UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
20-F
o |
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
EXCHANGE |
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OR |
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2007
OR
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period
from to
OR
o
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SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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|
Date
of event requiring this shell company
report. . . . . . . . . . . . . . . .
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For the
transition period
from to
Commission file number
_____________________________
DIANA
SHIPPING INC.
(Exact
name of Registrant as specified in its charter)
Diana
Shipping Inc.
(Translation
of Registrant’s name into English)
Republic
of The Marshall Islands
(Jurisdiction
of incorporation or organization)
Pendelis
16, 175 64 Palaio Faliro, Athens, Greece
(Address
of principal executive offices)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
Title
of each
class Name of
each exchange on which registered
Common
share, $0.01 par
value
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:
Title
of each
class Name of
each exchange on which registered
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:
As of
December 31, 2007, there were 74,375,000 shares of the registrant’s Common
Shares outstanding.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act
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o |
Yes
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x |
No
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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.
|
o |
Yes
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x |
No
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Note-Checking
the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those Sections.
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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.
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x |
Yes
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o |
No
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Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer
(Do
not check if a smaller
reporting
company) o
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Smaller
reporting company o
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Indicate
by check mark which financial statement item the registrant has elected to
follow.
|
o |
Item
17
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x |
Item
18
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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). |
o |
Yes |
x |
No |
TABLE
OF CONTENTS
FORWARD-LOOKING
STATEMENTS
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PART
I
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4
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Item
1.
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Identity
of Directors, Senior Management and Advisers
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4
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Item
2.
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Offer
Statistics and Expected Timetable
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4
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Item
3.
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Key
Information
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4
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Item
4.
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Information
on the Company
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18
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Item
4A.
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Unresolved
Staff Comments
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30
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Item
5.
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Operating
and Financial Review and Prospects
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30
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Item
6
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Directors,
Senior Management and Employees
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45
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Item
7
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Major
Stockholders and Related Party Transactions
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50
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Item
8.
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Financial
information
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52
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Item
9.
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Listing
Details
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53
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Item
10.
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Additional
Information
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54
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Item
11.
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Quantitative
and Qualitative Disclosures about Market Risk
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57
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Item
12.
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Description
of Securities Other than Equity Securities
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58
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PART
II
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58
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Item
13.
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Defaults,
Dividend Arrearages and Delinquencies
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58
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Item
14.
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Material
Modifications to the Rights of Security Holders and Use of
Proceeds
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58
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Item
15.
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Controls
and Procedures
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58
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Item
16A.
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Audit
Committee Financial Expert
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59
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Item
16B.
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Code
of Ethics
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59
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Item
16C.
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Principal
Accountant Fees and Services
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60
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Item
16D.
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Exemptions
from the Listing Standards for Audit Committees
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60
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Item
16E.
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Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
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60
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PART
III
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61
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Item
17.
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Financial
Statements
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61
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Item
18.
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Financial
Statements
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61
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Item
19.
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Exhibits
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61
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INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
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F-1
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FORWARD-LOOKING
STATEMENTS
Diana
Shipping Inc., or the Company, desires to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this cautionary statement in connection with this safe harbor
legislation. This document and any other written or oral statements
made by us or on our behalf may include forward-looking statements, which
reflect our current views with respect to future events and financial
performance. The words “believe”, “except,” “anticipate,” “intends,”
“estimate,” “forecast,” “project,” “plan,” “potential,” “will,” “may,” “should,”
“expect” and similar expressions identify forward-looking
statements.
Please
note in this annual report, “we”, “us”, “our”, “The Company”, all refer to Diana
Shipping Inc. and its subsidiaries.
The
forward-looking statements in this document are based upon various assumptions,
many of which are based, in turn, upon further assumptions, including without
limitation, management’s examination of historical operating trends, data
contained in our records and other data available from third
parties. Although we believe that these assumptions were reasonable
when made, because these assumptions are inherently subject to significant
uncertainties and contingencies which are difficult or impossible to predict and
are beyond our control, we cannot assure you that we will achieve or accomplish
these expectations, beliefs or projections.
In
addition to these important factors and matters discussed elsewhere herein,
important factors that, in our view, could cause actual results to differ
materially from those discussed in the forward-looking statements include the
strength of world economies, fluctuations in currencies and interest rates,
general market conditions, including fluctuations in charter hire rates and
vessel values, changes in demand in the dry-bulk shipping industry, changes in
the Company's operating expenses, including bunker prices, drydocking and
insurance costs, changes in governmental rules and regulations or actions taken
by regulatory authorities, potential liability from pending or future
litigation, general domestic and international political conditions, potential
disruption of shipping routes due to accidents or political events, and other
important factors described from time to time in the reports filed by the
Company with the Securities and Exchange Commission.
PART
I
Item
1. Identity of
Directors, Senior Management and Advisers
Not
Applicable.
Item
2. Offer Statistics and
Expected Timetable
Not
Applicable.
Item
3. Key
Information
A.
|
Selected
Financial Data
|
The
following table sets forth our selected consolidated financial data and other
operating data. The selected consolidated financial data in the table as of
December 31, 2007, 2006, 2005, 2004, and 2003 and for the five year periods
ended December 31, 2007 are derived from our audited consolidated financial
statements and notes thereto which have been prepared in accordance with U.S.
generally accepted accounting principles (“U.S. GAAP”) and have been audited by
Ernst & Young (Hellas) Certified Auditors Accountants S.A. (“Ernst &
Young”), an independent registered public accounting firm. The following data
should be read in conjunction with Item 5. “Operating and Financial Review and
Prospects”, the consolidated financial statements, related notes and other
financial information included elsewhere in this annual report.
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As
of and for the
Year
Ended December 31,
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2007
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2006
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2005
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2004
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2003
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(in
thousands of U.S. dollars,
except
for share and per share data and average daily results)
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Income
Statement Data:
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Voyage
and time charter revenues
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$
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190,480
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$
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116,101
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$
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103,104
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$
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63,839
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$
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25,277
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Voyage
expenses
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8,697
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6,059
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6,480
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4,330
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1,549
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Vessel
operating expenses
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29,332
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22,489
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14,955
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9,514
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6,267
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Depreciation
and amortization
|
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24,443
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16,709
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9,943
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5,087
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3,978
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Management
fees
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-
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573
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1,731
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947
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728
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Executive
management services and rent
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-
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76
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|
455
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1,528
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1,470
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General
and administrative expenses
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11,718
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6,331
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2,871
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|
300
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123
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Gain
on vessel sale
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(21,504)
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-
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-
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-
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-
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Foreign
currency losses (gains)
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(144)
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(52)
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(30)
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3
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20
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Operating
income
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137,938
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63,916
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66,699
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42,130
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11,142
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Interest
and finance costs
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(6,394)
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(3,886)
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(2,731)
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(2,165)
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(1,680)
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Interest
income
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2,676
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|
1,033
|
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1,022
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136
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27
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Gain
on vessel’s sale
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-
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|
-
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-
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19,982
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-
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|
|
|
|
|
|
|
|
|
|
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Net
income
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$
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134,220
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$
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61,063
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$
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64,990
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$
|
60,083
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$
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9,489
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|
|
|
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Preferential
deemed dividend
|
$
|
-
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$
|
(20,267)
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$
|
-
|
$
|
-
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net
income available to common stockholders
|
$
|
134,220
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$
|
40,796
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$
|
64,990
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$
|
60,083
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$
|
9,489
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
earnings per share
|
$
|
2.11
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$
|
0.82
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$
|
1.72
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$
|
2.17
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$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic and diluted shares outstanding
|
|
63,748,973
|
|
49,528,904
|
|
37,765,753
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|
27,625,000
|
|
25,340,596
|
|
|
|
|
|
|
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|
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|
|
|
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Dividends
declared per share
|
$
|
2.05
|
$
|
1.50
|
$
|
1.60
|
$
|
1.85
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
16,726
|
$
|
14,511
|
$
|
21,230
|
$
|
1,758
|
$
|
7,441
|
|
Total
current assets
|
|
21,514
|
|
19,062
|
|
26,597
|
|
3,549
|
|
9,072
|
|
Vessels,
Net
|
|
867,632
|
|
464,439
|
|
307,305
|
|
116,703
|
|
132,853
|
|
Total
assets
|
|
944,342
|
|
510,675
|
|
341,949
|
|
155,636
|
|
134,494
|
|
Total
current liabilities
|
|
20,964
|
|
7,636
|
|
4,667
|
|
11,344
|
|
9,107
|
|
Deferred
revenue, non current portion
|
|
23,965
|
|
146
|
|
-
|
|
-
|
|
-
|
|
Long-term
debt (including current portion)
|
|
98,819
|
|
138,239
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|
12,859
|
|
92,246
|
|
82,628
|
|
Total
stockholders' equity
|
|
799,474
|
|
363,103
|
|
324,158
|
|
59,052
|
|
48,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flow provided by operating activities
|
$
|
148,959
|
$
|
82,370
|
$
|
69,256
|
$
|
47,379
|
$
|
15,218
|
|
Net
cash flow used in investing activities
|
|
(409,085)
|
|
(193,096)
|
|
(169,241)
|
|
(11,778)
|
|
(52,723)
|
|
Net
cash flow provided by (used in) financing activities
|
|
262,341
|
|
104,007
|
|
119,457
|
|
(41,284)
|
|
43,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet
Data:
|
|
|
|
|
|
|
|
|
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|
Average
number of vessels (1)
|
|
15.9
|
|
13.4
|
|
9.6
|
|
6.3
|
|
5.1
|
|
Number
of vessels at end of period
|
|
18.0
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|
15.0
|
|
12.0
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|
7.0
|
|
6.0
|
|
Weighted
average age of fleet at end of period (in years)
|
|
3.4
|
|
3.7
|
|
3.8
|
|
3.4
|
|
2.9
|
|
Ownership
days (2)
|
|
5,813
|
|
4,897
|
|
3,510
|
|
2,319
|
|
1,852
|
|
Available
days (3)
|
|
5,813
|
|
4,856
|
|
3,471
|
|
2,319
|
|
1,852
|
|
Operating
days (4)
|
|
5,771
|
|
4,849
|
|
3,460
|
|
2,315
|
|
1,845
|
|
Fleet
utilization (5)
|
|
99.3%
|
|
99.9%
|
|
99.7%
|
|
99.8%
|
|
99.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily
Results:
|
|
|
|
|
|
|
|
|
|
|
|
Time
charter equivalent (TCE) rate (6)
|
$
|
31,272
|
$
|
22,661
|
$
|
27,838
|
$
|
25,661
|
$
|
12,812
|
|
Daily
vessel operating expenses (7)
|
|
5,046
|
|
4,592
|
|
4,261
|
|
4,103
|
|
3,384
|
|
|
Average
number of vessels is the number of vessels that constituted our fleet for
the relevant period, as measured by the sum of the number of days each
vessel was a part of our fleet during the period divided by the number of
calendar days in the period.
|
(2)
|
Ownership
days are the aggregate number of days in a period during which each vessel
in our fleet has been owned by us. Ownership days are an indicator of the
size of our fleet over a period and affect both the amount of revenues and
the amount of expenses that we record during a
period.
|
(3)
|
Available
days are the number of our ownership days less the aggregate number of
days that our vessels are off-hire due to scheduled repairs or repairs
under guarantee, vessel upgrades or special surveys and the aggregate
amount of time that we spend positioning our vessels. The shipping
industry uses available days to measure the number of days in a period
during which vessels should be capable of generating
revenues.
|
(4)
|
Operating
days are the number of available days in a period less the aggregate
number of days that our vessels are off-hire due to any reason, including
unforeseen circumstances. The shipping industry uses operating days to
measure the aggregate number of days in a period during which vessels
actually generate revenues.
|
(5)
|
We
calculate fleet utilization by dividing the number of our operating days
during a period by the number of our available days during the period. The
shipping industry uses fleet utilization to measure a company's efficiency
in finding suitable employment for its vessels and minimizing the amount
of days
that its vessels are off-hire for reasons other than scheduled repairs or
repairs under guarantee, vessel upgrades, special surveys or vessel
positioning.
|
(6)
|
Time
charter equivalent rates, or TCE rates, are defined as our voyage and time
charter revenues less voyage expenses during a period divided by the
number of our available days during the period, which is consistent with
industry standards. Voyage expenses include port charges, bunker (fuel)
expenses, canal charges and commissions. TCE rate is a standard shipping
industry performance measure used primarily to compare daily earnings
generated by vessels on time charters with daily earnings generated by
vessels on voyage charters, because charter hire rates for vessels on
voyage charters are generally not expressed in per day amounts while
charter hire rates for vessels on time charters are generally expressed in
such amounts. The following table reflects the calculation of our TCE
rates for the periods presented.
|
|
|
Year
Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
(in
thousands of U.S. dollars, except for
TCE
rates, which are expressed in U.S. dollars, and available
days)
|
Voyage
and time charter revenues
|
$
|
190,480
|
$
|
116,101
|
$
|
103,104
|
$
|
63,839
|
$
|
25,277
|
Less:
voyage expenses
|
|
(8,697)
|
|
(6,059)
|
|
(6,480)
|
|
(4,330)
|
|
(1,549)
|
|
|
|
|
|
|
|
|
|
|
|
Time
charter equivalent revenues
|
$
|
181,783
|
$
|
110,042
|
$
|
96,624
|
$
|
59,509
|
$
|
23,728
|
|
|
|
|
|
|
|
|
|
|
|
Available
days
|
|
5,813
|
|
4,856
|
|
3,471
|
|
2,319
|
|
1,852
|
Time
charter equivalent (TCE) rate
|
$
|
31,272
|
$
|
22,661
|
$
|
27,838
|
$
|
25,661
|
$
|
12,812
|
(8)
|
Daily
vessel operating expenses, which include crew wages and related costs, the
cost of insurance, expenses relating to repairs and maintenance, the costs
of spares and consumable stores, tonnage taxes and other miscellaneous
expenses, are calculated by dividing vessel operating expenses by
ownership days for the relevant
period.
|
B.
|
Capitalization
and Indebtedness
|
Not
Applicable.
C.
|
Reasons
for the Offer and Use of Proceeds
|
Not
Applicable.
Some of the following risks relate principally to
the industry in which we operate and our business in general. Other risks relate
principally to the securities market and ownership of our common stock. The
occurrence of any of the events described in this section could significantly
and negatively affect our business, financial condition, operating results or
cash available for dividends or the trading price of our common stock.
Industry
Specific Risk Factors
Charter
hire rates for dry bulk carriers may decrease in the future, which may adversely
affect our earnings
The
dry bulk shipping industry is cyclical with attendant volatility in charter hire
rates and profitability. For example, the degree of charter hire rate volatility
among different types of dry bulk carriers has varied widely. Charter hire rates
for Panamax and Capesize dry bulk carriers are near historically high levels.
Because we charter some of our vessels pursuant to short-term time charters, we
are exposed to changes in spot market and short-term charter rates for dry bulk
carriers and such changes may affect our earnings and the value of our dry bulk
carriers at any given time. We cannot assure you that we will be able to
successfully charter our vessels in the future or renew existing charters at
rates sufficient to allow us to meet our obligations or to pay dividends to our
stockholders. Because the factors affecting the supply and demand for vessels
are outside of our control and are unpredictable, the nature, timing, direction
and degree of changes in industry conditions are also
unpredictable.
Factors that influence demand for vessel capacity
include:
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demand
for and production of dry bulk
products;
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global
and regional economic and political
conditions;
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the
distance dry bulk is to be moved by sea;
and
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changes
in seaborne and other transportation
patterns.
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The factors that influence the supply
of vessel capacity include:
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the
number of newbuilding deliveries;
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port
and canal congestion;
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the
scrapping rate of older vessels;
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the
number of vessels that are out of
service.
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We
anticipate that the future demand for our dry bulk carriers will be dependent
upon continued economic growth in the world's economies, including China and
India, seasonal and regional changes in demand, changes in the capacity of the
global dry bulk carrier fleet and the sources and supply of dry bulk cargo to be
transported by sea. The capacity of the global dry bulk carrier fleet seems
likely to increase and there can be no assurance that economic growth will
continue. Adverse economic, political, social or other developments could have a
material adverse effect on our business and operating results.
The
market values of our vessels may decrease, which could limit the amount of funds
that we can borrow under our credit facilities
The
fair market values of our vessels have generally experienced high volatility.
The market prices for secondhand Panamax and Capesize dry bulk carriers are near
historically high levels. You should expect the market value of our vessels to
fluctuate depending on general economic and market conditions affecting the
shipping industry and prevailing charter hire rates, competition from other
shipping companies and other modes of transportation, types, sizes and age of
vessels, applicable governmental regulations and the cost of newbuildings. If
the market value of our fleet declines, we may not be able to draw down the full
amount of our credit facilities and we may not be able to obtain other financing
or incur debt on terms that are acceptable to us or at all.
The
market values of our vessels may decrease, which could cause us to breach
covenants in our credit facilities and adversely affect our operating
results
We
believe that the market value of the vessels in our fleet is in excess of
amounts required under our credit facilities. However, if the market values of
our vessels, which are near historically high levels, decrease, we may breach
some of the covenants contained in the financing agreements relating to our
indebtedness at the time, including covenants in our credit facilities. If we do
breach such covenants and we are unable to remedy the relevant breach, our
lenders could accelerate our debt and foreclose on our fleet. In addition, if
the book value of a vessel is impaired due to unfavorable market conditions or a
vessel is sold at a price below its book value, we would incur a loss that could
adversely affect our operating results.
World
events could affect our results of operations and financial
condition
The
threat of future terrorist attacks in the United States and elsewhere continues
to cause uncertainty in the world's financial markets and may affect our
business, operating results and financial condition. The continuing conflict in
Iraq may lead to additional acts of terrorism and armed conflict around the
world, which may contribute to further economic instability in the global
financial markets. These uncertainties could also adversely affect our ability
to obtain additional financing on terms acceptable to us or at all. In the past,
political conflicts have also resulted in attacks on vessels, mining of
waterways and other efforts to disrupt international shipping, particularly in
the Arabian Gulf region. Acts of terrorism and piracy have also affected vessels
trading in regions such as the South China Sea. Any of these occurrences could
have a material adverse impact on our operating results, revenues and
costs.
Our
operating results are subject to seasonal fluctuations, which could affect our
operating results and the amount of available cash with which we can pay
dividends
We
operate our vessels in markets that have historically exhibited seasonal
variations in demand and, as a result, in charter hire rates. This seasonality
may result in quarter-to-quarter volatility in our operating results, which
could affect the amount of dividends that we pay to our stockholders from
quarter to quarter. The dry bulk carrier market is typically stronger in the
fall and winter months in anticipation of increased consumption of coal and
other raw materials in the northern hemisphere during the winter months. In
addition, unpredictable weather patterns in these months tend to disrupt vessel
scheduling and supplies of certain commodities. As a result, our revenues have
historically been weaker during the fiscal quarters ended June 30 and
September 30, and, conversely, our revenues have historically been stronger
in fiscal quarters ended December 31 and March 31. While this
seasonality has not materially affected our operating results, it could
materially affect our operating results and cash available for distribution to
our stockholders as dividends in the future.
Rising
fuel prices may adversely affect our profits
While
we generally do not bear the cost of fuel (bunkers) under our time charters,
fuel is a significant, if not the largest, expense in our shipping operations
when vessels are under voyage charter. Changes in the price of fuel may
adversely affect our profitability. The price and supply of fuel is
unpredictable and fluctuates based on events outside our control, including
geopolitical developments, supply and demand for oil and gas, actions by OPEC
and other oil and gas producers, war and unrest in oil producing countries and
regions, regional production patterns and environmental concerns. Further, fuel
may become much more expensive in the future, which may reduce the profitability
and competitiveness of our business versus other forms of transportation, such
as truck or rail.
We
are subject to international safety regulations and the failure to comply with
these regulations may subject us to increased liability, may adversely affect
our insurance coverage and may result in a denial of access to, or detention in,
certain ports
The
operation of our vessels is affected by the requirements set forth in the United
Nations' International Maritime Organization's International Management Code for
the Safe Operation of Ships and Pollution Prevention, or ISM Code. The ISM Code
requires shipowners, ship managers and bareboat charterers to develop and
maintain an extensive “Safety Management System” that includes the adoption of a
safety and environmental protection policy setting forth instructions and
procedures for safe operation and describing procedures for dealing with
emergencies. The failure of a shipowner or bareboat charterer to comply with the
ISM Code may subject it to increased liability, may invalidate existing
insurance or decrease available insurance coverage for the affected vessels and
may result in a denial of access to, or detention in, certain ports. As of the
date of this annual report, each of our vessels is ISM
code-certified.
Maritime
claimants could arrest one or more of our vessels, which could interrupt our
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 a vessel for
unsatisfied debts, claims or damages. In many jurisdictions, a claimant may seek
to obtain security for its claim by arresting a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our vessels could
interrupt our cash flow and require us to pay large sums of money to have the
arrest or attachment lifted. In addition, in some jurisdictions, such as South
Africa, under the “sister ship” theory of liability, a claimant may arrest both
the vessel which 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 attempt to assert “sister ship” liability against one vessel in our fleet
for claims relating to another of our vessels.
Governments
could requisition our vessels during a period of war or emergency, resulting in
a loss of earnings
A government could requisition one or more of our
vessels for title or for hire. Requisition for title occurs when a government
takes control of a vessel and becomes her owner, while requisition for hire
occurs when a government takes control of a vessel and effectively becomes her
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 we would be entitled to compensation in
the event of a requisition of one or more of our vessels, the amount and timing
of payment would be uncertain. Government requisition of one or more of our
vessels may negatively impact our revenues and reduce the amount of cash we have
available for distribution as dividends to our stockholders.
Company
Specific Risk Factors
We
charter some of our vessels on short-term time charters in a volatile shipping
industry and a decline in charter hire rates would affect our results of
operations and ability to pay dividends
We
charter certain of our vessels pursuant to short-term time charters, although we
have also entered into longer-term time charters ranging in duration from
18 months to 62 months for 15 of the vessels in our fleet, including
one of the vessels under construction that we expect to take delivery of in the
second quarter of 2010, and we may in the future employ additional vessels,
including any container vessel that we may acquire, on longer term time
charters. Currently, two of our vessels are employed on time charters scheduled
to expire within the next six months, at which time we expect to enter into new
charters for those vessels. Although significant exposure to short-term time
charters is not unusual in the dry bulk shipping industry, the short-term time
charter market is highly competitive and spot market charter hire rates (which
affect time charter rates) may fluctuate significantly based upon available
charters and the supply of, and demand for, seaborne shipping capacity. While
the short-term time charter market may enable us to benefit in periods of
increasing charter hire rates, we must consistently renew our charters and this
dependence makes us vulnerable to declining charter rates. As a result of the
volatility in the dry bulk carrier charter market, we may not be able to employ
our vessels upon the termination of their existing charters at their current
charter hire rates. The dry bulk carrier charter market is volatile, and in the
past, short-term time charter and spot market charter rates for dry bulk
carriers have declined below operating costs of vessels. We cannot assure you
that future charter hire rates will enable us to operate our vessels profitably
or to pay you dividends.
Our
earnings and the amount of dividends that we are able to pay in the future may
be adversely affected if we are not able to take advantage of favorable charter
rates
We
charter certain of our dry bulk carriers to customers pursuant to short-term
time charters that range in duration from several days to 13 months.
However, as part of our business strategy, 15 of our vessels are currently fixed
on longer-term time charters ranging in duration from 18 months to
62 months, including one of our vessels under construction that we expect
to take delivery of in the second quarter of 2010. We may extend the charter
periods for additional vessels in our fleet, including additional dry bulk
carriers or container vessels that we may purchase in the future, to take
advantage of the relatively stable cash flow and high utilization rates that are
associated with long-term time charters. While we believe that longer-term
charters provide us with relatively stable cash flows and higher utilization
rates than shorter-term charters, our vessels that are committed to longer-term
charters may not be available for employment on short-term charters during
periods of increasing short-term charter hire rates when these charters may be
more profitable than long-term charters.
Investment
in derivative instruments such as freight forward agreements could result in
losses
From
time to time, we may take positions in derivative instruments including freight
forward agreements, or FFAs. FFAs and other derivative instruments may be used
to hedge a vessel owner's exposure to the charter market by providing for the
sale of a contracted charter rate along a specified route and period of time.
Upon settlement, if the contracted charter rate is less than the average of the
rates, as reported by an identified index, for the specified route and period,
the seller of the FFA is required to pay the buyer an amount equal to the
difference between the contracted rate and the settlement rate, multiplied by
the number of days in the specified period. Conversely, if the contracted rate
is greater than the settlement rate, the buyer is required to pay the seller the
settlement sum. If we take positions in FFAs or other derivative instruments and
do not correctly anticipate charter rate movements over the specified route and
time period, we could suffer losses in the settling or termination of the FFA.
This could adversely affect our results of operations and cash
flows.
We
cannot assure you that our board of directors will declare
dividends
Our
policy is to declare quarterly distributions to stockholders by each February,
May, August and November substantially equal to our available cash from
operations during the previous quarter after cash expenses and reserves for
scheduled drydockings, intermediate and special surveys and other purposes as
our board of directors may from time to time determine are required, and after
taking into account contingent liabilities, the terms of our credit facilities,
our growth strategy and other cash needs and the requirements of Marshall
Islands law. The declaration and payment of dividends, if any, will always be
subject to the discretion of our board of directors. The timing and amount of
any dividends declared will depend on, among other things, our earnings,
financial condition and cash requirements and availability, our ability to
obtain debt and equity financing on acceptable terms as contemplated by our
growth strategy and provisions of Marshall Islands law affecting the payment of
dividends. The international dry bulk shipping industry is highly volatile, and
we cannot predict with certainty the amount of cash, if any, that will be
available for distribution as dividends in any period. Also, there may be a high
degree of variability from period to period in the amount of cash that is
available for the payment of dividends.
We
may incur expenses or liabilities or be subject to other circumstances in the
future that reduce or eliminate the amount of cash that we have available for
distribution as dividends. Our growth strategy contemplates that we will finance
the acquisition of additional vessels through a combination of debt and equity
financing on terms acceptable to us. If financing is not available to us on
acceptable terms, our board of directors may determine to finance or refinance
acquisitions with cash from operations, which would reduce or even eliminate the
amount of cash available for the payment of 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. We may not have
sufficient surplus in the future to pay dividends. We can give no assurance that
we will continue to pay dividends in the future.
We
may have difficulty effectively managing our planned growth, which may adversely
affect our ability to pay dividends
Since
the completion of our initial public offering in March 2005, we have taken
delivery of five Panamax dry bulk carriers and six Capesize dry bulk carriers,
sold one of our Capesize dry bulk carriers, and have agreed to purchase two
additional Capesize dry bulk carriers, which are expected to be delivered in the
second quarter of 2010. The addition of these vessels to our fleet
has resulted in a significant increase in the size of our fleet and imposes
significant additional responsibilities on our management and staff. While we
expect our fleet to grow further, this may require us to increase the number of
our personnel. We will also have to increase our customer base to provide
continued employment for the new vessels.
Our
future growth will primarily depend on our ability to:
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locate
and acquire suitable vessels;
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identify
and consummate acquisitions or joint
ventures;
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enhance
our customer base;
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manage
our expansion; and
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obtain
required financing on acceptable
terms.
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Growing
any business by 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 difficulties
associated with imposing common standards, controls, procedures and policies,
obtaining additional qualified personnel, managing relationships with customers
and integrating newly acquired assets and operations into existing
infrastructure. We cannot give any assurance that we will be successful in
executing our growth plans or that we will not incur significant expenses and
losses in connection with our future growth. If we are not able to successfully
grow the size of our company or increase the size of our fleet, our ability to
pay dividends may be adversely affected.
We
cannot assure you that we will be able to borrow amounts under our credit
facilities and restrictive covenants in our credit facilities may impose
financial and other restrictions on us
We
entered into a $230 million secured revolving credit facility with The Royal
Bank of Scotland Plc in February 2005, amended in May 2006. In
January 2007 we entered into a supplemental loan agreement for an
additional credit facility with the Royal Bank of Scotland Plc. We have also
entered into a loan agreement with Fortis Bank for a secured term loan of
$60.2 million, which we intend to use to finance the pre-delivery
installments of two newbuilding Capesize dry bulk carriers that we expect to
take delivery of during the second quarter of 2010. As of December 31, 2007, we
had $99.1 million outstanding under our facilities. In February and March
2008, we drew down an additional amount of $71.5 million and $27.0 million under
our revolving credit facility with the Royal Bank of Scotland to fund part of
the purchase price of the Norfolk, a 2002 built Capesize dry bulk carrier, which
was delivered to us in February 2008. We have used and intend to use
our facilities in the future to finance future vessel acquisitions and our
working capital requirements. Our ability to borrow amounts under the credit
facilities is subject to the execution of customary documentation relating to
the facilities, including security documents, satisfaction of certain customary
conditions precedent and compliance with terms and conditions included in the
loan documents. Prior to each drawdown, we are required, among other things, to
provide the lender with acceptable valuations of the vessels in our fleet
confirming that the vessels in our fleet have a minimum value and that the
vessels in our fleet that secure our obligations under the facilities are
sufficient to satisfy minimum security requirements. To the extent that we are
not able to satisfy these requirements, including as a result of a decline in
the value of our vessels, we may not be able to draw down the full amount under
the credit facilities without obtaining a waiver or consent from the lender. We
will also not be permitted to borrow amounts under the facilities if we
experience a change of control.
The
credit facilities also impose operating and financial restrictions on us. These
restrictions may limit our ability to, among other things:
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pay
dividends or make capital expenditures if we do not repay amounts drawn
under our credit facilities, if there is a default under the credit
facilities or if the payment of the dividend or capital expenditure would
result in a default or breach of a loan
covenant;
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incur
additional indebtedness, including through the issuance of
guarantees;
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change
the flag, class or management of our
vessels;
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create
liens on our assets;
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enter
into a time charter or consecutive voyage charters that have a term that
exceeds, or which by virtue of any optional extensions may exceed,
thirteen months;
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merge
or consolidate with, or transfer all or substantially all our assets to,
another person; and
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enter
into a new line of business.
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Therefore,
we may need to seek permission from our lenders in order to engage in some
corporate actions. Our lenders’ interests may be different from ours and we
cannot guarantee that we will be able to obtain our lenders' permission when
needed. This may limit our ability to pay dividends to you, finance our future
operations, make acquisitions or pursue business opportunities.
We
cannot assure you that we will be able to refinance indebtedness incurred under
our credit facilities
We
intend to finance our future vessel acquisitions with net proceeds of future
equity offerings and with secured indebtedness drawn under our credit
facilities. While our current policy is to refinance amounts in excess of
$150.0 million drawn under our credit facilities with the net proceeds of
future equity offerings, we cannot assure you that we will be able to do so on
terms that are acceptable to us or at all. If we are not able to refinance these
amounts with the net proceeds of equity offerings on terms acceptable to us or
at all, we will have to dedicate a greater portion of our cash flow from
operations to pay the principal and interest of this indebtedness than if we
were able to refinance such amounts. If we are not able to satisfy these
obligations, we may have to undertake alternative financing plans. The actual or
perceived credit quality of our charterers, any defaults by them, and the market
value of our fleet, among other things, may materially affect our ability to
obtain alternative financing. In addition, debt service payments under our
credit facilities or alternative financing may limit funds otherwise available
for working capital, capital expenditures and other purposes. If we are unable
to meet our debt obligations, or if we otherwise default under our credit
facilities or an alternative financing arrangement, our lenders could declare
the debt, together with accrued interest and fees, to be immediately due and
payable and foreclose on our fleet, which could result in the acceleration of
other indebtedness that we may have at such time and the commencement of similar
foreclosure proceedings by other lenders.
If
the delivery of any of the two vessels that have not yet been delivered to us is
delayed or either of the vessels is delivered with significant defects, our
earnings and financial condition could suffer
We
have assumed shipbuilding contracts for two Capesize dry bulk carriers that we
expect to be delivered to us during the second quarter of 2010. A delay in the
delivery of either of these vessels, or other vessels that we may enter into
agreements to acquire in the future, to us or the failure of the contract
counterparty to deliver such vessels to us at all could adversely affect our
earnings, our financial condition and the amount of dividends that we pay in the
future.
Purchasing
and operating secondhand vessels may result in increased operating costs and
reduced fleet utilization
While
we have the right to inspect previously owned vessels prior to our purchase of
them and we intend to inspect all secondhand vessels that we acquire in the
future, such an inspection does not provide us with the same knowledge about
their condition that we would have if these vessels had been built for and
operated exclusively by us. A secondhand vessel may have conditions or defects
that we were not aware of when we bought the vessel and which may require us to
incur costly repairs to the vessel. These repairs may require us to put a vessel
into drydock which would reduce our fleet utilization. Furthermore, we usually
do not receive the benefit of warranties on secondhand vessels.
In
the highly competitive international shipping industry, we may not be able to
compete for charters with new entrants or established companies with greater
resources
We
employ our vessels in a highly competitive market that is capital intensive and
highly fragmented. Competition arises primarily from other vessel owners, some
of whom have substantially greater resources than we do. Competition for the
transportation of dry bulk cargo by sea is intense and depends on price,
location, size, age, condition and the acceptability of the vessel and its
operators to the charterers. Due in part to the highly fragmented market,
competitors with greater resources could enter the dry bulk shipping industry
and operate larger fleets through consolidations or acquisitions and may be able
to offer lower charter rates and higher quality vessels than we are able to
offer.
We
may be unable to attract and retain key management personnel and other employees
in the shipping industry, which may negatively impact the effectiveness of our
management and results of operations
Our
success depends to a significant extent upon the abilities and efforts of our
management team. We have entered into employment contracts with our Chairman and
Chief Executive Officer, Mr. Simeon Palios, our President,
Mr. Anastassis Margaronis, our Chief Financial Officer, Mr. Andreas
Michalopoulos and our Executive Vice President, Mr. Ioannis Zafirakis. Our
success will depend upon our ability to retain key members of our management
team and to hire new members as may be necessary. The loss of any of these
individuals could adversely affect our business prospects and financial
condition. Difficulty in hiring and retaining replacement personnel could have a
similar effect. We do not currently, nor do we intend to, maintain “key man”
life insurance on any of our officers or other members of our management
team.
Risks
associated with operating ocean-going vessels could affect our business and
reputation, which could adversely affect our revenues and stock
price
The
operation of ocean-going vessels carries inherent risks. These risks include the
possibility of:
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environmental
accidents;
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cargo
and property losses or damage;
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business
interruptions caused by mechanical failure, human error, war, terrorism,
political action in various countries, labor strikes or adverse weather
conditions; and
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Any
of these circumstances or events could increase our costs or lower our revenues.
The involvement of our vessels in an environmental disaster may harm our
reputation as a safe and reliable vessel owner and operator.
The
shipping industry has inherent operational risks that may not be adequately
covered by our insurance
We
procure insurance for our fleet against risks commonly insured against by vessel
owners and operators. Our current insurance includes hull and machinery
insurance, war risks insurance and protection and indemnity insurance (which
includes environmental damage and pollution insurance). We can give no assurance
that we are adequately insured against all risks or that our insurers will pay a
particular claim. Even if our insurance coverage is adequate to cover our
losses, we may not be able to timely obtain a replacement vessel in the event of
a loss. Furthermore, in the future, we may not be able to obtain adequate
insurance coverage at reasonable rates for our fleet. We may also be subject to
calls, or premiums, in amounts based not only on our own claim records but also
the claim records of all other members of the protection and indemnity
associations through which we receive indemnity insurance coverage for tort
liability. Our insurance policies also contain deductibles, limitations and
exclusions which, although we believe are standard in the shipping industry, may
nevertheless increase our costs.
Our
vessels may suffer damage and we may face unexpected drydocking costs, which
could adversely affect our cash flow and financial condition
If
our vessels suffer damage, they may need to be repaired at a drydocking
facility. The costs of drydock repairs are unpredictable and can be substantial.
The loss of earnings while a vessel is being repaired and repositioned, as well
as the actual cost of these repairs not covered by our insurance, would decrease
our earnings and reduce the amount of cash that we have available for dividends.
We may not have insurance that is sufficient to cover all or any of the costs or
losses for damages to our vessels and may have to pay drydocking costs not
covered by our insurance.
The
aging of our fleet may result in increased operating costs in the future, which
could adversely affect our earnings
In
general, the cost of maintaining a vessel in good operating condition increases
with the age of the vessel. Currently, our fleet consists of thirteen Panamax
dry bulk carriers and six Capesize dry bulk carriers having a combined carrying
capacity of 2.0 million dwt and a weighted average age of 3.5 years.
As our fleet ages, we will incur increased costs. Older vessels are typically
less fuel efficient and more costly to maintain than more recently constructed
vessels due to improvements in engine technology. Cargo insurance rates increase
with the age of a vessel, making older vessels less desirable to charterers.
Governmental regulations and safety or other equipment standards related to the
age of vessels may also require expenditures for alterations or the addition of
new equipment to our vessels and may restrict the type of activities in which
our vessels may engage. We cannot assure you that, as our vessels age, market
conditions will justify those expenditures or enable us to operate our vessels
profitably during the remainder of their useful lives.
We
are exposed to U.S. dollar and foreign currency fluctuations and devaluations
that could harm our reported revenue and results of operations
We
generate all of our revenues in U.S. dollars but currently incur over half of
our operating expenses and the majority of our general and administrative
expenses in currencies other than the U.S. dollar, primarily the euro. Because a
significant portion of our expenses are incurred in currencies other than the
U.S. dollar, our expenses may from time to time increase relative to our
revenues as a result of fluctuations in exchange rates, particularly between the
U.S. dollar and the euro, which could affect the amount of net income that we
report in future periods. While we historically have not mitigated the risk
associated with exchange rate fluctuations through the use of financial
derivatives, we may employ such instruments from time to time in the future in
order to minimize this risk. Our use of financial derivatives would involve
certain risks, including the risk that losses on a hedged position could exceed
the nominal amount invested in the instrument and the risk that the counterparty
to the derivative transaction may be unable or unwilling to satisfy its
contractual obligations, which could have an adverse effect on our
results.
We
may have to pay tax on United States source income, which would reduce our
earnings
Under
the United States Internal Revenue Code of 1986, or the Code, 50% of the gross
shipping income of a vessel owning or chartering corporation, such as ourselves
and our subsidiaries, that is attributable to transportation that begins or
ends, but that does not both begin and end, in the United States is
characterized as United States source shipping income and such income is subject
to a 4% United States federal income tax without allowance for deductions,
unless that corporation qualifies for exemption from tax under Section 883 of
the Code and the Treasury Regulations.
We
expect that we and each of our subsidiaries qualify for this statutory tax
exemption for the 2007 taxable year and we will take this position for United
States federal income tax return reporting purposes. However, there
are factual circumstances beyond our control that could cause us to lose the
benefit of this tax exemption in future years and thereby become subject to
United States federal income tax on our United States source
income. For example, at December 31, 2007, our 5% shareholders owned
approximately 19.21% of our outstanding stock. There is a risk that
we could no longer qualify for exemption under Code section 883 for a particular
taxable year if other shareholders with a five percent or greater interest in
our stock were, in combination with our existing 5% shareholders, to own 50% or
more of our outstanding shares of our stock on more than half the days during
the taxable year. Due to the factual nature of the issues involved,
we can give no assurances on our tax-exempt status or that of any of our
subsidiaries.
If
we or our subsidiaries are not entitled to this exemption under Section 883 for
any taxable year, we or our subsidiaries would be subject for those years to a
4% United States federal income tax on our U.S.-source shipping income. The
imposition of this taxation could have a negative effect on our business and
would result in decreased earnings available for distribution to our
stockholders. For the 2007 taxable year, we estimate that our maximum United
States federal income tax liability would be immaterial if we were to be subject
to this taxation. Please see the section of this annual report entitled
“Taxation” under item 10E for a more comprehensive discussion of the United
States federal income tax consequences.
United
States tax authorities could treat us as a “passive foreign investment company”,
which could have adverse United States federal income tax consequences to United
States holders
A
foreign corporation will be treated as a “passive foreign investment company,”
or PFIC, for United States federal income tax purposes if either (1) at
least 75% of its gross income for any taxable year consists of certain types of
“passive income” or (2) at least 50% 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.
For purposes of these tests, income derived from the performance of services
does not constitute “passive income.” United States stockholders of a PFIC are
subject to a disadvantageous United States federal income tax regime with
respect to the income derived by the PFIC, the distributions they receive from
the PFIC and the gain, if any, they derive from the sale or other disposition of
their shares in the PFIC.
Based
on our current and proposed method of operation, we do not believe that we will
be a PFIC with respect to any taxable year. In this regard, we intend to treat
the gross income we derive or are deemed to derive from our time chartering
activities as services income, rather than rental income. Accordingly, we
believe that our income from our time chartering activities does not constitute
“passive income,” and the assets that we own and operate in connection with the
production of that income do not constitute passive assets.
There
is, however, no direct legal authority under the PFIC rules addressing our
proposed method of operation. Accordingly, no assurance can be given that the
United States Internal Revenue Service, or IRS, or a court of law will accept
our position, and there is a risk that the IRS or a court of law could determine
that we are a PFIC. Moreover, no assurance can be given that we would not
constitute a PFIC for any future taxable year if there were to be changes in the
nature and extent of our operations.
If
the IRS were to find that we are or have been a PFIC for any taxable year, our
United States stockholders will face adverse United States tax consequences.
Under the PFIC rules, unless those stockholders make an election available under
the Code (which election could itself have adverse consequences for such
stockholders, such stockholders would be liable to pay United States federal
income tax at the then prevailing income tax rates on ordinary income plus
interest upon excess distributions and upon any gain from the disposition of our
common shares, as if the excess distribution or gain had been recognized ratably
over the stockholder's holding period of our common shares.
We
depend upon a few significant customers for a large part of our revenues and the
loss of one or more of these customers could adversely affect our financial
performance
We
have historically derived a significant part of our revenues from a small number
of charterers. During 2007, approximately 49% of our revenues derived from three
charterers. During 2006, approximately 50% of our revenues derived from three
charterers and in 2005, approximately 63% of our revenues derived from four
charterers. If one or more of our charterers chooses not to charter our vessels
or is unable to perform under one or more charters with us and we are not able
to find a replacement charter, we could suffer a loss of revenues that could
adversely affect our financial condition, results of operations and cash
available for distribution as dividends to our stockholders.
We
are a holding company, and we depend on the ability of our subsidiaries to
distribute funds to us in order to satisfy our financial obligations and to make
dividend payments
We
are a holding company and our subsidiaries conduct all of our operations and own
all of our operating assets. We have no significant assets other than the equity
interests in our subsidiaries. As a result, our ability to make dividend
payments depends on our subsidiaries and their ability to distribute funds to
us. If we are unable to obtain funds from our subsidiaries, our board of
directors may exercise its discretion not to declare or pay dividends. We do not
intend to obtain funds from other sources to pay dividends.
As
we expand our business, we may need to improve our operating and financial
systems and will need to recruit suitable employees and crew for our
vessels
Our
current operating and financial systems may not be adequate as we expand the
size of our fleet and our attempts to improve those systems may be ineffective.
In addition, as we expand our fleet, we will need to recruit suitable additional
seafarers and shoreside administrative and management personnel. While we have
not experienced any difficulty in recruiting to date, we cannot guarantee that
we will be able to continue to hire suitable employees as we expand our fleet.
If we or our crewing agent encounter business or financial difficulties, we may
not be able to adequately staff our vessels. If we are unable to grow our
financial and operating systems or to recruit suitable employees as we expand
our fleet, our financial performance may be adversely affected and, among other
things, the amount of cash available for distribution as dividends to our
stockholders may be reduced.
Risks
Relating to Our Common Stock
There
is no guarantee that there will continue to be an active and liquid public
market for you to resell our common stock in the future
The price of our common stock
may be volatile and may fluctuate due to factors such as:
|
·
|
actual
or anticipated fluctuations in our quarterly and annual results and those
of other public companies in our
industry;
|
|
·
|
mergers
and strategic alliances in the dry bulk shipping
industry;
|
|
·
|
market
conditions in the dry bulk shipping
industry;
|
|
·
|
changes
in government regulation;
|
|
·
|
shortfalls
in our operating results from levels forecast by securities
analysts;
|
|
·
|
announcements
concerning us or our competitors;
and
|
|
·
|
the
general state of the securities
market.
|
The
dry bulk shipping industry has been highly unpredictable and volatile. The
market for common stock in this industry may be equally
volatile.
We
are incorporated in the Marshall Islands, which does not have a well-developed
body of corporate law
Our
corporate affairs are governed by our amended and restated articles of
incorporation and bylaws and by the Marshall Islands Business Corporations Act,
or the 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 Marshall Islands interpreting the BCA. The rights and
fiduciary responsibilities of directors under the laws 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 the United
States. The rights of stockholders of the Marshall Islands may differ from the
rights of stockholders of companies incorporated in the United States. While the
BCA provides that it is to be interpreted according to the laws of the State of
Delaware and other states with substantially similar legislative provisions,
there have been few, if any, court cases interpreting the BCA in the Marshall
Islands and we cannot predict whether Marshall Islands courts would reach the
same conclusions as United States courts. Thus, you may have more difficulty in
protecting your interests in the face of actions by the management, directors or
controlling stockholders than would stockholders of a corporation incorporated
in a United States jurisdiction which has developed a relatively more
substantial body of case law.
Certain
existing stockholders will be able to exert considerable control over matters on
which our stockholders are entitled to vote
As
of the date of this report Mr. Simeon Palios, our President and Chief Executive
Officer, beneficially owns 14,312,040 shares, or approximately 19.22% of our
outstanding common stock, the vast majority of which is held indirectly through
entities over which he exercises sole voting power. Please see Item 7.A. “Major
Stockholders.” While Mr. Palios and the non-voting shareholders of these
entities have no agreement, arrangement or understanding relating to the voting
of their shares of our common stock they effectively control the outcome of
matters on which our stockholders are entitled to vote, including the election
of directors and other significant corporate actions. The interests of these
stockholders may be different from your interests.
Future
sales of our common stock could cause the market price of our common stock to
decline
Sales
of a substantial number of shares of our common stock in the public market or
the perception that these sales could occur, may depress the market price for
our common stock. These sales could also impair our ability to raise additional
capital through the sale of our equity securities in the future.
We
intend to issue additional shares of our common stock in the future to refinance
indebtedness in excess of $150.0 million incurred in connection with the
acquisition of vessels and our stockholders may elect to sell large numbers of
shares held by them from time to time. Our amended and restated articles of
incorporation authorize us to issue up to 100,000,000 shares of common stock, of
which as of December 31, 2007, 74,375,000 shares were outstanding. The number of
shares of common stock available for sale in the public market is limited by
restrictions applicable under securities laws and agreements that we and our
executive officers, directors and principal stockholders have entered
into.
Prior
to our initial public offering, we entered into a registration rights agreement
with Corozal Compania Naviera S.A., Ironwood Trading Corp. and Zoe S.
Company Ltd., certain of our stockholders, pursuant to which we have
granted them, their affiliates (including Mr. Simeon Palios,
Mr. Anastassis Margaronis and Mr. Ioannis Zafirakis) and certain of
their transferees, the right, under certain circumstances and subject to certain
restrictions, to require us to register under the Securities Act of 1933, as
amended, or the Securities Act, shares of our common stock held by them. Under
the registration rights agreement, these persons have the right to request us to
register the sale of shares held by them on their behalf and may require us to
make available shelf registration statements permitting sales of shares into the
market from time to time over an extended period. In addition, these persons
have the ability to exercise certain piggyback registration rights in connection
with registered offerings requested by stockholders or initiated by us.
Registration of such shares under the Securities Act would, except for shares
purchased by affiliates, result in such shares becoming freely tradable without
restriction under the Securities Act immediately upon the effectiveness of such
registration. In addition, shares not registered pursuant to the registration
rights agreement may, subject to any applicable lock-up agreement in effect at
such time, be resold pursuant to an exemption from the registration requirements
of the Securities Act, including the exemptions provided by Rule 144 and
Regulation S under the Securities Act.
Anti-takeover
provisions in our organizational documents could make it difficult for our
stockholders to replace or remove our current board of directors or have the
effect of discouraging, delaying or preventing a merger or acquisition, which
could adversely affect the market price of our common stock
Several
provisions of our amended and restated articles of incorporation and bylaws
could make it difficult for our stockholders to change the composition of our
board of directors in any one year, preventing them from changing the
composition of management. In addition, the same provisions may discourage,
delay or prevent a merger or acquisition that stockholders may consider
favorable.
These
provisions include:
|
·
|
authorizing
our board of directors to issue “blank check” preferred stock without
stockholder approval;
|
|
·
|
providing
for a classified board of directors with staggered, three year
terms;
|
|
·
|
prohibiting
cumulative voting in the election of
directors;
|
|
·
|
authorizing
the removal of directors only for cause and only upon the affirmative vote
of the holders of a majority of the outstanding shares of our common stock
entitled to vote for the directors;
|
|
·
|
prohibiting
stockholder action by written
consent;
|
|
·
|
limiting
the persons who may call special meetings of stockholders;
and
|
|
·
|
establishing
advance notice requirements for nominations for election to our board of
directors or for proposing matters that can be acted on by stockholders at
stockholder meetings.
|
In
addition, we have adopted a stockholder rights plan pursuant to which our board
of directors may cause the substantial dilution of any person that attempts to
acquire us without the approval of our board of directors.
These
anti-takeover provisions, including provisions of our stockholder rights plan,
could substantially impede the ability of public stockholders to benefit from a
change in control and, as a result, may adversely affect the market price of our
common stock and your ability to realize any potential change of control
premium.
Item
4. Information on the
Company
A.
|
History
and development of the Company
|
Diana
Shipping Inc. is a holding company incorporated under the laws of Liberia
in March 1999 as Diana Shipping Investments Corp. In February 2005, the
Company’s articles of incorporation were amended. Under the amended articles of
incorporation, the Company was renamed Diana Shipping Inc. and was redomiciled
from the Republic of Liberia to the Marshall Islands. Our executive
offices are located at Pendelis 16, 175 64 Palaio Faliro, Athens, Greece. Our
telephone number at this address is +30-210-947-0100.
We
are a global provider of shipping transportation services. We
specialize in transporting dry bulk cargoes, including such commodities as iron
ore, coal, grain and other materials along worldwide shipping routes. Currently,
our fleet consists of 19 dry bulk carriers, of which 13 are Panamax and six are
Capesize dry bulk carriers, having a combined carrying capacity of approximately
2.0 million dwt and a weighted average age of 3.5 years. We also have assumed
shipbuilding contracts for two additional Capesize dry bulk carriers, which are
under construction by the China Shipbuilding Trading Company Ltd., and Shanghai
Waigaoqiao Shipbuilding Co. Ltd., and are expected to be delivered to us in the
second quarter of 2010.
As
of December 31, 2007, our fleet consisted of 13 modern Panamax dry bulk carriers
and five Capesize dry bulk carriers that had a combined carrying capacity of
approximately 1.8 million dwt and a weighted average age of 3.4 years. As of
December 31, 2006, our fleet consisted of 13 modern Panamax dry bulk carriers
and two Capesize dry bulk carriers that had a combined carrying capacity of
approximately 1.1 million dwt and a weighted average age of 3.7
years.
In
February 2007, we entered into a memorandum of agreement to acquire one newly
built Capesize dry bulk carrier, the Semirio
that was under construction at the Shanghai Waigaoqiao Shipbuilding Co. Ltd., in
China, for the price of $98.0 million. We paid a 20% advance, amounting to $19.6
million, on signing of the agreement and the balance of the purchase price of
$78.4 million was paid on the delivery of the vessel to us in June 2007. We
financed $92.0 million of the purchase price with proceeds from our revolving
credit facility with the Royal Bank of Scotland and the remaining with cash on
hand.
In February 2007, we entered into a memorandum of
agreement to sell the Pantelis
SP for
the price of $81.0 million less 2.5% commission. On signing of the agreement, the buyers
of the vessels paid a 10% advance of the purchase price, amounting to $8.1
million, which was released to us together with the balance of the purchase
price on delivery of the vessel to its new buyers in July 2007. We used the
proceeds from the sale of the Pantelis SP to repay $90.0 million of the then
outstanding debt with the Royal Bank of Scotland amounting to $109.0
million.
In
March 2007, we entered into a memorandum of agreement to acquire one second hand
Capesize dry bulk carrier, the Aliki,
for the price of $110.0 million. We paid a 10% advance, amounting to $11.0
million, on signing of the agreement with cash on hand. The balance of the
purchase price, amounting to $99.0 million, was paid on the delivery of the
vessel to us in April 2007 and was partly funded with an $87.0 million loan
drawn under our revolving credit facility with the Royal Bank of
Scotland.
In April 2007, we completed a public offering of an
aggregate of 9,825,500 shares of our common stock at a price of $17.00 per
share, resulting in net proceeds to us of $159.3 million. In the same
offering certain of our shareholders sold an additional 2,250,000 shares of our
common stock, for which we did not receive any proceeds. As described
below, we used a portion of the net proceeds of this offering to repay
outstanding indebtedness and we used the balance to fund a portion of the
acquisition costs of the vessels Semirio
and Aliki.
In
April 2007, we drew down an amount of $22.0 million under our revolving credit
facility to fund part of the advances paid for the vessels’ Semirio
and Aliki.
During the same month, we repaid in full the then outstanding balance under our
revolving credit facility with the Royal Bank of Scotland, amounting to $136.6
plus interest and costs, partly with the proceeds of our public offering that
was completed in the same month.
In
April 2007, we entered into a memorandum of agreement to acquire one newly built
Capesize dry bulk carrier, the Boston,
for the purchase price of $110.0 million. On signing of the agreement, we paid a
20% advance, amounting to $22.0 million, with available cash on hand and in May
2007 we drew down an amount of $22.0 million under our revolving credit facility
to finance the advance. We paid the balance of the purchase price of $88.0
million on the vessel’s delivery to us in November 2007, with the proceeds from
our September 2007 public offering, discussed below.
In
September 2007, we completed a public offering of an aggregate of 11,500,000
shares of common stock at a price of $25.00 per share, resulting in net proceeds
to us of $273.7 million. We used a portion of the net proceeds of this offering
to repay the $100.8 million outstanding under our revolving credit facility with
the Royal Bank of Scotland, plus interest and costs. We also used a portion of
the proceeds of this offering to fund a portion of the purchase price of the
Boston.
On
October 9, 2007, the Company entered into two Memoranda of Agreement to acquire
two secondhand Capesize dry bulk carriers, the Salt Lake
City and the Norfolk,
for a total consideration of $140.0 million and $135.0 million, respectively. On
signing of the agreements, we paid 20% of the respective purchase prices
amounting to $28.0 million and $27.0 million, respectively. The balance of the
purchase prices was paid on the delivery of the vessels to us in December 2007
and February 2008, respectively. In December 2007, we drew down an amount of
$75.0 million under our revolving credit facility with the Royal Bank of
Scotland to finance part of the purchase price of the Salt Lake
City. In February and March 2008, we drew down an amount of $71.5 million
and $27.0 million, respectively, under the same facility to finance part of the
purchase price of the Norfolk.
During
2007, 2006 and 2005, we had a fleet utilization of 99.3%, 99.9% and 99.7%,
respectively, our vessels achieved daily time charter equivalent rates of
$31,272, $22,661 and $27,838, respectively, and we generated revenues of $190.5
million, $116.1 million and $103.1 million, respectively.
The
following table presents certain information concerning the dry bulk carriers in
our fleet, as of March 12, 2008.
Vessel
|
|
Operating
Status
|
|
Dwt
|
|
Age
(1)
|
|
Time
Charter
Expiration
Date (2)
|
|
Daily
Time
Charter
Hire Rate
|
|
Sister
Ships
(3)
|
Nirefs
|
|
Delivered
Jan 2001
|
|
75,311
|
|
6.9
years
|
|
Feb
3, 2010 – Apr 3, 2010
|
|
$60,500
|
|
A
|
Alcyon
|
|
Delivered
Feb 2001
|
|
75,247
|
|
6.9
years
|
|
Nov
21, 2012 – Feb 21, 2013
|
|
$34,500
|
|
A
|
Triton
|
|
Delivered
Mar 2001
|
|
75,336
|
|
6.8
years
|
|
Oct.
17, 2009 – Jan 17, 20104
|
|
$24,400
|
|
A
|
Oceanis
|
|
Delivered
May 2001
|
|
75,211
|
|
6.6
years
|
|
Jul
29, 2009 – Oct 29, 2009
|
|
$40,000
|
|
A
|
Dione
|
|
Acquired
May 2003
|
|
75,172
|
|
7.0
years
|
|
Jan
7, 2009 – Mar 7, 2009
|
|
$82,000
|
|
A
|
Danae
|
|
Acquired
Jul 2003
|
|
75,106
|
|
7.0
years
|
|
Feb
18, 2009 – May 18, 2009
|
|
$29,400
|
|
A
|
Protefs
|
|
Delivered
Aug 2004
|
|
73,630
|
|
3.3
years
|
|
Mar
22, 2008 – Mar 25, 2008
|
|
$31,650
|
|
B
|
Calipso
|
|
Delivered
Feb 2005
|
|
73,691
|
|
2.9
years
|
|
Jan
14, 2009 – Mar 14, 2009
|
|
$55,000
|
|
B
|
Clio
|
|
Delivered
May 2005
|
|
73,691
|
|
2.6
years
|
|
Jan
27, 2009 – Mar 27, 2009
|
|
$27,000
|
|
B
|
Thetis
|
|
Acquired
Nov 2005
|
|
73,583
|
|
3.4
years
|
|
Sep
2, 2008 – Nov 2, 2008
|
|
$60,250
|
|
B
|
Erato
|
|
Acquired
Nov 2005
|
|
74,444
|
|
3.3
years
|
|
Jan
1, 2009 – Mar 1, 2009
|
|
$80,300
|
|
C
|
Naias
|
|
Acquired
Jun 2006
|
|
73,546
|
|
1.5
years
|
|
Aug
24, 2009 – Oct 24, 2009
|
|
$34,000
|
|
B
|
Coronis
|
|
Delivered
Jan 2006
|
|
74,381
|
|
1.9
years
|
|
Jan
18, 2009 – Apr 9, 2009
|
|
$27,500
|
|
C
|
Sideris
GS
|
|
Delivered
Nov 2006
|
|
174,186
|
|
1.1
years
|
|
Nov
30, 2008
|
|
$43,000
|
|
D
|
|
|
|
|
|
|
|
|
Nov
30, 2009
|
|
$39,000
|
|
|
|
|
|
|
|
|
|
|
Oct
15, 2010 – Jan 15, 20115
|
|
$36,000
|
|
|
Aliki
|
|
Acquired
Apr 2007
|
|
180,235
|
|
2.8
years
|
|
May
1, 2009
|
|
$52,000
|
|
-
|
|
|
|
|
|
|
|
|
Mar
1, 2011 – Jun 1, 20115
|
|
$45,000
|
|
|
Semirio
|
|
Delivered
Jun 2007
|
|
174,261
|
|
0.6
years
|
|
Jun
15, 2009
|
|
$51,000
|
|
D
|
|
|
|
|
|
|
|
|
Apr
30, 2011 – Jul 30, 20115
|
|
$31,000
|
|
|
Boston
|
|
Delivered
Nov 2007
|
|
177,828
|
|
0.1
years
|
|
Sep
28, 2011 – Dec 28, 20116
|
|
$52,000
|
|
D
|
Salt
Lake City
|
|
Acquired
Dec 2007
|
|
171,810
|
|
2.3
years
|
|
Aug
28, 2012 – Oct 28, 2012
|
|
$55,800
|
|
-
|
Norfolk
|
|
Acquired
Feb 2008
|
|
164,218
|
|
-
|
|
Jan
12, 2013 – Mar 12, 2013
|
|
$74,750
|
|
-
|
Hull
H11077,
8
|
|
Expected
2010
|
|
177,000
|
|
-
|
|
Feb,
28, 2015 – Jun 30, 20159
|
|
$48,000
|
|
D
|
Hull
H11087,
8
|
|
Expected
2010
|
|
177,000
|
|
-
|
|
-
|
|
-
|
|
D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As
of December 31, 2007.
|
|
(2)
|
The
date range provided represents the earliest and latest date on which the
charterer may redeliver the vessel to us upon the termination of the
charter.
|
|
(3)
|
Each
dry bulk carrier is a sister ship of other dry bulk carriers that have the
same letter.
|
|
(4)
|
The
charterer has the option to employ the vessel for an additional 11-13
month period at a daily rate based on the average rate of four
pre-determined time charter routes as published by the Baltic Exchange.
The optional period, if exercised must be declared on or before the end of
the 30th month of employment and can only commence at the end of the 36th
month.
|
|
(5)
|
The
charterer has the option to employ the vessel for an additional 11-13
month period. The optional period, if exercised, must be declared on
or before the end of the 42nd month of employment and can only commence at
the end of the 48th month, at the daily time charter rate of
$48,500.
|
|
(6)
|
The
charterer has the option to employ the vessel for an additional 11-13
month period. The optional period, if exercised, must be declared on or
before the end of the 42nd month of employment and can only commence at
the end of the 48th month, at the daily time charter rate of
$52,000.
|
|
(7)
|
Expected
to be delivered in the second quarter of
2010.
|
|
(8)
|
The
fixture relates to Hull
1107 or Hull
1108, depending on the date of their delivery to us. The gross rate
will be either $50,000 per day for delivery between October 1, 2009 and
January 31, 2010 or $48,000 for delivery between February 1, and April 30,
2010.
|
|
(9)
|
Based
on the latest possible date of delivery to us from the
yard.
|
Each
of our vessels is owned through a separate wholly-owned subsidiary.
Our
vessels operate worldwide within the trading limits imposed by our insurance
terms and do not operate in areas where United States, European Union or United
Nations sanctions have been imposed.
Management
of Our Fleet
The
commercial and technical management of our fleet is carried out by our
wholly-owned subsidiary, Diana Shipping Services S.A., to which we refer as DSS,
or our fleet manager. Prior to our acquisition of DSS effective April 1,
2006, DSS was majority owned and controlled by Mr. Simeon Palios, our
Chairman and Chief Executive Officer. The stockholders of DSS also included
Mr. Anastassis Margaronis, our President and a member of our board of
directors, and Mr. Ioannis Zafirakis, our Executive Vice President and a
member of our board of directors.
In
exchange for providing us with commercial and technical services, personnel and
office space, we pay our fleet manager a commission that is equal to 2% of our
revenues and a fixed management fee of $15,000 per month for each vessel in our
operating fleet.
The
following table presents a detail of commissions and management fees incurred
during the periods indicated.
|
|
Year
Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in
thousands of U.S. dollars)
|
Commissions
|
$
|
3,918
|
$
|
2,384
|
$
|
2,061
|
Management
fees
|
|
2,859
|
|
2,414
|
|
1,731
|
|
|
|
|
|
|
|
Total
|
$
|
6,777
|
$
|
4,798
|
$
|
3,792
|
|
|
|
|
|
|
|
Effective
April 1, 2006 these amounts are considered inter-company transactions and
therefore eliminated from our consolidated financial statements. The total
amount shown for 2005 and $497 of the total amount shown for 2006 were included
in voyage expenses. The remaining amount of $1,887 for 2006 and the total amount
for 2007 have been eliminated as inter-company transactions.
We
generally charter our vessels to major trading houses (including commodities
traders), major producers and government-owned entities rather than to more
speculative or undercapitalized entities. Our customers include national,
regional and international companies, such as China National Chartering Corp.,
Cargill International S.A., Australian Wheat Board (AWB), BHP Billiton and
Bocimar N.V. Antwerp. During 2007, three of our charterers accounted for 49% of
our revenues; Australian Wheat Board (11%), BHP Billiton (15%) and Cargill
(23%). During 2006, three or our customers accounted for 50% of our
revenues; Cargill (20%), Bocimar (15%) and China National (15%). During 2005,
four of our customers accounted for 63% of our revenues; Cargill (26%),
China National (14%), Navios International Inc. (12%) and Norden A/S
(11%).
We
charter our dry bulk carriers to customers primarily pursuant to time charters.
Under our time charters, the charterer typically pays us a fixed daily charter
hire rate and bears all voyage expenses, including the cost of bunkers (fuel
oil) and canal and port charges. We remain responsible for paying the chartered
vessel's operating expenses, including the cost of crewing, insuring, repairing
and maintaining the vessel. We also pay commissions ranging from 0% to 6.25% of
the total daily charter hire rate of each charter to unaffiliated ship brokers
and to in-house brokers associated with the charterer, depending on the number
of brokers involved with arranging the charter.
We
strategically monitor developments in the dry bulk shipping industry on a
regular basis and, subject to market demand, seek to adjust the charter hire
periods for our vessels according to prevailing market conditions. In order to
take advantage of the relatively stable cash flow and high utilization rates
associated with long-term time charters along with the historically high charter
hire rates for Panamax and Capesize vessels, currently 15 of our vessels,
including one of the vessels under construction that we expect to take delivery
of in the second quarter of 2010, are fixed on longer-term time charters ranging
in duration from 18 months to 62 months. Those of our vessels on
short-term time charters provide us with flexibility in responding to market
developments. We will continue to evaluate our balance of short- and long-term
charters relative to developments in the dry bulk shipping industry and may
extend the charter hire periods of additional vessels in our fleet to take
advantage of these historically high charter hire rates.
The
Dry Bulk Shipping Industry
The
global dry bulk carrier fleet may be divided into four categories based on a
vessel's carrying capacity. These categories consist of:
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Capesize vessels which
have carrying capacities of more than 85,000 dwt. These vessels generally
operate along long haul iron ore and coal trade routes. There are
relatively few ports around the world with the infrastructure to
accommodate vessels of this size.
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Panamax vessels have a
carrying capacity of between 60,000 and 85,000 dwt. These vessels carry
coal, grains, and, to a lesser extent, minor bulks, including steel
products, forest products and fertilizers. Panamax vessels are able to
pass through the Panama Canal making them more versatile than larger
vessels.
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Handymax vessels have a
carrying capacity of between 35,000 and 60,000 dwt. These vessels operate
along a large number of geographically dispersed global trade routes
mainly carrying grains and minor bulks. Vessels below 60,000 dwt are
sometimes built with on-board cranes enabling them to load and discharge
cargo in countries and ports with limited
infrastructure.
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Handysize vessels have
a carrying capacity of up to 35,000 dwt. These vessels carry exclusively
minor bulk cargo. Increasingly, these vessels have operated along regional
trading routes. Handysize vessels are well suited for small ports with
length and draft restrictions that may lack the infrastructure for cargo
loading and unloading.
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The
supply of dry bulk carriers is dependent on the delivery of new vessels and the
removal of vessels from the global fleet, either through scrapping or loss.
Currently, newbuilding statistics from shipping analysts show that approximately
225 million tons dwt of dry bulk vessels over 10,000 tons dwt are on order,
representing approximately 57% of the existing fleet. The level of
scrapping activity is generally a function of scrapping prices in relation to
current and prospective charter market conditions, as well as operating, repair
and survey costs. The average age at which a vessel is scrapped over
the last five years has been 26 years. However, due to recent
strength in the dry bulk shipping industry, the average age at which the vessels
are scrapped has increased.
The
demand for dry bulk carrier capacity is determined by the underlying demand for
commodities transported in dry bulk carriers, which in turn is influenced by
trends in the global economy. Seaborne dry bulk trade increased by slightly more
than 2% annually during the 1980s and 1990s. However, this rate of growth has
increased dramatically in recent years. Between 2001 and 2007, trade in all dry
bulk commodities increased from approximately 2.1 billion tons to
3.0 billion tons, equivalent to a compound average growth rate of 5.2%.
Demand for dry bulk carrier capacity is also affected by the operating
efficiency of the global fleet, with port congestion, which has been a feature
of the market since 2004, absorbing tonnage and therefore leading to a tighter
balance between supply and demand. In evaluating demand factors for dry bulk
carrier capacity, it is important to bear in mind that dry bulk carriers can be
the most versatile element of the global shipping fleets in terms of employment
alternatives. Dry bulk carriers seldom operate on round trip voyages. Rather,
the norm is triangular or multi-leg voyages. Hence, trade distances assume
greater importance in the demand equation.
Competition
Our
business fluctuates in line with the main patterns of trade of the major dry
bulk cargoes and varies according to changes in the supply and demand for these
items. We operate in markets that are highly competitive and based primarily on
supply and demand. We compete for charters on the basis of price, vessel
location, size, age and condition of the vessel, as well as on our reputation as
an owner and operator. We compete with other owners of dry bulk carriers in the
Panamax and smaller class sectors and with owners of Capesize dry bulk carriers.
Ownership of dry bulk carriers is highly fragmented.
We
believe that we possess a number of strengths that provide us with a competitive
advantage in the dry bulk shipping industry:
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We own a modern, high quality
fleet of dry bulk carriers. We believe that owning a
modern, high quality fleet reduces operating costs, improves safety and
provides us with a competitive advantage in securing favorable time
charters. We maintain the quality of our vessels by carrying out regular
inspections, both while in port and at sea, and adopting a comprehensive
maintenance program for each
vessel.
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Our fleet includes four groups
of sister ships. We believe that maintaining a fleet
that includes sister ships enhances the revenue generating potential of
our fleet by providing us with operational and scheduling flexibility. The
uniform nature of sister ships also improves our operating efficiency by
allowing our fleet manager to apply the technical knowledge of one vessel
to all vessels of the same series and creates economies of scale that
enable us to realize cost savings when maintaining, supplying and crewing
our vessels.
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We have an experienced
management team. Our management team consists of
experienced executives who have on average more than 22 years of
operating experience in the shipping industry and have demonstrated
ability in managing the commercial, technical and financial areas of our
business. Our management team is led by Mr. Simeon Palios, a
qualified naval architect and engineer who has 40 years of experience
in the shipping industry.
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Internal management of vessel
operations. We conduct all of the commercial and
technical management of our vessels in-house through DSS. We believe
having in-house commercial and technical management provides us with a
competitive advantage over many of our competitors by allowing us to more
closely monitor our operations and to offer higher quality performance,
reliability and efficiency in arranging charters and the maintenance of
our vessels.
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We benefit from strong
relationships with members of the shipping and financial
industries. We have developed strong relationships with
major international charterers, shipbuilders and financial institutions
that we believe are the result of the quality of our operations, the
strength of our management team and our reputation for
dependability.
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We have a strong balance sheet
and a relatively low level of indebtedness. We believe
that our strong balance sheet and relatively low level of indebtedness
provide us with the flexibility to increase the amount of funds that we
may draw under our credit facilities in connection with future
acquisitions and enable us to use cash flow that would otherwise be
dedicated to debt service for other purposes, including funding operations
and making dividend payments.
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Charter
Hire Rates
Charter
hire rates fluctuate by varying degrees among dry bulk carrier size categories.
The volume and pattern of trade in a small number of commodities (major bulks)
affect demand for larger vessels. Therefore, charter rates and vessel values of
larger vessels often show greater volatility. Conversely, trade in a greater
number of commodities (minor bulks) drives demand for smaller dry bulk carriers.
Accordingly, charter rates and vessel values for those vessels are subject to
less volatility.
Charter
hire rates paid for dry bulk carriers are primarily a function of the underlying
balance between vessel supply and demand, although at times other factors may
play a role. Furthermore, the pattern seen in charter rates is broadly mirrored
across the different charter types and the different dry bulk carrier
categories. However, because demand for larger dry bulk vessels is affected by
the volume and pattern of trade in a relatively small number of commodities,
charter hire rates (and vessel values) of larger ships tend to be more volatile
than those for smaller vessels.
In
the time charter market, rates vary depending on the length of the charter
period and vessel specific factors such as age, speed and fuel
consumption.
In
the voyage charter market, rates are influenced by cargo size, commodity, port
dues and canal transit fees, as well as delivery and redelivery regions. In
general, a larger cargo size is quoted at a lower rate per ton than a smaller
cargo size. Routes with costly ports or canals generally command higher rates
than routes with low port dues and no canals to transit. Voyages with a load
port within a region that includes ports where vessels usually discharge cargo
or a discharge port within a region with ports where vessels load cargo also are
generally quoted at lower rates, because such voyages generally increase vessel
utilization by reducing the unloaded portion (or ballast leg) that is included
in the calculation of the return charter to a loading area.
Vessel
Prices
Vessel
prices, both for newbuildings and secondhand vessels, have increased
significantly as a result of the strength of the dry bulk shipping
industry. Because sectors of the shipping industry (dry bulk carrier,
tanker and container ships) are in a period of prosperity, newbuilding prices
for all vessel types have increased significantly due to a reduction in the
number of berths available for the construction of new vessels in
shipyards.
In
the secondhand market, the steep increase in newbuilding prices and the strength
of the charter market have also affected vessel prices. With vessel
earnings at relatively high levels and a limited availability of newbuilding
berths, the ability to deliver a vessel early has resulted in a premium to the
purchase price. Consequently, secondhand prices of five year old
Panamax and Capesize dry bulk carriers have reached higher levels than those of
comparably sized newbuildings.
Permits
and Authorizations
We
are required by various governmental and quasi-governmental agencies to obtain
certain permits, licenses and certificates with respect to our vessels. The
kinds of permits, licenses and certificates required depend upon several
factors, including the commodity transported, the waters in which the vessel
operates, the nationality of the vessel's crew and the age of a vessel. We have
been able to obtain all permits, licenses and certificates currently required to
permit our vessels to operate. Additional laws and regulations, environmental or
otherwise, may be adopted which could limit our ability to do business or
increase the cost of us doing business.
Environmental
and Other Regulations
Government
regulation significantly affects the ownership and operation of our vessels. We
are subject to international conventions, national, state and local laws and
regulations in force in the countries in which our vessels may operate or are
registered.
A
variety of government and private entities subject our 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) and charterers,
particularly terminal operators. Certain of these entities require us to obtain
permits, licenses and certificates for the operation of our vessels. Failure to
maintain necessary permits or approvals could require us to incur substantial
costs or temporarily suspend the operation of one or more of our
vessels.
International
Maritime Organization
The
United Nation's International Maritime Organization, or IMO, has negotiated
international conventions that impose liability for oil pollution in
international waters and a signatory's territorial waters. In
September 1997, the IMO adopted Annex VI to the International Convention
for the Prevention of Pollution from Ships to address air pollution from ships.
Annex VI was ratified in May 2004, and became effective in May 2005.
Annex VI set limits on sulfur oxide and nitrogen oxide 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. Our fleet has conformed to the Annex VI
regulations.
The
operation of our vessels is also affected by the requirements set forth in the
IMO's Management Code for the Safe Operation of Ships and Pollution Prevention,
or ISM Code. The ISM Code requires ship owners and bareboat charterers to
develop and maintain an extensive “Safety Management System” that includes the
adoption of a safety and environmental protection policy setting forth
instructions and procedures for safe operation and describing procedures for
dealing with emergencies. 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, 2006,
each of our vessels was ISM code-certified.
The
United States Oil Pollution Act of 1990
The
United States Oil Pollution Act of 1990, or OPA, established an extensive
regulatory and liability regime for the protection and cleanup of the
environment from oil spills. OPA affects all owners and operators whose vessels
trade in the United States, 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.
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:
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o
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natural resources damage and
the costs of assessment
thereof;
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o
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real and personal property
damage;
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o
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net loss of taxes, royalties,
rents, fees and other lost
revenues;
|
|
o
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lost profits or impairment of
earning capacity due to property or natural resources damage;
and
|
|
o
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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.
|
Under
amendments to OPA that became effective on July 11, 2006, the liability of
responsible parties is limited to the greater of $950 per gross ton or
$0.8 million per non-tank vessel that is over 300 gross tons (subject to
possible adjustment for inflation). 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.
We
currently maintain pollution liability coverage insurance in the amount of
$1 billion per incident for each of our vessels. If the damages from a
catastrophic spill were to exceed our insurance coverage it could have an
adverse effect on our business and results of operation.
OPA
requires owners and operators of vessels to establish and maintain with the
United States Coast Guard evidence of financial responsibility sufficient to
meet their potential liabilities under the OPA. Current United States Coast
Guard regulations require evidence of financial responsibility in the amount of
$900 per gross ton for non-tank vessels, which includes the OPA limitation on
liability of $600 per gross ton and the United States Comprehensive
Environmental Response, Compensation, and Liability Act, or CERCLA, liability
limit of $300 per gross ton. We expect the United States Coast Guard to increase
the amounts of financial responsibility to reflect the July 2006 increases
in liability. Under the regulations, vessel owners and operators may evidence
their financial responsibility by showing proof of insurance, surety bond,
self-insurance or guaranty. Under 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.
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 are required to waive
insurance policy defenses.
The
United States Coast Guard's financial responsibility regulations may also be
satisfied by evidence of surety bond, guaranty or by self-insurance. 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. We have complied 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 self-insurance.
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. In some cases, states, which have enacted such legislation, have not yet
issued implementing regulations defining vessels owners' responsibilities under
these laws. We intend to comply with all applicable state regulations in the
ports where our vessels call.
Other
Environmental Initiatives
Although
the United States is not a party thereto, many countries have ratified and
currently follow the liability plan adopted by the IMO and set out in the
International Convention on Civil Liability for Oil Pollution Damage of 1969, or
the 1969 Convention. Under this convention, and depending on whether the country
in which the damage results is a party to the 1992 Protocol to the International
Convention on Civil Liability for Oil Pollution Damage, a vessel’s registered
owner is strictly liable for pollution damage caused in the territorial waters
of a contracting state by discharge of persistent oil, subject to certain
complete defenses. Under an amendment that became effective in
November 2003 for vessels of 5,000 to 140,000 gross tons (a unit of
measurement for the total enclosed spaces within a vessel), liability is limited
to approximately $6.5 million plus approximately $913 for each additional
gross ton over 5,000. For vessels of over 140,000 gross tons,
liability is limited to approximately $129.9 million. As the 1969
Convention calculates liability in terms of basket currencies, these figures are
based on currency exchange rates on March 20, 2006. Under the 1969 Convention,
the right to limit liability is forfeited where the spill is caused by the
owner’s actual fault; under the 1992 Protocol, a shipowner cannot limit
liability where the spill is caused by the owner’s intentional or reckless
conduct. Vessels trading in jurisdictions that are parties to these
conventions must provide evidence of insurance covering the liability of the
owner. In jurisdictions where the 1969 Convention has not been
adopted, including the United States, various legislative schemes or common law
govern, and liability is imposed either on the basis of fault or in a manner
similar to that convention. We believe that our protection and
indemnity insurance will cover the liability under the plan adopted by the
IMO.
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 the MTSA, came into effect. To
implement certain portions of the MTSA, in July 2003, the United States
Coast Guard 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 the
International Convention for the Safety of Life at Sea, or 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:
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on-board
installation of automatic information systems, or AIS, to enhance
vessel-to-vessel and vessel-to-shore
communications;
|
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·
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on-board
installation of ship security alert
systems;
|
|
·
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the
development of vessel security plans;
and
|
|
·
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compliance
with flag state security certification
requirements.
|
The
United States Coast Guard regulations, intended to align with international
maritime security standards, exempt non-United States vessels from MTSA vessel
security measures provided such vessels have on board a valid International Ship
Security Certificate, or ISSC, that attests to the vessel's compliance with
SOLAS security requirements and the ISPS Code. We have implemented the various
security measures addressed by the MTSA, SOLAS and the ISPS Code.
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 also undertakes on request 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 or to the regulations of
the country concerned.
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, at intervals of 12 months from the date of
commencement of the class period indicated in the
certificate.
Intermediate
Surveys. Extended annual surveys are referred to as intermediate surveys
and typically are conducted two and one-half years after commissioning and each
class renewal. Intermediate surveys may be carried out on the occasion of the
second or third annual survey.
Class Renewal
Surveys. Class renewal surveys, also known as special surveys, are
carried out for the ship's hull, machinery, including the electrical plant and
for any special equipment classed, at the intervals indicated by the character
of classification for the hull. 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. The classification
society may grant a one year grace period for completion of the special survey.
Substantial amounts of money may have to be spent for steel renewals to pass a
special survey if the vessel experiences excessive wear and tear. In lieu of the
special survey every four or five years, depending on whether a grace period was
granted, a ship owner has the option of arranging with the classification
society for the vessel's hull or machinery to be on a continuous survey cycle,
in which every part of the vessel would be surveyed within a five year cycle. At
an owner's application, the surveys required for class renewal may be split
according to an agreed schedule to extend over the entire period of class. This
process is referred to as continuous class renewal.
All
areas subject to survey as defined by the classification society are required to
be surveyed at least once per class period, unless shorter intervals between
surveys are prescribed elsewhere. The period between two subsequent surveys of
each area must not exceed five years.
Most
vessels are also drydocked every 30 to 36 months for inspection of the
underwater parts and for repairs related to inspections. If any defects are
found, the classification surveyor will issue a “recommendation” which must be
rectified by the ship owner within prescribed time limits.
Most
insurance underwriters make it a condition for insurance coverage that a vessel
be certified as “in class” by a classification society which is a member of the
International Association of Classification Societies. All our vessels are
certified as being “in class” by Lloyd's Register of Shipping. All new and
secondhand vessels that we purchase must be certified prior to their delivery
under our standard purchase contracts and memorandum of agreement. If the vessel
is not certified on the date of closing, we have no obligation to take delivery
of the vessel.
General
The
operation of any dry bulk 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 always an inherent possibility of marine disaster, including
oil spills and other environmental mishaps, and the liabilities arising from
owning and operating vessels in international trade. OPA, which imposes
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.
While
we maintain hull and machinery insurance, war risks insurance, protection and
indemnity cover, increased value insurance and freight, demurrage and
defense cover for our operating fleet in amounts that we believe to be prudent
to cover normal risks in our operations, we may not be able to achieve or
maintain this level of coverage throughout a vessel's useful life. Furthermore,
while we believe that our present insurance coverage is adequate, not all risks
can be insured, and there can be no guarantee that any specific claim will be
paid, or that we will always be able to obtain adequate insurance coverage at
reasonable rates.
Hull &
Machinery and War Risks Insurance
We
maintain marine hull and machinery and war risks insurance, which cover the risk
of actual or constructive total loss, for all of our vessels. Our vessels are
each covered up to at least fair market value with deductibles of $100,000 per
vessel per incident. We also maintain increased value coverage for each of our
vessels. Under this increased value coverage, in the event of total loss of a
vessel, we are entitled to recover amounts not recoverable under our hull and
machinery policy due to under-insurance.
Protection
and Indemnity Insurance
Protection
and indemnity insurance is provided by mutual protection and indemnity
associations, or P&I Associations, which insure our third party liabilities
in connection with our shipping activities. This includes third-party 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. Protection and indemnity insurance is a
form of mutual indemnity insurance, extended by protection and indemnity mutual
associations, or “clubs.” Subject to the “capping” discussed below, our
coverage, except for pollution, is unlimited.
Our
current protection and indemnity insurance coverage for pollution is
$1 billion per vessel per incident. The fourteen P&I Associations that
comprise the International Group insure approximately 90% of the world's
commercial tonnage and have entered into a pooling agreement to reinsure each
association's liabilities. As a member of a P&I Association, which is a
member of the International Group, we are subject to calls payable to the
associations based on the group's claim records as well as the claim records of
all other members of the individual associations and members of the pool of
P&I Associations comprising the International Group.
C.
|
Organizational
structure
|
Diana
Shipping Inc. is the sole owner of all of the issued and outstanding shares of
the subsidiaries listed in Note 1 of our consolidated financial statements under
Item 18 and in exhibit 8.1.
D.
|
Property,
plants and equipment
|
We
do not own any real property. We lease property through our management company
under finance and operating leases. Our interests in the vessels in our fleet
are our only material properties.
Item
4A. Unresolved Staff Comments
None.
Item
5. Operating
and Financial Review and Prospects
The
following management's discussion and analysis should be read in conjunction
with our historical consolidated financial statements and their notes included
elsewhere in this report. This discussion contains forward-looking statements
that reflect our current views with respect to future events and financial
performance. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of certain factors, such as those
set forth in the section entitled “Risk Factors” and elsewhere in this
report.
A.
Operating results
We
charter our dry bulk carriers to customers primarily pursuant to short-term and
long-term time charters. Currently, 14 of our vessels are currently employed on
longer-term time charters ranging in duration from 18 to 62 months. Under our
time charters, the charterer typically pays us a fixed daily charter hire rate
and bears all voyage expenses, including the cost of bunkers (fuel oil) and port
and canal charges. We remain responsible for paying the chartered vessel's
operating expenses, including the cost of crewing, insuring, repairing and
maintaining the vessel, the costs of spares and consumable stores, tonnage taxes
and other miscellaneous expenses, and we also pay commissions to one or more
unaffiliated ship brokers and to in-house brokers associated with the charterer
for the arrangement of the relevant charter.
Factors
Affecting Our Results of Operations
We
believe that the important measures for analyzing trends in our results of
operations consist of the following:
|
·
|
Ownership days. We
define ownership days as the aggregate number of days in a period during
which each vessel in our fleet has been owned by us. Ownership days are an
indicator of the size of our fleet over a period and affect both the
amount of revenues and the amount of expenses that we record during a
period.
|
|
|
Available days. We
define available days as the number of our ownership days less the
aggregate number of days that our vessels are off-hire due to scheduled
repairs or repairs under guarantee, vessel upgrades or special surveys and
the aggregate amount of time that we spend positioning our vessels. The
shipping industry uses available days to measure the number of days in a
period during which vessels should be capable of generating
revenues.
|
|
·
|
Operating days. We
define operating days as the number of our available days in a period less
the aggregate number of days that our vessels are off-hire due to any
reason, including unforeseen circumstances. The shipping industry uses
operating days to measure the aggregate number of days in a period during
which vessels actually generate
revenues.
|
|
·
|
Fleet utilization. We
calculate fleet utilization by dividing the number of our operating days
during a period by the number of our available days during the period. The
shipping industry uses fleet utilization to measure a company's efficiency
in finding suitable employment for its vessels and minimizing the amount
of days that its vessels are off-hire for reasons other than scheduled
repairs or repairs under guarantee, vessel upgrades, special surveys or
vessel positioning.
|
|
·
|
TCE rates. We define
TCE rates as our voyage and time charter revenues less voyage expenses
during a period divided by the number of our available days during the
period, which is consistent with industry standards. TCE rate is a
standard shipping industry performance measure used primarily to compare
daily earnings generated by vessels on time charters with daily earnings
generated by vessels on voyage charters, because charter hire rates for
vessels on voyage charters are generally not expressed in per day amounts
while charter hire rates for vessels on time charters generally are
expressed in such amounts.
|
The
following table reflects our ownership days, available days, operating days,
fleet utilization and TCE rates for the periods indicated.
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Ownership
days
|
|
|
5,813 |
|
|
|
4,897 |
|
|
|
3,510 |
|
Available
days
|
|
|
5,813 |
|
|
|
4,856 |
|
|
|
3,471 |
|
Operating
days
|
|
|
5,771 |
|
|
|
4,849 |
|
|
|
3,460 |
|
Fleet
utilization
|
|
|
99.3 |
% |
|
|
99.9 |
% |
|
|
99.7 |
% |
Time
charter equivalent (TCE)
rate
|
|
$ |
31,272 |
|
|
$ |
22,661 |
|
|
$ |
27,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage
and Time Charter Revenue
Our
revenues are driven primarily by the number of vessels in our fleet, the number
of days during which our vessels operate and the amount of daily charter hire
rates that our vessels earn under charters, which, in turn, are affected by a
number of factors, including:
|
·
|
the
duration of our charters;
|
|
·
|
our
decisions relating to vessel acquisitions and
disposals;
|
|
·
|
the
amount of time that we spend positioning our
vessels;
|
|
·
|
the
amount of time that our vessels spend in dry-dock undergoing
repairs;
|
|
·
|
maintenance
and upgrade work;
|
|
·
|
the
age, condition and specifications of our
vessels;
|
|
·
|
levels
of supply and demand in the dry bulk shipping industry;
and
|
|
·
|
other
factors affecting spot market charter rates for dry bulk
carriers.
|
Our
revenues have grown significantly in recent periods as a result of the
enlargement of our fleet, which has increased our ownership, available and
operating days. Revenues have also increased during last year due to increasing
hire rates. At the same time, we have maintained relatively high vessel
utilization rates.
Voyage
Expenses
We
incur voyage expenses that include port and canal charges, bunker (fuel oil)
expenses and commissions. Port and canal charges and bunker expenses primarily
increase in periods during which vessels are employed on voyage charters because
these expenses are for the account of the owner of the vessels. Port and canal
charges and bunker expenses currently represent a relatively small portion of
our vessels' overall expenses because all of our vessels are employed under time
charters that require the charterer to bear all of those expenses.
As
is common in the shipping industry, we pay commissions ranging from 0% to 6.25%
of the total daily charter hire rate of each charter to unaffiliated ship
brokers and in-house brokers associated with the charterers, depending on the
number of brokers involved with arranging the charter. In addition to
commissions paid to third parties, we have historically paid our fleet manager a
commission that is equal to 2% of our revenues in exchange for providing us with
technical and commercial management services in connection with the employment
of our fleet. However, this commission is being eliminated from our consolidated
financial statements since April 1, 2006 (after DSS was acquired) and therefore,
since that date they do not constitute part of our voyage expenses.
The
following table presents a breakdown of the commissions incurred during the
periods indicated.
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in
thousands of U.S. dollars)
|
|
Commissions
to unaffiliated and in-house ship brokers
|
|
|
8,913 |
|
|
|
5,364 |
|
|
|
4,731 |
|
Commissions
to fleet
manager
|
|
|
- |
|
|
|
497 |
|
|
|
2,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,913 |
|
|
|
5,861 |
|
|
|
6,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
believe that the amounts and the structures of our commissions are consistent
with industry practices.
We
expect that the amount of our total commissions will continue to grow as a
result of our increased revenues related to the growth of our fleet and charter
hire rates.
Vessel
Operating Expenses
Vessel
operating expenses include crew wages and related costs, the cost of insurance,
expenses relating to repairs and maintenance, the cost of spares and consumable
stores, tonnage taxes and other miscellaneous expenses. Our vessel operating
expenses, which generally represent fixed costs, have historically increased as
a result of the enlargement of our fleet. We expect these expenses to increase
further as a result of the enlargement of our fleet. Other factors beyond our
control, some of which may affect the shipping industry in general, including,
for instance, developments relating to market prices for insurance, may also
cause these expenses to increase.
Depreciation
The
cost of our vessels is depreciated on a straight-line basis over the expected
useful life of each vessel. Depreciation is based on the cost of the vessel less
its estimated residual value. We estimate the useful life of our vessels to be
25 years from the date construction is completed, which we believe is
common in the dry bulk shipping industry. Furthermore, we estimate the residual
values of our vessels to be $150 per light-weight ton which we also believe is
common in the dry bulk shipping industry. Our depreciation charges have
increased in recent periods due to the enlargement of our fleet which has also
led to an increase of ownership days. We expect that these charges will continue
to grow as a result of our acquisition of additional vessels.
Management
Fees
We
pay our fleet manager a fixed management fee of $15,000 per month for each
vessel in our operating fleet in exchange for providing us with technical and
commercial management services in connection with the employment of our fleet,
in addition to a 2% commission on revenues. Effective April 1, 2006, management
fees have been eliminated from our consolidated financial statements as
intercompany transactions.
General
and Administrative Expenses
We
incur general and administrative expenses which include our onshore vessel
related expenses such as legal and professional expenses and other general
vessel expenses. Subsequent to April 2006, our general and administrative
expenses increased as a result of our acquisition of our fleet manager. Our
general and administrative expenses also include payroll expenses of employees,
executive officers and consultants, travelling, promotional and other expenses
of the public company. General and administrative expenses may increase as a
result of the enlargement of our fleet.
Interest
and Finance Costs
We
have historically incurred interest expense and financing costs in connection
with the vessel specific debt of our subsidiaries. As of December 31,
2007 and 2006, we had $75.0 million and $114.6 million of indebtedness
outstanding under our revolving credit facility, respectively. We incurred
additional indebtedness of $98.5 million in February and March 2008 under the
same facility. We incur interest expense and financing costs relating to our
outstanding debt and our available credit facility and interest expense relating
to our financing lease. We expect to incur additional debt to finance future
acquisitions. However, we intend to limit the amount of these expenses and costs
by repaying our outstanding indebtedness in excess of approximately $150.0
million from time to time with the net proceeds of future equity issuances. As
of December 31, 2007 and 2006, we had $24.1 million of indebtedness outstanding
under our facility with Fortis bank. Interest and finance costs incurred in
connection with this loan facility are capitalized in vessel cost.
Lack
of Historical Operating Data for Vessels before Their Acquisition
Although
vessels are generally acquired free of charter, we have acquired (and may in the
future acquire) some vessels with time charters. Where a vessel has been under a
voyage charter, the vessel is usually delivered to the buyer free of charter. It
is rare in the shipping industry for the last charterer of the vessel in the
hands of the seller to continue as the first charterer of the vessel in the
hands of the buyer. In most cases, when a vessel is under time charter and
the buyer wishes to assume that charter, the vessel cannot be acquired without
the charterer’s consent and the buyer entering into a separate direct agreement
(called a “novation agreement”) with the charterer to assume the charter. The
purchase of a vessel itself does not transfer the charter because it is a
separate service agreement between the vessel owner and the
charterer.
Where
we identify any intangible assets or liabilities associated with the acquisition
of a vessel, we record all identified assets or liabilities at fair value. Fair
value is determined by reference to market data. We value any asset or liability
arising from the market value of the time charters assumed when a vessel is
acquired. The amount to be recorded as an asset or liability at the date of
vessel delivery is based on the difference between the current fair market value
of the charter and the net present value of future contractual cash
flows. When the present value of the time charter assumed is greater
than the current fair market value of such charter, the difference is recorded
as prepaid charter revenue. When the opposite situation occurs, any
difference, capped to the vessel’s fair value on a charter free basis, is
recorded as deferred revenue. Such assets and liabilities,
respectively, are amortized as a reduction of, or an increase in, revenue over
the period of the time charter assumed.
We have entered
into agreements to purchase vessels with time charters assumed for the Thetis,
the Salt
Lake City and
the Norfolk.
Up to December 31, 2007, we had evaluated the charters of the Thetis
and the Salt Lake
City and recognized an asset in the case of the Thetis
with a corresponding decrease of the vessel’s value and a liability in the case
of the Salt Lake
City, with a corresponding increase of the vessel’s value. The asset
recognized for the Thetis
was fully amortized to revenue in 2007. The liability recognized for the Salt Lake
City will be fully amortized in 2012 (when the charter contract
expires).
When
we purchase a vessel and assume or renegotiate a related time charter, we must
take the following steps before the vessel will be ready to commence
operations:
|
·
|
obtain
the charterer’s consent to us as the new
owner;
|
|
·
|
obtain
the charterer’s consent to a new technical
manager;
|
|
·
|
in
some cases, obtain the charterer’s consent to a new flag for the
vessel;
|
|
·
|
arrange
for a new crew for the vessel, and where the vessel is on charter, in some
cases, the crew must be approved by the
charterer;
|
|
·
|
replace
all hired equipment on board, such as gas cylinders and communication
equipment;
|
|
·
|
negotiate
and enter into new insurance contracts for the vessel through our own
insurance brokers;
|
|
·
|
register
the vessel under a flag state and perform the related inspections in order
to obtain new trading certificates from the flag
state;
|
|
·
|
implement
a new planned maintenance program for the vessel;
and
|
|
·
|
ensure
that the new technical manager obtains new certificates for compliance
with the safety and vessel security regulations of the flag
state.
|
When
we charter a vessel pursuant to a long-term time charter agreement with varying
rates, we recognize revenue on a straight line basis, equal to the average
revenue during the term of the charter. However, we calculate quarterly
dividends based on the available cash from operations during the relevant
quarter. We have entered into such time charter agreements for our recent
acquisitions, the Sideris
GS, the Aliki
and the Semirio.
The
following discussion is intended to help you understand how acquisitions of
vessels affect our business and results of operations.
Our
business is comprised of the following main elements:
|
· |
employment
and operation of our dry bulk vessels; and |
|
·
|
management
of the financial, general and administrative elements involved in the
conduct of our business and ownership of our dry bulk
vessels.
|
The
employment and operation of our vessels require the following main
components:
|
·
|
vessel
maintenance and repair;
|
|
·
|
crew
selection and training;
|
|
·
|
vessel
spares and stores supply;
|
|
·
|
contingency
response planning;
|
|
·
|
onboard
safety procedures auditing;
|
|
·
|
vessel
insurance arrangement;
|
|
·
|
vessel
security training and security response plans
(ISPS);
|
|
·
|
obtain
ISM certification and audit for each vessel within the six months of
taking over a vessel;
|
|
·
|
vessel
hire management;
|
|
·
|
vessel
performance monitoring.
|
The
management of financial, general and administrative elements involved in the
conduct of our business and ownership of our vessels requires the following main
components:
|
·
|
management
of our financial resources, including banking relationships, i.e.,
administration of bank loans and bank
accounts;
|
|
·
|
management
of our accounting system and records and financial
reporting;
|
|
·
|
administration
of the legal and regulatory requirements affecting our business and
assets; and
|
|
·
|
management
of the relationships with our service providers and
customers.
|
The
principal factors that affect our profitability, cash flows and stockholders’
return on investment include:
|
·
|
rates
and periods of charter hire;
|
|
·
|
levels
of vessel operating expenses;
|
|
·
|
fluctuations
in foreign exchange rates.
|
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of those financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptions and
conditions.
Critical
accounting policies are those that reflect significant judgments of
uncertainties and potentially result in materially different results under
different assumptions and conditions. We have described below what we believe
are our most critical accounting policies, because they generally involve a
comparatively higher degree of judgment in their application. For a description
of all our significant accounting policies, see Note 2 to our consolidated
financial statements included in this annual report.
Accounts
receivable, trade, at each balance sheet date, include receivables from
charterers for hire net of a provision for doubtful accounts. At each balance
sheet date, all potentially uncollectible accounts are assessed individually for
purposes of determining the appropriate provision for doubtful
accounts.
Accounting
for Revenues and Expenses
Revenues
are generated from time charter agreements and are usually paid fifteen days in
advance. Time charter agreements with the same charterer are accounted for as
separate agreements according to the terms and conditions of each agreement.
Time charter revenues over the term of the charter are recorded as service is
provided when they become fixed and determinable. Revenues from time charter
agreements providing for varying annual rates over their term are accounted for
on a straight line basis. Income representing ballast bonus payments
by the charterer to the vessel owner is recognized in the period earned.
Deferred revenue includes cash received prior to the balance sheet date for
which all criteria to recognize as revenue have not been met, including any
deferred revenue resulting from charter agreements providing for varying annual
rates, which are accounted for on a straight line basis. Deferred revenue also
includes the unamortized balance of the liability associated with the
acquisition of second-hand vessels with time charters attached which were
acquired at values below fair market value at the date the acquisition agreement
is consummated.
Voyage
expenses, primarily consisting of port, canal and bunker expenses that are
unique to a particular charter, are paid for by the charterer under time charter
arrangements or by the Company under voyage charter arrangements, except for
commissions, which are always paid for by the Company, regardless of charter
type. All voyage and vessel operating expenses are expensed as incurred, except
for commissions. Commissions are deferred over the related voyage charter period
to the extent revenue has been deferred since commissions are earned as the
Company’s revenues are earned.
Prepaid/Deferred
Charter Revenue:
The
Company records identified assets or liabilities associated with the acquisition
of a vessel at fair value, determined by reference to market data. The Company
values any asset or liability arising from the market value of the time charters
assumed when a vessel is acquired. The amount to be recorded as an asset or
liability at the date of vessel delivery is based on the difference between the
current fair market value of the charter and the net present value of future
contractual cash flows. When the present value of the contractual
cash flows of the time charter assumed is greater than its current fair value,
the difference is recorded as prepaid charter revenue. When the
opposite situation occurs, any difference, capped to the vessel’s fair value on
a charter free basis, is recorded as deferred revenue. Such assets
and liabilities, respectively, are amortized as a reduction of, or an increase
in, revenue over the period of the time charter assumed.
Depreciation
We
record the value of our vessels at their cost (which includes acquisition costs
directly attributable to the vessel and expenditures made to prepare the vessel
for its initial voyage) less accumulated depreciation. We depreciate our dry
bulk vessels on a straight-line basis over their estimated useful lives,
estimated to be 25 years from the date of initial delivery from the
shipyard which we believe is also consistent with that of other shipping
companies. Second hand vessels are depreciated from the date of their
acquisition through their remaining estimated useful life. Depreciation is based
on cost less the estimated residual scrap value. Furthermore, we estimate the
residual values of our vessels to be $150 per light-weight ton which we believe
is common in the dry bulk shipping industry. A decrease in the useful life of a
dry bulk vessel or in its residual value would have the effect of increasing the
annual depreciation charge. When regulations place limitations on the ability of
a vessel to trade on a worldwide basis, the vessel's useful life is adjusted at
the date such regulations are adopted.
Deferred
Drydock Cost
Our
vessels are required to be drydocked approximately every 30 to 36 months for
major repairs and maintenance that cannot be performed while the vessels are
operating. We capitalize the costs associated with drydockings as they occur and
amortize these costs on a straight-line basis over the period between
drydockings. Unamortized dry-docking costs of vessels that are sold are written
off and included in the calculation of the resulting gain or loss in the year of
the vessel’s sale. Costs capitalized as part of the drydocking include actual
costs incurred at the yard and parts used in the drydocking. We believe that
these criteria are consistent with industry practice and that our policy of
capitalization reflects the economics and market values of the
vessels.
Impairment
of Long-lived Assets
We
evaluate the carrying amounts (primarily for vessels and related drydock costs)
and periods over which long-lived assets are depreciated to determine if events
have occurred which would require modification to their carrying values or
useful lives. In evaluating useful lives and carrying values of long-lived
assets, we review certain indicators of potential impairment, such as
undiscounted projected operating cash flows, vessel sales and purchases,
business plans and overall market conditions. We determine undiscounted
projected net operating cash flow for each vessel and compare it to the vessel’s
carrying value. If our estimate of undiscounted future cash flows for any vessel
is lower than the vessel's carrying value plus any unamortized dry-docking
costs, the carrying value is written down, by recording a charge to operations,
to the fair market value if the fair market value is lower than the vessel's
carrying value. We estimate fair market value primarily through the use of third
party valuations performed on an individual vessel basis. Furthermore, in the
period a long lived asset meets the “held for sale” criteria of SFAS No.144, a
loss is recognized for any initial adjustment of the long lived asset’s carrying
amount to fair value less cost to sell. As vessel values are volatile, the
actual fair market value of a vessel may differ significantly from estimated
fair market values within a short period of time.
Results
of Operations
Year
ended December 31, 2007 compared to the year ended December 31,
2006
Voyage and Time
Charter Revenues. Voyage and time charter revenues
increased by $74.4 million, or 64%, to $190.5 million for 2007, compared to
$116.1 million for 2006. The increase is attributable to an increase in the size
of the fleet resulting in a 19% increase in operating days, and a 38% increase
in average charter rates as a result of the favorable shipping rates in 2007
compared to the same period of 2006. The increase in operating days during 2007
resulted from the enlargement of our fleet following our acquisition of the Aliki
in April, the Semirio
in June, the Boston
in November and the Salt Lake
City in December 2007 and was partly offset with days lost due to the
sale of the Pantelis
SP in July, 2007. In 2007 we had total operating days of 5,771 and fleet
utilization of 99.3%, compared to 4,849 total operating days and a fleet
utilization of 99.9%, in 2006.
Voyage
Expenses. Voyage
expenses increased by $2.6 million, or 43%, to $8.7 million in 2007 compared to
$6.1 million in 2006. This increase in voyage expenses is attributable to the
increase in commissions and was partly offset by the 2% elimination in
commissions charged by our management company, after its acquisition by us on
April 1, 2006. Commissions paid to our fleet manager during 2007 and 2006
amounted to $0 and $0.5 million (due to their elimination upon acquisition
of our fleet manager), respectively, and commissions to unaffiliated ship
brokers and in-house ship brokers associated with charterers amounted to $8.9
million and $5.4 million, respectively. The increase in commissions was
primarily the result of the increase in the amount of charter hire revenue we
reported in 2007.
Vessel
Operating Expenses. Vessel operating expenses
increased by $6.8 million, or 30%, to $29.3 million in 2007 compared to $22.5
million in 2006. The increase in operating expenses is attributable to the 19%
increase in ownership days resulting from the delivery of the new Capesize
vessels to our fleet having higher daily operating expenses than the Panamax
vessels as well as increased crew costs, insurances, repairs, taxes and other.
Daily operating expenses were $5,046 in 2007 compared to $4,592 in 2006,
representing an increase of 10%.
Depreciation
and Amortization of Deferred Charges. Depreciation
and amortization of deferred charges increased by $7.7 million, or 46%, to
$24.4 million for 2007, compared to $16.7 million for 2006. This
increase is the result of the increase in the number of vessels in our fleet and
was partly offset by decreased depreciation expenses for the vessel Pantelis
SP.
General and
Administrative expenses. General and
Administrative Expenses for 2007 increased by $5.4 million or 86% to $11.7
million compared to $6.3 million in 2006. The increase is mainly attributable to
increases in salaries, a bonus of $1.7 million to officers and employees,
expenses for contemplated due diligence issues related to a potential merger and
acquisition transaction in 2007, the exchange rate of USD to the Euro and
finally to the first quarter expenses of the fleet manager that did not exist in
2006.
Gain on Vessel
Sale. In February 2007, we entered into a memorandum of agreement to sell
the Pantelis SP. The vessel was delivered to her new owners in July 2007 and
resulted in a gain of $21.5 million, which is reflected in the 2007 statement of
income.
Interest and
Finance Costs. Interest and finance costs
increased by $2.5 million or 64%, to $6.4 million compared to $3.9 million in
2006. The increase is attributable to interest expenses relating to long-term
debt outstanding. Interest costs in 2007 amounted to $5.5 million compared to
$3.1 million for the same period in 2006, which resulted from increased
long-term debt outstanding during the year, increased average interest rates and
increased interest relating to leased
property.
Interest
Income. Interest income increased by $1.7 million or 170%, to $2.7
million compared to $1.0 million in 2006. The increase is attributable to
increased cash provided by our operating activities and proceeds resulting from
our secondary public offerings, which were temporarily invested in bank deposits
until being used to finance new vessel
acquisitions.
Year
ended December 31, 2006 compared to the year ended December 31,
2005
Voyage and Time
Charter Revenues. Voyage and time charter revenues
increased by $13.0 million, or 13%, to $116.1 million for the year ended
December 31, 2006, compared to $103.1 million for the same period in
2005. This increase is primarily attributable to an increase in the number of
operating days that we achieved. The increase in operating days during 2006
resulted primarily from the enlargement of our fleet following our acquisition
of the
Coronis, the Naias
and the Sideris
GS in January, August and November 2006, respectively and the full
operation in 2006 of Pantelis
SP, the Calipso,
the Clio,
the Erato
and the Thetis,
all acquired in 2005. In 2006, we had total operating days of 4,849 and fleet
utilization of 99.9%, compared to 3,460 total operating days and a fleet
utilization of 99.7% in 2005.
Voyage
Expenses. Voyage expenses decreased by
$0.4 million, or 6%, to $6.1 million for the year ended December 31,
2006, compared to $6.5 million for the same period in 2005. This decrease
is attributable to the elimination of the 2% commission paid to the management
company effective April 1, 2006. This decrease was partly offset with increases
in commissions due to increased revenues. Commissions paid during 2006 and 2005
to our fleet manager amounted to $2.4 million (of which $1.9 million was
eliminated upon acquisition of our fleet manager) and $2.1 million,
respectively, and commissions paid to the unaffiliated ship brokers and
in house ship brokers associated with charterers amounted to
$5.4 million and $4.7 million, respectively. The increase in
commissions was primarily the result of the increase in the amount of revenue we
reported due to increased operating days in
2006.
Vessel
Operating Expenses. Vessel operating expenses
increased by $7.5 million, or 50%, to $22.5 million for the year ended
December 31, 2006, compared to $15.0 million for the same period in
2005. This increase was primarily the result of the increased number of
ownership days during 2006, resulting from the enlargement of our fleet. Daily
vessel operating expenses increased by 8% to $4,592 for 2006, compared to $4,261
for 2005. This increase was mainly attributable to increased crew costs, stores,
spares and repairs.
Depreciation
and Amortization of Deferred Charges. Depreciation
and amortization of deferred charges increased by $6.8 million, or 69%, to
$16.7 million for the year ended December 31, 2006, compared to
$9.9 million for the same period in 2005. This increase was primarily the
result of increased number of vessels and ownership days, as described above and
the increase in vessels that underwent drydock and special surveys during the
year.
Management Fees
and General and Administrative
expenses. Management fees decreased by
$1.1 million, or 65%, to $0.6 million for the year ended December 31,
2006, compared to $1.7 million for the same period in 2005. This decrease is
attributable to the elimination of the management fees paid to DSS after its
acquisition effective April 1, 2006. However, due to this acquisition General
and Administrative Expenses during 2006 increased by $3.4 million to $6.3
million compared to $2.9 million in
2005.
Interest and
Finance Costs. Interest and finance costs
increased by $1.2 million, or 44%, to $3.9 million for the year ended
December 31, 2006, compared to $2.7 million for the same period in
2005. Interest and finance costs increased due to increased interest costs which
as of December 31, 2006, amounted to $3.1 million compared to $1.4 million for
the same period in 2005, which resulted from increased long-term debt
outstanding during the year, increased average interest rates and interest
relating to leased property that did not exist in
2005.
Inflation
Inflation
has only a moderate effect on our expenses given current economic conditions. In
the event that significant global inflationary pressures appear, these pressures
would increase our operating, voyage, administrative and financing
costs.
B. Liquidity
and Capital Resources
We
have historically financed our capital requirements with cash flow from
operations, equity contributions from stockholders and long-term bank debt. Our
main uses of funds have been capital expenditures for the acquisition of new
vessels, expenditures incurred in connection with ensuring that our vessels
comply with international and regulatory standards, repayments of bank loans and
payments of dividends. We will require capital to fund ongoing operations, the
construction of new vessels, acquisitions and debt service. Working capital,
which is current assets minus current liabilities, including the current portion
of long-term debt, amounted to $0.6 million at December 31, 2007 compared to
$11.4 million as at December 31, 2006.
We anticipate that internally generated cash flow
and borrowings under our credit facilities will be sufficient to fund the
operations of our fleet, including our working capital requirements. Currently,
we have $126.5 million available under our revolving credit facility with the
Royal Bank of Scotland to finance future vessel acquisitions, of which $50.0
million can be used for working capital purposes, and $36.1 million available
under our facility with Fortis Bank to finance the construction of our Hull
1107 and Hull
1108.
It
is our current policy to fund our future acquisition related capital
requirements initially through borrowings under our credit facilities and to
repay those borrowings in excess of $150 million from time to time with the net
proceeds of equity issuances. We are a holding company and our subsidiaries
conduct all of our operations and own all of our operating assets. We have no
significant assets other than the equity interests in our subsidiaries. As a
result, our ability to make dividend payments depends on our subsidiaries and
their ability to distribute funds to us. We believe that excess funds will
be available to support our growth strategy, which involves the acquisition of
additional vessels, and will allow us to distribute substantially all of our
available cash from operations as dividends to our stockholders as contemplated
by our dividend policy. We do not intend to obtain funds from other sources to
pay dividends. Depending on market conditions in the dry bulk shipping industry
and acquisition opportunities that may arise, we may be required to obtain
additional debt or equity financing which could affect our dividend
policy.
Cash
Flow
Cash
and cash equivalents increased to $16.7 million as of December 31, 2007,
compared to $14.5 million as of December 31, 2006. We consider highly
liquid investments such as time deposits and certificates of deposit with an
original maturity of three months or less to be cash equivalents. Cash and cash
equivalents are primarily held in U.S. Dollars.
Net
Cash Provided By Operating Activities
Net
cash provided by operating activities increased by $66.6 million, or 81%,
to $149.0 million in 2007 compared to $82.4 million million in 2006.
This increase was primarily attributable to the increase in the number of
operating days that we achieved during the year and the increased charter rates,
which resulted in an increase in our revenues. For 2006, net cash provided by
operating activities increased by $13.1 million, or 19%, to $82.4 million
compared to $69.3 million in 2005. The increase was primarily the result of the
increase in operating days in 2006 compared to 2005.
Net
cash used in investing activities was $409.1 million for 2007, which consists of
the advance and additional costs paid for the acquisition of the Norfolk,
amounting to $27.0 million and $1.8 million of construction costs we paid for
Hull
1107 and Hull
1108; $459.0 million paid for the delivery installment of the Semirio
and for the acquisition of Aliki,
the Boston
and the Salt Lake
City; $78.9 million of net proceeds from the sale of the Pantelis
SP and $0.2 million paid for other assets.
Net
cash used in investing activities was $193.1 million for 2006, mainly consisting
of the first predelivery advance we paid for our vessels under construction,
Hull
1107 and Hull
1108, amounting to $24.1 million plus additional construction costs and
$168.7 million paid for the delivery installment of the Coronis
and the acquisition of the Naias
and the Sideris
GS.
Net
cash used in investing activities amounted to $169.2 million for 2005,
consisting of the final installments that we paid in connection with our
acquisitions of the Calipso,
the Clio and
the Pantelis SP, the
acquisitions of the Erato
and the Thetis
and the 10% advance we paid for the Coronis.
Net
Cash Provided By / Used In Financing Activities
Net
cash provided by financing activities in 2007 amounted to $262.3 million and
consists of $287.8 million of proceeds drawn under our revolving credit facility
for the acquisition of the Semirio
($92.0 million), the Aliki
($87.0 million), the Boston
($22.0 million) and the Salt Lake
City ($86.8 million); $327.4 million of indebtedness that we repaid under
our revolving credit facility with the Royal Bank of Scotland and $0.1 million
of financing fees relating to the 364 day loan facility with the Royal Bank of
Scotland. Net cash provided by financing activities also consists of $433.1
million of net proceeds from our public offerings in April and September 2007,
and $131.1 million of dividends paid to stockholders.
Net
cash provided by financing activities was $104.0 million for 2006, mainly
consisting of $197.2 million of proceeds drawn under our revolving credit and
loan facilities for the acquisition of the Coronis
($38.5 million), the fleet manager or DSS ($20.0 million), the Naias
($39.6 million), the Sideris
GS ($75.0 million) and Hulls
1107 and 1108
($24.1 million). From the above loan proceeds an amount of $71.4 million was
repaid with the net proceeds of our additional public offering in June 2006,
amounting to $71.7 million. Also, an amount of $19.7 million was the net cash
consideration paid for the acquisition of DSS, the fleet manager, which
represents the consideration of $20.0 paid, net of $0.3 million of cash acquired
in the transaction. In addition, $73.6 million was paid as dividends in
2006.
Net
cash provided by financing activities was $119.5 million in 2005. We
borrowed $150.9 million of long-term debt to partially finance the
acquisition of the Calipso,
the Pantelis
SP, the Erato
and the Clio and
incurred $1.2 million of financing costs. We repaid $230.7 million of
outstanding long-term debt with the net proceeds of our initial public offering
in March 2005, which amounted to $194.0 million and with the net proceeds of our
follow on offering in December 2005, which amounted to $63.1 million and
released $0.8 million of restricted cash. We paid our stockholders
$57.4 million in cash dividends.
Credit
Facilities
In
February 2005, we entered into a $230.0 million secured revolving
credit facility with The Royal Bank of Scotland Plc., which was amended on
May 24, 2006, to increase the facility amount to $300.0 million. Our
credit facility permits us to borrow up to $50.0 million for working
capital. In January 2007, we entered into a supplemental agreement with The
Royal Bank of Scotland Plc. for a 364-day standby credit facility of up to
$200.0 million, which is available to us in connection with vessel
acquisitions or the acquisitions of vessel owning, chartering or operating
subsidiaries upon our full utilization of the existing $300.0 million
revolving credit facility. Because our strategy involves limiting the amount of
debt that we have outstanding, we intend to draw funds under our
$300.0 million credit facility to fund acquisitions and, as necessary, to
fund our working capital needs and to repay outstanding debt from time to time
with the net proceeds of future equity issuances.
The
$300.0 million revolving credit facility has a term of ten years from
May 24, 2006, which we refer to as the availability date, and we are
permitted to borrow up to the facility limit, provided that conditions to
drawdown are satisfied and that borrowings do not exceed 75% of the aggregate
value of the vessels. The facility limit will be $300.0 million for a
period of six years from the availability date, at which time the facility limit
will be reduced to $285.0 million. Thereafter, the facility limit will be
reduced by $15.0 million semi-annually over a period of four years with a
final reduction of $165.0 million together with the last semi-annual
reduction. The terms of the $200.0 million credit facility were similar to
the terms of the $300.0 million facility. However, we were permitted to
draw down our $200.0 million standby credit facility only upon the full
utilization, and subject to the same conditions to drawdown, of the
$300.0 million facility at any time through March 6, 2008, as
amended.
The
credit facility has commitment fees of 0.25% per annum on the amount of the
undrawn balance of the facility, payable quarterly in arrears. Interest on
amounts drawn are payable at a rate ranging from 0.75% to 0.85% per annum over
LIBOR. During 2007 and 2006, the weighted average interest rate relating to the
amounts drawn under the credit facility were 6.17% and 5.99%,
respectively.
In
November 2006, we entered into a loan agreement with Fortis Bank for a
secured term loan of $60.2 million and a guarantee facility of up to
$36.5 million, which we intend to use to finance the pre-delivery
installments of the two newbuilding Capesize dry bulk carriers that we expect to
take delivery of during the second quarter of 2010. Under this loan agreement,
principal payments are scheduled upon completion of certain stages of the
construction of the vessels, until December 30, 2010 (the termination date) and
such advances will be repaid in full at the earlier of the repayment date
(December 31, 2010) or the delivery of each vessel. The guarantee facility will
be available until December 31, 2010.
The
loan bears interest at LIBOR plus a margin ranging from 0.65% to 0.85% and
commitment fees of 0.10% until issuance of the guarantee. The bank guarantee
bears guarantee commission equal to the margin. The interest and finance costs
on this facility during the construction period are capitalized and included in
the construction cost of the vessels.
Our
obligations under our credit facilities are secured by, or will be secured upon
drawdown, by a first priority mortgage on one or more of the vessels in our
fleet, currently on eleven vessels, and such other vessels that we may from time
to time include with the approval of our lender, and a first assignment of all
freights, earnings, insurances and requisition compensation. We may grant
additional security from time to time in the future.
Our
ability to borrow amounts under the credit facilities is subject to the
execution of customary documentation relating to the facilities, including
security documents, satisfaction of certain customary conditions precedent and
compliance with terms and conditions included in the loan documents. To the
extent that the vessels in our fleet that secure our obligations under the
credit facilities are insufficient to satisfy minimum security requirements, we
will be required to grant additional security or obtain a waiver or consent from
the lender. We will also not be permitted to borrow amounts under the facilities
if we experience a change of control.
The
credit facilities contain financial and other covenants requiring us, among
other things, to ensure that:
|
·
|
the
aggregate market value of the vessels in our fleet that secure our
obligations under the credit facility at all times exceeds 120% of the
aggregate principal amount of debt outstanding under the credit facility
and the notional or actual cost of terminating any relating hedging
arrangements;
|
|
·
|
our
total assets minus our debt will not at any time be less than
$150 million and at all times will exceed 25% of our total
assets;
|
|
·
|
we
maintain $0.40 million of liquid funds per
vessel.
|
For
the purposes of the credit facilities, our “total assets” are defined to include
our tangible fixed assets and our current assets, as set forth in our
consolidated financial statements, except that the value of any vessels in our
fleet that secure our obligations under the credit facility will be measured by
their fair market value rather than their carrying value on our consolidated
balance sheet.
The
credit facilities also contains general covenants that require us to maintain
adequate insurance coverage and to obtain the lender's consent before we acquire
new vessels, change the flag, class or management of our vessels, enter into
time charters or consecutive voyage charters that have a term that exceeds, or
which by virtue of any optional extensions may exceed, thirteen months or enter
into a new line of business. In addition, the credit facility includes customary
events of default, including those relating to a failure to pay principal or
interest, a breach of covenant, representation and warranty, a cross-default to
other indebtedness and non-compliance with security documents.
Our
credit facilities do not prohibit us from paying dividends as long as an event
of default has not occurred and we are not, and after giving effect to the
payment of the dividend would not be, in breach of a covenant. When we incur
debt under the credit facility, however, the amount of cash that we have
available to distribute as dividends in a period may be reduced by any interest
or principal payments that we are required to make.
As of December 31, 2007, we had
$75.0 million principal balance outstanding under our $300.0 million
revolving credit facility, which was used to fund a portion of the purchase
price of the Salt Lake
City. In February and March 2008, we drew down an
additional amount of $71.5 million and $27.0 million, respectively, under
our revolving credit facility to fund part of the acquisition cost of the Norfolk.
As of December 31, 2007, we had a $24.1 million principal balance
outstanding under our $60.2 million loan
facility.
As
of December 31, 2007, 2006 and 2005 and as of the date of this annual report, we
did not use and have not used, any financial instruments for hedging
purposes.
Capital
Expenditures
We make capital
expenditures from time to time in connection with our vessel acquisitions. We
have entered into agreements to assume the shipbuilding contracts for two
177,000 Capesize dry bulk carriers, which we expect to take delivery of in the
second quarter of 2010. We financed the 20% first predelivery installments of
the two vessels under construction, amounting to $12.04 million each, with funds
under our loan facility with Fortis and expect to finance the second, third and
fourth predelivery installments of $6.0 million each, with funds under the same
facility. In October 2007, we entered into a memorandum of agreement of acquire
the secondhand Capesize dry bulk carrier, Norfolk,
for the purchase price of $135.0 million. We financed the 20% advance, paid in
October 2007, of $27.0 million with cash on hand and the balance of the purchase
price, paid in February 2008, with $98.5 million of funds drawn under our
revolving credit facility.
We
incur additional capital expenditures when our vessels undergo surveys. This
process of recertification may require us to reposition these vessels from a
discharge port to shipyard facilities, which will reduce our operating days
during the period. The loss of earnings associated with the decrease in
operating days, together with the capital needs for repairs and upgrades, is
expected to result in increased cash flow needs. We expect to fund these
expenditures with cash on hand.
C. Research
and development, patents and licenses
We
incur from time to time expenditures relating to inspections for acquiring new
vessels that meet our standards. Such expenditures are insignificant and they
are expensed as they incur.
D. Trend
information
Our
results of operations depend primarily on the charter hire rates that we are
able to realize. Charter hire rates paid for dry bulk carriers are
primarily a function of the underlying balance between vessel supply and
demand.
The
demand for dry bulk carrier capacity is determined by the underlying demand for
commodities transported in dry bulk carriers, which in turn is influenced by
trends in the global economy. According to analysts, between 2001 and 2007,
trade in all dry bulk commodities increased from approximately 2.1 billion
tons to 3.0 billion tons, equivalent to a compound average growth rate of
5.2%.
The
increasingly active grain market, with Asia again the largest contributor to
growth, should be incremental for transportation distances as shipments are
being sourced from origins such as the Black Sea, the U.S. Gulf and Argentina.
One of the primary reasons for the resurgence in dry bulk trade has been the
growth in imports by China of iron ore, coal and steel products during the last
five years. The driver of this dramatic upsurge in charter rates was
primarily the high level of demand for raw materials imported by China. Rates
declined somewhat in 2006, but in 2007 have risen again to record highs on the
strength of continued high demand for dry bulk shipping capacity. Demand for dry
bulk carrier capacity is also affected by the operating efficiency of the global
fleet, with port congestion, which has been a feature of the market since 2004,
absorbing tonnage and therefore leading to a tighter balance between supply and
demand.
It
is expected that increases in cargo demand will continue in 2008, and this is
likely to be broadly matched by increases in tonnage supply. Factors affecting
the supply and demand balance such as the ton-mile effect and congestion will
continue having a generally beneficial effect on this balance. Given the
imbalance in iron ore flows, it is more likely than not that the second half of
2008 will be stronger than the first half. Risks on the downside include the
down side risks of the whole commodity cycle, the growing bottlenecks in cargo
generation and over investment in ships and shipbuilding capacity.
The
supply of dry bulk carriers is dependent on the delivery of new vessels and the
removal of vessels from the global fleet, either through scrapping or loss.
Currently, newbuilding statistics from shipping analysts, show that
approximately 225 million tons dwt of dry bulk vessels over 10,000 tons dwt are
on order, representing approximately 57% of the existing fleet. These
vessels are scheduled for delivery over the next four-and-a-half
years. The level of scrapping activity is generally a function of
scrapping prices in relation to current and prospective charter market
conditions, as well as operating, repair and survey costs. The
average age at which a vessel is scrapped over the last five years has been
26 years. However, due to recent strength in the dry bulk
shipping industry, the current average age at which dry bulk vessels are being
scrapped has increased.
E. Off-balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements.
F. Contractual
Obligations
The
following table sets forth our contractual obligations, in thousands of U.S.$,
and their maturity dates as of December 31, 2007:
|
|
Within
One
Year
|
|
|
One
to
Three
Years
|
|
|
Three
to
Five
Years
|
|
|
More
than
Five
years
|
|
|
Total
|
|
|
|
(in
thousands of U.S. dollars)
|
|
Shipbuilding
contracts (1)
|
|
$ |
- |
|
|
|
96,320 |
|
|
|
- |
|
|
|
- |
|
|
$ |
96,320 |
|
Long
term debt
(2)
|
|
|
- |
|
|
|
24,080 |
|
|
|
- |
|
|
|
75,000 |
|
|
|
99,080 |
|
Financing
lease obligations (3)
|
|
|
233 |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
233 |
|
Operating
lease obligations (4)
|
|
|
168 |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
168 |
|
(1)
|
We
have entered into agreements to assume the shipbuilding contracts for the
construction of two Capesize dry bulk carriers for the purchase price of
$60.2 million each. We have paid the first predelivery installment of
$12.04 million for each vessel, or 20% of the contract price. We financed
the first predelivery installment with proceeds under our loan facility
with Fortis, mentioned in note (2) below. The remaining installments
amounting to $48.2 million for each vessel will be paid as certain stages
of construction are completed, pursuant to the respective shipbuilding
contracts.
|
(2)
|
As
of December 31, 2007, we had an aggregate principal of $99.1 million of
indebtedness outstanding under our loan facilities. This indebtedness was
incurred in connection with our acquisition of the Salt Lake City and in
connection with the first predelivery installments of Hull 1107 and Hull 1108, mentioned in
note (1) above and does not include projected interest payments which are
based on LIBOR plus a margin. In February and March 2008, we incurred
additional debt of $71.5 million and $27.0 million of principal balance
under our revolving credit facility in order to finance part of the
purchase price of the Norfolk.
|
(3)
|
Since
our acquisition of our fleet manager, effective April 1, 2006, we pay rent
to Universal Shipping and Real Estates Inc., a related party company
controlled by our Chairman and Chief Executive Officer, Mr. Palios,
pursuant to a lease agreement signed between DSS and Universal Shipping
and Real Estates Inc. in January 2006, and amended in December 2006. This
finance lease has a term of three years and minimum estimated lease
payments until expiration of the agreement in 2008, using the exchange
rate at December 31, 2007 of U.S.$ 1.494 to €1.00 are estimated to be
around $0.2 million. See also item 7B. “Related Party
Transactions”.
|
(4)
|
We
pay rent to Altair Travel Agency Ltd. and Diana Shipping Agencies S.A.,
both related companies controlled by our Chairman and Chief Executive
Officer, Mr. Palios, pursuant to lease agreements signed between the two
companies and DSS in January and December 2006, respectively. Both
agreements expire in December 2008, and minimum estimated lease payment
amounts, using the exchange rate at December 31, 2007 of U.S.$ 1.494 to
€1.00, are estimated to be around $19,000 and $148,580, respectively. See
also item 7B. “Related Party
Transactions”.
|
We
have entered into agreements with an unrelated supplier for the exclusive supply
of lubricants for some of our vessels. Under the terms of those agreements, we
were provided with free lubricants provided that the specific supplier remains
our exclusive supplier for a specified period. Please see the notes to the
consolidated financial statements as of December 31, 2007.
In
October 2007, we entered into an agreement to acquire a secondhand Capesize dry
bulk carrier for $135.0 million, which was delivered to us in February 2008. We
paid a 20% advance of $27.0 million on signing of the agreement and the balance
of the purchase price of $108.0 million on its delivery to us in February 2008,
partly with funds drawn under our revolving credit facility with the Royal Bank
of Scotland mentioned above under “Credit Facilities”.
G. Safe
Harbor
See
section “forward looking statements” at the beginning of this annual
report.
A. Directors
and Senior Management
Set
forth below are the names, ages and positions of our directors and executive
officers. Our board of directors is elected annually on a staggered basis, and
each director elected holds office for a three year term. Officers are appointed
from time to time by our board of directors and hold office until a successor is
appointed or their employment is terminated.
Name
|
|
Age
|
|
Position
|
Simeon
Palios
|
|
66
|
|
Class
I Director, Chief Executive Officer and Chairman
|
Anastassis
Margaronis
|
|
52
|
|
Class
I Director and President
|
Ioannis
Zafirakis
|
|
36
|
|
Class
I Director, Executive Vice President and Secretary
|
Andreas
Michalopoulos
|
|
37
|
|
Chief
Financial Officer and Treasurer
|
Maria
Dede
|
|
35
|
|
Chief
Accounting Officer
|
William
(Bill) Lawes
|
|
64
|
|
Class
II Director
|
Konstantinos
Psaltis
|
|
69
|
|
Class
II Director
|
Boris
Nachamkin
|
|
74
|
|
Class
III Director
|
Apostolos
Kontoyannis
|
|
59
|
|
Class
III Director
|
The
term of our Class I directors expires in 2009, the term of our
Class II directors expires in 2010 and the term of our Class III
directors expires in 2008.
The
business address of each officer and director is the address of our principal
executive offices, which are located at Pendelis 16, 175 64 Palaio Faliro,
Athens, Greece.
Biographical
information with respect to each of our directors and executive officers is set
forth below.
Simeon P. Palios has served as
our Chief Executive Officer and Chairman since February 21, 2005 and as a
Director since March 9, 1999. Mr. Palios also serves as an employee of
DSS. Prior to November 12, 2004, Mr. Palios was the Managing Director
of Diana Shipping Agencies S.A. and performed on our behalf the services he now
performs as Chief Executive Officer. Since 1972, when he formed Diana Shipping
Agencies, Mr. Palios has had the overall responsibility of our activities.
Mr. Palios has 40 years experience in the shipping industry and
expertise in technical and operational issues. He has served as an ensign in the
Greek Navy for the inspection of passenger boats on behalf of Ministry of
Merchant Marine and is qualified as a naval architect and engineer.
Mr. Palios is a member of various leading classification societies
worldwide and he is a member of the board of directors of the United Kingdom
Freight Demurrage and Defense Association Limited. He holds a bachelors degree
in Marine Engineering from Durham University.
Anastassis C. Margaronis has
served as our President and as a Director since February 21, 2005.
Mr. Margaronis also serves as an employee of DSS. Prior to
February 21, 2005, Mr. Margaronis was employed by Diana Shipping
Agencies S.A. and performed on our behalf the services he now performs as
President. He joined Diana Shipping Agencies in 1979 and has been responsible
for overseeing our insurance matters, including hull and machinery, protection
and indemnity and war risks cover. Mr. Margaronis has 27 years of
experience in shipping, including in ship finance and insurance. He is a member
of the Governing Council of the Greek Shipowner's Union and a member of the
board of directors of the United Kingdom Mutual Steam Ship Assurance Association
(Bermuda) Limited. He holds a bachelors degree in Economics from the University
of Warwick and a master’s degree from the Wales Institute of Science and
Technology.
Andreas Michalopoulos has
served as our Chief Financial Officer since March 8, 2006. Mr. Michalopoulos
started his career in 1993 where he joined Merrill Lynch Private Banking in
Paris. In 1995, he became an International Corporate Auditor with Nestle SA
based in Vevey, Switzerland and moved in 1998 to the position of Trade Marketing
and Merchandising Manager. From 2000 to 2002, he worked for McKinsey and Company
in Paris, France as an Associate Generalist Consultant before joining from 2002
to 2005, a major Greek Pharmaceutical Group, Lavipharm SA, with U.S. R&D
activity as a Vice President International Business Development, Member of the
Executive Committee. From 2005 to 2006, he joined Diana Shipping Agencies as a
Project Manager. Mr. Michalopoulos has graduated from Paris IX Dauphine
University with Honours in 1993 obtaining an MSc in Economics and a Masters
degree in Management Sciences specialized in Finance. In 1995, he also obtained
an MBA from Imperial College, University of London. Mr. Andreas Michalopoulos is
married to the youngest daughter of Mr. Simeon
Palios.
Maria Dede has served
as our Chief Accounting Officer since September 1, 2005 during which time
she has been responsible for all financial reporting requirements.
Mrs. Dede has also served as an employee of DSS since March 2005. In
2000, Mrs. Dede joined the Athens branch of Arthur Andersen, which merged
with Ernst and Young (Hellas) in 2002, where she served as an external auditor
of shipping companies until 2005. From 1996 to 2000, Mrs. Dede was employed
by Venus Enterprises SA, a ship-management company, where she held a number of
positions primarily in accounting and supplies. Mrs. Dede holds a bachelors
degree in Maritime Studies from the University of Piraeus and a Master's Degree
in Business Administration from
ALBA.
William (Bill) Lawes has
served as a Director and the Chairman of our Audit Committee since March 2005.
Mr. Lawes served as a Managing Director and a member of the Regional Senior
Management Board of JPMorgan Chase (London) from 1987 until 2002. Prior to
joining JPMorgan Chase, he was Global Head of Shipping Finance at Grindlays
Bank. Since December 2007, he serves as an independent member of the Board of
Directors and Chairman of the Audit Committee of Teekay Tankers Ltd.
Mr. Lawes is qualified as a member of the Institute of Chartered
Accountants of Scotland.
Konstantinos Psaltis
has served as a Director since March 2005. Since 1981,
Mr. Psaltis has served as Managing Director of Ormos Compania
Naviera S.A., a company that specializes in operating and managing multipurpose
container vessels. Prior to joining Ormos Compania Naviera S.A.,
Mr. Psaltis simultaneously served as a technical manager in the textile
manufacturing industry and as a shareholder of shipping companies managed by
M.J. Lemos. From 1961 to 1964, he served as ensign in the Royal Hellenic Navy.
Mr. Psaltis is a member of the Germanischer Lloyds Hellas Committee. He
holds a degree in Mechanical Engineering from Technische Hochschule
Reutlingen & Wuppertal and a bachelor’s degree in Business
Administration from Tubingen University in
Germany.
Boris Nachamkin has served as
a Director and as a member of our Compensation Committee since March 2005.
Mr. Nachamkin was with Bankers Trust Company, New York, for 37 years,
from 1956 to 1993 and was posted to London in 1968. Upon retirement in 1993, he
acted as Managing Director and Global Head of Shipping at Bankers Trust.
Mr. Nachamkin was also the UK Representative of Deutsche Bank Shipping from
1996 to 1998 and Senior Executive and Head of Shipping, based in Paris, for
Credit Agricole Indosuez between 1998 and 2000. Previously, he was a Director of
Mercur Tankers, a company which was listed on the Oslo Stock Exchange, and
Ugland International, a shipping company. He also serves as Managing Director of
Seatrust Shipping Services Ltd., a private consulting
firm.
Apostolos Kontoyannis has
served as a Director and as the Chairman of our Compensation Committee and a
member of our Audit Committee effective as since March 2005. Since 1987,
Mr. Kontoyannis has been the Chairman of Investments and Finance Ltd.,
a financial consultancy firm he founded, that specializes in financial and
structuring issues relating to the Greek maritime industry, with offices in
Piraeus and London. He was employed by Chase Manhattan Bank N.A. in Frankfurt
(Corporate Bank), London (Head of Shipping Finance South Western European
Region) and Piraeus (Manager, Ship Finance Group) from 1975 to 1987. He is an
independent member of the Board of Directors of Excel Maritime Carriers Ltd.
Mr. Kontoyannis holds a bachelors degree in Finance and Marketing and an
M.B.A. in Finance from Boston University.
B. Compensation
The
aggregate compensation to members of our senior management for 2007, 2006 and
for the period from March 17, 2005 (the date our initial public offering was
completed) to December 31, 2005, was $1.9 million, $1.9 million and $1.6
million, respectively. We have not paid senior management compensation for any
years prior to 2005. Those members of our senior management during 2004 were
employed and paid compensation by our fleet manager from the management fees
that we paid to it. We estimated that the fair market value of the aggregate
compensation for the period from January 1, 2005 to March 17, 2005 (the date our
initial public offering was completed) that we would have paid to members of our
senior management, had we been a public company would have been $0.3 million,
had such services been charged to us at fair value by our fleet manager during
those periods. We did not pay any benefits in 2007, 2006 and 2005. In February
2008, our senior management received a cash bonus of $0.9 million, relating to
2007 performance, and restricted stock certificates of an aggregate of 65,100
shares of common stock. The restricted stock will vest ratably over three years.
We do not have a retirement plan for our officers or directors.
Non-employee
directors receive annual fees in the amount of $40,000 plus reimbursement of
their out-of-pocket expenses. In addition, each non-executive serving as
chairman or member of the committees receives annual fees of $20,000 and
$10,000, respectively, plus reimbursement of their out-of-pocket expenses. For
2007, 2006 and 2005 fees to non-executive directors amounted to $220,000,
$220,000 and $173,500, respectively. In February 2008, non-employee directors
received restricted stock certificates of an aggregate of 10,400 shares of
common stock. The restricted stock will vest ratably over three years. We do not
have a retirement plan for our officers or directors.
C. Board
Practices
We
have established an Audit Committee, comprised of two board members, which is
responsible for reviewing our accounting controls, recommending to the board of
directors the engagement of our independent auditors, and pre-approving audit
and audit related services and fees. Each member is an independent
director. As directed by its written charter, the Audit Committee is responsible
for appointing, and overseeing the work of the independent auditors, including
reviewing and approving their engagement letter and all fees paid to our
auditors, reviewing the adequacy and effectiveness of the Company's accounting
and internal control procedures and reading and discussing with management and
the independent auditors the annual audited financial statements.
In
addition, we have established a Compensation Committee comprised of two members,
which is responsible for establishing executive officers' compensation and
benefits. The members of the Audit Committee are Mr. William Lawes
(Chairman and financial expert) and Mr. Apostolos Kontoyannis (member and
financial expert) and the members of the Compensation Committee are
Mr. Apostolos Kontoyannis (Chairman) and Mr. Boris Nachamkin (member).
While we are exempt from New York Stock Exchange rules on independent directors,
we currently conform to those rules.
We
have established an Executive Committee comprised of the three executive
directors, Mr. Simeon Palios, Mr. Anastassis Margaronis and Mr. Ioannis
Zafirakis. The Executive Committee has, to the extent permitted by law, the
powers of the Board of Directors in the management of the business and affairs
of the Corporation.
We also maintain directors’ and officers’ insurance,
pursuant to which we provide insurance coverage against certain liabilities to
which our directors and officers may be subject, including liability incurred
under U.S. securities law. The maximum coverage under this
insurance is currently U.S.$45 million per incident and in the aggregate per
policy year.
D. Crewing
and Shore Employees
Prior
to February 21, 2005, the shoreside personnel provided by our fleet manager
included Mr. Simeon Palios, Mr. Anastassis Margaronis,
Mr. Ioannis Zafirakis and Evangelos Monastiriotis, who, as employees of our
fleet manager, performed services that were substantially identical to services
provided by executive officers. On February 21, 2005, Mr. Simeon
Palios, Mr. Anastassis Margaronis, and Mr. Ioannis Zafirakis became
executive officers and employees of Diana Shipping Inc. effective March 17,
2005. From February 21, 2005 to September 1, 2005, Mr. Monastiriotis,
while employed by our fleet manager, served as our acting Chief Accounting
Officer. On September 1, 2005, Mrs. Maria Dede became our Chief Accounting
Officer and provides her services to us pursuant to her employment with our
fleet manager. Effective March 8, 2006, Mr. Andreas Michalopoulos became our
Chief Financial Officer and Mr. Koutsomitopoulos who served as our Chief
Financial Officer until then, became our Vice President and Head of Corporate
Development until April 30, 2007.
We
crew our vessels primarily with Greek officers and Filipino officers and seamen.
We are responsible for identifying our Greek officers, which are hired by our
vessel owning subsidiaries. Our Filipino officers and seamen are referred to by
Crossworld Marine Services Inc., an independent crewing agency. The crewing
agency handles each seaman's training, travel and payroll. We ensure that all
our seamen have the qualifications and licenses required to comply with
international regulations and shipping conventions. Additionally, our seafaring
employees perform most commissioning work and supervise work at shipyards and
drydock facilities. We typically man our vessels with more crew members than are
required by the country of the vessel's flag in order to allow for the
performance of routine maintenance duties.
Although
we had no shoreside employees in 2005 and until April 1, 2006 when our fleet
manager became our wholly owned subsidiary, our fleet manager has informed us of
the number of persons employed by it that were dedicated to managing our fleet.
The following table presents the average number of shoreside personnel and the
number of seafaring personnel employed by our vessel owning subsidiaries during
the periods indicated.
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
Shoreside
|
|
|
39 |
|
|
|
36 |
|
|
|
30 |
|
Seafaring
|
|
|
389 |
|
|
|
329 |
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
428 |
|
|
|
365 |
|
|
|
293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
respect to the total amount of common stock owned by all of our officers and
directors, individually and as a group, see Item 7 “Major Stockholders and
Related Party Transactions”.
Equity
Incentive Plan
We
have adopted an equity incentive plan, which we refer to as the plan, which
entitles employees, officers and directors to receive options to acquire our
common stock. A total of 2,800,000 shares of common stock are reserved for
issuance under the plan. The plan is administered by our board of directors.
Under the terms of the plan, our Board of Directors will be able to grant a)
incentive stock options, b) non-qualified stock options, c) stock
appreciation rights, d) dividend equivalent rights, e) restricted stock, f)
unrestricted stock, g) restricted stock units, and h) performance shares. No
options, stock appreciation rights or restricted stock units can be exercisable
prior to the first anniversary or subsequent to the tenth anniversary of the
date on which such award was granted. The plan will expire 10 years from the
adoption of the Plan by the Board of Directors. As of December 31, 2007, no
awards were granted under the plan. However, in February 2008, our Board of
Directors granted 75,500 shares of restricted common stock to our senior
management and non-executive directors. These shares will be vested over a
period of three years by 1/3 per annum. The restricted shares are subject to
forfeiture until they become vested. Unless they forfeit, grantees have the
right to vote, to receive and retain all dividends paid and to exercise all
other rights, powers and privileges of a holder of shares.
The
following table sets forth current information regarding (i) the owners of
more than five percent of our common stock that we are aware of and
(ii) the total amount of common stock owned by all of our officers and
directors, individually and as a group. All of the stockholders, including the
stockholders listed in this table, are entitled to one vote for each share of
common stock held.
Title
of Class
|
Identity
of Person or Group
|
|
Number
of
Shares
Owned
|
|
|
Percent
of Class
|
|
Common
Stock, par value $0.01
|
Simeon
Palios (1)
|
|
|
14,312,040 |
|
|
|
19.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
All
officers and directors as a group (2)
|
|
|
14,365,040 |
|
|
|
19.29 |
% |
|
(1)
|
Currently,
Mr. Simeon Palios beneficially owns 25,500 restricted common shares
granted through the Company’s Equity Incentive Plan on February 26, 2007
and 14,286,540 shares indirectly through Corozal Compania Naviera S.A. and
Ironwood Trading Corp. over which Mr. Simeon Palios exercises sole
voting and dispositive power. In March 2005, when we became public, Mr.
Simeon Palios beneficially owned 51.8% of our outstanding stock. Following
several secondary offerings as of December 31, 2005, 2006, 2007 and
currently, Mr. Simeon Palios owned indirectly through Corozal and Ironwood
46.04%, 39.06%, 19.21% and 19.22%, respectively, of our common
stock.
|
|
(2)
|
Mr. Simeon
Palios is our only director or officer that beneficially owns 5% or more
of our common stock.: Mr. Anastassis Margaronis, our President and a
member of our board of directors, and Mr. Ioannis Zafirakis, our
Executive Vice President and a member of our board of directors, are
indirect stockholders through ownership of stock held in Corozal Compania
Naviera S.A., which is the registered owner of some of our common stock.
Mr. Margaronis and Mr. Zafirakis do not have dispositive or
voting power with regard to shares held by Corozal Compania S.A. and,
accordingly, are not considered to be beneficial owners of our common
shares held through Corozal Compania Naviera S.A.. Messrs.
Lawes, Psaltis, Nachamkin and Kontoyannis, each a non-executive director
of ours, owns shares of our common stock of less than 1%,
each.
|
Since
we became public, Zoe S. Company Ltd., a wholly-owned subsidiary of Maas Capital
Investments, which in turn is a wholly-owned subsidiary of Fortis Bank
(Nederland) N.V., beneficially owned 12.63% of our common
stock. Following secondary offerings Zoe S. Company Ltd., owned as of
December 31, 2005, 2006 and 2007, 11.22%, 9.52% and 4.68%, respectively, of our
common stock. As of September 2007 and the date of this annual report, Zoe S.
Company Ltd. owns less than 5% of our issued and outstanding common
stock.
Universal
Shipping and Real Estates Inc.
Following
our acquisition of DSS, we pay rent for our office space to Universal Shipping
and Real Estates Inc., or Universal, a company controlled by our Chairman and
Chief Executive Officer, Mr. Simeon Palios. Pursuant to the lease agreement
signed between DSS and Universal and amended in December 2006, in 2007 and 2006,
we paid rent amounting to about $205,000 and $227,000, respectively. The
duration of the agreement is three years. The part of the rent paid in 2006 and
all of the rent paid in 2007 was classified as interest expense of a financing
lease. For 2008, when the rent agreement expires, we expect to pay about
$233,000 of rent expense to Universal, which will be classified as interest
expense.
Diana
Shipping Agencies S.A. Management Agreements
Diana
Shipping Agencies S.A., or DSA, is an affiliated entity that is majority owned
and controlled by our Chairman and Chief Executive Officer. In December 2006, we
entered into a lease agreement with DSA to lease office space. The duration of
the lease is for 25 months. Until December 31, 2006, we paid one monthly rent
amounting to $11,000 and in 2007 we paid rent amounting to about $138,000. Rent
increases annually by the rate of 3% above inflation and in 2008, the year that
the agreement expires, we expect to pay approximately $149,000 in rent
expense.
Commercial
Banking, Financial Advisory and Investment Banking Services
Fortis
Bank (Nederland) N.V., which prior to September 2007 owned more than 5% of our
issued and outstanding shares, and its affiliates have provided and may provide
in the future commercial banking, financial advisory and investment banking
services for us for which they receive customary compensation. Fortis Securities
LLC, an affiliate of Fortis Bank (Nederland) N.V., was an underwriter in our
initial public offering in March 2005 and our follow-on offering in December
2005. In November 2006, we entered into a loan facility agreement with Fortis
Bank for a loan of up to $60,200 and a guarantee facility of up to $36,451 for
the purpose of financing and guaranteeing the payment of part of the
construction cost of our two Capesize dry bulk carriers we have under
construction at the Shanghai Waigaoqiao Shipbuilding Co. Ltd, in China and we
expect to take delivery of in 2010.
Registration
Rights Agreement
We
have entered into a registration rights agreement with Corozal Compania Naviera
S.A., Ironwood Trading Corp., and Zoe S. Company Ltd., our stockholders of
record immediately prior to our initial public offering in March 2005, pursuant
to which we have granted them, their affiliates (including Mr. Simeon
Palios, Mr. Anastassis Margaronis and Mr. Ioannis Zafirakis) and
certain of their transferees, the right, under certain circumstances and subject
to certain restrictions, including any applicable lock-up agreements then in
place, to require us to register under the Securities Act shares of our common
stock held by them. Under the registration rights agreement, these persons will
have the right to request us to register the sale of shares held by them on
their behalf and may require us to make available shelf registration statements
permitting sales of shares into the market from time to time over an extended
period. In addition, these persons will have the ability to exercise certain
piggyback registration rights in connection with registered offerings requested
by stockholders or initiated by us. Our stockholders of record immediately prior
to our initial public offering, owned 25,768,750 shares entitled to these
registration rights. In December 2006, we filed a Registration Statement to
register 8,000,000 of these shares of which 5,750,000 were sold in a secondary
offering in January 2007, at the price of $15.75 per share and the remaining
2,250,000 in April 2007 at the price of $17.00 per share.
Consultancy
Agreements
We
have consulting agreements with companies owed by Mr. Palios,
Mr. Margaronis, Mr. Zafirakis, Mr. Michalopoulos (as of March 1,
2006), and until March 31, 2006 with Mr. Koutsomitopoulos, respectively. In
2007, 2006 and 2005, we paid to these companies $1.6 million, $1.6 million and
$1.4 million, respectively, for services provided by their owners and performed
outside of Greece.
Travel
Services
Altair
Travel Agency S.A., an affiliated entity that is controlled by our Chairman and
Chief Executive Officer, Mr. Simeon Palios, provides us with travel related
services. Travel related expenses in 2007, 2006 and 2005 amounted to $1.2
million, $0.9 million and $0.7 million, respectively. We believe that the fees
that we pay to Altair Travel Agency S.A. are no greater than fees we would pay
to an unrelated third party for comparable services in an arm's length
transaction. Following our acquisition of DSS, we also pay rent to Altair for
the lease of parking space, which for 2007 and 2006 amounted to about $17,000
and $13,000. The duration of the agreement is three years and rent is increased
annually at the rate of 3% above inflation. In 2008, when the agreement expires,
we expect to pay to Altair approximately $19,000 of rent expense.
C. Interests of
Experts and Counsel
Not
Applicable.
Item
8. Financial
information
A. Consolidated
statements and other financial information
See
Item 18.
Legal
Proceedings
We have not been involved in any legal proceedings
which may have, or have had, a significant effect on our business, financial
position, results of operations or liquidity, nor are we aware of any proceedings that are pending or threatened which may
have a significant 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. We expect that these claims would be
covered by insurance, subject to customary deductibles. Those claims, even if
lacking merit, could result in the expenditure of significant financial and
managerial resources.
Dividend
Policy
Our
policy is to declare quarterly distributions to stockholders by each February,
May, August and November substantially equal to our available cash from
operations during the previous quarter after expenses and reserves for scheduled
drydockings, intermediate and special surveys and other purposes as our board of
directors may from time to time determine are required, and after taking into
account contingent liabilities, the terms of our credit facilities, our growth
strategy and other cash needs and the requirements of Marshall Islands law. Our
board of directors may review and amend our dividend policy from time to time in
light of our plans for future growth and other factors.
In
times when we have in excess of $150.0 million of debt outstanding,
excluding construction pre-delivery financing, we intend to calculate our
dividends per share as if any debt, excluding construction pre-delivery
financing, in excess of $150.0 million were financed entirely with equity
such that (i) the available cash from operations as determined by our board
of directors would be increased by the amount of interest expense incurred on
account of such outstanding debt during the related period, and (ii) the
number of shares outstanding would be deemed to include an additional number of
shares, which, if issued, would have generated net proceeds that would have been
sufficient to have allowed us to repay such outstanding debt as of the beginning
of the related period (based on the market price of our common stock as of the
determination date). Depending on the circumstances, we may or may not be
required to use sources other than our available cash from operations to fund
such dividends. From time to time we may use the net proceeds from equity
offerings to temporarily reduce our outstanding debt, excluding construction
pre-delivery financing, to less than $150.0 million pending the application
of such proceeds to vessel acquisitions or other uses. As of December 31, 2007,
we had total debt outstanding of $99.1 million of principal balance,
including $24.1 million of construction pre-delivery
financing.
We believe that, under current law, our
dividend payments from earnings and profits will constitute “qualified dividend
income” and as such will generally be subject to a 15% United States federal
income tax rate with respect to non-corporate United States stockholders.
Distributions in excess of our earnings and profits will be treated first as a
non-taxable return of capital to the extent of a United States stockholder's tax
basis in its common stock on a dollar-for-dollar basis and thereafter as capital
gain. We note that legislation was recently introduced in the United States
Congress, which, if enacted in its present form, would preclude dividends
received after the date of enactment from qualifying as “qualified dividend
income.” Please see the section of this annual report entitled “Taxation” under
item 10.E for additional information relating to the tax treatment of our
dividend payments.
The
dry bulk shipping industry is highly volatile and we cannot accurately predict
the amount of cash distributions that we may make in any period. Factors beyond
our control may affect the charter market for our vessels and our charterers'
ability to satisfy their contractual obligations to us, and we cannot assure you
that dividends in any amounts will actually be declared. Marshall Islands law
generally prohibits the payment of dividends other than from surplus or when a
company is insolvent or if the payment of the dividend would render the company
insolvent.
In
addition, we may incur expenses or liabilities, including extraordinary
expenses, which could include costs of claims and related litigation expenses,
or be subject to other circumstances in the future that reduce or eliminate the
amount of cash that we have available for distribution as dividends or for which
our board of directors may determine we require the establishment of reserves.
Our growth strategy contemplates that we will finance the acquisition of
additional vessels through a combination of debt and equity financing on terms
acceptable to us. If financing is not available to us on acceptable terms, our
board of directors may determine to finance or refinance acquisitions with cash
from operations, which would reduce or even eliminate the amount of cash
available for the payment of dividends.
Since
our initial public offering in March 2005, we have declared and paid dividends
of $2.19 per share, $1.56 per share and $1.485 per share, representing our cash
available from operations for 2007, 2006 and 2005, respectively.
B. Significant
Changes
There
have been no significant changes since the date of the annual financial
statements included in this annual report.
Item
9. Listing
Details
The
trading market for shares of our common stock is the New York Stock Exchange, on
which our shares trade under the symbol “DSX”. The following table sets forth
the high and low closing prices for shares of our common stock since our initial
public offering on March 17, 2005, as reported by the New York Stock
Exchange:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Period
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
Annual
|
|
|
- |
|
|
|
- |
|
|
$ |
44.82 |
|
|
$ |
15.79 |
|
|
$ |
13.55 |
|
|
$ |
11.19 |
|
|
$ |
17.50 |
|
|
$ |
12.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
quarter
|
|
|
- |
|
|
|
- |
|
|
$ |
20.31 |
|
|
$ |
15.79 |
|
|
$ |
13.55 |
|
|
$ |
11.19 |
|
|
|
|
|
|
|
|
|
2nd
quarter
|
|
|
- |
|
|
|
- |
|
|
|
23.00 |
|
|
|
17.95 |
|
|
|
12.53 |
|
|
|
9.85 |
|
|
|
|
|
|
|
|
|
3rd
quarter
|
|
|
- |
|
|
|
- |
|
|
|
29.24 |
|
|
|
21.62 |
|
|
|
13.95 |
|
|
|
10.23 |
|
|
|
|
|
|
|
|
|
4th
quarter
|
|
|
- |
|
|
|
- |
|
|
|
44.82 |
|
|
|
25.05 |
|
|
|
15.83 |
|
|
|
13.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
|
|
|
|
|
|
|
- |
|
|
$ |
28.62 |
|
|
$ |
25.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October
|
|
|
|
|
|
|
|
|
|
|
44.82 |
|
|
|
29.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
|
|
|
|
|
|
|
|
|
|
|
42.92 |
|
|
|
27.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
|
|
|
|
|
|
|
|
|
|
|
34.65 |
|
|
|
28.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
$ |
30.85 |
|
|
$ |
21.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
|
|
|
31.10 |
|
|
|
25.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
10. Additional
Information
Not
Applicable.
B.
|
Memorandum
and articles of association
|
Information
regarding the rights, preferences and restrictions attaching to each class of
the shares is described in section “Description of Capital Stock” in our
Registration Statement on Form F-1 filed with the Securities and Exchange
Commission on November 23, 2005 with file number 333-129726, provided that since
the date of that Registration Statement, our outstanding shares of common stock
has increased to 74,450,500.
We
refer you to Item 7.B for a discussion of our registration rights agreement with
our stockholders of record before our initial public offering and agreements
with companies controlled by our Chairman and Chief Executive Officer, Mr.
Simeon Palios. Other than these agreements, we have no material contracts, other
than contracts entered into in the ordinary course of business, to which the
Company or any member of the group is a party.
Under
Marshall Islands, Panamanian and Greek law, there are currently no restrictions
on the export or import of capital, including foreign exchange controls or
restrictions that affect the remittance of dividends, interest or other payments
to non-resident holders of our common stock.
The
following discussion is based upon the provisions of the U.S. Internal Revenue
Code of 1986, as amended (the “Code”), existing and proposed U.S. Treasury
Department regulations, administrative rulings, pronouncements and judicial
decisions, all as of the date of this Annual Report. This discussion
assumes that we do not have an office or other fixed place of business in the
United States. Unless the context otherwise requires, the reference to Company
below shall be meant to refer to both the Company and its vessel owning and
operating subsidiaries.
Taxation
of the Company’s Shipping Income: In General
The
Company anticipates that it will derive substantially all of its gross income
from the use and operation of vessels in international commerce and that this
income will principally consist of freights from the transportation of cargoes,
hire or lease from time or voyage charters and the performance of services
directly related thereto, which the Company refers to as “shipping
income.”
Shipping
income that is attributable to transportation that begins or ends, but that does
not both begin and end, in the United States will be considered to be 50%
derived from sources within the United States. Shipping income attributable to
transportation that both begins and ends in the United States will be considered
to be 100% derived from sources within the United States. The Company is not
permitted to engage in transportation that gives rise to 100% U.S. source
income. Shipping income attributable to transportation exclusively between
non-U.S. ports will be considered to be 100% derived from sources outside
the United States. Shipping income derived from sources outside the United
States will not be subject to U.S. federal income tax.
Based
upon the Company’s anticipated shipping operations, the Company’s vessels will
operate in various parts of the world, including to or from U.S. ports.
Unless exempt from U.S. taxation under Section 883 of the Code, the
Company will be subject to U.S. federal income taxation, in the manner
discussed below, to the extent its shipping income is considered derived from
sources within the United States.
In
the year ended December 31, 2007, approximately4.6%, of the Company’s shipping
income was attributable to the transportation of cargoes either to or from a
U.S. port. Accordingly, 2.3% of the Company’s shipping income would be
treated as derived from U.S. sources for the year ended December 31, 2007.
In the absence of exemption from tax under Section 883, the Company would
have been subject to a 4% tax on its gross U.S. source shipping income equal to
approximately $0.2 million for the year ended December 31,
2007.
Application
of Code Section 883
Under
the relevant provisions of Section 883 of the Code and the final
regulations promulgated thereunder, or the final regulations, which became
effective on January 1, 2005 for calendar year taxpayers like ourselves and our
subsidiaries, a foreign corporation will be exempt from U.S. taxation on
its U.S. source shipping income if:
(1)
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It
is organized in a qualified foreign country which, as defined, is one that
grants an equivalent exemption from tax to corporations organized in the
United States in respect of the shipping income for which exemption is
being claimed under Section 883, or the “country of
organization requirement”; and
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(2)
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It
can satisfy any one of the following two (2) stock ownership
requirements:
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§
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more
than 50% of its stock, in terms of value, is beneficially owned by
qualified stockholders which, as defined, includes individuals who are
residents of a qualified foreign country, or the “50% Ownership Test”;
or
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§
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its
stock or that of its 100% parent is “primarily and regularly” traded on an
established securities market located in the United States, or the
“Publicly Traded Test”.
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The
U.S. Treasury Department has recognized the Marshall Islands, the Company’s
country of organization since February 2005, and Panama, the country of
incorporation of each of the Company’s subsidiaries that earned shipping income
during 2007, as a qualified foreign country. Accordingly, the Company and each
of the subsidiaries satisfy the country of organization
requirement.
For
the 2007 tax year, the Company believes that it will be unlikely to satisfy the
50% Ownership Test. Therefore, the eligibility of the Company and each
subsidiary to qualify for exemption under Section 883 is wholly dependent
upon being able to satisfy the Publicly Traded Test.
Under
the final regulations, the Company’s common stock, which is the sole class of
issued and outstanding stock, was “primarily traded” on the New York Stock
Exchange during 2007.
Under
the final regulations, the Company’s common stock will be considered to be
“regularly traded” on the New York Stock Exchange if its common stock is listed
on the New York Stock Exchange and in addition, its common stock is traded on
the New York Stock Exchange, other than in minimal quantities, on at least
60 days during the taxable year and the aggregate number of shares of
common stock so traded during the taxable year is at least 10% of the average
number of shares of common stock issued and outstanding during such year. The
Company has satisfied the listing requirement as well as the trading frequency
and trading volume tests.
Notwithstanding
the foregoing, the final regulations provide, in pertinent part, that stock will
not be considered to be “regularly traded” on an established securities market
for any taxable year in which 50% or more of such stock is owned, actually or
constructively under specified stock attribution rules, on more than half the
days during the taxable year by persons, or 5% Stockholders, who each own 5% or
more of the value of stock, or the “5 Percent Override Rule.”
For
more than half the days of the tax year 2007, 19.21% of the Company’s common
stock was owned by 5% Stockholders. Therefore, the Company is not
subject to the 5 Percent Override Rule for 2007. However, there is no
assurance that the Company will continue to qualify for exemption under Section
883. For example, the Company could be subject to the 5% Override
Rule if another 5% Stockholder in combination with the Company’s existing 5%
Stockholders were to own 50% or more of the Company’s stock. In such
a case, the Company would be subject to the 5% Override Rule unless it could
establish that, among the shares owned by the 5% Stockholders, sufficient shares
are owned by qualified shareholders to preclude non-qualified shareholders from
owning 50 percent or more of the Company’s stock for more than half the number
of days during the taxable year. These requirements are onerous and
there is no assurance the Company will be able to satisfy them.
Based
on the foregoing, the Company believes that it satisfied the publicly traded
test for 2007 and intends to take this position on its 2007 United States income
tax returns.
Taxation
in Absence of Internal Revenue Code Section 883 Exemption
To
the extent the benefits of Section 883 are unavailable with respect to any item
of U.S. source shipping income, the Company and each of its subsidiaries would
be subject to a 4% tax imposed on such income by Section 887 of the Code on a
gross basis, without the benefit of deductions. Since under the sourcing rules
described above, no more than 50% of the Company’s shipping income would be
treated as being derived from U.S. sources, the maximum effective rate of U.S.
federal income tax on the Company’s shipping income would never exceed 2% under
the 4% gross basis tax regime.
Based
on its U.S. source Shipping Income for 2007, the Company would be subject to
U.S. federal income tax of approximately $0.2 million under Section 887 in
the absence of an exemption under Section 883.
Gain
on Sale of Vessels.
Regardless
of whether we qualify for exemption under Section 883, we will not be
subject to United States federal income taxation with respect to gain realized
on a sale of a vessel, provided the sale is considered to occur outside of the
United States under United States federal income tax principles. In
general, a sale of a vessel will be considered to occur outside of the United
States for this purpose if title to the vessel, and risk of loss with respect to
the vessel, pass to the buyer outside of the United States. It is
expected that any sale of a vessel by us will be considered to occur outside of
the United States.
Marshall
Islands Tax Considerations
We
are incorporated in the Marshall Islands. Under current Marshall Islands law, we
are not subject to tax on income or capital gains, and no Marshall Islands
withholding tax will be imposed upon payments of dividends by us to our
stockholders.
F.
Dividends and paying agents
Not
Applicable.
Not
Applicable.