregate of 3,056,188 Class A common shares at an exercise price of $9.25. CMA CGM received consideration consisting of 6,778,650
Class A common shares, 3,934,050 Class B common shares, 12,375,000 Class C common shares, 1,000 Series A preferred shares, warrants to acquire 3,131,900
Class A common shares at an exercise price of $9.25, and $18,570,135 in cash. The rights of holders of Class B common shares are identical to those of holders
of Class A common shares subject to meeting certain tests, except that the holders of Class B common shares were not entitled to receive any dividends with
respect to any quarter prior to the fourth quarter of 2008 and their dividend rights are subordinated to those of holders of Class A common shares until at least the
third quarter of 2011. The Class C common shares automatically converted into Class A common shares on a one-for-one basis on January 1, 2009.
The Class A common shares, warrants to purchase Class A common shares and units (each unit consisting of one Class A common share and one warrant to
purchase one Class A common share) are listed on the NYSE under the symbols GSL for the Class A common shares, GSL.WS for the warrants and GSL.U for
the units.
The mailing address of Global Ship Lease’s principal executive office is c/o Global Ship Lease Services Limited, Portland House, Stag Place, London SW1E
5RS, United Kingdom, and its telephone number is 44 (0) 20 7869 8006.
B. Business Overview
Our Fleet
Global Ship Lease’s fleet, as of December 31, 2009, consisted of 17 containerships, including three newly built vessels, with an aggregate capacity of 66,297
TEU and a weighted average age of approximately 5.8 years and a non-weighted average age of 6.9 years. All of these vessels were acquired from CMA CGM or
its subsidiaries pursuant to the asset purchase agreement.
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The table below provides information about Global Ship Lease’s current fleet. Each vessel is on charter to CMA CGM:
Vessel Name
Ville d’Orion
Ville d’Aquarius
CMA CGM Matisse
CMA CGM Utrillo
Delmas Keta
Julie Delmas
Kumasi
Marie Delmas
CMA CGM La Tour
CMA CGM Manet
CMA CGM Alcazar
CMA CGM Château d’If
CMA CGM Thalassa
CMA CGM Jamaica
CMA CGM Sambhar
CMA CGM America
CMA CGM Berlioz
Size
(TEU)
4,113
4,113
2,262
2,262
2,207
2,207
2,207
2,207
2,272
2,272
5,100
5,100
10,960
4,298
4,045
4,045
6,627
Year
Built
1997
1996
1999
1999
2003
2002
2002
2002
2001
2001
2007
2007
2008
2006
2006
2006
2001
Classification
Society
Bureau Veritas
Bureau Veritas
Bureau Veritas
Bureau Veritas
Bureau Veritas
Bureau Veritas
Bureau Veritas
Bureau Veritas
Bureau Veritas
Bureau Veritas
Bureau Veritas
Bureau Veritas
Bureau Veritas
Germanischer Lloyd
Lloyd’s Register
Lloyd’s Register
Bureau Veritas
In addition, Global Ship Lease has contracted to purchase two further containerships as set out below:
Vessel Name
Hull 789
Hull 790
(1)
(1)
Size
(TEU) Year Built
Estimated Delivery
Date to GSL
4,250
4,250
2010 December 2010
2010 December 2010
Charterer
Zim
Zim
Charter
Period (years)
7-8
7-8
(2)
(2)
Net Daily
Rate ($)
$28,000
$28,000
(1)
(2)
Contracted to be purchased from German interests
Seven to eight year charter at charterer’s option
Time Charters
A time charter is a contract for the use of a vessel for a fixed period of time at a specified daily rate. Under a time charter, the vessel owner provides crew,
lubricating oil, all maintenance and other services related to the vessel’s operation, the cost of which is included in the daily rate. The vessel owner is also
responsible for insuring its interests in the vessel and liabilities as owner arising from its use. The charterer is responsible for substantially all of the vessel’s
voyage costs, such as fuel and cargo handling charges.
Initial Term
Each of the vessels in our current fleet is subject to a long-term time charter with CMA CGM. Global Ship Lease has separate subsidiaries to own each vessel in
its fleet. Global Ship Lease guarantees the obligations of each of its subsidiaries under the charters. Each of Global Ship Lease’s charters commenced on each
vessel’s delivery. Due to different delivery dates and durations, its charters will expire on different dates and over a period of time. Global Ship Lease believes the
staggered expirations of its charters will reduce its exposure to re-chartering risk upon expiration of its initial charters and may mitigate the impact of the cyclical
nature of the container shipping industry. The charters have initial terms of five to 17 years and its fleet has a non-weighted average charter period of 9.1 years
remaining at December 31, 2009 for the 17 vessels in the fleet at that date. The initial charter periods for Global Ship Lease’s current fleet are as follows:
Vessel Name
Ville d’Orion
Ville d’Aquarius
CMA CGM Matisse
CMA CGM Utrillo
Delmas Keta
Julie Delmas
Marie Delmas
Kumasi
CMA CGM La Tour
CMA CGM Manet
CMA CGM Alcazar
CMA CGM Château d’If
CMA CGM Thalassa
CMA CGM Jamaica
CMA CGM Sambhar
CMA CGM America
CMA CGM Berlioz
Commencement of Charter
December 2007
December 2007
December 2007
December 2007
December 2007
December 2007
December 2007
December 2007
December 2007
December 2007
January 2008
January 2008
December 2008
December 2008
December 2008
December 2008
August 2009
Charter Period (Years)
5
5
9
9
10
10
10
10
9
9
13
13
17
14
14
14
12
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Net Daily Rate
“Net daily rate” refers to the basic payment by the charterer to the owner for the use of the vessel, net of any chartering commission (if applicable). Under all of
the time charters for its current fleet, hire is payable to Global Ship Lease in advance every 15 days in United States dollars. The net daily rate is a fixed daily
amount that will remain the same for the duration of the charter, although in certain circumstances the charter rate can increase. For example, under the global
expense agreement, CMA CGM has agreed, effective as of the fourth year of each charter agreement, to compensate Global Ship Lease for any vessel in its fleet
on charter to CMA CGM by the amount by which actual operating costs per day (excluding any drydock costs and insurance premiums) are greater than $500
over a specified amount, which specified amount is based on projected operating costs over the life of each charter, provided more than 50% of such increase is
attributable to crew and lubricating oil costs, such compensation not to exceed $500 per day per vessel.
The following chart shows the net daily hire rate that CMA CGM has agreed to pay for each vessel:
Vessel Name
Ville d’Orion
Ville d’Aquarius
CMA CGM Matisse
CMA CGM Utrillo
Delmas Keta
Julie Delmas
Marie Delmas
CMA CGM La Tour
CMA CGM Manet
Kumasi
CMA CGM Alcazar
CMA CGM Château d’If
CMA CGM Thalassa
CMA CGM Jamaica
CMA CGM Sambhar
CMA CGM America
CMA CGM Berlioz
Operations and Expenses
Net Daily Rate ($)
28,500
28,500
18,465
18,465
18,465
18,465
18,465
18,465
18,465
18,465
33,750
33,750
47,200
25,350
25,350
25,350
34,000
As owner, Global Ship Lease is required to maintain each vessel in class and in an efficient state of hull and machinery and is responsible for vessel costs such as
crewing, lubricating oil, maintenance, insurance and drydocking. The charterer is responsible for the voyage costs, which includes bunker fuel, stevedoring, port
charges and towage. As described below, Global Ship Lease has entered into ship management agreements and the global expense agreement with its Ship
Manager.
For vessels in the current fleet, costs incurred due to structural changes because of changes in legal, classification society or regulatory requirements regarding the
vessel shall be paid by Global Ship Lease although if the annual costs aggregate to more than $100,000 for each vessel impacted by such changes, the initial
Charterer will compensate Global Ship Lease through an increase in charterhire from the year the aggregate amount is reached.
The charter agreements for vessels in the current fleet stipulate that the initial Charterer should re-imburse Global Ship Lease for any costs of war risks insurance
additional premiums and additional crew expenses, if any, that are applicable if the initial Charterer acts outside the insurance limits and for entering areas which
are specified by the insurance underwriters as being subject to additional premiums.
Right of First Refusal
Pursuant to the terms of the time charter, the initial Charterer of the current fleet has a right of first refusal to purchase the vessel at matching terms to any offer of
any third party if Global Ship Lease decides to sell the vessel during, or at the end of, the charter period. Should the initial Charterer not exercise its right of first
refusal in case of a sale during the charter period, Global Ship Lease will be entitled to sell the vessel, subject to the initial Charterer’s approval, which shall not
be unreasonably withheld. The initial Charterer has the right to reject a sale of a vessel to owners whose business or shareholding is determined to be detrimental
or contrary to the initial Charterer’s interest.
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Off-hire
Under the time charter, when the vessel is not available for service, or “off-hire,” the initial Charterer generally is not required to pay charter hire (unless the
initial Charterer is responsible for the circumstances giving rise to the ship’s unavailability), and Global Ship Lease is responsible for costs during any off-hire
period, and possible additional costs of fuel to regain lost time. A vessel generally will be deemed to be off-hire if there is an occurrence that affects the full
working condition of the vessel, such as:
•
•
•
•
•
•
any drydocking for repairs, maintenance or classification society inspection;
any damage, defect, breakdown or deficiency of the ship’s hull, machinery or equipment or repairs or maintenance thereto;
any deficiency of the ship’s master, officers and/or crew, including the failure, refusal or inability of the ship’s master, officers and/or crew to perform
the service immediately required, whether or not within its control;
its deviation, other than to save life or property, which results in initial Charterer’s lost time;
crewing labor boycotts or certain vessel arrests; or
Global Ship Lease’s failure to maintain the vessel in compliance with the charter’s requirements, such as maintaining operational certificates.
Ship Management and Maintenance
Under each of its time charters, Global Ship Lease is responsible for the operation and technical management of each vessel, which includes crewing, provision of
lubricating oils, maintaining the vessel, periodic drydocking and performing work required by regulations. The day-to-day crewing and technical management of
its vessels are provided by its Ship Manager pursuant to the terms of the ship management agreements.
Termination and Withdrawal
If a vessel in the current fleet is off-hire for more than 90 consecutive days, then the initial Charterer may cancel the charter without any further consequential
claims provided the vessel is free of cargo.
If a vessel’s fuel consumption is increased for a prolonged period above a specified percentage or speed is decreased below a specified level, the time charter
provides that hire payments under the time charter may be adjusted until or unless the speed and fuel consumption return to the level specified in the time charter.
If a vessel’s fuel consumption exceeds a higher percentage than the percentages specified in the charter over a continuous period of 30 days, and the reason is
within its or the vessel’s control, the initial Charterer may request that Global Ship Lease cures the deficiency. If the deficiency is not cured within 30 days after
Global Ship Lease receives notice, then the initial Charterer may terminate the charter.
If either party informs the other party of a default under the charter, and the default is not rectified within 60 days of such notice, then the party giving the notice
has the right to terminate the time charter with respect to that vessel.
The charter will terminate in the event of a total (actual or constructive) loss of the vessel or if the vessel is requisitioned.
Global Ship Lease may suspend the performance of its obligations under the charter if the initial Charterer defaults on its payment obligations under the charter.
Ship Management Agreements
For the current fleet Global Ship Lease’s Ship Manager, CMA Ships, a subsidiary of CMA CGM, provides day-to-day technical ship management services,
including purchasing, crewing, provision of lubricating oil, vessel maintenance including arranging drydocking inspections and ensuring compliance with flag,
class and other statutory requirements necessary to support Global Ship Lease’s business. CMA CGM guarantees the performance of all services and any
payment due to Global Ship Lease by its Ship Manager pursuant to the ship management agreements.
Pursuant to its ship management agreements, Global Ship Lease expects to pay its Ship Manager for its services an annual management fee of $114,000 per
vessel. Under the ship management agreements, its Ship Manager is responsible for all day-to-day ship management, including crewing, purchasing stores,
lubricating oils and spare parts, paying wages, pensions and insurance for the crew, and organizing other vessel operating necessities, including the arrangement
and management of drydocking. Global Ship Lease will reimburse the Ship Manager for costs it incurs on Global Ship Lease’s behalf. However, such cost
reimbursement is capped on a quarterly basis pursuant to the global expense agreement described in more detail below in “Global Expense Agreement.” Each
ship management agreement provides that Global Ship Lease has the right to audit the accounts of its Ship Manager to verify the costs
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incurred. The Ship Manager has agreed to maintain Global Ship Lease’s vessels so that they remain in class with valid certification. In addition, the Ship Manager
will be responsible for Global Ship Lease’s current fleet’s compliance with all government and other regulations, and compliance with class certifications.
The Ship Manager has established an accounting system and maintains the records of all costs and expenditures incurred as well as data necessary for the
settlement of accounts between parties.
The Ship Manager is required to use its best endeavors to provide the services specified in the ship management agreements. Pursuant to the terms of the ship
management agreements, Global Ship Lease will indemnify its Ship Manager and its employees, agents and sub-contractors and hold them harmless against all
actions, proceedings, claims, demands or liabilities which may be brought against them or incurred by them arising out of or in connection with the performance
of the ship management agreements, unless the same is proved to have resulted solely from the negligence, gross negligence or willful default of the Ship
Manager, its employees, agents and sub-contractors.
Global Ship Lease’s Ship Manager will not be permitted to sub-contract its obligations under the ship management agreements without Global Ship Lease’s
consent, which Global Ship Lease will not unreasonably withhold. With Global Ship Lease’s consent, the Ship Manager has sub-contracted all of its management
services under its ship management agreements to its UK subsidiary, CMA Ships UK. Global Ship Lease’s ship management agreements with the Ship Manager
have a term of three years from delivery of each vessel subject to the termination rights set forth below.
The ship management agreements are cancelable by Global Ship Lease if its Ship Manager fails to meet its obligations under the ship management agreements for
any reason within its control and fails to remedy the default. In addition, after a ship management agreement has been in effect for one year, Global Ship Lease
has the option of terminating the ship management agreement upon three months notice if Global Ship Lease can secure more competitive pricing from a
recognized third party, approved by CMA CGM as charterer of the vessels, such approval not to be unduly withheld, subject to CMA Ships’ right to match the
third party’s terms.
Global Ship Lease’s Ship Manager can terminate the agreement prior to the end of its term if, among other things: (a) it has not been paid within 30 days of a
written request for payment (and Global Ship Lease fails to remedy such default) or (b) Global Ship Lease undergoes a change in control.
Either party may terminate a ship management agreement in the event of an order being made or a resolution being passed for the winding up, dissolution or
bankruptcy of either party, or if a receiver is appointed, or if it suspends payment, ceases to carry on business or makes a special arrangement with its creditors.
The ship management agreement will also terminate if the vessel becomes a total loss, is declared as a constructive or compromised or arranged total loss, is
requisitioned or sold.
Global Ship Lease intends that the ship management of newbuilding hulls 789 and 790, scheduled for delivery in the fourth quarter of 2010 for timecharter to
Zim, will be subcontracted to a third party ship manager unrelated to CMA CGM.
Insurance
Global Ship Lease arranges for insurance coverage for each of its vessels, including hull and machinery insurance, protection and indemnity insurance and war
risk insurance. Global Ship Lease is responsible for the payment of all premiums.
Global Expense Agreement
Pursuant to the ship management agreements with CMA Ships, ship operating expenses incurred by the Ship Manager on Global Ship Lease’s behalf in the
operation of its fleet on charter to CMA CGM will be reimbursed. Pursuant to the global expense agreement that Global Ship Lease entered into with its Ship
Manager, these expenses will be subject to a quarterly cap. Drydocking expenses and insurance premiums are not included in the cap arrangements. For each
quarterly period, its Ship Manager bears the amount (if any) by which the actual aggregate expenses, excluding drydocking expenses and insurance premiums and
costs of accidents and incidents, incurred with respect to all vessels in service exceed the aggregate cap for such quarterly period. The table below sets out the per
diem cap per vessel.
Vessel Name
Ville d’Orion
Ville d’Aquarius
CMA CGM Matisse
CMA CGM Utrillo
Delmas Keta
Julie Delmas
Marie Delmas
CMA CGM La Tour
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Per Diem Cap ($)
6,400
6,400
5,400
5,400
5,400
5,400
5,400
5,400
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Vessel Name
CMA CGM Manet
Kumasi
CMA CGM Alcazar
CMA CGM Château d’If
CMA CGM Thalassa
CMA CGM Jamaica
CMA CGM Sambhar
CMA CGM America
CMA CGM Berlioz
Per Diem Cap ($)
5,400
5,400
5,900
5,900
8,800
6,650
6,650
6,650
7,800
Once its ship management agreements and the global expense agreement with its Ship Manager expire or are terminated, Global Ship Lease may not be able to
negotiate similar terms in replacement agreements.
Also in the global expense agreement, CMA CGM has agreed, effective as of the fourth year of each charter agreement, to compensate Global Ship Lease, for any
vessel in its current fleet by the amount by which actual operating costs per day (excluding any drydock costs and insurance premiums) are greater than $500 over
a specified amount, which specified amount is based on projected operating costs over the life of each charter, provided more than 50% of such increase is
attributable to crew and lubricating oil costs, such compensation not to exceed $500 per day per vessel.
Credit Facility
Global Ship Lease has a senior secured credit facility with Fortis Bank (Nederland) N.V. (the “Agent”), Citibank Global Markets Limited, HSH Nordbank AG,
Sumitomo Mitsui Banking Corporation, Brussels Branch, KFW, DnB Nor Bank ASA and Bank of Scotland, which Global Ship Lease refers to as its credit
facility. Global Ship Lease drew funds under its credit facility to finance in part the purchase of its vessels from CMA CGM. All of Global Ship Lease’s vessel-
owning subsidiaries are included as borrowers and guarantors jointly and severally guaranteeing Global Ship Lease’s obligations under the credit facility.
Credit Facility Amendment
Under the terms of the Credit Facility Amendment, effective as of August 20, 2009, the credit facility effectively became a term loan of approximately $600
million with a final maturity date of August 14, 2016. Following the Credit Facility Amendment, there is no undrawn capacity under the credit facility.
The credit facility has a leverage ratio test which provides that, if the leverage ratio exceeds 75%, the Agent may require a prepayment of the borrowings or the
delivery of additional security to the extent necessary to reduce the leverage ratio to 75%.
Due to the global economic downturn and significantly reduced demand for container shipping services and containerships, combined with continued delivery of
newbuildings, containership values have experienced dramatic declines in recent months. Purchase and sale transactions in the containership market have been
very limited, confined primarily to small vessels and, in instances where such transactions have been completed, the prices have been significantly lower than
comparable transactions in the past. No newbuilding orders have been placed for many months and many ship brokers have not been providing certificates of
market value due to the disrupted market.
Due to the possibility that Global Ship Lease would exceed the maximum permitted leverage ratio under the credit facility as a result of the declines in charter-
free market values of its vessels, Global Ship Lease’s lenders agreed to enter into the Credit Facility Amendment. Under the Credit Facility Amendment, the
maximum 75% leverage ratio will not apply until the leverage ratio is first tested after the expiration of the waiver period which is up to and including
November 30, 2010. Consequently the first such test is scheduled to be as of April 30, 2011. In addition, and in connection with the purchase of the CMA CGM
Berlioz for $82.0 million, which was completed in August 2009, the Credit Facility Amendment permitted drawings of up to $42.0 million under the main credit
facility and up to an additional $20.0 million as a newly created Over Advance Portion. In August, $42 .0 million was drawn under the main credit facility and
$15.0 million was drawn under the Over Advance Portion. The $25.0 million balance of the purchase price was met from available cash. The Credit Facility
Amendment provides that borrowings under the Over Advance Portion will be paid quarterly commencing November 2009 with free cash in excess of $20.0
million determined as of the previous month end. The Over Advance Portion is required to be fully prepaid by June 30, 2010. The credit facility will be repaid
quarterly commencing June 30, 2010 with free cash in excess of $20.0 million determined as of the previous month end subject to a minimum $40.0 million
prepayment per rolling four-quarters as long as the leverage ratio is, or is deemed to be, over 75%. When the leverage ratio becomes 75% or less, scheduled
repayments will be set at $10.0 million per quarter.
No additional indebtedness is permitted until the Over Advance Portion is repaid in full, other than for the purpose of financing the purchase of the two contracted
vessels from German interests.
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If any additional capital is raised, 25% of such additional capital, net of expenses, must be used to prepay borrowings under the credit facility. This provision
terminates when the repayment profile of the credit facility is reduced to 18 years or lower, based on the market value and weighted average age of the vessels. In
the event of a sale of a vessel or a total loss or constructive total loss of a vessel, the proceeds received from such sale, total loss or constructive total loss must be
used to prepay borrowings under the credit facility.
Further, the undrawn portion of the credit facility amounting to approximately $200.0 million was cancelled and Global Ship Lease has agreed that it will not
declare or pay any dividends to common shareholders during the waiver period or thereafter until the leverage ratio falls to 75% or below.
In connection with the Credit Facility Amendment, CMA CGM has agreed not to reduce its holding of common shares in Global Ship Lease below the current
level of approximately 24.4 million common shares at least until November 30, 2010 and to defer the redemption of the $48.0 million preferred shares until after
the final maturity of the credit facility in August 2016.
General Borrowing Terms
Borrowings under the credit facility bear interest at a rate of the margin over one, three, six, nine or 12 month United States Dollar LIBOR, or such other periods
as the Agent may agree. The margin depends on the “leverage ratio,” which is defined as the ratio of the aggregate amount outstanding under its credit facility, net
of surplus cash held in the retention account, to the aggregate charter-free market value of the vessels securing the credit facility plus the value of other security
held. The charter-free market value of a vessel is calculated semi-annually in April and November as the arithmetic average of valuations determined by two
independent sale and purchase brokers acceptable to the Agent. If only one such valuation is available at the relevant time, then the result of that valuation will be
used to assess the leverage ratio until a second valuation, to be sought monthly, becomes available and the two valuations can be averaged. Should no current
valuations be available at the relevant time, then the leverage ratio will be assumed to be over 100%. The margin is fixed at 3.50% until the leverage ratio is first
tested after November 30, 2010. Set forth below is the margin that applies for the relevant leverage ratio once the fixed margin period expires.
Leverage Ratio
Up to 65%
Greater than 65% to 75%
Greater than 75%
Margin
2.50%
3.00%
3.50%
During the continuance of any principal or interest default, the margin on the overdue amounts increases by 2% per annum. Pursuant to the terms of the credit
facility, Global Ship Lease must hedge at least 50% of the amounts outstanding under the credit facility. Global Ship Lease hedged, prior to the Merger, the
majority of the amounts outstanding under the credit facility.
Until undrawn commitments were cancelled pursuant to the Credit Facility Amendment, Global Ship Lease paid a commitment fee of 0.50% per annum on the
undrawn portion of the credit facility. Global Ship Lease is responsible for the duly justified costs properly incurred in connection with the establishment and the
maintenance of the credit facility.
Global Ship Lease is permitted to make early prepayments that can reduce subsequent prepayment obligations. Any amount outstanding under the credit facility
at the final maturity date in August 2016 must be repaid in one installment.
Security
Global Ship Lease’s credit facility provides that borrowings under the credit facility are secured by the following:
•
•
•
•
•
•
•
•
a first priority pledge over Global Ship Lease’s bank accounts, and those of Global Ship Lease’s subsidiaries’ owning vessels in the security package,
which are held with the Agent;
cross-collateralized first priority mortgages on each of the vessels in the security package registered or flagged in a jurisdiction acceptable to the
lenders;
marine and war risks insurance covering a minimum of 110% of the outstanding credit facility amount;
a first priority assignment of time charter contracts, in respect of the vessels in the security package;
a first priority assignment of insurances in respect of each of the vessels in the security package;
a first priority pledge over the shares of Global Ship Lease’s borrowing or guaranteeing subsidiaries;
corporate guarantees for Global Ship Lease’s obligations from guarantors being Global Ship Lease’s non-borrowing subsidiaries under this credit
facility;
a first priority assignment of the unconditional and irrevocable corporate guarantee from CMA CGM to Global Ship Lease for the obligations of the
initial Charterer, under the time charters, in cases where the initial Charterer is a subsidiary of CMA CGM;
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•
•
a first priority assignment of the management agreements for the vessels in the security package; and
a first priority (general) assignment of the earnings of the vessels in the security package.
In the event of either the sale or total loss of a vessel, the amount available for Global Ship Lease to borrow under its credit facility will be reduced so that its
borrowings under the credit facility does not exceed 70% of the market value of the remaining vessels that secure its obligations under the credit facility.
Covenants
Global Ship Lease’s credit facility contains covenants that require Global Ship Lease to ensure, among other things, that:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the employment details of additional vessels that Global Ship Lease acquires are given to the Agent;
technical and/or operational management of all the vessels secured under this facility and/or the supervisor in respect of newbuildings to be executed
by CMA CGM or any of its wholly owned subsidiaries, or any other company internationally recognized and acceptable to the Agent;
the earnings accounts, the operating account and retention account in relation to the vessels are held with the Agent;
the vessels are in class, free of any material overdue recommendations, and the classification society is part of the IACS. No change of class without
the prior written consent of the Agent, such consent not to be unreasonably withheld;
Global Ship Lease is only to be involved in the business of ownership of vessels, technical and commercial management of such vessels and related
activities;
Global Ship Lease may not charter-in vessels, lease vessels or enter into any similar arrangement without the prior written approval of the Agent,
other than time chartering up to three months, such consent not to be unreasonably withheld, unless the arrangement is with or to Global Ship Lease
or its subsidiaries, in which case no approval from the Agent shall be required;
Global Ship Lease supplies a list of acceptable flags approved by the Agent. Global Ship Lease may change flag to another approved flag provided
the Agent receives the required documentation;
Global Ship Lease is restricted from certain asset acquisitions and disposals with respect to its subsidiaries other than disposals made in the ordinary
course of business of the disposing subsidiary on arms-length terms and for fair value or any disposal of assets (other than vessels) in exchange for
other assets comparable or superior as to type, value and quality;
there are restrictions on the ability of Global Ship Lease’s subsidiaries to incur additional indebtedness;
Global Ship Lease will at all times comply with the International Maritime Code for the Safe Operation of Ships and for Pollution Prevention
adopted by the IMO;
there is no change of ownership of any of Global Ship Lease’s subsidiaries;
Global Ship Lease will provide the Agent with audited annual consolidated accounts, quarterly management accounts and, in respect of each
subsidiary, annual unaudited accounts as soon as they are made available, in no event later than 120 days of the year-end and 60 days of the end of
each quarter. Further relevant financial information will be provided on demand;
Global Ship Lease shall, at the same time the audited annual consolidated accounts and management accounts are due, provide the Agent with
compliance certificates showing the calculation of the financial covenants. A listing of charter rates may also be included;
Global Ship Lease cannot dispose of net assets in excess of $300.0 million (of which a maximum of $200.0 million in aggregate should be in respect
of its initial and contracted fleet) over any period of three consecutive calendar years other than with the consent of the Agent; and
Global Ship Lease may pay dividends if (1) no event of default has occurred or is continuing, (2) the payment of such a dividend does not trigger an
event of default and (3) any payments to be made into the retention account are fully up to date.
Global Ship Lease’s credit facility contains financial covenants requiring that, among other things:
•
•
•
its cash balance on a consolidated basis must be a minimum of $15.0 million or six months’ net interest expense at all times;
Global Ship Lease’s financial net debt to total capitalization ratio shall not exceed 75%;
Global Ship Lease’s ratio of EBITDA to debt service, on a trailing four-quarter basis, shall be no less than 1.10 to 1. (Under the Credit Facility
Amendment, $10.0 million per quarter is the amount of debt prepayment deemed to be the scheduled prepayment for the purposes of determining
debt service); and
•
Global Ship Lease maintains a minimum net worth of $200.0 million.
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Events of Default
Among other things, each of the following events with respect to Global Ship Lease or any of its subsidiaries, in some cases after the passage of time or notice or
both, is an event of default under the credit facility agreement:
•
•
•
•
•
•
non-payment of amounts due and payable under this credit facility within four business days of the due date;
Global Ship Lease’s or its subsidiaries’ breach of Global Ship Lease’s non-financial covenants and failure to remedy within seven business days of
receipt of a notice;
Global Ship Lease’s breach of a financial covenant;
cross default with respect to Global Ship Lease’s and its subsidiaries’ other obligations for any amount in excess of $15.0 million (with respect to
Global Ship Lease) and $10.0 million (with respect to its subsidiaries);
if any person other than CMA CGM, and not agreed to by the lenders, acquires more than 51% of its outstanding voting shares; and
default of the initial Charterer or the Charter Guarantor which is continuing in respect of three or more of the time charter contracts associated with
its initial and contracted fleet or default of more than half by number of the time charters associated with any approved charterer (provided such
charterer is the charterer of at least 25% of Global Ship Lease’s vessels).
The credit facility agreement provides that upon the occurrence of an event of default, the lenders may require that all amounts outstanding under the credit
facility be repaid immediately and terminate Global Ship Lease’s ability to borrow under the credit facility and foreclose on the mortgages over the vessels and
the related collateral.
Inspection by Classification Societies
Every seagoing vessel must be “classed” by a classification society. The classification society certifies that the vessel is “in class,” signifying that the vessel has
been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the vessel’s country of
registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and
corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the
authorities concerned.
The classification society, on request, also undertakes other surveys and checks that are required by regulations and requirements of the flag state. These surveys
are subject to agreements made in each individual case and/or to the regulations of the country concerned. In addition, the classification society will make
recommendations, including imposing a timetable, for repairs following accidents and check to confirm such repairs have been effected to an acceptable standard.
For maintenance of the class, regular and extraordinary surveys of hull, machinery, including the electrical plant, and any special equipment classed, are required
to be performed as follows:
•
•
Annual Surveys. For seagoing ships, annual surveys are conducted for the hull and the machinery, including the electrical plant, and where
applicable for special equipment classed.
Intermediate Surveys. Also referred to as extended annual surveys, intermediate surveys are typically conducted two and one-half years after
(a) commissioning the vessel and (b) after each class renewal. A drydocking is usually required during the intermediate survey for inspection
of underwater parts and for repairs related to inspections. However, by increasing the resilience of the underwater coating and marking the
vessel’s hull to accommodate in-water inspection by divers, in-water inspections may be accepted by classification societies in lieu of
drydockings at intermediate surveys. If any defects are found, the classification surveyor will issue a “recommendation” that must be
rectified by the ship-owner within prescribed time limits. A drydocking would only be required if the in-water inspection showed urgent
repairs that could only be carried out in drydock. In-water inspections are typically less expensive than drydocking inspections and Global
Ship Lease intends to conduct in-water inspections when that option is available to it.
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•
Class Renewal Surveys. Class renewal surveys, also known as special surveys, are carried out typically every five years on the ship’s hull,
machinery, including the electrical plant, and any special equipment classed, at the intervals indicated by the character of classification for
the hull. Vessels are required to be inspected in a drydock as part of the special survey. At the special survey, the vessel is thoroughly
examined including audio-gauging to determine the thickness of the steel structures. Should the thickness be found to be less than class
requirements, the classification society would prescribe steel renewals. Substantial expense may have to be incurred for steel renewals to
pass a special survey if the vessel has experienced excessive wear and tear. As an alternate to carrying out all of the required inspections at
the special survey every five years, a ship-owner has the option of arranging with the classification society for the vessel’s hull or machinery
to be on a continuous basis, in which every relevant part of the vessel would be surveyed on a five year cycle. A dry-docking is still required
at the firth year anniversary to inspect underwater parts. The process of continuous class renewal spreads out the required inspections and
their associated cost, whilst the vessel is still in service, and reduces the amount of inspection required each fifth year.
As a condition for obtaining insurance coverage as well as for obtaining financing from its lenders, each of Global Ship Lease’s vessels needs to be certified “in
class” by a member of the IACS. Pursuant to the terms of the asset purchase agreement, any recommendations or suspensions from class which existed at the time
of sale to Global Ship Lease would need to be remedied at the sole expense of the vendor before or during the next scheduled drydocking of that vessel. Global
Ship Lease is also indemnified for a period of two years from the date of the purchase of each vessel for certain losses incurred prior to the full repair of any
vessel that arise out of any recommendations existing on the vessel or suspensions from class at the time of sale. Generally, if the recommendations are not
sufficiently corrected as determined by a member of the IACS, then the vessel may not remain “in class.” If a vessel is not “in class,” it may not be covered by
insurance, and may not be available for charter. In addition, Global Ship Lease’s vessels must remain “in class” as a condition to obtaining financing from the
lenders under its credit facility.
The following table lists the month by which the vessels in Global Ship Lease’s fleet need to have completed their next drydocking:
Vessel Name
Ville d’Orion
Ville d’Aquarius
CMA CGM Matisse
CMA CGM Utrillo
Delmas Keta
Julie Delmas
Marie Delmas
CMA CGM La Tour
CMA CGM Manet
Kumasi
CMA CGM Alcazar
CMA CGM Château d’If
CMA CGM Thalassa
CMA CGM Jamaica
CMA CGM Sambhar
CMA CGM America
CMA CGM Berlioz
Drydocking Month*
January 2012
December 2011
November 2014
December 2014
March 2013
October 2012
January 2012
June 2011
October 2011
March 2012
November 2012
December 2012
December 2013
September 2011
July 2011
September 2011
July 2011
*
Expected month of drydocking assume that the vessels of Global Ship Lease’s fleet qualify for in-water inspections.
Competition
Global Ship Lease operates in markets that are highly competitive. Global Ship Lease expects to compete for vessel purchases and charters based upon price,
customer relationships, operating expertise, professional reputation and size, age and condition of the vessel. Global Ship Lease also expects to compete with
many other companies, including CMA CGM and its subsidiaries, to, among other things, purchase newbuildings and secondhand vessels to grow its fleet.
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Global Ship Lease expects substantial competition in obtaining new containership charters from a number of experienced and substantial companies. Many of
these competitors may have greater financial resources than Global Ship Lease, and may also operate larger fleets and may be able to offer better charter rates.
Due to the industry downturn, there are an increasing number of vessels available for charter, including many from owners with strong reputations and
experience. The lack of available financing and excess supply of vessels in the container shipping market results in a more active short-term charter market and
greater price competition for charters. As a result of these factors, Global Ship Lease may be unable to purchase additional containerships, expand its
relationships with CMA CGM or to obtain new charterers on a profitable basis, if at all, which would have a material adverse effect on its business, results of
operations and financial condition.
Permits and Authorizations
Global Ship Lease is required by various governmental and other agencies to obtain certain permits, licenses and certificates with respect to its vessels. The kinds
of permits, licenses and certificates required depend upon several factors, including the commodities transported, the waters in which the vessel operates, the
nationality of the vessel’s crew and the age of a vessel. Not all of the permits, licenses and certificates currently required to operate the vessels globally have been
obtained by Global Ship Lease or its Ship Manager. For example, the Delmas Keta, Julie Delmas, Kumasi and Marie Delmas are not compliant with all United
States, Canadian and Panama Canal regulations, as the initial Charterer does not intend to operate them in these waters.
Environmental and Other Regulations
Government regulation significantly affects the ownership and operation of vessels. Global Ship Lease is subject to international conventions and codes, and
national, state and local laws and regulations in force in the countries in which its vessels may operate or are registered, including those governing the
management and disposal of hazardous substances and wastes, the cleanup of oil spills and other contamination, air emissions, and water discharges and ballast
water management. Compliance with these laws, regulations and other requirements entails significant expense, including vessel modifications and
implementation of certain operating procedures, and are subject to frequent change.
A variety of governmental and private entities subject its vessels to both scheduled and unscheduled inspections. These entities include the local port authorities,
United States Coast Guard, harbor master or equivalent, classification societies, flag state administrations, country of registry, charterers, and terminal operators.
Certain of these entities require Global Ship Lease to obtain permits, licenses and certificates for the operation of its vessels. Failure to maintain necessary permits
or approvals could require Global Ship Lease to incur substantial penalties, costs or temporarily suspend the operation of one or more of its vessels in one or more
ports.
Global Ship Lease believes that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to
greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the shipping industry.
Increasing environmental concerns have created a demand for vessels that conform to the stricter environmental standards. Global Ship Lease will be required to
maintain operating standards for all of its vessels that emphasize operational safety, quality maintenance, continuous training of its officers and crews and
compliance with United States and international regulations. Because such laws and regulations are changed frequently and may impose increasingly strict
requirements, future environmental regulations may limit Global Ship Lease’s ability to do business, increase its operating costs, force the early retirement of its
vessels and/or affect their resale value, all of which could have a material adverse affect on its financial condition and results of operations.
International Maritime Organization
Global Ship Lease’s vessels are subject to standards imposed by the International Maritime Organization, or IMO, the United Nations agency for maritime safety
and the prevention of pollution by ships. The IMO has negotiated international conventions and implemented regulations that address oil discharges, ballasting
and unloading operations, sewage, garbage and air emissions, and impose liability for pollution in international waters and a signatory’s territorial waters.
The IMO’s International Convention for the Prevention of Pollution from Ships, or MARPOL, imposes environmental standards on the shipping industry relating
to oil spills, management of garbage, the handling and disposal of noxious liquids, harmful substances in packaged forms, sewage and air emissions. Annex I
specifies requirements for continuous monitoring of oily water discharges and establishes a number of special areas in which more stringent discharge standards
are applicable. Carriage of chemicals in bulk is covered by regulations MARPOL Annex II. Annex III of MARPOL regulates the transportation of packaged
dangerous goods (marine pollutants) and includes standards on packing, marking, labeling, documentation, stowage, quantity limitations and pollution
prevention. These Annex III requirements have been expanded by the International Maritime Dangerous Goods Code, which imposes additional standards for all
aspects of the transportation of dangerous goods and marine pollutants by sea. Annex IV contains a set of regulations regarding the discharge of sewage into the
sea, the configuration and operation of ships’ equipment and systems for the control of sewage discharge, and requirements for survey and certification. Annex V
totally prohibits the disposal of plastics anywhere
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into the sea, and severely restricts discharges of other garbage from ships into coastal waters and special areas. MARPOL’s Annex VI sets limits on sulfur oxide,
nitrogen oxide, carbon dioxide and particulate matter emissions from ship exhausts and prohibits deliberate emissions of ozone depleting substances, such as
chlorofluorocarbons. Annex VI also includes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent
controls on sulfur emissions. Global Ship Lease has registered the vessels in its fleet in flag states that have ratified Annex VI, which require that Global Ship
Lease obtains International Air Pollution Prevention Certificates, or IAPP Certificates, for the vessels in its fleet, from those flag states. As of December 31, 2009,
all of the vessels in the fleet had IAPP Certificates. On July 21, 2008, the United States enacted the Maritime Pollution Protection Act of 2008, implementing
Annex VI in territorial waters of the United States. Once the president delivers the instrument of ratification to the IMO, the United States will become a party to
Annex VI within 90 days. On October 9, 2008, the Member States of the IMO adopted amendments to Annex VI creating more stringent standards for engines
and fuels The main changes to MARPOL Annex VI will see a progressive reduction in sulphur oxide (SOx) emissions from ships, with the global sulphur cap
reduced initially to 3.50% (from the current 4.50%), effective from 1 January 2012; then progressively to 0.50 %, effective from 1 January 2020, subject to a
feasibility review to be completed no later than 2018.
The limits applicable in Sulphur Emission Control Areas (SECAs) will be reduced to 1.00%, beginning on 1 July 2010 (from the current 1.50 %); being further
reduced to 0.10 %, effective from 1 January 2015.
Progressive reductions in nitrogen oxide (NOx) emissions from marine engines were also agreed, with the most stringent controls on so-called “Tier III” engines,
i.e. those installed on ships constructed on or after 1 January 2016, operating in Emission Control Areas.
These requirements could require modifications to Global Ship Lease’s vessels to achieve compliance. Global Ship Lease is evaluating these requirements and the
alternatives for achieving compliance. The costs to comply with these requirements may be material or significant to the company’s operations.
The operation of Global Ship Lease’s vessels is also affected by the requirements set forth in the International Management Code for the Safe Operation of Ships
and Pollution Prevention, or ISM Code, compliance with which is required under the International Convention of Safety of Life at Sea, or SOLAS. The ISM
Code requires ship-owners or any other entity such as a manager or a bareboat charterer, who has assumed the responsibility for operating and managing the
vessel, to develop and maintain a “Safety Management System,” which includes the requirements to adopt a safety and environmental protection policy;
instructions and procedures to ensure safe operation of ships and protection of the environment pursuant to international and flag state laws and regulations;
defined levels of authority and lines of communication between, and among, shore and shipboard personnel; procedures for reporting accidents and non-
conformities within the provision of the ISM Code; procedures to prepare guidelines and respond to emergency situation; and procedures for internal audits and
management reviews. The ISM Code requires that the vessel operator be issued a Document of Compliance and the vessels it operates be issued a Safety
Management Certificate, evidencing compliance by the vessel’s management with ISM Code requirements for a Safety Management System. The failure of a
ship-owner or bareboat charterer to comply with the ISM Code may subject such party to increased liability, may decrease available insurance coverage for the
affected vessels and may result in a denial of access to, or detention in, certain ports. As of December 31, 2009, each of the vessels in the fleet, and the entities
managing or owning them, were certified pursuant to requirements of ISM Code. There can be no assurance that any certification will be maintained indefinitely.
SOLAS itself specifies minimum standards for the construction, equipment and operation of ships, compatible with their safety. Flag states are responsible for
ensuring that ships under their jurisdictions comply with these requirements, and require various certificates pursuant to SOLAS as proof of such compliance.
The IMO has also adopted an International Convention for the Control and Management of Ships’ Ballast Water and Sediments, or BWM Convention. The BWM
Convention’s implementing regulations call for a phased introduction of mandatory ballast water exchange requirements beginning in 2009, to be replaced in time
with mandatory concentration limits. The BWM Convention will not enter into force until 12 months after it has been adopted by 30 IMO Member States, the
combined merchant fleets of which represent not less than 35% of the gross tonnage of the world’s merchant shipping. The BWM Convention has not yet been
ratified by the required number of states to come into force. The IMO has indicated that it may seek to postpone the deadline for inclusion of ballast water
treatment facilities on newly built ships to the end of 2011. Please see “Ballast Water Management,” below, for a discussion of possible impacts of increased
ballast water management regulation.
In 2001, the IMO adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage, or the Bunker Convention, which imposes strict
liability on ship owners for pollution damage in jurisdictional waters of convention states caused by discharges of “Bunker Oil.” The Bunker Convention defines
“Bunker Oil” as “any hydrocarbon mineral oil, including lubricating oil, used or intended to be used for the operation or propulsion of the ship, and any residues
of such oil.” The Bunker Convention also requires registered owners of ships over a certain size to maintain insurance for pollution damage in an amount equal to
the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calculated in accordance with the Convention
on Limitation of Liability for Maritime Claims of 1976, as amended). The Bunker Convention took effect on November 21, 2008.
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On September 17, 2008, the International Convention on the Control of Harmful Anti-fouling Systems on Ships, or AFSC, came into force. It prohibits the use of
harmful organo-tins in anti-fouling paints used on ships and will establish a mechanism to prevent the potential future use of other harmful substances in anti-
fouling systems. Our vessels are required to obtain certification of compliance.
Increasingly, independent agencies representing various nations and regions are adopting additional unilateral requirements on the operation of vessels in their
territorial waters. These regulations, as described below, apply to its vessels when they are in their waters and can add to the costs of operating and maintaining
those vessels as well as increasing the potential liabilities that apply to spills or releases of oil or other materials or violations of the applicable requirements.
United States
The United States Oil Pollution Act of 1990
The United States Oil Pollution Act of 1990, or OPA, establishes an extensive regulatory and liability regime for the protection and cleanup of the environment
from oil spills. OPA applies to discharges of any oil from a vessel, including discharges of fuel and lubricants and affects all owners and operators whose vessels
trade to the United States, including its territories and possessions, or whose vessels operate in United States waters, which includes the United States’ territorial
sea and its two hundred nautical mile exclusive economic zone. Although OPA is primarily directed at oil tankers (which are not owned or operated by Global
Ship Lease), it also applies to non-tanker ships, including containerships, with respect to the fuel oil, or bunkers, used to power such ships.
Under OPA, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely
from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or
threatened discharges of oil from their vessels. OPA defines these other damages broadly to include:
•
•
•
•
•
natural resources damage and the costs of assessment thereof;
real and personal property damage;
net loss of taxes, royalties, rents, fees and other lost revenues;
lost profits or impairment of earning capacity due to property or natural resources damage; and
net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards, and loss of subsistence use of
natural resources.
On July 1, 2009 the United States Coast Guard by Interim Rule increased the limits of the liability of responsible parties with effect from July 31, 2009. For any
non-tank vessel, the new limits on liability are the greater of $1,000 per gross ton or $854,400. These limits of liability do not apply if an incident was directly
caused by violation of applicable United States federal safety, construction or operating regulations or by a responsible party’s gross negligence or willful
misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with oil removal activities. Additionally, OPA
specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states
have enacted legislation providing for unlimited liability for oil spills. Global Ship Lease intends to comply with all applicable state regulations in the ports where
its vessels call.
Global Ship Lease intends to maintain pollution liability coverage insurance in the amount of $1.0 billion per incident for each of its vessels. If the damages from
a catastrophic spill were to exceed its insurance coverage it could have an adverse effect on its business and results of operation.
OPA requires owners and operators of vessels to obtain a certificate of financial responsibility by establishing and maintaining with the United States Coast
Guard, or Coast Guard, evidence of financial responsibility sufficient to meet their potential liabilities under the OPA; an owner or operator of a fleet of vessels is
required only to demonstrate evidence of financial responsibility in an amount sufficient to cover the vessels in the fleet having the greatest maximum liability
under OPA. An owner or operator may evidence its financial responsibility by showing proof of insurance, surety bond, self-insurance or guaranty. Under the
self-insurance provisions, the ship-owner or operator must have a net worth and working capital, measured in assets located in the United States against liabilities
located anywhere in the world, that exceeds the applicable amount of financial responsibility. For its vessels that are likely to enter U.S. waters, Global Ship
Lease intends to comply with the United States Coast Guard regulations by providing a certificate of responsibility from third party entities that are acceptable to
the United States Coast Guard evidencing sufficient insurance.
The United States Coast Guard’s regulations concerning certificates of financial responsibility provide, in accordance with OPA, that claimants may bring suit
directly against an insurer or guarantor that furnishes certificates of financial responsibility. In the event that such insurer or guarantor is sued directly, it is
prohibited from asserting any contractual defense that it may have had against the responsible party and is limited to asserting those defenses available to the
responsible party and the defense that the incident was caused by the willful misconduct of the responsible party. Certain organizations, which had typically
provided certificates of financial responsibility under pre-OPA laws, including the major protection and indemnity organizations, have declined to furnish
evidence of insurance for vessel owners and operators if they are subject to direct actions or required to waive insurance policy defenses. This requirement may
have the effect of limiting the availability of the type of coverage required by the Coast Guard and could increase costs of obtaining this insurance for Global Ship
Lease and its competitors.
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In addition, Title VII of the Coast Guard and Maritime Transportation Act of 2004, or CGMTA, amended OPA to require the United States Coast Guard to issue
regulations to require the owner or operator of any non-tank vessel of 400 gross tons or more that carries oil of any kind as a fuel for main propulsion, to prepare
and submit a response plan for each vessel. The United States Coast Guard has not issued such regulations yet, but has published a guidance document that allows
for the issuance of interim authorization letters until the final regulations are promulgated. The vessel response plans include detailed information on actions to be
taken by vessel personnel to prevent or mitigate any discharge or threat of discharge of oil from the vessel due to operational activities or casualties. Global Ship
Lease has plans to comply with the requirements of the CGMTA and OPA. Global Ship Lease’s vessels that call at U.S. ports have appropriate vessel response
plans filed with the United States Coast Guard and copies are available onboard.
The Comprehensive Environmental Response, Compensation, and Liability Act
The Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, governs spills or releases of hazardous substances other than
petroleum or petroleum products. CERCLA imposes joint and several liability, without regard to fault, on the owner or operator of a ship, vehicle or facility from
which there has been a release, along with other specified responsible parties. Costs recoverable under CERCLA include cleanup and removal costs, natural
resource damages and governmental oversight costs. Liability under CERCLA is generally limited to the greater of $300 per gross ton or $0.5 million unless the
incident is caused by gross negligence, willful misconduct or a violation of certain regulations, in which case liability is unlimited. These liability amounts are
included in the total financial responsibility amounts required to obtain a Coast Guard certificate of financial responsibility, as described above.
Ballast Water Management
The National Invasive Species Act, or NISA, was enacted in 1996 in response to growing reports of harmful organisms being released into United States ports
through ballast water taken on by ships in foreign ports. Under NISA, the Coast Guard requires mandatory ballast water management practices for all vessels
equipped with ballast water tanks bound for United States ports or entering United States waters and requires vessels to maintain a ballast water management plan
that is specific for that vessel and assigns responsibility to the master or appropriate official to understand and execute the ballast water management strategy for
that vessel.
Coast Guard regulations also establish penalties for ships headed to the United States that fail to submit a ballast water management reporting form, as well as
vessels bound for the Great Lakes or portions of the Hudson River that violate mandatory ballast water management requirements. The Coast Guard may now
impose a civil penalty of up to $27,500 per day or, in the case of knowing violations, Class C Felony charge for non-submittal.
In the absence of federal standards, states have enacted legislation or regulations to address invasive species through ballast water and hull cleaning management
and permitting requirements. For example, Michigan has approved a law requiring vessels to obtain a ballast water discharge permit to operate in state waters and
use certain technologies to prevent the introduction of non-native species into waters of the state. The Michigan Department of Environmental Quality has
approved four options for ballast water treatment that involve sodium hypochlorite, chlorine dioxide, ultraviolet light radiation, or de-oxygenation. The use of
these technologies may be costly for oceangoing vessels operating in Michigan ports to implement. The Sixth Circuit rejected a challenge to this law in
November 2007, and it is unclear if it will be challenged on other grounds.
Similarly, on October 10, 2007, the California governor signed into law legislation, or A.B. 740, expanding the state’s marine invasive species ballast water
regulatory program (A.B. 433, California’s Marine Invasive Species Act, which regulates the discharge and/or exchange of ballast water of vessels coming from
outside the exclusive economic zone into a California port) to regulate “hull fouling organisms.” A.B. 740 gives the State Lands Commission until 2012 to adopt
regulations requiring vessels owners and operators to use best available and economically feasible “inwater” technology to remove aquatic species from
submerged parts of vessels. Until the regulations can be implemented, A.B. 740 specifies that “hull fouling organisms,” such as barnacles, algae, mussels, and
worms that attach to the hard parts of ships, must be removed and disposed of on a regular basis. Furthermore, on October 15, 2007, the California State Lands
Commission approved regulations governing the discharge of ballast water for vessels operating in California waters, which among other things, sets limits for
the number of living organisms allowed in ballast water discharge. The regulations will be implemented on a graduated time schedule beginning on January 1,
2009, with a final performance standard of zero detectable living organisms going into effect on January 1, 2020. Other states may create other similar hull
cleaning regulations or ballast water performance standards that could increase the costs of operating in state waters of the United States.
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The Clean Water Act, or CWA, prohibits the discharge of oil or hazardous substances in United States navigable waters without a permit and imposes strict
liability in the form of penalties for any unauthorized discharges. Current Environmental Protection Agency, or EPA, regulations exempt ships in United States’
navigable waters from the requirement to obtain CWA permits for discharges of ballast water and other substances incidental to the normal operation of vessels.
However, a United States District Court ruled in 2006 that EPA lacks the authority to exclude discharges of vessel ballast water from permitting requirements
under the CWA, invalidating the blanket exemption in EPA regulations for all discharges incidental to the normal operation of a vessel as of September 30, 2008,
and directed EPA to develop a system for regulating all discharges from vessels by that date. EPA’s appeal failed and the Ninth Circuit Court of Appeals upheld
the District Court’s ruling on July 23, 2008. In response, EPA issued a Vessel General Permit, or the VGP, covering the discharges incidental to the operation of
vessels greater than 79 feet in length on December 18, 2008. Vessels must comply with the VGP by February 6, 2009. The VGP requires the use of Best
Management Practices, inspections, and monitoring of the areas of the vessel the permit addresses. States may also add additional conditions. For example,
California requires that all vessel discharges in its waters comply with numeric effluent limitations.
Changes in ballast water management rules and regulations, either in the United States or internationally (please see “International Maritime Organization”
above), could increase the cost of compliance for ocean carriers, including requiring installation of equipment of ballast water treatment systems on vessels at
substantial cost.
Clean Air Act
The Federal Clean Air Act of 1970, as amended by the Clean Air Act Amendments of 1977 and 1990, or the CAA, requires the EPA to promulgate standards
applicable to emissions of volatile organic compounds and other air contaminants. The company’s vessels are subject to vapor control and recovery requirements
when cleaning fuel tanks and conducting other operations in regulated port areas and emissions standards for compression-ignition marine engines operating in
U.S. waters. These types of engines are called “Category 3” marine diesel engines and are typically found on large oceangoing vessels. These rules are currently
limited to new engines beginning with the 2004 model year. More recently, in November 2007, the EPA issued an Advance Notice of Proposed Rulemaking
regarding its plan to propose more stringent emission standards and other related provisions for new Category 3 marine engines. The standards under
consideration are consistent with the U.S. Government’s proposal to amend Annex VI of MARPOL discussed above, by establishing more stringent standards for
vessel emissions of particulate matter, sulfur oxides, and nitrogen oxides. Certain emission standards under consideration could take effect as early as 2011. This
announcement comes as the EPA is defending a lawsuit seeking to require new limits for emissions from Category 3 marine diesel engines on U.S. and foreign-
flagged vessels operating in U.S. waters. If these amendments are implemented and apply to existing vessels (as opposed to vessels manufactured after the
effective date), we may incur costs to install equipment in these vessels to comply.
The CAA also requires states to draft State Implementation Plans, or SIPs, designed to attain national health-based air quality standards in primarily major
metropolitan and/or industrial areas. Where states fail to present approvable SIPs or SIP revisions by certain statutory deadlines, the federal government is
required to draft a Federal Implementation Plan. Several SIPs regulate emissions resulting from degassing operations by requiring the installation of vapor control
equipment on vessels. A risk exists that new regulations could require significant capital expenditures and otherwise increase our costs.
After a previous attempt to regulate the emissions of auxiliary diesel engines on ocean-going vessels was rejected by the Ninth Circuit, California’s Air Resources
Board, or CARB, approved new regulations on July 24, 2008. These regulations apply to ocean-going vessels’ main diesel engines, auxiliary engines, and
auxiliary boilers when operating within 24 miles of the California coast and require operators to use low sulfur fuels. The Office of Administrative Law approved
the rulemaking and filed it with the Secretary of State on May 29, 2009. The regulation became effective on June 28, 2009.
California also approved regulations on December 3, 2008 to reduce emissions from diesel auxiliary engines on certain ocean-going vessels while in California
ports, including container ship fleets that make 25 or more annual visits to California ports. The regulations became effective January 2, 2009 and require vessel
operators to either (1) turn off auxiliary engines for most of their stay and connect the vessel to some other source of power, most likely a shore-based grid, or
(2) use alternative control techniques to achieve equivalent emission reductions. These requirements may increase operating costs while in California ports.
European Union
In waters of the European Union, or the EU, the company’s vessels are subject to regulation EU-level directives implemented by the various nations through laws
and regulations of these requirements. These laws and regulations prescribe measures to prevent pollution, protect the environment, and support maritime safety.
For instance, the EU has adopted directives that require member states to refuse access to their ports to certain sub-standard vessels, according to vessel type, flag,
and number of previous detentions. Member states must inspect at least 25% of vessels using their ports annually and provide increased surveillance of vessels
posing a high risk to maritime safety or the marine environment. If deficiencies are found that are clearly hazardous to safety, health or the environment, the state
is required to detain the vessel until the deficiencies are addressed. Member states are also required to implement a system of penalties for breaches of these
standards.
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Our vessels are also subject to inspection by appropriate classification societies. Classification societies typically establish and maintain standards for the
construction and classification of vessels, supervise that construction is according to these standards, and carry out regular surveys of ships in service to ensure
compliance with the standards. The EU has adopted directives that provide member states with greater authority and control over classification societies,
including the ability to seek to suspend or revoke the authority of classification societies that are negligent in their duties. The EU requires member states to
monitor these organizations’ compliance with EU inspection requirements and to suspend any organization whose safety and pollution prevention performance of
the organization becomes unsatisfactory.
The EU’s directive on the sulfur content of fuels restricts the maximum sulfur content of marine fuels used in vessels operating in EU member states’ exclusive
economic zones. Under this Directive, our vessels may need to make expenditures to comply with the sulfur fuel content limits in the marine fuel they use in
order to avoid delays or other obstructions to their operations. The EU has also issued a directive adopting the IMO’s standards for the maximum sulfur content of
marine fuels used in special SOx Emission Control Areas, or ECAs, in the Baltic Sea, North Sea, and for any other seas or ports the IMO may designate as SOx
ECAs 12 months after the date of entry into force of the designation. These and other related requirements may increase our costs of operating and may affect
financial performance.
In response to the sinking of the MT Prestige and resulting oil spill in 2003, the EU adopted a directive requiring member states to impose criminal sanctions for
certain pollution discharges committed intentionally, recklessly, or by serious negligence. Penalties may include fines, imprisonment, permanent or temporary
disqualification from engaging in commercial activities, placement under judicial supervision, or exclusion from access to public benefits or aid.
The EU also authorizes member states to adopt the IMO’s Bunker Convention, discussed above, that imposes strict liability on ship owners for pollution damage
caused by spills of oil carried as fuel in vessels’ bunkers and requires vessels of a certain size to maintain financial security to cover any liability for such damage.
The EU is currently considering other proposals to further regulate vessel operations. In October 2007, the EU adopted a new Integrated Maritime Policy for the
European Union that included, in part, the development of environmentally sound end-of-life ship dismantling requirements, promotion of the use of shore-side
electricity by ships at berth in EU ports to reduce air emissions, and consideration of options for EU legislation to reduce greenhouse gas emissions from maritime
transport. Individual countries in the EU may also have additional environmental and safety requirements. It is impossible to predict what additional legislation or
regulations, if any, may be promulgated by the European Union or any other country or authority. The trend, however, is towards increasing regulation and our
expectation is that requirements will become more extensive and more stringent. Were more stringent future requirements to be put in effect in the future, they
may require, individually or in the aggregate, significant expenditures and could increase our costs of operating, potentially affecting financial performance.
It is impossible to predict what additional legislation or regulations, if any, may be promulgated by the European Union or any other country or authority.
Other Regions
The environmental protection regimes in other relatively high-income countries, such as Canada, resemble those of the United States. To the extent Global Ship
Lease’s vessels operate in the territorial waters of such countries or enter their ports, the relevant vessels would typically be subject to the requirements and
liabilities imposed in such countries. Other regions of the world also have the ability to adopt requirements or regulations that may impose additional obligations
on its vessels and may entail significant expenditures on its part and may increase the company’s costs to operate its fleet. These requirements, however, would
apply to the industry as a whole and would also affect Global Ship Lease’s competitors.
Greenhouse Gas Legislation
In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change, or the Kyoto Protocol, entered into force. Pursuant to the
Kyoto Protocol, adopting countries are required to implement national programs to reduce emissions of certain gases, generally referred to as greenhouse gases,
which are suspected of contributing to global warming. Greenhouse gas emissions from international shipping are not expressly excluded from the Kyoto
Protocol though are not included in the Annex 1 country’s national targets. The Protocol directs those countries to pursue limitation and reduction measures
through the IMO. The European Union confirmed in April 2007 and in 2009 that it plans to expand the European Union emissions trading scheme (ETS) by
adding vessels. The 2009 ETS Directive requires the EU to propose an alternate plan to reduce shipping emissions if agreement is not reached by the IMO by
December 2011. In the United States, the California Attorney General and a coalition of environmental groups petitioned the EPA in October 2007 to regulate
greenhouse gas emissions from ocean-going ships under the Clean Air Act. Legislation has been introduced into the U.S. Congress to reduce greenhouse gas
emissions in the United States. In addition, EPA’s December 2009 “endangerment finding” regarding greenhouse gases allows the EPA to begin regulating
greenhouse gas emissions under existing provisions of the federal Clean Air Act. To date, rules proposed by EPA pursuant to this authority have not involved
ocean-going vessels. Any passage of climate control legislation or other regulatory initiatives by the IMO, European Union, or individual countries where we
operate that restrict emissions of greenhouse gases from vessels could require us to make significant financial expenditures we cannot predict with certainty at
this time.
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Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002, the
Maritime Transportation Security Act of 2002, or MTSA, came into effect. To implement certain portions of the MTSA, the United States Coast Guard in July
2003 issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United
States. Similarly, in December 2002, amendments to SOLAS created a new chapter of the convention dealing specifically with maritime security. The new
chapter came into effect in July 2004 and imposes various detailed security obligations on vessels and port authorities, most of which are contained in the newly
created International Ship and Port Facilities Security Code, or ISPS Code. Among the various requirements are:
•
•
•
•
on-board installation of automatic information systems to enhance vessel-to-vessel and vessel-to-shore communications;
on-board installation of ship security alert systems;
the development of vessel security plans; and
compliance with flag state security certification requirements.
United States Coast Guard regulations are intended to align with international maritime security standards and they exempt non-United States vessels from
MTSA vessel security measures provided such vessels have on board a valid International Ship Security Certificate that attests to the vessel’s compliance with
SOLAS security requirements and the ISPS Code. Global Ship Lease has implemented various security measures addressed by SOLAS and the ISPS Code for the
vessels in its initial fleet and intends to do so in the future for the vessels of its contracted fleet.
100% Container Screening
The United States signed into law the 9/11 Commission Act on August 3, 2007. The Act requires that all containers destined to the United States be scanned by x-
ray machines before leaving port. This new requirement for 100% scanning is set to take effect in 2012, but the Secretary of the United States Department of
Homeland Security has the authority to set an earlier deadline (based on developments arising from the on-going pilot program under the SAFE-Port Act of 2006)
or to extend the deadline up to two years, to 2014. Ports that ship to the United States will likely have to install new x-ray machines and make infrastructure
changes in order to accommodate the screening requirements. Such implementation requirements may change which ports are able to ship to the United States
and shipping companies may incur significant increased costs. It is impossible to predict how this requirement will affect the industry as a whole, but changes and
additional costs can be reasonably expected.
Risk of Loss and Liability Insurance
General
The operation of any container vessel includes risks such as mechanical failure, collision, property loss, cargo loss or damage and business interruption due to
political circumstances in foreign countries, hostilities and labor strikes. In addition, there is an inherent possibility of marine disaster, including oil spills and
other environmental damages, other spills or releases, and the liabilities arising from owning and operating vessels in international trade. OPA, which imposes, in
certain circumstances, virtually unlimited liability upon owners, operators and demise charterers of vessels trading in the United States exclusive economic zone
for certain oil pollution accidents in the United States, has made liability insurance more expensive for ship owners and operators trading in the United States
market.
Global Ship Lease maintains marine hull and machinery insurance, war risks insurance, protection and indemnity cover, increased value insurance and freight,
demurrage and defense cover for all its vessels in amounts that it believes to be prudent to cover normal risks in its operations, but Global Ship Lease may not be
able to maintain these levels of coverage throughout its vessels’ useful lives. Furthermore, while Global Ship Lease believes that its insurance coverage will be
adequate, not all risks can be insured, and there can be no guarantee that any specific claim will be paid, or that Global Ship Lease will always be able to obtain
adequate insurance coverage at reasonable rates.
Hull & Machinery, Loss of Hire and War Risks Insurance
Global Ship Lease maintains marine hull and machinery and war risks insurances, which cover the risk of actual or constructive total loss, for all of its vessels. Its
vessels are each covered up to at least fair market value, which Global Ship Lease expects to assess at least annually, with certain deductibles per vessel per
incident. Global Ship Lease also maintains increased value coverage for each of its vessels under which in the event of total loss or constructive total loss of a
vessel, Global Ship Lease will be entitled to recover amounts otherwise not recoverable under its basic hull and machinery or war policies due to under-insurance.
Under the terms of its credit facility, Global Ship Lease has assigned these insurance policies to its lenders and is subject to restrictions on its use of any proceeds
there from.
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Global Ship Lease generally does not obtain loss-of-hire insurance covering the loss of revenue during extended off-hire periods. Global Ship Lease will evaluate
the need for such coverage on an ongoing basis, taking into account insurance market conditions and the employment of its vessels.
Protection and Indemnity Insurance
Protection and indemnity insurance is mutual indemnity insurance provided by mutual protection and indemnity associations, or P&I Associations, which insure
its third-party and crew liabilities in connection with its shipping activities. This includes third-party liability, crew liability and other related expenses resulting
from the injury or death of crew, passengers and other third parties, the loss or damage to cargo, claims arising from collisions with other vessels, damage to other
third-party property, pollution arising from oil or other substances and salvage, towing and other related costs, including wreck removal. Subject to the “capping”
discussed below, its coverage, except for pollution, will be unlimited. Its protection and indemnity insurance coverage for pollution will be $1.0 billion per vessel
per incident.
The International Group is comprised of 13 P&I Associations. The International Group insures approximately 90% of the world’s commercial blue-water tonnage
and has entered into a pooling agreement with each of its members to reinsure each association’s liabilities. This pooling agreement provides a mechanism for
sharing all claims up to a current cap of approximately $5.4 billion. Global Ship Lease intends to remain a member of a P&I Association that is a member of the
International Group, and as such, Global Ship Lease will be subject to calls payable to the other P&I Associations based on the International Group’s claim
records as well as the claim records of all other members of the individual P&I Associations.
C. Organizational Structure
The holding company, Global Ship Lease, Inc., is a Marshall Islands corporation. Each vessel is owned by a directly held separate wholly owned subsidiary.
Sixteen vessels are owned by companies incorporated in Cyprus and one is held by a Marshall Islands company. In addition, Global Ship Lease Services Limited,
a company incorporated in England and Wales and which is directly wholly owned by the holding company, provides administrative services to the group.
D. Property, Plants and Equipment
Global Ship Lease’s only material properties are the vessels in its fleet, which are described in Item 4.B. Global Ship Lease does not own any real property.
Item 5.
Operating and Financial Review and Prospects
A. Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations for Global Ship Lease and Global Ship Lease’s Predecessor Group, or the
Predecessor Group, should be read in conjunction with Global Ship Lease’s combined financial statements and the related notes and the financial and other
information included elsewhere in this Annual Report. The term combined financial statements refers to the combined financial statements of Global Ship Lease,
and its subsidiaries, and the Predecessor Group. The term Predecessor Group refers to the container shipping services provided by CMA CGM, and certain of its
subsidiaries, using the vessels of Global Ship Lease’s initial fleet before they were purchased by Global Ship Lease. CMA CGM and its subsidiaries are in the
business of providing container shipping services to shippers and earning revenue by carrying containerized cargo, whereas Global Ship Lease is a vessel owner
earning revenue from chartering out its vessels. Further, as a result of the Merger between Global Ship Lease and Marathon on August 14, 2008, the combined
financial statements for the years ended December 31, 2009 and 2008 are not comparable to prior periods, primarily as a result of the change in the capital and
legal structure of the company and the effect of the purchase price allocation in connection with the Merger on periods subsequent to August 14, 2008. The period
from January 1 to August 14, 2008 is described as Predecessor and August 15 to December 31, 2008 as Successor.
Overview
The combined financial statements include:
•
the carve out financial information reflecting the results and financial position of the 10 secondhand vessels and two newly built vessels (from their
dates of purchase by the Predecessor Group) as they were operated by the Predecessor Group, in its business as a container shipping company, for the
period up to the dates in December 2007 that CMA CGM sold the 10 secondhand vessels to Global Ship Lease, and the dates in January 2008 that
CMA CGM sold the two newly built vessels to Global Ship Lease;
•
the results and financial position of the 10 secondhand vessels and the two newly built vessels as they were operated by Global Ship Lease, in its
business as a vessel owner earning revenue from chartering out vessels, from the dates of the vessels’ acquisition in December 2007 and January
2008 by Global Ship Lease from CMA CGM;
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•
the results and financial position of the three secondhand vessels and one newly built vessel as they were operated by Global Ship Lease, in its
business as a vessel owner earning revenue from chartering out vessels, from the dates of the vessels’ acquisition in December 2008 by Global Ship
Lease from CMA CGM and the results and financial position of the one secondhand vessel as it was operated by Global Ship Lease, in its business as
a vessel owner earning revenue from chartering out vessels, from the date of the vessel’s acquisition in August 2009 by Global Ship Lease from
CMA CGM.
Assets, liabilities, revenues and expenses that relate to the Predecessor Group have been included where relevant in the combined financial statements. The
shipping interests and other assets, liabilities, revenues and expenses of the Predecessor Group that do not relate to vessels in Global Ship Lease’s initial fleet are
not included in the combined financial statements.
The combined financial statements have been prepared in accordance with the generally accepted accounting principles in the United States of America, which
we refer to as U.S. GAAP, and are presented in United States dollars.
This discussion contains forward-looking statements based on assumptions about Global Ship Lease’s future business. Global Ship Lease’s actual results will
likely differ materially from those contained in the forward-looking statements. See “Special Note Regarding Forward-Looking Statements.”
Global Ship Lease acquired 10 secondhand vessels in December 2007, two newly built vessels in January 2008, three secondhand vessels, one newly built vessel
in December 2008 and a further second-hand vessel in August 2009 from CMA CGM. All 17 vessels are chartered to CMA CGM under fixed-rate time charters,
with staggered expirations, for terms that range from five years to 17 years. Each charter commenced on the delivery of the relevant vessel to Global Ship Lease.
The company has also contracted to purchase two newly built vessels from German interests scheduled for delivery in the fourth quarter of 2010. These two
vessels are to be chartered to Zim for seven to eight years.
Global Ship Lease has entered into ship management agreements with its Ship Manager for the day-to-day technical management of its current fleet of vessels.
See “Business Overview—Ship Management Agreements” for a more detailed description of Global Ship Lease’s ship management agreements.
Global Ship Lease commenced its business operations in December 2007 with its acquisition of the 10 secondhand vessels from CMA CGM. Global Ship Lease’s
operations as a time charter owner differ significantly from the historical operations of the Predecessor Group upon which the Predecessor Group’s historical
carve-out financial information included in the combined financial statements is based. In particular, Global Ship Lease generates revenues primarily from charter
payments made to it by the charterers of its vessels and not from freight rates for transporting cargoes as undertaken by the Predecessor Group. Costs are also
different. Global Ship Lease’s expenses consist mainly of vessel operating expenses including for crewing, provision of lubricating oil and for routine
maintenance, as well as insurance costs and general and administrative expenses. Global Ship Lease does not bear the cost of bunker fuel or any costs associated
with loading, unloading or transporting containers. The Predecessor Group’s costs include vessel operating expenses but also voyage expenses including costs for
bunker fuel, stevedoring, provision of containers and inland transportation. Global Ship Lease believes that its contracted revenue under the fixed rate time
charters that are in place and fixed fee and capped operating costs arrangements will help provide it with a stable cash flow that is sufficient for Global Ship
Lease’s present operating requirements.
Because Global Ship Lease’s operations as ship-owner differ significantly from the business operations of the Predecessor Group as a vessel operator, trends or
performance that likely had a material effect on the Predecessor Group’s revenues will likely have limited direct impact on Global Ship Lease’s future revenues,
except to the extent that these trends are a result of changing economic conditions in the overall containership industry, which may affect the viability of Global
Ship Lease’s customers or generally affect the global demand for and the supply of containerships.
Global Ship Lease’s financial results will be largely driven by the following factors:
•
•
•
•
the continued performance of the charter agreements;
the number of vessels in Global Ship Lease’s fleet and their charter rates;
the number of days that Global Ship Lease’s vessels are utilized and not subject to drydocking, special surveys or otherwise are off-hire;
Global Ship Lease’s ability to control its expenses, including ship operating costs, ship management fees, insurance costs, drydock costs, general,
administrative and other expenses and interest and financing costs. Operating costs may vary from month to month depending on a number of
factors, including the timing of purchases of spares and stores and of crew changes; and
•
access to, and the pricing and other terms of, Global Ship Lease’s credit facility.
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Global Ship Lease has entered into long-term fixed rate time charters for all of its vessels. Global Ship Lease expects that its base revenue will be largely fixed
until (a) any of its charters expire or otherwise terminate when it will need to seek a renewal or recharter, at possibly a significantly different and lower rate
depending on market conditions at the time, or (b) it acquires additional vessels. Global Ship Lease’s shortest time charter agreements expire in December 2012
on two vessels. The charter rate that it will be able to achieve on renewal will be affected by market conditions at that time. As discussed further below,
operational matters such as off-hire days for planned maintenance or for unexpected accidents and incidents affect the actual amount of revenues Global Ship
Lease receives.
CMA CGM is currently Global Ship Lease’s only customer and charter payments from CMA CGM are Global Ship Lease’s sole source of operating cash flow.
At any given time in the future, the cash resources of CMA CGM may be diminished or exhausted, and Global Ship Lease cannot assure its shareholders that
CMA CGM will be able to make charter payments to it. In particular, CMA CGM announced in September 2009 that CMA CGM and its lenders are exploring a
potential financial restructuring and that CMA CGM is seeking to reduce and in some cases cancel certain ship deliveries. In addition, Global Ship Lease has
experienced increased delays in receiving charterhire from CMA CGM, where between one and three instalments have been outstanding. If CMA CGM is unable
to make charter payments to it, Global Ship Lease’s results of operations and financial condition will be materially adversely affected. If Global Ship Lease’s
existing charters with CMA CGM were terminated and Global Ship Lease was required to recharter at lower rates or if it failed to find new charters due to market
conditions, its results of operations and financial condition would be materially adversely affected.
Merger
On March 21, 2008, Global Ship Lease entered into a merger agreement with Marathon, GSL Holdings and CMA CGM and thereafter entered into amendments
to the merger agreement pursuant to which Marathon merged with and into GSL Holdings, its newly-formed, wholly owned Marshall Islands subsidiary, and then
Global Ship Lease merged with and into GSL Holdings, with GSL Holdings (now renamed Global Ship Lease, Inc.) continuing as the surviving company
incorporated in the Republic of the Marshall Islands. The Merger was consummated on August 14, 2008. Pursuant to the Merger, holders of shares of Marathon
common stock (other than Marathon Founders, LLC and the other initial stockholders of Marathon) received one Class A common share of Global Ship Lease for
each share of Marathon common stock issued and outstanding immediately prior to the effective time of the Merger. In respect of the aggregate 9,375,000 shares
of Marathon common stock held by them, Marathon Founders, LLC and the other initial stockholders of Marathon received in the Merger an aggregate of
2,846,906 Class A common shares of Global Ship Lease, 3,471,906 Class B common shares and warrants to acquire an aggregate of 3,056,188 Class A common
shares at an exercise price of $9.25. CMA CGM received consideration consisting of 6,778,650 Class A common shares, 3,934,050 Class B common shares,
12,375,000 Class C common shares, 1,000 Series A preferred shares, warrants to acquire 3,131,900 Class A common shares, and $18,570,135 in cash.
Critical Accounting Policies and Estimates
The combined financial statements have been prepared in accordance with U.S. GAAP, which requires Global Ship Lease to make estimates in the application of
certain accounting policies based on its best assumptions, judgments and opinions. Global Ship Lease bases these estimates on the information available to it at
the time and on various other assumptions it believes are reasonable under the circumstances. The following is a discussion of the principal accounting policies of
Global Ship Lease and the Predecessor Group, some of which involve a high degree of judgment, and the methods of their application.
For a further description of Global Ship Lease’s material accounting policies, including for the Merger, please see notes 3 and 4 to the combined financial
statements included elsewhere in this Annual Report.
Combined Financial Statements of the Vessels of Global Ship Lease’s Initial Fleet
The combined financial statements up to December 31, 2007 reflect mainly the financial position, results of operations and cash flows of the 10 secondhand
vessels of Global Ship Lease’s initial fleet as they were operated by the Predecessor Group, in its business as a containership operator, up to the dates that those
vessels were sold to Global Ship Lease by CMA CGM in December 2007. The combined financial statements up to December 31, 2008 include the two newly
built vessels for the period of the Predecessor Group’s ownership up to dates in January 2008 when they were also sold to Global Ship Lease. The relevant
financial information has been carved out of the consolidated financial statements of CMA CGM and its subsidiaries. The Predecessor Group’s business is as a
containership operating company providing cargo transportation services, not as an independent ship-owner as is Global Ship Lease’s business. Global Ship Lease
believes that the information on these vessels, including their assets, liabilities, results of operations and cash flows, reasonably represent those vessels’ financial
position, results of operations and cash flows for the Predecessor Group. However, the carve-out financial information on those vessels and their financial
positions, results of operations and cash flows are not indicative of those that would have been realized had those or all the vessels of Global Ship Lease’s initial
fleet been operated by it as an independent, stand-alone ship-owning entity for the periods presented. For example, the combined financial statements for the year
ended December 31, 2007 include only 159 ship days, all in December 2007, when the 10 secondhand vessels were owned by
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Global Ship Lease and operated by it in its business as a vessel owner chartering out its vessels on long-term time charters. These 10 vessels were owned by
Global Ship Lease for 3,660 ship days in the year ended December 31, 2008. Accordingly, the financial position, results of operations and cash flows reflected in
the combined financial statements are not indicative of those that would have been achieved had Global Ship Lease’s operated as an independent, stand-alone
entity for the periods presented or of future results.
Successor / Predecessor presentation
In accordance with SAB Topic 5-J, Global Ship Lease reports separately the historical financial information related to its Predecessor which was acquired at the
time of the Merger in August 2008. Accordingly, the combined financial statements up to December 31, 2008 include two distinct reporting periods (i) January 1,
2006 through August 14, 2008 (“Predecessor”) and (ii) August 15, 2008 through December 31, 2008 (“Successor”), which relate to the period preceding the
Merger referred to in Note 1 to combined financial statements and the period succeeding the Merger, respectively. Predecessor and Successor historical financial
information is presented on the face of the combined balance sheet, combined statements of income, cash flow and shareholders’ equity with vertical “black line”
between the Predecessor and Successor columns as these periods refer to two different entities.
Business Combination
In accordance with ASC Topic 805 “Business Combinations” (“ASC Topic 085”), the purchase method of accounting is used to account for the acquisition of
Global Ship Lease Inc. The cost of the acquisition is measured as the fair value of the assets given, equity instruments issued at the date of acquisition, plus costs
directly attributable to the acquisition. The acquired assets, assumed liabilities, contractual contingencies and contingent liabilities, are recognized and measured
at their fair value at the acquisition date. Management considered a number of factors, including valuations and appraisals, in determining the fair values of assets.
Liabilities were revalued at using appropriate then current interest rates. In addition to revaluing existing assets and liabilities, Global Ship Lease recorded certain
previously unrecognized assets and liabilities, including an intangible asset for the favorable purchase agreements related to the five vessels to be delivered post
Merger and an intangible liability for below-market charters. The sum of the amounts assigned to assets and liabilities exceeded the allocable purchase price,
creating negative goodwill. In accordance with ASC Topic 805, Global Ship Lease allocated this negative goodwill as a reduction of asset values (to vessels in
operation, other fixed assets, and intangible assets) on a pro-rata basis.
Revenue Recognition
Unlike the Predecessor Group, whose revenue was derived from freight revenue generated by cargo transportation services, Global Ship Lease’s charter revenue
is generated from long-term time charters for each vessel. The charters are regarded as operating leases and provide for a per vessel fixed daily charter rate.
Revenue is recorded as earned. Assuming Global Ship Lease’s vessels are not off-hire, Global Ship Lease’s charter revenues are fixed for the period of the current
charters and, accordingly, little judgment is required to be applied to the amount of revenue recognition.
Accounting for lease and similar transactions
Global Ship Lease’s charter hire agreements are classified as operating leases based on the facts and circumstances at their inception. In accordance with ASC
Topic 840 “Leases” , an operating lease is a lease agreement that does not transfer substantially all the risks and rewards incidental to the ownership to the lessee.
The company pays a particular attention in evaluating and applying the proper accounting treatment to lease transactions.
Vessel Lives
Vessels represent Global Ship Lease’s most significant tangible assets and Global Ship Lease states them in its financial statements at their acquisition cost (less
an amount allocated to dry dock component), less accumulated depreciation and impairment loss, if any. Following the Merger, the vessels are recorded at their
fair value less a proportion of the negative goodwill arising on the acquisition, allocated to these vessels.
Subsequent expenditures for major improvements and upgrading are capitalized, provided they appreciably extend the life, increase the earning capacity or
improve the efficiency or safety of the vessels.
Borrowing costs incurred during the construction of vessels or as part of the prefinancing of the acquisition of vessels are capitalized. Interest capitalized in the
year ended December 31, 2009 was $524 (2008: $1,643 and 2007: $833). Other borrowing costs are expensed as incurred.
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Vessels are depreciated to their estimated residual value using the straight-line method over their estimated useful lives which are reviewed on an ongoing basis to
ensure they reflect current technology, service potential and vessel structure. During the period of ownership by CMA CGM when the vessels were earning
freight revenues generated by containerized transportation, the useful life was estimated at 25 years. Following the sale of the vessels to Global Ship Lease, the
nature of operations changed significantly and the useful life was reassessed and estimated to be 30 years as Global Ship Lease anticipates that it will be able to
earn revenue from its vessels at least until they are 30 years old.
Should certain factors or circumstances cause Global Ship Lease to revise its estimate of vessel service lives in the future, depreciation expense could be
materially lower or higher. Such factors and circumstances include, but are not limited to, the extent of cash flows generated from future charter arrangements,
changes in international shipping requirements and other factors, many of which are outside of Global Ship Lease’s control.
Derivative Instruments
The Predecessor Group entered into bunker derivative agreements to reduce its exposure to cash flow risks from changing bunker prices. In accordance with the
requirements of U.S. GAAP, Global Ship Lease has recognized these derivative instruments on its balance sheet at fair value with the changes in the fair value of
these derivative instruments recognized in the statement of income or deferred in equity within “Accumulated other comprehensive income/(loss)” until
settlement of the hedge transaction. Global Ship Lease does not expect to enter into such hedging transactions in its on-going business as bunker costs are borne
by its charterers.
In connection with its credit facility and as part of overall risk management, Global Ship Lease has entered into interest rate swap agreements to reduce its
exposure to cash flow risks from floating interest rates. See Item 11 “Quantitative and Qualitative Disclosure About Market Risk—Interest Rate Risk” for more
information about Global Ship Lease’s interest rate swap agreements. The swaps are not accounted for as hedging instruments as they have not been designated as
such and are not effective in mitigating the risks of changes in interest rates under U.S. GAAP. As such swaps are not accounted for as hedging instruments,
Global Ship Lease recognizes them on its balance sheet at fair value with the changes in the fair value of these derivative instruments (mark to market adjustment)
recognized in the statement of income. Global Ship Lease will not hold or issue derivative financial instruments for trading or other speculative purposes.
Impairment of Long-lived Assets
In accordance with ASC Topic 360, “Accounting for the Impairment or Disposal of Long-Lived Assets” Global Ship Lease’s long-lived assets are regularly
reviewed for impairment. Global Ship Lease performs the impairment test at the individual vessel level pursuant to paragraph 10 of ASC Topic 360.
Due to the global economic downturn and significantly reduced demand for container shipping services and thus for containerships, combined with continuing
delivery of newbuilds, containership values have experienced dramatic declines since mid 2008. The book value of the Global Ship Lease’s fleet is likely to be
greater than its market value based on ship brokers’ valuation. Please see — Item 3 “Key Information—Risk Factors”.
To determine whether there is an impairment indicator under ASC Topic 360, Global Ship Lease compares the sum of the undiscounted future cash flows
resulting from existing charters for each vessel less estimated operating and dry dock expenses, plus the estimated undiscounted residual value of each vessel at
the end of the charter, with its book value at the end of each reporting period in order to determine if the book value of such vessel is recoverable. The residual
value at the end of the charter is determined taking into account the impact of possible future new charters and operating and dry dock expenses and/or the
eventual disposition of the vessel.
The assumptions used to determine whether the sum of undiscounted cash flows expected to result from the use and eventual disposition of the vessels exceeds
the carrying value involve a considerable degree of estimation on the part of Global Ship Lease’s management team. Actual results could differ from those
estimates, which could have a material effect on the recoverability of the vessels.
The most significant assumptions used are:
•
•
•
the determination of the possible future new charters, future market values and/or the eventual disposition of each vessel. Estimates are based on
market data and reports, including for the chartering and sale of comparable vessels, prepared by the industry press and by independent shipping
analysts and brokers, and assessment by management thereof. The assumed charter rates subsequent to initial charter are based on the 10 years
average historical charter rates and range from $18,900 for 2,207 TEUs to $60,400 for 10,960 TEUs.
the days on-hire which are estimated at a level consistent with Global Ship Lease’s on-hire statistics and peer group benchmarking;
useful life;
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•
•
future operating costs including insurance; and
the drydock expenses which are estimated based on one drydock every five years.
These assumptions are based on historical trends as well as future expectations. Although management believes that the assumptions used to evaluate potential
impairment are reasonable and appropriate, such assumptions are highly subjective.
Whenever the sum of the undiscounted future cash flows resulting from the charter of each vessel less operating expenses plus its expected residual value is
above its book value, Global Ship Lease considers that there is no indication of impairment. Whenever the sum of the undiscounted future cash flows resulting
from the charter of each vessel less operating expenses plus its expected residual value is below its book value, Global Ship Lease considers that there is a
potential impairment and perform a recoverability test, similar to the above but based on discounted cashflows. An impairment loss will be recognized if the book
value of the vessel exceeds the sum of the discounted cash flows expected to result from the use and eventual disposition of the vessel.
As of December 31, 2009, Global Ship Lease concluded that the undiscounted sum of the undiscounted future cash flows resulting from the charter of each vessel
less operating expenses plus its expected residual value exceeded the vessel’s book value and accordingly the recoverability test of the impairment analysis was
not required as no individual impairment of vessels existed.
An impairment indication, requiring the Company to recognize an impairment loss based on discounted cashflows, would exist for certain vessels if the
forecasted charter rates were 60% less than the average historical charter rates assumed from the end of the initial charter term for the remaining lives of the
vessels.
Drydocking
Global Ship Lease’s drydocking costs are recognized as a component of the cost of the related vessel, depreciated to the date of the next drydocking. Global Ship
Lease’s vessels are drydocked approximately every five years for major repairs and maintenance that cannot be performed while the vessels are operating. Costs
associated with the drydocks are capitalized as a component of the cost of the relevant vessel as they occur and are amortized on a straight line basis over the
period to the next anticipated drydock. Other expenditures relating to maintenance and repairs are expensed when incurred.
Upon initial purchase, an element of the purchase price is allocated to the drydock component and is amortized on a straight line basis to the next anticipated
drydocking.
Costs capitalized as part of the drydock include costs directly associated with the required regulatory inspection of the ship, its hull and its machinery and for the
defouling and repainting of the hull. Any cost of repair to hull or machinery that extends useful life is capitalized. Other repair costs are expensed. Two vessels
were drydocked in 2009 for a total cost of $1.7 million. One vessel was drydocked in 2008 for a total cost of $1.5 million. In 2007, three vessels were drydocked
by the Predecessor Group for a total cost of $4.7 million.
Share based compensation
Global Ship Lease has awarded restricted stock units to its employees which vest, based on service conditions only, over a period of time up to three years from
the award date. In addition, half of the base compensation paid to the directors for 2009 and for 2008 (from their appointment) was in the form of restricted stock
units which vest, based on service conditions only, annually in arrears. The fair value of restricted stock unit grants is determined by reference to the quoted stock
price on the date of grant, as adjusted for estimated dividends forgone until the restricted stock units vest. Compensation expense is recognized based on a graded
expense model over the vesting period.
Recent accounting pronouncements
Management does not believe that there are recently issued, but not yet effective accounting pronouncements, if currently adopted, would have a material impact
on the combined financial statements of Global Ship Lease.
Year ended December 31, 2009 Compared to Year ended December 31, 2008
Comparison between these two periods is of somewhat limited value as operations in the year ended December 31, 2009 were comprised entirely of Global Ship
Lease’s on-going business of owning and chartering out containerships under time charters whereas operations in the year ended December 31, 2008 included for
a few days in January 2008 the results for two vessels when they were owned and operated by the Predecessor Group earning revenue from the transportation of
containerized cargo. Further, as a result of the accounting for the Merger on August 14, 2008, the year ended December 31, 2008 is reported as a Predecessor
period, prior to the Merger, and a Successor period, after the Merger. The capital and legal structure of Global Ship Lease changed significantly on the Merger,
including Global Ship Lease becoming listed on the New York Stock Exchange.
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Total operating revenue
Operating revenue was $148.7 million for the year ended December 31, 2009 compared to $58.0 million for the period from January 1 to August 14, 2008,
including time charter revenue of $55.9 million and voyage revenue of $2.1 million, and $39.1 million for the period from August 15 to December 31, 2008 all
related to the time charter business. The total time charter revenue for 2008 was $95 million.
Time charter revenue reflects income under the fixed rate time charters in effect. The significant increase in time charter revenue between 2008 and 2009 reflects
a full year’s contribution of the three secondhand vessels and one newly built vessel purchased by Global Ship Lease in December 2008 and the contribution of
the secondhand vessel purchased in August 2009. Certain time charter rates were also increased with effect from April 1 and August 12, 2008. Ownership days in
2009 were 5,968 compared to 4,416 in 2008 (1,717 for the Successor and 2,699 for the Predecessor periods). There were 74 planned and unplanned off-hire days
in 2009 compared to 45 in 2008 resulting in a utilization rate of 99%. Of the off-hire days, 32 were for the planned drydocking of CMA CGM Matisse in August
and CMA CGM Utrillo in November/December 2009. In 2008 15 off-hire days were for the planned drydocking of the Delmas Keta in March.
Voyage revenue of $2.1 million in 2008 is the revenue earned by the Predecessor Group in carrying cargo on the two newly built vessels up to their dates of sale
to Global Ship Lease in January 2008.
Operating expenses
Total operating expenses totaled $87.0 million for the year ended December 31, 2009 (or 58% of operating revenue) compared to $36.1 million for the period
from January 1 to August 14, 2008 (or 62% of operating revenue) and $24.2 million for the period from August 15 to December 31, 2008 (or 62% of operating
revenue). Operating expenses can be analyzed as follows:
•
Voyage expenses: Voyage expenses, which are associated only with the Predecessor Group’s activity of earning freight revenue, were $1.9 million in
2008 relating only to the two newly built ships for the part of January whilst they were owned by the Predecessor Group. There were no voyage
expenses in 2009.
•
•
•
•
Vessel expenses: Vessel expenses, which relate to the operation of the vessels themselves, were $41.4 million for 2009 (or 28% of operating revenue)
compared $18.1 million for the period from January 1 to August 14, 2008 (or 31% of operating revenue) of which $17.9 million related to the time
charter business of Global Ship Lease and $0.2 million related to the Predecessor Group’s business, and $11.9 million for the period from August 15
to December 31, 2008 (or 30% of operating revenue) all related to the time charter business. The increase in vessel operating expenses in 2009 for
the time charter business is due to the full year’s effect of the three secondhand vessels and one newly built vessel purchased by Global Ship Lease in
December 2008 and the of the secondhand vessel purchased in August 2009.
Depreciation: Depreciation was $37.3 million for 2009 (or 25% of operating revenue) compared to $12.2 million for the period from January 1 to
August 14, 2008 (or 21% of operating revenue) of which $11.9 million related to the time charter business of Global Ship Lease and $0.3 million
related to the Predecessor Group’s business, and was $8.7 million for the period from August 15 to December 31, 2008 (or 22% of operating
revenue) all related to the time charter business. Depreciation in 2009 was higher than 2008 mainly due to the effect of the full year effect of the four
vessels purchased in December 2008 and the secondhand vessel purchased in August 2009.
General and Administrative: General and administrative expenses in 2009 were $8.7 million (or 6% of operating revenue) compared to $3.8 million
for the period from January 1 to August 14, 2008 (or 7% of operating revenue), of which $2.3 million related to the time charter business of Global
Ship Lease and $1.5 million related to the Predecessor Group’s business, and $3.7 million for the period from August 15 to December 31, 2008 (or
9% of operating revenue) all related to the time charter business. The increase in general and administrative expenses after August 14, 2008 reflects
Global Ship Lease becoming a publicly listed company which carries incremental costs together with the costs of stock based incentive plans which
were $2.5 million in 2009 compared to $1.2 million in the period from August 15 to December 31, 2008.
Other operating (income) expense: Other operating income was $0.4 million in 2009 compared to an expense of $0.1 million for the period from
January 1 to August 14, 2008, of which $(0.2) million income related to the time charter business of Global Ship Lease and $0.3 million expense
related to bunker hedging activities in the Predecessor Group’s business, and $(0.1) million income for the period from August 15 to December 31,
2008 all related to the time charter business. Other operating income related to the time charter business is miscellaneous revenue mainly from
carrying passengers and sundry recharges under the time charters.
Operating Income
As a consequence of all preceding items, operating income was $61.7 million in 2009 compared to $21.9 million for the period from January 1 to August 14,
2008, of which $24.0 million related to the time charter business of Global Ship Lease and $2.1 million loss related to the Predecessor Group’s business, and
$14.9 million for the period from August 15 to December 31, 2008 all related to the time charter business.
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Interest Income
Interest income on cash deposits made by Global Ship Lease in 2009 was $0.5 million compared to $0.4 million for the period from January 1 to August 14, 2008
all related to the time charter business of Global Ship Lease, and $0.4 million for the period from August 15 to December 31, 2008 also all related to the time
charter business.
Interest Expense
Interest expense was $24.2 million for 2009 (or 16% of operating revenue) compared to $17.6 million for the period from January 1 to August 14, 2008 (or 30%
of operating revenue) all of which related to the time charter business of Global Ship Lease and $3.8 million for the period from August 15 to December 31, 2008
(or 10% of operating revenue) also all related to the time charter business. The substantial reduction in interest cost after August 14, 2008 is due to the changes in
capital structure of Global Ship Lease on completion of the Merger including cancellation of the fixed rate $176.9 million shareholder loan and repayment of
$115.0 million drawing under Global Ship Lease’s credit facility.
Realized and unrealized gain on derivatives
During 2008, Global Ship Lease entered into derivative interest rate agreements to fix the interest rate on debt drawn or anticipated to be drawn under its credit
facility. A total of $580.0 million of anticipated core debt was swapped into fixed rate debt at an average rate of 3.59%. Of the notional amount of $580.0 million,
$494.0 million of the swaps were effective by December 31, 2008 with a further $41.0 million becoming effective in July 2009 and the balance of $45.0 million
becoming effective in 2010 consistent with anticipated purchases of further vessels. All swap agreements continue until at least March 2013 at the full notional
amount, without amortization.
None of the interest rate agreements qualify for hedge accounting, therefore, the net changes in the fair value of the interest rate derivative assets and liabilities at
each reporting period are reflected in the current period financial statements as unrealized gains or losses on derivatives. Cash flows related to interest rate
derivatives (initial payments of derivatives and periodic cash settlements) are included within cash flows from investing activities in the combined statement of
cash flows. In 2008, initial payments in respect of derivatives of $4.7 million were made.
Realized gains or losses from interest rate derivatives are recognized in the statement of income concurrent with cash settlements. In addition, the interest rate
derivatives are “marked to market” each reporting period to determine the fair values which generate unrealized gains or losses. The unrealized gain on interest
rate derivatives in 2009 was $17.9 million compared to $3.1 million for the period from January 1 to August 14, all related to the time charter business of Global
Ship Lease, and $54.9 million loss for the period from August 15 to December 31, 2008 also all related to the time charter business.
Taxes on Income
Taxes on income were $0.4 million or 1% of income before income taxes. Taxes on income in 2008 were not material.
Net Income
As a consequence of all preceding items net income was $42.4 million for 2009 compared to $7.4 million for the period from January 1 to August 14, 2008, of
which $9.5 million related to the time charter business of Global Ship Lease and $(2.1) million loss related to the Predecessor Group’s business, and $(44.0)
million loss for the period from August 15 to December 31, 2008 all related to the time charter business.
Year ended December 31, 2008 Compared to Year ended December 31, 2007
Comparison between these two periods is of limited value as operations in the year ended December 31, 2008 were comprised almost entirely of Global Ship
Lease’s on-going business of owning and chartering out containerships under time charters, whereas operations in the year ended December 31, 2007 were
comprised almost entirely of the Predecessor Group earning revenue from the transportation of containerized cargo. Further, as a result of the accounting for the
Merger on August 14, 2008, the year ended December 31, 2008 is reported as a Predecessor period, prior to the Merger, and a Successor period, after the Merger.
The capital and legal structure of Global Ship Lease changed significantly on the Merger, including Global Ship Lease becoming listed on the New York Stock
Exchange.
Total operating revenue
Operating revenue was $58.0 million for the period from January 1 to August 14, 2008, including time charter revenue of $55.9 million and voyage revenue of
$2.1 million, and $39.1 million for the period from August 15 to December 31, 2008 all related to the time charter business. This compares to time charter
revenue of $2.9 million and voyage revenue of $332.2 million for the year ended December 31, 2007.
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Time charter revenue reflects income under the fixed rate time charters in effect. The significant increase in time charter revenue between 2007 and 2008 reflects
a full year’s contribution of the 10 secondhand vessels purchased by Global Ship Lease in December 2007 and the contribution of the two newly built vessels
purchased in January 2008. Certain time charter rates were also increased with effect from April 1 and August 12, 2008. Ownership days in 2008 were 4,416
(1,717 for the Successor and 2,699 for the Predecessor periods) compared to 159 in 2007. There were 45 planned and unplanned off-hire days in 2008 resulting in
a utilization rate of 99%. Of the off-hire days, 15 were for the planned drydocking of the Delmas Keta in March. In 2007, there was one day off-hire and
utilization was 99%.
Voyage revenue of $2.1 million in 2008 is the revenue earned by the Predecessor Group in carrying cargo on the two newly built vessels up to their dates of sale
to Global Ship Lease in January 2008. Voyage revenue at $332.2 million in 2007 is significantly higher as it represents the Predecessor Group’s freight revenue
carrying containerized cargo on the 10 vessels owned by it throughout almost all of 2007 and the two newly built vessels from their delivery to the Predecessor
Group in November and December 2007 that are now owned by Global Ship Lease.
Operating expenses
Total operating expenses totaled $36.1 million for the period from January 1 to August 14, 2008 (or 62% of operating revenue) and $24.2 million for the period
from August 15 to December 31, 2008 (or 62% of operating revenue). This compares to $304.9 million in 2007 (or 91% of operating revenue). The significant
drop in total operating expenses is due to the change in business model and the elimination of voyage expenses, which were $249.5 million in 2007, from the cost
base. Operating expenses can be analyzed as follows:
•
Voyage expenses: Voyage expenses, which are associated only with the Predecessor Group’s activity of earning freight revenue, were $1.9 million in
2008 relating only to the two newly built ships for the part of January whilst they were owned by the Predecessor Group. Voyage expenses of $249.5
million in 2007 (or 74% of operating revenue) related to 10 secondhand vessels for the entire period and the two newly built vessels for part of the
year.
•
Vessel expenses: Vessel expenses, which relate to the operation of the vessels themselves, were $18.1 million for the period from January 1 to
August 14, 2008 (or 31% of operating revenue) of which $17.9 million related to the time charter business of Global Ship Lease and $0.2 million
related to the Predecessor Group’s business, and $11.9 million for the period from August 15 to December 31, 2008 (or 30% of operating revenue) all
related to the time charter business. In 2007, vessel operating expenses were $24.0 million (or 7% of operating revenue) of which $0.7 million related
to Global Ship Lease’s time charter business and $23.2 million related to the Predecessor Group’s business. The increase in vessel operating expenses
in 2008 for the time charter business and the reduction in these costs related to the Predecessor Group’s business is due to the transfer of vessels from
the Predecessor Group to Global Ship Lease.
•
Depreciation: Depreciation was $12.2 million for the period from January 1 to August 14, 2008 (or 21% of operating revenue) of which $11.9
million related to the time charter business of Global Ship Lease and $0.3 million related to the Predecessor Group’s business, and was $8.7 million
for the period from August 15 to December 31, 2008 (or 22% of operating revenue) all related to the time charter business. In 2007, depreciation was
$16.1 million (or 5% of operating revenue) of which $0.6 million related to the time charter business of Global Ship Lease and $15.5 million related
to the Predecessor Group’s business. Depreciation in 2008 was higher than 2007 mainly due to the effect of the two newly built vessels being
included for a full year in 2008 together with the result of the step-up in the value of vessels under purchase accounting on the Merger offset by the
impact of the application of the 30 year vessel life in Global Ship Lease’s ownership compared to 25 years in the Predecessor Group’s ownership.
•
General and Administrative: General and administrative expenses in 2008 were $3.8 million for the period from January 1 to August 14, 2008 (or
7% of operating revenue), of which $2.3 million related to the time charter business of Global Ship Lease and $1.5 million related to the Predecessor
Group’s business, and $3.7 million for the period from August 15 to December 31, 2008 (or 9% of operating revenue) all related to the time charter
business. The increase in general and administrative expenses after August 14, 2008 reflects Global Ship Lease becoming a publicly listed company
which carries incremental costs together with the costs of stock based incentive plans which were $1.2 million in the period from August 15 to
December 31, 2008. In 2007, general and administrative expenses were $17.8 million (or 5% of operating revenue) of which $0.3 million related to
the time charter business of Global Ship Lease and $17.4 million related to the Predecessor Group’s business. General and administrative expenses
for the Predecessor Group represent an allocation of the total CMA CGM group overhead and are thus not comparable to the costs incurred by
Global Ship Lease as a standalone entity.
•
Other operating (income) expense: Other operating expense was $0.1 million for the period from January 1 to August 14, 2008, of which $(0.2)
million income related to the time charter business of Global Ship Lease and $0.3 million expense related to bunker hedging activities in the
Predecessor Group’s business, and $(0.1) million income for the period from August 15 to December 31, 2008 all related to the time charter business.
Other operating income related to the time charter business is miscellaneous revenue mainly from carrying passengers. In 2007, other operating
income was $(2.3) million and was entirely attributable to the Predecessor Group and related to bunker hedging.
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Operating Income
As a consequence of all preceding items, operating income was $21.9 million for the period from January 1 to August 14, 2008, of which $24.0 million related to
the time charter business of Global Ship Lease and $2.1 million loss related to the Predecessor Group’s business, and $14.9 million for the period from August 15
to December 31, 2008 all related to the time charter business. This compares to $30.2 million in 2007 of which $1.2 million related to the time charter business of
Global Ship Lease and $28.9 million related to the Predecessor Group’s business.
Interest Income
Interest income on cash deposits made by Global Ship Lease in 2008 was $0.4 million for the period from January 1 to August 14, 2008 all related to the time
charter business of Global Ship Lease, and $0.4 million for the period from August 15 to December 31, 2008 also all related to the time charter business. There
were no such deposits in 2007.
Interest Expense
Interest expense was $17.6 million for the period from January 1 to August 14, 2008 (or 30% of operating revenue) all of which related to the time charter
business of Global Ship Lease and $3.8 million for the period from August 15 to December 31, 2008 (or 10% of operating revenue) also all related to the time
charter business. The substantial reduction in interest cost after August 14, 2008 is due to the changes in capital structure of Global Ship Lease on completion of
the Merger including cancellation of the fixed rate $176.9 million shareholder loan and repayment of $115.0 million drawing under Global Ship Lease’s credit
facility. Interest expense in 2007 was $13.4 million (or 4% of operating revenue) of which $1.1 million relates to the time charter business and $12.3 million
relates to the Predecessor Group’s on borrowings associated with the relevant vessels.
Realized and unrealized gain on derivatives
During 2008, Global Ship Lease entered into derivative interest rate agreements to fix the interest rate on debt drawn or anticipated to be drawn under its credit
facility. A total of $580.0 million of anticipated core debt was swapped into fixed rate debt at an average rate of 3.59%. Of the notional amount of $580.0 million,
$494.0 million of the swaps were effective by December 31, 2008 with the balance of $86.0 million becoming effective in 2009 and 2010 when debt is
anticipated to be drawn to purchase the one secondhand vessel in July 2009 and the two newly built vessels in fourth quarter 2010. All swap agreements continue
until at least March 2013 at the full notional amount, without amortization.
None of the interest rate agreements qualify for hedge accounting, therefore, the net changes in the fair value of the interest rate derivative assets and liabilities at
each reporting period are reflected in the current period financial statements as unrealized gains or losses on derivatives. Cash flows related to interest rate
derivatives (initial payments of derivatives and periodic cash settlements) are included within cash flows from investing activities in the combined statement of
cash flows. In 2008, initial payments in respect of derivatives of $4.7 million were made.
Realized gains or losses from interest rate derivatives are recognized in the statement of income concurrent with cash settlements. In addition, the interest rate
derivatives are “marked to market” each reporting period to determine the fair values which generate unrealized gains or losses. The unrealized gain on interest
rate derivatives in 2008 was $3.1 million for the period from January 1 to August 14, all related to the time charter business of Global Ship Lease, and $54.9
million loss for the period from August 15 to December 31, 2008 also all related to the time charter business. Unrealized gains amounted to $9.1 million in 2007.
Taxes on Income
Taxes on income were not material.
Net Income
As a consequence of all preceding items net income was $7.4 million for the period from January 1 to August 14, 2008, of which $9.5 million related to the time
charter business of Global Ship Lease and $(2.1) million loss related to the Predecessor Group’s business, and $(44.0) million loss for the period from August 15
to December 31, 2008 also all related to the time charter business compared to $16.8 million in 2007 of which $0.1 million related to the time charter business
and $16.7 million to the Predecessor Group.
B. Liquidity and Capital Resources
Year ended December 31, 2009 Compared to Year ended December 31, 2008
For the year ended December 31, 2009 Global Ship Lease’s operating activities were comprised entirely of the chartering out its vessels under time charters.
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Net cash provided by operating activities was $72.9 million in 2009 reflecting mainly net income of $42.4 million, depreciation of $37.3 million, amortization of
deferred charges $3.1 million, share based compensation $2.5 million less $1.5 million amortization of intangible liability, $4.3 million deterioration in net
working capital, $4.8 million change in fair value of interest rate derivatives net of settlement of hedges which do not qualify for hedge accounting and $1.7
million payment of drydock costs.
The cash settlement of interest rate derivatives was $13.1 million. CMA CGM Berlioz was purchased in August 2009 for a total cash cost of $83.6 million,
financed by $57.0 million of borrowings under the credit facility and the balance from cash on hand.
In November 2009 $10.9 million of borrowings were repaid. Professional fees and other costs associated with the amendments to the credit facility that were
secured in 2009 totaled $5.4 million.
After paying a dividend in respect of fourth quarter 2008 in March 2009 totaling $12.4 million, the net increase in cash and cash equivalents during 2009 was
$4.4 million resulting in closing cash of $30.8 million.
Year ended December 31, 2008 Compared to Year ended December 31, 2007
For the year ended December 31, 2008 Global Ship Lease’s operating activities were comprised almost entirely of the chartering out its vessels under time
charters. The combined financial statements comprise two distinct reporting periods, the Predecessor period before the Merger, which completed on August 14,
2008, and the Successor period from that date.
Net cash provided by operating activities was $20.7 million in the period from January 1 to August 14, 2008 reflecting net income of $7.4 million, depreciation
and amortization expense of $12.6 million, $5.1 million improvement in net working capital less $3.0 million change in fair value of interest rate derivatives net
of settlement of hedges which do not qualify for hedge accounting and $1.5 million payment of drydock costs.
The cash settlement of interest rate derivatives was $4.9 million. The two newly built vessels were purchased in January for $188.7 million, financed by $188.0
borrowings under the credit facility which had been made in December 2007 with the proceeds being placed on deposit.
The net change in cash for the period January 1 to August 14, 2008 was an increase of $14.4 million leaving cash at the end of the period of $16.3 million.
Net cash provided by operating activities for the period from August 15 to December 31, 2008 was $14.0 million reflecting the net loss of $44.0 million,
depreciation and amortization expense of $8.9 million, $55.5 million non cash change in fair value of interest rate derivatives net of settlement of hedges which
do not qualify for hedge accounting, $1.1 million non cash charge for stock based compensation less $7.5 million settlement of accounts payable and other
liabilities mainly associated with the Merger.
The cash settlement of interest rate derivatives was $0.6 million. Net current liabilities of $6.5 million (net of cash of $16.3 million) were acquired in the Merger
and $317.4 million was released from the trust account. $147.1 million was used to retire stock in connection with the Merger and $115.0 million of long term
debt was repaid. Amendment and other fees relating to the credit facility totaling $3.9 million were paid in connection with the Merger.
Warrant proceeds of $3.0 million were received and placed on restricted deposit. Four vessels were purchased in December 2008 for $257.4 million cash (in
addition to the $99 million that had been prepaid through the issuance of 12,375,000 common shares to CMA CGM pursuant to the Merger). The cash payment
was mainly financed by additional drawings under the credit facility of $256 million. A deposit of $15.5 million was paid for the two vessels anticipated to be
purchased in fourth quarter 2010 and $15.6 million of dividends were paid.
The net change in cash for the period August 15, 2008 to December 31, 2008 was an increase of $25.8 million leaving cash at the end of the period of $26.4
million.
For the year ended December 31, 2007, Global Ship Lease’s operating activities, largely those of the Predecessor Group until Global Ship Lease’s acquisition of
the 10 secondhand vessels in December 2007, generated $56.6 million. This amount reflects net income of $16.8 million, depreciation and amortization expenses
of $18.3 million, $9.1 million change in the fair value of financial derivative instruments less payment of drydock costs of $4.7 million. Improvements in working
capital contributed $17.0 million.
For the year ended December 31, 2007, net cash used in Global Ship Lease’s and the Predecessor Group’s investing activities amounted to $183.8 million, almost
entirely being the acquisition of the two newly built vessels for $183.7 million.
For the year ended December 31, 2007, net cash received from Global Ship Lease’s and the Predecessor Group’s financing activities was $129.1 million.
Drawings under Global Ship Lease’s credit facility were $401.1 million of which $188.0 million was placed on deposit pending the acquisition of the two newly
built vessels in January 2008. A shareholder loan totaling $176.9 million was received from CMA CGM. Out of these inflows, costs of $5.9 million for the credit
facility were paid and $146.2 million debt relating to certain vessels when owned by the Predecessor Group was repaid. The remaining cash outflow of $108.8
million is comprised (i) a
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reduction of $11.9 million in the amount due to CMA CGM within stockholders equity and (ii) a deemed distribution of $96.9 million relating to the difference
between the purchase price of the initial fleet paid by Global Ship Lease and the value at which the initial fleet was recorded in the Predecessor Group’s financial
statements at the dates of sale.
Overall, the net increase in cash and cash equivalents in 2007 was $1.9 million.
Global Ship Lease’s Credit Facility
Global Ship Lease has a senior secured credit facility with Fortis Bank (Nederland) N.V. (the “Agent”), Citibank Global Markets Limited, HSH Nordbank AG,
Sumitomo Mitsui Banking Corporation, Brussels Branch, KFW, DnB Nor Bank ASA and Bank of Scotland, which Global Ship Lease refers to as its credit
facility. Global Ship Lease drew funds under its credit facility to finance in part the purchase of its vessels from CMA CGM. All of Global Ship Lease’s vessel-
owning subsidiaries are borrowers and guarantors jointly and severally guaranteeing Global Ship Lease’s obligations under the credit facility.
Credit Facility Amendment
Under the terms of the Credit Facility Amendment, effective as of August 20, 2009, the credit facility effectively became a term loan of approximately $600
million with a final maturity date of August 14, 2016. Following the Credit Facility Amendment, there is no undrawn capacity under the credit facility.
The credit facility has a leverage ratio test which provides that, if the leverage ratio exceeds 75%, the Agent may require a prepayment of the borrowings or the
delivery of additional security to the extent necessary to reduce the leverage ratio to 75%.
Due to the global economic downturn and significantly reduced demand for container shipping services and containerships, combined with continued delivery of
newbuildings, containership values have experienced dramatic declines since mid 2008. Purchase and sale transactions in the containership market have been
very limited, confined primarily to small vessels and, in instances where such transactions have been completed, the prices have been significantly lower than
comparable transactions in the past. No newbuilding orders have been placed for many months and many ship brokers have not been providing certificates of
market value due to the disrupted market.
Due to the possibility that Global Ship Lease would exceed the maximum permitted leverage ratio under the credit facility as a result of the declines in charter-
free market values of its vessels, Global Ship Lease’s lenders agreed to enter into the Credit Facility Amendment. Under the Credit Facility Amendment, the
maximum 75% leverage ratio will not apply until the leverage ratio is first tested after the expiration of the waiver period which is up to and including
November 30, 2010. Consequently the first such test is scheduled to be as of April 30, 2011. In addition, and in connection with the purchase of the CMA CGM
Berlioz for $82.0 million, which was completed in August 2009, the Credit Facility Amendment permitted drawings of up to $42.0 million under the main credit
facility and up to an additional $20.0 million as a newly created Over Advance Portion. In August, $42 .0 million was drawn under the main credit facility and
$15.0 million was drawn under the Over Advance Portion. The $25.0 million balance of the purchase price was met from available cash. The Credit Facility
Amendment provides that borrowings under the Over Advance Portion will be paid quarterly commencing November 2009 with free cash in excess of $20.0
million determined as of the previous month end. The Over Advance Portion is required to be fully prepaid by June 30, 2010. The credit facility will be repaid
quarterly commencing June 30, 2010 with free cash in excess of $20.0 million determined as of the previous month end subject to a minimum $40.0 million
prepayment per rolling four-quarters as long as the leverage ratio is, or is deemed to be, over 75%. When the leverage ratio becomes 75% or less, scheduled
repayments will be set at $10.0 million per quarter.
No additional indebtedness is permitted until the Over Advance Portion is repaid in full, other than for the purpose of financing the purchase of the two contracted
vessels from German interests.
If any additional capital is raised, 25% of such additional capital, net of expenses, must be used to prepay borrowings under the credit facility. This provision
terminates when the repayment profile of the credit facility reduces to 18 years or lower, based on the market value and weighted average age of the vessels. In
the event of a sale of a vessel or a total loss or constructive total loss of a vessel, the proceeds received from such sale, total loss or constructive total loss must be
used to prepay borrowings under the credit facility.
Further, the undrawn portion of the credit facility amounting to approximately $200.0 million was cancelled and Global Ship Lease has agreed that it will not
declare or pay any dividends to common shareholders during this waiver period or thereafter until the leverage ratio falls to 75% or below.
In connection with the Credit Facility Amendment, CMA CGM has agreed not to reduce its holding of common shares in Global Ship Lease below the current
level of approximately 24.4 million common shares at least until November 30, 2010 and to defer the redemption of the $48.0 million preferred shares until after
the final maturity of the credit facility in August 2016.
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General Borrowing Terms
Borrowings under the credit facility bear interest at a rate of the margin over one, three, six, nine or 12 month United States Dollar LIBOR, or such other periods
as the Agent may agree. The margin depends on the “leverage ratio,” which is defined as the ratio of the aggregate amount outstanding under its credit facility, net
of surplus cash held in the retention account, to the aggregate charter-free market value of the vessels securing the credit facility plus the value of other security
held. The charter-free market value of a vessel is calculated semi-annually in April and November as the arithmetic average of valuations determined by two
independent sale and purchase brokers acceptable to the Agent. If only one such valuation is available at the relevant time, then the result of that valuation will be
used to assess the leverage ratio until a second valuation, to be sought monthly, becomes available and the two valuations can be averaged. Should no current
valuations be available at the relevant time, then the leverage ratio will be assumed to be over 100%. The margin is fixed at 3.50% until the leverage ratio is first
tested after November 30, 2010. Set forth below is the margin that applies for the relevant leverage ratio once the fixed margin period expires.
Leverage Ratio
Up to 65%
Greater than 65% to 75%
Greater than 75%
Margin
2.50%
3.00%
3.50%
During the continuance of any principal or interest default, the margin on the overdue amounts increases by 2% per annum. Pursuant to the terms of the credit
facility, Global Ship Lease must hedge at least 50% of the amounts outstanding under the credit facility. Global Ship Lease hedged, prior to the Merger, the
majority of the amounts outstanding under the credit facility.
Until undrawn commitments were cancelled pursuant to the Credit Facility Amendment, Global Ship Lease paid a commitment fee of 0.50% per annum on the
undrawn portion of the credit facility. Global Ship Lease is responsible for the duly justified costs properly incurred in connection with the establishment and the
maintenance of the credit facility.
Global Ship Lease is permitted to make early prepayments that can reduce subsequent prepayment obligations. Any amount outstanding under the credit facility
at the final maturity date in August 2016 must be repaid in one installment.
See “Business Overview—Credit Facility” for further details on Global Ship Lease’s credit facility, including a description of the security provided, covenants
and events of default.
Utilization of the credit facility
Global Ship Lease financed the purchase of the 10 secondhand vessels in December 2007 with $213.1 million of borrowings under the credit facility and
drawings of $171.9 million under a shareholder loan made between Global Ship Lease and CMA CGM. In addition, Global Ship Lease drew approximately $5.0
million under the shareholder loan to pay lenders’ fees and expenses in connection with the credit facility bringing the total borrowings under the shareholder loan
to $176.9 million. Prior to December 31, 2007, Global Ship Lease drew a further $188.0 million under the credit facility, which was placed on restricted cash
deposit, in order to pay for the two newly built vessels of Global Ship Lease’s initial fleet purchased in January 2008. Total drawings under the credit facility as of
December 31, 2007 were $401.1 million. The shareholder loan of $176.9 million was cancelled on the closing of the Merger and $115 million of the drawings
under the credit facility were prepaid.
Pursuant to the Merger, $99.0 million of the total $355.0 million purchase price of the four vessels acquired in December 2008 was prepaid by the issuance of
12,375,000 Class C common shares to CMA CGM. These shares converted to Class A common shares on January 1, 2009. The balance of the purchase price of
$256.0 million was settled from further borrowings under Global Ship Lease’s credit facility. As of December 31, 2008, total drawings under the credit facility
were $542.1 million.
An additional $57.0 million was borrowed in August 2009 under the credit facility to purchase the CMA CGM Berlioz, the final ship to be purchased pursuant to
the asset purchase agreement with CMA CGM, consisting of drawings of $42.0 million under the main credit facility and $15.0 million under the newly created
Over Advance Portion. The $25.0 million balance of the purchase price of $82.0 million was met from available cash. In November 2009, $10.9 million of the
Over Advance Portion was prepaid leaving a total balance outstanding on the credit facility of $588.2 million at December 31, 2009 of which $68.3 million has
been presented as current.
As a result of the Credit Facility Amendment, the undrawn portion of the credit facility was cancelled. Alternate sources of financing are required in order to
complete the purchases of the two 4,250 TEU newbuildings for total contracted price of $77.4 million per vessel, of which 10% has been paid and 90% is to be
paid upon delivery, which is expected to be in the fourth quarter of 2010.
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Working capital and dividends
Global Ship Lease’s net cash flows from operating activities corresponds directly with the number of vessels under charter, days on-hire, vessel charter rates,
operating expenses, drydock costs, interest and other financing costs and general and administrative expenses. Global Ship Lease’s net cash flows from operating
activities will not be exposed to the same fluctuations in operating expenses to which the Predecessor Group’s cash flows were subject. Pursuant to Global Ship
Lease’s ship management agreements, Global Ship Lease has agreed to pay its Ship Manager an annual management fee of $114,000 per vessel and to reimburse
the Ship Manager for operating costs it incurs on Global Ship Lease’s behalf up to a quarterly cap pursuant to the global expense agreement (other than
drydocking expenses and insurance premiums which will not be subject to the cap). Charterhire is payable by the initial Charterer 15 days in advance and
estimated ship management costs are payable monthly in advance. Although Global Ship Lease can provide no assurances (see “Risk Factors – Risks Related to
our Business – Global Ship Lease is highly dependent on charter payments from CMA CGM”), it expects that its cash flow from its chartering arrangements will
be sufficient to cover its ship management costs and fees, interest payments, commitment fees and other financing costs under its credit facility, insurance
premiums, vessel taxes, general and administrative expenses and other costs and any other working capital requirements for the short and medium term and
planned drydocking expenses. Based on such arrangements, Global Ship Lease expects that its operating cash flow will be reasonably stable for at least the initial
three year terms of the ship management agreements and will be sufficient to fund its working capital requirements.
The Credit Facility Amendment provides that Global Ship Lease may not declare or pay common dividends before November 30, 2010 or until the leverage ratio
is no more than 75%, whichever is later. As a result, Global Ship Lease has suspended its previous policy of paying dividends to common shareholders.
The Credit Facility Amendment provides that borrowings under the Over Advance Portion totaling $15.0 million will be repaid quarterly commencing November
2009 with free cash in excess of $20.0 million determined as of the previous month end. The Over Advance Portion is required to be fully prepaid by June 30,
2010. The credit facility will be repaid quarterly commencing June 30, 2010 with free cash in excess of $20.0 million determined as of the previous month end
subject to a minimum $40.0 million prepayment per rolling four-quarter basis as long as the leverage ratio is, or is deemed to be, over 75%. When the leverage
ratio becomes 75% or less, scheduled repayments will be set at $10.0 million per quarter.
Further, the $48.0 million Preferred Shares are mandatorily redeemable at par by quarterly installments of approximately $4.0 million commencing August 31,
2016.
Over the five years following the closing of the Merger, Global Ship Lease estimates that the average cost of the first drydocking of each of its vessels will be
$1,150,000. Global Ship Lease has included a schedule of the next anticipated drydocking date for each of Global Ship Lease’s vessels in the section of this
Annual Report entitled “Business Overview—Inspection by Classification Societies.”
Global Ship Lease’s other liquidity requirements include repaying the credit facility quarterly commencing June 30, 2010, financing the purchase of the two 4,250
TEU newbuildings from German interests which is expected to be in the fourth quarter 2010 and the repaying the remaining principal balance of its credit facility
at the final maturity date in August 2016. In addition to funds generated by the business, Global Ship Lease may require new borrowings, issuances of equity or
other securities, or a combination of the former and the latter to meet its obligations and will likely require such further funding to meet all of its repayment
obligations under the credit facility.
C. Research and Development
Not applicable.
D. Trend Information
Container shipping is a cyclical industry, with the demand for container shipping services driven by global trade. Between 1997 and 2007 containerized trade
exhibited compound annual growth of approximately 10%, with a period of super-cyclical growth from 2002 to mid-2008 fuelled partly by exports from China.
This period of high growth, combined with operators seeking economies of scale achievable with ever larger vessels, led to a significant orderbook of new
containerships. In December, 2008 the orderbook was estimated to represent approximately 50% of existing global capacity measured in TEU. By March 2010 it
had fallen to approximately 34%, with almost no additional newbuildings contracted in the preceding 12 months.
Vessel newbuilding prices, second hand values and charter rates have tended to be closely correlated and are all strongly influenced by the dynamics of supply
and demand. A theoretical 3,500 TEU containership newbuilding could have been contracted for approximately $34 million in first quarter 2002, with contract
prices peaking in third quarter 2008 at around $67 million for essentially the same vessel. Over this period, second hand values for a 10 year old vessel of
comparable size increased from approximately $21 million to $46 million, peaking at around $50 million in first quarter 2008. During the same timeframe, spot
market charter rates for such a vessel moved from approximately $10,000 per day to $26,000 per day, peaking at $44,000 per day in first quarter 2005.
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The global economic crisis has adversely impacted containerized trade, with demand contracting by approximately 9% in 2009. Liner operators’ published results
for 2009 have been poor, reflecting the challenging market environment with both lower trade volumes and significantly reduced freight rates. However, first
quarter 2010 has seen improvement in both volume and freight rates although this modest recovery is fragile.
For charter-owners, the adverse impact of reduced demand has been compounded in the near term by supply-side growth. As of March 2010 approximately 10%
of the existing containership fleet was assessed to be idle, with the substantial orderbook still to be delivered. In March 2010, spot market charter rates for a 3,500
TEU vessel were around $7,000 per day, improved on a low of approximately $5,500 per day in fourth quarter 2009 but substantially below peak rates. Vessel
values declined significantly during 2009 but may have bottomed out and, for certain size categories, both asset values and charter rates have shown some slight
upward momentum during first quarter 2010.
E. Off-Balance Sheet Arrangements
Except as described under Item 5F (Contractual Obligations) and Item 11 (Quantitative and Qualitative Disclosure About Market Risk), Global Ship Lease does
not have any other transactions, obligations or relationships that could be considered material off-balance sheet arrangements.
F. Contractual Obligations
The contractual obligations presented below represent Global Ship Lease’s estimates of future payments under fixed contractual obligations and commitments as
of December 31, 2009. Changes in Global Ship Lease’s business needs or in interest rates, as well as actions by third parties and other factors, may cause these
estimates to change. These estimates are necessarily subjective and Global Ship Lease’s actual payments in future periods are likely to vary from those presented
in the table.
Contractual Obligations
Long term debt obligations (1)
Interest on long term debt obligations (1)(2)
Net obligation under Interest Rate Swaps (3)
Ship management agreements (4)
Vessel purchase agreements (5)
Mandatorily Redeemable Preferred Shares and related interest (6)
Less
than 1
year
1-3 years
3-5 years
(in millions of U.S. dollars)
More
than 5
years
Total
$ 68.3 $ 85.3 $ 80.0 $354.6 $588.2
105.5
87.5
2.5
139.3
56.1
$250.2 $ 160.2 $ 131.3 $437.2 $979.1
28.4
20.5
—
—
2.4
35.4
36.5
0.6
—
2.4
18.8
13.7
—
—
50.0
22.9
16.8
1.9
139.3
1.2
(1) Global Ship Lease did not assume any of the Predecessor Group’s debt relating to the vessels in Global Ship Lease’s fleet. Amounts shown in the table
reflect debt and interest payable to Fortis Bank (Nederland) N.V., or Agent, Citibank Global Markets Limited, HSH Nordbank AG, Sumitomo Mitsui
Banking Corporation, Brussels Branch, KFW, DnB Nor Bank ASA and Bank of Scotland under Global Ship Lease’s credit facility. Interest on the
outstanding portion of Global Ship Lease’s credit facility will be charged at the rate of the margin over one, three, six, nine or 12 month LIBOR as
determined by the Agent. During the continuance of any principal or interest payment default, the margin will increase by 2%. Global Ship Lease expects
that interest on the balance outstanding will be payable at least quarterly. Long term debt obligations do not include the effect of the financing of the two
vessels to be acquired from German interests in fourth quarter 2010. The consequences of the Credit Facility Amendment are reflected in the table.
Remaining borrowings under the Over Advance Portion of $4.1 million were prepaid in February 2010. The credit facility will be repaid quarterly
commencing June 30, 2010 with free cash in excess of $20.0 million determined as of the previous month end subject to a minimum $40.0 million
prepayment per rolling four-quarters as long as the leverage ratio is, or is deemed to be, over 75%. When the leverage ratio becomes 75% or less, scheduled
repayments will be set at $10.0 million per quarter. For the purposes of the above table, it is assumed that the leverage ratio becomes 75% or less when the
leverage ratio is next tested as at April 30, 2011. The Credit Facility Amendment cancelled all undrawn commitments and therefore there is no availability
under the facility to finance the purchase of the two vessels from German interests.
The estimated contractual interest obligation has been calculated using an assumed all in interest rate of 4.00% being estimated LIBOR of 0.50% plus a
spread of 3.50% being the margin set by the Credit Facility Amendment, effectively up to April 30, 2011 then reduced to an assumed all in interest rate of
3.50% including a spread of 3.00% on the assumption that the leverage ratio becomes 75% or less. The Credit Facility Amendment contemplates a
continuation of a spread of 3.50% if the leverage ratio remained over 75%. As all undrawn commitments were cancelled by the Credit Facility Amendment,
commitment fees are no longer payable.
The estimated net obligations under Global Ship Lease’s interest rate swaps have been calculated using a LIBOR of 0.5% and assumes that the
counterparties do not exercise their options to terminate, as at March 17, 2013, three contracts totaling $191.0 million but that these continue to maturity of
December 17, 2016.
(2)
(3)
(4) Obligations under Global Ship Lease’s ship management agreements include an annual management fee of $114,000 per vessel and do not include the
reimbursement of daily operating costs incurred on Global Ship Lease’s behalf.
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(5) On September 11, 2008, Global Ship Lease entered into contracts to purchase from German interests two 4,250 TEU containerships for a price of
approximately $77.4 million each. The vessels are expected to be delivered in December 2010. A deposit of 10% was paid when the purchase contracts
were signed and the balance of 90%, or approximately $139.3 million, is due upon delivery. As a result of the Credit Facility Amendment, Global Ship
Lease has no capacity to borrow any further amounts under the credit facility to fund the remainder of the purchase price of the two newbuildings, and as
such, must secure other sources of financing to meet its obligations to the sellers under the contracts. Global Ship Lease’s obligations under the purchase
contracts are not conditioned on either the availability of financing or on the performance of the charters with Zim which are due to come into effect on
delivery of each vessel.
In connection with the Credit Facility Amendment, CMA CGM agreed to defer the redemption of the $48.0 million Preferred Shares until after the final
maturity date of the Credit Facility such that the Preferred Shares are mandatorily redeemable at par by quarterly installments of approximately $4.0 million
commencing August 31, 2016. The interest obligation has been determined using an all in rate of 2.50% being estimated LIBOR of 0.5% plus the
contractual spread of 2.0%.
(6)
Item 6.
Directors, Senior Management and Employees
A. Directors and Senior Management
Our directors and executive officers as of the date of this annual report and their ages as of December 31, 2009 are listed below:
Name
Michael S. Gross
Howard Boyd
Angus R. Frew
Guy Morel
Jeffrey D. Pribor
Ian J. Webber
Susan J. Cook
Thomas A. Lister
Vivek Puri
Age Position
48 Chairman of the Board
65 Director
51 Director
60 Director
52 Director
52 Chief Executive Officer
53 Chief Financial Officer
40 Chief Commercial Officer
52 Chief Technical Officer
Michael S. Gross. Michael S. Gross has been a director of Global Ship Lease since its inception and was appointed Chairman in September 2008. Mr. Gross has
been chairman of the board of directors of Solar Capital Ltd since December 2007, and chief executive officer and president since November 2007. From July
2006 through approximately the first quarter 2009, Mr. Gross was a partner in Magnetar Capital Partners LP, the holding company for Magnetar Financial LLC.
Between February 2004 and February 2006, Mr. Gross was the president and chief executive officer of Apollo Investment Corporation, a publicly traded business
development company that he founded and on whose board of directors and investment committee he served as chairman from February 2004 to July 2006, and
was the managing partner of Apollo Investment Management, L.P., the investment adviser to Apollo Investment Corporation. From 1990 to February 2006,
Mr. Gross was a senior partner at Apollo Management, L.P., a private equity firm which he founded in 1990 with five other persons. In addition, from 2003 to
February 2006, Mr. Gross was the managing partner of Apollo Distressed Investment Fund, an investment fund he founded to invest principally in non-control
oriented distressed debt and other investment securities of leveraged companies. Mr. Gross currently also serves on the boards of directors of Saks, Inc. and
Jarden Corporation.
Howard Boyd. Howard Boyd has been a director of Global Ship Lease since August 2008. In 1996, Mr. Boyd was named chief executive officer of Safmarine, a
container liner operator based in Antwerp, which was purchased by AP Moller-Maersk in 1999. Mr. Boyd took a leading role in the takeover and continued as
chief executive officer of the separate Safmarine entity until his retirement in 2004. His career with Safmarine began in 1970 when he joined as a tanker
accountant. Mr. Boyd held a variety of positions with Safmarine, including financial controller, USA trade executive, chief operating officer of the bulk division
and bulk director. He became a member of the Safmarine board of directors in 1988. Mr. Boyd was appointed a consultant to AP Moller-Maersk, continuing as a
director of Safmarine, from 2004 to 2008. During this period, he served on the Audit and Remuneration Committees. Mr. Boyd has a Bachelor of Commerce from
University of Cape Town and qualified as a South African Chartered Accountant.
Angus R. Frew. Angus R. Frew has been a director of Global Ship Lease since August 2008. Mr. Frew has been chief executive of the British Chamber of
Shipping since July 2009 and was president and chief executive officer from 2003 until early 2008 of GE SeaCo SRL, a joint venture between GE Capital and
Sea Containers Ltd and one of the largest global container leasing companies. Mr. Frew was a director of the Institute of International Container Lessors from
2003 until early 2008, serving as chairman in 2004, and a director of the Container Owners’ Association from 2007 to early 2008. Mr. Frew was an officer of Sea
Containers Ltd from 2003 to 2005 and senior vice president of its container division. From 1990 to 2002, Mr. Frew held senior management positions in the
beverages industry with Grand Metropolitan Plc, Diageo Plc and The Seagram Company Ltd. After qualifying as a British Chartered Accountant in 1983,
Mr. Frew held senior financial positions in a number of small entrepreneurial businesses in the IT consultancy, design and retail industries. Mr. Frew has an
honors degree in chemistry from the University of Durham.
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Guy Morel. Guy Morel has been a director of Global Ship Lease since August 2008. Mr. Morel is the general secretary of InterManager, the International
Association of Shipmanagers. From 2005 to 2007, he was a professor of corporate finance and director of development at the International University of Monaco.
From 1993 to 2004, he was the president and chief operating officer of MC Shipping Inc, a company quoted on the American Stock Exchange, and involved in
the ownership and time chartering of containerships and LPG carriers. Between 1979 and 1993, Mr. Morel was one of the founders, a director and a shareholder
of V.Ships Inc., a leading shipmanagement group, where he was a vice president in charge of strategic planning and marketing. Prior to 1979, he was a consultant
with Data Resources Inc., an American consulting group involved in econometric modeling and economic forecasting. Mr. Morel holds a Bachelor’s Degree in
civil engineering from Ecole Centrale de Paris and an MBA from Harvard Business School.
Jeffrey D. Pribor. Jeffrey D. Pribor has been a director of Global Ship Lease since August 2008. Mr. Pribor is currently executive vice president and the chief
financial officer of General Maritime Corporation. Prior to that, from 2002 to 2004, Mr. Pribor was managing director and president of DnB NOR Markets, Inc.,
the U.S. investment banking division of DnB NOR Bank ASA, responsible for mergers and acquisitions, strategic advisory services and U.S. capital market
activities for the bank’s shipping, offshore, logistics and energy clients. From 2001 to 2002, Mr. Pribor was managing director and group head of transportation
banking at ABN AMRO, Inc. where he was responsible for all commercial and investment banking activities for shipping and other transportation companies in
North America. From 1996 to 2001, Mr. Pribor was managing director and sector head of transportation and logistics investment banking for ING Barings. He
also worked for over 10 years in the mergers and acquisitions group at Merrill Lynch, and as an attorney in the corporate and banking law practice of Milbank,
Tweed, Hadley and McCloy. Mr. Pribor holds a B.A. from Yale University and a J.D. and an M.B.A. from Columbia University.
Ian J. Webber. Upon the completion of the Merger, Mr. Webber became the Chief Executive Officer of Global Ship Lease. From 1979 to 1996, Mr. Webber
worked for PriceWaterhouse, the last five years of which he was a partner. From 1996 to 2006, Mr. Webber served as the Chief Financial Officer and a director of
CP Ships Limited, a subsidiary of Canadian Pacific Limited until 2001 and thereafter a public company listed on the New York and Toronto stock exchanges until
its acquisition by TUI A.G. in 2005. Mr. Webber is a graduate of Cambridge University.
Mr. Webber was named, along with his former employer CP Ships Limited and other officers of that company, as a defendant in a securities class action case
before the United States District Court for the Middle District of Florida (the “Court”). The consolidated amended class action complaint alleged violations of
Section 10(b) and Rule 10b-5 of the Exchange Act against all defendants and Section 20(a) of the Exchange Act against the individual defendants. The parties
have reached an agreement to settle this class action proceeding in its entirety. Under the terms of the settlement, Mr. Webber denies all wrongdoing, is not
making any payment, and will be fully released from any liability in this matter. The settlement was given final approval by the Court on October 21, 2008. One
objector appealed the Court’s final approval of the settlement to the 11th Circuit Court of Appeals. On August 13, 2009, the 11th Circuit dismissed the objector’s
appeal. All time for further appeal has expired and a joint motion was filed on November 30, 2009 to dismiss a separate appeal from the district court’s dismissal
of the complaint that had been stayed pending final approval of the settlement. The 11 Circuit granted the parties’ joint motion to dismiss the appeal with
prejudice on December 16, 2009. Mr. Webber was also named, along with CP Ships Limited and several of its officers and directors, as a defendant in three
purported securities class actions in Canada (the “Canadian Actions”). The Canadian Actions allege similar claims to those raised in the United States securities
class action. The parties have reached an agreement to settle the Canadian Actions in their entirety. Under the terms of the settlement, Mr. Webber denies all
wrongdoing, is not making any payment, and is fully released from any liability in this matter. The settlement of the Canadian Actions received final approval by
the Quebec Superior Court on January 18, 2010 and by the Ontario Superior Court of Justice on February 3, 2010.
th
Susan J. Cook. Upon the completion of the Merger, Ms. Cook became the Chief Financial Officer of Global Ship Lease. From 1986 to 2006, Ms. Cook worked
for The Peninsular and Oriental Steam Navigation Company and served as Group Head of Specialized Finance from 2003 to 2006, Head of Structured Finance
from 1999 to 2003, Deputy Group Treasurer from 1994 to 1999 and Treasury Manager from 1989 to 1993. She is a Chartered Management Accountant and a
member of the Association of Corporate Treasurers. Ms. Cook graduated from Brunel University and received a Master of Science from Oxford University.
Thomas A. Lister. Upon the completion of the Merger, Mr. Lister became the Chief Commercial Officer of Global Ship Lease. From 2005 until 2007, Mr. Lister
was Senior Vice President at DVB Group Merchant Bank (Asia) Ltd, responsible for developing DVB’s Singapore ship fund and leasing project. Before that,
from 2004 to 2005, he worked for the German KG financier and ship owning group Nordcapital as Director of Business Development. From 1991 to 2002,
Mr. Lister worked for a number of shipping companies in both South America and the United States. Mr. Lister graduated from Durham University and holds an
MBA from INSEAD.
Vivek Puri. In November 2008 Mr. Puri was appointed as Chief Technical Officer of Global Ship Lease. Prior to joining Global Ship Lease, Mr. Puri was Senior
Vice President and Chief Technical Officer for British Marine PLC UK. Before that he was Chief Technical Officer at Synergy Marine Cyprus, where he was
responsible for the technical and commercial operations of a rapidly growing fleet of containerships. Mr. Puri spent 26 years with the Wallem Group, a global
ship management company, where he held several positions including Managing Director of Wallem Ltd UK. Mr. Puri graduated from the Marine Engineering
College India in 1978. He is a Chartered engineer, a Chartered marine engineer and a Fellow of the Institute of Marine Engineers and Scientists.
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B. Compensation
Employment Agreements and Executive Compensation of Global Ship Lease
Global Ship Lease Services Limited, Global Ship Lease’s wholly owned subsidiary, entered into an employment agreement with Mr. Webber and, pursuant to the
terms of an inter-company agreement between Global Ship Lease and Global Ship Lease Services Limited, Mr. Webber serves as Global Ship Lease’s Chief
Executive Officer. Pursuant to his employment agreement, Mr. Webber receives an annual salary of £250,000 and is eligible to receive a bonus payment up to an
annual maximum of 50% of his salary at the discretion of Global Ship Lease Services Limited.
The agreement is terminable by Mr. Webber if he provides not less than six months advance written notice to Global Ship Lease Services Limited, or by Global
Ship Lease Services Limited if it provides not less than 12 months advance written notice to him (subject to exceptions in the case of summary termination).
Global Ship Lease Services Limited has the right to terminate Mr. Webber at any time and in its absolute discretion by paying Mr. Webber a sum equal to his
salary and contractual benefits for the relevant period of notice. If Mr. Webber terminates his employment agreement for “good reason” following a “change of
control” (each as defined in the employment agreement) he will be entitled to receive payment in lieu of salary and contractual benefits for the 12 month notice
period, together with any accrued but unpaid bonus.
The agreement also provides that, during his employment or for a period of one year thereafter, Mr. Webber will not, among other actions, solicit or attempt to
solicit certain employees or certain customers of Global Ship Lease (or one of its group companies) or be involved in any relevant business in competition with
Global Ship Lease (or one of its group companies).
Global Ship Lease Services Limited entered into an employment agreement with Ms. Cook and, pursuant to the inter-company agreement, Ms. Cook serves as its
Chief Financial Officer. Pursuant to her employment agreement, Ms. Cook receives an annual salary of £160, 000 (£135,000 up to December 31, 2009) and is
eligible to receive a bonus payment up to an annual maximum of 25% of her salary at the discretion of Global Ship Lease Services Limited.
The agreement is terminable by Ms. Cook if she provides not less than six months advance written notice to Global Ship Lease Services Limited, or by Global
Ship Lease Services Limited if it provides not less than nine months advance written notice to her (subject to exceptions in the case of summary termination).
Pursuant to the terms of her employment agreement, Global Ship Lease Services Limited has the right to terminate Ms. Cook at any time and in its absolute
discretion by paying Ms. Cook a sum equal to her salary and contractual benefits for the relevant period of notice. If Ms. Cook terminates her employment
agreement for “good reason” following a “change of control” (each as defined in the employment agreement) she will be entitled to receive payment in lieu of
salary and contractual benefits for the nine-month notice period, together with any accrued but unpaid bonus.
The agreement also provides that, during her employment or for a period of one year thereafter, Ms. Cook, will not, among other actions, solicit or attempt to
solicit certain employees or certain customers of Global Ship Lease (or one of its group companies) or be involved in any relevant business in competition with
Global Ship Lease (or one of its group companies).
Global Ship Lease Services Limited entered into an employment agreement with Mr. Lister and, pursuant to the inter-company agreement, Mr. Lister serves as its
Chief Commercial Officer. Pursuant to his employment agreement, Mr. Lister receives an annual salary of £150, 000 (£135,000 up to December 31, 2009) and is
eligible to receive a bonus payment up to an annual maximum of 25% of his salary at the discretion of Global Ship Lease Services Limited.
The agreement is terminable by Mr. Lister if he provides not less than three months advance written notice to Global Ship Lease Services Limited, or by Global
Ship Lease Services Limited if it provides not less than six months advance written notice to him (subject to exceptions in the case of summary termination).
Pursuant to the terms of his employment agreement, Global Ship Lease Services Limited will have the right to terminate Mr. Lister at any time and in its absolute
discretion by paying him a sum equal to his salary and contractual benefits for the relevant period of notice. If Mr. Lister terminates his employment agreement
for “good reason” following a “change of control” (each as defined in the employment agreement) he will be entitled to receive payment in lieu of salary and
contractual benefits for the six-month notice period, together with any accrued but unpaid bonus.
The agreement also provides that, during his employment or for a period of six months thereafter, Mr. Lister, will not, among other actions, solicit or attempt to
solicit certain employees or its certain customers of Global Ship Lease (or one of its group companies) or be involved in any relevant business in competition with
Global Ship Lease (or one of its group companies).
Global Ship Lease Services Limited entered into an employment agreement with Mr. Puri and, pursuant to the inter-company agreement, Mr. Puri serves as its
Chief Technical Officer. Pursuant to his employment agreement, Mr. Puri receives an annual salary of £110, 000 (£85,000 up to December 31, 2009) and is
eligible to receive a bonus payment up to an annual maximum of 25% of his salary at the discretion of Global Ship Lease Services Limited.
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The agreement is terminable by Mr. Puri if he provides not less than three months advance written notice to Global Ship Lease Services Limited, or by Global
Ship Lease Services Limited if it provides not less than six months advance written notice to him (subject to exceptions in the case of summary termination).
Pursuant to the terms of his employment agreement, Global Ship Lease Services Limited will have the right to terminate Mr. Puri at any time and in its absolute
discretion by paying him a sum equal to his salary and contractual benefits for the relevant period of notice. If Mr. Puri terminates his employment agreement for
“good reason” following a “change of control” (each as defined in the employment agreement) he will be entitled to receive payment in lieu of salary and
contractual benefits for the six-month notice period, together with any accrued but unpaid bonus.
The agreement also provides that, during his employment or for a period of 12 months thereafter, Mr. Puri, will not, among other actions, solicit or attempt to
solicit certain employees or its certain customers of Global Ship Lease (or one of its group companies) or be involved in any relevant business in competition with
Global Ship Lease (or one of its group companies).
Compensation of Directors of Global Ship Lease
The Chairman of the board of directors receives an annual fee of $150,000, consisting up to December 31, 2009 of $75,000 in cash and an annual restricted stock
grant with a grant date value of $75,000. From January 1, 2010, the annual fee consists of $120,000 in cash and an annual restricted stock grant with a grant date
value of $30,000. The other directors of Global Ship Lease receive an annual fee of $100,000, consisting up to December 31, 2009 of $50,000 in cash and an
annual restricted stock grant with a grant date value of $50,000. From January 1, 2010, the annual fee consists of $80,000 in cash and an annual restricted stock
grant with a grant date value of $20,000. The Chairman of the audit committee receives an additional fee of $15,000 and each member of the audit committee an
additional $7,500. The Chairmen of the governance and nominating committee and the compensation committee each receive an additional $5,000 and each
member receives an additional $2,500. In addition, each director is reimbursed for out-of-pocket expenses in connection with attending meetings of the board of
directors or committees.
2008 Equity Incentive Plan
Global Ship Lease adopted the 2008 Equity Incentive Plan (the “Plan”), which entitles employees, consultants and directors of Global Ship Lease and its
subsidiaries to receive options, stock appreciation rights, stock grants, stock units and dividend equivalents. The following description of the Plan is a summary of
the material terms of the Plan.
The Plan is administered by the board of directors of Global Ship Lease or a committee of the board of directors. Subject to adjustment as provided below, the
maximum aggregate number of Class A common shares that may be delivered pursuant to awards granted under the Plan during the 10-year term of the Plan is
1,500,000. The maximum number of Class A common shares with respect to which awards may be granted to any participant in the Plan in any fiscal year is
500,000 per participant. If an award granted under the Plan is forfeited, or otherwise expires, terminates or is canceled without the delivery of shares, then the
shares covered by such award will again be available to be delivered pursuant to other awards under the Plan.
In the event that Global Ship Lease is subject to a change of control, the Plan administrator in its discretion may make such adjustments and other substitutions to
the Plan and outstanding awards under the Plan as it deems equitable or desirable in its sole discretion.
The exercise price for options cannot be less than 100% of the fair market value on the date of grant. The maximum term of each stock option agreement shall not
exceed 10 years from the date of the grant.
Stock appreciation rights, or SARs, may provide for a maximum limit on the amount of any payout notwithstanding the fair market value on the date of exercise
of the SAR. The exercise price of a SAR shall not be less than 100% of the fair market value on the date of grant. The SAR Agreement shall also specify the
maximum term of the SAR which shall not exceed 10 years from the date of grant.
Stock grants may be issued with or without cash consideration under the Plan. The holder of a stock grant awarded under the Plan shall have the same voting,
dividend and other rights as the company’s other Class A common shareholders. The Plan administrator may provide a participant who holds stock grants with
dividends or dividend equivalents payable in cash, Class A common shares or other property.
Settlement of vested stock units may be in the form of cash, shares or any combination of both, as determined by the Plan administrator at the time of the grant of
the stock units. Methods of converting stock units into cash may include (without limitation) a method based on the average fair market value of shares over a
series of trading days. The holders of stock units shall have no voting rights.
Subject to the provisions of the Plan, awards granted under the Plan may include dividend equivalents. The Plan administrator may determine the amounts, terms
and conditions of any such awards provided that they comply with applicable laws.
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The Plan became effective as of the closing of the Merger. No award may be granted under the Plan after the tenth anniversary of the date of shareholder approval
of the Plan.
In August 2008, the Global Ship Lease board of directors granted 375,000 restricted shares to Mr. Webber, 202,500 restricted shares to Ms. Cook and 202,500
restricted shares to Mr. Lister under the Plan, which are expected to vest over a three-year period. One third of the award vested over 20 business days
commencing mid September 2009, one third is expected to vest on the second anniversary of the Merger and one third on the third anniversary. In November
2008, Mr. Puri was been granted 80,000 restricted shares, half of which vested over 20 business days commencing mid September 2009 and half of which is
expected to vest on the second anniversary of the Merger. No further awards have been made.
C. Board Practices
Global Ship Lease’s board of directors is divided into three classes with one class of directors being elected in each year and each class serving a three-year term.
The term of office of the first class of directors, consisting of Mr. Morel and Mr. Pribor, expired at the first annual meeting of stockholders held in July 2009.
They were re-elected to serve until the Annual Meeting to be held in 2012.
The term of office of the second class of directors, consisting of Mr. Boyd and Mr. Frew, expires at the second annual meeting of stockholders. The term of office
of the third class of directors, consisting of Mr. Gross, expires at the third annual meeting of stockholders.
Director Independence
Global Ship Lease’s board of directors has determined that Messrs. Pribor, Frew and Morel are “independent directors” as such term is defined in Rule 10A-3 of
the Exchange Act and the rules of the NYSE.
Board Committees
Global Ship Lease’s board of directors has formed an audit committee, a compensation committee, and a governance and nominating committee.
Audit Committee
Global Ship Lease’s audit committee consists of Messrs. Pribor, Frew and Morel, each of whom is “independent” as defined in Rule 10A-3 of the Exchange Act
and the rules of the NYSE. In addition, Global Ship Lease’s board of directors has determined that Mr. Pribor is an “audit committee financial expert” as that term
is defined under Item 401 of Regulation S-K of the Securities Exchange Act of 1934, as amended.
Financial Experts on Audit Committee
The audit committee will at all times be composed exclusively of “independent directors” who, as required by the NYSE listing standards, are able to read and
understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement.
In addition, Global Ship Lease has certified to the NYSE that the committee has, and will continue to have, at least one member who has past employment
experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the
individual’s financial sophistication. The board of directors has determined that Mr. Pribor satisfies the NYSE’s definition of financial sophistication and also
qualifies as an “audit committee financial expert,” as defined under rules and regulations of the SEC.
Compensation Committee
U.S. issuers are required to have a compensation committee that is comprised entirely of independent directors. Although as a foreign private issuer this rule does
not apply to Global Ship Lease, we have a compensation committee. Global Ship Lease’s compensation committee consists of Messrs. Boyd, Frew, Gross and
Pribor. The compensation committee is responsible for and reports to the board of directors on the evaluation and compensation of executives, oversees the
administration of compensation plans, reviews and determines director compensation and prepares any report on executive compensation required by the rules
and regulations of the SEC.
Nominating and Corporate Governance Committee
Global Ship Lease’s nominating and corporate governance committee consists of Messrs. Boyd, Gross and Morel. The nominating and corporate governance
committee reports to the board of directors on and is responsible for issues succession planning and the appointment, development and performance evaluation of
the members of the board and senior executives of Global Ship Lease. It also assesses the adequacy and effectiveness of Global Ship Lease’s corporate
governance guidelines, reviewing and recommending changes to the board whenever necessary.
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Code of Business Conduct and Ethics
Global Ship Lease has adopted a code of business conduct and ethics (“Code of Ethics”) that applies to its officers, employees and directors. More information on
the Code of Ethics and board committee charters is available on Global Ship Lease’s website (www.globalshiplease.com) and in print to any shareholder upon
request.
Exemptions from NYSE Corporate Governance Rules
As a foreign private issuer, we are exempted from certain corporate governance rules that apply to domestic companies under NYSE listing standards. The
following are the significant ways in which our corporate governance practices differ from those followed by domestic companies:
•
•
we hold annual meetings of shareholders under the Business Corporations Act of the Republic of the Marshall Islands, similar to NYSE
requirements; and
in lieu of obtaining shareholder approval prior to the adoption of equity compensation plans, the full board of directors approves such adoption.
D. Employees
At December 31, 2009, the company had five employees.
E. Share Ownership
See Item 7.A for information regarding beneficial ownership by our directors and executive officers.
Item 7.
Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth information regarding the beneficial ownership of Global Ship Lease common shares as of April 30, 2010 by:
•
•
•
each person known by Global Ship Lease to be the beneficial owner of more than 5% of its outstanding common shares;
each of Global Ship Lease’s officers and directors; and
all of Global Ship Lease’s officers and directors as a group.
Except as otherwise indicated, each person or entity named in the table has sole voting and investment power with respect to all shares of Global Ship Lease
common shares shown as beneficially owned, subject to applicable community property laws. As of April 30, 2010, an aggregate of 54,236,423 Global Ship
Lease Class A and Class B common shares were issued and outstanding.
Percentage ownership calculations for beneficial ownership excluding IPO warrants, sponsor warrants and Class A warrants are based on 54,236,423 common
shares outstanding, which includes only Class A and Class B common shares. Percentage ownership calculations for beneficial ownership including 39,531,348
IPO warrants, 6,188,088 Class A warrants and 618,510 unvested RSUs are based on 100,574,369 common shares outstanding, which (i) does not include shares
underlying 5,500,000 sponsor warrants (since a cashless exercise as of March 31, 2010 would not result in the issuance of any shares), (ii) assumes the exercise in
cash of all IPO warrants and all Class A warrants, and (iii) includes Class A common shares underlying the unvested restricted stock units issued to management
and directors.
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Name and Address of Beneficial Owner (1)
Michael S. Gross (2)(3)
Jeffrey Pribor (3)
Howard Boyd (3)
Angus R. Frew (3)
Guy Morel (3)
Ian J. Webber (4)
Susan J. Cook (5)
Thomas Lister (6)
Vivek Puri (7)
All directors and executive officers as a group (9
individuals)
CMA CGM S.A.
Amount and Nature of Beneficial Ownership
Excluding IPO
Warrants, Sponsor
Warrants and Class A
Warrants
Including IPO
Warrants, Class A
Warrants and
unvested RSUs
Approximate Percentage of Outstanding
Common Shares
Excluding IPO
Warrants, Sponsor
Warrants and Class A
Warrants
Including IPO
Warrants, Class A
Warrants and
unvested RSUs
10,698,237
59,019
34,019
34,019
34,019
84,800
38,800
38,800
23,000
11,044,713
24,412,700
13,721,483
69,657
44,657
44,657
44,657
334,800
173,800
173,800
63,000
14,670,511
27,544,600
19.73%
0.11%
0.06%
0.06%
0.06%
0.16%
0.07%
0.07%
0.04%
20.36%
45.01%
13.64%
0.07%
0.04%
0.04%
0.04%
0.33%
0.17%
0.17%
0.06%
14.59%
27.39%
(1) Unless otherwise noted, the business address of each of the individuals is c/o Portland House, Stag Place, London SW1E 5RS, United Kingdom.
(2) Marathon Founders, LLC is the record holder of 6,217,712 Class A and Class B common shares and 3,007,288 Class A warrants. Marathon Founders, LLC
is owned and controlled by Mr. Gross. As a result, Mr. Gross may be deemed to beneficially own the shares held by Marathon Founders, LLC. In addition,
Mr. Gross owns 3,850,000 sponsor warrants, which have been amended to be exercisable only on a cashless basis. On June 4, 2008, Mr. Gross entered into
a stock purchase plan with Citi, in accordance with the guidelines of Rule 10b5-1 and the provisions of Rule 10b-18 of the Exchange Act, under which he
placed a limit order to purchase up to 2,000,000 shares of Marathon common stock at a price of $8.00 per share or below. Under this plan, 2,000,000 shares
were purchased at prices between $7.59 and $7.87 with an average price of $7.84 per share. In addition, in connection with the consummation of the
Merger, Mr. Gross purchased 1,325,000 Class A common shares. In January 2009, Mr. Gross received 10,045 Class A common shares as part of his
remuneration for 2008 as the company’s chairman. In the period November 16, 2009 to November 30, 2009, Mr. Gross purchased in open market
transactions 1,104,495 Class A common shares at prices between $1.0682 and $1.50. In January 2010, Mr. Gross received 40,985 Class A common shares
as part of his remuneration for 2009 as the company’s chairman. At March 31, 2010 Mr. Gross held 15,958 restricted stock units in relation to his
remunerations for 2010 as Chairman of the Board of Directors which are expected to vest in January 2011. The business address of Mr. Gross is c/o
Marathon Founders, LLC, 500 Park Avenue, 5th Floor, New York, New York 10022.
Each of these individuals is a director.
(3)
(4) Mr. Webber serves as Chief Executive Officer of Global Ship Lease. At April 30, 2010 Mr. Webber held 250,000 restricted stock units which are included
in the table above.
(5) Ms. Cook serves as Chief Financial Officer and Secretary of Global Ship Lease. At April 30, 2010 Ms. Cook held 135,000 restricted stock units which are
included in the table above.
(6) Mr. Lister serves as Chief Commercial Officer of Global Ship Lease. At April 30, 2010 Mr. Lister held 135,000 restricted stock units which are included in
the table above.
(7) Mr. Puri serves as Chief Technical Officer of Global Ship Lease. At April 30, 2010 Mr. Puri held 40,000 restricted stock units which are included in the
table above
B. Related Party Transactions
See Item 4.B for a discussion of our commercial transactions and agreements with CMA CGM.
Stockholders Agreement
At the time of the Merger, Global Ship Lease entered into a stockholders agreement with CMA CGM and Marathon Founders, LLC, pursuant to which, until
August 14, 2013, CMA CGM agrees not to:
•
•
•
acquire additional common shares or other equity securities of Global Ship Lease;
make any tender offer or exchange offer for any common shares or other equity securities of Global Ship Lease;
make, or take any action to solicit, initiate or encourage, any offer or proposal for, or any indication of interest in, a merger, other business
combination or other extraordinary transaction involving Global Ship Lease or any of its subsidiaries, or the acquisition of any common shares or
other equity interest in, or a substantial portion of the assets of, Global Ship Lease or any of its subsidiaries;
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•
•
propose any changes to the size or members of the board of directors of Global Ship Lease;
solicit, or become a participant in any solicitation of, any proxy from any holder of common shares in connection with any vote on the matters
described in the two preceding bullet points above, or agree or announce its intention to vote with any person undertaking a solicitation or grant any
proxies with respect to any common shares to any person with respect to such matters, or deposit any common shares in a voting trust or enter into
any other arrangement or agreement with respect to the voting thereof; or
•
form, join or in any way participate in a “group” (within the meaning of the Exchange Act) with respect to any common shares of Global Ship Lease.
These standstill restrictions will be temporarily released (i) in the event Global Ship Lease or its shareholders receive an unsolicited third party tender offer or
exchange offer to acquire at least a majority of the outstanding common shares or there is a public announcement of a proposal or offer, or commencement of a
proxy contest, to effect a change of control of Global Ship Lease, until such time as the board of directors of Global Ship Lease notifies CMA CGM that in the
good faith determination of the board of directors such offer or proposal or proxy contest has concluded or been withdrawn, and (ii) to allow CMA CGM to
respond to any vote, offer or other transaction involving a tender offer or exchange offer or a merger, business combination, sale of a substantial portion of assets
or other extraordinary transaction that has been approved by the board of directors and/or for which the board of directors has granted its recommendation. Global
Ship Lease agrees to include such standstill exceptions in any shareholder rights plan it may adopt.
Furthermore, in connection with the Credit Facility Amendment in August 2009, CMA CGM has agreed not to reduce its holding of common shares in Global
Ship Lease below the current level of approximately 24.4 million shares.
Registration Rights Agreement
At the time of the Merger, Global Ship Lease entered into a registration rights agreement with CMA CGM, Marathon Investors, LLC, Marathon Founders, LLC
and the other initial stockholders of Marathon common stock (including Michael Gross), pursuant to which Global Ship Lease agreed to register for resale on a
registration statement under the Securities Act and applicable state securities laws, the common shares issued to such shareholders pursuant to the Merger or upon
exercise of warrants. CMA CGM has the right to demand up to three registrations and the Marathon initial stockholders will have the right to demand up to two
registrations. These shareholders also have the right to request that Global Ship Lease file a shelf registration statement with respect to their common shares as
soon as the applicable transfer restrictions under the stockholders agreement expire. In addition, these shareholders also have piggyback registration rights
allowing them to participate in offerings by Global Ship Lease and in demand registrations of the other shareholders. Global Ship Lease is obligated to pay all
expenses incidental to the registration, excluding underwriter discounts and commissions.
Item 8.
Financial Information
A. Financial Statements and Other Financial Information
Please see Item 18 below.
Legal Proceedings
We have not been involved in any legal proceedings that may have, or have had a significant effect on our business, financial position, results of operations or
liquidity, and we are not aware of any proceedings that are pending or threatened that may have a material effect on our business, financial position, results of
operations or liquidity. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business, principally personal injury and
property casualty claims associated with operating containerships. We expect that these claims would be covered by insurance, subject to customary deductibles.
Claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources.
Dividend Policy
As noted in “Business Overview—Credit Facilities” above, pursuant to the terms of the Credit Facility Amendment, Global Ship Lease has agreed not to declare
or pay any dividends to common shareholders until the later of November 30, 2010 or the date at which the leverage ratio falls to 75% or lower. The board of
directors intends to review Global Ship Lease’s dividend policy once the company is eligible to resume dividend payments.
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Dividends, if any, would be based on available cash flow, rather than net income, after all relevant cash expenditures, including cash interest expense on
borrowings that finance operating assets, cash income taxes and after an allowance for the cash cost of future drydockings but not including deductions for non-
cash items including depreciation and amortization and changes in the fair values of financial instruments, if any.
In addition to the 46,680,194 Class A common shares outstanding at December 31, 2009, there are 7,405,956 subordinated Class B common shares held by
Marathon’s initial stockholders and CMA CGM. During the subordination period, no dividends can be paid on the Class B common shares unless dividends at the
rate of $0.23 per share have been paid on all Class A common shares for all quarters. In general, during the subordination period, Global Ship Lease can pay
quarterly dividends on its Class A common shares and subordinated Class B common shares from its operating surplus (as defined in the amended and restated
articles of incorporation) in the following manner:
first, 100% to all Class A common shares, pro rata, until each outstanding common share has been paid an amount equal to the applicable dividend for that
quarter;
second, 100% to all Class A common shares, pro rata, until they have received any unpaid arrearages in the dividend for prior quarters during the
subordination period;
third, 100% to all subordinated Class B common shares, pro rata, until each outstanding Class B common share has been paid an amount equal to the
applicable dividend for that quarter;
after that, 100% to all Class A and Class B common shares, pro rata, as if they were a single class.
Notwithstanding the foregoing, the dividend rights of the holders of Class B common shares will be subordinated to those of holders of Class A common shares
until at least the third quarter of 2011 absent a prior change in control of Global Ship Lease.
The declaration and payment of any dividend is subject at all times to the discretion of Global Ship Lease’s board of directors and will depend on, among other
things, its earnings, financial condition and anticipated cash requirements and availability, additional acquisitions of vessels, restrictions under its credit facility,
the provisions of Marshall Islands law affecting the payment of distributions to shareholders, required capital and drydocking expenditures, reserves established
by its board of directors, increased or unanticipated expenses, a change in its dividend policy, additional borrowings or future issuances of securities and other
factors, many of which will be beyond its control.
Global Ship Lease’s ability to pay dividends may be limited by the amount of cash it can generate from operations following the payment of fees and expenses
and the establishment of any reserves as well as additional factors unrelated to its profitability. Global Ship Lease is a holding company, and Global Ship Lease
will depend on the ability of its subsidiaries to distribute funds to Global Ship Lease in order to satisfy its financial obligations and to pay dividend payments.
Further, its board of directors may elect to not distribute any dividends or may significantly reduce the dividends. As a result, the amount of dividends actually
paid, if any, may vary from the amount previously paid and such variations may be material. Please see Item 3 – “Key Information—Risk Factors” for a
discussion of the risks associated with Global Ship Lease’s ability to pay dividends.
Marshall Islands law generally prohibits the payment of dividends other than from surplus (retained earnings and the excess of consideration received for the sale
of shares above the par value of the shares) or while a company is insolvent or would be rendered insolvent by the payment of such a dividend.
Global Ship Lease believes that, under current U.S. federal income tax law, some portion of the distributions you receive from Global Ship Lease will constitute
dividends and, if you are an individual that is a citizen or resident of the United States and that meets certain holding period and other requirements, such
dividends will be taxable as “qualified dividend income” (subject to a maximum 15% U.S. federal income tax rate through 2010). Please see “Additional
Information—Taxation—Tax Consequences of Holding Class A Shares—U.S. holders—Taxation of dividends paid on Class A common shares” for information
regarding the eligibility requirements for “qualified dividend income” and for a discussion of proposed legislation that, if enacted, would prevent dividends paid
by Global Ship Lease from constituting qualified dividend income.
B. Significant Changes
Not applicable.
Item 9.
The Offer and Listing.
On August 15, 2008, our Class A common shares, warrants and units began trading on the NYSE under the symbols “GSL”, “GSL.WS” and “GSL.U”,
respectively. Each of our units consists of one Class A common share and one warrant.
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The following sets forth the high and low closing sales price of our Class A common shares, warrants and units, as reported on the NYSE for the periods shown:
Class A Common Shares
Quarter Ended
September 30, 2008 (since August 15, 2008)
December 31, 2008
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
March 31, 2010
June 30, 2010 (through April 30, 2010)
Warrants
Quarter Ended
September 30, 2008 (since August 15, 2008)
December 31, 2008
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
March 31, 2010
June 30, 2010 (through April 30, 2010)
Units
Quarter Ended
September 30, 2008 (since August 15, 2008)
December 31, 2008
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
March 31, 2010
June 30, 2010 (through April 30, 2010)
60
High
Low
$7.64 $6.33
$6.30 $2.34
$3.60 $1.84
$2.35 $1.75
$2.10 $1.19
$1.66 $1.05
$2.66 $1.45
$3.29 $2.31
High
Low
$1.53 $0.68
$0.60 $0.08
$0.28 $0.05
$0.15 $0.05
$0.12 $0.04
$0.05 $0.02
$0.03 $0.02
$0.04 $0.02
High
Low
$9.23 $7.00
$6.99 $2.35
$3.70 $2.00
$2.22 $1.51
$2.09 $1.36
$1.93 $1.01
$2.60 $1.38
$3.22 $2.30
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Item 10.
Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Our Articles of Incorporation have previously been filed as Exhibit C to Exhibit 2.1 of Marathon Acquisition Corp.’s Current Report on Form 8-K (File No. 001-
32983), filed with the SEC on July 8, 2008 and are hereby incorporated by reference into this Annual Report. Our Bylaws have previously been filed as Exhibit
3.2 to Form F-4 (File No. 333-150309) filed with the SEC on April 18, 2008 and are hereby incorporated by reference into this Annual Report.
The necessary actions required to change the rights of shareholders and the conditions governing the manner in which annual general meetings and special
meetings of shareholders are convoked are described in our Articles of Incorporation and Bylaws and are hereby incorporated by reference into this Annual
Report.
The rights, preferences and restrictions attaching to each class of our capital stock are described in the section “Description of Securities” of our Form F-1 (File
No. 333-147070), filed with the SEC on September 12, 2008 and hereby incorporated by reference into this Annual Report and there have been no changes since
that date.
There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the
securities imposed by the laws of the Republic of the Marshall Islands or by our Articles of Incorporation or Bylaws.
C. Material Contracts
Reference is made to Item 4.B for a description of the time charters, the ship management agreements and the global expense agreement, which are incorporated
herein by reference. Reference is made to Item 5.B for a description of our credit facility, which is incorporated herein by reference. Reference is made to
Item 6.B for a description of employment agreements, which is incorporated herein by reference. Reference is made to Item 7.B for a description of the
registration rights agreement and the stockholders agreement, which are incorporated herein by reference.
D. Exchange Controls
We are not aware of any governmental laws, decrees or regulations in the Republic of The Marshall Islands that restrict the export or import of capital, including
foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-resident holders of our securities.
We are not aware of any limitations on the right of non-resident or foreign owners to hold or vote our securities imposed by the laws of the Republic of the
Marshall Islands or our Articles of Incorporation and Bylaws.
E. Taxation
The following represents the material U.S. federal income tax consequences of the acquisition, ownership and disposition of our Class A common shares.
This section is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”) current and proposed Treasury regulations
promulgated thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change, possibly on a retroactive basis.
This section does not purport to be a comprehensive description of all of the tax considerations that may be relevant to us or each investor. This section does not
address all aspects of U.S. federal income taxation that may be relevant to any particular investor based on such investor’s individual circumstances. In particular,
this section considers only investors that will own Class A common shares as capital assets and does not address the potential application of the alternative
minimum tax or the U.S. federal income tax consequences to investors that are subject to special treatment, including:
•
•
•
•
•
•
broker-dealers;
insurance companies;
taxpayers who have elected mark-to-market accounting;
tax-exempt organizations;
regulated investment companies;
real estate investment trusts;
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•
•
•
•
financial institutions or “financial services entities”;
taxpayers who hold Class A common shares as part of a straddle, hedge, conversion transaction or other integrated transaction;
certain expatriates or former long-term residents of the United States; and
U.S. holders (as defined herein) whose functional currency is not the U.S. dollar.
No ruling has been or will be requested from the IRS regarding any matter affecting us or our shareholders. The statements made herein may be challenged by the
IRS and, if so challenged, may not be sustained upon review in a court.
The following does not address any aspect of U.S. federal gift or estate tax laws, or state, local or non-U.S. tax laws. Additionally, the section does not consider
the tax treatment of partnerships or other pass-through entities or persons who hold Global Ship Lease’s Class A common shares through such entities.
Prospective investors may want to consult their tax advisors regarding the specific tax consequences to them of the acquisition, holding or disposition of Class A
common shares, in light of their particular circumstances.
Taxation of Global Ship Lease
Taxation of operating income
Unless exempt from U.S. federal income taxation under the rules described below in “The Section 883 exemption,” a foreign corporation that earns only
transportation income is generally subject to U.S. federal income taxation under one of two alternative tax regimes: (1) the 4% gross basis tax or (2) the net basis
tax and branch profits tax.
The 4% gross basis tax
For foreign corporations not engaged in a United States trade or business, the United States imposes a 4% U.S. federal income tax (without allowance of any
deductions) on the corporation’s United States source gross transportation income. For this purpose, transportation income includes income from the use, hiring or
leasing of a vessel, or the performance of services directly related to the use of a vessel (and thus includes time charter and bareboat charter income). The United
States source portion of transportation income includes 50% of the income attributable to voyages that begin or end (but not both) in the United States. Generally,
no amount of the income from voyages that begin and end outside the United States is treated as United States source, and consequently none of the
transportation income attributable to such voyages is subject to this 4% tax. Although the entire amount of transportation income from voyages that begin and end
in the United States would be United States source, Global Ship Lease does not expect to have any transportation income from voyages that begin and end in the
United States.
The net basis tax and branch profits tax
Global Ship Lease does not expect to engage in any activities in the United States or otherwise have a fixed place of business in the United States. Nonetheless, if
this situation were to change or Global Ship Lease were to be treated as engaged in a United States trade or business, all or a portion of Global Ship Lease’s
taxable income, including gain from the sale of vessels, could be treated as effectively connected with the conduct of this United States trade or business, or
effectively connected income. Any effectively connected income would be subject to U.S. federal corporate income tax (with the highest statutory rate currently
being 35%). In addition, an additional 30% branch profits tax would be imposed on Global Ship Lease at such time as Global Ship Lease’s after-tax effectively
connected income is viewed as having been repatriated to Global Ship Lease’s offshore office. The 4% gross basis tax described above is inapplicable to income
that is treated as effectively connected income.
The Section 883 exemption
Both the 4% gross basis tax and the net basis and branch profits taxes described above are inapplicable to U.S. source transportation income that qualifies for
exemption under Section 883 of the Code. To qualify for the Section 883 exemption a foreign corporation must, among other things:
•
•
•
be organized in a jurisdiction outside the United States that grants an equivalent exemption from tax to corporations organized in the United States,
which we call an Equivalent Exemption;
satisfy one of the following three ownership tests (discussed in more detail below): (1) the more than 50% ownership test, or 50% Ownership Test,
(2) the controlled foreign corporation test, or CFC Test or (3) the “Publicly Traded Test”; and
meet certain substantiation, reporting and other requirements (which include the filing of United States income tax returns).
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Global Ship Lease is organized under the laws of the Marshall Islands. Each of the vessels in the fleet is owned by a separate wholly owned subsidiary organized
either in the Marshall Islands or Cyprus. The United States Treasury Department recognizes both the Marshall Islands and Cyprus as jurisdictions that grant an
Equivalent Exemption; therefore, Global Ship Lease should meet the first requirement for the Section 883 exemption. Additionally, Global Ship Lease intends to
comply with the substantiation, reporting and other requirements that are applicable under Section 883 of the Code. As a result, qualification for the Section 883
exemption will turn primarily on Global Ship Lease’s ability to satisfy the second requirement enumerated above.
(1) The 50% Ownership Test
In order to satisfy the 50% Ownership Test, a non-United States corporation must be able to substantiate that more than 50% of the value of its stock is owned,
directly or indirectly, by “qualified shareholders.” For this purpose, qualified shareholders are: (1) individuals who are residents (as defined in the regulations
promulgated under Section 883 of the Code, or Section 883 Regulations) of countries, other than the United States, that grant an Equivalent Exemption, (2) non-
United States corporations that meet the Publicly Traded Test of the Section 883 Regulations and are organized in countries that grant an Equivalent Exemption,
or (3) certain foreign governments, non-profit organizations, and certain beneficiaries of foreign pension funds. A corporation claiming the Section 883
exemption based on the 50% Ownership Test must obtain all the facts necessary to satisfy the IRS that the 50% Ownership Test has been satisfied (as detailed in
the Section 883 Regulations). Global Ship Lease believes that it satisfied the 50% Ownership Test up to and including 2008 due to being a wholly owned
subsidiary of CMA CGM until the merger on August 14, 2008 but does not believe that it will be able to satisfy the 50% Ownership Test for 2009 and beyond due
to its lack of knowledge of the direct and indirect owners of entities which own its Class A common shares.
(2) The CFC Test
The CFC Test requires that the non-United States corporation be treated as a controlled foreign corporation, or CFC, for U.S. federal income tax purposes. As
discussed below at “Tax Consequences of Holding Class A Common Shares—U.S. holders—Possible treatment as a controlled foreign corporation,” Global Ship
Lease cannot predict at this time whether it will be a CFC.
(3) The Publicly Traded Test
The Publicly Traded Test requires that one or more classes of equity representing more than 50% of the voting power and value in a non-United States
corporation be “primarily and regularly traded” on an established securities market either in the United States or in a foreign country that grants an Equivalent
Exemption.
The Section 883 Regulations provide, in pertinent part, that stock of a non-United States corporation will be considered to be “primarily traded” on an established
securities market in a given country if the number of shares of each class of stock that are traded during any taxable year on all established securities markets in
that country exceeds the number of shares in each such class that are traded during that year on established securities markets in any other single country. Global
Ship Lease’s Class A common shares are listed on the NYSE, and are not listed on any other securities exchange. Therefore, the Class A common shares should
be treated as primarily traded on an established securities market in the United States. Moreover, the Class A common shares represent more than 50% of both the
voting power and value of all classes of shares of Global Ship Lease.
The Section 883 Regulations also generally provide that stock will be considered to be “regularly traded” on an established securities market if one or more
classes of stock in the corporation representing in the aggregate more than 50% of the total combined voting power and value of all classes of stock of the
corporation are listed on an established securities market during the taxable year. However, even if a class of shares is so listed, it is not treated as regularly traded
under the Section 883 Regulations unless (1) trades are made in the common shares on the established securities market, other than in minimal quantities, on at
least 60 days during the taxable year (or / 6 of the days in a short taxable year); and (2) the aggregate number of common shares traded on the established
securities market during the taxable year is at least 10% of the average number of outstanding common shares during that year (as appropriately adjusted in the
case of a short taxable year). Even if these trading frequency and trading volume tests are not satisfied with respect to the Class A common shares, however, the
Section 883 Regulations provide that such tests will be deemed satisfied if the Class A common shares are regularly quoted by dealers making a market in such
Class A common shares. While Global Ship Lease anticipates that these trading frequency and trading volume tests will be satisfied each year, satisfaction of
these requirements is outside of Global Ship Lease’s control and, hence, no assurances can be provided that Global Ship Lease will satisfy the Publicly Traded
Test each year.
1
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In addition, even if the “primarily and regularly traded” tests described above are satisfied, a class of stock will not be treated as primarily and regularly traded on
an established securities market if, during more than half the number of days during the taxable year, one or more shareholders holding, directly or indirectly, at
least 5% of the vote and value of that class of stock, or 5% Shareholders, own, in the aggregate, 50% or more of the vote and value of that class of stock. This is
referred to as the 5% Override Rule. In performing the analysis, the company is entitled to rely on current Schedule 13D and 13G filings with the SEC to identify
its 5% Shareholders, without having to make any independent investigation to determine the identity of the 5% Shareholder. In the event the 5% Override Rule is
triggered, the Section 883 Regulations provide that the 5% Override Rule will nevertheless not apply if the company can establish that among the closely-held
group of 5% Shareholders, sufficient shares are owned by 5% Shareholders that are considered to be “qualified shareholders”, as defined above, to preclude non-
qualified 5% Shareholders in the closely-held group from owning 50% or more of the value of the class of stock for more than half the number of days during the
taxable year. Based on information currently available to Global Ship Lease on its shareholders, it appears that the 5% Override Rule did not apply for 2009 and
will continue to not apply if such shareholders were to retain the Global Ship Lease Class A common shares throughout 2010 and the company was to satisfy
certain substantiation requirements. However, it is possible that Global Ship Lease’s ownership may change such that the 5% Override Rule may apply. The
ability to avoid application of the 5% Override Rule will be outside of Global Ship Lease’s control and, as a result, no assurances can be provided that Global
Ship Lease will satisfy the Publicly Traded Test for any year.
If Global Ship Lease were not to qualify for the Section 883 exemption in any year, the United States income taxes that become payable could have a negative
effect on Global Ship Lease’s business, and could result in decreased earnings available for distribution to Global Ship Lease’s shareholders. However, under the
charter agreements, the initial Charterer has agreed to provide reimbursement for any such taxes.
United States taxation of gain on sale of vessels
If Global Ship Lease qualifies for the Section 883 exemption, then gain from the sale of any vessel may be exempt from tax under Section 883. Even if such gain
is not exempt from tax under Section 883, Global Ship Lease will not be subject to U.S. federal income taxation with respect to such gain, assuming that Global
Ship Lease is not, and has never been, engaged in a U.S. trade or business. Under certain circumstances, if Global Ship Lease is so engaged, gain on sale of
vessels could be subject to U.S. federal income tax.
Possibility of taxation as a U.S. corporation
Under changes made to the Code by the American Jobs Creation Act of 2004, which added Section 7874 of the Code, a foreign corporation which acquires
substantially all the properties of a U.S. corporation is generally treated, for U.S. federal tax purposes, as though it were a U.S. corporation if, after the
acquisition, at least 80% (by vote or value) of the stock of the foreign corporation is owned by former shareholders of the U.S. corporation by reason of owning
stock in the U.S. corporation. Marathon has received a legal opinion of Akin Gump Strauss Hauer & Feld LLP that this rule should not apply to Global Ship
Lease following the Merger. The opinions of tax counsel neither bind the IRS nor preclude the IRS or courts from adopting a contrary position. Marathon did not
obtain a ruling from the IRS on the application of Section 7874 of the Code to the Merger. Akin Gump Strauss Hauer & Feld LLP has not undertaken any
obligation to update its opinion.
Such opinion relied, in part, on assumptions, representations and other information as to certain factual matters, including the value per share of Global Ship
Lease Class B stock and Class C stock relative to the market value per share of Global Ship Lease Class A stock. Valuation is a question of fact and is subjective.
If the IRS were successfully to challenge the correctness of any such assumptions, representations or other information, it is possible that Section 7874 of the
Code could apply.
In addition, there is no definitive legal authority applying the rules under Section 7874 of the Code. Therefore, no assurance can be provided that the IRS will not
successfully assert that Global Ship Lease should be treated as a U.S. corporation, in which case Global Ship Lease’s net income would be subject to U.S. federal
corporate income tax (with the highest statutory rate currently being 35%).
Tax Consequences of Holding Class A Common Shares
U.S. holders
For purposes of this discussion, a U.S. holder is a beneficial owner of Global Ship Lease Class A common shares that is:
•
•
•
•
an individual who is a citizen or resident of the United States;
a corporation (or other entity taxed as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States,
any state thereof or the District of Columbia;
an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
a trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust, or (ii) it has in effect a valid election to be treated as a U.S. person.
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Exercise of a warrant
Subject to the discussions of the PFIC and CFC rules below, a U.S. holder generally will not recognize gain or loss upon the exercise of a warrant, although it is
possible that a holder of a sponsor warrant will recognize compensation income (taxable as ordinary income) in connection with such an exercise. Holders of
sponsor warrants may want to consult their tax advisors as to the consequences to them of exercising their sponsor warrants. Class A common shares acquired
pursuant to the exercise of a warrant will have a tax basis equal to the U.S. holder’s tax basis in the warrant increased by the exercise price paid to exercise the
warrant. The holding period of such Class A common shares would begin on the date following the date of exercise of the warrant (or possibly the date of
exercise).
To the extent a U.S. holder is entitled to receive a fractional interest of a share as a result of the exercise of a warrant, Global Ship Lease will round up the number
of Class A common shares issued to the U.S. holder to the nearest whole number of Class A common shares. If Global Ship Lease has paid or pays dividends with
respect to its Class A common shares within three years of such an exercise, it is possible that the difference between the rounded up number of Class A common
shares and the fractional interest of the share could be treated as a taxable share dividend. Accordingly, U.S. holders may want to consult their tax advisors
regarding the tax consequences of exercising warrants in light of their particular circumstances.
Taxation of dividends paid on Class A common shares
When Global Ship Lease makes a distribution with respect to its Class A common shares, subject to the discussions of the passive foreign investment company, or
PFIC, and CFC rules below, a U.S. holder will be required to include in gross income as foreign source dividend income the amount of the distribution to the
extent paid out of Global Ship Lease’s current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Distributions in excess of
such earnings and profits will be applied against and will reduce the U.S. holder’s tax basis in the Class A common shares and, to the extent in excess of such
basis, will be treated as gain from the sale or exchange of the Class A common shares.
Subject to the discussions of the PFIC and CFC rules below, in the case of a U.S. holder that is a corporation, dividends that Global Ship Lease pays will
generally be taxable at regular corporate rates of up to 35% and generally will not qualify for a dividends-received deduction available for dividends received
from United States corporations. In the case of certain non-corporate U.S. holders, dividends that Global Ship Lease pays prior to January 1, 2011 generally will
be subject to tax at a maximum rate of 15%, provided that the U.S. holder meets certain holding period and other requirements and Global Ship Lease is not a
PFIC in the taxable year in which the dividends are paid or in the immediately preceding taxable year. Legislation has been introduced which, if enacted, would
deny the benefit of the 15% maximum rate to dividends that Global Ship Lease pays. Global Ship Lease cannot predict whether such legislation will be enacted,
or, if so, what its effective date might be.
Taxation of the disposition of Class A common shares
Subject to the discussions of the PFIC and CFC rules below, upon the sale, exchange or other disposition of Class A common shares, a U.S. holder will recognize
capital gain or loss in an amount equal to the difference between the amount realized on the disposition and such U.S. holder’s tax basis in its Class A common
shares.
Subject to the discussions of the PFIC and CFC rules below, capital gain from the sale, exchange or other disposition of Class A common shares held more than
one year is long-term capital gain, and is eligible for a reduced rate of taxation for individuals. Gain recognized by a U.S. holder on a sale, exchange or other
disposition of Class A common shares generally will be treated as U.S. source income. A loss recognized by a U.S. holder on the sale, exchange or other
disposition of Class A common shares generally will be allocated to U.S. source income. The deductibility of a capital loss recognized on the sale, exchange or
other disposition of Class A common shares may be subject to limitations, and U.S. holders may want to consult their own tax advisors regarding their ability to
deduct any such capital loss in light of their particular circumstances.
Consequences of possible passive foreign investment company classification
A non-United States entity treated as a corporation for U.S. federal income tax purposes will be a PFIC in any taxable year in which, after taking into account the
income and assets of the corporation and certain subsidiaries pursuant to a “look through” rule, either: (1) 75% or more of its gross income is “passive” income or
(2) 50% or more of the average value of its assets is attributable to assets that produce passive income or are held for the production of passive income. If a
corporation is a PFIC in any taxable year that a person holds stock in the corporation (and was not a qualified electing fund with respect to such year, as discussed
below), the stock held by such person will be treated as stock in a PFIC for all future years (absent an election which, if made, may require the electing person to
pay taxes in the year of the election).
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While there are legal uncertainties involved in this determination, Simpson Thacher has advised Global Ship Lease, and has delivered an opinion to the effect,
that (1) the charters Global Ship Lease has entered into with CMA CGM should constitute service contracts rather than leases for U.S. federal income tax
purposes and (2) as a result, the income from these charters should not constitute “passive income,” and the assets that Global Ship Lease owns for the production
of this income should not constitute passive assets. Simpson Thacher’s opinion was based on certain representations that Global Ship Lease made to counsel
including:
•
•
the terms of the charters that Global Ship Lease has entered into with CMA CGM were negotiated at arm’s-length, and the terms of the charters are
customary for long-term charters of comparable vessels;
the terms of the ship management agreements and the global expense agreement that Global Ship Lease has entered into with CMA Ships were
negotiated at arm’s-length and are reflective of the terms that Global Ship Lease believes could be reached in an agreement between unrelated third
parties;
•
all charters that Global Ship Lease has entered into with CMA CGM and all ship management agreements that Global Ship Lease has entered into
with CMA Ships are substantially similar to the charter and the ship management agreement that Global Ship Lease provided to Simpson Thacher for
its review;
•
•
each vessel in Global Ship Lease’s initial and contracted fleet had, at charter inception, a remaining economic useful life of no less than (a) 30 years
minus (b) the age of the vessel at charter inception; and
the total payments due to Global Ship Lease under each of the charters with CMA CGM were, at the time each such charter was entered into,
substantially in excess of the bareboat charter rate for a comparable vessel.
Simpson Thacher’s opinion was also based on a representation that Global Ship Lease and Marathon made to counsel that, for each of the ship management
agreements with CMA Ships, Global Ship Lease will enter into replacement ship management agreements with ship managers unrelated to CMA Ships or any of
its affiliates on or prior to the expiration of each agreement’s initial three year term.
Based on this opinion (and Global Ship Lease’s expectation that the representations set forth above will apply equally to any future charters that Global Ship
Lease enters into, that the terms of any future charters that Global Ship Lease enters into will contain terms that are substantially similar to those contained in the
charter that was provided to Simpson Thacher for its review, that Global Ship Lease’s income from its chartering activities will be greater than 25% of Global
Ship Lease’s total gross income at all relevant times and that the gross value of Global Ship Lease’s vessels subject to charter will exceed the gross value of all
other assets Global Ship Lease owns at all relevant times), Global Ship Lease does not expect that it will constitute a PFIC with respect to any taxable year.
There can be no assurance that the representations made by Global Ship Lease, GSL Holdings, and Marathon will prove correct or that the nature of Global Ship
Lease’s assets, income and operations will remain the same in the future (notwithstanding Global Ship Lease’s current expectations). Simpson Thacher has not
undertaken any obligation to update its opinion. Further, in a recent case not concerning PFICs, Tidewater Inc. v. U.S., 2009-1 USTC ¶ 50,337, the Fifth Circuit
held that a vessel time charter at issue generated rental, rather than services, income. However, the court’s ruling was contrary to the position of the IRS that the
time charter income should be treated as services income, and the terms of the time charter in that case differ in material respects from the terms of most of our
time charters. No assurance can be given that the IRS or a court of law will accept Simpson Thacher’s position that the charters Global Ship Lease has entered
into with CMA CGM constitute service contracts rather than leases for U.S. federal income tax purposes, or that future changes of law will not adversely affect
Simpson Thacher’s opinion. Unlike a ruling, an opinion of counsel represents only that counsel’s best legal judgment (based on the law then in effect) and does
not bind the IRS or the courts. Any contest with the IRS may materially and adversely impact the market for the Class A common shares and the prices at which
Class A common shares trade. In addition, the costs of any contest with the IRS will result in a reduction in cash available for distribution and thus will be borne
indirectly by Global Ship Lease’s shareholders.
If Global Ship Lease were to be classified as a PFIC in any year, each U.S. holder of Global Ship Lease’s Class A common shares will be subject (in that year and
all subsequent years) to special rules with respect to: (1) any “excess distribution” (generally defined as any distribution received by a shareholder in a taxable
year that is greater than 125% of the average annual distributions received by the shareholder in the three preceding taxable years or, if shorter, the shareholder’s
holding period for the Class A common shares), and (2) any gain realized upon the sale or other disposition of the Class A common shares. Under these rules:
•
•
•
the excess distribution or gain will be allocated ratably over the U.S. holder’s holding period for its Class A common shares;
the amount allocated to the current taxable year and any year prior to the first year in which Global Ship Lease was a PFIC will be taxed as ordinary
income in the current year; and
the amount allocated to each of the other taxable years in the U.S. holder’s holding period for its Class A common shares will be subject to U.S.
federal income tax at the highest rate in effect for the applicable class of taxpayer for that year, and an interest charge will be added as though the
amount of the taxes computed with respect to these other taxable years were overdue.
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In order to avoid the application of the PFIC rules, U.S. holders of Global Ship Lease Class A common shares may make a qualified electing fund, or a QEF,
election provided in Section 1295 of the Code. In lieu of the PFIC rules discussed above, a U.S. holder that makes a valid QEF election will, in very general
terms, be required to include its pro rata share of Global Ship Lease’s ordinary income and net capital gains, unreduced by any prior year losses, in income for
each taxable year (as ordinary income and long-term capital gain, respectively) and to pay tax thereon, even if the amount of that income is not the same as the
distributions paid on the Class A common shares during the year. If Global Ship Lease later distributes the income or gain on which the U.S. holder has already
paid taxes under the QEF rules, the amounts so distributed will not again be subject to tax in the hands of the U.S. holder. A U.S. holder’s tax basis in any Class A
common shares as to which a QEF election has been validly made will be increased by the amount included in such U.S. holder’s income as a result of the QEF
election and decreased by the amount of nontaxable distributions received by the U.S. holder. On the disposition of a common share, a U.S. holder making the
QEF election generally will recognize capital gain or loss equal to the difference, if any, between the amount realized upon such disposition and its adjusted tax
basis in the common share. In general, a QEF election should be made on or before the due date for filing a U.S. holder’s federal income tax return for the first
taxable year for which Global Ship Lease is a PFIC or, if later, the first taxable year for which the U.S. holder held common stock. In this regard, a QEF election
is effective only if certain required information is made available by the PFIC. Subsequent to the date that Global Ship Lease first determines that it is a PFIC,
Global Ship Lease will use commercially reasonable efforts to provide any U.S. holder of Class A common shares, upon request, with the information necessary
for such U.S. holder to make the QEF election. If Global Ship Lease does not believe that it is a PFIC for a particular year but it is ultimately determined that it
was a PFIC, it may not be possible for a holder to make a QEF election for such year.
In addition to the QEF election, Section 1296 of the Code permits United States persons to make a “mark-to-market” election with respect to marketable stock in
a PFIC. If a U.S. holder of Global Ship Lease Class A common shares makes a mark-to-market election, such U.S. holder generally would, in each taxable year:
(1) include as ordinary income the excess, if any, of the fair market value of the Class A common shares at the end of the taxable year over such U.S. holder’s
adjusted tax basis in the Class A common shares, and (2) be permitted an ordinary loss in respect of the excess, if any, of such U.S. holder’s adjusted tax basis in
the Class A common shares over their fair market value at the end of the taxable year, but only to the extent of the net amount previously included in income as a
result of the mark-to-market election (with the U.S. holder’s basis in the Class A common shares being increased and decreased, respectively, by the amount of
such ordinary income or ordinary loss). The consequences of this election are generally less favorable than those of a QEF election for U.S. holders that are
sensitive to the distinction between ordinary income and capital gain, although this is not necessarily the case. U.S. holders may want to consult their tax advisors
as to the consequences to them of making a mark-to-market or QEF election, as well as other U.S. federal income tax consequences of holding stock in a PFIC in
light of their particular circumstances.
As previously indicated, if Global Ship Lease were to be classified as a PFIC for a taxable year in which Global Ship Lease pays a dividend or the immediately
preceding taxable year, dividends paid by Global Ship Lease would not constitute “qualified dividend income” and, hence, would not be eligible for the reduced
rate of U.S. federal income tax.
Possible treatment as a controlled foreign corporation
If more than 50% of the voting power or value of Global Ship Lease’s shares is owned by U.S. persons (within the meaning of the Code) who each own (directly
or through application of certain rules of attribution) 10% or more of the voting power of the shares, or U.S 10% Holders, Global Ship Lease will be a controlled
foreign corporation, or a CFC. If Global Ship Lease is so treated, there will be additional tax consequences to U.S. 10% Holders. In particular, in each year Global
Ship Lease is a CFC, such U.S. 10% Holders who directly or indirectly own Global Ship Lease shares on the last day of the year will be required to include in
ordinary income their pro rata share of Global Ship Lease’s “Subpart F income,” even if no distributions are made, for each such year. Such inclusions will not be
eligible for the 15% maximum rate of tax on qualified dividends received by non-corporate taxpayers. In general, Subpart F income will include dividends,
interest, royalties and other passive income of Global Ship Lease, but will not include active business income. Global Ship Lease believes, and intends to take the
position, that the charters Global Ship Lease has entered into should not generate passive income, and thus the income generated by Global Ship Lease’s charters
should not be treated as Subpart F income to its U.S. 10% Holders, although no assurance can be provided that the IRS will not successfully challenge such
position.
Additionally, if Global Ship Lease is treated as a CFC, gain realized by a U.S. 10% Holder on the sale or other disposition of Class A common shares may be
treated as dividend income to the extent of certain accumulated earnings and profits of Global Ship Lease. Moreover, for taxable years of a U.S. 10% Holder in
which Global Ship Lease is a CFC, and taxable years of Global Ship Lease that end with or within such taxable years of such U.S. 10% Holders, Global Ship
Lease generally will not be treated as a PFIC with respect to Class A common shares held by such U.S. 10% Holder (but may be treated as a PFIC with respect to
other U.S. holders). However, it appears that a U.S. 10% Holder of a CFC who disposes of common shares received upon exercise of warrants may be subject to
tax treatment under the PFIC regime with respect to such common shares. Each U.S. holder is advised to consult such U.S. holder’s own tax advisor concerning
the PFIC and CFC rules with respect to ownership and disposition of Class A common shares received upon the exercise of warrants.
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Under the attribution rules provided in the Code, the holder of an option to acquire common shares (including, for this purpose, a warrant) is deemed to own such
common shares for purposes of determining whether such holder is a U.S. 10% Holder and for purposes of determining whether Global Ship Lease is a CFC. In
applying similar option attribution rules for certain other purposes, the IRS has taken the position (with which some courts have disagreed) that a holder of
warrants is treated as owning the common shares subject to such warrants, but that warrants owned by other holders would not be viewed as increasing the total
number of outstanding common shares. It is not clear whether, or how, the IRS would seek to apply a similar theory to determine whether a particular shareholder
is a U.S. 10% Holder or whether Global Ship Lease is a CFC, nor is it clear whether such a theory would be upheld. If a similar theory were to apply for this
purpose, it could substantially increase the likelihood that Global Ship Lease would be a CFC or that a particular U.S. holder would be a U.S. 10% Holder.
Global Ship Lease believes that it is not a CFC but cannot predict whether it will become a CFC, and satisfaction of the CFC definitional test is outside of Global
Ship Lease’s control. U.S. holders may want to consult their own tax advisors concerning the application of the controlled foreign corporation rules to them in
light of their particular circumstances.
Non-U.S. holders
For purposes of this discussion, a non-U.S. holder is a beneficial owner of Global Ship Lease Class A common shares that is neither a U.S. holder nor a
partnership (or any other entity taxed as a partnership for U.S. federal income tax purposes).
A non-U.S. holder will generally not be subject to U.S. federal income tax on dividends paid in respect of the Class A common shares or on gains recognized in
connection with the sale or other disposition of the Class A common shares, provided, in each case, that the non-U.S. holder makes certain tax representations
regarding the identity of the beneficial owner of the Class A common shares, and that such dividends or gains are not effectively connected with the non-U.S.
holder’s conduct of a United States trade or business.
Dividends or gains that are effectively connected with a non-U.S. holder’s conduct of a United States trade or business (and, if required by an applicable income
tax treaty, are attributable to a United States permanent establishment) are subject to U.S. federal income tax on a net income basis in the same manner as if the
non-U.S. holder were a U.S. holder, and may be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable
income tax treaty.
If Global Ship Lease is treated as a U.S. corporation pursuant to Section 7874 of the Code, non-U.S. holders generally will be subject to withholding tax at a rate
of 30% on all dividends paid by Global Ship Lease, unless a reduced rate of tax is available under a tax treaty.
Information Reporting and Back-up Withholding
U.S. holders generally are subject to information reporting requirements with respect to dividends paid on Class A common shares, and on the proceeds from the
sale, exchange or disposition of Class A common shares. In addition, a holder may be subject to back-up withholding (currently at 28%) on dividends paid on
Class A common shares, and on the proceeds from the sale, exchange or other disposition of Class A common shares, unless the holder provides certain
identifying information, such as a duly executed IRS Form W-9 or W-8BEN, or otherwise establishes an exemption. Back-up withholding is not an additional tax
and the amount of any back-up withholding will be allowable as a credit against a holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the IRS.
F. Dividends and Paying Agents
Not applicable.
G. Statements by Experts
Not applicable.
H. Documents on Display
Documents concerning us that are referred to herein may be inspected at the offices of our subsidiary Global Ship Lease Services Limited, Portland House, Stag
Place, London SW1E 5RS, United Kingdom. Those documents electronically filed via the Electronic Data Gathering, Analysis, and Retrieval (or EDGAR)
system may also be obtained from the SEC’s website at www.sec.gov or from the SEC public reference room at 100 F Street, N.E., Room 1580, Washington,
D.C. 20549. Further information on the operation of the public reference rooms may be obtained by calling the SEC at 1-800-SEC-0330. Copies of documents
can be requested from the SEC public reference rooms for a copying fee.
Item 11.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Global Ship Lease is exposed to the impact of interest rate changes primarily through its floating-rate borrowings under Global Ship Lease’s credit facility and its
$48 million preferred shares. Significant increases in interest rates could adversely affect Global Ship Lease’s results of operations and its ability to service its
own debt. The Predecessor Group did not enter into interest rate swap agreements to reduce its exposure to cash flow risks from changing interest rates.
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In connection with Global Ship Lease’s credit facility and as part of overall risk management, it has entered into interest rate swap agreements to reduce its
exposure to market risks of variable interest rates. The swaps are not accounted for as hedging instruments as for accounting purposes they are not expected to be
effective in mitigating the risks of changes in interest rates over the term of the debt and they do not meet all U.S. GAAP requirements. As a result, changes in the
fair value of the interest rates swaps (mark to market adjustment) are included in earnings each period.
Counterparties to these financial instruments expose Global Ship Lease to credit-related losses in the event of non-performance; however, counterparties to these
agreements are major financial institutions, and Global Ship Lease considers the risk of loss due to non-performance to be minimal. Global Ship Lease will not
require collateral from these institutions. Global Ship Lease will not enter into interest rate swaps for trading purposes.
Sensitivity Analysis
Global Ship Lease’s analysis of the potential effects of variations in market interest rates is based on a sensitivity analysis, which models the effects of potential
market interest rate changes on Global Ship Lease’s financial condition and results of operations. The following sensitivity analysis may have limited use as a
benchmark and should not be viewed as a forecast as it does not include a variety of other potential factors that could affect Global Ship Lease’s business as a
result of changes in interest rates.
Without applying the effect of any interest rate swap arrangements that Global Ship Lease has entered into in connection with Global Ship Lease’s credit facility,
and based on borrowings under the credit facility together with the preferred shares and ignoring cash on deposit as of December 31, 2009, a hypothetical 1%
increase in LIBOR would have the impact of reducing Global Ship Lease’s net income, before income taxes, by approximately $6.4 million.
The interest rate swaps agreements that Global Ship Lease entered into in connection with the credit facility is intended to minimize the risks associated with
Global Ship Lease’s variable rate debt under its credit facility. Global Ship Lease expects that these interest rate swaps will significantly reduce the additional
cash interest expense that could be caused by upward changes in variable market interest rates.
Foreign Currency Exchange Risk
The shipping industry’s functional currency is the United States dollar. All of Global Ship Lease’s revenues and the majority of Global Ship Lease’s operating
costs are in United States dollars. In the future, Global Ship Lease does not expect to be exposed to any significant extent to the impact of changes in foreign
currency exchange rates. Consequently, Global Ship Lease does not presently intend to enter into derivative instruments to hedge the foreign currency translation
of assets or liabilities or foreign currency transactions or to use financial instruments for trading or other speculative purposes.
Inflation
With the exception of rising costs associated with the employment of international crews for Global Ship Lease’s vessels and the impact of the price of lube oil
costs, Global Ship Lease does not believe that inflation has had or is likely, in the foreseeable future, to have a significant impact on vessel operating expenses,
drydocking expenses and general and administrative expenses. For the duration of the Ship Management Agreements, daily operating costs, including the costs of
crews and lube oils, are capped as discussed elsewhere in this Annual Report.
Item 12.
Description of Securities Other than Equity Securities
Not applicable.
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Item 13.
Defaults, Dividend Arrearages and Delinquencies
None.
PART II
Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15 and 15d-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and
procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange
Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under
the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding our required disclosure. In designing and evaluating our 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
was required to apply its judgment in evaluating and implementing possible controls and procedures.
Based on the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2009, the end of the period covered by
this report, our disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Management acknowledges its responsibility for establishing and maintaining adequate internal controls over financial reporting. Internal control over financial
reporting refers to a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board of
directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
•
Relate to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and
members of our board of directors; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a
material effect on our financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its
inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such
limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However,
these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not
eliminate, this risk.
Management evaluated the effectiveness of the company’s internal control over financial reporting as of December 31, 2009 using the framework set forth in the
report of the Treadway Commission’s Committee of Sponsoring Organizations. Based on the foregoing, management has concluded that internal control over
financial reporting was effective as of December 31, 2009.
The effectiveness of our internal controls over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers Audit, France, the
independent registered public accounting firm that audited the company’s December 31, 2009 combined financial statements, as stated in their report which is
included herein.
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Changes in Internal Control over Financial Reporting
In accordance with Rule 13a-15(d), management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any
changes in our internal control over financial reporting that occurred during our last fiscal year have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
During the year ended December 31, 2009 there were no changes with regard to internal control over financial reporting that has materially affected or is
reasonably likely to materially affect the Company’s internal control over financial reporting
Item 16A.
Audit Committee Financial Expert
The Board has determined that director and member of the Audit Committee, Jeffrey D. Pribor, qualifies as an audit committee financial expert and is
independent under applicable NYSE and SEC standards.
Item 16B.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics for all employees and directors. This document is available in the Corporate Governance section of our
website (www.globalshiplease.com). We also intend to disclose any waivers to or amendments of our Code of Business Conduct and Ethics for the benefit of our
directors and executive officers on our website. We will provide a hard copy of our Code of Ethics free of charge upon written request of a shareholder.
Item 16C.
Principal Accountant Fees and Services
Our principal accountant for 2009 and 2008 was PricewaterhouseCoopers Audit, France, an independent registered public accounting firm.
Fees Incurred by Global Ship Lease for PricewaterhouseCoopers Audit’s Services
In 2009 and 2008, the fees rendered by the auditors were as follows:
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Audit Fees
2008
(Predecessor for the
period from January 1,
2008 to August 14,
2008)
$
$
403,250
7,250
32,389
—
442,889
2009
(Successor)
$383,753
—
60,386
—
$444,140
2008
(Successor for the
period from August 15,
2008 to December 31,
2008)
$
$
342,118
—
32,389
—
374,507
Audit fees represent professional services rendered for the audit of our combined annual financial statements, the quarterly reviews and services provided by our
principal accountant in connection with statutory and regulatory filings or engagements. Included in Audit Fees for the Predecessor period 2008 is $403,250 for
professional services rendered in connection with the review of our regulatory filings for our merger.
Audit-Related Fees
Audit-Related fees consist of assurance and related services rendered by the principal accountant related to the performance of the audit or review of our
combined financial statements which have not been reported under Audit Fees above.
Tax Fees
Tax fees for 2009 and 2008 are primarily for tax consultation services.
The Audit Committee has the authority to pre-approve permissible audit-related and non-audit services not prohibited by law to be performed by our independent
auditors and associated fees. Engagements for proposed services either may be separately pre-approved by the Audit Committee or entered into pursuant to
detailed pre-approval policies and procedures established by the Audit Committee, as long as the Audit Committee is informed on a timely basis of any
engagement entered into on that basis. The Audit Committee separately pre-approved all engagements and fees paid to our principal accountant after the Merger
which took place in August 2008.
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Item 16D.
Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
Item 16F.
Change in Registrants’ Certifying Accountant
Not applicable.
Item 16G.
Corporate Governance
Not applicable.
The following are the significant ways in which our corporate governance practices differ from those followed by domestic companies:
•
•
we hold annual meetings of shareholders under the Business Corporations Act of the Republic of the Marshall Islands, similar to NYSE
requirements; and
in lieu of obtaining shareholder approval prior to the adoption of equity compensation plans, the full board of directors approves such adoption.
U.S. issuers are required to have a compensation committee that is comprised entirely of independent directors. Although as a foreign private issuer this rule does
not apply to us, we have a compensation committee that consists of four directors, all of whom satisfy NYSE standards for independence.
PART III
Item 17.
Financial Statements
Not applicable.
Item 18.
Financial Statements
The following financial statements, together with the report of PricewaterhouseCoopers Audit thereon, are filed as part of this Annual Report:
GLOBAL SHIP LEASE, INC.
Audited
Report of Independent Registered Public Accounting Firm
Combined Balance Sheets as at December 31, 2009 and 2008
Combined Statements of Income for the years ended December 31, 2009, 2008 and 2007
Combined Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
Combined Statements of Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007
Notes to the Combined Financial Statements
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Page
F-1
F-2
F-4
F-6
F-8
F-10
Table of Contents
Item 19.
Exhibits
The following exhibits are filed as part of this Annual Report:
Exhibit
Number
1.1
1.2
2.1
2.2
2.3
2.4
2.5
2.6
2.7
4.1
4.2
4.3
4.4
4.5
4.6
4.7
Description
Amended and Restated Articles of Incorporation of GSL Holdings, Inc. (incorporated by reference to Exhibit C to Exhibit 2.1 Marathon
Acquisition Corp.’s Current Report on Form 8-K (File No. 001-32983) filed on July 8, 2008).
Amended and Restated By-laws of GSL Holdings, Inc. (incorporated by reference to Exhibit 3.2 of Global Ship Lease, Inc.’s Registration
Statement on Form F-4 (File No. 333-150309) filed on April 18, 2008).
Specimen Unit certificate (incorporated by reference to Exhibit 4.1 of Global Ship Lease, Inc.’s Registration Statement on Form F-1 (File No.
333-153448) filed on September 12, 2008).
Specimen Class A common share certificate (incorporated by reference to Exhibit 4.2 of Global Ship Lease, Inc.’s Registration Statement on
Form F-1 (File No. 333-153448) filed on September 12, 2008).
Specimen Warrant certificate (incorporated by reference to Exhibit 4.3 of Global Ship Lease, Inc.’s Registration Statement on Form F-1 (File No.
333-153448) filed on September 12, 2008).
Warrant Agreement entered into by The Bank of New York and Marathon Acquisition Corp. (incorporated by reference to Exhibit 4.4 of Global
Ship Lease, Inc.’s Registration Statement on Form F-1 (File No. 333-153448) filed on September 12, 2008).
First Supplemental Warrant Agreement, dated March 18, 2008, between Marathon Acquisition Corp. and the Warrant Agent (incorporated by
reference to Exhibit 4.2 of Marathon Acquisition Corp.’s Current Report on Form 8-K (File No. 001-32983) filed on March 25, 2008).
Second Supplemental Warrant Agreement, dated March 24, 2008, between Marathon Acquisition Corp. and the Warrant Agent (incorporated by
reference to Exhibit 4.3 of Marathon Acquisition Corp.’s Current Report on Form 8-K (File No. 001-32983) filed on March 25, 2008).
Third Supplemental Warrant Agreement between Marathon Acquisition Corp. and the Warrant Agent (incorporated by reference to Exhibit 4.1 of
Global Ship Lease, Inc.’s Registration Statement on Form F-4 (File No. 333-150309) filed on August 7, 2008).
Agreement and Plan of Merger by and among Marathon Acquisition Corp., GSL Holdings, Inc., Global Ship Lease, Inc. and CMA CGM S.A.,
dated as of March 21, 2008 (incorporated by reference to Exhibit 2.1 of Marathon Acquisition Corp.’s Current Report on Form 8-K (File No.
001-32983) filed on March 25, 2008).
Amendment, dated as of June 2, 2008, to Agreement and Plan of Merger, dated as of March 21, 2008, among Marathon Acquisition Corp., GSL
Holdings, Inc., CMA CGM S.A. and Global Ship Lease, Inc. (incorporated by reference to Exhibit 2.1 of Marathon Acquisition Corp.’s Current
Report on Form 8-K (File No. 001-32983) filed on June 3, 2008).
Second Amendment, dated as of July 3, 2008, to Agreement and Plan of Merger, dated as of March 21, 2008, among Marathon Acquisition
Corp., GSL Holdings, Inc., CMA CGM S.A. and Global Ship Lease, Inc., as amended (incorporated by reference to Exhibit 2.1 of Marathon
Acquisition Corp.’s Current Report on Form 8-K (File No. 001-32983) filed on July 8, 2008).
Form of Registration Rights Agreement between GSL Holdings, Inc., Marathon Founders, LLC, Marathon Investors, LLC, the insiders listed on
the signature page thereto and CMA CGM S.A. (incorporated by reference to Exhibit A-1 to Exhibit 2.1 of Marathon Acquisition Corp.’s Current
Report on Form 8-K (File No. 001-32983) filed on July 24, 2008).
Founder Warrant Purchase Agreement, dated as of May 11, 2006, between Marathon Acquisition Corp. and Marathon Investors, LLC
(incorporated by reference to Exhibit 10.8 of Amendment No. 1 to Marathon Acquisition Corp.’s Registration Statement on Form S-1 (File No.
333-134078) filed on June 29, 2006).
First Supplemental Founder Warrant Purchase Agreement, dated March 18, 2008, between the Marathon Acquisition Corp. and Marathon
Investors, LLC (incorporated by reference to Exhibit 4.1 of Marathon Acquisition Corp.’s Current Report on Form 8-K (File No. 001-32983)
filed on March 25, 2008).
Founder Unit Purchase Agreement, dated as of May 11, 2006 among Marathon Acquisition Corp. and Marathon Founders, LLC and certain
directors of Marathon (incorporated by reference to Exhibit 10.5 of Amendment No. 1 to Marathon Acquisition Corp.’s Registration Statement
on Form S-1 (File No. 333-134078) filed on June 29, 2006).
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Table of Contents
Exhibit
Number
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
Description
Form Indemnification Agreement between Marathon Acquisition Corp. and each of its directors and executive officers (incorporated by reference
to Exhibit 10.6 of Amendment No. 2 to Marathon Acquisition Corp.’s Registration Statement on Form S-1 (File No. 333-134078) filed on August
1, 2006).
Form of Transitional Services Agreement between Global Ship Lease Services Limited and CMA CGM S.A. (incorporated by reference to Exhibit
A-5 to Exhibit 2.1 of Marathon Acquisition Corp.’s Current Report on Form 8-K (File No. 001-32983) filed on March 25, 2008).
Amended and Restated Asset Purchase Agreement, dated as of December 5, 2007, among Global Ship Lease, Inc. and CMA CGM S.A., Delmas
S.A.S., Pacific I S.N.C. and Pacific II S.N.C. (incorporated by reference to Exhibit 10.7 of Global Ship Lease, Inc.’s Registration Statement on
Form F-4 (File No. 333-150309) filed on April 18, 2008).
Form of Second Amended and Restated Asset Purchase Agreement among Global Ship Lease, Inc. and CMA CGM S.A., Delmas S.A.S., Pacific I
S.N.C. and Pacific II S.N.C. (incorporated by reference to Exhibit A-2 to Exhibit 2.1 of Marathon Acquisition Corp’s Current Report on Form 8-K
(File No. 001-32983) filed on March 25, 2008).
Credit Facility, dated as of December 10, 2007, among the Companies Listed In Part 1 of Schedule 1 thereto, Global Ship Lease, Inc., Fortis Bank
(Nederland) N.V., Citigroup Global Markets Limited, HSH Nordbank AG, DNB Nor Bank ASA, Sumitomo Mitsui Banking Corporation, Brussels
Branch (incorporated by reference to Exhibit 10.9 of Amendment No. 3 to Global Ship Lease, Inc.’s Registration Statement on Form F-1 (File No.
333-147070) filed on November 13, 2007).
Addendum No. 1 to Credit Facility, dated December 10, 2007, among the Companies Listed In Part 1 of Schedule 1 thereto, Global Ship Lease,
Inc., Fortis Bank (Nederland) N.V., Citigroup Global Markets Limited, HSH Nordbank AG, DNB Nor Bank ASA, Sumitomo Mitsui Banking
Corporation, Brussels Branch (incorporated by reference to Exhibit 10.10 of Global Ship Lease, Inc.’s Registration Statement on Form F-4 (File
No. 333-150309) filed on April 18, 2008).
Addendum No. 2 to Credit Facility, dated February 2009, among the Companies Listed In Part 1 of Schedule 1 thereto, Global Ship Lease, Inc.,
Fortis Bank (Nederland) N.V., Citigroup Global Markets Limited, HSH Nordbank AG, DNB Nor Bank ASA, Sumitomo Mitsui Banking
Corporation, Brussels Branch, (incorporated by reference to Exhibit II of Global Ship Lease, Inc.’s Current Report on Form 6-K (File No. 001-
341539) filed on February 10, 2009).
Waiver Agreement to Credit Facility, dated April 29, 2009, between Global Ship Lease, Inc. and Fortis Bank (Nederland) N.V., as Facility Agent
for and on behalf of the Lenders to the Credit Facility, (incorporated by reference to Exhibit II of Global Ship Lease, Inc.’s Current Report on
Form 6-K (File No. 001-341539) filed on May 1, 2009).
Waiver Agreement to Credit Facility, dated June 26, 2009, between Global Ship Lease, Inc. and Fortis Bank (Nederland) N.V., as Facility Agent
for and on behalf of the Lenders to the Credit Facility, (incorporated by reference to Exhibit II of Global Ship Lease, Inc.’s Current Report on
Form 6-K (File No. 001-341539) filed on June 29, 2009).
Waiver Agreement to Credit Facility, dated July 30, 2009, between Global Ship Lease, Inc. and Fortis Bank (Nederland) N.V., as Facility Agent
for and on behalf of the Lenders to the Credit Facility, (incorporated by reference to Exhibit II of Global Ship Lease, Inc.’s Current Report on
Form 6-K (File No. 001-341539) filed on July 31, 2009).
Amendment and Restatement Agreement to Credit Facility, dated August 20, 2009, among the Companies Listed In Part 1 of Schedule 1 thereto,
Global Ship Lease, Inc., Fortis Bank (Nederland) N.V., Citigroup Global Markets Limited, HSH Nordbank AG, DNB Nor Bank ASA, Sumitomo
Mitsui Banking Corporation, Brussels Branch, (incorporated by reference to Exhibit II of Global Ship Lease, Inc.’s Current Report on Form 6-K
(File No. 001-341539) filed on August 21, 2009).
Form of Guarantee made by Global Ship Lease, Inc. in favor of the charterer listed on Schedule I thereto (incorporated by reference to Exhibit
10.10 of Global Ship Lease, Inc.’s Registration Statement on Form F-1 (File No. 333-147070) filed on November 1, 2007).
Form of Guarantee made by the CMA CGM S.A. in favor of Global Ship Lease, Inc. (incorporated by reference to Exhibit 10.11 of Global Ship
Lease, Inc.’s Registration Statement on Form F-1 (File No. 333-147070) filed on November 1, 2007).
Form of Charter Agreement entered into by a subsidiary of Global Ship Lease, Inc. and CMA CGM S.A. or one of its subsidiaries (incorporated
by reference to Exhibit 2.1 of Marathon Acquisition Corp.’s Current Report on Form 8-K (File No. 001-32983) filed on March 25, 2008).
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Table of Contents
Exhibit
Number
4.22
4.23
4.24
4.25
4.26
4.27
4.28
4.29
4.30
4.31
4.32
4.33
8.1
11.1
12.1*
12.2*
13.1*
13.2*
15.1*
Description
Form of Ship Management Agreement entered into by CMA Ships and a Subsidiary of Global Ship Lease, Inc. (incorporated by reference to
Exhibit A-3 to Exhibit 2.1 of Marathon Acquisition Corp.’s Current Report on Form 8-K (File No. 001-32983) filed on March 25, 2008).
Form of Guarantee made by Global Ship Lease, Inc. in favor of CMA CGM S.A. and CMA Ships (incorporated by reference to Exhibit 10.14 of
Global Ship Lease, Inc.’s Registration Statement on Form F-1 (File No. 333-147070) filed on November 1, 2007).
Form of Guarantee made by CMA CGM S.A. in favor of Global Ship Lease, Inc. and its Subsidiaries (incorporated by reference to Exhibit 1015
of Global Ship Lease, Inc.’s Registration Statement on Form F-1 (File No. 333-147070) filed on November 1, 2007).
Form of Global Expense Agreement between CMA Ships and Global Ship Lease, Inc. (incorporated by reference to Exhibit 10.16 of Global Ship
Lease, Inc.’s Registration Statement on Form F-1 (File No. 333-147070) filed on November 1, 2007).
Form of Indemnification Agreement entered into between Global Ship Lease, Inc. and each of its directors and officers (incorporated by
reference to Exhibit 10.17 of Global Ship Lease, Inc.’s Registration Statement on Form F-1 (File No. 333-147070) filed on November 1, 2007).
Form of Stockholders Agreement among GSL Holdings, Inc., CMA CGM S.A. and Marathon Founders, LLC (incorporated by reference to
Exhibit B to Exhibit 2.1 of Marathon Acquisition Corp.’s Current Report on Form 8-K (File No. 001-32983) filed on June 3, 2008).
2008 Equity Incentive Plan (incorporated by reference to Exhibit 10.22 of Global Ship Lease, Inc.’s Registration Statement on Form F-1 (File
No. 333-153448) filed on September 12, 2008).
Form of Employment Agreement of Ian J. Webber (incorporated by reference to Exhibit 10.23 of Amendment No. 3 to Global Ship Lease, Inc.’s
Registration Statement on Form F-4 (File No. 333-150309) filed on July 3, 2008).
Form of Employment Agreement of Susan J. Cook (incorporated by reference to Exhibit 10.24 of Amendment No. 3 to Global Ship Lease, Inc.’s
Registration Statement on Form F-4 (File No. 333-150309) filed on July 3, 2008).
Form of Employment Agreement of Thomas A. Lister (incorporated by reference to Exhibit 10.25 of Amendment No. 3 to Global Ship Lease,
Inc.’s Registration Statement on Form F-4 (File No. 333-150309) filed on July 3, 2008).
Memorandum of Agreement for Hull 789 (incorporated by reference to Exhibit 10.26 of Global Ship Lease, Inc.’s Registration Statement on
Form F-1/A (File No. 333-153448) filed on September 18, 2008).
Memorandum of Agreement for Hull 790 (incorporated by reference to Exhibit 10.27 of Global Ship Lease, Inc.’s Registration Statement on
Form F-1/A (File No. 333-153448) filed on September 18, 2008).
List of Subsidiaries of Global Ship Lease, Inc. (incorporated by reference to Exhibit II of Global Ship Lease, Inc.’s Annual Report on Form 20-F
(File No. 001-341539) filed on June 25, 2009).
Code of Ethics (incorporated by reference to Exhibit II of Global Ship Lease, Inc.’s Annual Report on Form 20-F (File No. 001-341539) filed on
June 25, 2009).
Rule 13a-14(a)/15d-14(a) Certification of Global Ship Lease, Inc.’s Chief Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of Global Ship Lease, Inc.’s Chief Financial Officer.
Global Ship Lease, Inc. Certification of Ian J. Webber, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Global Ship Lease, Inc. Certification of Susan J. Cook, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Consent of PricewaterhouseCoopers Audit to the incorporation by reference of the consolidated financial statements of the Company for the
fiscal year ended December 31, 2009.
* Filed herewith.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
GLOBAL SHIP LEASE, INC.
By:
/S/ IAN J. WEBBER
Ian J. Webber
Chief Executive Officer
Date: May 18, 2010
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The following are definitions of certain terms that are commonly used in the shipping industry and in this Annual Report.
GLOSSARY OF SHIPPING TERMS
Annual Survey. The inspection of a ship pursuant to international conventions, by a classification society surveyor, on behalf of the flag state, that takes
place every year.
Backhaul. The weaker leg of a round trip voyage with less volume than the stronger headhaul leg or the return movement of a container—often empty—
from a destination of unloading to a point of reloading of cargo.
Ballast. Weight in solid or liquid form, such as sea water, taken on a ship to increase draught, to change trim, or to improve stability or a voyage in which a
ship is not laden with cargo.
Bareboat Charter. A charter of a ship under which the ship-owner is usually paid a fixed amount of charterhire for a certain period of time during which
the charterer is responsible for the ship operating expenses and voyage expenses of the ship and for the management of the ship, including crewing. A bareboat
charter is also known as a “demise charter” or a “time charter by demise.”
Bunkers. Heavy fuel and diesel oil used to power a ship’s engines.
Capacity. The nominal carrying capacity of the ship.
Charter. The hire of a ship for a specified period of time or a particular voyage to carry a cargo from a loading port to a discharging port.
Charterer. The party that hires a ship for a period of time or for a voyage.
Charterhire. A sum of money paid to the ship-owner by a charterer for the use of a ship.
Charter owners. A company that owns containerships and charters out its ships to container shipping companies rather than operating the ships for liner
services; also known as ship-owner.
Charter rate. The rate charged by charter owners normally as a daily rate for the use of their containerships by container shipping companies. Charter rates
can be on a time charter or bareboat charter basis.
Classification society. An independent organization that certifies that a ship has been built and maintained according to the organization’s rules for that type
of ship and complies with the applicable rules and regulations of the country of the ship’s registry and the international conventions of which that country is a
member. A ship that receives its certification is referred to as being “in-class.”
Container shipping company. A shipping company operating liners services using its own or chartered ships with fixed port of call schedules. Also known
as a liner company or a container operator.
Drydocking. Placing the ship in a drydock in order to check and repair areas and parts below the water line. During drydockings, which are required to be
carried out periodically, certain mandatory classification society inspections are carried out and relevant certifications are issued. Drydockings for containerships
are generally required once every three to five years, one of which must be a Special survey.
Freight rate. The amount charged by container shipping companies for transporting cargo, normally as a rate per 20-foot or 40-foot container.
Geared Containerships. Self-sustained containerships, which are able to load and discharge containers with their own onboard cranes and derricks.
Gross tonnage. A unit of measurement of the entire internal cubic capacity of the ship expressed in tons of 100 cubic feet to the ton.
Headhaul. The stronger leg of a round trip voyage with greater volume than the weaker backhaul or the outgoing goods to be delivered from a point of
origin.
Hull. The main body of the ship without engines, buildings and cranes.
IMO. International Maritime Organization, a United Nations agency that issues international standards for shipping.
Intermediate survey. The inspection of a ship by a classification society surveyor that takes place 24 to 36 months after each special survey.
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Newbuilding. A ship on order, construction or just delivered.
Off-hire. The period in which a ship is not available for service under a time charter and, accordingly, the charterer generally is not required to pay the hire.
Off-hire periods can include days spent on repairs, drydocking and surveys, whether or not scheduled.
Protection and indemnity insurance. Insurance obtained through a mutual association formed by ship-owners to provide liability indemnification protection
from various liabilities to which they are exposed in the course of their business, and which spreads the liability costs of each member by requiring contribution
by all members in the event of a loss.
Scrapping. The sale of a ship for conversion into scrap metal.
Ship management. The provision of shore-based ship management services related to crewing, technical and safety management and the compliance with
all government, flag state, class certification and international rules and regulations.
Ship operating expenses. The costs of operating a ship, primarily consisting of crew wages and associated costs, insurance premiums, ship management
fee, lubricants and spare parts, and repair and maintenance costs. Ship operating expenses exclude fuel cost, port expenses, agents’ fees, canal dues and extra war
risk insurance, as well as commissions, which are included in “voyage expenses.”
Sister ships. Ships of the same class and specifications typically built at the same shipyard.
Special survey. The inspection of a ship by a classification society surveyor that takes place every five years, as part of the recertification of the ship by a
classification society.
Spot market. The market for immediate chartering of a ship, usually for single voyages.
TEU. A 20-foot equivalent unit, the international standard measure for containers and containership capacity.
Time charter. A charter under which the ship-owner hires out a ship for a specified period of time. The ship-owner is responsible for providing the crew
and paying ship operating expenses while the charterer is responsible for paying the voyage expenses and additional voyage insurance. The ship-owner is paid
charterhire, which accrues on a daily basis.
Voyage expenses. Expenses incurred due to a ship’s voyage from a loading port to a discharging port, such as bunkers cost, port expenses, agents’ fees,
canal dues, extra war risk insurance and commissions.
78
Table of Contents
GLOBAL SHIP LEASE, INC.
COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2009
Table of Contents
Global Ship Lease, Inc.
Index to Combined Financial Statements
Report of Independent Registered Public Accounting Firm
Combined Balance Sheets as at December 31, 2009 and 2008
Combined Statements of Income for the years ended December 31, 2009, 2008 and 2007
Combined Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
Combined Statements of Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007
Notes to Combined Financial Statements
Page 1
Page
F-1
F-2
F-4
F-6
F-8
F-10
Table of Contents
To the Board of Directors and Shareholders
Global Ship Lease, Inc.
Report of Independent Registered Public Accounting Firm
In our opinion, the accompanying combined balance sheets and the related combined statement of income and statement of cash flows present fairly, in all
material respects, the financial position of Global Ship Lease, Inc. (the “Company”) as at December 31, 2009 and December 31, 2008, and the results of its
operations and its cash flows for each of the periods then ended in conformity with accounting principles generally accepted in the United States of America. Also
in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in section entitled Management’s Report on Internal Control Over Financial Reporting
within the Company’s Annual Report. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial
reporting based on our audits (which was an integrated audit in 2009). We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
The accompanying combined financial statements have been prepared assuming that the Company will continue as a Going Concern. As discussed in Note 2 to
the combined financial statements, the uncertainty related to the financial situation of the Company’s charterer raises substantial doubt about its ability to continue
as a Going Concern. Management’s description of these matters is also included in the note. The combined financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
May 10, 2010
F-1
Table of Contents
Global Ship Lease, Inc.
Combined Balance Sheets
The combined financial statements up to December 31, 2009 include two distinct reporting periods (i) January 1, 2007 through August 14, 2008
(“Predecessor”) and (ii) August 15, 2008 through December 31, 2009 (“Successor”), which relate to the period preceding the merger referred to in note 1
and the period succeeding the merger, respectively. Further, the Company derived all of its revenue in 2009 and virtually all of its revenue in 2008 from
chartering out its vessels under long term fixed rate time charters whereas in 2007, it earned virtually all of its revenue from carrying containerized
cargo. The combined financial statements for the Successor period reflect the acquisition of Global Ship Lease, Inc. under the purchase method of
accounting. The results of the Successor are not comparable to the results of the Predecessor due to the difference in the basis of presentation under
purchase accounting as compared to historical cost. Further, the results for the periods after January 1, 2008 are not comparable to results prior to that
date due to the different nature of the business.
(Expressed in thousands of U.S. dollars)
Note
December 31,
2009
Successor
December 31,
2008
Successor
Assets
Cash and cash equivalents
Restricted cash
Accounts receivable
Prepaid expenses
Other receivables
Deferred tax
Deferred financing costs
Total current assets
Vessels in operation
Vessel deposits
Other fixed assets
Intangible assets – purchase agreement
Deferred tax
Deferred financing costs
Total non-current assets
Total Assets
Liabilities and Stockholders’ Equity
Liabilities
Intangible liability – charter agreements
Current portion of long term debt
Accounts payable
Accrued expenses
Derivative instruments
Total current liabilities
Long term debt
Preferred shares
Intangible liability – charter agreements
Derivative instruments
Total long term liabilities
Total Liabilities
Commitments and contingencies
$
16
30,810
3,026
7,838
685
613
285
903
44,160
961,708
16,243
9
—
161
5,077
983,198
$
26,363
3,026
638
734
1,420
176
526
32,883
906,896
15,720
21
7,840
117
3,131
933,725
$1,027,358
$ 966,608
$
2,119
68,300
3,502
4,589
15,971
94,481
519,892
48,000
24,288
13,142
$
1,608
—
36
6,436
10,940
19,020
542,100
48,000
26,348
36,101
605,322
$ 699,803
—
652,549
$ 671,569
—
9
5
6
7
9
10
11
8
11
16
10
8
14
See accompanying notes to combined financial statements
F-2
Table of Contents
Global Ship Lease, Inc.
Combined Balance Sheets (continued)
The combined financial statements up to December 31, 2009 include two distinct reporting periods (i) January 1, 2007 through August 14, 2008
(“Predecessor”) and (ii) August 15, 2008 through December 31, 2009 (“Successor”), which relate to the period preceding the merger referred to in note 1
and the period succeeding the merger, respectively. Further, the Company derived all of its revenue in 2009 and virtually all of its revenue in 2008 from
chartering out its vessels under long term fixed rate time charters whereas in 2007, it earned virtually all of its revenue from carrying containerized
cargo. The combined financial statements for the Successor period reflect the acquisition of Global Ship Lease, Inc. under the purchase method of
accounting. The results of the Successor are not comparable to the results of the Predecessor due to the difference in the basis of presentation under
purchase accounting as compared to historical cost. Further, the results for the periods after January 1, 2008 are not comparable to results prior to that
date due to the different nature of the business.
(Expressed in thousands of U.S. dollars)
Stockholders’ Equity
Class A Common stock - authorized 214,000,000 shares with a $.01 par value; 46,680,194 shares issued and
outstanding
Class B Common stock - authorized 20,000,000 shares with a $.01 par value; 7,405,956 shares issued and outstanding
Class C Common stock - authorized 15,000,000 shares with a $.01 par value; 12,375,000 shares issued, converted to
Class A common shares on January 1, 2009
Retained deficit
Net income (loss) for the period
Additional paid in capital
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to combined financial statements
F-3
Note
December 31,
2009
Successor
December 31,
2008
Successor
16
16
16
467
74
—
(65,679)
42,374
350,319
327,555
339
74
124
(9,338)
(43,970)
347,810
295,039
$1,027,358
$ 966,608
Table of Contents
Global Ship Lease, Inc.
Combined Statements of Income
The combined financial statements up to December 31, 2009 include two distinct reporting periods (i) January 1, 2007 through August 14, 2008
(“Predecessor”) and (ii) August 15, 2008 through December 31, 2009 (“Successor”), which relate to the period preceding the merger referred to in note 1
and the period succeeding the merger, respectively. Further, the Company derived all of its revenue in 2009 and virtually all of its revenue in 2008 from
chartering out its vessels under long term fixed rate time charters whereas in 2007, it earned virtually all of its revenue from carrying containerized
cargo. The combined financial statements for the Successor period reflect the acquisition of Global Ship Lease, Inc. under the purchase method of
accounting. The results of the Successor are not comparable to the results of the Predecessor due to the difference in the basis of presentation under
purchase accounting as compared to historical cost. Further, the results for the periods after January 1, 2008 are not comparable to results prior to that
date due to the different nature of the business.
(Expressed in thousands of U.S. dollars except share data)
Operating Revenues
Voyage revenue
Time charter revenue
Operating Expenses
Voyage expenses
Vessel operating expenses
Depreciation
General and administrative
Other operating (income) expense
Total operating expenses
Operating Income
Non Operating Income (Expense)
Interest income
Interest expense
Realized and unrealized gain (loss) on interest rate derivatives
Note
Year ended
December 31,
2009
August 15 to
December 31,
2008
Successor
Successor
January 1 to
August 14,
2008
Predecessor
Year ended
December 31,
2007
Predecessor
$
— $
148,708
148,708
—
41,368
37,307
8,748
(432)
5
12
—
39,095
39,095
—
11,904
8,731
3,712
(106)
$
2,072 $ 332,186
55,883
2,909
335,095
57,955
1,944
18,074
12,163
3,814
93
249,457
23,959
16,119
17,751
(2,341)
86,991
24,241
36,088
304,945
61,717
14,854
21,867
30,150
519
(24,224)
4,806
413
(3,842)
(55,293)
17
424
(17,600)
2,749
207
(13,561)
—
Income (Loss) before Income Taxes
42,818
(43,868)
7,440
16,796
Income taxes
Net Income (Loss)
(444)
(102)
(23)
(20)
$
42,374 $ (43,970)
$
7,417 $
16,776
See accompanying notes to combined financial statements
F-4
Table of Contents
Global Ship Lease, Inc.
Combined Statements of Income (continued)
The combined financial statements up to December 31, 2009 include two distinct reporting periods (i) January 1, 2007 through August 14, 2008
(“Predecessor”) and (ii) August 15, 2008 through December 31, 2009 (“Successor”), which relate to the period preceding the merger referred to in note 1
and the period succeeding the merger, respectively. Further, the Company derived all of its revenue in 2009 and virtually all of its revenue in 2008 from
chartering out its vessels under long term fixed rate time charters whereas in 2007, it earned virtually all of its revenue from carrying containerized
cargo. The combined financial statements for the Successor period reflect the acquisition of Global Ship Lease, Inc. under the purchase method of
accounting. The results of the Successor are not comparable to the results of the Predecessor due to the difference in the basis of presentation under
purchase accounting as compared to historical cost. Further, the results for the periods after January 1, 2008 are not comparable to results prior to that
date due to the different nature of the business.
(Expressed in thousands of U.S. dollars except share data)
Weighted average number of Common shares outstanding basic and diluted
Net Income in $ per share Basic and diluted
Weighted average number of Class A common shares outstanding
Basic
Diluted
Net Income (Loss) in $ per share
Basic
Diluted
Weighted average number of Class B common shares outstanding
Basic and diluted
Net Income in $ per share
Basic and diluted
Note
Year ended
December 31,
2009
August 15 to
December 31,
2008
Successor
Successor
n.a.
n.a.
n.a.
n.a.
January 1 to
August 14,
2008
Predecessor
100
Year ended
December 31,
2007
Predecessor
100
$ 74,170
$ 167,760
20
20
20
20
46,459,509
46,754,858
33,800,307
33,800,307
$
$
0.91
0.91
$
$
(1.30)
(1.30)
20
7,405,956
7,405,956
20
$
nil
$
nil
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
See accompanying notes to combined financial statements
F-5
Table of Contents
Global Ship Lease, Inc.
Combined Statements of Cash Flows
The combined financial statements up to December 31, 2009 include two distinct reporting periods (i) January 1, 2007 through August 14, 2008
(“Predecessor”) and (ii) August 15, 2008 through December 31, 2009 (“Successor”), which relate to the period preceding the merger referred to in note 1
and the period succeeding the merger, respectively. Further, the Company derived all of its revenue in 2009 and virtually all of its revenue in 2008 from
chartering out its vessels under long term fixed rate time charters whereas in 2007, it earned virtually all of its revenue from carrying containerized
cargo. The combined financial statements for the Successor period reflect the acquisition of Global Ship Lease, Inc. under the purchase method of
accounting. The results of the Successor are not comparable to the results of the Predecessor due to the difference in the basis of presentation under
purchase accounting as compared to historical cost. Further, the results for the periods after January 1, 2008 are not comparable to results prior to that
date due to the different nature of the business.
Cash Flows from Operating Activities
Net Income (Loss)
(Expressed in thousands of U.S. dollars)
Note
Year ended
December 31,
2009
August 15 to
December 31,
2008
Successor
Successor
January 1 to
August 14,
2008
Predecessor
Year ended
December 31,
2007
Predecessor
$
42,374 $ (43,970)
$
7,417 $
16,776
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation
Amortization of deferred financing costs
Change in fair value of certain derivative instruments
Amortization of intangible liability
Settlements of hedges which do not qualify for hedge accounting
Share based compensation
(Increase) decrease in other receivables and other assets
Decrease in inventories
Increase (decrease) in accounts payable and
other liabilities
Costs relating to drydocks
Unrealized foreign exchange loss (gain)
5
17
17
18
37,307
3,108
(17,928)
(1,549)
13,121
2,513
(6,510)
—
2,165
(1,706)
17
8,731
199
54,851
(67)
632
1,167
337
—
(7,849)
—
(80)
12,164
491
(3,081)
—
141
—
(980)
1,613
4,420
(1,459)
—
16,119
2,194
9,132
—
58
—
26,574
2,390
(11,918)
(4,738)
—
Net Cash Provided by Operating Activities
72,912
13,951
20,726
56,587
Cash Flows from Investing Activities
Settlements of hedges which do not qualify for hedge accounting
Acquisition of Global Ship Lease, Inc. net of cash acquired
Release of trust account
Purchase of other fixed assets
Purchases of vessels, vessel prepayments and vessel deposits
17
3
3
(13,121)
—
—
—
(83,639)
(632)
(6,547)
317,446
—
(272,927)
(4,871)
—
—
—
—
(58)
—
—
(36)
(183,713)
Net Cash (Used in) Provided by Investing Activities
(96,760)
37,340
(4,871)
(183,807)
Cash Flows from Financing Activities
Proceeds from debt
Repayments of debt
Variation in restricted cash
Issuance costs of debt
Proceeds from shareholder loans
Proceeds from warrant exercise
Buyback of shares
(Decrease) in amount due to CMA CGM
Deemed distribution to CMA CGM
Dividend payments
57,000
(10,908)
—
(5,426)
—
—
—
—
—
(12,371)
256,000
(115,000)
(3,026)
(3,856)
—
3,026
(147,053)
—
—
(15,624)
—
—
188,000
(276)
—
—
—
)
(188,713
(505
)
—
401,100
(146,166)
(188,000)
(5,892)
176,875
—
—
)
(11,881
(96,925
)
—
3
16
Net Cash Provided by (Used in) Financing Activities
28,295
(25,533)
(1,494)
129,111
Net Increase in Cash and Cash Equivalents
4,447
25,758
14,361
1,891
Cash and Cash Equivalents at start of Period
26,363
605
1,891
—
Cash and Cash Equivalents at end of Period
$
30,810 $
26,363
$ 16,252 $
1,891
See accompanying notes to combined financial statements
F-6
Table of Contents
Global Ship Lease, Inc.
Combined Statements of Cash Flows (continued)
The combined financial statements up to December 31, 2009 include two distinct reporting periods (i) January 1, 2007 through August 14, 2008
(“Predecessor”) and (ii) August 15, 2008 through December 31, 2009 (“Successor”), which relate to the period preceding the merger referred to in note 1
and the period succeeding the merger, respectively. Further, the Company derived all of its revenue in 2009 and virtually all of its revenue in 2008 from
chartering out its vessels under long-term fixed rate time charters whereas in 2007, it earned virtually all of its revenue from carrying containerized
cargo. The combined financial statements for the Successor period reflect the acquisition of Global Ship Lease, Inc. under the purchase method of
accounting. The results of the Successor are not comparable to the results of the Predecessor due to the difference in the basis of presentation under
purchase accounting as compared to historical cost. Further, the results for the periods after January 1, 2008 are not comparable to results prior to that
date due to the different nature of the business.
(Expressed in thousands of U.S. dollars)
Year ended
December 31
2009
August 15 to
December 31,
2008
January 1 to
August 14,
2008
Year ended
December 31,
2007
Successor
Successor
Predecessor
Predecessor
Supplemental Information
Non cash investing and financing activities
Issuance of shares and preferred shares for the acquisition of 100% shares of Global
Ship Lease, Inc.
Dividends declared
Total interest paid
Total income tax paid
$
$
$
$
—
$ 216,730
$
$
—
—
—
—
22,092
186
$
$
$
4,639
$ 10,782
—
$
—
$
$
$
$
—
—
10,102
310
See accompanying notes to combined financial statements
F-7
Table of Contents
Global Ship Lease, Inc.
Combined Statements of Stockholders’ Equity
The combined financial statements up to December 31, 2009 include two distinct reporting periods (i) January 1, 2007 through August 14, 2008
(“Predecessor”) and (ii) August 15, 2008 through December 31, 2009 (“Successor”), which relate to the period preceding the merger referred to in note 1
and the period succeeding the merger, respectively. Further, the Company derived all of its revenue in 2009 and virtually all of its revenue in 2008 from
chartering out its vessels under long-term fixed rate time charters whereas in 2007, it earned virtually all of its revenue from carrying containerized
cargo. The combined financial statements for the Successor period reflect the acquisition of Global Ship Lease, Inc. under the purchase method of
accounting. The results of the Successor are not comparable to the results of the Predecessor due to the difference in the basis of presentation under
purchase accounting as compared to historical cost. Further, the results for the periods after January 1, 2008 are not comparable to results prior to that
date due to the different nature of the business.
Number of
Common Stock
at $0.01
Par value
Common
Stock
Accumulated
Earnings
(Deficit)
Net
Income
Due to
CMA CGM
Accumulated
Other
Comprehensive
Income
Additional
Paid in
Capital
Stockholders’
Equity
Net income for the period
—
—
—
7,417
—
Balance at December 31, 2006
(Predecessor)
Change in amount due from CMA CGM
Allocation of prior year net income
Net income for the period
Effect of derivative instruments
Effect of currency translation adjustment
Other effect of the transfer of the initial ten
vessels in 2007
Deemed distribution to CMA CGM
Balance at December 31, 2007
(Predecessor)
Change in amount due from CMA CGM
Allocation of prior year net income
Other effect of the transfer of the two vessels
in 2008
Deemed distribution to CMA CGM
Allocation of net income
Balance at August 14, 2008 (Predecessor)
Elimination of historical stockholders’ equity
Recognition of GSL Holdings stockholders’
100 $ — $
—
—
—
—
—
—
—
—
—
—
— $ 32,677 $ 115,350 $
—
—
—
(32,677)
(11,881)
32,677
21,969 $ — $ 169,996
(11,881)
—
—
—
—
—
—
—
—
16,776
—
—
—
—
—
—
(211)
9,509
—
—
—
—
—
(96,925)
—
—
26,739
—
(26,528)
—
100
—
—
—
—
—
(96,925)
—
(4,967)
16,776
—
(16,776)
162,885
(188,716)
21,743
—
—
—
—
—
—
—
(505)
8,068
651
—
(8,068)
4,088
—
—
100
(100)
—
—
(94,329)
94,329
—
—
4,739
—
—
—
(4,739)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
16,776
(211)
9,509
211
(96,925)
87,475
(188,716)
—
7,417
—
(505)
—
(94,329)
94,329
equity pre-merger
26,685,209
266
6,286
—
Issuance of shares and warrants in connection
with the merger (note 3)
Class A
Class B
Class C
Warrants
Warrants exercised into Class A shares (note
16)
Restricted Stock Units (note 18)
Net (loss) for the period
Dividends declared (note 16)
6,778,650
7,405,956
12,375,000
—
68
74
124
—
504,502
—
—
5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(43,970)
—
—
(15,624)
—
—
—
—
—
—
—
—
—
—
—
—
—
175,375
181,927
—
—
—
—
—
—
—
—
51,672
26,043
89,348
1,184
3,021
1,167
—
51,740
26,117
89,472
1,184
3,026
1,167
(43,970)
—
(15,624)
Balance at December 31, 2008 (Successor)
53,749,317 $
537 $
(9,338) $ (43,970) $
— $
— $347,810 $ 295,039
See accompanying notes to combined financial statements
F-8
Table of Contents
Global Ship Lease, Inc.
Combined Statements of Stockholders’ Equity (continued)
The combined financial statements up to December 31, 2009 include two distinct reporting periods (i) January 1, 2007 through August 14, 2008
(“Predecessor”) and (ii) August 15, 2008 through December 31, 2009 (“Successor”), which relate to the period preceding the merger referred to in note 1
and the period succeeding the merger, respectively. Further, the Company derived all of its revenue in 2009 and virtually all of its revenue in 2008 from
chartering out its vessels under long-term fixed rate time charters whereas in 2007, it earned virtually all of its revenue from carrying containerized
cargo. The combined financial statements for the Successor period reflect the acquisition of Global Ship Lease, Inc. under the purchase method of
accounting. The results of the Successor are not comparable to the results of the Predecessor due to the difference in the basis of presentation under
purchase accounting as compared to historical cost. Further, the results for the periods after January 1, 2008 are not comparable to results prior to that
date due to the different nature of the business.
Balance at December 31, 2008
(Successor)
Number of
Common Stock
at $0.01
Par value
Common
Stock
Accumulated
Earnings
(Deficit)
Net
Income
Due to
CMA CGM
Accumulated
Other
Comprehensive
Income
Additional
paid in
Capital
Stockholders’
Equity
53,749,317
$
537
$
(9,338)
$ (43,970)
$ —
$
—
$347,810
$ 295,039
Allocation of prior year net (loss)
—
—
(43,970)
43,970
Class C Shares converted to Class A
Class C
Class A
Restricted Stock Units (note 18)
Shares issued (note 18)
Net income for the period
Dividends declared (note 16)
Balance at December 31, 2009
(Successor)
(12,375,000)
12,375,000
—
336,833
—
—
(124)
124
—
4
—
—
—
—
—
—
—
—
—
(12,371)
42,374
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,513
(4)
—
—
(124)
124
2,513
—
42,374
(12,371)
54,086,150
$
541
$ (65,679)
$ 42,374
$ —
$
—
$350,319
$ 327,555
See accompanying notes to combined financial statements
F-9
Table of Contents
1.
General
Global Ship Lease, Inc.
Notes to the Combined Financial Statements
(Expressed in thousands of U.S. dollars)
On August 14, 2008, Global Ship Lease, Inc. (the “Company”) merged indirectly with Marathon Acquisition Corp. (“Marathon”), a company then listed on
The American Stock Exchange. Following the merger, the Company became listed on the New York Stock Exchange on August 15, 2008.
Under the merger agreement, Marathon, a U.S. corporation, first merged with its 100% owned Marshall Islands subsidiary, GSL Holdings, Inc.
(“Holdings”), with Holdings continuing as the surviving company. Global Ship Lease, Inc., at that time a subsidiary of CMA CGM, then merged with
Holdings, with Holdings again being the surviving company. Holdings was renamed Global Ship Lease, Inc. and became listed on the New York Stock
Exchange on August 15, 2008.
In accordance with ASC Topic 805 “Business Combinations”, Marathon (through its subsidiary Holdings) has been treated as the accounting acquirer and
Global Ship Lease, Inc. was treated as the acquiree. Under the purchase method of accounting, the identifiable assets and assumed liabilities of Global Ship
Lease, Inc. were recorded at their estimated fair values as of the acquisition date. The excess of the fair value of the net acquired assets over the purchase
price has been recorded as a pro rata reduction of identified intangible assets, vessels in operation and other fixed assets. Because the activities of Marathon
were insignificant prior to the acquisition, Global Ship Lease, Inc. (the acquiree), was determined to be the Predecessor for the purpose of reporting
historical financial information.
The financial statements for the year ended December 31, 2009 and for the period August 15, 2008 to December 31, 2008 are wholly “Successor”,
reflecting results of the combined operations following the merger. The results for the period January 1, 2008 to August 14, 2008 and for the year ended
December 31, 2007 (labeled “Predecessor”), reflect results of the operations as historically reported for Global Ship Lease, Inc. prior to the merger. Under
Predecessor accounting rules, the period January 1, 2008 to August 14, 2008 includes for a few days of January 2008 the results of two vessels when they
were owned and operated by CMA CGM (rather than Global Ship Lease, Inc.) in its business of carrying containerized cargo prior to the sale of the vessels
to the Company (see note 15).
As the merger was consummated on August 14, 2008, the balance sheets as of December 31, 2009 and December 31, 2008 (both labeled “Successor”)
reflect the acquisition under the purchase method of accounting of all the identified assets and assumed liabilities of Global Ship Lease, Inc. (see note 3).
The term “Company” refers to both Successor and Predecessor periods.
2.
Nature of Operations and Basis of Preparation
(a) Nature of Operations
The Company has a business of owning and chartering out containerships under long term time charters. It contracted under an asset purchase agreement
dated December 5, 2007, to acquire 17 containerships from CMA CGM. Of these, 10 were purchased by the Company during December 2007, two in
January 2008, four in December 2008 and one in August 2009. All vessels are time chartered to CMA CGM for remaining terms as at December 31, 2009
ranging from 3 to 16 years. The Company has also entered into an agreement with German interests to acquire in the fourth quarter of 2010 two
newbuildings for approximately $77,000 per vessel. The Company has an agreement to charter out these vessels to ZIM Integrated Shipping Services
Limited (“ZIM”) for a period of seven years that could be extended to eight years at ZIM’s option.
During the period covered by these combined financial statements, the Company operated under two business models. During the period up to the delivery
of the 10 vessels in December 2007 and the two ships in January 2008 (i.e. virtually all of the year ended December 31, 2007 and, for two ships of the fleet,
for a few days of January 2008 included in the year ended December 31, 2008) operations involved earning freight revenues from containerized
transportation of goods for shippers whilst the vessels were owned by CMA CGM. Following the purchase by the Company of the 10 vessels in December
2007 and a further two vessels in January 2008, the activities changed and consisted solely of ownership and provision of vessels to container shipping
companies under time charters.
F-10
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
2.
Nature of Operations and Basis of Preparation (Continued)
(b)
Basis of Preparation
CMA CGM, the Company’s sole source of operating revenue, announced in September 2009 that it and its lenders were exploring a potential financial
restructuring to address its short and medium term financing requirements and that it was seeking to reduce and in some cases cancel certain ship
deliveries. The Company is not involved in these discussions. The Company has experienced delays in receiving charterhire from CMA CGM, where
between one and three instalments have been outstanding. Under the charter contracts charterhire is due to be paid every 15 days in advance on the 1 and
st
16 of each month.
th
As at December 31, 2009, one period of charterhire, due on December 16, 2009, was outstanding amounting to $6.9 million. This was received in January
2010. As at close of business on May 7, 2010, the latest practicable date prior to the issuance of these combined financial statements, charterhire due on
May 1, 2010 totalling approximately $6.4 million was outstanding.
Under the ship management contracts with CMA Ships, a wholly owned subsidiary of CMA CGM, vessel operating costs and management fees are
payable monthly in advance. As at December 31, 2009 the Company owed its ship manager approximately $3.4 million under the ship management
agreement for operating costs and management fees for December 2009. This was paid in January 2010. As at close of business on May 7, 2010, the latest
practicable date prior to the issuance of these combined financial statements, $3.1 million was owed by the Company to CMA Ships for operating costs and
management fees for May 2010.
The Company’s combined financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. These combined financial statements do not include any adjustments relating to the recoverability
and classification of recorded assets, nor relate to the amounts and classification of liabilities that may be necessary should the Company be unable to
continue as a going concern.
If CMA CGM is unable to accomplish a financial restructuring and ceases doing business or otherwise fails to perform its obligations under the Company’s
charters, Global Ship Lease’s business, financial position and results of operations would be materially adversely affected as it is probable that, should the
Company be able to find replacement charters, these would be at significantly lower daily rates and for shorter durations than currently in place. In this
situation there would be significant uncertainty about the Company’s ability to continue as a going concern.
F-11
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
2.
Nature of Operations and Basis of Preparation (Continued)
The following table provides information about the 17 vessels in the fleet chartered to CMA CGM and reflected in these combined financial statements:
Vessel Name
Ville d’Orion
Ville d’Aquarius
CMA CGM Matisse
CMA CGM Utrillo
Delmas Keta
Julie Delmas
Kumasi
Marie Delmas
CMA CGM La Tour
CMA CGM Manet
CMA CGM Alcazar
CMA CGM Château d’lf
CMA CGM Thalassa
CMA CGM Jamaica
CMA CGM Sambhar
CMA CGM America
CMA CGM Berlioz
(3)
Capacity
in TEUs
(1)
4,113
4,113
2,262
2,262
2,207
2,207
2,207
2,207
2,272
2,272
5,100
5,100
10,960
4,298
4,045
4,045
6,627
Year Built
1997
1996
1999
1999
2003
2002
2002
2002
2001
2001
2007
2007
2008
2006
2006
2006
2001
Purchase Date
by GSL
(2)
December 2007
December 2007
December 2007
December 2007
December 2007
December 2007
December 2007
December 2007
December 2007
December 2007
January 2008
January 2008
December 2008
December 2008
December 2008
December 2008
August 2009
Charter Remaining
Duration (years)
3.00
3.00
7.00
7.00
8.00
8.00
8.00
8.00
7.00
7.00
11.00
11.00
16.00
13.00
13.00
13.00
11.75
Daily
Charter
Rate
$28,500
$28,500
$18,465
$18,465
$18,465
$18,465
$18,465
$18,465
$18,465
$18,465
$33,750
$33,750
$47,200
$25,350
$25,350
$25,350
$34,000
(1)
(2)
(3)
Twenty-foot Equivalent Units.
The table shows purchase dates of vessels related to the Company’s time charter business, which occurred during both the Predecessor and
Successor periods.
The vessel, CMA CGM Berlioz, is a second hand vessel acquired during the year.
The following table provides information about the contracted fleet not reflected in these combined financial statements, other than deposits paid:
Vessel Name
Hull 789
Hull 790
(2)
(2)
Capacity
in TEUs
(1)
4,250
4,250
Year Built
2010
2010
Estimated
Delivery Date
to GSL
October 2010
December 2010
Charterer
ZIM
ZIM
Charter
Duration
(years)
7-8
(3)
7-8
(3)
Daily
Charter
Rate
$28,000
$28,000
(1)
(2)
(3)
Twenty-foot Equivalent Units.
Contracted to be purchased from German interests (note 8).
Seven years charter that could be extended to eight years at Charterer’s option.
F-12
Table of Contents
3.
Accounting for the Merger
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
On August 14, 2008, pursuant to the terms of the merger agreement, Holdings acquired all of Global Ship Lease, Inc.’s outstanding capital stock for
$235,300 excluding transaction expenses, funded by the issue to CMA CGM of 6,778,650 Class A common shares, 3,934,050 Class B common shares,
12,375,000 Class C common shares, warrants to acquire 3,131,900 Class A common shares with an exercise price of $9.25 and 1,000 Series A preferred
shares with a total nominal value of $48,000 and $18,570 in cash. The rights of the different classes of securities are set out in note 16.
The Company accounted for the business combination under the purchase method as prescribed by ASC Topic 805. Under the purchase method, the
identifiable assets acquired and liabilities assumed were recorded at their fair value as of the acquisition date. Any excess of the fair value of the net
acquired assets over the purchase price was recorded as a pro rata reduction of identified intangible assets, vessels in operation and other fixed assets.
The following table shows the calculation of allocable purchase price:
(1)
Cash payment
Class A common shares
Class B common shares
Class C common shares
Warrants to acquire Class A common shares
Mandatory redeemable preferred shares
Transaction related expenses
Total allocable purchase price
Number of
Instruments
n.a.
6,778,650
3,934,050
12,375,000
3,131,900
1,000
Fair Value
Per
Instrument
n.a.
7.67
6.63
7.23
0.38
n.a.
n.a.
Fair Value
$ 18,570
51,992
26,083
89,471
1,184
48,000
235,300
14,556
$249,856
(1)
An amount of $8,056 cash was paid in the Successor period in 2008.
Equity instruments issued in connection with the merger were assessed at their respective fair value reflecting specific features of each instrument at the
date of the announcement of the definitive terms of the merger on July 24, 2008.
The Class A common shares were valued at the $7.67 per share average closing price of the common stock (using the average closing price of the five
business days on and surrounding the date of the announcement of definitive terms of the merger i.e. July 24, 2008). The rights of holders of Class B
common shares are identical to those of holders of Class A common shares, except that the holders of Class B common shares were not entitled to receive
any dividends with respect to any quarter prior to those paid with respect to the fourth quarter of 2008 and their dividend rights are subordinated to those of
holders of Class A common shares until at least the third quarter of 2011. The rights of holders of Class C common shares were identical to those of holders
of Class A common shares, except that holders of Class C common shares were not entitled to receive any dividends. The Class C common shares
converted into Class A common shares on a one-for-one basis on January 1, 2009. Management estimated the per share fair value of the Class C common
shares at the merger by discounting the share price of $7.67 by the present value of the first two $0.23 anticipated dividends foregone in 2008. Management
calculated the discount rate of 10.75% by using the average of (a) a 12.6% cost of equity using the dividend growth model (assumes a comparable dividend
of 8.6% and long term dividend growth of 4.0%) and (b) an 8.9% cost of equity using the beta method (4.38% U.S. Risk Free Rate (30-year U.S. Treasury)
plus a 5.0% adjusted equity market risk premium). Using this rate, the discount for the present value of the foregone dividends was $0.44. This results in an
implied share price of $7.23. Management estimated the per share fair value of the Class B common shares using the same method for the forgone
dividends as used for Class C common shares. Management also applied an additional discount for subordinated dividend risk and impaired liquidity.
Management estimated this additional discount of 7.8% (or $0.60 per share) by examining the trading performance of subordinated share class for
precedent transactions. This resulted in an implied share value of $6.63.
F-13
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
3.
Accounting for the Merger (Continued)
Warrants issued to CMA CGM as part of the purchase price were valued using the Black-Scholes option pricing model, with an average share value of
$7.67 (as described above), expected volatility at 30.0%, a risk free rate of 3.87%, an expected dividend yield of 11.99% over the duration of the
instrument, and an expected duration of five years.
The following table shows the fair value of identifiable assets acquired and liabilities assumed at the merger date:
Cash and cash equivalents
Prepaid expenses and other receivables
Derivative instruments
Vessels in operation
Vessel deposit
Other fixed assets
Intangible assets – purchase agreement
Long term debt
Accounts payable
Accrued expenses and other liabilities
Intangible liabilities – charter agreements
Negative goodwill to be allocated
Total allocable purchase price
Fair Value of
Net Assets
acquired
$
16,252
2,894
7,811
635,000
99,000
26
51,750
(401,100)
(1,181)
(12,604)
(28,023)
(119,969)
$ 249,856
Adjustments
for Negative
Goodwill
$
—
—
—
(110,921)
—
(5)
(9,043)
—
—
—
—
119,969
—
$
$
Purchase Price
Allocation
16,252
2,894
7,811
524,079
99,000
21
42,707
(401,100)
(1,181)
(12,604)
(28,023)
—
249,856
$
The fair value of the identifiable acquired assets and liabilities was reduced by $119,969 which equals the estimated excess of the fair value of the net
acquired assets over the purchase price. Three asset classes were reduced pro rata: (i) identified intangible assets from $51,750 to $42,707, (ii) other fixed
assets from $26 to $21 and (iii) vessels in operation from $635,000 to $524,079.
Derivative instruments comprised solely of interest rate financial instruments that were recognized at their mark-to-market value. Vessels in operation were
written up to their estimated fair market value at the merger date. The intangible asset recognized in connection with the purchase agreement is for the five
vessels contracted to be purchased as at August 14, 2008 from CMA CGM and was valued by comparing the acquisition prices as per the agreement and
the vessels estimated fair market values at the merger date. The intangible liability recognized in connection with charter agreements was valued using the
market approach where the Company’s actual charter agreements were compared to market rates at the merger date and discounted at an 8.0% interest rate.
In connection with the merger, $317,446 cash previously held in trust by Marathon was released. These funds were used to repay $115,000 of the assumed
credit facility, to purchase $147,053 of shares from shareholders under the merger agreement and a share repurchase program, to pay $18,500 of costs
associated with the merger and to pay $18,570 to CMA CGM due under the merger agreement. The balance was held for general working capital purposes
including financing the deposits of $15,477 for the two vessels to be purchased in the fourth quarter of 2010 paid in September 2008.
F-14
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
3.
Accounting for the Merger (Continued)
Unaudited Supplemental Pro Forma Information
The following pro forma information for the year ended December 31, 2008 assumes that the acquisition of the Company occurred at the beginning of the
reporting period being presented.
Operating revenue
Net loss
Pro forma net income per share
Weighted average number of Class A common shares outstanding (1)
Basic
Diluted
Net loss per share
Basic
Diluted
Weighted average number of Class B common shares outstanding (1)
Basic
Diluted
Net income per share
Basic
Diluted
Year Ended
December 31,
2008
100,135
$
$
(26,045)
33,591,788
33,591,788
$
$
(0.78)
(0.78)
7,405,956
7,405,956
$
$
—
—
(1) Assuming Class A and B common shares are participating securities under the two-class method.
4.
Significant Accounting Policies
(a)
Basis of combination
The accompanying combined financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles
(“US GAAP”) and include the financial statements of the Company and its wholly-owned subsidiaries, together with the carve-out information
during the period CMA CGM owned the vessels and the merger referred to in note 1. All inter-company transactions and accounts have been
eliminated on consolidation. For the Successor period, the Company’s financial statements have been prepared on a consolidated basis.
The accounting policies have been consistently applied throughout the periods presented.
(b) Use of estimates
The preparation of combined financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect
the amounts reported in the combined financial statements and the accompanying notes. It is possible that actual results may differ from those
estimates. Allocation methodologies used to prepare the combined financial statements are based on estimates and have been described in the notes,
where appropriate.
F-15
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
4.
Significant Accounting Policies (Continued)
(c)
Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities
of three months or less.
(d)
Restricted cash
Cash and cash equivalent subject to restrictions are excluded from cash and cash equivalents in the balance sheet and are presented as restricted cash.
(e) Accounts receivable
The Company carries its accounts receivable at cost less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs, collections and current credit conditions. The
Company does not generally charge interest on past-due accounts unless the accounts are subject to legal action, and accounts are written off as
uncollectible when all reasonable collection efforts have failed. Accounts are deemed as past-due based on contractual terms. Allowances for
doubtful accounts amount to $nil as of December 31, 2009 (2008: $nil).
During the period of operations under ownership by CMA CGM, customers were shippers, comprising exporters, importers and intermediaries, also
known as freight forwarders. At that time, the Company sub-contracted certain freight recruitment and payment collections to shipping agencies who
were obligated to pay for services provided if a customer defaulted on payment. Amounts receivable directly from final customers or shipping agents
were shown within accounts receivables. An allowance for doubtful accounts was established for amounts that were considered uncollectible at year-
end, based on review of outstanding invoices.
(f)
Inventories
Inventories consisted of bunkers on board vessels and lubricants in the period when the vessels were owned by CMA CGM. They are valued at cost
on a first-in-first-out basis. Inventory costs include the transfer from equity of any gains/losses on qualifying cash flow hedges relating to inventory
purchases.
(g) Vessels
Vessels are recorded at their acquisition cost (less an amount allocated to dry dock component), less accumulated depreciation and impairment loss,
if any. Following the merger described in note 1, the vessels are recorded at their fair value, less a proportion of the negative goodwill arising at the
time of the merger allocated to these vessels, rather than at their acquisition cost.
In connection with the merger (note 1), the Company recognised an intangible asset arising from the comparison of the acquisition prices per the
asset purchase agreement and the estimated fair values at the merger date of the vessels yet to be purchased. This intangible asset was transferred to
the cost of the appropriate vessel on delivery and as all such vessels have now been delivered, no intangible asset remains.
Subsequent expenditures for major improvements and upgrading are capitalized, provided they appreciably extend the life, increase the earning
capacity or improve the efficiency or safety of the vessels.
Borrowing costs incurred during the construction of vessels or as part of the prefinancing of the acquisition of vessels are capitalized. Interest
capitalized in the year ended December 31, 2009 was $523 (2008: $1,643 and 2007: $833). Other borrowing costs are expensed as incurred.
F-16
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
4.
Significant Accounting Policies (Continued)
(g) Vessels (Continued)
Vessels are depreciated to their estimated residual value using the straight-line method over their estimated useful lives which are reviewed on an
ongoing basis to ensure they reflect current technology, service potential and vessel structure. During the period when the vessels were owned by
CMA CGM when the vessels were earning freight revenues generated by the containerized transportation, the useful life was estimated as 25 years.
Following the sale of the vessels to the Company, the nature of operations changed significantly and from this date, the vessels earn time charter
income from the chartering out of the vessels instead of from carrying cargo. On this new basis of operations the useful life was reassessed and
estimated to be 30 years.
Prepayments and costs directly related to the future acquisition of vessels are presented in the balance sheet as vessel deposits.
(h) Drydocking costs
Vessels are drydocked approximately every five years for major repairs and maintenance that cannot be performed while the vessels are operating.
Costs directly associated with the required regulatory inspection of the ship, its hull and its machinery and for the defouling and repainting of the hull
are capitalized as they are incurred and depreciated on a straight line basis over the period between drydocks. Upon initial purchase, an element of
the cost of a vessel is allocated to a drydock component which is amortised on a straight line basis to the anticipated next dry dock.
(i)
Long-lived assets
In accordance with ASC Topic 360, “Impairment of long-lived assets”, intangible and fixed assets such as vessels are reviewed for impairment when
events or changes in circumstances indicate that their carrying amounts may not be recoverable. An impairment loss is recognized when the sum of
the expected undiscounted future cash flows from the asset over its estimated remaining useful life is less than its carrying amount. An impairment
loss is recorded equal to the amount by which the asset’s carrying amount exceeds its fair value. Fair value is the net present value of future cash
flows discounted by an appropriate discount rate.
During the year ended December 31, 2009, market conditions deteriorated as a result of the global economic downturn and a surplus of containership
capacity. Containership spot charter rates and asset values decreased significantly during the year. These changes are considered indicators of
potential impairment of the carrying amount of the Company’s vessels. Accordingly, the undiscounted cash flow test for each vessel was performed
as of December 31, 2009.
The assumptions used to determine the cash flows expected to be generated by each vessel involve a considerable degree of estimation. Actual
conditions may differ significantly from the assumptions used and thus actual cash flows may be significantly different to those expected with a
material effect on the recoverability of each vessel’s carrying amount.
The most significant assumptions made for the determination of expected cash flows are (i) charter rates on expiry of existing charters, which are
based on a reversion to the historical mean for each category of vessel, adjusted to reflect current and expected market conditions (ii) off-hire days,
which are based on actual off-hire statistics for the GSL fleet (iii) operating costs, based on current levels escalated over time based on long term
trends (iv) dry docking frequency, duration and cost and (v) estimated useful life which is assessed as a total of 30 years. In case of an indication of
impairment, the results of a recoverability test would also be sensitive to the discount rate applied.
Based on the assumptions made, the expected undiscounted future cash flows exceed the vessels’ carrying amounts as of December 31, 2009.
F-17
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
4.
Significant Accounting Policies (Continued)
(j)
Derivative instruments
(i)
Interest rate hedging activities
The Company has entered into certain hedging agreements in connection with its borrowings.
Interest rate derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-
measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated and
qualifies as a hedging instrument, and if so, the nature of the item being hedged.
The Company’s interest rate derivative instruments do not qualify for hedge accounting. Changes in the fair value, as well as cash
settlements of interest rate derivative instruments, are recognized immediately in the statement of income within “Realized and unrealized
gain (loss) on interest rate derivatives”. Cash flows related to interest rate derivatives (including payments and periodic cash settlements) are
included within “Net cash provided by (used in) investing activities”.
The fair value of derivatives is presented on the face of the balance sheet under the line item “Derivative instruments” and is split into
current and non-current portions based on the net cash flows expected within one year.
(ii)
Commodity hedging activities
Since the acquisition of the vessels from CMA CGM, the Company has not entered into any bunker derivative instruments and has not
undertaken any bunker hedging activities. However these were activities undertaken during the period when the vessels were owned by
CMA CGM.
(k) Deferred finance costs
Costs incurred in connection with obtaining long term debt and in obtaining amendments to existing facilities are recorded as deferred financing
costs and are amortized to interest expense over the estimated duration of the related debt. Such costs include fees paid to the lenders or on the
lenders’ behalf and associated legal and other professional fees.
(l)
Preferred shares
Preferred shares have been included within liabilities in the combined balance sheet and preferred share dividends included within interest expense
in the combined income statement as their nature is similar to that of a liability rather than equity. Holders of these mandatorily redeemable preferred
shares are entitled to receive a dividend equal to 3-month Libor plus 2% on the original issue price and rank senior to the Class A and Class B
common shares with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company.
(m)
Intangible liabilities – charter agreements
In connection with the merger (note 1), the Company recognised an intangible liability using the market approach wherein the Company’s actual
charter agreements were compared to market rates at the merger date.
These intangible liabilities are amortized as an increase of time charter revenue over the remaining term of the relevant charter.
(n)
Classification of long term debt
Long term debt is classified within current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12
months after the balance sheet date.
F-18
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
4.
Significant Accounting Policies (Continued)
(o) Other comprehensive income (loss)
Other comprehensive income (loss), which is reported in the accompanying combined statement of equity, consists of net income (loss) and other
gains and losses affecting equity that, under US GAAP, are excluded from net income (loss). Other comprehensive income (loss) only relates to the
period in which the vessels were owned and operated by CMA CGM and includes the effective portion of bunker derivative financial instruments
that qualified as hedge accounting and the impact of the translation of foreign currency statements, as certain of CMA CGM’s vessel owning
subsidiaries had a functional currency other than the U.S. dollar.
(p)
Segment information
Segment information has been prepared on the same basis that it is reported internally to the Company’s chief operating decision maker. The
Company operated under two business models from which it derives its revenues reported within these financial statements: (i) the provision of
vessels by the Company under time charters to container shipping companies and (ii) freight revenues generated by the containerized transportation
of a broad range of industrial and consumer goods by the Predecessor group. There are no transactions between reportable segments.
(q)
Revenue recognition and related operating expense
The Company charters out its vessels on time charters which involves placing a vessel at a charterer’s disposal for a period of time during which the
charterer uses the vessel in return for the payment of a specified daily hire rate. Such revenues are accounted for as operating leases and are therefore
recognized on a straight line basis as the average revenues over the rental periods of such charter agreements, as service is performed, except for loss
generating time charters, in which case the loss would be recognized in the period when such accumulated loss is determined.
Under time charter arrangements the Company, as owner, is responsible for all the operating expenses of the vessels, such as crew costs, insurance,
repairs and maintenance, and such costs are expensed as incurred.
Freight revenues earned during the period of the vessels’ ownership by CMA CGM and related costs directly attributable to loaded container
movements were recognized on delivery of the loaded container to its final destination. Freight revenues and costs directly attributable to containers
not delivered at the closing date, excluding mainly time based costs such as charter costs, fuel and lubrication oil consumption and port taxes and
expenses, were reported as “other receivables” and “other payables”. A provision for net realizable value was recorded only when all costs necessary
to complete the delivery of the service exceeded the corresponding expected freight revenue.
(r)
Foreign currency transactions
The Company’s functional currency is the U.S. dollar as substantially all revenues and a majority of expenditures are denominated in U.S. dollars.
Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the balance sheet dates. Expenses paid in
foreign currencies are recorded at the rate of exchange at the transaction date. Exchange gains and losses are included in the determination of net
income.
(s)
Repairs and maintenance
All expenditures relating to routine maintenance and repairs are expensed when incurred.
(t)
Insurance
The Company maintains hull and machinery insurance, war risks insurance, protection and indemnity insurance coverage, increased value insurance,
and freight, demurrage and defence insurance coverage in amounts considered prudent to cover normal risks in the ordinary course of its operations.
Premiums paid in advance to insurance providers are recognized as prepaid expenses and expensed over the period covered by the insurance
contract.
F-19
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
4.
Significant Accounting Policies (Continued)
(u)
Share based compensation
The Company awards restricted stock units to its employees and directors which vest, based on service conditions only, over a period of time up to
three years from the award date.
The fair value of restricted stock unit grants is determined by reference to the quoted stock price on the date of grant, adjusted for estimated
dividends forgone until the restricted stock units vest. Compensation expense is recognized based on a graded expense model over the vesting
period.
(v)
Income taxes
The Company and its Marshall Island subsidiaries are exempt from taxation in the Marshall Islands. The Company’s Cyprus subsidiaries are liable
for a tax based on the tonnage of the vessel each company owns. The cost, which is included within operating expenses, amounted to $109, $48 and
$nil for the years ended December 31, 2009, 2008 and 2007, respectively. The Cyprus subsidiaries are also liable for income tax payable on interest
income.
The Company has one subsidiary in the United Kingdom, where the principal rate of corporate income tax is 28% (2008: 28%, 2007: 30%). This
subsidiary earns management and other fees from fellow group companies.
The Company accounts for deferred income taxes using the liability method which requires the determination of deferred tax assets and liabilities,
based upon temporary timing differences that arise between the financial statement and tax bases of recording assets and liabilities, using enacted tax
rates in effect for the year in which differences are expected to reverse. The net deferred tax asset is adjusted by a valuation allowance where
appropriate, if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be
realized. However, with regard to a deferred tax asset arising from the recognition of compensation costs for share awards, the Company recognizes
a deferred asset based on the compensation cost booked in the reporting period with no adjustment for a valuation allowance, in accordance with the
requirements of ASC Topic 718 “Accounting for stock based compensation.” At December 31, 2009 a deferred tax asset of $445 (2008: $293)
presented within “Other receivables” was recognized relating to the stock based compensation costs booked in the year.
(w) Dividends
Dividends are recorded in the period in which they are declared by the Company’s Board of Directors. Dividends to be paid are presented in the
combined balance sheet in the line item “Dividends payable”.
(x)
Earnings per share
In accordance with ASC Topic 260 “Earnings Per Share”, basic earnings per common share is based on income available to common shareholders
divided by the weighted-average number of common shares outstanding during the period, excluding non-vested restricted stock units. Diluted
earnings per common share is calculated by applying the treasury stock method. All outstanding warrants and non-vested restricted stock units that
have a dilutive effect are included in the calculation. The basic and diluted Earnings Per Share for the Successor period is presented for each
category of participating common shares under the two-class method.
F-20
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
4.
Significant Accounting Policies (Continued)
(y)
Recently issued accounting standards
The FASB “Accounting Standards Codification” (the Codification) became effective on July 1, 2009, officially becoming the single source of
authoritative non-governmental U.S. generally accepted accounting principles (US GAAP), superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF), and related accounting literature. Only one level of authoritative
US GAAP now exists and it is termed Accounting Standards Codification (“ASC”). All other accounting literature is considered non-authoritative.
The Codification reorganizes US GAAP pronouncements into accounting topics and displays them using a consistent structure. Also included in the
Codification is relevant Securities and Exchange Commission (SEC) guidance organized using the same topical structure in separate sections within
the Codification. This has impacted the Company’s financial statements as all references to authoritative accounting literature have now been
referenced in accordance with the Codification.
On April 9, 2009, the Financial Accounting Standards Board (“FASB”) issued guidance now codified as ASC Topic 825, “Interim Disclosures about
Fair Value of Financial Instruments.” This pronouncement requires disclosures of fair value for any financial instruments not currently reflected at
fair value on the balance sheet for all interim periods. This pronouncement is effective for interim and annual periods ending after June 15, 2009 and
is applied prospectively. The adoption of this pronouncement did not have a material impact on the combined financial statements of the Company.
On April 9, 2009 the FASB issued guidance now codified as ASC Topic 320, “Recognition and Presentation of Other Than Temporary
Impairments.” This pronouncement is intended to bring greater consistency to the timing of impairment recognition, and provide greater clarity to
investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. This pronouncement also requires
increased and more timely disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. This
pronouncement is effective for interim and annual periods ending after June 15, 2009 and is applied prospectively. The adoption of this
pronouncement did not have a material impact on the combined financial statements of the Company.
In May 2009, the FASB issued guidance now codified as ASC Topic 855, “Subsequent Events,” which establishes general standards of accounting
for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be
issued. The Company adopted this pronouncement and has evaluated for disclosure subsequent events that have occurred up to the date of issuance
of the combined financial statements of the Company.
Management do not believe that any other recently issued, but not yet effective accounting pronouncements, if currently adopted, would have a
material impact on the combined financial statements of the Company.
F-21
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
5.
Vessels in Operation, less Accumulated Depreciation
Cost
Accumulated Depreciation
Net Book Value
Variations in net book value of vessels including drydocking, are presented below:
Opening balance
Depreciation expense (Predecessor)
Additions in the period (Predecessor)
Purchase price adjustment (note 3)
Additions in the period (Successor)
Transfer from intangible assets – purchase agreement (note 7)
Depreciation expense (Successor)
Closing balance
December 31,
2009
Successor
$1,007,500
(45,792)
$ 961,708
December 31,
2008
Successor
$ 915,627
(8,731)
$ 906,896
December 31,
2009
Successor
$ 906,896
—
—
—
84,267
7,840
(37,295)
$ 961,708
December 31,
2008
Successor
$ 475,299
(12,163)
1,460
59,302
356,862
34,867
(8,731)
$ 906,896
In December 2008 the Company took delivery of four of the five vessels in the contracted fleet. Included within additions for the year ended December 31,
2008 was an advance payment of $99,000 made in that year and capitalized interest of $1,400 (2007: $833) relating to the advance payment.
In August 2009, the Company took delivery of the CMA CGM Berlioz, the final vessel in its contracted fleet. The book value of the CMA CGM Berlioz
includes the transfer of $7,840 from the intangible asset recognized at the time of the merger, and which arose from the comparison of the acquisition prices
per the asset purchase agreement and the estimated fair value at the merger date of the vessels yet to be purchased. There was no interest capitalized during
the year ended 31 December 2009 in respect of vessels in operation.
As of December 31, 2009 all 17 vessels were pledged as collateral under the credit facility agreement.
F-22
Table of Contents
6.
Vessel Deposits
Opening balance
Additions in the period
Capitalized interest
Closing balance
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
December 31,
2009
Successor
15,720
—
523
16,243
$
$
December 31,
2008
Successor
$
$
—
15,477
243
15,720
Vessel deposits relate to two 4,250 TEU newbuildings that the Company has agreed to acquire from German interests for approximately $77,000 per vessel.
The purchase is subject to the completion of customary additional documentation and closing conditions. The two vessels are scheduled to be delivered in
the fourth quarter of 2010. Both vessels are contracted to be chartered to ZIM for a term of seven or eight years at a net rate of $28,000 per vessel per day.
The Company is not liable for any other prepayments before the delivery of these vessels other than to provide certain owner’s supplies such as lashing
gear. Vessel deposits include capitalized interest of $766 as at December 31, 2009 (2008: $243).
7.
Intangible Assets – Purchase Agreement
Purchase price allocation (note 3)
Transfer to vessels in operation
Closing balance
December 31,
2009
Successor
$
$
7,840
(7,840)
—
December 31,
2008
Predecessor
42,707
$
(34,867)
7,840
$
Intangible assets related to the agreement in place as at August 14, 2008 to purchase five vessels from CMA CGM. These intangible assets were not
amortised but on delivery of the related vessel were allocated to the cost of the purchased vessels.
During the year ended December 31, 2009, the final vessel in the contracted fleet (2008: four) was purchased by the Company. The related intangible asset
of $7,840 (2008: $34,867) was transferred to the cost of the vessel.
8.
Derivative Instruments
The fair value of derivative financial instruments contracted by the Company is as follows:
Fair value of interest rate swap hedging instruments - current and non current portions
Closing balance
December 31,
2009
Successor
$ (29,113)
(29,113)
$
December 31,
2008
Successor
$ (47,041)
$ (47,041)
As at December 31, 2009 and December 31, 2008, none of the Company’s derivative instruments qualified for hedge accounting. In the year ended
December 31, 2007 the net gains recognized in earnings during the period for bunker derivative instruments that qualified as cash flow hedging instruments
amounted to $3,083.
F-23
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
8.
Derivative Instruments (Continued)
During 2008 the Company entered into certain derivative interest rate agreements to fix the interest rate on debt drawn or anticipated to be drawn under its
credit facility. A total of $580,000 of anticipated core debt has been swapped into fixed rate debt at a weighted average rate of 3.59%, with details as
follows:
Start Date
May 12, 2008
May 19, 2008
May 20, 2008
November 19, 2008
December 17, 2008
December 17, 2008
December 17, 2008
December 17, 2008
December 17, 2008
July 15, 2009
October 29, 2010
Maturity Date
March 17, 2013
March 17, 2013
March 17, 2013
September 17, 2013
March 17, 2013
December 17, 2016
December 17, 2016
March 17, 2013
December 17, 2016
June 17, 2014
October 29, 2015
Total / Weighted average rate:
Notional Amount
60,000
$
60,000
68,000
50,000
20,000
60,000
60,000
45,000
71,000
41,000
45,000
580,000
$
Fixed Rate %
3.40
3.40
3.40
3.32
3.40
3.69(1)
3.80(1)
3.40
3.70(1)
3.80
4.25
3.59%
(1)
The swap counterparty has a one time option to cancel the swap as of March 17, 2013
As of December 31, 2009 the maximum length of time over which the entity is hedging its interest rate exposure is approximately seven years.
9.
Deferred Financing Costs
Opening balance
Amortization expense included within interest expense (Predecessor)
Expenditure in the period
Purchase price adjustment (note 3)
Amortization expense included within interest expense (Successor)
Closing balance
December 31,
2009
Successor
$
$
3,657
—
5,431
—
(3,108)
5,980
December 31,
2008
Successor
5,882
(491)
3,856
(5,391)
(199)
3,657
$
$
The Company’s borrowing capacity under its credit facility was reduced as part of amendments agreed on February 10, 2009 and August 20, 2009 (see note
11). A portion of the unamortized deferred financing costs at the date of each amendment was written off, in proportion to the decrease in the borrowing
capacity, for $176 and $2,015 respectively. These amounts have been included within interest expense. The remaining unamortized deferred financing costs
existing at the date of each amendment together with the additional fees and attributable costs paid ($3,293 and $2,138, respectively) were deferred and are
amortized over the remaining term of the credit agreement.
F-24
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
10.
Intangible Liability – Charter Agreements
Opening balance
Purchase price allocation (note 3)
Amortization in period
Closing balance
December 31,
2009
Successor
$
$
27,956
—
(1,549)
26,407
December 31,
2008
Successor
—
28 ,023
(67)
27,956
$
$
Intangible liabilities relate to management’s estimate of fair value of below-market charters at the date of the merger (note 1), on August 14, 2008. The
intangible liabilities will be amortized for each vessel over the remaining life of the charter. The fair value was estimated by management based on its
experience with regard to availability of similar vessels, costs to build new vessels and current market demand. The contracted lease rates were compared
to the estimated current market lease rates for similar vessels. The estimated lease intangibles were computed by discounting the difference in the projected
lease cash flows using a discount rate of 8.0% and the length of the charter as the relevant time period.
Amortization of the intangible liabilities for the 12 initial vessels began on the date following the merger and for the remaining five vessels delivered to the
Company after the merger, amortization commenced on delivery.
11. Long term Debt
In December 2007 the Company entered into an $800,000 senior secured credit facility with Fortis Bank, Citibank, HSH Nordbank, Sumitomo Mitsui
Banking Corporation, KFW and DnB Nor Bank. Subsequently, Bank of Scotland joined the syndicate.
On February 10, 2009 the Company announced it had amended the terms of the original agreement in response to significant decreases in market values of
containerships and the consequent implications on the loan to value covenant in the credit facility. Loan to value is the ratio of the balance outstanding on
the credit facility to the aggregate charter free market value of the secured vessels, determined in April and November each year. The amended agreement
increased temporarily the permitted maximum loan to value to 100% (previously 75%) applicable for test dates up to and including April 30, 2010. The
margin applicable on interest payable under the credit facility varied from 1.25% to 2.75% over Libor depending on the loan to value ratio. The Company
also paid a commitment fee of 0.50% per annum based on the undrawn portion of the credit facility (0.25% per annum up to February 10, 2009). During
this period, the Company had no restrictions on its ability to distribute dividends unless the loan to value ratio exceeded 90%, at which point the Company
would have been required to place 50% of its quarterly cash available for distribution in a pledged account. The pledged account would be released back to
the Company if loan to value fell back below 90% during a subsequent valuation period. If the loan to value ratio exceeded 100%, the Company may have
been required to prepay the loan or provide additional security to reduce the loan to value ratio to below 100%. The credit facility amount of $800,000 was
to be reduced by 19 equal quarterly instalments, based on the market value weighted average age of the secured vessels compared to 18 years, commencing
in December 2011. The final maturity date of the credit facility continued to be August 14, 2016 at which point any remaining outstanding balance had to
be repaid.
On April 29, 2009, the Company agreed with the lenders that no loan to value tests would be performed pending agreement of a further amendment to the
credit facility in response to further deterioration in market values of containerships. The margin applicable during this waiver period was 2.75% and the
Company agreed that no dividends would be declared or paid on common shares during this time. The waiver period was extended on June 25, 2009 and
again on July 30, 2009 through until August 31, 2009.
F-25
Table of Contents
11. Long term Debt (Continued)
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
On August 20, 2009, the Company further amended the terms of the credit facility. Under the revised terms of the credit facility, the loan to value covenant
has been waived up to and including November 30, 2010 with the next loan to value test scheduled for April 30, 2011. Further, the amendment enabled the
Company to borrow $57,000 under the credit facility including a $15,000 newly created Over Advance Portion (“OAP Loan”) to allow the purchase of the
CMA CGM Berlioz on August 26, 2009. The balance of the $82,000 vessel purchase price was funded by cash. Amounts borrowed under the amended
credit facility bear interest at Libor plus a fixed margin of 3.50% up to November 30, 2010. Thereafter, the margin will be between 2.50% and 3.50%
depending on the loan to value ratio, to be determined at the end of April and November each year.
Under the amendment, all undrawn commitments of $200,900 were cancelled after the delivery of the CMA CGM Berlioz. No further commitment fees are
payable subsequent to the cancellation of the undrawn commitments. The commitment fee in the year ended December 31, 2009 amounted to $779 (2008:
$473 (Successor) and $624 (Predecessor), 2007: $92 (Predecessor). The Company may not declare or pay dividends to common shareholders during the
period up to November 30, 2010 or thereafter until the loan to value ratio is at or below 75%.
A repayment of $10,908 of the OAP loan was made in November 2009. The second repayment in February 2010 fully repaid the OAP loan.
The balance of borrowings under the credit facility is to be repaid quarterly commencing June 30, 2010 in an amount equal to free cash in excess of
$20,000 determined as at the previous month end subject to a minimum of $40,000 repayment a year on a rolling 12 month trailing basis. Once loan to
value is at or below 75%, repayment of borrowings will become fixed at $10,000 per quarter. The final maturity date of the credit facility remains
August 14, 2016 at which point any remaining outstanding balance must be repaid.
As part of the August 20, 2009 amendment, CMA CGM has agreed to defer redemption of the $48,000 preferred shares it holds until after the final
maturity of the credit facility in August 2016, subject to any earlier redemption from proceeds from the exercise of warrants (see note 10), and also to retain
its current holding of approximately 24.4 million common shares in the Company until at least November 30, 2010.
The credit facility is secured by, inter alia, first priority mortgages on each of the vessels in the security package, a pledge of shares of the vessel owning
subsidiaries as well as assignments of earnings and insurances. The financial covenants in the credit facility are: a) a minimum cash balance of the lower of
$15,000 or six months net interest expense; b) net debt to total capitalization ratio not to exceed 75%; c) EBITDA to debt service, on a trailing four-quarter
basis, to be no less than 1.10 to 1; and d) a minimum net worth of $200,000 (with all terms as defined in the credit facility).
F-26
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
11. Long term Debt (Continued)
Long term debt is summarized as follows:
Credit facility, at Libor USD + 2.5% to 3.5%
Less current instalments of long term debt
December 31,
2009
Successor
$ 588,192
(68,300)
$ 519,892
December 31,
2008
Successor
$ 542,100
—
$ 542,100
As described above and as part of the amendment dated August 20, 2009, outstanding borrowings under the credit facility are to be repaid quarterly in an
amount equal to free cash in excess of $20,000 determined as at the month end prior to the scheduled repayment. Repayments become fixed at $10,000 per
quarter once loan to value is at or below 75% which, for the purposes of the following table, is assumed to be as at April 30, 2011, the next scheduled test
date. Based on management’s reasonable estimates of excess cashflow, as at December 31, 2009 the estimated repayments in each of relevant periods are as
follows:
Due in one year or less
Due after one year through two years
Due after two years through five years
Due after five years
December 31,
2009
$
Successor
68,300
45,300
120,000
354,592
$ 588,192
December 31,
2008
Successor
$
—
—
—
542,100
$ 542,100
The amount of excess cash generated may vary significantly from management’s estimates and consequently the repayment profile of outstanding debt may
be significantly different from that presented. Further, loan to value may not be at or below 75% as at April 30, 2011 in which case, assuming a
continuation of the current waiver, prepayments will continue to be based on excess cash.
12. Other operating (income) expense
Other operating (income) expense is summarized as follows:
Sundry shipping income
Other sundry income
Realized (gains) losses on bunker derivative instruments
2009
Successor
$ (288)
(144)
—
$ (432)
F-27
Year ended December 31,
2008
Successor
August 15 to
December 31
$
(106)
—
(106)
$
Predecessor
January 1 to
August 14
$
(187)
2007
Predecessor
$ —
280
93
(2,341)
$ (2,341)
$
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
13. Related Party Transactions
CMA CGM is presented as a related party as it was, until the merger, the parent company of Global Ship Lease, Inc. and at December 31, 2009 is a
significant shareholder of the Company, owning certain Class A and Class B common shares representing a 45% voting interest in the Company.
Amounts due to CMA CGM companies are summarized as follows:
Current account (below)
Amounts due to CMA CGM companies presented within liabilities
Current account (below)
Amounts due from CMA CGM companies presented within assets
December 31,
2009
December 31,
2008
Successor
3,764
3,764
7,838
7,838
$
$
$
$
Successor
1,040
1,040
958
958
$
$
$
$
CMA CGM charters all of the Company’s operating vessels and one of its subsidiaries provides the Company with ship management services. The current
account balances at December 31, 2009 and December 31, 2008 relate to amounts payable to or recoverable from CMA CGM group companies.
CMA CGM holds all of the Series A preferred shares of the Company. During the year to December 31, 2009, the Company paid CMA CGM dividends on
the preferred shares of $2,279 (2008: $nil) of which $848 related to the year ended December 31, 2008.
Under a shareholder’s loan agreement dated December 11, 2007, CMA CGM provided to the Predecessor a credit facility of $250,000. The amount of the
loan outstanding on August 14, 2008 of $176,875 was cancelled upon completion of the merger (note 1). The loan was unsecured and bore interest at
5.25% per annum.
Asset Purchase Agreement
As reported in note 2, the Company entered into an asset purchase agreement with CMA CGM on December 5, 2007. Pursuant to this agreement, during
December 2007, the Company purchased 10 secondhand vessels for a total price of $385,000 and in January 2008, the Company purchased two newly built
vessels for a total price of $188,000. In December 2008 the Company purchased four vessels for a total price of $354,780 of which $99,000 was prepaid by
virtue of the 12,375,000 Class C common shares in the Company issued to CMA CGM in the merger (note 3).
In August 2009, the Company took delivery of the CMA CGM Berlioz, a 2001-built 6,627 TEU container vessel and the last vessel of its contracted fleet
with CMA CGM. The vessel was purchased for $82,000 and was funded by drawings under the credit facility and available cash (see note 11). The CMA
CGM Berlioz is on a non-cancellable, 12-year time charter to CMA CGM at a daily rate of $34.
Time Charter Agreements
All of the Company’s vessels are time chartered to CMA CGM. Under each of the time charters, hire is due in advance and the daily rate is fixed for the
duration of the charter. The charters are for remaining periods as at December 31, 2009 of between 3 and 16 years. Of the $1,659,803 maximum future
charter hire receivable for the total fleet set out in note 14 (including for two vessels scheduled to be purchased in fourth quarter 2010 and to be chartered to
ZIM, a company not related to CMA CGM), $1,516,611 relates to the 17 ships currently chartered to CMA CGM.
F-28
Table of Contents
13. Related Party Transactions (Continued)
Ship Management Agreement
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
The Company outsources day to day technical management of its vessels to a ship manager, CMA Ships Ltd, a wholly owned subsidiary of CMA CGM.
The Company pays CMA Ships Ltd an annual management fee of $114 per vessel and reimburses costs incurred on its behalf, mainly being for the
provision of crew, lubricating oils and routine maintenance. Such reimbursement is subject to a cap of between $5.4 and $8.8 per day per vessel depending
on the vessel. The impact of the cap is determined quarterly and for the fleet as a whole. Ship management fees expensed for the year ended December 31,
2009 amounted to $1,864 (2008: Successor period $528 and Predecessor period $848, 2007: $49).
Except for transactions with CMA CGM, the Company did not enter into any other related party transactions.
14. Commitments and Contingencies
Contracted Vessel Purchases
As reported in note 2, the Company has agreed to purchase two vessels from German interests in the fourth quarter of 2010 for approximately $77,000
each. A deposit of 10% has been paid for these two vessels. The remaining purchase obligations are currently unfunded.
Charter Hire Receivable
The Company has entered into long term charters for its vessels owned at December 31, 2009. The charter hire (including those relating to vessels due for
delivery in 2010), is due in advance and the daily rate is fixed for the duration of the charter. The charters were originally for periods of between five and
17 years and the maximum future annual charter hire receivable for the fleet of 17 vessels as at December 31, 2009 and for the total contracted fleet of 19
vessels, taking account of actual or anticipated delivery dates and before allowance for any off-hire periods, is as follows:
Year ending December 31
2010
2011
2012
2013
2014
2013 and thereafter
15. Operating Segments
Fleet operated as at
December 31, 2009
156,756
$
156,756
156,502
135,952
135,952
774,693
1,516,611
$
Total fleet to
be operated
$ 158,911
177,197
176,998
156,392
156,392
833,913
$1,659,803
Segment information reported below has been prepared on the same basis that it is reported internally to the Company’s chief operating decision maker.
The Company operated under two business models from which it derives its revenues reported within these combined financial statements: (i) the provision
of vessels by the Company under time charters to container shipping companies and (ii) freight revenues generated by the containerized transportation of a
broad range of industrial and consumer goods by the Predecessor group. There are no transactions between reportable segments. Following the delivery of
the initial 12 vessels in December 2007 and January 2008, the activity consists solely of the ownership and provision of vessels for container shipping
under time charters.
The “Adjustment” columns in the table below include (i) the elimination of the containerized transportation activity performed by the Predecessor up to
August 14, 2008, and (ii) the IPO and merger costs expensed by the Predecessor.
F-29
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
15. Operating Segments (Continued)
During the years ended December 31, 2009, 2008 and 2007 the activities can be analyzed as follows:
2009
Year ended
December 31,
Successor
Time
Charter
Period August 15 to
December 31,
Successor
Time
Charter
2008
2007
Period January 1 to August 14,
Year ended December 31,
Predecessor
Predecessor
Time
Charter
Adjustment
Total
Time
Charter
Adjustment
Total
Operating revenues
$ 148,708 $
39,095
$ 55,883 $
2,072 $ 57,955 $ 2,909 $ 332,186 $335,095
Operating expenses
Voyage expenses
Vessel operating expenses
Depreciation
General and administrative
Other operating (income) expense
—
41,368
37,307
8,748
(432)
—
11,904
8,731
3,712
(106)
—
17,893
11,902
2,306
(187)
1,944
181
261
1,508
280
1,944
18,074
12,163
3,814
93
—
740
622
330
—
249,457
23,219
15,497
17,421
(2,341)
249,457
23,959
16,119
17,751
(2,341)
Total operating expenses
86,991
24,241
31,914
4,174
36,088
1,692
303,253
304,945
Operating income (loss)
61,717
14,854
23,969
(2,102)
21,867
1,217
28,933
30,150
Interest income
Interest expense
Realised and unrealised gain (loss) on
derivatives
519
(24,224)
413
(3,842)
424
(17,600)
—
—
424
(17,600)
—
(1,103)
—
(12,251)
—
(13,354)
4,806
(55,293)
2,749
—
2,749
—
—
—
Income (loss) before income taxes
42,818
(43,868)
9,542
(2,102)
7,440
114
16,682
16,796
Income taxes
(444)
(102)
(23)
—
(23)
(20)
—
(20)
Net income (loss)
$
42,374 $
(43,970)
$ 9,519 $ (2,102) $ 7,417 $
94 $ 16,682 $ 16,776
16.
Share Capital
At December 31, 2009 the Company has two classes of common shares. The rights of holders of Class B common shares are identical to those of holders of
Class A common shares, except that the dividend rights of holders of Class B common shares are subordinated to those of holders of Class A common
shares until at least the third quarter of 2011. Class B common shares will convert to Class A common shares on a one-for-one basis after the expiration of
the subordination period and provided certain financial conditions are met. Until January 1, 2009 the Company had three classes of common shares but on
that date the 12,375,000 Class C common shares issued by the Company were converted into Class A common shares on a one-for-one basis.
The restricted stock units granted to the Directors in November 2008 as part of their compensation for service during 2008 vested on January 1, 2009, and
subsequently 36,833 shares were issued to the Directors. A proportion of the restricted stock units granted to management in August and November 2008
as part of their compensation arrangements vested in September and October 2009, and consequently 300,000 Class A common shares were issued to
management in this period.
F-30
Table of Contents
16.
Share Capital (Continued)
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
The Series A preferred shares rank senior to the common shares and are mandatorily redeemable in 12 quarterly instalments commencing on August 31,
2016 and are required to be redeemed earlier using the proceeds of any exercise of Public Warrants. The preferred shares are redeemed each time that
proceeds from the exercise of warrants reach $5,000. As at December 31, 2009 total proceeds received from the exercise of warrants, classified in the
balance sheet as restricted cash, were $3,026 (2008: $3,026) and therefore none of the preferred shares have been redeemed. Series A preferred shares are
classified as a liability. The dividend that preferred shares holders are entitled to be paid is presented as part of interest expense.
In addition to the outstanding Class A and B common shares and the Series A Preferred shares, there are 39,531,348 Public Warrants (2008: 39,531,348)
which have an expiry of August 24, 2010 and give the holder the right to purchase one Class A common share at a price of $6. There are 5,500,000 Sponsor
Warrants (2008: 5,500,000) which have similar terms to the Public Warrants except that the exercise must be on a cashless basis. Further, there are
6,188,088 Class A Warrants (2008: 6,188,088) which expire on September 1, 2013 and give the holders the right to purchase one Class A common share at
a price of $9.25.
On September 30, 2008 500,102 Public Warrants were exercised at a price of $6 each and 500,102 Class A common shares issued.
On October 22, 2008, 4,400 Public Warrants were exercised at a price of $6 each and 4,400 Class A common shares issued.
On September 22, 2008 the Company announced a starting dividend of $0.23 per Class A common share which was paid on October 14, 2008 to Class A
common shareholders and unit holders of record on October 2, 2008.
On November 13, 2008 the Company announced a third quarter 2008 dividend of $0.23 per Class A common share which was paid on November 28, 2008
to Class A common shareholders and unit holders of record as of November 21, 2008.
On February 10, 2009, the Company announced a fourth quarter 2008 dividend of $0.23 per Class A common share, unit and Class B share which was paid
on March 5, 2009 to Class A common shareholders and unit holders and Class B shareholders of record as of February 20, 2009.
17.
Interest Rate Derivatives and Fair Value Measurements
The Company is exposed to the impact of interest rate changes on its variable rate debt. Accordingly, the Company enters into interest rate swap
agreements to manage the exposure to interest rate variability and details of existing interest rate derivatives are set out in note 8. None of the Company’s
interest rate agreements qualify for hedge accounting, therefore, the net changes in the fair value of the interest rate derivative assets and liabilities at each
reporting period are reflected in the current period operations as unrealized gains and losses on derivatives. Cash flows related to interest rate derivatives
(initial payments of derivatives and periodic cash settlements) are included within cash flows from investing activities in the combined statement of cash
flows. There were no initial payments on derivatives made in the year ended December 31, 2009 (2008: Successor period $nil and Predecessor period
$4,730).
Realized gains or losses from interest rate derivatives are recognized in the statement of income concurrent with cash settlements. In addition, the interest
rate derivatives are “marked to market” each reporting period to determine the fair values which generate unrealized gains or losses. The unrealized gain on
interest rate derivatives for the year ended December 31, 2009 was $17,928 (2008: $51,770 loss, of which Successor period loss of $54,851 and
Predecessor period gain of $3,081, 2007 $nil).
F-31
Table of Contents
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
17.
Interest Rate Derivatives and Fair Value Measurements (Continued)
The Company adopted ASC Topic 820 “Fair Value Measurements.” The fair value hierarchy under ASC Topic 820 has three levels based on the reliability
of the inputs used to determine fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets;
Level 2.
Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company has determined that the only derivative instruments that are measured at fair value on a recurring basis and are categorized using the fair
value hierarchy are its interest rate swap agreements. These are all categorized as Level 2 and at December 31, 2009 there was a liability of $29,113 (2008:
$47,041). The fair value of the Company’s derivative instruments is the estimated amount that the Company would receive or pay to terminate the
agreements at the reporting date, taking into account interest rates at that date.
18.
Share-based compensation
In August 2008, the Company’s Board adopted the 2008 Equity Incentive Plan (the “Plan”), which enables employees, consultants and Directors of the
Company and its subsidiaries to receive options, stock appreciation rights, stock grants, stock units and dividend equivalents.
The Plan is administered by the Board or a committee of the Board. The maximum aggregate number of Class A common shares that may be delivered
pursuant to awards granted under the Plan during the 10-year term of the Plan is 1,500,000. The maximum number of Class A common shares with respect
to which awards may be granted to any participant in the Plan in any fiscal year is 500,000 per participant.
The holder of a stock grant awarded under the Plan shall have the same voting, dividend and other rights as the Company’s other Class A common
shareholders when the grant vests and the shares are issued.
Under the plan, the Company has issued the following share based awards:
Granted on August 14, 2008
Granted on November 12, 2008
Un-vested as at January 1, 2009
Vested in January 2009
Granted on May 18, 2009
Vested in September 2009
Vested in October 2009
Un-Vested as at December 31, 2009
Restricted Stock Units
Number of Shares
Management
780,000
80,000
860,000
—
—
(195,000)
(105,000)
560,000
Directors
—
37,671
37,671
(37,671)
150,273
—
—
150,273
Weighted Average
Fair Value
$
$
$
$
$
$
$
$
7.37
2.80
6.77
(2.80)
1.83
(6.76)
(6.76)
5.94
The restricted stock units granted to management on August 14, 2009 were to vest over a period of three years; one third on the first anniversary of the
merger, one third on the second anniversary and one third on the third anniversary. The vesting date of the first tranche was amended and total of 260,000
vested in September and October 2009. The vesting date on the second and third tranches remains unchanged.
F-32
Table of Contents
18.
Share-based compensation (Continued)
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
The restricted stock units granted on to management on November 12, 2008 were to vest over a period of two years; half on the first anniversary of the
merger and half on the second anniversary. The vesting date of the first tranche was amended and a total of 40,000 vested in September and October 2009.
The vesting date on the second tranche remains unchanged.
The restricted stock units granted to Directors on November 12, 2008 vested in January 2009.
The restricted stock units granted to Directors in May 2009 vested in January 2010.
Using the graded vesting method of expensing the restricted stock unit grants, the weighted average fair value of the shares is recognized as compensation
costs in the income statement over the vesting period. The fair value of the restricted share units for this purpose is calculated by multiplying the number of
share units by the fair value of the shares at the grant date, which is discounted for dividends forfeited over the vesting period.
For the grants issued on August 14, 2008 and November 12, 2008, the fair value at the grant date was $7.37 and $2.80 respectively, both of which were the
average closing prices for the common stock surrounding those dates. The share values were discounted by 10.75% (the same rate used to discount the
Class C shares in the purchase price allocation) and for the estimated $0.23 quarterly dividend over the relevant vesting periods.
For the grant issued on May 18, 2009, the fair value at the grant date was $1.83, which was the closing price for the common stock on that date. The share
value has not been discounted.
During the year ended December 31, 2009 the Company recognized a total of $2,513 (2008: Successor period $1,167 and Predecessor period $nil, 2007:
$nil) in respect of share based compensation costs. As at December 31, 2009, there was a total of $1,126 (2008: $3,363, 2007: $nil) unrecognized
compensation costs relating to the above share based awards. The remaining costs are expected to be recognized over a period of 20 months.
19. Risks associated with concentration
The Company is exposed to certain concentration risks that may adversely affect the Company’s financial position in the near term:
(i)
(ii)
There is a concentration of credit risk with respect to cash and cash equivalents at December 31, 2009 to the extent that substantially all of the
amounts are deposited with two banks (2008; one bank). However, the Company believes this risk is remote as the banks are high credit quality
financial institutions.
The Company derives 100% of its revenue from CMA CGM which is exposed to the slowdown in the container market industry and which
announced in September 2009 that it and its lenders were exploring a potential financial negotiation to address its short and medium term financing
requirements (see note 2).
(iii) The Company has contracted to purchase two vessels in the fourth quarter of 2010 for approximately $77,000 each, of which 10% has been paid. The
balance of the purchase price is unfunded and the acquisition of these vessels is dependent upon the Company being able to generate sufficient
funding.
F-33
Table of Contents
20. Earnings per share
Global Ship Lease, Inc.
Notes to the Combined Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
Basic earnings per common share presented under the two-class method is computed by dividing the earnings applicable to common stockholders by the
weighted average number of common shares outstanding for the period. At December 31, 2009, there were 51,219,436 warrants (2008: 51,219,436
warrants) to purchase Class A common shares outstanding, including 39,531,348 Public Warrants exercisable at $6 which expire on August 24, 2010,
5,500,000 Sponsor Warrants (2008: 5,500,000 Sponsor Warrants) (which must be exercised on a cashless basis), at an exercise price of $6 which also
expire on August 24, 2010, and 6,188,088 Class A Warrants exercisable at $9.25 and which expire September 1, 2013. In addition, there were 710,273
restricted stock units (2008: 897,671 restricted stock units) authorized as part of management’s equity incentive plan and as part of the Directors’
compensation for 2009. As of December 31, 2009 only Class A and B common shares are participating securities.
The diluted weighted average number of Class A common shares outstanding as at December 31, 2009 includes the incremental effect relating to
outstanding restricted stock units, but excludes the outstanding warrants. The warrants are excluded because they would have an antidilutive effect.
Class B
The Merger created 7,405,956 shares of Class B common shares. Class B common shareholders were not entitled to receive dividends in respect of income
prior to the fourth quarter of 2008 and their dividend rights is be subordinated to those of holders of Class A common shares.
21.
Subsequent events
There are no subsequent events other than those disclosed elsewhere in these financial statements.
F-34
EXHIBIT 12.1
I, Ian J. Webber, Chief Executive Officer of the company, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this report on Form 20-F of Global Ship Lease, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the Company is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the report
that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
5.
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the Company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over
financial reporting.
Dated: May 18, 2010
By: /s/ Ian J. Webber
Ian J. Webber
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 12.2
I, Susan J. Cook, Chief Financial Officer of the Company, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this report on Form 20-F of Global Ship Lease, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the Company is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the report
that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
5.
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the Company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over
financial reporting.
Dated: May 18, 2010
By: /s/ Susan J. Cook
Susan J. Cook
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 13.1
In connection with the annual report of Global Ship Lease, Inc. (the “Company”) on Form 20-F for the year ended December 31, 2009 as filed with the Securities
and Exchange Commission on the date hereof (the “Form 20-F”), I Ian J. Webber, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350,
as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Form 20-F fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
and
(2)
The information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: May 18, 2010
By: /s/ Ian J. Webber
Ian J. Webber
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 13.2
In connection with the annual report of Global Ship Lease, Inc. (the “Company”) on Form 20-F for the year ended December 31, 2009 as filed with the Securities
and Exchange Commission on the date hereof (the “Form 20-F”), I Susan J. Cook, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350,
as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Form 20-F fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
and
(2)
The information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: May 18, 2010
By: /s/ Susan J. Cook
Susan J. Cook
Chief Financial Officer
(Principal Financial and Accounting Officer)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 No. 333-156454 of Global Ship Lease, Inc. of our reports dated
May 10, 2010 relating to the combined financial statements of Global Ship Lease, Inc., and its Predecessor, which appears in this Annual Report on Form 20-F.
EXHIBIT 15.1
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Neuilly-sur-Seine, France
May 18, 2010
PricewaterhouseCoopers is represented by PricewaterhouseCoopers Audit, 63 rue de Villiers—92200 Neuilly-sur-Seine, France