Dry Bulk Cape Holding, Inc. Step Aquisition Gain

6 Months Ended

Jun. 30, 2011

Dry Bulk Cape Holding, Inc. Step Aquisition Gain [Abstract]

Dry Bulk Cape Holding, Inc. Step Aquisition Gain

Note 5.  Dry Bulk Cape Holding, Inc. Step Acquisition

On March 25, 2011, Cape Holding, Ltd. (one of our indirect wholly-owned subsidiaries) and DryLog Ltd. completed a transaction that restructured their respective 50% interests in Dry Bulk.

Prior to this transaction, Dry Bulk controlled through various subsidiaries two Cape Size vessels and two Handymax Newbuildings.  In connection with this transaction, (i) Cape Holding, Ltd. increased its ownership in Dry Bulk from 50% to 100% and (ii) in consideration, DryLog Ltd. received ownership of two former Dry Bulk subsidiaries holding one Cape Size vessel and one shipbuilding contract relating to a Handymax vessel scheduled to be delivered in the second half of 2012.  Following the transfer of these subsidiaries, Dry Bulk continues to control through two subsidiaries, one Cape Size vessel and one shipbuilding contract relating to a Handymax vessel scheduled to be delivered by the end of the first quarter of 2012.  After completion of this transaction, we now beneficially own 100% of Dry Bulk and have complete control of the two remaining vessels.

In early 2011, we retained an independent, third party firm with shipping industry experience to assist us in determining the fair value of Dry Bulk and the fair value of our previous 50% interest in Dry Bulk.

At the time of the acquisition, the assets of Dry Bulk consisted of cash, trade receivables, prepayments, inventory, two capesize vessels, two handysize vessels under construction and time charter agreements on the two capesize vessels which expire in early 2013 and are currently fixed at attractive time charter rates. Current liabilities consisted primarily of accrued interest on debt and the non-current liabilities consisting primarily of floating rate bank borrowings. With the exception of the capesize vessels and the intangible value assigned to the above-market time charter contracts, the fair value of all assets and liabilities were equal to the carrying values.

As of March 31, 2011, the combined appraised value for both capesize vessels was $84.0 million as compared to the book value of approximately $53.6 million. In determining the appraised fair value of the capesize vessels, the cost and comparable sales approaches were used with equal weight applied to each approach. In addition to the fair value adjustment on the capesize vessels, an intangible asset was established reflecting the difference between the existing value of the time charter contracts in place as compared to current market rates for similar vessels under short-term contracts, discounted back to present value. Based on the income approach, the fair value of the intangible asset was calculated to be $10.4 million and will be amortized over the remaining life of both contracts, each of which is set to expire on January 7, 2013. As a result of the combined fair value adjustments noted above, we concluded that the total fair value of the net assets of Dry Bulk acquired was $69.0 million.

In order to arrive at the fair value of our existing interest in Dry Bulk, 50% of the total fair value of $69.0 million was discounted by 5.1%, reflecting our lack of control of Dry Bulk  as a 50% owner. The discount rate of 5.1% was derived from a sample of recent industry data. As a result, we concluded that the fair value of our existing 50% interest was $32.7 million.

Under Accounting Standards Codification 805, a step up to fair value is required when an equity interest changes from a non-controlling interest to a controlling interest (step acquisition). Based on the step up from a 50% interest to a 100% interest in Dry Bulk, a gain of approximately $18.3 million was generated by taking the difference between the fair value of our previously held 50% interest less the book value of the previously held interest. This calculation is shown below:

Fair Value of Previously Held 50% Interest                         $32.7M

Less: Book Value of Previously Held Interest                    (14.4)M

Gain on Previously Held 50% Interest                                  $18.3M

We also recognized a bargain purchase gain $0.5 million with respect to a step up to fair value of the 50% interest we acquired, calculated as follows:

Fair Value of Net Assets Acquired                                       $69.0M

Less: Fair Value of Purchase Consideration                       (35.8)M

Less: Fair Value of Previously Held 50% Interest              (32.7)M

Bargain Purchase Gain                                                           $  0.5M

Previously, we accounted for our non-controlling interest in Dry Bulk under the equity method. We now include the financial results of Dry Bulk in our consolidated financial results, which include revenues and net income for Dry Bulk for the second quarter of 2011 of   $2.4 million and $539,000 respectively.  Assuming we recorded this transaction on January 1, 2010, our consolidated financial results for the three month periods ending June 30, 2010 and June 30, 2011 and the six months ending June 30, 2010 and June 30, 2011 would not have been materially different from what we actually reported. As such, we have not disclosed in this report any proforma financial information for either of these periods.