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SALE/LEASBACK ARRANGEMENTS

Fiscal 2014 Sale/Leasebacks

In March of 2014, the company sold four vessels to an unrelated third party, and simultaneously entered into bareboat charter agreements with the purchasers. The sale/leaseback transactions resulted in proceeds to the company of $63.3 million and deferred gains totaling $30.5 million. The aggregate carrying value of the four vessels was $32.8 million at their respective dates of sale. Two of the vessel leases are for seven years and will expire in March 2021, and the other two leases are for ten years and will expire in March 2024. Under the sale/leaseback agreements which expire in March 2021, the company has the right to re-acquire the vessels at approximately 59% of the original sales price at the end of the sixth year, deliver the vessel to the owner at the end of the lease term, purchase the vessels at their then fair market values at the end of the lease term or extend the lease for 24 months at mutually agreeable lease rates. Under the two sale/leaseback agreements which expire in March 2024, the company has the right to re-acquire the vessels at the end of the ninth year for approximately 53% of the original sales price, re-acquire the vessel at the end of the lease term at its then fair market value or deliver the vessel to the owner at the end of the lease term.

During the third quarter of fiscal 2014, the company sold four vessels to unrelated third parties, and simultaneously entered into bareboat charter agreements with the purchasers. The sale/leaseback transactions resulted in proceeds to the company of $141.9 million and deferred gains totaling $36.2 million. The aggregate carrying value of the four vessels was $105.7 million at their respective dates of sale. The leases on three of the vessels will expire in the quarter ending December 2020, and the fourth lease expires in December 2022. Under the sale/leaseback agreements which expire during the quarter ending December 2020, the company has the right to re-acquire the vessels at values ranging from 59% to 62% of the original sales price at the end of the sixth year, deliver the vessel to the owner at the end of the lease term, purchase the vessels at their then fair market values at the end of the lease term or extend the lease for 24 months at mutually agreeable lease rates. Under the sale/leaseback agreement which expires in December 2022, the company has the right to re-acquire the vessel at the end of the sixth year for $43.6 million or at the end of the eighth year for $34.5 million, re-acquire the vessel at the end of the lease term at its then fair market value or deliver the vessel to the owner at the end of the lease term and pay a return fee of $2.9 million.

In September 2013, the company sold two vessels to an unrelated third party, and simultaneously entered into bareboat charter agreements with the purchaser. The sale/leaseback transactions, which expire in September 2020, resulted in proceeds to the company of $65.6 million and a deferred gain of $31.3 million. The aggregate carrying value of the two vessels was $34.3 million at the dates of sale. Under each September 2013 sale/leaseback agreement, the company has the right to either re-acquire the two vessels at approximately 55% of the original sales price at the end of the sixth year, deliver the vessel to the owner at the end of the lease term, purchase the vessels at their then fair market values at the end of the lease term or extend the lease for 24 months at mutually agreeable lease rates.

The company is accounting for the transactions as sale/leaseback transactions with operating lease treatment and expenses lease payments over the respective lease term. The deferred gains are amortized to gain on asset dispositions, net ratably over the respective lease term. Any deferred gain balance remaining upon the repurchase of the vessel would reduce the vessels’ stated cost if the company elected to exercise the purchase options.

Fiscal 2010 Sale/Leaseback

In June and July 2009, the company sold six vessels to unrelated third-party companies, and simultaneously entered into bareboat charter agreements for the vessels with the purchasers.

The sale/leaseback transactions resulted in proceeds to the company of approximately $101.8 million and a deferred gain of $39.6 million. The aggregate carrying value of the six vessels was $62.2 million at the dates of sale. The leases on the five vessels sold in June 2009 will expire June 30, 2014, and the lease on the vessel sold in July 2009 will expire July 30, 2014. The company is accounting for the transactions as sale/leaseback transactions with operating lease treatment and expenses lease payments over the five year charter hire operating lease terms.

Under the sale/leaseback agreements, the company has the right to either re-acquire the six vessels at 75% of the original sales price or cause the owners to sell the vessels to a third-party under an arrangement where the company guarantees approximately 84% of the original lease value to the third party purchaser. The company also has the right to re-acquire the vessels prior to the end of the charter term with penalties of up to 5% assessed if purchased in years one and two of the five year lease. The company will recognize the deferred gain as income if it does not exercise its option to purchase the six vessels at the end of the operating lease term. If the company exercises its option to purchase these vessels, the deferred gain will reduce the vessels’ stated cost after exercising the purchase option.

During the fourth quarter of fiscal 2014, the company elected to repurchase the six vessels from their respective lessors for an aggregate price of $78.8 million. Three of these were sold and leased back in March 2014. The carrying value of these purchased vessels was reduced by the previously recognized deferred gains of $39.6 million. Refer to “Fiscal 2014 Sale/Leasebacks” above.

Fiscal 2006 Sale/Leaseback

In March 2006, the company entered into agreements to sell five of its vessels that were under construction at the time to an unrelated third party, for $76.5 million and simultaneously entered into bareboat charter agreements with the same unrelated third party upon the vessels’ delivery to the market. Construction on these five vessels was completed at various times between March 2006 and March 2008, at which time the company sold the respective vessels and simultaneously entered into bareboat charter agreements.

The company accounted for all five transactions as sale/leaseback transactions with operating lease treatment. Accordingly, the company did not record the assets on its books and the company is expensing periodic lease payments. The operating lease for all five charter hire agreements were for eight year terms. The company has the option to extend the respective bareboat charter agreements three times, each for a period of 12 months. At the end of the basic term (or extended option periods), the company has an option to purchase each of the vessels at its then fair market value or to redeliver the vessel to its owner.

The bareboat charter agreements on the first two vessels, whose original expiration dates were in calendar year 2014, ended in September and October 2012 because the company exercised its option to repurchase these vessels as discussed below. The bareboat charter agreements on the third and fourth vessels expire in 2015 and the company has the option to extend the bareboat charter agreements three times, each for a period of 12 months, which would provide the company the opportunity to extend the operating leases through calendar year 2018. The bareboat charter agreement on the fifth vessel expires in 2016. The company has the option to extend the bareboat charter agreements three times, each for a period of 12 months, which would provide the company the opportunity to extend the operating leases through calendar year 2019.

The company may purchase each of the vessels at their fixed amortized values, as outlined in the bareboat charter agreements, at the end of the fifth year, and again at the end of the seventh year, from the commencement dates of the respective charter agreements. The company may also purchase each of the vessels at a mutually agreed upon price at any time during the lease term. In September 2012, the company elected to repurchase one of its leased vessels from the lessor for $8.8 million. During October 2012, the company repurchased a second leased vessel, for $8.4 million. In March 2014, the company repurchased a third and fourth leased vessel for a total cost of $22.8 million.

Future Minimum Lease Payments

As of March 31, 2014, the future minimum lease payments for the vessels under the operating lease terms are as follows:


Fiscal year ending (In thousands)	Fiscal 2014 Sale/Leaseback		Fiscal 2006 Sale/Leaseback		Total
2015		$ 20,879		1,645		22,524
2016		20,879		1,279		22,158
2017		20,879		—		20,879
2018		23,485		—		23,485
2019		24,800		—		24,800
2020 and Thereafter		65,263		—		65,263
Total future lease payments		$ 176,185		2,924		179,109

The operating lease expense on these bareboat charter arrangements for the years ended March 31, are as follows:


(In thousands)	2014		2013		2012
Vessel operating leases	$	21,910		16,837		17,967