HMAR Roulette'
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The Company has not been in compliance, since March 31, 1999, with certain covenants contained in the Credit Facility. The Company's bank lenders have waived the Company's noncompliance on several occasions, most recently until August 20, 1999. However, these waivers have resulted in the payment of additional interest and substantial fees. In obtaining the current waiver, the Company agreed to pay interest at the rate of 7% over the "base rate" of Citibank, N.A. (for a total annual interest rate of 15.0% at July 30, 1999); however, if the Company does not repay the borrowings under the Credit Facility by August 20, 1999, the Company will be obligated to pay an additional 3% of interest on borrowings outstanding from July 30, 1999. In addition, in obtaining the current waiver, the Company agreed to pay an "extension fee" of $500,000 that will be refunded to the Company only if it repays the borrowings under the Credit Facility by August 20, 1999. There can be no assurance that the current waiver will be further extended, or as to the terms of any such extension, should the Company be unable to repay its borrowings under the Credit Facility by August 20, 1999 (see "Restructuring Discussions" below for additional information). The Company's outstanding indebtedness under the Credit Facility was $266.3 million at June 30, 1999 and $241.0 million at August 9, 1999.
Further, at August 9, 1999, the Company had available cash and cash equivalents totaling approximately $9.5 million and approximately $7.0 million available for use under the Credit Facility. Because of its current financial condition and the covenants in the Credit Facility and other debt instruments, the Company does not have any additional borrowing capacity and does not expect to have any such capacity unless the possible restructuring plan discussed below is consummated.
Once the Company uses its available cash and cash equivalents and exhausts the amount available for use under the Credit Facility, it will be unable to meet its cash requirements and will be required to seek protection from its creditors under applicable bankruptcy laws. Based on current estimates, the Company anticipates that it will exhaust its available cash and borrowing capacity during the third week of August 1999.
In addition, an interest payment of approximately $12.5 million is due on the Senior Notes on August 16, 1999. The Company does not have sufficient funds to make this payment. If this payment is not made by September 15, 1999 and the possible restructuring plan discussed below is not consummated, the Company will be in default under the Senior Notes, and payment thereof could be accelerated. This would likely have the effect of requiring the Company to seek protection from its creditors under applicable bankruptcy laws.
Recent Actions. In June and July 1999, the Company sold eight vessels (excluding vessels under construction) for net cash proceeds approximating $32.3 million. Under the terms of the Credit Facility, approximately $25.3 million of these proceeds were used to permanently reduce borrowings under the Credit Facility. The remaining $7.0 million of net cash proceeds are available to the Company for general corporate purposes. The Company is also considering the sale of additional assets in order to raise cash. However, it is not actively negotiating any such sales and does not expect any sales to be completed in an amount, or in sufficient time, to address its near-term cash requirements.
The Company has also curtailed or deferred certain capital expenditures. Among other things, the Company has deferred certain scheduled drydockings of vessels, consistent with safety and operational considerations, has canceled the construction of certain vessels and has disposed of other vessels under construction. The Company is also considering other actions to cancel the construction and/or to dispose of the remaining three vessels currently under construction. Such actions could result in claims against the Company for the costs of construction and, possibly, other amounts; however, the Company has not yet determined whether or the extent to which it may be subject to such claims. The estimated future cost of completing the vessels currently under construction was $13.3 million at August 9, 1999; this amount does not reflect any actions that may be taken by the Company to cancel construction and/or dispose of these vessels or any claims that may result from those actions.
Further, the Company has reduced operating and overhead expenses. These reductions are estimated to generate annual savings of $11.5 million; however, these reductions have been substantially offset by increased interest on borrowings under the Credit Facility, professional and other fees under the Credit Facility, and other fees and costs resulting from the Company's financial condition. The Company has also improved its working capital position by, among other things, strengthening its efforts to collect receivables.
Restructuring Discussions. The Company previously reported on a proposed offering of secured notes, the proceeds from which were to have been used to purchase the outstanding indebtedness under the Credit Facility (see the Parent's Current Report on Form 8-K dated July 8, 1999). At the same time, the Company also reported that it was seeking additional means of financing and was in discussions with respect thereto.
In July 1999, the Company determined not to proceed with the above offering. However, the Company is in active discussions with representatives of certain major creditors concerning a possible restructuring plan in which (a) the Company's general creditors would be paid in full; (b) the Company's borrowings under the Credit Facility would be refinanced; (c) the holders of the Senior Notes would exchange their Senior Notes for new debt securities and common equity of the Company; and (d) the holders of the Trust Convertible Preferred Securities and the Common Stock would also receive such common equity and warrants to purchase additional common equity. Implementation of such plan would result in substantial dilution to the Company's current stockholders. In addition, the Company is in discussions with potential lenders regarding the refinancing of the Credit Facility. The Company's ability to reach agreement as to the terms of any such plan, as well as the actions contemplated by and in connection with any such plan, are subject to numerous conditions and uncertainties, including the need to obtain various consents from and reach agreement with third parties (including the potential lenders referred to above). Accordingly, there can be no assurance as to whether or when the Company will agree on the terms of such a plan or will be in a position to implement such a plan. In particular, the Company can give no assurance that it will be in a position to refinance the Credit Facility by August 20, 1999 (see "Background; Liquidity Concerns" above). Should the Company not reach agreement as to the terms of such a plan, it will likely exhaust its available cash and borrowing capacity in late August or September 1999 and would thereafter be subject to a voluntary (or, possibly, an involuntary) bankruptcy proceeding. Either type of proceeding would have a material adverse effect on the Company's operations.
CAVEAT EMPTOR (Let the Buyer Beware)
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